In re Philadelphia Mortg. Trust

• Decision Date: 22 August 1990
• Docket Number: Bankruptcy No. 83-03504S.
• Citation: 117 BR 820
• Parties: In re PHILADELPHIA MORTGAGE TRUST, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

117 B.R. 820 (1990)

In re PHILADELPHIA MORTGAGE TRUST, Debtor.

Bankruptcy No. 83-03504S.

United States Bankruptcy Court, E.D. Pennsylvania.

August 22, 1990.

Richard J. Micheel, Brigantine, N.J., objector pro se.

Gene A. Foehl, Media, Pa., for Marie Micheel.

Horace A. Stern, Philadelphia, Pa., for Committee of Equity Security Holders.

James J. O'Connell, Philadelphia, Asst. U.S. trustee.

Dixon R. Rich, Rich, Fluke, Tishman & Rich, Pittsburgh, Pa., for Donald R. Sarp.

David S. Fishbone, Philadelphia, Pa., for trustee.

Marvin, Krasny, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for debtor.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION

Before us in the above-captioned, longpending Chapter 11 bankruptcy case are Objections of Richard J. Micheel ("Micheel"), the former President and an alleged creditor of the Debtor, PHILADELPHIA MORTGAGE TRUST ("the Debtor"), to the Third Amended Proof of Claim ("the Fourth Claim"), filed by Donald R. Sarp ("Sarp"). Sarp contends that his claim of $47,326.69 set forth in the Fourth Claim is entitled to administrative expense priority treatment under 11 U.S.C. § 503(b)(1)(A). The Claim consists of sums to which Sarp was allegedly entitled as reimbursement of expenditures made in his capacity as a Trustee of the Debtor under its Trust Agreement ("the Agreement").

We conclude that Sarp is not entitled to assert any claim against the Debtor under the terms of the Agreement. Furthermore, the claim could not, in any event, be deemed an administrative claim for two separate reasons: (1) Sarp has failed to establish that the Debtor's estate benefitted by any obligation to reimburse him; and (2) The claims appear to have arisen pre-petition.

B. FACTUAL AND PROCEDURAL BACKGROUND

This bankruptcy case was filed with two companion cases, In re Leedy Mortgage Co., Bankr. No. 83-03502S ("Leedy"), and In re Investment Co. of America, Bankr. No. 83-03503S ("ICA"), on September 8, 1983. Some feeling for the history of these cases can be developed by reading our Leedy opinions reported at 111 B.R. 488, 489-90 (Bankr.E.D.Pa.1990) ("Leedy II") (administrative status denied as to claims of banks who advanced funds to the Trustee's accountant to assemble the Leedy Debtor's disorganized records regarding its mortgage servicing duties for the banks); and 76 B.R. 440, 441-44, 451-59 (Bankr.E. D.Pa.1987) ("Leedy I") (summary judgment motion by insurers on the Trustee's claims against fidelity policies covering Leedy's high-level employees, including Micheel, granted in part and denied in part). Suffice it to say that the three related debtors were engaged in gross improprieties which resulted in appointment of separate Trustees in all three cases on September 16, 1983, just eight days after the filing of the cases. ICA was converted to a Chapter 7 case on April 6, 1988, and Leedy was also so converted on August 10, 1988. Final audit hearings in both cases have been completed, and they will be closed shortly.

This case has survived in Chapter 11. After considerable prodding of the Trustee appointed in this case by this court to proceed with a Plan or allow its conversion, the Trustee, with the Debtor's Committee of Equity Security Holders, filed a joint plan of reorganization which was ultimately confirmed on November 22, 1989.

The instant controversy began on October 18, 1989, when Micheel filed pro se Objections to the third of Sarp's Proofs of Claim, filed, as Claim No. 18, on January 25, 1989, as an administrative claim in the amount of $48,478.04. This claim had been preceded by Sarp's initial claim (No. 9), filed on March 30, 1987, as unsecured in the amount of $41,561.02, and an amended claim (No. 11) on November 16, 1988, in the same amount as the first, but classified as administrative.

The hearing on Micheel's Objections was ultimately continued until January 24, 1990. At that hearing, at which Sarp alone testified, Sarp brandished the Fourth Claim, filed as Claim No. 22 that day. At the close of the hearing, we entered an Order of January 26, 1990, which addressed, inter alia, Sarp's claims, by striking the admittedly-superseded Claims No. 9, 11, and 18; requiring Sarp to submit documentation for the legal services for which reimbursement was sought in procedural conformity with In re Meade Land & Development Co., Inc., 527 F.2d 280 (3d Cir.1975); and In re Mayflower Associates, 78 B.R. 41 (Bankr.E.D.Pa.1987), on or before March 23, 1990; and allowing any party until April 10, 1990, to submit written responses to Sarp's submissions.

