In re American Preferred Prescription, Inc., Bankruptcy No. 893-84170-478.

• Citation: 218 BR 680
• Decision Date: 09 March 1998
• Docket Number: Bankruptcy No. 893-84170-478.
• Parties: In re AMERICAN PREFERRED PRESCRIPTION, INC., Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

218 B.R. 680 (1998)

In re AMERICAN PREFERRED PRESCRIPTION, INC., Debtor.

Bankruptcy No. 893-84170-478.

United States Bankruptcy Court, E.D. New York.

March 9, 1998.

Schwarzfeld, Ganfer & Shore by Alan Fried, New York City, for Debtor.

Hughes, Hubbard & Reed by David Wiltenburg, New York City, for Tracar, S.A.

Hahn & Hessen L.L.P. by Jeffrey Stein, Joshua I. Divack, New York City, for BDO Seidman, L.L.P.

Jaspan, Schlesinger, Silverman & Hoffman, Garden City, NY, for Kenneth Silverman.

DECISION GRANTING APPLICATION OF BDO SEIDMAN, LLP FOR PAYMENT OF ATTORNEY'S FEES AS A NECESSARY EXPENSE

DOROTHY EISENBERG, Bankruptcy Judge.

BDO Seidman, LLP ("BDO"), which was officially retained by the Chapter 11 Trustee to perform accounting services on his behalf, filed a fee application seeking reimbursement from the estate of American Preferred Prescription, Inc. (the "Debtor") for professional fees and expenses incurred in this case. The Court had previously granted an interim award of the fees requested for professional services and scheduled a heating to determine whether BDO was entitled to be reimbursed for legal expenses the firm incurred in connection with its defense of a motion made by the Debtor to disqualify BDO. The Debtor had made the motion to disqualify BDO after BDO had completed the majority of the accounting work it had been retained to perform. Based on all of the pleadings herein, the hearings held, the Court's familiarity with the entire case, and this Court having concluded that the legal expenses incurred by BDO represent actual and necessary expenses, the Court grants BDO's request for expenses as set forth below. This opinion constitutes the Court's findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure made applicable to this contested matter by Rule 9014.

BACKGROUND

The Debtor is engaged in the business of a mail-order pharmacy and is currently operating from premises located at 50 Republic Road, Melville, New York, the same premises from which the Debtor's parent corporation and various affiliates are operated. On July 22, 1993, over four and one-half years ago, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code, which filing came on the heels of a jury verdict entered in favor of Preferred RX, Inc. ("Preferred") against the Debtor, Ray Adiel, a former principal of the Debtor, and certain affiliates of the Debtor, including American Prescription Plan, Inc. ("AP Plan")¹ in the United States District Court for the Northern District of Ohio (the "Ohio Action"). The judgment was entered against the Debtor and the other defendants jointly and severally for $1,122,643 in compensatory damages and $1 million in punitive damages on claims of breach of contract and fraud against Preferred, which is a competitor of the Debtor (the "Ohio Judgment"). Pursuant to a written agreement dated December 31, 1993, Preferred assigned its claims, including the Ohio Judgment to Cost Controls, Inc. ("CCI"). CCI and Preferred are related entities.

During the pendency of this case, the Debtor pursued an appeal of the decision rendered in the Ohio Action, and attempted to proceed with reorganization in this Court. The Debtor filed its first Disclosure Statement and Plan of Reorganization on February 25, 1994, which was rejected by this Court as unconfirmable pursuant to a hearing held on April 14, 1994. By this time, the Debtor's exclusivity had expired and as a result the Court entertained competing plans from various entities, including CCI.

While the Debtor was engaging in legal battle with CCI and others over the various proposed plans of reorganization, the Debtor filed an Order to Show Cause on April 29, 1994 to reject two non-residential leases entered into with Ryan Properties, Inc. and TPC Logistics Services, Inc. (collectively, the "Landlords") claiming that it had entered into a lease for other space. At a hearing held on May 13, 1994, the Court refused to grant the OSC until the Debtor had obtained Court authorization to enter into a lease for new space, pursuant to applicable bankruptcy rules and procedures. At this point, the Debtor advised the Court that it had already entered into a sublease with APP Plus, Inc. ("APP Plus")², for the space at 50 Republic Road, Melville, New York. As a result of the Debtor's unauthorized rejection of the leases and after ultimate Court approval, after notice and a hearing, of such lease rejections, the Landlords filed proofs of claim for damages. The Debtor commenced an adversary proceeding against the Landlords alleging that the Landlords' actions against the Debtor resulted in a constructive eviction of the Debtor, and sought damages in the amount of $300,000. The adversary proceeding was assigned to Judge Connelly for trial.

