IN RE 114 TENTH AVE. ASS'N, INC.

• Decision Date: 31 March 2010
• Docket Number: No. 05-60099(ALG).,05-60099(ALG).
• Citation: 427 B.R. 283
• Parties: In re 114 TENTH AVENUE ASSOC., INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

427 B.R. 283

In re 114 TENTH AVENUE ASSOC., INC., Debtor.

No. 05-60099(ALG).

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

March 31, 2010.

COPYRIGHT MATERIAL OMITTED

Schafferman & Feldman, LLP, by Joel M. Schafferman, Esq., New York, NY, for the Debtor.

Adam Leitman Bailey, P.C., by William J. Geller, Esq., Special Litigation and Real Estate, New York, NY, for the Debtor.

The Law Offices of Gabriel del Virginia, by Gabriel Del Virginia, Esq., Yitzhak Greenberg, Esq., New York, NY, for Karen Nason.

Michael T. Sucher, Esq., by Michael T. Sucher, Esq., Brooklyn, NY, for Carlton Capital Group and Highline Properties LLC.

MEMORANDUM OF OPINION

ALLAN L. GROPPER, Bankruptcy Judge.

Before the Court are two claims objections filed by 114 Tenth Avenue Associates, Inc.(the "Debtor").The Debtor seeks disallowance of the claim of Karen Nason("Nason") on the grounds, inter alia, that a stipulation providing for the underlying mortgage claim is invalid and that the mortgage lacks consideration.The Debtor also seeks to expunge a claim filed by Carleton Capital Corp. and Carleton's assignee, Highline Properties, LLC(collectively, "Carlton"), on grounds that the Debtor is not liable for the fair market value of use and occupancy in connection with its possession of 114 Tenth Avenue during the period between a foreclosure sale and the closing (the "Stay Period").The Debtor asserts it is only liable to Carlton for the rents and profits it actually received, less expenses of maintaining the Property, and that it is entitled to a setoff measured by interest on the purchase price not paid during the Stay Period.For the reasons set forth below, the Debtor's objection to the Nason claim is overruled and its objection to the Carleton claim is sustained in part and set down for a further hearing.

BACKGROUND

Facts Relating Primarily to Nason

The Debtor's sole asset was land and a mixed-use building located at 114 Tenth Avenue in New York City(the "Property").When the Property was purchased in the 1990's, Nason and Zivadin Krstic("Krstic"), the Debtor's president and sole shareholder, were involved in a personal relationship, and on November 24, 1994, Nason gave birth to a son, Zillian Krstic("Zillian").

Nason contends that funds from a business she operated provided part of the purchase price of the Property.In return, she alleges, Krstic agreed that she would be a 50% owner of the Property and that title to the Property would be in the Debtor's name, with Nason owning 50% of the stock.Nason, however, never received any stock, and the alleged agreement was not documented.Nason alleges that she was involved in the day-to-day operations of the building and that income from the building paid her expenses and Krstic's.The Debtor in turn contends that Nason made no financial or other contribution to the Property.

The relationship between Nason and Krstic ended in 2002, at which time Krstic denied that Nason had any ownership interest or rights in the Property or the Debtor.As a result, on February 13, 2003, Nason filed an action in the Supreme Court, New York County (the "State Court"), against both Krstic and the Debtor for unjust enrichment and partition of the Property (the "Partition Action").At that time, Nason also filed a notice of pendency asserting a one-half ownership interest in the Property.On February 28, 2003, Nason also filed an action in Family Court, New York County, against Krstic, seeking an order of paternity and child support for Zillian (the "Family Court Action").

Nason and Krstic subsequently entered into a stipulation, "so ordered" by the Family Court on November 8, 2004(the "State Court Stipulation"), that provided for settlement of both the Family Court Action and the Partition Action.It stated, among other things:

Respondent shall execute a will providing that Zillian shall be the beneficiary of the real property located at 457 West 17th Street, New York, N.Y . . . . and the shares of stock of 114 Tenth Avenue Association, Inc. which holds title to the Property, or any other corporation which shall hereafter hold title to such property, provided, however, that, in the event Respondent or any corporation which shall hold title to the property shall cause or permit the sale of disposition of such property to a person or entity in which or with respect to which the Respondent has no interest, prior to the Respondent's death, then Zillian shall receive the sum of $400,000 out of the proceeds of such sale or disposition.In the event, at the time of such sale or other disposition, Zillian is under the age of 21, the payment of said $400,000 shall be made to Petitioner as Trustee for Zillian pursuant to a trust agreement.. . .

