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Court gives trustees control of properties

See Corrections and Amplifications below.

As a bevy of lawyers debated the fate of Webster developer Lawrence Frumusa’s properties in Bankruptcy Court this month, the court moved to strip his control over his holdings, putting the properties under the stewardship of Chapter 7 trustees.

Frumusa, who had hoped to attend, was not present. For the second time this year, he was stuck behind bars, in the Monroe County jail.
Learning of the court’s action after his release later that day, Frumusa fought back with a tactic he has used often: He filed new court papers.
The sprawling legal battle has engaged a small army of lawyers for the past eight months. Now without legal counsel, Frumusa seems determined to soldier on. Still, his aim in arranging a series of court maneuvers-hanging onto a substantial portfolio of properties-seems to be a rapidly fading possibility.
On Aug. 17, Frumusa sent a letter addressed simply to the U.S. Western District Court complaining that he is being unfairly blocked from appealing the Aug. 5 Bankruptcy Court orders that put some $20 million worth of his properties under trustees’ control and asking for the court’s help in the matter. As of Aug. 18, the appeal remained unfiled.
Frumusa’s holdings include the Scenic Village apartment and townhouse development in Webster and the Webster Holiday Inn Express & Suites hotel. Both developments are the target of civil suits, filed separately in state Supreme Court here by Frumusa’s partner in the hotel project and a lender who has placed a nearly $1 million lien on Scenic Village and several other Frumusa properties.
A Chapter 7 trustee now is collecting Scenic Village rents and a court-appointed receiver is running the Webster hotel. Both have complained in court papers that Frumusa has been uncooperative in turning over books and records. In June, Frumusa thwarted a second receiver’s attempt to take control of other properties he owns by refiling a bankruptcy petition the court had dismissed. Arranging for court-supervised reorganization of companies or properties through a Chapter 11 filing is a well-recognized tactic for debtors to keep creditors at bay.
After Commercial Division Justice Kenneth Fisher named receivers in both state court actions, Frumusa filed Chapter 11 bankruptcy petitions for himself and the LLCs he has used to conduct his real estate business.
His Chapter 11 filings were made legitimately for the same reason as highly publicized filings by General Motors Corp. and Chrysler Corp., Frumusa recently told the Rochester Business Journal: to seek court protection and supervision for an orderly reorganization. Still, the spate of filings has created a legal puzzle area courts and lawyers drawn into the case are laboring to solve.
"It is always difficult to figure out how to go forward in these," Bankruptcy Court Judge John Ninfo II said with a sigh as he prepared to dispose of some 14 Frumusa-related matters on his docket Aug. 5. Those matters partially represented the developer’s recent legal output.
In bankruptcy court
Cases filed by Frumusa on Ninfo’s calendar include filings of several real estate corporations Frumusa controls, a petition filed against the Webster Holiday Inn and a filing for Frumusa personally.
First to go into Chapter 11 was the corporation that owns the Webster Holiday Inn: Webster Hospitality Development LLC. It was forced into an involuntary bankruptcy by creditors in April. That filing came shortly after Fisher put the property into receivership. The judge acted in a suit in which Webster Hospitality partner Marianela Hernandez accused Frumusa of improperly diverting hotel funds, a charge Frumusa has denied in state court filings.
Frumusa in an interview with the Rochester Business Journal denied organizing the involuntary bankruptcy filing, but conceded he might have advised the creditors who did file of their rights. 
The Webster Hospitality bankruptcy-the first of two filed against the property this year-was dismissed July 23 after a court-appointed trustee, Douglas Lustig of Chamberlain, D’Amanda, Oppenheimer & Greenfield LLP, arranged to have the receiver continue to operate the property and to have creditors who filed claims paid off at seven cents on the dollar.
Four days after the case was closed on July 27, however, Frumusa filed a new Chapter 11 petition for the hotel, naming himself one of the creditors. He acted without an attorney. He had earlier refiled his personal bankruptcy case after it was dismissed at the request of the U.S. Trustee’s office, which cited Frumusa’s failure to file schedules stating his assets and liabilities, failure to show proof of insurance, and failure to produce a balance sheet or other financial records. Both cases are active. 
Shortly after the hotel’s first involuntary filing in April, Frumusa filed Chapter 11 petitions for himself personally and for three real estate companies he controls: Rising Tide LLC, Maincliff Properties LLC and Frumusa Land Development LLC.
He filed those petitions in Utica, seeking to represent himself and the LLCs without an attorney. It took several weeks for the Bankruptcy Court there to declare the venue improper and arrange for the cases to be transferred to the court in Rochester.
Frumusa then hired lawyers to represent the three LLCs, having been informed by the court that the bankruptcy code specifies corporations seeking Chapter 11 protection must be represented by lawyers.
He also has been sued for divorce by his wife of 25 years, Valoree, a development Frumusa sees as central to the unraveling of his real estate empire. It was the matrimonial case that landed Frumusa in jail Aug. 4. He was arrested during a hearing on a charge of failure to comply with a family court order. Frumusa was freed Aug. 5 after posting $47,500 in bail-the amount in back child support payments his wife had been seeking. His exit from the jail did not come in time for the 9:30 a.m. Bankruptcy Court hearing, however.
Frumusa-related matters on Ninfo’s Aug. 5 calendar included motions to convert the Rising Tide, Maincliff and Frumusa Land Development cases to Chapter 7 liquidations and motions by attorneys Frumusa had hired to represent the LLCs and himself to be excused from the cases. As there had been with previous proceedings in the developer’s cases, there was some confusion.
The question of converting the cases initially had been raised in a May 14 motion by Monroe Capital Inc. and Robert Morgan Ltd. Partnership III, the lender holding roughly $1 million in mortgages on Frumusa properties whose state court action put Frumusa’s properties into receivership. Monroe Capital is the lender’s agent.
Criminal case
Among reasons for the conversion cited by Monroe Capital’s attorney, Jeffrey Dove of Menter, Rudin & Trivelpiece P.C. in Syracuse, were the Frumusa LLCs had failed to file schedules; parts of Scenic Village were unfinished and unprotected against the weather; and Frumusa faced a pending criminal indictment that, Dove maintained, would continue to distract the developer.
