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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
Chapter 11
No. 96-10123-CK
In Re:
V&M MANAGEMENT, INC.,
Debtor,
ALPHONSE MOURAD,
Plaintiff
v.
STEPHEN GREY, TRUSTEE,
Defendant.
OPPOSITION TO CREDITOR'S TRUSTEE' CROSS-MOTION FOR JUDGMENT ON THE PLEADINGS
Alphonse Mourad, by and through his counsel opposes the Trustee's Cross-Motion for Judgment on the Pleadings and requests that this Honorable Court deny said cross-motion. Alphonse Mourad requests all additional relief as is appropriate and just. In support thereof, Alphonse Mourad states as follows:
1. On April 12, 2000, the United States Bankruptcy Appellate Panel for the First Circuit (hereinafter "BAP") remanded for further proceedings of Alphonse Mourad's claim of trustee negligence. See BAP Order at 2. The Appeals Court, noting that Mr. Mourad's was a pro se litigant, found that "the bankruptcy court's order dismissing the motion did not resolve Mourad's claim that Grey was negligent in the performance of his duties as trustee." Id. at 5. The Appeals Court added that "Mourad's allegations provided a theory of recovery not adjudicated by the appealed order." Id. The Appeals Court expressly stated that Mourad developed his argument that his tax liability was unnecessarily increased by the Trustee's negligence. Id. at 5 n.4. There should be no dispute that Mourad has adequately alleged that the Trustee failed to apply for the low income housing tax credit on behalf of the debtor. Id. There is also no dispute that the Trustee is on notice that Mourad alleges that the Trustee sold the debtor's property at well below fair market value, e.g. without accounting for the value of the low income housing tax credit. See Id.
2. The Trustee's cross-motion simply adopts a fiction that the BAP Order does not exist. The Trustee's cross-motion, with the exception of adding a copy of a Tax Court opinion, adds nothing new. The Trustee provides no affidavit in support of his motion or any evidentiary exhibits. The Tax Court opinion, in fact, merely proves-up the harm suffered by Mr. Mourad as a result of the alleged negligence.
3. In his cross-motion, the Trustee asserts that the Plan of Reorganization (Plan) precludes Trustee liability except for acts or omissions reflecting bad faith, willful misconduct or gross negligence. While Mr. Mourad does not accept this proposition under the facts of this case, his claims pointedly allege bad faith, willful misconduct or gross negligence. As a starting point, there is no dispute that the Office of Bar Counsel concluded that the Trustee "filed two false, or at least grossly inaccurate, disclosure statements with the Bankruptcy Court." See Plaintiff's Pre-Trial Exhibit 17. In addition, there is also no dispute that the Trustee attempted to sell the debtor's multi-million dollar property for $100,000.
4. In terms of the Trustee's intent and conduct, these two facts set the tone. However, the main allegations focus on intentional and willful conduct relating to the tax issues. Mr. Mourad is clearly alleging that the Trustee, in order to enhance recovery for the creditors, appropriated shareholder rights that were separate and apart from the assets of the debtor. The Trustee, despite a clear duty to the shareholders, specifically manipulated the S Corporation status of the debtor for the purpose of (1) requiring the shareholders to bear the burden of corporate income while simultaneously (2) seeking to strip from the shareholders of the beneficial tax items. See Plaintiff's Pre-Trial Exhibit 1.
5. This issue is amplified when the Trustee's conduct relative to the low income housing tax credit is given consideration. As an initial matter, S corporation status creates certain rights and obligations in the shareholders. The rights and obligations go hand in hand and amount to a property right.
A symmetry is created placing both the tax benefits and burden on the shareholder.
