Nader Modanlo

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
IN RE: NADER MODANLO 	:
NADER MODANLO 	:
Appellant 	:
v. 	: Civil Action No. DKC 2006-0268
:
MICHAEL AHAN
:
Appellee
:
MEMORANDUM OPINION
This 	case 	is 	before 	the 	court 	on 	appeal 	from 	the 	Order 	of
United 	States 	Bankruptcy 	Judge 	Nancy 	V. 	Alquist 	appointing 	a
trustee upon the motion of a creditor, Michael Ahan, in the Chapter
11 case filed by Nader Modanlo (“Debtor”), Case no. 05-26549-NVA.
(Paper 6). 	Ahan also has filed a motion to supplement the record
on 	appeal. 	(Paper 	11). 	Oral 	argument 	is 	deemed 	unnecessary
because the facts and legal arguments are adequately presented in
the 	briefs 	and 	record, 	and 	the 	decisional 	process 	would 	not 	be
significantly 	aided 	by 	oral 	argument. 	See 	Fed.R.Bankr.P. 	8012.
For the reasons that follow, the court will affirm the bankruptcy
court’s Order.
I. 	Background
The following facts are undisputed, unless noted. 	Debtor has
been 	involved 	in 	ongoing 	litigation 	over 	the 	management 	of 	two
companies, 	Final 	Analysis, 	Inc. 	(“FAI”), 	and 	Final 	Analysis
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1 In the papers, NYS is also referred to as New York Satellite
Industries, LLC.
2 Ahan was a party to the Montgomery County litigation. 	He is
identified 	as 	a 	“third-party 	defendant/counterclaim-plaintiff.”
(Paper 1, ex. 16).
2
Communications Services, Inc. (“FACS”), which he founded with Ahan
in 	the 	early 	1990s. 	FAI 	is 	an 	engineering 	company. 	FACS 	was
established 	to 	develop 	and 	operate 	a 	worldwide 	satellite
telecommunications system. 	When FACS was formed, FAI owned 100% of
FACS’s voting shares.
Sometime in the late 1990s, disputes arose between Debtor and
Ahan over the management and direction of the companies. 	In 2001,
FAI 	filed 	an 	involuntary 	petition 	under 	Chapter 	11 	of 	the
Bankruptcy Code. 	As part of FAI’s bankruptcy, the bankruptcy court
ordered 	FAI 	to 	sell 	its 	assets, 	which 	included 	a 	majority 	of 	the
outstanding stock in FACS. 	A company solely owned by Debtor, New
York 	Satellite, 	LLC 	(“NYS”), 	was 	the 	successful 	bidder 	for 	the
stock. 1
Also in 2001, fourteen shareholders of FACS filed direct and
derivative 	claims 	against 	FACS, 	FAI, 	and 	Debtor 	in 	the 	Circuit
Court for Montgomery County, alleging misappropriation, fraud, and
breach 	of 	fiduciary 	duty 	on 	the 	part 	of 	Debtor 	and 	FAI. 2 	On
October 22, 2004, a jury found that Debtor had breached a fiduciary
duty owed to Ahan, and awarded Ahan $103.93 million. 	On July 14,
2005, 	Circuit 	Court 	Judge 	Michael 	D. 	Mason 	held 	a 	hearing 	during
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3 	The 	final 	judgment 	in 	the 	General 	Dynamics 	litigation 	was
entered April 17, 2006, after Judge Alquist entered her ruling on
the motion to appoint a trustee.
3
which 	he 	ordered 	Debtor 	to 	file 	a 	$1 	million 	bond 	while 	Debtor
appealed the $103.93 million judgment, but stayed his order for ten
days. 	On July 22, 2005, Debtor filed a petition under Chapter 11
of the Bankruptcy Code.
On August 8, 2005, Debtor filed schedules and his statement of
financial affairs with the bankruptcy court. 	The personal property
identified therein included Debtor’s interest in NYS and FACS. 	In
the 	schedules, 	Debtor 	listed 	the 	value 	of 	his 	interest 	in 	NYS 	at
“0.00.” 	NYS 	has 	three 	assets: 	It 	owns 	a 	majority 	of 	the 	voting
stock in FACS; it owns account receivables from FACS; and it owns
two 	contracts 	with 	Polyot, 	the 	Russian 	space 	agency, 	for 	launch
services, which Debtor claims are for the benefit of FACS. 	FACS,
in 	turn, 	has 	two 	significant 	assets: 	rights 	to 	contract 	with
Polyot, 	which 	Debtor 	has 	valued 	at 	$56 	million; 	and 	a 	verdict
obtained 	in 	the 	United 	States 	District 	Court 	for 	the 	District 	of
Maryland 	against 	General 	Dynamics 	on 	September 	6, 	2005, 	Case 	no.
PJM 03-307. 	The jury in the General Dynamics litigation originally
awarded FACS $129 million. 	The award was reduced to $11.87 million
after 	Judge 	Peter 	J. 	Messitte 	granted 	in 	part 	a 	judgment 	as 	a
matter of law. 3 	FACS has filed an appeal.
