In re Food Management Group, LLC

• Decision Date: 23 January 2008
• Docket Number: Bankruptcy No. 04-22891 (ASH).,Bankruptcy No. 04-22880 (ASH).,Bankruptcy No. 04-22892 (ASH).,Adversary No. 07-08221 (MG).,Bankruptcy No. 04-22890 (ASH).,Bankruptcy No. 04-04-20312 (ASH).
• Citation: 380 B.R. 677
• Parties: In re FOOD MANAGEMENT GROUP, LLC, KMA I, Inc., KMA II, Inc., KMA III, Inc., Bronx Donut Bakery, Inc., Debtor. Janice Grubin, in her capacity as Chapter 11 Trustee for Debtors Food Management Group, LLC, KMA I, Inc., KMA II, Inc., and Bronx Donut Bakery, INC. Plaintiff, v. Robert L. Rattet; Jonathan S. Pasternak; Rattet Pasternak & Gordon Oliver, LLP, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

380 B.R. 677

In re FOOD MANAGEMENT GROUP, LLC, KMA I, Inc., KMA II, Inc., KMA III, Inc., Bronx Donut Bakery, Inc., DebtorJanice Grubin, in her capacity as Chapter 11 Trustee for Debtors Food Management Group, LLC, KMA I, Inc., KMA II, Inc., and Bronx Donut Bakery, INC.Plaintiff, v.Robert L. Rattet; Jonathan S. Pasternak; Rattet Pasternak & Gordon Oliver, LLP, Defendants.

Bankruptcy No. 04-22880 (ASH).

Bankruptcy No. 04-22890 (ASH).

Bankruptcy No. 04-22891 (ASH).

Bankruptcy No. 04-22892 (ASH).

Bankruptcy No. 04-04-20312 (ASH).

Adversary No. 07-08221 (MG).

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

January 23, 2008.

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White Flesher & Fino, LLP, by Gil M. Coogler, Esq., New York, NY, Duane Morris & Heckscher LLP, by John Collen, Esq., Chicago, IL, Co-Counsel for Robert L. Rattet, Jonathan S. Pasternak and Rattet, Pasternak & Gordon Oliver, LLP.

Drinker Biddle & Reath LLP, by Warren von Credo Baker, Esq., Chicago, IL, Counsel for Janice B. Grubin, Chapter 11Trustee for Food Management Group, LLC, KMA I, Inc., KMA II, Inc., KMA III, Inc., and Bronx Donut Bakery, Inc.

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

MARTIN GLENN, Bankruptcy Judge.

This case raises important issues concerning the integrity of the bankruptcy process.If the allegations in the adversary complaint filed by the chapter 11trustee, Janice B. Grubin("Grubin" or "Trustee"), are proven, the former counsel for the debtors engaged in serious wrongdoing.Pending before the Court is a motion to dismiss pursuant to Rules 9(b)and12(b)(6) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Rules 7009and7012(b) of the Federal Rules of Bankruptcy Procedure, filed by the law firm of Rattet, Pasternak & Gordon Oliver, LLP("Rattet"), and two of its named partners, Robert L. Rattet, Esq., and Jonathan S. Pasternak, Esq.(together, the "Rattet Defendants").The Rattet Defendants were among sixteen defendants originally included in the adversary complaint ("Compl.,"ECF Doc. No. 1).¹For the reasons provided below the motion to dismiss is granted in part and denied in part.The Trustee is granted leave to amend the complaint with respect to one of the dismissed claims.

I.BACKGROUND²

On June 1, 2004, the Debtor Food Management Group, LLC filed a voluntary petition for reorganization pursuant to chapter 11 of the Bankruptcy Code, On June 2, 2004, the Debtors KMA I, Inc., KMA II, Inc., KMA III, Inc. and Bronx Donut Bakery, Inc.(collectively, where appropriate, the "Debtors" or "FMG") respectively filed voluntary petitions for reorganization pursuant to chapter 11 of the Bankruptcy Code.FMG engaged in the business of managing twenty four (24) Dunkin' Donuts franchises that were owned and operated by the Debtors KMA I, Inc., KMA II, Inc. and KMA III, Inc.The Debtor Bronx Donut Bakery, Inc. was engaged in the business of operating a cooperative food production facility, servicing the franchises owned by the KMA Debtors and non-related Dunkin' Donuts franchises in the local area.Rattet previously served as counsel to the Debtors in the chapter 11 case from the initial filings in June 2004 until September 2005, when Rattet was ordered by Grubin to have no further involvement in the case.

Even before the chapter 11 case was filed, FMG was embroiled in several lawsuits that threatened its continued existence.FMG was owned by members of the Gianopoulos family.The Dunkin' Donuts franchisor, Dunkin' Donuts Incorporated("Dunkin' Donuts"), sued the Gianopouloses in federal court in White Plains, New York for failure to pay franchise fees.That action was resolved by a settlement that contemplated the sale of FMG's 24 Dunkin' Donuts franchises no later than July 31, 2005(the "Settlement Agreement").The.Settlement Agreement required that the Gianopouloses have no further direct or indirect involvement with Dunkin' Donuts franchises.³

FMG was also a party to a lawsuit in federal court with QuesTech Financial, LLC("QuesTech").QuesTech was a secured lender to FMG and QuesTech claimed that FMG had converted the collateral securing its loans.On QuesTech's Motion, Judge Colleen McMahon appointed a temporary receiver, pendente lite.FMG responded by filing its chapter 11 petition on June 1, 2004.On June 10, 2004, QuesTech moved for the appointment of a chapter 11trustee.The motion was denied, but an Examiner was appointed to investigate the conduct of Debtors and their principals.

