In re Forte

• Decision Date: 06 May 1999
• Docket Number: 094-70710-511,Bankruptcy No. 094-70708-511,094-70711-511.
• Citation: 234 BR 607
• Parties: In re Michael FORTE, Setre Corporation, Foreal Homes, Inc., Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of New York

234 B.R. 607 (1999)

In re Michael FORTE, Setre Corporation, Foreal Homes, Inc., Debtors.

Bankruptcy Nos. 094-70708-511, 094-70710-511, 094-70711-511.

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

May 6, 1999.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Berkman, Henoch, Peterson & Peddy, P.C. by Ronald M. Terenzi, Garden City, NY, for Michael Forte.

Geoffrey J. O'Connor, Southhampton, NY, Special Counsel for debtor Michael Forte.

United States Department of Justice, Tax Division by Gregory S. Nickerson, Bartholomew Cirenza, Washington, DC, for Internal Revenue Service.

DECISION AFTER EVIDENTIARY HEARING

MELANIE L. CYGANOWSKI, Bankruptcy Judge.

Michael Forte ("Forte" or the "Debtor") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on March 24, 1994. On December 18, 1996, the Debtor moved for an Order reducing claim number 13 filed by the United States Department of the Treasury, Internal Revenue Service ("IRS"). The IRS' original proof of claim was filed on August 2, 1994 and asserted a pre-petition, unsecured priority claim in the sum of $68,407.79. Forte objected to the claim and sought to reduce it to the sum of $14,020 on the sole ground that "the Debtor's books and records indicate a reduced amount due and owing to claimants." See Application for Second Omnibus Order Reducing Claims, dated Dec. 12, 1996, ¶ 8.

Although the IRS did not file any papers in opposition, the motion was repeatedly adjourned at the parties' request to allow them to negotiate a resolution of the motion. In June 1997, however, Forte filed supplemental papers indicating that the parties were unable to reach a settlement. In fact, the IRS had amended its proof of claim to assert an unsecured, priority claim for $403,472.14 and a general, unsecured claim for $52,592.74 plus interest.¹ In his supplemental submission, Forte argues that the increase in the IRS' claim results from its disallowance of certain deductions he had claimed for the tax years 1992 and 1993 concerning losses from Related Partners Property, Inc. ("Related"), a sub-chapter S corporation in which he was a 50 percent shareholder.

For its part, the IRS contends that Forte has not rebutted the prima facie validity of the IRS proof of claim because he has not demonstrated that Related was a valid sub-chapter S corporation, that he was a valid shareholder, or that, in any event, the deductions were properly disallowed because Forte had an insufficient basis in Related.

The Court conducted an evidentiary hearing which took place on January 13, 1998.² For the reasons that follow, the Court concludes that the Debtor has rebutted the prima facie validity of the IRS' proof of claim. The Court disagrees, however, with the Debtor's view as to the mount of his basis in Related and finds that it must be reduced to $779,621.73. As a result, the claim of the IRS must be modified to reflect the amount of taxes now due and owing, taking into account the Debtor's adjusted basis in Related as determined by this ruling.³

Underlying Facts

It is undisputed that Forte and Alexander Abbate ("Abbate"), Forte's estranged son-in-law, were each 50 percent shareholders of Related. See IRS' Statement of Undisputed Facts, ¶ 1. Related was incorporated in Florida as a sub-chapter S corporation in March 1989 (Trial Tr. at 26)⁴ and was formed to purchase and operate two apartment complexes, known as Cornerstone Apartments ("Cornerstone") and Sutton Place Apartments ("Sutton Place"). Abbate ran the day-to-day operations of Related and Forte was a "passive investor." Trial Tr. at 14.

At the evidentiary hearing, the Court received into evidence copies of 23 checks which allegedly show Forte's monetary contributions to Related. See Exh. 1. All checks are written from Forte's personal checking accounts maintained at The Chase Manhattan Bank or the National Bank of New York City during the period April 10, 1989 through December 24, 1991. Twenty of the checks are made payable to Related and total $536,903.73. The remaining checks are made payable to the following entities in the following amounts: (1) "Alexander Abbate" — $350,000; (2) "Cromwell . . . "⁵— $15,000; and (3) "Hill, Ward & Henderson, P.A." — $160,000.⁶ The total of all 23 checks is $1,061,903.73. Although written against his accounts, Forte testified that there were times he just signed his name on these checks and Abbate would fill in the name of the payee and the amount.⁷ Trial Tr. at 15-17. Forte never asked for, nor received, promissory notes or loan agreements evidencing these payments to Related. Trial Tr. at 73.

