In re Val W. Poterek & Sons, Inc., Bankruptcy No. 93 B 22051.
| Decision Date | 19 July 1994 |
| Docket Number | Bankruptcy No. 93 B 22051. |
| Citation | 169 BR 896 |
| Parties | In re VAL W. POTEREK & SONS, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Joel A. Schechter, Grossman Mitzenmacher & Schechter, Chicago, IL, for alleged debtor.
Irving S. Capitel, Siegel Lynn & Capitel, Northbrook, IL, for Jerome Skiba.
FINDINGS OF FACT AND CONCLUSIONS OF LAW FOLLOWING HEARING ON MOTION FOR FEES UNDER § 303 AND SANCTIONS UNDER RULE 9011
(Amended and Reissued July 19, 1994)
This action was commenced by filing on October 21, 1983 of an involuntary petition under 11 U.S.C. § 303 against Val Poterek & Sons, Inc. ("Poterek & Sons"), the alleged debtor. On December 8, 1993, this Court dismissed the involuntary petition, but reserved jurisdiction over whether debtor is entitled to attorneys' fees, costs, and punitive damages under § 303(i) arising out of the improper bankruptcy filing. Jurisdiction was also retained to determine whether sanctions under Fed.R.Bankr.P. 9011 should be imposed against the three petitioning creditors and their counsel. A hearing was held on the motions of Poterek & Sons for relief under both provisions.
For reasons that follow, the Court entirely denies debtor's motion under § 303(i) and Rule 9011 to the extent they lie against petitioning creditors Goodmark Foods ("Goodmark") and the Estate of Esther Skiba Testamentary Trust (the "Esther Skiba Trust"). However, attorneys' fees are allowed in the amount of $7,100.00, plus allowable damages, for a total of $10,218.80 against the creditor, Jerome Skiba ("Skiba"). Further, sanctions under Fed.R.Bankr.P. 9011 are allowed against both Skiba and his counsel, Irving S. Capitel ("Capitel"), each in the amount of $1,000.00.
The discussion that follows will stand as Findings of Fact and Conclusions of Law under Fed.R.Bankr.P. 7052.
Poterek & Sons is a family-owned and operated business formed over 50 years ago to sell tobacco and candy products to retailers. Its sources of those products have been major cigarette and candy companies. Prior to filing of the involuntary bankruptcy petition, Poterek & Sons was on open credit terms with those distributors. Its creditors would ship the goods, and Poterek & Sons would pay later.
John Poterek is the current President of Poterek & Sons. His cousin, Skiba, is one of the petitioning creditors and was formerly an officer and director of the alleged debtor. He left his employment with Poterek & Sons to work for City Sales, one of its competitors. Skiba is alleged to have taken some of Poterek & Son's clients with him when he left, and some evidence supported that contention, but no finding is necessary nor is one made on that allegation. Skiba is still a shareholder of Poterek & Sons. He has filed a state court action in the Chancery Division seeking dissolution of the corporation. That action has not yet been adjudicated.
Pursuant to 11 U.S.C. § 303, when a debtor has more than twelve creditors, at least three must join together to file an involuntary petition against debtor. Here there were many more than 12 creditors of the alleged debtor when the involuntary petition was filed, so three petitioning creditors were required. In this case, one petitioning creditor (Goodmark) was originally a trade creditor. The other two petitioning creditors (Skiba and the Esther Skiba Trust) had claims for family loans to Poterek & Sons. However, neither Goodmark nor Skiba were actually creditors when the petition was filed.
Goodmark's asserted claim of $688.85 was a trade debt allegedly due from Poterek & Sons. Goodmark had earlier initiated two state court actions against debtor to collect that debt. Both cases were voluntarily dismissed. In the second case, No. 93 MI 130314, in the Circuit Court of Cook County, Illinois, Poterek & Sons had filed a counterclaim. When the state court agreed to dismiss the suit against Poterek & Sons, that court also entered judgment against Goodmark on the Poterek & Sons Counterclaim in the amount of $1,302.78 plus costs. This took place before the involuntary petition was filed herein.
While an attorney for Goodmark who had filed suit was present at the hearing dismissing Goodmark's complaint, that attorney did not enter a formal written appearance on the counterclaim. Poterek & Sons did not otherwise inform any representative of Goodmark that a judgment had been entered against it on the counterclaim. There was no testimony as to whether the Goodmark attorney who was in the courtroom informed his client that judgment had been entered against it on the counterclaim, although that attorney did receive a copy of the judgment order. Poterek & Sons has taken no steps to collect that judgment.
