In re Mushroom Transp. Co., Inc.
| Decision Date | 04 September 2002 |
| Docket Number | Adversary No. 94-3.,CIV.A. No. 99-3144.,Bankruptcy No. 85-02575.,Adversary No. 92-1043. |
| Citation | 282 B.R. 805 |
| Parties | In re MUSHROOM TRANSPORTATION CO., INC., et al., Debtors. Jeoffrey L. Burtch, Trustee, et al., Plaintiffs-Appellants, v. Jonathan Ganz, et al., Defendants-Appellees. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Kent Cprek, Sagot, Jennings and Sigmond, Philadelphia, PA, for plaintiffs.
Andrew F. Napoli, Hochberg Napoli Diamond, P.C., James R. Kahn, Margolis, Edelstein and Scherlis, Walter Weir, Jr., Weir and Partners, Edward I. Swichar, Ann E. Kim, Blank Rome Comiskey & McCauley LLP, Ernest J. Bernabei, III, Harvey, Pennington, Herting and Renneisen, Ltd., Philadelphia, PA, for defendants.
David N. Bressler, Kaplin, Stewart, Meloff, Reiter and Stein, P.C., Blue Bell, PA, pro se.
Frederick Baker, Sr. Asst. U.S. Trustee, Philadelphia, PA, pro se.
Jeoffrey Burtch, Trustee, Wilmington, DE, pro se.
Richard L. Hahn, Bala Cynwyd, PA, pro se.
Pace Reich, Pace Reich, PC, Elkins Park, PA, pro se.
Andrew D. Tepper, Klehr, Harrison, Harvey, Branzburg & Ellers, Philadelphia, PA, for Home Insurance Company.
Plaintiffs below Jeoffrey L. Burtch, trustee in the bankruptcy of Mushroom Transportation Company, Inc., Michael C. Arnold,1 Robbey Realty, Inc., Penn York Realty Co., Inc., Trux Enterprises, Inc., and various pension funds and their administrators [hereinafter collectively referred to as "plaintiffs"] appeal several Orders of the United States Bankruptcy Court granting summary judgment in favor of defendants below, Pincus, Verlin, Hahn & Reich, P.C., Pincus, Reich, Hahn, Dubroff & Ganz, P.C., Pincus, Verlin, Bluestein, Hahn, & Reich, P.C. ("PVHR"),2 Continental Bank ("Continental Bank"), and Richard L. Hahn, Pace Reich, Jerome J. Verlin, Andrew F. Napoli, Herman Weinberg, David Bressler, Allen B. Dubroff, and Erwin L. Pincus ("shareholders") [collectively referred to as "defendants"].3 This court has appellate jurisdiction over this matter pursuant to 28 U.S.C. § 158(a). For the reasons that follow, the Bankruptcy Court's orders granting summary judgment in favor of all defendants will be affirmed.
The storied background of the dispute between the litigants, now in its fifteenth year, can be found in its essence in the Memoranda and Orders of Chief Bankruptcy Judge Bruce Fox dated August 24, 1998 and the Memorandum and Order dated October 1, 1999 and shall not be restated in its entirety here. At its core, however, is the theft of approximately one-half million dollars in estate property by the estate's attorney, Jonathan Ganz. While the fact of the theft is admitted, the responsibility for allowing it to occur is not so clear. The officers of the debtors, the bank, the law firms where Ganz was a partner, and the chapter 7 trustee point the finger of culpability at each other. Because the actions in this case were filed way past the period permissible under the applicable statute of limitations, the plaintiffs' actions can only survive if they are able to show that, despite the exercise of due diligence, they did not learn of the misappropriation until a much later date. The case thus raises the proverbial query of what did plaintiffs know and when did (or should) they know it. By way of background, the court offers the following factual scenario.
Mushroom Transportation Company and its related entities (jointly referred to as "Mushroom Company" or "debtors") filed for bankruptcy pursuant to chapter 11 of the Bankruptcy Code in June 1985. Upon filing of the chapter 11 petition, the Mushroom Company became the debtor in possession. By order of the Bankruptcy Court, the case of the parent company and all of the affiliates were to be jointly administered. Mushroom Company remained as debtor in possession until December 1990 when the case was converted to a chapter 7 proceeding. The relevant events here occurred while Mushroom Company was a debtor in possession under chapter 11.
As debtors in possession, Mushroom Company retained the legal services of Jonathan Ganz, Esquire, of the law firm of Pincus, Verlin, Hahn & Reich, P.C. ("PVHR") to act as counsel to the debtors in the chapter 11 bankruptcy proceeding. Within six months from the filing of the petition, however, the debtors ceased operating and began liquidating their assets. Arnold, as a Mushroom Company officer, was appointed "Special Liquidation Consultant" for the debtors in February 1986.4 Under Arnold's leadership, the debtors liquidated a substantial portion of their assets. From the proceeds of these sales, the debtors began repayment of a large debt owed to Continental Bank, a secured creditor, who held a perfected security interest in all of the debtors' assets.