In or about October 1989, Related, as well as Setre Corporation ("Setre") and Foreal Homes, Inc. ("Foreal"),⁸ entered into a loan agreement with Southeast Bank, N.A. ("Southeast"). Although there was some confusion at the hearing regarding the character of this loan,⁹ the Loan Agreement itself defines the loan as meaning:

the loan in the original principal mount of Four Million and No/100 Dollars ($4,000,000.00), extended by the Bank to the Borrower, and evidenced by the Term Loan Note in the mount of $2,000,000 and the Letters of Credit three in total aggregating $2,000,000.

Exh. 13, ¶ 1h. The IRS asserts that Forte's contributions to Related came from this loan with Southeast. Trial Tr. at 47. Forte denies this, asserting that the monies came from either his "building business" (id. at 54) or loans that he obtained from "Chase Manhattan and National Bank of North America."¹⁰ Id. at 48.

As noted, Forte was the president and 20 percent shareholder of Setre, another sub-chapter S corporation formed by Forte to own and rent real estate buildings in New York. Trial Tr. at 31-32. In or about December 1991, Setre borrowed $450,000 from U.S. Capital Corporation ("USC").¹¹ Forte was a guarantor on this loan. See Exh. 12. It is from this loan between USC and Setre that Forte ultimately made the $350,000 transfer to Abbate.¹² As Forte testified:

Q. So the primary borrower on this loan was Setre Corp., wasn\'t that correct?

A. I had to use that name, but it was my building and my name. I had to use that because of the usurious charges. They didn\'t want to give me that money, me, personally.

Q. The one the bank would go after principally, as the borrower, was Setre Corp.; isn\'t that correct?

. . .

A. They wrote the checks to Setre Corporation.

Q. From this 450, you wrote the $350,000 check to Related Partners?

A. Yes.

Trial Tr. at 105.

According to Forte, the $350,000 check was written out by Abbate and was intended to "cure a default that was about to happen" with respect to real property taxes owed on Related's Florida properties. Trial Tr. at 17-18. When asked why the check was made payable to Abbate, Forte stated that

it was a last-minute situation on the taxes, and they had to be paid, so what he Abbate had done, I guess he had influence with the bank, and my cheek from New York would take 10 days to clear, so he manipulated or maneuvered something with the bank, whereas he gave them his cheek, which cleared a way to pay the taxes.

Id. at 90. Forte then stated that the real estate taxes were, in fact, paid. Id.

In 1992, Related filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the Southern District of Florida. Due to his medical condition at the time, Forte could not travel from New York to Florida and authorized his son, John Forte, to act on his behalf in Related's bankruptcy proceeding. Trial Tr. at 79. John Forte ultimately voted to accept Related's plan of reorganization, which scheduled Forte's claim at $434,042.82. Trial Tr. at 79-83; Exh. O. However, Forte claims he never received "a dollar" from Related prior to the bankruptcy (id. at 18) nor "a penny" during the bankruptcy.¹³ Id. at 83. Related's chapter 11 bankruptcy case was subsequently converted to one under chapter 7 of the Bankruptcy Code.

At the evidentiary hearing, Forte also testified that he would lend money to Abbate, individually, from time to time. Trial Tr. 76-77. Forte testified as follows:

Q. When you would lend Mr. Abate sic money personally, you would write a check to Mr. Abate sic, is that correct?

. . .

A. Yes, I did.

Q. When you would lend money to Related Partners, you would make a check to Related Partners; isn\'t that correct?

A. That\'s right.

Id. at 77. However, Forte never sued Abbate to get this money back because of the familial relationship with Abbate¹⁴ and, for a period of time, he "couldn\'t find him." Id. at 78.

Toward the end of the evidentiary hearing, the IRS focused upon a certain conveyance which purportedly transferred 100 shares of Related stock¹⁵ from Forte, individually, to Forte as Trustee of a trust (the "Trust"). Exh. AG. The Trust Agreement is dated December 19, 1989 and provides, inter alia, that "during the lifetime of the Settlor Forte, the Trustee Forte shall pay so much or all of the net income from the principal of this trust . . . as the Settlor shall direct." Debtor's Reply Memorandum, Exh. A, Art. II. The IRS argues that this transfer severs Related's subchapter S status and transforms the Trust, and not Forte, as the shareholder of Related.

Abbate's prior deposition transcript was admitted into evidence upon the request of the IRS. Exh. AJ. Abbate's deposition was taken on October 27, 1997, at which he testified that Forte was a "passive investor" in Related. Id. at 24. Abbate also estimated that Forte lent Related "a million dollars" (id. at 19) and that these monies were intended to be loans, although no loan documents were ever executed. Id. at 17. Abbate also corroborated Forte's testimony regarding the source of the funds that were lent to Related. He testified that Forte obtained the money from his "New York bank account" and not from Related's loan with Southeast Bank. Exh. AJ at 21. Nonetheless, Abbate's testimony was not always consistent with that of Forte's and, at times, Abbate contradicted himself.

When...