Law360 (October 29, 2019, 9:40 PM EDT) — Philadelphia-based solo attorney Dimitri Karapelou credits tenacity, reasonable prices and an appealing bedside manner for his trial court defeat of a landlord’s decadelong bid to upend the $24 million shareholder distribution a New Jersey-based tanning salon empire managed to reap after selling its nationwide franchise.
The victory, formalized in a September ruling by U.S. District Judge Robert J. Kugler that’s currently on appeal, closes the chapter on the latest attempt by a creditor to seize upon the fortune of the Venuto family of South Jersey, which has called Karapelou its trusted counsel since 2008. The litigation — which evolved from a 2009 rent collection judgment against Hollywood Tanning Systems Inc. in Florida state court to a 2010 fraud suit over the shareholder distribution in New Jersey — was plagued by laborious financial discovery and a bench trial that saw its judge, U.S. District Judge Jerome B. Simandle, die before rendering a decision.
“I was nervous,” recalled Karapelou, whose boutique firm specializes in bankruptcy and business litigation.
He needn’t have been. Judge Kugler, who took over the case, ruled on Sept. 16 that the shareholders — Carol Venuto, the administrator of her late husband Ralph Venuto Sr.’s estate, and their three adult children — exhibited none of the “badges of fraud” required to support landlord MSKP Oak Grove LLC’s claim that they shifted assets around to dodge HTS’ rental obligation on a lease in an Altamonte Springs, Florida, tanning salon.
The family never tried to hide the distribution, and it was made a year before the franchisee at the Florida location defaulted on its rent, so no obligation even existed at the time of the payout to the family members, said Judge Kugler, who relied on transcripts from the bench trial.
The case isn’t the only one Karapelou defended for the Venutos, but it’s been the longest running and most complicated for the lawyer, who considers persistence to be one of his hallmarks.
“They accused us of fraud, malfeasance, cooking the books. I had to go through all these things one by one in cross-examining their [forensic valuation] expert. It was very tedious and trying,” Karapelou said.
MSKP, which filed notice of its Third Circuit appeal on Oct. 14, didn’t immediately respond to a request for comment.
As for an appeal strategy, Karapelou noted that appellate courts must defer to a trial court’s findings of fact. He said he’ll ask the Third Circuit to uphold those findings, which were based largely on testimony from Ralph Venuto Jr., who “told the whole HTS story.”
“That testimony was a lot more credible and believable than the expert who was trying to reverse-engineer the financial statements 10 years later,” Karapelou said, referring to MSKP’s forensic valuation expert.
At one time, the Venutos, whom Karapelou describes as serial entrepreneurs, helmed the most widely recognized strip-mall tanning salon franchise in the nation. They decided to wind down the business, which launched in 1994, amid Venuto Sr.’s ailing health.
When they finalized the sale of HTS’ assets to ACI Capital LLC in June 2007, about 300 Hollywood Tans franchises spanned multiple states.
The $40 million sale deal allowed HTS to keep a 25% equity interest in the company, according to court records. After the sale, HTS transferred the company’s remaining $23.9 million to the Venuto family. Venuto Sr. died the following year.
MSKP, the landlord of an HTS franchise location in Altamonte Springs, sued HTS in Florida state court after rent payments went into default in 2008 and won a $411,573.45 judgment in 2009. The judgment, which was also recorded in New Jersey state court, hasn’t been satisfied.
Enter Karapelou, who had been retained by the family in 2008 to wind down the operations of a pizza shop franchise it had operated. By that time, the Great Recession had hit and, according to Karapelou, the family’s businesses weren’t making money.
HTS’ successor was forced to close several locations as the economy continued to decline. HTS was insolvent and thus had no assets to pay back rent for the tanning salon locations, according to Karapelou.
Morgan Lewis & Bockius LLP had been representing HTS in litigation brought by disgruntled franchisees. Karapelou took on the HTS litigation after the family became frustrated with BigLaw prices and legalese, he said.
They liked his responsiveness, according to Karapelou, who offered affordable rates and took time to boil down complicated courtroom jargon for the family. The collaborative approach worked.
“They know business, and they now know the law pretty well,” Karapelou said.
The attorney was also armed with a good grasp of the law, a quality that helped him prepare for the biggest challenge of his time representing Venutos. That came in 2010, when MSKP challenged the shareholder distribution in a federal lawsuit asserting claims under the New Jersey Uniform Fraudulent Transfer Act.
For the next several years, the case trudged through amendments, timeliness challenges and discovery disputes. At one point, it was suspended pending the outcome of another landlord’s challenge to the distribution, which was ultimately settled. Karapelou also dodged a sanctions motion for what MSKP argued was a late dismissal motion filing.
The case was ultimately tried for six days in Camden, New Jersey, federal court in May 2017. During the bench trial, Karapelou said he “eviscerated” MSKP’s forensic valuation expert and also challenged the expert’s testimony with a rebuttal witness.
Then in July 2019, before rendering a decision, Judge Simandle died after a battle with cancer. The case was turned over to Judge Kugler, who had the choice of retrying it or ruling from the records and transcripts. To Karapelou’s relief, Judge Kugler chose the latter and ended up ruling for the Venutos.
Had the landlord’s judgment been upheld, it would have ballooned with interest and the Venutos would have been on the hook for hundreds of thousands of dollars plus legal fees, Karapelou said. A loss also would have opened the floodgates to rulings in favor of other creditors.
Three other challenges to the distribution, two of which Karapelou handled, have settled or were dismissed, and a fourth, also handled by Karapelou, is still pending in New Jersey state court. He predicts Judge Kugler’s ruling will guide the pending matter.
Karapelou was struck by how Judge Kugler’s dismissal of the claims never even mentioned the elaborate forensic valuation input by MSKP.
“In my mind, that was the most profound part of the decision,” Karapelou said.
–Editing by Brian Baresch and Alanna Weissman.