AMC Computer Corp. v Geron

[*1] AMC Computer Corp. v Geron 2006 NY Slip Op 50361(U) [11 Misc 3d 1062(A)] Decided on March 14, 2006 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 14, 2006
Supreme Court, New York County

AMC Computer Corporation, Assignor,

against

Yann Geron, Assignee.



510002/05

Bernard J. Fried, J.

This dispute is one of several lawsuits arising from the insolvency of AMC Computer Corp. ("AMC"). At issue are a petition to remove the assignee of AMC and a petition by the assignee to resign. For the reasons that follow, the petition to remove the assignee is denied, and the petition by the assignee is granted in part and denied in part.

In May 2005, pursuant to a seldom-invoked section of the New York Debtor and Creditor Law, the Board of Directors of AMC assigned its assets to Yann Geron as assignee for the benefit of all the creditors of AMC. (Debt. Cred. Law, Art. 2.) Geron is an attorney licensed to practice in New York and a partner at the firm of Fox Rothschild LLP ("Fox").

Under Article 2, an assignee for the benefit of creditors takes title to a debtor's estate as trustee for all the creditors. All that the assignor owns after its assignment is completed is the right to a refund of whatever remains after the creditors have been satisfied. The court supervises the assignee and orders distribution of the settled estate to the creditors. (City of New York v. U.S., 283 F.2d 829, 831-32 [2d Cir. 1960] (citations omitted).)

In this case, although AMC has multiple creditors, the parties seem to agree that most or all of AMC's assets are subject to liens by Eugenia VI Venture Holdings, Ltd. ("Eugenia"). Eugenia has initiated several lawsuits in its effort to recover money it claims to be owed from the remaining assets of AMC.

On July 14, 2005, Justice John E.H. Stackhouse signed a Stipulation and Order ("July 2005 Order"), recognizing that Eugenia has a "valid, enforceable, duly-perfected lien" against AMC's assets (its "collateral") and providing that Eugenia had to "carve-out" from its collateral "up to $125,000" to pay Geron's administrative expenses and commissions. (July 2005 Order ¶ 4.) According to the July 2005 Order, the assignee "shall submit" a weekly accounting report to Eugenia, remitting to Eugenia the full amount collected on behalf of the estate during the previous week, with the exception of anticipated commission, expenses, and fees, which may not exceed $125,000. (Id. ¶ 6.) This carve-out or "fee cap" is "without prejudice to the parties' right to consent to an increase of the cap," (id. ¶ 4), subject to "application to, and approval by, this [*2]Court," (id. ¶ 6). The July 2005 Order provides that it "cannot be amended or modified except by a writing executed by all the parties and approved by the Court." (Id. ¶ 17.)

In a letter dated August 3, 2005, Geron provided Eugenia with a detailed budget of his estate administration expenses and asked Eugenia to agree to an increase in the $125,000 fee cap to accommodate the anticipated future expenses. In the letter, Geron informed Eugenia that he intended to maintain a reserve of at least $300,000 in the estate bank account to accommodate those expenses. The letter contained a signature block at the bottom of the last page for Eugenia to sign, indicating its consent. It is undisputed that Eugenia did not sign the letter or otherwise indicate its agreement with his request.

Nevertheless, Geron continued working as assignee. Between July 2005 and the present, Geron reports that he has collected about $2,590,000 from outstanding accounts receivable owed to AMC and from the sale of AMC's tangible assets. It is undisputed that he transferred about $2,150,000 to Eugenia in three separate payments: $900,000 on August 9, 2005, $499,000 on September 12, 2005, $752,000 on January 9, 2006. Currently, the estate bank account contains about $350,000. Since August 2005, Geron has maintained a reserve of at least $300,000 to $400,000 in funds not disbursed to Eugenia in the estate bank account.

Geron did not seek or obtain further authorization by the Court to continue to accrue expenses and fees in excess of the fee cap or to hire his own law firm, Fox, as counsel in connection with this assignment. According to Geron, he has incurred about $243,000 in legal fees and costs in connection with the estate administration, and $110,000 in administrative costs, as of January 12, 2006. Since August 2005, Eugenia has continued to ask Geron to participate on behalf of the estate in the litigations it had commenced against AMC's former directors and officers, and it has received substantial benefits from his services.

