Jacobson Dev. Grp. v. Office of the United States Tr.
| Decision Date | 08 March 2023 |
| Docket Number | 22-CV-604 (JMA) |
| Parties | JACOBSON DEVELOPMENT GROUP, LLC, Appellant, v. OFFICE OF THE UNITED STATES TRUSTEE, ANDREW M. THALER, ESQ. TRUSTEE OF THE BANKRUPTCY ESTATE OF JACOBSON DEVELOPMENT GROUP, LLC, GARY GROSSMAN, YNEWS INC., QUANTUM LEAP INC., ARABIAN NIGHTS HOLDINGS LLC, DOM-REZ AFFILIATES, LLC, and BABYLON JAZ LLC, Appellees. |
| Court | U.S. District Court — Eastern District of New York |
Appellant Jacobson Development Group, LLC (“Appellant” or “Jacobson”), the debtor in this Chapter 11 bankruptcy case, appeals from a January 18, 2022 Order (the “Bankruptcy Court Order”) of Judge Louis A Scarcella of the United States Bankruptcy Court for the Eastern District of New York (the “Bankruptcy Court”) converting Jacobson's Chapter 11 case to a Chapter 7 bankruptcy case. (Bankruptcy Court Order, ECF No 1; see In re Jacobson Development Group, LLC, Bankr No. 8-21-70087, ECF No. 85.) For the reasons set forth below the Bankruptcy Court's judgement is AFFIRMED.
The Court assumes the parties' familiarity with the facts and procedural history of this action and summarizes the facts and history relevant to the instant appeal based on the record on appeal, the filings in Appellant's bankruptcy proceeding, and the briefs filed by the instant parties.
On or about February 19, 2020, a final judgment was entered in the New York State Supreme Court, Nassau County in favor of an individual known as Mary Middleton (the “Middleton Judgment”), and against the Appellant, in the sum of $426,216.80. (See ECF. No. 3, Bankruptcy Record (“BR”), at 16.). On February 27, 2020, the Middleton Judgment was assigned to Appellee Dom-Rez Affiliates, LLC (“Dom-Rez”), which subsequently commenced enforcement proceedings. (Id.) In connection therewith, Dom-Rez delivered an execution to the Office of the Sheriff of Nassau County, which served the execution on the Appellant in September 2020, and thereafter began to levy, for the purpose of sale, upon certain assets belonging to Jacobson, namely its interest in a pair of mortgages (the “Mortgages”) executed by Appellant as mortgagee and Appellee Arabian Knights Holdings, LLC (“Arabian Knights”), as mortgagor. (Id. at 51, 73.) A Sheriff's auction to sell Appellant's interest in the Mortgages was scheduled for January 20, 2021. (Id.)
On January 20, 2021, just before the auction was scheduled to take place, Appellant filed a bankruptcy petition (the “Petition”) under Chapter 11 of the bankruptcy code. (BR at 7.) The Petition identified two pre-petition lawsuits as assets. (Id. at 63.) The first is the action titled, Grossman, et al. v. Jacobson Development Group, et al., Index No. 0601902/2017, brought by Appellees Gary Grossman, Yews, Inc., Quantum Leap Inc., and Arabian Nights (collectively, the “Grossman Appellees”). (Id. at 16-17.) The Grossman Appellees removed this pending state court action to the Bankruptcy Court (the “Adversary Proceeding”). In the Adversary Proceeding, the Grossman Appellees sued Jacobson and its principal, Alexander Jacobson, for breach of a joint venture agreement, and are listed as Jacobson's creditors. (See id.) Jacobson asserted a pair of counterclaims against the Grossman Appellees in the Adversary Proceeding, seeking to foreclose on two mortgages. (Id. at 21.) The second action listed in the Petition is titled Jacobson Development Group, LLC v. Grossman, et al., Index No. 0603297/2020, where Jacobson is suing the Grossman Appellees for an alleged breach of a different joint venture agreement. (Id. at 21, 63.) Jacobson's claims in this matter are also listed as bankruptcy estate assets. (Id. at 21.)
Approximately nine months after filing the Petition, Jacobson sought to settle with Dom-Rez, and claimed to have funds to fully satisfy the Middleton Judgment. To that end, Appellant and Dom-Rez agreed to a settlement dated November 19, 2021, that provides, in relevant part:
Within seven (7) business days after the full execution of this Stipulation, the Debtor shall (i) move the Court for an Order dismissing the instant Chapter 11 Case under 11 U.S.C. Section 1112(b) (the ‘Dismissal Motion'), with payment to Dom-Rez in full satisfaction of the Middleton Judgment with accrued interest as provided for hereinafter and (ii) in so moving the Bankruptcy Court, disclose and provide evidence of the source of the funds being used to satisfy the Middleton Judgment and the agreement, if any at all, between the Debtor and the funding source and the use of such funds and (iii) will provide evidence that the funds have been deposited with the Debtor's counsel in escrow before the return date of the hearing on the Dismissal Motion.