Assuming, without deciding, that the original Goodmark claim survived these events, that claim is smaller than the counterclaim judgment against Goodmark. Accordingly, when the involuntary petition was filed, no debt was due from Poterek & Sons to Goodmark.
Skiba's claim against debtor arose from a loan he made to Poterek & Sons on December 26, 1987. The loan was in the amount of $40,000.00 plus interest at prime plus 1%. It was to be a short-term loan.
The debt owed from the alleged debtor to the Esther Skiba Trust arose from two promissory notes given by Poterek & Sons to the decedent Esther Skiba (who was Skiba's mother) in return for her loans to it. The first note, dated January 1, 1987, was in the amount of $120,610.01. The second note, for the amount of $150,000.00, was dated December 28, 1987. The involuntary bankruptcy petition alleged the amount outstanding on the two notes as $124,027.00 plus interest.
Esther Skiba died on or about January 12, 1988. Following his mother's death, Skiba was appointed as executor of her estate. He advanced funds from his personal account to pay the decedent's medical bills and funeral costs, which totaled between $20,000.00 and $22,000.00. He also provided his sister with an advancement on her testamentary bequest in the amount of $5,000.00. After advancing his personal funds to pay the foregoing debts of the estate, he urged Poterek & Sons to repay the notes due to the Esther Skiba Trust and/or the Esther Skiba Estate. Suit was later filed in the Circuit Court of Cook County to collect on those notes. Judgment in that action was entered on March 30, 1994, in favor of the plaintiff (the Esther Skiba Trust) in the amount of $335,286.28.
Skiba now contends that Poterek & Sons did respond to his request in 1988 for payment on the two notes due to the Esther Skiba Trust and that it then paid him $42,821.05 on September 5, 1988 to reimburse his personal expenses on behalf of the Esther Skiba Estate. There is no doubt that the alleged debtor did make that payment. However, the payment was by check payable to Skiba individually, not to the Esther Skiba Trust or Estate. Poterek & Sons contends that this check was repayment of all the money due Skiba personally on his loan, rather than a payment to the Esther Skiba Trust or Estate.
From the evidence, it is quite clear that the $40,000.00 debt owed by Poterek & Sons to Skiba was paid with interest in September 1988 by the $42,821.05 check. That check was payable to Skiba personally, not to the Esther Skiba Trust. Skiba deposited that check directly into his personal account, even though there was an account open for the estate at that time. If Skiba understood that the money was remitted to reimburse him for funds he advanced on behalf of the Esther Skiba Trust, he would likely have deposited the check into the Esther Skiba Estate's account and used it to reimburse himself out of that account for advances he made totalling under $27,000.00.
In January 1994, Skiba filed an affidavit in the state court action, claiming the amount due to the testamentary trust in that action. Importantly, he did not then credit the $42,821.05 he now contends was received by him in 1988 on behalf of the Esther Skiba Trust, indicating that he treated the earlier payment as repayment of the personal debt to him.
Additionally, Skiba has filed a shareholder derivative action, seeking dissolution of the corporation in the Chancery Division of the Cook County Circuit Court. At no point in the state court litigation did he seek repayment of the old $40,000.00 debt now allegedly still due him. This further supports the conclusion that he treated the $42,821.05 check as full payment of the personal debt owed to him until he joined in the involuntary petition claiming that the debt to him was still due. Indeed, the weight of the evidence clearly showed that Skiba's loan was paid off in 1988.1
On October 21, 1993, the involuntary bankruptcy petition was filed herein against Poterek & Sons by the three alleged creditors. Shortly thereafter, the credit terms available to Poterek & Sons from its suppliers became much more restrictive. Many creditors insisted on wire transfers of payment before or when goods were shipped. Each time Poterek & Sons used the electronic transfer process, it was charged $25.00 by its bank. There were 59 electronic transfers after the involuntary petition was filed, for a total cost of $1,475.00. Of those transfers, 21 were between the date the involuntary petition was filed and the date the petition was dismissed, for a cost of $525.00 during that period. Some creditors also restricted the amount of goods they would ship to debtor.
When the credit terms were changed and the company essentially was put on a C.O.D. basis in order to do business, its bank account balance dropped sharply. This resulted in its bank charging additional service charges in the amount of $382.50 during the period affected by...
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