This case was reassigned to the Commercial Division.

On November 10, 2005, Surinder Chabra, the largest shareholder and a creditor of AMC, filed a petition (Motion Seq. No. 5) seeking (1) the removal of Geron as assignee pursuant to Debt. Cred. Law, Art. 2, § 8, or (2) an order determining Geron's obligations and awarding Surinder Chabra a $328,253 judgment against AMC's estate with interest from July 15, 2005. Geron cross-moved for attorneys' fees and costs.

On January 12, 2006, Geron filed an Order to Show Cause petition (Motion Seq. No. 6) seeking an order (1) discharging Geron as the assignee, (2) transferring Geron's records and accounts receivable to Eugenia (other than a $125,000 reserve to pay transfer costs and potential estate tax liabilities), (3) approving Geron's report and estate accounting, and (4) authorizing Geron to pay his counsel and his commissions using Eugenia's collateral. Attached to his petition, Geron submitted a report of estate receipts and disbursements as of January 9, 2006.

Response briefs in limited opposition were filed (a) by Eugenia, (b) jointly by Surinder Chabra, Narinder Chabra, and Parvinder Chabra ("the Chabras"), and (c) jointly by several shareholders of AMC (AMC Investors, LLC and AMC Investors II, LLC) and creditors of AMC (Maplewood Equity Partners, L.P., Maplewood Equity Partners (Offshore) Ltd., and Maplewood Partners, L.P.) (jointly the "Investors"). Geron's requests (1) and (3) are unopposed. To the extent that requests (2) and (4) are disputed, the parties dispute whether a successor assignee should be appointed to replace Geron, and whether Geron should receive additional commissions and counsel fees and keep a $125,000 reserve. [*3]

For the reasons that follow, Surinder Chabra's petition is denied, and Geron's petition is granted in part and denied in part.

I. The Powers of the Court Under Debtor and Creditor Law, Article 2

Under Article 2 of the Debtor and Creditor Law, a court has broad equitable powers to supervise the administration of an estate held by an assignor for the benefit of creditors. (In re Gen. Assignment for Benefit of Creditors of Vogue Pleating & Embroidery Co., 11 AD2d 358, 360, 206 NYS2d 334 [1st Dept. 1960].) Section 20 provides: Any proceeding under this article shall be deemed for all purposes, including review by appeal or otherwise, to be a proceeding had in the court as a court of general jurisdiction, and the court shall have full jurisdiction to do all and every act relating to the assigned estate, the assignees, assignors and creditors.

(Debt. Cred. Law, Art. 2, § 20.)

Section 15 enumerates the court's broad powers of supervision. As relevant to these proceedings, a court may "authorize the business of assignor to be conducted for limited periods by assignee, if necessary in the best interests of the estate, and allow additional compensation for such services." (Id. § 15(2) [emphasis added].) A court may also "require the assignee to render and file a final account of his proceedings, and to enforce the same in the manner provided by law for compelling an executor or administrator to comply with a surrogate's order for an account." (Id. § 15(10).) Finally, the court may "adjourn the proceedings from time to time, grant further orders if necessary, and amend the petition and proceedings thereon before decree in furtherance of justice." (Id. § 15(15).)

In addition, section 8 provides: The judge... may..., at any time,... on petition of the assignee himself, showing sufficient reason therefor, and after due notice of not less than five days to the assignor, assignee, surety and such other person as the judge may prescribe, remove or discharge the assignee, and appoint one or more in his place, and order an accounting of the assignee so removed or discharged.

(Id. § 8.)

Furthermore, the "actual and necessary expenses incurred by the assignee in the administration of the estate," if approved, "shall be paid out of the estate." (Id. § 21.) The court "may in its discretion award reasonable counsel fees and costs, determine which party shall pay the same, and make all necessary rules to govern the practice under this article." (Id.) "The assignee... shall receive for his... services a commission of not to exceed five per centum on the whole sum which will have come into his... hands." (Id.) Moreover, "[t]he judge may... require further security to be given whenever, in his judgment, the security afforded by the bond on file is not adequate." (Id. § 7.)

