In re Hearthside Baking Co., Inc.

• Decision Date: 27 February 2009
• Docket Number: Bankruptcy No. 08 B 01187.,Adversary No. 08 A 00279.,Adversary No. 08 A 00237.
• Citation: 402 B.R. 233
• Parties: In re HEARTHSIDE BAKING CO., INC., Debtor. Official Unsecured Creditors' Committee of Hearthside Baking Co., Inc. and Wayne Cohen, individually and derivatively as President and beneficial owner of Hearthside Baking Co., Inc., d/b/a Maurice Lenell Cooky Company, Plaintiffs, v. Terry Cohen, Melvin Blum, Marvin Gordon, and Hearthside Baking Co., Inc., d/b/a Maurice Lenell Cooky Company, Defendants. Official Unsecured Creditors' Committee of Hearthside Baking Co., Inc., ex rel. Hearthside Baking Co., Inc., Plaintiff, v. Terry Cohen, Wayne Cohen, Andee Cohen Kochavi, Shimon Kochavi, Florence Barton, Miriam Cohen, Tewaan Corp., Melvin Blum, and Marvin Gordon, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

Page 233

402 B.R. 233

In re HEARTHSIDE BAKING CO., INC., Debtor.

Official Unsecured Creditors' Committee of Hearthside Baking Co., Inc. and Wayne Cohen, individually and derivatively as President and beneficial owner of Hearthside Baking Co., Inc., d/b/a Maurice Lenell Cooky Company, Plaintiffs, v. Terry Cohen, Melvin Blum, Marvin Gordon, and Hearthside Baking Co., Inc., d/b/a Maurice Lenell Cooky Company, Defendants.

Official Unsecured Creditors' Committee of Hearthside Baking Co., Inc., ex rel. Hearthside Baking Co., Inc., Plaintiff, v. Terry Cohen, Wayne Cohen, Andee Cohen Kochavi, Shimon Kochavi, Florence Barton, Miriam Cohen, Tewaan Corp., Melvin Blum, and Marvin Gordon, Defendants.

Bankruptcy No. 08 B 01187.

Adversary No. 08 A 00237.

Adversary No. 08 A 00279.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

February 27, 2009.

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Joseph D. Frank, Jeremy C. Kleinman, and Micah R. Krohn of Frank/Gecker LLP, for the Creditors' Committee.

Stephen Scallan and Michael B. Cohen of Staes & Scallan PC, for Wayne Cohen.

Joseph P. Kincaid and Thomas J. Verticchio of Swanson, Martin & Bell, LLP, for Terry Cohen.

Stephen Novack, Monte L. Mann, and Julie Johnston-Ahlen of Novack and Macey LLP, for Melvin Blum.

David E. Gordon of David E. Gordon & Associates, for Marvin Gordon.

William T. Neary, U.S. Trustee.

MEMORANDUM OPINION

JACQUELINE P. COX, Bankruptcy Judge.

In this matter, defendants, Melvin Blum ("Blum"), Marvin Gordon ("Gordon") (together, the "Co-Trustees")¹ seek to dismiss both Wayne Cohen's Third Amended Complaint ("Wayne's Complaint") as directed toward them and Counts II and LX of the amended complaint (the "Committee's Complaint") filed by the Official Unsecured Creditors' Committee of Hearthside Baking Co., Inc. (the "Committee") pursuant to Federal Rule of Civil Procedure 12(b)(6), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012. Defendant Terry Cohen ("Terry") seeks to dismiss the eighteen counts in Wayne's Complaint that relate to him. Wayne Cohen ("Wayne") moves for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012, on Counts XIV-XIX and XXI of the Committee's Complaint, and to strike paragraph 65 of the Committee's Complaint. Count XII of Wayne's Complaint is not challenged by either motion to dismiss.² Based on the foregoing, the Co-Trustee's motion to dismiss Wayne's Complaint as it relates to them is granted in part and denied in part; their motion to dismiss Counts II and LX of the Committee's Complaint is denied. Terry's motion to dismiss Wayne's Complaint as it relates to him is granted in part and denied in part. Wayne's motion for judgment on the pleadings and to strike paragraph 65 of the Committee's Complaint is denied.

I. JURISDICTION

The Court has jurisdiction to decide these matters pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. These matters are core proceedings under 28 U.S.C. §§ 157(b)(2)(A), (B), (C), (E), (H) and (0).

II. BACKGROUND³

The following background is taken as true for purposes of this motion. Before it was placed into bankruptcy, the Debtor, Hearthside Baking Co., Inc. ("Hearthside"), an Illinois corporation, manufactured and sold cookies as the Maurice Lenell Cooky Company since its founding by the Lenell family in 1937. The cookies are well-known in the Chicago area. Irwin Cohen ("Irwin") acquired Hearthside in 1987 and began operating the company. When Irwin took control of Hearthside, most of its business was in the Chicago market where the cookies were sold in local grocery stores. By 2007, the cookies were sold throughout North America, primarily in stores such as Walgreens and Wal-Mart.

