In re Mushroom Transp. Co., Inc.

Decision Date03 May 2007
Docket NumberBankruptcy No. 85-02575.,Adversary No. 92-1043.
PartiesIn re MUSHROOM TRANSPORTATION COMPANY, INC., et al., Debtors. Jeoffrey L. Burtch, Trustee, Plaintiff, v. Jonathan Ganz, et al., Defendants.
CourtUnited States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

Pace Reich, Pace Reich P.C., Elkins Park, PA, for Debtors.

George R. Tsakataras, Willington, DE, Trustee, for Plaintiff.

OPINION

BRUCE FOX, Bankruptcy Judge.

The chapter 7 trustee, Jeoffrey L. Burtch, in his amended complaint, asserts three alternate claims against defendants Pincus, Verlin, Hahn & Reich, P.C.; Pincus, Reich, Hahn, Dubroff & Ganz, P.C.; and Pincus, Verlin, Bluestein, Hahn & Reich, P.C. (hereinafter "Pincus"). In essence, the trustee demands judgment in the amount of funds misappropriated by Jonathan Ganz, who had been a Pincus law firm shareholder, along with funds deposited with the Pincus firms, for which the firms allegedly cannot account. The trustee asserts this combined amount exceeds $1 million.

Specifically, in Count I of the amended complaint, the trustee alleges that the debtors' property was entrusted to the Pincus firms and they have a duty to "turnover" estate property to the trustee, pursuant to 11 U.S.C. § 542 or § 543. In Count II, the trustee maintains that the Pincus law firms were "escrow agents" acting as fiduciaries for the debtors' estates. By failing to pay the liquidation proceeds purportedly entrusted to them, the trustee alleged that they have "breached their dut(ies)" to the debtors. And in Count VI, the trustee contends that the Pincus law firms breached a contract — which contract arose via stipulation to place funds in escrow — and therefore are liable for missing estate assets that should have been held in escrow.

Three principal issues were raised during the trial. First, are the Pincus corporate law firms liable for Ganz's illegal activities? Second, if they are liable, what are the provable damages? And third, did the trustee wait too long to commence this litigation against the Pincus law firms, and so have his claims barred by the statute of limitations?

A trial took place over five days,1 with more than one hundred exhibits admitted. The parties thereafter submitted post-trial proposed factual findings and legal conclusions.2 Upon review of all the evidence, including the exhibits admitted and the testimony offered, admissions made in the pleadings, plus those documents in the court file for which judicial notice is appropriate under Fed.R.Evid. 201,3 see, e.g., In re Indian Palms Associates, Ltd., 61 F.3d 197, 204 (3d Cir.1995); Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1200 n. 3 (3d Cir.1991); Mesirow v. Duggan, 240 F.2d 751, 756-57 (8th Cir.1957), I find that the following facts were proven.

I.

1. On June 25, 1985, Mushroom Transportation Company, and its affiliated companies — Penn York Realty Co., Leazit Inc., Robbey Realty, Inc., and Trux Enterprises, Inc. — filed voluntary petitions in bankruptcy under chapter 11, with the goal of reorganizing and exiting chapter 11 as going concerns. Exs. P-6 to P-10, P-200.

2. When it filed its bankruptcy petition, Mushroom was a regulated ICC carrier, which leased terminals for its operations. Ex. P-18 at 1069; 2 N.T. at 11. Some of the leased terminals used by Mushroom were owned by the affiliated companies. Ex. P-18 at 1089-90; Ex. P-22 at 1222; Ex. P-23 at 1235; Ex. P-24 at 1248; 2 N.T. at 11-12. The affiliates had no carrier operations. Exs. P-21 to P-24.

3. Mushroom's officers at the time of its bankruptcy filing were: Richard W. Cutaiar, President; Robert F. Cutaiar, Vice President; Michael C. Arnold, Executive Vice President; Jerry A. LuCante, Vice President; Walter C. Lopez, Vice President and Secretary; and Robert B. Cutaiar, Treasurer. Ex. P-18 at 1092.

4. The officers of Leazit were Jacques R. Cutaiar and William T. Mecouch. Ex. P-21 at 1204. The officers of Trux Enterprises were Robert F. Cutaiar, Mary F. Cutaiar, Robert B. Cutaiar and Robert G. Cutaiar. Ex. P-22 at 1218. The officers of Penn York were Robert F. Cutaiar, Richard W. Cutaiar and Robert G. Cutaiar. Ex. P-23 at 1231. And the officers of Robbey Realty were Robert F. Cutaiar, Richard W. Cutaiar and Robert G. Cutaiar. Ex. P-24 at 1244.

5. Michael Arnold was an officer only of Mushroom, and was involved in overseeing its operations. 1 N.T. at 31. His duties at Mushroom were those of chief operating officer "directly handling the daily operations of the company." Ex. P-19 at 1198. He was a law school graduate, and at the time of Mushroom's bankruptcy filing had been employed by the company for eight years. Id. When Mushroom filed its bankruptcy petition, Mr. Arnold's salary was $920 per week. Id.

