In re 72nd Street Realty Associates

• Decision Date: 25 July 1995
• Docket Number: Bankruptcy No. 93 B 44927 (JLG).
• Citation: 185 BR 460
• Parties: In re 72ND STREET REALTY ASSOCIATES, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

185 B.R. 460 (1995)

In re 72ND STREET REALTY ASSOCIATES, Debtor.

Bankruptcy No. 93 B 44927 (JLG).

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

July 25, 1995.

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Anderson Kill Olick & Oshinsky, P.C., New York City, pro se and as counsel to Roy Babitt and Lawrence Hartman.

Bloom Borenstein, P.C., Springfield, NJ, for WT Associates.

MEMORANDUM DECISION ON OBJECTION TO CLAIM FOR SANCTIONS

JAMES L. GARRITY, Jr., Bankruptcy Judge.

Pursuant to a cross-motion filed in response to Anderson Kill Olick & Oshinsky's ("AKOO") motion to be relieved as counsel herein, WT Associates ("WT") seeks to sanction AKOO, Roy Babitt, Esq., ("Babitt"), an AKOO partner, and Lawrence Hartman, Esq., ("Hartman"), a former AKOO partner, pursuant to Bankruptcy Rule 9011, 28 U.S.C. § 1927, and our inherent sanction powers.¹ AKOO, Babitt and Hartman (collectively, the "Objectants") object to the Claim and pursuant to Bankruptcy Rule 7012 and Fed. R.Civ.P. 12(b)(6) seek to dismiss it on the grounds that it fails to state a claim upon which relief can be granted. Alternatively, they seek summary judgment pursuant to Bankruptcy Rule 7056 and Fed.R.Civ.P. 56(c) dismissing the Claim. As fully explained below, we find that the Claim is a substitute for a cause of action by WT against Objectants to recover damages occasioned by their alleged fraud and/or misrepresentation. Accordingly, even assuming, arguendo, the truth of the allegations supporting the Claim (which Objectants sharply contest), as a matter of law, WT is not entitled to relief under Rule 9011 or § 1927. Moreover, WT is estopped from seeking relief under Rule 9011. As such, we dismiss the Claim to the extent it is predicated on Rule 9011 and § 1927. If WT successfully prosecutes its fraud/misrepresentation action against Objectants, it may be entitled to recover all or a portion of the attorneys fees and costs incurred in that litigation and herein as sanctions under our inherent sanction powers. Because resolution of those issues is best left to the state court, we dismiss the balance of the Claim without prejudice to WT's right to reassert it after the merits of the state court litigation are resolved.²

Facts

On October 5, 1993, a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code ("Code") was filed on behalf of 72nd Street Realty Associates ("Realty" or "debtor"), a New York partnership. See Borenstein Aff.Ex. 4.³ Lieb Waldman is a partner of the debtor. His daughter, Beatrice Zaks, executed debtor's petition in her capacity as another of debtor's partners. Id. In paragraph 12 of her Affidavit Pursuant to Local Rule 52 annexed to the petition, she identifies debtor's two principal assets as an apartment building at 240 West 72nd Street, New York, New York (the "New York Property") and an apartment complex at 10300 Wilcrest Drive, Houston, Texas (the "Texas Property"). Id. At all relevant times, the New York Property was encumbered by a lien held by the Resolution Trust Company ("RTC"), as Receiver to Yorkville Federal Savings Association, predecessor to Yorkville Federal Savings Association.

David Gluck is an officer of WT. Gluck Aff. ¶ 1.⁴ On or about November 5, 1988, WT purchased the Texas Property with $6.0 million borrowed from Cotten Tree Development Corp., then a wholly owned subsidiary of Seamen's Bank for Savings.⁵ Gluck August Aff. ¶¶ 5-6.⁶ That loan is evidenced by a note secured by a Deed of Trust and Security Agreement, Financing Agreement and an Assignment of Leases and Rents. Gluck August Aff. ¶ 7. WT defaulted under the note and in February 1992, the FDIC commenced foreclosure proceedings against the Texas Property. Sometime in late 1992 or early 1993, WT filed a chapter 11 petition in the United States Bankruptcy Court for the Eastern District of New York. That case was dismissed on the FDIC's motion.⁷ When this case was commenced, the FDIC had a foreclosure sale scheduled for October 5, 1993. Gluck August Aff. ¶¶ 9-10.

Waldman and Gluck are members of the same religious community and Waldman was aware of the financial problems WT was encountering with the Texas Property. Gluck August Aff. ¶ 11. In September 1993, Waldman allegedly approached Gluck and represented to him that he could act as a consultant to resolve WT's difficulties with the FDIC in a fashion that would yield large profits to him on a sale or refinancing of the Texas Property. Id.; Babitt Aff. ¶ 3. To that end, Waldman introduced Gluck to Babitt. During the third week of September 1993, Waldman and Gluck met with Babitt and Hartman in Babitt's office to discuss WT's financial problems and its efforts to prevent the FDIC from selling the Texas Property. Gluck August Aff. ¶¶ 12-13; Babitt Aff. ¶¶ 2-6.

