Ricco, Inc.

OCR transcription for search; preserved printed pages are authoritative

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dt MM. sa

Dated: June 28, 2010

THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA

IN RE:
RICCO, INC;

RALPH A. CALANDRELLA and
CAROLYN S. CALANDRELLA,

Case Nos. 3:10-bk-00023; 3:10-bk-00033

Debtors. Chapter 11

Nee eee ee ee ee

MEMORANDUM OPINION

The United States Trustee (the “USTE”) seeks the appointment of Chapter 11 trustees in
the bankruptcy cases of Ralph and Carolyn Calandrella, and Ricco, Inc., on grounds of gross
mismanagement and incompetence. For the reasons stated herein, the court will grant the
USTE’s motion.

I. BACKGROUND'

Mr. Calandrella has been in the real estate business since 1973. He makes his
investments through, inter alia, Ricco, a Maryland corporation, which, according to its Chapter
11 petition, has accumulated approximately $14,000,000 in real estate assets. Ricco’s assets
include mineral rights, security interests in real estate, and equity interests in real estate holding
entities. Mr. Calandrella is the sole shareholder and president of Ricco, and has valued the Ricco

stock as an asset in his personal bankruptcy case at $6,500,000.

' In response to certain questions propounded to the Calandrellas by the USTE, the Calandrellas
asserted their 5" Amendment privilege against self-incrimination and refused to answer. In
rendering this Memorandum Opinion, the court has relied only upon the testimony freely given
by the Calandrellas, and has not used or drawn any adverse inferences from their assertion of the
privilege against self-incrimination in response to questioning by the USTE.

1

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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Mr. Calandrella financed his real estate purchases, and that of Ricco’s by borrowing, on
an unsecured basis, from various individuals. Some notes are issued by him, others by Ricco,
and some are in the names of both Mr. Calandrella and Ricco or some other related entity.

Ultimately, Mr. Calandrella’s ventures were unable to support the unsecured note
payments. Many of Mr. Calandrella’s and Ricco’s note holders have sued, and some have
obtained judgments. In 2009 — before Ricco filed its January 7, 2010 Chapter 11 bankruptcy
petition, and before the Calandrellas filed their January 8, 2010 Chapter 1! bankruptcy petition —
the judgment holders levied the Calandrellas’ and Ricco’s deposit accounts. Following the
levies, Mr. Calandrella closed his and Ricco’s deposit accounts and he operated the Calandrellas’
and Ricco’s financial affairs by using the cash and deposit accounts of other, related entities.

Despite Mr. Calandrella’s extensive investments and network of partnerships, he
employs what, cuphemistically, is best described as a “shoe-box” record-keeping system. To
track accounts payable, he retains copies of the notes he issues, and retains copies of bank
statements and canceled checks showing payments made on the notes. To track accounts
receivable, in sone instances, he merely makes a hand-written notation on the face of the note to
reflect his receipt of principal payments. In other instances, he makes hand-written notes on an
amortization schedule. He maintains no regular books to reflect the allocation of income and
expenses to the entities involved in his various investments. In fact, the last time Mr.
Calandrella had an income statement prepared for any of his entities was in 2004 — the last time
he prepared tax returns.

Mr. Calandrella’s informal method of record-keeping is matched by his informal
financial dealings among himself and the entities he controls. Even before he closed the
Calandrellas’s and Ricco’s pre-petition deposit accounts to prevent further levy, he would make
informal loans to his companies, take company income for his personal use, and treat the cash of
his companies interchangeably. Given Mr. Calandrella’s haphazard and ineffective accounting
practices, and the distinct lack of financial record-keeping, the professionals hired by the
bankruptcy estate are now left to reconstruct several years of financial transactions relying
almost entirely cn bank statements and Mr. Calandrella’s lackluster memory.

Neither the Calandrellas nor Ricco have plans to continue operating their real estate

related investments. They have entered into agreements with their respective creditors to freeze

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the use of assets except as necessary to propose and consummate Chapter 11 liquidation plans.
They have hired a forensic accountant and a title examiner to reconstruct their books and real
estate transactions. Ricco has negotiated with the unsecured creditors committee to file a plan
that calls for the creation of a liquidation trust, the employment of an independent trustee, and a
100% payoff of all estate creditors within two years from confirmation. Likewise, the
Calandrellas propose a plan that includes the creation of a liquidating trust to be administered by
a third party trustee that projects to pay 100% of creditors’ claims.
II. DISCUSSION

Despite Ricco’s and the Calandrellas’ proposed plans to liquidate and pay all creditors
100% of their allowed claims, the USTE believes that a Chapter 11 trustee should be appointed
in both cases on the grounds that Mr. Calandrella’s conduct in managing the Calandrellas’ and
Ricco’s business affairs shows gross mismanagement and incompetence, both of which are
grounds to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a)(1).

