In re Audio Visual Workshop, Inc., Bankruptcy No. 97 B 42775 (JLG).

• Decision Date: 25 July 1997
• Docket Number: Bankruptcy No. 97 B 42775 (JLG).
• Citation: 211 BR 154
• Parties: In re AUDIO VISUAL WORKSHOP, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

211 B.R. 154 (1997)

In re AUDIO VISUAL WORKSHOP, INC., Debtor.

Bankruptcy No. 97 B 42775 (JLG).

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

July 25, 1997.

COPYRIGHT MATERIAL OMITTED

Capetanakis & Preite, Brooklyn, NY, for Alleged Debtor.

Tenzer, Greenblatt, L.L.P., New York City, for Times Circle Associates.

MEMORANDUM DECISION ON DEBTOR'S OBJECTIONS TO AND MOTION TO DISMISS TIMES CIRCLE ASSOCIATES' INVOLUNTARY CHAPTER 7 PETITION UNDER 11 U.S.C. § 305(A)(1)

JAMES L. GARRITY, Jr., Bankruptcy Judge.

Audio Visual Workshop, Inc. ("Alleged Debtor") objects to the entry of an order for relief in this involuntary chapter 7 case and moves pursuant to § 305 of the Bankruptcy Code to dismiss it. Times Circle Associates ("Times Circle"), one of three petitioning creditors, opposes the motion. We grant it.

Facts

The facts are not in dispute. Alleged Debtor formerly leased and rented audio and visual recording equipment. On or about May 17, 1990, Times Circle, as landlord, and Alleged Debtor, as tenant, executed identical leases (collectively, the "Lease") for two floors of a building located at 333 West 52nd Street (the "Premises"). On or about February 19, 1997, prior to the filing of the involuntary petition, Times Circle commenced two summary proceedings against Alleged Debtor in New York County Civil Court-Landlord-Tenant Commercial Part 52, seeking to collect arrears from Alleged Debtor comprised of base rent, cost of living adjustments ("COLA") and/or electricity charges. Alleged Debtor moved to dismiss those actions on procedural grounds without challenging the validity of Times Circle's calculation of the COLA or electricity charges. The court denied both motions.

Alleged Debtor vacated the Premises and on April 29, 1997 (the "Petition Date"), Times Circle, Manny's Music and Edisys Video Rentals, Inc. commenced this involuntary case. Times Circle asserts a claim for $103,679.13 for unpaid prepetition rent comprised of base rent, COLA and/or electricity charges. Manny's Music and Edisys Video Rentals assert undisputed claims of $1,047.95 and $1,123.50, respectively.

On March 28, 1997, Alleged Debtor and KVL Audio Visual Services-NY, Inc. ("KVL") executed a bulk sale agreement ("Bulk Sale Agreement") pursuant to Article 6 of the New York Uniform Commercial Code ("N.Y.U.C.C."). Under that agreement, Alleged Debtor sold KVL its name and all of its accounts receivable, inventory, furniture, fixtures and equipment, telephone numbers, customer lists and files, vendor lists and files, computer software, equipment manuals, service manuals, schematics, miscellaneous intangibles and spare parts. See Bulk Sale Agreement Schedule 3.1.6. The sale closed on April 30, 1997 — one day after the Petition Date. When distributed, the sale proceeds will fully satisfy the claim of European American Bank ("EAB"), Alleged Debtor's only secured creditor, and pay approximately 10% to unsecured creditors. The consideration to the Alleged Debtor under the agreement consists of:

(i) cash payment of $388,000;

(ii) the assumption of approximately $210,000 in liabilities, consisting of debt arising from lease obligations on equipment to Rockford Indus., Inc., GE Capital Corp., and Minolta Company; and

(iii) payment of all cash shortfalls between the date of the Agreement (March 28, 1997) and the closing date (April 30, 1997).

Additionally, KVL agreed to employ 20 of Alleged Debtor's personnel, including Joseph Sorrento for a two year period at an annual salary of $62,200, plus commissions, and Charles Spataro, Sr. and Charles Spataro, Jr., Alleged Debtor's President and Vice President, for 18 month periods at annual salaries of $132,754 and $72,600, respectively.

Time Circle contends that we must deny this motion because the fact of the bulk sale proves that Alleged Debtor is not paying its bills as they become due and because its claim is not the subject of a bona fide dispute since Alleged Debtor cannot assert a defense to it. See 11 U.S.C. § 303(h)(1).¹

Alleged Debtor does not contend that it has been paying its debts as they become due. It objects to the involuntary petition because Times Circle's claim purportedly is the subject of a bona fide dispute. It seeks to dismiss this case pursuant to § 305 of the Bankruptcy Code because:

• its business and assets have been duly and legally liquidated under New York States\'s bulk transfer law;

• Times Circle neither sought the appointment of an interim trustee nor the issuance of an order barring the bulk transfer from this Court, see 11 U.S.C. § 303(f), (g);²

• bulk transfers are authorized under §§ 303(f) and 549(b) of the Bankruptcy Code;

• the bulk sale proceeds will yield a 10% distribution to unsecured creditors and full payment of EAB\'s secured claim; and

• there are no assets for a chapter 7 trustee to administer.

