IN RE KLIEGL BROS.

• Decision Date: 09 September 1999
• Docket Number: Bankruptcy No. 191-13001-352.
• Parties: In re KLIEGL BROS. UNIVERSAL ELEC. STAGE LIGHTING CO., INC., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

238 B.R. 531 (1999)

In re KLIEGL BROS. UNIVERSAL ELEC. STAGE LIGHTING CO., INC., Debtors.

Bankruptcy No. 191-13001-352.

United States Bankruptcy Court, E.D. New York.

September 9, 1999.

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A. Peter Lubitz, Kirk L. Brett, Rosenman & Colin LLP, New York City, for movant.

Laurence Y. Solarsh, White Plains, NY, for Richard Davisson.

William Greenberg, White Plains, NY, for Lawrence Gottlieb.

Decision on Administrative Creditor's Motion for Sanctions for Debtor's Final Report and Application Seeking a Final Decree

MARVIN A. HOLLAND, Bankruptcy Judge.

Donovan Leisure Newton & Irvine¹ (DLNI or Movant) seeks sanctions from Debtor's counsel and former principal pursuant to Fed.R.Bankr.P. 9011,² 28 U.S.C. § 1927, and the inherent powers of the court for misrepresentations and omissions in Debtor's final report and ex parte application for a final decree (the application). Movant asserts that sanctions are appropriate because Debtor's application was intentionally and materially misleading in failing to adequately inform the court of Debtor's precarious financial condition and in misrepresenting the status of Movant's unpaid administrative claim. After a series of hearings, we find that the facts surrounding the filing of the application and the proliferation of proceedings spawned by the application warrant the imposition of sanctions. We conclude that we have authority to impose sanctions and direct that a further hearing be held to determine their magnitude.

I. HISTORY

The plan of reorganization of Kliegl Bros. Universal Electric Stage Lighting Co., Inc., (Kliegl) confirmed in 1992 resulted in an outsider, Richard Davisson, acquiring a controlling equity interest in the Debtor (Dec. 9 Tr. at 135 and 137-139, 162), an old-line highly respected manufacturer of stage and commercial lighting. Davisson is a well-educated and experienced investment broker and advisor who invests in what he described as a "diverse group of often start-up companies." (12/9/97 Tr. at 5, 121-126.)

Kliegl was already in Chapter 11 when an investment banker who had previously done business with Davisson brought the Debtor to Davisson's attention. (Id. at 127-128.) Davisson was attracted by the possibility of Kliegl's obtaining lucrative contracts,³ and his attraction led to a commitment. During the reorganization management was replaced by an operating trustee who was pressed by Davisson to propose a plan. (Id. at 137.) Under the plan ultimately filed by the Trustee, Davisson became the principal investor, shareholder and director in the reorganized entity. (Id. Tr. at 142.) Kliegl's disclosure statement provided that "Mr. Davisson shall fund, to the extent necessary, fees as allowed", (12/9/97 Tr. at 11),⁴ and at confirmation Davisson made a critical $150,000 capital contribution.⁵ After confirmation Davisson continued to fund the reorganized debtor with additional cash. (12/9/97 Tr. at 41-43; 1/12/98 Tr. at 16.) However, when the anticipated new business failed to materialize (1/12/98 Tr. at 55), Kliegl ceased operations in November of 1996 (12/9/97 Tr. at 63) without having made all of the payments required by its confirmed plan. (12/9/97 Tr. at 163.)

Among the creditors that did not receive all anticipated plan payments was the law firm of DLNI which held a sizable administrative claim for its service as Debtor's counsel prior to the appointment of the Chapter 11 operating trustee. Davisson claims to have reached an oral agreement with DLNI on the eve of confirmation (12/9/97 Tr. at 21, 145) ("in late June or July of 1992") under which Kliegl would not object to DLNI's fee application⁶ in exchange for DLNI's agreement to accept payments on its claim at a rate of three percent of Kliegl's sales per month. (12/8/97 Tr. at 217). Davisson admits that he did not have authority to bind Kliegl at the time of the agreement. (12/9/97 Tr. at 22.)⁷ DLNI denies the existence of the agreement altogether (12/8/97 Tr. at 36, 99, 101, 106-109), but an affidavit by Peter Lubitz made in support of DLNI's fee application states that an agreement for counsel fees had been reached with Kliegl. DLNI also claims that Davisson actually personally guaranteed DLNI's fees. (1/12/98 Tr. at 184-5; Davisson Exh., Docket Doc. # 245, Ex. DA).

