No. 11-95-11659.United States Bankruptcy Court, D. New Mexico.
August 12, 1998
Mr. Michael K. Daniels, Attorney for Santa Fe Aviation, Albuquerque, NM.
Ms. Barbara K. Hoffman-Hill, Attorney for Aviation Services, Dallas, TX.
Ms. Julia B. Rose, Attorney for Aviation Services, Santa Fe, NM.
Mr. Robert Cates, Attorney for James Hayes, Los Lunas, NM.
Mr. James A. Hayes, Rio Rancho, NM.
Mr. Leonard K. Martinez-Metzgar, Attorney, Office of the United States Trustee, Albuquerque, NM.
Dinah N. Martinez, Secretary to Judge McFeeley.
MARK McFEELEY, Chief Judge, Bankruptcy
The matter before the Court is a Motion for Order to Show Cause Regarding Contempt (“Contempt Motion”), filed on August 15, 1996 by Santa Fe Aviation Services, Inc. (“Aviation Services”). Aviation Services is the purchaser of Debtors’ assets pursuant to a Corrected First Amended Plan of Reorganization (the “Plan”) confirmed by this Court in an oral ruling on May 30, 1996, and in a written order filed June 5, 1996 (the “Confirmation Order”).
In the Contempt Motion, Aviation Services seeks an order holding James Hayes, representative of the Debtors, in contempt for violating several of this Court’s orders, particularly the Confirmation Order, regarding production of documents related to the Debtors’ business operations. Aviation Services also asks this Court to award, as a sanction, all its attorney’s fees and expenses in prosecuting the Contempt Motion and in connection with efforts to obtain Debtors’ records from outside sources. The following are the Court’s findings of fact and conclusions of law.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
In early 1996, Aviation Services requested documents relating to the Debtors’ business operations including financial statements, bank statements, payable and receivable lists, and information regarding fuel purchased and taxes. On March 26, 1996, Aviation Services filed a Motion for Rule 2004
Examination and Production of Records of Debtors through their representative James Hayes, owner of Santa Fe Fliers, Inc., the operating general partner of Santa Fe Aviation (the “2004 Motion”). The 2004 Motion sought inter alia, the following business records:
1) all bank account records including bank statements along with checks, registers and ledgers from June 1, 1991 to the present;
2) all financing documents in which Debtors acted as either borrower or lender from June 1, 1991 to the present;
3) all federal and state tax returns and documents from June 1, 1991 to the present;
4) all financial statements from June 1, 1991 to the present;
5) all corporate and partnership records;
6) all documents pertaining to real estate;
7) all documents relating to Debtors’ general business operations, including documents relating to payables from January 1994 to the present and all listings of accounts receivable from January 1994 to the present;
8) all insurance policies in connection with the business from June 1, 1991 to the present;
9) all documents concerning machinery and equipment;
10) all documents pertaining to employees, including payroll records, general personnel files, employment agreements and fringe benefit agreements from June 1, 1991 to the present;
11) all documents relating to fuel tanks used by Debtors, including environmental reports;
12) all communications with governmental agencies from 1989 to the present;
13) all documents related to quarterly fees due to the United States Trustee; and
14) all documents and correspondence relating to all claims listed by Debtors on their Schedules as disputed.
On May 8, 1996, this Court issued an Order Approving Motion for Rule 2004 Examination and Production of Records ordering the Debtors to produce all the requested documents on April 17, 1996 and scheduling the 2004 examination for May 9, 1996 (the “2004 Order”). Debtors produced some documents but failed to produce bank statements for the Debtors’ prepetition accounts, bank statements for the Debtor in Possession Account (the “DIP account”), tax returns, insider notes, and other records relating to its business that were included in the original request.
A hearing on confirmation of the Plan was held on May 22, 1996. At the hearing, the Debtors’ principal James Hayes attempted to present evidence of his and his son’s claims against the estate. Upon objection by Aviation Services, the Court disallowed this evidence because Hayes had not yet produced the documents required by the 2004 Order that would have verified this claim. The Court ordered Hayes to produce the following documents the next day:
1) evidence of James Hayes’ income for the years 1992 through 1995 in the form of Federal W-2, Form 1099, or K-1 income tax statements, James Hayes’ personal income tax returns for 1992 through 1994;
2) the promissory note from Santa Fe Aviation to William Hayes (Hayes’ son) and his 1992 W-2 form;
3) a printout per employee for 1994 and 1995 of payroll generated for Debtors from Crest Outsourcing or Execu-Staff; and
4) all bank statements for 1995, including all checks and other items that would be included in the statement.
