In re Richard Potasky Jeweler, Inc., Bankruptcy No. 93-31896

• Citation: 222 BR 816
• Decision Date: 31 March 1998
• Docket Number: No. C-3-94-101,Adversary No. 93-0151,C-3-94-120 and C-3-94-541,93-0214.,C-3-94-103,Bankruptcy No. 93-31896,C-3-94-101
• Parties: In re RICHARD POTASKY JEWELER, INC., Debtor. Martin A. GREENBLATT, Appellant, v. RICHARD POTASKY JEWELER, INC., Appellee.
• Court: U.S. District Court — Southern District of Ohio

222 B.R. 816 (1998)

In re RICHARD POTASKY JEWELER, INC., Debtor.

Martin A. GREENBLATT, Appellant, v. RICHARD POTASKY JEWELER, INC., Appellee.

Bankruptcy No. 93-31896, Nos. C-3-94-101, C-3-94-103, C-3-94-120 and C-3-94-541, Adversary Nos. 93-0151, 93-0214.

United States District Court, S.D. Ohio, Western Division.

March 31, 1998.

COPYRIGHT MATERIAL OMITTED

Martin Greenblatt, Diamond Dealers Club, New York City, pro se.

Philip Eugene Langer, Porter, Wright, Morris & Arthur, Dayton, OH, for Richard Potasky Jeweler, Inc.

DECISION AND ENTRY AFFIRMING IN PART AND REVERSING IN PART THE ORDER OF THE BANKRUPTCY COURT IN C-3-94-101, AFFIRMING THE ORDER OF THE BANKRUPTCY COURT IN C-3-94-103, REVERSING THE ORDER OF THE BANKRUPTCY COURT IN C-3-94-120, AND REVERSING THE ORDER OF THE BANKRUPTCY COURT IN C-3-94-541; JUDGMENT TO BE ENTERED ACCORDINGLY; TERMINATION ENTRY ON EACH OF FOUR CAPTIONED CAUSES

RICE, Chief Judge.

I. INTRODUCTION

"One of the primary purposes of the bankruptcy act is to `relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.'" Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) (quoting Williams v. U.S. Fidelity & Guar. Co., 236 U.S. 549, 554-55, 35 S.Ct. 289, 59 L.Ed. 713 (1915)); see also SEN. REP. No. 989, 95th Cong., 2d. Sess. 54-55 (1978), reprinted in 1978 U.S.C.C.A.N. 5840-41. While the Bankruptcy Code ("Code") calms the financial seas surrounding the debtor, the same is not true of the rough financial waters surrounding other entities affiliated with the debtor. Absent the proper exercise of its equitable powers, a bankruptcy court does not operate as a deus ex machina for all the woes that beset third parties when a debtor files a petition in bankruptcy. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 209, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). The present case demonstrates this growing "tension between demands for bankruptcy court resolution of matters ranging far beyond debt restructuring and concerns over expanding the jurisdictional limits of bankruptcy courts in the federal court system." Howard C. Buschman III & Sean P. Madden, The Power and Propriety of Bankruptcy Court Intervention in Actions Between Nondebtors, 47 BUS. LAW. 913, 913 (1992).

II. FACTS

Appellee, Richard Potasky Jeweler, Inc. ("Potasky Jeweler"), is an Ohio corporation which operates a chain of jewelry stores scattered through the Midwest and the Northeast. Appellant, Martin Greenblatt¹ ("Greenblatt"), is a consignment vendor of diamond jewelry who operates his business from the Diamond Dealers Club in New York City. From 1989 until mid-1993, Greenblatt and Potasky Jeweler regularly conducted business with one another. During this period of time, Greenblatt provided diamond jewelry merchandise to Potasky Jeweler on consignment.² Before an item of consigned jewelry was sold, Potasky Jeweler would request the invoice for that item from Greenblatt in order to pass the title of the jewelry to the customer. After selling the jewelry, Potasky Jeweler would in turn remit the amount stated on the invoice to Greenblatt and retain for itself any additional profit from the sale.

While initially there were no problems, relations between the parties drew increasingly tense as Greenblatt became concerned over the financial condition of Potasky Jeweler. This concern stemmed from the increasing irregularity of Potasky Jeweler's "calling in" of invoices from Greenblatt. These tensions boiled over when Potasky Jeweler filed a petition for relief, pursuant to Chapter 11 of the Bankruptcy Code, on May 19, 1993.