Notwithstanding the plain language of paragraph 17 of the July 2005 Order, which provides that the July 2005 Order "cannot be amended or modified except by a writing executed [*4]by all the parties and approved by the Court," it cannot limit the plenary powers of this Court to supervise this assignment, which conferred by Article 2.

II.Geron's Petition for an Order to Show Cause

A. Geron's request to be discharged as assignee

Geron requests that he be discharged as assignee of the estate, pursuant to section 8, which permits me to discharge an assignee upon a petition showing sufficient reason therefor and due notice to all interested parties.

Geron has given due notice to AMC and its creditors of his intention to seek to be discharged. Geron's request to be discharged as assignee is unopposed by Eugenia and the Investors. Surinder Chabra has filed a petition seeking to remove Geron as assignee. Based on Eugenia's limited opposition brief, which opposes further compensation for Geron, it is apparent that Eugenia does not have confidence in his ability to continue to act as assignee. Geron contends that he is unable to continue his work effectively, because Eugenia refuses to provide him with accurate accountings.

On this record, I find sufficient reason to discharge Geron as assignee under section 8.

B.Geron's request for payment of counsel fees and costs and commissions out of Eugenia's collateral

The broad equitable authority vested in a court under sections 15 and 20 includes the power to determine the compensation that will adequately compensate the assignee for his actual and necessary costs in administering the estate. (See id. § 15[2] [court may "authorize the business of assignor to be conducted for limited periods by assignee, if necessary in the best interests of the estate, and allow additional compensation for such services"] [emphasis added].) Consequently, I have the statutory authority to modify the July 2005 Order regarding the assignee's compensation for his services, if necessary in the best interests of the estate.

Geron contends that Eugenia's acquiescence in his expenditures after receipt of the August 2005 letter and budget, and its request that he participate in its litigations, although it knew that Geron had already exceeded the carve-out cap, constitute implied assent to his request for an increase in the fee cap.

Geron asks that he be compensated for Fox's legal fees and costs, totaling about $243,000, and that he be paid about $130,000 in commissions, representing 5% of the amounts he collected on behalf of the estate. Geron also asks that he be permitted to retain a reserve of $125,000 to indemnify himself against the costs of transferring his records and accounts receivable and against possible estate tax liabilities.

Eugenia maintains that Geron's holding of funds in excess of the $125,000 fee cap for [*5]several months violated the July 2005 Order. Eugenia further maintains that because Eugenia did not consent to an increase of the fee cap, Geron may not be compensated for his work as assignor for benefit of creditors beyond $125,000. The Investors have no objection to Geron's request for fees in excess of the fee cap. Eugenia further contends that its interest in AMC's assets is superior to any interest of Geron, and that without its consent, Geron has no right to use the assets, hold them, or have any of his costs and expenses paid from them.

Although the July 2005 Order specifically permits the assignee "in his discretion, [to] submit interim applications to this Court for payment of the Administrative Expenses from the Estate Bank Account," ¶ 10, Geron never sought court authorization for additional funds beyond $125,000. Therefore, he has no legal cause of action to force Eugenia to pay him in excess of that amount.

Nevertheless, between August 2005 and the present, Geron has collected funds on behalf of the estate, and it is not questioned that he transferred about $2,150,000 to Eugenia. Eugenia was on notice that he was working to collect these funds, it accepted the fund transfers, and it was on notice that Geron's expenses exceeded $125,000 and were continuing to increase.

Notwithstanding Eugenia's interest in AMC's assets, this Court has the statutory authority to order payment of the "actual and necessary expenses incurred by the assignee in the administration of the estate," as well as reasonable counsel fees and costs, and a commission to the assignee, out of the assets of the estate. (Debt. Cred. Law, Art. 2, § 21. See also id. § 15[2] [court may allow additional compensation for the assignee, if necessary in the best interests of the estate].)

