In re 300 Wash. St. LLC

• Decision Date: 31 March 2015
• Docket Number: Case No. 1–13–43089–nhl
• Citation: 528 B.R. 534
• Parties: In re: 300 Washington Street LLC, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

528 B.R. 534

In re: 300 Washington Street LLC, Debtor.

Case No. 1–13–43089–nhl

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

Signed March 31, 2015

Isaac Nutovic, Esq., Nutovic & Associates, 261 Madison Avenue, 26th Floor, New York, NY 10016, Attorney for the Debtor

Shannon Marie Jones, Esq., Assistant Corporation Counsel, 233 E. Washington Street Syracuse, NY 13202, Attorney for City of Syracuse

Clifford Tsan, Esq., Joseph Zagraniczny, Esq., Thomas L. Kennedy, Esq., Bond, Schoeneck & King, PLLC, One Lincoln Center, 18th Floor, Syracuse, NY 13202, Attorneys for City of Syracuse

DECISION ON OBJECTION TO CLAIMS AND MOTION TO DISMISS OR LIFT THE AUTOMATIC STAY

NANCY HERSHEY LORD, UNITED STATES BANKRUPTCY JUDGE

Before this Court is the contested motion of the City of Syracuse (the “City”) seeking dismissal of the chapter 11 case of 300 Washington Street LLC (the “Debtor”) or, alternatively, relief from the automatic stay so that the City may foreclose against the Debtor's asset, a vacant building in downtown Syracuse, New York (the “Property”), on account of delinquent real estate tax indebtedness. Also to be determined is the Debtor's objection to allowance of the City's filed proofs of claim and the ability of the City to make a Bankruptcy Code § 1111(b) election on account of its largest claim. For the reasons set forth herein, the Court (1) finds in favor of the Debtor on the issues of dismissal and stay relief; (2) disallows the City's claim for ad valorem taxes in excess of the City's $595,000 appraised value of the Property; (3) determines that the City may not elect to treat its claim for ad valorem taxes as fully secured pursuant to § 1111(b) ; and (4) overrules the Debtor's objection as to the City's claims that do not constitute ad valorem real property taxes, without prejudice to the right of the Debtor to seek disallowance or reduction of said claims on other grounds.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C. § 157(b)(2). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.

BACKGROUND

On May 21, 2013, the Debtor filed a voluntary petition under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). On June 18, 2013, the City moved to dismiss the case under 11 U.S.C. § 1112(b), or in the alternative, to lift the automatic stay under 11 U.S.C. § 362(d)(1) and (2).¹ The Debtor opposes the City's motion, and also objects to the eight proofs of claim filed by the City, numbers 3–10 on the claims register. The Debtor requests that the Court void the portion of the claims that exceed the City's appraised value of the Property, pursuant to 11 U.S.C. § 502(b)(3). The City argues that its ad valorem tax claim is not limited to the value of the Property and should be allowed in full, and that its other claims are not in the nature of ad valorem taxes. Alternatively, the City asserts that it may elect to treat its ad valorem tax claim as fully secured under 11 U.S.C § 1111(b).

The Court held an evidentiary hearing and, over the course of three days, heard the testimony of Isaac Jacobowitz, the Debtor's principal; Berl Jacobowitz, a former principal of the Debtor; Abraham Grunbaum, principal of lender Capitol Holdings USA, LLC (“Capitol”); Martin Spitzer, the Debtor's only employee; and Ben Walsh, Deputy Commissioner of the Department of Neighborhood and Business Development for the City. Following closing arguments, the parties each submitted proposed findings of fact and conclusions of law.

FINDINGS OF FACT

Original members Isaac and Berl Jacobowitz formed the Debtor for the purpose of acquiring, developing, and holding the Property, located at 300 East Washington Street, Syracuse, New York.² The Debtor purchased the Property in 2006 for $3.5 million. Purchase Agreement Ex. 13; Trial Tr. 48–49, Nov. 6, 2013, ECF No. 124; City's Pretrial Statement 5, ECF No. 111. At the time of purchase, the Property was subject to tax arrears in the amount of $900,000. Trial Tr. 48, Nov. 6, 2013. Carnegie Management contributed the down payment on the Property. Carnegie Management, a Brooklyn-based entity co- owned by Isaac and Berl Jacobowitz, manages several properties in the New York City area. It has paid substantially all of the Debtor's operating expenses since the Debtor acquired the Property.

Capitol, an entity formerly owned by the Jacobowitzes, provided the Debtor with approximately $2.7 million to finance the purchase.³ Note Ex. 16, at 1; Modification and Extension Agreement Ex. 17, at 1; City's Pretrial Statement 1. Although the Debtor never made payments on the loan, Capitol did not initiate foreclosure proceedings. Instead, Capitol operates with the understanding that the Debtor will begin making payments after it completes development of the Property and begins generating income. Id. at 20, 71.