The Court later ordered him to pay $1591.69 in attorney’s fees and expenses incurred by Aviation Services, as a sanction.
The Court continued the hearing the next day and learned that Hayes produced some of the documents requested, but not all. [ 1 Hayes produced the following documents:
1) 1991 1040 joint federal tax return for Hayes and his wife with W-2 form for his wife Karen Marie Hayes showing employer as Santa Fe Aviation;
2) 1992 W-2 form for Karen Marie Hayes showing employer as Santa Fe Aviation;
3) 1993 1040 joint federal tax return for Hayes and wife;
4) 1993 1099 Miscellaneous income statement for Hayes from Flying Z Aviation;
5) 1993 Schedule K-1 showing partnership share of income paid from Santa Fe Aviation to Santa Fe Fliers;
6) 1994 Schedule K-1 showing partnership income paid from Santa Fe Aviation to Santa Fe Fliers;
7) 1994 W-2 form for Karen Marie Hayes showing employer as Quatro Corporation;
8) 1994 1040 joint federal tax return for Hayes and wife;
9) Promissory Note dated February 1, 1995 from Santa Fe Aviation executed by James Hayes, to William Hayes, his son;
10) Bank Statements for Santa Fe Aviation 1995;
11) Checks for the above bank statements, with several missing]1 The Court reserved its ruling on confirmation until the following week. On May 30, 1996, the Court orally confirmed the Plan, and the Confirmation Order was filed on June 5, 1996. The Court also valued the Hayes’ claims at zero, and found that the plan met all the qualifications of 11 U.S.C. § 1129.
After the oral confirmation order Debtors continued to operate the business over the Memorial Day weekend. However, after the Confirmation Order was entered on June 5, 1996, Aviation Services took possession of Debtors’ business premises and claim that there were no current 1996 business records in the Debtors’ files. The missing records included accounts receivable records, collections on receivables after May 1, 1996, current payable information, all bank statements from the DIP account for 1996, accounting information for fuel purchased and sold from April 1996 through June 1996 along with copies of invoices for purchases and sales of fuel.
From June through August 1996, Aviation Services had to obtain 1996 DIP account bank statements and several other business records by subpoena to the Bank of America, American Express, various fuel suppliers and insurers. It filed the Contempt Motion on August 15, 1996.
At the October 8, 1996 hearing on the Contempt Motion, Hayes testified that to the best of his knowledge, all the current business records were left on the premises on the date Debtors vacated the premises. However, Herbert Marchman, president of Aviation Services, testified that, within the 30 days before the hearing, the Debtors delivered bank statements for May through August 1996, but the bank statements for January through April 1996 were never delivered. Marchman testified that in attempting to reconcile several checks in these statements, consisting of disbursements after confirmation, he and his attorney had to request invoices directly from fuel suppliers and an aircraft insurer because those records were not supplied by Debtors and were not left on the premises. Marchman also testified that the only records found on the premises were found in early October inside a box in the Santa Fe Aviation operations building. No one at Aviation Services discovered this box when they took possession on June 5. Marchman testified as follows regarding what was found in the box:
A: . . . just in the last few days, I had found over in the terminal building that Mr.
Hayes had vacated a box that contained copies of cashier’s checks . . .
. . . .
A: There was a box, single box, that was sitting next to the reception area that looked like it could have been going to the trash. But in that box was a number of things; some financial records, some invoices, there was a book that was kind of an operations manual. There was a book from Crest Outsourcing with all the employee payroll in it. There were a lot of other items in there that I didn’t know what they were. But there was records of daily logs, what had gone on in the last four or five days of operations.
Q: Were there also separate file folders? It wasn’t just loose papers?
A: No, they were — everything was in a separate file folder, as well as the cashier’s checks that I mentioned earlier.
. . . .
A: This is one of the books that was in the box that I just referred to as kind of an operations manual and what happens on a daily basis. It’s got some invoices from May 31 through June 3rd, I believe, in here from fuel sales and various things that were sold, as well as readings from fuel trucks showing the amount of gallons that were pumped from each truck and meter, who it went to. A book of active accounts, hotels, just things that someone on a front counter would refer to in the daily operations. . . .
. . . .
Q: As part of the things that you found in that box, Mr. Marchman, is this one of those folders, and can you tell the Court what it is?
A: Yes, it is. It is a folder labeled “Bank of America,” and inside there are customer copies of various cashier’s checks.
Q: Had Aviation Services had those before last weekend, would we have been able to reconcile some of those cash and Bank of America payments?
A: We certainly would have.
Q: This ring binder that says, “Client Information Manual, Pegasus,” is that one of the things that you found in that box?
