Opinion
CASE NO. 97-25645-BKC-PGH.
April 12, 2007
MEMORANDUM OPINION DETERMINING THAT FRAUD HAS HOT BEEN PERPETRATED UPON THE COURT
THIS MATTER came before the Court for an evidentiary hearing January 29-31, 2007 upon Norman Lanson and Meryl Lanson (collectively the "Lansons") Emergency Motion to Reopen Bankruptcy Case (the "Motion to Reopen") in which the Lansons claimed that a fraud had been perpetrated upon this Court. The purpose of the evidentiary hearing was to determine whether Ronald C. Kopplow, Esq., Kopplow Flynn, P.A. (collectively, "Kopplow"), Marc Cooper, Esq., Cooper Wolfe, P.A. (collectively, "Cooper"), Sonya Salkin, Esq., and Malnik Salkin, P.A. (collectively, "Salkin") (all collectively, the "Attorneys"), perpetrated a fraud upon this Court in connection with their applications to be retained as general or special counsel.
Procedural Posture
The Debtor, Baron's Stores, Inc. ("Baron's"), filed a Chapter 11 petition on September 9, 1997, and Salkin was retained as its bankruptcy counsel. On November 16, 1998, Baron's obtained an Order Confirming Debtor's and Committee's Joint Amended Plan of Liquidation ("Confirmation Order"). A Final Decree closing the case was entered on December 10, 1999.
Prior to Baron's seeking bankruptcy relief, Kopplow and Cooper served as counsel for Baron's in a state court lawsuit for professional malpractice (the "MBA Action"), against its former accounting firm, Morrison, Brown, Argiz Company, P.A. ("MBA"). After Baron's filed for Chapter 11 bankruptcy relief, Kopplow and Cooper were retained as counsel to continue prosecuting the MBA Action.
On September 7, 1999, the Lansons and Baron's filed a legal malpractice action against Kopplow and Cooper in the Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida (the "Legal Malpractice Action"). In November, 2001 the Lansons amended the Legal Malpractice Action to include Salkin as a defendant. The Lansons and Baron's argued in the Legal Malpractice Action that the Attorneys had perpetrated a fraud on this Court in connection with their retention as counsel for Baron's during the Chapter 11 case. Judge Norman Gerstein, the presiding judge in the Legal Malpractice Action, advised the Lansons that allegations of fraud upon the Bankruptcy Court should be resolved by the Bankruptcy Court. Consequently on March 11, 2005, the Lansons filed their Emergency Motion To Reopen Case with this Court. The Lansons were subsequently joined by Baron's (collectively with the Lansons, the "Movants"). A hearing was held on April 4, 2005, and on April 7, 2005 the Court entered an Order Reopening the case "for the purpose of adjudicating the merits of the claims that [the Attorneys] perpetrated a fraud on this Court." Id.
On October 5, 2006 the Court entered an Order Bifurcating Fraud Hearing and Agreed Order Denying Motion for Protective Order as Moot, in which the Court ruled that "this matter will be bifurcated into a liability hearing and, if necessary upon a finding that the Attorneys perpetrated a fraud, a subsequent hearing concerning the remedy." Id.
On January 22, 2007, the parties filed a Bilateral Prehearing Stipulation. The Court, having conducted a three day hearing to receive evidence and testimony with respect to liability for the "fraud on the Court" allegations, makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
The Lansons were officers of Baron's and were its sole shareholders. Norman Lanson owned 99% of the Debtor's common stock, and his wife, Meryl Lanson, owned 1%. Thus, the Lansons controlled the Debtor at all relevant times.
1. Prepetition Retention of Kopplow and Cooper for the MBA Action
In December 1993, Baron's discovered that its Chief Financial Officer, David Peterson ("Peterson"), had stolen substantial sums of money from Baron's. On January 12, 1994, Baron's and Norman Lanson individually, signed an "Authority to Represent" and "Clients Bill of Rights" (collectively, the "MBA Retention Agreement") whereby they retained Kopplow and Cooper to represent them in the litigation related to the embezzlement on a contingency fee basis. See Ex. 1.
In November 1995, Kopplow and Cooper filed the MBA Action on behalf of Baron's against Baron's former auditors, MBA. The MBA Action alleged that MBA had committed professional malpractice by failing to detect Peterson's embezzlement. Baron's was the only named plaintiff in the MBA Action. Kopplow and Cooper did not file a lawsuit against MBA on behalf of Norman Lanson or Meryl Lanson individually.
2. Retention of Salkin as General Bankruptcy Counsel
When Baron's later experienced financial difficulties, Kopplow referred the Lansons to bankruptcy attorney Salkin. Kopplow testified that he knew Salkin professionally from a previous case in 1994 in which Salkin represented one of Kopplow's clients. On or about July 15, 1997, Salkin met with the Lansons, Kopplow, and others regarding the possibility of Baron's filing for bankruptcy protection. Baron's overall financial condition, the current status of Baron's financing, the MBA Action, and the impact of a Chapter 11 filing on the MBA Action were discussed at this meeting. The retention of counsel for postpetition prosecution of the MBA Action was also discussed at this meeting. Salkin advised that Kopplow and Cooper would have to be retained as special counsel by the Debtor-in-Possession with the Court's approval or, alternatively, that Baron's could reject its retention agreement with Kopplow and Cooper, and hire new counsel.
The Lansons and Gary S. Tedesco ("Tedesco"), Baron's controller, signed the retention letter dated July 18, 1997 that Salkin sent to Baron's, and pursuant to which, Baron's retained Salkin as bankruptcy counsel ("Salkin Retention Letter"). See Ex. 45. The Salkin Retention Letter states that Salkin was retained for the purpose of preparing and filing a Chapter 11 bankruptcy on behalf of Baron's. The Salkin Retention Letter also addressed in detail the duties and responsibilities of a Debtor-In-Possession in a Chapter 11 case. Salkin's retainer was paid by Baron's on July 22, 1997.
