In re Chief Executive Officers Clubs, Inc.

• Citation: 359 B.R. 527
• Decision Date: 31 January 2007
• Docket Number: No. 02-14829-MG.,02-14829-MG.
• Parties: In re CHIEF EXECUTIVE OFFICERS CLUBS, INC., Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

359 B.R. 527

In re CHIEF EXECUTIVE OFFICERS CLUBS, INC., Debtor.

No. 02-14829-MG.

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

January 31, 2007.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Avrum J. Rosen, Esq., The Law Offices of Avrum J. Rosen, of Counsel, Huntington, NY, Attorneys for Trustee.

Michael Siegel, Esq., Siegel & Siegel P.C., of Counsel, New York, NY, Attorneys for Joseph Mancuso.

MEMORANDUM OPINION AND ORDER REGARDING TRUSTEE'S MOTION SEEKING TO HOLD JOSEPH MANCUSO IN CIVIL CONTEMPT

MARTIN GLENN, Bankruptcy Judge.

Kenneth P. Silverman, the Chapter 7 Trustee ("Silverman" or the "Trustee") of Chief Executive Officers Clubs, Inc. ("Debtor"), seeks an order holding Joseph Mancuso ("Mancuso") in civil contempt for violating a November 18, 2002 Order ("November 18 Order") signed by Chief Judge Bernstein. The November 18 Order enjoined Mancuso from transferring or diverting any property of Debtor's estate pending the appointment and qualification of a chapter 11 trustee. The Trustee alleges that Mancuso violated the November 18 Order by transferring money from Debtor's bank account for his own use or benefit.

Federal Rule of Civil Procedure 52 (Findings by the Court) is applicable to this contested matter. See Federal Rules of Bankruptcy Procedure 7052, 9014(c) and 9020. This Memorandum Opinion and Order includes the Court's findings of fact and conclusions of law. The Court has also included specific findings with respect to the credibility of the witnesses who testified in Court based upon my opportunity to hear and observe the witnesses as they testified.

For the reasons provided below, the Court grants the Trustee's motion in part and denies it in part, ordering that Mancuso pay the Trustee the sum of $1,500 on or before 5:00 p.m., Monday, February 12, 2007. If Mancuso fails to pay the money to the Trustee by that date and time, Mancuso and his counsel shall appear before the Court on February 13, 2007, at 10:00 a.m., in Courtroom 723, to show cause why Mancuso should not immediately be jailed until he pays the money.

I. Background

The Debtor filed a chapter 11 case on September 30, 2002. The Debtor is a not-for-profit New York corporation. Mancuso was its Chief Executive Officer, and he signed the chapter 11 petition. Gabriel Del Virginia, Esq. appeared as the Debtor's counsel of record when the case was filed. The chapter 11 petition did not include the required schedules and statement of affairs. At the request of 180 Varick Street Corporation ("180 Varick Street"), Debtor's largest creditor, the Debtor was directed to file full schedules and a statement of affairs on or before November 8, 2002, by 5:00 p.m. (ECF Docket No. 8). The Debtor never filed the documents. On October 27, 2002, 180 Varick Street filed an application for an order to show cause for the appointment of a chapter 11 trustee. The order to show cause was entered on October 31, 2002, and a hearing was scheduled for 10:00 a.m., November 18, 2002 (ECF Docket No. 13). The events at issue in this contempt proceeding happened after Mancuso learned that the order to show cause for the appointment of a chapter 11 trustee had been entered, and that appointment of a trustee would strip him of the power unilaterally to transfer the Debtor's property.

At the November 18, 2002 hearing, Chief Judge Bernstein granted the motion for appointment of a trustee. Because of concerns raised regarding Mancuso's conduct as Chief Executive Officer of the debtor in possession, Chief Judge Bernstein enjoined Mancuso and his wife from transferring or diverting property of the estate pending appointment and qualification of the trustee. With Mancuso present in the courtroom, Chief Judge Bernstein announced his decision from the bench. The written November 18 Order was signed by Chief Judge Bernstein at 11:07 a.m. and entered on the docket at 11:30 a.m. (ECF Docket No. 21). The November 18 Order provided as follows:

ORDERED, that pending the appointment and qualification of the chapter 11 trustee, the management of the debtor, including Joseph Mancuso and Karla Mancuso, are enjoined without further order of the Court from transferring or diverting any property of the estate except for the payment of the wages (and corresponding payroll taxes) of three employees as specifically authorized on the November 18, 2002 record.

The carve-out permitting payment of wages and payroll taxes of three employees was included after Mancuso raised the issue during the November 18, 2002 hearing.

On November 26, 2002, Silverman was appointed as the chapter 11 trustee. On March 11, 2003, the case was converted to a case under chapter 7, and on March 24, 2003, Silverman was appointed as the chapter 7 trustee.

