Menu    7 ABR 275 

UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF ALASKA

In re:


GARY KING, INC.,


                      Debtor. 

                                                                   

Case No. A99-01135-DMD                       Chapter 11

 

ORDER GRANTING MOTION TO COMPEL DISGORGEMENT,

IN PART, REQUIRING PAYMENT FOR RAFT INVENTORY,

DENYING MOTION TO COMPEL ACCOUNTING,

DENYING REQUEST FOR ATTORNEY’S FEES,

APPROVING FINAL ACCOUNT SUBJECT TO CERTAIN

EXCEPTIONS AND REQUIRING TRANSFER OF ALL

CORPORATE FUNDS TO STEVEN HARTUNG



     Michael and Tim King's motions to compel disgorgement from James King, to hold debtor in contempt and to compel accounting as well as the debtor’s motion for approval of final accounting duly came before the court for hearing on April 12, 2002. Spencer Sneed appeared for the debtor. John Siemers appeared for James King. Cabot Christianson appeared for Michael and Tim King. After hearing the evidence and reviewing the memoranda of the parties, IT IS ORDERED:


     1.    Michael and Tim King’s motion for disgorgement is granted. James A. King shall immediately pay to the bankruptcy estate the sum of $37,500.00, representing unauthorized payments received from February 1, 2001, through February 2, 2002. Additionally, Mr. King shall reimburse the estate for $1,730.00 in unauthorized severance pay taken in December of 2000. Mike and Tim King’s request for disgorgement of payments made to James King’s secured claim of $30,900.00 is denied without prejudice to the filing of an appropriate adversary action.


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     2.    James A. King shall pay the sum of $12,826.00 to the bankruptcy estate, representing the cost of the inflatable raft inventory taken from the store by Mr. King without authorization and placed in an individual storage compartment.


     3.   Michael and Tim King’s motion to hold debtor in contempt and compel accounting will be denied. Michael and Tim King’s request for attorney’s fees is denied without prejudice.


     4.   The debtor’s motion for approval of final accounting will be approved, except for the following exceptions and conditions. The court does not approve any of the payments made to James King after February 1, 2001, nor does it approve payment of severance pay to Mr. King. The court does not endorse or approve any of the payments made to Sunland for rent by the debtor after January of 2001. The court does not approve of the payments shown under “Adjustments to Certain Transactions” for “Unpaid balance of Jim King secured note due to interest calculations.” Under the heading, “Final unpaid liquidation costs to be Reserved,” as found on page 5 of debtor’s Exhibit “A,” the court approves reservation of the unpaid liquidation costs. By allowing such reservation of costs, however, the court does not intend to release James King from any liability to the estate. Additionally, James King shall have no role in the final bookkeeping and preparation of checks or preparation of final payroll tax returns, all of which shall be accomplished by Mr. Hartung. Nor do I approve any further disbursements to Sunland for office space.


     5.   On the court’s own motion, the debtor and James A. King shall immediately transfer all funds held by Gary King, Inc. to Steven Hartung for TOP       7 ABR 277  distribution as provided herein. Mr. Hartung shall utilize his best efforts to make a final or interim dividend to unsecured creditors as soon as possible.



Discussion


      This bankruptcy proceeding was initiated October 15, 1999, by an involuntary chapter 7 petition for relief from creditors of the debtor, a long-time Anchorage sporting goods store. The case was converted to a chapter 11 proceeding on December 30, 1999. The debtor initially proposed an operating plan of reorganization through a plan and disclosure statement filed May 31, 2000. An amended operating plan was filed August 10, 2000. The operating plans were not viable. On November 1, 2000, the debtor filed an amended disclosure statement and plan proposing a complete liquidation of the debtor’s assets during November and December of 2000, and a distribution to creditors.


      The amended disclosure statement and liquidating plan were unequivocal with regard to the liquidation and distribution that was to occur. “The Plan provides for the prompt liquidation of all of debtor’s assets and distribution of all proceeds thereof in accordance with the Bankruptcy Code and applicable non-bankruptcy law.” 1 Footnote At page 9 of the amended disclosure statement, the debtor stated:


     E.   Future Business of the Reorganized Debtor.

 

    The Reorganized Debtor will not continue in existence and will not operate or conduct its business after the Effective Date except to the extent necessary to promptly liquidate its assets and distribute the proceeds to creditors TOP       7 ABR 278  in accordance with the Plan. Debtor will then be dissolved.