Section 1107(a) of the Bankruptcy Code grants a Chapter 11 debtor the opportunity to
control the bankruptcy estate as a “debtor in possession,” giving rise to a strong presumption that
the debtor’s pre-petition management should remain in control of the debtor’s business. §§
1101(a), 1107(a), 1106(a); Jn re Heck’s Properties, Inc., 151 B.R. 739, 755 (S.D.W. Va. 1992).
A Chapter 11 debtor’s right to control the bankruptcy estate as the debtor in possession,
however, is not absolute. Jn re Byrd, No. 04-35620, 2007 Bankr. LEXIS 4126, *34-35 (Bankr.
D. Md. Dec. 5, 2007).

A court may limit the Chapter 11 debtor’s power over the estate by appointing a trustee.
The appointment of a trustee “is an extraordinary remedy, and should be considered as the
exception to the general rule that a Chapter 11 debtor remain in possession of its own affairs.”
In re Funge Systems, Inc., No. 01-12219, 2002 Bankr. LEXIS 1937, *9 (Bankr. E.D. Va.
October 17, 2002) (citing Jn re Marvel Entertainment Group, Inc., 140 F.3d 463, 471 (3d Cir.
1998)). Grounds to appoint a Chapter 11 trustee are set forth in 1] U.S.C. § 1104(a)(1), and
include incompetence, or gross mismanagement of the affairs of the debtor by current
management, either before or after the commencement of the case. The moving party must
establish the geounds to appoint a trustee by clear and convincing evidence. Jn re Brown, No.

99-06393, 2000 Bankr. LEXIS 247, *28 (Bankr. E.D.N.C. Feb. 24, 2000). Once cause is

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established by clear and convincing evidence, the appointment of a trustee is mandatory. Jn re
TAAF, LLC, No. 10-171-8, 2010 Bankr. LEXIS 449, *5 (Bankr. E.D.N.C. Feb. 12, 2010).

Regarding gross mismanagement, cause to appoint a trustee is “manifest when creditors
may reasonably lose all confidence in the ability of management to direct the reorganization
effort.” In re Eagle Creek Subdivision, LLC, No. 08-4292, 2009 Bankr. LEXIS 632, *11 (Bankr.
E.D.N.C. March 9, 2009) (internal quotation marks omitted). The term “incompetence” is not
defined in the Bankruptcy Code, but is generally defined as the “state or fact of being unable or
unqualified to de something.” Black’s Law Dictionary 780 (8" ed. 2004).

The USTE developed clear and convincing evidence of gross mismanagement and
incompetence in support of his motion.

A. The Calandrellas

Regarding the Calandrellas, they failed to file income tax returns for five years, are
unaware of their income for each year since 2006, misused loan proceeds and income of Ricco to
pay the experises of other, related entities, used their entities’ cash interchangeably, and
maintained no recognizable form of accounting. Confusion is rampant. For example, Mr.
Calandrella failed to file tax returns for several years, stating that he only choose to file returns
for years in which the Calandrellas’ income exceeds expenses. According to the Calandrellas’
statement of financial affairs, however, the Calandrellas received an estimated $78,000 in
payments from Ricco during 2008 and 2009. Nevertheless, no tax returns are filed.’ Then, at the
hearing in this matter, Mr. Calandrella testified that his statement as to the Calandrellas* income
on the statement of financial affairs is inaccurate.

In attempting to reconstruct the Calandrellas’ finances for purposes of preparing past-due
tax returns, a forensic accountant testified that he relied on Mr. Calandrella’s memory for
assistance. Mr. Calandrella*s memory, however, is simply insufficient to address the sheer
volume of transactions that affect the Calandrellas’ bankruptcy estate. Although the forensic
accountant had met with Mr. Calandrella and billed either the Calandrellas or Ricco for 60 hours
of work, he learned at the hearing — for the first time — that Mr. Calandrella had operated the

Calandrellas’ and Ricco’s affairs without a bank account for several months pre-petition, and

° Carolyr filed a separate return for 2008.

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that Mr. Calandrella maintained some amortization schedules. He also learned for the first time
that Ms. Calandrella filed a separate tax return in 2008. This shows that the Calandrellas lack
the initiative to disclose key information to professionals, and are unable to direct the
professionals in gathering the information required to administer the Calandrellas’ estate or that
of Ricco.

Further, despite his representation that he has some records available that would assist in
reconstructing relevant financial and real estate transactions, Mr. Calandrella has been unable to
locate those records. In that regard, Mr. Calandrella stated that in order to reconstitute real estate
transactions, one would need to go to the courthouse and examine public records due to his
inability to find the relevant records. In a similar vein, although he acknowledges that he may
have borrowed up to $500,000 over the past five years, he neither can recall any details of the
loans, nor locate the records for those transactions. In fact, Mr. Callendrella testified that his
knowledge of the liabilities is based merely upon keeping track of them in his head; although, as
noted, he was unable to recall any relevant details when asked about them.

