UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

KBC BREW PUB & GRILL, INC. LLC CASE NO. 96-51176

a/k/a Kentucky Brewing Co., Inc. LLC

KENTUCKY BREWING COMPANY, INC. CASE NO. 96-51177

a/k/a KBC Brew Pub & Grill, Inc. LLC

DEBTORS

JAMES D. LYON, TRUSTEE PLAINTIFF

VS. ADVERSARY NO. 96-5101

PHILIP H. TALBERT II DEFENDANT

The above corporate entities filed separate petitions for relief under chapter 11 of the Bankruptcy Code on June 6, 1996. The petitions were signed by Philip H. Talbert II as president of the debtors. Resolutions of the board of directors of each entity authorized Philip H. Talbert II as president to initiate chapter 11 proceedings in behalf of the debtors. The resolutions are signed by Philip H. Talbert II as secretary of each of the debtors.

The petitions describe KBC Brew Pub & Grill, Inc. LLC as a restaurant and bar and Kentucky Brewing Company, Inc. as a holding company. However, the latter may not own any of the shares of stock of the former.

Although the schedules to the petitions indicate otherwise, as best the court can determine from documentation attached to proofs of claim, Kentucky Brewing Company, Inc. purchased from the former owner, King Three Inc., the machinery, equipment, fixtures, appliances and furniture located in the bar and restaurant and granted King Three, Inc. a security interest therein to secure payment of the balance due on the purchase price. Also, Kentucky Brewing Company is the lessee of the premises in which the business is operated. The secured debt and leasehold debt listed as obligations of KBC Brew Pub & Grill, Inc. are apparently obligations of Kentucky Brewing Company, Inc.; the electrical and telephone service were in the name of Kentucky Brewing Company; much of the trade debt was incurred in the name of and billed to Kentucky Brewing Company.

However, the restaurant and bar appears to have been operated by KBC Brew Pub & Grill, Inc.; some of the trade debt, as for example the amount owing to Critchfield Meats, appears to have been billed to KBC Brew Pub & Grill, Inc.

It is not clear from the record whether persons who worked at the restaurant and bar were employed by Kentucky Brewing Company, Inc. or KBC Brew Pub and Grill, Inc. Kentucky Brewing Company, Inc. appears to have issued payroll checks on account no. 003487213 at Bank One, Lexington, N.A.; KBC Brew Pub & Grill, Inc. appears to have issued checks on two accounts nos. 611495805 and 263487205, also at Bank One. The claims filed by the United States Internal Revenue Service and the Commonwealth of Kentucky Division of Unemployment Insurance indicate that according to their records the employer was KBC Brew Pub & Grill. Also, the schedules to its petition indicate KBC Brew Pub & Grill owned the liquor license and sales tax licenses issued by the Commonwealth of Kentucky.

There is an indication in the record that payroll checks may have been prepared by ADP-Automatic Data Processing, 3201 Nicholasville Road, Lexington, Kentucky.

Item 17 of The Statement of Financial Affairs to both petitions indicate that Philip H. Talbert II had possession of and kept the books of account and records of the debtors. The schedules to the petition of Kentucky Brew Pub & Grill, Inc. indicate it had approximately $1,000 cash on hand and $2,000 in a checking account at Bank One when bankruptcy intervened.

In compliance with the rules of this court the debtors filed with their petitions a pleading designating Philip A. Talbert II as the person who would perform the duties of the debtor during the pendency of the bankruptcy cases. See Local Rule 402 and Rule 9001(5), Federal Rules of Bankruptcy Procedure. The designations were signed by Philip H. Talbert II under oath identifying himself as the person who would perform the duties of the debtors.

On June 6, 1997, the same day the cases were commenced, the court entered its chapter 11 operating order, which, inter alia, directed the debtor in possession to place all funds of the bankruptcy estates into debtor in possession accounts and required that all withdrawals from these accounts be made only upon the signature of two persons, one of whom may be the attorney for the debtor. Within 10 days thereafter the debtor was required to advise the court of the name and address of the depositories holding funds of the bankruptcy estates and of the names of the two persons authorized to sign checks making withdrawals from the accounts. Mr. Talbert did not comply with this order.

