Opinion
CASE NO. 99-02969-AJM-11
March 17, 2002
Tim Black, Thomas Farlow, Deborah Hepler, for the Debtor
Leonard Opperman, for the Creditors' Committee
Joseph McGonigal, for the United States Trustee
ORDER DENYING DEBTOR'S MOTION TO RECONSIDER THE COURT'S ORDER FOLLOWING JANUARY 28, 2002 HEARING
Charles W. Zollman ("the Debtor") filed a voluntary petition under Chapter 11 of the Bankruptcy Code on March 12, 1999. The Official Unsecured Creditors' Committee (the "Committee") was formed on April 20, 1999 and Leonard Opperman ("Opperman") of the law firm of Kunz and Opperman was approved as Committee counsel on June 10, 1999.
This case was filed along with the three other related cases of Wally Zollman, M.D. P.C. a/k/a Zollman Center; Zollman Enterprises, LLC, and Zollman Surgery Center, Inc. The four cases were jointly administered, as of April 21, 1999. An order providing for separate administration of these cases was entered on December 21, 2000 and the other three cases have subsequently converted to chapter 7 cases.
The Examination of Ronald Wilson on January 22nd
On Tuesday, January 22, 2002, Opperman examined under oath Ronald Wilson ("Wilson"), a caretaker and conservator formerly employed full time and recently employed part time by the Debtor. Based on the information obtained from that examination, Opperman concluded that a substantial amount of personal property neither listed on the Debtor's schedules nor otherwise disclosed by the Debtor was stored either at the Debtor's Indianapolis residence located at 6848 Fox Lake, North Drive, Indianapolis (the "Indianapolis Residence") or the Debtor's Bloomington lake house, located at Lot 1 TC Steele Road, Bloomington (the "Bloomington Residence"). In order to discern what information Wilson had given the Committee, the Debtor then moved to take the Rule 2004 examination of Wilson (the "Debtor's 2004 Exam Motion") to which the Committee objected, and hearing on that motion was scheduled for 9:30 a.m. on Monday, January 28, 2002.
On Thursday, January 24, 2002, Opperman, along with Joseph McGonigal, an attorney with the United States Trustee's office and who had been assigned to this case upon its filing, requested a meeting with this Court to inquire as to the Court's availability to hold an immediate hearing on a motion which the Committee would be filing requesting ex parte relief to inspect and inventory both the Indianapolis and Bloomington residences. The Court informed Opperman and McGonigal that the Debtor's 2004 Exam Motion had already been set for hearing for Monday, January 28, 2002, and that an emergency ex parte motion could also be heard at that time. Accordingly, on Friday, January 25, 2002, the Committee filed its "Emergency Motion for Ex Parte Order Authorizing Inventory of Property" (the "Committee's Motion").
The Committee's Motion and the Hearing thereon held January 28th
The Committee's Motion set forth that it had examined Wilson under oath on January 22, 2002 and that certain pieces of the Debtor's art collection had been moved from the Debtor's medical building/art gallery to his Indianapolis Residence and that neither the verified statement of personal property provided to the Court by the Debtor on late October, 2001 nor any operating reports filed by the Debtor after August 2001 contained a description of any of the art objects that had been moved to the Debtor's Indianapolis Residence. Furthermore, the Motion alleged that the Debtor maintained a gun collection at his Bloomington Residence and that, these items, too, had not been disclosed in any schedules or verified statements filed with the Court. The Committee's Motion requested that it be given authority to conduct a "prompt inspection" of both the Indianapolis and the Bloomington Residences in order to inventory the property found there. The Committee believed that time was of the essence and that ex parte relief was sought "in order to avoid putting counsel of the Debtor in a position where he would feel compelled to advise his client of this request, when doing so could affect the outcome and because it believes that notice of a hearing may result in the disappearance of the property not scheduled".