On June 1, 1993, almost three weeks after Potasky Jeweler's petition in bankruptcy, Greenblatt initiated a suit in the Southern District of New York captioned Martin Greenblatt v. Richard Potasky Jeweler, Inc.; Richard Potasky; Mark Scher; Jean Walther and Deloitte & Touche ("First New York Lawsuit").³ At the time he filed the suit, Greenblatt was aware that Potasky Jeweler had filed a petition in bankruptcy. Aside from Potasky Jeweler, the other named defendants in the suit were either officers, directors or employees of Potasky Jeweler. The gravamen of the suit was Potasky Jeweler's failure to inform Greenblatt of its poor financial condition near the end of 1992. Specifically, Greenblatt alleged that the defendants knew of Potasky Jeweler's poor financial condition, that this condition placed consigned jewelry held by the debtor at risk, and that, despite their fiduciary obligations to him, the defendants failed to inform him of this situation.⁴

In response to the filing of the lawsuit, Potasky Jeweler initiated an adversary proceeding ("Adv.Pro.93-0151") against Greenblatt, seeking both preliminary and permanent injunctive relief as well as monetary damages for the appellant's violation of the automatic stay. On August 11, 1993, the bankruptcy court held a hearing to determine the propriety of granting the debtor's request for a preliminary injunction; Greenblatt, however, failed to attend the hearing. At the conclusion of the hearing, the bankruptcy court entered an order preliminarily enjoining the First New York Lawsuit in its entirety. For the next two months, both parties filed a salvo of motions with the bankruptcy court relating to a host of procedural issues, none of which is relevant to the resolution of the present appeals.⁵

After losing at the preliminary injunction hearing, Greenblatt took other measures. On October 4, 1993, he filed a proof of claim with the bankruptcy court and requested that the court establish a constructive trust over the consigned jewelry held by Potasky Jeweler. The court, however, denied Greenblatt's request. Without obtaining leave of the bankruptcy court, on October 22, 1993, Greenblatt filed a second lawsuit in the Southern District of New York entitled Martin Greenblatt vs. Kurt Denkewalter; Philip E. Langer; Chernesky, Heyman & Kress; Richard Potasky; Mark Scher; and Jean Walther ("Second New York Lawsuit"). Aside from the defendants named in the previous lawsuit, the remaining defendants served as the court appointed bankruptcy counsel for Potasky Jeweler. Greenblatt's complaint alleged that the debtor's attorneys had called him at his home ostensibly to discuss issues surrounding Adv. Pro. No. 93-0151, but in reality to harass him.⁶ In response to the filing of this lawsuit, Potasky Jeweler initiated another adversary proceeding ("Adv.Pro. No. 93-214") against Greenblatt. In this adversary proceeding, as in the previous one, Potasky Jeweler sought preliminary and permanent injunctive relief as well as monetary damages. On November 29, 1993, Greenblatt filed a motion for a jury trial and a motion for summary judgment. In order to bring an end to the peripheral matters that were increasingly dominating its time, the bankruptcy court set January 14, 1994, as the date for a trial on most of the issues contained in both adversary proceedings.⁷ In the interim, the bankruptcy court confirmed Potasky Jeweler's plan for reorganization.

Greenblatt failed to attend the trial. After the trial, on January 25, 1994, the bankruptcy court entered written orders relating to both adversary proceedings. As to Adv. Pro. No. 93-0151, the bankruptcy court determined that the First New York Lawsuit was void insofar as it applied to Potasky Jeweler and awarded the debtor damages in the amount of $5,847.76 for Greenblatt's violation of the automatic stay. Greenblatt has appealed this order of the bankruptcy court.⁸ As to Adv. Pro. No. 93-214, the bankruptcy court permanently enjoined the appellant from pursuing the Second New York Lawsuit against any of the non-debtor defendants, denied his motion for summary judgment, denied his motion for a jury trial, awarded Potasky Jeweler $9,045.50 in damages (attorney's fees) for his failure to seek leave of the court when he initiated the Second New York Lawsuit, and directed him to dismiss with prejudice the Second New York Lawsuit within 10 days or be fined $100 a day. Greenblatt has also appealed this order of the bankruptcy court.⁹ After entering these orders, the court held a hearing on February 7 in order to resolve all the remaining issues surrounding Adv. Pro. No. 93-0151. Not surprisingly, Greenblatt failed to appear at this hearing.

On February 15, the bankruptcy court entered a written order permanently enjoining Greenblatt from pursuing the First New York Lawsuit against any of the non-debtor defendants and directed him to dismiss with prejudice the First New York Lawsuit within 10 days or be fined $100 a day. Greenblatt has appealed this order of the bankruptcy court.¹⁰ Despite these repeated attempts by the court to end the nagging troubles that had been surrounding the non-debtors affiliated with Potasky Jeweler, the troubles persisted. Greenblatt refused to dismiss either lawsuit and instead proceeded with litigating both suits in the Southern District of New York. As a result, on May 20, 1994, Potasky Jeweler filed with the bankruptcy court a motion for contempt of court and requested that the court impose sanctions against Greenblatt. On August 15, 1994, the bankruptcy court set a hearing to resolve Potasky Jeweler's motion and gave notice to Greenblatt to attend the hearing. On October 4, 1994, the bankruptcy court entered a written order finding that Greenblatt was in contempt of court and awarded $1128.50 to Potasky Jeweler, an amount representing attorney's fees as well as the other costs incurred by the debtor in pursuing the motion for contempt. Greenblatt has appealed this order as well.¹¹

For the reasons set forth below, the order of the bankruptcy court in C-3-94-101 is affirmed in part and reversed in part, the order of the bankruptcy court in C-3-94-103 is affirmed, the order of the bankruptcy court in C-3-94-120 is reversed, and the order of the bankruptcy...