In re Cohoes Indus. Terminal, Inc.

• Decision Date: 09 October 1987
• Docket Number: Bankruptcy No. 86 B 20201.
• Citation: 78 BR 681
• Parties: In re COHOES INDUSTRIAL TERMINAL, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

78 B.R. 681 (1987)

In re COHOES INDUSTRIAL TERMINAL, INC., Debtor.

Bankruptcy No. 86 B 20201.

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

October 9, 1987.

Leon C. Baker, White Plains, N.Y., Special Counsel for Trustee.

John F. Scheffel, New York City, Chapter 11 Trustee.

Zubres, D'Agostino & Hoblock, P.C., Albany, N.Y., for Latham Sparrowbush Associates.

DECISION ON OBJECTION TO CLAIM OF LATHAM SPARROWBUSH ASSOCIATES

HOWARD SCHWARTZBERG, Bankruptcy Judge.

This Chapter 11 debtor, Cohoes Industrial Terminal, Inc. ("CIT"), for whom a trustee has been appointed, objects to the claim of the landlord of the premises in question, Latham Sparrowbush Associates ("LSA"). LSA has asserted a claim in the amount of $2,307,391.00 as follows: $1,300,000.00 for the tenant's violation of the obligation to maintain and repair the leased property; $162,391.00 for contingent rent, and $845,000.00 for use and occupancy. The debtor denied the claim and asserted certain affirmative defenses. The main defense is that the debtor only held bare legal title to the leasehold interest and that it was merely the nominee or agent for Gloria Baker, who was the declared principal and beneficial owner of the leasehold. Gloria Baker is the wife of Leon Baker, who is a principal shareholder and president of the debtor, as well as its former counsel. He has been retained by the Chapter 11 trustee as special counsel to litigate the debtor's objection to LSA's claim. Additionally, the debtor has asserted other affirmative defenses, including res judicata, the statute of limitations, the splitting of a cause of action which bars all of LSA's claims after it obtained a default judgment against the debtor in state court, merger of claims by LSA's acceptance of the conveyance of the leasehold interest, and merger by judgment and waiver of claims by LSA's acceptance of rent after the termination of the lease.

FINDINGS OF FACT

1. On April 28, 1986, the debtor, CIT, filed with this court its petition for relief under Chapter 11 of the Bankruptcy Code. The debtor was named as lessee under two leasehold interests. One lease involved an industrial terminal located at 100 North Mohawk Road, Cohoes, New York. The lessor of these premises is the Coleman Capital Employee's Profit Sharing Trust which is an entity controlled by Leon Baker, who is also special counsel and a shareholder and president of the debtor. When the Baker-controlled debtor did not pay rent to the Baker-controlled lessor, the latter terminated the lease and put in as a new tenant another Baker-controlled entity which he formed, known as Cohoes Terminal, Inc. Thus, the debtor no longer has any interest in the industrial terminal. The other leasehold interest to which the debtor is a party is an eleven-building garden apartment complex in Latham, New York, known as Sparrowbush Apartments, with respect to which LSA is the lessor. The debtor disclaims any beneficial interest in this leasehold and contends that Gloria Baker, the wife of Leon Baker, is the true beneficial tenant and that the lease was put in the debtor's name as an unrecorded, verbal nominee of Gloria Baker, who is the real tenant. Therefore, the debtor argues that LSA's claims should be asserted against Gloria Baker, who now assumes full responsibility for all leasehold claims, with the result that the debtor should not be liable for any of the claims filed by LSA in this case. Moreover, the debtor maintains that LSA's termination of the lease did not affect Gloria Baker's interest as the true lessee, because the debtor was merely her designated nominee and that the debtor never had possession of the leased premises.

2. This court had previously ruled that Leon Baker, as special counsel for the debtor, was disqualified from asserting this kamikaze defense because, if successful, the debtor would be deprived of the $350,000 payment that LSA had to pay as consideration for its right to exercise a termination option contained in Article 32 of the lease for the Sparrowbush premises. In re Cohoes Industrial Terminal, Inc., 69 B.R. 717 (Bankr.S.D.N.Y.1987). Having subsequently accepted an assignment of Gloria Baker's interest in these funds, the Chapter 11 trustee now reasserts this defense, and has retained Leon Baker, as special counsel, to litigate the merits of LSA's claim.

