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In re Segal

United States District Court, Eastern District of Pennsylvania

March 20, 2014

IN THE MATTER OF STANLEY J. SEGAL, Appellant,
v.
ROBERT H. HOLBER, TRUSTEE FOR STANLEY J. SEGAL Appellee. Bankruptcy No. 10-16822

MEMORANDUM

Juan R. Sánchez, J.

Debtor-Appellant Stanley J. Segal (Debtor), appeals from an April 3, 2013, order of the United States Bankruptcy Court for the Eastern District of Pennsylvania (Order) granting the application of Robert H. Holber, the trustee of Segal’s Chapter 7 bankruptcy estate (Trustee), to employ the law firm Haviland Hughes as special litigation counsel to the Trustee in the underlying bankruptcy proceedings (Application). The Debtor argues the bankruptcy court erred in granting the Application for three reasons: (1) there was no legitimate underlying basis for appointing special counsel in the first place; (2) the engagement of counsel will cause excessive payment for services and create an unnecessary expense; and (3) appointed counsel has a conflict of interest with respect to the matters for which it was employed. In response, the Trustee refutes each of the Debtor’s arguments on the merits, but also maintains this Court should not reach these questions because it lacks appellate jurisdiction. For the following reasons, this Court concludes the Order is interlocutory, and declines to exercise its discretionary jurisdiction to hear an interlocutory appeal. The appeal will therefore be dismissed for lack of jurisdiction.

FACTS

On August 13, 2010, the Debtor filed a voluntary Chapter 7 bankruptcy petition. The schedules accompanying the petition disclosed the Debtor’s assets and liabilities, including the right to collect payments under a consulting agreement (Consulting Agreement or Agreement). On Schedule B, which lists personal property, the Debtor characterized the possibility of collecting monies owed under the Consulting Agreement as “doubtful, ” and listed the value of the asset as “unknown.” Ex. 6 (Schedule B to Bankr. Pet.).[1] He also listed the same asset—any remaining equity resulting from collection of monies owed under the Consulting Agreement—as exempt from the property of the estate pursuant to 11 U.S.C. § 522(d)(5). Id. (Schedule C to Bankr. Pet.).

On April 1, 2011, the Trustee filed objections to the exemptions claimed by the Debtor on Schedule C, including the exemption for any remaining equity resulting from the collection of monies owed under the Consulting Agreement. After negotiations, the parties entered into a Stipulation and Consent Order that was approved by the bankruptcy court on May 3, 2011. Pursuant to the stipulation, the Trustee and the Debtor agreed the Debtor’s claimed exemption for the Consulting Agreement was limited to $410, the remaining amount available to the Debtor under § 522(d)(5). The stipulation further provided that if the Debtor sought to argue any monies allegedly owed under the Consulting Agreement were wages, the Trustee “shall have the right to file any further pleading in the [bankruptcy court] contesting such right of the Debtor to receive such Consulting Agreement payments.” Ex. 9 ¶ 4(c) (Stipulation and Consent Order).

The Consulting Agreement arose out of the sale of a long-term care facility (Ashton Hall) by a company in which the Debtor was a principal shareholder. In the Agreement, executed on April 25, 2008, the purchasers of Ashton Hall—Green Lion Group, LLC, and Capital Family Partners, LLC—agreed to pay the Debtor $1.9 million over ten years for his consulting services associated with the management of the facility. The Consulting Agreement also included a payment schedule. Two $250, 000 dollar payments were to be made on May 28, 2008, and June 28, 2008, and the remaining $1.4 million was to be distributed via quarterly payments beginning on June 1, 2010. Eliezer Friedman and Naftali Weinberger signed the Agreement as guarantors.

The Debtor filed his bankruptcy petition shortly after a company called Reliant Healthcare Management (Reliant) obtained a jury verdict against him on July 27, 2010, in the Philadelphia Court of Common Pleas, which resulted in a $1, 829, 260 judgment. The jury found the Debtor conspired with others, including Weinberger and Friedman, to tortiously interfere with a management contract between Reliant and Ashton Hall. The complaint in that action, filed on January 25, 2008, alleged the Debtor and his coconspirators interfered with and terminated Reliant’s contract with Ashton Hall because the sale of Ashton Hall required termination of the contract with Reliant.

