In re MacFarlane Webster Associates

• Decision Date: 31 July 1990
• Docket Number: Bankruptcy No. 89B-11438,Adv. No. 89-6444A.
• Citation: 121 BR 694
• Parties: In re MacFARLANE WEBSTER ASSOCIATES, Debtor. Robert M. FISHER, Trustee of the Estate of MacFarlane Webster Associates, Plaintiff, v. BANK LEUMI TRUST COMPANY OF NEW YORK and EOR Two of New York Inc., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

121 B.R. 694 (1990)

In re MacFARLANE WEBSTER ASSOCIATES, Debtor Robert M. FISHER, Trustee of the Estate of MacFarlane Webster Associates, Plaintiff, v. BANK LEUMI TRUST COMPANY OF NEW YORK and EOR Two of New York Inc., Defendant.

Bankruptcy No. 89B-11438, Adv. No. 89-6444A.

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

July 31, 1990.

Leo Fox, New York City, for trustee.

Parker, Chapin, Flattau & Kimpl by Aurora Cassirer, New York City, for Bank Leumi Trust Co. of New York and EOR Two of New York Inc.

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

Before the court is the motion of a senior mortgagee of MacFarlane Webster Associates ("MacFarlane Webster" or the "Debtor") seeking, inter alia, an order pursuant to section 707(a) of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq. (1988) (the "Code"), dismissing the instant chapter 7 bankruptcy case commenced by the filing of an involuntary petition filed against the Debtor by a junior mortgagee. The assets of this estate consist of claims to avoid a pre-petition foreclosure by the senior mortgagee. See, e.g., Durrett v. Washington Nat'l Ins. Co., 621 F.2d 201 (5th Cir.1980). Only the junior mortgagee would benefit were the foreclosure overturned. The junior mortgagee consented prepetition to the foreclosure sale. Permitting the bankruptcy case to be maintained under these unique circumstances would constitute an abuse of chapter 7. The motion is therefore granted.

I

The facts are largely undisputed. Macfarlane Webster acquired premises known as 40 West 45th Street, New York, New York (the "Premises") on April 18, 1985, Compl. ¶ 7, with funds borrowed from Bank Leumi Trust Company of New York (the "Bank" or "Bank Leumi"), Compl. ¶ 10; Ans. ¶ 5; Cassirer Aff. ¶ 3, Consol.Agrt. (Exh. B), Mortgage (Exh. D), Note (Exh. E). In consideration of those acquisition funds and additional construction funds, the Debtor executed promissory notes and mortgages to Bank Leumi in the combined sum of $10,931,000. Id.

When the Debtor subsequently experienced difficulty in making repayments, Bank Leumi commenced a foreclosure action against it. Cassirer Aff. ¶ 10, Notice of Pendency (Exh. J). The Bank agreed on July 16, 1987 to settle the action by extending the maturity date of the notes and permitting the Debtor to grant a junior mortgage in favor of Eagle SA Funding Company ("Eagle") in exchange for $2.5 million in new financing. Compl. ¶ 11; Ans. ¶ 6; Fox Aff., Modif. & Ext.Agrt. (Exh. C); Cassirer Aff. ¶ 11, Note (Exh. K).

Soon thereafter, the Debtor again defaulted in paying installments of interest and principal. Compl. ¶ 11; Cassirer Aff. ¶ 12. The Bank commenced a foreclosure action. Compl. ¶ 11; Ans. ¶ 6. Approximately six months later, the Bank, Eagle and the Debtor, among others, entered into a stipulation agreement. Cassirer Aff. ¶ 13, Stip. & Order dated 5/17/88 (Exh. M). As part of the agreement, the Bank promised not to pursue its foreclosure action against the Debtor for a four month period in exchange for a consent judgment of foreclosure and sale to be entered if the Debtor did not make payment on a date certain. Id. The consensual judgment of foreclosure and sale established the liability of the Debtor to the Bank. Id. Eagle, in writing, consented to it. Id.

The Debtor again defaulted; the Bank filed the judgment on January 31, 1989, some nine months later. Cassirer Aff. ¶ 14, Consent Judgment (Exh. N). It is alleged that during the Bank's moratorium, the Debtor made numerous unsuccessful attempts to sell the Premises, but none of the five offers it received exceeded $16 million. Compl. ¶¶ 17-21.

The referee appointed to sell the Premises advertised the time and place of the foreclosure sale, and served notice upon all parties in interest. Cassirer Aff. ¶ 15, Referee's Report (Exh. P). The Bank postponed the sale to allow the Debtor to negotiate a proposed joint venture agreement which would have provided funds to satisfy the debt owed to the Bank. Id.; Cassirer Aff. ¶ 15, Stip. (Exh. O); Compl. ¶ 22. The Debtor was not able to conclude the agreement, and the Bank re-noticed the sale. Compl. ¶ 22; Cassirer Aff. ¶ 16, Referee's Report (Exh. P).

Eagle, the Debtor, and approximately seven to ten people, attended the auction sale held on May 31, 1989. Cassirer Aff. ¶'s 17, 18; Compl. ¶ 13. The Bank made the winning bid of $9 million. Compl. ¶ 13; Cassirer Aff. ¶¶ 17, 18, Referee's Report (Exh. P).

