In re Euro-American Lodging Corp., 06-11325(SMB).

• Decision Date: 09 January 2007
• Docket Number: No. 06-11325(SMB).,06-11325(SMB).
• Citation: 357 B.R. 700
• Parties: In re EURO-AMERICAN LODGING CORPORATION, Alleged Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

Page 700

357 B.R. 700

In re EURO-AMERICAN LODGING CORPORATION, Alleged Debtor.

No. 06-11325(SMB).

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

January 9, 2007.

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White & Case LLP, Howard S. Beltzer, Glenn M. Kurtz, Scott Greissman, Douglas P. Baumstein, of counsel, New York, NY, for Petitioner, CDR Créances S.A.

Cole, Schotz, Meisel, Forman & Leonard, P.A., Joshua J. Angel, Neil Y. Siegel, Frederick E. Schmidt, of counsel, New York, NY, for Alleged Debtor.

Kaye Scholer LLP, Madlyn Gleich Primoff, David Eskew, of counsel, New York, NY, for Gilles Gauthier.

POST-TRIAL FINDINGS OF FACT AND CONCLUSIONS OF LAW

STUART M. BERNSTEIN, Chief Judge.

This is an atypical single asset real estate bankruptcy case. CDR Créances S.A. ("CDR"), a mortgagee, filed this involuntary chapter 7 case against Euro-American Lodging Corporation ("EALC"), its mortgagor, at the same time that CDR was pursuing foreclosure in state court. EALC, the alleged debtor, opposes the petition. The principal issue is whether EALC had 12 or more creditors as of the Petition Date, who held claims that were neither contingent nor subject to bona fide disputes.

The Court conducted a three-day bench trial, and the evidence confirmed what one generally finds in a single asset real estate case. The managing agent of the property dealt with the suppliers of goods and services, the alleged debtor had few of its own creditors, and the mortgagee accounted for substantially all of the debt. As discussed below, CDR sustained its burden of proof with respect to the involuntary petition, and relief is ordered.

BACKGROUND¹

A. The Parties

EALC, a Delaware corporation, owns a multi-story building located at 135 West 52nd Street in Manhattan (the "Property" or the "Hotel"). (Tr. (9/27-I), at 31-32.) At all relevant times, the Property was run as a hotel under a "Contract for Operation of a FLATOTEL Franchise," dated June 20, 1991, between Macson Express S.A. and EALC (the "Management Agreement"). (PX 637.) At some point, Macson Express S.A. assigned its interests in the Management Agreement to Macson Express USA, Inc., and pursuant to a Hotel Management Sub-Agency Agreement, dated as of February 14, 2000, Macson Express USA, Inc., a Delaware Corporation, retained Macson USA LLC, a New York Limited Liability Company, to manage the Property. (PX 639.) On or about September 21, 2000, Macson USA LLC filed a Certificate of Assumed Name, and began operating under the name "Flatotel." (PX 636A.) Except where a distinction is necessary, the Macson entities are collectively referred to as "Macson."

Under the Management Agreement, EALC designed and built the Hotel to operate it as a franchisee of the FLATOTEL System. (Management Agreement, at Art. 1.) The actual responsibility for operation was vested in Macson, the exclusive United States licensee of the FLATOTEL Mark and System, (id., at Art. 2(a)), EALC granted Macson the exclusive right to use, occupy and operate the Property "as a Hotel Residence in the FLATOTEL System" for the duration of the. Management Agreement.² (Id., at Art. 2(b).) Among other things, Macson was required to pay all personnel salaries, maintenance and housekeeping costs, accounting or other fees, property insurance, agency commissions, utilities, assessments and a share of the Flatotel advertising and international marketing costs. (Id., at Art. 10, ¶ (j).) Macson had to "present itself to everyone, with the exception of customers, as the Operator of the Hotel Residence Franchised by TLATOTEL,'" and indicate to its vendors that it was an "independent concern." (Id., at Art. 10(f).) Jeffrey Stoler, an officer of both Macson and EALC, was the individual that ran the Hotel. (Tr. (9/27-11), at 12-14.)

EALC had few rights or obligations once construction was complete. Stoler, who is also a certified public accountant, described EALC as a holding company, the Hotel as its "investment," and the day-to-day duties of EALC's Israeli president (Meyer Inny) as non-existent. (Stoler Deposition, at 12-13.) Macson was required, on a quarterly basis, to remit the net operating profit to EALC (after deducting its franchise fee), but EALC was obligated to cover any operating losses. (Management Agreement, at Art. 8.) EALC had the right to examine the accounting and operating books once each year, (id., at Art 5(a)), and inspect the Property from time to time to verify "the proper functioning of the FLATOTEL Franchise Manual." (Id., at Art. 5(b).) EALC's right to cancel the Management Agreement was limited to non-payment of its fee. (Id., at Art. 14(a).) Notably, it could not cancel if Macson failed to operate the hotel in compliance with the FLATOTEL System or the franchise manual.

