In re Cohoes Indus. Terminal, Inc., Bankruptcy No. 86 B 20201.

• 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

103 B.R. 474 (1989)

In re COHOES INDUSTRIAL TERMINAL, INC., Debtor.

Bankruptcy No. 86 B 20201.

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

August 11, 1989.

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

Anne E. Pitter, New York City, Chapter 7 Trustee.

Summit, Rovins & Feldesman, New York City, for the Chapter 7 trustee.

DECISION ON FINAL APPLICATION OF CHAPTER 7 TRUSTEE AND COUNSEL FOR COMPENSATION

HOWARD SCHWARTZBERG, Bankruptcy Judge.

The Chapter 7 trustee, Anne E. Pitter, and her attorneys, Summit, Rovins & Feldesman ("Summit"), have submitted applications for final allowance and compensation pursuant to 11 U.S.C. §§ 326 and 330, respectively. Leon C. Baker ("Baker"), as president and sole shareholder of the debtor, and as former counsel and special counsel for the erstwhile Chapter 11 trustee before conversion to Chapter 7 under the Bankruptcy Code, and as an unsecured creditor, has objected to the applications for allowances. Baker urges that the applications of the trustee and her counsel should be denied completely for their alleged breaches of their fiduciary duties.

On April 28, 1986, the debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code. When the debtor filed its Chapter 11 petition it held a leasehold interest in an industrial terminal in Cohoes, New York, which was owned by a Baker-controlled partnership known as Cohoes Associates, subject to a mortgage held by another Baker-controlled entity. The Chapter 11 petition was not prompted by any pressure from the only two unsecured creditors of the industrial terminal who were not related to a Baker-controlled entity. There are no creditors holding secured claims against this debtor.

The Chapter 11 petition was filed by the debtor because Baker sought to prevent the loss of its other leasehold interest, a group of garden apartment buildings in Sparrowbush, New York which are owned by Latham Sparrowbush Associates ("LSA"). Pursuant to the long term lease for the garden apartment complex, LSA had the option to terminate the lease upon tendering $350,000.00 to the debtor for such termination. The debtor refused to accept the $350,000.00 termination fund and contended that the termination clause violated the rule against perpetuities. LSA obtained a state court default judgment terminating the lease and directing return of possession of the leasehold property to LSA. The appellate courts in New York refused to vacate the judgment, with the result that a receiver was appointed to take control of the garden apartment buildings and oust the debtor from possession. The Chapter 11 petition which the debtor filed in response to this prepetition litigation could not preserve the debtor's former leasehold when this court ruled that the automatic stay imposed upon filing the Chapter 11 petition did not protect debtor's leasehold interest in the garden apartment buildings because the prepetition lease termination prevented those buildings from being considered property of the estate. 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).

A Chapter 11 trustee was appointed by this court on October 10, 1986, because of Baker's various conflicting interests and because the debtor had not complied with the administrative obligations enforced by the United States trustee. During the Chapter 11 case, LSA, the owner of the repossessed garden apartment buildings in Sparrowbush, New York filed a proof of claim for over $2 million for damages, waste and additional contingent rent. After a trial, during which Baker acted as special counsel for the Chapter 11 trustee, LSA was able to establish its claim to the extent of $838,724.00. In re Cohoes Industrial Terminal, Inc., 78 B.R. 681 (Bankr.S.D.N.Y.1987). This determination was affirmed by the District Court, 87 Civ. 8919 (S.D.N.Y. May 2, 1987, Brieant, C.I.) and the Court of Appeals, XX-XXXX-XX (2nd Cir. Oct. 20, 1988).

Having lost the leasehold interest in the garden apartment buildings, Baker terminated the debtor's occupancy of its only Chapter 11 leasehold, namely, the industrial terminal located in Cohoes, New York. At that juncture in this case, the debtor no longer had any business to operate because its other leasehold interest, the garden apartment complex in Sparrowbush, New York, was removed from the debtor's estate before the Chapter 11 petition was filed. Accordingly, this court granted a motion to convert this case for liquidation under Chapter 7 of the Bankruptcy Code on December 17, 1987. Pursuant to an order dated February 10, 1988, Anne E. Pitter was appointed as the Chapter 7 trustee. By order dated April 14, 1988, the trustee was authorized to retain Summit as counsel.

