In re 167 W. 133RD St. Hous. Dev. Fund Corp., Case No. 18-12043 (JLG)

• Decision Date: 25 September 2018
• Docket Number: Case No. 18-12043 (JLG)
• Parties: In re: 167 West 133rd Street Housing Development Fund Corp., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

In re: 167 West 133rd

Street Housing Development Fund Corp., Debtor.

Case No. 18-12043 (JLG)

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

September 25, 2018

NOT FOR PUBLICATION

Chapter 11

MEMORANDUM DECISION AND ORDER GRANTING MOTION TO DISMISS CHAPTER 11 CASE

APPEARANCES:

RIVKIN RADLER LLP

Attorneys for HSC Management Corp., David Perez, and Ricardo Grant

Stuart I. Gordon, Esq.

Matthew V. Spero, Esq.

926 RXR Plaza

Uniondale, NY 11556

Andrew Citron, Esq.

Attorney for Judith Smith

30 Wall Street

8th Floor

New York, New York 10005

HON. JAMES L. GARRITY, JR. U.S. BANKRUPTCY JUDGE

Introduction

167 West 133rd Street HDFC is the debtor herein (the "Debtor"). Its sole asset is a building located at 167 West 133rd Street, New York, New York (the "Building" or "Property"), that is being managed by HSC Management Corp. ("HSC"). Judith Smith and her brother David Smith reside in the Building. In August 2016, the Smiths sued the Debtor, HSC, David Perez, a property manager at HSC ("Perez"), and Ricardo Grant ("Grant") a shareholder of the Debtor and the President of the Debtor's Board of Directors (the "Board"), in New York State Supreme Court, New York County (the "State Court"). In that action, they are seeking an order declaring that they are Board members, and that Ms. Smith is the Secretary-Treasurer of the Board. In June 2018, the State Court preliminarily enjoined the Smiths from interfering with the management of the Building. In doing so, the court found that Ms. Smith is not a member of the Board. That action is pending.

Ms. Smith has brought the governance dispute to this Court. On July 2, 2018 (the "Petition Date"), she filed a bare bones chapter 11 petition for reorganization (the "Petition") on behalf of the Debtor. In the Petition, she claims that she is the Debtor's Secretary-Treasurer and that the Board authorized her actions. She executed the Board resolution authorizing the Debtor to file this case in her purported capacity as "Secretary-Treasurer." The Debtor is acting pro se. The matter before the Court is the motion filed by HSC, Perez and Grant (together, the "Movants") to dismiss the case pursuant to §§ 105(a) and 1112(b) of the Bankruptcy Code (the "Motion").¹ The City of New York (the "City") is the Debtor's largest creditor in what is, from afinancial perspective, essentially a two-party case. It holds a Foreclosure Judgment (defined below) against the Building. To date, the Debtor has made no attempt to redeem the Building, and its Mandatory Period (defined below) to do so has expired. The City supports the Motion and urges the Court to dismiss the case.² Ms. Smith opposes the Motion.³

As explained below, the Movants have established "cause" for relief under § 1112(b) of the Bankruptcy Code. The Court finds that it is in the best interests of the Debtor's estate and creditors that this case be dismissed. Accordingly, for the reasons set forth herein, the Motion is GRANTED, and the case is dismissed.⁴

Jurisdiction

This Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 1334(a) and 157(a) and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2012 (Preska, C.J.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).

Facts

The Debtor is a Housing Development Finance Corporation ("HDFC") organized under § 573 of the Private Housing Finance Law of the State of New York ("PHFL") exclusively for the purpose of developing a housing project for persons of low income. NYC Stmt. ¶ 1; see also 2017 Perez Aff. ¶ 8 (noting that the Debtor is organized under Article XI (§§ 570-582) of the PHFL). The New York City Department of Housing Preservation and Development ("HPD") is responsible for all City-owned buildings and, among other things, is tasked with overseeing HDFC on behalf of the City. See New York City Housing Preservation & Development: https://www1.nyc.gov/site/hpd/about/about-us.page (last visited September 25, 2018). Sometime in the late 1970s, the City acquired title to the Building pursuant to an in rem foreclosure action. NYC Stmt. ¶ 2. In 2001, pursuant to the provisions of the PHFL, the City transferred title to the Building to the Debtor. Id.⁵ The Building is the Debtor's sole asset.

By 2015, the Building had fallen into disrepair and the Debtor was experiencing significant financial problems. 2017 Perez Aff. ¶ 9. Indeed, as of December 2015, the Building had unpaid real property tax and water bills totaling in excess of $200,000. Id. At that time, theUrban Homesteading Assistance Board (the "UHAB") urged the Debtor to retain an experienced property manager to manage the Building. Id. ¶ 10. At its suggestion, on or about November 23, 2015, the Debtor entered into a property management agreement with HSC, effective December 1, 2015. Id. ¶¶ 10-11. In December 2016, the Debtor renewed its agreement with HSC. Id. ¶ 11. HSC understands that until December 2015, Ms. Smith handled all management responsibilities for the Building, including, without limitation, collecting rent, paying bills and managing the Debtor's bank account. Id. ¶ 12.

