In re Ballachino, Bankruptcy No. 99-3254-9P3
| Decision Date | 31 August 1999 |
| Docket Number | 99-3255-9P3.,Bankruptcy No. 99-3254-9P3 |
| Citation | 243 BR 531 |
| Parties | In re Samuel R. BALLACHINO, Debtor. In re Fred Grant Morse, III, Debtor. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
Edward R. Miller, Naples, FL, for Samuel R. Ballachino and Fred Grant Morse, III.
Robert Zarco, Miami, FL, for movant.
Terry E. Smith, Bradenton, FL, Chapter 13 Trustee.
ORDER ON MOTION TO DISMISS CHAPTER 13 PETITION OR, IN THE ALTERNATIVE, TO LIFT AUTOMATIC STAY IN ORDER TO LIQUIDATE CLAIMS AGAINST DEBTOR
The explosive proliferation of the franchise industry over the past decades produced some spectacular successes but also some colossal failures. This, of course, produced numerous controversies leading to extensive litigations by disenchanted franchisees who claim to have been promised by the franchisor a pot of gold but which promise turned to be nothing but fool's gold and the loss of a substantial investment. It is not surprising that this extensive explosion in the franchise industry was not limited to the fast food industry, but also, ironically, to the very opposite, the weight reducing and wellness area. This development is not surprising when one considers the insatiable desire of a contemporary society to be super healthy and slim.
The present controversy in these cases precisely reflects this scenario and finds its genesis in weight reducing and wellness programs promoted through franchises sold by Samuel R. Ballachino and Fred Grant Morse, III (Debtors) to Christine LaValle, Cape Coral Wellness, Inc., Peter F. and Christine Sonderegger, O & S Properties, Rick and Patti Albritton, R.P.E.L., Inc., Sharon J. Bullock-Brown, S.A. Ventures, Inc., Brian and Barbara McNichols, and Beverly Hills Weight Loss & Wellness, Inc. (the Movants).
The Movants became disenchanted with the franchises purchased from the Debtors and ultimately filed lawsuits in various state courts and one federal district court. One of the suits was filed by Patty Albritton and others in the Circuit Court in and for Collier County, Florida (the "Albritton Lawsuit"). In addition LaValle and Cape Coral Wellness, Inc. filed lawsuits. The Debtors and others filed a motion to submit the matters to arbitration. An arbitration proceeding was commenced with the American Arbitration Association (AAA) in Boston, Massachusetts, in December 1998. The Debtors objected to the selection of the arbitrators and filed a civil suit in the Massachusetts state court seeking declaratory and injunctive relief to modify the makeup of the panel. On March 3, 1999, the AAA decided to proceed with arbitration notwithstanding the pending objection by the Debtors.
The arbitration proceeding came to a sudden halt when the Debtors filed their respective voluntary Petitions for relief under Chapter 13 of the Bankruptcy Code.
On December 4, 1998, four other sets of franchisees filed lawsuit against Morse, Ballachino and others, which includes also as defendant Beverly Hills Weight Loss and Wellness, Inc. (BHWLW). This lawsuit was basically identical with the LaValle lawsuit. The plaintiffs in this lawsuit commenced settlement negotiations with BHWLW and ultimately settled with the franchisor. This left for resolution their claims against Morse and Ballachino and their companies who are actively defending this lawsuit. The trial date has not been set although discovery commenced in this lawsuit. It is likely that the resolution of the LaValle would have a controlling affect on the multiple franchisee lawsuits against the Debtors and their companies.
The Movants filed the present Motion, seeking dismissal of both Chapter 13 cases on the basis of bad faith or, alternatively, relief from the automatic stay to proceed with arbitration. In due course, the Motion was set for final evidentiary hearing at which time the following relevant facts were established:
BHWLW is a Rhode Island corporation maintaining its principal place of business in Guilford, New Hampshire. BHWLW is a national franchisor of weight loss clinics. At the relevant time, Morse was the president and principal stockholder of Health and Wellness, Inc. (HWI) and BHMC, Inc. These entities were appointed by the franchisor as regional directors for the states of Florida and Georgia and charged with the development of franchises in these states. Both Debtors were the principals who actually sold franchises in these states, including the franchises sold to LaValle as well as the franchises sold to the plaintiffs in the actions instituted against the Debtors.
In 1997, the Debtors purchased a lot in Naples, Florida, and ultimately constructed a residential home on the same. The cost of the construction was in excess of $600,000 and the price of the lot was $140,000. The Debtors paid cash for the purchase of the lot and for the construction of the home.
Until September 1998, the home was the residence of both. It is still the current residence of Morse. The residence was owned by both Debtors as tenants in common until July 30, 1998, when the Debtors as grantors, conveyed the full title to the residence to Morse. Presently, the house appears to be worth $1.2 to $1.3 million. Morse paid Ballachino $725,000 for his interest in the home. Morse claims that the $725,000 was obtained by him by liquidating some investments, i.e., money in a money market account, a stock portfolio, certificates of deposit and an account maintained by Smith Barney brokerage house.
The Statement of Financial Affairs filed by Morse reflect gross income of $379,329 in 1997, described as wages; $174,412 in 1998, described as wages; and $4,300 during the first part of 1999 up to the filing date, February 26, 1999. The Statement of Financial Affairs also reflect that at the relevant time, Morse was the sole stockholder and the principal officer of BHMC, Inc., West Coast Wellness, Inc. 95-98 and Health and Wellness, Inc.
It appears that in December 1997, the Debtors purchased a Crownline Power boat, paying $30,000 cash for the purchase. In August 1998, the Debtors transferred their interest in the boat to Ballachino's mother, Florence Ballachino. Facially, the transaction appears to be an outright sale for no consideration, although both Debtors contend it was a transfer as collateral for a loan each received from Ms. Ballachino in the amount of $5,000. Why Mr. Ballachino needed $5,000 after he received $725,000 from Morse for his interest in the former residence was not explained. The boat currently is docked in Key Largo and is registered in the name of Mrs. Ballachino.
Morse's Schedule of Assets reflect that Morse holds 100 percent of the stock in BHMC, Inc.; Westcoast Wellness, Inc., and Health and Wellness, Inc. The scheduled value of the stock is $1 each, or a total of $3.00. Even though his interest in the boat was transferred to Ms. Ballachino, Morse still scheduled a ½ ownership interest in the boat and scheduled Mrs. Ballachino as a secured creditor holding a claim in the amount of $10,000, describing the collateral as the Crownline Boat which debt allegedly was incurred by him in the amount of $10,000 in September 1998 after lawsuits had been filed against him.
On Schedule F, Morse listed only one liquidated claim, the claim of American Express in the amount of $3,926. The balance of the scheduled creditors consist of the plaintiffs who filed the lawsuits described above. Their claims are scheduled as contingent, unliquidated, and disputed. On his current income and expenses in Schedule I, Morse estimates...
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