Baron's filed its Chapter 11 petition on September 9, 1997. On September 10, 1997, Salkin filed her Motion for Authority to Retain Attorney for DIP, ("General Counsel Retention Motion"). On February 2, 1998, the Court entered an Order Approving the Retention of Salkin Nunc Pro Tunc to July 18, 1997 ("Order Employing General Counsel"). In Salkin's affidavit in support of the General Counsel Retention Motion ("Salkin's Retention Affidavit"), Salkin states that neither she nor her firm represent any interest adverse to Debtor, and they are disinterested persons as required by 11 U.S.C. § 327(a). In Salkin's Retention Affidavit, Salkin also states that neither she nor her firm have any connection with "the debtor, creditor, any other party in interest, their respective attorneys and accountants, the U.S. Trustee, or any person employed in the office of the U.S. Trustee in connection with this case."
3. Retention of Kopplow and Cooper as Special Counsel
After filing for bankruptcy, Baron's decided that Kopplow and Cooper should continue as counsel for the MBA Action. On October 23, 1997, Salkin filed a Motion to Authorize Employment of Kopplow as Special Counsel ("Kopplow Special Counsel Retention Motion"), and a Motion to Authorize Employment of Cooper as Special Counsel ("Cooper Special Counsel Retention Motion") (collectively, the "Special Counsel Retention Motions"). On October 31, 1997, the Court entered an Order Granting Motion to Employ Kopplow as Special Counsel, and an Order Granting Motion to Employ Cooper as Special Counsel (collectively, the "Special Counsel Retention Orders").
Although Kopplow testified that he did not remember the specifics of their conversation, Salkin testified that prior to filing the Special Counsel Retention Motions, she discussed with Kopplow the retention process including the required affidavits in support of retention. Salkin also testified that she told Kopplow that the purpose of the affidavits was to establish that special counsel did not represent any interests adverse to Baron's with respect to the claims asserted against MBA. Salkin testified that she discussed with Kopplow whether he had any relationships with the parties on Baron's creditor list. Salkin further testified that she asked Kopplow to make similar inquiry of Cooper so that he could furnish a similar affidavit in support of the Cooper Special Counsel Retention Motion. Cooper testified that he did not see Baron's petition or its creditor list at the time.
In Kopplow's affidavit in support of Kopplow's Special Counsel Retention Motion and in Cooper's affidavit in support of Cooper's Special Counsel Retention Motion (collectively, the "Special Counsel Affidavits"), both Kopplow and Cooper state that they do not hold or represent any interest adverse to the estate and that they are disinterested as required by 11 U.S.C. § 327(a). Copies of the MBA Retention Agreement were attached to the Special Counsel Affidavits. The Special Counsel Retention Motions, the Special Counsel Affidavits, and the proposed Special Counsel Retention Orders were prepared by Salkin's firm. Based upon the Special Counsel Retention Motions, the Special Counsel Affidavits, and the lack of any objection thereto, the Court signed the proposed Special Counsel Retention Orders which stated that neither Kopplow nor Cooper held any interest adverse to the estate, and that both Kopplow and Cooper were disinterested as required by Bankruptcy Rule 2014 and 11 U.S.C. § 327(a). Salkin testified that she failed to properly proof read the retention documents, and that the references therein to § 327(a), instead of § 327(e), were mistakes. The Special Counsel Retention Orders also provided for the employment of Kopplow and Cooper as special counsel on a general retainer pursuant to 11 U.S.C. § 330. This was inconsistent with the MBA Retention Agreement attached to the Special Counsel Retention Affidavits in that the MBA Retention Agreement provided for a contingency fee arrangement. The Lansons did not appeal, or seek rehearing of the Special Counsel Retention Orders.
4. Rachlin, Cohen Holtz
Morris Hollander ("Hollander") of Rachlin, Cohen Holtz ("RCH") was Baron's prepetition forensic accounting witness in the MBA Action. Salkin knew RCH principal Laurie Holtz ("Holtz") from the unrelated Premium Sales case in which Holtz served as an accounting expert in opposition to clients represented by Salkin. On October 23, 1997, Salkin filed a Motion to Authorize Employment of Accounting Expert for Debtor-In-Possession ("Motion to Employ Accountant") so that Hollander and RCH could continue to work postpetition in the MBA Action as Baron's expert accounting witness. Salkin's office prepared the Motion to Employ Accountant, Hollander's supporting affidavit ("Hollander Affidavit"), and the proposed order thereon. The Motion to Employ Accountant states that Hollander and RCH "do not represent any adverse interest to the debtor, except to the limited extent that they hold a pre-petition claim, which claim is duly scheduled on Debtor's Schedule F, pursuant to the attached [Hollander Affidavit]." The attached Hollander Affidavit further discloses that "Rachlin, Cohen Holtz P.A. holds a pre-petition claim against the estate of [sic] the amount of $18,896.00 which sum is duly scheduled in Debtor's Schedule F." See Ex. VV. On October 30, 1997 the Court signed the proposed Order Approving the Motion to Employ Accountant ("Order Retaining Accountant") which stated that the firm of RCH held "no interest adverse to the estate and the matters upon which they are engaged, and that their employment is necessary and would be in the best interests of the estate." Thus, although RCH's prepetition claim was disclosed in both the Motion to Employ Accountant and the Hollander Affidavit, the Order Retaining Accountant was incorrect insofar as it did not include "exception" language indicating that RCH held no adverse interest except to the extent that RCH held a prepetition claim.
5. Bank Atlantic Post Petition Financing
At the July 15, 1997 initial meeting in Salkin's office, the Lansons and Tedesco, the officers of Baron's, expressed concern about refinancing Baron's existing loan with its primary lender BankAtlantic. Baron's needed to refinance so that it would be able to buy inventory for the upcoming Christmas season. Salkin testified that she was asked by Tedesco to try to find postpetition financing that would not require personal guarantees by the officers. Salkin further testified that she sought financing from three entities, City National Bank, First Southern Bank, and BankAtlantic. City National Bank declined the loan. First Southern Bank and BankAtlantic both required personal guarantees by the Lansons, however BankAtlantic's other lending terms were more favorable than those of First Southern Bank. Thus, Salkin sought and obtained Court approval for Baron's BankAtlantic postpetition financing which required personal guarantees by the Lansons.
6. Court Approval of MBA Settlement Special Counsel Fees
In February and March of 1998, Salkin, Kopplow, Cooper, the Lansons, and attorneys for several creditors attended two negotiation and mediation sessions related to the MBA Action. Both sessions resulted in impasses.
