In re Emergency Beacon Corp.
| Citation | 27 BR 757 |
| Decision Date | 22 February 1983 |
| Docket Number | Bankruptcy No. 76 B 356. |
| Parties | In re EMERGENCY BEACON CORPORATION, Debtor. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Harvey S. Barr, Spring Valley, N.Y., Trustee in Possession and for Trustee in Possession.
Stephen G. Glatzer, New Rochelle, N.Y., pro se.
Guggenheimer & Untermyer, New York City, for Montmartco, Inc.; Ephraim K. Leibowitz, New York City, of counsel.
DECISION ON APPLICATION TO CHARGE CREDITOR WITH ATTORNEY'S FEES AND COSTS
The trustee in possession of Emergency Beacon Corporation (EBC) and a major shareholder of EBC seek to recover attorney's fees, costs and expenses from a creditor, Montmartco, Inc. (formerly known as Montco Inc.) (for the sake of brevity, whenever the court hereinafter refers to Montco, Inc. it will be called Montmartco). The trustee in possession retained counsel to perform legal services for which reimbursement is sought. The major shareholder, Stephen G. Glatzer, the president of EBC, seeks to recover as a pro se litigant. Recovery is sought on the ground that the creditor, Montmartco, vexatiously continued litigation against the estate and that Montmartco's conduct was in bad faith.
In 1968, Stephen G. Glatzer and Rocco Scappatura formed EBC. Glatzer was EBC's president and Scappatura was vice-president, and after the firm went public, each became a 28% shareholder. In 1974, there was a falling out between the two men. After negotiations which took place on November 3, 1974, Glatzer agreed to leave the company, EBC agreed to pay Glatzer $100,000 per year for two years, and Scappatura agreed to buy Glatzer's shares for $200,000. These agreements were memorialized in the corporate minutes prepared by the corporate secretary, Jack Polish. EBC also agreed that Glatzer could keep certain equipment and that he was to pay EBC the book value of the two company cars in his possession, both vintage Buicks. After Glatzer's departure, Scappatura assumed the management of EBC. Glatzer never received any of the payments called for in the agreements made with EBC and Scappatura.
EBC's financial plight deteriorated under the Scappatura management. On February 18, 1976, EBC filed a petition for an arrangement under Chapter XI of the former Bankruptcy Act, 11 U.S.C. §§ 701-99. During the course of the Chapter XI case, a special meeting of creditors was held to approve the debtor's sale of a company airplane. Montmartco wanted the proceeds to be remitted to it pursuant to Montmartco's secured claim. This request was approved by the court. However, counsel for the debtor also requested authority to issue a certificate of indebtedness to Montmartco pursuant to § 344 of the former Bankruptcy Act, 11 U.S.C. § 744. By issuing the certificate, the debtor hoped to stave off foreclosure by Montmartco. Although the court refused to permit the issuance of a certificate of indebtedness, language to this effect was included in an order submitted by debtor's counsel that was supposed to relate only to the remittance to Montmartco of the proceeds from the sale of the debtor's airplane. There was no opposition to the proposed order, which was signed on the day it was submitted.
On March 11, 1977, the Scappatura-led debtor consented to an adjudication in bankruptcy. Harvey S. Barr, the standby trustee was appointed trustee in bankruptcy. However, EBC's shareholders brought back Stephen G. Glatzer by electing him president at a shareholder's meeting. The shareholders authorized Glatzer to reinstitute the Chapter XI proceedings. A second Chapter XI petition was filed and accepted by the court on April 29, 1977. Harvey S. Barr, as the former trustee in bankruptcy, continued as trustee in possession pursuant to § 342 of the former Bankruptcy Act, 11 U.S.C. § 742 and Bankruptcy Rule 11-18(b). The secured creditor, Montmartco, was allowed to foreclosure on all of the debtor's personal property. The second mortgage on the debtor's real estate has matured and the funds for payment are being held in escrow in a money market fund pending a determination of this dispute as to attorney's fees, costs and expenses. Therefore, apart from the mortgage, the balance of Montmartco's claim is unsecured.