CDR is the successor to Société de Banque Occidentale ("SDBO"), an insolvent French bank. In 1990 and 1991, SDBO agreed to loan EALC up to the aggregate approximate amount of $88 million to acquire and renovate the Property. (See PX 640, ¶ 100.) The loan was collateralized by two recorded mortgages on the Property. (PX 647, 648.) EALC also pledged additional collateral, including all leases and rents relating to the Property and all of its personal property. (PX 649.) The loan agreement included a forum selection clause that conferred exclusive jurisdiction over disputes in the Paris Commercial Court. (PX 640, at ¶ 980.)

B. Prior Litigation Between the Parties

Drawn out litigation between CDR and EALC began in the Paris Commercial Court in 1992, and culminated in a judgment, dated Feb. 2, 2003, awarding CDR the principal sum of $95,837,522 (inclusive of an offset in favor of EALC). (See PX 655.) In May 2003, CDR commenced a foreclosure proceeding, and procured an order appointing Andrew L. Herz, Esq., as temporary receiver (the "Receiver"). (PX 8.) The Receiver was authorized, without further order, to collect all revenues, (PX 8, at 3), make most reasonable and necessary ordinary repairs, (id., at 4), and incur and pay operating expenses in the ordinary course of business. (See id.) After payment of the expenses relating to the care and management of the Property, the Receiver was directed to retain the net proceeds until further order of the court. (Id., at 6.)

The proposed receivership order authorized the Receiver to retain an agent to manage the Property, but the provision was stricken. (Id., at 4.) Instead, Macson continued to operate, the Property and collect the revenues, and then wired the funds to the Receiver. (Tr. (9/27-II), at 20.) The Receivership creditors still sent their bills and invoices to Macson, and Macson submitted requisitions and underlying documentation to the Receiver in support of payment. (Id., at 33-34). If the Receiver approved the payment, he wired the necessary funds back to Macson who paid the bill. (Id., at 34.) The Receivership was not publicized, and many vendors did not know about it when they dealt with Macson. (See id., at 67-68.)

In September 2003, CDR commenced an action in New York state court to recognize the French judgment. The state court granted summary judgment to CDR, and in April 2005, entered a judgment in favor of CDR against EALC in the principal amount of $95,838,152. (PX 660.) The judgment referred the computation of unpaid interest to a referee. After the issuance of a referee's report, the New York Court entered a second judgment, dated October 11, 2005, for $112,159,088.41 in interest, (PX 666), yielding a combined judgment of $207,997,240.41 (the "New York Judgment"). As of the Petition Date, EALC owed CDR $224,425,502.74 on account of the New York Judgment. (PX 728; Tr. (9/27-I), at 73.)

On May 27, 2005, CDR commenced a second action to foreclose its mortgages on the Property (the "Foreclosure Action"). (See PX 670.) The record does not reflect the fate of the 2003 foreclosure suit, but the Receiver remained in place throughout, and Macson continued to manage the Property. On October 11, 2005, the New York court granted summary judgment in favor of CDR, and dismissed all of the defenses to foreclosure raised by EALC and the other defendants. (PX 671.) A judgment of foreclosure was entered on December 1, 2005, (PX 673), and a foreclosure sale was scheduled for January 4, 2006. (PX 677) The New York Appellate Division, First Department, stayed the foreclosure sale pending the outcome of appeals filed by EALC and Macson, provided that Macson pay CDR $1,500,000 per month. (PX 679.) The Appellate Division did not stay the collection of the New York Judgment. The appeals are still pending.

C. The French Bankruptcy Proceedings and the Chapter 15 Petition

The present case is intertwined with other proceedings in France. In February 2001, three entities, S.N.C. Summersun et cie, S.A. Summersun and S.A.R.L. Summersun Paris (collectively, "Summersun") were placed into judicial liquidation in the Commercial Court of Antibes. Mr. Gilles Gauthier was appointed official judicial liquidator by the Antibes court. The Summersun entities were eventually consolidated.

Two orders issued by the Antibes court require mention. The events leading up to the orders are recounted solely as background, and are not findings of fact. According to Mr. Gauthier, Summersun was supposed to own 65% of the equity in EALC, and a subsidiary of SDBO was supposed to own the remaining 35%. Maurice Cohen, a former de facto manager of Summersun, perpetrated a fraudulent scheme by which he "wrongfully diverted [Summersun's] interests in EALC to shell companies controlled by his affiliates in order to realize for himself the economic benefit of the New York Property." (Supplemental Declaration of Gilles Gauthier, as Foreign Representative, in Support of Petition for Recognition of Foreign Main Proceedings Under Sections 1515 and 1517 of the Bankruptcy Code, dated July 17, 2006, at ¶ 5) ("Supplemental Gauthier Declaration".)³

In February...