 

          1.      Strategy


    The liquidation strategy is to sell as much inventory as is commercially reasonably [sic] by way of increasing discount sales through December 31, 2000, and then to sell in bulk or by auction the remaining inventory and furniture, fixtures and equipment by January 31, 2001.


          2.      Risks.

    There is virtually no risk that the assets of the Debtor will not be promptly sold and the proceeds thereof distributed in accordance with the Plan. . . . . 2 Footnote



Pages 13, 14, and 15 of Exhibit E to the amended disclosure statement all indicated that the debtor would be totally liquidated by January 14, 2001. The debtor's confirmation memorandum, filed November 27, 2000, provides, in part, as follows:


On the Effective Date, the operation of Debtor through its brief period of liquidation will become the general responsibility of the existing board of directors of Gary King, which will, thereafter, have the responsibility for the management, control, and operation of the Reorganized Gary King through the end of the liquidation, which should not exceed sixty days from the effective date of the Plan. 3 Footnote


Under the plan, the effective date was to be ten days following the order approving the disclosure statement and liquidating plan. An order confirming the liquidating TOP       7 ABR 279  plan was entered November 29, 2000. 4 Footnote Thus, the plan's effective date was December 8, 2000, and the plan should have been completed no later than February 6, 2001.


     Steven Hartung testified in support of the debtor's plan on November 27, 2000. He stated that the plan was well under way and that the projections were very conservative. He felt that the secured creditors could easily receive an additional $75,000.00 to $100,000.00 over and above the $18,000.00 initially projected. In conjunction with completion of the plan, Dorsey & Whitney and Steven Hartung submitted their final applications for allowance and payment of fees in December of 2000.


     In the course of the liquidation sale, James A. King took inflatable raft inventory with a value of $12,826.00 from Gary King, Inc. and placed it in a private storage facility. The storage unit was held in Mr. King’s name as an individual. Following the sale, Mr. King moved the items back to his office in Gary King’s store, where they remain today. He has offered to repay the estate $12,826.00, representing the cost of the rafts. The existence of the rafts and Mr. King’s misappropriation of them was not revealed through an accounting until April of 2002.


     The liquidation sale went very well, although creditors were never informed as to how well it went and they were not paid. The debtor should have had over $300,000.00 on hand for distribution to creditors. But instead of distributing these funds to creditors, James King took monthly draws from the liquidation proceeds and TOP       7 ABR 280  paid his rental costs. This prompted his brothers, Mike and Tim King, to file a motion requiring the debtor to prepare an accounting and distribute funds in October of 2001. At a hearing on October 24, 2001, the debtor was directed to file an accounting and distribution report within 30 days. The debtor partially complied but never gave a full accounting. On January 7, 2002, Mike and Tim King filed a motion to compel disgorgement from James King and to compel an accounting. On January 17, 2002, the debtor filed a motion for approval of a final accounting. Hearings on all the pending motions were delayed until April 12, 2002. The debtor’s “final accounting” was not available until just two days before the hearing.


Analysis


     Mike and Tim King seek disgorgement of $37, 500.00 paid to James King from February to November of 2001. Their motion has merit. A chapter 11 plan must disclose the identity of any insider to be employed by the reorganized debtor, and the nature of any compensation to be paid him. 5 Footnote There was no provision in the liquidating plan or the amended disclosure statement that provided James King with prolonged compensation. Mr. King, in accordance with the plan, was to promptly pay creditors and cease all further operations of the debtor after the liquidation sale was concluded. Instead, he continued his salary for ten months and paid his own secured claim in full, while accomplishing nothing of value for the estate. James King’s conduct was contrary to the provisions of the confirmed plan. The fact that the debtor’s liquidation was more successful than anticipated did not justify his TOP       7 ABR 281  actions. The excess funds realized from liquidation were to be disbursed under the terms of the plan, not utilized as a personal slush fund by a corporate insider.


