In re Cohoes Indus. Terminal, Inc.
| Citation | 103 BR 480 |
| Decision Date | 11 August 1989 |
| 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 |
Leon C. Baker, White Plains, N.Y., Christy & Viener, New York City, for debtor and defendants.
Zubres, D'Agostino & Hoblock, P.C., Albany, N.Y., for Latham Sparrowbush Associates.
DECISION ON MOTION FOR RULE 9011 SANCTIONS
Latham Sparrowbush Associates ("LSA"), a former lessor and creditor of the debtor which has since been paid in full, seeks an order pursuant to Bankruptcy Rule 9011 and 28 U.S.C. § 1927 for sanctions and attorneys' fees against Leon C. Baker for bad faith litigation. Mr. Baker occupied various roles in this case, including unretained attorney for the debtor, president and sole shareholder of the debtor, general partner of the debtor's lessor involving an industrial terminal in Cohoes, New York, and principal with his wife, Gloria Baker, of the mortgagee, Coleman Capital Corporation Employee's Profit Sharing Trust ("Coleman Capital") which held the mortgage on the industrial terminal which the debtor operated in Cohoes, New York. Additionally, Mr. Baker and his wife, Gloria, asserted claims against the debtor as creditors. Significantly, Leon and Gloria Baker also claimed that Gloria Baker was the beneficial owner of a garden apartment complex in Sparrowbush, New York and that the debtor corporation only held nominal title to the leasehold for the garden apartment buildings pursuant to an unrecorded verbal transaction between Gloria Baker and the corporate debtor, Cohoes Industrial Terminal, Inc. Accordingly, the Bakers asserted that LSA's prepetition exercise of a termination option in the lease for the garden apartment buildings was ineffective because Gloria Baker never received notice of such termination and she was really the tenant in possession of the garden apartment buildings.
The debtor formerly operated two leasehold interests; a garden apartment complex in Sparrowbush, New York and an industrial terminal in Cohoes, New York. LSA, as lessor of the garden apartment buildings in Sparrowbush, New York originally had no interest in the debtor's other lease which involved the industrial terminal in Cohoes, New York. The lessor of the industrial terminal was Cohoes Associates, a limited partnership consisting of Leon Baker as the general partner and various limited partners who ultimately sold their interests to Leon Baker. The industrial terminal had various subtenants who occupied the terminal. The mortgagee of the terminal was Coleman Capital, which was owned by Leon and Gloria Baker.
LSA's involvement in this case as a creditor, and the reason why the debtor originally filed a Chapter 11 petition with this court, stems from a conflict arising out of a termination option in the lease for the garden apartment buildings in Sparrowbush, New York. Pursuant to Article 32 of the lease, LSA had the right to terminate the lease for the garden apartment buildings in exchange for the payment of $350,000.00 to the lessee as consideration for such termination.
The Sparrowbush lease had originally been entered into in 1968 between LSA, as lessor, and Shaker Estates, Inc., as lessee. On December 31, 1973, Shaker Estates, Inc. assigned its rights under the lease to the debtor, Cohoes Industrial Terminal, Inc. On August 27, 1975, the debtor and LSA entered into an Amendment of Lease which involved a settlement of a rent default. On December 26, 1984, LSA gave notice of its exercise of a termination option in Article 32 of the lease, terminating the lease effective 60 days from the notice date. Thereafter, on January 12, 1985, Gloria Baker commenced a declaratory action in the state court in New York seeking various relief including that the termination clause was invalid because the termination option violated the rule against perpetuities. LSA cross moved to dismiss the complaint on the ground that Gloria Baker lacked standing to sue because she was not in privity with LSA and had no connection with the lease. By a decision entered April 30, 1985, and an order dated June 30, 1985, Justice Anthony Cerrato of the New York Supreme Court, Westchester County, dismissed Gloria Baker's complaint, holding that she had no standing to question the validity of the termination clause in the lease because she was a legal outsider to it. The debtor's motion to reargue was denied.
