In re Holstein

• Decision Date: 02 March 2005
• Docket Number: Adversary No. 04 A 3074.,Bankruptcy No. 00 B 18138.
• Citation: 321 B.R. 229
• Parties: In re Robert A. HOLSTEIN, Debtor Robert A. Holstein, Plaintiff, v. Alexander S. Knopfler, Trustee of the Estate of Robert A. Holstein, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

321 B.R. 229

In re Robert A. HOLSTEIN, Debtor

Robert A. Holstein, Plaintiff, v. Alexander S. Knopfler, Trustee of the Estate of Robert A. Holstein, Defendant.

Bankruptcy No. 00 B 18138. Adversary No. 04 A 3074.

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

March 2, 2005.

Harold Moskowitz, Chicago, IL, for Robert A. Holstein.

Scott N. Schreiber, James E. Morgan, William S. Hackney, Much Shelist Freed Denenberg Ament & Rubenstein, P.C., Chicago, IL, for Alexander S. Knopfler, Trustee.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

This is the latest chapter in the "seemingly endless bankruptcy" of Chicago lawyer Robert A. Holstein. Bank One v. Knopfler (In re Holstein), Nos. 00 B 18138, 03 A 638, 2004 WL 26516, at *2 (Bankr.N.D.Ill. Jan. 5, 2004). In September 2003, Holstein was denied a discharge. Some months later, Holstein brought an action in the Circuit Court of Cook County, Illinois against his former bankruptcy lawyers, alleging that their malpractice in the handling of his bankruptcy case led to the denial of discharge.

Believing that the malpractice action was property of Holstein's bankruptcy estate, trustee Alexander S. Knopfler began negotiating a settlement directly with the defendants in the action. This prompted Holstein in July 2004 to file an adversary complaint against Knopfler. The complaint is in three counts. The first seeks a declaratory judgment that the malpractice action belongs to Holstein, either because it is not property of his bankruptcy estate under 11 U.S.C. § 541 or because Knopfler sold it to Holstein in a court-approved sale. The second requests a preliminary injunction to stop Knopfler from meddling with the malpractice action. The third is a claim for breach of an alleged agreement to sell the action to Holstein.

Knopfler consented to stay out of the malpractice action while the parties litigated who owns it. At the court's invitation, Holstein and Knopfler filed cross-motions for summary judgment on the declaratory judgment count, submitting a joint stipulation of facts.

The motions are now fully briefed and ready for decision. For the reasons that follow, the court concludes that Holstein's malpractice action is not property of his bankruptcy estate. Holstein's motion for summary judgment on Count I will therefore be granted, and Knopfler's motion will be denied. The remaining counts of Holstein's complaint will be dismissed as moot.

1. Jurisdiction

The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a) and (e) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2). See Johnston Envtl. Corp. v. Knight (In re Goodman), 991 F.2d 613, 617 (9th Cir.1993) (noting that determinations of "the nature and extent of the bankruptcy estate" are core); Koken v. Reliance Group Holdings, Inc. (In re Reliance Group Holdings, Inc.), 273 B.R. 374, 394-95 (Bankr.E.D.Pa.2002) (noting that matters requiring a declaration whether property is "property of the estate" are core). The court may therefore enter a final judgment. In re Smith, 848 F.2d 813, 816 (7th Cir.1988).

2. Facts

The following facts are taken from the pleadings and the parties' joint stipulation. Since the complaint, answer, and stipulated facts tend to begin in medias res, a fair amount of background information, all of it indisputable, is drawn from past opinions in this case and in related bankruptcy cases.¹

Debtor Robert A. Holstein was a partner in Holstein, Mack & Klein ("HMK"), a Chicago law firm engaged primarily in plaintiffs' personal injury litigation, including class actions. In the mid-1990s, HMK represented, among others, 2,500 plaintiffs in several product liability class actions involving the "Norplant" contraceptive device. The Circuit Court of Cook County, Illinois had certified a class in one such action, and federal multidistrict litigation concerning the device was pending in a district court in Texas.

The Norplant litigation proved expensive for HMK: by June 1995, the firm's investment in the litigation had reached $3 million. Around that time, HMK partners therefore approached another Chicago law firm, Jeffrey M. Goldberg & Associates, Ltd. ("Goldberg"), about serving as cocounsel in the litigation. Concluding both that the prospects of prevailing in the litigation were good and that HMK was financially sound, Goldberg entered into a co-counsel agreement with HMK. Under the agreement, Goldberg would pay HMK $1 million, as well as a capped percentage of future litigation costs, receiving in return a percentage of all costs and fees HMK recovered in the litigation.

