Krasny et al v. Bagga et al

I N THE U NITED S TATES B ANKRUPTCY C OURT
F OR THE E ASTERN D ISTRICT OF P ENNSYLVANIA
In re 	: Chapter 7
:
JAMUNA REAL ESTATE, LLC 	: Bankruptcy No. 04-37130
UNITED MANAGEMENT SERVICES, INC. 	: Bankruptcy NO. 04-37132
BAGGA ENTERPRISES, INC. 	: Bankruptcy No. 04-37136
Debtor(s) 	:
:
MARVIN KRASNY, IN HIS CAPACITY AS 	:
CHAPTER 7 TRUSTEE OF UNITED 	:
MANAGEMENT SERVICES, INC.; 	:
MARVIN KRASNY, IN HIS CAPACITY AS 	:
CHAPTER 7 TRUSTEE OF JAMUNA REAL 	:
ESTATE LLC; GARY SEITZ, IN HIS 	:
CAPACITY AS CHAPTER 7 TRUSTEE OF 	:
BAGGA ENTERPRISES, INC. AND FL 	:
RECEIVABLES TRUST 2002-A 	:
Plaintiffs 	:
:
v. 	:
PRATPAL BAGGA; KHUSHVINDER BAGGA; 	:
RAVINDER CHAWLA; HARDEEP CHAWLA; 	:
WELCOME GROUP, INC.; K&P REAL 	:
ESTATE LLC; WORLD APPAREL PRODUCTS,:
INC. D/B/A/ SJM TRADING COMPANY, 	:
D/B/A TEN TIGERS; AMERICAN 	:
MERCHANDISE CO., INC., A/K/A 	:
AMERICAN MERCHANDISING CO.,INC.; 	:
21 ST CENTURY RESTAURANT SOLUTIONS, 	: Adv.No. 06-00128
INC.; BRAND TRADE, INC.; H.B. 	: Adv.No. 06-00129
PROPERTIES, INC.; H.B. PROPERTIES 	: Adv.No. 06-00130
LLP; SANT PROPERTIES; JOHN AND 	:
JANE DOES AND ABC COMPANIES 	:
Defendants 	:
______________________________ 	:
Opinion
By: Stephen Raslavich, United States Bankruptcy Judge.
Introduction
The Court has issued two prior opinions in this litigation
which together set out the operative background facts.
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1In re Jamuna Real Estate LLC, 365 B.R. 540 (Bankr.E.D.Pa.2007)
(ruling on motion to dismiss); In re Jamuna Real Estate LLC, 2008 WL
320299 (Bankr.E.D.Pa.) (granting partial summary judgment on RICO
claims)
2The “Chawla Defendants” consist of brothers Ravinder and Hardeep
Chawla, and certain business entities they control; to wit: World
Apparel Products, Inc., K & P Real Estate, LLC, American Merchandising
Co., Inc., 21 st Century Restaurant Solutions, Inc., and Brand Trade,
Inc.
2
Familiarity with them will be presumed and the history will not
be presented. 1
Summary of Ruling
At this juncture, the Chawla Defendants 2 seek summary
judgment in their favor as to all of the remaining counts of the
Plaintiffs’ Complaint which are directed at them. 	Their legal
theory is somewhat analogous to their premise to a previous
motion for summary judgment wherein they sought dismissal of the
Complaint’s RICO counts on the basis that Plaintiff FL
Receivables Trust 2002-A (FL Receivables) lacked assignment
standing to assert such claims. 	For the reasons discussed in its
Opinion and Order of February 6, 2008 the Court agreed and these
counts, to the extent predicated on assignee standing, were
dismissed. 	Here, the Chawla Defendants argue that all other
counts of the Complaint should be dismissed as to them because FL
Receivables has no authority to institute this lawsuit, hence it
is ultra vires and a legal nullity. 	The issues have been briefed
and the matter heard on February 5, 2008. 	The Court disagrees
with the moving parties and the Motion will be denied.
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3Attached as Ex. B to Chawla Defendants’ Motion.
4Attached as Ex. C to Chawla Defendants’ Motion.
