In re 680 Fifth Ave. Associates
| Citation | 218 BR 305 |
| Decision Date | 20 February 1998 |
| Docket Number | Adversary No. 95-1395A.,Bankruptcy No. 92 B 44734(TLB) and 92 B 44735(TLB) |
| Parties | In re 680 FIFTH AVENUE ASSOCIATES and 54th and Fifth Land Partners, Reorganized Debtors. 680 FIFTH AVENUE ASSOCIATES, on its own behalf and as successor-in-interest to 54th and Fifth Land Partners, Plaintiff, v. EGI COMPANY SERVICES INC., Engadine Holdings Inc., 54th Estate Corp., 680 Realty Partners and HFA Investor Services, Inc., Defendants. EGI COMPANY SERVICES INC., Engadine Holdings Inc., 54th Estate Corp., 680 Realty Partners and HFA Investor Services, Inc., Counterclaimants and Third Party Plaintiffs, v. 680 FIFTH AVENUE ASSOCIATES, Counterclaim Defendant, and Lodz Properties, L.P., Hensel Fifth Avenue Associates, L.P., Hensel 680 Realty Corp., Farrell C. Galser, J. Michael Broumas, Ober, Kaler, Grimes & Shriver, Steven L. Green, and S.L. Green Real Estate, Inc., Third Party Defendants. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
Hahn & Hessen L.L.P. by Jeffrey L. Schwartz, Joshua I. Divack, Brown, Raysman & Millstein, L.L.P. by Kenneth M. Block, New York City, for Reorganized Debtor.
Ross & Hardies by Marshall Biel, Kathryn C. Spann, New York City, for EGI Company Services Inc., Engadine Holdings Inc., and HFA Investor Services, Inc.
Edward M. Strasser, who has moved for an award for sanctions, was the president of the former managing agent and, through a corporate vehicle, controlled the general partner of 680 Fifth Avenue Associates and its affiliated company, both of which were partnership debtors-in-possession under chapter 11 of the Bankruptcy Code. Together, the two debtors owned and operated a commercial office building in a tony part of Fifth Avenue in Manhattan. Competing plans were filed by Strasser and the limited partners, with the limited partners' plan ultimately being confirmed. Throughout the course of the reorganization cases the enmity flowing between the limited partners and Strasser was almost palpable. Shortly after the limited partners' plan was confirmed, Strasser filed millions of dollars of administrative claims on behalf of entities which he controlled for services said to have been rendered by them during the debtor in possession phase. Although a footnote in Strasser's disclosure statement reserved his right to file claims for these entities, nowhere did the disclosure statement reveal that he intended to do so or that the claims would aggregate some $2 million. The claims were not asserted and their magnitude was concealed until after confirmation of the limited partners' plan.
In response to Strasser's filing of these claims, the Reorganized Debtor (the two debtors having been merged into one pursuant to the plan), under the control of new management installed pursuant to the limited partners' plan, filed a complaint drafted by attorneys new to the proceedings containing ten causes of action against Strasser and his entities, including objections to the claims. Strasser answered and several weeks later moved for (i) partial judgment on the pleadings and (ii) leave to amend his answer to assert a counterclaim and interpose a third-party complaint seeking to revoke confirmation of the limited partners' plan and authorize him to solicit acceptances to a new plan which he would propose. Before the motion was heard, the parties agreed that the reorganized debtor, under the guidance of a still different set of attorneys, could amend the complaint to delete some of the claims and drop some of the defendants, including Strasser. Strasser responded to the amended complaint with an answer asserting the counterclaim and instituting the third party complaint. He simultaneously moved for sanctions pursuant to Fed.R.Bankr.P. 9011 with respect to the omitted claims. The reorganized debtor and third party defendants promptly moved to dismiss the counterclaim and third party complaint, a motion which I granted. In re 680 Fifth Ave. Assocs., 209 B.R. 314 (Bankr.S.D.N.Y.1997). This decision treats with Strasser's request for sanctions.
It is fairly likely from Strasser's concealment of the magnitude of his entities' administrative claims until after confirmation of the limited partners' plan coupled with his attempt to revoke that plan once confirmed that he was desirous of torpedoing the reorganization by burdening the surviving entity which he no longer controlled with first priority claims which no one had anticipated. (Had he revealed the size of his entities' claims at the time that his own plan was under consideration, it would have made confirmation of that plan very unlikely.)