At the same time HMK was securing Goldberg's assistance in its Norplant cases, HMK was also obtaining additional operating capital from its long-time lender. American National Bank & Trust Company of Chicago, now known as Bank One, N.A. (the "Bank"), had been providing HMK with operating capital since 1989. In 1995, the Bank made additional loans of $1.7 million to the firm, receiving in return promissory notes and a security interest in all of the firm's assets. Holstein and two other HMK partners personally guaranteed the notes.

Shortly thereafter, everything began to unravel-both for HMK and for Holstein. Not as sound financially as Goldberg had believed, HMK defaulted on its obligations to the Bank, and the Bank terminated the firm's line of credit. In May 1996, the Bank brought actions in the circuit court against HMK on the promissory notes and against Holstein personally on his guarantee. The Norplant litigation was not going well either. In September 1996, the class was decertified in the state court action, and there were setbacks in the federal action as well. Ultimately, none of the Norplant actions was successful. Goldberg never recovered its substantial investment in the litigation.

In November 1996, HMK dissolved. Two months later, the Bank entered into a settlement agreement with HMK, Holstein, and others under which the Bank's collection actions were stayed while the firm and its partners attempted to repay the debt. But Holstein et al. were unable to make a go of the settlement agreement, and they defaulted on their obligations. In September 1997, a former HMK partner filed an involuntary chapter 7 petition against the firm, placing it in bankruptcy. With the settlement agreement out of the picture, the Bank also proceeded to seek a default judgment in the now-consolidated circuit court actions. In October 1998, the circuit court entered a judgment for $748,006 in favor of the Bank and against Holstein. Holstein did not appeal.

Two months later, the Bank began efforts to collect its judgment from Holstein. These efforts turned up certain partnership interests that Holstein claimed to have transferred to Barbara Stackler, a lawyer with whom he had been romantically involved. Doubting Holstein's claim that the interests had really been transferred, the Bank moved for their turnover. At the circuit court's request, the Bank filed a separate complaint for turnover, and the complaint was set for trial.

On June 19, 2000, two days before trial on the Bank's turnover complaint, Holstein filed his own bankruptcy petition seeking relief under chapter 7. Barry A. Chatz, James A. Chatz, Miriam R. Stein, and the firm of Kamensky & Rubenstein represented Holstein and prepared the petition on his behalf. Alexander Knopfler was appointed chapter 7 trustee.

The Bank obtained relief from the automatic stay, and the turnover complaint went to trial in August 2000. Holstein testified but was not otherwise represented by counsel at trial. In October 2000, the circuit court entered an extensive order, making findings and ruling in favor of the Bank. The circuit court found that Holstein's transfers of assets to Stackler were a fraudulent effort—"an elaborate hoax"—to shield his assets from his creditors. Again, Holstein did not appeal.

Meanwhile, Goldberg had filed an adversary complaint against Holstein in the bankruptcy objecting to Holstein's discharge under section 727 of the Bankruptcy Code or alternatively objecting under section 523 to the dischargeability of his debt to Goldberg. One of the section 727 claims alleged that within a year of the bankruptcy Holstein had concealed assets, intending to hinder, delay, or defraud creditors in violation of section 727(a)(2)(A).

The initial complaint was dismissed in part on Holstein's motion, see Jeffrey M. Goldberg & Assocs., Ltd. v. Holstein (In re Holstein), 272 B.R. 463 (Bankr.N.D.Ill. 2001), but an amended complaint was filed, and Holstein's motion to dismiss the amended complaint was denied. Several months later, Goldberg moved for summary judgment on the section 727 claims in the complaint. Holstein cross-moved for summary judgment on all of the complaint's counts.

On September 24, 2003, this court awarded Goldberg summary judgment and denied Holstein a discharge under section 727(a)(2)(A). See Jeffrey M. Goldberg & Assocs., Ltd. v. Holstein (In re Robert A. Holstein), 299 B.R. 211 (Bankr.N.D.Ill. 2003). Based largely on the collateral estoppel effect of the circuit court judgment in the turnover matter, the court found that Holstein had indeed concealed assets—the partnership interests at issue in the circuit court—with an intent to defraud his creditors. Id. Holstein sought review in the district court, but the district court affirmed the decision. See Jeffrey M. Goldberg & Assocs., Ltd. v. Holstein, No. 03 C 8023, 2004 WL 2075442 (N.D.Ill. Aug. 31, 2004).²

His discharge denied, on May 10, 2004, Holstein filed a legal malpractice action in the circuit court against the Chatzes, Stein, the Kamensky firm, and the firm of Arnstein & Lehr (where the Chatzes and Stein currently practice). Styled Robert A. Holstein v. Barry A Chatz, et al, No. 04 L 5271, the complaint alleges that Holstein began consulting Barry Chatz about his financial problems...