Bergman, Matter of

• Decision Date: 13 October 1978
• Docket Number: No. 861,D,861
• Parties: Bankr. L. Rep. P 67,001 In Matter of Bernard BERGMAN d/b/a Park Crescent Nursing Home, Debtor. CHASE MANHATTAN MORTGAGE AND REALTY TRUST, Plaintiff-Appellant, v. Bernard BERGMAN d/b/a Park Crescent Nursing Home, Defendant-Debtor-Appellee. ocket 78-5007.
• Court: U.S. Court of Appeals — Second Circuit

Page 1171

585 F.2d 1171

Bankr. L. Rep. P 67,001

In Matter of Bernard BERGMAN d/b/a Park Crescent Nursing Home, Debtor CHASE MANHATTAN MORTGAGE AND REALTY TRUST, Plaintiff-Appellant, v. Bernard BERGMAN d/b/a Park Crescent Nursing Home Defendant-Debtor-Appellee.

No. 861, Docket 78-5007.

United States Court of Appeals Second Circuit.

Argued April 13, 1978.

Decided Oct. 13, 1978.

Richard F. Levy, Chicago, Ill. (Howard A. Tullman, Theodore L. Freedman, Steven C. Dupre, Levy & Erens, Chicago, Ill., of counsel), (Kramer, Lowenstein, Nessen, Kamin, & Soll, New York City, of counsel) for plaintiff-appellant.

Arthur S. Olick, New York City (Anderson Russell Kill & Olick, P. C., New York City, James P. Heffernan, and Tina L. Wellner, New York City, of counsel), for trustee.

Before LUMBARD, MANSFIELD and MESKILL, Circuit Judges.

MANSFIELD, Circuit Judge:

The sole issue on this appeal from an order of the Southern District of New York affirming a decision of the bankruptcy court is whether the debtor, Bernard Bergman, d/b/a Park Crescent Nursing Home ("Park Crescent"), is the "legal or equitable owner" of real property in the Park Crescent within the meaning of Chapter XII of the Bankruptcy Act, 11 U.S.C. §§ 801 Et seq., which permits a debtor owning such an interest to invoke the jurisdiction of the bankruptcy court for the purpose of arriving at a court-approved arrangement altering or modifying the rights of creditors holding debts secured by the debtor's interest. We hold that the debtor here does have such an interest and therefore affirm.

The debtor, Bernard Bergman, formerly operated the Park Crescent, a nursing home located at 150 Riverside Drive in Manhattan. It is one of the largest nursing homes in the state of New York, with a 520-bed capacity and is fully occupied by elderly residents, many of whom are indigent and infirm. The Park Crescent receives more than 90% Of its income from governmental sources through Medicaid and Medicare reimbursements.

In 1975 Bergman was indicted by a federal grand jury for filing false tax returns, submitting false Medicaid claims, making fraudulent statements to the federal government, and conspiracy to defraud the government and commit these offenses. He was also indicted by a New York State grand jury for conspiracy, filing fraudulent reimbursement claims, larceny, and obstruction of governmental administration. Negotiations with the United States Attorney for the Southern District of New York and with Assistant Attorney General Charles J. Hynes, the Special State Prosecutor for Health and Social Services, led to a plea agreement, one provision of which was that "Bernard Bergman will pay to the State of New York, voluntarily . . . whatever sums of money are owing to the State of New York from the Towers Nursing Home and other nursing homes in which he has an interest arising out of Medicaid payments." ¹

In order to comply with this provision of the plea agreement, Bergman and his wife signed on September 14, 1976, a confession of judgment for.$2.5 million, and a document stating that the Bergmans:

" . . . hereby, assign to the O.S.P. (Office of Special Prosecutor) Nursing Home Restitution Fund, and to any nominee (hereafter referred to as the receiver) selected by the Special State Prosecutor, Charles J. Hynes, to act in this matter on behalf of the State of New York and said Fund all right, title, and interest held by us directly or indirectly, in all property, real and personal, wherever situated, this assignment being for the purpose of the liquidation, sale and disposal by the said receiver of said property as is necessary to provide funds to fully satisfy Bernard Bergman's obligation to pay to the O.S.P. Nursing Home Restitution Fund the sum of two million, five hundred thousand dollars."

The document further obligated Bergman and his wife to "cooperate with, aid and assist the receiver, in whatever manner he shall request, in the sale, disposition and conversion to cash of our assets," and specified that "(u)pon the payment of such sums ($2,500,000), the receiver shall return to us such of the assets assigned to him as are undisposed of." The Bergman assets thus assigned for the purpose of satisfying the.$2.5 million obligation included Bergman's interests in numerous other nursing home and realty enterprises besides Park Crescent. Simultaneously with the execution of the plea agreement, confession of judgment, assignment and agreement to cooperate, Bergman executed a security agreement which confirms that the sole purpose of the other documents was to assure that the state's judgment would be satisfied.

