In re King
| Decision Date | 03 February 2004 |
| Docket Number | No. 02-37616(CGM).,02-37616(CGM). |
| Parties | Stephen E. KING, Debtor. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
Cynthia Rosenzweig, Van DeWater and Van DeWater, LLP, Poughkeepsie, NY, for Creditor Upper Valley Commercial Corporation.
Lewis D. Wrobel, Poughkeepsie, NY, for Debtor Stephen E. King.
Anthony Carlini, Poughkeepsie, NY, Special Counsel for Debtor Stephen E. King.
Creditor Upper Valley Commercial Corporation moved to Lift the Automatic Stay pursuant to § 362(d)(1). Debtor filed opposition to the Motion to Lift the Automatic Stay and objected to Upper Valley Commercial Corporation's Proofs of Claim Numbers 7 and 8, filed December 11, 2002 and September 18, 2003 respectively. For the reasons set forth below, upon consideration of the testimony and evidence submitted at the evidentiary hearing held October 9, 2003, together with the papers and legal arguments submitted by both parties, the Court overrules Debtor's objection to Upper Valley Commercial Corporation's Claim Number 7, and grants Upper Valley Commercial Corporation relief from the automatic stay imposed by 11 U.S.C. § 362. With regard to Upper Valley Commercial Corporation's Claim Number 8, Upper Valley Commercial Corporation is granted leave to amend this claim to reflect the appropriate amount guaranteed by Debtor. The leave to amend Claim Number 8 is granted without prejudice to Debtor's right to object to the amended claim on any grounds not decided herein.
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Standing Order of Reference signed by Acting Chief Judge Robert J. Ward dated July 10, 1984. Allowance or disallowance of claims against the bankruptcy estate and motions to terminate, annul, or modify the automatic stay are "core proceedings" under 28 U.S.C. § 157(c)(2)(B) and (G).
Testimony was taken on this contested matter during an evidentiary hearing heard on October 9, 2003. The parties submitted pre-trial and post-trial briefs. The following constitutes the Court's findings of fact and conclusions of law under Bankruptcy Rules 9014 and 7052.
Debtor Stephen E. King (the "Debtor") and Movant herein, Upper Valley Commercial Corporation ("UVCC"), had a longstanding business relationship that commenced in or around February, 1990, at which time Debtor and minority shareholder Geraldine Fulling approached UVCC for financial assistance. Debtor was the majority Shareholder in G & S Energy, d/b/a/ STK Petroleum Products, Inc. ("STK") with offices in Milan, New York. (See Debtor's 2/21/2003 Affidavit in Opposition to Upper Valley Commercial Corporation's Motion for Relief From Automatic Stay, at ¶ 26). Ms. Fuller held 49 shares and Debtor held 51 shares of the 100 outstanding shares of STK stock. In October, 2002, David Patten and Alvin Fadden, principals of UVCC, together owned 69% of the shares of STK. The manner by which David Patten and Alvin Fadden came by these shares is disputed, but apparently, Debtor and Ms. Fulling each transferred 20 shares of stock to David Patten and Alvin Fadden in 1999 in exchange for financial assistance. Subsequent to this transaction, Ms. Fulling, upon the break up of her personal relationship with Debtor, sold her remaining STK stock to Mr. Fadden and Mr. David Patten. From February, 1990 until October, 2002, UVCC was STK's only supplier of propane gas. Id. As the parties' business relationship progressed, UVCC lent money to STK for, inter alia, various construction projects, as well as to Debtor in his personal capacity.1
In connection with the parties' financial transactions, the Debtor, on behalf of STK, executed and delivered a series of promissory notes evidencing obligations owed to Upper Valley during the period January, 1991 to approximately March, 2002 (the "Corporate Notes"). See Joint Pretrial Order entered October 9, 2003, Docket # 87 (the "Joint Pretrial Order"). The Debtor and Ms. Fulling personally guaranteed many of the Corporate Notes. The Debtor also executed and delivered to Upper Valley a collateral security mortgage dated March 22, 1993, in the sum of $100,000.00 (the "Mortgage") secured by property located at 486 Milan Hill Road, Town of Milan, County of Dutchess, New York (the "Real Property"). Id. The parties have stipulated that the Real Property had a value as of November 1, 2002 of $275,000.00. Id.
