In re Tougher Industries, Inc., Case No. 06-12960 (Bankr. N.D.N.Y. 4/18/2008)
| Decision Date | 18 April 2008 |
| Docket Number | Case No. 06-12960.,Adversary No. 07-90022. |
| Parties | In re: TOUGHER INDUSTRIES, INC., Chapter 11, Debtor. LEE E. WOODARD, ESQ., CHAPTER 11 TRUSTEE, Plaintiff, v. STEVEN SHAW, CAROLE NEUMULLER a/k/a CAROLE SHAW, AND LISA PAPA a/k/a LISA PETTOGRASSO, Defendant(s). |
| Court | U.S. Bankruptcy Court — Northern District of New York |
Justin A. Heller, Esq., NOLAN & HELLER, LLP, Attorneys for Defendant Steven Shaw, Albany, NY.
Thomas D. Latin, Esq., SHEEHAN, GREENE, CARRAWAY, GOLDERMAN & JACQUES, LLP, Attorneys for Defendant Carole Neumuller, Albany, NY.
David M. Capriotti, Esq., HARRIS BEACH, PLLC, Attorneys for Plaintiff, Syracuse, NY.
Currently before the court are motions for attorney's fees filed by Steven Shaw ("Shaw") and Carole Neumuller ("Neumuller") pursuant to Rule 6212(e) of New York Civil Practice Law and Rules ("CPLR"), made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7064 and Federal Rule of Civil Procedure 64. Given the similarities of the facts and legal issues raised in the motions, they are being consolidated for purpose of this decision.
The court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(a), 157(b)(1), and 1334(b).
The relevant facts are not in dispute. The debtor, Tougher Industries, Inc. ("Tougher"), filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on November 3, 2006. Shaw is President and CEO of Tougher. Lee E. Woodard, Esq., Chapter 11 Trustee ("Plaintiff" or "Trustee"), was appointed by the court on November 22, 2006.
By summons and amended complaint (the "Complaint"), Plaintiff commenced this adversary proceeding against Shaw and Neumuller (collectively, "Defendants") and Lisa Papa ("Papa") on February 8, 2007, pursuant to 11 U.S.C. §§ 542-548 and New York Debtor & Creditor Law §§ 273-276. (No. 1.) Plaintiff alleges that Shaw, with the aid of Neumuller and Papa, misappropriated Tougher's assets for Shaw's personal use. Shaw admitted to being romantically involved with Neumuller for many years. Papa is an acquaintance of Shaw.
Shaw filed his answer on March 7, 2007. (No. 8.) He subsequently filed an amended answer with counterclaim on April 24, 2007. (No. 39.) Neumuller filed her answer on March 12, 2007, and Papa filed her answer on March 30, 2007.1 (Nos. 10 and 21.) The Plaintiff filed an answer to Shaw's counterclaim on May 2, 2007.
On March 16, 2007, the Trustee presented an order to show cause and supporting affidavit for an order of attachment, without notice, of all bank accounts owned by Defendants, a certain boat purchased by Shaw, but titled to Neumuller, and certain real property located in Lake George, New York. (Nos. 12 and 13.) The court signed an ex parte order of attachment under CPLR 6211(a) on March 20, 2007, based upon the allegations in the supporting affidavit and the Complaint that Defendants secreted Tougher's assets with the intent to defraud creditors. (No. 14.) The ex parte order of attachment directed, among other things, that
Plaintiff's undertaking be and the same is hereby fixed in the sum of Twenty Thousand and 00/100ths ($20,000.00) Dollars, of which amount the sum of Seventeen Thousand Five Hundred and 00/100ths ($17,500.00) Dollars thereof is conditioned that the plaintiff will pay to the defendant all costs and damages, including reasonable attorney's fees, which may be sustained by reason of the attachment of the defendant's property. . . .
(No. 15.) Plaintiff timely posted the undertaking. The ex parte order of attachment was served on Bank of America and HSBC, as well as on the marina where Neumuller stored her boat. The ex parte order of attachment was amended on March 22, 2007, to remove any references to attachment of the Lake George property. (No. 15.)
The Trustee conducted a Rule 2004 examination of Shaw on March 21, 2007, to discern how he had used the funds taken from Tougher. Shaw asserted his Fifth Amendment Privilege Against Self Incrimination ("Fifth Amendment Privilege") to the questions asked by the Trustee.
