In re Machne Menachem, Inc.

• Citation: 425 B.R. 749
• Decision Date: 04 March 2010
• Docket Number: No. 5-01-bk-04926.,5-01-bk-04926.
• Parties: In re MACHNE MENACHEM, INC., Debtor.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Middle District of Pennsylvania

425 B.R. 749

In re MACHNE MENACHEM, INC., Debtor.

No. 5-01-bk-04926.

United States Bankruptcy Court, M.D. Pennsylvania.

March 4, 2010.

Allen T. Reishtein, Edley and Reishtein, Wilkes-Barre, PA, Ronald V. Santora, Bresset and Santora, Forty Fort, PA, Stephen G. Bresset, Bresset & Santora, LLC, Honesdale, PA, for Debtor.

OPINION

JOHN J. THOMAS, Bankruptcy Judge.

As the bankruptcy case winds down, one of the final issues remaining to be decided focuses on the Proof of Claim filed by Yaakov Spritzer (sometimes hereinafter referred to as Claimant).

A brief summary of the history of the Debtor might be helpful.

Machne Menachem, Inc., hereinafter Machne or Debtor, was the brain child of a small group of Hasidic men from their Brooklyn, New York community. Four members of this community convened with the purpose of starting a summer camp for boys in a rural location away from the distracting events of the city. In 1995, a corporation, Machne Menachem, Inc., was formed under the New York Not-For-Profit Corporation Law (N-PCL) by these four individuals for the purpose of advancing this camp. By all accounts, the camp was received very enthusiastically. While well-attended, it did suffer from significant economic problems. It was not long after that these economic issues manifested itself in a rift between rival factions of the community. This disagreement found itself before the District Court for the Southern District of New York. On October 21, 2002, that District Court issued an Opinion which included findings of fact essential to its conclusions and, I find, helpful in discussing the outcome of the litigation before me.¹ Machne Menachem, Inc. v. Hershkop, 237 F.Supp.2d 227 (E.D.N.Y.2002).

The Debtor was incorporated on July 21, 1995. Id. at 230. The founding directors were Mendel Herschop (sometimes spelled Hershkop), Shmuel Heber, Yaakov Spritzer, and Yosef Goldman. Id. at 230. Initially, Machne leased a property in New York state to conduct its summer camp. Claimant Exhibit 3. On May 20, 1996, real estate in the Pocono region of Pennsylvania was purchased by the Debtor corporation. Claimant Exhibit 6. It was fairly apparent from the start that funding the operation would be a problem. While the majority of directors thought that the shortfall could be managed with donations and camp fees, it soon became apparent that Spritzer saw the only practical solution as an advance of funds, which he accommodated with a stream of personal funds deposited into Machne from mid 1995 through 2001. Claimant Exhibit 2. It was during this time period that Spritzer virtually usurped total control of the Debtor. Machne Menachem, Inc. v. Hershkop, 237 F.Supp.2d 227 (E.D.N.Y., 2002) ("Spritzer's testimony regarding the transfer of money and the cashing of checks between the Corporation and his own company, A-1 Merchandising, without any board involvement compel the conclusion that Spritzer had indeed, arrogated to himself the affairs of the Corporation.") Id. at 236.² It was the stream of funds from Spritzer that formed the basis of his Proof of Claim filed in this case. While many of the deposits made by Spritzer were from Spritzer's personal funds, some came from his solely-owned corporation, A-One Merchandising Corp. (A-One); some funds were run through The Schreiber Family Charitable Foundation; and some were run through Spritzer's joint account with his spouse. To memorialize these advances, shortly before bankruptcy, Spritzer caused to be executed a Mortgage in his favor from Machne encumbering the real estate for $1,000,000. Claimant Exhibit 1.

On December 6, 2001, on behalf of the Debtor, Spritzer filed the Chapter 11 which lends jurisdiction to this Court. With that filing, the controversy that has mired this corporation in the New York court spilled over into this Bankruptcy Court in Pennsylvania. Nevertheless, Spritzer's control of the corporation vanished when the original directors were confirmed by the District Court on October 21, 2002, and Spritzer was effectively ousted from control by the majority of directors. See attachment to Doc. # 63. That did not, however, end Spritzer's role in the bankruptcy. As a creditor of Machne by reason of his Proof of Claim, Spritzer proposed a Plan which was eventually confirmed and provided that Machne's real estate would be purchased by a new non-profit corporation under Spritzer's direction. Doc. # 617. The consideration for that sale would be held by an independent agent to be disbursed pursuant to the terms of the Plan.