A: Yes, it is.
Q: What is that, from your review of it?
A: From my review, it’s a printed statement from Crest Payroll Outsourcing which lists the payroll by individual and hours, and then gives summaries as well as the various taxes and deductions that were made.
Q: Is that some of the information that Aviation Services had repeatedly requested from the Debtors and Mr. Hayes?
A Yes, it is.
. . . .
Q: What is that?
A: This one is labeled “Execu-Staff stuff” and it is apparently a contract that was executed with Santa Fe Aviation and Crest Outsourcing on how the payroll would be handled and the responsibilities of each party.
Q: Was that some of the documents that Aviation Services had also requested from Mr. Hayes and Santa Fe Aviation?
A: Yes, it is.
. . . .
Q: . . . Is Exhibit 5 information from Farmers Insurance?
A: Yes, it is.
. . .
Q: Where did you find these papers?
A: They were in the same box.
. . . .
Q: Did the box contain some information about Avemco Insurance, Mr. Marchman?
Q: If you would turn to Exhibit 6, is that some of the information that was included in that box, or that we obtained subsequently from Avemco, or both?
A: That is correct.
. . . .
Transcript of Proceedings held on October 8, 1996 at pp. 20-38.
Marchman also testified that documents needed to verify accounts payable and receivable were not on the premises:
Q: . . . What other record is it that we don’t have that we want, other than to just say “all the records?”
A: Trying to find something that I can reconcile on what to pay the Creditors. I would like to get that done. We don’t have an accurate accounting from Mr. Hayes what the payables are. His list shows zero and yet, we get statements from various vendors showing hat there is monies owed, the funds, what has come in, what is available for them in the accounts receivable, what has been collected and what is still outstanding. Just basically some records so I can reconcile this thing and get it closed. . . .
Q: We have summaries of some of this stuff, why can’t you use that?
A: The summaries don’t give me the details that I need to go back on individual things. I’m finding checks listed to some of these people that have filed claims, and I can’t tell if those checks have been deducted from the claim that is due them or whether it’s not. There are a lot of those, and I’m just having a hard time trying to reconcile.
. . . .
Transcript of Proceedings held on October 8, 1996 at pp. 52-53. Hayes testified that the missing documents Marchman referred to should have been on the premises:
Q: Mr. Hayes, have you ever provided any documentation to me or to Dennis Lee or anyone at International [Aviation Services] to explain the checks that were dated after May 30th?
A: I gave Mr. Lee a check register with explanations for the checks as part of one of the packets.
Q: Is that what you consider back-up documentation?
A: That’s all the back-up — and I’m not sure what you mean by, “back-up documentation.”
Q: Let me show you an ATT phone bill. That would be the invoice that was paid by a check, wouldn’t it be?
A: It would be that.
Q: Let me show you a U.S. West phone bill. That would be an invoice that was paid by check?
A: That would be. No problem.
Q: Have you ever supplied me with any back-up documentation?
A: That documentation was all contained in the file that was in the office.
Q: That was in what office?
A: In the Santa Fe Aviation office.
Q: So if I told you there was nothing there that related to Brewer Oil, the Bank of America checks, the James Hayes checks, the NBA statement check, Diamond Shamrock, ATT and was there — or Avemco, would you have any reason to dispute that?
A: I did not look in the box so I really just heard the file. I really don’t know whether they were in there or not. I would have to assume they were in there, but —
Q: You didn’t ever tell any of us that that box was there, did you?
A: Yes, I did, when the partner Martin Shaeffer was doing the walk-through and we did the sign off on it. They counted the furniture, the equipment counts and what have you. At that point I said that box has the accounts payable files in it and the employee files.
Q: And if I told you that that box did not have the accounts payable files in it, you wouldn’t have any reason to dispute it?
A: Today I would have no reason to dispute it. I haven’t been in the office since that day.
Q: What other records do you still have that were taken from the premises?
A: Well, I have copies — I have computer printouts that you have copies of, and I have photocopies of the checks and the bank statements.
Q: Who has all the invoices from all of the vendors?
A: The invoices should have been contained — all the current invoices should have been contained in that file. I supplied you —
Q: Mr. Hayes, the box wasn’t a very large box, was it? Are you saying all of your vendors’ invoices for 1996 were in a box that says —
A: For the year 1996, it should have been contained there.
. . . . My explanation is, they were in the box.
The Court: Where? In 1995’s?
The Witness: 1995’s are in the files. We have those in Albuquerque in a storage locker.
The Court: Is it possible that somebody put the ’96 ones in there? Have you looked?
The Witness: . . . I could look, Your Honor, but I would be surprised if I have them.