It seems unconscionable for Eugenia to retain the benefits of the assignee's services, while at the same time refusing to compensate him for the actual and necessary additional expenses that these services required. Consequently, I find that it would be unjust to allow the estate to receive the substantial benefit of Geron's additional work as assignee without providing him with additional compensation. Therefore, I consider Geron's request for commissions, counsel fees, and an additional $125,000 reserve in the nature of a request for the quantum meruit value of his services on behalf of the creditors of AMC.

I will further refer to a Special Referee the limited question of what commissions, counsel fees, and reserve funds are actual and necessary to compensate Geron for the value of his additional services as assignee, for his costs to transfer documents to his successor, and to protect him against potential estate tax liabilities, pursuant to C.P.L.R. § 4317(b). The Referee shall consult the guidelines for determining awards of commissions and counsel fees as discussed in Matter of South Shore Tobacco & Candy Co., (541 NYS2d 155, 158-60 {143 Misc 2d 992} [Nassau Co. Ct. 1989] [Ain, J.], aff'd, 567 NYS2d 198 {148 Misc 2d 274} [App. Term 1990]) and the decisions cited therein.

C.Appointment of a successor assignee

Although Geron, pursuant to his request, is discharged as assignee, the assignment for the benefit of the creditors of AMC has not ended. Pursuant to section 8, a successor assignee must be appointed to administer the remaining accounts receivable in the estate, amounting to approximately $350,000. Therefore, I reject Eugenia's request that, as a creditor, it be permitted [*6]to "step into the shoes" of AMC and control all of AMC's rights in its assets. Rather, pursuant to section 8, I will appoint a successor assignee in place of Geron.

To that end, if Eugenia, the Investors, and the Chabras can agree upon the name of the successor assignee, they may submit a single name for approval, within ten days of the entry of this Memorandum and Order. If they are unable to agree, within ten days of the entry of this Memorandum and Order, they shall submit a list of ten names from the database of New York State fiduciaries compiled by, and available from, the New York Supreme Court, Civil Division Guardianship and Fiduciary Support Office, at https://iapps.courts.state.ny.us/fiduciary/jsp/ home.html, from which a successor assignee will be selected. If they do not submit such a list within ten days of the entry of this Memorandum and Order, I will select a successor assignee on my own.

The Investors ask that the successor assignee administer the remaining assets, which should continue to be held in reserve, on behalf of the estate. I agree that these assets should continue to be held in reserve, at least pending the report and recommendation of the Special Referee.

Within ten days of the appointment of the successor assignee, the parties shall jointly submit a proposed stipulation and order modifying the July 2005 Order to reflect this Order. If the parties are unable to agree on the language of the proposed stipulation and order, they shall submit individual proposals to the Court by that date.

The proposed stipulation and order shall provide for all actual and necessary funds to the successor assignee to carry out its duties. If a dispute subsequently arises, the successor assignee may seek relief in this Court.

D.Geron's request for approval of his report and estate accounting and transfer of records to Eugenia

Geron also requests approval of his report and estate accounting, which he includes as part of his petition. Attached to his petition, Geron also submitted a report of estate receipts and disbursements as of January 9, 2006. Inasmuch as Eugenia, the Investors, and the Chabras have not opposed Geron's request for approval, I am satisfied that Geron's report and estate accounting are acceptable.

Geron proposes that if his request to be discharged is granted, he will provide a further report detailing the status of all accounts receivable to Eugenia, as well as any documents relating to the accounts. The Investors oppose this request, because they contend that the report and documents should be transferred to the successor assignee. I agree.

Geron shall provide a report detailing the status of all accounts receivable for his successor assignee, with copies sent to Eugenia, the Investors, and the Chabras, and he shall transfer any records and documents relating to the accounts receivable to his successor assignee. His report shall also account for the bond, if any, filed by Geron in the clerk's office, in accordance with Debt. Cred. Law, Art. 2, § 6.