On August 29, 2005, Debtor’s first meeting of creditors took
place 	and 	was 	continued 	on 	September 	12, 	2005. 	During 	both
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4 Prospect Telecom is a Swiss holding company.
5 Debtor also asserts that Ahan was given information relating
to NYS’s loans in post-judgment discovery in the Montgomery County
litigation.
4
meetings, Debtor was asked questions about a loan made to NYS by a
third 	party, 	including 	whether 	the 	loan 	was 	secured. 	Debtor
asserted 	that 	he 	could 	not 	answer 	the 	questions 	due 	to
confidentiality provisions in the loan documents. 	A third meeting
with the creditors was not held.
On November 23, 2005, Ahan filed a motion to appoint a trustee
or, 	in 	the 	alternative, 	to 	convert 	the 	case 	to 	Chapter 	7 	of 	the
Bankruptcy 	Code. 	Judge 	Alquist 	held 	hearings 	over 	two 	days,
December 20 and 21, 2005. 	Most of the hearing was devoted to the
testimony 	of 	Debtor, 	one 	of 	two 	witnesses 	called. 	Debtor
identified NYS’s lenders as his brother and Prospect Telecom, AG. 4
He 	said 	NYS 	borrowed 	approximately 	$1.8 	million 	from 	his 	brother
and $10 million from Prospect Telecom. 5 	NYS used its stock in FACS
as collateral for the Prospect Telecom loan. 	Debtor further stated
that the Prospect Telecom loan has been in default since 2004, NYS
was 	given 	twelve 	months 	to 	cure 	the 	default, 	and 	the 	extension
expired in January 2005.
On 	the 	first 	day 	of 	testimony, 	Ahan 	and 	the 	United 	States
Trustee learned, apparently for the first time, that after Debtor
filed 	for 	bankruptcy, 	Prospect 	Telecom 	began 	to 	take 	steps 	to
perfect 	and 	secure 	the 	loan. 	Debtor 	testified 	that 	in 	August,
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6 Prospect Telecom was unsecured until it filed its financing
statement on September 8, 2005. 	Debtor contends that because NYS
was 	in 	default 	and 	could 	not 	cure, 	NYS 	could 	have 	filed 	a
bankruptcy petition, and if it had done so within 90 days following
Prospect Telecom’s UCC filing on September 8, 2005, NYS might have
been able to avoid the security interest as a preferential transfer
pursuant to 11 U.S.C. § 547(b). 	(Paper 12, at 16).
5
September, 	and 	October 	2005, 	he 	received 	several 	calls 	from
attorneys 	representing 	Prospect 	Telecom 	about 	the 	loan 	being 	in
default and that Prospect Telecom wished to take possession of the
FACS 	stock 	certificates, 	which 	Prospect 	Telecom 	should 	have 	done
when the loan was signed. 	In October 2005, Prospect Telecom filed
a 	replevin 	action 	in 	the 	Circuit 	Court 	for 	Montgomery 	County
seeking to obtain the stock certificates. 	Debtor testified that he
made a business decision not to fight the replevin action because
NYS 	was 	in 	default 	and 	it 	could 	not 	cure 	the 	default. 	He 	stated
that 	he 	made 	the 	decision 	without 	hiring 	an 	attorney, 	and 	after
consulting 	on 	one 	occasion 	with 	his 	bankruptcy 	attorney, 	Joel
Aronson. 	He 	explained 	that 	he 	didn’t 	hire 	a 	lawyer 	because 	“I
didn’t have the money.” 	(Paper 1, ex. 11, at 45). 	On November 7,
2005, 	the 	Montgomery 	County 	Circuit 	Court 	ordered 	Debtor 	to 	turn
over 	the 	FACS 	stock 	certificates 	owned 	by 	NYS, 	which 	he 	did 	on
November 9, 2005. 6
On 	December 	22, 	2005, 	the 	bankruptcy 	court 	granted 	Ahan’s
motion 	to 	appoint 	a 	trustee. 	The 	Order 	was 	entered 	December 	23,
2005. 	Debtor 	filed 	a 	timely 	appeal. 	On 	February 	24, 	2006,
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7 Ahan filed a motion to supplement the record on appeal with
this ruling, which Debtor opposes, contending that considering the
ruling without the parties’ papers is misleading. 	With or without
a 	motion 	to 	supplement, 	this 	court 	is 	entitled 	to 	take 	judicial
notice 	of 	the 	records 	of 	the 	bankruptcy 	court: 	“Moreover, 	the
Bankruptcy Court is considered ‘a unit of the district court’ under
28 	U.S.C. 	§ 	151, 	and 	we 	believe 	a 	district 	court 	should 	properly
take judicial notice of its own records.” Anderson v. Fed. Deposit
Ins. 	Corp., 	918 	F.2d 	1139, 	1141 	(4 th 	Cir. 	1990). 	Certainly, 	the
stay denial is relevant to the issue before this court on appeal,
and Ahan’s motion will be granted.
