MacMenamin’s Lawyer Withdraws Citing “Serious Ethical Concerns”, Possible “Criminal Investigation”

Written By: Robert Cox

Talk of the Sound has obtained a copy of the motion filed by New Rochelle bankruptcy attorney David Stone asking Judge Adlai S. Hardin to allow him to withdraw as the lawyer for MacMenamin’s Grill, Ltd. In the motion Stone tells the court “serious ethical concerns have arisen that make it impossible for the applicant [Stone] to continue with its representation of the Debtor [MacMenamin’s Grill]. Such matters involve allegations of improper conduct in violation of the Bankruptcy Code, some of which may rise to the level of requiring criminal investigation.”

Court documents show MacMenamin’s Grill has a single shareholder, Brian Macmenamin who also serves as the president.

Concurrent with Mr. Stone’s request to withdraw, the United States Trustee brought a motion to deny the dismissal sought by the debtor in possession, to appoint a Trustee and/or to convert the case to a Chapter 7 proceeding which typically results in a liquidation of assets. Sections of the U.S. Trustee filing are excerpted below.

The U.S. Court System offers a “Bankruptcy Basics” Primer which describes a Chapter 7 Bankruptcy proceeding and the role of the trustee.

  • When a chapter 7 petition is filed, the U.S. trustee appoints an impartial case trustee to administer the case and liquidate the debtor’s nonexempt assets.
  • The case trustee will hold a meeting of creditors within 20 to 40 days at which the trustee puts the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor’s financial affairs and property…the debtor [should] cooperate with the trustee and to provide any financial records or documents that the trustee requests.
  • The primary role of a chapter 7 trustee in an asset case is to liquidate the debtor’s nonexempt assets in a manner that maximizes the return to the debtor’s unsecured creditors. The trustee accomplishes this by selling the debtor’s property if it is free and clear of liens (as long as the property is not exempt) or if it is worth more than any security interest or lien attached to the property and any exemption that the debtor holds in the property.
  • The trustee may also attempt to recover money or property under the trustee’s “avoiding powers.” The trustee’s avoiding powers include the power to: set aside preferential transfers made to creditors within 90 days before the petition; undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition; and pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the business for a limited period of time, if such operation will benefit creditors and enhance the liquidation of the estate.

Stone told the court that since January 3, 2009 MacMenamin’s Grill and its management have “refused to cooperate…or communicate in any manner whatsoever” with their own attorney.

All telephone messages have gone unreturned and my letters to Brian MacMenamin, delivered to his home and to his office, have also gone unanswered. [MacMenamin’s Grill] has not provided me with December 2008 or January 2009 monthly operating reports for filing; such that I have had to personally go directly to the bank to obtain material for filing. Further, and most importantly, based upon the allegations contained and proofs in the motion of the U.S. Trustee to appoint a Trustee and/or convert the case it appears that the legal advise we have provided to [MacMenamin’s Grill] has been ignored and [MacMenamin’s Grill] is instead following the advise of Mr. Finger, counsel for the investor Jamie Rodriguez.

Diane G. Adams, the U.S. Trustee for Region 2 submitted her motion to the court for the appointment of a Chapter 11 or Chapter 7 Trustee (the court later appointed attorney Robert L. Geltzer, a Chapter 7 Trustee). Adams cited “gross mismanagement of the estate resulting from the debtor’s many unauthorized transactions and payments.”

In determining whether cause exists for the appointment of a chapter 11 trustee, courts have looked to the several factors, including conflicts of interest; misuse of assets and funds; inadequate record keeping and reporting; non-filing of required documents; non-payment of taxes; various instances of conduct found to establish fraud or dishonesty, which includes incompetence and gross mismanagement; as well as lack of credibility and creditor confidence.

Any one of the factors listed above could support the appointment of a trustee. The presence of almost all of these factors in the instant case not only justifies, but mandates the appointment of a chapter 11 trustee. This Debtor has engaged in gross mismanagement of the bankruptcy estate. The Debtor has, without notice to either the Court or creditors, borrowed $130,556.25 from a person or entity known as Don Coqui and has apparently executed a promissory note with respect to the repayment of that indebtedness. The loan received by the Debtor constitutes unsecured credit obtained outside the ordinary course of the Debtor’s business.

The Debtor has also been using an undisclosed non-DIP PayPal Account to transfer funds in and out of the Debtor’s DIP Operating Account. Undisclosed third parties also appear to have the ability to make withdrawals and transfers out of the Debtor’s DIP-EFT Chefwork’s Account. The Debtor has bounced over 50 checks through January 31, 2009, including payroll checks, rent checks and State sales tax checks. Nor is the Debtor current on its post-petition obligations, including rent, utilities and equipment leases. It also appears that the Debtor has hired and paid a consultant without filing a retention application. The creditors of the Debtor have also expressed concern that if this case is dismissed, they will not see any recovery. Finally, the Debtor has breached its fiduciary obligations to file its monthly operating reports. The repeated violations of the requirements and protections of the Bankruptcy Code clearly constitute cause for the appointment of a trustee…

The motions filed by Adams and Stone were approved by the court.