Ultimately, MBA offered to settle Baron's claims for $2.4 million and Baron's accepted. The Lansons approved the settlement on behalf of Baron's, by signing the April 9, 1998 letter sent to them by Salkin ("April 9 Letter"). See Ex. 15. The Lansons' handwritten notation on the April 9 Letter states, "BankAtlantic is to be paid prior to legal fees as per our agreement with BankAtlantic." Salkin's April 9 Letter also stated that "by not filing a Joint Plan with the Unsecured Creditors' Committee, you will be foregoing the $100,000 offered previously, but you will incur far less expense to the estate by way of attorneys' fees and maintain control during the liquidation process." After signing the April 9 Letter, the Lansons apparently changed their position and decided to file a joint plan with the Committee. Salkin sent a subsequent letter dated April 20, 1998 ("April 20 Letter") in which Salkin stated "you have instructed this office to agree to settle the underlying State Court action against [MBA] for 2.4 million dollars, and to file a Joint Liquidation Plan whereby BankAtlantic will be paid first, after payment of administration and priority claims, followed by the leasing company, the surety company, and the general unsecured creditors." The Lansons signed and returned this letter to Salkin. See Ex. Q.
On May 18, 1998, after a hearing on notice to all creditors and parties in interest including the Lansons, the Court entered the Order Granting Motion For Approval of Settlement of Debtor's Litigation against Morrison, Brown, Argiz Co., P.A. by Baron's Stores, Inc. ("MBA Settlement Order"), in which both the settlement of the MBA Action and the award of fees to Kopplow and Cooper were approved. The MBA Settlement Order awarded Kopplow and Cooper a total of $600,000.00 in attorneys' fees and $146,327.04 in costs.
After the Court approved the MBA settlement, the Lansons refused to sign the proposed release prepared by MBA's counsel because the proposed release included signature lines for the Lansons individually. The Lansons' personal counsel, Harvey Kopelowitz ("Kopelowitz"), reviewed and negotiated the language in the release. See Exs. BB, DD, CCCC, EEEE. On June 19, 1998, Norman Lanson signed a release respecting the MBA Action solely in his corporate capacity as President of Baron's.
The Lansons did not appeal, or seek rehearing of the MBA Settlement Order. However, Norman Lanson advised Kopplow and Cooper by letter dated July 8, 1998 that he disputed their fees as follows:
[S]ince to date my interests, in my opinion, have not been fully protected, and, in fact, you have refrained from taking appropriate steps to protect my personal interests, you are hereby advised that any attorneys fees you receive are disputed by me and until such time as my personal interests are fully protected and resolved you have no right to any proceeds in any settlement of this matter that does not contemplate, protect and finally resolve my interests . . . See Ex. 17.
On July 17, 1998, Kopplow and Cooper filed a Motion to Determine Entitlement to Attorney's Fees ("Fee Entitlement Motion") in which they sought a determination of their entitlement to take into income the fees awarded by the Court on May 18, 1998. On August 27, 1998 the Lansons, individually, filed an Affidavit in Opposition to Ronald C. Kopplow and Marc Cooper's Entitlement to Attorneys' Fees in the Bankruptcy Court, asserting that Kopplow and Cooper had deceived the Court by failing to disclose relationships with other parties in interest in connection with their retention as special counsel. On August 31, 1998 the Court held a hearing on the Fee Entitlement Motion. Following the hearing, in which the Lansons were represented by their individual attorney, Mark Osherow ("Osherow"), the Court entered an Order Determining Entitlement to Attorneys' Fees ("Fee Entitlement Order"). The Fee Entitlement Order determined that the fees at issue had been earned by Kopplow and Cooper solely as a result of their representation of the Debtor pursuant to a contingent fee contract previously approved by the Court. The Fee Entitlement Order further determined that the settlement upon which the fee was based was solely that of the Debtor, and that Norman Lanson, individually, was not entitled to any portion of that settlement. Lastly the Fee Entitlement Order determined that Norman Lanson, individually, had no claim to any portion of the contingent fee earned by Kopplow and Cooper. The Lansons did not appeal, or seek rehearing of the Fee Entitlement Order.
7. Plan Confirmation
Baron's commenced plan negotiations with the Official Committee of Unsecured Creditors ("Committee") in, or around, March, 1998. In early April, Committee counsel Larry Gottlieb ("Gottlieb") corresponded with Salkin about the terms of a liquidating plan, including provisions which would compensate Norman Lanson as an officer of Baron's to ensure his cooperation. See Exs. 56-58, 61. Salkin's time records for April 16, 1998 indicate that Salkin had a telephone conference with Meryl Lanson "regarding annuity, life insurance, and again advised of need to obtain personal counsel." See Ex. HHH, Bates Stamp No. SS023854.
In an April 23, 1998 letter from Kopelowitz to Gottlieb ("April 23 Letter"), Kopelowitz states that he had been retained by the Lansons. See Ex. DDDDD. The April 23 Letter indicated that Kopelowitz would address with the Committee the following issues concerning the Lansons: 1) the ownership of Norman Lanson's One Million Dollar Life insurance policy; 2) the ownership of Meryl Lanson's Mercedes automobile; 3) the $100,000 (or $75,000) additional consideration due Norman; and 4) the refund of the difference between the guarantee on the utility and equipment lease versus the dividend payable to these creditors as a dividend to Norman. Other correspondence by Kopelowitz indicates that he represented the Lansons personally with respect to their execution of releases required for settling the MBA Action. See Exs. BB, DD, CCCC, EEEE. Thus, from at least April 23, 1998, the Lansons were formally represented by personal counsel.
In the summer of 1998, Osherow also appeared in this case as personal counsel representing the Lansons in: 1) opposing the fees sought by Kopplow and Cooper; 2) concluding negotiations that Kopelowitz had commenced with Committee counsel regarding the Lansons' personal claims and interests in connection with Baron's First Amended Joint Disclosure Statement and the First Amended Joint Plan of Liquidation. See Exs. SSSS, WWWW, YYYY; 3) filing the Motion of Norman Lanson to Determine Ownership of a Certain Annuity Identified in Section VI of Disclosure Statement and for Order Granting Claim of Ownership of Annuity and for Guaranteed Payment Under Plan to Norman Lanson; and 4) prosecuting a Motion for Expenses and Costs on Behalf of Norman Lanson and Meryl Lanson and/or to Permit Filing of Administrative Proof of Claim.
