In re Main, Inc.
| Decision Date | 07 December 1999 |
| Docket Number | Bankruptcy No. 96-19098DAS. Adversary No. 98-0073. |
| Citation | 242 BR 574 |
| Parties | In re MAIN, INC., Debtor. Mitchell Miller, Esq., Trustee, Plaintiff v. Eric J. Blatstein, Lori J. Blatstein, Morris Lift, Airbev, Inc., Cobalt, Inc., Delawareco, Inc., Engine 46 Steak House, Inc., Pier 53 North, Inc., Reedco, Inc., Waterfront Management Corp., and Waterfront Valet, Inc. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
COPYRIGHT MATERIAL OMITTED
Paul B. Maschmeyer, Ciardi, Maschmeyer & Karalis, PC, Philadelphia, PA, for Main, Inc.
Mitchell W. Miller, Philadelphia, PA, trustee for Main, Inc.
Eric L. Frank, Philadelphia, PA, General Counsel for trustee Miller.
Steven M. Coren, Philadelphia, PA, Special Counsel for trustee Miller.
Edward J. DiDonato, DiDonato & Winterhalter, P.C., Philadelphia, PA, for Eric J. Blatstein.
Michael H. Kaliner, Fairless Hills, PA, trustee in Blatstein case.
B. Christopher Lee, Philadelphia, PA, for Jacoby Donner and Corporate defendants.
Kevin J. Carey, Mesirov Gelman Jaffe Cramer & Jamieson, Philadelphia, PA, for Lori J. Blatstein.
Joel W. Todd, Dolchin, Slotkin & Todd, PC, Philadelphia, PA, Possibly Present Attorney for Morris Lift.
W.J. Winterstein, Jr., Philadelphia, PA, Former Attorney for Morris Lift.
Frederic Baker, Philadelphia, PA, Ass't. U.S. Trustee.
SUPPLEMENTAL OPINION
The seemingly modest purpose of the instant decision is to decide claims asserted by MITCHELL W. MILLER, ESQUIRE, the trustee ("the Trustee") in the MAIN, INC. ("the Debtor") Chapter 7 bankruptcy case ("the Trustee"), against ERIC J. BLATSTEIN ("Blatstein") and his wife, LORI J. BLATSTEIN ("Lori," with Blatstein, "the Blatsteins"), for their receipt of alleged excess salaries from the Debtor, and their alleged negligent incurrence of tax penalties on behalf of the Debtor, which were left unresolved in our previous Opinion of September 22, 1999, now reported at 239 B.R. 281 and designated herein as "Main IX", and thus it supplements Main IX. With one exceptions noted at pages 576-77 infra, all of the other references to prior decisions arising out of the Debtor's and Blatstein's bankruptcy cases utilized herein are consistent with the references utilized in Main IX.
Considering the record compiled at a post-Main IX supplemental trial of October 29, 1999 ("the Trial"), we find that the Blatsteins met their burden of proof, through their counter-analysis of the sums properly designated as salaries received and unrebutted expert testimony, that they did not receive excessive salaries from Debtor. We also find that the Blatsteins are liable for only $6669.50, the sole amount proven to be attributable to penalties for their failure to timely pay tax obligations, holding that the Trustee was obliged to pay some of the taxes at issue and that the Blatsteins failed to establish that nonpayment of this sum was justified under the "business judgment" rule.
The increasingly complex procedural history of the adversary proceedings arising out of the bankruptcy cases of the Debtor and its principal Blatstein are outlined in Main IX and a decision of September 17, 1999, now reported at 239 B.R. 59, to which we described Main IX as a "companion piece" and which is referenced herein as "Main VIII" rather than, as in Main IX, "the 9/17 Opinion." We will not repeat all of prior history set forth therein anew. We will recite herein, as relevant facts, only those developed at the Trial.
The interested reader will be asked to recall that, in Main IX, we found the Blatsteins liable to the Trustee for the entire $685,520.78 which we had declared to be the sum remaining due from the nondebtor corporations owned by the Blatsteins ("the Nondebtors") to the Debtor upon application of the ruling of the District Court in Main VII, reported at 1999 WL 424296 (E.D.Pa. June 23, 1999), that the Blatsteins could avoid such liability only by proving that they had good business reasons for effecting the advances from the Debtor to the Nondebtors. We concluded in Main IX, 239 B.R. at 288-92, that they had failed to do so. However, we further found that we could resolve the issues of whether the Blatsteins were also liable for receipt of excessive salaries and certain tax penalties allegedly imposed upon the Debtor only upon application of the principles of Main VII, at *16 and *20-*21, respectively, to more specific facts than those in the record to date. Main IX, 239 B.R. at 292-96. In that Opinion, we therefore scheduled a hearing after the remand on October 6, 1999. Id. at 296-97.
