In re Ellison Associates

• Citation: 63 BR 756
• Decision Date: 27 September 1983
• Docket Number: No. 81 Civ. 5841-CSH,Reorganization Case No. 81 B 11213.,81 Civ. 5841-CSH
• Parties: In re ELLISON ASSOCIATES, Debtor. ELLISON ASSOCIATES, Appellant, v. EASTWOOD MANAGEMENT CORPORATION, Ellison Park Enterprises, The Bowery Savings Bank, and Harris, Beach, Wilcox, Rubin & Levey, Appellees.
• Court: U.S. District Court — Southern District of New York

63 B.R. 756 (1983)

In re ELLISON ASSOCIATES, Debtor.

ELLISON ASSOCIATES, Appellant, v. EASTWOOD MANAGEMENT CORPORATION, Ellison Park Enterprises, The Bowery Savings Bank, and Harris, Beach, Wilcox, Rubin & Levey, Appellees.

No. 81 Civ. 5841-CSH, Reorganization Case No. 81 B 11213.

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

September 27, 1983.

Louis P. Rosenberg, Brooklyn, N.Y., for Ellison Associates.

Skadden, Arps, Slate, Meagher & Flom, New York City, for Eastwood Management Corp., Michael L. Cook, of counsel.

Cadwalader, Wickersham & Taft, New York City, for Bowery Sav. Bank; Terence F. Gilheany, of counsel.

Costello & Shea, New York City, for Harris, Beach Wilcox, Rubin & Levey; Ann R. Goodwin, Frederick N. Gaffney, of counsel.

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

Plaintiff and debtor Ellison Associates (hereinafter "Ellison") appeals from an order of the Honorable Burton R. Lifland, Bankruptcy Judge, which granted defendants Eastwood Management Corp. (hereinafter "Eastwood"), Bowery Savings Bank (hereinafter "Bowery"), and Harris, Beach, Wilcox, Rubin & Levey's (hereinafter "Harris, Beach") motion for summary judgment and dismissed plaintiff's adversary proceeding and Chapter 11 petition. Ellison filed its adversary proceeding against defendants on October 31, 1980, alleging that Bowery had violated the Bankruptcy Code's automatic stay provision, 11 U.S.C. § 362, and had committed an act in contempt of the Bankruptcy Court by "causing and permitting" a foreclosure sale of Ellison's alleged property to occur on August 1, 1980, one day after the purported filing of its petition in bankruptcy. For the reasons to be discussed in this opinion, we agree with the Bankruptcy Court's determination that this case contains no genuine issue of material fact and that the defendants are entitled to a judgment of dismissal as a matter of law.¹

The pertinent facts as set forth by the Bankruptcy Judge in his August 14, 1981 opinion, 13 B.R. 661, at pp. 6-20, are not challenged on this appeal. Ellison, a purported New Jersey limited partnership, claims that it obtained title to the Ellison Park Apartments, a 388 unit rental apartment complex in Rochester, New York (hereinafter the "Property") through its general partner, W.J.C. Realty Co., Inc. (hereinafter "WJC"). Ellison, WJC, Mid-City Management Corp. (hereinafter "Mid-City") and Eastern Development and Investment Corporation (hereinafter "Eastern") are all interrelated entities under the control of Walter Cook. Cook is the central figure in this case, and his lengthy deposition and admissions provided the factual foundation for defendants' summary judgment motion.

For our purposes, the chain of title begins in April, 1977, when A. Bailey and W. Erickson purchased the Property, which was subject to an existing first purchase money mortgage held by Bowery, from an entity known as Ellison Park Apartment Associates. Ellison Park Apartment Associates is totally unrelated to and should not be confused with the debtor in this case. On June 2, 1978, Bailey and Erickson entered into an agreement to sell the Property to Eastern, an entity under Cook's control, for $4.2 million. Bowery's lien was to stay in effect. The following week, Eastern assigned all of its rights in the Property to WJC, another Cook corporation. On June 20, 1978, Bailey and Erickson executed a deed conveying the Property to WJC, which in turn signed a bond and mortgage evidencing an $850,000 loan given by Bailey and Erickson. This loan gave Bailey and Erickson a third purchase money mortgage on the Property, which was junior to a pre-existing mortgage held by Manufacturers Hanover Trust Co. and to Bowery's senior lien.

At closing, only half of the $250,000 due was paid in cash; a $125,000 note, due September 8, 1978, substituted for the remainder. This note was never fully paid. Following closing, the deed, bond and mortgage were not delivered to WJC but instead were placed in escrow with Robert Sylvor (hereinafter "Sylvor"), an escrow agent. The terms of the escrow agreement signed by the parties on July 31, 1978, provided that Sylvor would hold the instrument until he received written notice from Bailey and Erickson that a certain outstanding tax certiorari proceeding had been settled or until one year's time had elapsed. This year was later extended for an additional thirty days. The escrow agreement further provided that after these conditions were met Sylvor was to release the deed, bond and mortgage to the Pioneer National Title Insurance Company, located in Rochester, and was to return a certain letter agreement between Bailey and Erickson and WJC to Bailey and Erickson. Cook stated during deposition that it was the parties' understanding that WJC had the responsibility to record the deed and to bear the cost of such recording.

