In re Gen-Air Plumbing & Remodeling, Inc.
| Decision Date | 19 May 1997 |
| Docket Number | Bankruptcy No. 97 B 06046. |
| Citation | 208 BR 426 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re GEN-AIR PLUMBING & REMODELING, INC., Debtor. |
COPYRIGHT MATERIAL OMITTED
Glen E. Berman, DiTommaso & Berman, P.C., Oakbrook Terrace, IL, for Movant.
Kevin M. Brill, Patricia K. Rummer, Kevin M. Brill & Associates, Chicago, IL, for Respondent.
This matter comes before the Court on the motion of Teo and Denise Kawa, directors, officers, and shareholders of Gen-Air Plumbing & Remodeling, Inc., to dismiss this Chapter 11 petition. For the reasons set forth herein, the Court grants the motion and dismisses the petition under 11 U.S.C. § 1112(b). Further, the motion to employ the law firm of Kevin M. Brill & Associates as attorneys for Gen-Air Plumbing & Remodeling, Inc. is denied. In addition, the Court grants the motion of Teo and Denise Kawa to remand the corporate dissolution proceeding (Adversary Proceeding 97 A 00476) back to the Circuit Court of DuPage County, Illinois pursuant to 28 U.S.C. § 1452(b). Finally, the Court abstains from ruling on the motion to disqualify the law firm of DiTommaso & Berman, P.C. under 28 U.S.C. § 1334(c)(1).
The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Local General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O).
Teo and Denise Kawa collectively own 50% of the stock in, and are both directors of, Gen-Air Plumbing & Remodeling, Inc. ("Gen-Air") an Illinois corporation. See Kawas' Exhibit No. 10. Teo Kawa is vice president of Gen-Air and Denise Kawa its treasurer. Id. The remaining 50% shareholder, Ellyn Schwartz, its secretary, who along with her spouse Irving Schwartz, its president, comprise the other two of Gen-Air's four officers. Id. The Kawas and Ellyn are the three Gen-Air directors. Id. In 1993, Gen-Air was created when the Kawas and Schwartzes combined their respective businesses, General Building Services Corporation and Bel-Air Plumbing resulting in the incorporation of Gen-Air under the Illinois Business Corporation Act of 1983 (805 ILCS 5/1.01 et seq.) Id.
In June 1996, disputes between the shareholders, officers, and directors escalated to a point where the parties could no longer operate the business together and an undisputed deadlock ensued which persists to date. In July 1996, after much squabbling between the Kawas and Schwartzes, (the details and relative merits are not relevant for purposes of this decision) the Kawas filed a proceeding in the Circuit Court of DuPage County, Illinois (the "state court") to dissolve Gen-Air. See Kawas' Exhibit No. 9. Thereafter, the Kawas sought the appointment of a receiver. On July 29, 1996, the state court appointed Brian McKillip receiver (the "Receiver") of Gen-Air. See Exhibit 5 to Gen-Air's Response to Motion to Dismiss and Motion to Remand Removed Proceedings. Specifically, in appointing the Receiver, the state court noted:
The receiver is to be appointed as independent administrator to represent the interests of the corporation and to resolve deadlock disputes. He is authorized to conduct whatever he deems necessary to run this business, to consult with the owners and to cooperate with them to the best of his ability. To enter upon the premises, to authorize other persons to enter on the premises, to obtain all books, records, including the mail of the corporation.
Id. at 6-7. The state court has entered subsequent orders directing the Receiver to auction assets of Gen-Air, among other matters. See Kawas' Exhibit No. 8.
On February 27, 1997, a voluntary Chapter 11 petition was filed purportedly on behalf of Gen-Air and signed by Ellyn Schwartz. She is obviously unhappy with the results of the state court proceedings and thus instituted the petition here. It is undisputed that Gen-Air's board of directors did not authorize Ellyn Schwartz to act on its behalf or sign any documents on behalf of the corporation thereby authorizing it to file a bankruptcy petition. There was no meeting by the board of directors authorizing the filing of a bankruptcy petition on behalf of Gen-Air, nor was there a unanimous action of the then deadlocked board of directors that would authorize the Chapter 11 filing. The Kawas did not approve of Gen-Air filing bankruptcy nor did they have any prior knowledge of the filing until receiving notice thereof. Further, the Kawas never agreed to the retention of the law firm of Kevin M. Brill & Associates to represent Gen-Air in any capacity, including the bankruptcy filing. Consequently, the Kawas seek to dismiss this petition as an unauthorized filing. They object to the retention of Kevin M. Brill & Associates as attorneys for Gen-Air and they seek to have the removed corporate dissolution action remanded back to the state court.
