In re Monahan Ford Corp. of Flushing, Bankruptcy No. 02-23134-CEC.

• Decision Date: 02 July 2008
• Docket Number: Adversary No. 04-1496-CEC.,Bankruptcy No. 02-23134-CEC.
• Citation: 390 B.R. 493
• Parties: In re MONAHAN FORD CORP. OF FLUSHING, Debtor. Richard J. McCord, as Chapter 7 Trustee of the Estate of Monahan Ford Corp. of Flushing, Plaintiff, v. Jaspan Schlesinger Hoffman, LLP, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

390 B.R. 493

In re MONAHAN FORD CORP. OF FLUSHING, Debtor.

Richard J. McCord, as Chapter 7 Trustee of the Estate of Monahan Ford Corp. of Flushing, Plaintiff, v. Jaspan Schlesinger Hoffman, LLP, Defendant.

Bankruptcy No. 02-23134-CEC.

Adversary No. 04-1496-CEC.

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

July 2, 2008.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Allan Hyman, Certilman Balin Adler & Hyman LLP, East Meadow, NY, for Plaintiff.

Vincent D. McNamara, Law Office of Vincent D. McNamara, East Norwich, NY, for Defendant.

DECISION

CARLA E. CRAIG, Chief Judge.

In this adversary proceeding, Richard J. McCord, chapter 7 trustee of the estate of Monahan Ford Corporation of Flushing (the "trustee"), asserts claims against Jaspan Schlesinger Hoffman, LLP (the "Jaspan Firm") for legal malpractice in their representation of the debtor-in-possession in this bankruptcy case. This matter comes before the Court on the trustee's motion for partial summary judgment, and on the Jaspan Firm's cross motion for summary judgment. The trustee's motion is granted in part and denied in part, and the Jaspan Firm's motion is denied.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b) and the Eastern District of New York standing order of reference dated August 28, 1986. This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.

Facts

The following facts are undisputed.

In 2002, Monahan Ford Corporation of Flushing (the "debtor" or "Monahan Ford") was a franchised automobile dealer of Ford vehicles located in Flushing, Queens. Monahan Ford operated at premises leased from 150-05 Northern LLC, 37-20 Prince Street LLC, and 133-48 Prince Street LLC (collectively, the "Landlords"). The Landlords were owned equally by Micaela Monaghan and her brother, John Monaghan. Each lease was for a period of ten years, commencing June 1, 2001, and offered Monahan Ford the right of first refusal in the event the Landlords decided to sell the premises. One of the leases had two renewal options of five years each, and the other lease had a single ten year renewal option.

On October 17, 2002, Monahan Ford, then represented by Pryor & Mandelup LLP, filed a voluntary petition under chapter 11 of the Bankruptcy Code. As of that date, Micaela Monaghan, one of the 50% owners of the Landlords, owned 49% of Monahan Ford's shares, and George Papantoniou owned 51%.¹

On October 18, 2002, Pryor & Mandelup filed a motion on behalf of the debtor seeking authorization to use cash collateral of Ford Motor Credit Company ("Ford Credit"). Ford Credit asserted a security interest in almost all of the debtor's assets. Shortly thereafter, the Jaspan Firm replaced Pryor & Mandelup, and on November 30, 2002, the Court approved the debtor's retention of the Jaspan Firm, nunc pro tunc to October 22, 2002.

On November 14, 2002, the Court so-ordered a stipulation between the debtor and Ford Credit, which was also signed by the Jaspan Firm, permitting the use of cash collateral in compliance with a budget. Pursuant to the stipulation, all proceeds received from selling vehicles or vehicle parts were to be deposited into a bank account, and, subject to certain exceptions, the debtor was not permitted to withdraw funds from the account without Ford Credit's consent. As soon as the debtor completed a vehicle sale, Ford Credit obtained the proceeds, without deduction of any sales taxes. As a result, the debtor did not pay any post-petition sales taxes, causing the assessment of penalties and interest.

The cash collateral stipulation also provided that George Papantoniou would not have any managerial power, and required the debtor to hire an independent manager. Steve Leon was hired to manage the debtor pursuant to a management agreement, in compliance with the cash collateral stipulation.

Given that the debtor filed its petition on October 17, 2002, the sixty day period provided in § 365(d)(4) of the Bankruptcy Code for the debtor to assume leases of non-residential real property, or seek an extension of time to do so, expired on December 16, 2002. Although the Jaspan Firm was involved in discussions with entities interested in purchasing the debtor's dealership, and although the leases for the premises on which the dealership operated were unquestionably material to any potential sale, the Jaspan Firm did not move to assume the leases by that date, or seek an extension of time to do so. Section 365(d)(4) of the Bankruptcy Code provides that if a lease is not assumed, or the time extended, within the statutory sixty day period, the lease "is deemed rejected." 11 U.S.C. § 365(d)(4).