8 Ahan raises the question of whether the bankruptcy court’s
order is final for purposes of appellate review. 	The United States
Court 	of 	Appeals 	for 	the 	Fourth 	Circuit 	has 	held 	that 	an 	order
denying 	appointment 	of 	a 	Chapter 	11 	trustee 	is 	a 	final 	decision
appealable 	under 	28 	U.S.C. 	§ 	1291. 	See 	Comm. 	of 	Dalkon 	Shield
Claimants v. A.H. Robins Co, 828 F.2d 239, 241 (4 th Cir. 1987). 	In
so ruling, the court cited with approval In re Paolino, 60 B.R. 828
(Bankr.E.D.Pa. 1986), in which the court treated the appointment of
a trustee as final for purposes of review. 	Dalkon Shield, 828 F.2d
at 241. 	In an unpublished decision, Harford v. Potomac Valley Farm
Credit, ACA, 911 F.2d 722, 1990 WL 116729, at **1 (4 th Cir. 1990),
the Fourth Circuit relied on Dalkon Shield to state expressly that
a 	bankruptcy 	court 	order 	appointing 	a 	trustee 	may 	be 	considered
final and appealable, and therefore it had jurisdiction to consider
the 	appeal. 	The 	court 	finds 	it 	has 	jurisdiction 	to 	hear 	the
present appeal.
6
Bankruptcy 	Judge 	Alquist 	denied 	Debtor’s 	motion 	to 	stay 	the
appointment of the trustee pending appeal. 7
II. 	Standard of Review
On appeal from the bankruptcy court, the district court acts
as an appellate court and reviews the bankruptcy court’s findings
of fact for clear error and conclusions of law de novo.8 	See In re
Johnson, 	960 	F.2d 	396, 	399 	(4 th 	Cir. 	1992); 	Travelers 	Ins. 	Co. 	v.
Bryson Prop., XVIII (In re Bryson Prop., XVIII), 961 F.2d 496, 499
(4 th Cir.), cert. denied sub nom., Bryson Prop., XVIII v. Travelers
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7
Ins. 	Co., 	506 	U.S. 	866 	(1992). 	A 	bankruptcy 	court’s 	order
approving 	the 	appointment 	of 	a 	trustee 	is 	reviewed 	for 	abuse 	of
discretion. 	See 	Comm. 	of 	Dalkon 	Shield 	Claimants 	v. 	A.H. 	Robins
Co, 828 F.2d 239, 242 (4 th Cir. 1987); In re Fraidin, 43 F.3d 1466,
1994 WL 687306, at *1 (4 th Cir. 1994)(unpublished)(“[T]he question
here is not whether the court would have appointed a trustee had it
been deciding the question in the first instance, but whether the
bankruptcy court abused its discretion in appointing a trustee.”).
III. 	Analysis
Debtor 	presents 	the 	following 	issue 	on 	appeal: 	“Did 	the
Bankruptcy Court err when it granted Ahan’s motion for appointment
of a Trustee?”
The 	bankruptcy 	court 	may 	appoint 	a 	trustee 	in 	a 	Chapter 	11
case pursuant to 28 U.S.C. § 1104(a)(1), which provides in part:
(a) 	At 	any 	time 	after 	the 	commencement 	of
the case but before confirmation of a plan, on
request 	of 	a 	party 	in 	interest 	or 	the 	United
States 	trustee, 	and 	after 	notice 	and 	a
hearing, the court shall order the appointment
of a trustee –
(1) 	for 	cause, 	including 	fraud,
dishonesty, 	incompetence, 	or 	gross
mismanagement 	of 	the 	affairs 	of 	the
debtor 	by 	current 	management, 	either
before 	or 	after 	the 	commencement 	of 	the
case, or similar cause . . . ; or
(2) 	if 	such 	appointment 	is 	in 	the
interest 	of 	creditors, 	any 	equity
security holders, and other interests of
the 	estate 	without 	regard 	to 	the 	number
of holders of securities of the debtor or
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9 Relying on Collier on Bankruptcy, Debtor asserts that there
is 	a 	strong 	presumption 	against 	appointing 	a 	trustee, 	and 	that
“[t]here is no indication from the Bankruptcy Court’s ruling that
this presumption was considered.” 	(Paper 6, at 4-5). 	The record
shows 	that 	the 	Bankruptcy 	Court 	considered 	this 	point 	in 	handing
down 	her 	ruling. 	Judge 	Alquist 	read 	from 	Collier 	on 	Bankruptcy,
stating: “Although there is generally a presumption that the debtor
is entitled to remain in possession during a Chapter 11 case, there
are cases in which it is inappropriate to permit the debtor and its
management 	to 	continue 	in 	possession.” 	(Paper 	1, 	ex. 	12, 	at
16)(quoting Collier on Bankruptcy 1104.02[1] (15 th ed. rev. 2005)).
8
the 	amount 	of 	assets 	or 	liabilities 	of
the debtor.