Frumusa was arrested in February on a felony charge of possession of a forged instrument. He remains free on that charge and is in talks with the Monroe County district attorney’s office. Frumusa said in an interview he expects the charge to be dismissed or pleaded down to a minor violation.
Matthew Dunham, the assistant Monroe County district attorney handling the case, could not be reached for comment this week. Dunham said several weeks ago no trial was scheduled, but added he believed Frumusa would enter a guilty plea to the original felony charge. 
Last month, Joseph Zagraniczny of Bond, Schoeneck & King PLLC in Syracuse, who represents the Webster Hospitality Development receivership, filed papers supporting the conversions. In the motions, he detailed allegedly improper transfers of some $250,000 in hotel funds to a bank in Pennsylvania and subsequent transfers from the Pennsylvania account to Frumusa Enterprises LLC, a corporation Frumusa controls that until then had not been enmeshed in the growing legal tangle. Frumusa had used some of the hotel money to pay retainers to lawyers handling the bankruptcy cases, Zagraniczny alleged.
Frumusa told the Rochester Business Journal he had been aware of the transfers of hotel funds but had not reported it, believing that others would see the receiver’s failure to notice the missing funds as proof of the receiver’s less than able management of the property.
"I was waiting to see how long it would take him to notice," Frumusa said.   
Motions submitted July 20 in the Main-cliff, Rising Tide and Frumusa Land Development bankruptcies by Charles Moster of Moster & Wynne P.C. in Austin, Texas, whom Frumusa had hired to represent the LLCs, state the debtors-the Frumusa-controlled LLCs-approved the conversion.
If Frumusa had approved, however, he withdrew his consent, stating in one filing he had gone along with the conversion motion only because he expected a court hearing would be held before Ninfo took action.
In a July 27 letter to Ninfo, Frumusa states: "Please be advised that I do not support the conversion of the (Rising Tide, Frumusa Land Development and Main-cliff) cases. I now understand that in order to preserve the excellent progress we made in the Chapter 11, I am requesting you to vacate the (conversion) order(s)." 
Ninfo did not comply but did schedule the Aug. 5 hearing.
Then on Aug. 4, Frumusa filed a motion asking the judge to take himself off the case, accusing Ninfo of undue partiality to Monroe Capital principal Paul Adams and of converting the cases without due process. "Back-door trading" with his attorney had led the judge to hastily approve the conversion motions, Frumusa charged.
In the Aug. 5 hearing, Ninfo did not address Frumusa’s recusal motion or deal directly with Frumusa’s pleas to keep the cases as Chapter 11s. 
Those motions "are not on the calendar today and not on the calendar, period," Ninfo said during the proceedings. "(Fru-musa) has been deficiencied a number of times, because notwithstanding the fact that he wants to go around filing papers, he doesn’t ever seem to take the time to understand what the court’s procedures are. It hasn’t occurred to Mr. Frumusa that perhaps he ought to learn something about the procedures if he really wants any of his papers to be considered by the court.
"But I did look at his papers," Ninfo continued. "And if I read them carefully, he never specifically says that he did not authorize (Moster) to convert."
Still, Ninfo asked: In light of Frumusa’s incarceration, was it proper to move ahead?
Attorney Dove argued it was proper and necessary. Frumusa "has demonstrated an ability to abscond with an asset of any value, peculiarly money. There is at least the $250,000 that is missing in action from the Webster hotel. If he manages to extricate himself from (jail) there is no telling what he’ll do next."
Of particular concern, Dove continued, was Frumusa Enterprises, the LLC not under court control but through which Frumusa apparently had been conducting much of his business. Frumusa had testified that at some recent point he had turned over shares of the LLC to his sons, but he still owned 52 percent. Conversion of Frumusa’s personal case would give a trustee control sufficient to prevent any possible fund diversions through Frumusa Enterprises, the attorney told Ninfo.
Assistant U.S. Trustee Kathleen Schmitt concurred. Under oath in a creditors’ meeting, she said, Frumusa-who had filed no operating reports-had denied keeping any books and records.
"We can’t follow the money in this case," Schmitt said. 
After listening to a tape of Schmitt’s remarks, Frumusa this week sent the assistant U.S. trustee a letter stating that he had "been frantically attempting to understand" her Aug. 5 statements.  
Citing his history as a developer, employer and supporter of community initiatives who has arranged some $48 million in financing, Frumusa tells Schmitt that her courtroom portrayal of him as "someone who is irresponsible, maintains no records (and) avoids responsibilities just does not add up." 
In the end, Ninfo ordered the Rising Tide, Maincliff and Frumusa Land Development cases and Frumusa’s personal Chapter 11 converted to Chapter 7 liquidations. Michael Arnold of Place & Arnold Attorneys at Law in Fairport would remain as the Scenic Village trustee, the judge said. Ninfo authorized Schmitt to appoint a second Chapter 7 trustee to oversee Frumusa’s newly converted personal case. She named a Syracuse attorney last week.
Even with Frumusa’s properties under management by the Chapter 7 trustees and a receiver, there could be further bumps, Schmitt said in a post-hearing interview. Disputes between the receiver and the trustees over the disposition of funds or hard assets could arise.
Finally, Ninfo heard motions from Frumusa’s lawyers-Moster and James Glucksman of Rattet, Pasternak & Gordon-Oliver LLP on Long Island, who had been representing Frumusa in the personal Chapter 11-to be excused as Frumusa’s attorneys. Frumusa had fired them and had been uncooperative before that, the lawyers said.
The issue of payment also loomed. Retainers Frumusa had paid to the attorneys might have come from the $250,000 in allegedly diverted hotel receipts.
Ninfo granted the lawyers’ withdrawal requests, stipulating each would have to disgorge funds should their retainers turn out to have come from a tainted source. Both attorneys accepted the stipulation.
Legal fights ongoing
Those proceedings did not end Frumusa’s court adventures, however.
Acting without an attorney last week, Frumusa filed a motion seeking to reverse the conversion of his personal Chapter 11. In the filing, he cited his own 30 years’ experience as a real estate developer and the fact he now was without an attorney as factors for the court to consider reversal. The second Webster Hospitality Development involuntary Chapter 11 remains an open case. Court proceedings are slated for the end of this month.   
Pending against Frumusa is a contempt of court citation issued by Fisher last month and served on the developer last week. The citation gives as cause Frumusa’s alleged failure to cooperate with the receiver in the hotel case and repeated disregard of previous court orders. Frumusa’s continued failure to comply could result in his arrest, the order warns.

