In re Smith
| Decision Date | 16 February 1989 |
| Docket Number | Bankruptcy No. 2-80-04322,Adv. No. 2-80-0621. |
| Citation | 100 BR 330 |
| Parties | In re W. Gail SMITH dba Gail Smith Development Co., Debtor. W. Gail SMITH, Plaintiff, v. O'MARA ENTERPRISES, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Ohio |
COPYRIGHT MATERIAL OMITTED
William B. Logan, Jr., Luper Wolinetz Sheriff & Neidenthal, Columbus, Ohio, for plaintiff W. Gail Smith.
James C. Carpenter, Carlile Patchen Murphy & Allison, Columbus, Ohio, for defendant O'Mara Enterprises, Inc.
Stanley G. Burech, Burech & Sargus, St. Clairsville, Ohio, for D. William Davis, Trustee.
D. William Davis, Bellaire, Ohio, Trustee.
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON COMPLAINT FOR DECLARATORY JUDGMENT
This matter is before the Court following the plaintiff's request for declaratory judgment and money damages. D. William Davis, successor-Trustee ("Trustee") brought this adversary proceeding on behalf of the bankruptcy estate of W. Gail Smith ("Smith"). The Trustee seeks to recover money damages from the defendant O'Mara Enterprises, Inc. ("O'Mara") for royalties due Smith under agreements executed by Smith and O'Mara. O'Mara answered the complaint and the matter was tried to the Court.
The Court has jurisdiction in this proceeding under 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. The parties indicated in their pre-trial statements that this action is a non-core proceeding, however both parties consented, at trial, to this Court entering a final order of judgment.
O'Mara was incorporated in West Virginia in 1969. Its principal place of business is Steubenville, Ohio. O'Mara operates a total of sixteen (16) Bonanza Steakhouse restaurants located in West Virginia, Pennsylvania and Ohio. Presently, the principal shareholders in O'Mara are Timothy, Vincent, Michael and James Patrick O'Mara. Prior to forming their own company, three of the O'Mara brothers worked as store and regional managers in Burger Chef restaurants owned and operated by W. Gail Smith.
When the O'Mara brothers decided to leave Smith's employ to start their own business, Smith apparently asked to be involved. Recognizing their need for capital and aware of Smith's financial worth, the O'Mara brothers accepted Smith's services and elected him the first president and chief executive officer of O'Mara Enterprises. Smith, in return, provided financial assistance by agreeing to guarantee equipment and store leases. In addition, Gail Smith Development Co. ("Smith Development"), of which Smith was the sole proprietor, was to manage all of the accounting functions for O'Mara.
To compensate Smith for his services, O'Mara and Smith executed eleven separate royalty agreements and allegedly one "master" royalty agreement. The agreements provide that Smith is to receive royalties based upon the gross sales receipts of the restaurants. The parties disagree, however, as to the circumstances under which Smith is entitled to those royalties.
In addition to his involvement in O'Mara, Smith had several other business interests. By 1979 many of those interests were experiencing financial strain. As a result, Smith's participation in O'Mara decreased. On June 6, 1979 Smith ceased serving as president and chief executive officer of the company. Smith remained a director of O'Mara until September, 1980 when all of his responsibilities were terminated.
While serving as president and chief executive officer of O'Mara, Smith personally committed, or directed others to commit on his behalf, several acts which caused the company to incur substantial financial obligations. Specifically, in 1979 and 1980, Smith, in conjunction with Terry Thompson, comptroller, improperly diverted into the bank account of Smith Development checks intended to satisfy O'Mara's tax withholding liabilities. The total sum of the checks diverted was $498,147.63. O'Mara Enterprises did not become aware of the diversion until August 24, 1980 when Tim O'Mara was contacted by an agent of the Internal Revenue Service.
In 1977, Smith executed certain leases with Tri-Continental Leasing, Inc. ("Tri-Continental") for restaurant equipment to be used in restaurants owned by Sanoma Foods, a company with which Smith was involved, but in which O'Mara had no ownership interest. In order to obtain the equipment leases, Smith executed unauthorized guarantees for those leases on behalf of O'Mara. When Sanoma Foods became insolvent, Tri-Continental brought suit against O'Mara on the guarantees. O'Mara settled the Tri-Continental suit for $27,417 plus a participation right in O'Mara's suits against certain banks for the improper handling of O'Mara's tax deposit checks. The participation right could potentially cost O'Mara an additional $15,000.
