Complaint (2020-11-11)
- Date
- 2020-11-11
Summary
An objection filed November 11, 2020 as Doc 248 in No. 2:19-bk-00787, the Chapter 7 case of Panthera Enterprises, LLC in the United States Bankruptcy Court for the Northern District of West Virginia, by Panthera Training, LLC, defendant in Adversary Proceeding A.P. No. 2:19-ap-51. It asks the court to deny in full the fees and costs application of Bernstein-Burkley, P.C. (Doc 238), arguing that the firm filed and pursued the adversary complaint without the reasonable inquiry FRCP Rule 11 requires. The objection reviews the lease terms at issue, including taxes, $2 million of liability insurance, financial records and Additional Rent, and cites West Virginia Code §11A-11-7 and the trustee's Motion to Compromise/Settle Adversary Proceeding (Doc 245). A second ground concerns the debtor's Monthly Operating Reports and cites 18 U.S.C § 152. The document is 8 pages.
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Full text
No. 2:19-bk-00787 Doc 248 Filed 11/11/20 Entered 11/12/20 11:23:14 Page 1 of 8
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
In re:
PANTHERA ENTERPRISES, LLC Case No. 2:19-BK-787
Chapter 7
Debtor in Possession.
PANTHERA ENTERPRISES, LLC
Plaintiff,
v. A.P. No. 2:19-ap-51
PANTHERA TRAINING, LLC
Defendant.
PANTHERA TRAINING, LLC’S OBJECTION
TO BERNSTEIN-BURKLEY, P.C.’S FEES AND COSTS APPLICATION
Now comes Panthera Training, LLC (“Training”), by counsel, and in support of its
Objection to the Fees and Costs Application filed by the law firm of Bernstein-Burkley, P.C. (“the
Firm”) states as follows.
1. The Firm’s application for fees and costs generated in connection with Adversary
Proceeding # 2:19-AP-00051 (“the Adversary Proceeding”) should be denied in
full.
The Firm’s application for fees and costs (Doc 238) generated in connection with the
Adversary Proceeding should be denied in full. Its attorneys signed and filed the Complaint in
violation of FRCP Rule 11 which provides that presentation of a pleading to the court constitutes
a certification that to the best of the person’s knowledge, information, and belief, formed after a
reasonable inquiry under the circumstances, the factual contentions have evidentiary support. The
evidence establishes that the Firm signed and filed the Complaint, and subsequently pursued the
Adversary Proceeding, without conducting a reasonable inquiry into the existence of evidentiary
support, or the lack thereof, for the factual allegations asserted.
The Trustee’s Motion.
Following conversion of this matter to Chapter 7 Liquidation, Aaron C. Amore, Esq., as
Trustee (“the Trustee”) for the Estate of Panthera Enterprises, LLC (“the Debtor”), investigated
No. 2:19-bk-00787 Doc 248 Filed 11/11/20 Entered 11/12/20 11:23:14 Page 2 of 8
the merits of the Adversary Proceeding. To assist his investigation, the Trustee engaged Mr. Kelly
T. Smith, CPA to conduct a financial review of Training’s accounting and financial records
including but not limited to invoices, receipts, bank statements and accounting reports. Upon
receipt of the CPA’s report of his findings and after conducting his separate investigation, on
November 9, 2020, the Trustee filed a Motion to Compromise/Settle Adversary Proceeding (“the
Motion”). Doc 245.
In his Motion, the Trustee provided a detailed review of the CPA’s report and of the
Trustee’s findings with respect to the claims asserted in the Adversary Proceeding. The Trustee
concluded “that the claims asserted in this adversary proceeding are baseless. The Trustee did not
uncover facts that would support the claims asserted in this adversary proceeding. Not only were
facts to support the claims absent, but evidence to directly refute the claims was readily available.”
(emphasis added). Doc 245, p. 13-14. Training concurs with the Trustee’s conclusion and for the
reasons set forth below contends that the Firm would not have filed the Adversary Proceeding if it
had complied with FRCP 11 by conducting a reasonable inquiry into the factual allegations it
made.
By way of brief background, pursuant to a Commercial Lease dated June 1, 2018 (“the
Lease” – Doc 1, Exhibit A), Training leased a 750 acre tactical training facility located in Hardy
County, West Virginia (“the Property”) from the Debtor. Contrary to the contentions made in the
Adversary Proceeding, and consistent with the Trustee’s findings, Training performed all of its
obligations under the Lease unless performance was prevented by the Debtor. A detailed review
of the Firm’s false factual allegations asserted in the Adversary Proceeding is as follows.