Asked how he would answer the contempt citation, Frumusa produced an Aug. 3 letter he had written to Seventh Judicial District Chief Administrative Judge Thomas Van Strydonck asking Van Strydonck to intervene. In the letter, Frumusa complains he has been treated unfairly by Fisher. No action by Van Strydonck is noted in court records.

 
rbj@rbj.net / 585-546-8303
 
A tangle of cases
Numerous properties and real estate businesses of Webster developer Lawrence Frumusa have ended up in court. They include:

– Webster Holiday Inn Express & Suites-Frumusa has filed a new Chapter 11 petition for this hotel, naming himself as one of the creditors. A court-appointed receiver is running the hotel.

– Scenic Village-A lender has placed a nearly $1 million lien on this apartment and townhouse development in Webster. A Chapter 7 trustee is collecting Scenic Village rents.

– Rising Tide LLC, Maincliff Properties LLC and Frumusa Land Development LLC-Frumusa filed Chapter 11 petitions for these three real estate companies he controls. The bankruptcy judge ordered them converted to Chapter 7 liquidations.

Frumusa also filed a Chapter 11 petition for himself personally, which the judge converted to Chapter 7. Frumusa is trying to reverse this conversion.

And the developer was arrested in February on a felony charge of possession of a forged instrument. He remains free on that charge and is in talks with the Monroe County district attorney’s office. 

Correction published August 28, 2009:
Creditors in the Chapter 11 bankruptcy of Webster Hospitality Development LLC were paid 70 cents on the dollar. Douglas Lustig was the creditors’ attorney. The defendants in a lawsuit brought by Webster Hospitality partner Marianela Hernandez were Frumusa, a Webster Hospitality partner, and a purported Webster Hospitality minor partner, Todd Thompson. Charges cited in a contempt order against Frumusa in the Webster Hospitality lawsuit include the allegation that Frumusa misappropriated $250,000 in hotel funds.

08/21/09 (c) Rochester Business Journal. To obtain permission to reprint this article, call (585) 546-8303.

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