Objectants contend that Gluck and Waldman advised Babitt and Hartman (i) that WT had no equity in the Texas Property; (ii) the FDIC had scheduled state proceedings to foreclose on that property for October 5, 1993; and (iii) that Gluck believed WT could not protect the property from foreclosure by filing its own bankruptcy case due to the dismissal of WT's case in the Eastern District. Babitt Aff. ¶¶ 4-7; see also Hartman Aff. ¶ 2.⁸ Gluck denies advising Babitt that WT could not file a petition in bankruptcy, and maintains that he did not understand the ramifications of the order dismissing that case. Gluck Aff. ¶ 21. Babitt insists that Gluck asked him to accompany Waldman to Texas to negotiate with the FDIC on Gluck's and WT's behalf, see Babitt Aff. ¶ 8, and that Gluck "hoped that Waldman and Babitt might be successful in negotiating a reorganization of the FDIC's debt that would prevent loss through foreclosure and enable Gluck to retain his interest in the Texas Property." Id. Babitt and Hartman maintain that during the meeting Gluck and Waldman advised them that if Babitt was unable to persuade the FDIC to refrain from foreclosing on the property, Gluck desired to transfer the property to an entity owned and controlled by Waldman which would then file a chapter 11 petition for reorganization. Babitt Aff. ¶ 9; Hartman Aff. ¶¶ 2-3. Babitt states that "it was agreed to by Gluck, Waldman and me that Anderson Kill would continue to represent Gluck in the negotiations with the FDIC, but that in the event that such negotiations were not fruitful, the Texas Property would be transferred to Waldman." Babitt Aff. ¶ 9. To that to that end, after the initial meeting with Babitt and Hartman, Waldman and Gluck met separately with Hartman allegedly "for the purpose of discussing the real estate documentation needed to achieve the transfer of the Texas Property from Gluck to Waldman in the event that Waldman and Babitt were unsuccessful in negotiating a restructuring of Gluck's debt to the FDIC." Babitt Aff. ¶ 10; see also Hartman Aff. ¶ 6.

By letter dated September 28, 1993, Hartman forwarded Gluck a copy of a proposed Contract of Sale transferring the Texas Property to Realty. Gluck August Aff.Ex. 1. The stated consideration therein was $200,000 cash, plus Realty's assumption of existing liens. Id. The cash payment was to be borrowed by Waldman from an entity known as the Rabbinical Schoctim Center ("RSC"), pursuant to a loan secured by a mortgage on the Texas Property. Hartman Aff. ¶ 6; Gluck August Aff. ¶ 20, Ex. 3. A copy of the Contract dated September 29, 1993 ("September 29 Contract") was executed by Gluck, on WT's behalf, and Waldman, on behalf of Realty. Gluck August Aff.Ex. 1. Hartman maintains that at Gluck's direction he mailed a copy of the contract to Jimmy Nassour, Esq., an attorney in Texas who allegedly represented Gluck in other matters. Hartman Aff. ¶ 7; Objection Ex. C.⁹

Nassour denies that he received a copy of the September 29 Contract or that he was representing Gluck in connection with that agreement. Nassour Aff. ¶ 5.¹⁰ Moreover, Gluck denies that the September 29 Contract was prepared as a back-up to the FDIC negotiations. Gluck Aff. ¶ 16. He maintains that it was "phony" and that Babbitt caused it to be drawn and executed to "mislead FDIC into believing that there was a real deal present which might persuade FDIC not to go ahead with the pending foreclosure." Gluck Aff. ¶ 17. Likewise, he insists that "it was Babitt who created the strategy for his firm to type up a contract which looked real, but at the beginning was never serious, in order to induce FDIC to stop the foreclosure." Id.

In relevant part, the September 29 Contract states that $200,000 of the $4,065,000 purchase price is payable "on the signing of the contract, by check subject to collection", with the "balance payable at closing." Gluck August Aff.Ex. 1. Simultaneously with the execution of the agreement, and Rider thereto, see Gluck Aug. Aff. Ex. 2, Realty and Gluck tendered Hartman a $200,000 check drawn on RSC's account payable to "Anderson Kull sic Olig sic & Oshinsky" which Hartman agreed to deposit in AKOO's escrow account at Chemical Bank. See Hartman Aff. ¶ 8; Gluck Aug. Aff. Ex. 3. Hartman acknowledged receipt of that check, as follows:

I have received this original check and have given same to my firm\'s accounting department, to be deposited in an escrow account at Chemical Bank.

Gluck August Aff.Ex. 3. Hartman failed to deposit the check in AKOO's escrow account. He explains that he "locked the $200,000 check in his desk because the accounting department at Anderson Kill was closed for the evening", see Hartman Aff. ¶ 8, and that he failed to deposit it in the firm's escrow account because he became "immediately involved in a large complex matter and did not have the opportunity to complete the necessary paperwork for Anderson Kill's accounting department to open an escrow account." Id.

On October 4, 1993, Waldman and Babitt travelled to Texas and met with FDIC representatives in an effort to persuade the FDIC not to foreclose on the Texas Property. Gluck August Aff. ¶ 23; Babitt Aff. ¶ 12. They returned to...