Presumably, then, by August 31, 1979, record title and ownership to the Property could have been transferred from Bailey and Erickson to WJC. Nevertheless, they continued to hold themselves out as the owners of the property. For example, in July, 1979, while negotiating a modification and extension of their pre-existing mortgage with Bowery, Bailey and Erickson represented that they were the owners in fee simple. In October, 1979, Erickson conveyed through a recorded deed all of his right, title and interest in the Property to Bailey. Later that month, Bailey negotiated a $700,000 loan with the Commercial Credit Corporation which replaced the second mortgage held by the Manufacturers Hanover Trust Co. At this transaction, Bailey again warranted that he held title subject only to Bowery's first lien on the premises. In this same month, Bailey once again claimed that he was the record title owner of the premises when he executed a mortgage to the First National Bank of Jamestown for $200,000. Finally, in February, 1980, Bailey transferred his title to the Property to an unrelated third party, Grummbasco, Inc., which recorded its deed on February 4, 1980.

Neither debtor nor Cook denied that these misrepresentations took place and were encouraged. Cook admitted that he knew of and acquiesced in Bailey's representing himself as title owner. In fact, Norman Kaye (hereinafter "Kaye"), Vice President of WJC, was present at the Commercial Credit closing and had actual knowledge of the terms of the Commercial Credit Mortgage.

The parties with which Bailey was negotiating had no reason to suspect that Bailey was not in fact the record owner of the Property, since the deed evidencing the transfer from Bailey and Erickson to WJC was still in the hands of Sylvor. Cook testified that he had "forgotten" about the deed just prior to and subsequent to August 1, 1979 and therefore had failed to demand that Sylvor release it from escrow. Cook further admitted that Sylvor, in his opinion, had not violated his fiduciary duty while acting as escrowee.

From September 1, 1979 on Bailey failed to meet his monthly mortgage payments to the Bowery, consisting of principal, interest and real property taxes. On December 6, 1979, Bowery elected to declare the entire unpaid balance due and owing, and through its Rochester counsel, defendant Harris, Beach, filed a lis pendens on the Property and began foreclosure proceedings in the Supreme Court of the State of New York, County of Monroe. Cook admitted that he knew of the state court action on the day of its commencement due to a conversation he had with Letha Miller (hereinafter "Miller"), an employee of Mid-City, which was managing the property. Miller was named as a party to the action pursuant to N.Y. Real Prop. Acts. Law § 1311.² She informed Cook of the proceedings and further notified him that a receiver, J. Michael Smith, had been appointed by the court to take possession and collect the rents and profits from the Property. Cook admitted that during the more than six months which ensued until the Judgment of Foreclosure Sale was entered in state court, he took no action to intervene in the proceedings. The Foreclosure Judgment, which was never appealed, ordered that the Property be sold on August 1, 1980.

On July 29, 1980, Kaye filed an order to show cause in state court seeking leave for an entity named WJC Realty Co. to intervene in the action as fee owner or, alternatively, for a stay of the foreclosure action. In the order Kaye charged that Bowery had constructive as well as actual knowledge of WJC's ownership and therefore should have named it as a necessary party to the action pursuant to N.Y. Real Prop. Acts. Law § 1311. Kaye based these allegations on the facts that Bowery knew that WJC was in possession, i.e., was managing the property, and that the receiver, upon appointment, had demanded surrender of the security deposits for the property, the tenants lists, the insurance documents and other materials which Kaye claimed were relevant to "ownership, possession, operation and control of the premises." Cook later claimed that Kaye had intended to list the debtor, Ellison, as owner of the premises, rather than WJC, as he did two days later when filing Ellison's bankruptcy petition.

After argument by counsel and submission of papers, Judge Fritsch of the Monroe County Court denied the motion. Almost immediately upon learning of the denial, Kaye filed the instant Chapter 11 petition naming Ellison Associates as owner of the Property. Although the petition was not filed until 5:15 p.m., telegrams were sent to Bowery and Harris, Beach at 4:30 p.m. notifying them that an entity named Ellison Park Associates had filed a bankruptcy petition. Cook further claims that a messenger delivered a letter to the Harris, Beach offices the morning of the sale date and that a call was placed to the sale's court-appointed referee. Neither Bowery nor Harris, Beach deny that they received the telegrams or letters, but they claim that they read them after the sale had taken place. Regardless, it is uncontested that an...