On February 7, 1995, the United States Court of Appeals for the Sixth Circuit reversed the Ohio Judgment as against the Debtor, leaving CCI with no apparent recourse against the Debtor on the Ohio cause of action. Undeterred, on August 8, 1995, CCI commenced an adversary proceeding against the Debtor seeking, inter alia, a judgment against the Debtor determining that the Debtor is responsible for, and should pay, CCI's claim against AP Plan as a result of the fraudulent conveyance of assets to the Debtor by AP Plan and/or under the theory that the Debtor is the alter ego of AP Plan.

While that litigation was wending its way to trial, on March 25, 1996, an order was entered confirming the Debtor's Third Amended Plan of Reorganization (the "Plan"). The Plan as confirmed, which is a final order of this Court, proposes to pay 100% of all allowed claims in which a final, non-appealable judgment has been rendered. The Plan further provides that any debts due to Marl Corporation ("Marl")³ and other alleged secured creditors which support the Plan, together with the Debtor's affiliates and insiders are to be subordinated to the claims of the unsecured creditors, including CCI and the Landlords. Pursuant to the Plan, the Debtor deposited $2.5 million into an escrow account reserved for the payment of claims.

As a result of the purchase of unsecured claims in excess of $256,000 by Marl and another entity either friendly with or related to the Debtor, the only outstanding non-insider unsecured claims in excess of $5,000 which were unpaid as of the confirmation date and are still unpaid are those held by (i) Moshe Katlowitz, an attorney who claims entitlement to payment for legal work performed for the Debtor prepetition in the approximate sum of $13,000,⁴ (ii) the Landlords,⁵ (iii) CCI, and (iv) Charles Hutson, a former consultant to the Debtor.⁶ All of these claims are disputed by the Debtor and have been and continue to be subject to continuing litigation.

After a lengthy trial conducted before the Honorable Francis G. Conrad in February and March 1997, and by Decision dated March 21, 1997, CCI was awarded a judgment against the Debtor based on fraud and alter ego claims. CCI was awarded $2,970,000 in compensatory damages and punitive damages equal to three times the compensatory damages. Judge Conrad found that the principals and parties in control of the Debtor had provided false testimony, had committed serious fraudulent acts where various assets were transferred from AP Plan to the Debtor including $3.9 million in sales, and that the transfers of assets to the Debtor were made without fair consideration, were made in bad faith, and were made with actual intent to hinder, delay or defraud CCI in violation of New York's Debtor and Creditor Law. As part of the judgment, CCI was also awarded up to $1 million as reimbursement of its attorneys fees. CCI presently has a claim for approximately $13 million against the Debtor. The Debtor has appealed the entire decision including the attorneys fee award, which appeals are pending in the United States District Court for the Eastern District of New York. The Debtor has drained the entire escrow fund established pursuant to the Plan to pay the compensatory damages in full. The punitive damages portion of the award has been bonded in the amount of $2 million and collection thereof has been stayed.

Based in part on the findings made by Judge Conrad in his decision, a joint Order to Show Cause was filed by CCI and the Landlords seeking the appointment of a Chapter 11 Trustee pursuant to Section 1104 of the Code. After holding a hearing and taking testimony, the Court granted the motion and on April 11, 1997, this Court signed an order appointing Kenneth Silverman as the Chapter 11 Trustee of the Debtor with limited powers, charged with the supervision of the Debtor's non-ordinary course business decisions, and was directed to investigate transactions among the Debtor and its affiliates. The Debtor at the time was a substantial provider of mail order drugs having annual gross sales of approximately $30,447,000.

The focus of the Chapter 11 Trustee's initial appointment was that of investigation of the Debtor's business, intercompany transfers and transactions and supervision of its management affairs, in order to preserve the substantial value of this Debtor's business. It was intended that the Debtor's officers would cooperate with the Trustee so that the Debtor could conduct its business in the ordinary course while the Trustee performed its oversight and investigative duties pending a final determination of the disputed claims.

As the case continued, the Court became painfully aware that the Debtor still appeared ready to litigate every and any issue, rather than negotiate a reasonable settlement with any of its disputed creditors. Recognizing that the Court had confirmed the Debtor's Plan over eighteen months ago, with no foreseeable date in view wherein a final decree would be filed, and because the Debtor had indicated it had no intention of settling any disputed claims, upon the Chapter 11 Trustee's...