In re Grasso

• Citation: 490 B.R. 500
• Decision Date: 04 April 2013
• Docket Number: No. 12–11063–MDC.,12–11063–MDC.
• Parties: In re Joseph GRASSO, Debtor.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

490 B.R. 500

In re Joseph GRASSO, Debtor.

No. 12–11063–MDC.

United States Bankruptcy Court,

E.D. Pennsylvania.

April 4, 2013.

Dave P. Adams, Kevin P. Callahan, Hugh J. Ward, United States Trustee, Philadelphia, PA, for the United States Trustee, Office of the U.S. Trustee, U.S. Trustee.

Harry J. Giacometti, Flaster/Greenberg, P.C., Robert A. Kargen, White and Williams LLP, Regina Stango Kelbon, Blank Rome LLP, Steven D. Usdin, Flaster/Greenberg, Philadelphia, PA, Christine C. Shubert, Medford, NJ, for Trustee.

Matthew A. Hamermesh, James M. Matour, Hangley Aronchick Segal & Pudlin, Harrisburg, PA, Corinne Michelle Samler, Klehr Harrison Harvey Branzburg LLP, Paul J. Winterhalter, Law Offices of Paul J Winterhalter, P.C., Philadelphia, PA, for Debtor.

Memorandum

MAGDELINE D. COLEMAN, Bankruptcy Judge.

INTRODUCTION

On October 16, 2012, this Court issued an Order ordering the appointment of a Chapter 11 Trustee (the “Trustee Order”) for the estate of the debtor, Joseph Grasso (the “Debtor”) for cause pursuant to 11 U.S.C. § 1104(a)(1), and in the best interest of creditors pursuant to § 1104(a)(2). On October 31, 2012, the Debtor filed a motion for reconsideration of the Trustee Order (the “Motion”). In the Motion, the Debtor acknowledged that the appointment of a Chapter 11 Trustee was warranted. However, the Debtor requested that this Court amend the Trustee Order to reflect appointment under § 1104(a)(2) only and remove all findings regarding his conduct as a basis for its decision. At the hearing on the Motion, this Court advised the Debtor that it would not amend the Trustee Order to provide for appointment under § 1104(a)(2) only, or withdraw any of the factual findings. Thereafter, Debtor requested that this Court, at a minimum, remove from the Trustee Order its finding in Paragraph (L) that the Debtor had employed Bruce Kaplan, as Debtor's accountant without application to or approval from the Bankruptcy Court.

For the reasons discussed below, this Court will grant the Debtor's request that it amend the Trustee Order and remove the findings set forth in Paragraph L. This Court finds that the Debtor was denied an opportunity to address this Court's concern that the Debtor circumvented the requirementsof § 327 by relying on Bruce Kaplan to serve as his estate's accountant. The Debtors' request for any other amendment to the Trustee Order remains denied. In support of this Court's determination, this Memorandum will, by way of background provide first, the procedural history for the Trustee Order and, second, a detailed summary of the Court's reasons for the Trustee Order. Having stated this Court's reasons for the Trustee Order, this Court will then address the merits of the Motion.

Procedural Background

The matters addressed by the Trustee Order were first raised pursuant to a Motion to Convert dated July 23, 2012 (the “Motion to Convert”) ¹ whereby Madison Capital Company, LLC (“Madison”) requested this Court convert the Debtor's case to a chapter 7 proceeding. Madison premised its Motion to Convert on the Debtor's failure to file monthly operating reports and the required financial disclosures for various entities in which he holds an ownership interests. The Motion to Convert also cited the Debtor's unauthorized use of estate assets to fund his and his non-debtor wife's post-petition living expenses. Finally, the Motion to Convert raised for the first time the legitimacy of the Debtor's claim that he owns his various business interests with his wife as tenants by the entirety. Like a sweater come undone by the pulling of one loose string, the Debtor's legitimacy as a debtor-in-possession quickly began to unravel as Madison and his other creditors began to investigate the allegations made by this Motion to Convert.

Shortly after Madison filed its Motion to Convert, Roberta A. DeAngelis, the United States Trustee (the “US Trustee”), filed a Motion to Convert or in the Alternative to Dismiss dated July 25, 2012 (the “Trustee's Conversion Motion”). In the Trustee's Conversion Motion, the U.S. Trustee argued that cause for conversion or dismissal existed because of the Debtor's failure to (i) file timely and accurate monthly operating reports, (ii) pay the quarterly fees required by 28 U.S.C. § 1930(a)(6), and (iii) propose a confirmable plan of reorganization. Thereafter, Madison filed a Joinder dated August 9, 2012 joining the Trustee's Conversion Motion.