Prior to his death in June 1997, Irwin owned 87.5% of the shares of the company. The other shares were owned by Lisa Lenell ("Lenell"). Irwin was the sole director of Hearthside. On August 4, 1993, Irwin created a trust, The Irwin Cohen Trust (the "Trust"), consisting of, inter alia, Irwin's share of the company, and it named Irwin's three children, Terry, Wayne, and Andee Cohen Kochavi ("Andee"), as the trust's beneficiaries. Terry was Hearthside's Chief Executive Officer and Wayne was its President. Blum and Gordon were appointed the as Trust's trustees. Blum is an attorney licensed to practice law in Illinois.

The Trust provided, that upon the death of Irwin, the Co-Trustees would retain control of the voting stock of Hearthside and that they would have the power "to . . . prosecute . . . claims in favor of or against the trust," and to "perform other acts necessary or appropriate for the proper administration of the [T]rust." (Irwin Cohen Trust Dated August 4, 1993, Wayne Cohen's Amended Compl., Case No. 08-AP-00237 [Dkt. No. 71], Ex. 1, Sec. 5, pg. 18-20, ¶¶ (h) and (n)). The Trust also authorized the Co-Trustees to elect directors and shareholders and, in their discretion, to retain any common stock for at least twenty-five years. Further, the Trust required that all claims against the estate of Irwin be paid from the Trust's principal; that the Co-Trustees purchase an annuity using the principal of the Trust to pay Florence Barton ("Barton"), Irwin's former wife and the mother of Terry, Wayne, and Andee, $25,000 per year; and that the Co-Trustees set aside the common shares of Hearthside in a separate trust designated the "Cohen/Hearthside Trust." The Cohen/Hearthside Trust was never created.

In 1991, Hearthside purchased a condominium in North Miami Beach Florida for $450,000.00. The Committee alleges that Barton ("Barton") resides at this condominium for a portion of each year. Hearthside pays the expenses related to ownership of this property including utility charges, mortgage payments, assessments, and taxes.

In 1994, Irwin incorporated Tewaan Corp., an Illinois corporation ("Tewaan"). In December 1994, Hearthside transferred real estate consisting of the land and building in which Hearthside operated to Tewaan. After the transfer, Hearthside began paying rent to Tewaan. Terry, Wayne, and Andee are the shareholders and officers of Tewaan.

After Irwin died in 1997, the Co-Trustees elected Wayne and Terry as the sole directors of Hearthside; they continued their roles as officers of the company. Shortly after Irwin's death, Lisa Lenell sold her 12.5% ownership interest in Hearthside to Merit Collection Agency, Inc., an affiliate company of Hearthside, essentially giving the Trust 100% ownership of Hearthside. As provided by the Trust, the Co-Trustees retained control over the voting shares of Hearthside.

There are several alleged misappropriations of Hearthside's funds, many beginning before Irwin's death in 1997. In the years before his death, Irwin borrowed $3,356,470 from Hearthside. This money was never reimbursed to Hearthside out of the Trust's principal as required by the language of the Trust. Several other transfers made within the year preceding Hearthside's bankruptcy are alleged to be improper. In addition to his regular salary, Wayne received from Hearthside $122,186.80 that included $3,610.80 for what was listed as a "medical reimbursement" and $118,576.00 for "repayment of loan with interest." The Cohens' mother, Barton, also received paychecks from Hearthside between March 31, 2007 and January 17, 2008 totaling $27,611.72 and an additional check for $847.79. Barton is not an employee, officer, or director of Hearthside. Between March 31, 2007 and January 17, 2008, Andee received paychecks totaling $16,297.04 and a "medical reimbursement" for $4,42417. In July 2007, the Co-Trustees appointed Andee to Hearthside's board of directors. Prior to this appointment, Andee was not employed by or otherwise involved with the operations of Hearthside. Wayne alleges that Andee was appointed as a director of Hearthside because she could be easily influenced by Terry. When Andee was appointed to Hearthside's board of directors, Hearthside hired Andee's husband, Shimon Kochavi ("Shimon") and issued him weekly paychecks between July 12, 2007 and December 20, 2007 totaling $48,077.00. In addition, Hearthside also paid a medical bill for Shimon for $1,396.62 on October 3, 2007 and made two unidentified payments to him: $4,000.00 on April 12, 2007 and $12,000.00 on May 21, 2007.

Perhaps the most shocking allegations are those involving Terry's alleged misappropriations totaling over $2 million of Hearthside funds. Between June 1, 1995 and June 1, 1997, those allegations are that Terry used Hearthside funds totaling $93,000 for the construction of his home and beginning June 2, 1997 through December 31, 2007, Terry spent another $700,000 of Hearthside funds on his home. This included the home's construction, decorative paintings, landscape illumination, photosensitive window tinting and numerous pieces of furniture. It is also alleged that Terry used Hearthside funds for personal expenses beginning in 1997. These include multiple non-business meals per week, cable television bills for his residence, gasoline for his personal vehicle, and expenses for his family's cellular phone usage. During the same time period, Terry is alleged to have spent approximately $50,000 of Hearthside funds on entertainment expenses including hockey and entertainment event tickets, golf equipment, golf course fees, massages, bathhouse visits, hockey equipment, designer clothing, and cigars. Terry is also alleged to have used Hearthside funds to pay for motor vehicles. From April 26, 1999 through April, 2002, Terry allegedly used Hearthside funds to make lease payments on a Bentley vehicle totaling $115,039.00; for a Mercedes-Benz vehicle between 2002 and 2004 totaling $62,522.00; a Ford vehicle...