Opinion ID: 3009882
Heading Depth: 2
Heading Rank: 1

Heading: The Bankruptcy Court

Text: The bankruptcy court held a hearing on the fees application and on the sanction motion on October 20, 1993, and issued its 3 The bankruptcy court warned: [Y]ou're on a knife's edge, Mr. Fellheimer. You're representing Mr. Burke, he has no independent counsel. He may be a lawyer himself, but he met with you outside the Erie Club in order to determine what he should personally get out of the reorganization for him to step out as manager. In that instance you're acting as his lawyer. And that's adverse to the interests of the [Debtor]. . . . . . . . You have to be very careful about how you represent Mr. Burke. Because to the extent that you represent him to the detriment of the [Debtor] and the creditors, you're violating your fiduciary duty to the [Debtor]. And you're representing him individually and you're risking whatever fee you might get out of this. . . . And for Mr. Burke to get upset because the creditors committee thinks that he's incompetent, is unfortunate. You as a lawyer, as a practicing lawyer have to tone him down. You can't file this kind of lawsuit that you filed here just because Mr. Burke is upset. That's ridiculous. opinion and order regarding these matters on November 2, 1993. Charter Techs., Inc., d.b.a. Elgin Elecs. v. Knox, McLaughlin, Gornall & Sennett, P.C. (In re Charter Techs., Inc.), 160 B.R. 925 (Bankr. W.D. Pa.). The bankruptcy court granted the sanction motion and denied FE&B's entire fees application, except for $15,000 which the court allowed for reimbursement of expenses. The bankruptcy court also granted the motion of the Committee for the appointment of a Chapter 11 trustee. In reaching its decision, the bankruptcy court made the following factual findings. First, the bankruptcy court found that [t]he evidence establishing that Fustine and the Knox Firm represented the Committee, and only the Committee, is overwhelming. Charter Techs., 160 B.R. at 927. In this regard, the bankruptcy court further found that [t]he Debtor failed to present any evidence that Fustine and the Knox Firm represented any individual member of the Committee. Id. Second, the bankruptcy court found that [t]he overwhelming evidence supports the fact that the language of the June 4th letter accurately reflected the Committee's position. Id. at 928. The bankruptcy court found that the Debtor's allegations to the contrary were based upon a complete lack of evidence. Id. The Debtor had attempted to prove that the June 4th letter was a vehicle designed to further the interests of individual members of the Committee, rather than a statement of the consensus of the Committee. Towards this end, the Debtor alleged in its complaint that two Committee members--Robert E. Miller and Frank Slurkanich--telephoned Mr. Burke and stated that Fustine and the Knox Firm were not authorized to send the June 4th letter and that it does not represent the position or opinion of the Committee. Id. The bankruptcy court found, however, that Mr. Slurkanich--a former employee of the Debtor--never denied the authority of Mr. Fustine to send the June 4th letter. Instead, Mr. Slurkanich merely indicated that he did not personally put out the letter. Furthermore, the bankruptcy court found that Slurkanich did not call in response to the June 4th letter, but rather in response to a notice of termination as a sales representative which Slurkanich received from Burke on June 7, 1993, which Burke had issued in retaliation for the Committee's June 4th letter! Id. The bankruptcy court found, moreover, that the Committee had objectively sound reasons for wishing to replace Mr. Burke.4 Third, the bankruptcy court summarily rejected the Debtor's defamation allegations. The Debtor had claimed that Mr. Fustine and the Knox firm stated falsely that the Debtor had accumulated $1,600,000 in pre-tax losses since October 1989 and that the Debtor had nonetheless paid $315,000 in stock dividends over that same time period. The bankruptcy court found that it was readily determin[able] through the Debtor's own financial 4 The bankruptcy court cited a draft report prepared by the accounting firm of Ernst & Young for a potential investor which identified numerous management deficiencies from which it would have been reasonable for the Committee to determine the need to replace Burke. Id. records that these statements were true and accurate. Id. at 929. Fourth, the bankruptcy