In re Rosner

• Decision Date: 15 April 1985
• Docket Number: Bankruptcy No. 182-13088-21,Adv. No. 183-0448.
• Citation: 48 BR 538
• Parties: In re Susan ROSNER, Debtor. KREDIETBANK, N.V., Plaintiff, v. ESIC CAPITAL CORP. and Susan Rosner, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

48 B.R. 538 (1985)

In re Susan ROSNER, Debtor KREDIETBANK, N.V., Plaintiff, v. ESIC CAPITAL CORP. and Susan Rosner, Defendants.

Bankruptcy No. 182-13088-21, Adv. No. 183-0448.

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

April 15, 1985.

COPYRIGHT MATERIAL OMITTED

Zimmer, Fishbach & Hertan, New York City, for ESIC Capital Corp.

Slade & Pellman, New York City, for Kredietbank.

Finkel, Goldstein & Berzow, New York City, for debtor, Susan Rosner.

OPINION

CECELIA H. GOETZ, Bankruptcy Judge:

This proceeding involves the validity of two liens on the debtor's principal assets which were her residence and an adjacent piece of property in Old Westbury, New York, improved by a home, tennis court and a swimming pool.

At the time the debtor, Susan Rosner, filed under Chapter 11 and became a debtor-in-possession, ESIC Capital Inc. ("ESIC") held a second mortgage against both parcels of real property to secure a principal indebtedness of $250,000 which with interest and attorneys' fees now amounts to $329,117.17. Kredietbank, N.V. ("KB") held a one million dollar third mortgage against the single parcel of land improved by the debtor's former residence to secure a principal indebtedness in the approximate sum of $2,463,615.30, the product of a personal guarantee given by Rosner. The total now claimed by KB exceeds $3 million.

KB initiated this adversary proceeding to set aside and invalidate ESIC's second mortgage for usury and to vacate the automatic stay imposed by § 362 of the Bankruptcy Code precluding it from enforcing its rights under its third mortgage. The debtor answered and counterclaimed against KB for fraud and misrepresentation; she also cross-claimed against ESIC for usury.¹

ESIC joined Rosner in attacking KB's mortgage but defended its own, and by way of cross-claim requested an order directing the payment to it from the money held in escrow of the amount due it from Rosner.

Prior to the filing of this adversary proceeding, both parcels of real estate had been sold at public auction for the sum of $800,000 with the liens to attach to the proceeds. The net proceeds of this sale (after payment of the first mortgage to Bankers Trust Co. and of real estate taxes) are currently being held in escrow.

JURISDICTION

At the time the complaint herein was filed on December 4, 1983, this Court had jurisdiction to hear and determine it by virtue of 28 U.S.C. § 1471(a) and the "Emergency Resolution" entitled In re Jurisdiction of Bankruptcy Courts, signed on December 21, 1982 by Chief Judge Jack B. Weinstein. That Resolution explicitly referred to the bankruptcy judges of this District "all cases under Title 11 and all civil proceedings arising under Title 11 or arising in or related to cases under Title 11." See In re Kaiser, 722 F.2d 1574 (2d Cir.1983).

Subsequent to the enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984, Public Law 98-353, 98th Cong.2d Sess. (1984), District Judge I. Leo Glasser, by Order dated July 30, 1984, determined this proceeding to be a core proceeding and referred it to me to determine in accordance with 28 U.S.C. § 157(b)(3) whether this proceeding is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2) and upon making this determination to hear and determine and to enter the appropriate orders and judgments pursuant to 28 U.S.C. § 157(b)(1). This Order supplemented a blanket order of reference signed by Chief Judge Jack B. Weinstein on July 12, 1984, amended August 7, 1984, referring all core proceedings arising under, or in, a case under Title 11 to the bankruptcy judge of the District to hear and determine.

Pursuant to these Orders of Reference, this Court holds this proceeding to determine the validity, extent or priority of liens and to lift the automatic stay to be a core proceeding arising in a case under Title 11 which this Court is authorized to hear and determine when such a proceeding is referred to it by the District Court. 28 U.S.C. § 157(a), (b)(1), (2)(G), (K). Also relevant to jurisdiction are the provisions included within the definition of a "core proceeding" "(A) matters concerning the administration of the estate"; "(E) orders to turn over property of the estate"; and "(O) other proceedings affecting the liquidation of the assets of the estate."²

THE FACTS

Susan Rosner, who initiated this proceeding by filing voluntarily under Chapter 11 of the Bankruptcy Code, operates no business and had no property at the time she filed, other than the home she had occupied for many years with her husband, Stanley Rosner, and the adjacent land and the home's contents. Apart from the monies she owes ESIC and KB on her guarantees of the debts of two corporations of which her husband was a stockholder, her debts are relatively small.

