In re Hudsar Inc.
| Decision Date | 02 April 1996 |
| Docket Number | Bankruptcy No. 86-03475. Adv. No. 95-2115. |
| Citation | 199 BR 266 |
| Parties | In re HUDSAR INC., Debtor. Mary Ellen PATERSON, Pamela Sutton and Frederick C. Ferguson, Executors of the Estate of Mary Ellen Paterson, Plaintiffs, v. Everett M. SCHERER, Riker, Danzig, Scherer, Hyland & Perretti, John Doe (a fictitious name), Hudsar, Inc., Thomas W. Paterson, Jr., and Thomas W. Paterson, III, Defendants. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
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Colasanti, Ermel & Casale by Michael A. Casale, West Caldwell, New Jersey, for Plaintiffs.
Collier, Jacob & Mills by Cynthia M. Jacob, Somerset, New Jersey, for Defendants Everett M. Scherer and Riker, Danzig, Scherer, Hyland & Perretti.
Riker, Danzig, Scherer, Hyland & Perretti by Louise A. Johnson, Morristown, New Jersey, for Defendant Riker, Danzig, Scherer, Hyland & Perretti.
Dechert, Price & Rhoads by Christopher J. Michie, Princeton, New Jersey, for Defendant Thomas W. Paterson, Jr.
Before the court is the motion for summary judgment by Defendants Riker, Danzig, Scherer, Hyland & Perretti and Everett M. Scherer (collectively, "Riker, Danzig") dismissing the claims of the Executors of the Estate of Mary Ellen Paterson, et al., ("the MEP Estate") against Riker, Danzig. Said claims, comprising Counts Ten, Eleven and Twelve of the Second Amended Complaint, consist of allegations of malpractice against Riker, Danzig. The Court conducted a hearing on this motion on August 24, 1995. The following constitutes this Court's findings of fact and conclusions of law.
Hudsar Incorporated ("Hudsar") was a secondary refiner of precious metals, with operations located in Newark, New Jersey. Gordon Paterson, Mary Ellen Paterson's husband, ran the company until his death in 1985. While Gordon Paterson was living, he owned approximately 95% of Hudsar's outstanding shares. Pursuant to Gordon Paterson's Last Will and Testament, his shares were held in his testamentary trust, of which Mary Ellen Paterson ("MEP") was co-trustee with First Fidelity Bank, N.A. and the principal beneficiary of the trust. After Gordon Paterson's death, the Hudsar Board was composed of Mary Ellen Paterson, Thomas W. Paterson and Everett M. Scherer.
In 1986 Hudsar was experiencing financial difficulties and sought an infusion of capital. In March 1986 MEP agreed to loan Hudsar the sum of $300,000 in exchange for a mortgage on the real estate owned by Hudsar and a lien on its machinery, fixtures and equipment.
MEP was to pay off an existing loan held by First National State Bank (later First Fidelity Bank) and was to succeed to the lien held by First National State. MEP's security interest was documented by a mortgage and mortgage note each dated March 14, 1986 and a UCC-1 financing statement was prepared and filed with the Secretary of State of the State of New Jersey on April 14, 1986.
At the request of both Hudsar and MEP, Everett M. Scherer, Esq. of Riker, Danzig drafted and recorded a mortgage, mortgage note and UCC-1 Financing Statement (the "UCC-1"), evidencing MEP's $300,000 loan to Hudsar and her security interest. At the time of the bankruptcy filing, MEP was Hudsar's only secured creditor.
The loan to Hudsar did not resolve its financial problems. On May 21, 1986, Hudsar's Board of Directors unanimously authorized Hudsar to file for bankruptcy protection. On June 3, 1986, Hudsar filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. By Order dated June 5, 1986, Riker, Danzig was approved as bankruptcy counsel for Hudsar.
During the course of its Chapter 11 proceeding, Hudsar attempted to sell its business as a going concern. When it became clear that this was not possible, Hudsar proposed a liquidating plan of reorganization (the "Plan"). The bankruptcy court sent notice to all creditors on November 30, 1988, conducted a hearing on January 17, 1989 and approved the Disclosure Statement as modified by order of the late Bankruptcy Judge Daniel J. Moore, dated June 29, 1989. Judge Moore confirmed the Plan on September 5, 1989.
The Disclosure Statement at page 7 described MEP's debt as secured by "a first and second mortgage . . . against 373-375 South Street, Newark, New Jersey," Hudsar's real property. The Disclosure Statement also indicated that MEP's security interest would be satisfied from the proceeds of the sale of Hudsar's real estate, and that in the event her claim was not satisfied by said sale, MEP would be treated as an unsecured creditor for the unpaid portion.
