In re Cohoes Indus. Terminal, Inc.

• Citation: 69 BR 717
• Decision Date: 06 February 1987
• 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

69 B.R. 717 (1987)

In re COHOES INDUSTRIAL TERMINAL, INC., Debtor.

Bankruptcy No. 86 B 20201.

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

February 6, 1987.

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

Zubres, D'Agostino & Hoblock, P.C., Albany, N.Y. (David M. Siegal and Pamela A. McMahon, of counsel), for Latham Sparrowbush Associates.

Kissam & Halpin, New York City (John F. Scheffel, of counsel), for trustee.

DECISION ON OBJECTION TO CLAIM OF LATHAM SPARROWBUSH ASSOCIATES

HOWARD SCHWARTZBERG, Bankruptcy Judge.

The Chapter 11 trustee of Cohoes Industrial Terminal, Inc., the debtor in this case, invokes Bankruptcy Rule 3007 and objects to the claim of Latham Sparrowbush Associates ("LSA"), the debtor's former lessor. LSA has filed a claim against the debtor in the total sum of $2,504,255.70, arising out of a written lease between LSA and the debtor with respect to an apartment complex known as Sparrowbush Apartments, located in Albany County, New York (the "lease").

LSA, as owner of the fee of Sparrowbush Apartments, 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.), aff'd, 70 B.R. 214 (S.D.N.Y.1986), (Brieant, C.J.).

STATE COURT LITIGATION

LSA's state court complaint was titled as an action for specific performance. It sought a declaratory judgment that the termination clause in the lease was valid and enforceable and an order directing the debtor to deliver possession of the premises to LSA in exchange for LSA's tender of the $350,000 termination payment required under the lease. The debtor had disputed the validity of the termination clause on the ground that it violated the rule against perpetuities.

On April 15, 1985, an order and default judgment was signed by Justice Lawrence E. Kahn of the New York Supreme Court, which:

(1) held that Article 32 of the Lease (the termination clause) was valid and enforceable;

(2) directed the debtor to deliver possession of the premises to LSA: and

(3) ordered that upon delivery of possession, LSA should tender to the debtor a certified check for $350,000.

The debtor moved to vacate the default judgment on the ground that it had not received a copy of the summons and complaint from the New York Secretary of State because the debtor had failed to designate a replacement for the original agent for service of process, who had died some years before. Mr. Justice Kahn denied the debtor's motion to vacate LSA's default judgment. The Appellate Division affirmed Justice Kahn's denial of the debtor's motion to vacate the default judgment and thereafter denied the debtor permission to appeal to the New York Court of Appeals. The New York Court of Appeals subsequently denied the debtor's appeal from the Appellate Division's order denying it leave to appeal. The debtor's motion in the New York Court of Appeals for reargument was also denied.

LSA's PROOF OF CLAIM

In paragraphs 3(a) and 4(a) of its proof of claim, LSA seeks $162,390.70, together with accrued interest to the date of the petition for additional contingent rent and additional bonus rent pursuant to an amended lease dated August 27, 1975, for the period from September 1, 1975 through February 25, 1985.

Paragraphs 3(b) and 4(b) of LSA's proof of claim demand $1,300,000, together with accrued interest, on the ground that the lease agreement required the debtor at its sole cost and expense to take good care of the leased premises. LSA contends that the debtor breached this duty and also committed waste.

Paragraphs 3(c) and 4(c) seek $1,040,000 for the debtor's use and occupancy of the leased premises for periods commencing after February 25, 1985, the effective date of LSA's termination of the lease.

LSA seeks $1,750 in paragraphs 3(d) and 4(d) of its proof of claim for filing fees which it paid to the American Arbitration Association with regard to a portion of its contingent rent claim.

In paragraphs 3(e) and 4(e) of its proof of claim, LSA demands the $115, together with accrued interest, pursuant to the judgment which was entered by the New York Supreme Court on April 18, 1985 in favor of LSA and against the debtor.

THE DEBTOR'S FIRST OBJECTION

The debtor's first objection to LSA's proof of claim is that all of the claims arising out of the lease were merged into the default judgment which LSA obtained against the debtor for specific performance of the option in the lease to reacquire or terminate the leasehold. The debtor argues that LSA may not split a cause of action and, therefore, all claims arising out of breaches of the lease which had accrued at the time LSA commenced its state court action on February 13, 1985, should have been sued on in that action. Therefore, the debtor maintains that any accrued claim which LSA did not assert in that action is now barred by the default judgment in favor of LSA which was entered in the New York Supreme Court on April 18, 1985. This position is bottomed on various theories, such as merger by judgment, prohibition against splitting a cause of action and the rule of discharge by adjudication.