The 	bankruptcy 	court 	found 	there 	was 	cause 	to 	appoint 	a 	trustee
under 	this 	section. 9 	(Paper 	1, 	ex. 	12, 	at 	4). 	Her 	reasons
included:
[T]he 	debtor’s 	wearing 	of 	multiple 	hats 	and
holding 	of 	multiple 	and 	perhaps 	conflicting
duties 	to 	the 	creditors 	or 	shareholders 	of
different 	companies 	as 	well 	as 	to 	the
creditors of this estate; the debtor’s lack of
business operations and the licenses necessary
to conduct those businesses; the inattention,
neglect 	or 	other 	inappropriate 	treatment 	of
the replevin action in this case that may have
led 	to 	the 	loss 	o[r] 	diminution 	in 	value 	of
this estate’s largest assets; and the loss of
confidence 	in 	the 	debtor 	by 	the 	creditor 	in
this case and the U.S. Trustee.
Id. 	at 	20. 	Debtor 	challenges 	certain 	factual 	findings 	that 	the
bankruptcy 	court 	made 	in 	reaching 	its 	decision 	to 	grant 	Ahan’s
motion to appoint a trustee.
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9
A. The Transfer of the FACS Stock Due to Mismanagement
The bankruptcy court stated that “the most compelling reason”
for appointment of a trustee was Debtor’s handling of the replevin
action filed by Prospect Telecom. 	The court stated:
Mr. 	Modanlo 	took 	no 	steps 	to 	have 	New 	York
Satellite 	defend 	this 	action 	in 	any 	way. 	An
order was entered in that case in November of
2005 	directing 	Mr. 	Modanlo 	to 	turn 	the 	stock
of New York Satellite over to Prospect Telecom
within 48 hours.
Furthermore, 	Mr. 	Modanlo 	testified 	that
he 	had 	heard 	from 	different 	lawyers 	for
Prospect Telecom starting in June of 2005 with
respect 	to 	the 	alleged 	loan 	default 	by 	New
York 	Satellite 	in 	connection 	with 	this 	loan
from 	Prospect 	Telecom 	and 	Prospect 	Telecom’s
demand for the turnover of stock as a result.
Although Mr. Modanlo testified that he refused
to 	turn 	over 	the 	stock 	to 	Prospect 	Telecom’s
lawyers, 	it 	is 	notable 	that 	at 	least 	some 	of
these demands occurred before the debtor’s 341
meetings 	and 	that 	the 	debtor 	made 	no 	mention
of this critical issue to anyone in this case.
The 	relinquishment 	of 	this 	stock,
ostensibly 	Mr. 	Modanlo’s 	estate’s 	largest
asset, 	was 	alienated 	in 	a 	replevin 	action
without defense apparently within the last two
months. 	Maybe 	this 	asset 	is 	capable 	of 	being
brought 	back 	into 	the 	estate; 	perhaps 	not.
Perhaps 	there 	are 	fraudulent 	conveyance 	or
avoidance 	actions 	available; 	perhaps 	not.
Perhaps defenses to or attacks on the replevin
order 	are 	available; 	perhaps 	not. 	But 	it 	is
clear from his testimony that Mr. Modanlo did
nothing 	to 	defend 	or 	investigate 	a 	defense.
He 	didn’t 	do 	anything, 	he 	stated, 	because 	he
didn’t know what to say to the Court.
He 	did 	not 	seek 	counsel 	for 	New 	York
Satellite 	except 	to 	confer 	with 	his 	personal
bankruptcy counsel, Mr. Aronson. 	A Chapter 11
trustee needs to investigate. 	Mr. Modanlo, by
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10 	Debtor 	asserts 	in 	his 	reply 	memorandum 	that 	there 	is 	no
evidence of current mismanagement, and most of the allegations of
mismanagement 	pertain 	to 	the 	mid-1990s. 	(Paper 	17, 	at 	2). 	The
bankruptcy 	court, 	however, 	relied 	solely 	on 	evidence 	relating 	to
Debtor’s 	management 	since 	he 	filed 	for 	Chapter 	11 	bankruptcy.
(Paper 1, ex. 12, at 9). 	Debtor also asserts that his past acts do
not support the appointment of a trustee. 	(Paper 17, at 13). 	As
(continued...)
10
his actions, has demonstrated that he has not
or cannot do this. 	He committed a major asset
to 	leave 	the 	estate 	without 	investigation 	or
remedies or serious consultation with counsel,
and 	Mr. 	Modanlo 	told 	no 	one 	involved 	in 	this
case 	about 	the 	creditor 	demands 	or 	the
replevin action, including the U.S. Trustee.
In 	this 	Court’s 	view, 	his 	actions 	with
respect to this suit and this asset constitute
mismanagement or incompetence. 	His actions in
this 	regard 	were 	certainly 	not 	in 	the
furtherance of the interests of his creditors
and the estate.
(Paper 1, ex. 12, at 13-14).
Debtor 	makes 	several 	challenges 	to 	the 	bankruptcy 	court’s
findings of mismanagement: (1) It was clear from the loan agreement
between 	NYS 	and 	Prospect 	Telecom 	that 	NYS 	was 	in 	default, 	and 	it
would have been improper for Debtor to interpose an answer for the
purpose of delay; (2) Debtor had no legal authority to contest the
replevin action pursuant to Delaware law or, as Ahan suggested, to
place NYS into bankruptcy; (3) there was no transfer of FACS stock,
only 	possession 	of 	the 	stock 	certificates 	was 	given 	to 	Prospect
Telecom; and (4) attorneys for Ahan were aware of the entire loan
agreement, 	and 	they 	knew 	about 	the 	condition 	and 	status 	of 	the
loan. 10 	(Paper 6, at 5-14).
