Matter of Kaleidoscope, Inc.
| Decision Date | 13 November 1981 |
| Docket Number | Bankruptcy No. B79-304A. |
| Citation | 15 BR 232 |
| Parties | In the Matter of KALEIDOSCOPE, INC., Debtor. Frank W. SCROGGINS, Trustee in Reorganization Under Chapter X of the Bankruptcy Act of Kaleidoscope, Inc., Plaintiff, v. POWELL, GOLDSTEIN, FRAZER & MURPHY, A Georgia General Partnership, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
COPYRIGHT MATERIAL OMITTED
Hicks & Scroggins, Hicks, Maloof & Campbell, Atlanta, Ga., for plaintiff.
Trotter, Bondurant, Miller & Hishon, Atlanta, Ga., for defendants.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This matter is presently before the Court on the motion of Frank W. Scroggins, Trustee in Reorganization Under Chapter X of the Bankruptcy Act of Kaleidoscope, Inc., the above-named Debtor (hereinafter the "Trustee"), for an Order directing Powell, Goldstein, Frazer & Murphy, (hereinafter "Powell, Goldstein") and the members, associates, and employees thereof to turn over to the Trustee, and his counsel, all property of the Debtor in their possession, custody or control, including corporate records and all legal files amassed or created by Powell, Goldstein, its members, associates, and employees during the course of the legal representation by that firm of the Debtor.
In seeking to justify its refusal to turn over the corporate records of the Debtor in its possession and the legal files which it amassed or created during the course of its representation of the Debtor, Powell, Goldstein has cited a plethora of potential problems and circumstances which it contends stand between those records and files, this Court, and the Trustee.
Although the Court acknowledges that the concerns and objections stated by Powell, Goldstein may require some further effort and inquiry by this Court regarding very minor portions of the records and files in question, as well as a determination as to the validity and amount of the claimed attorney's lien of Powell Goldstein, none of the arguments put forth by Powell, Goldstein can cloud the Court's vision as to the simplicity of the true issue before the Court, the undisputed facts which frame that issue, and the legal conclusion which is compelled thereby.
Among all else, the single most important fact is that Powell, Goldstein stood in the fiduciary relationship of attorney-at-law to Kaleidoscope, Inc. This relationship lasted from on or about December 23, 1977 to at least January 17, 1979.1 As evidenced by the nature of the description of the professional services rendered by Powell, Goldstein to Kaleidoscope in the billings sent for a substantial portion of the time in which this relationship existed,2 the amount of those billings, and the claims made by Powell, Goldstein for unpaid fees, a substantial amount of legal work was performed by Powell, Goldstein for Kaleidoscope. In addition to its claims for unpaid fees of approximately $37,000.00, Powell, Goldstein was paid at least $53,892.25 by Kaleidoscope.
During the initial stages of its representation of Kaleidoscope, Powell, Goldstein played an integral role in the creation and implementation of a so-called "Stock Redemption Agreement" effective as of February 2, 1978 as a result of which Kaleidoscope: (a) transferred $200,000 to Charles K. Edmondson, Jr. (a 50% stockholder) through the escrow account of Powell, Goldstein; (b) paid Mr. Edmondson's legal expenses; (c) executed a promissory note to Mr. Edmondson for $550,000; and (d) gave a security agreement and financing statement, upon substantially all of its assets, to Mr. Edmondson to secure payment of that note. At that time, Powell, Goldstein also represented Susan L. Edmondson in the so-called "Stock Redemption Agreement", as a result of which she became the sole stockholder of Kaleidoscope.
During the final stages of its representation of Kaleidoscope, Powell, Goldstein participated, on behalf of its then clients Kaleidoscope, Susan L. Edmondson, Theodore J. Munchak, and, upon its incorporation, MOA Corporation, in the negotiation, creation, implementation, and execution of transaction effective as of January 12, 1979 whereby, under the purported terms of the security agreement previously executed by Kaleidoscope to Charles K. Edmondson, Jr.: (a) merchandise recently acquired mostly on credit by Kaleidoscope; (b) the work in process of catalogs to be mailed; (c) the mailing list of Kaleidoscope; (d) the name Kaleidoscope itself, and (e) other miscellaneous assets of Kaleidoscope, were transferred from Kaleidoscope by Charles K. Edmondson, as "attorney-in-fact" for Kaleidoscope to Theodore J. Munchak in return for the payment by Mr. Munchak to Mr. Edmondson (not Kaleidoscope) of the sum of $312,500. These assets were then further transferred by Mr. Munchak to MOA Corporation, which had been incorporated by Powell, Goldstein, and the stock of which was owned 70% by Mr. Munchak, and 30% by Susan L. Edmondson. Thereafter, Powell, Goldstein retained Jack M. McLaughlin, a former associate of Powell, Goldstein, to provide legal representation to Kaleidoscope and ceased its own formal representation of Kaleidoscope, but continued the representation of Mr. Munchak, Susan L. Edmondson, and MOA Corporation.
