In re White, Bankruptcy No. 882-81246-20

• Citation: 42 BR 494
• Decision Date: 23 August 1984
• Docket Number: Bankruptcy No. 882-81246-20,Adv. No. 884-0091-20.
• Parties: In re George WHITE and Johnnie Mae White, Debtors. Dorothy EISENBERG, Trustee of the Estate of George and Johnnie Mae White, Plaintiffs, v. George and Johnnie Mae WHITE and Herman & Natale, a Law Firm, and Robert Alexander, Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

42 B.R. 494 (1984)

In re George WHITE and Johnnie Mae White, Debtors.

Dorothy EISENBERG, Trustee of the Estate of George and Johnnie Mae White, Plaintiffs, v. George and Johnnie Mae WHITE and Herman & Natale, a Law Firm, and Robert Alexander, Defendants.

Bankruptcy No. 882-81246-20, Adv. No. 884-0091-20.

United States Bankruptcy Court, E.D. New York.

August 23, 1984.

John Westerman, Shaw, Goldman, Licitra, Levine & Weinberg, P.C., Garden City, N.Y., for trustee Dorothy Eisenberg.

Eugene Natale, Herman & Natale, Garden City, N.Y., for defendant Herman & Natale.

Leslie Martin, Garden City, N.Y., for defendant and cross-claimant Robert Alexander.

ROBERT JOHN HALL, Bankruptcy Judge.

On May 12, 1982, the Debtors, George and Johnnie Mae White, (the "Whites") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On May 19, 1982 Dorothy Eisenberg was appointed Trustee for the Debtor's estate. The Whites' major asset was a tavern and restaurant located at 678 Union Avenue in Westbury, New York (the "property"). On August 9, 1983 the court approved the sale of the property to Alvin Davis for the sum of $70,000.00. On September 1, 1983 George White entered into a lease and purchase agreement, as landlord and owner, with Robert Alexander, as tenant and buyer, for the very same property that was the subject of the court approved sale by the Trustee to Alvin Davis.

On February 23, 1984 the Trustee commenced this adversary proceeding against the Whites, Robert Alexander and the debtors' attorneys, the law firm of Herman & Natale, seeking damages arising out of alleged fraud and post petition transfers of estate property. The Whites have defaulted to the charges against them. Robert Alexander has denied any wrongdoing. As an affirmative defense against the charges of the Trustee and as a counterclaim against the Whites and Herman & Natale, Alexander alleges that he was fraudulently induced by George White and Herman & Natale to enter into the lease and purchase agreement.

FACTS

The parties are essentially in agreement over the terms of, and the parties' actions pursuant to, the lease and purchase agreement that George White and Robert Alexander entered into on September 1, 1983. The lease was for a three year term with a monthly rent of $1,000.00. In order to execute the lease agreement Alexander tendered a binder check in the amount of $200.00 to George White on August 15, 1983. The lease granted Alexander an option to purchase the property for $100,000.00. On September 2, 1983 Alexander paid $9,000.00 to George White as a down-payment on the purchase of the property. Pursuant to the lease agreement, Alexander made payments of $1,000.00 to George White on October 3 and November 4, 1983. On December 3, 1983 Alexander made a rental payment of $700.00 to George White. Alexander testified at his deposition that $300.00 was deducted from December's rent to repay Alexander for a personal loan he had made to George White. Alexander further testified that the Whites waived September's rent in consideration for Alexander's preparation of the tavern and restaurant for reopening.

The parties further agree that late in September of 1983, Eugene Natale, of defendant law firm Herman & Natale, held a meeting with George White and Robert Alexander at the law offices of Herman & Natale. According to the testimony of Alexander and the affidavit filed by Eugene Natale, it was at this meeting that Natale first became aware that Alexander had given White $9,000 toward the purchase of the building and business. Alexander and Natale also agree that at this same meeting Natale informed Alexander of the bankruptcy proceeding that the Whites were involved in, and the fact that the court had already approved a sale of the premises at 678 Union Avenue.

On September 28, 1983, the law firm of Herman & Natale was substituted for Mark Rosenberg, Esq. as attorneys for the Whites in this bankruptcy proceeding. Herman & Natale drew up a contract between the Whites and Alexander for the sale of the tavern and restaurant at 678 Union Avenue and this contract was executed by the parties on October 19, 1983. Pursuant to this contract Alexander tendered $2,000.00 as a further downpayment on the purchase of the property. This $2,000.00 downpayment was held by Herman & Natale in escrow and later returned to Alexander. Herman & Natale filed an Order to Show Cause returnable before this court on November 10, 1983, seeking an Order vacating this court's August 9, 1983 Order authorizing the sale of the tavern and restaurant to Alvin Davis, and seeking an Order approving the sale of the premises to Alexander. The relief requested in the Order to Show Cause was denied.