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10 (...continued)
noted 	previously, 	the 	bankruptcy 	court’s 	decision 	was 	based 	on
current management, therefore Debtor’s past acts are irrelevant to
this appeal.
11
The bankruptcy court was not clearly erroneous in stating that
Debtor’s 	actions 	“constitute 	mismanagement 	or 	incompetence.”
Although 	Debtor 	claims 	he 	could 	not 	present 	a 	defense 	to 	the
replevin 	action, 	he 	reached 	this 	conclusion 	without 	benefit 	of
legal counsel, other than conferring with his personal bankruptcy
counsel, 	Mr. 	Aronson. 	There 	is 	no 	suggestion 	that 	Debtor 	ever
considered 	the 	possibility 	of 	mounting 	a 	legal 	defense 	to 	the
replevin action. 	With respect to Debtor’s argument that pursuant
to 	Delaware 	statute 	he 	had 	no 	legal 	authority 	to 	contest 	the
replevin action because he had filed for bankruptcy, Debtor did not
raise 	this 	issue 	before 	the 	bankruptcy 	court, 	and 	the 	court 	will
not consider this new argument that was raised for the first time
on 	appeal. 	See 	Wheatley 	v. 	Wicomico 	County, 	Maryland, 	390 	F.3d
328, 335 (4 th Cir. 2004).
With respect to Debtor’s argument that there was no transfer
of 	FACS 	stock 	(only 	transfer 	of 	the 	stock 	certificate), 	this
argument misconstrues the bankruptcy court’s rationale. 	Although
the bankruptcy court expressed concern that Debtor relinquished the
stock, the bankruptcy court’s primary concerns were with Debtor’s
lack 	of 	legal 	defense 	to 	the 	replevin 	action 	and 	his 	failure 	to
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11 In her order denying the stay pending appeal, Judge Alquist
stated: 	“Whether 	by 	virtue 	of 	his 	action 	(or 	inaction) 	in 	the
replevin 	suit, 	the 	Debtor 	merely 	allowed 	Prospect 	Telecom 	to
perfect a lien in the stock, or whether he permitted the transfer
of ownership, does not change the outcome or the Court’s view. 	The
Debtor stood by, to the potential detriment of creditors and other
parties 	in 	his 	bankruptcy 	case, 	while 	a 	significant 	asset 	was
encumbered or transferred.” (Paper 11, ex. A, at 7).
12
inform 	other 	parties 	to 	the 	bankruptcy 	action 	about 	Prospect
Telecom’s actions on the loan default. 11
Finally, the evidence does not support Debtor’s assertion that
attorneys 	for 	Ahan 	were 	fully 	aware 	fully 	of 	the 	loan 	agreement,
including 	the 	loan’s 	status. 	Although 	there 	is 	evidence 	that
Ahan’s 	attorneys 	knew 	some 	of 	the 	information 	regarding 	the
Prospect 	Telecom 	loan, 	they 	did 	not 	know 	all 	of 	the 	information,
and 	they 	knew 	nothing 	about 	Prospect 	Telecom’s 	replevin 	action
relating 	to 	NYS’s 	most 	significant 	asset. 	According 	to 	Debtor’s
testimony 	during 	the 	hearing, 	most 	of 	Prospect 	Telecom’s 	actions
with respect to the loan default took place in August, September,
and 	October 	2005, 	when 	attorneys 	representing 	Prospect 	Telecom
notified 	Debtor 	that 	it 	wished 	to 	take 	possession 	of 	the 	FACS
certificates. 	(Paper 1, ex. 11, at 40-42, 64-65). 	To the extent
that 	Debtor 	argues 	that 	he 	disclosed 	information 	relating 	to 	the
Prospect 	Telecom 	loan 	“prior 	to 	the 	bankruptcy 	filing,” 	any
disclosure would not include Prospect Telecom’s more recent actions
(e.g., telephone calls made in August, September, and October 2005
and 	the 	replevin 	action) 	which 	had 	not 	occurred 	yet. 	Although
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Debtor 	testified 	several 	times 	that 	he 	had 	relayed 	information
about Prospect Telecom’s actions to Ahan’s attorneys, it is unclear
from the transcript of the testimony what exactly he claims to have
told Ahan’s attorneys. 	Notwithstanding this ambiguity, there is no
evidence in the record that Debtor notified parties involved in the
bankruptcy 	proceeding 	about 	Prospect 	Telecom’s 	filing 	of 	the
replevin 	action, 	or 	that 	the 	end 	result 	was 	the 	transfer 	of
possession of the FACS stock certificates.
The record amply supports the bankruptcy court’s findings that
Debtor’s actions with respect to the replevin lawsuit and the FACS
stock “constitute mismanagement or incompetence,” and therefore the
finding of the bankruptcy court was not clearly erroneous.