Discussion

We base our subject matter jurisdiction of this contested matter on 28 U.S.C. §§ 1334(b) and 157(a) and the "Standing Order of Referral of Cases to Bankruptcy Judges" of the United States District Court for the Southern District of New York, dated July 10, 1984 (Ward, Acting C.J.). This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A), (O).

Section 303(b)(1) of the Bankruptcy Code provides, in pertinent part:

An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title —

by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute.

11 U.S.C. § 303(b)(1). The Bankruptcy Code does not define the term "bona fide dispute". See, e.g., B.D. Int'l Discount Corp. v. Chase Manhattan Bank, N.A. (In re B.D. International Discount Corp.), 701 F.2d 1071 (2d Cir.), cert. den. 464 U.S. 830, 104 S.Ct. 108, 78 L.Ed.2d 110 (1983); In re All Media Properties, Inc., 5 B.R. 126 (Bankr.S.D.Tex. 1980), aff'd, 646 F.2d 193 (5th Cir.1981). However, if there is a genuine issue of material fact that bears upon the debtor's liability to the petitioning creditor, or a meritorious contention as to the application of law to undisputed facts, the claim is subject to a bona fide dispute. In re Elsa Designs, Ltd., 155 B.R. 859, 863-65 (Bankr.S.D.N.Y.1993); In re Busick, 831 F.2d 745, 747 (7th Cir.1987) (quoting In re Lough, 57 B.R. 993 (Bankr. E.D.Mich.1986)). We must determine whether there is an objective basis for either a substantial factual or legal dispute as to the validity of the debt. Busick, 831 F.2d at 750; In re Nargassans, 103 B.R. 446, 449 (Bankr. S.D.N.Y.1989).

The phrase "not . . . subject of a bona fide dispute" is both an element of the condition upon which a controverted order for relief may be entered and a prerequisite for our jurisdiction. See In re Onyx Telecommunications, Ltd., 60 B.R. 492, 496 (Bankr.S.D.N.Y.1985). As the party asserting jurisdiction, Times Circle must establish it. In re Secured Equipment Trust of Eastern Air Lines, Inc., 153 B.R. 409, 412 (Bankr.S.D.N.Y.1993).

The petitioning creditor must establish a prima facie case that no bona fide dispute exists. Once this is done, the burden shifts to the debtor to present evidence demonstrating that a bona fide dispute does exist.

In re Elsa Designs, Ltd., 155 B.R. at 863. To qualify as a petitioning creditor with a claim not subject to a bona fide dispute a claimant need only "`establish . . . that there are good grounds for the claim and that no defenses have been asserted in substantiable form.'" See In re Nargassans, 103 B.R. at 449 (citing In re B.D. Int'l. Discount Corp., 701 F.2d at 1077); In re Tampa Chain Co., Inc., 35 B.R. 568, 575 (Bankr.S.D.N.Y.1983). See also In re Johnston Hawks, Ltd., 49 B.R. 823, 830 (Bankr.D.Haw.1985) ("a bona fide dispute is a conflict in which an assertion of a claim or right made in good faith and without fraud or deceit on one side is met by contrary claims or allegations made in good faith and without fraud or deceit on the other side."); In re Stroop, 51 B.R. 210, 212 (D.Colo.1985) (if the defense of the alleged debtor to the claim of the petitioning creditor raises material issues of fact or law so that "a summary judgment could not be rendered as a matter of law in favor of the creditor on a trial of the claim, the claim is subject to a bona fide dispute").

Alleged Debtor admits that as of April 3, 1997, it owed Times Circle $122,748.29. See Certified List Of Creditors Of Audio Visual Warehouse, Inc. Prepared Pursuant to N.Y.U.C.C. § 6-104 ("Certified List of Creditors"), annexed as Exhibit G to the affidavit of Daniel W. Dowe, Esq. ("Dowe Aff.") submitted in support of motion. Nonetheless, it argues that Times Circle's claim is the subject of a bona fide dispute because Times Circle purportedly overtaxed Alleged Debtor for COLA and electricity charges during the six years the Lease was in effect, giving rise to a counterclaim that will more than offset Time Circle's rent claim under the Lease. Times Circle denies those allegations and argues that § 26 of the Lease bars Alleged Debtor from interposing them. That paragraph states:

It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant\'s use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any summary proceeding for possession of the premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding.

Lease § 26 (emphasis added). This provision is inapposite because this is not a summary proceeding to recover possession...