In re O'loughlin

• Decision Date: 24 May 1984
• Docket Number: 84-00482-HL.,Bankruptcy No. 84-00446-HL
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts
• Parties: In re Francis O'LOUGHLIN, Edward F. Carroll, Francis O'Loughlin and Edward F. Carroll, d/b/a R & R Realty, Debtors.

40 B.R. 707 (1984)

In re Francis O'LOUGHLIN, Edward F. Carroll, Francis O'Loughlin and Edward F. Carroll, d/b/a R & R Realty, Debtors.

Bankruptcy Nos. 84-00446-HL, 84-00482-HL.

United States Bankruptcy Court, D. Massachusetts.

May 24, 1984.

Thomas J. Raftery, Raftery & Warren, Boston, Mass., for debtor/individuals and as partners of R & R.

Bernard P. Rome, Wasserman, Salter & Rome, Boston, Mass., for Chestnut Hill Mortg. Corp.

FINDINGS AND RULINGS ON MOTION TO DISMISS THE ABOVE THREE CASES

HAROLD LAVIEN, Bankruptcy Judge.

Counsel, representing the first and second secured creditors on the business real estate and possibly the first or second secured creditors on the personal property used in the operation of the businesses, and, depending upon the value of the security, possibly the largest unsecured creditors seek to have the two individual and partnership Chapter 11's dismissed as having not been filed in good faith. They are joined in this request by counsel who may be the first secured creditor in the personal property in the laundromat and delicatessen operations. Other allegedly secured creditors, in either the business or individual assets, had filed motions to be relieved of the stays or were preparing to do so, although some of these latter may have been willing to enter into stipulations that would have allowed the debtor a short period of time to attempt to sell on his own some of the individual realty and, in one case, possibly to make periodic payments. None of those matters were gone into in greater detail because of the basic problem of the good faith of the filings. The basic controversy involves real estate comprising a one-story brick building having a laundromat and a delicatessen, operated by the debtors, and a third store which was rented to third parties. The real estate was purchased in April of 1982 and was undisputedly owned and in the name of the R & R Realty Trust, a nominee trust. There was some conflict as to whether the personal property and operation of the delicatessen and the laundromat were part of the trust, part of a partnership, or part of individually owned assets.

On March 26, 1984, the second mortgagee, Chestnut Hill Mortgage Corp., entered the premises under its security agreements to take possession, by virtue of a breach, of all of the personal property of the R & R Realty Trust; namely, the property in the laundromat and the delicatessen, with a view toward holding a public auction sale on April 3, 1984. Mr. Carroll refused to allow them to take peaceful possession but was, of course, informed of the intended exercise of the foreclosure rights under that security agreement, and was given a copy of the notice, which is Exhibit # 6. On March 29, 1984, the Trust was dissolved and so recorded in the Registry of Deeds, and the property reverted, under the Trust, to the individuals. On the following day, March 30th, the individuals filed their Chapter 11 bankruptcy petitions, and on April 6th, a further filing was made of the partnership bankruptcy. On March 29th, the Indian Head National Bank, the creditor holding security interests as a result of the purchase of the laundry equipment from Craig Supply Company, sent notice of default and its intention to repossess as of April 2nd. This notice was received by Mr. Carroll on March 30th and, according to him, was the sole cause and the first consideration of filing their individual and the partnership Chapter 11's.

Mr. Carroll testified that he was unaware, until he read in the Sunday paper, on March 31st, that Chestnut Hill Mortgage Corp. was intending to hold a public auction on April 3rd, 1984, and although he acknowledges that he was visited on March 26th, 1984 by counsel, the principal in Chestnut Hill Mortgage Corp., and a third person, who attempted to take possession, that he was not given any notice of the impending foreclosure, or of the public auction on April 3rd, or of the notice dated March 26th. I do not find any of this credible and do not believe that the parties, including counsel who visited him on March 26th to attempt to take peaceful possession, did not advise him of why they were there or did not leave with him the notice of March 26th. I find that all of this occurred and that the debtor was fully aware of the intention of Chestnut Hill Mortgage Corp. to conduct its sale on April 3rd, 1984, and that he received all of this notice on the visit of March 26th.

