In re Blatstein, 96-31813DAS
| Decision Date | 23 September 1998 |
| Docket Number | 97-CV-7064,No. 96-31813DAS,97-CV-7069 and 97-CV-7070.,Adversary No. 97-0004,97-CV-7066,97-0008,Civ.A. No. 97-CV-7063,96-19098DAS,96-31813DAS |
| Parties | In re Eric J. BLATSTEIN, Debtor. In re MAIN, INC., Debtor. 718 ARCH STREET ASSOCIATES, LTD., et al., Plaintiffs, v. Eric J. BLATSTEIN, et al., Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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Edward J. DiDonato, DiDonato and Winterhalter, Paul B. Maschmeyer, Ciardi, Maschmeyer & Karalis, P.C., Philadelphia, PA, for Debtors.
Steven M. Coren, Kaufman, Coren & Ress, Mitchell W. Miller, Eric L. Frank, Miller, Frank and Miller, Michael H. Kaliner, W.J. Winterstein, Jr., Naderson, Kill & Olick, P.C., Philadelphia, PA, for Plaintiffs.
Mary F. Walrath, Jacoby, Donner & Jacoby, P.C., Kevin J. Carey, Mesirov Gelman Jaffe Cramer and Jamieson, Philadelphia, PA, for Defendants.
Frederic Baker, Assistant U.S. Trustee, Philadelphia, PA, Trustee.
Before the Court are cross-appeals from the Bankruptcy Court's September 8, 1997, and October 7, 1997 Opinions in these consolidated adversary proceedings. The Chapter 7 debtors in these bankruptcy cases, and defendants in these adversary proceedings, Eric J. Blatstein ("Blatstein") and Main, Inc. ("Main"), a corporation controlled by Blatstein, have appealed the Bankruptcy Court's holding that Blatstein and his long-time accountant, Morris Lift ("Lift") orchestrated a series of "sham" transactions designed to strip Main of its only asset — the Philly Rock Bar and Restaurant ("Philly Rock") — to prevent the plaintiff in these adversary proceedings, 718 Arch Street Associates ("Arch"), from collecting a $2.7 million default judgment that it obtained against Main in November, 1993.1 Blatstein also appeals the Bankruptcy Court's holding that, as a consequence of his alleged efforts to thwart Arch's collection of its judgment, he should be denied his personal bankruptcy discharge pursuant to 11 U.S.C. § 727(a)(2)(A).
Lift, also a defendant in the adversary proceedings, appeals the Bankruptcy Court's holding that his July 25, 1996 public foreclosure on Main's assets and subsequent transfer of those assets to Columbusco, Inc. ("Columbusco") must be set aside pursuant to Pennsylvania's Uniform Fraudulent Transfer Act. Lift also appeals the Bankruptcy Court's rejection of the $492,415.41 Proof of Claim that he filed in connection with the Main bankruptcy case.
The Bankruptcy Court found in Blatstein's favor on two issues. Chief Judge Scholl held that: (1) Blatstein's alleged transfer of in excess of $1 million to accounts maintained in the name of his wife, Lori Blatstein, was not fraudulent;2 and (2) Arch had failed to carry its burden in its claim for alter-ego liability on the non-debtor corporate defendants.3 Arch appeals both of these rulings.4
Blatstein has owned and operated nightclubs and restaurants in Philadelphia for decades. Presently, his establishments in Philadelphia include Philly Rock, the Engine 46 Steakhouse, and the Maui nightclub. He owns and operates each of these establishments as a separate corporation.5 As a result of tax liens and other credit problems, Blatstein has had difficulty obtaining financing for his new restaurants from commercial lenders. See In re Main, Inc., 213 B.R. 67, 75, 94 (Bankr.E.D.Pa.1997). Accordingly, he borrows start-up funding and operating capital from various business associates, including Lift and Gayle and Harold Beratan ("the Beratans").6 213 B.R. at 75. At trial, Lift produced canceled checks made out to the corporate defendants (or to third-parties on their behalf) totaling $530,758.86 and canceled checks evidencing loans from the Beratans totaling $790,200. 213 B.R. at 89-90. The Beratans also purchased a loan from Marian State Bank ("Marian"), originally made to Lift on behalf of Main, that had gone into default. 213 B.R. at 75-76.
In 1987, Blatstein opened the Phoenix nightclub at 718 Arch Street in Philadelphia. In re Main, Inc., 207 B.R. 832, 835 (Bankr. E.D.Pa. Apr. 23, 1997), aff'd in part, rev'd in part, No. Civ. A. 97-CV-3739, 1997 WL 560119 (E.D.Pa. Aug. 26, 1997). On behalf of Archco, Inc., the corporation formed to own the nightclub, Blatstein executed a lease with Arch, the property's owner, that extended through the year 2003. 207 B.R. at 835. In March, 1988, the parties executed a new lease, permitting Arch to increase the square footage of the premises and providing for specified monthly payments over a fifteen-year lease term. In re Blatstein, No. 97-CV-3739, 1997 WL 560119, at *1 (E.D.Pa. Aug. 26, 1997). In addition, Arch loaned Blatstein $227,180 for operating expenses, obtaining a security interest in the nightclub's furniture, fixtures, and equipment. 1997 WL 560119, at *1.