. . . .
By Mr. Daniels:
Q: Mr. Hayes, can you describe, to the best of your recollection, what happened to any business records on the Santa Fe Aviation premises between the day in Court you found out this plan would be confirmed, I think that’s May 30th and June 5th, 1996, which was the day the Confirmation Order was signed?
A: The business records?
Q: Any piece of paper in the Santa Fe Aviation office that you know anything about, and describe it to the best of you recollection.
A: We left — to the best of my knowledge, we left all the records there in two different file cabinets, one in a smaller file and one in a four-drawer file that was in my office.
. . . .
Q: You have heard Mr. Marchman testify about a box left at the Santa Fe Aviation office. Do you know anything about that?
A: That’s a file box that contained the accounts receivable and the payroll records. . . . .
Transcript of Proceedings dated October 8, 1996 at pp. 93-102.
In response to Hayes’ testimony that records for previous years were kept in a storage facility in Albuquerque, Aviation Services’ attorney stated that they did not know of this facility. The Court then granted Aviation Services access to the storage facility and continued the hearing. Aviation Services and the Debtors’ representatives inspected the storage facility in Albuquerque on October 22, 1996 and listed the items that Aviation Services found there.
On January 27, 1997 the Court resumed the contempt hearing, and the attorney for Aviation Services stated that many of the 1996 documents that had so far eluded them were found in the storage facility. A letter dated October 30, 1996 written by Debtors’ counsel was entered into evidence as Exhibit 2X. It listed what was found in the storage facility including, inter alia: checks on the DIP account for early 1996, daily reconciliation sheets for all of 1996, fuel tickets for February through April 1996, credit card statements and individual tickets for 1996 for fuel purchases, Visa/MasterCard statements for 1996, check registers for the DIP account for July 1995 through February 1996, Valley and Avfuel (fuel suppliers) fuel invoices, statements and remittance summaries for 1996, checkbook for the DIP account, including check stubs for January 1995 through 1996, eleven bank account deposit books from December 1994 forward with the last deposit book missing, May 1996 credit card slips, and 1996 petty cash expense receipts. The letter also stated that the Debtors could not explain why the box containing all the payables was missing when Aviation Services took possession of the business.
In the Contempt Motion, Aviation Services requests a sanction consisting of additional attorney’s fees and expenses incurred in obtaining the records that Debtors failed to produce in contravention of the Court’s 2004 Order and the Confirmation Order. At the January 27 hearing, Aviation Services limited its sanction request to additional attorney’s fees and expenses incurred to obtain the records found to be missing from the Debtors’ premises after Aviation Services took possession following the Confirmation Order.
At the January 27, 1997 hearing, Debtors argued that they were not in violation of the Confirmation Order and that at all times they attempted to cooperate with Aviation Services in producing business records. They presented testimony from Anja Baca, an employee of Santa Fe Aviation for several years, who was responsible for keeping accounts payable and payroll. She testified that all the current accounts payable and payroll records were on the premises in boxes and file cabinets on the date of a “walk through” when Aviation Services representatives inspected the premises before taking possession. Transcript of Proceedings held on January 27, 1997 at pp. 70 and 76. Laura Lujan, another employee of Santa Fe Aviation testified that she was in charge of accounts receivable but did not handle any of the bank statements. She said that to her knowledge no 1996 business records were in the storage facility. She also testified, however, that a number of records for 1996 were in fact found in the storage facility, including the checks and bank statements for 1996. She also confirmed that the 1996 deposit books, and Multi-Service and Avfuel (fuel suppliers) remittance summaries were found in the storage facility when Aviation Services inspected it. Transcript of Proceedings held on January 27, 1997 at pp. 59 and 63-64.
The Confirmation Order provides that the “. . . Debtors shall immediately vacate the premises and surrender all property to Aviation Services which shall, until Effective Date, have the exclusive right to possession of Premises. . . .” However, the Confirmation Order also provides that the Plan’s effectiveness is contingent upon Aviation Services’ acceptance of the results of environmental tests on the premises. To effectuate acceptance and effectiveness of the plan, Aviation Services was to file a notice stating its intention to close the purchase. Within 30 days from the notice, Debtors were to deliver all documents, “requested by Aviation Services to implement and effectuate the Plan and to complete the transfer of the purchased assets to Aviation Services free and clear of liens. . . .” Debtors assert that this language changed the deadline for production of the documents missing from the premises. Aviation Services filed its Notice of Intent to Close on August 15, 1996, therefore, the Debtors argue they were not required to produce any of the missing documents until September 16, thirty days after the notice. Debtors’ contend, therefore, that the Contempt Motion filed on August 15 was premature, and on that date, they were not in violation of the Confirmation Order. Debtors counsel conceded at the January 27 hearing that Aviation Services should have been allowed access to the storage facility earlier, but asked the Court to limit the sanction to attorney’s fees and expenses that were incurred in the trip to Albuquerque on October 22, 1996 to inspect the documents in the storage facility.