On February 11, 1985, LSA commenced an action against the debtor to reacquire the garden apartment buildings in Sparrowbush, New York. LSA's action was commenced by the service of two copies of a summons and complaint on the Secretary of State pursuant to N.Y.B.C.L. Section 306. The debtor had designated an attorney as its agent who apparently died prior to the service of the summons and complaint with the result that the debtor never received that copy of the papers although the debtor was aware of the action because Leon Baker included a copy of the LSA papers as an exhibit in the case which he commenced against LSA on behalf of Gloria Baker. Nonetheless, on February 25, 1985, the 60 days notice period given by LSA to terminate the lease ran its course. On March 15, 1985, the debtor defaulted in answering LSA's complaint. On April 19, 1985, Justice Lawrence E. Kahn, of the New York Supreme Court, Albany County, entered an order sustaining the validity of the termination clause in the face of the rule against perpetuities objection, directed the debtor to deliver possession of the Sparrowbush garden apartment buildings to LSA, and ordered that upon delivery of possession LSA should tender to the debtor a certified check for $350,000.00. The debtor's motion to vacate the order was denied by Justice Kahn on May 20, 1985.
On October 10, 1985, a unanimous Appellate Division affirmed Justice Kahn's denial of the motion to vacate the default judgment. On December 20, 1985, the Appellate Division entered an order denying the debtor permission to appeal to the Court of Appeals. On February 13, 1986, the New York Court of Appeals denied the debtor's appeal from the order denying leave to appeal. On March 27, 1984, the New York Court of Appeals denied the debtor's motion to reargue its appeal. Immediately thereafter, on that same day, Mr. Justice Kahn entered an order appointing a post-judgment receiver to collect rents and ordering that the receiver take possession of the Sparrowbush premises; that the tenants surrender possession and among other things, enjoined the debtor from collecting rents and interfering with the receiver's possession. On April 24, 1986, the Appellate Division entered an order denying the debtor's motion for a stay pending appeal.
After having seemingly exhausted the state court remedies with respect to the Sparrowbush lease and control of this property by the debtor having been extinguished with the appointment of the receiver, on April 28, 1986, the debtor filed with this court its petition for relief under Chapter 11 of the Bankruptcy Code. When the debtor filed its Chapter 11 petition, its only uncontested asset was its leasehold interest in the industrial terminal in Cohoes, New York, which was owned by the Baker-controlled partnership known as Cohoes Associates, subject to a mortgage held by another Baker-controlled entity known as Coleman Capital. There was no need for Chapter 11 reorganization as to the industrial terminal lease because the landlord and the mortgagee were Baker-controlled entities. The debtor's schedules listed only two unsecured creditors, other than LSA, who were unrelated to the Bakers. Approximately $15,704.00 was owed to Niagara Mohawk Gas & Electric Company and $1,417.00 was owed to Blue Shield. There were no secured creditors listed in the debtor's schedules. The admitted reason for the Chapter 11 filing was the fact that the debtor desired to prevent the loss of the leased garden apartment buildings in Sparrowbush, New York to LSA as a result of LSA's prepetition termination of the lease validated by the default judgment which the appellate courts in New York would not vacate.
On June 12, 1986, this court ruled that the state court default order in favor of LSA was final and res judicata as to the termination. In re Cohoes Industrial Terminal, Inc., 62 B.R. 369 (Bankr.S.D.N.Y. 1986), aff'd, 70 B.R. 214 (S.D.N.Y.1986), aff'd, No. 87-5004 (2nd Cir. Sept. 18, 1987). Therefore, the automatic stay imposed under Title 11 U.S.C. Section 362(a) did not bar LSA from enforcing its right to possession because the Sparrowbush lease was not property of the estate when the Chapter 11 petition was filed.
On October 10, 1986, this court granted the United States trustee's motion for the appointment of a Chapter 11 trustee because of the conflicts of interest created by the various Baker-controlled entities and because the debtor failed to file proper schedules of assets and liabilities. Additionally, the debtor did not file accurate monthly operating statements and did not pay post-petition rent and mortgage charges with respect to the industrial terminal in Cohoes, New York to the Baker-controlled landlord and mortgagee. Moreover, there was no forward movement after the filing of the Chapter 11 petition and no plan of reorganization. Therefore, a Chapter 11 trustee was required.
This court then rejected the United States, trustee's alternative argument for a conversion of the case because a liquidation of the debtor at that time "would simply enable the debtor's principals Leon and Gloria Baker, in their roles as insider secured claimholders, to reacquire the leased premises (the industrial terminal) upon foreclosure and to form a new corporate enterprise to lease the industrial complex which they own, free from the unsecured claims which are now asserted against this debtor." In re Cohoes Industrial Terminal, Inc., 65 B.R. 918 at 922 (Bankr.S.D.N. Y.1986).
The...
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