On February 5, 1979, Kaleidoscope filed a Chapter XI petition in a pending Involuntary Bankruptcy case, alleging that its liabilities exceeded its assets by $1,620,620.00. On that date the Court appointed Frank W. Scroggins as Receiver in that Chapter XI case.
On September 14, 1979, the Court granted a motion to convert the pending Chapter XI proceeding into a Chapter X proceeding, and appointed Frank W. Scroggins as Trustee in Reorganization Under Chapter X of the Bankruptcy Act of the Debtor.
Frank W. Scroggins, first as Receiver, and then as Trustee, by and through his attorneys, has made repeated requests of Powell, Goldstein that it turn over to him the Corporate Minute Book and other property of the Debtor Kaleidoscope, Inc., including the legal files amassed and created by Powell, Goldstein during the course of its representation of the Debtor. After the requests for voluntary turn-over of these documents were refused, on August 29, 1979, the Trustee filed an action in this Court seeking a Turnover Order as to these documents.
In response to the Trustee's Complaint, Powell, Goldstein initially filed a motion to dismiss or to stay the action asserting, among other things, that this Court lacked jurisdiction to decide the matters set forth in the Trustee's Complaint since there was presently pending an action in the Superior Court of Fulton County, Georgia involving the identical factual and legal issues. On March 3, 1980, this Court entered an Order denying the motion of Powell, Goldstein to dismiss or stay this matter on that ground. Powell, Goldstein filed an Answer and also filed notice of appeal of that Order, but on June 4, 1980 sought and obtained a voluntary dismissal of that appeal by an order signed by the Honorable Richard C. Freeman, District Judge, entitled "Consent Order Dismissing Appeal Without Prejudice."
Thereafter, while the Trustee and various parties to the Superior Court action sought to compromise and settle their existing controversies, one such settlement having been presented to this Court and ultimately rejected, this matter was not pursued.
On September 22, 1981, after all settlement efforts had apparently been exhausted and the litigation in Superior Court had begun to enter a phase of substantive activity, the Trustee filed a motion in this Court seeking leave to amend his Complaint against Powell, Goldstein to add alleged instances of additional efforts to obtain the records and property of Kaleidoscope in the possession of Powell, Goldstein, and other matters pertaining to both the motion of the Trustee for this Court to examine into the reasonableness of any fees paid to Powell, Goldstein by the Debtor "in contemplation of bankruptcy" and also that portion of the Trustee's Complaint seeking to determine the nature, validity, and amount of the attorney's lien claimed by Powell, Goldstein. By this motion the Trustee also sought to obtain an expedited trial date from the Court as to at least that portion of his Complaint requesting a Turnover Order. This Court set October 26, 1981 as the hearing date for the Trustee's motion, and also set a pre-trial conference for this case at the same time.
At the hearing of this matter it was acknowledged by both the Trustee and Powell, Goldstein that with respect to that portion of the Trustee's Complaint seeking a Turnover Order there was no need for amendment to the Complaint, the essential facts were not in dispute, and an expedited trial of the remaining portions of the Trustee's action need not be had if the Court would decide the issue of the Trustee's right to a Turnover Order by motion. The Trustee thereupon made a motion for a Turnover Order, and the Court heard argument thereon from both the Trustee and Powell, Goldstein. The Court also permitted Powell, Goldstein the opportunity to address this matter by written brief filed within ten (10) days of the hearing, and has read and considered that brief as well as all other matters of record in this case.
The Court will now set forth the positions and contentions of the parties at interest in this matter, the facts necessary to decide this matter, and the Court's determinations with respect thereto.
With regard to the Corporate Minute Book, Powell, Goldstein initially refused this request on the ground that it asserted an attorney's retaining lien against the Minute Book for the payment of fees allegedly due to it for legal representation of the Debtor. The amount of these fees were initially stated by Powell, Goldstein to be approximately $18,500, but are now stated by them to be approximately $37,000. At the First Meeting of Creditors held in this case on August 30, 1979, Powell, Goldstein agreed to...
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