In re Ross

• Court: U.S. Bankruptcy Court — Southern District of New York
• Writing for the Court: PRUDENCE B. ABRAM
• Citation: In re Ross, 63 B.R. 951 (Bankr. S.D.N.Y. 1986)
• Decision Date: 22 August 1986
• Docket Number: Bankruptcy No. 83 B 11757 (JG).
• Parties: In re Stuart R. ROSS, Debtor.

63 B.R. 951 (1986)

In re Stuart R. ROSS, Debtor.

Bankruptcy No. 83 B 11757 (JG).

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

August 22, 1986.

COPYRIGHT MATERIAL OMITTED

Barst, Mukamal & Babitt, by Stuart N. Bernstein, New York City, for original petitioners.

Barrett Smith Schapiro Simon & Armstrong, New York City, for Merrill Lynch Futures, Inc.

Rosenman Colin Freund Lewis & Cohen by Eugene A. Gaer, New York City, pro se.

Robson, Miller & Osserman, Cooper Cohen Singer Ecker & Shainswit, by Morton S. Robson, New York City, for Robson & Miller and WLW Funding Corp.

Fenwick, Stone, Davis & West by Jack David, New York City, Melincove, Kaufman, Weiner & Smouse, P.A. by Ransom J. Davis, Baltimore, Md., for Richard L. Vogel and Seneca Mining Corp.

Fox Glynn & Melamed, by John R. Horan, New York City, for Roger L. Deville.

Certilman Haft Lebow Balin Buckley & Kremer by Martin F. Brecker, Jeffrey W. Levitan, Law Offices of Stuart A. Jackson by Stuart A. Jackson, New York City, for debtor.

MEMORANDUM DECISION AND ORDER GRANTING MOTIONS TO INTERVENE AND DENYING MOTIONS TO DISMISS INVOLUNTARY PETITION AND TO WITHDRAW AS PETITIONING CREDITOR

PRUDENCE B. ABRAM, Bankruptcy Judge:

Despite seven days of trial, a significant change in the applicable law, an application by one of the petitioning creditors for leave to withdraw, two motions for intervention, a motion for dismissal or abstention and resolution of a motion for summary judgment in a companion case adversely to two of the petitioning creditors,¹ the merits of this involuntary petition cannot yet be finally resolved. As this decision will make clear, the legal issues respecting involuntary petitions are of continuing complexity. What makes this case particularly difficult is the sheer magnitude of the non-bankruptcy litigation the debtor, Stuart Ross ("Ross" or "Debtor"), has engaged in with the seven petitioning creditors.² For the reasons which follow, this court has concluded that this debtor cannot create a bona fide dispute with respect to each of the petitioner's claims through mere litigiousness. This court can, and must, go below the surface of this sea of litigation to determine the issues raised by the involuntary petition.

The involuntary Chapter 7 petition was filed against Ross on December 8, 1983. The original petitioning creditors were Merrill Lynch Commodities, Inc. ("Merrill"); Rosenman, Colin, Freund, Lewis & Cohen, Esqs. ("Rosenman"); Robson & Miller, Esqs. (the "Robson Firm") and WLW Funding Corporation ("WLWFC") (collectively the "Original Petitioners"). The nature and amount of petitioners' claims were described in the petition as follows:

Creditor        Nature            Amount
                Merrill         deficit balance   $473,877.28
                                in corporate
                                commodities
                                trading account
                                used by debtor
                                and guaranteed
                                by debtor
                Rosenman        unpaid attorneys' $ 91,187.27
                                fees
                Robson          guarantee of      $305,000.00
                Firm            corporate loan;   $347,171.57 plus
                                conversion of     punitive damages
                                notes pledged
                                to the Robson
                                Firm
                WLWFC           guarantee of      $220,000.00
                                corporate loan;   $170,000.00 plus
                                conversion of     punitive damages
                                notes pledged
                                to WLWFC
                

The involuntary petition alleged that Ross was generally not paying his debts as they became due as indicated by the following:

a) Rosenman had obtained a judgment against the Debtor in the amount of $71,558.85, which amount remained unpaid except for $175.25 collected upon execution of the judgment;

b) the Debtor had made no payments on debts owed to the other petitioners; and

c) the Debtor had not paid various tax bills and two judgments as follows had been entered against him:

    1) City of New York           $3,529
                    2) N.Y.S. Tax Commission       7,259
                

Ross filed an answer to the petition on January 3, 1984. Ross denied the allegations of the petition as to the claims of the Original Petitioners except admitted that Rosenman held a claim against Ross not contingent as to liability for unpaid legal fees in the amount of $71,558.85. A denial was made to the allegation that Ross was generally not paying his debts as they became due except Ross admitted that he had made no payments to the Original Petitioners except for the $175.25 collected by Rosenman on execution. Ross denied knowledge or information sufficient to form a belief as to the existence of the City of New York and N.Y.S. Tax Commission judgments.