On July 17, 1990, Hudsar conducted an auction sale of its personal property including machinery, equipment, and other assets in accordance with the provisions of the Disclosure Statement and the confirmed Plan. The property, which had been valued by Hudsar in its petition and schedules at $492,000, sold for $41,985.00. After expenses were deducted, the net proceeds were $28,968.80. None of the net proceeds were turned over to MEP. The funds were used to pay Hudsar's post-petition administration claims.
Also pursuant to its confirmed liquidating plan, Hudsar solicited offers and obtained a bona fide offer to purchase its real estate for $250,000. Subsequently, on October 5, 1990, Hudsar filed a motion for Leave to Sell Property Free and Clear of Liens, Secured Claims and Encumbrances. MEP objected to the proposed sale and no such sale was ever consummated.
On October 30, 1990, approximately four and one-half years after its inception, Hudsar's Chapter 11 case was converted to one under Chapter 7. On November 7, 1990, Bruce H. Levitt, Esq. was appointed as Chapter 7 trustee. On June 4, 1992, Mary Ellen Paterson died. By Order dated January 20, 1995, the Trustee was permitted to abandon Hudsar's real estate.
There have been several actions initiated by MEP or the MEP Estate before this Court. On February 3, 1992, MEP1 filed an adversary proceeding in this Court against Hudsar and Thomas W. Paterson, Jr. (Adv. Proc. 92-2077). In that proceeding, MEP sought an Order establishing the validity of her lien on Hudsar's machinery and equipment and awarding her damages for Hudsar's alleged conversion of the proceeds of the sale of that machinery and equipment.
On March 14, 1995, this Court granted Thomas Paterson, Jr.'s motion for partial summary judgment on that adversary complaint, Adv.Proc. 92-2077, holding that there was no conversion of the proceeds because MEP's lien on Hudsar's machinery and equipment was not perfected. This Court held that the UCC-1 financing statement failed to contain a "reasonable description of the non-fixture equipment and machinery," and thus was insufficient to perfect MEP's lien. (O'Grady Cert. Exh. P, Tr. 15-17). The Order granting summary judgment in favor of Thomas Paterson, Jr. and against the MEP estate was entered on March 17, 1995. By order dated April 28, 1995 the pending counterclaim of the Debtor was dismissed and Adversary Proceeding No. 92-2077 was closed.
On September 8, 1992, the MEP Estate filed an application in this Court to disqualify Riker, Danzig as counsel for Hudsar and seeking disgorgement of all fees paid by Hudsar to Riker, Danzig during the bankruptcy case. The MEP Estate asserted that Riker, Danzig was not disinterested under the Bankruptcy Code because, inter alia, Riker, Danzig allegedly represented MEP as a secured creditor of Hudsar and thus had an undisclosed conflict of interest. On August 21, 1992, Riker, Danzig voluntarily withdrew from its representation of Hudsar.
On January 6, 1993, a plenary hearing was held on the MEP Estate's disgorgement application and on May 27, 1993 this Court issued an oral opinion denying the MEP Estate's application. This Court stated:
The Court\'s review of the entire record also fails to establish that Riker, Danzig represented Mary Ellen Paterson in her capacity as a secured creditor of Hudsar.
(Riker, Danzig Exh. V, Tr. 34.)
The instant action was commenced on June 3, 1992, by MEP's filing of a complaint in the Superior Court of New Jersey, Law Division, Essex County against Riker, Danzig and First Fidelity Bank. On August 20, 1992 the MEP Estate filed an Amended Complaint in the state court against Riker, Danzig and First Fidelity. The Amended Complaint asserted five counts against Riker, Danzig, alleging, inter alia, that Riker, Danzig committed malpractice in its representation of MEP in connection with her March 1986 loan to Hudsar. The Amended Complaint further alleged that First Fidelity Bank, as a co-trustee of a testamentary trust of the Estate of Gordon W. Paterson should not have allowed MEP to lend money to Hudsar.
On December 14, 1993, the state court granted Riker, Danzig's motion for summary judgment on Counts One through Five of the Complaint with prejudice as barred by the applicable statute of limitations. By order dated January 21, 1994, the state court granted the MEP Estate leave to file a Second Amended Complaint alleging claims not previously asserted. By that order, the state court reaffirmed its dismissal order except insofar as that order barred on statute of limitations grounds any claim of negligent drafting of the UCC-1, and granted MEP's request to file a second Amended Complaint.
The MEP Estate's Second Amended Complaint, Adv.Proc. 95-2115, asserts, of the thirteen counts, some nine counts against Hudsar, its former officers, Thomas W. Paterson, Jr. and Thomas W. Paterson III, alleging under various legal theories that they caused environmental harm to the property mortgaged to MEP and devalued her security. In the Tenth Count, Riker, Danzig is alleged to have allowed Hudsar and its former officers to cause environmental damage to its property either by negligently advising Hudsar that its conduct was lawful or by failing to advise Hudsar that its conduct was unlawful. In the Eleventh Count, the Complaint asserts that Hudsar and the Patersons, on...
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