Beck Industries, Inc., In re
| Decision Date | 16 January 1984 |
| Docket Number | No. 17,D,17 |
| Citation | 725 F.2d 880 |
| Parties | 10 Collier Bankr.Cas.2d 574 In re BECK INDUSTRIES, INC., Debtor. Manuel F. ROTHBERG, Plaintiff-Appellant, v. Stephen KIRSCHENBAUM, Trustee of Beck Industries, Inc., and W & J Sloane of Beverly Hills, Inc., Defendants, Stephen Kirschenbaum, Trustee of Beck Industries, Inc., Defendant-Appellee. ocket 83-5014. |
| Court | U.S. Court of Appeals — Second Circuit |
Robert J. Rosenberg, New York City (Moses & Singer, New York City), for plaintiff-appellant.
Lonn A. Trost, New York City (Shea & Gould, New York City), for defendant-appellee.
Before FEINBERG, Chief Judge, FRIENDLY and NEWMAN, Circuit Judges.
"I do not use the term 'jurisdiction' ", Justice Frankfurter once observed, "because it is a verbal coat of too many colors." United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 39, 73 S.Ct. 67, 70, 97 L.Ed. 54 (1952) (dissenting opinion). If the term is used, as it may have to be, this should be done with a precision unhappily not practiced here. It is thus necessary for us to make a fresh analysis.
Beck Industries, Inc. ("Beck"), has been in reorganization proceedings under Chapter X of the Bankruptcy Act of 1898 in the District Court for the Southern District of New York since May 27, 1971. 1 Beck owned all the stock of a non-filing subsidiary, W & J Sloane of Beverly Hills, Inc. ("Sloane"), a Delaware corporation, which was engaged in the retail sale of furniture in California. Manuel F. Rothberg had been employed by Sloane since 1960 and had become its president. On February 14, 1979, the trustee addressed a letter to Rothberg "to confirm our understanding with regard to the continued employment by [sic ] you as the President of W & J Sloane." Effective January 1, 1979, Rothberg was to receive an annual salary of $125,000, continuation of existing fringe benefits, and a bonus of 10% of Sloane's net profits in excess of $500,000 per annum. The letter confirmed "that there is no contract of employment between you and the company, your employment being at will." Rothberg accepted this.
On December 24, 1981, upon the application of Stephen Kirschenbaum, the current reorganization trustee of Beck, Bankruptcy Judge Ryan signed an order directing interested parties to show cause why the bankruptcy court should not enter an order authorizing the trustee to take such corporate action as might be necessary to cause Sloane to sell its interest in real property, fixtures and equipment, and the name "W & J Sloane" for $3,000,000 and to conduct a liquidation sale on the Premises upon such terms and conditions as the Trustee believes to be in the best interests of Sloane, Beck, the estate herein and the creditors hereof, as more fully set forth in the Application.
The application stated that in conjunction with the contemplated sale it would become necessary and appropriate to liquidate Sloane's inventory; that the trustee believed it would be in the best interests of the estate and its creditors if the liquidation were to be conducted under the supervision and control of Rothberg; and that the trustee proposed to pay Rothberg for his services in connection with the liquidation of the inventory 10% of the net profits. Use of the word "net" was an error by counsel for the trustee; it was later corrected to read 10% of the gross proceeds. After a hearing the bankruptcy judge, on February 19, 1982, entered an order, later vacated and superseded by an order dated April 12, 1982, reading as follows:
[T]hat the Trustee be and he hereby is authorized and empowered to take such corporate action as may be necessary or appropriate to cause Sloane to liquidate its inventory on the Premises or otherwise, upon such terms and conditions as the Trustee believes to be in the best interests of Sloane, Beck and the estate herein and the creditors hereof.
The order made no express reference to the employment of Rothberg to conduct the liquidation or its terms, and the arrangements were never formalized.
