In re Rusty Jones, Inc.

• Decision Date: 09 December 1991
• Docket Number: Bankruptcy No. 88 B 18708.
• Citation: 134 BR 321
• Parties: In re RUSTY JONES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

134 B.R. 321 (1991)

In re RUSTY JONES, INC., Debtor.

Bankruptcy No. 88 B 18708.

United States Bankruptcy Court, N.D. Illinois, E.D.

December 9, 1991.

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Norman Newman, Much Shelist Freed Denenberg Ament & Eiger, P.C., Chicago, Ill., for debtor.

Malcolm M. Gaynor, A. Daniel Feldman, Schwartz, Cooper, Kolb & Gaynor, Chicago, Ill., for Much Shelist Freed Denenberg Ament & Eiger, P.C.

James Carmel, Carmel, Baker & Marcus, Chicago, Ill., for Creditors Committee.

Dean Harvalis, Office of the U.S. Trustee, Chicago, Ill., U.S. Trustee.

Karen Goodman, Robert Nord, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for Distributors Committee.

Glenn R. Heyman, Dannen, Crane, Heyman & Simon, Chicago, Ill., for Creditors Trustee.

AMENDED FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION AND RULING ON FEE APPLICATIONS FOR COUNSEL FOR DEBTOR

JACK B. SCHMETTERER, Bankruptcy Judge.

INTRODUCTION

In a bankruptcy case with an unhappy past,¹ one more unhappy issue has been presented. Debtor's counsel Much, Shelist, Freed, Denenberg, Ament & Eiger, P.C. ("Much Shelist") filed a final application for allowance of compensation and reimbursement of expenses. Also pending before the Court is the third interim fee application of Much Shelist. Through its final fee application, Much Shelist seeks compensation for services rendered in the total amount of $591,529.50 and reimbursement of expenses totalling $43,283.23. To date, Much Shelist has been paid $224,769.60 in fees and $28,011.58 in expenses.

The Creditor's Grantor Trust, the Distributors' Committee, and the U.S. Trustee all object to specific items in Much Shelist's fee applications for failing to meet the recognized standards for the granting of fees. See In re Wildman, 72 B.R. 700 (Bankr. N.D.Ill.1987). The U.S. Trustee also seeks total denial of all compensation, disgorgement of fees already received, and disqualification of Much Shelist from representing Rusty Jones in its litigation with Beatrice Companies, Inc. ("Beatrice") based on Much Shelist's alleged conflicts of interests in this case. For reasons that follow, the Court orders Much Shelist to reimburse $130,557.93 to the estate within 21 days hereof, and its application for payment of other and further fees and reimbursement of expenses is entirely denied. However, the objection of parties in interest to continued service of that firm as special litigation counsel in the pending District Court Beatrice litigation is denied.

Following the hearing held, from the record and all evidence presented by stipulation and otherwise, the Court entered Findings of Fact and Conclusions of Law on October 21, 1991. The need for certain changes in the dollars applicable to portions of the Opinion has since been called to the Court's attention. The Court now withdraws and vacates those earlier Findings and Conclusions, and now makes and enters Amended Findings of Fact and Conclusions of Law pursuant to Much Shelist's motion to reconsider and the U.S. Trustee's motion to modify the earlier decision.

FINDINGS OF FACT

1. Rusty Jones, Inc. ("Debtor") filed a voluntary petition on December 5, 1988 in the Northern District of Illinois under Chapter 11 of the Bankruptcy Code. It operated as a Debtor-In-Possession until confirmation of the Debtor's Fifth Amended Plan of Reorganization on March 12, 1990.

2. On December 12, 1988, this Court entered an order authorizing the Debtor to employ James Chatz, Norman Newman, Morrie Much, Deborah Thorne, and John Ward as well as the law firm of Much Shelist, and other attorneys and paralegals of that firm to be counsel for the estate.

3. The Debtor's Application to Employ Much Shelist stated that the firm and its attorneys were disinterested. The application also included affidavits of Norman Newman ("Newman") and James Chatz ("Chatz"). Both affidavits are identical in content and recite that Chatz, Newman and Much Shelist had no connection with Debtor, or with any of the Debtor's creditors, or any other party in interest in the case, or with any of their respective attorneys except that Much Shelist represents the Debtor. The affidavits further stated that Much Shelist represented no interest adverse to the Debtor in this case or in the Debtor's estate in the matters in which Much Shelist was engaged.

4. On February 9, 1990, this Court denied confirmation of the Debtor's Fourth Amended Plan of Reorganization finding that "the Plan serves to an unacceptable extent as a vehicle for the personal profit of `investors' who purchased the Debtor for $1.00 and since sought to operate it in bankruptcy for their personal benefit and contrary to the interests of the creditors." In re Rusty Jones, 110 B.R. 362, 375 (Bankr.N.D.Ill.1990).

