In re Harvey Probber, Inc.
| Decision Date | 26 September 1984 |
| Docket Number | Bankruptcy No. 84-01067-HL,84-01068-HL. |
| Citation | 44 BR 647 |
| Parties | In re HARVEY PROBBER, INC., a/k/a Harvey Probber, Inc. (New York), Debtor. In re HARVED REALTY CORP., Debtor. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Christopher Parker, Stephen Wald, Craig & Macauley, P.C., Boston, Mass., for debtors.
Charles R. Bennett, Riemer & Braunstein, Boston, Mass., for Bank.
Steven T. Hoort, Ropes & Gray, Boston, Mass., for creditors committee of Harvey Probber of Mass.
MEMORANDUM ON DISMISSAL OF HARVEY PROBBER, INC. OF NEW YORK AND HARVED REALTY CORP. CHAPTER 11's
On August 16, 1984, Harvey Probber, Inc. (New York) ("Probber NY"), Harvey Probber, Inc. (Massachusetts) ("Probber MA"), and Harved Realty Corp. ("Harved"), filed Chapter 11 petitions in this Court. Probber MA., a wholly owned subsidiary of Probber NY, is a manufacturer of business/office furniture. From 1961 to present, it has operated from facilities located at 44 Probber Lane, Fall River. It has approximately 100 employees, assets, and trade liabilities. Probber NY, however, has no business, no employees, and no assets other than the stock of its wholly owned subsidiaries.1 Its only liabilities are guarantees of its subsidiaries' lending agreements with the Shawmut Bank of Boston, N.A. (the "Bank").2 Harved has no employees, no business, and its only assets are property located at 136 Fifth Avenue, New York City, New York, and 44 Probber Lane, Fall River, Massachusetts. The New York premises, subject to a proposed sale, is leased to tenants. Although Probber MA occupies the Fall River premises, it pays no rent. The only liabilities of Harved are guarantees to the Bank for the liabilities of Probber MA, including a mortgage on the Fall River property. In sum, Probber MA is the only company with substantial assets and debts. Harved merely holds real estate and Probber NY is merely a stockholder of Probber MA and Harved. Probber NY and Harved's only creditor at the time of filing was the Bank. At the time of filing, Harved was attempting to sell its unencumbered New York real estate in order to loan $400,000 to Probber MA.
The guarantees to the Bank stem from transactions in 1981. On June 1, 1981, Probber NY and Probber MA entered into a Credit and Loan Agreement with the Bank and jointly and severally executed an unsecured promissory note in the amount of $2,000,000 to establish a three-year revolving line of credit. This obligation was further unconditionally guaranteed by Harved. In February, 1984, the principals for the debtors entered into negotiations for the extension of the line of credit plus an agreement to lend additional sums of money to the debtors. On May 16, 1984, the Bank agreed to lend an additional $325,000 to Probber MA, although only Probber MA executed a promissory note in favor of the Bank without the Bank executing any reciprocal agreement. On May 25, Harved executed and delivered to the Bank a second Unlimited Guarantee of Probber MA's obligation to the Bank and a mortgage on the manufacturing premises at 44 Probber Lane. Probber MA contends that the Bank's breach of its agreement to lend the additional $325,000 resulted in the present filing. The Bank denies an unconditional obligation to advance the $325,000 and, in fact, only advanced $150,000. On June 27, 1984, the Bank made demand on Probber MA for payment of the June 1, 1981 and the May 25, 1984 notes. Additionally, the Bank made demands on Probber NY and Harved under their unlimited guarantees. On August 9, 1984, the Bank moved to foreclose upon the mortgage in Land Court. At the same time, the Bank filed an action in Suffolk (Massachusetts) Superior Court and obtained an order restraining Harved from disposing of the proceeds of the sale of the New York property. The debtors' Chapter 11 petitions followed. Shortly thereafter, the Bank filed a motion to dismiss against Harved. The Court also indicated an intention to dismiss petitions of Probber NY and Harved, sua sponte.3
The facts required to mandate dismissal based upon lack of good faith are as varied as the number of cases. See, e.g., In re Coastal Cable T.V., Inc., 709 F.2d 762 (1st Cir.1983); Furness v. Lilienfield, 35 B.R. 1006 (D.Maryland 1983); In re O'Loughlin, 40 B.R. 707 (Bankr.D.Ma. 1984); In re Levinsky, 23 B.R. 210 (Bankr. E.D.N.Y.1982); In re Spenard Ventures, Inc., 18 B.R. 164 (Bankr.D.Alaska 1982); In re First Dade Corp., 17 B.R. 887 (Bankr.M.D.Fla.1982); In re Mogul, 17 B.R. 680 (Bankr.M.D.Fla.1982); In re Washington Funding Corp., 13 B.R. 216 (Bankr.E.D.N.Y.1981); In re Scher, 12 B.R. 258 (Bankr.S.D.N.Y.1981); In re Victory Construction Co., 9 B.R. 549 (Bankr.C.D. Cal.1981); In re Alison Corp., 9 B.R. 827 (Bankr.S.D.Cal.1981); In re Nancant, Inc., 8 B.R. 1005 (Bankr.D.Ma.1981); In re Dutch Flat Investment Co., 6 B.R. 470 (Bankr.N.D.Cal.1980); In re Groundhog, 1 B.C.D. 923 (Bankr.S.D.N.Y.1975). A common thread is the requirement that the debtor must owe real "legitimate" debts, In re Coastal Cable T.V., Inc., 709 F.2d at 765, to "real creditors," Furness v. Lilienfield, 35 B.R. at 1013, constituting an "unsecured creditor body." In re Alison Corp., 9 B.R. at 829. Further, there must be an established "ongoing business," In re Dutch Flat Investment Co., 6 B.R. at 471, with more than a "vague plan for the development of a sole asset." In re Nancant, Inc., 8 B.R. at 1009. Further, a relationship must exist between the Chapter 11 petition and "the reorganization-related purpose" of that chapter. In re Coastal Cable T.V., Inc., 709 F.2d at 764. As more fully stated by District Judge Young:
Other courts have found the financial distress of the petitioner persuasive as to the presence of good faith. There must be real debt and real creditors, otherwise the basic purposes of Chapter 11 would be thwarted. In re Century City, Inc., 8 B.R. 25, 32 (Bkrtcy.D.N.J.1980). Thus, the courts have looked to whether a petitioner can name any unsecured creditors, see, e.g., In re Alison Corp., 9 B.R. 827 (Bkrtcy.S.D.Cal.1981); whether the debtor has any assets to protect; and whether he is engaged in an ongoing business. See, e.g., In re Dutch Flat Investment Co., 6 B.R. 470 (Bkrtcy.N.D.Ca.1980); In re Washington Funding Corporation, 13 B.R. 216 (Bkrtcy.E.D.N.Y.1981).
Furness v. Lilienfield, 35 B.R. 1006, 1012 (D.Maryland 1983).
In the case at bar, the debtors have failed to meet the burden of proving good faith. In re O'Loughlin, 40 B.R. at 708. Probber NY's only assets are its stock in its subsidiaries. It has no employees, nor any history of operations for over thirty years. All of its debts are in the form of guarantees to the Bank with no other creditors.4 Harved also has no employees, nor any substantial operating history. Its only assets are the real estate in New York and in Fall River, Massachusetts, for which rent on a net, net, net basis is received only for the New York property. Again, its only creditor is the Bank which holds a mortgage on the debtor's property in Fall River. While no rent is paid by Probber MA., the rental value of the premises is some $270,000 a year, greatly in excess of the expenses paid by Probber MA and, certainly, no more than it would pay on a net, net lease, to say nothing of the $5,000 per month it receives from the New York property rentals. So, it is clear that Probber MA, as sister corporation, has been diverting Harved's assets for years and Harved, on any inter-company accounting, is a creditor of Probber MA, as of the date of filing, and the records of Probber MA so indicate. In short, neither debtor is engaged in any viable business operation, nor have they proven how its one "unsecured" creditor will benefit from its filing and eventual "reorganization."
Further, the debt of Harved is the subject of state court proceedings where the Bank has moved to foreclose upon their mortgage and to restrain the debtor from disposing the proceeds of any sale of the New York property. The debtor has countered with claims of contract breaches and lack of consideration for the underlying guarantees. This litigation, which encompasses all of Harved's debts, is a controversy between two individuals involving state law. There is little reason to expect this to be better litigated in Federal Bankruptcy Court. Indeed, in light of Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) and the Bankruptcy Amendments and Federal Judgeship Act of 1984, these matters should be litigated in state court. In re Coastal Cable T.V., Inc., 709 F.2d 762, 765 (1st Cir.1983), 28 U.S.C. § 1334(c)(1). Counsel for the debtors and counsel for the Creditor's Committee of Probber MA argue that failure to litigate its defenses may prove to be fatal to the reorganization of Probber MA. It is undisputed that Probber MA is a debtor with real debts, assets, and employees, and a right to utilize the protection of Chapter 11, but it is not the debtor in question, and its creditors, except for the Bank, are not their creditors.
An obvious but superficial distinction may be made between some of the dismissal cases and these two cases, namely, that neither Harved Realty Corp. nor Harvey Probber of New York are recent creations. That is not only true, it further emphasizes the distinct and separate identity of each corporation. But, more to the point, the rationale of dismissal, namely, the essential purpose of Chapter 11 being abused or perverted, is equally applicable.
While individuals as well as corporations may file a Chapter 11, the essence of the chapter is business reorganization of some sort. Its justification is the public interest in preserving jobs, and something roughly described as business activity which will, hopefully, be taxable while promoting to the extent possible an equitable distribution for creditors and investors. However loose this description, it clearly was not intended as...
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