The Debtor filed his Response to the Motion to Convert on August 14, 2012 (the “First Response”). In the Debtor's First Response, the Debtor relied on his filing of certain of his operating reports that were filed after the Motion to Convert and the Trustee's Conversion Motion. The Debtor also contested whether he had made progress toward proposing a confirmable plan of reorganization.

On August 28, 2012 and September 5, 2012, this Court held hearings to address the Motion to Convert and the Trustee's Conversion Motion. At these hearings, this Court heard testimony from the Debtor and Bruce Kaplan, the Debtor's accountant. At the close of the September 5th hearing, it became apparent that the Debtor was unwilling to investigate whether his wife's interests in the entireties property may be invalidated for the benefit of his estate. Madison then advised this Court that it would file a motion for the appointment of a trustee, under either Chapter 11 or Chapter 7. As a result, this Court expressed its serious concerns with regard to the management of the Debtor's estate and whether appointment of a Chapter 11 Trustee was required.

Consistent with its representations at the close of the September 5th hearing, Madison filed a Motion to Appoint Trustee dated September 14, 2012 (the “Trustee Motion”) requesting that the Court appoint pursuant to 11 U.S.C. § 1104(a) a Chapter 11 Trustee to operate or manage the Debtor's chapter 11 estate. The Trustee Motion was subsequently joined by Marshall J. Katz (“Katz”) and The Sherwin Williams Company (“SWC”), both of whom are alleged creditors of the Debtor. The Debtor filed his Response to the Trustee Motion on September 28, 2012 (the “Second Response”). This Court then held a hearing on October 15, 2012 (the “October 15th Hearing”) to address the appointment of a trustee pursuant to 11 U.S.C. § 1104 to operate and manage this Debtor's estate. At the October 15th Hearing, this Court heard the testimony of both the Debtor and his accountant, Bruce Kaplan.

At the close of the October 15th Hearing, this Court made several factual findings including, inter alia, that (1) the Debtor was dishonest in his testimony to this Court, (2) the Debtor diverted estate assets, and (3) the Debtor breached his fiduciary duty as a debtor-in-possession. Despite these findings, the Debtor requested this Court provide him an opportunity to redeem himself. His advocates suggested this Court give the Debtor a short period during which he may, with the assistance of new counsel, attempt to rehabilitate himself. Rather than issue its ruling at the close of the October 15th Hearing, this Court advised the parties that it would take the matter under advisement. After considering whether circumstances required the appointment of a Chapter 11 Trustee, this Court concluded that the Debtor's misconduct warranted appointment and were not outweighed by any benefit that would accrue to the estate if the Debtor was left in possession. The Trustee Order embodying this Court's decision was issued on October 16, 2012.

In response to the Trustee Order, the Debtor first filed a notice of appeal dated October 30, 2012 (the “Notice of Appeal”). The next day, the Debtor filed the instant Motion. On November 13, 2012, the Debtor filed a praecipe to withdraw the Notice of Appeal. The hearing on the Motion was originally scheduled for November 27, 2012, but that was later rescheduled to allow the parties to submit briefs addressing the Motion. The hearing ultimately was held on January 15, 2013 (the “January 15th Hearing”), at which time the Court heard arguments from the various parties. At the January 15th Hearing, the Debtor and his representatives did not dispute the basis of this Court's factual findings or whether those findings warranted the appointment of a Chapter 11 Trustee. Rather, the Debtor requested that this Court retract all of its factual findings relating to whether cause existed for appointment pursuant to § 1104(a)(1) and instead limit its order to a general finding that appointment was in the interests of creditors and the estate pursuant to § 1104(a)(2). The Debtor argued that, if the factual findings remained a part of the record, such findings would impair his estate's ability to reorganize.

At the close of the January 15th Hearing, the Court advised the parties that based upon its consideration of the Motion, the various memoranda submitted by the parties and the appearance of all parties in interest at the January 15th Hearing, it would deny the Motion with regards to amending (1) the Trustee Order for appointment under § 1104(a)(2) only, and (2) all of its factual findings except for this Court's findings contained in paragraph L(13) of the Order. The Court took under advisement the issues relating to Paragraph L(13) and provided all interested parties an opportunity to file briefs on that issue. No briefs were filed and the Court is now prepared to issue a decision.

Reasons for Appointment of a Chapter 11 Trustee

As this Court acknowledged in the Trustee Order, it found by clear and convincing evidence that pursuant to § 1104(a)(1) cause existed to appoint a Chapter 11 Trustee. Based upon the same misconduct underlying this Court's § 1104(a)(1) determination, this Court also found that pursuant to § 1104(a)(2) appointment of a Chapter 11 Trustee was in the best interest of the Debtor's creditors. This Court's findings with regard to cause under § 1104(a)(1) and with regard to the best interest of his creditors under §...