When both bankruptcy counsel and special counsel for the Debtor appeared for the hearing on the Debtor's 2004 Exam Motion on 9:30 a.m. on Monday, January 28, 2002, they were served with a copy of the Committee's Motion and informed then that the Court would also be hearing the Committee's Motion at that time. Appearing at that hearing was Leonard Opperman for the Committee; Joseph McGonigal for the United States Trustee; Tim Black, and later, Gary Hosteller, bankruptcy counsel for the Debtor, and Thomas Farlow, special counsel for the Debtor. Mr. Black, the Debtor's bankruptcy counsel, informed the Court that his attendance at a 10:00 a.m. meeting on another chapter 11 case was expected and that, not having been aware of the Committee's Motion up to that point, he would need to make alternate arrangements for other counsel to attend this hearing. The Court recessed to allow Mr. Black to make the appropriate arrangements. The Court then commenced the hearing.
In support of the Committee's Motion, Opperman called Wilson as a witness. In the course of his direct examination by Mr. Opperman, Wilson testified of his employment by the Debtor as a curator and restorer of art objects. He also testified that he assisted the Debtor with moving certain items of personal property from the medical building/art gallery on Woodland Lane to the Debtor's Indianapolis Residence or to a Zionsville warehouse. The Court admitted into evidence over the objection of the Debtor's special counsel Exhibits A and B, each of which was a collection of photographs of art objects taken primarily by Wilson and/or Rex Heller and had been in Wilson's possession for an appreciable length of time in his capacity as curator. Wilson testified that none of the items appearing in Exhibits A and B had been sold to a Mr. Edler, the purchaser to whom artwork had been sold and approved by the Court on August 28, 2001. Wilson also testified that certain gold pieces that had been at the medical building/art gallery had been packed by the Debtor and placed in a trunk and that Wilson had later seen some of these gold pieces at the Debtor's home. Wilson testified that the Nok pieces were at the house and that they were not among the art objects sold to Elder. He also testified that the Debtor kept certain firearms including machine guns in a room in the basement of his Bloomington Residence, but that Wilson had not seen the guns for a few years since the room was locked. But, before that time, Wilson had done work in that room and had seen the guns at that time. Wilson also testified that there was a feather collection worth about $32,000 that had been shipped to this country from Germany. Wilson also testified that he had previously been asked to move some art pieces from the Debtor's Indianapolis Residence when the Debtor and his spouse were having marital difficulties.
The Debtor's special counsel, and later when he arrived, Gary Hosteller, an attorney from Mr. Black's firm, both were given the opportunity to cross examine Wilson. Both raised procedural irregularities with respect to the timing of the hearing and indicated that, without having the opportunity to take Wilson's deposition first, they were not prepared to conduct a cross examination of him at that time.
The Committee's Motion asked only that the Committee be allowed to inspect the Debtor's Indianapolis and Bloomington Residences and to videotape and inventory the property found within, in the presence of either the Debtor or his representative, and a U.S. Marshal. Nothing in the Committee's Motion or the hearing thereon requested that the Committee also be allowed to seize or impound items from either of the residences. [P. 64, lines 22-25; P. 65, lines 1-7];
During the course of the hearing and the discussions of counsel with respect to the propriety of the hearing, the Court several times stressed that is was the disclosure or nondisclosure of assets that was focus and purpose of the Committee Motion and that the creditors of the estate were of primary concern. [P. 59, lines 19-25; P. 60, lines 1-15]. The Court, at the conclusion of the hearing on the Committee's Motion, made findings on the record finding that there was the possibility that assets existed that had not been previously disclosed [P. 65, lines 11-21] and that, similar to a pre judgment attachment under nonbankruptcy law, prior notice of the motion to opposing counsel or the Debtor is not necessary if there is a fear that the property will disappear if notice is given. (P. 58, lines 22-25; P. 59, lines 1-9).
Rule 7052 of the Federal Rules of Bankruptcy Procedure provides that findings of fact and conclusions of law may be stated orally and recorded in open court following the close of the evidence.
Consequently, the Court signed the order tendered by Committee counsel (the "January 28th Order" or the "Order") which provided that ". . . counsel for The Official Creditors' Committee and the Debtor or the Debtors' representative, be authorized to immediately inventory the Debtor's personal property located at 6848 Fox Lake, North Drive, Indianapolis, Indiana and Lot 1 TC Steel Road, Bloomington, Indiana" and that ". . . the United States Marshall [sic] be authorized and directed to accompany and assist the counsel for The Official Creditors' Committee in the inspection and inventorying of the Debtor's personal property".
