In re Citi-Toledo Partners, Bankruptcy No. 93-33474.
| Citation | 170 BR 602 |
| Decision Date | 23 June 1994 |
| Docket Number | Bankruptcy No. 93-33474. |
| Parties | In re CITI-TOLEDO PARTNERS, a California Limited Partnership, Debtor. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio |
Kenneth Baker, Toledo, OH, for Comm. Const. Corp.
H. Buswell Roberts, Jr., Toledo, OH, for Active Bldg. Systems, Guardian Insulation, Inc. and Carrier Michigan Co.
Dean Wyman, Derrick Rippy, Office of the U.S. Trustee, Cleveland, OH.
John Czarnecki, Toledo, OH, for Merit Plumbing, Inc.
James Sulewski, Toledo, OH, for Maumee Valley Drywall.
Michael Kennedy, Gen. Counsel, Citi-Equity Group, Inc., Culver City, CA.
Gary Cunningham, David Hart, Southfield, MI, for debtor.
David Leta, Salt Lake City, UT, for Weybridge, Inc.
Richard Malone, Toledo, OH, for Transtar Elec. Inc.
Amy Borman, Toledo, OH, for Country Const., Inc.
This matter is before the Court on the motion of Commonwealth Construction Corporation, Merit Plumbing, Inc., Country Construction, Inc., Transtar Electric, Inc., Active Building Systems, Guardian Insulation, Inc., and Carrier Michigan Co. (collectively the "Moving Creditors") to convert the chapter 11 bankruptcy case of Citi-Toledo Partners ("Toledo I") to a case under chapter 7 pursuant to 11 U.S.C. § 1112(b). The United States Trustee ("UST") has moved for the appointment of a chapter 11 trustee under § 1104. Toledo I has filed objections to the aforementioned motions. Upon consideration of the evidence adduced on the parties' respective motions, the Court finds that the Moving Creditors' motion is well taken and should be granted. The Court further finds that the UST's motion should be dismissed as moot.
Toledo I and Citi-Toledo Partners II (collectively the "Toledo Partnerships") are limited partnerships which were formed in 1990 in order to construct and operate multi-family low income housing units in Maumee, Ohio. The Court shall hereinafter refer to the properties owned by the Toledo Partnerships collectively as the "Project".
The Project consists of a 160 unit multi-family apartment complex which is approximately 90% complete. The general partners of Toledo I and Citi-Toledo Partners II ("Toledo II") are Gary Lefkowitz ("Lefkowitz") and City Equity Group, Inc. ("CEG"). Lefkowitz formerly served as the president of CEG.
The Moving Creditors' claims arose from the construction of the Project. Construction on the Project began in June 1993. Thereafter, in November of 1993, construction was discontinued when the Toledo Partnerships failed to make payments on the debts incurred on the Project.
A number of the Moving Creditors filed involuntary chapter 7 petitions against the Toledo Partnerships on December 9, 1993.
The Toledo Partnerships moved to transfer venue of their bankruptcy cases to the United States Bankruptcy Court for the Central District of California on January 14, 1994 which motion was denied by the Court.
On April 12, 1994 the Court entered a consent order which constituted an order for relief pursuant to § 303 (the "Consent Order"). The Consent Order converted the Toledo Partnerships' involuntary chapter 7 cases to voluntary bankruptcy cases under chapter 11.
The Consent Order directed the Toledo Partnerships to file statements of financial affairs and schedules of assets and liabilities within 30 days of the entry of the Consent Order. The Consent Order further directed the Toledo Partnerships to appear at a meeting of creditors conducted by the UST pursuant to § 341 and § 521.
Toledo I also sought an additional ex parte extension of time until May 19, 1994 to file its bankruptcy schedules.
Lefkowitz was indicted in May of 1994 for his alleged fraudulent activities in marketing and managing partnerships in which Lefkowitz and CEG were general partners during Lefkowitz's tenure as president of CEG (the "Indictment").
Certain of the creditors of CEG (the "Minnesota Creditors") filed an involuntary bankruptcy petition under chapter 11 in the United States Bankruptcy Court for the District of Minnesota on May 18, 1994 (the "Minnesota Court"). On the same day, the Minnesota Court ordered that a trustee be appointed in CEG's bankruptcy case (the "Trustee Order").