Before the Debtor finalized the purchase, its principals met with City officials to discuss the Syracuse real estate market and plans to develop the Property. Trial Tr. 138, Nov. 18, 2013, ECF No. 135. The City expressed interest in leasing office space in the Property, which is located across the street from City Hall, and provided specifications, including required cost and square footage. Id. at 138, 143–44 (referencing email from the City's Head of Econ. Dev. to the Mayor Ex. 41, regarding his meeting with the Jacobowitzes), 148. The Debtor hired professionals and expended approximately $250,000 to generate a proposal responsive to the City's needs, including reduced energy costs. Id. at 147–48, 151–52, 158, 160–61; Email from the City's Head of Econ. Dev. to the Mayor Ex. 41. Between 2006 and 2008, the Debtor's local counsel continued lease negotiations with the City and periodically reported back to the Debtor. Id. at 149.

Shortly after acquiring the Property, the Debtor instituted a tax certiorari proceeding to challenge the $1.5 million discrepancy between the purchase price and the City's $5 million tax valuation. Id. at 148–49; 173–74; Debtor's Pretrial Statement 3. The Debtor also obtained approval from the State to participate in the New York State Empire Zone Program, which, subject to the City's consent, would offer the Debtor benefits such as tax reimbursement.⁴ Trial Tr. 169, Nov. 18, 2013; Trial Tr. 19, Feb. 24, 2014, ECF No. 164.

While the certiorari proceeding was pending, the City conditioned its continued participation in lease negotiations and approval of the Empire Zone certification on the Debtor's entrance into a tax trust agreement. Trial Tr. at 169, 172, 179, Nov. 18, 2013; Ex. 40, at 1. Under the agreement, the Debtor would stipulate to a $3.5 million tax assessment. Settlement Ex. G; Trial Tr. 170–72, 179, Nov. 18, 2013. Initially, City officials assured the Debtor that the settlement would not preclude a further reduction in the assessment if the Debtor prevailed in the tax certiorari proceeding. Trial Tr. 170–71, Nov. 18, 2013; Letters from Dep't. of Assessment and Dep't. of Fin. to Debtor's Syracuse Counsel Ex. 40, at 2–3. However, three months later, the City's First Deputy Commissioner of Finance told the Debtor that in order to enter into the tax trust agreement, the Debtor was, in fact, required to dismiss its tax certiorari proceedings. The City would not execute the agreement “unless and until the pending Certiorari proceedings are settled....” Trial Tr. 171, Nov. 18, 2013; Ex. 40, at 4. Thus, in order to continue lease negotiations with the City and obtain its sign-off on the Empire Zone program, both crucial components of the Debtor's plans to develop the Property, the Debtor dismissed the tax certiorari proceeding in March of 2009 and thus acquiesced to a $3.5 million tax assessment. Id. at 174.

In 2010, the City elected a new mayor. The Debtor attempted to engage the newly appointed administration in continued negotiations. Trial Tr. 160, Nov. 18, 2013. The Debtor's principals met with Ben Walsh, who now served as the City's Deputy Commissioner of the Department of Neighborhood and Business Development. The Jacobowitzes testified that the tenor of their first meeting was overwhelmingly negative. Id. at 162; Trial Tr. 86–89, Nov. 6, 2013. Mr. Walsh reportedly indicated to the Jacobowitzes that the City's real estate market was ill-suited for a large downtown office building. Trial Tr. 162, Nov. 18, 2013. Mr. Walsh also expressed that the City did not intend to lease space in the Property. Id.

In response, the Debtor began soliciting other tenants and formulating plans to develop the Property for residential use. Id. at 164–65. Isaac Jacobowitz testified that the previous administration encouraged the Debtor to consider residential development, given the demand for downtown housing. Id. at 166. Mr. Walsh, however, told the Debtor's principals that the market was not right for residential development either. Trial Tr. 88–89, Nov. 6, 2013.

The Debtor attempted to negotiate a resolution with the City as to the outstanding tax debt on the Property. Isaac Jacobowitz testified that in a meeting with Mr. Walsh, the Debtor offered to pay $800,000 of the $1.4 million tax debt and to invest $1 million into the Property.⁵ Id. at 66–67, 167–68. The City rejected this settlement. Id. at 68. According to Mr. Walsh, as a matter of policy the City does not compromise on tax debt, and he opined that the City would reject a hypothetical offer to pay $1.1 million on a $1.2 million tax obligation. Id. at 68–69, 122. In the year between the Jacobowitzes' first meeting with Mr. Walsh in the spring of 2010, and their second meeting in May of 2011, the Debtor defaulted under the tax trust agreement. Id. at 208–09.

Mr. Walsh testified to meeting with the Debtor's Syracuse counsel, but does...