Martelli v. Golf

• Decision Date: 24 August 2015
• Docket Number: Case No. 14-8101 (FLW)
• Parties: SALVATORE MARTELLI, Appellant, v. COLTS NECK GOLF AND COUNTRY CLUB, Appellee.
• Court: U.S. District Court — District of New Jersey

SALVATORE MARTELLI, Appellant,
v.
COLTS NECK GOLF AND COUNTRY CLUB, Appellee.

Case No. 14-8101 (FLW)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

August 24, 2015

NOT FOR PUBLICATION

OPINION

WOLFSON , United States District Judge :

This matter comes before the Court on the appeal of Salvatore Martelli ("Appellant" or "Martelli") from the final order, dated December 23, 2014, of the United States Bankruptcy Court for the District of New Jersey denying Appellant's motion for reconsideration for, inter alia, an order denying the appointment of a Chapter 11 trustee or examiner, and denying Appellant's request for a comfort order that the automatic stay does not act to prevent Appellant from filing a case in the New Jersey Superior Court against Dr. Anthony DeGennaro ("DeGennaro"), Carmella DeGennaro and Pegasus Properties, LLC ("Pegasus"), to recover an allegedly fraudulent transfer or, in the alternative, for an order granting relief from the automatic stay to allow Appellant to file the fraudulent transfer suit against the DeGennaros and Pegasus. This Court has jurisdiction to review the decision of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). For the reasons set forth below, the Court affirms in part and reverses in part the decisions of the Bankruptcy Court. Specifically, the denial of Appellant's motion for relief from the automatic stay is reversed; the remaining decisions are affirmed.

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I. Background

The background of this dispute has been set forth in detail before the Bankruptcy Court. Accordingly, the Court sets forth only those facts that are relevant to this appeal.¹

In May 1998, Pegasus, which is wholly owned by Anthony and Carmella DeGennaro, acquired land in Colts Neck, New Jersey, from Martelli for the purpose of building a golf course. As part of the transaction, Martelli and DeGennaro formed Colts Neck Golf and Country Club, Inc. ("Debtor" or "CNGCC"), with Martelli as a 10 percent shareholder and DeGennaro as a 90 percent shareholder. In May 2000, CNGCC entered into a lease with Pegasus to occupy the golf course and clubhouse at a monthly rent of $75,000. The rent was determined based upon "a return on capital without regard to net earnings." Tr. of Decision by the Hon. Patricia Del Bueno Cleary, April 16, 2014 (hereinafter "Tr. of Judge Cleary Decision"), 13. Throughout the duration of the lease, CNGCC was never able to pay the full monthly rent to Pegasus, which accepted partial payments and deferred the unpaid rent. Appellee Br. at 2.

In November 2010, Martelli filed suit against CNGCC and DeGennaro in the Superior Court of New Jersey, Monmouth County, Chancery Division. In his suit, Martelli alleged breach of contract, fraud, unjust enrichment, conversion, and he sought the appointment of an independent accountant. Tr. of Judge Cleary Decision, 2-3. Following a 24-day bench trial before Judge Cleary, the court entered a judgment on April 24, 2014 in favor of Martelli and against CNGCC for $341,540 for past due earnings and ordered a buyout of $385,000 for Martelli's ten percent shareholder interest in CNGCC. Superior Ct. Order, April 24, 2014.

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On the breach of contract claim, the state court found that the Memorandum of Understanding between the parties provided that Martelli was entitled to ten percent of the "net earnings" attributable to revenue derived from "green fees" collected by the golf course; the court found that the amount of net earnings due to Martelli was $341,540. Tr. of Judge Cleary Decision, 6, 11.

Martelli had also asserted that he was an oppressed shareholder, pursuant to N.J.S.A. 14A:12-7(1)(c). Judge Cleary found a "substantial element of unfairness in Anthony DeGennaro's dealings with Salvatore Martelli." Tr. of Judge Cleary Decision, 12. The state court found that DeGennaro operated CNGCC without considering its fiduciary duty to stockholders, constituting unfairness under N.J.S.A. 14A:12-7(1)(c). Tr. of Judge Cleary Decision, 13-14. Judge Cleary determined that Degennaro "fixed the rent, paid by [CNGCC] to Pegasus Properties, which is wholly [owned] by Dr. and Mrs. DeGennaro, not at a fair market rate, but at a rate designed to give Anthony DeGennaro a return on capital without regard to net earnings." Tr. of Judge Cleary Decision, 13. Judge Cleary accepted the testimony of Martelli's expert on the issue of fair market rent, but did not elaborate further on the issue. Judge Cleary also noted that after Pegasus Properties received a settlement of $300,000—some of which would have been allocable to CNGCC—DeGennaro refused to allow Martelli to review the corporate records or provide information about the corporation's financial institution. Tr. of Judge Cleary Decision, 17. Judge Cleary held that this and other conduct by DeGennaro "frustrated the legitimate expectations of [Martelli] and his conduct was contrary to the understanding between the parties," and therefore she found that Martelli was an oppressed shareholder. Tr. of Judge Cleary Decision, 14.