Ms. Calandrella testified that she entrusts Mr. Calandrella with all of the family’s
businesses; thus, practically, Mr. Calandrella is the person in control of the household’s financial
affairs and the financial affairs of Ricco. Her testimony made clear that she lacks any detailed
knowledge of the family’s investments and financial affairs. In fact, Ms. Calandrella loaned
$60,000 to Ricco, but she does not know the terms of the loan or to what use the money was put.
According to rer, Mr. Calandrella requested the loan for Ricco and she just gave it to him
without any questions. Ms. Calandrella cannot disclaim all responsibility for the financial affairs
of the Calandrellas merely by playing ostrich and burying her head deeply enough in the sand.
Her own incompetency and gross mismanagement is shown by her complete lack of
understanding as to the financial affairs of the household or of Ricco.

In sum, the Calandrellas’ ramshackle approach to the management of their finances,
including the eppalling lack of recordkeeping, is not only deficient, it is manifestly well below
any acceptable or reasonable expectation. No excuse was offered for Mr. Calandrella’s sloppy
practices or his inability to reconstruct relevant financial transactions or locate records. In fact,
Mr. Calandrella’s testimony was singularly listless and completely unenlightening. The court

was left with the impression that he was either purposefully evasive in his answers or highly

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inept in his financial affairs, or both. In any event, the upshot of his testimony, and that of Ms.
Calandrella, le*t the court distinctly unimpressed with their ability and motivation to move their
case forward. Mr. Calandrella’s lack of recall, combined with Ms. Calandrella’s ignorance of
the their financial affairs, demonstrate by clear and convincing evidence that the Calandrellas
have grossly mismanaged their affairs and are incompetent to manage their Chapter 11
bankruptcy estate. In similar circumstances, courts have not hesitated to appoint a trustee. F.g.,
Wilmington Trust Co. v. Aardvark, Inc. (In re Aardvark, Inc.), No. 96-412, 1997 U.S. Dist.
LEXIS 3304, *11-12 (D. Del. Mar. 4, 1997) (finding an abuse of discretion in the bankruptcy
court’s denial of a trustee appointment on the grounds that cause existed where the debtor kept
inadequate records and failed to file tax returns); Jn re TAAF, LLC, at *10-11 (commingling of
assets among entities by debtor’s sole manager is cause to appoint a trustee); In re Eagle Creek
Subdivision, LLC, at *11 (misuse of loan proceeds and commingling assets as cause).
B. Ricco

Because Mr. Calandrella used the same faulty business and accounting practices for
Ricco as he used for his household, cause to appoint a trustee in the Ricco case is a mirror image
of the Calandrella case. For example, Ricco too, under the management auspices of Mr.
Calandrella, failed to file income tax returns for five years, misused its money to pay the
expenses of cther, related entities, and maintained no recognizable form of accounting.
Regarding Mr. Calandrella’s stated practice to only file a tax return in a year when Ricco’s
income exceeded its expenses, Ricco’s statement of financial affairs reflects that Ricco received
an estimated $92,400 in income from note payments in years 2008 and 2009, yet no tax returns
have been filed for either year. Ricco’s records of accounts are in the same confused state of
affairs as the Calandrellas’ family records. And reliance on Mr. Calandrella’s memory to
reconstruct Ricco’s books is just as forlorn as in the Calandrellas’ case, because, for instance,
Mr. Calandrella could not recall in his testimony any details of the various loans made to Ricco.

In deciding whether to appoint a Chapter 11 trustee for a corporate debtor, some mistakes
of past management can be corrected post-petition. 7 Collier on Bankruptcy § 1104.02[c][3][i]
(Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2010); In re Eagle Creek Subdivision,
LLC, at *7 (“[W]hen current management has been tainted by the misdeeds of prior

management, the court may also consider the actions of prior management.”). In this case,

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however, Mr. Calandrella’s mismanagement (both pre- and post-petition) continues to permeate
the administration of Ricco’s bankruptcy estate. Thus, for the same reasons that the court has
found that the Calandrellas are incompetent to manage their own financial affairs, and based on
the Calandrellas’ own gross management of their personal affairs, so too is the continued
administration cf Ricco’s estate at the hands of Mr. Calandrella untenable. In short, Mr.
Calandrella has grossly mismanaged the affairs of Ricco and is incompetent to continue any
further business dealings on behalf of Ricco.
II. CONCLUSION

In fashioning proposed liquidating Chapter 11 plans for the Calandrellas and Ricco,
counsel for those estates have made an admirable attempt to ameliorate the pre-petition concerns
raised by the USTE in his motion, but that attempt is insufficient to overcome the clear and
convincing evicence adduced at the hearing that demonstrated incompetence and gross
mismanagement. To find that a Chapter 11 trustee should not be appointed in these related cases
would require the court to either ignore the mandatory requirement of § 1104(a)(1), or to attempt
an end run around it, something the court is not authorized to do.

For the above-stated reasons the court will enter separate orders for the appointment of

trustees in the Calandrellas’ and Ricco’s Chapter 11 cases.

* The court will also grant applications of the Calandrellas and Ricco to employ bankruptcy
counsel from the date of their respective bankruptcy filings to the date of the entry of this
Memorandum Opinion.