B. Conflicts of Interest
Debtor begins his next argument by stating that the bankruptcy
court 	could 	not 	fashion 	effective 	relief, 	thus 	“it 	should 	have
withheld from rendering this judgment.” 	(Paper 6, at 15). 	Debtor
contends 	that 	appointing 	a 	trustee 	was 	ineffective 	because 	(1)
Christopher 	Mead, 	the 	trustee 	appointed 	for 	Debtor’s 	case, 	is
equally 	conflicted 	as 	Debtor, 	and 	therefore 	appointing 	a 	trustee
is 	harmful 	to 	FACS, 	NYS, 	Debtor, 	and 	his 	creditors; 	and 	(2) 	the
appointment of a trustee endangered NYS’s contracts with Polyot.
Debtor 	did 	not 	raise 	most 	of 	these 	arguments 	before 	the
bankruptcy 	court. 	To 	the 	extent 	that 	Debtor 	objects 	to 	certain
actions Mr. Mead has taken since his appointment, these objections
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are 	not 	properly 	before 	this 	court. 	The 	trustee’s 	actions 	were
never at issue in the bankruptcy court’s decision – nor could they
be – because a trustee had not been appointed yet, much less taken
action. 	Moreover, 	Debtor’s 	argument 	that 	a 	trustee 	would 	be
equally conflicted as Debtor because he or she would serve multiple
masters 	also 	was 	not 	raised 	before 	the 	bankruptcy 	court, 	and 	the
court will not consider new arguments raised for the first time on
appeal. 	See Wheatley, 390 F.3d at 335. 	Debtor also argues that a
trustee 	is 	not 	necessary 	due 	to 	acrimony 	between 	the 	parties,
(paper 	6, 	at 	19), 	however, 	the 	bankruptcy 	court 	never 	cited 	a
concern 	about 	acrimony 	between 	the 	parties 	as 	a 	factor 	in 	the
decision to appoint a trustee.
Debtor 	further 	argues 	that 	the 	appointment 	of 	a 	trustee
endangers FACS’s Polyot contracts as well as licenses issued by the
Federal Communications and permissions issued by the Department of
Defense, 	and 	therefore 	the 	appointment 	should 	be 	overturned.
Debtor 	presented 	no 	evidence 	to 	the 	bankruptcy 	court 	to 	support
this argument, nor has he designated any evidence in his appeal in
support. 	The 	bankruptcy 	court 	did 	not 	give 	specific 	factual
findings with respect to this issue, and therefore there could be
no 	clear 	error. 	Moreover, 	the 	bankruptcy 	court 	apparently 	gave
this 	argument 	little 	if 	any 	weight, 	and 	instead 	relied 	on 	other
factors, such as Debtor’s actions in the replevin actions. 	Because
there is ample evidence regarding Debtor’s actions with respect to
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the replevin action and, as will be discussed in the next section,
his 	dealings 	with 	creditors 	and 	his 	valuation 	of 	NYS, 	Debtor’s
argument is without merit.
C. Lack of Candor and Valuation of NYS
Debtor objects to the bankruptcy court’s characterization that
he was “less than forthcoming” at the creditors’ meetings and that
the 	schedules 	filed 	with 	the 	court 	“show 	at 	minimum 	a 	lack 	of
candor” because Debtor valued his interest in NYS as zero. 	(Paper
1, ex. 12, at 10). 	With respect to the creditors’ meetings, Debtor
contends 	that 	he 	was 	forthcoming 	during 	the 	meetings 	and 	that 	he
declined 	to 	answer 	only 	a 	few 	questions 	due 	to 	confidentiality
agreements; 	Ahan 	already 	knew 	the 	information 	sought; 	and 	the
opportunity 	to 	question 	Debtor 	further 	was 	never 	pursued 	by 	the
United 	States 	Trustee 	or 	by 	Ahan. 	(Paper 	6, 	at 	22-24). 	With
respect to the schedules, Debtor asserts that his valuation of NYS
was his “guesstimate,” that Debtor had no way of predicting whether
the General Dynamics litigation would result in a positive verdict,
and 	there 	was 	no 	way 	Debtor 	could 	know 	whether 	NYS 	would 	benefit
from a positive verdict.
Debtor asserts that confidentiality agreements prevented him
from 	disclosing 	certain 	information 	at 	the 	creditors 	meetings.
During the first meeting, Debtor was asked about NYS’s loans, and
he 	responded 	that 	he 	did 	not 	know 	whether 	he 	could 	answer 	the
questions 	due 	to 	the 	confidentiality 	agreement. 	Lynn 	Kohen, 	the
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12 	The 	court 	has 	reviewed 	the 	compact 	disc 	recording 	of 	the
hearing 	entered 	into 	evidence 	(paper 	1, 	ex. 	27), 	as 	well 	as 	the
unofficial transcript which was referred to during the bankruptcy
court’s 	hearing 	(paper 	1, 	ex. 	26). 	For 	purposes 	of 	citation, 	the
court will utilize the unofficial transcript.