      James King is not entitled to any compensation from and after February 1, 2001. Nor is he entitled to the $1,730.00 in severance pay he took in violation of this court’s order. Finally, he is not entitled to 335 hours at $100.00 an hour for services which violated the plan and accomplishing nothing of benefit for the estate. I find his current attempt to justify fees incredible. His requested fees are particularly galling given his attempt to convert $12,800.00 worth of corporate inventory to his own use.


      At the hearing on April 12, 2002, Mike and Tim requested additional relief against Jim King, in the form of disgorgement of the $30,900.00 plus interest that James King received on his secured loan to the corporation. They allege his claim should not be paid due to Mr. King’s misconduct in the case. In other words, his claim should be subordinated to all other claims and disallowed. Notice of this additional claim against James King is inadequate, as it was only raised at the April 12th, 2002 hearing. Additionally, a request for equitable subordination must be in the form of an adversary proceeding under Fed. R. Bankr. P. 7001(8). The subordination claim will be denied without prejudice at this time.


      Mike and Tim King also request that an order to show cause be issued as to why the debtor should not be held in contempt for failure to file an accounting. I do not see any point in holding the debtor in contempt at this stage of the proceeding. Imposition of fines against the debtor will only decrease the pool of funds available TOP       7 ABR 282  to unsecured creditors, who have been terribly treated as it now stands. This request will be denied.


      Mike and Tim King request attorney’s fees as well, apparently under 11 U.S.C. § 503(b)(3) and (b)(4). Notice and a hearing is required before this type of relief can be granted. They gave notice of their request for attorney’s fees on April 12, 2002, the day of the hearing. Their notice is inadequate and no motion has been filed. This request will be denied, without prejudice.


      The debtor’s final accounting is inadequate in a number of respects. It asks the court to approve payments made to James King. The payments were made without authorization or disclosure. They violated the terms of the liquidating plan and amended disclosure statement, just as the rental payments to Sunland did. The payments were fraudulent breaches of James King’s fiduciary responsibilities and cannot be approved. Finally, no future payments to James King can be approved because he owes the debtor substantial funds.


      James King cannot be trusted. His actions have amply demonstrated his inability to deal honestly and in good faith with creditors and this court. The debtor must transfer all of its remaining funds to Mr. Hartung immediately, to insure their proper disposition. Mr. Hartung must make an interim or final distribution of these funds, in accordance with the provisions of the plan, as soon as possible. He may reserve an adequate amount from such funds to pay for valid liquidation costs, including his fees and expenses incurred in making the distribution, but no further distributions shall be made to James King.


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Conclusion


      James King’s post-liquidation conduct was contrary to the interest of creditors and to his fiduciary responsibilities as defined by the plan. He must disgorge the funds he received in violation of the plan and repay them to the debtor. He must also pay the debtor for the value of the corporate inventory he misappropriated for his own use.


      Pending receipt of such payments from James King, there is no reason why the distributions contemplated by the liquidating plan should be delayed any longer. The debtor must promptly transfer all of its funds to Mr. Hartung, who shall proceed with dispatch to make the distributions to the unsecured creditors in conformance with the plan. Although Mr. Hartung may reserve adequate funds to cover valid unpaid liquidation costs, it is time that the creditors receive the dividends they were ordered to receive long ago.


      DATED: April 25, 2002.


                                                                             BY THE COURT



                                                                             DONALD MacDONALD IV

                                                                             United States Bankruptcy Judge



N O T E S:

1.  Am. Disclosure Statement with Respect to Liquidating Plan of Reorganization Proposed by Gary\ King, Inc., filed Nov. 1, 2000, at p. 3 [Docket No. 125].


2. Id. at p. 9.


3. Debtor's Confirmation Memorandum, filed Nov. 27, 2000, at p. 7 [Docket No. 134].


4. Order Approving Amended Disclosure Statement and Confirming Debtor’s Liquidating Plan, entered November 29, 2000 [Docket No. 132].


5. 11 U.S.C. § 1129(a)(5)(B) (2002).