5. Subsequent to the denial of confirmation of Debtor's Fourth Amended Plan, the U.S. Trustee moved for the appointment of a Chapter 11 trustee. In response, the Debtor proposed a modified plan which was discussed with the various parties in this proceeding, including the Committee of Warranty Claims Holders and the Committee of Distributors Claims Holders. What emerged was a liquidating plan in that all of the assets of the Debtor were transferred to a liquidating trust for the benefit of creditors and all interests of the Debtor's shareholders were eliminated. Under the Fifth Amended Plan, the trustee's duties were virtually identical to the duties of a Chapter 7 trustee. The Court approved confirmation of the Fifth Amended Plan, and the trustee of the liquidating trust is proceeding with the administration of the trust pursuant to the terms of the plan.

6. James Chatz, who was the Rusty Jones lead bankruptcy counsel, had close relationships, both on a personal and business level, with Donald Grauer ("Grauer") and Jeffrey Grossman ("Grossman") who were indirect controlling owners of the Debtor.² No facts concerning these relationships were ever disclosed by Chatz or Much Shelist to the Court when they applied to be Debtor's counsel, nor from that time until after the Fifth Amended Plan was confirmed. These facts came to light only through the extensive efforts of the U.S. Trustee's office. The following facts indicate the depth and extent of these relationships:

a. Chatz has been and remains a personal friend of both Grauer and Grossman since before 1970. Grossman and Grauer have attended Chatz family functions and the families have vacationed together.

b. Chatz has invested in numerous projects with either Grauer, Grossman, or both, including a hot dog stand (which closed in 1972); a limited partnership in a cable television concern; a company which owned delicatessens (Chatz\'s firm did the legal work on this investment); and the purchase and subsequent sale of property in Northbrook, Illinois and condominiums in Vail, Colorado.

c. In 1982, Chatz, Grauer, and Grossman formed the 3105 MacArthur Partnership and acquired the property at that address in Northbrook. The purchase was funded by a loan which was guaranteed by Grossman and Grauer. This partnership stills owns that property, and Chatz has a 5% ownership interest in the partnership.

d. In 1985, Grauer and Chatz together received unsecured loans of $75,000 each from Mount Prospect State Bank. The loans were apparently used to finance their continued ownership of the 3105 MacArthur Blvd. property. The loans were facilitated through Grossman\'s connections with a loan officer who was originally introduced to him by Chatz. Grossman was present at the loan negotiations. Later, in litigation with the bank, Grossman offered to pay the balance on these loans to settle the claim against him. However, Chatz repaid his loan by himself six weeks before Rusty Jones filed its Chapter 11 petition.

e. In 1985, Chatz, Grauer, and Grossman unsuccessfully attempted to purchase a shopping mall in Chicago together.

f. Chatz\'s children and Grauer\'s children have purchased and subsequently sold buildings in Wilmette, Illinois and Glencoe, Illinois together and shared in the profits.

g. Grauer has from time to time loaned Chatz sums of money for his personal use. As of December 5, 1988 (the date of Debtor\'s bankruptcy filing), Chatz owed Grauer approximately $10,000, and as of November 13, 1990, Chatz owed Grauer $12,000. The total amount of loans made at any time by Grauer to Chatz aggregates about $50,000.

h. In 1985 or 1986, Chatz, Grossman and Grauer borrowed approximately $75,000 from the First Midwest Bank of Waukegan. The funds were used in the 3105 MacArthur Partnership. Final payment on the loan was made in late 1990.

7. Chatz has also worked professionally with both Grauer and Grossman. Chatz has represented them, their businesses, and has worked with them on bankruptcy matters, both before, during, and after the Rusty Jones proceedings. The following is a list of matters on which he did professional work for them:

a. Chatz started representing Grossman in isolated matters in 1975 while at the firm of Chatz, Sugarman & Abrams.

b. Chatz represented Grauer in a variety of personal matters including a lien dispute concerning Grauer\'s residence, the preparation of his will, the purchase and sale of real estate.

c. In April, 1985, Chatz was appointed as trustee in two related Chapter 7 proceedings, Brokers Capital, Ltd. (85 B 4842) and First LaSalle Services, Inc. (85 B 4841). Chatz caused his counsel to file motions in both cases seeking to retain Grauer as the trustee\'s accountant, which motions were granted.

d. Grossman was the Chairman of the Board of North American Group Limited, which was formed to fund plans of reorganization in two Chapter 11 cases pending in Madison, Wisconsin.³ North American was represented in these cases by a law partner of Chatz. His firm (Antonow & Fink) received over $106,000 for its representation of North American.

e. In 1988, two of the subsidiaries of North American, Pioneer

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