Real estate taxes
Pursuant to Section 8 of the Lease, Training was obligated to pay all real property taxes
payable on the Property pro-rata during the term of the Lease. In the Adversary Proceeding the
Firm falsely alleged that Training breached this obligation to pay these real estate taxes. A
reasonable inquiry by the Firm would have revealed that the Debtor was delinquent in its payment
of real estate taxes on the Property for years prior to the commencement of the Lease. Reasonable
research by the Firm would have led the Firm to West Virginia Code §11A-11-7 which states that
the Debtor’s outstanding delinquent taxes from prior periods prevented Training from paying real
estate taxes for the periods following commencement of the Lease. Specifically, West Virginia
Code §11A-11-7 states that the sheriff “shall decline to receive current taxes on any land where it
appears to his or her office that a prior year’s real property taxes are unpaid.” Accordingly, the
Debtor’s failure to pay taxes for prior periods prevented Training from paying subsequent period’s
real estate taxes.
In addition, a hearing was conducted on November 25th and 26th, 2019, before the
Honorable United States Bankruptcy Judge Patrick M. Flatly, on the Debtor’s request for
injunctive relief, seeking possession of the Property due to Training’s purported breach of the
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Lease. (“the Hearing”). In the Hearing the unchallenged evidence testimony from Robert Starer,
manager of Training, was that current real estate taxes payable on the Property were paid by
Training by means of allowing the Debtor to retain certain amounts that the Debtor owed Training
for services rendered. Nevertheless, the Firm falsely stated that Training violated its obligation to
pay the real estate taxes.
Personal property taxes
Also pursuant to Section 8 of the Lease, Training was obligated to pay all personal property
taxes payable on the tangible personal property identified in the Lease’s Exhibit B, pro-rata during
the term of the Lease. In the Adversary Proceeding the Firm falsely alleged that Training breached
its obligation under the Lease to pay personal property taxes payable during the term of the Lease.
Again, a reasonable inquiry by the Firm would have revealed the Debtor was delinquent in
payment of the personal property taxes on its personal property for periods prior to the
commencement of the Lease. A reasonable inquiry would have led the Firm to West Virginia Code
§11A-11-7a which states that the Debtor’s delinquent personal property taxes from prior periods
prevented Training prevented Training from paying property taxes on the Debtor’s personal
property following commencement of the Lease. West Virginia Code §11A-11-7a states that the
sheriff “shall decline to receive current taxes on any personal property where it appears to his or
her office that a prior year’s personal property taxes are unpaid.”
In addition, shortly after the Lease was executed, the Debtor advised Training that the
personal property identified in the Lease’s Exhibit B was not in fact owned by the Debtor, and was
not subject to the Lease because it had sold the personal property to a company called SMI, LLC.
SMI, LLC (“SMI”) subsequently demanded Training execute a separate lease for this personal
property and pay separate rent to SMI for the use of this property. Clearly the Firm did not
undertake a reasonable inquiry regarding ownership of the personal property or the Debtor’s failure
to pay prior period taxes, prior to filing the Adversary Proceeding, or at any time during its
prosecution.
Liability Insurance.
Section 9 of the Lease requires Training to maintain $2 million dollars of liability insurance
coverage. Prior to the filing of the Adversary Proceeding, Training’s counsel provided the Firm
with a copy of Training’s Certificate of Insurance evidencing its satisfaction of the Lease’s
requirement. In addition, as noted by the Trustee, Training subsequently provided proof of
insurance to the Court and to the Trustee. Doc 245, p. 12. Nevertheless, the Firm falsely claimed
that Training breached its obligation to maintain liability insurance coverage as required by the
Lease and never amended its Complaint after receiving evidence of Training’s insurance coverage.
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Training’s offer to provide financial information.
Section 4 of the Lease provides that Training was to cooperate with a request by the Debtor
to audit its books and records. The Firm falsely alleged that Training refused to provide “adequate
and sufficient records and/or an accounting as required by the Lease”. (Complaint ¶ 19) However,
a reasonable inquiry would have revealed that Training provided copies of its financial records to
the Debtor prior to the Debtor filing bankruptcy. When the Debtor’s counsel announced his
intention to file a lawsuit against Training immediately following filing the bankruptcy petition,
and following the Debtor’s authorization publication of Training’s confidential financial
information, Training stopped providing its confidential financial information to the Debtor and
instead reaffirmed its willingness to cooperate with an audit as specified in the Lease, if requested.
The Debtor never requested an audit of Training’s books and records until its Chapter 11 Plan was
converted to a Chapter 7 Liquidation when the trustee in liquidation, in his effort to determine
whether there was any merit to the Debtor’s claims presented in the Adversary Proceeding with
respect to Training’s alleged defaults in the Lease , initiated an audit. As the Trustee observed,
when the CPA visited Training’s offices to review its books and records, Training “offered to open
its books and records and continues to do so without delay or limit.” Doc 245, p. 13.