The Chapter 7 trustee took control of the debtor's assets which consisted of a fund of approximately $430,000.00, representing mainly the $350,000.00 lease termination fund paid by LSA together, with interest. The trustee, through its counsel, Summit, commenced an adversary proceeding against Baker and several of his affiliated entities seeking the value of the balance of the term at the industrial terminal lease which Baker took over when, as owner of the premises, he installed another Baker-controlled entity to operate the terminal. Baker contended that the debtor's leasehold interest had already terminated by its own term and that additionally, neither the Chapter 11 trustee nor the Chapter 7 trustee assumed the lease, with the result that it was automatically rejected in accordance with 11 U.S.C. § 365(d)(4). The trustee also sought to recover for the estate a $500,000.00 sum which a major subtenant had paid to Baker who had transferred the funds to the mortgagee, another Baker-controlled entity, pursuant to a rent assignment clause in the recorded mortgage. Moreover, the trustee sought to recover in the adversary proceeding certain payments made by the debtor just prior to the appointment of the Chapter 11 trustee, including the debtor's prepayment of approximately $35,000.00 to a public utility which the debtor contends was done for credit reasons, and the return of prepaid rent received from subtenants at the industrial terminal. These subtenants became subtenants of the newly installed Baker-controlled entity which replaced the debtor as lessee of the industrial terminal in Cohoes, New York. The total recovery sought by the trustee in the adversary proceeding was nearly $1,400,000.00.

This adversary proceedings lost significance after Baker's wife paid the LSA award of $838,724.00 in full, with the result that LSA was no longer the major creditor of this estate and Gloria Baker was subrogated to LSA's rights. Therefore, the remaining two small unsecured claims could be paid in full from the funds presently held by the Chapter 7 trustee.

At this point, this court suggested that there was no purpose in pursuing the trustee's adversary proceeding against Baker because after the payment of the two small unsecured claims and the compensation sought by the Chapter 7 trustee and her counsel, the remaining assets will be returned to the debtor, and its sole shareholder, Baker. The trustee was concerned that she continued to be responsible for filing income tax returns for the debtor. The trustee and Baker disputed the manner in which the debtor's income tax liability was calculated. Baker believed that his interpretation of the facts resulted in no tax liability, or perhaps, a tax refund. The trustee believed that the debtor owed over $500,000.00 in taxes based upon the calculations of her accountants. After conferring with this court, it was agreed that the trustee would file income tax returns for the period during which she controlled the debtor and Baker would file income tax returns for the period before and during the Chapter 11 phase, when he guided the debtor's business operations. No tax claims have been filed in this case by any of the federal or state tax authorities.

Ultimately the Chapter 7 trustee and Baker stipulated to the discontinuance of the adversary proceeding in the best interests of the debtor's estate, which stipulation was approved by this court on August 11, 1989. Additionally, the debtor's motion to convert this case back to Chapter 11 under the Bankruptcy Code was approved by this court on August 8, 1989, with the debtor in possession. Pursuant to this conversion to Chapter 11, with the approval of the court, the Baker-controlled debtor will file a plan of reorganization providing for payment in full of all creditors other than those affiliated with Baker. The Baker-controlled debtor will also be responsible for the filing of income tax returns and will assume all responsibility for any taxes owed.

Baker's main reason for objecting to any compensation to the Chapter 7 trustee and her counsel stems from the income tax dispute. Baker proposed to resolve the open question regarding the debtor's income tax returns by commencing a proceeding under 11 U.S.C. § 505(b) which would require the governmental unit to notify the trustee within 60 days that the debtor's income tax returns which would be filed were selected for examination and that the examinations for such selected returns must be completed within 180 days thereafter. Baker objected to the income tax returns which the Chapter 7 trustee proposed to file because he believed that such returns maximized the debtor's liabilities to a sum of approximately $500,000.00 and that the governmental authorities would have no reason to object to the returns he filed. Thus, Baker reasons that not only did the Chapter 7 trustee and her counsel propose to resolve all tax disputes against the debtor's interests, but that they undermined the debtor's interests by confessing a judgment against the estate for much more than Baker's interpretation of the tax liability would show. The conference with the court resolved this dispute.

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