The two corporations, the debts of which she guaranteed and in connection with which she gave the mortgages on her home here involved, were Parachute Designs Ltd. ("Parachute"), and "Side-by-Side Sportswear, Inc." ("Side-by-Side").

ESIC received its mortgage interest in Susan Rosner's home as a result of a loan made to Parachute on April 20, 1977; KB's junior interest was the product of loans to Side-by-Side.

Parachute was organized by Stanley Rosner, the debtor's husband, sometime in early 1977. Its business was the purchase and sale at wholesale of ladies apparel. (Tr. 6/14/84 at 80). Originally, it imported its merchandise, later it manufactured it.

More or less contemporaneously with the organization of Parachute, Stanley Rosner applied to George Bookbinder, who was then President and principal stockholder of ESIC, for a loan of $225,000. Id. at 82-92. ESIC is a small business investment company ("SBIC") operating in accordance with regulations laid down by the Small Business Administration. 13 C.F.R. 107.

When Bookbinder met with Stanley Rosner and Spencer Kent, President of Parachute, he informed them that the SBA regulations did not allow ESIC to charge more than 15% interest on the loans it made, but that since "he could not be in business effectively at a 15% interest rate" that Parachute, if it wanted to borrow money, would have to enter into a consulting agreement with ESIC Advisory & Consulting Services, Ltd. ("ESIC Advisory"). (Tr. 6/14/84 at 122, 88-89; Tr. 8/6/84 at 11-12, 53). He "could not make a living strictly on loan money at 15 percent." (Tr. 6/14/84 at 157, 167-168). On a loan of $225,000 the fee of ESIC Advisory was to be $1600 a month. (Tr. 6/14/84 at 106-107). The size of the fee was a function of the size of the loan. (Tr. 6/14/84 at 108-109).

Bookbinder, who did not testify at the trial, but whose deposition, taken in Israel, was admitted into evidence, confirmed that from the outset, he made it clear, that no money would be forthcoming from ESIC unless Parachute accepted his counseling services. (Bookbinder's Deposition, 4/12/84, at 18-19, hereinafter "BK"). He told Rosner that he needed business advice; that the record showed him to be a good salesman, but not a good administrator; that he needed "a lot of help." (BK at 18-20). He represented himself to Rosner and Kent as knowledgeable in Parachute's business. (Tr. 6/14/84 at 125-126). He said that the services he would render would consist of making himself available, and that once a week he would visit Parachute's premises to see what was going on. (Tr. 6/14/84 at 123).

Neither Rosner nor Kent paid any attention to Bookbinder's description of the services he was to render since neither had any interest in his help, and regarded the service contract as simply part of the consideration they had to pay for the loan. (Tr. 6/14/84 at 129-130, 131-134; 8/6/84 at 38-54; BK at 19). At every negotiating meeting Rosner expressed his reluctance to enter into the consulting agreement. (Tr. 6/14/84 at 91-92).

When Stanley Rosner was asked why, if he did not want Mr. Bookbinder's services, Parachute had, nevertheless, entered into the consulting agreement, Rosner replied: "We needed the $225,000 and, as a business decision, if that is what it took to come along with it, that is what we did." (Tr. 6/14/84 at 90, 98).

Kent put the matter even more bluntly. Asked why he had signed the consulting agreement which sets forth that Parachute had advised ESIC Advisory that it "will have a continuing need for financial advisory services and for this reason seeks to retain ESIC Advisory", and asked why he had signed this statement if it were not true, his reply was: "If you are asking me if I took that paper seriously as far as consulting, no, I did not. I did it as part of getting a loan, if that's the question." (Tr. 8/6/84 at p. 26). When he was pressed as to whether he would sign a letter setting forth facts which were not the case, he responded: "Whether they were the case or were not the case was not important to me. The loan was important to me. It was stated that this was part of the loan agreement. I signed my name to it." (Tr. 8/6/84 at 26. See also 6/14/84 at 156-159). The language was dictated to Parachute by Bookbinder. (Tr. 6/14/84 at 157-159).

As Mr. Rosner summarized the negotiations: "The thrust of everything was Mr. Bookbinder explaining that, you know, in this day and age, 15 percent is not a lot of interest and you have got to make the money somewhere. $1600 a month was sort of his bonus. There was never any real intention to do any consulting. There was never any." (Tr. 6/14/84 at 90).

Indeed, the consulting agreement into which Parachute subsequently entered with ESIC Advisory, as a condition of receiving the loan from ESIC, did not obligate ESIC Advisory to provide any services whatsoever. (PX KB 11).³ Whether or not any services would be rendered, as Bookbinder admitted, was left entirely within the discretion of ESIC Advisory. (BK 98-100).

ESIC imposed other conditions on its $225,000 loan in addition to its insistence on an annual retainer of $19,200 to ESIC Advisory. Parachute was required to sell ESIC 200 shares...