3. The Coleman Capital Employee's Profit Sharing Trust ("Coleman Trust") is another Baker-controlled entity that participated in the facts relating to the debtor's involvement in the Sparrowbush Apartments leasehold. The Coleman Trust is an entity whose trustees are Leon Baker and his wife, Gloria Baker. The sole beneficiaries of the Coleman Trust are also Leon Baker and his wife, Gloria Baker. Leon Baker acts as counsel for the Coleman Trust. The Coleman Trust served to fund a portion of the transaction which resulted in title to the leasehold being transferred to the debtor. The Coleman Trust holds a wrap-around mortgage on the Sparrowbush Apartment premises for approximately $205,000.

4. William Magee is the executive vice president, an employee of the debtor, CIT, and personally supervised and managed the industrial terminal in Cohoes, New York until its lease was terminated by the Baker-controlled Coleman Trust, which is the lessor of the premises. Magee also personally supervised and managed the Sparrowbush Apartments. He also performed other management services over the past twenty years at the request of Leon Baker at various facilities with respect to which Leon Baker had an interest. Magee participated with Leon Baker in the transaction whereby LSA leased the Sparrowbush Apartments in question to the debtor, CIT, as lessee on December 31, 1973.

5. This case represents a continuation of the two-party dispute originally commenced in the state courts and before an arbitration panel between LSA and the debtor, including its officers, Leon and Gloria Baker. Apart from the claim of LSA, which is the subject of the debtor's instant objection, there are only two scheduled creditors who are non-Baker related entities; namely, Niagara Mohawk Gas & Electric Co. for $15,704 and Blue Shield for $1,417. Leon Baker claims approximately $17,500 for legal fees and disbursements; Gloria Baker claims $1,375 for bookkeeping services; The Coleman Employee's Profit Sharing Trust claims $13,750 for rent and The Coleman Capital Corporation claims $1,100.

PROCEDURAL BACKGROUND

6. On August 28, 1968, Latham Sparrowbush Corp., as landlord, and Shaker Estates, Inc. as tenant, executed a lease of an apartment complex in Albany County, New York, known as Sparrowbush Apartments. On the same day Latham Sparrowbush Corp. deeded the property over to Latham Sparrowbush Associates ("LSA"). On December 31, 1973, Shaker Estates, Inc. assigned its rights under the lease to Cohoes Industrial Terminal, Inc., the debtor in this case.

7. On August 27, 1975, the debtor and LSA entered into an Amendment of Lease, amending the lease dated August 28, 1968, which was executed by Latham Sparrowbush Corp. as lessor and Shaker Estates, Inc. as lessee. LSA had succeeded to the rights of the lessor and the debtor had succeeded to the rights of the lessee by assignment. The Amendment of Lease followed a default in the payment of rent by the debtor, which resulted in a settlement of this rent default pursuant to a settlement agreement entered into between the debtor and LSA, also dated August 27, 1975. Pursuant to the Amendment of Lease, the debtor's monthly interest and amortization payments under the mortgage held by the Manhattan Savings Bank were reduced, in exchange for the debtor's agreement to pay LSA an additional fixed rent, an additional contingent rent and an additional bonus rent.

8. On December 26, 1984, LSA gave notice of its exercise of an option to terminate the Lease, effective 60 days from the giving of notice, pursuant to Article 32 of the Lease.¹ Leon C. Baker, president of the debtor, sent LSA a letter acknowledging receipt of the notice on December 27, 1984. The letter also questioned the validity of Article 32 of the Lease, because of an alleged violation of the rule against perpetuities.

9. On January 12, 1985, Gloria F. Baker commenced a declaratory action in state court seeking various relief with respect to the Lease. Gloria F. Baker is the secretary of the debtor. The plaintiff's attorney in that case was her husband, Leon C. Baker, who is also president of, and attorney for, the debtor.

10. On or about February 8, 1985, Gloria F. Baker made a motion for summary judgment seeking, among other things, a declaration that Article 32 of the Lease was invalid because the repurchase option granted therein to LSA violated the rule against perpetuities. Defendant LSA cross moved to dismiss the complaint on the ground that Gloria F. 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 order dated June 20, 1985, Justice Anthony Cerrato of the New York Supreme Court, Westchester County, dismissed Gloria F. Baker's complaint, holding that she had no standing to question the validity of the Lease as she was a legal outsider to it. The court specifically refused to reach any other issue. The debtor's motion to reargue was denied.

11. On or about February 11, 1985, LSA commenced an action against the debtor by service of two copies of a summons and complaint on the Secretary of State pursuant to N.Y.B.C.L. § 306.² 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.

12. A copy of LSA's summons and complaint was annexed as an exhibit to LSA's cross motion in the action between Gloria F. Baker and LSA, which was served prior to February 25, 1985.

13. On February 25, 1985, LSA's exercise of its option to terminate the Lease became...