In re Food Management Group, LLC, Case No. 04-22880 (ASH) (Bankr. S.D.N.Y. 7/16/2008), Case No. 04-22880 (ASH)
| Decision Date | 16 July 2008 |
| Docket Number | Adversary Proceeding Case No. 06-08470A,No. 04-22892 (ASH),No. 04-22891 (ASH),No. 04-20312 (ASH) (Jointly Administered),No. 04-22890 (ASH),Case No. 04-22880 (ASH),04-22890 (ASH),04-22891 (ASH),04-22892 (ASH),04-20312 (ASH) (Jointly Administered) |
| Parties | In re: FOOD MANAGEMENT GROUP, LLC, KMA I, INC., KMA II, INC., KMA III, INC., BRONX DONUT BAKERY, INC., Chapter 11 Debtors. FOOD MANAGEMENT GROUP, LLC, KMA I, INC., KMA II, INC., KMA III, INC., BRONX DONUT BAKERY, INC., Plaintiffs, v. RICHARD PU, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
JANICE B. GRUBIN, Chapter 11 Trustee.
DRINKER BIDDLE & REATH LLP Attorneys for Plaintiff, Janice B. Grubin as Chapter 11 Trustee By: John D'Attomo, Esq.
RICHARD PU
Richard Pu ("Pu") is one of the debtors' former attorneys and has filed a $489,448.81 proof of claim on account of legal services rendered to the debtors and/or other entities. Pu's proof of claim is based on a number of engagements billed under thirteen separate billing categories. The Chapter 11 Trustee (the "Trustee") has objected to Pu's proof of claim on a variety of grounds and seeks an order disallowing and expunging the claim in its entirety through this adversary proceeding.1 For the reasons set forth below, the Trustee's objection will be sustained in part and overruled in part. This adversary proceeding was tried to the Court without a jury and this decision sets forth the Court's findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(b) and 157(a) and the standing order of referral to bankruptcy judges signed by Acting Chief Judge Robert J. Ward on July 10, 1984. The adversary proceeding now before the Court is a core proceeding under 28 U.S.C. § 157(b)(2).
The debtors are each companies that were owned and operated by Anastasios Gianopoulos ("Tom"). The debtors (or the "Tom Companies") owned and operated a number of Dunkin' Donuts franchises in the Westchester area. Debtors KMA I, Inc., KMA II, Inc., KMA III, Inc. and Bronx Donut Bakery, Inc. were formed on November 19, 2002 as part of an October 18, 2002 settlement (the "Dunkin' Donuts Settlement Agreement") between Dunkin' Donuts Incorporated, Baskin-Robbins USA Co., Baskin-Robbins Incorporated and Third Dunkin' Donuts Realty, Inc. (collectively "Dunkin' Donuts") and Tom, Tom's brother Constantine Gianopoulos ("Gus"), and numerous companies owned and controlled by one or both of the Gianopoulos brothers, some of which (those companies that have been referred to in these proceedings as the "Gus Companies") operated the donut shops and bakery that were later transferred to the Tom Companies. The Dunkin' Donuts Settlement Agreement resolved three separate lawsuits pending in federal District Court between the parties to the Agreement. It provided, in relevant summary, that the Dunkin' Donuts franchise agreements that were held by the settling Gianopoulos companies would be transferred to new corporate entities to be owned by Tom and/or Gus which were to operate the franchises (and the bakery that serviced them). Pursuant to the Dunkin' Donuts Settlement Agreement, some but not all of the franchise agreements held by the Gianopoulos companies were transferred to debtors KMA I, Inc., KMA II, Inc., KMA III, Inc. and Bronx Donut Bakery, Inc. However, the other assets of the Gianopoulos companies (including several Dunkin' Donuts franchises) were not transferred to the Tom Companies which became the debtors.
Sometime in 2003 Questech Financial LLC ("Questech") brought one or more actions against the Gus Companies and other companies owned or controlled by one or both of the Gianopoulos brothers (the "Questech defendants")2 in New York State court (the "Questech state court litigation") seeking to foreclose upon substantially all of the assets of those companies based on a default under seventeen notes and security agreements that encumbered those assets (the "Questech Collateral"3). Many of the obligations under these agreements were cross-guaranteed by the various Questech defendants. The Questech defendants were represented by Pu in the Questech state court litigation and claimed through Gus and attorney Pu that they no longer possessed the Questech Collateral. Tom testified in a deposition that the Questech defendants had "abandoned" the Questech Collateral and that his company (whose name he refused to identify at the time) "found" the "abandoned" property sometime in April or May 2003. He also testified that his company began using this newly "found" property to operate donut shops in the Questech defendants' "abandoned" locations. Subsequently, and at the direction of the state court, Pu informed Questech in a letter dated January 2, 2004 that Tom's company that operated the shops was Food Management Group, LLC ("FMG").
