In re Perret

• Court: U.S. Bankruptcy Court — Northern District of New York
• Writing for the Court: HOWARD SCHWARTZBERG, , by designation
• Citation: In re Perret, 67 B.R. 757 (Bankr. N.D.N.Y. 1986)
• Decision Date: 02 December 1986
• Docket Number: 85 Adv. 8007.,Bankruptcy No. 82-10055
• Parties: In re Marion J. PERRET and Annette Perret, d/b/a Hill Haven Farm, Debtors. J. Reiley McDONALD, Trustee, Plaintiff, v. Mohammed Taieb DABBAGH and Charles W. Schoeneman, Defendants.

67 B.R. 757 (1986)

In re Marion J. PERRET and Annette Perret, d/b/a Hill Haven Farm, Debtors.
J. Reiley McDONALD, Trustee, Plaintiff,
v.
Mohammed Taieb DABBAGH and Charles W. Schoeneman, Defendants.

Bankruptcy No. 82-10055, 85 Adv. 8007.

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

December 2, 1986.

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COPYRIGHT MATERIAL OMITTED

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Carter, Ledyard & Milburn, New York City, for trustee. James W. Rayhill, and Marta S. Lively, of counsel

Charles W. Schoeneman, Washington, D.C., pro se.

DECISION ON COMPLAINT SEEKING AN ORDER FOR A SHORTFALL CLAIMED DUE UNDER CONFIRMED PLAN

HOWARD SCHWARTZBERG, Bankruptcy Judge, by designation.

The issues in this adversary proceeding arose out of a confirmed Chapter 11 liquidating plan of reorganization which gave the trustee the option, in lieu of a cash payment at distribution, to deliver immediately thoroughbred horses from this estate to a Saudi Arabian resident holding an allowed claim of $500,000. The delivery of the horses was subject to an express condition that in the event of a shortfall in the proposed distribution to the unsecured claimholders, the Saudi was required to return sufficient horses or cash to cover his pro rata shortfall liability. The actions of the Saudi and his local attorney, (who was also chairman of a two person creditors' committee), in their dealings with the Chapter 11 trustee and this estate with respect

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to the delivery of thoroughbred horses, gave rise to this adversary proceeding commenced by the Chapter 11 trustee. The trustee claims that there is a shortfall in available cash for distribution to unsecured creditors and that the Saudi, Mohammed Taieb Dabbagh, and his attorney, Charles W. Schoeneman, are each personally obligated to the estate for the $365,000 Blood-stock Appraisal value of the thoroughbred horses assigned to the Saudi. The complaint also seeks to recover $33,500 for stallion seasons, or stud fees, incurred to service four of the assigned mares

The attorney, Charles W. Schoeneman, has counterclaimed against the estate for damages allegedly sustained as a result of the trustee's refusal to turn over jockey Club certificates and other registration papers and his alleged failure to allow Schoeneman complete control in the resale of the horses. The counterclaim also seeks to have the trustee removed and directed to pay damages to the estate and to Schoeneman because of the trustee's conduct with respect to the sale of the horses at an auction conducted by Fasig-Tipton Company, Inc., the trustee's employer, which allegedly caused damage to the estate and to Dabbagh. The defendant, Mohammed Taieb Dabbagh, filed an answer in the form of a letter, but did not appear at the trial. The defendant, Charles W. Schoeneman, appeared pro se.

FINDINGS OF FACT

1. The debtors, Marion J. Perret and his wife, Annette Perret, filed a voluntary joint Chapter 11 petition with the United States Bankruptcy Court for the Northern District of New York on January 8, 1982. They were originally continued in possession of the property of their estates pursuant to 11 U.S.C. § 1108.

2. After notice and hearing following a request made by the creditors' committee, plaintiff was appointed and serves as the Chapter 11 trustee of the debtors' estates pursuant to orders of the United States Bankruptcy Court for the Northern District of New York, dated February 25, 1983 and March 7, 1983.

3. Defendant, Mohammed Taieb Dabbagh, is a subject of the Kingdom of Saudi Arabia with his principal place of business located at Dabbagh Establishment, Madinah Road, Jeddah, Kingdom of Saudi Arabia. Dabbagh is the Class Six Creditor under the trustee's Second Amended Chapter 11 Plan (the "Plan") which was confirmed by the United States Bankruptcy Court for the Northern District of New York, by order dated March 7, 1984.

4. Defendant, Charles W. Schoeneman, is an attorney and a resident of Washington, D.C. with an office located at 2501 M Street N.W., Suite 604, Washington, D.C. Schoeneman was chairman of the official creditors' committee, which consisted of two persons. He also represented Mohammed Taieb Dabbagh in this case as Dabbagh's attorney in fact pursuant to a power of attorney dated March 27, 1982. Exhibit 2. Mr. Schoeneman had previously represented Dabbagh under an earlier power of attorney in enforcing an international arbitration award against the debtor, Marion J. Perret, which was then filed as a claim against this estate in the amount of $3,073,091. Schoeneman also represented Dabbagh in this case as the latter's attorney at law, until he resigned in February of 1985.