On September 30, 1976, Hynes moved in the New York State Supreme Court pursuant to CPLR § 5528(a) for the appointment of a receiver "to sell . . . property and apply the proceeds therefrom to the satisfaction of the judgment rendered . . . against . . . Bernard Bergman . . . in favor of the judgment creditor, People of the State of New York, for the sum of Two Million Five Hundred Thousand Dollars, plus interest, plus the costs and expenses of the receivership." Ramsey Clark, former United States Attorney General, was appointed receiver of Bergman's assets. People v. Bergman, 55 A.D.2d 542, 389 N.Y.S.2d 589 (1st Dept.).

Chase Manhattan Mortgage and Realty Trust ("Chase") is the holder of a mortgage in the principal sum of approximately $7.5 million on the Park Crescent. When the debtor failed to make timely payments on this mortgage in 1976, Chase commenced an action in the Supreme Court of the State of New York to foreclose the mortgage. On October 29, 1976, Chase obtained summary judgment in its favor in the mortgage foreclosure proceeding, and after judgment was entered on May 17, 1977, a foreclosure sale of the property was set for June 10, 1977.

However, on June 9, 1977, Bergman filed in the Southern District of New York Bankruptcy Court a petition under Chapter XII, § 422 of the Bankruptcy Act. ² Thereupon, the bankruptcy court entered an order continuing the debtor in possession and operation of the business and property and staying the foreclosure sale. On June 17, 1977, on motion of New York Attorney General Louis Lefkowitz and Deputy Attorney General Charles J. Hynes, and with the consent of the debtor, the bankruptcy court appointed James L. Garrity as trustee of the debtor's property. Since that time the trustee has been operating the Park Crescent with the approval of the State Department of Health. ³

By motion dated June 14, 1977, Chase sought summary dismissal of the bankruptcy proceeding on the ground that the debtor was neither the legal nor equitable owner of the Park Crescent realty, and was therefore not entitled to invoke the bankruptcy procedures of Chapter XII. The Chase motion was based on Bergman's entry into the September 14, 1976, plea agreement whereby he had assigned all of his assets to the special fund established for the purpose of making restitution to the State of New York for excess payments previously made by the State to Bergman pursuant to allegedly fraudulent reimbursement claims submitted by Bergman's nursing homes. Along with the motion to dismiss, Chase initiated an adversary proceeding seeking an order lifting and/or vacating the automatic stay of the foreclosure sale.

After hearings in June and July 1977, Bankruptcy Judge John J. Galgay denied the Chase motion, holding that "the jurisdictional requisites of legal and equitable ownership of realty are present . . . the debtor is recognized in equity as the owner of the property because the real and beneficial use and title belong to him, notwithstanding any 'assignment to the O.S.P. Restitution Fund'." ⁴

Chase appealed this decision only with respect to the jurisdictional issue to the district court, which concluded that further evidence, including a report from Mr. Clark, the receiver appointed by the state court to sell such of the debtor's property as might be necessary to satisfy the.$2.5 million judgment, should be taken by the bankruptcy court to determine whether Bergman, after satisfaction of the judgment, might be expected to retain any residual interest in the Park Crescent. Judge Pollack noted that this evidence would be relevant to the question of whether the September 14, 1976, Bergman assignment should be treated as a complete divestiture of ownership or as a security instrument, stating,

However, if the Bergman assignment is to be viewed only as a security for the Bergman debt to the OSP, there may be basis on which to suggest that Bergman has retained a sufficient equitable interest in the real property on which to ground a Chapter XII proceeding. On the other hand, if the retained interest is factually gossamer and there is no factual chance that Bergman's debt to the OSP will be satisfied out of assets other than the Park Crescent Nursing Home Property, and there is no factual reason for requiring the liquidation of the nursing home under the assignment, there would be some basis for the view that Bergman is not the "legal or equitable owner of real property" within the meaning of Section 406(6) of the Bankruptcy Act.

The Appellate Division's order of December 16, 1976 held that "The Bergmans retained a reversionary interest in the assigned assets which would remain unsold after satisfaction of the debt and payment of the ancillary costs." This may mean no more than their expression that a security instrument was given to OSP and unless converted into cash by the Receiver, the property was returnable to Bergman in kind. If there is no chance that this real property is to be sold, then the interest of Bergman may properly be described as equitable.

Accordingly, before reaching any conclusion in the premises it appears to the Court that a further evidentiary submission is required on the state of the Clark receivership to the extent that light may be shed on the factual absoluteness of the assignment. This might include the...