IN RE ESTATE PARTNERS LTD.
| Decision Date | 31 January 2005 |
| Docket Number | Bankruptcy No. 00-21564 (JKF),98-21139 (JKF). Adversary No. 00-2679 (JFK). |
| Citation | 320 B.R. 295 |
| Parties | In re ESTATE PARTNERS, LTD., Debtors. Estate Partners, Ltd., Plaintiff, v. James A. Budzak, M.D., Constance Budzak, Lawrence A. Collins, M.D., Judith S. Collins, David P. Connolly, M.D., Joanne P. Connolly, Marshall S. Levy, M.D., Lois G. Levy, Richard J. Panicco, M.D., Patricia Panicco, Mohan S. Phanse, M.D., Terence W. Starz, M.D., Joanne H. Starz, Fred Berkowitz, M.D., Lynne Berkowitz, Subramoniam Joyakumar, M.D., Celia Jayakumar, Robert S. Jones, Jr., Sharon Jones, Paul W. Kerber, Donna L. Kerber, Ramesh C. Khurana, Saroj B. Khurana, Ernest Medwig, Nancy J. Medwig, Stephen R. Nohowel, Vincent F. Piano, M.D., Sherry R. Piano, Robert N. Pursell, M.D., Carol S. Pursell, M.D., James L. Putt, Edmond C. Watters, Comley C. Watters, Donald W. Wright, Norma Wright, Paul T. Yu, and Isabel Yu, Defendants. In re W/B Associates. |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
COPYRIGHT MATERIAL OMITTED
Richard A. DeTar, Esquire, Easton, MD, for Plaintiff.
Robert J. Ridge, Esquire, Elene Mountis Moran, Esquire, Thorp, Reed & Armstrong, LLP, Pittsburgh, PA, for Defendants.
Before the court is another proceeding in the tortuous path that has resulted in numerous bankruptcies in this district, all as the result of actions by Aubrey Gladstone ("Gladstone") and persons or entities affiliated with him. The interrelationships of the entities are excruciating in their complexity.
The present matter involves an Adversary Complaint (the "Complaint" at Dkt. no. 1) filed by the Debtor/Plaintiff, Estate Partners, Ltd. ("Estate Partners" or "Debtor") and a Motion to Dismiss filed by the Defendants ("W/B Guarantors"). Following oral argument on the Motion to Dismiss held on January 22, 2002, both Estate Partners and the W/B Guarantors filed additional materials: (i) W/B Guarantors' Motion to Strike Plaintiff Debtor's Post-Hearing Supplementation or, in the Alternative, Reply to Debtor's Post-Hearing Supplementation, at Dkt. no. 28 and (ii) Estate Partners' Response thereto, at Dkt. no. 29. We have reviewed the arguments and authorities in these submissions in addition to those filed before January 22, 2002.2 We will consider the Motion to Strike as a reply to Debtor's Post-Hearing Submission.
The W/B Guarantors are limited partners of a Pennsylvania real estate syndication named W/B Associates. W/B Associates was created to finance and guarantee the purchase, management, and leasing of an office building in Wilkes-Barre, Pennsylvania (the "Wilkes-Barre Building"). In the Complaint, Estate Partners asserts that it is the owner of 22 guarantee agreements (the "W/B Guarantees") executed by the W/B Guarantors during the formation of the limited partnership.3
The W/B Note and Guarantees, Estate Partners alleges, matured and became due and owing on December 31, 1997. As of December 20, 2000, the date the Complaint was filed, Estate Partners claims the cumulative amount due and owing on the W/B Guarantees was $2,685,073 and asks for judgment against each W/B Guarantor for a pro rata share (in the amount of $132,911 or 4.95% per unit), plus additional interest accruing from December 15, 2000, and reasonable legal fees and costs in connection with collection efforts.
The W/B Guarantors move for summary judgment on the grounds that the W/B Guarantees are not property of Estate Partners' bankruptcy estate.4The W/B Guarantors argue that Estate Partners came into possession of the W/B Guarantees through two Allegheny County, Pennsylvania Sheriffs sales that rested upon a debt (the "SLAC Judgment"5) that had already been satisfied. Specifically, W/B Guarantors argue that the U.S. Trust Note,6 of which TSM was a co-guarantor, was satisfied when it was sold in a Uniform Commercial Code § 9-505(2)7 strict foreclosure transaction, as authorized by the order of the Honorable Robert Kraft, Judge of the Court of Common Pleas, Hamilton County, Ohio on April 18, 1988.8 The strict foreclosure pursuant to UCC § 9-505(2) also released from liability on the U.S. Trust Note any secondary obligors, including TSM. Therefore, according to the W/B Guarantors, satisfaction of the U.S. Trust Note extinguished the SLAC Judgment against the guarantors of the U.S. Trust Note, one of which was TSM. As the SLAC Judgment no longer existed, it would not have been available to provide the mechanism by which Estate Partners obtained the writ of execution against TSM and the subsequent Sheriffs sales of TSM assets through which Estate Partners obtained the W/B Guarantees.
