Solomon v. Riverview Finance Co. (In re Kitchen Fare Food Service, Inc.)

70 B.R. 501, 1987 Bankr. LEXIS 240
CourtDistrict Court, E.D. Michigan
DecidedFebruary 26, 1987
DocketBankruptcy No. 84-04346-R; Adv. No. 85-0202-R
StatusPublished
Cited by1 cases

This text of 70 B.R. 501 (Solomon v. Riverview Finance Co. (In re Kitchen Fare Food Service, Inc.)) is published on Counsel Stack Legal Research, covering District Court, E.D. Michigan primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Solomon v. Riverview Finance Co. (In re Kitchen Fare Food Service, Inc.), 70 B.R. 501, 1987 Bankr. LEXIS 240 (E.D. Mich. 1987).

Opinion

ORDER DENYING MOTION FOR SANCTIONS

STEVEN W. RHODES, Bankruptcy Judge:

The defendant, Riverview Finance Company, seeks sanctions against the trustee, Shelia Solomon, and her attorney, Kenneth Schneider, for alleged violations of Rule 11 of the Federal Rules of Civil Procedure.1 Specifically, Riverview contends that three pleadings were filed in this adversary proceeding in violation of Rule 11 — the complaint, the first amended complaint, and the trial brief, in that Solomon and Schneider did not conduct an adequate pre-filing investigation and the pleadings were not well grounded in fact. Solomon and Schneider deny any violation of Rule 11.

The complaint was filed on February 26, 1986, alleging that Riverview had accepted conveyances of the property of Kitchen Fare, the debtor, from co-defendant Kate Kovacevic, the debtor’s principal. On July 29, 1985, the first amended complaint was filed, alleging that over a substantial period of time, Riverview had failed to pay Kitchen Fare in full pursuant to their agreement under which Riverview purchased retail installment sales contracts from Kitchen Fare. It was further alleged that Riverview had commingled and failed [502]*502to account for Kitchen Fare’s funds, had exercised such control over Kitchen Fare that its distinct corporate identity was disregarded, and that Riverview fraudulently used Kitchen Fare’s money to pay off the debts of Kovacevic and her previous business, Suburban Food Service, Inc., without consideration.

The trial brief filed on January 16, 1986, at the start of trial indicated more specifically that Riverview owed approximately $1,000,000 for “dealer reserve” funds and approximately $55,000 for a “second half” account, and that Riverview had borrowed from Henry Rabier but used the Kitchen Fare’s money to repay the loans.

The non-jury trial ended after three weeks when the Court granted Riverview’s Rule 41(b) motion to dismiss at the close of the plaintiff’s case. The primary basis for this decision was the Court’s conclusion that Kate Kovacevic, upon whom Solomon and Schneider relied to establish the allegations as to nature of the arrangement between Riverview and Kitchen Fare, lacked credibility.

The present motion followed.

II.

A.

Riverview contends that several witnesses available to Solomon and Schneider were not contacted prior to making the allegations that were eventually dismissed. These include Jack Boland, Kitchen Fare’s accountant, Robert Piraino, Kitchen Fare’s attorney, Diane Janes, Kitchen Fare's bookkeeper, Louis Demás, Kovacevic’s attorney when she operated Suburban Food Services, and other unbiased witnesses. Thus, Riverview contends that Solomon and Schneider relied too heavily on the evidence provided by Kovacevic and two biased creditors, George Zaratzian and Henry Raiber. Riverview further contends that Solomon and Schneider failed to adequately investigate the evidence available through its own employees, who would have established Kovacevic’s lack of credibility. Finally, Riverview attacks Solomon’s failure to do any of her own investigation, or even to read the complaint, before it was filed.

B.

Schneider testified that he examined Kate Kovacevic pursuant to Rule 2004 of the Bankruptcy Rules, and the information he obtained in that examination formed the basis of his claims at trial. He further testified that he had previously represented George Zaratzian, and was familiar with the relationship between Riverview and Kitchen Fare. During the period before the complaint was filed, he contacted Mur-dock Herzog, who was then Riverview’s attorney, and they had several conversations about the claim. However, he was unable to resolve the matter or get a satisfactory explanation. He also talked with Dale Riggar, who was Kate Kovacevic’s son and who was involved in Kitchen Fare.

Schneider testified that he was persuaded of Kate Kovacevic’s credibility by the lack of any accounting from Riverview or segregation of funds by it, and because Riverview had written checks to itself on Kitchen Fare’s accounts. Moreover, two creditors (Zaratzian and Fuller) had confirmed the control over Kitchen Fare exercised by Robert Fisher, Riverview’s president. Prior to filing the amended complaint, Schneider was able to recover and review Kitchen Fare’s records, and hired a bookkeeper to help establish the various claims.

Finally he testified that after he filed the first amended complaint, Riverview’s new counsel severely hampered his effort to obtain discovery from Riverview to prepare for trial. Just prior to trial, the bookkeeper he hired reported to him that Riverview owed Kitchen Fare over $1,000,000. In his view, the loan office accounting reports, when they were finally obtained from Riv-erview, conclusively established that the 10% discount charged to Kitchen Fare by Riverview was actually a dealer reserve, not a discount, and therefore the trustee was entitled to recover it.

III.

Rule 11, Federal Rules of Civil Procedure, provides in pertinent part:

[503]*503Every pleading, motion, and other paper of a party represented by an attorney shall be signed by at least one attorney of record in his individual name, whose address shall be stated.... The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion, or other paper; that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.... If a pleading, motion, or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleading, motion, or other paper, including a reasonable attorney’s fee.

In construing this rule, the Court in Mohammed v. Union Carbide Corp., 606 F.Supp. 252, 260-61 (E.D.Mich.1985) indicated:

One of the important additions to the amended rule is the requirement that an attorney make “reasonable inquiry” into the operative facts and relevant law before signing his name to a pleading, motion or other party, which signature constitutes his certificate that the paper is “well-grounded in fact and is warranted by existing law or a good faith argument for the extension of existing law.” Unlike the subjective good faith of an attorney, “reasonable inquiry” is an empirically verifiable fact or event, inasmuch as the court can examine the efforts undertaken by the attorney to investigate her claim prior to filing suit. The focus of such an inquiry is upon events that can be observed and verified to some extent: what ■ the attorney learned from his client, what efforts he undertook to corroborate the client’s account, and so on.

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70 B.R. 501, 1987 Bankr. LEXIS 240, Counsel Stack Legal Research, https://law.counselstack.com/opinion/solomon-v-riverview-finance-co-in-re-kitchen-fare-food-service-inc-mied-1987.