In re JFD Enterprises, Inc.
| Decision Date | 06 August 1998 |
| Docket Number | Adversary No. 97-4114.,Bankruptcy No. 93-41606-HJB |
| Citation | 223 BR 610 |
| Parties | In re J.F.D. ENTERPRISES, INC., Debtor. Joseph F. DiSTEFANO and Patricia A. DiStefano, Plaintiffs, v. Peter M. STERN, Eugene B. Berman, Park West Bank and Trust Co., Roger Dialessi, and James H. Fierberg, Defendants. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
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F. Michael Joseph, Springfield, MA, for DiStefanos.
Stephen M. Coyle, for Roger Dialessi.
Kerry David Strayer, Springfield, MA, for Eugene Berman.
Kevin Giordano, for Peter Stern.
Before the Court for determination are Motions for Summary Judgment (the "Motions") filed by all three of the defendants remaining in this adversary proceeding, Peter M. Stern ("Stern"), Eugene B. Berman ("Berman"), and Roger Dialessi ("Dialessi") (collectively, the "Defendants").1 In their complaint, Joseph F. DiStefano ("Mr. DiStefano"), a shareholder and unsecured creditor of J.F.D. Enterprises, Inc. ("JFD" or the "Debtor"), and his wife Patricia A. DiStefano ("Mrs. DiStefano"), an under-secured creditor of the Debtor, (jointly the "DiStefanos"), seek damages relative to the business failure and liquidation of the Debtor. They point the finger of blame for their losses at the three Defendants.
Prior to the commencement of the case, the Debtor owned all the assets of Century Liquor Mart, a liquor store in West Springfield, Massachusetts. The business was managed by Mr. DiStefano. According to the DiStefanos, business had been good for a number of years, but financial difficulties began to intrude in 1990. The DiStefanos attribute the Debtor's prepetition financial problems to the closure of a nearby bridge and the concomitant reduction in traffic to the shopping plaza where the Debtor's business was located. JFD's financial statements from 1990 through 1993 reflect severe financial distress during that period.2
On June 10, 1993, JFD filed a Chapter 11 petition in this Court. An Official Unsecured Creditors' Committee (the "Committee") was appointed shortly thereafter, and, on August 9, 1993, the Court3 allowed the Committee's application to employ Kamberg, Berman, P.C. as its counsel. Berman is a principal of that firm.
On July 16, 1993, Mrs. DiStefano filed a "Motion . . . for Adequate Protection," alleging, inter alia, that she had loaned a total of $477,602 to the Debtor, and that the debt was secured by a junior lien on all of the assets of the company. The Committee filed an objection to allowance of the motion, and a hearing was held on September 9, 1993. Relying on the parties' representation that the matter had been resolved and that a stipulation would be forthcoming, the Court continued the hearing generally. That stipulation (the "Adequate Protection Stipulation") was executed on October 27, 1993 by the Debtor, the Committee, and Mrs. DiStefano, and was subsequently approved by the Court on November 17, 1993. Pursuant to the terms thereof, Mrs. DiStefano's claim was fixed in the amount of $40,000, and deemed to be secured by the Debtor's inventory, proceeds, and accounts receivable, but junior to the security interest of Park West. The stipulation further provided:
That except to institute actions to compel the payment of monies due under the terms of this Stipulation, Mrs. DISTEFANO shall have no standing to institute by complaint, Motion or otherwise any action in this case or to object to any aspect of the administration of the proceedings or to be heard as a party in interest therein.
By its terms, the stipulation was to be binding on any subsequently appointed fiduciary in the case, and was to survive either conversion or dismissal of the case.
On July 30, 1993, Berman, as counsel to the Committee, Edward V. Sabella ("Sabella"), as counsel to JFD, and Fierberg, as counsel to Park West, executed and submitted a proposed "Stipulated Order for Use of Cash Collateral" (the "First Stipulated Order"). By virtue thereof, the parties agreed that Park West held a valid, perfected, and enforceable security interest in all of the Debtor's personal property, but agreed to disagree on whether the Bank had such a security interest in the Debtor's liquor license. That matter was explicitly left to be determined by the Court. Further, the continued use of cash collateral was "conditioned upon the Debtor maintaining a post-petition inventory having a value of not less than the value of the inventory at the time of the filing" of the Chapter 11 case. The First Stipulated Order was entered by the Court on August 18, 1993.