UVCC alleges that the Corporation defaulted on its obligations under the Corporate Notes in October, 2002. Specifically, Mr. Edward Patten, chairman of the board of UVCC, testified that STK's default was in the nature of untimely payments. See Evidentiary Hearing Transcript of October 9, 2003 Hearing at p. 29. ("Tr.") STK's obligations to UVCC were accelerated on October 9, 2002 and STK was notified of the debt acceleration by way of correspondence (the "Acceleration Notice") prepared by UVCC's counsel. The Acceleration Notice was also delivered to Debtor personally by David Hagstrom, UVCC's attorney. The Acceleration Notice stated that the total principal amount due to UVCC was $2,339,384.16, that STK had defaulted under the terms of the Corporate Notes and the Corporate Security Agreements and STK had not cured the default within the required twenty-day period. UVCC demanded possession of the collateral described in the Corporate Security Agreements, to wit: all accounts receivables, inventory, fixtures, furniture, machinery, equipment and proceeds thereof, as well as the premises located at 917 Route 199 in Red Hook, New York ("STK's Assets"). UVCC stated in the Acceleration Notice that it was exercising its rights under the Collateral Assignment of Corporate Security Agreements dated March 22, 1993,2 and transferred Debtor's remaining thirty-one shares of STK stock to UVCC. Thus as of October, 2002, David Patten and Alvin Fadden owned 69% of STK stock, and UVCC owned 31 shares of stock.
Debtor resigned his position as director, officer and employee of STK by way of a letter dated October 11, 2002 and addressed to Alvin Fadden, vice president and secretary of UVCC, and shareholder in STK. On November 1, 2002, Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code.
On January 22, 2003, UVCC filed a Motion for Relief from the Automatic Stay (the "Lift Stay Motion") pursuant to 11 U.S.C. § 362(d)(1) & (2)3 seeking to foreclose on UVCC's interest in the Premises. UVCC argued that "cause" existed to lift the automatic stay as UVCC was not adequately protected, in that Debtor had failed to make any payments on the Mortgage since UVCC accelerated STK debt, was thus using UVCC's collateral "rent free" and had further failed to provide UVCC with an additional or replacement lien.
Debtor opposed the Lift Stay Motion, alleging that Champion Mortgage Corporation had satisfied the Mortgage via a wire transfer in the amount of $97,075.74 made on January 30, 2001. Debtor further alleged that UVCC was in violation of New York State Real Property Law § 1921 for failing to file a satisfaction of Mortgage in connection with the alleged payoff of the Mortgage. The Debtor argued that he did in fact have equity in the Real Property, which was valued at $275,000. As the face value of the mortgage held by UVCC was $100,000, Debtor advanced that he had $175,000 in equity in the Real Property. Thus, UVCC was adequately protected by a large equity cushion. Additionally, Debtor contended that the default of STK Petroleum under the notes was a "sham," because UVCC had made no attempt to collect the secured debt from STK. In support of this contention, Debtor points out that as of October, 2002, the principals of STK (David Patten, Edward Patten and Alvin Fadden) were also the principals of UVCC. Finally, Debtor advanced that STK's Assets were worth more than four million dollars, and Debtor maintained that UVCC must "marshal" the assets of STK prior to seeking satisfaction of their security interest from the Debtor's home.
UVCC filed a reply to the Debtor's opposition to the Lift Stay Motion, stating that the $97,075.74 Champion had paid to UVCC, purportedly in satisfaction of UVCC's mortgage, was instead repayment of the various unsecured personal loans made to Mr. King in his personal capacity.4 UVCC stated that it was owed over $2.5 million dollars from STK, that the mortgage was given to UVCC as security for the existing and future debts of the corporate entity, and that until the $2.5 million debt was satisfied, they were entitled to collect on the Mortgage.
UVCC filed two Proofs of Claim; a secured claim for $100,000.00 ("Claim No. 7") and an unsecured claim for $3,065,723.10 ("Claim No. 8"). Debtor objected to both proofs of claim.
On April 1, 2003, this Court scheduled an evidentiary hearing for May 22, 2003, to hear evidence regarding the disputed issues herein. The hearing was further adjourned to June 12, 2003. On June 9, 2003, a letter was forwarded to this Court by counsel for UVCC that set forth a discovery schedule, which adjourned the evidentiary hearing on consent of the parties until August 28, 2003. Although the letter directed to the Court was not signed by counsel for Debtor, neither party objected to the proposed schedule and both parties agreed to a longer scheduling order. Pursuant to the agreed upon schedule, the parties were to each conduct appraisals of STK's assets and exchange appraisal reports by July 14, 2003. All discovery, including motions in limine and depositions, was to be complete by August 11, 2003.
Pursuant to the June 9, 2003 letter memorializing the agreement of the parties as to a discovery schedule, the deadline for obtaining the appraisals of STK's...
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