After the chapter 11 case was filed, Dunkin' Donuts sought to enforce the terms of the Settlement Agreement requiring the sale of FMG's franchises no later than July 31, 2005.Therefore, the effort to salvage substantial value from the Debtors' business required a sale without any continuing involvement by the Gianopouloses.Dunkin' Donuts had the contractual right to approve any purchaser before the sale could be completed.

On January 11, 2005, Rattet filed on behalf of the Debtors a motion for authorization to conduct an auction of substantially all of Debtors' property free and clear of all liens, claims and encumbrances pursuant to 11 U.S.C. §§ 105,363(a) and (b)and365("Auction Motion").The Auction Motion also included Bidding Procedures and an Offer & Bidder Registration Form.On February 22, 2005, the Court granted the Auction Motion and entered an order authorizing the Bidding Procedures and sale process.(Compl. ¶ 60.)The Bidding Procedures provided that any offer be "a good faith, bona fide, offer to purchase," and required that each bidder "fully disclose the identity of each entity that will be bidding for a[n] Asset or otherwise participating in such bid, and the complete terms of any such participation," and that each bidder submit a registration form certifying that the bidder Was not an insider of the Debtors.(Compl. ¶¶ 61-64.)

The Bidding Procedures required a "Qualified Bidder" to submit an executed, irrevocable contract, a completed Bidder Registration Form and a deposit of ten percent (10%) of the bid amount to Rattet.The Bidding Procedures also contemplated a "stalking horse bid," intended to elicit higher bids, with a negotiated break-up fee in the event the stalking horse bid was topped.

Between March 1, 2005 and March 16, 2005, the Trustee alleges that the Rattet Defendants had discussions with the Gianopouloses concerning the sale of the Debtors' assets, as evidenced by Rattet's time records and documents created by Rattet during this time period.(Compl. ¶¶ 69-72.)At a March 16, 2005 meeting between Mr. Rattet, Thomas Borek("Borek"), and the Gianopouloses, Mr. Rattet purportedly told Borek that he would have to disclose any connection that the Gianopouloses had with any bids for Debtors' assets.(Compl. ¶ 76.)Borek is a principal of 64 East as well as of Newell Funding and Golden Age Mortgage Corp., all of which were co-defendants in this adversary proceeding.(Compl. ¶ 15.)

ZPG Restaurant Associates, LLC("ZPG"), and a related party, the Matrix Realty Group, Inc.("Matrix"), expressed an interest in purchasing all of the Debtors' assets for $16,000,000, and to be designated as a "stalking horse" bidder.ZPG/Matrix requested a break-up fee of 2.5% of its bid in the event that it was not the ultimate successful purchaser of the Debtors' assets.On March 18, 2005, ZPG/Matrix executed (1) a contract of sale for the purchase of all of the Debtors' assets for $16,000,000 and (2) an Offer & Bidder Registration Form.It also deposited $1,600,000 in escrow with Rattet.The Court scheduled a March 24, 2005 hearing on the amount of the ZPG/Matrix breakup fee.

On March 22, 2005, Mr. Rattet met with Borek at the Rattet firm offices to discuss a potential bid by 64 East and involvement by the Gianopouloses in any bid by 64 East.(Compl. ¶ 79.)Immediately after the meeting, Mr. Rattet drafted a letter that he personally handed to Borek, and that included the following language:

With respect to your potential purchase of the above referenced Debtors' assets pursuant to 11 U.S.C. Sections 363and365, please find enclosed herewith the following:

(1) A copy of an agreement, dated October 2002, as amended, between Dunkin' Donuts Incorporated and its affiliates, and the Debtors.

(2) A copy of the Bidding Procedures and Auction Order.Please note that the Auction Order supersedes the printed Bidding Procedures, and to the extent the latter are inconsistent with the Order, the Order controls.

Please pay particular attention to Paragraph "5" of the Settlement Agreement with respect to transfer of the franchises.Because subparagraphs "E" and "F" of the Paragraph 5 require an "arms-length transaction" and that the transferee cannot be "associated in any ways [sic] with the past or present management," I strongly urge you to ensure that Tom and/or Gus have individual bankruptcy counsel in connection with any security provided to you or otherwise, and insist that they do so.

(Compl. ¶ 80 Ex. L.)

Mr. Rattet later testified in a Rule 2004 deposition that the March 22 letter was intended as a "warning" to Borek because of "an innuendo" of an improper arrangement between Borek and the Gianopouloses regarding the 64 East bid.(Compl, ¶ 81.)Rattet's concerns in the letter to Borek were not shared with any other persons (including Borek's own counsel in the bankruptcy) nor did Rattet disclose this information to the Court.(Compl. ¶¶ 82-85.)

At the March 24, 2005Court hearing, with the new higher bid in hand, Rattet asked the Court to approve 64 East's $21. million bid as the stalking horse bid (instead of the ZPG/Matrix $16 million bid), and also to approve a break-up fee for 64 East in the event its bid was topped.On March 31, 2005, the Court approved the 64 East bid, including a break-up fee of $250,000...