The only issue that remains is the disposition of the current Objections by the Debtor to the claims of Spritzer and A-One. Doc. # 365, 366 (duplicate filing), and 382. The Objection against A-One was overruled since there was no claim filed by A-One, merely an entry on the schedules which was always subject to amendment by the Debtor.

The Debtor's Objection against the Spritzer claim, among other grounds, denies the indebtedness, asserts the lack of corporate authorization, and argues that any funds provided were donations. Doc. # 365.

The Proof of Claim filed by Yaakov Spritzer is prima facie evidence of the validity of the debt. Federal Rule of Bankruptcy Procedure 3001(f). It is in the amount of $1,012,454. It attaches approximately 120 pages of supporting documents. A review of that claim, together with Spritzer's testimony, leaves little doubt that a significant amount of Spritzer or Spritzer controlled funds went into Machne. Having said that, there was a sparse presentation of corporate books and records to either corroborate Spritzer's history of so-called "loans" or the Debtor-Objector's allegations of inappropriate personal use by Spritzer of corporate funds. What was apparent is that Yaakov Spritzer meticulously itemized a significant amount of the advances he had made to the Debtor or its employees or vendors. Attached to the Proof of Claim are copies of cancelled checks from accounts controlled by Yaakov Spritzer and his spouse, A-One Merchandising Corp., and from the Debtor itself in an apparent effort to demonstrate the legitimacy of the infusion into, and the outflow from the Debtor. Also attached were copies of numerous invoices from vendors and a petty cash ledger. Filed as a separate exhibit at trial were copies of a number of Machne deposit slips. Claimant Exhibit 5. Some of those deposit slips are marked "loan."

The essence of Debtor's Objection to the claim is that there were no loans from Spritzer to the Debtor—that if there were advances, they either were not authorized or were merely donations for which no repayment was anticipated.

An analysis of the documentation would be in order so as to properly characterize the advances. While the normal exercise regarding a for-profit entity would involve a determination whether a given advance is a loan or a capital investment, the fact that the Debtor is a non-profit corporation alters those options so as to require that I weigh whether the advances were loans or donations to a very worthy venture. In making that review, I find the Third Circuit case of Cohen v. KB Mezzanine Fund II, (In re SubMicron Systems Corp.), 432 F.3d 448 (3d Cir.2006) to be of significant assistance.

In SubMicron, the plan administrator for a Chapter 11 estate brought an adversary proceeding seeking to recharacterize an insider's claim from debt to equity. The Court's analysis explained that the term recharacterization was "misleading" and that the task is better identified as a study of the original intent of the parties, relying on Citicorp Real Estate, Inc. v. PWA, Inc. (In re Georgetown Bldg. Assocs. Ltd. P'ship), 240 B.R. 124, 137 (Bankr.D.D.C.1999) ("The debt-versus-equity inquiry is not an exercise in recharacterizing a claim, but of characterizing the advance's true character.") and In re Cold Harbor Assocs., L.P., 204 B.R. 904, 915 (Bankr.E.D.Va.1997) ("Rather than recharacterizing the exchange from debt to equity, or subordinating the claim for some reason, the question before this Court is whether the transaction created a debt or equity relationship from the outset."). SubMicron, supra. at 455 n. 7.

The implication is obvious that I should first turn my attention to the analysis of just what the relationship was between Spritzer and the Debtor during these relevant time periods.

The record is fairly replete with indications that Spritzer, as one of four directors, ran the Debtor corporation on his own with little input from the other directors. That is not to say that Spritzer was the sole manager, since others were brought in by Spritzer, from time to time, to assist in camp operations. As indicated, there was sparing use of corporate records, although Claimant Exhibit 1 included an undated purported Resolution memorializing and authorizing a $1,000,000 mortgage to an unidentified entity. The meeting at which the Resolution was ostensibly passed was referenced as being held on September 24, 2001. The Mortgage to Spritzer was dated November 6, 2001, about one month before the Debtor's Chapter 11 filing. I will note that by 2001, the bulk of Spritzer's advances had already occurred. The 2001 corporate meeting appears to be of little significance since, as found by District Judge Glasser, the only true representatives of the Debtor were its four directors: Spritzer, Goldman, Herschop and Heber. There was no indication that Goldman, Herschop or Heber were notified of that meeting.

Spritzer's advances are identified in chronological order beginning on page 17 of Claimant Exhibit 1. That document identifies approximately 125 separate transactions taking place between 1995 and 2001 totaling close to $1,000,000. Added to that total is almost $200,000 interest assessed against the Debtor. While Spritzer's religious faith prohibits the charging of interest, Spritzer explains that he merely billed the Debtor for the interest that he was charged by his bank for loans he obtained. A review of the...