Since its appointment, HSC has been at odds with Ms. Smith over matters relating to the governance of the Debtor and the management of the Building. HSC states that Ms. Smith:

(i) Refused to turn over the Debtor's books, records, and bank information to HSC, forcing HSC to resort to opening a new bank account for the Debtor, and approaching each tenant in the building in December 2015 to recreate the rent roll. Id. ¶¶ 13-14.

(ii) Refused to turn over the Debtor's operating funds to HSC to enable it to make a payment to the City on account of the tax arrears. Id. ¶ 16.

(iii) Refused to provide HSC with any historical financial data or accounting records regarding the Debtor and /or the Building. Id. ¶ 17.

(iv) Refused to cooperate with HSC and the Urban Homesteading Assistance Board to create a plan to get the Debtor back track financially. Id. ¶ 20.

The dispute between HSC and Ms. Smith crystalized in August 2016, when the Smiths sued the Debtor and the Movants in State Court (the "State Court Action"). See id., Ex. H (the "Complaint"). At its core, that action seeks to resolve a corporate governance dispute among the Smiths and the Debtor. Specifically, in the Complaint, the Smiths seek a declaration that they are members of the Board, and that Ms. Smith is the Board's Secretary-Treasurer. Compl. at 4-5. HSC states that in the period since the commencement of the State Court Action, and notwithstanding its appointment as property manager, Ms. Smith has interfered with the operation of the Building. To that end, it contends that she has:

(i) attempted to terminate HSC's contract, and the contract of the Building's superintendent;

(ii) changed the locks on vacant apartments and blocked attempts to market and sell those apartments;

(iii) advised tenants that HSC was no longer managing the Building, and told them not to pay rent to HSC; and

(iv) otherwise created a chaotic and unproductive environment in the Building in protest of HSC's retention as manager.

2017 Perez Aff. ¶ 23.

In August 2017, HSC discovered that in July 2017, Ms. Smith, purportedly acting on behalf of the Debtor, entered into a contract (the "July Contract") to sell the Building to West 133rd Acquisition Group LLC for $1.5 million. Id., Ex. L. Both the Debtor's Certificate of Incorporation, and the deed conveying the Building to the Debtor, bar the Debtor from selling the Building without first obtaining HPD's permission. See id., Ex. C (the "Certificate of Incorporation") at §§ 10(B)-(C); NYC Stmt. ¶ 2, Ex. A (Deed) at 3. It is undisputed that Ms. Smith neither sought nor obtained HPD's permission before executing the July Contract on behalf of the Debtor. HSC promptly challenged Ms. Smith's right to proceed with the sale, and on August 22, 2017, sent Ms. Smith a cease and desist letter. See 2017 Perez Aff., Ex. M (Cease & Desist Letter).

Thereafter, HSC sought relief against Ms. Smith in the State Court Action. Specifically, on September 14, 2017, at the request of HSC, the State Court issued an Order to Show Cause(the "Show Cause Order")⁶ with a temporary restraining order, directing the Smiths to appear and show cause why an order should not be made and entered:

(i) declaring the July Contract null and void as it is in violation of the covenants in the Debtor's Certificate of Incorporation,

(ii) preliminarily and permanently enjoining the Smiths from "transferring, marketing, encumbering, selling or disposing of and/or entering into a Contract of Sale for" the Building,

(iii) preliminarily and permanently enjoining the Smiths (or anyone acting on their behalf) from interfering with the management of the Building, and

(iv) permitting the defendants to market and sell the vacant units in the Building immediately, subject to the consent of Mr. Grant and Ms. Smith, which shall not be unreasonably withheld.

Show Cause Order, at 2. The Order also temporarily enjoined and restrained the Smiths from:

(a) transferring, marketing, encumbering, selling or disposing of and/or entering any Contract of Sale for the Building; and

(b) interfering in the management of the Building, which includes but is not limited to changing the locks on apartments (other than the Smiths'), directing tenants not to pay rent to HSC, threatening or purporting to terminate the Building's employees or vendors such as the Building's superintendent and management company.

See id. Neither Ms. Smith, nor her brother responded to the Show Cause Order, or otherwise opposed the relief the Movants seek in State Court.

On June 14, 2018, the State Court issued a decision and order (the "State Court Decision")⁷ in which it declared the July Contract null and void. In so ruling, the State Court found that Ms. Smith lacked authority to act on behalf of the Debtor in connection with thepurported sale, because she was not a...