When bankruptcy intervened King Three, Inc. held a security interest in the inventory, machinery, equipment, fixtures and accounts receivable of the debtor Kentucky Brewing Company, Inc., including the proceeds thereof. The Bankruptcy Code defines cash collateral as cash and receivables in which a third party holds a security interest. Consistent with title 11 U.S.C. § 363(2) the court's chapter 11 operating order precluded the debtor from using cash collateral without consent of the secured party or approval of the court, after notice and a hearing. Following a hearing on June 13, 1996 the court authorized the debtors in possession to use cash collateral for a period of 30 days from June 13, 1996 under certain conditions, which were not complied with.

Because of the totally inadequate record keeping practices of the debtors, under the supervision of Mr. Talbert, it is not clear whether the inventory of food and beverages belonged to KBC Brew Pub & Grill, Inc. or to Kentucky Brewing Company, Inc. or to which of these entities proceeds of sales of inventory were credited. If the proceeds of food and beverage sales were credited to KBC Brew Pub & Grill, Inc. the only income of Kentucky Brewing Company would have been as lessor of the restaurant machinery, equipment, fixtures, appliances and furniture to KBC Brew Pub & Grill, Inc. and as sublessor of the premises to KBC Brew Pub & Grill, Inc. However, there is no evidence of any lease of the equipment or sublease of the premises between the parties.

After the restaurant and bar commenced operation, brewing equipment was purchased and placed on, but not installed on, the premises. There is no information in the record from which the court can discern which debtor purchased the brewing equipment.

Apparently Mr. Talbert opened a debtor in possession account for each debtor at Bank One but never deposited any money in these accounts until the assets of Kentucky Brewing Company, Inc. were sold to Oldenberg Brewing Company on July 22, 1996. When the sale was closed on August 2, 1996 a check for the sum of $9,479.61 was deposited by Mr. Talbert in the debtor in possession account of Kentucky Brewing Company, Inc.

The order of this court entered on July 22, 1996 approving the sale of the assets of the debtors to Oldenberg Brewing Company authorized the debtor to disburse from the proceeds of sale at closing a sum sufficient to satisfy the lien claim of King Three, Inc. The remainder of the funds were ordered held by the debtor pending further orders of the court.

On August 12, 1996, counsel for the debtor in possession filed a motion in the KBC Brew Pub & Grill case for leave to pay, on a pro rata basis, along with certain other administrative expenses, postpetition wage claims totaling $10,735.85. The motion sought payment of these claims from the $9,479.61 which the motion erroneously alleges was placed in the debtor in possession account of KBC Brew Pub & Grill, Inc. The motion identifies and has attached to it as exhibits proofs of claim of 7 employees, including Michael R. Cook, Grandon McFadden, and Michael Tobin. The motion was noticed for hearing at 10:30 a.m. on August 15, 1996.

On August 15, 1996, the court overruled the motion to pay wage claims. As indicated by its findings previously made herein the court could not tell whether the wage claimants were employees of KBC Brew Pub & Grill, Inc. or Kentucky Brewing Company, Inc. The court was not inclined to permit monies of the latter to be used to pay wages of the former. The court instead sustained the motion of the U.S. Trustee to convert these cases to cases under chapter 7 of the Bankruptcy Code. These rulings were made by the court from the bench prior to noon on August 15, 1996.

After these rulings by the court, and after entry prior to noon on August 15, 1996 of orders converting these cases to cases under chapter 7 of the Bankruptcy Code, which, pursuant to 11 U.S.C. § 348(e), terminated the debtors' status as debtors in possession and the authority of Philip H. Talbert II to act for the debtors in possession, Mr. Talbert made unauthorized disbursements from the account of Kentucky Brewing Company.

