In re Kolinsky, Bankruptcy No. 86 B 20217
| Decision Date | 08 June 1989 |
| Docket Number | No. 89 Adv. 6005,Bankruptcy No. 86 B 20217,89 Adv. 6005 |
| Citation | 100 BR 695 |
| Parties | In re Joseph T. KOLINSKY, Debtor. Joseph T. KOLINSKY and Conjo Realty Corp., Plaintiffs, v. Abraham RUSS, Russ & Weyl, Jay Edmond Russ, Joseph P. Gagliano, and Alexander M. Goren and James G. Goren d/b/a Goren Brothers, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Stroock & Stroock & Lavan, New York City, for defendants Gagliano, the Gorens and Jay Russ.
Russ & Weyl, Massapequa, N.Y., for defendants Abraham Russ & Russ & Weyl.
Reich & Reich, White Plains, N.Y., for Joseph T. Kolinsky.
Herrick, Feinstein, New York City, for Conjo Realty Corp.
MOTIONS TO DISMISS THE COMPLAINT OR FOR ABSTENTION
The nondebtor defendants in an adversary proceeding commenced by the debtor, Joseph T. Kolinsky ("Kolinsky"), and his wholly owned nondebtor corporation, Conjo Realty Corp. ("Conjo"), made a motion returnable on June 2, 1989, to dismiss the complaint on various grounds including lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted. Alternatively, the defendants seek abstention pursuant to 28 U.S.C. § 1334(c). The jurisdictional objection is based on the argument that the debtor, Kolinsky, has joined the adversary proceeding as a nominal plaintiff and that the main relief is sought by the nondebtor corporate plaintiff, Conjo, which seeks to rescind a contract under which Conjo sold real estate to some of the nondebtor defendants. The nondebtor defendants who purchased the real estate from Conjo contend that this court should not entertain a cause of action for the rescission of a contract between the nondebtor defendants as purchasers, and the nondebtor corporate vendor, when the debtor, as sole shareholder of Conjo, was not a party to the contract of sale. Essentially, the nondebtor purchasers of the real estate sold to them by Conjo reason that the debtor, Kolinsky, may not pierce the veil of his own corporation, Conjo, in order to redress injuries allegedly sustained by his corporation because the debtor's rights are derivative and can be asserted only through the corporation.
In addition to the purchasers of the Conjo real estate, the other defendants are the debtor's former attorneys and the son of the debtor's former attorney, who is alleged to have acted as a broker in connection with the real estate sale by Conjo and also as attorney for the purchasing defendants. The causes of action asserted against the attorney defendants include fraud, fiduciary fraud and a claim for an accounting.
On May 8, 1986, plaintiff, Joseph T. Kolinsky, filed with this court a petition for relief under Chapter 11 of the Bankruptcy Code. He continued in possession and management of his property in accordance with 11 U.S.C. § 1108. Kolinsky was the sole shareholder of two corporations. One corporation, known as Transportation Services, Inc. ("TSI") is in the business of repairing and rebuilding gasoline and diesel engines. TSI had previously filed with this court a petition for relief under Chapter 11 of the Bankruptcy Code on April 30, 1986. The other corporation of which Kolinsky is the sole shareholder is Conjo Realty Corp. Conjo is the owner of waterfront real property on City Island, Bronx, New York. The Conjo real estate also includes a two-story building and a one-family house. Conjo is not a debtor in any bankruptcy case. TSI is a tenant on portions of Conjo's real estate. The TSI Chapter 11 plan of reorganization was confirmed by this court on April 18, 1988.
Abraham Russ and his law firm, Russ & Weyl, formerly represented TSI and Kolinsky in their Chapter 11 cases. Abraham Russ and Russ & Weyl are also named as defendants in the adversary proceeding commenced by the debtor, Kolinsky, and his nondebtor corporation, Conjo. Jay Russ, who is the son of Abraham Russ, is also named as a defendant in the plaintiffs' adversary proceeding. Jay Russ is an attorney, but is not a member of his father's firm. Jay Russ is a member of another firm, known as Russ & Russ.
The defendants, Joseph P. Gagliano, Alexander B. Goren and his brother James G. Goren ("the purchasers") are the parties who entered into the contract with Conjo to acquire the City Island property.