Five affirmative defenses were asserted by Ross. The first defense was that the petition failed to state a claim upon which relief could be granted. The second defense asserted was that the claims of Merrill, the Robson Firm and WLWFC were contingent as to liability, disputed, unliquidated and subject to pending litigation and thus the requirements of Bankruptcy Code § 303(b)(1)³ had not been met. The third defense was that Ross was not generally not paying his debts as such debts became due, that no custodian, receiver or agent had been appointed or authorized to take charge of any of Ross' property and that thus Code § 303(h) had not been satisfied. The fourth affirmative defense was that the litigation respecting liability on the Merrill, the Robson Firm and WLWFC claims, which were stated to be contingent, contested and unliquidated, was pending in other more appropriate forums and that in consequence the bankruptcy court should abstain from exercising any jurisdiction. The fifth and final defense was that

"The petition herein was not filed in good faith but, rather, to harass and annoy the alleged debtor and to frustrate his efforts to defend against the claims of petitioners Merrill Lynch Commodities, Robson & Miller and Wake L. Warthem."

By notice of motion dated February 23, 1984, Ross sought leave to file an amended answer. The first four defenses were identical to those asserted in the original answer. The fifth defense, however, was much enlarged and elaborated upon, with great stress being placed on the supposed bad faith, malice and lack of justification of the Robson Firm and WLWFC.⁴ On the first day of trial, the court denied the motion to amend the answer without prejudice to renew the request at the end of the trial. Trial Transcript, 3/6/84 at 58. The fifth defense need not be reached if the involuntary petition is sustained and an order for relief entered.

Shortly after the involuntary petition was filed and before the trial commenced, the Original Petitioners filed a motion seeking the appointment of an interim trustee pursuant to Bankruptcy Code § 303(g) to take possession of Ross' property as well as for injunctive relief against the transfer of assets by Ross or any corporations, partnerships or other entities, including twenty-three named entities, owned or controlled directly by Ross or the named entities (the "Corporations"). The application alleged that there was a substantial likelihood that at trial the movants would be able to establish that "each of the corporate defendants is no more than the alter-ego of Ross and that they are all part of the massive scheme perpetrated by Ross to shield assets from creditors." On January 6, 1984, that motion was settled by entry into a stipulation (the "Settlement Stipulation") between Ross, the Corporations and the Original Petitioners which was so ordered by the court. The Settlement Stipulation provides that Ross and the Corporations are restrained from transferring funds other than in the ordinary course of business. Ross is permitted to draw an aggregate weekly salary of $5,000. Ross and the Corporations are to provide semi-monthly accountings of all receipts and disbursements and to make their books and records available for inspection. Ross and the Corporations cannot pay any debt or expense in excess of $10,000 without prior notice. Transfers between the entities and to third parties are restricted. In the summer of 1984, two motions were made relative to the Settlement Stipulation: Ross made a motion to vacate the Settlement Stipulation and the Original Petitioners made a motion to enforce its provisions or accountings. On February 27, 1985, this court denied the motion to vacate the Settlement Stipulation but found that a further hearing would be required before the contempt request could be determined.⁵

In March 1984, a trial on the involuntary petition began before Bankruptcy Judge John J. Galgay, to whom the case was then assigned. The trial ran for seven days in March and April 1984 and produced 900 pages of transcript and some 70 exhibits were offered. Unfortunately, Judge Galgay became ill in April 1984 and died in May 1984 before the trial could be resumed and completed. The principal witness at trial was Ross himself, who testified extensively on both direct and cross-examination.

After Judge Galgay's death, the case was reassigned. A trial de novo is generally required when continuation of a trial is to be conducted before another judge. See Rule 9028 of the Bankruptcy Rules of Procedure; In re Schoenfield, 608 F.2d 930 (2d Cir.1979); In re Potter Instrument Company, Inc., 15 B.R. 202 (Bankr. E.D.N.Y.1981). The purpose of requiring a new trial is the importance of credibility assessments in evaluating the testimony. Schoenfield, supra. Mid-hearing resumption by a new judge is permissible only when unanimous party consent is given. See Arrow-Hart, Inc. v. Phillip Carey Company, 552 F.2d 711 (6th Cir.1977); Bromberg v. Moul, 275 F.2d 574 (2d Cir. 1960); Wright & Miller, Federal Practice and Procedure, § 2922 (1971). The unanimous consent of the parties was not given and this court therefore could not resume the trial midstream.

Before a new trial could commence and on July 6, 1984, Ross filed a motion to dismiss the involuntary...