3
Stipulated Facts
and Arguments
The parties agree that the Plaintiff is a domestic statutory
trust organized under Delaware law; that the Trust is governed by
two documents: the Owner Trust Agreement (OTA) 3 and the
Administration Services Agreement (ASA) 4; and that the Trust may
sue and be sued. 	Transcript (T-) 14, 15. 	The terms of the OTA
confirm all of this. 	See OTA §§ 2.1, 2.6, 2.11(i). 	Where the
parties are at odds is on the question of who may file suit on
behalf of the Trust.
Defendants’ arguments are alternative: first, that only
Wilmington Trust Company, the Trustee, could file suit on behalf
of the Trust; second, even if the right to sue could be
delegated, there is no proof that delegation occurred.
Defendants’ Brief, 6-9; T-6,7. 	Plaintiff, too, makes alternative
arguments: first, it reads the trust documents to allow liberal
delegation of the Trustee’s rights to file suit; and second, it
contends that by filing a Proof of Claim, the Trustee implicitly
authorized this lawsuit. 	Plaintiff’s Response, 3-8
The Proof of Claim
The Proof of Claim which was filed on behalf of the
Plaintiff was signed by the Trustee and expressly contained a
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5All that the form says in the way of a duty to investigate is to
state the criminal penalties for filing a fraudulent claim. 	See
Official Form 10, bottom of first page, italics
4
claim for damages under the RICO statute. 	From this, the
Plaintiff would have the Court infer that the Trustee authorized
the lawsuit. 	Plaintiff’s Brief, 8; T-53,54. 	The problem with
this argument is that it suffers from the fallacy of association:
the Trustee filed a Proof of Claim demanding damages under RICO;
the Complaint contains counts alleging RICO violations;
therefore, the Trustee authorized the filing of the Complaint.
But there is simply no evidence that it was the Trustee who made
the decision to file this Complaint. 	As the Defendants’ counsel
emphasized, there is a world of difference between filing a claim
in a bankruptcy case and commencing litigation. 	T-33,34. 	They
are governed by different rules of procedure. 	Compare B.R. 3001
et seq. with B.R. 7001 et seq. 	In particular, the latter is
governed to a large extent by the Federal Rules of Civil
Procedure. 	See, generally, Part VII of the Bankruptcy Rules of
Procedure. 	Among those rules is the duty to reasonably
investigate the basis of the claims raised in a complaint. 	See
B.R. 9011. 	Bankruptcy Rule 3001 requires that a Proof of Claim
conform to the Official Form. 	B.R. 3001(a) 5 ; 9 Collier on
Bankruptcy ¶ 3001.03[1] (15 th ed. rev.) 	Simply put, the
Trustee’s having filed a Proof of Claim is not probative of
whether the Trustee affirmatively decided to file a lawsuit. 	But
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6See Restatement (Third) of Trusts, § 227(c) (adopting prudent
investor rule which recognizes that a trustee may be required to
delegate investment decisions under certain circumstances; see also
id., Comment j.
5
did someone else have the authority to make such a decision?
Delegation
Typically, a trustee is charged with administering a trust.
See Restatement (Third) of Trusts, § 76. 	For the Defendants,
this means that the Trustee may not delegate those duties which
are charged to it under the Trust. 	Indeed, it is a principle of
trust law that a trustee has a duty to personally perform the
responsibilities of the trusteeship except as a prudent person
might delegate those responsibilities to others. 	See Scott &
Fratcher, Law of Trusts, § 171 (Fourth ed. 2001); see also
Restatement (Third) Trusts § 171.
However, this rule has since evolved to meet the needs of
business. 	One commentator has observed that “the nondelegation
rule of the law of trusts entered the 1990's considerably
weakened.” John H. Langbein, Reversing the NonDelegation Rule of
Trust Investment Law, 59 Mo.L.Rev. 105, 114 (Winter 1994). 	The
Restatement of Trusts has been revised to effectively reverse the
rule with regard to investment of trust funds. 6 Instruments which
govern a trust now often contain flexible management provisions
which place administrative duties on an entity other than the
trustee. 	Delaware, for example, has accordingly amended its
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6
business trust law to relax the traditional rule. 	Section 3806
of the Delaware domestic statutory trust law provides that
“[e]xcept to the extent otherwise provided in the governing
instrument of a statutory trust, the business and affairs of a
statutory trust shall be managed by or under the direction of its
trustees.” 12 Del.C. § 3806(a) (emphasis added). 	As one Court
has remarked:
[U]nlike an ordinary property trust that is
instinct with fiduciary obligation, a
“business trust” is simply an alternative
form of business organization, see generally
Morrissey v. Commissioner of Internal
Revenue, 296 U.S. 344, 357, 56 S.Ct. 289, 80
L.Ed. 263 (1935), designed, especially in
Delaware, to give sophisticated commercial
parties unusual flexibility in structuring
their ventures, see R. Franklin Balotti and
Jesse A. Finkelstein, The Delaware Law of
Corporations and Business Organizations, §
25.1.
