In re State Street Associates, L.P., No. 04-63673.

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Northern District of New York
Writing for the CourtStephen D. Gerling
Citation342 B.R. 32
PartiesIn re STATE STREET ASSOCIATES, L.P., Debtor. In re State Street Houses, Inc., Debtor.
Decision Date27 October 2005
Docket NumberNo. 04-63672.,No. 04-63673.
342 B.R. 32
In re STATE STREET ASSOCIATES, L.P., Debtor.
In re State Street Houses, Inc., Debtor.
No. 04-63673.
No. 04-63672.
United States Bankruptcy Court, N.D. New York.
October 27, 2005.

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Hancock & Estabrook, LLP (Daniel B. Berman, Esq., Of Counsel, R. John Clark. Esq., Of Counsel), Syracuse, NY, for Debtors.

Nixon Peabody, LLP (Robert N.H. Christmas, Esq., Of Counsel, Gregory J. Mascitti, Esq., Of Counsel, William S. Thomas, Jr., Of Counsel), New York City, for New York State Mortgage Loan Enforcement and Administration Corporation New York State Urban Development Corp. and New York State Project Finance Agency.

MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

STEPHEN D. GERLING, Chief Judge.


Before the Court is a motion filed on October 21, 2004, by New York State Mortgage Loan Enforcement and Administration Corporation ("MLC"), as agent for the New York State Urban Development Corporation ("UDC"), doing business as Empire State Development Corporation ("ESDC")1 and New York State Project Finance Agency ("PFA") (collectively the "UDC"). seeking relief from the automatic stay pursuant to § 362(d) of the United States Bankruptcy Code, 11 U.S.C. §§ 101-1330 ("Code"). Opposition to the motion was filed on behalf of State Street Associates, L.P. ("SSA") and State Street Houses, Inc. ("SSH") (collectively, the "Debtors") on November 18, 2004.

The motion was heard at the Court's regular motion term in Utica, New York, on November 23, 2004. Following oral

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argument, the Court indicated that it would schedule an evidentiary hearing on the motion. Originally scheduled for February 23, 2005, the evidentiary hearing was adjourned to March 17, 2005, on consent of the parties. Ultimately, after a further consensual adjournment, two days of evidentiary hearings were held on May 12, 2005 and June 2, 2005.2 In order to allow both parties the opportunity to obtain transcripts of the hearings and to provide the Court with post-hearing memoranda of law, the matter was taken under submission by the Court on July 21, 2005.

JURISDICTIONAL STATEMENT

The Court has core jurisdiction over the parties and subject matter of this contested matter pursuant to 28 U.S.C. §§ 1334, 157(a), (b)(1) and (b)(2)(A), (G) and (O).

FACTS

On July 21, 1971, SSH borrowed $8,105,000 from UDC to construct and operate Kennedy Plaza Apartments ("Kennedy Plaza"), a 303 unit subsidized rental apartment complex located in Utica, New York.3 See UDC's Exhibit 1. SSH is a New York corporation, which holds legal title to Kennedy Plaza. SSA is a New York limited partnership and owner of the equitable interest, in Kennedy Plaza. Mathematical Bridge Corporation is a New York corporation and the managing general partner of SSA. Mathematical Bridge Corp. provides accounting, tax and legal services to SSA and manages Kennedy Plaza. Lanny Horwitz ("Horwitz") is the sole shareholder and president of SSH and Mathematical Bridge Corp., as well as the sole director of both corporations. Horwitz is one of five employees of Mathematical Bridge Corp. and is the only one residing in Florida.

On January 3, 1972, the Debtors, UDC and the United States Department of Housing and Urban Development ("HUD") entered into an Interest Reduction Contract ("IRC") under Section 236 of the National Housing Act. See Debtors' Exhibit C. HUD is authorized by statute "to make interest reduction payments with respect to a rental or cooperative housing project owned by a private non-profit corporation or other private non-profit entity. . . which is financed under a state or local program providing assistance through loans, loan insurance or tax abatements." Id. The IRC provided for a cap of $396,697 in interest reduction payments per year for a period not to exceed 50 years. Id. at 3. For purposes of reflecting subsequent increases in UDC's loans to the Debtors, on August 1, 1975, the terms of the IRC were amended to provide for a new cap of $479,109. See Debtors' Exhibit D. The IRC was again amended on March 1, 1988, to reflect a cap of $538,381, in conjunction with the increased debt to UDC of $9,613,693 of which $9,343,779 was "attributable to the subsidized dwelling units." See Debtors' Exhibit E. Those payments equal approximately $45,000 per month ($538,381 ÷ 12 = $44,865). White testified that between October 1981 and April 2005, HUD has paid approximately $12 million to UDC in connection with Kennedy Plaza. See May 12th Tr. at 47 and Ds' Exhibits A and B. According to Horwitz, the monthly debt service is actually approximately $60,000, resulting in a short-fall

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of approximately $15,000 per month. See Transcript of June 2, 2005 Hearing ("June 2 Tr.") at 51. The Debtors have not paid UDC since January 2002, according to White.4 See May 12th Tr. at 27.