The court thus required a buy-out of Martelli's ten percent stock interest in CNGCC, and set the buy-out amount at $385,000. Tr. of Judge Cleary Decision, 17. However, the court found that, while DeGennaro's actions were unfair, they "did not rise to the level of fraud or illegality."

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Tr. of Judge Cleary Decision, 18. The court dismissed the counts alleging fraud, unjust enrichment, and conversion against CNGCC, as well as all counts against the individual, DeGennaro. Judge Cleary Final J., April 24, 2014.

Between May 27, 2014 and June 3, 2014, Martelli's and CNGCC's counsel communicated by e-mail and telephone with respect to the judgment pending appeal. However, the parties could not come to an agreement on the terms of a deposit and ceased communication on June 3, 2014.² On June 9, 2014, DeGennaro, as the majority shareholder of CNGCC, filed an appeal of the trial court's decision with the New Jersey Superior Court, Appellate Division.

On or about June 11, 2014, CNGCC filed a voluntary petition seeking the protection of Chapter 11 of the Bankruptcy Code. Since the filing, CNGCC has operated as debtor in possession and retained special counsel. CNGCC has not yet submitted a reorganization or liquidation plan. On July 25, 2014, Martelli moved to dismiss the Chapter 11 case, alleging that CNGCC filed the Chapter 11 bankruptcy in bad faith to avoid posting a supersedeas bond, and CNGCC was highly unlikely to file a confirmable plan. The Bankruptcy Court denied the motion to dismiss by order dated September 17, 2014.

On October 14, 2014, Martelli filed a motion to (1) appoint a trustee under 11 U.S.C. 1104(a)(1)-(2); (2) appoint an examiner under 11 U.S.C. 1104(c); (3) order the United States Trustee to file a motion requesting the appointment of a trustee pursuant to 11 U.S.C. 1104(e); and (4) extend the Chapter 11 proceeding to include Pegasus as a debtor and then substantively

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consolidate the CNGCC and Pegasus cases by authority of 11 U.S.C. 105 and 11 U.S.C. 1123(a)(5)(c). Martelli argued that the facts set out in the record and a supporting certification from Martelli's state court counsel, Shannon Fury Cutis, Esq., evidenced sufficient cause—specifically "fraud and dishonesty in the management of the affairs" of CNGCC—to appoint an independent trustee as specified in Section 1104(a)(1). As evidence of this mismanagement, Martelli cited DeGennaro's rent "in excess of the fair market rental value, as a way of diverting funds away from [CNGCC]," which CNGCC was allegedly still paying to Pegasus.³ Martelli further claimed that none of Pegasus' $300,000 settlement in 2006, which included damages for alleged lost profits of CNGCC, was paid to CNGCC. Moreover, Martelli noted Judge Cleary's findings that DeGennaro failed to provide access to CNGCC's records, and also highlighted several alleged discrepancies between DeGennaro's completed Amended Schedule B and CNGCC's income tax returns.⁴

On November 18, 2014, the Bankruptcy Court held a hearing on the motion and issued an oral decision denying Martelli's motion. See Bankruptcy Decision Tr., November 18, 2014 (hereinafter "Bankruptcy Transcript I"), 18:5-6. The Bankruptcy Court "[did not] see the point of appointing a trustee" because, as the largest unsecured creditor, Martelli had "a lot of control in this case" and would be protected. Id., 16:11-24. The court further stated that between Martelli, the United States Trustee, and the court, "we can certainly oversee the kind of decisions that the

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debtor is going to make with regard to the landlord and his ability to confirm." Id., 16:18-20. Moreover, the Bankruptcy Court did not agree that Judge Cleary found dishonesty and did not believe there was enough in the state court decision to support the appointment of a trustee. See Id., 17:17-22. The Bankruptcy Court therefore denied the motion on all issues: to appoint a trustee or an examiner, to order the United States Trustee to move for the appointment of a trustee, and to include Pegasus as a debtor in the present case.

Martelli then filed a motion on November 24, 2014 for (1) reconsideration of the denial of Martelli's motion to appoint a Chapter 11 trustee, (2) a comfort order that the automatic...