Lodging revenues
In addition to its lease of the Property, Training separately leased a group of townhouses
located in nearby Moorefield, West Virginia from a third party. Periodically Training provided
lodging in these townhouses for clients receiving training at the Facility. Although Training’s
lodging revenues generated from off-site are not subject to the terms of the Lease according to
paragraph 4 of the Lease, Training included all lodging revenues in its financial books and records.
The Trustee and the CPA specifically investigated Training’s contracts that included off-site
lodging and confirmed that there was no unreported lodging revenue. Doc 245, p. 13. The Firm
could have, and should have, requested an audit of Training’s books and records prior to filing its
baseless Complaint. If the Firm had done so then it would have learned, as set forth in the Trustee’s
Motion and the CPA’s report, that there was no evidence of any unreported lodging revenue.
Instead of conducting an audit or other form of reasonable inquiry, the Firm made false allegations
about unreported income, wasting the Court’s resources, and causing Training to incur significant
legal fees and expenses defending another frivolous claim.
Additional Rent
Paragraph 4 of the Lease contains a formula for profit-sharing in the form of “Additional
Rent” payments to the Debtor based on Training’s Taxable Income, as adjusted. Training’s
financial statements that were provided to the Debtor revealed that Training had not realized any
Taxable Income. If the Debtor had untaken an audit as encouraged by Training, or conducted a
reasonable inquiry similar to the Trustee’s investigation, then it would have learned that there was
no Additional Rent payable. The Trustee and the CPA concluded that there was no evidence to
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support the contentions that Training owed the Debtor any Additional Rent. Doc 245, p. 10.
Nevertheless, the Firm falsely alleged that Training defaulted on its Lease obligations because it
owed but did not pay Additional Rent to the Debtor. (See Complaint ¶12).
2. The balance of the Firm’s application for fees and costs should be denied in full
because the Firm filed materially false Monthly Operating Reports facilitating the
Debtor’s principals’ apparent fraud and embezzlement.1
The Firm filed materially false Monthly Operating Reports that facilitated the Debtor’s
principals’, James Punelli and Raymond Jones, ability to make false oaths and claims (18 U.S.C
§ 152), and to apparently commit bankruptcy embezzlement (18 U.S.C. § 153) and bankruptcy
fraud (18 U.S.C. § 157).
Together with other information relevant to this objection to the Firms’ fee application, by
the time the Debtor’s first Report, for September, 2019, was filed on October 12, 2019, the Firm
knew, or should have known, that; (1) the Debtor had an 80% subsidiary company, Panthera
Training Center (“Center”), (2) the Debtor’s 750 training facility located in Hardy County, WV
(“the Facility”) had been leased to Training pursuant to a long-term lease since June 1, 2018, (3)
Training was performing services for the DEA pursuant tom a subcontract with the Debtor, (4)
Center had stopped conducting any training at the Facility not later by June 1, 2018, and (5) the
Debtor’s two principals, James Punelli (“Punelli”) and Ray Jones (“Jones”), were the only
individuals managing the Debtor’s affairs once it filed its bankruptcy petition.
Despite the fact that Center had not conducted any training at the Facility for more than
seventeen (17) months, the Firm filed the Debtor’s September, 2019 Report falsely reporting that
a payable was owed to Center in the amount of $138,750 for “training COGS [cost of goods
sold]”. Doc 37, p.9. Based on the knowledge the Firm should have had at the time, as noted above,
even a cursory review of a draft of the Report before filing would have revealed the improbability
of such a payable being correct and demanded an inquiry.
The October 2019 Report reflected a $134,160 payment to Center purportedly in partial
satisfaction of the payable refenced in the September Report. Doc 63, p. 8. Two statements should
have caught the Firm’s eye; (1) the Report’s notation that the payment to Center was for the “DEA
Contract” and (2) the asterisked red ink statement that the payment to Center was “Paid in error,
will be refunded and shown on the November operating report.” Doc 63, p. 8. By that time the
Firm knew that Training, not Center, was the subcontractor on the Debtor’s DEA contract. Further,
the highlighted disclosure that the Debtor made a $134,160 payment to its affiliate “in error”
demanded an inquiry as to how such an error could have been made. If the Firm had investigated
this “error”, the Firm would have learned that James Punelli transferred the $134,160 from the
1
Panthera Training, LLC does not suggest that the Firm intentionally or knowingly facilitated the actions taken by
James Punelli and Raymond Jones.
No. 2:19-bk-00787 Doc 248 Filed 11/11/20 Entered 11/12/20 11:23:14 Page 6 of 8
Debtor’s bank account that was subject to review by the Court and the Debtor’s creditors, to
Center’s separate bank account, beyond the scrutiny of the Court and the Debtor’s creditors.