court found that there was absolutely no evidence to support the Debtor's allegation that Mr. Fustine breached an agreement that he had allegedly entered into that forbade him from meeting with potential investors in the Debtor. Id. According to the complaint, Mr. Fustine breached this agreement when he met with Vito Casoni and George Leone of SMG Control Systems. As the bankruptcy court found, this meeting took place on May 20, 1993. The earliest date that Mr. Fellheimer discussed such an agreement with Mr. Fustine, however, according to Mr. Fellheimer's own time sheets, was May 21, 1993--one day after the alleged breach of the agreement took place. Fifth, the bankruptcy court found that, contrary to the assertion in the Debtor's complaint, the statements of Mr. Fustine to Mr. Casoni of SMG Control Systems did not cause SMG Control Systems to lower its bid for the Debtor. Id. As the bankruptcy court noted, the affidavit of Mr. Casoni submitted by the Debtor explicitly states that the session of May 20th with Mr. Fustine did not alter SMG's offer as to price. The bankruptcy court also found that Mr. Fustine did not, as further asserted in the complaint, cause Kulicke & Soffa to withdraw its business from the Debtor. Id. As indicated by the affidavit of Jim King of Kulicke & Soffa, that firm retracted business from the debtor as a result of the debtor's inability to fulfill Kulicke & Soffa's production schedule on time and serious problems we perceive in the debtor's quality and recycling procedure. The bankruptcy court found that FE&B had not bothered to contact Mr. Casoni, or anyone at Kulicke & Soffa, to ascertain the veracity of these allegations before filing the complaint. Id. Last, the bankruptcy court was greatly offended by Mr. Fellheimer's misrepresentation to it that Mr. Burke would be out of the country and unable to attend the hearing on the complaint on the day it was originally scheduled. Id. at 929-30. After noting that FE&B had made six telephone calls to the Debtor on July 6, including at least one direct call between Mr. Fellheimer and Mr. Burke, the bankruptcy court concluded: There is no rational basis favorable to Fellheimer as to why he would represent to the Court on July 6 that he thought Burke was in England and unavailable for the scheduled hearing on July 8. Id. at 930. On the strength of these preliminary findings, the bankruptcy court determined that sanctions against FE&B were appropriate: Debtor's counsel failed to make any reasonable inquiry into the underlying facts before filing the within Complaint. Debtor's counsel knew or should have known that many of the allegations were baseless without any inquiry. . . . . . . . . . . The conclusion is inescapable that the purpose of the Complaint was to separate the Committee from its chosen counsel due to the fact that counsel for the Committee was advocating the Committee's position that it would be appropriate to remove Burke from upper-level management. . . . . In short, Fellheimer filed a lawsuit against the attorneys for the Creditors' Committee seeking $4.25 million in damages for the sole purpose of protecting his real client, Burke, from the legitimate actions of the Creditors' Committee in opposing Burke's management of the Debtor's business. . . . We further conclude that Fellheimer never had any intent to proceed with a trial on the merits of this complaint. He knew when he filed the Complaint that the allegations were unsupported. His scheme was to file the Complaint, demand the $4.25 million from the Creditors' Committee counsel, and then delay a hearing on the merits while he used the lawsuit as a wedge to intimidate the Creditor's Committee and its counsel for the benefit of Burke. . . . That illicit purpose plus the total lack of any evidentiary basis for the serious accusations made in the Complaint cry out for judicial recognition and appropriate sanction. Id. at 930-32. After discussing the nature and scope of Rule 11 of the Federal Rules of Civil Procedure and Bankruptcy Rule 9011, the bankruptcy court decided to deny FE&B its entire fee in the case. Although FE&B had arguably performed some services of value to the Debtor, the bankruptcy court did not allow it any compensation because Fellheimer's inappropriate conduct affected and continues to affect this entire case. Both the Debtor and its counsel have exhibited conduct of dishonesty, incompetency and gross mismanagement of the affairs of the Debtor. Id. at 933.