In re Cohoes Indus. Terminal, Inc.

• Decision Date: 10 October 1986
• Docket Number: Bankruptcy No. 86 B 20201.
• Parties: In re COHOES INDUSTRIAL TERMINAL, INC., Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

65 B.R. 918 (1986)

In re COHOES INDUSTRIAL TERMINAL, INC., Debtor.

Bankruptcy No. 86 B 20201.

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

October 10, 1986.

Harold Jones, United States Trustee, New York City; Eric Small, of counsel.

Leon C. Baker, White Plains, N.Y., for debtor.

Zubres, D'Agostino & Hoblock, P.C., Albany, N.Y., for Latham Sparrowbush, Associates; David Siegel, of counsel.

HOWARD SCHWARTZBERG, Bankruptcy Judge.

The United States trustee has moved for an order dismissing this Chapter 11 case or converting it to a case under Chapter 7 of the Bankruptcy Code or, in the alternative, directing the appointment of a Chapter 11 trustee. An unsecured creditor, Latham Sparrowbush Associates ("LSA"), has joined in the motion for a conversion to Chapter 7 or the appointment of a Chapter 11 trustee, but opposes the alternative request for a dismissal.

The debtor, Cohoes Industrial Terminal, Inc. ("C.I.T.") claimed a leasehold interest in a garden apartment complex in Latham, New York, known as Sparrowbush Apartments. The unsecured creditor, LSA, is the owner of the fee of Sparrowbush Apartments and has recovered the leasehold pursuant to an option in the lease which gave LSA the right to reacquire the leasehold in exchange for a $350,000 payment to the debtor. LSA's motion for relief from the automatic stay pursuant to 11 U.S.C. § 362(d) to regain possession of the apartment complex was granted by this court. In re Cohoes Industrial Terminal, Inc., 62 B.R. 369 (Bankr.S.D.N.Y.1986). The debtor's only other major asset is a leasehold interest in an industrial complex known as Cohoes Industrial Terminal in Cohoes, New York. The debtor continues to operate the industrial terminal, which is a complex consisting of four old buildings with a substantial vacancy and, with a negative cash flow as of the filing of the debtor's Chapter 11 petition on April 28, 1986.

FACTUAL BACKGROUND

There has been no real progress in this case during the more than five months since it was commenced. No plan of reorganization has been filed. More importantly, the debtor has not filed any schedules of assets and liabilities as required by Bankruptcy Rules 1007(b) and X-1007 and as prescribed by Official Form No. 6. Such financial information as the debtor did file is incomplete and unclear. The so-called operating statements which the debtor represented at the hearing would be filed later do not contain a cut-off date reflecting when the debtor-in-possession figures begin. Bankruptcy Rule X-1007(b) mandates that a trustee or debtor in possession must furnish the United States trustee with such information as is required in order to assist the United States trustee in supervising the case. The rule gives the United States trustee the authority to promulgate local regulations or rules which delineate such requirements. 6 Norton Bankr.L. & Prac. Rule X-1007 at p. 802 (1985 ed.); See also In re Denrose Diamond Co., Inc., 49 B.R. 754, 758 (Bankr.S.D.N.Y.1985) (citing 28 U.S.C. § 586(a)(3)). The debtor has been operating without fire or liability insurance for the last 9 months. Its vice president testified that he has not yet been able to find a carrier willing to insure the premises because it has an antiquated sprinkler system and because its substantial vacancy was conducive to vandalism.

A major concern for unsecured creditors is the fact that the debtor has not paid post-petition rent or mortgage charges because the owner of the building, Coleman Associates, Ltd. and the mortgagee, Coleman Capital Corporation Employee's Profit Sharing Trust ("Coleman Capital"), are related entities, controlled by the debtor's president, Leon Baker, and his wife, Gloria Baker. The increase in the post-petition administrative obligations for rent and mortgage will result in increased priority claims to the potential detriment of unsecured claimants. Similarly, post-petition, real estate taxes, which are also priority debts, have not been paid because the City of Cohoes has, according to the debtor, tacitly consented to the deferral of these taxes so as to help the debtor stay in business in order to preserve the jobs of 500 or more people who work in the Cohoes Industrial Terminal.

The debtor's corporate secretary, Gloria Baker, claims, and the debtor agrees, that she is the beneficial owner of the disputed garden apartment complex lease in Latham, New York and that the debtor is her unrecorded nominee, holding merely bare legal title to the lease. Accordingly, she sought to have the debtor transfer its interest in the lease to her so that she could then continue the dispute with LSA, the owner of the fee, as to whether or not LSA could unilaterally exercise its option to purchase the lease for $350,000. The debtor's transfer of its interest in the Sparrowbush lease would mean that Mrs. Baker, rather than the debtor, would be entitled to receive the $350,000 purchase price. Although, not surprisingly, the debtor supported Mrs. Baker's motion for such a transfer, this court denied the request as not in the best interests of this estate. In re Cohoes Industrial Terminal, 62 B.R. at 378-380.

