In re Masterwear Corp.
| Decision Date | 09 April 1999 |
| Docket Number | Bankruptcy No. 97 B 47083(SMB),Adversary No. 98/8723A.,to 97 B 47088(SMB) |
| Citation | 233 BR 266 |
| Parties | In re MASTERWEAR CORPORATION, et al., Debtors. Masterwear Corporation, et al., Plaintiffs, v. Angel & Frankel, P.C., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
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Coleman, Rhine & Goodwin LLP, New York City, Ira Daniel Tokayer, of Counsel, for Plaintiff.
Angel & Frankel, P.C., New York City, Joshua J. Angel, Robert A. Abrams, of Counsel, for Defendant Pro Se.
The debtors (collectively "Masterwear") commenced this adversary proceeding to recover a $20,000.00 retainer paid prepetition to the defendant law firm, Angel & Frankel, P.C. (the "Firm"). Former management hired the Firm and paid the retainer, but a new board replaced the former board following a contested election, and immediately fired the Firm. Ignoring the discharge, the Firm continued to perform legal services. It claims it earned the $20,000.00 through both pre-discharge and post-discharge services, and moves for summary judgment. Masterwear also requests summary judgment, but has not made a formal motion.
The principal issue before me is whether the new board had the authority to fire the Firm. I conclude that it did. Accordingly, the Firm is entitled to partial summary judgment in an amount equal to the reasonable value of its pre-discharge services, and Masterwear is entitled to partial summary judgment in an amount equal to the balance of the retainer. The remaining requests for relief are denied.
Masterwear is a Delaware corporation. Prior to the events described below, Norman Bernard, Brad Bernard and Albert Mushkin (collectively, the "Bernard Group") were Masterwear's officers and directors. (Affirmation of Joshua Angel in Support of Motion for Summary Judgment, sworn to Feb. 18, 1999 ("Angel Affirmation"), ¶ 2.) Signal Capital Corporation ("Signal") was also a shareholder of Masterwear.
Beginning sometime prior to 1997, Signal contended that the members of Bernard Group had breached their fiduciary and contractual duties to Masterwear by unlawfully extending their employment agreements and taking excessive and unauthorized compensation and reimbursement for personal expenses.1 After following certain pre-election procedures that are not in dispute, Signal issued a notice of a special meeting of shareholders to elect a new board. (Williams Affidavit, Ex. "A".) The special meeting was scheduled for July 2, 1997.
On the date of the meeting, the Bernard Group attempted to prevent it by seeking injunctive relief in state supreme court. State Supreme Court Justice Charles E. Ramos denied the request for immediate relief from the bench. (Williams Affidavit, Ex. "E", at 2.)2 The meeting went forward, and the shareholders elected Eben S. Moulton, Walter H. Leonard and Willis A. Williams, as the new board of directors. (Williams Affidavit, Ex. "C".) All three are associated with Signal. They will be referred to as the "Signal Directors," and where the context permits, the "Signal Board." The Signal Board also nominated and elected Williams Vice President and Assistant Secretary of Masterwear, (Williams Affidavit, Ex. "C"), but did not replace the existing Bernard Group officers.3
The Bernard Group apparently continued to contest the election, (see Williams Affidavit, Ex. "E", at 3), but the submissions do not describe what occurred. On or about September 18, 1997, the parties entered into a "so ordered" stipulation in the state court. (Id., Ex. "E".) The stipulation ended the challenge. The Bernard Group acknowledged that the Signal Directors constituted the duly elected Masterwear board since July 2, 1997, and agreed not to interfere with the board or the Signal Directors. (Id.)
While these events unfolded, Masterwear continued to suffer from severe financial problems. On or about June 18, 1997, Joshua Angel, Esq., a member of the Firm, met with "Masterwear's management" (i.e., the Bernard Group),4 and agreed to represent Masterwear in addressing its deteriorating financial condition. (Angel Affirmation, ¶ 5.) The parties did not execute a written retainer agreement. According to Mr. Angel, the oral agreement included a flat fee of $20,000.00 at the commencement of the representation and another flat fee of $20,000.00 at its conclusion. (Id.)
Five weeks later — and after the election of the new board — the Firm received a $20,000.00 retainer on July 22, 1997, for services rendered and to be rendered in connection with effecting a common law composition. (Id.) Only two days later, however, the new board discharged the Firm. On July 24th, counsel to the Signal Board — and now Masterwear — delivered a letter to the Firm stating that the Firm was not authorized to act on behalf of Masterwear, and demanding the refund of the retainer. (Id., Ex. "F".)
