Matter of Braten Apparel Corp.

• Decision Date: 25 June 1982
• Docket Number: Bankruptcy No. 74-B-1256.
• Citation: 21 BR 239
• Parties: In the Matter of BRATEN APPAREL CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

21 B.R. 239 (1982)

In the Matter of BRATEN APPAREL CORPORATION, Debtor.

Bankruptcy No. 74-B-1256.

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

June 25, 1982.

COPYRIGHT MATERIAL OMITTED

Moses & Singer, New York City, for applicant, Bankers Trust Co.; David B. Eizenman and Arnold A. Jaffe, New York City, of counsel.

Ruskin, Schlissel, Moscou & Evans, Rhoades & Rhoades, New York City, for debtor; Joseph J. Moscou and Richard G. Leland, Daniel A. Rhoades, New York City, of counsel.

OPINION

ROY BABITT, Bankruptcy Judge:

On September 5, 1974, Braten Apparel Corporation (BAC or debtor) filed a petition for relief under Chapter XI of the now repealed 1898 Bankruptcy Act. Sections 301 et seq., 11 U.S.C. §§ 701 et seq. (1976 ed.)¹ The debtor's plan was confirmed by this court on March 12, 1976. However, the confirmation of this Chapter XI plan did not end BAC's involvement with this court, for on September 10, 1976, Bankers Trust Company (Bankers), the largest creditor, moved to set aside the confirmation of this plan pursuant to Section 386 of the Act, 11 U.S.C. § 786, and its mate in the Bankruptcy Rules, Rule 11-41, 415 U.S. 1031, 94 S.Ct. 3242, 39 L.Ed.2d XLIX.

In its application, filed just short of the six-month period fixed by the statute as the time within which revocation of confirmation could be procured, Bankers, as mandated by Section 386,² alleged that the debtor had procured confirmation of its plan through fraudulent means and that Bankers had not learned of that fraud until after confirmation. It is Bankers' position that the essence of the fraud was the debtor's scheme to conceal from its creditors that it owned Brookfield Clothes, Inc. (Brookfield), a corporation acquired by the debtor shortly before it filed its Chapter XI petition, with the intent to reinstate the ownership after the debtor had reestablished its vitality through the Chapter XI process. And, as Bankers viewed it, the very nature of this fraud was that it could not have been discovered until events took place after confirmation. BAC, not surprisingly, denies any wrongdoing, and, in any event, BAC insists, Bankers had constructive, if not actual knowledge of the facts on which it grounds its application from its involvement in the unfolding of BAC's Chapter XI.

After extensive discovery, the trial of this dispute consumed all or parts of eighteen days, during which over 2,700 pages of often vague and conflicting testimony were adduced and over 275 documents received in evidence.

THE EVIDENCE

BAC is a clothing manufacturer incorporated in 1968 by Milton Braten (Braten). Its stock was owned by Braten and his father-in-law, Erwin Klineman (Klineman). (Exhibit A to BAC's Chapter XI petition). Before his involvement in BAC, Braten had been employed as a certified public accountant by a well-known accounting firm (50).³ BAC's business was financed by Bankers pursuant to a revolving credit arrangement first established in March, 1971.⁴ BAC prospered until the Spring of 1974 when it began experiencing financial difficulties, partially due to industry-wide conditions. Bankers was aware of these difficulties (170-1, 409, 1030; Exh. B).

In the Spring of 1974, a lucrative opportunity appeared on the horizon. At that time, Philips Van Heusen Corporation (PVH) decided to divest itself of its Brookfield division which had been operating at a loss for several years⁵ (136). Herman Soifer (Soifer), a lead character in this saga, had organized Brookfield in 1948 and operated it successfully until its sale to PVH in 1969 (389). At that time, Soifer, a successful, well-known and highly regarded figure in the textile industry, left the scene to retire.

Although the early details of the genesis of the "Brookfield deal" are in a state of some confusion, Soifer testified that the PVH people approached him as to his possible reacquisition of Brookfield in the Spring of 1974. But as Soifer was content with both his retirement and his financial picture, he did not want any financial exposure. Soifer was willing, however, to run the Brookfield business, possibly pursuant to an employment agreement, and Braten was brought in to handle the financial details of this transaction (1029, 1436, 1483).

Soifer was a personal friend of Klineman, Braten's father-in-law, as they had both belonged to the same Westchester club, the Fenway, for some 25 years. Braten was also a club member (52, 395). In fact, in 1971, Klineman brought Soifer in to do some consulting for BAC (394). According to Soifer, he had both high regard and a personal liking for Braten and he considered him to have a "touch of genius" (1425-27). Apparently, this "personal relationship" alone satisfied Soifer as to the new role he might have in the clothing business. This is clear from Soifer's testimony that he knew nothing of Braten's financial condition at that time. In fact, Soifer went so far as to testify that he had never asked (1030). Moreover, Soifer did not know BAC was then experiencing financial difficulty, and, although Braten was coming in to supply the required working capital for this new venture, Braten and Soifer both agreed that the financial needs of Brookfield were never discussed (407-8, 413). According to Soifer his personal relationship with Braten was enough.