16
U.S. 	Trustee, 	asked 	Debtor 	to 	look 	at 	the 	confidentiality
agreements so he would know whether he could answer the questions
at the next meeting, and Debtor’s counsel specifically stated that
he 	would 	determine 	whether 	or 	not 	the 	confidentiality 	agreement
allowed Debtor to disclose the loan terms. 	At the second meeting,
Debtor 	was 	asked 	again 	about 	NYS’s 	loans, 	and 	Debtor’s 	counsel
again invoked the confidentiality agreement. 	When Ms. Kohen asked
whether 	Debtor’s 	counsel 	had 	looked 	at 	the 	agreement, 	counsel
answered 	that 	he 	had 	not, 	“[s]o 	I 	don’t 	know 	any 	more 	now 	than 	I
knew then.” (Paper 1, ex. 26, at 63). 12 	This evidence supports the
bankruptcy court’s findings that Debtor was “less than forthcoming”
at the creditors’ meetings. 	Moreover, as discussed previously, the
evidence 	does 	not 	support 	Debtor’s 	assertion 	that 	Ahan 	“knew
everything 	... 	including 	everything 	about 	the 	Loan 	Agreement 	and
its 	status.” 	(Paper 	6, 	at 	23). 	Finally, 	Debtor’s 	argument 	that
that the U.S. Trustee failed to call a third meeting is simply an
attempt to shift the responsibility of disclosure away from Debtor,
who 	had 	already 	refused 	to 	disclose 	certain 	information 	on 	two
previous occasions.
Debtor’s explanation for why he estimated the value of NYS at
zero 	is 	equally 	unpersuasive. 	Debtor 	argues 	that 	neither 	he
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13 	Debtor 	has 	filed 	a 	supplement 	to 	his 	reply 	brief 	in 	which
he 	notes 	that 	the 	General 	Dynamics 	verdict 	has 	been 	reduced.
(Paper 21). 	He argues that, because the General Dynamics verdict
was 	reduced, 	neither 	the 	trustee 	nor 	Debtor’s 	creditors 	can
reasonably expect to see any distribution from FACS at the present
time. 	As 	discussed 	below, 	Debtor 	is 	required 	to 	disclose 	all
assets, 	including 	contingent 	claims, 	and 	the 	eventual 	outcome 	of
the 	General 	Dynamics 	litigation 	is 	of 	little 	significance 	in
assessing the appointment of the trustee.
17
individually 	nor 	NYS 	was 	a 	party 	to 	the 	General 	Dynamics
litigation, 	and 	the 	case 	went 	to 	trial 	after 	the 	bankruptcy 	case
commenced. 	He 	asserts 	that 	he 	did 	not 	have 	a 	“crystal 	ball” 	to
help 	him 	ascertain 	the 	potential 	verdict. 	He 	also 	argues 	that,
even if the General Dynamics litigation was successful, there was
no 	guarantee 	that 	NYS, 	which 	holds 	common 	non-preferred 	stock 	in
FACS, 	would 	benefit 	from 	a 	successful 	outcome. 	“In 	the 	General
Dynamics 	case, 	on 	July 	22, 	2005 	[the 	date 	Debtor 	filed 	for
bankruptcy], 	no 	one, 	including 	Mr. 	Modanlo, 	FACS, 	and 	General
Dynamics could predict as to what was going to be the verdict or as
to what is going to happen to the verdict.” 13 	(Paper 6, at 27).
11 	U.S.C. 	§ 	521(1) 	provides 	that 	“[t]he 	debtor 	shall 	file 	a
list 	of 	creditors, 	and 	unless 	the 	court 	orders 	otherwise, 	a
schedule 	of 	assets 	and 	liabilities, 	a 	schedule 	of 	current 	income
and current expenditures, and a statement of the debtor’s financial
affairs.” 	The Code imposes upon a debtor “an express, affirmative
duty to disclose all assets, including contingent and unliquidated
claims.” 	Browning Mfg. v. Mims (In re Coastal Plains, Inc.), 179
F.3d 197, 207-08 (5 th Cir. 1999).
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The 	duty 	of 	disclosure 	in 	a 	bankruptcy
proceeding 	is 	a 	continuing 	one, 	and 	a 	debtor
is 	required 	to 	disclose 	all 	potential 	causes
of 	action”. 	Youngblood 	Group 	v. 	Lufkin 	Fed.
Sav. 	& 	Loan 	Ass’n, 	932 	F.Supp. 	859, 	867
(E.D.Tex. 	1996). 	“‘The 	debtor 	need 	not 	know
all the facts or even the legal basis for the
cause 	of 	action; 	rather, 	if 	the 	debtor 	has
enough information . . . prior to confirmation
to 	suggest 	that 	it 	may 	have 	a 	possible 	cause
of 	action, 	then 	that 	is 	a 	“known” 	cause 	of
action such that it must be disclosed’”. 	Id.
(brackets omitted; quoting Union Carbide Corp.
v. 	Viskase 	Corp. 	(In 	re 	Envirodyne 	Indus.,
Inc.), 183 B.R. 812, 821 n. 17 (Bankr.N.D.Ill.