On January 17, 2003, the Landlords filed a motion seeking the debtor's surrender of the premises, or relief from the automatic stay in order to evict the debtor. The Landlords argued that the leases were rejected by operation of law. The Jaspan Firm, on behalf of the debtor, opposed the Landlords' motion, arguing that Ms. Monaghan knew that the debtor needed to sell the dealership or obtain an investor to pay Ford Credit's claims, and that the debtor therefore needed to assume and assign the leases. Objection of Debtor to Motion of the Landlord [Case No. 02-23134, Docket # 32] at ¶ 13. The Jaspan Firm also asserted that John Monaghan had "expressed a willingness to work with the [d]ebtor and an awareness of the importance of the leases." Id. at ¶ 14. The Jaspan Firm noted that a stipulation extending the time to assume or reject the unexpired leases was sent to Ms. Monaghan's counsel, who did not return phone calls relating to the stipulation until after the 60 day assumption period had expired. Id. at ¶ 13

On February 3, 2003, the debtor commenced an adversary proceeding against the Landlords, John Monaghan, and Micaela Monaghan seeking to recover fraudulent and preferential transfers, and asserting claims for breach of fiduciary duty and conversion. The total judgment sought in that adversary proceeding was approximately $2.3 million.

On February 13, 2003, Mark Tulis was appointed as chapter 11 trustee. On February 14, 2003, the case was converted to one under chapter 7 of the Bankruptcy Code, and Richard J. McCord was appointed as chapter 7 trustee.

On March 5, 2003, in response to the Landlord's motion for relief from the stay, the trustee filed a cross-motion to extend the time to assume or reject the leases to April 8, 2003. The trustee argued that, pursuant to § 365(d), he was entitled to an additional 60 days from the date of conversion to assume the leases. The trustee also argued that the Landlords waived their right to argue that the leases were rejected because the Landlords and the debtor had common insiders, and therefore, the Landlords knew of the bankruptcy filing and the debtor's intention to assume and assign the leases. The Landlords objected to the trustee's motion, arguing that the conversion of the case on February 14, 2003 did not create a new period to assume the leases after they were rejected by operation of law on December 16, 2002.

On May 14, 2003, the Court approved a stipulation between the trustee, the Landlords, Mr. Monaghan, and Ms. Monaghan settling the adversary proceeding and the pending motions. Pursuant to the stipulation, the trustee received $1 million from Ms. Monaghan's estate², the trustee agreed to surrender the premises, and Ms. Monaghan's estate agreed to indemnify the debtor's estate for any taxes it owed New York State to the extent Ms. Monaghan was personally liable therefor.

On October 15, 2004, the trustee commenced this adversary proceeding against the Jaspan Firm alleging that its failure to move in a timely fashion to assume the leases, or for an extension of time to do so, or to advise the debtor of the consequences of the failure to do either, constituted legal malpractice. The trustee also alleged that the Jaspan Firm committed legal malpractice by advising the debtor not to pay sales taxes and drafting the management agreement and cash collateral stipulation in a way that did not permit the debtor to do so without Ford Credit's consent.

Applicable Law

Standard for Summary Judgment

Summary judgment is appropriate when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "When cross-motions for summary judgment are pending, `[e]ach individual summary judgment motion must be evaluated independently.'" Healey v. Thompson, 186 F.Supp.2d 105, 113 (D.Conn.2001), aff'd in part, vacated in part on other grounds, Lutwin v. Thompson, 361 F.3d 146 (2d Cir.2004). A court is not required to grant one party's motion because the other party's motion was denied. Otis Elevator Co. v. Factory Mut. Ins. Co., 353 F.Supp.2d 274, 279 (D.Conn.2005).

When deciding a motion for summary judgment, the court's function is not to resolve disputed issues of fact, but only to determine whether there is a genuine issue of material fact to be tried. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is considered material if it "might affect the outcome of the suit under the governing law." Id. at 248, 106 S.Ct. 2505. No genuine issue exists "unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Id. at 249-50, 106 S.Ct. 2505 (citations omitted). On the other hand, if "there is any evidence in the record from any source from which a reasonable inference could be drawn in favor of the nonmoving party, summary judgment is improper."...