C-TC 9th Avenue Partnership, In re

• Decision Date: 30 May 1997
• Docket Number: D,C-TC,No. 674,674
• Citation: 113 F.3d 1304
• Parties: 38 Collier Bankr.Cas.2d 115, 30 Bankr.Ct.Dec. 1146, Bankr. L. Rep. P 77,410 In re9TH AVENUE PARTNERSHIP, Debtor. 9TH AVENUE PARTNERSHIP, Plaintiff-Appellant, v. NORTON COMPANY, Defendant-Appellee, Maplewood Colonie Common School District, and the Town of Colonie, Creditors-Appellees. ocket 96-5068.
• Court: U.S. Court of Appeals — Second Circuit

Page 1304

113 F.3d 1304

38 Collier Bankr.Cas.2d 115, 30 Bankr.Ct.Dec. 1146,

Bankr. L. Rep. P 77,410

In re C-TC 9TH AVENUE PARTNERSHIP, Debtor C-TC 9TH AVENUE PARTNERSHIP, Plaintiff-Appellant, v. NORTON COMPANY, Defendant-Appellee Maplewood Colonie Common School District, and the Town of Colonie, Creditors-Appellees.

No. 674, Docket 96-5068.

United States Court of Appeals Second Circuit.

Argued Jan. 10, 1997.

Decided May 30, 1997.

Alan W. Kornberg, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Plaintiff-Appellant.

David F. Kunz, DeGraff, Foy, Holt-Harris, Healey & Kunz, L.L.P., Albany, NY, for Defendant-Appellee.

David R. Murphy, Cusick, Hacker & Murphy, L.L.P., Latham, New York City, for Creditor-Appellee.

William A. Nowak, Town Attorney for Town of Colonie, Newtonville, NY, for Creditor-Appellee.

Before: NEWMAN, Chief Judge, McLAUGHLIN and CUDAHY, ^* Circuit Judges.

CUDAHY, Circuit Judge:

The debtor, C-TC 9th Avenue Partnership (C-TC), appeals the determination, made in the first instance by the bankruptcy court, that C-TC is not a "person" eligible for Chapter 11 relief, and that C-TC filed its Chapter 11 petition in bad faith. C-TC's petition was dismissed by the bankruptcy court, whose decision was affirmed by the district court. We affirm.

I. Factual Background

C-TC, a general partnership under New York law, was formed in 1988 by Richard Cabral and the Timmons Corporation. The purpose of the partnership was to purchase and manage the Cloverleaf Distribution Center (Cloverleaf), a 21-acre plot of open land containing warehouses. C-TC's purchase agreement with Norton Company (Norton), the then-owner of Cloverleaf, included payment of a $110,000 fee to compensate Norton for canceling a prior purchase agreement. The purchase price itself required a $25,000 cash payment upon signing, another $850,000 in cash at closing and a $2,850,000 note secured by a mortgage on the property. The agreement also included a sale-leaseback provision whereby Norton leased and occupied approximately half of the property after the sale.

Prior to closing the sale, Norton executed at C-TC's request an environmental indemnification agreement in which Norton agreed to indemnify C-TC for "any discharges to [Cloverleaf] of hazardous wastes or substances within the meaning of the Comprehensive Environmental Response Compensation and Liability Act of 1980...."

For various reasons, C-TC failed to make any of its required payments. In November, 1988, Norton brought two actions against C-TC. The first alleged that C-TC breached the obligation of the note by failing to make the required cash payments, and the second sought foreclosure of the mortgage on the property because of C-TC's breach of its obligations under the long-term note and mortgage. C-TC counterclaimed in the foreclosure action alleging breach of the purchase agreement and fraud. C-TC claimed that the property was not in compliance with applicable zoning and environmental regulations and that Norton had purposely defrauded C-TC by selling the property to it in such a condition. The parties dispute whether there has been any actual environmental damage to the land or any pollution. ¹ In any event, a New York state court severed Norton's foreclosure action from C-TC's counterclaims, and held that $4 million was the maximum C-TC could recover from Norton. The state court also required Norton to post bond in that amount, which it did. In addition, the New York court appointed a referee and orally granted Norton's motion to appoint a receiver. On the same day that the court approved the appointment of a receiver, C-TC filed its voluntary Chapter 11 petition in bankruptcy court. This filing automatically stayed the foreclosure action in state court.

Norton sought relief from the automatic stay. These proceedings resulted in the dismissal of C-TC's petition on the grounds that C-TC was ineligible to proceed under Chapter 11 and that C-TC had filed in bad faith. The district court affirmed and C-TC again appealed.

II. C-TC's Eligibility under Chapter 11

When C-TC filed its voluntary Chapter 11 petition in bankruptcy court, it listed itself as having only one partner, Timmons Corporation, thereby indicating that Richard Cabral had withdrawn from the partnership. Cabral's withdrawal, and the forced dissolution of the partnership which it precipitated, has become the central issue of the litigation. The bankruptcy court dismissed C-TC's petition as a matter of law for the reason that C-TC, as a dissolved partnership, was not eligible for reorganization and could not implement a Chapter 11 reorganization. As the bankruptcy court held, 11 U.S.C. § 109(d) places some limitations on the categories of entities eligible for Chapter 11 reorganization. This statute provides that "[o]nly a person that may be a debtor under chapter 7 ... may be a debtor under chapter 11 of this title."