Between 4:00 p.m. and 4:02 p.m. on August 15, 1996, Mr. Talbert caused the sum of $8,200 to be withdrawn from the debtor in possession account of Kentucky Brewing Company at Bank One and used the withdrawals to purchase official (cashier's) checks payable to himself and others. He issued to himself cashier's checks totaling $4,000, to Dave Strohmeyer a cashier's check for $2,000, to Larry Ellington a cashier's check for $1,800, to Genevieve Banks a cashier's check for $200, and to Mike Tobin a cashier's check for $200. There was no payment to Michael R. Cook, Grander McFadden, Connie L. Triplett, Dan Underwood, or Scott P. Dean on their wage claims.

The court's chapter 11 operating orders entered when these cases were filed directed the debtor in possession to comply with the IRS laws and regulations regarding the withholding of taxes from wages of employees, to make deposits for payment of employer's FICA and FUTA tax liabilities for such taxes and to file 940, 941 and 943 returns. Obviously, Mr. Talbert did not comply with these orders.

After conversion of the cases to chapter 7 liquidation cases the chapter 7 trustee moved the court for an order holding Philip H. Talbert II in contempt for violation of the court's chapter 11 operating order, for making unauthorized disbursements from the debtor in possession accounts, and to compel Mr. Talbert to file final reports of receipts and disbursements in these superseded chapter 11 cases. At a hearing on October 28, 1996 the court sustained these motions.

The written response of Philip H. Talbert II to these motions states that his actions were not in violation of the court's chapter 11 operating order, which in his view, prohibited him only from paying prepetition debts and, in his view, he was not required to withhold taxes because he was paying only a pro rata portion of the wages due himself and other management employees. He claims he was not made aware of the hearing on August 15, 1996 at which the court denied the motion to pay wage claims.

These responses are refuted by the language of the court's chapter 11 operating orders which required two signatures on all checks for withdrawal of funds from each debtor in possession account and make no such exception with respect to withholding taxes from wages of employees. And it seems appropriate to reiterate that monies of the Kentucky Brewing Company, Inc. estate should not have been used to pay wages owed to employees of KBC Brew Pub & Grill, Inc., the operator of the bar and restaurant.

These findings shall be made part of the record with respect to the chapter 7 trustee's motion to hold Philip H. Talbert II in contempt of court for disregarding the court's chapter 11 operating orders and the trustee's motion for an order requiring Philip H. Talbert II to file final reports of receipts and disbursements in these cases.

These findings shall also be made a part of the record in Adversary Proceeding No. 96-5101 to support the entry of a partial summary judgment against Philip H. Talbert II in the amount of the monies he unlawfully withdrew from the debtor in possession account of Kentucky Brewing Company, Inc. in violation of the chapter 11 operating order in that case.

Dated:

By the court -

_____________________________

JOE LEE, CHIEF JUDGE

Copies to:

James Lyon, Esq.

Philip H. Talbert II

Barbara M. Griffin, Esq.

U.S. Trustee

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

KBC BREW PUB & GRILL, INC. LLC CASE NO. 96-51176

a/k/a Kentucky Brewing Co., Inc. LLC

KENTUCKY BREWING COMPANY, INC. CASE NO. 96-51177

a/k/a KBC Brew Pub & Grill, Inc. LLC

DEBTORS

JAMES D. LYON, TRUSTEE PLAINTIFF

VS. ADVERSARY NO. 96-5101

PHILIP H. TALBERT II DEFENDANT

In conformity with its Findings of Fact this day entered the court finds that Philip H. Talbert II should be and hereby is adjudged to be in contempt of this court. The said Philip H. Talbert II shall remain in contempt of this court until he satisfies the judgment entered against him on January 29, 1997 in Adversary Proceeding No. 96-5101.

Further, in conformity with the Findings of Fact of the court, it is ordered that within 60 days from the date of this order the said Philip H. Talbert II file with the court a report of daily receipts and disbursements of each of the above-named debtors from the date of commencement of the cases on June 6,

1996 through August 15, 1996, the date the cases were converted to cases under chapter 7.

Dated:

By the court -

____________________________

JOE LEE, CHIEF JUDGE

Copies to:

James W. Lyon, Esq.

Barbara M. Griffin, Esq.

Philip H. Talbert, II

U.S. Trustee