5. The debtors had been engaged in the business of breeding, raising and selling thoroughbred race horses. They operated a thoroughbred horse farm consisting of approximately 270 acres located in Columbia County, New York, known as "Hill Haven Farm". The debtors resided in Metairie, Louisiana, where they owned a home. They also owned a parcel of vacant land in Lacombe Harbor, Louisiana.

6. The Chapter 11 trustee, J. Reiley McDonald, is a vice president of Fasig-Tipton Company, Inc., a firm recognized in horse breeding circles as a leading auctioneer of thoroughbred racing horses. McDonald was recommended to the creditors by Schoeneman as a knowledgeable person

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who is familiar with the business of breeding and selling thoroughbred race horses. Upon the consent of counsel for the creditors' committee and at the suggestion of the creditors' committee, McDonald was appointed by the court as Chapter 11 trustee, effective March 11, 1983

7. After meeting with the creditors and the debtors, the Chapter 11 trustee filed with the court on October 4, 1983 a plan of liquidation which proposed to sell substantially all of the debtors' assets. The proposed plan was amended several times, the last being December 30, 1983. Following the court's approval of a disclosure statement, the proposed plan was consented to by the debtors who hoped to salvage some assets, if possible. The plan was also appropriately accepted by the requisite majority of creditors as required under 11 U.S.C. § 1126(c) and was ultimately confirmed pursuant to an order of the court dated March 7, 1984.

8. The plan divides the secured and unsecured claims, exclusive of priority and administration expense claims, into seven classes. The general unsecured claims were placed in Class 7 and were offered a potential 100% distribution to the extent of the availability of funds for repayment. During the negotiations with respect to the plan, Dabbagh's $3,073,091 claim, which represented the largest unsecured claim against the estate, was reduced to $500,000, with Dabbagh's consent. Dabbagh's unsecured claim was given special treatment under the Plan and was placed in a separate class, referred to as Class 6.

9. As the Class 6 unsecured claimholder, Dabbagh was entitled to receive $500,000 in cash to the extent that funds were available at the time of distribution, or, the trustee could elect to deliver horses to Dabbagh prior to the time when Classes 1 through 3 received their minimum distributions. In the event that the trustee elected to deliver horses to Dabbagh, certain conditions were imposed. Among the conditions were that the trustee would retain a lien on the horses for the benefit of the estate. Another condition attached to the delivery of the horses, and which forms the basis for the instant adversary proceeding, was that Dabbagh and the Class 7 creditors would share ratably in any shortfall in the funds available to satisfy their claims. The Plan provided that, in the event of such shortfall, Dabbagh would be obligated to reconvey horses or pay cash to cover the amount necessary so that Dabbagh and the unsecured Class 7 claims shared the shortfall ratably. In other words, Dabbagh was not to receive an advantage or preference over the other unsecured creditors and his pro rata share was not to exceed the pro rata shares received by the other unsecured creditors merely because Dabbagh received horses in kind before the unsecured creditors received their distributions. To the extent that the other unsecured creditors received less than 100% of their claims, Dabbagh was obligated to return sufficient horses or cash to maintain the pro rata level of distribution to all the unsecured creditors. This provision was expressed in paragraph 4 of Article 5.06 of the Plan as follows:

To implement this provision Dabbagh and the Trustee shall agree that if the proceeds of sale generated or reasonably expected to be generated from the sale of the Property of the Estate are insufficient, so that a shortfall is extant or reasonably likely to exist, the Trustee shall have the right to require and Dabbagh shall have the obligation to reconvey to the Trustee for liquidation either (i) such of the mares as shall have a sales value, as determined pursuant to the Bloodstock Appraisal, sufficient to provide for the allocation of the shortfall or, (ii) at the election of Dabbagh cash in an amount equivalent to the appraised value of the mare(s) as specified in the Bloodstock Appraisal, whereupon Dabbagh and the unsecured creditors shall receive the proceeds of sale pro rata and shall share in the shortfall ratably. (for this purpose the Claim of Dabbagh shall be valued at $500,000.)

10. The trustee incorrectly states the crucial terms of the Plan in paragraph 7 of the complaint as, follows:

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The Plan gave the Class Six Creditor the option to elect to receive either cash or these horses in satisfaction of his claim. If the Class Six Creditor elected to keep the Horses, however, the Plan provided that he would be obligated to pay the Trustee an amount in cash sufficient to make up any shortfall in the funds available to satisfy claims under the Plan.

(Emphasis added). On the contrary, Article 5.06 of the Plan provides:

In lieu of a cash payment, Dabbagh may receive, at the option of the Trustee, the mares. .

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