1995)). 	“Any 	claim 	with 	potential 	must 	be
disclosed, 	even 	if 	it 	is 	‘contingent,
dependent 	or 	conditional’”. 	Id. 	(quoting
Westland 	Oil 	Dev. 	Corp. 	v. 	MCorp 	Management
Solutions, 	Inc., 	157 	B.R. 	100, 	103 	(S.D.Tex.
1993))(emphasis added).
In re Coastal Plains, 179 F.3d. at 208.
When 	Debtor 	filed 	for 	Chapter 	11 	bankruptcy, 	Debtor 	was 	the
sole 	owner 	of 	NYS. 	One 	of 	NYS’s 	assets 	was 	a 	majority 	of 	the
voting stock in FACS. 	FACS, in turn, was getting ready for trial
against General Dynamics. 	The fact that Debtor could not say with
certainty the result of the litigation does not relieve Debtor of
his duty of disclosure. 	See In re Coastal Plains, 179 F.3d. at 210
(stating that the debtor should have disclosed information 	about
a claim of up to $10 million against a supplier); Hamilton v. State
Farm Fire & Casualty Co., 270 F.3d 778, 784 (9 th Cir. 2001)(stating
that the debtor should have amended his disclosure statements and
schedules to provide notice regarding a claim against State Farm);
Youngblood Group v. Lufkin Federal Sav. & Loan Ass’n, 932 F.Supp.
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859, 	868 	(E.D. 	Tex. 	1996)(“Plaintiff 	was 	all 	the 	while 	aware 	of
each fact underlying the tying claim which would be later asserted.
Yet 	plaintiff 	failed 	to 	disclose 	the 	possibility 	of 	litigation,
despite 	the 	statutory 	and 	common-law 	mandates 	for 	such
disclosure.”).
Debtor 	relies 	on 	In 	re 	Walker, 	198 	B.R. 	476, 	479
(Bankr.E.D.Va. 1996), to assert that “[a] debtor cannot be expected
to 	unerringly 	predict 	the 	future 	. 	. 	. 	.” 	At 	issue 	was 	whether
the 	bankruptcy 	court 	should 	reopen 	the 	debtor’s 	case 	to 	hear 	a
lender 	liability 	claim 	filed 	by 	several 	state 	court 	plaintiffs,
including 	the 	debtor. 	Id. 	at 	478. 	Counsel 	for 	the 	state 	court
plaintiffs 	already 	had 	taken 	steps 	to 	dismiss 	with 	prejudice 	the
debtor 	from 	the 	state 	suit. 	In 	a 	footnote, 	the 	court 	noted 	that
the 	debtor 	lacked 	standing 	to 	pursue 	the 	state 	court 	litigation
because he did not disclose to the bankruptcy court any potential
causes 	of 	action 	against 	the 	state 	court 	defendants. 	Id. 	at 	478
n.3. 	The 	court 	denied 	the 	motion 	to 	reopen 	the 	case. 	The
observation 	relied 	on 	by 	Debtor 	here 	arose 	in 	a 	different 	set 	of
circumstances and does not excuse Debtor’s failure to make candid
disclosures.
Debtor valued his interest in NYS as zero, even though he knew
of 	the 	pending 	General 	Dynamics 	litigation 	and 	he 	was 	confident
about 	the 	case. 	(Paper 	1, 	ex. 	10, 	at 	74). 	Debtor 	acknowledged
that the valuation was a “guestimate” and that he did not obtain a
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formal 	appraisal. 	Id. 	at 	64-65. 	Based 	on 	the 	evidence, 	the
bankruptcy 	court 	was 	not 	clearly 	erroneous 	in 	finding 	that 	the
schedules Debtor filed with the court showed “at minimum a lack of
candor.”
Finally, 	with 	respect 	to 	all 	of 	Debtor’s 	objections 	to 	the
bankruptcy court’s findings of fact, it is worth noting that there
was no single factor underlying the bankruptcy court’s decision to
appoint a trustee. 	In reaching her decision, the bankruptcy court
cited:
[T]he 	debtor’s 	wearing 	of 	multiple 	hats 	and
holding 	of 	multiple 	and 	perhaps 	conflicting
duties 	to 	the 	creditors 	or 	shareholders 	of
difference 	companies 	as 	well 	as 	to 	the
creditors of this estate; the debtor’s lack of
business operations and the licenses necessary
to conduct those businesses; the inattention,
neglect 	or 	other 	inappropriate 	treatment 	of
the replevin action in this case that may have
led 	to 	the 	loss 	o[r] 	diminution 	in 	value 	of
this estate’s largest assets; and the loss of
confidence 	in 	the 	debtor 	by 	the 	creditor 	in
this case and the U.S. Trustee.
(Paper 1, ex. 12, at 20). 	Debtor attempts to question many of the
individual factual findings, but he is unable to demonstrate that
the bankruptcy court erred when she found that these factors “taken
together” constitute cause for the appointment of a trustee under
§ 1104(a). 	The bankruptcy court did not abuse its discretion when
it appointed a trustee in Debtor’s Chapter 11 case.
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IV. 	Conclusion
For the reasons stated above, the court will affirm the ruling
of the bankruptcy court. 	A separate Order will follow.
/s/
DEBORAH K. CHASANOW
United States District Judge
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