The Firm ignored the request. It continued to perform legal services until September 10, 1997, (see Williams Affidavit, Ex. "K", at 3), purportedly on behalf of Masterwear, in connection with the common law composition.5 On October 27, 1997, Masterwear filed their chapter 11 petitions, and on July 10, 1998, filed this adversary proceeding.
Fed.R.Civ.P. 56(c)6, made applicable to this adversary proceeding by Fed. R. Bankr.P. 7056, governs summary judgment motions. Under the Rule, the Court will grant judgment if the submissions show that no genuine material issues of fact exist, and the movant is entitled to judgment as a matter of law. Accord, Cargill, Inc. v. Charles Kowsky Resources, Inc., 949 F.2d 51, 55 (2d Cir.1991); In re Maxwell Newspapers, Inc., 151 B.R. 63, 67 (Bankr.S.D.N.Y.1993); Shugrue v. Pension Benefit Guar. Corp. (In re Ionosphere Clubs, Inc.), 147 B.R. 855, 860 (Bankr. S.D.N.Y.1992). A material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A court cannot resolve disputed issues of fact, but instead, must assess whether any factual issues exist, and resolve any ambiguities or inferences against the moving party. Lopez v. S.B. Thomas, Inc., 831 F.2d 1184, 1187 (2d Cir.1987); Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir.1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987).
If the movant carries the initial burden of demonstrating the absence of genuine factual issues, the nonmoving party cannot rely on pleadings or mere denials, and must set forth specific facts that show triable issues. Fed.R.Civ.P. 56(e)7. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); see Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The nonmoving party must show that there is more than a metaphysical doubt regarding a material fact, Matsushita Elec. v. Zenith, 475 U.S. at 586, 106 S.Ct. 1348; Brass v. American Film Technologies, Inc., 987 F.2d 142, 146 (2d Cir.1993), and may not rely solely on self-serving conclusory statements. Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir.1993); Wyler v. U.S., 725 F.2d 156, 160 (2d Cir. 1983).
As noted, this case comes down to the authority of the Signal Board to fire the Firm. Delaware law vests the board of directors with the authority to manage the corporation, Del.Code Ann., title 8, § 141(a)(1998)("Del.Corp.Law"), and this includes the authority to hire and fire lawyers. The Firm concedes this general proposition. (See Supplemental Affidavit by Angel & Frankel, P.C. sic in Support of Motion for Summary Judgment, sworn to by Joshua J. Angel, Mar. 16, 1999, at ¶ 3.) It contends, however, that if the election of a new board is contested, only the old board can speak for the company until the contest is resolved. (Id.) The law does not support this premise.
When a corporation elects directors, it will be presumed that their election was regular, and that all legal requirements have been met. 2 Victoria A. Braucher, et al., Fletcher Cyclopedia of the Law of Private Corporations § 296, at 98 (1998 rev. ed.)("Fletcher"). If, however, the director holds and exercises the power of his office under color and claim of an irregular election, he is not a de jure director but is still a de facto director. Blish v. Thompson Automatic Arms Corp., 64 A.2d 581, 603-04 (Del.1948); Prickett v. American Steel & Pump Corp., 253 A.2d 86, 88 (Del.Ch.1969); Drob v. National Memorial Park, 41 A.2d 589, 598 (Del.Ch. 1945); Fletcher § 374, at 213-14; Harry G. Henn & John R. Alexander, Laws of Corporations and Other Business Enterprises § 206, at 562 (3rd ed. 1983)("Henn"); 18B Am.Jur.2d, Corporations § 1415 (1985). A board consisting of de facto directors has the same authority as a de jure board to bind the corporation, at least insofar as third persons are concerned. Drob v. National Memorial Park, 41 A.2d at 598; Fletcher § 380, at 223-24; see Dillon v. Scotten, Dillon Co., 335 F.Supp. 566, 569 (D.Del.1971). The status of a de facto director may be attacked directly by a shareholder or another director, Del. Corp. Law § 225(a); see Young v. Janas, 103 A.2d 299, 301 (Del.Ch. 1954); but his title and the validity of his acts are usually not subject to collateral attack. Henn § 206, at 562; see Fletcher § 387, at 232.
This latter point leads me initially to question the Firm's standing. The Signal Directors were duly elected at the special meeting on July 2nd. The Firm, as a third party vendor of legal services, is in no different or better position than any other vendor. Under the general rule discussed above, it cannot collaterally attack the election, and hence the status and authority,...
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