In re Elegant Concepts, Ltd.

• Decision Date: 30 April 1986
• Docket Number: Adv. No. 086-0025.,Bankruptcy No. 086-60160-21
• Citation: 61 BR 723
• Parties: In re ELEGANT CONCEPTS, LTD., Debtor. ELEGANT CONCEPTS, LTD., Plaintiff, v. Erling C. KRISTIANSEN, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

61 B.R. 723 (1986)

In re ELEGANT CONCEPTS, LTD., Debtor ELEGANT CONCEPTS, LTD., Plaintiff, v. Erling C. KRISTIANSEN, Defendant.

Bankruptcy No. 086-60160-21, Adv. No. 086-0025.

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

April 30, 1986.

Philip Irwin Aaron, P.C. by Philip Irwin Aaron and Alan Mendelsohn, Jericho, N.Y., for debtor.

Moritt & Wolfeld by Neil Moritt, Garden City, for Erling C. Kristiansen.

Pinks, Brooks, Stern & Arbeit by Steven Pinks, Hauppauge, N.Y., for creditors.

OPINION and NOTICE OF HEARING

CECELIA H. GOETZ, Bankruptcy Judge:

Before the Court for decision at this time are three separate applications by Erling C. Kristiansen:

(1) Modification of the automatic stay imposed by 11 U.S.C. § 362 so as to permit the entry of a judgment against the debtor in the Supreme Court of the State of New York in the pending proceeding known as "In the Matter of the Application of Erling C. Kristiansen, Holder of One-Third of all Outstanding Shares Entitled to Vote of Elegant Concepts, Ltd., Petitioner, for the Judicial Dissolution of Elegant Concepts, Ltd." ("State Stockholder Proceeding").

(2) Modification of the automatic stay so as to permit the Honorable Alfred Lama of the Supreme Court, State of New York, County of Suffolk, to decide an action brought against the debtor and two of its stockholders, Norbert Nardone and William Terranova, tried by Justice Lama in May, 1985.

(3) Abstention by the Court from hearing and the dismissal of the adversary proceeding brought in this Court by the debtor against Erling C. Kristiansen. The relief is requested pursuant to 28 U.S.C. § 1334.

Kristiansen's first and third requests are closely related to a motion earlier brought on by the debtor by Order to Show Cause requiring Kristiansen to show cause "why an order pursuant to 11 U.S.C. § 105 should not be made and entered herein extending the provisions of the automatic stay imposed under 11 U.S.C. § 362 to the above-named remaining shareholders Norbert Nardone and William Terranova of the debtor corporation." In connection with the debtor's application to extend the umbrella of the stay protecting it to its two stockholders, the Court took extensive evidence stating at the time that the same evidence would be considered in connection with Kristiansen's application, as to which no new, or additional, evidence was taken.

As to Kristiansen's second request, that is for modification of the automatic stay to permit the action brought by Saxpo, Inc. and Lauder, Inc. to proceed to decision in the State court, no decision is now being reached for the reason that the Court deems the information now before it inadequate to make an informed determination. The hearing on this application will be continued to May 20, 1986 at 10:00 a.m. for the purpose of receiving whatever evidence either side wishes to present as to this matter. Pending such hearing, the stay is to remain in effect.

This opinion deals only with the relief sought with respect to the pending adversary proceeding and the related request for relief from stay so as to permit judgment to be entered in the action now pending before the Honorable Robert W. Doyle, Justice of the Supreme Court, State of New York.

This is the second opinion this Court is issuing in this matter. On April 9, 1986, when it denied from the Bench the debtor's application to enlarge the stay which was precluding Kristiansen from proceeding in the State court, it stated on the record at some length its reasons for doing so, reciting the facts on which it relied. Familiarity with the Court's opinion will be presumed.

The Background Facts

The procedural background giving rise to the applications now pending before the Court is not in dispute.

The complaint in the adversary proceeding which Kristiansen is requesting this Court to abstain from hearing alleges that Kristiansen, who was a shareholder in the debtor corporation organized under the laws of New York, commenced an action on March 26, 1984 pursuant to Section 1104(a) of the Business Corporation Law of the State of New York to dissolve the debtor corporation; that thereafter the corporation and its two remaining shareholders, Nardone and Terranova, elected to purchase Kristiansen's stock pursuant to § 1118 of New York's Business Corporation Law, automatically staying the dissolution proceedings. The complaint does not allege, but copies of the opinions rendered in the State Stockholder Proceeding disclose, that following this election Kristiansen moved for and obtained an order under Section 1118(b) of the Business Corporation Law, calling for a hearing to determine the fair market value of his shares in Elegant, as of March 25, 1984.