One of the ten claims in the original complaint represented that Strasser had allowed to expire an agreement tolling the statute of limitations. The assertion was true but incomplete because Strasser had obtained the oral agreement of the committee of unsecured creditors to his inaction. Strasser paints that claim as violative of Fed. R.Bankr.P. 9011. It is not surprising that counsel for the reorganized debtor, arriving on the scene only after confirmation, did not know of the conversations between Strasser and the committee given that the reorganized debtor's management was also new. More comprehensive inquiry would have revealed the flaw in the claim, but counsel's ignorance is understandable. Strasser tags a second claim as sanctionable on the theory that had the reorganized debtor obtained the relief it sought, avoidance of the so-called Oak Tree note, that relief would have greatly harmed the limited partners who had voted in favor of the confirmed plan. However, even if this were true, Strasser fails to demonstrate how this claim was frivolous or was filed for an improper purpose, the ultimate tests for whether a pleading warrants sanctions.
I have concluded that, because both claims and, indeed, the entire complaint, were objectively reasonable and not filed for an improper purpose, sanctions ought not be imposed.
54th and Fifth Land Partners, the owner of real property located at 680 Fifth Avenue in Manhattan, and 680 Fifth Avenue Associates (54th and Fifth Land Partners and 680 Fifth Avenue Associates are collectively referred to as the "Debtors"), the owner and operator of a 27 story commercial office building located at that address, filed voluntary chapter 11 petitions in late August 1992.
As their reorganization cases progressed, the Debtors encountered difficulty in mustering support for their reorganization proposals. Growing increasingly restless, a group of the limited partners (the "McNamee Group") banded together to attempt to oust 680 Realty Partners (and by extension, Strasser) as the Debtors' general partner. After a period of litigation, the parties reached a truce, whereby the litigation was terminated and the McNamee Group1 was permitted to file its own plan of reorganization in competition with the Debtors'.
Just about three years after the chapter 11 petitions were filed, I conducted a confirmation hearing to consider the two camps' competing plans. After denying confirmation of the Debtors' plan because they did not have the necessary financing in place for its execution and after refusing their request for an adjournment to yet again seek such financing2, I confirmed the McNamee Group's plan (the "McNamee Plan").
About a month later, Strasser surprised the parties in interest by filing administrative claims which he had reserved the right to assert but whose magnitude he had not described in the Debtors' disclosure statement for four companies which he controlled ("Strasser Claimants"). These claims, as supplemented, aggregated just under $2 million and were said to be for services rendered to the debtors-in-possession. In addition, the Strasser Claimants asserted $4.2 million in general unsecured claims.3
Just after the Strasser Claimants filed their claims, the McNamee Plan became effective. As a result, the property of the Debtors vested in the Reorganized Debtor4, with the general partners being removed, thereby eliminating Strasser from control and management of the building formerly in the Debtors' possession. The law firms of Kensington & Ressler, L.L.C. and Strasburger & Price, L.L.P. were retained by the Reorganized Debtor.
Represented by those two law firms, the Reorganized Debtor commenced this adversary proceeding by filing a complaint (the "Original Complaint") objecting to the claims of the Strasser Claimants and asserting a number of claims against not only the four Strasser Claimants but also five other parties including Strasser himself and four entities which he controlled, 680 Realty Partners, CRC Realty Capital Corp., HC Financial Service, and Emstra Realty, Inc. (collectively the "Strasser Defendants"). On January 19, 1996, the Strasser Defendants answered the complaint, interposing a number of affirmative defenses including the expiration of the statute of limitations.
During a pretrial conference, I asked the Reorganized Debtor's counsel, Michael J. Venditto of Strasburger & Price, L.L.P., about the statute of limitations defense contained in the answer. Venditto replied that he believed that a tolling agreement was in effect which made the action timely. However, no tolling agreement pertaining to that time period has ever been produced.
The Strasser Defendants moved to dismiss the Original Complaint, for partial judgment on the pleadings and for leave to amend their answer to assert a counterclaim and third party complaint against the Reorganized Debtor and the other third-party defendants. Two forms of relief, damages and equitable remedies, were requested, the latter to include injunctive relief, revocation of the order confirming the McNamee Plan and resolicitation of creditors to vote on a new plan supported by the former Debtors (that is, Strasser). Sometime afterward, the Reorganized Debtor...
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