III.Surinder Chabra's Petition for Reimbursement of Employee Wages [*7]

In support of his request for a judgment against AMC's estate, Surinder Chabra states that he personally paid $328,253 to the employees of AMC in payment of wages that they earned but had not been paid by AMC. At oral argument on a preliminary injunction motion in a separate federal litigation between Eugenia and Petitioner, Judge Denny Chin ordered that $350,000 of Eugenia's customer receipts must be held in escrow, "leaving open th[e] possibility" that this money would be ordered to be paid out to AMC's former employees. (July 28, 2005 Order Show Cause Hrg. Trans. 23, Eugenia VI Venture Holdings, Ltd. v. Chabra, Civ. No. 05-5277 [S.D.NY].)

Judge Chin, however, stated that he did not reach the issue of whether Eugenia or anyone else was responsible for paying the employees that money; he expressly left that issue to be resolved "later." (Id. at 25.) When Petitioner suggested that he himself might pay the employees that money, Eugenia's counsel did not object to Petitioner's "step[ping] into the shoes of the employees for purposes of being able to make a request that he be reimbursed if the Court were to determine that the employees should have been paid. (Id. at 23-26 [emphasis added].) While Petitioner argues that he is entitled to be reimbursed the money he paid AMC's former employees from AMC's estate, because the Court did not determine that the employees should have been paid, it is evident that Petitioner's argument is premature.[FN1]

Thus, Surinder Chabra's petition is denied.

Accordingly, in accordance with the foregoing opinion, it is hereby ORDERED that:

(1)Geron's unopposed request to be discharged as assignee is granted, pursuant to Debt. Cred. Law, Art. 2, § 8: Geron shall provide a report detailing the status of all accounts receivable to his successor assignee, with copies to Eugenia, the Investors, and the Chabras, and he shall transfer any documents relating to the accounts to the successor assignee.

(2)Within ten days of the entry of this Memorandum and Order, Eugenia, the Investors, and the Chabras shall submit the name of a proposed successor assignee for approval. If they are unable to agree, within ten days of the entry of this Memorandum and Order, they shall jointly submit a list of ten names from the database of New York State fiduciaries compiled by, and available from, the New York Supreme Court, Civil Division Guardianship and Fiduciary Support Office, at https://iapps.courts.state.ny.us/fiduciary/ jsp/home.html.

(3)Chabra's request for a $328,253 judgment against AMC's estate with interest from July 15, 2005 is denied, and the remainder of his petition is denied as moot.

(4)Geron's cross-motion for attorneys' fees and costs is denied.

(5)Within ten days of the appointment of the successor assignee, the parties shall jointly submit a proposed stipulation and order modifying the July 2005 Order to [*8]reflect this Order. If the parties are unable to agree on the language of the proposed stipulation and order, they shall submit individual proposals to the Court by that date.

(6)The limited question of what commissions, counsel fees, and reserve funds are actual and necessary to pay Geron for the value of his services as assignee is hereby referred to a Special Referee to hear and report with recommendations, pursuant to Matter of South Shore Tobacco & Candy Co., (541 NYS2d 155, 158-60 {143 Misc 2d 992} [Nassau Co. Ct. 1989], [Ain, J.], aff'd, 567 NYS2d 198 {148 Misc 2d 274} [App. Term 1990]) and the decisions cited therein, except that, in the event of and upon the filing of a stipulation of the parties, as permitted by C.P.L.R. § 4317(b), the Special Referee, or another person designated by the parties to serve as referee, shall determine the aforesaid issue; and it is further ORDERED that this motion is held in abeyance pending receipt of the report and recommendations of the Special Referee and a motion pursuant to C.P.L.R. § 4403 or receipt of the determination of the Special Referee or the designated referee; and it is furtherORDERED that a copy of this order with notice of entry shall be served on the Special Referee Clerk (Room 119) to arrange a date for the reference to a Special Referee.

Dated: March 14, 2006

__________________________

J.S.C. Footnotes

Footnote 1:Moreover, it is unclear whether Petitioner has standing even to raise this issue in this Court. For the same reason, I dismiss the Chabras' request that $350,000 from Eugenia's collateral be deposited in the Clerk's office, rather than transferred to Eugenia.