On June 16, 1986, after the debtors in possession repaid some, but not all, of their debt to Continental Bank, the Bankruptcy Court, with the consent of the parties, authorized the opening of an "escrow" account at Continental Bank to hold the balance of the proceeds generated from the sale of the debtors' assets not yet paid to Continental Bank.
In a letter to Ganz dated February 12, 1987, Arnold informed Ganz that he and Robert B. Cuatair, corporate president of Mushroom Company, were handling the day-to-day operations of the debtors. Although Arnold also requested via the letter an accounting of the proceeds of one of the realty sales and a report of the debtors' assets held by Continental Bank,5 he informed Ganz that his involvement in the bankruptcy proceedings would be "further reduc[ed]" in March of 1987. Pl's.App., Vol. 3, 3077. Ganz responded to Arnold's letter on February 17, 1987 by informing Arnold that the account at Continental Bank held approximately $986,000 "in various escrow accounts," and that unspecified additional funds were held by PVHR in "escrow accounts" as well. Pl's.App., Vol. 3, 3078.
Pursuant to a Bankruptcy Court-approved stipulation in June 1987, Continental Bank was repaid the balance of its debt out of the funds held in the bank's escrow account. After payment to Continental Bank, the balance of the proceeds were to be transferred to and held in escrow by PVHR. In September 1987, at Ganz' urging, the Bankruptcy Court excused the debtors from the statutory requirement to file monthly operating statements.6
Unfortunately for the debtors and their creditors, during the transfer of funds from the Continental Bank account to PVHR from June 1987 to April 1998, Ganz misappropriated more than one-half million dollars. The parties agree that Ganz completed his siphoning of estate funds by April 26, 1988.
From June 1987 (when the Bankruptcy Court approved the stipulation allowing the balance of the liquidation proceeds to be transferred from the Continental Bank account and placed in a new account with PVHR) until the beginning of 1992 (when Arnold actually learned of Ganz' defalcation), the attention of Arnold and Cutaiar was undisputedly elsewhere.7 By Arnold's own declaration, both he and Cutaiar were involved in other business ventures and paid little attention to the debtors' affairs. Furthermore, according to Arnold, the marshaling and distribution of the debtors' assets were put on hold while the Bankruptcy Court considered motions to substantively consolidate the bankruptcy cases of the Mushroom Company and its affiliates. As Arnold concedes, to the extent that he and Cutaiar did work for Mushroom Company, they "spent most of [their] time over the next several years analyzing and resolving priority claims," Pl.'s App., Vol. 7, 7092, and filing claims against insurance carriers.
In either late 1987 or early 1988, at the prompting of counsel for the Official Committee of the Unsecured Creditors ("Creditors Committee"), Arnold sent another letter to Ganz requesting information about the status of the debtors' assets. Ganz responded to Arnold's request on February 2, 1988 by sending Arnold a copy of the June 1987 stipulation. Arnold followed up on Ganz' response on February 10, 1988 writing Ganz that the stipulation did "not clear up the problem of how much is being held and by whom." Pl.'s App., Vol. 3, 3094. Arnold further included his own estimates of the debtors' assets based on internal company records and requested that Ganz confirm the accuracy of this information. From Ganz' own testimony, though not memorialized in any written document, he and Arnold verbally communicated after Arnold's February 10, 1988 letter. During that conversation, Ganz told Arnold that the money was being held in certificates of deposit at various banks. This information turned out to be untrue. It is undisputed that Arnold, however, did not request written verification of Ganz' representation or otherwise take any steps to confirm its accuracy.
In January 1992, the Bankruptcy Court approved the substantive consolidation of the Mushroom Company and the affiliates. At that point, Arnold was prepared to distribute the proceeds from the sale of the debtors' assets and called Ganz to request that Ganz start liquidating the certificates of deposits and escrow accounts supposedly held on behalf of the Mushroom Company and its affiliates by PVHR. Arnold received no response from Ganz to these requests. At the end of February 1992, the United States Trustee advised Arnold that Ganz was reportedly involved in the defalcation of other bankruptcy estates where he had acted as counsel. Upon making further inquiries, Arnold discovered that Ganz had absconded with the Mushroom Company estate funds under Ganz' control. Thus, the plaintiffs contend that Arnold first learned of the Ganz misappropriation in February 1992, approximately four years after Arnold's initial inquiry to Ganz.
On October 5, 1992, the Mushroom Company trustee (at this time, Arnold) filed this adversary action...
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