The Motion to Reconsider
On February 7, 2002, the Debtor filed his Motion to Reconsider the Court's Orders Following January 28, 2002 Hearing (the "Motion to Reconsider"). The Debtor requests that this Court reconsider the January 28th Order, and issue a protective order in favor of the Debtor, requiring that the videotape obtained as a result of the January 28th inspection be turned over to Mr. Black, the Debtor's bankruptcy counsel.
A hearing on the Motion to Reconsider was held on February 12, 2002 and counsel for the Debtor relied upon and cited as controlling law the case of In re Barman, 252 B.R. 403 (Bankr. E.D. Mich. 2000), which has many parallels to the case here.
Barman was a chapter 7 case where the chapter 7 debtor's schedules listed total assets having a value of $500. The chapter 7 trustee in that case obtained information from individuals that there was a trailer on the debtor's property that contained personal property of the debtor and that it appeared that the debtor and his wife were in the process of moving from the residence. The chapter 7 trustee filed an adversary proceeding alleging that the debtor made various fraudulent transfers of property, and the complaint sought revocation of the debtor's discharge. Fearing that the debtor had property worth far in excess of $500, the trustee contemporaneously with the filing of the complaint filed an ex parte motion seeking authority to inspect the debtor's residence. Attached to the motion were excerpts of depositions of the debtor, the debtor's spouse, the testimony of the debtor's parents at their own § 341 meeting in their bankruptcy, and a sworn statement of a process server who claimed to have seen video poker machines in the debtor's garage approximately two weeks before the trustee obtained authority to inspect the residence. Based on the ex parte motion and the attachments and without a hearing, the Barman court authorized an inspection of the debtor's residence. After the chapter 7 trustee conducted the inspection, the debtor moved to suppress the evidence based on the argument that the inspection violated the debtor's Fourth Amendment rights against unreasonable search and seizure. The Barman court denied the debtor's motion to suppress, and upheld the reasonableness of the inspection.
The inspection in Barman was authorized solely upon the trustee's ex parte motion and the attachments without the benefit of live testimony of any of the individuals who claimed to have seen personal property either in the debtor's garage or in the trailer on the debtor's premises. No hearing was held, and therefore, absolutely no opportunity to cross examine witnesses, was afforded.
Recognizing that in some cases "debtors are not perfectly trustworthy", the Barman court acknowledged that the discharge of debts received in return for a debtor's full disclosure of assets may at times prompt a trustee's inspection of the debtor's residence, and, such inspection, may in fact "be a crucial part of the process and therefore a matter of substantial need". 252 B.R. at 417. Circumstances often warrant that such inspections be requested on an ex parte basis, because, ". . . if the Debtor is given advanced warning concerning this entry and appraisal of the personal property, then a less than full and candid inventory of personal property will occur . . .: 252 B.R. at 409. The bankruptcy court order in Barman which authorized the inspection of the Debtor's residence was based on the fact that the chapter 7 trustee seeking the inspection had proven that "immediate and irreparable injury, loss or damage will result should the requested relief not be granted and for the reason that prior notice to the opposing party would result in less than full and candid disclosure of assets and potential harm to the bankruptcy estate. . . ." 252 B.R. at 410. Finally, the bankruptcy court inspection order concluded that, based on the supporting documents attached to the motion, there was a "high potential of irreparable harm and the damage to the bankruptcy estate" and that undisclosed assets "may not be detected absent granting the relief requested". 252 B.R. at 410.
The Motion to Reconsider alleges that, given the ex parte nature of the Committee's Motion, Debtor's counsel did not have enough time to prepare for cross examination of Wilson and that they should have been given the opportunity to depose Wilson before the Court heard the Committee's Motion. Debtor's counsel has not provided, nor has this Court found, any authority to suggest that, when a debtor in possession has allegedly failed to disclosed assets for which a committee seeks an ex parte inspection order because it is feared that the Debtor will abscond with the assets if given notice, the Debtor is entitled to first conduct discovery and depose the accusing party. Nothing in Barman suggests such a result.