On November 2, 1993, following a chamber's conference initiated by DLNI, and while a decision on DLNI's fee application was still pending, this Court entered an order directing Kliegl to deposit 3% of its monthly revenues into an escrow account pending a final decision on DLNI's fee application. (the "Deposit Order") (12/8/97 Tr. at 218, 317, 410-412.) Kliegl's compliance with the Deposit Order, however, was short-lived; payments ceased after several months (in or around June 1994) (12/9/97 Tr. at 35) resulting in DLNI receiving only $4,180.46. (Docket Doc. # 235, Ex. 27.) No other payments were made to DLNI by Kliegl, (12/8/97 Tr. at 218) leaving DLNI as the reorganized debtor's only major unpaid administrative creditor.⁸

In October 1995, Kliegl's first final report dated October 14 and first ex parte application dated October 16, 1995 seeking a final decree (the first application) were filed. Kliegl was then represented by Lawrence Gottlieb (Gottlieb),⁹ who states that he prepared the application at Davisson's request in order to remove the "stigma attached to being a Chapter 11 debtor." (12/8/97 Tr. at 221; 1/12/98 Tr. at 30-31.) Gottlieb maintains that he relied on Davisson's representations that the statements contained in the final report were true. (12/8/97 Tr. at 225; 1/12/98 Tr. at 34-35.) According to Davisson, he and Gottlieb had a conversation during which Gottlieb confirmed with Davisson that the facts contained in the final report were true and Gottlieb advised Davisson that Kliegl had satisfied the requirements for a final decree because he had concluded that the conditions necessary and sufficient to effect substantial consummation had occurred. (12/9/97 Tr. at 46-7, 64; 1/12/98 Tr. at 32-33). No testimony was offered to indicate that there was any discussion with regard to the requirement¹⁰ that the estate be fully administered. The final report, signed by Davisson as Treasurer of Kliegl, and by Gottlieb as its attorney, provided in relevant part:

2. Pursuant to the Plan, substantial consummation was defined as the date that first distribution to Class 4 Claimants under the Plan were made.

3. First distribution payments under the Plan on account of the sole Class 4 Claimant, John Kliegl, have been made.

4. Allowed Administrative claims have been paid in full or pursuant to agreement.

5. Debtor\'s Plan has been substantially consummated.

6. The estate is ready to be closed and a Final Decree effecting the same should issue.

(The full text of the final report and application is attached as an appendix to this decision.) No statement was made as to any payment schedule for various claims as required by the confirmed plan of reorganization.¹¹ (Docket Doc. # 235, Ex. 2.) And nothing in this first final report nor its accompanying first ex parte application made any mention of Kliegl's failure to comply with an outstanding deposit order or of DLNI's unpaid administrative claim. We denied this application to close the case because of a pending fee application of DLNI.

In late November 1995, Davisson met with DNLI to discuss Kliegl's dire financial condition. Davisson claims to have offered Peter Lubitz the keys to Kliegl at one point. (1/12/98 Tr. at 37-39.) Several weeks later, a decision was rendered granting in full DLNI's long pending application seeking nearly $150,000 in fees and expenses. Davisson claims that shortly after the release of the decision, DLNI denied the existence of the fee agreement and sought full payment of the fees awarded. (21/9/97 Tr. at 51; 1/12/98 Tr. at 40-41.) On January 16, 1996 Davisson faxed a letter to DLNI in which among other things, he stated his reluctance to continue Kliegl's funding without assurances that DLNI would limit its claim for fees consistent with the Deposit Order:

I understand that this is an unpleasant subject for you. For me it Davisson\'s involvement with Kliegl is a disaster on its way to becoming a dead duck. However we might feel about the experience, I must ask again, as I did Thursday, "Are you prepared to honor the simple understanding of October 1992, without embellishments, or not?" Payroll to be funded by Davisson or a member of his family must be wired in by noon today or we have a 50/50 chance of a walkout tomorrow by our ten member union shop, followed not long after by our seven other employees. (Docket Doc. # 235, Ex. 25.)

Under date of January 19, 1996, by way of written response, DLNI indicated its non binding willingness to accept payments from Kliegl consistent with the deposit order without limiting its claim to such amounts as follows:

This letter confirms that, without waiver of any our rights or remedies and until otherwise noticed to you by this Firm, this Firm will accept payment from Kliegl Bros. amounts of fees and disbursements granted to us pursuant to Judge Holland\'s December 28, 1995, decision (the "Award Amount"): (I) a lump sum payable forthwith equal to three percent of the gross revenues of Kliegl from the date of confirmation of the Chapter 11 plan to December 31, 1995, and (ii) three percent of Kliegl\'s gross revenues in each month thereafter payable as soon as practicable in the following month until the entire Award Amount is received by us. (Docket Doc. # 235, Ex. 26.) (Emphasis supplied.)

The parties differ as to whether DLNI had agreed to limit the amount of its administrative fee claim to the three percent of Kliegl's monthly revenues mandated in the earlier mentioned payment order or whether DLNI had merely voluntarily engaged in a non binding accommodation. The only writing evidencing this agreement is the above letter.

The...