On May 9, 1978, Montmartco filed its proof of claim for $217,363.75, with interest at 24% per annum from November 1, 1977. Montmartco claimed an administration priority status by reason of the certificate of indebtedness. The trustee in possession objected to the certificate of indebtedness because it had been issued without notice, without cause, without consideration and had been procured without full disclosure to the court. The Bankruptcy Court sustained the objection to the certificate of indebtedness and ruled that the court never intended to authorize the issuance of the certificate of indebtedness. The Bankruptcy Court pointed out that the order relating to the proceeds from the sale of the airplane should not have included language approving the issuance of a certificate of indebtedness, especially since the court expressly refused to entertain the oral application for a certificate of indebtedness. In re Emergency Beacon Corp., 5 B.C.D. 372, 19 C.B.C. 362 (Bkrtcy.S.D.N.Y.1978).
Montmartco unsuccessfully appealed this ruling to the District Court. In re Emergency Beacon Corp., CCH 67, 480 (S.D.N.Y. 1980). The District Court's affirmance of the Bankruptcy court's ruling was affirmed on appeal to the Second Circuit Court of Appeals. In re Emergency Beacon Corp., 666 F.2d 754 (2d Cir.1981).
The trustee in possession and EBC's president, Stephen G. Glatzer, contend that the appeals by Montmartco were unnecessary, vexatious and in bad faith, in light of this court's ruling that it never intended to authorize the issuance of the certificate of indebtedness, and that Montmartco's continued efforts to reinstitute the effectiveness of the certificate justify the imposition of attorney's fees and costs. They reason that Montmartco should not have continued litigation over a three year period in order to prevent this court from rectifying a mistake in a submitted order which had misstated the court's actual ruling regarding the certificate of indebtedness issue.
Apart from the litigation involving the certificate of indebtedness, there were numerous other disputed matters resulting in litigation between Montmartco, the trustee in possession and the debtor's president, Stephen G. Glatzer, for which compensation is sought. One controversy concerned Glatzer's right to retain the two automobiles which were part of the buy-out agreement negotiated before Glatzer left the company in 1974.
In the spring of 1975, Montmartco had loaned $275,000 to EBC, secured by EBC's present and future accounts, contract rights, machinery, furniture, equipment, inventory and a second mortgage on EBC's real estate. The extent of Montmartco's lien became the subject of litigation in March, 1979, when the trustee in possession sought permission from this court to give Glatzer a bill of sale and/or certificates of title for the two Buicks, free and clear of all liens. The trustee's application was opposed by Montmartco, on the ground that its security interest in EBC's property, which had been granted in connection with the $275,000 loan, extended to the two Buicks held by Glatzer. This litigation was ultimately resolved by the Second Circuit Court of Appeals in favor of Glatzer. In re Emergency Beacon Corp., 665 F.2d 36 (2d Cir.1981).
Another dispute involved Montmartco's motion to dismiss the reinstituted Chapter XI petition filed by the Glatzer-led debtor after the Scappatura-led debtor had consented to an adjudication in bankruptcy. The Bankruptcy Court ruled that Montmartco's motion to dismiss was frivolously commenced, in light of the pending litigation in the Second Circuit Court of Appeals in which this court's authority to accept the reinstituted Chapter XI petition and to reject the certificate of indebtedness issued during the first Chapter XI case was already at issue. Accordingly, the Bankruptcy Court fined Montmartco $500 for the frivolous litigation. Montmartco appealed the fine to the District Court, where the fine was sustained on September 21, 1981 with an admonishment to Montmartco that an additional fine was likely to be imposed by the Second Circuit if Montmartco appealed any further.
Further litigation between the parties for which compensation is sought related to Montmartco's right to foreclose the second mortgage on the debtor's real estate. The Bankruptcy Court had directed that the mortgage payments with respect to this second mortgage should be held by the trustee in possession in an escrow money market account as security for any attorney's fees or costs that might be awarded by the Bankruptcy Court against Montmartco as a result of the instant applications. One of the payments to the escrow account allegedly bounced, prompting Montmartco's application to this court for permission to proceed with foreclosure in state court on the basis that a default had occurred under the terms of the mortgage and a stipulation between the parties concerning the payments. The trustee in possession denied that a default had occurred. This court vacated the stay so that the issue of whether a default had occurred could be determined in the state court, since the stipulation had arisen out of prior state court proceedings between the parties.
Eventually, the state court ruled that there had been no default. The trustee claims that the litigation was oppressive and vexatious, and seeks to recover attorney fees.
The trustee in possession seeks reimbursement for counsel fees and expenses for the following matters:
(1) Litigation involving his objection to Montmartco's claimed administration status under the improperly obtained certificate of indebtedness: Fees, $52,500;...
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