In re Dollar Time Group, Inc.
| Decision Date | 20 July 1998 |
| Docket Number | Bankruptcy No. 95-22816-BKC-RBR,95-23589-BKC-RBR,Adversary No. 96-0380-BKC-RBRA.,95-22817-BKC-RBR |
| Citation | 223 BR 237 |
| Parties | In re DOLLAR TIME GROUP, INC., Store No. 22, Inc. a/k/a Dollar Time Dollar Time, Inc., Debtors. Kenneth A. WELT, Trustee, Plaintiff, v. Joseph SASSON, Individually, Jeffrey Klansky, Individually, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
COPYRIGHT MATERIAL OMITTED
Ronald Neiwirth, Miami, FL, for Debtors.
Irwin Fingerit, New York City, for Defendants.
Arthur Rice, Miami, FL, for Plaintiff.
RECOMMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW
This cause of action is before the Court upon the complaint of Kenneth A. Welt, Trustee, ("Trustee") alleging that Joseph Sasson ("Sasson") and Jeffrey Klansky ("Klansky") breached their corporate fiduciary duty to Dollar Time Group, Inc. ("Dollar Time"), a debtor in this jointly administered case. After a trial on the merits in Miami, Florida, on June 16 and September 15, 1997, the matter was taken under advisement.
Jurisdiction of this proceeding is pursuant to 28 U.S.C. §§ 157(a) & 1334. Sasson and Klansky have moved that the Court determine this to be a related, noncore case.
The Court agrees that this is a noncore proceeding related to but not arising in or under title 11. A core proceeding invokes a substantive right either provided by title 11 or dependent for its existence upon a bankruptcy environment. Diamond Mortgage Corp. v. Sugar, 913 F.2d 1233, 1238 (7th Cir.1990) (quoting Barnett v. Stern, 909 F.2d 973, 981 (7th Cir.1990)); Peterson v. 610 W. 142 Owners Corp. (In re 610 W. 142 Owners Corp.), 219 B.R. 363, 367 (Bankr. S.D.N.Y.1998) (quoting In re Leco Enters., 144 B.R. 244, 248-49 (S.D.N.Y.1987) (citing In re Wood, 825 F.2d 90, 96-97 (5th Cir. 1987))); Acolyte Electric Corp. v. City of New York, 69 B.R. 155, 173 (Bankr.E.D.N.Y. 1986), aff'd, 1987 WL 47763 (E.D.N.Y. March 27, 1987).
In contrast, a noncore proceeding involves non-bankruptcy law claims that are independent of and antecedent to the bankruptcy filing. Peter J. Schmitt Co. v. Firestone Star Market, Inc. (In re Peter J. Schmitt Co.), 150 B.R. 556, 558 (Bankr.D.Del. 1993); Nationwide Roofing & Sheet Metal, Inc. v. Cincinnati Ins. Co. (In re Nationwide Roofing & Sheet Metal, Inc.), 130 B.R. 768, 774 (Bankr.S.D.Ohio 1991). A noncore, related proceeding is one that affects the amount of property of the estate or allocation of property among creditors. Elscint, Inc. v. First Wis. Fin. Corp. (In re Xonics, Inc.), 813 F.2d 127, 131 (7th Cir.1987) (citing In re Paso Del Norte Oil Co., 755 F.2d 421 (5th Cir.1985)); Pacor, Inc. v. Higgins, 743 F.2d 984, 994-96 (3rd Cir.1984).
The instant case involves a state law cause of action alleging breach of fiduciary duty. The events giving rise to the cause occurred approximately two years before the pending chapter 7 bankruptcy was filed. Furthermore, the corporation could have pursued the cause even if the Debtor were not in bankruptcy. For these three reasons, the proceeding is noncore.
Though noncore, this proceeding is related to the bankruptcy case because the outcome will affect the amount of property of the estate and the extent of allocation to creditors. Numerous courts have characterized cases as both noncore and related when a trustee or debtor-in-possession has assumed the debtor corporation's cause of action against fiduciaries for breach of duty. See, e.g., Diamond Mortgage Corp. v. Sugar, 913 F.2d 1233, 1239 (7th Cir.1990) (); Mellon v. Delaware & Hudson Ry. Co. (In re Delaware & Hudson Ry. Co.), 122 B.R. 887, 894 (D.Del.1991) (); Nationwide Roofing & Sheet Metal, Inc. v. Cincinnati Insurance Co. (In re Nationwide Roofing & Sheet Metal, Inc.), 130 B.R. 768, (Bankr.S.D.Ohio 1991) ().
Because this is a noncore proceeding, the Court submits the following proposed findings of fact and conclusions of law to the district court for de novo review of those matters to which either party has lodged a timely objection. 28 U.S.C. § 157(c)(1) (1994); Federal Rule of Bankruptcy Procedure 9033.