Thereafter, Questech brought suit against FMG in federal District Court (the "Questech federal court litigation") to recover the Questech Collateral from FMG under a conversion and unjust enrichment theory. In the Questech federal court litigation FMG, through Tom, asserted that it "found" the assets that were "abandoned" by the Questech defendants and operated those shops pursuant to franchise agreements issued to FMG by Dunkin' Donuts. Attorney Pu also advanced the position that FMG was a Dunkin' Donuts franchisee and that as such FMG controlled the Questech Collateral and was using it to operate the donut shops. This assertion was patently false. As noted previously, it was the KMA entities and the Bronx Donut Bakery that held the franchise agreements and other collateral and were operating the donut shops using the Questech Collateral. In a written decision imposing sanctions against Tom and Pu for their misconduct in the litigation, Magistrate Judge Fox ruled that Tom and Pu affirmatively mislead Questech into believing that FMG held the franchises and thereby induced Questech to sue FMG for the return of the Questech Collateral rather than the parties that actually held the franchises, namely, KMA I, Inc., KMA II, Inc., KMA III, Inc., and Bronx Donut Bakery, Inc. Magistrate Judge Fox found that Tom's and Pu's conduct in concealing the true franchisees amounted to bad faith for the purposes of delay, and Pu was subsequently suspended from the practice of law as a result of his misconduct in the litigation.
As a result of the above-referenced obfuscation and efforts to "hide the ball" as to the true identity of the entities that possessed the Questech Collateral, Judge Colleen McMahon appointed a receiver over all of the Questech Collateral4 by an order signed on May 21, 2004 (the "Receiver Order") based in part on the "real and present danger that the [Questech] Collateral could be transferred, sold, lost or squandered pendent lite." Receiver Order at 6. Due to the appointment of the receiver, on June 1 and 2, 2004 the Tom Companies each filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code and thereby became the debtors in this Court. See Tom's 1007-2 Affidavit. By an order of this Court dated June 4, 2004, the bankruptcy cases of these debtors were procedurally consolidated for the purpose of joint administration.
Questech promptly moved for the appointment of a trustee under 11 U.S.C. § 1104, alleging multiple acts of fraud and wrongdoing by Tom and Gus. The motion was granted to the extent that the Court entered an order dated June 28, 2004 for the appointment of an examiner (the "Examiner"). By orders dated September 1 and 2, 2005 the Court authorized and confirmed the appointment of Janice B. Grubin as Chapter 11 Trustee (the "Trustee") in response to the latest in a series of motions for the appointment of a trustee filed by Questech following revelations of a continuing series of misconduct by Tom as owner and principal of the debtors, many of which were disclosed in Interim Reports filed by the Examiner. Since her appointment the Trustee has operated and controlled the debtors' assets and affairs, including prosecution of the present adversary proceeding.
After the filing the debtors sought to settle the controversy with Questech. In the course of settlement negotiations it became apparent that although the Gus Companies had transferred the franchise agreements relating to their Dunkin' Donuts shops to the KMA entities and the Bronx Donut Bakery, the Gianopoulos companies had not transferred all of their assets to the debtors. In order to settle the controversy with Questech the debtors, the Gus Companies and Questech entered into a stipulation whereby all of the assets and liabilities of the Gus Companies were transferred to the debtors' estates. The stipulation was "So Ordered" by this Court on December 1, 2004 and an amended stipulation was "So Ordered" by this Court on December 3, 2004.5
Because the Gus Companies' assets and liabilities were transferred to the debtors' estates without allocating them between the five estates and because various other transactions have been conducted between the debtors' estates and third parties without allocating the proceeds of those transactions between the estates, the debtors' bankruptcy estates will be the subject of a motion for substantive consolidation. For the purposes of this Decision, it is presumed that the debtors' estates have been substantively consolidated.
On August 16, 2004, Pu filed an identical proof of claim in each of the debtors' respective cases in the amount of $489,448.81. On December 28, 2004 Pu filed an amended proof of claim in each of the debtors' respective cases in which he recharacterized a portion of his original claim as a secured claim ($440,503.93), leaving the balance of the original claim as an unsecured claim ($48,944.88). Pu's proof of claim was based on a variety of legal...
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