The bankruptcy court determined that the threshold issue was thus whether C-TC, as a partnership in dissolution, was a "person" within the meaning of the bankruptcy code. The definition of a partnership, which is not defined in the bankruptcy code, is a matter of nonbankruptcy law. See Chicago Title & Trust Co. v. 4136 Wilcox Bldg. Corp., 302 U.S. 120, 128-29, 58 S.Ct. 125, 128-29, 82 L.Ed. 147 (1937). In New York a partnership is composed of two or more persons acting as partners. Thus, under New York law, the withdrawal of Richard Cabral one of C-TC's two partners, dissolved the partnership. But a dissolved partnership is allowed to "continue[ ] until the winding up of the partnership affairs is completed." N.Y. Partnership Law § 61 (McKinney 1996). This raises the question of the meaning of "continue." In Pastor v. State Tax Comm'n, 115 A.D.2d 144, 146, 495 N.Y.S.2d 515 (N.Y.App.Div.1985), the Appellate Division held that § 61 of the New York Partnership Law operates not to "prolong the life of an otherwise unviable entity" but only to allow continuation of the partners' liability for debts of the partnership. Based on this interpretation, the bankruptcy court found that "the Debtor's restricted capacity as a partnership in dissolution under New York law is inconsistent with the Debtor's stated objective in Chapter 11 of obtaining a 'fresh start.' "

C-TC contends that the bankruptcy court disregarded the Supreme Court's insistence that the plain meaning of the Bankruptcy Code be given effect. See Toibb v. Radloff, 501 U.S. 157, 161, 111 S.Ct. 2197, 2199, 115 L.Ed.2d 145 (1991). ² Instead, C-TC argues that the bankruptcy court, relying on In re Fitzgerald Group, 38 B.R. 16 (Bankr.S.D.N.Y.1983), proposed an additional requirement for eligibility under Chapter 11, namely, that the debtor "intend to reorganize." C-TC further argues that the "dissolution" of a partnership is distinguishable from its "termination" in that a partnership in dissolution is still a "person" for purposes of Chapter 11.

Norton, on the other hand, supports the bankruptcy court's reasoning. While Norton concedes that a partnership is an eligible person, Norton emphasizes that under New York law a partnership "is an association of two or more persons to carry on as co-owners a business for profit." N.Y. Partnership Law § 10(1) (McKinney 1996). Further, the argument goes, before C-TC filed its bankruptcy petition, one of its two partners had already withdrawn, thereby destroying the partnership. Thus, since the bankruptcy code considers "partnerships" but not "partnerships in dissolution" to be eligible as "persons," C-TC is not a "person" and is not eligible. Norton agrees with the bankruptcy court's conclusion that C-TC's petition is inconsistent with the objectives of Chapter 11. In this connection, the Sixth Circuit has held that without a viable business to rehabilitate, Chapter 11 loses its purpose. In re Winshall Settlor's Trust, 758 F.2d 1136, 1137 (6th Cir.1985).

If the primary purpose of Chapter 11 is to enable businesses to reorganize and emerge from bankruptcy as operating enterprises, and New York partnership law prohibits C-TC from engaging in any business other than liquidation, Chapter 11 reorganization is not available as a course for C-TC to follow. A somewhat analogous case applying New York law, In re Fitzgerald Group, held that

the underlying purpose of Chapter 11 ... is to rehabilitate the debtor and offer a fresh start. The debtor in this case is a partnership that has been dissolved by the death of a partner. There can be no opportunity to rehabilitate an entity that, by law, no longer exists except for the purposes of liquidation. This debtor seeks relief under Chapter 11, a reorganization chapter, when there is nothing which can be reorganized.

38 B.R. at 18. C-TC has pointed out that the only asset involved in In re Fitzgerald was a typewriter (worth $2500) and that this was reason enough to deny a Chapter 11 petition. However, the bankruptcy court did not rely in its decision on the limited assets involved, but rather on the status of the debtor (i.e., as a partnership in dissolution).

The importance under New York law of dissolution as it affects a partnership can be appreciated when one compares the effect of dissolution on a partnership with the effect of dissolution on a corporation. In Cedar Tide Corp. v. Chandler's Cove Inn, Ltd. (In re Cedar Tide Corp.), 859 F.2d 1127, 1128 (2d Cir.1988), this circuit examined the question "whether the federal courts have jurisdiction over a Chapter 11 petition filed by a corporation previously dissolved by New York State for nonpayment of franchise taxes." We held there that, while § 1006(a) of New York Business Corporation Law, (McKinney 1996), limited a dissolved corporation to those activities involved in the winding up of its affairs, the New York Tax Law, § 203-a(7) (McKinney 1996), allowed a dissolved corporation to be reinstated nunc pro tunc upon the filing of a certificate indicating that all taxes, penalties, interest...