6. Likewise, the Trustee is limited in authority to the assets of the debtor - not the shareholders. For instance, the Trustee possesses no right to strip the "S" shareholders of a tax credit unless he exercises authority over the stock itself. In fact, it seems clear from the facts of this case that the Trustee exercised control over the corporate stock at the time he applied for a certification for the tax credit for the ultimate benefit of the creditors. Under these circumstances, the "S" status of the corporation evaporated. See IRC งง 1362(d)(2) and 1361(b)(1)(D) (indicating termination of the "S" election where there are two classes of stock); IRC งง 1362(d)(2) and 1361(b)(2) (indicating termination of the "S" election where shares are held for the benefit of financial institutions).
7. In this light, the Trustee's intentional and wrongful acts are clear. The Trustee had an absolute duty, as the operating manager of the debtor, to seek the tax credit on behalf of the shareholders. He chose not to do this in 1995, 1996 and 1997. The facts strongly suggest that this decision was made to appropriate the tax credit for the benefit of the creditors. In this regard, it is clear that in order to qualify for the tax credit, a ten year holding period is mandatory. In this case, the shareholder-taxpayers qualified for the credit. The new purchaser, however, would not qualify unless the holding period of the taxpayers was transferred with the property. Both the Trustee and the bankruptcy judge clearly understood this issue. In fact, in order to effect this transfer, the Trustee applied for the credit on behalf of the debtor. Thus, the value of the credit as reflected in the value of the debtor's property belonged not to the debtor, but to the shareholders. See In re. Forman Enterprises, Inc., 281 B.R. 600 (2002). There is no dispute that the Trustee has broad authority over the debtor's property. There should equally be no dispute that the Trustee has no rights over the assets of the shareholder. Acts to appropriate shareholder assets are actionable and well within Mr. Mourad's claim.
8. Alphonse Mourad has adequately stated a claim that the Trustee intentionally took action which he knew would terminate the "S" status of the debtor. See discussion supra. As discussed, this action, as a matter of design, sought to squarely place the tax burden on the shareholders while reserving tax benefits for the creditors. The Trustee's strategy, however, fails given the plain text of the Internal Revenue Code which automatically terminates the "S" election under these facts. Despite the Trustee's termination of the "S" election in 1997, the Trustee filed "S" returns and issued K-1s to the shareholders. See Exhibit 1, Plaintiff's
Pretrial. The issuance of the K-1s is actionable.
9. The Trustee compounded this wrong by filing "S" returns and issuing K-1s in tax years 1998 and 1999 as well. The issuance of K-1s in 1999 is particularly egregious since the debtor corporation dissolved in 1998. Clearly, the "S" election (had it not terminated in 1997), evaporated upon the dissolution of the corporation in 1998. Numerous ancillary issues exist regarding all of the debtor's tax returns during the Trustee's tenure. For instance, in 1995 and 1996, the Trustee inexplicably treated certain expenses as non-deductible. Further, there is ample concern that the Trustee selected tax recognition strategies in order to impair the shareholders.
10. Limited discovery will allow for the proper determination as to the valuation of the property. What is clear is that the creditors and the purchaser of the property entered into an arrangement or association to facilitate the sale of the property. Mr. Mourad alleges that the debtor's property was sold at a non-competitive bid because the trustee and/or the creditors received business considerations outside of the bankruptcy matter (from an ongoing business arrangement with the buyer). Whether or not this claim can be sustained is really an issue for discovery. However, it is clear that valuations in the 1996-1997 time period suggest values in the $12 to $9 million range. See Exhibits 7 and 8, Plaintiff's Pretrial. This, of course, makes sense when the value of the tax credit is considered. In any event, Mr. Mourad should be permitted sufficient time to pursue his claim.
WHEREFORE, Alphonse Mourad, by and through his counsel opposes the Trustee's Cross-Motion for Judgment on the Pleadings and requests that this Honorable Court deny said cross-motion. Alphonse Mourad requests all additional relief as is appropriate and just.
Respectfully Submitted,
Attorney for Plaintiff
Attorney Lester E. Riordan III
81 Washington Street, Suite 8
Salem, MA 01970
Telephone: 1-978-744-9461
BBO #: 633725