The relevant events precipitating this cause of action occurred between August 1993 and late March 1994, more than a year before Dollar Time filed its chapter 11 bankruptcy in July of 1995. In August 1993, Dollar Time was a publicly held corporation engaged in the retail sales of a broad range of merchandise selling for approximately one dollar. A Nevada corporation headquartered in Hollywood, Florida, Dollar Time operated numerous stores throughout the United States.
During the same period, Sasson and Klansky were 100 percent shareholders and the principal officers of A Real New York Bargain — Worldwide, Ltd. ("Bargain"), an entity created by Sasson and Klansky to engage in retail sales of men's and women's clothing at a price of approximately $10.00 per unit. Bargain owned and operated about ten stores and franchised another six, all in either Florida or the New York metropolitan area. Sasson and Klansky also owned the outstanding shares of stock and were the principal officers of affiliated corporations whose business concept was similar to that of Bargain.
In August 1993, certain Dollar Time shareholders initiated discussions with Sasson and Klansky about a possible merger between Bargain and its affiliates and Dollar Time. These major shareholders outlined a plan to restructure the management of Dollar Time, make its stores more compatible with Bargain's stores, and expand both entities, thereby increasing profits through the acquisition and merger of Bargain. The proposal entailed Sasson and Klansky selling their respective interests in Bargain and its affiliates to Dollar Time in return for shares of stock in Dollar Time and an agreement that Sasson and Klansky would operate Dollar Time.
On September 2, 1993, a letter of intent was executed between the parties. It provided that upon the consummation of the proposed merger, Sasson and Klansky would receive between them ten million shares of common stock of Dollar Time for their interest in 100 percent of all issued and outstanding securities of Bargain and its affiliates.
On the same date, Sasson entered into a Consulting Agreement with Dollar Time. The Consulting Agreement provided that while Dollar Time and Bargain continued to negotiate terms of a merger agreement, Sasson would act as "managing consultant" to Dollar Time with "authority to manage all aspects of the business of Dollar Time during the term of this agreement." (Trustee's Ex. 4 at 2.) The Consulting Agreement indemnified Sasson against liability for performance of his duties undertaken in good faith and the best interests of the corporation, and stated that New York law would apply to any dispute resulting from the agreement.
Before and during the period of Sasson's management of Dollar Time, the company was in poor financial condition, a circumstance Sasson acknowledged in his testimony. In 1993, before Sasson's and Klansky's involvement, Dollar Time incurred significant operating losses that led to a continual need to raise additional cash from third party sources. Bargain, by contrast, was financially healthy, with cash and equivalents of $640,000.00 and total assets of $3,000,000.00 as of June 1993.
On September 24, 1993, after Sasson's Consulting Agreement was in effect, Bargain borrowed $500,000.00 from Dollar Time as evidenced by a promissory note for that amount and a separate letter agreement captioned "Re: Bridge Loan." (Def.'s Ex. E; Trustee's Ex. 5). The $500,000.00 to fund the loan was supplied by Jordan Belfort, a controlling shareholder of Dollar Time. Bargain agreed to pay five percent per year interest and the note would mature in January 1995.
Testimony conflicts about whether the board had earmarked the funds to pay for goods for Dollar Time inventory and Bargain inventory, whether the funds were to be an inducement to Bargain to enter into the merger, or whether the funds were to be used for other expenses related to the merger. William McConnell, Dollar Time chairman of the board in September 1993, testified that the board did discuss the loan to Bargain at a September meeting. The Letter Agreement stated that the funds were for working capital.
The Letter Agreement granted Dollar Time a security interest in Bargain's assets, accounts receivable, and inventory and required Bargain to file the appropriate financing statements to perfect Dollar Time's lien. Dollar Time prepared the agreement as evidenced by the return address, and the board of directors approved the loan as evidenced by a signature of a representative of Dollar Time at the close of the agreement. A provision of the document stated that the note and Letter Agreement would be construed under New York law. Bargain did not execute or deliver to Dollar Time a formal security agreement, nor were UCC financing statements ever recorded.
Sasson testified that commencing in September 1993, he and other personnel of both Bargain and Dollar Time began traveling around the county to assess the operations of Dollar Time and the business needs of the combined companies. During the ensuing four months, Sasson and Klansky, who remained officers, directors, and sole shareholders of Bargain, supervised the opening of ten new Dollar Time stores and converted eight others to clothing stores while continuing to operate Bargain and its affiliates. Sasson and Klansky had check writing authority and began writing checks on Dollar Time's account as early as October 4, 1993.
Five Bargain employees worked for Dollar Time for varying periods from September 1993 to January...
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