Here, the Debtor had been given at least two previous opportunities to list all of his assets, with the most recent sworn statement having been given as recently as late October, 2001. Neither the items appearing in the pictures admitted into evidence nor the firearms described by Wilson in the January 28th hearing had been disclosed on that October, 2001 sworn statement. Furthermore, Wilson testified that he, at the Debtor's direction, had moved personal property from the residence when the Debtor and his wife were having marital difficulties. The Court, in its findings on the record, articulated that, although the type of relief sought by the Committee's Motion was extraordinary, it nevertheless was necessary, and likened the situation to a pre judgment attachment where ex parte relief was entirely appropriate since there was a fear that the property will disappear if notice is given. (Hearing transcript, pp. 58-60). Given the respective duties and rights of debtors in possession and creditors committees, and the emergency nature of a motion that alleges that potentially valuable assets have not been disclosed and may disappear if notice is given, a hearing held without advance notice to the Debtor is not unreasonable.
The Motion to Reconsider also alleges that the January 28th Order fails to include findings of probable cause or other conditions justifying the inspection. The Fourth Amendment may protect citizens from unreasonable searches and seizures of their property in their homes by the Government, but it is not a foregone conclusion that the Fourth Amendment applies under these circumstances. Rooted in the notion that each person has a "reasonable expectation of privacy" as to their personal affects, even the Barman court acknowledged that, in a bankruptcy context, it is a diminished "expectation of privacy" to which the debtor is entitled:
Barman concluded, in part, that the Fourth Amendment applied in that case because it was the Chapter 7 Trustee seeking the ex parte order. Here, the Committee, which is composed of private individuals who happen to be creditors of the estate and who are collectively represented by a private attorney, sought the inspection order.
. . . debtors who have filed for bankruptcy relief must have a significantly reduced expectation of privacy in their "houses, papers and effects" that society is prepared to recognize as reasonable. The reduced expectation of privacy is a natural consequence of the substantial and detailed disclosures that are inherent in the bankruptcy process.
252 B.R. at 414. The Court's findings on the record aptly set forth the reasons justifying the inspection with no notice to the debtor, and given the Debtor's "significantly reduced expectation of privacy" there was no error in authorizing the inspection.
Furthermore, it should be remembered that the inspection order sought here was to uncover potentially unaccounted for assets located in the Debtor's residences, and if found, to videotape and inventory them. It was not sought for the purpose of obtaining evidence of a crime, and therefore the inspection may not have been the type of "search" that comes under the confines of the Fourth Amendment. See, Barman, 252 B.R. at 416, and discussion of Wyman v. James, 400 U.S. 309 (1971) therein. Nevertheless, the Committee was justified in filing the ex parte motion and the granting of the January 28th Order was proper.
The Debtor also contends that the inspection that was ultimately conducted included a videotaping of the Debtor's personal belongings in his residence, and since the Debtor shared the residences with his spouse, the inspection included property that was not property of the estate. The United States Trustee, in his response to the Motion to Reconsider, noted that the inspection of both the Indianapolis and the Bloomington residences included only those areas in which artwork or firearms could be stored. In addition, the January 28th Order authorized only an inspection and not a seizure of any assets, and the Debtor has not demonstrated that the Debtor's spouse objected to the videotaping of personal property or was harmed by it.
Finally, the Debtor contends that Committee Counsel violated Rule 3.6 of the Rules of Professional Conduct by "unlawfully obstructing Debtor's access to evidence" as well as instructing Wilson to "refrain from voluntarily giving relevant information to another party". In the hearing, Committee Counsel indicated that, before questioning Wilson, he consulted with an ethics professor from Indiana School of Law and determined that, as long as Wilson was not in a managerial or decision making position in this employ with the Debtor, the Committee was not violating any ethical rules by talking to him. If the Debtor believes that Wilson was employed in a managerial position or has some other reason to believe that Committee counsel violated ethical rules, the Debtor is free to pursue those allegations in the appropriate forum at the appropriate time. However, the propriety or impropriety of Committee counsel's conduct in this regard does not negate from the Court's ultimate findings of the substantial likelihood that in the Debtors residences were assets neither scheduled nor disclosed and that there existed a danger in those assets being removed if the debtor were given advanced notice of the Committee's Motion. Accordingly, the Debtor's Motion to Reconsider is DENIED.