The conflicts of interest in this case abound. The owner of the industrial complex in Cohoes, New York is Cohoes Associates, a limited partnership of which Leon Baker is the sole general partner. The owner of the land is Coleman Capital, the two trustees and the two beneficiaries of which are Leon Baker and his wife, Gloria. Mr. and Mrs. Baker hold the mortgage upon the Cohoes property. The debtor is required to pay rent to Cohoes Associates, which includes the obligations of the landlord, Cohoes Associates, that are owed to Coleman Capital and to Mr. and Mrs. Baker. The debtor is required under its lease to pay all of the expenses with respect to the Cohoes Industrial Complex. Leon Baker, the debtor's president and sole shareholder, is also serving as attorney for the debtor, although no order of general retention has been approved by this court. He is a prepetition creditor for legal services billed in the amount of $17,500. Gloria Baker, the debtor's secretary, is a creditor holding a claim in the amount of $1350 for bookkeeping services. Their pension trust, Coleman Capital, holds a claim for the rental of an automobile leased to the debtor.

LSA holds more than two-thirds in amount of the unsecured claims against the debtor, exclusive of insider claims, and asserts that it does not intend to accept any plan other than a liquidating Chapter 11 plan. LSA contends that the debtor does not intend to reorganize and that it filed a Chapter 11 petition, (according to the testimony of Leon Baker), to prevent LSA from executing on a state court judgment to recover possession of the garden apartment complex in Latham, New York. LSA maintains that this Chapter 11 petition was filed for the purpose of promoting the personal interests of Leon and Gloria Baker to the exclusion of the interests of the debtor's arms-length creditors. To support this charge, LSA points to the fact that Gloria Baker, with the support of the debtor, claims that she is the beneficial owner of the disputed garden apartment complex lease and that the debtor is her nominee for the purpose of holding bare legal title.

DISCUSSION

A debtor's failure to file proper schedules of assets and liabilities; a failure to file accurate monthly operating statements of assets and liabilities; an inability to obtain adequate insurance to protect its property; a failure to pay post-petition rent and mortgage charges, and the absence of a plan of reorganization or any forward movement during the more than five months after the filing of a Chapter 11 petition constitute sufficient cause for either dismissing the case or converting it for liquidation pursuant to 11 U.S.C. § 1112(b). In re Denrose Diamond Co., Inc. 49 B.R. 754; In re 3868-70 White Plains Road, Inc., 28 B.R. 515 (Bankr.S.D. N.Y.1983); In re CCN Realty Corp., 23 B.R. 261 (Bankr.S.D.N.Y.1982); In re Paccar Financial Corp. v. Pappas (In re Pappas), 17 B.R. 662, 8 B.C.D. 927 (Bankr.D. Mass.1982); In re Larmar Estates, Inc., 6 B.R. 933, 6 B.C.D. 1300 (Bankr.E.D.N.Y. 1980). However, this is not a case where a mortgagee or secured creditor is being thwarted by the debtor from foreclosing upon secured collateral or where such collateral is eroding in value during the Chapter 11 period. The objectants in this case are the United States trustee, representing the unsecured creditors, and LSA, the debtor's largest unsecured creditor. The lack of any reorganizational progress by the debtor is in large measure due to the continuing litigation with LSA in order to preserve Gloria Baker's personal interest in the apartment complex lease which she claims as beneficial owner and which she alleges was held by the debtor as her nominee. Although Gloria Baker and her husband, Leon Baker, assert that their interests parallel those of the debtor for purposes of reorganization, their individual conflicting interests vis-a-vis the debtor have substantially contributed to the conditions which prompted the United States trustee to move for a dismissal, conversion or the appointment of a Chapter 11 trustee.

There is no question that the debtor is in financial distress and cannot continue to permit priority claims for taxes and rents to accrue to the detriment of unsecured creditors, notwithstanding that Mr. and Mrs. Baker in their conflicting roles as controlling interests on behalf of the debtor's landlord and mortgage holder are willing to defer the payment of rent and mortgage charges. Moreover, the unsecured creditors would benefit if the debtor could keep the $350,000 payment for the termination of the garden apartment complex lease. However, Leon Baker, as president of the debtor, sought to transfer the rights to the terminated lease to his wife Gloria, which transfer would carry with it the right to the $350,000 termination payment.

If this were the...