Finally, Smith originally loaned money to O'Mara through another of his unrelated companies, Smith-Eckard Corp. ("Smith-Eckard"). In 1975 or 1976, Smith-Eckard fell behind in making its state sales tax payments. Consequently, Smith directed Terry Thompson to begin drawing money from the O'Mara accounts with the apparent understanding he would draw funds until Smith-Eckard was repaid the money it originally advanced. However, Smith continued to draw funds from the account until Smith-Eckard owed O'Mara $174,183. In September of 1980 Smith repaid O'Mara $70,000 of that amount.
On November 12, 1980, Smith filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. The schedules list O'Mara as an unsecured creditor for $396,000. The schedules indicate that O'Mara's claim is disputed, contingent, unliquidated, and subject to setoff. Smith also listed in his schedule of assets an account receivable from O'Mara, representing unpaid royalties of approximately $114,333. The estate has not received any royalties since the filing for relief.
On December 23, 1980, Smith, as debtor-in-possession, filed the present adversary proceeding against O'Mara. Smith's complaint asked for royalties earned pursuant to eleven agreements made with O'Mara. The complaint recites that the eleven agreements provide for a two percent royalty on the gross sales receipts of the eleven restaurants. It states that through December 31, 1980, Smith agreed to take a one percent royalty, but after that date the full royalty of two percent is due.
The complaint asks for a judgment declaring the royalty agreements to be in full force and effect. It also asks for an accounting of all gross sales for each restaurant subject to a royalty agreement. And finally, the complaint asks for a monetary judgment against O'Mara in the amounts due under the royalty agreements from the date Smith's petition was filed.
On February 25, 1981, O'Mara filed an answer to the complaint. O'Mara admitted that it had entered into the royalty agreements with Smith. However, O'Mara stated that because of Smith's bankruptcy filing, Smith could not provide the consideration required by the agreements. Therefore, O'Mara asked the Court to dismiss the action.
On May 20, 1982, Smith converted this case to a case under Chapter 7 of the Bankruptcy Code and Gary M. Hallock was appointed Trustee.
On April 22, 1983, Trustee Hallock applied to the Court to settle this adversary proceeding. The settlement proposed a $2,000 payment from O'Mara and a waiver of its rights to any distribution from the estate, in return for Smith's interest in O'Mara and dismissal of the adversary proceeding. Objections to the settlement were asserted by Heritage Bank (now Bank One of Eastern Ohio). On October 27, 1983, after hearing, a former judge of this court denied Trustee Hallock's application to compromise this action.
On August 13, 1985, Trustee Hallock resigned and the court appointed D. William Davis as the successor trustee.
On July 11, 1986, O'Mara filed a motion seeking Summary Judgment. That motion was denied by the Court on August 17, 1987.
On July 1, 1987, the Court appointed D. William Davis as attorney for the estate. On July 14, 1987, the Court denied a request to permit counsel for Bank One to assist the Trustee in pursuing the estate's claim against O'Mara. On September 27, 1987, the Court approved the appointment of Stanley G. Burech as co-counsel for this adversary proceeding.
Subsequently, the parties filed pre-trial statements with the Court. On the 17th and 18th of August, 1988, a trial was conducted by the Court in Steubenville, Ohio.
The Trustee contends that under each of the individual royalty agreements, the estate is owed royalties since the filing of the petition in November of 1980. Through 1987, the Trustee calculates the total of those royalties at $1,156,459.00. This figure does not include royalties owed for 1988 because O'Mara was unable during discovery to supply information regarding gross sales receipts for that period. The Trustee requests an accounting of those receipts when available.
The Trustee also contends that the estate should be awarded pre-judgment interest from the date the royalties were due. According to the Trustee, accrued interest on the unpaid royalties is $496,336.00. Therefore, through 1987, the total amount due the estate is $1,652,795.
In response, O'Mara argues that Smith's breach of his fiduciary duties entitled it to terminate the royalty agreements. O'Mara also contends that the "master" royalty agreement was to end by its own terms when Smith's duties as chief executive officer and president ended. That event occurred prior to November 1980 when Smith filed his petition for relief. Alternatively, O'Mara contends that any royalties owed to Smith are subject to set off against damages suffered by O'Mara as a result of Smith's wrongful conduct. O'Mara argues that the amount of such damages far exceeds any royalties owed to Smith. Therefore, the Trustee is not entitled to recover...
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