Prior to October 6, 1999, we were advised that accountant Harvey W. Grossman, the Trustee's principal expert witness, was out of the country until later that month. We therefore ultimately entered an Order of October 7, 1999, rescheduling the Trial on October 29, 1999, on a must-be-heard basis.
The six-hour Trial was in fact conducted on October 29, 1999. Testimony was adduced by the Trustee from Grossman only. The Blatsteins called George W. Miller, the expert accountant previously testifying on behalf of them and the Nondebtors; Dean W. Laskaris, an expert in the food and beverage industry; and Blatstein. The Trustee's evidence at the hearing consisted of (1) Grossman's presentation of a voluminous comprehensive report ("the Trustee's Report") covering the years 1994 through 1997, detailing and providing back up for each and every alleged payment conceivably made by Philly Rock Bar and Grill ("Philly Rock") to or for the benefit of the Blatsteins; and (2) a five-page report ("the Tax Report") for the years 1996, 1997, and 1998, showing that Philly Rock allegedly incurred certain tax penalties.
The Trustee's Report hypothesized that the Blatsteins received $1,158,866.93 in payments in the nature of compensation during the period covered. This dollar amount was broken down by the Trustee as follows:
TABLE 1
COMPENSATION RECEIVED BY THE
BLATSTEINS AS CLAIMED
BY THE TRUSTEE
YEAR DOLLAR AMOUNT
1994 $ 177,130.77
1995 $ 587,489.09
1996 $ 336,352.59
1997 $ 57,894.881
TOTAL DOLLAR AMOUNT $1,158,866.93
The Blatsteins, in response, introduced (1) Miller's analysis of the Trustee's Report; (2) Miller's own exhibits showing his version of the compensation paid to the Blatsteins from 1994 through 1997; (3) Laskaris' expert opinion of the reasonable rate of compensation in restaurants similar in size and revenues to Philly Rock; and (4) Blatstein's testimony regarding Philly Rock's operations. Miller thoroughly reviewed and analyzed the Trustee's Report and, almost needless to say, presented some very different opinions and dollar figures regarding the salary compensation received by the Blatsteins from 1994 through 1997, which concluded as follows:
TABLE 2
COMPENSATION RECEIVED BY THE
BLATSTEINS AS CLAIMED BY MILLER
YEAR DOLLAR AMOUNT
1994 $ 39,842.352
1995 $415,416.40
1996 $ 76,967.69
1997 $ 2,911.17
TOTAL DOLLAR AMOUNT $535,137.613
At the outset, we note that the Trustee's present figure for the Blatsteins' alleged excessive salaries is approximately $100,500 higher than any of their figures presented previously and is over three times the amount which the District Court believed was at issue on this point. See Main IX, 239 B.R. at 292-93, citing Main VII, at *12.
Similarly, the alleged tax liability for which the Trustee now attempts to hold the Blatsteins liable, although covering the same period as before, has grown from the range of $10,000 to $15,000, Main VI, 1998 WL 601249, at *2, to $20,873, Main VII, at *20, to $33,256.99, itemized by Grossman at the Trial as follows:
TABLE 3
TAX PENALTIES ALLEGED BY THE TRUSTEE TO BE OWED
TO THE DEBTOR BY THE BLATSTEINS
TAXING AUTHORITY YEAR DOLLAR AMOUNT OWED
1. Internal Revenue Service 1996 $ 2,754.70
2. Jefferson Bank (tax authority not identified) 1996 $ 1,507.72
3. Internal Revenue Service 1997 $19,683.05
4. Pennsylvania Department of Revenue 1997 $ 872.83
5. City of Philadephia 1997 $ 317.20
6. Internal Revenue Service 1998 $ 7,996.49
7. City of Philadelphia 1998 $ 125.00
TOTAL DOLLAR AMOUNT OWED $33,256.99
Miller, meanwhile, contended that little or no evidence of the Debtor's liability for the tax penalties exists, let alone evidence that the Blatsteins are liable for same. Miller observed that the only support for all but one of the sums claimed by the Trustee as tax penalties were entries in the Debtor's general ledger under headings "Taxes & penalties" and "Fines & penalties." The one exception is a Notice from the Internal Revenue Service ("the IRS") dated October 13, 1997, indicating that Columbusco, Inc. ("CCO") was liable for penalties of $6669.50 relating to Philly Rock for the tax period ending June 30, 1997. While arguing that, for the most part, no tax penalty obligations existed for the Debtor, the Blatsteins claim, assuming arguendo that there were, that Blatstein made a legitimate business decision to pay other debts and vendors ahead of the obligations owed to the taxing authorities. To justify their actions, the Blatsteins cite authority adopting the "business judgment rule" and claim that they reasonably believed their conduct to be appropriate under the circumstances.
We note, as we did in Main II, 213 B.R. 67,...
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