After his appointment, the Trustee commenced an investigation into the conduct of the Debtor's business and affairs. The Trustee's counsel served subpoenas for bank records, including a subpoena on The Provident Bank ("Provident"), where the Debtor maintained a business checking account in the name CEO Clubs, Inc. Based upon a review of Debtor's "Reconciliation Detail" for the Provident account, see PX 15, and the Provident bank records, see PX 12, the Trustee believed that Mancuso transferred or diverted money from the Debtor's Provident account after the November 18 Order was entered.

On March 25, 2004, the Trustee applied for and the Court signed an order to show cause why Mancuso should not be held in civil contempt for violating the November 18 Order (ECF Docket Nos. 80 and 81). Specifically, Silverman alleges that, in violation of the November 18 Order, Mancuso made, or caused to be made, the following transfers of estate property: (1) a $31,375¹ wire transfer on November 18, 2002, from the Debtor's Provident account to CEO Clubs China, Inc.; (2) a $5,000 check, dated November 15, 2002, signed by Mancuso and made payable to cash, that was endorsed and cashed by Mancuso on November 18, 2002; (3) a $20,000 check, dated November 8, 2002, signed by Mancuso and made payable to his minor daughter, with the legend "repay loan" handwritten on the check; (4) a $1,500 check, hand-dated November 16, 2002, but allegedly back-dated from November 19, 2002, signed by Mancuso and made payable to Wells Fargo Bank; and (5) two payroll checks for salary to Mancuso and his wife, both dated November 26, 2002, in the amounts of $436.09 and $419.90, respectively.²

An evidentiary hearing on the contempt motion was scheduled for March 31, 2004. The disposition of the motion was long-delayed, however, by various requested adjournments, and by a personal chapter 7 case Mancuso filed on April 9, 2004, in the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division (see ECF Docket No. 90). Following briefing on the impact of Mancuso's pending chapter 7 proceeding on the continued prosecution of the civil contempt motion, on July 20, 2004, Chief Judge Bernstein concluded in a written opinion that continuation of the contempt proceeding was barred by the automatic stay, 11 U.S.C. § 362(a), because the relief sought was purely compensatory (ECF Docket No. 94).

In January 2005, Silverman commenced an adversary proceeding against Mancuso in his Texas chapter 7 case seeking to deny Mancuso a discharge. A trial of the adversary proceeding was held in January 2006. On August 16, 2005, a Judgment was entered denying Mancuso a discharge pursuant to 11 U.S.C. § 727(a)(3), (a)(4)(A) and (a)(5) (see ECF Docket No. 99, Exhibit A). Judge Brenda T. Rhoades also filed detailed Findings of Fact and Conclusions of Law ("Findings & Conclusions"), concluding that Mancuso engaged in numerous acts of misconduct that barred any discharge.³ Id.

With Mancuso's discharge denied, on September 29, 2006, the Trustee requested that the contempt proceeding be placed back on the Court's calendar (ECF Docket No. 98). On November 3, 2006, the Trustee filed supplemental papers in support of the contempt motion (ECF Docket No. 99).

All matters relating to the motion to hold Mancuso in civil contempt were transferred to the undersigned, and on December 20, 2006, the Court conducted a pretrial scheduling conference. A Scheduling Order was entered the next day, requiring the parties to complete a joint pretrial order identifying witnesses and documents that the parties anticipated relying upon during the evidentiary hearing, and scheduling the evidentiary hearing for January 17, 2007 (ECF Docket No. 106).

II. A Court's Power to Impose Civil Contempt Sanctions

A. Court's Authority to Punish for Contempt

Courts have inherent power to enforce compliance with their lawful orders through civil contempt. See Spallone v. United States, 493 U.S. 265, 110 S.Ct. 625, 107 L.Ed.2d 644 (1990); Shillitani v. United States, 384 U.S. 364, 369, 86 S.Ct. 1531, 16 L.Ed.2d 622 (1966). As the Supreme Court stated in Ex parte Robinson, 19 Wall. 505, 86 U.S. 505, 510, 22 L.Ed. 205 (1874), "the power to punish for contempt is inherent in all courts; its existence is essential to the preservation of order in judicial proceedings, and to the enforcement of the judgments, orders and writs of the courts and, consequently, to the due administration of justice." See also 11A CHARLES A. WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2960 (3d ed. 2006) ("A court's ability to punish contempt is thought to be an inherent and integral element of its power and has deep historical roots.").

Courts have embraced the inherent contempt authority as a power "necessary to the exercise of all others." Int'l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 831, 114 S.Ct. 2552, 129 L.Ed.2d 642 (1994) ("Courts independently must be vested with power to impose silence, respect, and decorum, in their presence, and submission to their lawful mandates, and to preserve themselves and their officers from the approach and insults of pollution."); see also Roadway Express, Inc. v. Piper, 447 U.S....