Even before the entry of the superseding order, the amicable relations between the trustee and Rothberg had come to an end. On March 26, 1982, the trustee of the Beck estate, owner of all the stock of Sloane, elected a new board of directors which removed Rothberg as president. On the same day Sloane instituted an action in the Superior Court of California, Los Angeles County, against Rothberg, MFR Corp. (a California corporation wholly owned by Rothberg), and 20 persons described as "DOES". The complaint, as amended on April 15, 1982, alleged that between January 1982 and March 26, 1982, Rothberg had misappropriated some $830,000 of Sloane's funds and had put some or all of them into MFR Corp. Neither the initial nor an amended complaint said how the misappropriation had occurred. However, an affidavit of the trustee in the adversary proceeding in the bankruptcy court discussed below claimed that Rothberg had purchased millions of dollars of new inventory and that after a sale of this for some $8,000,000, Sloane had been left with inventory costing $2,215,000, about what it had started with, which remained to be liquidated. At the hearing before the bankruptcy court recounted below, counsel for the trustee claimed that discovery had disclosed that Rothberg and his wife and children purchased in excess of $35,000 of inventory during the liquidation and directed that it be written off, that "one-half to a million dollars of union dues ... were not negotiated down", and that $210,000 of "other family receivables" had been written off.
On May 3, 1982, Rothberg initiated an adversary proceeding in the bankruptcy court pursuant to Bankruptcy Rules 701(5) and 10-701(4) against the trustee and Sloane. The complaint began by reciting the proceedings in the bankruptcy court outlined above, the recital being preceded by an allegation that
[i]n December, 1981 Rothberg entered into a contract with the Trustee wherein it was agreed that Rothberg would direct, manage and operate the liquidation of Sloane and would receive for his services 10% of the gross sales.
It went on to say that Rothberg had recovered over $7,000,000 in gross sales from the liquidation of Sloane and had received $700,000 for his services from its controller. The complaint then alleged Rothberg's dismissal, the institution of the California suit, and the fact that the judge in charge of the latter had entered an order temporarily freezing the $700,000 which Rothberg had received. 2 The complaint requested various [i]n the alternative, and in the event this Court declines to enjoin the Trustee and Sloane from proceeding with the California action, ... an Order declaring that any order entered in the California action shall be binding upon all parties thereto, including the Trustee and shall bar any further action by the Trustee or Sloane against plaintiff Rothberg or MFR Corp. on account of the subject matter of the California action.
forms of relief; an injunction against the trustee and Sloane from proceeding with the California action; orders authorizing Rothberg to retain 10% of the gross proceeds from the liquidation and to sell the remaining inventory of Sloane and receive 10% of the gross proceeds; an order interpreting the court's orders of February 19 and April 12, 1982; and
Upon an affidavit of Robert J. Rosenberg, Rothberg's New York attorney, reciting substantially what we have stated, the bankruptcy court issued an order requiring the trustee, Sloane and all other parties in interest to show cause why the trustee and Sloane should not be temporarily enjoined from prosecuting the California action and directed to take all necessary and appropriate action to dissolve the temporary injunction that had been issued therein.
The trustee submitted an affidavit in opposition. This contained the allegation with respect to Rothberg's inflating the Sloane inventory mentioned above, and cited cases alleged to show that the bankruptcy court lacked authority to enjoin a suit by a solvent subsidiary of the estate. Rosenberg submitted a reply affidavit. This stated that
[t]he crux of this matter is that the Trustee insists on retaining the ability to litigate the issues relating to Sloane's liquidation in two forums. Plaintiff has offered to discontinue this action on the condition that the Trustee stipulate that he will submit to the jurisdiction of the California court, that plaintiff can assert in the California action any claims he has against the Trustee relating to the liquidation of Sloane and that the Trustee will be bound by any order or judgment entered in the California action. The Trustee, however, has flatly refused Mr. Rothberg's offer.
It also averred that the trustee caused Sloane to commence the California action and was the real party in interest therein. Annexed to the affidavit was a declaration of Rothberg's supporting the allegation that he was a responsible businessman with assets in excess of $2,000,000.
The bankruptcy judge held a hearing on May 14, 1982. In attendance were Rosenberg; Heyman, a California lawyer for Rothberg; and Trost, attorney for the trustee. The discussion went considerably beyond the question of the relief sought in the order to show cause. Rosenberg asserted that the bringing of the California action was "an injury to this Court's jurisdiction". However, he had no objection to proceeding in California; his problem was that "the trustee wants more than one bite of the apple." More elaborately,
[h]e [the trustee] wants to say that he is not subject to jurisdiction in California. If he doesn't like the result, he's going to come back to this Court and say it was null and void; he's going to say that no cross-claims or counterclaims can be asserted against him because he is not involved in the proceeding....
He discussed the refusal by counsel for the...
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