Notwithstanding the stipulations between the parties, the Debtor's financial problems continued. On September 24, 1993, the Committee filed a motion to convert the case to Chapter 7. The Committee alleged that the Debtor had lost a total of $475,000 between August 1990 and May 21, 1993 and the Committee "had concluded that the Debtor was poorly managed and in serious financial condition for reason of a lack of proper business and operational controls and bad organization" which "continued to result in substantial losses to the estate above and beyond the losses as recorded."
The Committee's motion to convert triggered a flurry of activity. The first consequence was a deal struck between Sabella, as counsel to the Debtor, and Berman, as counsel to the Committee. Pursuant to that arrangement, the Committee agreed to withdraw its motion to convert and the Debtor agreed that Mr. DiStefano would step down as manager of the liquor store. That job was offered to Dialessi in early October 1993,4 and he began working at the liquor store on October 4, 1993. This agreement between the Debtor and the Committee was reflected (after the fact) in an October 14, 1993 stipulation (the "Conversion Stipulation"), which provided, inter alia, that Dialessi would be designated as the general manager of the Debtor and would "be granted, without limitation, all powers and authority of the Debtor to act for and on its behalf in the operation of the business of the Debtor-in-Possession and in the Chapter 11 proceedings of the Debtor."
However, on October 13, 1993, one day prior to the filing of the Conversion Stipulation, Park West filed its own motion to convert the case to Chapter 7. The Bank complained that the Committee had unlawfully "undertaken the management and direction of the Debtor and . . . ousted the legal management, placing third parties, with no responsibility to or privity with the Bank in custody of the affairs of the Debtor." Park West also complained that, according to information provided by the Committee, the Debtor's inventory had shrunk by one-third to one-half since the filing of the case.
Park West then froze the Debtor's bank account, in which $40,000 had been deposited from accounts receivable, and refused to grant Dialessi check-signing authority on that account. On October 27, 1993, the Debtor filed an adversary proceeding against Park West, seeking a preliminary injunction. However, the complaint was dismissed at the Debtor's request on November 3, 1993, after Park West had relented and allowed Dialessi to access the account.
On October 29, 1993, the United States Trustee (the "UST"), who apparently also had concerns about Dialessi's role in the case, filed an objection to the Conversion Stipulation and a motion for the appointment of a Chapter 11 trustee or conversion of the case to Chapter 7. The UST complained that Dialessi was unlawfully acting as a defacto Chapter 11 trustee.
At a November 10, 1993 hearing on Park West's Motion to Convert, two more stipulations were submitted in the hope of resolving the outstanding disputes. First, the Debtor, the Committee, Park West, and the UST submitted a "Stipulation and Agreement Concerning Appointment of Chapter 11 Trustee" (the "Trustee Stipulation"). In that document, all parties agreed that the UST would appoint a Chapter 11 trustee. Further, the Debtor, the Committee, and Park West (but not the UST) agreed that Dialessi would "be appointed as the Trustee upon his compliance with and satisfying the standard qualification requirements established by the Office of the United States Trustee."
Second, the Debtor, the Committee, and Park West submitted a "Stipulated Order for Continued Use of Cash Collateral" (the "Second Stipulated Order"). The Debtor and the Committee ( its position in the First Stipulated Order) agreed that, inter alia, Park West held a valid, perfected and enforceable prepetition first security interest in and to the Debtor's liquor license, and that the Bank held the same interest postpetition. Park West agreed not to seek relief from the automatic stay or move to convert so long as certain conditions were met, including: (1) regular monthly payments of principal and interest to the Bank; (2) weekly financial reports to the Committee and Park West; and (3) maintenance of "an aggregate inventory at cost and/or cash and/or accounts receivable in an amount of not less than ONE HUNDRED FIFTY THOUSAND . . . DOLLARS." The Second Stipulated Order also provided that Park West's motion to convert was to be deemed withdrawn. At the conclusion of the hearing, the Court executed the Second Stipulated Order, approved the Conversion Stipulation, and approved the Trustee Stipulation.
The UST subsequently decided against appointing Dialessi as the Chapter 11 trustee, and instead named Stern to that post. The appointment was approved by the Court on December 10, 1993. Despite Stern's appointment as trustee, Dialessi stayed on as store manager and ran the day-to-day affairs of the Debtor.
Given the nature of this adversary proceeding, several actions taken by Dialessi as manager of the liquor store are worth mentioning. First, soon after commencement of his duties, Dialessi commissioned RGIS...
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