On November 16, 1998, the Court entered the Confirmation Order which confirmed the Joint Amended Plan of Liquidation filed by the Debtor and the Committee. The record reflects that the Lansons did not object to confirmation of the Joint Amended Plan of Liquidation, and that they each voted individually to accept the plan. See Ex. Y.
CONCLUSIONS OF LAW
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 11 U.S.C. § 157(b)(2)(A).
A. Fraud Upon the Court
The Movants contend that the Attorneys perpetrated a fraud upon the Court in connection with their retention as counsel to Baron's during its Chapter 11 case by not disclosing their alleged "litany of connections and conflicts-of-interest". The Movants argue that the Attorneys' allegedly fraudulent non-disclosures vitiate final non-appealable orders of this Court including: 1) the MBA Settlement Order entered May 18, 1998 which approved both the settlement of the MBA Action and the award of fees to Kopplow and Cooper; 2) the Fee Entitlement Order entered August 31, 1998 which granted Kopplow and Cooper's motion determining their entitlement to fees over the objections of the Lansons; and 3) the Confirmation Order entered November 16, 1998. It is nearly nine years since the Court entered the above orders. It is nearly ten years since the Court entered the orders retaining the Attorneys. None of the above-mentioned orders was appealed. In the Court's experience, the lodging of allegations of fraud upon the Court to collaterally attack the Court's final orders nearly a decade after the alleged fraud was to have taken place is extraordinary. See also Herring v. United States of America, 424 F.3d 384, 386 (3d Cir. 2005) ("Actions for fraud upon the court are so rare that this Court has not previously had the occasion to articulate a legal definition of the concept. The concept of fraud upon the court challenges the very principle upon which our judicial system is based: the finality of a judgment").
The Movants also asserted that the Attorneys violated The Florida Bar Rules of Professional Conduct. The Court offers no opinion with respect to these assertions as such matters are within the purview of the Florida Bar
The theory of "fraud upon the court" and the finality of judgments was discussed in Hazel-Atlas Glass Co. v. Hartford Empire Co., 322 U.S. 238 (1944).
Federal courts . . . long ago established the general rule that they would not alter or set aside their judgments after the expiration of the term at which the judgments were finally entered. This salutary general rule springs from the belief that in most instances society is best served by putting an end to litigation after a case has been tried and judgment entered. This has not meant, however, that a judgment finally entered has ever been regarded as completely immune from impeachment after the term. From the beginning there has existed along side the term rule a rule of equity to the effect that under certain circumstances, one of which is after-discovered fraud, relief will be granted against judgments regardless of the term of their entry.
Id. at 244 (citations omitted).
Courts have held that only the most egregious conduct constitutes a "fraud on the court" for purposes of collaterally attacking an order or judgment. As stated in Rozier v. Ford Motor Co., 573 F.2d 1332, 1338 (5th Cir. 1978):
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc) the Eleventh Circuit adopted as binding precedent all the decisions of the former Fifth Circuit handed down prior to the close of business on September 30, 1981.
Generally speaking, only the most egregious misconduct, such as bribery of a judge or members of a jury, or the fabrication of evidence by a party in which an attorney is implicated, will constitute fraud on the court. Less egregious misconduct, such as nondisclosure to the court of facts allegedly pertinent to the matter before it, will not ordinarily rise to the level of fraud on the court. Id. (citations omitted).
Fraud upon the court must be proven by clear and convincing evidence, and embraces "only that species of fraud which does or attempts to defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery cannot perform in the usual manner its impartial task of adjudicating cases." King v. First American Investigations, Inc., 287 F.3d 91, 95 (2d Cir. 2002). "`Fraud upon the court' is narrowly construed. It has been found only in those instances where the fraud vitiates the court's ability to reach an impartial disposition of the case before it." Davenport Recycling Assoc. v. C.I.R., 220 F.3d 1255, 1262 (11th Cir. 2000) (citations omitted).
In Pearson v. First NH Mortgage Corp., 200 F.3d 30 (1st Cir. 1999) the Court of Appeals stated:
"`[F]raud on the court' occurs where it can be demonstrated, clearly and convincingly, that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system's ability impartially to adjudicate a matter." Fraud on the court is an "intentional deflecting of the Court from knowing all the facts necessary to make an appropriate judicial decision on the matter before it."
Id. at 37 (internal citations omitted).
The issue in this case is fraud upon the court. The case law instructs that intent is necessary to a finding of the existence of fraud upon the court. The Movants argue that the Attorneys' subjective intent is not the relevant inquiry and that the Court should determine the Attorneys' intent objectively. The Court does not agree. The Court finds that setting in motion an unconscionable scheme to interfere with the Court's ability to impartially adjudicate a matter requires subjective intent. The question here is whether there was an intentional omission or misstatement in the Attorneys' retention affidavits and motions, not whether there was an omission or misstatement. Fraud upon the Court requires more than a mistake, it requires subjective intent. In reviewing the extensive evidentiary record, the Court finds that the Attorneys did not perpetrate a fraud on this Court.
The Movants cite Pearson v. First NH Mortgage Corp., 200 F.3d 30 (1st Cir. 1999) as support for this proposition. The issue in Pearson was whether it was error for the bankruptcy court to deny the movant an evidentiary hearing after the movant claimed there had been a fraud on the court. The Pearson court used an objective standard to determine whether the movant had a colorable claim of fraud upon the court. The actual question of whether there had been fraud upon the court was remanded to the lower court for an evidentiary hearing. Id. In this matter the Court conducted a 3-day evidentiary hearing on the issue of whether there was a fraud upon the Court. The Movants additional citation to In re Berz, 173 B.R. 159 (N.D. Ill. 1994) is inapposite. Berz is a § 523(a)(2) credit card debt dischargeability action.
B. Kopplow and Cooper
The "fraud on the court" claims asserted against Kopplow and Cooper can be considered together and are summarized as follows:
(1) The claim that statements in the Kopplow and Cooper retention papers were fraudulent because Kopplow and Cooper were not "disinterested as required by 11 U.S.C. § 327(a)."
(2) The claim that Kopplow and Cooper's retention papers, wherein it stated they represented no interests adverse to the Debtor, were fraudulent because Kopplow and Cooper represented Norman Lanson who was the alleged holder of a competing claim against MBA.