Negotiations continued throughout June among Soifer, Braten and PVH. At that time, the firm of Hahn, Hessen, Margolis & Ryan (Hahn, Hessen), Braten's (and BAC's) regular counsel, saw to the legal work on the acquisition (73). In early August, Braten approached Bankers to finance the new venture. According to an August 2, 1974 memorandum in Bankers' file, Braten was told that Bankers had to turn down his request "as we feel BAC has enough problems on its own" (170; Exh. B).

Nonetheless, the acquisition negotiations went smoothly, and August 7, 1974 was chosen as the "closing date". All papers were prepared and these reflected PVH as the seller, BAC as the acquirer and "Brookfield Industries", a wholly owned subsidiary of BAC, as the acquiring entity. Soifer's name did not appear on any documentation through that date (Exh. 4 — "Acquisition Agreement"). Indeed, Soifer understood he had no interest at that time (419).

At that final hour, Walter Feldesman, Esq., then of Feldesman and D'Atri, was brought in to close the deal (74), "for both Soifer and Braten". According to both Braten and Soifer, Soifer decided Feldesman's negotiating skills were essential (74, 1142), while, according to Feldesman, he was representing only Soifer's interests (142). There was no testimony as to what expertise Feldesman supplied. However, it should be noted at this juncture that Feldesman, a fellow Fenway club member, had never before represented Soifer (74, 202, 597, 1135-36), but he was a long time friend of Klineman, Braten's father-in-law.

The acquisition agreement between BAC and PVH gave BAC the $3.4 million Brookfield assets for $1.00 subject to trade liabilities (80, 90; Exh. 46). The acquisition agreement was prepared with the acquiring entity as Brookfield Industries, BAC's wholly owned subsidiary. According to Braten, it was always intended that Brookfield Industries be the acquiring entity even though Braten knew that the name was unavailable as far back as May, for Hahn, Hessen was negotiating on his behalf to obtain it (713). Apparently, Hahn, Hessen's negotiations were successful, for on August 12, 1974 a certificate of incorporation for Brookfield Industries (Industries) (Exh. 13) was filed by Hahn, Hessen (605, 607, 610, 714). But this corporation was not utilized until after confirmation of BAC's Chapter XI plan. However, as Industries was not available at closing, Feldesman caused MBC Apparel Corporation (MBC), a wholly owned subsidiary of BAC, to be incorporated on August 7 to serve as the acquiring entity (215; Exhs. 14, 16).⁶ An escrow period was written into the deal, making the acquisition effective on the close of business on August 12, 1974 (Exh. 4-C).

On August 12, there was a flurry of activity regarding MBC's name. On that date Hahn, Hessen filed a certificate of amendment (Exh. 15) changing the name of MBC Apparel Corporation to Brookfield Clothes, Inc.⁷ And, although the name Brookfield Industries was then available, Braten never explained why it was not used.

On August 13, 1974, Braten⁸ and Soifer each gave guarantees to Chase Manhattan Bank (Chase) as part of Brookfield's factoring arrangement (Exhs. 5, 5a, 5b, 7, 10). Soifer was not troubled at giving his $250,000 guarantee notwithstanding the fact that he did not want any financial exposure and at that time had no apparent interest in Brookfield and did not know to what extent he would become an owner (418-19). According to Soifer, he went to Chase on August 13 because he had been advised by Braten the day before that Braten did not have the money to put into the business (421-22).

After committing himself to this guarantee, Soifer immersed himself in running Brookfield, notwithstanding the fact that he had not yet discussed with Braten what their respective interests in the company would be (410-11, 417). According to both Soifer and Braten, after August 12, both were too busy to finalize the transaction and planning was shelved (263, 535-38).

The first document to actually indicate Soifer's interest in Brookfield is a written shareholders' agreement (Exh. 11), dated as of August 7, 1974 between BAC, Pearl Soifer, as trustee, and Brookfield Clothes, under which BAC was made to appear to have lost its stock interest in Brookfield. According to Bankers, the essence of the fraud is that this shareholders' agreement was a sham, never intended to have legal effect. Although Soifer, Feldesman and Braten were unable to agree on the date and place of its execution, the overwhelming weight of the evidence indicates it was executed, if not drafted, sometime after August 12, and before August 27, 1974. The importance of the August 27 date is...