In re 1020 Warburton Ave. Realty Corp.

• Decision Date: 31 May 1991
• Docket Number: Bankruptcy No. 91 B 20222.
• Citation: 127 BR 333
• Parties: In re 1020 WARBURTON AVENUE REALTY CORP., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

127 B.R. 333 (1991)

In re 1020 WARBURTON AVENUE REALTY CORP., Debtor.

Bankruptcy No. 91 B 20222.

United States Bankruptcy Court, S.D. New York.

May 31, 1991.

Winthrop, Stimson, Putnam & Roberts, New York City (Leo T. Crowley, Valerie Fitch, of counsel), for debtor.

Sheinfeld, Maley & Kay, Houston, Tex., Robinson Silverman Pearce Aronsohn & Berson, New York City, for Nat. Bank of Canada.

DECISION ON MOTION FOR AN ORDER DISMISSING INVOLUNTARY PETITION

HOWARD SCHWARTZBERG, Bankruptcy Judge.

The debtor in this involuntary Chapter 11 case, 1020 Warburton Avenue Realty, has moved pursuant to Bankruptcy Rules 1017 and 9014 and 11 U.S.C. §§ 303 and 1112(b), for an order dismissing the involuntary Chapter 11 petition because it was filed in bad faith and is a perversion of the bankruptcy process. The involuntary Chapter 11 petition was filed by the National Bank of Canada ("National") and three trade creditors who collectively allege that they hold claims against the debtor that are not contingent as to liability or the subject of a bona fide dispute which aggregate more than $5,000.00 in excess of the value of any liens on property of the debtor securing such claims held by the petitioning creditors, as required by 11 U.S.C. § 303(b).

The debtor's basic position is that National is an undersecured mortgagee which has violated the doctrine of election of remedies under New York law by maintaining concurrently an action in the United States District Court for the Southern District of New York against the individual guarantors of the debtor's mortgage and commencing an involuntary Chapter 11 petition for the purpose of foreclosing on the mortgage. Under New York state law, a foreclosure action is not maintainable without leave of the court while an action is pending against the mortgage guarantors. The debtor cites New York Real Property Actions and Proceeding, ("RPAPL") § 1301 as the basis for invoking the election of remedies doctrine.¹

The debtor alleges that National has improper ulterior motives for filing this involuntary Chapter 11 petition in that it seeks to circumvent the New York election of remedies rule incorporated in RPAPL § 1301, which prohibits a mortgagee from pursuing an action at law for a money judgment on the debt concurrently with an action in equity to foreclose without leave of court. The debtor regards "the Bank's initiation of the involuntary petition as tantamount to foreclosure." Hence, the debtor views the involuntary Chapter 11 petition as an indirect violation of RPAPL § 1301, notwithstanding the efficacy of 11 U.S.C. § 362(a), which automatically stays foreclosure actions against property of the debtor.

Factual Background

The debtor is a single asset entity which was incorporated for the sole purpose of developing and marketing a condominium apartment building on Warburton Avenue in Yonkers, New York. Its sole shareholders are Frank and Anthony LaSala. National issued a series of mortgage loans to the debtor aggregating $14,125,000.00 in principal amount to fund the construction and marketing of the condominium building. National obtained the personal guarantees of the loans from Frank and Anthony LaSala.

The debtor has generally not paid its debts as they became due since March of 1990. There is no question that the debtor has defaulted in making payments under National's mortgage on August 5, 1990, the maturity date. Pursuant to a complaint dated January 24, 1991, National commenced an action against the LaSala guarantors in the United States District Court based on diversity of citizenship.

On February 7, 1991, National and three additional creditors filed an involuntary Chapter 11 petition against the debtor in this court, asserting claims of $14,125,000.00, $16,302.09, $31,937.80 and $19,984.22, respectively. National asserts that it is an undersecured creditor. The debtor does not dispute that the petitioning creditors hold noncontingent, undisputed, unsecured claims in excess of $5,000.00, as required by 11 U.S.C. § 303(b).

The debtor alleges that National induced the other three petitioning creditors to join the petition by falsely telling them that they may receive a dividend in a Chapter 11 case, whereas National is undersecured so that the unsecured creditors will not likely receive any dividend. There was no evidence as to this allegation nor was there any evidence that National solicited the other three petitioning creditors in bad faith or as a result of any misrepresentations or financial commitments made to them by National. Therefore, there remains for consideration whether National's participation in the involuntary Chapter 11 petition violates RPAPL § 1301 in light of its pending action in the district court against the debtor's shareholders on their personal guarantees with respect to the mortgage debt. The debtor maintains that National has made an election of remedies and that the involuntary Chapter 11 petition was filed in bad faith with the ulterior purpose of circumventing the impact of RPAPL § 1301.

Good Faith

When a single asset debtor files a voluntary Chapter 11 case on the eve of a foreclosure action a court may dismiss the case under 11 U.S.C. § 1112(b) on a finding of objective futility of any possible reorganization and subjective bad faith if the following factors exist: 1. The only significant creditors are those seeking foreclosure. 2. There are few or no unsecured creditors. 3. The filing of the case on the eve of a mortgage foreclosure, was not precipitated by creditor pressure other than those creditors seeking foreclosure. 4. The only employees are those who are in actual control of the debtor. 5. The debtor has little or no cash flow. 6. The debtor is not engaged in significant business activities. 7. There is no realistic possibility of a reorganization and there was evidence of subjective bad faith on the part of the petitioner in filing the Chapter 11 case. Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir.1989); Idaho Dept. of Lands v. Arnold (In re Arnold), 806 F.2d 937 (9th Cir.1986); Little Creek Development Co. v. Commonwealth Mortgage Co. (In re Little Creek Development Co.), 779 F.2d 1068 (5th Cir.1986); Albany Partners, Ltd. v. W.P. Westbrook, Jr. (In re Albany Partners, Ltd.), 749 F.2d 670 (11th Cir.1989).

Had the debtor filed the Chapter 11 petition in this case, there might have been an argument that the single asset case was filed in bad faith solely to prevent the mortgagee from foreclosing. However, this case presents the unusual twist of an involuntary Chapter 11 filed by four petitioning creditors against a debtor who asserts that one of the petitioning creditors had an ulterior purpose which tainted the petition as having been filed in bad faith. The debtor does not deny that all of the requirements for an involuntary petition under 11 U.S.C. § 303(b) have been satisfied. Moreover, the debtor has produced no evidence at the hearing as to National's lack of good faith in filing the involuntary Chapter 11 petition. The debtor relies upon inference for its legal conclusion as to bad faith. The debtor infers that an involuntary Chapter 11 petition may not be filed by a mortgagee without leave of court when the...