Alternatively, the W/B Guarantors move for summary judgment on the grounds that the SLAC Judgment was void as a fraudulent conveyance and could not serve as the mechanism by which Estate Partners obtained possession of the W/B Guarantees.
The court finds that the W/B Guarantors cannot prevail on their first issue because the Superior Court of Pennsylvania has determined that the SLAC Judgment "remained viable and was not extinguished by the Ohio proceedings."9 The Superior Court Judgment was a final judgment and its determination that the SLAC Judgment was not extinguished is binding on this court under the Full Faith and Credit Act, 28 U.S.C. 1738 (2003). Because the SLAC Judgment was not extinguished prior to the Sheriffs sales, the Sheriffs sales of the TSM assets through which Estate Partners obtained the W/B Guarantees were not void.
The court also finds that the transfer of the SLAC Judgment from Gladstone to Estate Partners, although a fraudulent conveyance, was not thereby void and passed at least bare legal title of the SLAC Judgment to Estate Partners. Consequently, the Sheriffs sales through which Estate Partners came into possession of the W/B Guarantees were not void.
At the relevant times, Gladstone was a businessman involved in many real estate transactions. He was an officer of both Tax Sheltered Investments Inc. ("TSI") and TSM as well as an officer and/or shareholder of several other entities related to this controversy: National Leasing Corporation ("NLC"), American Equity Corporation ("AEC"), TMT Properties Inc. ("TMT"), 21st Century Equity, Inc. ("21CE"), and 21st Century Equity, Inc., I ("21CEI"). At the relevant times, Thomas S. Evans ("Evans") was a business associate of Gladstone and an officer, director and shareholder of 21CE, AEC, TSI, TSM, TMT and NLC.
In 1982, Gladstone formed W/B Associates, a Pennsylvania limited partnership of which TSI was general partner, to purchase, lease, and manage the Wilkes-Barre Building. W/B Associates contracted with TSM to manage the Wilkes-Barre Building for five years, in return for which, among other consideration, W/B Associates issued to TSM a promissory note for $285,000 as payment for the organizational fee and the five-year management fee (the "W/B Note").
W/B Associates offered for sale 20 limited partnership interests or "units"; each unit was equivalent to a 4.95 percent share of W/B Associates.10 Each Limited Partner executed guarantees of payment to TSM for l/20th of the W/B Note per full unit in the event of default (the 22 W/B Guarantees). By January 1983, W/B Associates had subscription agreements for all 20 limited partnership units. The W/B Note and the W/B Guarantees contain language providing that they are to be construed under the laws of the State of New York.
Following the formation of W/B Associates, NLC purchased from Penn Place Associates ("Penn Place") an Installment Sales Agreement for the sale of the Wilkes-Barre Building. This Installment Sales Agreement had been entered into in 1974 by Penn Place and the Wilkes-Barre Development Authority. There was also a first mortgage on the Wilkes-Barre Building held by First Valley Bank. NLC, Penn Place and First Valley Bank executed an Agreement of Consent on January 12, 1983, which authorized NLC to assign the Installment Sales Agreement to W/B Associates in exchange for a second, wraparound mortgage on the Wilkes-Barre Building.
In 1985, TSM entered into a guaranty agreement along with several other Gladstone entities. Three corporations, 21CE, 21CEI, and NLC, obtained a $750,000 loan from United States Trust of New York ("U.S.Trust") and in return executed an Assignment and Pledge Agreement to U.S. Trust (the "U.S. Trust Note"). At the same time, AEC, TSI, TSM, and TMT executed a guaranty as security for the $750,000 loan by U.S. Trust to 21CE, 21CEI, and NLC (the "U.S. Trust Guaranty"). All of these instruments contained New York choice-of-law provisions.
On May 24, 1985, U.S. Trust, 21CE, 21CEI and NLC agreed to amend the original loan. NLC was removed as a borrower and added as a guarantor and the original loan was increased from $750,000 to $1 million. Also on May 24, 1985, AEC, TSI, TSM, TMT and NLC (the "U.S. Trust Guarantors") executed an Increase and Confirmation to Guaranty of Payment for the U.S. Trust Note. The U.S. Trust Guarantors also unconditionally guaranteed the U.S. Trust Note. The U.S. Trust Note was secured by four wraparound mortgages from various...
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