The complaint alleges that in early 1987, Kolinsky commenced negotiations through his attorney, Abraham Russ and Russ & Weyl, with a prospective purchaser of the Conjo real estate. The prospective purchaser was introduced by Jay Russ, acting as broker. The draft of the contract of sale provided for a sale price of $1.7 million, to be paid $100,000 as a down payment upon signing, and $200,000 together with delivery of a purchase money mortgage and note in the amount of $1.4 million at a second closing. In addition, the sum of $500,000 was to be paid by the prospective purchaser to Kolinsky's wholly owned corporation, TSI, as consideration for TSI vacating the Conjo property, and cancelling its lease. The contract provided that the purchaser would diligently provide his best efforts to obtain all variances and that thirty-six months was the maximum period for obtaining any rezoning. The sale was subject to the prospective purchaser's ability to have the property rezoned for the construction of fifty residential units and fifty boat slips.
The complaint further alleges that Abraham Russ pressured the debtor, Kolinsky, into rejecting the contract with the prospective purchaser by advising Kolinsky that the contract was not in his best interests and that Abraham Russ advised Kolinsky that his son, Jay Russ, had other potential purchasers in mind who were willing to purchase the Conjo property and that if Kolinsky did not enter into such an agreement soon it would create substantial problems with his creditors. It should be noted at this point that Kolinsky did not own the property; it was owned by Conjo, whereas Kolinsky owned all of the stock of Conjo.
The complaint then alleges that on April 7, 1987, at a meeting held in the offices of Russ & Weyl, Jay Russ represented himself as counsel to the defendants, Gagliano and the Gorens, who were collectively presented as new purchasers for the Conjo real estate. The complaint states that Abraham Russ advised Kolinsky at this meeting that the deal with Gagliano and the Gorens was in Conjo's and his best interests and that no significant changes had been made from the draft with the previous prospective purchaser except that the new purchasers had five years, rather than thirty-six months, within which to obtain all necessary zoning and all required permits and variances.
It is further alleged in the complaint that defendant, Gagliano, on behalf of himself and the Gorens, expressly represented to the debtor, Kolinsky, that the purchasers of the Conjo property would use due diligence to obtain the rezoning and all necessary permits and approvals. It is also alleged that Abraham Russ advised Kolinsky that the five-year period for obtaining variances was a mere formality and that utilizing best efforts, the purchasers would obtain all necessary permits, variances and approvals in a far shorter period. The plaintiffs then alleged that in reliance upon Abraham Russ' advice and the purchasers' representations that they would use due diligence to develop the Conjo property and obtain rezoning, the debtor, Kolinsky, executed a contract of sale dated April 7, 1987 on behalf of Conjo, as the seller, and Gagliano and the Gorens, as the purchasers. The purchase price was $1.7 million, with a $100,000 down payment upon execution. The purchasers were to pay $500,000 to TSI to cancel its lease and vacate the Conjo property. To secure the down payment of $100,000, the $500,000 payment to TSI and future advances for real estate taxes, Conjo, as seller, was to execute and deliver to the purchasers a mortgage on the Conjo property in the principal sum of $750,000. Additionally, Kolinsky entered into a separate joint venture agreement with Gagliano and the Gorens under which Kolinsky, Gagliano and the Gorens agreed to develop, construct and sell residential units, with a 70% distribution of the proceeds to the purchasers and 30% to Kolinsky. Kolinsky did not have a joint venture participation under the proposed draft with the previous prospective purchaser.
The complaint also alleges that on April 17, 1987, Russ & Weyl on behalf of Kolinsky, applied to this court for consent to permit the debtor, Kolinsky, as sole shareholder of Conjo, to obtain secured credit from the purchasers in the sum of $750,000 and to execute a mortgage upon the Conjo property. The proceeds obtained from the purchasers under the mortgage were to be paid to TSI in order to allow TSI to confirm its Chapter 11 plan of reorganization by paying TSI's creditors in full. The balance of the mortgage proceeds received by Conjo were to be held in escrow by Russ & Weyl for the purpose of use in funding Kolinsky's Chapter 11 plan of reorganization in this case. An order to this effect was signed by this court on June 18, 1987, without opposition.
Contrary to Abraham Russ' alleged representations to Kolinsky that the contract for the sale of the Conjo property contained no significant changes from the proposed draft contract with the previous potential purchaser, the complaint alleges that the contract with Gagliano and the Gorens did call for the development of 72 apartments and boat slips rather than the 50 apartments and boat slips referred to in the previous draft. Not only did the new contract allow the purchasers five years rather than thirty-six months to obtain necessary rezoning and approvals, but it did not expressly provide that time was of the essence nor did it expressly state that the purchasers shall promptly and diligently apply for all variances and permits. However, the contract did express that the purchasers...
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