(3) The claim that Kopplow and Cooper defrauded the Court by failing to disclose their prepetition relationships with various creditors and parties in interest.
For the reasons discussed below, the Court finds that Kopplow and Cooper did not intend to deceive the Court or misrepresent any material facts to it, and thus they did not perpetrate a fraud on the Court.
1. 11 U.S.C. § 327(a) (e) — "Disinterestedness"
The statements in the Special Counsel Retention Motions and the Special Counsel Retention Affidavits that Kopplow and Cooper were "disinterested as required by 11 U.S.C. § 327(a)" were incorrect, given that Kopplow and Cooper represented Baron's prepetition and therefore held contingent prepetition claims against Baron's for attorneys' fees and costs. Special counsel are generally employed under 11 U.S.C. § 327(e), and general bankruptcy counsel are employed under 11 U.S.C. § 327(a). Section 327(a) requires the professional to be "disinterested." In contrast, § 327(e) does not require "disinterestedness." Nevertheless, attorneys employed as special counsel under § 327(e) cannot represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed. In re Molten Metal Technology, Inc., 289 B.R. 505, 510 (Bankr. D. Mass. 2003). Kopplow and Cooper are not bankruptcy lawyers. Indeed, Cooper testified that this was the first time he had ever been retained as special counsel in a bankruptcy case. Kopplow and Cooper credibly testified that, having no bankruptcy law experience, they did not understand the difference between sections 327(a) and (e), or the import of the reference in their affidavits to being "disinterested as required by 11 U.S.C. § 327(a)". They both assumed that the retention papers, which had been prepared by Salkin's office, were accurate and in proper form. While Kopplow stated that he had seen the Special Counsel Retention Motions and Special Counsel Retention Orders, Cooper testified that he had not seen them at or about the time of his and Kopplow's retention. Both Kopplow and Cooper testified that they relied on Salkin as bankruptcy counsel for preparation of the retention papers, and that they believed all necessary disclosures had been made by virtue of attaching the MBA Retention Agreement to their Special Counsel Retention Affidavits. Both Kopplow and Cooper testified that they did not believe they held any conflict of interest that would have prevented them from continuing their representation of Baron's in the MBA Action. As to the Movants' allegation that Kopplow participated in plan negotiations thereby evidencing his intent to be employed as general counsel, the Court finds that Kopplow's limited participation in plan negotiations subsequent to his retention as special counsel does not evidence that he intended to be employed as general counsel.
The Court notes that the underlined uppercase titles of the Special Counsel Retention Motions each read: "MOTION TO EMPLOY SPECIAL COUNSEL FOR DEBTOR-IN-POSSESSION." The Special Counsel Retention Orders prepared by Salkin are similarly titled: "ORDER APPROVING EMPLOYMENT OF SPECIAL COUNSEL FOR DEBTOR-IN-POSSESSION." Thus while the Court itself did not notice the inconsistent § 327(a) references in the Special Counsel Retention Orders, it was always the Court's understanding that it was approving retention of special counsel on a contingency fee basis pursuant to § 327(e) since this is the basis on which special counsel are normally retained for prosecuting state court actions based upon negligence, and because the MBA Retention Agreement clearly provided for a contingency fee arrangement. The Movants argument that the Attorneys "engaged in a scheme to defraud this Court into believing that it had approved the prepetition contingency fee agreement as the postpetition fee agreement, when in point of fact, this Court only approved the retention of Kopplow and Cooper under a `general retainer'" is not at all persuasive. The date of the discovery of Peterson's defalcation, December 4, 1993, is displayed prominently on the face of the MBA Retention Agreement. The document was signed January 12, 1994. The 3-page MBA Retention Agreement was attached to a 2-page affidavit. If the Attorneys intended to defraud the Court they would not have attached the MBA Retention Agreement (which provided for a contingency fee arrangement) to their Special Counsel Retention Affidavits. The Attorneys did not attempt to hide or deceive the Court, nor did the Court have to "hunt around and ferret" out this information from thousands of pages of documents. Compare In re Jennings, 199 Fed. Appx. 845, 848 (11th Cir. 2006) (rejecting attorneys' argument that disclosures were discernible from the record in a proceeding where 11 related debtors filed for reorganization and their cases had been consolidated for administrative purposes).
Salkin accepted responsibility for the incorrect references to § 327(a) instead of § 327(e), and the incorrect inclusion of the "disinterested" language in the Kopplow and Cooper retention documents. Salkin testified that these papers were prepared by a junior lawyer in her firm and that the errors were the result of careless proofreading, as opposed to an intent to deceive the Court. Salkin's explanation is credible. Moreover there was no evidence presented of any plausible motive Salkin could have had to perpetrate an intentional fraud on the Court in connection with a routine matter such as retention of special counsel. The Movants' argument that the Attorneys conspired to get Kopplow and Cooper paid under a void contingency fee agreement is not supported by the evidence. Thus, the Court finds that the references to disinterestedness — which are required by § 327(a) but not required by § 327(e) — were mistakes. As noted previously, fraud upon the Court requires more than a mere mistake. The Court finds that there was no intent by any of the Attorneys to mislead the Court.
2. The Lansons Individual Claims Against MBA
The Movants' assert that Kopplow and Cooper fraudulently failed to disclose that they represented Norman Lanson who held an interest adverse to the estate with respect to the matter for which Kopplow and Cooper were engaged, i.e., the MBA Action. The Lansons assert that Kopplow and Cooper represented them individually in the MBA settlement conferences. The Court notes that Kopplow and Cooper's retention as special counsel required them to participate in the MBA settlement conferences, however the Court finds that their participation was on behalf of Baron's not the Lansons individually. The Court also finds that the Lansons' assertion that Kopplow and Cooper represented them individually in plan negotiations was not supported by the evidence.
The Movants' main argument is that Kopplow and Cooper represented both the Lansons and Baron's, and that the Lansons held individual claims against MBA that put the Lansons in conflict with Baron's because both the Lansons and Baron's were seeking recovery from a common limited fund. The Court need not and does not decide whether the Lansons had meritorious individual claims against MBA. For purposes of determining whether the Attorneys perpetrated a fraud on the Court, the Court must determine only whether the Attorneys believed that the Lansons had individual claims against MBA.