Thereafter, the Hon. Robert W. Doyle referred the valuation of Kristiansen's shares to Eugene R. Canudo, Referee, who rendered his report on September 6, 1985. The Referee's report notes that he held 14 days of hearing, and analyzed over 2,000 pages of testimony, over 60 exhibits and almost 150 pages of legal memoranda.

The Referee valued Kristiansen's stock as of March 24, 1984, at $422,525.00. He recommended that the Court award Kristiansen interest on this figure at nine percent from March, 1984. By decision dated February 18, 1986, Justice Robert W. Doyle, in a nine page opinion, confirmed Referee Canudo's report in all relevant respects. He directed the parties to settle judgment.

The Automatic Stay and Elegant's Adversary Proceeding

Before judgment could be entered, Elegant, on March 10, 1986, filed a voluntary petition under Chapter 11 in this Court. By virtue of § 362(a)(1), such filing automatically stayed entry of the judgment against Elegant. That filing, however, did not preclude entry of a judgment against Nardone and Terranova. Elegant, to give them the same protection as it enjoyed, then made the application to which reference was made earlier, asking this Court to use its power under 11 U.S.C. § 105 to stay the entry of the judgment against its two stockholders in the interests of the debtor. This Court, finding no prejudice to the debtor from permitting judgment to be entered against Nardone and Terranova, denied the relief requested.

Kristiansen is now seeking to remove Section 362's bar to entry of judgment against Elegant. Elegant, for its part, has brought an adversary proceeding in which, after reciting the facts as to the inception of the judicial dissolution proceeding and the election to buy Kristiansen's shares, Elegant seeks as relief a Declaratory Judgment finding, as follows, based on what are denominated as three "Causes of Action":

(1) That the election made by Elegant pursuant to Section 1118(a) of the Business Corporation Law was void, ab initio;

(2) That the election made pursuant to Section 1118(a) of the Business Corporation Law is an "executory contract" which Elegant has the authority under the Bankruptcy Code to reject in the bankruptcy court;

(3) That the election made by Elegant pursuant to Section 1118(a) of the Business Corporation Law was made under a mutual mistake of fact or law.

DISCUSSION

Elegant's argument opposing the abstention requested by Kristiansen covered a terrain far broader than the issued raised by the adversary proceeding. Elegant's attorney suggested that the obligation to purchase the Kristiansen stock arising from Elegant's election under New York's Business Corporation Law may be vulnerable as a fraudulent conveyance, or as a preference, and that Kristiansen's claim should be equitably subordinated to that of Elegant's creditors. The adversary proceeding, however, contains no such allegations. Elegant's attorney also argued that as a debtor-in-possession, enjoying the same rights as a lien creditor or a secured creditor, it has the ability to challenge an election which Elegant, itself, may be disabled from attacking.

To meet some of those objections, Kristiansen's attorney agreed to stipulate that if he were permitted to enter his judgment in the State Stockholder Proceeding, Kristiansen would recognize the right of Elegant to reject the election under § 1118(a) as an executory contract if it were, in fact, such a contract as though judgment had not been entered; that Kristiansen was not seeking to improve the position of his client at the bankruptcy proceeding vis-a-vis Elegant's other creditors through the entry of judgment; that equitable subordination was not being precluded; and that Elegant would be permitted to sell any of its property in the bankruptcy court free of Kristiansen's judgment lien.

Nevertheless, the sole creditor's representative present opposed Kristiansen's application.

This case involves a number of interesting issues arising from the interaction between the bankruptcy and state courts, and the effect on such interaction of the amendments made in 1984 made by the Bankruptcy Amendments and Federal Judgeship Act of 1984 ("1984 Amendments"). This territory is still largely uncharted.

To understand what is involved, a broad overview of the bankruptcy law and the role of the bankruptcy courts is not inappropriate. The bankruptcy courts may properly be viewed as providing a third judicial mechanism for dispute resolution, paralleling both the Federal courts in their non-bankruptcy aspect and the State courts. Thus, for example, an ordinary contract claim against a company which has filed for bankruptcy, which would normally be adjudicated in a court of conventional jurisdiction, is heard and determined after bankruptcy by the bankruptcy court as part of the necessary allowance, or disallowance, of claims against the estate. Furthermore, the doctrine of res judicata does not necessarily bar relitigation in the bankruptcy courts. Cf. Brown v. Felsen, 442 U.S. 127, 132, 99 S.Ct. 2205, 2209, 60 L.Ed.2d 767 (1979).

To those benefits must be added the automatic stay, which freezes all litigation against the debtor immediately upon the filing of a petition in bankruptcy.

The existence of...