See id. at 358-59 (the “Settlement”). Before agreeing to the Settlement, Jacobson represented that the funds available to satisfy the Middleton Judgment were in a bank account controlled by Alexander Jacobson. (Id. at 353-55.)
On or about November 22, 2021, Jacobson filed a motion under 11 U.S.C. §1112(b) (“Section 1112(b)”), seeking approval of the Settlement and dismissal of its Chapter 11 bankruptcy case. (Id. at 341.) Appellant's motion was scheduled to be heard on December 16, 2021, but was adjourned to January 13, 2022 at Jacobson's request, so it could respond to objections and comply with the Settlement. (Id. at 341.) Dom-Rez filed a limited objection to Appellant's dismissal motion, and urged the Bankruptcy Court not to approve the Settlement because Jacobson had breached the settlement agreement by failing to: (1) disclose any information regarding the funding source's solvency or how it would get the funds; or (2) deposit the funds in the attorney's escrow account. (Id. at 366-69.) The Grossman Appellees also objected to Jacobson's motion and argued that the Settlement preferred Dom-Rez over other creditors, in violation of Czyzewski v. Jevic Holding Corp., 137 S.Ct. 973 (2017). (See id. at 364-65.)
At the January 13, 2022 hearing, Jacobson's counsel could neither confirm that the funds were in his escrow account as required by, nor represent that Jacobson could proceed with, the Settlement. (Tr.[1] 7-8, 12-15.) Appellant's counsel further conceded that there was no possibility for Jacobson's reorganization, and that the Petition had been filed merely to obtain a stay of the Sheriff's auction. (Id. at 12 ()). Notwithstanding, Appellant's counsel still sought dismissal of Jacobson's Chapter 11 case. (Id. at 15-16.)
After hearing these arguments, Judge Scarcella concluded that Appellant's reorganization was not possible, and that the case should either be dismissed or converted to a Chapter 7 case. (Id. at 19.) In support of conversion, Dom-Rez highlighted that: (1) the Mortgages were estate assets, the validity of which will be determined in the Adversary Proceeding; (2) the Petition was filed merely to stop Dom-Rez's scheduled auction; and (3) Jacobson filed the Petition in bad faith. (See id. at 20-25.) The Grossman Appellees objected as well and argued that Dom-Rez's status as a secured creditor vis-a-vis Jacobson depended on the outcome of the Adversary Proceeding, meaning that the Settlement could not be approved pursuant to Jevic. (Id. at 27.) Counsel for the Office of the United States Trustee confirmed that conversion from a Chapter 11 case to a Chapter 7 case was in the best interest of the creditors and Jacobson's bankruptcy estate. (Id. at 28.)
After considering the entire record and the parties' arguments, the Bankruptcy Court determined that cause existed to dismiss Jacobson's Chapter 11 case or convert it from Chapter 11 to Chapter 7 and exercised its discretion to convert rather than dismiss the case. (Id. at 33-34.) The instant appeal followed on February 1, 2022. (See ECF No. 1.) On appeal, Jacobson argues that the Bankruptcy Court abused its discretion by: (1) converting the Appellant's Chapter 11 case to a Chapter 7 case; and (2) not approving the Settlement. For the reasons set forth below, the Bankruptcy Court's Order is AFFIRMED and Appellant's appeal is DENIED.
This Court has jurisdiction to hear appeals from bankruptcy courts under 28 U.S.C. § 158(a), which provides that “[t]he district courts of the United States shall have jurisdiction to hear appeals . . . from final judgments, orders, and decrees . . . [and] with leave of the court, from other interlocutory orders and decrees . . . of bankruptcy judges.” 28 U.S.C. §§ 158(a)(1), (3). District courts review a bankruptcy court's factual findings for clear error and its conclusions of law de novo. See In re Charter Commc'ns, Inc., 691 F.3d 476, 483 (2d Cir. 2012); Washington v. Chapter 13 Tr., No. 19-cv-7028, 2020 WL 5077403, at *2 (E.D.N.Y. Aug. 26, 2020); Wenegieme v. Macco, No. 17-cv-1218, 2018 WL 334032, at *2 (E.D.N.Y. Jan. 9, 2018).
Discretionary rulings of a bankruptcy court are reviewed for abuse of discretion. See Sterling v. 1279 St. John's Place LLC (In re Sterling), 737 Fed.Appx. 52, 53 (2d Cir. 2018) (summary order). Because the decision to dismiss a bankruptcy case under § 1112(b) is discretionary, a bankruptcy court's decision to dismiss or convert a party's Chapter 11 case is reviewed for abuse of discretion. Lippman v. Big Six Towers, Inc., No. 20-cv-973, 2021 WL 1784312, at *2 ...
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