The MBA Retention Agreement reflects that Kopplow and Cooper were retained by both Baron's and Norman Lanson individually. See Ex.1. Cooper testified that the MBA Retention Agreement was drafted that way because Peterson's defalcation had just been discovered and it was unclear at the time whether he had embezzled from Baron's, the Lansons, or both. Cooper further testified however, that by the time they filed the MBA Action in 1995, he and Kopplow had determined that only Baron's had a cause of action against MBA, and therefore they named Baron's as the sole plaintiff in the action.
Cooper testified that at the time of their prepetition retention, both he and Kopplow thought Norman Lanson was the sole shareholder and that they later learned that Meryl Lanson owned 1% of Baron's stock.
Cooper, who had primary responsibility for identifying appropriate legal theories and for crafting the causes of action in the complaint against MBA, testified at length concerning the basis of his determination that the Lansons did not possess individual claims against MBA. Cooper's analysis was also conveyed in a detailed letter to Osherow, the Lansons' individual attorney, on August 26, 1998 just prior to the hearing on Cooper and Kopplow's Fee Entitlement Motion. See Ex. 91. The Movants argue that even if the Attorneys did not believe the Lansons had individual claims at the inception of the lawsuit, they became aware of the Lansons' individual claims on February 13, 1998 through the deposition testimony of Cynthia Cohen ("Cohen") who stated that the Lansons suffered individual reputational damages. Both Kopplow and Cooper testified that Cohen's testimony did not change their analysis or their conclusion that the Lansons did not have individual claims against MBA. Cooper testified that Cohen was a retail industry specialist, not a lawyer. In Cooper's opinion Cohen had little, if any, understanding of claims cognizable under Florida law. Thus, the Court finds that there was no credible evidence that any of the Attorneys believed that the Lansons had individual claims against MBA which would have made them the holders of adverse interests to the estate with respect to Kopplow and Cooper's retention as special counsel. Cooper testified that when the MBA Action was filed, and later when the bankruptcy petition was filed, he believed that the interests of the Lansons were one and the same as Baron's, that being to maximize Baron's recovery from MBA.
On January 25, 2007 the Attorneys filed a Memorandum of Law Regarding Lansons' Alleged "Individual Claims" which discusses the case law relied upon, and the legal analysis pursuant to which, Cooper and Kopplow determined that the Lansons had no individual claims against MBA.
The Court finds that the Attorneys lacked intent to deceive the Court as to this matter. The MBA Retention Agreement identifies Norman Lanson individually as a client retaining Kopplow and Cooper. The inclusion of this document as the sole exhibit to the Special Counsel Retention Affidavits is inconsistent with an inference that Kopplow, Cooper, or Salkin sought to conceal this alleged "conflict" from the Court. The Court finds that at all relevant times, the Attorneys believed in good faith that the Lansons did not possess independent individual claims against MBA. Therefore, the Attorneys did not perpetrate a fraud upon the Court, as alleged, by failing to identify the Lansons as clients who held an interest adverse to the estate with respect to the MBA Action.
3. Kopplow's and Cooper's Other Prepetition Relationships
Finally, the Movants assert that Kopplow and Cooper perpetrated a fraud on this Court by failing to disclose the following prepetition relationships:
a. Reef Apartments
Kopplow represented Reef Apartments General Partnership and its general partners in a state court declaratory action relating to an insurance coverage dispute arising out of an automobile accident. The general partners of Reef Apartments included Norman Lanson (who, though not named individually in the Reef lawsuit, shared in the retainer paid to Kopplow); Alan M. Glist (who would become chairman of the Committee in Baron's Chapter 11 case); Glist's father, Hal; Marc Levine, a member of Baron's management team; David Peterson, controller of, and future embezzler from, Baron's; Jeffrey Perlow and Mark Perlman, both of whom were attorneys for Glist.
Kopplow represented Reef Apartments General Partnership and its general partner from 1988 to 1990, approximately seven years before the 1997 filing of Kopplow's Special Counsel Retention Motion and Affidavit. Kopplow's involvement in the Reef Apartment litigation was unrelated to the MBA Action.
b. Marc Levine
Kopplow also represented Marc Levine in a 1994 personal injury action arising from an automobile accident that was unrelated to his employment at Baron's. That case was dismissed in October, 1996.
c. Charlie Alberts
Between 1997 and 1999, Kopplow represented Charlie Alberts, who was a non-creditor, ex-employee of Baron's on the petition date, in a personal injury action arising from an automobile accident that was unrelated to his employment at Baron's.
d. Laurie Holtz
Laurie Holtz is a principal of RCH, an accounting firm that served, both prepetition and postpetition, as Baron's expert forensic accountant in the MBA Action. Cooper knew Holtz because they were both retained by the Receiver in the unrelated Premium Sales litigation which commenced in the early 1990s. Beyond having a single common client in previous unrelated litigation, Cooper had no personal or professional relationship with Holtz.
e. The Neiman Litigation
Kopplow represented Baron's in a series of lawsuits seeking to recover homes and assets purchased by Peterson with funds he embezzled from Baron's. Neiman had contracted to purchase some of these assets. During the ensuing litigation, Kopplow represented Norman Lanson as an officer of Baron's at a deposition. The litigation was eventually settled and releases were executed by Norman Lanson as President of Baron's, and by Norman and Meryl Lanson individually. The assertion that Kopplow represented Norman Lanson in any capacity other than as an officer of Baron's is not supported by the evidence.
The Court finds that the failure to disclose the above described relationships did not constitute a fraud on the Court. There was no evidence that Kopplow or Cooper understood that they were required to disclose these attenuated relationships or connections as part of their retention as special counsel. There was also no evidence that Salkin even knew of these relationships until after the case had been closed and the Lansons filed their Legal Malpractice Action.
The Movants also asserted at the evidentiary hearing that the Attorneys defrauded the Court by failing to disclose that Salkin had previously worked with Kopplow on unrelated cases, and that Cooper had previously worked with Kopplow on unrelated cases. As to these allegations, the Court notes that if Rule 2014 required disclosure of every occasion on which attorneys worked together on unrelated cases the resulting volume of disclosures would, for all practical purposes, render the disclosure requirement meaningless and thereby thwart the purpose of the Rule which is to disclose all relevant connections so as to "subject potentially adverse interests to review before employment is approved." In re Molten Metal Technology, Inc., 289 B.R. 505, 511 (Bankr. D. Mass. 2003) (citations omitted).