THE DEBTOR'S SECOND OBJECTION — THE KAMIKAZE DEFENSE

The debtor's second objection is that it cannot be liable to LSA because the debtor was allegedly a nominee and the agent of a disclosed principal, namely, Gloria Baker, and that an agent may not be personally liable for acts performed within the agent's apparent scope of authority. This objection is based upon a contention that the debtor held bare legal title to the Sparrowbush leasehold as a nominee and agent for Gloria Baker, who was really the beneficial owner of the leasehold pursuant to an unrecorded verbal transaction between Gloria Baker and the debtor. This objection is in reality a suicide defense which would extinguish the debtor's interest in the right to receive the $350,000 termination payment which LSA delivered pursuant to the terms of Article 32 of the lease. Before the Chapter 11 trustee was appointed, and at a time when Leon Baker, Gloria Baker's husband, acted as president of the debtor and attorney for the debtor, this court had denied the debtor's motion for leave to transfer the debtor's interest in the leasehold to Gloria Baker, who claimed to be the beneficial owner of the leasehold. This court ruled that since the lease was terminated, the debtor had nothing to transfer. Moreover, this court ruled that it would not permit a transfer without notice to all creditors because a debtor in possession could be compelled to assert the strong-arm powers made available under 11 U.S.C. § 544(a)(3).

The debtor argued that the asserted nominee relationship between Gloria Baker and the debtor could not be avoided under 11 U.S.C. § 544(a)(3) because the debtor did not transfer any property to Gloria Baker; she allegedly caused the title to the leasehold to be taken in the debtor's name as her nominee. This mistaken view of § 544(a)(3) overlooks the fact that this section applies not only to transfers made by the debtor, but also to "any obligation incurred by the debtor that is voidable" by a trustee acting as a hypothetical bona fide purchaser of real property. (Emphasis added). A debtor in possession or a trustee in bankruptcy could exercise the avoiding powers of a hypothetical bona fide purchaser of real estate to set aside the verbal nominee relationship, despite the debtor's alleged equitable duty to recognize the beneficial title claimed by Gloria Baker. The debtor's unrecorded agreement or obligation to Gloria Baker could be viewed as an "obligation incurred by the debtor that is voidable" within the meaning of 11 U.S.C. § 544(a). See Abney v. Cox Enterprises (In re Fulton Air Service, Inc.), 777 F.2d 1521 (11th Cir.1985) (unrecorded state tax liens were obligations which a trustee in bankruptcy, as a hypothetical bona fide purchaser, may avoid); U.S. v. Gleneagles Investment Co., Inc., 565 F.Supp. 556, 576 (D.M.D.Pa.1983) ("the guarantees are clearly `obligations incurred' under the Act. . . . ").

As stated by Chief Judge Charles L. Brieant in his affirmance:

The primary purpose of § 544 — to protect a bankrupt\'s creditors against secret liens — would be ill-served by honoring an unrecorded title claim of an insider of the Debtor. Creditors reasonably could have relied on the Debtor\'s title to the property in extending credit. The Debtor in possession, as trustee in bankruptcy, was under a duty to avoid the unrecorded nominee relationship or equitable interest and claim the $350,000.00. If it failed to do so, a creditor\'s committee or trustee, with court approval, would have been entitled to pursue this asset.

In re Cohoes Industrial Terminal, 70 B.R. at 223.

The Chapter 11 trustee retained Leon Baker, Gloria Baker's husband, as special counsel to object to LSA's claims upon his assertion that, for this purpose, Leon Baker held no interest adverse to the estate within the meaning of 11 U.S.C. § 327(e). Obviously, if Leon Baker succeeds in establishing that LSA has no claim against the debtor because the debtor is only a nominee for his wife, Gloria Baker, who was the beneficial owner of the leasehold, and, therefore, entitled to receive the $350,000 termination payment, this debtor and its other creditors will be affected adversely.

Accordingly, Leon Baker is disqualified from asserting this objection as special counsel for the Chapter 11 trustee. This second objection will be dismissed without prejudice to the Chapter 11 trustee's rights to reconsider whether or...