However, the Minnesota Court stayed the Trustee Order on May 26, 1994 (the "Stay Order") in light of a stipulated agreement (the "Management Stipulation") entered into between the Minnesota Creditors, CEG and Weybridge, Inc. ("Manager"). The Stay Order incorporates both the Management Stipulation and a management agreement entered into between CEG and Manager (the "Management Agreement").
The Stay Order provides that the Trustee Order will "become fully effective" upon the expiration of the Management Stipulation which expires upon the earlier of 60 days from the date of the Stay Order, termination of the Management Agreement, or a default by the parties to the Management Stipulation.
The Management Agreement expressly provides that "the actions of Manager . . . shall be solely as agent for CEG, and Manager does not assume any fiduciary relationship with or for CEG". See Management Contract, at p. 1, para. 1.2. Further, the Stay Order states that the Manager is not "deemed to be a custodian, trustee, marshall, or other officer of the court within the meaning of 18 U.S.C. § 154".
Notwithstanding the fact that the Manager is not liable as a fiduciary of CEG's estate, the Management Stipulation provides that the Manager "will have, consistent with the Management Contract, the right to make all decisions with respect to the operations of CEG and certain entities controlled by CEG". See Management Stipulation, at p. 7, para 4. The Management Agreement delegates substantially all of the CEG's fiduciary duties to the Manager. See Management Agreement, p. 4-5, para. 4.4. Included within the Manager's duties is the task of "directing and instructing counsel for CEG and other professionals employed by CEG". See Management Agreement, at p. 3, para. 4.1(e).
At the hearing, Kenneth Minnichiello ("Minnichiello"), president of Commonwealth Construction Corporation, testified that his company managed the construction work performed on the Project in accordance with a contract between the parties.
Minnichiello testified that, although the Toledo Partnerships experienced cash flow difficulties in July of 1993, his company continued to construct approximately 40% of the Project in reliance upon misrepresentations by CEG that CEG had sufficient funds to complete construction on the Project.
Minnichiello testified that Commonwealth has been required to furnish a security guard at the Project twenty-four hours per day. Minnichiello further testified that Commonwealth has furnished "builder's risk" insurance on the Project. According to Minnichiello, builder's risk insurance generally covers occurrences such as fire, theft, property damage and "acts of God". However, Minnichiello testified that builder's risk insurance generally does not cover liability for personal injuries.
The Moving Creditors also presented the testimony of Michael Jacobson ("Jacobson") who is employed with CED Construction, Inc. ("CCI"), a company which specializes in developing and constructing multi-family housing projects ranging in size from 100 units to 500 units. A number of CCI's properties have been allocated low income housing tax credits. Although Jacobson testified that he has only recently been employed by CCI, Jacobson has been a member of the Michigan Bar for approximately 30 years and has specialized in the area of real estate transactions.
According to Jacobson, the low income housing tax credit is an income tax credit awarded by state agencies for multi-family low income housing properties based upon an allocation formula determined by such state agencies. The amount of the low income housing tax credit ("Credits") awarded represents a function of several factors including the cost of constructing such low income housing. Jacobson testified that the amount of financing available for low income housing tax credit properties is typically lower than that available for conventional properties because the rents which may be charged for low income housing tax credit properties are generally lower than for conventional properties.
Jacobson testified that, preliminarily, he estimated the value of the Project's real estate would be "at least" equal to the aggregate book value of the real estate listed in Toledo I and Toledo II's bankruptcy schedules if the Project could obtain Credits.
Although Jacobson testified that a developer in Ohio is by no means guaranteed an allocation of Credits, he stated that the Project could potentially generate $500,000-$600,000 in Credits. Jacobson testified that the Project's market value could be substantially lower if the Project could not obtain an allocation of Credits. Indeed, Jacobson testified that if Credits should not be available for the Project, the value of the Project could be less than the total costs of construction for the Project.
Jacobson testified that the Credits which had been allocated to the Toledo Partnerships expired on December 31, 1993. The parties do not dispute this fact.
Jacobson also testified that in order to obtain an allocation of Credits for 1994, an application must be filed by a developer with the State of Ohio on or before September 1, 1994. Jacobson testified that if an allocation of Credits was not obtained for the Project in 1994, the next available opportunity for a developer to obtain Credits for the Project would be in May, 1995.
Jacobson...
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