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In re Gaslight Club Inc.

January 31, 1986

IN THE MATTER OF GASLIGHT CLUB, INC., ET AL., DEBTORS-APPELLANTS


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 84 C 4303 -- Marvin E. Aspen, Judge.

Author: Cudahy

Before CUMMINGS, Chief Judge, WOOD and CUDAHY, Circuit Judges.

CUDAHY, Circuit Judge

In January 1983 Gaslight Club, Inc. ("Gaslight") and seven affiliated corporations*fn1 filed voluntary petitions in the Bankruptcy Court for reorganization under Chapter 11 of the Bankruptcy Code. Gaslight operated private dining and drinking clubs in various cities throughout the United States. Robert Fredricks, president and majority shareholder of Gaslight, was designated by the court as the person entitled to exercise the rights and perform the obligations of Gaslight as debtor in possession.*fn2 See U.S.C. §§ 1107, 1108. An order was also entered permitting Gaslight to retain Malcolm Gaynor and David Missner of Schwartz, Cooper, Kolb & Gaynor, Chartered, and Norman Hanfling of Norman Hanfling and Associates as its attorney. Hanfling had enjoyed a close professional relationship with Gaslight and Fredricks for many years. Missner was recommended by Hanfling. A committee of creditors (the "Committee") was appointed, see 11 U.S.C. §§ 1102, 151102, and the court authorized the Committee to retain Daniel Zazove as its attorney.

In May 1983 the Committee filed a motion seeking the sale of the debtor's property because Gaslight was sustaining operating losses under Fredricks' control. In fact, Gaslight sustained a pre-tax operating loss of $1.6 million in the first eight months of 1983, while Fredricks was in control of the debtor in possession. In July an order was entered requiring the listing and/or sale of tje debtor's excess real estate and personal property and further requiring the debtor to file a plan by August 14, 1983.

On August 30, 1983, Fredricks had not filed a plan and the Committee requested an order designating William Brandt, Jr. to operate Gaslight and to exercise its debtor in possession powers. Fredricks consented to the appointment of Brandt. Fredricks had met at length with Missner and Hanfling concerning the proposed redesignation and had been advised that it was in his own best interest and in the best interest of Gaslight. He was also advised that he would remain president of Gaslight under Brandt's supervision. Fredricks also met with an independent bankruptcy attorney, Avrum Dannen. Although the United States trustee initially objected to the order, it ultimately supported the motion and agreed that its authority was not being usurped. The order was entered on August 30. It ordered Brandt to "perform the duties imposed upon the debtors by the applicable provisions of the bankruptcy Code" and gave him "full and exclusive power . . . to employ [and] discharge . . . all managers, officers, directors, agents, employees and servants of the debtors, as he may deem necessary and advisable. . . ." Brandt continued to employ Missner and his firm to represent Gaslight.

Within a month after his appointment, Brandt discharged Fredricks from his position as president. The bankruptcy court stated that this action was taken because Fredricks was not performing any active role in the corporation. There was also testimony that Fredricks had refused to recognize Brandt's authority. Further, there was testimony that Fredricks had been secretly paying himself interest on a pre-petition unsecured loan and that he had refused to repay the money to the estate.

On October 17, 1983, Louis Levit, of the law firm of Levit & Mason, Ltd., filed a motion to be substituted as attorney*fn3 for the debtor in possession.*fn4 Shortly thereafter Fredricks filed a motion, through John McCarthy and Harold Fein, his individual counsel, to appoint a trustee or in the alternative to vacate the order appointing Brandt so that Fredricks could regain control of Gaslight.

Fredricks claimed that his consent to the designation of Brandt had not been informed. Beginning in June or July 1983, Hanfling engaged in a series of negotiations in an attempt to acquire Gaslight for a snydicate organized by him and in which he as a substantial investor. Hanfling voluntarily withdrew as counsel for the debtor in possession in September 1983. Fredricks testified that he did not know of Hanfling's interest in acquiring Gaslight when he consented to Brandt's appointment, and that if he had known of Hanfling's interest he would not have taken his advice to consent to the designation of Brandt. Hanfling testified that Fredricks had consented to Hanfling's involvement with an investment group pursuant to an agreement that Fredricks would receive $50,000 per year for four or five years as a consulting fee.

The bankruptcy court found that Fredricks was aware of Hanfling's involvement prior to the August 30 order. Therefore the motion to appoint a trustee or to reappoint Fredricks was denied. The bankruptcy court found that

Fredricks' only motive for seeking the appointment of trustee is to threaten the Debtors and creditors with the consequences of not agreeing to his redesignation as person in control of the Debtors. Such motivation is an improper basis for a motion to appoint a trustee and borders on an abuse of the court. In fact, Fredricks' counsel has admitted in open court that while Fredricks wants to return to management and control of Gaslight "Mr. Fredricks cannot go back in. It would be improper."

The bankruptcy court also held that because Brandt had exclusive authority to employ agents of the debtor, the motion to substitute counsel must be denied. The district court held that the bankruptcy court did not err in denying these motions.

I.

Fredricks' first argument is that the bankruptcy court had no authority to enter the August 30 order, replacing Fredricks with Brandt, and that such an order is an improper circumvention of the statutory procedures for appointing a trustee.*fn5 We agree with the district court that, on the very special facts of this ...


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