Section 1112(b) of the Code authorizes the Court to dismiss a Chapter 11 petition or to convert the case to one under Chapter 7 for "cause," on the petition of a party in interest. Although that section sets out a list of circumstances constituting cause, that list is not exclusive. See § 102(3). The legislative history of § 1112(b) demonstrates the intent of Congress that the bankruptcy court retain broad equitable powers to dismiss petitions. Senate Report 95-989, 95th Cong. 2d Sess. 117 (1978); House Report 95-595, 95th Cong. 1st Sess. 405-406 (1977). Most courts that have faced the issue have held that bad faith in the filing of a petition constitutes cause for dismissal under § 1112(b). See, e.g., In re Victory Construction Co., Inc., 9 B.R. 549, 558, 7 B.C.D. 257, 3 C.B.C.2d 655 (Bkrtcy.C.D. Calif.1981); In re Tolco Properties, Inc., 6 B.R. 482, 6 B.C.D. 913, 3 C.B.C.2d 100, Bkr.L.Rptr. ¶ 67,699 (Bkrtcy.E.D.Va. 1980); In re G-2 Realty Trust, 6 B.R. 549, 552, 6 B.C.D. 1072, 2 C.B.C.2d 1344 (Bkrtcy.D.Mass.1980); Cf. Shapiro v. Wilgus, 287 U.S. 348, 53 S.Ct. 142, 77 L.Ed. 355 (1932) (interpreting the Uniform Fraudulent Conveyance Act and English common law). This Court agrees and holds that bad faith in filing a Chapter 11 petition may provide cause to dismiss a petition pursuant to § 1112(b). In addition, the United States District Court for the District of Alaska has held that the burden of proving good faith is on the debtor. In re Teneb, Inc., No. A-80-129 Civil, slip op. at p. 3 (D.Alaska March 11, 1981).

In re Spenard Ventures, Inc., 18 B.R. 164, 166, 6 C.B.C. 156, 159 (Bkrtcy.Alaska 1982).

In this district, it is well established that a nominee trust is not a person and is ineligible to file a bankruptcy petition, Nancy Cantor, Trustee of Cantor Manson Trust v. Wilbraham & Monson Academy, 609 F.2d 32 (1st Cir.1979), so that the issue becomes, was the conversion or dissolution of the nominee trust in order to file a Chapter 11, an act of bad faith done to hinder and delay the creditors in providing a method of filing under the Bankruptcy Act and devoid of any real business purpose. See, In re Norman Cohen, 4 B.R. 201, 6 B.C.D. 358 (Bkrtcy.S.D.Fla.1980); In re Treasure Island Trust, 2 B.R. 332, 5 B.C.D. 1246 (Bkrtcy.M.D.Fla.1980); In re Associated Developers Trust, 2 B.C.D. 903 (D.Mass.1976); In re G-2 Realty Trust, 6 B.R. 549, 6 B.C.D. 1072, 2 Collier Bankruptcy cases, 1344 (Bkrtcy.D.Mass.1980); In re Northwest Recreational Activities, Inc., 4 B.R. 36, 6 B.C.D. 164 (Bkrtcy.N.D.Ga.1980). As for the business purpose in dissolving the Trust, Carroll testified that as far back as January, 1983, he had been advised to dissolve the Trust; however, no credible reason had been given for so doing, and the only explanation offered was that it would be easier to obtain a loan. However, no such loan was obtained, and no evidence was presented that any lender declined to make a loan to the Trust and made as a condition the dissolution of the Trust. Further, if this advice went back as far as January, 1983, no explanation was given for the cancelling of the Trust three days after the attempted entry to foreclose and one day prior to the filing of the Chapter 11's. Further, and most convincing to this Court of the total lack of credibility of Mr. Carroll,¹ he testified on direct examination that he was unaware, on March 29th, when the Trust was dissolved, of the impending foreclosure sale by Chestnut Hill Mortgage Corp., and, indeed, the thought of filing the bankruptcy petition did not arise until he received, on March 30th, the notice from Indian Head, that it was seeking to repossess. In fact, the basic reason for filing was to stave off the Indian Head repossession. This testimony was then repeated several additional times. To make sure that there was absolutely no question about this witness' state of mind or knowledge, the Court repeated the question and received the same set of answers. The Court then showed the witness the petition and schedules in the Chapter 11's which included the signature of Mr. Carroll and the date of his signature, in his handwriting, of March 29th, the exact same date that the dissolution of the Trust was filed. The bankruptcy petition, therefore, had been prepared prior to the receipt of the notice from the Indian Head, which was not received until March 30th. Neither Carroll nor his attorney offered any explanation for this glaring contradiction and, in fact, Carroll's counsel sent the Court, after trial, the copy of what he considered to be a favorable case without seeking, at the same time, an opportunity to explain. It, thus, becomes manifest that the Trust dissolution and the bankruptcy filing were not two separate, unrelated acts but, rather, part of a single plan to delay the secured creditors without any redeeming business purpose.

This whole question of bad faith permeates the transactions between the debtors and Chestnut Hill Mortgage Corp. and Indian Head National Bank. The debtor, Mr. Carroll, testified that the businesses of the delicatessen and the laundromat were conducted as a partnership and that the personal property in the delicatessen and the laundromat...