In 1983 UDC and SSA, along with two other similarly damaged UDC financed parties, commenced an action against Dow Chemical ("Dow") for structural damage that occurred to the apartment complex as a result of the failure of a mortar additive, manufactured by Dow and known commercially as "Sarabond," which was used in the construction of the complex. On July 31, 1985, the Debtors authorized UDC to direct and manage the Dow litigation on their behalf by means of the execution of Powers of Attorney ("POA"). See Exhibit B, attached to UDC's Exhibit 33D. Under the terms of a Loan Restructuring Agreement ("LRA"), dated July 31, 1985, the Debtors assigned to UDC any settlement or award ("Settlement Proceeds") they might receive in the Dow litigation in exchange for UDC granting the Debtors a ten year forbearance period. See UDC's Exhibit 3.

Acting under the POAs, UDC finalized a settlement with Dow in April 1991 in the amount of $20,000,000 ("Sarabond Settlement"). Following receipt of the funds on behalf of the various plaintiffs whose mortgages were held by UDC, including the Debtors, a dispute arose over the distribution of the proceeds. In July 1992 the Debtors and UDC entered into a settlement agreement ("Settlement Agreement"), which provided that the Debtors would receive $7,056,000 as their share of the Sarabond Settlement. In the interim, an Amended LRA, made effective July 31, 1991, provided for an additional five year forbearance period.5 See UDC's Exhibit 6. The Amended LEA also provided that

[a]ny award . . . as a result of the [Dow] Litigation, or any portion of a settlement, or any portion of a settlement of the [Dow] Litigation . . . shall be assigned to UDC and allocated and distributed in the following order of priority:

(a) To accrued interest on the HUD Flexible Subsidy Loan,6 then to the payment of the Two Million, One Hundred Seventy-three Thousand, Eight Hundred Nine ($2,173,809) Dollars principal thereof . . .

See id, at Section 10 (amending Section 5.02 of the original LRA).

On July 16, 2002, SSH filed a voluntary chapter 11 petition in the United States Bankruptcy Court for the Southern District of Florida following receipt of two default notices from UDC. See In re State Street Houses, Inc., 305 B.R. 726, 731-32 (Bankr.S.D.Fla. 2002), aff'd, 305 B.R. 738 (S.D.Fla. 2003), aff'd, 356 F.3d 1345 (11th Cir. 2004). The case was dismissed on December 3, 2002 based on a finding of bad faith.7 Id.

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On May 28, 2003, UDC commenced an action against the Debtors in New York State Supreme Court, Oneida County ("New York State Court"), seeking to foreclose its mortgage lien on Kennedy Plaza based on alleged defaults in the Debtors' monthly payments.8 On May 20, 2004, the New York State Court issued an order appointing a temporary receiver. In response to the New York State Court's order, the Debtors filed voluntary petitions pursuant to chapter 11 of the Code on May 21, 2004 in the Northern District of New York, and this Court signed an order on May 25, 2004, providing for joint administration of the two cases.

According to the Debtors' schedules, UDC holds a secured claim for accrued interest of $2,947,247.24, which Debtors identify as "disputed." See Schedule D, filed June 14, 2004. UDC's proof of claim estimates a claim of $3,265,101.70 in interest arrears. See UDC's Exhibits 10 and 11. Debtors also list UDC with a secured claim of $9,614,440.91 in connection with "consolidated mortgages" on Kennedy Plaza, which Debtors identify as "disputed." See Schedule D. UDC's proof of claim, filed on September 30, 2004, estimates a claim of $9,612,532.48 in principal being owed.9 See UDC's Exhibits 10 and 11. According to the Debtors' schedules, HUD holds an unsecured claim of $2,543,357, labeled as "contingent" and "disputed." See Schedule F, filed June 14, 2004. The parties have agreed that the market value of Kennedy Plaza is $7,135,000 pursuant to an appraisal performed by GAR Associates, Inc., dated July 6, 2004. See UDC's Exhibit 13.

After obtaining several extensions of the exclusivity period for filing a chapter 11 plan and disclosure statement, the Debtors filed both on May 27, 2005. See UDC's Exhibit 32 and Debtors' Exhibit I. According to the Disclosure Statement, the Plan proposes the continued operation of Kennedy Plaza while pursuing the litigation currently pending in the Bankruptcy Court (Adv.Pro.04-80217) and in Florida State Court (collectively, the "UDC Litigation").

The litigation pending in this Court seeks the immediate turnover of $2,173,809, currently held by UDC following the Sarabond Settlement. The Debtors also seek an accounting of the balance of the "Settlement Proceeds" in the amount of $7,056,000. The litigation pending in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County Florida (Florida State Court) seeks recovery of monies allegedly owed by the UDC to the Debtors pursuant to Florida Statute, § 772.11 ("Civil Theft Action").'10 According

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to the Debtors' Disclosure Statement, the City of Utica, which is described as holding a statutory lien against the Debtors for prepetition water and sewer...

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