Thus, the Court concludes that the failure to disclose the above relationships was not a fraud on the Court.
C. Salkin
As discussed above, Salkin did not perpetrate a fraud on the Court in connection with her role in drafting and filing the retention papers for Kopplow and Cooper. Baron's remaining claims of Salkin's alleged "fraud on the court" can be summarized as follows:
(1) The claim that Salkin perpetrated a fraud on the Court by concealing RCH's status as a prepetition creditor, in connection with her preparation of the Motion to Employ Accountant so that RCH could continue to serve as Baron's expert witness in the MBA Action, and that Salkin also failed to disclose that she worked with RCH on a previous unrelated case.
(2) The claim that in addition to representing Baron's, Salkin also represented the Lansons individually during the Chapter 11 case, and that she fraudulently failed to disclose this disqualifying conflict to the Court.
1. RCH Disclosures
The Court finds that Salkin did not perpetrate a fraud on the Court in connection with Baron's postpetition retention of RCH. Contrary to the Lansons and Baron's assertion, the Motion to Employ Accountant and the supporting Hollander Affidavit expressly disclosed that RCH "holds a pre-petition claim against the estate in the amount of $18,896.00, which sum is duly scheduled on Debtor's Schedule F." See Ex. VV. Salkin and RCH both regularly work on bankruptcy and insolvency matters in this district. Salkin and RCH were on opposite sides in the unrelated Premium Sales case. The nondisclosure of the fact that they had previously been involved in an unrelated case does not constitute a fraud on the Court. As the court observed in In re eToys, Inc., 331 B.R. 176, 195 (Bankr. D. Del. 2005):
It is not unusual for professionals and turnaround specialists to work on the same cases. In fact, given the specialized nature of the bankruptcy practice, it is inevitable.
Id. at 195. The Court finds that Salkin neither intended to, nor did, defraud the Court in connection with RCH's retention.
The Movants cite cases under Fed.R.Bankr.P. 2014 that impose rigorous disclosure requirements upon professionals seeking retention under § 327 of the Code, and ostensibly divest the professionals of any discretion to determine the extent to which prepetition "connections," no matter how trivial or attenuated, must be disclosed. See, e.g., In re Jennings, 199 Fed. Appx. 845 (11th Cir. 2006), and cases cited therein. The Court notes that the cases cited by the Movants involve relevant material nondisclosures such as failure to disclose fee arrangements ( see e.g., In re Glenn Electric Sales, 99 B.R. 596 (D.N.J. 1988); In re Keller Financial Services of Fla., Inc., 248 B.R. 859 (Bankr. M.D. Fla. 2000)), and actual conflicts of interest ( see e.g., In re Tinley Plaza Assoc., L.P., 142 B.R. 1992 (Bankr. N.D. Ill. 1992); In re EWC, Inc., 138 B.R. 276 (Bankr. W.D. Okla. 1992)). Not one of the cases cited involve an alleged failure to disclose that an attorney worked with another attorney or an accountant on an unrelated case. The Court does not find that the RCH "connection" was relevant to, or could have had an effect upon, Salkin's judgment in this case. Moreover the issue is not whether there were disclosure omissions but rather whether there were intentional nondisclosures as part of a scheme to mislead the Court. The Court finds that there was no intent on Salkin's part to deceive the Court by not disclosing that Salkin and Holtz of RCH had previously worked on opposite sides in an unrelated case.
2. Who Did Salkin Represent?
Finally, the Lansons allege that Salkin perpetrated a fraud upon the Court by not disclosing that Salkin had a disqualifying conflict of interest based upon Salkin's representation of them individually. The Court notes that there is a very fine line between representing a debtor and representing the individual shareholders in a closely held corporation. When a debtor's attorney gives advice to the principals of the debtor as shareholders concerning payment of insider debt or pledges of personal assets, the attorney could reasonably believe that she is advising the officers of the debtor and the officers could reasonably believe that they were receiving advice as individuals. However based on the totality of the evidence as discussed below, and Salkin's correspondence with the Lansons and others throughout the Chapter 11 case, the Court finds that Salkin did not believe she had taken on the personal representation of the Lansons. See e.g., Exs. 15, 45, 62, 67, 72, Q, FF, WWW, YYY, ZZZ, AAAA, DDDD, EEEE, FFFF GGGG, SSSS. Thus, the Court finds that there was no intentional failure to disclose a conflicting relationship that would constitute fraud upon the Court.
The Court notes that Salkin had no prepetition relationship with either Baron's or the Lansons. The Salkin Retention Letter reflects that Salkin was retained solely by Baron's for the bankruptcy case, and Salkin's retainer was paid by Baron's. Thus, Salkin's Retention Affidavit and her General Counsel Retention Motion were truthful. She was disinterested in that she did not hold an interest adverse to the estate, and she was qualified to represent Baron's under 11 U.S.C. § 327(a). In addition, the Court finds that initially there was no conflict between the interests of Baron's and its principals; the Lansons hoped to reorganize Baron's so that they could continue to control and operate the company.
The Court addresses below the Lansons' allegations that Salkin represented them individually: a) by negotiating Baron's postpetition financing which required their personal guarantees; b) by preparing proofs of claims for them; and c) by advancing their interests in plan negotiations with the Committee.
a. Postpetition Financing.