Notwithstanding its having consented to the foreclosure sale, Eagle filed an involuntary Chapter 7 petition against the Debtor on June 20, 1989, prior to recordation of the referee's deed. Pl.'s Memo., p. 52; Defs' Memo., p. 7. The Debtor did not oppose the petition. On the Debtor's default, this Court entered an order for relief under the Bankruptcy Code in August 1989. The Bank's assignee, EOR Two of New York, Inc. ("EOR"), received and recorded the referee's deed on June 23, 1989. Pl.'s Memo., p. 52; Defs' Memo., p. 7. On July 22, 1989, the referee filed his Report of Sale for confirmation. Cassirer Aff., Exh P. The state court held a hearing to confirm the foreclosure sale on November 30, 1989, Cassirer Aff. ¶ 24, Motion (Exh. T), and confirmed that sale on January 25, 1990, Cassirer Aff. ¶ 25, Order (Exh U). Although counsel to the Trustee sent a letter to the state court on behalf of the Trustee claiming that confirmation of the sale would violate the automatic stay, Fox Aff., Letter dated 12/1/89 (Exh. P), he has not pursued that objection, Cassirer Aff. ¶ 25.

The Trustee brought an adversary proceeding against the Bank and EOR, on November 13, 1989. Principally, the complaint seeks to void the foreclosure sale as a fraudulent transfer under sections 544(b), 548(a), 550(d) and 551 of the Code. It alleges that an appraisal of the Premises by the Debtor and offers made to the Debtor establish that the fair market value of the Premises at the time of the foreclosure sale ranged from $15 million to $16 million. Compl. ¶¶ 16-21. There is no indication in the record that the Premises have since appreciated in value.

Dividends payable in the bankruptcy case would be attributable to recovery from the Trustee's action. Only the Bank and Eagle would appear to be entitled to them if the action is successful. The Debtor's liability on its senior mortgage debt, as of the date of the sale, was $13,956,637.79, inclusive of all costs, Cassirer Aff., Referee's Report, p. 2 (Exh. P), Order (Exh. U), and, on the Eagle mortgage, as of the date of the Petition, in excess of $3.6 million, Pet. ¶ 1. Interest on the Bank's mortgage continues to accrue. Since the aggregate debt owed the Bank and Eagle would exceed the alleged fair market value of the collateral, Eagle is undersecured. 11 U.S.C. § 506(a).¹

As affirmative defenses, the Defendants asserted that the foreclosure judgment was entered upon consent of all parties, including the Debtor and Eagle, that the Debtor was afforded fair consideration and reasonably equivalent value for the sale, res judicata and collateral estoppel, the doctrine of unclean hands, waiver and estoppel, and lack of standing. They then brought the instant motion to dismiss the chapter 7 case under section 707(a) or for abstention under section 305 of the Code and to dismiss the complaint for failure to state a claim upon which relief could be granted.

II

Section 707(a) of the Code, 11 U.S.C. § 707(a), provides:

The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including —

(1) unreasonable delay by the debtor that is prejudicial to creditors;

(2) nonpayment of any fees and charges required under Chapter 123 of title 28; and

(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521, but only on motion by the United States Trustee.

11 U.S.C. § 707(a). Although the examples provided concern debtor conduct such as causing unreasonable delay, the examples are illustrative only. H.R.Rep. No. 595, 95th Cong. 1st Sess. 380 (1977), U.S.Code Cong. & Admin.News 1978, p. 6336; S.Rep. No. 989, 95th Cong. 2d Sess. 84 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5870. The wording of the statute indicates that it covers both voluntary and involuntary cases, compare § 707(a)(1) with § 707(a)(3), that any party in interest can make such a motion except on the ground set forth in section 707(a)(3), and that cause lies in prejudice to a creditor such as the unreasonable delay set forth in section 707(a)(1).

A

The language of the statute thus requires the bankruptcy courts to determine, on a case by case basis, whether an abuse constituting cause has occurred. See In re Sky Group Int'l., Inc., 108 B.R. 86, 90 (Bankr.W.D.Pa.1989). The language of the statute easily accommodates a holding that maintaining a bankruptcy case is such an abuse in the extreme circumstance where the case was commenced by an undersecured junior mortgagee, who consented pre-petition to a foreclosure sale by a senior mortgagee, through the filing of an involuntary petition under section 303, 11 U.S.C. § 303, when the sole purpose of the bankruptcy case is to stop or avoid that sale with any benefit therefrom running only to the junior mortgagee. In such a case, a dividend will flow only to the senior and junior secured creditors. The senior secured creditor is prejudiced by the delay of the proceeding, notwithstanding having obtained the consent of the junior secured creditor to the foreclosure. The junior secured creditor is unfairly benefitted since it gave its consent.

B

Interpreting section 707(a) to find abuse from pre-petition conduct of a petitioning creditor is, moreover, consistent with numerous cases decided under the former Bankruptcy Act, 11 U.S.C. §§ 1 et seq. (1972) (repealed), where the courts have not hesitated to prevent such abuse by...