Gen-Air and Ellyn Schwartz argue that the petition should not be dismissed because Ellyn Schwartz, by virtue of being an officer, director and shareholder of Gen-Air, is a fiduciary, and as such, was "required" to file the instant Chapter 11 petition. According to Ellyn Schwartz, she was faced with a breach of fiduciary duty by Teo Kawa, the conversion by the Kawas of corporate assets, and breach of fiduciary duty by the Receiver. Moreover, on the day of trial on the motion to dismiss, Ellyn Schwartz presented a motion to disqualify the law firm of DiTommaso & Berman, P.C. from representing the Kawas on the basis that one of its principals, Glen Berman, previously represented Ellyn Schwartz, incorporated Gen-Air, and served as its registered agent. DiTommaso & Berman counter that there is no disqualifying conflict and that by waiting until this point there has been an effective waiver of the alleged disqualification.
The alleged pre-petition and post-petition wrongful acts and omissions of the parties are argued and debated at length in their papers. The parties' arguments along those lines are to no avail because those acts are immaterial to the ultimate and threshold issue which the Court must decide: whether or not the Chapter 11 petition filed by Ellyn Schwartz purportedly on behalf of Gen-Air should be dismissed because it was not authorized by Gen-Air's board of directors or ratified by the Kawas.
On April 8, 1997, the Court entered a Prehearing Order setting the motion to dismiss for trial on May 15, 1997. That Prehearing Order was served on the parties on April 9, 1997. It required the parties to perform the following requirements at least seven days prior to the hearing date: (1) file with the Court copies of all exhibits they intend to introduce into evidence; (2) file with the Court the names of all witnesses they intend to present at trial, together with a brief summary of the area of testimony each witness will present; (3) complete discovery; (4) file objections to the exhibits or witnesses within two days of the trial date; and (5) submit to the Court within two days of the hearing proposed detailed findings of fact and conclusions of law and have any other related motions filed and briefed. The Prehearing Order also provided for sanctions for failure to comply with the terms thereof. Several possible sanctions including barring exhibits and witnesses were enumerated, but were not inclusive. The parties complied with the Prehearing Order in part, but failed to timely designate any witnesses or provide a brief summary of their anticipated testimony. Rather, counsel for the Schwartzes belatedly filed a witness list, summary of the testimony, and several exhibits the day before trial.
Pursuant to Federal Rules of Bankruptcy Procedure 7016 and 7037 and Federal Rules of Civil Procedure 16(f) and 37(b)(2)(B) and (C), as a sanction for failure to comply with that Prehearing Order, the Court barred the testimony of any and all witnesses. See also In re Maurice, 21 F.3d 767 (7th Cir.1994). Further, under Local Bankruptcy Rule 402(O) and the exercise of the Court's discretion, the Court did not allow the parties to make oral arguments. Hence, the matters were taken under advisement based upon the filed papers and proffered exhibits.
Section 1112(b) of the Bankruptcy Code lists a number of non-exclusive grounds for dismissal or conversion of a Chapter 11 case. See 11 U.S.C. § 1112(b). The case at bar involves one of the non-enumerated grounds: alleged lack of proper corporate authority or an ultra vires act by a corporate agent. The authority to file a bankruptcy petition on behalf of a corporation must derive from state corporate governance law, Keenihan v. Heritage Press, Inc., 19 F.3d 1255, 1258 (8th Cir.1994) (citing Price v. Gurney, 324 U.S. 100, 106, 65 S.Ct. 513, 516, 89 L.Ed. 776 (1945)); Hager v. Gibson, 188 B.R. 194, 197 (E.D.Va.1995), aff'd, 108 F.3d 35 (4th Cir.1997), aff'd in part, rev'd in part, 109 F.3d 201 (4th Cir.1997); In re American Globus Corp., 195 B.R. 263, 265 (Bankr. S.D.N.Y.1996), and the corporate by-laws. In re Milestone Educ. Inst., Inc., 167 B.R. 716, 720 (Bankr.D.Mass.1994). Thus, Illinois law is applicable to determine whether Ellyn Schwartz had the authority to file a voluntary petition on behalf of Gen-Air. The Illinois Business Corporation Act of 1983 provides that "the business and affairs of the corporation shall be managed by or under the direction of the board of directors." See 805 ILCS 5/8.05(a). The power to file a voluntary petition in bankruptcy on behalf of an Illinois corporation, like many other states, rests with its board of directors. See Dearborn Process Serv., Inc. v. Storner (In re Dearborn Process Serv., Inc.), 149 B.R. 872, 878 (Bankr.N.D.Ill.1993) (citation omitted). Accord In re Giggles Restaurant, Inc., 103 B.R....
To continue reading
Request your trial