At or about the time of her retention, Salkin was advised by the Lansons and Tedesco that postpetition financing was critical to Baron's for its continued operations and for stocking inventory for the upcoming Christmas season. As requested by Baron's officers, Salkin attempted to secure financing that would not require the officers' guarantees, but she was not successful. As they had done prepetition, the Lansons personally guaranteed Baron's BankAtlantic postpetition financing. The Lansons assert that Salkin represented them individually in connection with Baron's postpetition financing from BankAtlantic. This assertion rests on several letters that identify the Lansons as Salkin's "clients." See Exs. 27-31. The Court finds — and it is important to note — that to the extent the Lansons were corporate officers of Baron's, Salkin was required to report to them and to take direction from them. One letter signed by Salkin states: "We are counsel to the Borrower and Norman Lanson and Meryl Lanson, his wife (hereinafter singularly or collectively referred to as the `Guarantor') in connection with the Loan." See Ex. 31. Salkin testified that this letter was drafted by the bank's representative and presented to Salkin for the purpose of placing it on her firm's letterhead, see Ex. BBB, which she did. This "opinion" letter from Salkin as borrower Baron's counsel, was a required closing document for Baron's postpetition loan. Salkin testified that her review of the BankAtlantic loan documents and her execution of the opinion letter was in furtherance of her representation of Baron's, and that she felt it was appropriate to comment on the terms of the loan documents. Furthermore, there was no conflict insofar as Baron's and the Lansons interests in perpetuating the Debtor's ability to conduct business were aligned. It would have been better practice on Salkin's part to have insisted that the Lansons have personal counsel review the personal guarantees required of them in order for Baron's to obtain critical postpetition financing. However under the circumstances, the Court finds that Salkin's presentation of personal guarantees to the Lansons did not transform the Lansons into individual clients of Salkin. Even more importantly, the Court finds that Salkin did not believe that by negotiating for Baron's postpetition financing she had undertaken the personal representation of the Lansons.
The Court notes that no dispute ever arose from the BankAtlantic financing. The postpetition debt was fully satisfied, and the Lansons were never required to honor their guarantees.
b. Proofs of Claim
The Lansons also assert that Salkin represented them individually because her office prepared form proofs of claim for them to file in their individual capacities. Salkin testified that she had done this for creditors in other cases. While this may have been a questionable act on Salkin's part, the Court finds that Salkin did not intend to represent the Lansons personally by preparing their form proofs of claim. Salkin's failure to disclose that she prepared these proofs of claim does not constitute a fraud upon the Court.
c. Plan Negotiations
The Court notes that Baron's bankruptcy was a fluid situation. Although Baron's hoped to reorganize, it became apparent sometime in March, 1998 that Baron's would not be able to reorganize under a consensual plan, but would instead have to liquidate. It was at this point that the interests of Baron's and the interests of the Lansons individually began to diverge. On April 8, 1998, Committee counsel corresponded with Salkin regarding the Committee's plan of liquidation and its provisions to compensate Norman Lanson as an officer of Baron's to ensure his cooperation and joinder in the plan. See Ex. 57. Salkin testified that during plan negotiations, the Lansons claimed an interest in a life insurance policy and an automobile, both of which were assets scheduled by the Debtor. In addition, the Committee questioned the ownership of an unscheduled annuity naming Norman Lanson as the annuitant. Salkin testified that it was at this point that she perceived that a conflict had arisen between the estate and the Lansons. Salkin further testified that she advised the Lansons to obtain personal counsel during a March 27, 1998 office conference. Salkin's time record entry for April 16, 1998 indicates that Salkin had a telephone conference with Meryl Lanson in which, among other things, she " again advised of need to obtain personal counsel." See Ex. HHH, Bates Stamp No. SS023854 (emphasis added). The earliest evidence of the Lansons having actually retained personal counsel is Kopelowitz' April 23 Letter to Committee counsel. Thus, the Court concludes that when the Lansons' interests were no longer aligned with the estate they were advised to retain personal counsel and they in fact did retain personal counsel, first Kopelowitz and later Osherow. It was reasonable for Salkin to assume that these attorneys were representing the Lansons personally. The Court notes that both Kopelowitz and Osherow participated in plan negotiations on the Lansons' behalf, and that Osherow — not Salkin — concluded the negotiations of the final contested issues between the Lansons and the Committee, resulting in the filing and confirmation of a consensual plan. See Exs. EEE, FFF.
The Lansons cite correspondence by Salkin in connection with plan negotiations in which Salkin discussed, or even advocated, favorable treatment or benefits for the Lansons. See, e.g., Exs. 56, 61. The Court finds that such negotiations are not unusual for Chapter 11 debtor's counsel in their efforts to forge consensus among multiple interest groups as to the allocation of a debtor's limited resources. It is common for debtor's counsel, during the course of plan negotiations, to argue for the plan treatment of various constituencies, including equity and management.
The Lansons asserted that they still relied on Salkin for personal advice after they retained personal counsel. Counsel for the Lansons cite The Florida Bar v. Beach, 65 So.2d 106, 109 (Fla. 1996) for the proposition that the subjective belief of the client is dispositive of whether an attorney-client relationship exists. However the Beach court qualified this statement by noting that the "subjective belief must be a reasonable one." Id. (citations omitted). The Court finds that the Lansons' reliance on Salkin for personal advise after they retained personal counsel was not reasonable.
The Court is not without sympathy for the Lansons who have clearly suffered losses, emotionally and financially, first with the embezzlement and then with the bankruptcy and liquidation of Baron's. Salkin can be criticized for not engaging in the type of defensive letter writing that all attorneys should undertake when representing a closely held debtor company. Salkin was also sloppy in not proof reading the Special Counsel Retention Motions and proposed Special Counsel Retention Orders. While Salkin could have done some things better, there is absolutely no evidence that Salkin intended to perpetrate a fraud upon the Court. In summary, the Court finds that Salkin did not perpetrate a fraud on the Court in connection with her disclosures to the Court.
CONCLUSION
The Court has thoroughly considered the extensive evidentiary record in this case, including three full days of live testimony. The Movants' claims of fraud on the Court rest upon an interpretation of a few erroneously drawn documents. These documents did not deceive the Court, nor were they drafted or filed with such intent.
The Court expressly finds that there was no evidence that the Attorneys perpetrated a fraud on this Court, or intended, at any time, to do so. The entry of this order moots the necessity of a further hearing on the issue of remedy, and concludes the matter for which the case was reopened. The Court will enter a separate order closing this case.
ORDER
The Court, having heard the testimony of the witnesses, having reviewed the evidence, the record in this case, the applicable law, the submissions of the parties, and being otherwise fully advised in the premises, does hereby:
ORDER AND ADJUDGE that Ronald C. Kopplow, Esq., Kopplow Flynn, P.A., Marc Cooper, Esq., Cooper Wolfe, P.A., Sonya Salkin, Esq., and Malnik Salkin, P.A., did not perpetrate a fraud upon this Court in connection with their applications to be retained as special counsel or general counsel in the Baron's bankruptcy case.
ORDERED