In 1989, Archco filed a Chapter 11 bankruptcy proceeding in which it elected to assume the lease with Arch. 207 B.R. at 835. The bankruptcy failed to resolve Archco's financial difficulties, however, and on January 31, 1992, Arch and Blatstein entered into a letter agreement modifying Archco's payment obligations to cure rent arrearages. 1997 WL 560119, at *2. Under the letter agreement, Archco's failure to satisfy the modified payment schedule would constitute an event of default for which it had seven days to cure. 1997 WL 560119, at *2. On April 6, 1992, following Archco's breach of the terms of the letter agreement, Arch gave Archco and Blatstein notice of default. 1997 WL 560119, at *2. On the evening of April 6th, the Philadelphia Police prevented Blatstein from emptying the nightclub's contents, and Arch padlocked the premises.7 207 B.R. at 835.
On November 12, 1992, Arch entered a confessed judgment against Archco and Blatstein for $2,774,803, representing past due rent and future accelerated rent from the date of the breach in April, 1992 through the expiration of the lease term in 2003. 213 B.R. at 75. On December 8, 1992, Blatstein petitioned to open the confessed judgment, claiming that by padlocking the nightclub doors, Arch prevented Blatstein from curing the default. 1997 WL 560119, at *2. The Common Pleas Court denied Blatstein's petition and, on appeal, the Superior Court of Pennsylvania affirmed, concluding that Blatstein's attempt to remove furniture and fixtures from the nightclub was an act of abandonment entitling Arch to immediate repossession. Id. at *2. The Superior Court found "void of any arguable merit" Blatstein's contention that Arch prevented him from curing the default by padlocking the nightclub premises. 718 Arch Street v. Blatstein, slip op. at 4-5, 433 Pa.Super. 624, 636 A.2d 1223 (Pa.Super. Aug. 31, 1993).
In September, 1989, more than three years before Arch obtained its confessed judgment against Archo, Blatstein had formed Main to operate a new restaurant, which eventually opened in 1991 as Philly Rock. 213 B.R. at 96. To document the outstanding loans owed to Lift by Blatstein's establishments that had closed,8 and in consideration for the start-up financing that Philly Rock would need, Main executed a series of judgment notes to Lift, including a January 31, 1989 judgment note for $500,000, an October 14, 1991 judgment note for $50,000, and a February 15, 1992 judgment note for $140,000. 213 B.R. at 75.
The Bankruptcy Court found that Blastein executed the January 31, 1989 judgment note for the "old loans of the failed businesses and allegedly told Lift at that time that he and Main would pay off the debts of the old corporations to him as a condition of his loans to the new corporations." 213 B.R. at 90. The Bankruptcy Court further noted that "both Lift and Blatstein testified that the $520,000 was used to capitalize Main and get Philly Rock off the ground." 213 B.R. at 90. At trial, Defendants' expert testified that "it was not improper nor unusual for Lift to insist that payment of the old debts occur before he loaned any additional monies to new entities." 213 B.R. at 91.
On May 28, 1992, following alleged defaults on the notes, Lift entered confessed judgments against Main for $43,229.50, based on the October, 1991 note, and for $174,443.40, based on the February, 1992 note. 213 B.R. at 74. On the day he obtained these judgments (totaling $217,672.90), Lift filed Uniform Commercial Code ("U.C.C.") financing statements with the Commonwealth of Pennsylvania referencing "virtually all of Main's assets, i.e., its liquor license, furniture, equipment, trade fixtures, inventory, cash and non-cash proceeds of the assets." 213 B.R. at 74. On November 12, 1992 — the same date on which Arch obtained its confessed judgment against Archco — Lift filed a third confessed judgment against Main for $481,411.30 based upon an alleged default on the January 31, 1989 judgment note. 213 B.R. at 74. Lift also filed a U.C.C. financing statement in connection with this confessed judgment. 213 B.R. at 75.
Shortly after Arch obtained its $2.7 million confessed judgment against Archco, it began serving interrogatories in aid of execution on corporations then owned by Blatstein, including Main. 1997 WL 560119, at *3. In November, 1993, following Main's failure to respond to Arch's interrogatories or appear at a scheduled assessment of damages hearing, the Common Pleas Court entered a default judgment against Main for $2,774,803 — the full amount of Arch's judgment against Archo and Blatstein. 1997 WL 560119, at *3.
In February, 1996, on the basis of its default judgment, Arch garnished $56,228.51 from Main's account at Jefferson Bank. 213 B.R. at 75. In response to the garnishment, Main unsuccessfully petitioned to open the November, 1993 default judgment. 213 B.R. at 75. On appeal, the Superior Court affirmed the denial of Main's petition with the caveat that "the right of Arch . . . to execute against assets in the hands of Main, Inc. is limited to those assets owed to, owned, or...
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