6. Robert B. Cutaiar was Mushroom's treasurer and chief financial officer. He was responsible, inter alia, for "all banking arrangements within the company system." Ex. P-19, at 1198. He had been employed by Mushroom since 1961. Id.

7. On June 28, 1985, the separate chapter 11 cases of Mushroom and its affiliates were ordered jointly administered.4 Ex. P-16 at 1065B; P-200 (docket entries # #, 7-10). Furthermore, an official committee of unsecured creditors was appointed in the Mushroom bankruptcy case. Id. (docket entry # 11). The creditors' committee engaged the law firm of Booth, Marcus & Pierce as its counsel, Id. (docket entry # 210).

8. On July 3, 1985, Mushroom and all of its affiliate debtors were authorized to engage the law firm of Pincus, Verlin, Hahn & Reich, P.C. to represent them as chapter 11 debtors in possession. 1 N.T. at 33. Exs. P-11 to 15; P-200 (docket entry # 18). The Pincus firm received compensation for its services to the chapter 11 debtors in possession at least through June 1989. Ex. P-200 (docket entry # 1255).

9. At the time of this engagement, the Pincus firm was a professional corporation with Jonathan Ganz, Esquire as one of its shareholders but not one of its officers. 2 N.T. at 168.

10. Both Arnold and Ganz graduated from Villanova Law School. Ex. P-19 at 1198. While at law school Arnold met Ganz and even took a bankruptcy class with him. 2 N.T. at 1617. It was Arnold who arranged for Mushroom to engage the Pincus law firm, and Pincus was chosen because of Arnold's association with Ganz and because of the firm's bankruptcy expertise. 1 N.T. at 32, 49. Arnold obtained his law license in 1978, but that license was revoked in 1995. 2 N.T. at 10. In 1996, Arnold pled guilty to embezzling Mushroom funds while serving as Mushroom's bankruptcy trustee. 2 N.T. at 57.

11. Arnold viewed his relationship with Ganz as more than simply attorney-client. 2 N.T. at 55. However, he had no social relationship with Ganz, at least prior to engaging his firm to represent Mushroom in its bankruptcy case. Ex. P-182 at 11. After the engagement, Arnold and Ganz became friendlier, sharing season baseball tickets. 2 N.T. at 55-56.

12. After the Pincus law firm was engaged by Mushroom and its affiliates for the bankruptcy representation, Ganz was considered by the firm to be the originating attorney for the Mushroom clients. 2 N.T. at 190; 4 N.T. at 132, 146.

13. Within the Pincus law firm, Ganz either requested or agreed that Pace Reich, another attorney shareholder with more bankruptcy experience than Ganz, be in charge of the reorganization efforts of the Mushroom bankruptcy cases. 4 N.T. at 146.

14. When Mushroom filed for bankruptcy relief, it estimated owing about $4.5 million to Continental Bank. Ex. P-18 at 1119. Continental held a security interest in Mushroom's receivables, equipment and real estate, id., and the affiliate companies (except for Leazit) had guaranteed that debt and placed their own assets as collateral. Exs. P-22 at 1220; P-23 at 1233; P-24 at 1246.

15. Shortly after Mushroom and its affiliates filed their chapter 11 petitions, they entered into agreements with Continental for the continued use of cash collateral and for postpetition loans. Exs. P-55 to 57. Among the terms of those agreements was the requirement that the debtors deposit the proceeds of their receivables in Continental Bank accounts. Id. After filing for chapter 11 bankruptcy, Mushroom opened debtor in possession bank accounts, first at Fidelity Bank and later at Continental Bank. 2 N.T. at 19-20.

16. About six months after they filed chapter 11 cases (by the end of 1985), Mushroom and its affiliates decided that they would be unable to reorganize as operating entities. On or about January 10, 1986, Mushroom decided to cease operations and simply liquidate all of its assets and those of its affiliates, but to do so in chapter 11 rather than in chapter 7. 1 N.T. at 33.

17. After Mushroom made its decision to liquidate its assets and those of its affiliate companies in chapter 11, and to cease operations, Ganz became the Pincus attorney in charge of overseeing the liquidating chapter 11 cases, as Ganz purportedly had more experience in that scenario than Reich. 5 N.T. at 146. Thus, by early 1986 Ganz became the lead Pincus attorney on the Mushroom bankruptcy cases. 2 N.T. at 138, 188; 5 N.T. at 147; Ex. P-182 at 213.

18. The Pincus firm did not have any supervision systems concerning Ganz's handling of the Mushroom bankruptcy cases. 2 N.T. at 189. As Ganz expressed it: "One of the nice parts of working for the firm was that you generally had a lot of independence." Ex. P-182 at 60.

19. On or about February 14, 1986, the official committee of unsecured creditors filed a motion to substantively consolidate the assets and liabilities of Mushroom and its affiliate entities (as well as requesting marshaling). Exs. P-200 (docket entry # 361); P-208.5 That motion was opposed by various parties, including certain shareholders of the affiliate debtors, the Estate of William C. Cutaiar and the Internal Revenue Service. The opposition believed that the assets of the affiliates exceeded their liabilities to Continental, and...

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