Following the November 10, 1983 appearance, the Whites failed to remove themselves from the property. Consequently, the Trustee brought an Order to Show Cause before this court returnable December 6, 1983 seeking an Order holding the Whites in contempt for failure to vacate. Eugene Natale appeared in court on behalf of the Whites and requested that the Whites be granted 90 days within which to vacate. The court declined to find the Whites in contempt but ordered them to vacate the property immediately. The Whites again failed to vacate the property and the Trustee brought another Order to Show Cause before this court returnable December 28, 1983 seeking an Order holding the Whites in contempt of court. Michael Santo, Esq. of Herman & Natale appeared in court on behalf of the Whites. This court gave the Whites until January 11, 1984 to vacate the property. At none of these court appearances did Herman & Natale inform this court or the Trustee of the lease and purchase agreement between the Whites and Alexander. The Whites failed to vacate the property by January 11 and the Trustee obtained a Writ of Assistance from this court directing the United States Marshal to forcibly evict the debtors. The marshal promptly evicted the Whites and Alexander. According to his deposition, Alexander was mystified as to the reasons for his eviction and protested to the marshal. Immediately thereafter the Trustee was informed of the agreement between Alexander and the Whites.

The Trustee is suing the Whites for $11,900.00 representing the total payments received by the Whites from Alexander ($200.00 binder, $9,000.00 downpayment on purchase and $2,700.00 in rent). The Trustee alleges that under 11 U.S.C. § 541, the proceeds from the sale or lease of the property were an asset of the bankruptcy estate, and that consequently, by not turning this money over to the Trustee, the Whites fraudulently misappropriated funds of the bankruptcy estate.

The Trustee is suing Robert Alexander for the same relief she seeks against the Whites. She alleges that, despite Alexander's knowledge of the bankruptcy proceeding, Alexander made rental payments to the Whites and entered into negotiations for the purchase of the premises and thus assisted the Whites in defrauding the bankruptcy estate.

The Trustee is suing Herman & Natale alleging that Herman & Natale knew of the Whites' fraudulent behavior and that as officers of the Bankruptcy Court they had an affirmative duty to report the Whites' behavior to the Trustee and the court. By not informing the Trustee and the court of the Whites' fraudulent behavior, the Trustee alleges that Herman & Natale contributed to the defrauding of the debtors' estate and therefore should be made to pay the Trustee punitive damages of $200,000.00.

Herman & Natale has denied any wrongdoing. Further, the law firm claims that the attorney-client privilege and its professional obligation to the Whites precluded Herman & Natale from informing the Trustee or the Bankruptcy Court of the lease and purchase agreement entered into by the Whites and Alexander.

Robert Alexander has filed a cross-claim against George White and Herman & Natale. Alexander alleges that White and Herman & Natale intentionally did not inform Alexander of his obligations pursuant to the bankruptcy laws and thus perpetrated a fraud upon Alexander. In addition, Alexander alleges that he paid Herman & Natale $500.00 for legal services in drawing up the October 19 contract for the sale of the premises and making an application to the court to set aside the original order to sell. The Trustee has submitted a copy of a receipt for a $500.00 payment purportedly given to Alexander and signed by Michael Santo, Esq. of Herman & Natale. Alexander alleges that in paying rental monies to the Debtor and in negotiating for the attempted purchase of the property, he relied upon the advice and expertise of Herman & Natale. Herman & Natale deny that they ever represented Alexander or breached any duty to him.

Based on these allegations, Alexander claims that the Whites and Herman & Natale must indemnify Alexander for any liability that might be found owing to the Trustee by Alexander. In addition, Alexander seeks $5,000.00 from George White and Herman & Natale for legal expenses incurred in defending this suit. Finally, Alexander claims that by virtue of their breach of duty as attorneys, Herman & Natale are liable to Alexander for $100,000.00 in punitive damages.

Herman & Natale has moved for summary judgment as to the Trustee's amended complaint and the claims of Robert Alexander. The Trustee has cross-moved for summary judgment against Herman & Natale. In addition, the Trustee and Alexander have moved against Herman & Natale, and Herman & Natale has moved against the Trustee and Alexander, for sanctions premised upon alleged abuses of the discovery process. These discovery motions will be treated separate from the motions for summary judgment.

DISCUSSION

Summary Judgment may only be rendered "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a...