Calvin Klein Trademark Trust v. Wachner, 123 F.Supp.2d 731, 734
(S.D.N.Y.2000) (emphasis added); see also James A. Florach and
Martin I. Lubaroff, The Best Entity for Doing Business, Delaware
Business Trusts, 937 PLI/Corp 371, 375-76 (April-May 1996)
(noting act’s extremely flexible management provisions); accord
John H. Langbein, The Secret Life of the Trust: The Trust as an
Instrument of Commerce, 107 Yale L.J. 165, 183-86 (October 1997)
(identifying key attribute of a Delaware business trust to be the
flexibility of design in matters of governance); Tamar Frankel,
The Delaware Business Trust Failure as the New Corporate Law, 23
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7
Cardozo L.Rev. 325, 326 (November 2001) (speculating as to why
counsel are not availing themselves of this flexible business
form) 	The Delaware business trust has been identified as a
business form well suited to securitization. 	See Report of
Committee on Bankruptcy and Corporate Reorganization of the Bar
Association of the City of New York, New Developments in
Structured Finance, 56 Bus.Law. 95, 174 (November 2000). 	To what
extent does the Plaintiff Trust exhibit these characteristics?
The Trust Documents
and Delegation
The OTA specifically provides that the Trustee may delegate
its administrative duties to someone else:
[]the Owner Trustee shall be deemed to have
discharged its duties and responsibilities
hereunder and under the Related Documents to
the extent other Persons have agreed in the
Administration Services Agreement to perform
such acts or to discharge such duties of the
Owner Trustee or the Owner Trust hereunder or
under any Related Document.
Owner Trust Agreement 	§ 6.2 (emphasis added). 	The
Administrative Services Agreement referred to was entered into
upon creation of the Trust. 	See OTA § 6.4. 	It names Prudential
Securities Credit Corp., LLC (PSCC) as “Administrator.” 	See ASA,
1. 	As Administrator, PSCC was to provide general bookkeeping and
accounting services. 	ASA § 2(a)(i)-(v). 	In addition, it was
required “to take any appropriate action that is the duty of the
Owner Trust to take pursuant to the Related Documents.” 	Id. §
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8
2(b). 	Plaintiff relies principally on this provision from
subsection 2(b) in asserting its right to file suit. 	Plaintiff’s
Brief, 2. 	Defendants disagree contending that the such a
reading cannot be reconciled with the rest of the subsection. 	T-
17, 27-30.
The Court finds the Defendants’ reading of the trust
documents to be hyper-technical. 	Contrary to their essential
premise, a great deal of flexibility is afforded a trust drafter
under Delaware law. 	This appears to have been the result of the
1994 amendments to the statute. 	See 12 Del.C. § 3806, Text
Amendment, 69 Laws 1994, ch. 265, §§ 3-5. 	That change renders
inapposite the case law relied upon by Defendants. 	See T-22
citing Riggs National Bank v. Zimmer, 1977 WL 5316 *14 (Del.Ch.)
(stating the general rule prohibiting delegation as it applied to
a trust created as part of estate plan). 	The law in Delaware,
then, is that delegation of basic administrative duties such as
the right to sue may be entirely proper.