Aviation Services argues that the Confirmation Order language requiring the Debtors to vacate the premises and surrender all property clearly included all current business records. It further contends that on the effective date, the Debtors were to deliver all documents to effectuate the actual transfer of ownership of the business, and this language did not set a new deadline for production of business records.
At the January 27, 1997 hearing, Ms. Hill, attorney for Aviation Services, entered Exhibit 1X into evidence consisting of her invoices showing the additional time she spent from May 1, 1996 to November 27, 1996 obtaining the records that Debtors failed to produce. These include time spent issuing subpoenas to the Debtors’ bank and other third parties who had copies of the records, invoices and the like. Ms. Hill also includes time spent prosecuting the Contempt Motion and traveling to and inspecting the storage facility. The Contempt Motion requests a total of $24,634.00 in attorney’s fees and $3,900.00 in expenses incurred in obtaining these records and in prosecuting the Contempt Motion.
The Court concludes that James Hayes, violated the 2004 Order when he failed to produce the 1996 business records in a timely fashion. The Court also concludes that Hayes violated the Confirmation Order when he vacated the Santa Fe Aviation premises on June 5, 1996. His violation consisted of either failing to leave all current 1996 business records on the premises, or failing to inform Aviation Services of the existence of the storage facility where the 1996 records were located and then failing to grant immediate access to that facility.
As a consequence of this lack of disclosure and timely production of records, Aviation Services incurred additional attorney’s fees and expenses in acquiring the records from outside sources and in prosecuting the Contempt Motion. The Court will impose, as a sanction, attorney’s fees for the following work in obtaining documents not produced by Debtors:
1) Requests and subpoenas of bank statements and checks from Bank of America;
2) Letters and subpoenas to fuel suppliers to obtain invoices;
3) Letters to Debtors’ attorney requesting documents;
4) Requests and subpoenas of documents from American Express;
5) Letters to insurers to obtain missing insurance documents after the October 22, 1996 inspection of the storage facility; and
6) Preparation of and prosecution of the Contempt Motion.
The Court will also allow expenses paid by Aviation Services to Bank of America for copies of bank statements and checks and expenses incurred by Aviation Services’ attorney traveling to the contempt hearing held on October 8, 1996.
The Court will not award attorney’s fees and expenses requested by Aviation Services that were for the following types of work:
1) Receipt and review of documents acquired from outside sources because this work would have been necessary even if Hayes had produced the documents;
2) Requests for Avemco and Farmer’s Insurance documents and time spent corresponding with those companies prior to October 22, 1996 because Marchman testified at the October 8, 1996 hearing that insurance documents from Avemco and Farmer’s were found in the box found on the premises, and this box could have been discovered as soon as the premises were vacated. Moreover it was not clear from Marchman’s testimony which documents were found in the box and which were obtained by Aviation Services on its own.
3) Entries on the attorney’s invoices that were not specific enough to determine if the time spent was in document production due to Debtors’ lack of cooperation;
4) Attorney’s fees and expenses prior to June 5, 1996 because Aviation Services so limits its request;
5) Attorney’s fees and travel expenses in connection with the inspection of the storage facility because if Hayes had informed Aviation Services of that facility and allowed access on June 5, 1996, Aviation Services would have incurred these attorney’s fees and expenses anyway; and
6) Consolidated entries of time for several activities in which one or more activities were for disallowed types of work.
In accordance with these findings and conclusions, the Court will award Aviation Services $5,391.25 in attorney’s fees and $1,274.28 in expenses as a sanction against James Hayes, representative of the Debtors.
A separate order shall be issued in accordance with this Memorandum Opinion.
In accordance with the Memorandum Opinion filed herewith, the Court finds James Hayes in contempt of its Order Approving Motion for Rule 2004 Examination and Production of Records entered on May 8, 1996 and its Order Confirming Plan of Reorganization and Extablishing Deadlines entered on June 5, 1996 due to his failure to timely produce business records as required by the above orders.
As a result of this failure IT IS HEREBY ORDERED that James Hayes shall pay to Santa Fe Aviation Services, Inc. (“Aviation Services”) $5,391. 25 in attorney’s fees and $1,274.28 in expenses as a sanction for failure to produce business records requested by Aviation Services and ordered to be produced by this Court.