(State Court Stipulation¶ 5).¹The State Court Stipulation further provided, "In order to secure the Respondent's obligation to make the payment of $400,000 as herein provided, Respondent shall execute a mortgage. . . ."(State Court Stipulation¶ 6).It also stated, "Respondent shall further provide in his will that upon his death, Zillian shall receive one-third of any real property owned by Respondent individually or by a corporation in which Respondent is the majority shareholder, after payment of any mortgages on the property as of April 1, 2004."(State Court Stipulation¶ 7).

A mortgage was thereafter executed on November 24, 2004, between the Debtor as mortgagor and Nason, as Trustee for Zillian, as mortgagee (the "Mortgage").Krstic signed the Mortgage, acting as President of the Debtor.Additionally, a Trust Agreement was entered into between Krstic, as settlor, and Nason, as trustee(the "Trust Agreement"), which identified the trust property as the Mortgage that the settlor, as sole shareholder of the Debtor, confirmed he had caused the Debtor to execute for the benefit of the Trustee.(TrustAgmt. Art. 2).

Meanwhile, in 2003, a tax lien foreclosure proceeding had been commenced against the Property in the Supreme Court, New York County, IndexNo. 109239/03 (the "Tax Foreclosure Action"), by the NYCTL 1999-1 Trust, a tax lien trust that had purchased a tax lien on the Property imposed by the City of New York.A Tax Foreclosure Action was thereafter brought against the Debtor and several other defendants with asserted interests in the Property.Nason was included as a defendant due to the notice of pendency she had filed against the Property.Krstic asserts that he never received actual notice of the Tax Foreclosure Action and that the Debtor was served at a former address.The Debtor subsequently defaulted, and on October 6, 2004, the Supreme Court issued a Judgment of Foreclosure and Sale against the Property (the "Foreclosure Judgment").²An auction sale of the Property was held on May 18, 2005, at which Carlton was the winning bidder in the amount of $2 million ("Foreclosure Sale").Krstic alleges that he only became aware of the Tax Foreclosure Action on the day after the auction, when a representative of the winning bidder came to inspect the Property.He thereafter moved, on behalf of the Debtor, to vacate the Foreclosure Judgment on due process grounds.

On November 10, 2005, having been unable to vacate the foreclosure, the Debtor filed a petition under Chapter 11 of the Bankruptcy Code.The Debtors' schedules listed Nason as a secured creditor holding a contingent, unliquidated and disputed claim in the amount of $400,000, the basis of which was a "purported mortgage" on the Property.On February 8, 2009, Nason, as trustee for Zillian, filed a proof of claim against the Debtor in the amount of $400,000.The basis of the claim was the State Court Stipulation, plus the costs and expenses of defending the alleged Mortgage.Thereafter, on October 18, 2006, Nason purported to record the Mortgage.

On July 18, 2008, the Debtor commenced an adversary proceeding, Adv.No. 08-01347, against Nason individually and as trustee of the Krstic Irrevocable Trust, and her attorney, Kenneth Miller(the "Nason Adversary Proceeding").The first count of the Complaint sought a declaratory judgment that the post-petition recordation of the Mortgage was in violation of the automatic stay and void; the second count sought a declaratory judgment that Nason had no valid interest in or claim against the estate; and the third count sought contempt damages for violation of the stay.After negotiations, Nason expunged the recording of the Mortgage, and the Debtor withdrew the first and third counts of the Complaint with prejudice.Nason moved for summary judgment in her favor on the second count.At a hearing held on February 26, 2009, Nason's summary judgment motion was dismissed without prejudice, the Court observing that Nason's rights, if any, could be determined in the context of an objection to her proof of claim.

Facts Relating Primarily to Carlton

As noted above, Carlton successfully bid $2 million for the Property.The Property contains one commercial space on the ground floor and basement and nine rent-stabilized residential apartments, including one duplex apartment.The terms of sale ("Terms of Sale") agreed to at the Foreclosure Sale provided, inter alia, that the Property was

sold in `as is' physical order and condition subject to:

* * *

e.) any rights of tenants or persons in possession of the premises;

f.) prior lien(s) of record which can not be extinguished in a foreclosure action of record, if any.

(Terms of Sale¶ 9).At the time of the Foreclosure Sale, the only commercial tenant had a fifteen-year lease that expired in 2010.(Carlton BriefEx. 7).The Debtor and Carlton dispute whether the residential units were fully occupied by tenants with valid leases at the time of the sale.Carlton has strenuously asserted in this Court and in the Tax Foreclosure Action that the Debtor fraudulently back-filed residential leases and that many of the residential tenants did not reside in those units either prior to or after the Foreclosure Sale....