Neither does the Court accept Defendants’ argument that the
trust’s terms are ambiguous (T-13, 17) There are a number of
reasons for this. 	First, the Administrator is charged with two
sets of duties: in addition to providing bookkeeping and
accounting duties, the Administrator must also “take any
appropriate action that it is the duty of the Owner Trust or
Owner Trustee to take pursuant to the Related Documents or the
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9
Contract Assets.” 	See OTA § 6.4(a). 	Defendants, however, see
this “general duty” as so at odds with the specific tasks
described in the same paragraph as to render them surplusage. 	T-
12, 13. 	In other words, there would be no need for the specific
task mentioned if the general duty is interpreted so broadly as
to empower the Administrator to do anything. 	But the Court finds
no inconsistency here. 	Like the Plaintiff, the Court finds them
to be complementary, not limiting (T-49). 	Moreover, clarity is
also demonstrated by an apparent redundancy: 	the Administrator’s
duties as first stated in the OTA are then repeated almost
verbatim in the ASA. 	Compare OTA § 6.4(a) with ASA § 2(a) and
(b).
Second, Defendants are not signatories to the Trust
agreement. 	To what extent, then, may they assert that the terms
of the Trust are vague? 	The Court notes that the parties to this
arrangement—Wilmington and PSCC—agree on what it means. 	The
Trustee’s representative stated in her deposition that PSCC was
authorized to file this litigation; PSCC’s representative said
the same in his declaration. 	See Defendants’ Supplemental Brief,
Ex. A, Deposition of M. Pupillo, 104-05; Plaintiff’s Response,
Schwartz Affidavit, ¶ 5. 	This is confirmed by the parties’
conduct as well. 	See Capitol Bus Co. V. Blue Bird Coach Lines,
Inc., 478 F.2d 556, 560 (3d Cir.1973) (stating that course of
dealing may indicate parties’ mutual intent). 	In sum, Defendants
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7Plaintiff puts it another way: the Administrator is also a
beneficiary so there is no chance of harming a third party. 	T-57
10
never satisfactorily explain why those provisions in the OTA and
ASA should be interpreted differently.
And aside from contract interpretation, the Court queries
whether any harm is risked by delegation? 	Typically, a trust is
created for the benefit of a third party not in control of the
trust property. 	Where the trust in question is a vehicle for an
estate plan, that beneficiary is often incapable or otherwise
unable to manage the trust property responsibly; thus the
creation of a fiduciary to assume that duty. 	But here the
beneficiaries are the holders of the certificates of the Trust. 7
Their interest is the income derived from the securitized loans.
And as the OTA makes clear, it is the general duty of the Owner
Trustee or the person acting in his stead to “administer the
owner Trust in the interest of the Owner Trust
Certificateholders.” 	OTA § 6.2 (emphasis added). 	Likewise, the
OTA requires that the Administrator “shall … engage in such other
activities as may be required in connection with conservation of
the Owner Trust Estate … ” 	OTA § 2.3(v) (emphasis added). 	That
would require recovery on the defaulted loan. 	As Plaintiff’s
counsel emphasized, how else can the Administrator “administer”
the trust at this stage (with respect to loans in default) except
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8Indeed, the word “administer” means to “manage or conduct.”
Black’s Law Dictionary, 41 (5 th Ed.) 	See Wisconsin, Dept. of Tax. v.
Pabst, 15 Wis.2d 195, 202, 112 N.W.2d 161, 165 (1965) (applying this
dictionary definition the word to determine if certain acts committed
by inter vivos trustee constituted “administering” a trust)
11
to pursue collection and, if necessary thereto, file suit? 8 	T-45.
That is the most reasonable interpretation of PSCC’s
administrative duties with regard to the loans made to the
Defendants.
Did the Administrator
Authorize Filing Suit?
Having found that the Administrator was empowered to file
suit, the Court turns to the question of whether, in fact, PSCC
so decided. 	The OTA provides generally that the Trustee could
file suit with the prior consent of the Majority Owner Trust
Certificateholders (i.e., the beneficiaries). 	For actions to
collect on contracts owed the trust, however, no prior consent is
needed. 	See OTA § 4.1(xii). 	So if the Trustee had the
discretion to sue, so would the Administrator. 	Did PSCC make
that decision?