On December 23, 2010, acting as the Debtor’s primary creditor in the Chapter 7 proceedings, Reliant filed a motion for an examination of the Debtor under Federal Rule of Bankruptcy Procedure 2004, seeking to explore the Debtor’s involvement in the fraudulent concealment of assets through the Consulting Agreement and other transactions associated with the Ashton Hall sale. The bankruptcy court granted Reliant’s motion for the Rule 2004 Exam, which was held on March 10, 2011. During the examination, Reliant, then represented by attorney Mark L. Rhoades (currently of Haviland Hughes), questioned the Debtor extensively regarding his personal property and any rights he may have had under the Consulting Agreement. The Debtor testified the sale of Ashton Hall was valued at $8.45 million. Ex. 24 (Rule 2004 Examination Tr. at 123). When the sale closed on April 27, 2008, the Debtor received nothing. He believed at the time that the only money he would realize from the sale was through the Consulting Agreement. Although the Debtor may have received one of the first two $250, 000 payments under the Agreement, none of the subsequent quarterly payments scheduled to begin on June 1, 2010, were made, and the Debtor believed the Consulting Agreement had been terminated. Id. (Rule 2004 Examination Tr. at 61-62, 154, 160). The Debtor also stated he did not intend to pursue litigation to recover any monies owed under the Consulting Agreement because he did not have the money to fund a lawsuit. Id. (Rule 2004 Examination Tr. at 166-67).

On January 16, 2012, the Trustee issued a report of no distribution, stating the Debtor had “no property available for distribution over and above that exempted by law.” See Docket of Bankr. No. 10-16822. The Trustee contends the issuance of the no distribution report was based, in large part, on representations by the Debtor that any claims he had under the Consulting Agreement were without value and the Debtor did not intend to pursue those claims. By order of June 26, 2012, the bankruptcy court discharged the Debtor and closed the Chapter 7 case. Three days after receiving his discharge, the Debtor commenced an action in the Eastern District of Pennsylvania against Friedman and Weinberger for breach of contract in connection with the failure to make the payments owed under the Agreement (the Contract Action).[2]

In October 2012, the district court transferred the Contract Action to the bankruptcy court “for a determination as to whether or not the subject of the contract at issue was properly reported to said court and considered by the Trustee during the pendency of [the Debtor’s] Chapter 7 Petition.” Ex. 21. By order of February 6, 2013, the bankruptcy court reopened the Debtor’s Chapter 7 case, and directed the Office of the United States Trustee to appoint a Chapter 7 trustee.[3] The next day, Holber was reappointed to serve as the Trustee. The Trustee then sought to employ Haviland Hughes as special counsel to assist in determining whether the fees pursuant to the Consulting Agreement should be considered property of the bankruptcy estate. In opposing the Application, the Debtor argued, among other things, that the fees pursuant to the Consulting Agreement are wages that are not property of the bankruptcy estate because they were not yet earned by the Debtor or owed to the Debtor at the time he filed his bankruptcy petition. See 11 U.S.C. § 541(a)(6).

On April 3, 2013, the bankruptcy court entered the Order approving the Trustee’s Application to employ Haviland Hughes as special counsel to the Trustee in the Chapter 7 proceedings. The Order states in full:

AND NOW this 3rd day of April 2013, upon consideration of the Application of Robert H. Holber, Chapter 7 Trustee (the “Trustee”) of the bankruptcy estate of Stanley J. Segal (the “Debtor”) to employ Haviland Hughes, as special litigation counsel to the Trustee (the “Application”), in this bankruptcy case, and it and the Court being satisfied that Haviland Hughes has no interest adverse to the bankruptcy estate with respect to the matters for which it is to be employed, and further that Haviland Hughes’ retention is in the best interest of the creditors; it is hereby:
ORDERED that the Application is granted; and it is further
ORDERED that the Trustee is hereby authorized to retain and employ Haviland Hughes, as special counsel to the Trustee in the within proceeding under Chapter 7 of the ...

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