On March 26, 2007, Plaintiff moved for an order confirming the ex parte order of attachment pursuant to CPLR 6211(b) ("Motion to Confirm") based largely on his theory that the documentation provided proved Defendants secreted a substantial amount of money from Tougher for the purpose of defrauding creditors. Plaintiff asserted his theory was further confirmed by the negative inference that could be drawn from Shaw's assertion of his Fifth Amendment Privilege at the Rule 2004 examination. Shaw filed opposition to the Motion to Confirm consisting of declarations of a former Tougher employee and Shaw's attorney, and Shaw's affidavit detailing the payments from Tougher to himself and Neumuller. The Motion to Confirm, originally returnable on March 29, was adjourned to April 6, 2007, at Shaw's request. At the conclusion of the hearing on April 6, 2007, the court found that the Plaintiff had not established grounds for an order of attachment and directed that the ex parte order of attachment and the amended order of attachment be vacated. An order in conformance with the court's oral ruling was entered on April 6, 2007. (No. 35.)
Shaw filed a motion on May 14, 2007, seeking attorney's fees and costs of $10,649.00 for defending the Motion to Confirm. (No. 45.) Plaintiff opposed Shaw's motion. (No. 62.) Shaw filed a declaration in further support of his motion and sought an additional $752.50 in attorney's fees. (No. 73.) Plaintiff filed further opposition in reply and a memorandum of law. (No. 83 and 85.) Finally, Shaw filed a declaration in further support of his motion and sought an additional $643.50 in attorney's fees. (No. 87.)
On July 3, 2007, Neumuller filed a motion for attorney's fees and costs seeking $4,797.01 for defending the Motion to Confirm. (No. 80.) Plaintiff filed opposition to Neumuller's motion (No. 84), and Neumuller submitted a reply. (No. 89.) The official committee of unsecured creditors filed a letter in support of the Trustee's position with respect to both motions. (No. 68.)
Shaw and Neumuller claim that pursuant to CPLR 6212(e) and the terms of the ex parte order of attachment, Plaintiff is liable for all damages naturally and proximately flowing from the wrongful attachment, including their attorney's fees and costs incurred in defending the Motion to Confirm. Shaw seeks a total of $12,045.00, and Neumuller seeks a total of $4,797.01.
Plaintiff argues that the attorney's fees sought by Shaw and Neumuller are outrageous given the facts surrounding the attachment. Relying on Kidder, Peabody & Co. Inc. v. IAG Int'l. Acceptance Group, 28 F.Supp.2d 126 (S.D.N.Y. 1998), Plaintiff claims that if an order of attachment is issued and later vacated because attachment was unwarranted, strict liability should be limited to cases where property is actually attached.
Plaintiff's position is that no property of Shaw and Neumuller was actually attached. More specifically, Plaintiff contends that there was a negative balance in Shaw's HSBC account at the time of the order of attachment and, therefore, none of his property was actually attached. With respect to Neumuller, Plaintiff claims that she successfully withdrew the majority of the funds on deposit in her accounts even after the order of attachment was served upon Bank of America. The Plaintiff maintains because Neumuller retained use of her bank account there was no actual attachment of her property. Neumuller's position is that there was nothing in the order of attachment prohibiting her from accessing her account and, although she withdrew most of her funds, her account was nevertheless attached, which she needed to address. Furthermore, her boat was attached.
Shaw's attorney claims that in responding to the Motion to Confirm, it was necessary that he review and respond to each document and check relied upon by the Plaintiff, interview a former Tougher employee, and prepare detailed affidavits in response to the Motion to Confirm. In addition, he asserts he also needed to perform legal research regarding the Trustee's argument that a negative inference was permissibly drawn from Shaw's exercise of his Fifth Amendment Privilege at the Rule 2004 examination.
Plaintiff contends that damages sustained must be proximately caused by reason of the attachment. Plaintiff argues attorney's fees incurred by Shaw associated with research of the negative inference were not proximately caused by the attachment, but by Shaw himself. Thus, at a minimum, the Plaintiff should not be liable for that portion of Shaw's attorney's fees.
Additionally, Plaintiff argues that if counsel for Shaw contacted him and advised that the balance in Shaw's account was de minimis or, in fact, negative, this motion practice could have been avoided. Furthermore, if Shaw had provided any explanation as to his withdrawals of Tougher funds, the Trustee indicated he would have withdrawn the ex parte order of attachment. Thus, the Plaintiff asserts that Shaw expended over $10,000.00 in costs and fees defending the Motion to Confirm at his own risk. Shaw responds that the Trustee had all of this information at the time of the hearing on April 6, 2007, but nevertheless did not withdraw the Motion to Confirm.
Based upon the parties' submission, the applicable state and federal laws, and the relevant case law, the court finds an award of attorney's fees for the Defendants appropriate. Pursuant to Federal Rule of Civil Procedure 64, made applicable by Federal Rule of Bankruptcy Procedure 7064, the remedy of attachment is governed by state law. See Chem. Bank v. Hoseotes, 13 F.3d 569, 572 (2d Cir. 1994). In New York, the statutory basis for attachment is found in Article 62 of the CPLR. Rule 6212(e) provides,
The plaintiff shall be liable to the defendant for all costs and damages, including...
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