The Plaintiff maintains that it did relying principally on
the affidavit of Edward M. Schwartz, Jr., Senior Vice President
of PSCC. 	According Mr. Schwarz, PSCC—as Administrator—expressly
authorized the Plaintiff to commence this litigation. 	See
Plaintiff’s Response, Schwartz Affidavit, ¶5. 	Viewing this
evidence in the light most favorable to the Plaintiffs, the Court
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12
must conclude that PSCC properly commenced this litigation.
Summary
The Court finds that the operative trust documents
permissibly delegated to the Administrator the discretion to file
suit against the Defendants. 	Evidence exists in the record
demonstrating that PSCC, the Administrator, affirmatively made
that decision. 	Accordingly, the Chawla Defendants’ Motion for
Partial Summary Judgment is denied.
By the Court:
_________________________________
Stephen Raslavich
United States Bankruptcy Judge
Dated: 	April 7, 2008
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I N THE U NITED S TATES B ANKRUPTCY C OURT
F OR THE E ASTERN D ISTRICT OF P ENNSYLVANIA
In re 	: Chapter 7
:
JAMUNA REAL ESTATE LLC 	: Bankruptcy No. 04-37130
UNITED MANAGEMENT SERVICES, INC. 	: Bankruptcy NO. 04-37132
BAGGA ENTERPRISES, INC. 	: Bankruptcy No. 04-37136
Debtor(s) 	:
:
MARVIN KRASNY, IN HIS CAPACITY AS 	:
CHAPTER 7 TRUSTEE OF UNITED 	:
MANAGEMENT SERVICES, INC.; 	:
MARVIN KRASNY, IN HIS CAPACITY AS 	:
CHAPTER 7 TRUSTEE OF JAMUNA REAL 	:
ESTATE LLC; GARY SEITZ, IN HIS 	:
CAPACITY AS CHAPTER 7 TRUSTEE OF 	:
BAGGA ENTERPRISES, INC. AND FL 	:
RECEIVABLES TRUST 2002-A 	:
Plaintiffs 	:
:
v. 	:
PRATPAL BAGGA; KHUSHVINDER BAGGA; 	:
RAVINDER CHAWLA; HARDEEP CHAWLA; 	:
WELCOME GROUP, INC.; K&P REAL 	:
ESTATE LLC; WORLD APPAREL PRODUCTS,:
INC. D/B/A/ SJM TRADING COMPANY, 	:
D/B/A TEN TIGERS; AMERICAN 	:
MERCHANDISE CO., INC., A/K/A 	:
AMERICAN MERCHANDISING CO.,INC.; 	:
21 ST CENTURY RESTAURANT SOLUTIONS, 	:
INC.; BRAND TRADE, INC.; H.B. 	:
PROPERTIES, INC.; H.B. PROPERTIES 	:Adv.No. 06-00128
LLP; SANT PROPERTIES; JOHN AND 	:Adv.No. 06-00129
JANE DOES AND ABC COMPANIES 	:Adv.No. 06-00130
Defendants 	:
______________________________ 	:
Order
AND NOW, upon consideration of the Chawla Defendants’ Motion
for Partial Summary Judgment as to Claims of Plaintiff FL
Receivables Trust 2002-A, the Plaintiff’s Response, after hearing
held February 5, 2008, and for the reasons set forth in the
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2
attached Opinion, it is hereby
ORDERED that the Motion is Denied.
By the Court:
Stephen Raslavich
Dated: 	April 7, 2008 	United States Bankruptcy Judge
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3
Interested Parties:
George Conway, Esquire
Office Of The U.S. Trustee
833 Chestnut Street
Suite 500
Philadelphia PA 	19106
Counsel for Plaintiffs
Lawrence J. Tabas, Esquire
OBERMAYER REBMAN MAXWELL & HIPPEL LLP
One Penn Center, 19 th Fl.
1617 JFK Blvd
Philadelphia, PA 19103
Patrick E. Fitzmaurice, Esquire
THATCHER PROFFIT & WOOD LLP
50 Main Street
White Plains, NY 10606
Counsel for Defendants
Richard M. Simins, Esquire
Jeffrey Carbineau, Esquire
BUCHANAN INGERSOLL & ROONEY PC
1835 Market Street, 14 th Fl
Philadelphia, PA 19103-2985
Andrew Teitelman, Esquire
380 Red Lion Road, Ste 202
Huntingdon Valley, PA 19006
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