Micheel then proceeded to file, on February 20, 1990, a request that Sarp produce certain additional documents, and on March 16, 1990, a motion to compel responses thereto. On March 29, 1990, we granted Micheel's requests in part; required certain documents to be produced by Sarp by June 1, 1990; and extended the period for response to Sarp's submissions until June 29, 1990. On June 1, 1990, Sarp filed a Fourth Amended Proof of Claim ("the Fifth Claim"). This Claim is identical to the Third except that it appended $10,767.61 for Sarp's costs in prosecuting his various Proofs of Claim, bringing his alleged total claim to $57,483.85. We note that this Claim is not on the court's claim docket, but that there is an additional unsecured Proof of Claim of Sarp (No. 29), filed on March 27, 1990, in the amount of $39,770.16, on that docket.¹ Micheel filed Objections to the Fourth Amended Proof of Claim, which are listed for a hearing on September 12, 1990. Our Order will dispose of all of Sarp's outstanding claims, rendering that hearing unnecessary.

On June 8, 1990, Micheel filed objections to the sufficiency of Sarp's production-request responses, which we sustained in part in an Order of June 28, 1990. In that Order, we also required Sarp to render supplemental responses and allowed him to file a Brief in support of his Claim by July 10, 1990, and extended the period of response until July 31, 1990. In characteristically verbose fashion, Micheel submitted a 41-page Response (not counting hundreds of pages of exhibits attached thereto) to Sarp's own 13-page Brief.

Since the Fifth Claim represents the summation of all that has gone before, we will describe that claim in some detail. Firstly, Sarp claims to have incurred legal fees and expenses in the amount of $39,770.16 defending himself as a Trustee of the Debtor in a lawsuit commenced in 1983 in the United States District Court for the Northern District of Alabama, Southern Division, encaptioned Colonial Bank of Alabama, et al. v. Richard J. Micheel, et al., Civil Action Nos. CV-83-H-2060-S; and CV-83-P-2002-S ("the First Colonial Action"). Secondly, Sarp claims to have incurred legal fees and expenses in the amount of $4,546.07 in defending himself as a Trustee of the Debtor in a lawsuit commenced in the Court of Common Pleas of Philadelphia County, encaptioned Touche Ross & Co. v. Richard J. Micheel, et al., No. 764, August Term, 1987 ("the Touche Ross Action"). In addition, as indicated previously, Sarp also includes therein legal fees and expenses in the amount of $10,767.61, allegedly incurred in connection with the preparation and submission of his original and amended proofs of claim.

We note at the outset that the sum of separate components of the Fifth Claim, $39,770.16, $4,546.07, and $10,767.62, totals $55,083.85, not the $57,483.85 figure advanced by Sarp. We assume that the $2,400.00 difference is merely the result of an arithmetic error by Sarp and that the actual amount of indebtedness claimed by the Fifth Claim is $55,083.85.

The underlying facts are, to a certain degree, disputed, but the resolution of most, if not all, of these disputes is unnecessary to our disposition. It is undisputed that Micheel and Sarp have been business associates for approximately twenty years. Their principal common venture was the Debtor, a Massachusetts business trust which operated as a real estate investment trust after it was formed in 1972. Sarp was the Debtor's largest shareholder, and Micheel was its President and Chairman of its Board of Directors. Sarp, who is a certified public accountant, became an officer and director of the Debtor in December, 1979.

Micheel was the sole owner of both ICA, a mortgage brokerage service, and Leedy, a mortgage servicing company. Sarp was treasurer and a director of ICA for many years, and served as a director of Leedy from Fall, 1979, to Spring, 1980.

Both Micheel and Sarp attempt to distance themselves from the frauds which engulfed Leedy and the related entities. See Leedy I, 76 B.R. at 441-44, 451-59. Sarp characterizes himself as an innocent Board member victimized by Micheel's actions. Micheel, who served a prison term of 2½ years for fraud arising out of certain incidents involving Leedy, characterizes himself as a "fall guy" who did not engage in most of the fraudulent acts but admittedly failed to act to check them. Micheel suggests that Sarp was also well aware of the frauds which transpired and was as guilty as Micheel himself with respect to his failure to check them.

Just before all three bankruptcy filings, on August 31, 1983, Colonial Bank of Alabama ("Colonial") sued Micheel, Leedy, ICA and the Debtor for RICO violations and fraud in the First Colonial Action. The Complaint was amended on September 9, 1983, one day after the Debtor's bankruptcy filing, to add Sarp and the other directors of the Debtor, Leedy, and ICA as defendants. Sarp seeks indemnification of the legal fees and costs of $39,770.16 incurred in defending this action.

Colonial commenced another action against Sarp individually on July 31, 1984, alleging that Sarp was negligent in rendering professional accounting services to Leedy, ICA, and the Debtor. Sarp does not seek indemnification of legal fees and costs in connection with this action because his defense was supplied by his professional insurer, INAPRO. Both Colonial Actions were settled in...