When Center breached certain contractual obligations owed to Training, Training filed suit
in Loudon County Circuit Court, Virginia and subpoenaed Center’s bank records. Center’s bank
records revealed that immediately after receiving the $134,160 from the Debtor, Punelli began
distributing the Debtor’s transferred funds from Center’s account to himself and to Jones. (See
Center’s bank records in Doc 162.) A reasonably prompt inquiry by the Firm into the
acknowledged erroneous transfer of the Debtor’s funds could have frustrated Punelli’s fraudulent
scheme to transfer the Debtor’s funds to himself and Jones and would have preserved the Debtor’s
funds for the payment of its creditors.
If the Firm had performed even a cursory review of the Debtor’s Reports filed for
November, December, January, or February, it would have discovered that, contrary to Punelli’s
representation that the purported erroneous transfer of funds to Center would be refunded in
November, those funds were not fully returned until February, 2020. During these interim months
Punelli continued helping himself and Jones to the Debtor’s money. (See Docs 80, 93, 98, 110,
and 162).
Particularly troublesome is the Firm’s failure to take steps when it filed the Debtor’s
November, 2019 Report which stated that the $134,160 had not been returned to the Debtor in
November in part due to a “miscommunication”. Doc 80, p. 6. Any standard of reasonableness
would have called for the Firm to investigate Punelli’s failure to refund the Debtor’s money due
to a purported miscommunication since the evidence is that Punelli was the person handling the
Debtor’s bank account and Center’s bank account..
Lastly, the Firm must not have given any attention to the December Report or the
November Report’s representation the $134,160 had finally “been returned in December”. The
December Report discloses that only a portion of the funds had been returned by December. As
stated above, the Firm’s lack of any reasonable inquiry before filing these materially false monthly
Reports allowed Punelli’s transfer of the Debtor’s funds to himself and Jones to continue unabated.
3. The Firm’s lack of reasonable inquiry into the facts is reflected in additional false
statements made in the Debtor’s Reports.
In addition to the Firm’s inattention to Punelli’s mishandling of the Debtor’s cash, the Firm
filed numerous Reports that falsely inflated the Debtor’s Receivables. These Reports reflect the
Firm’s apparent failure to have read the Lease. For example, the Lease requires Training to
maintain $2,000,000 general liability insurance, not to reimburse or pay the Debtor’s insurance
premium. (Doc 1, Exhibit A, p. 3). However, the Firm filed false Reports repeatedly stating that
Training owed the Debtor more than $230,000 for “Liability ins. Due under the Lease”. Doc 80,
p. 8, Doc 93, p. 10, Doc 98, p. 9, and Doc 110, p. 10.
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Conclusion
In conclusion, Training contends that justice should not condone the Firm being rewarded
by compensating it for filing and prosecuting a “baseless” Adversary Proceeding in clear violation
of FRCP 11. With respect to the false monthly Reports filed by the Firm, a debtor’s operating
reports are the means by which creditors can monitor the debtor’s post-petition operation A
debtor’s operating reports have been characterized as the “life-blood” of the Chapter 11 process.
In re Tucker, 411 B.R. 530, 535 (S.D. Ga. 2009). Avoiding the invitation to graphically extend
the Tucker Court’s analogy, Training instead simply contends that the significance of the
requirement that accurate operating reports be filed cannot be overstated.
WHEREFORE, for the reasons set forth above Panthera Training, LLC requests that the
Court; (1) DENY the Firm’s fees and costs application in full, and (2) GRANT such further relief
as this cause merits.
PANTHERA TRAINING, LLC
By: /s/ Douglas E. Kahle
Douglas E. Kahle, Esq.
VSB # 15964
DKahle@basnightkinser.com
Admitted Pro Hac Vice
308 Cedar Lakes Drive, 2nd Floor
Chesapeake, VA 23322
Phone: (757) 547-9191
Fax: (757) 547-9135
Counsel for Panthera Training, LLC
No. 2:19-bk-00787 Doc 248 Filed 11/11/20 Entered 11/12/20 11:23:14 Page 8 of 8
CERTIFICATE OF SERVICE
I, Douglas E. Kahle, Esq., Admitted Pro Hac Vice, do hereby certify that a true and accurate
copy of PANTHERA TRAINING, LLC’S OBJECTION TO BERNSTEIN-BURKLEY,
P.C.’S FEES AND COSTS APPLICATION has been served via CM/ECF and/or email on this
11th day of November, 2020, to the following:
Via E-Mail:
Aaron C. Amore, Esq. aaron@amorelaw.com
John J. Richardson, Esq. jrichardson@bernsteinlaw.com
Mark A. Lindsay, Esq. mlindsay@bernsteinlaw.com
Via CM/ECF:
Debra Lee Allen, Esq. dallen@spilmanlaw.com
Julia A. Chincheck, Esq. jchincheck@bowlesrice.com
Zachary James Rosencrance, Esq. zrosencrance@bowlesrice.com
United States Trustee ustpregion04.ct.ecf@usdoj.gov
By: /s/ Douglas E. Kahle
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