Matter of East-West Associates, No. 89 Civ. 1671 (KC).

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Writing for the CourtCONBOY
Citation106 BR 767
PartiesIn the Matter of EAST-WEST ASSOCIATES, a Limited Partnership, Debtor. CARTERET SAVINGS BANK, F.A., Appellant, v. NASTASI-WHITE, INC., et al., Petitioning Creditors, Appellees.
Docket NumberNo. 89 Civ. 1671 (KC).
Decision Date06 November 1989

106 B.R. 767 (1989)

In the Matter of EAST-WEST ASSOCIATES, a Limited Partnership, Debtor.
NASTASI-WHITE, INC., et al., Petitioning Creditors, Appellees.

No. 89 Civ. 1671 (KC).

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

November 6, 1989.

106 BR 768

Wachtell, Lipton, Rosen & Katz, Theodore Gewertz; Carb, Luria, Glassner, Cook & Kufeld, Stephen J. Fallis, Carol Duffy, New York City, for appellant.

Shaw, Licitra, Esernio & Schwartz, P.C., J. Stanley Shaw, Edward P. Frey, Jeffrey M. Zalkin; Albanese, Albanese & Fiore, Joseph A. Fiore, New York City, for appellees.


CONBOY, District Judge:

Appellant Carteret Savings Bank, F.A., ("Carteret") appeals from two orders issued by the United States Bankruptcy Court for the Southern District of New York. The first order, issued on January 25, 1989, granted Carteret relief from the automatic stay imposed pursuant to 11 U.S.C. § 362, conditioned upon the "Petitioning Creditors'" (appellees Nastasi-White, Inc., Circle Industries Division, Argus Construction Corporation, and U.S.A. Contracting Corporation) failure to provide Carteret adequate protection of its interest in the mortgaged premises. The second order, issued on February 15, 1989, after Carteret had appealed the January 25, 1989 order (hereinafter, "Lift Stay Order"), suspended the making of adequate protection payments by the Petitioning Creditors to Carteret, and directed that the payment already made be refunded. For the reasons stated below, we remand to the Bankruptcy Court for further proceedings in accordance with this opinion.


The complex history of this case begins in December, 1984, when Carteret and four other participating banks (collectively, "Carteret") made a $65 million construction

106 BR 769
loan to the debtor, East-West Associates,1 for the construction of a building located at 135 West 52nd Street, New York, New York. HRH Construction Corporation ("HRH") was the general contractor on the project, and Petitioning Creditors were three of HRH's subcontractors. The building contains 45 floors, is nearly completed, but remains wholly unoccupied. As a result of East-West's defaults under the construction loan, including its failure to make interest payments and pay real property taxes, Carteret commenced a foreclosure action in the Supreme Court of the State of New York in early 1987

In March, 1987, the State Court appointed a receiver to maintain the building. In March, 1988, Carteret obtained a decision and order in the State Court action granting it summary judgment. The referee in the State Court Foreclosure Action determined that as of May 2, 1988, Carteret was owed principal and interest of almost $77 million. Although no official valuation of the building has been made, the building has apparently declined in value to approximately $50 to $60 million. To establish that it is undersecured, Carteret itself estimated the value of the building to be $55 to $60 million. Carteret's Proposed Findings of Fact and Conclusions of Law re: § 362(d) Relief and Other Motions at 16.

On May 26, 1988, Petitioning Creditors, who hold mechanics' liens against the property, commenced an involuntary Chapter 11 Bankruptcy proceeding, thereby invoking an automatic stay of the foreclosure proceedings pursuant to Section 362(a) of the Bankruptcy Code. On August 4, 1988, Carteret moved to lift the automatic stay. Carteret thereafter moved to dismiss the case in its entirety, pursuant to 11 U.S.C. § 1112, and the Petitioning Creditors moved for the appointment of a trustee or conversion to a Chapter 7 liquidation, pursuant to the same Code section.

In December, 1988, the Petitioning Creditors filed a proposed Liquidating Plan of Reorganization ("Proposed Plan") and a Funding Agreement, executed between the Petitioning Creditors and a "Joint Venture" consisting of Albanese Development Corporation, Breslin Realty Development Corporation and Gary Calmenson. This Proposed Plan provided for revaluation of Carteret's mortgage at $50 million, with a term of maturity three years from the date of the closing, $3.7 million for property taxes, interest and penalties, and payments to various other classes of creditors, including $2.3 million to the Petitioning Creditors.

After a protracted hearing on Carteret's motions to lift the stay and for dismissal, and the Petitioner's Creditors' motion to appoint a trustee or convert to Chapter 7, the Bankruptcy Court granted Carteret's motion for dismissal, unless Carteret received an adequate protection payment from the Petitioning Creditors in the sum of $871,416 on or before January 27, 1989, and $152,000 per month thereafter. On January 27, 1989, the Joint Venture posted the adequate protection payment, thereby extending the automatic stay and preventing Carteret from proceeding with foreclosure.

On February 9, 1989, after spending $38,000 of the $871,416 on receiver's expenses, Carteret appealed from the Lift Stay Order, on the grounds that the amount of adequate protection was inadequate, and that, in any event, the petition should have been dismissed and the stay lifted for various reasons, including lack of standing, bad faith filing, and lack of an effective reorganization plan. Six days later, the Bankruptcy Court, pursuant to Bankruptcy Rule 8005, issued its order directing the return of the adequate protection payment already posted, and staying all future adequate protection payments. This order (hereinafter, "Rule 8005 Order") ostensibly was intended to preserve the status quo as of Carteret's appeal of the Lift Stay Order.

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Arguing that the Rule 8005 Order should be vacated for lack of subject matter jurisdiction, Carteret immediately moved for an order to show cause in this Court, which was signed by Judge Ward on February 17, 1989. Judge Ward's order essentially stayed the proceedings and preserved the status quo as of the Rule 8005 Order. It provided for the remaining $833,416 to be paid to the Joint Venture and placed in escrow, and for Carteret to post an undertaking in the amount of $100,000 to reimburse the Joint Venture for any damages sustained by it, including the sum of $38,000 already spent by Carteret. On March 3, 1989, the parties entered into a stipulation before Judge Patterson, embodying the decretal paragraphs of Judge Ward's order, and providing for Carteret's appeal of the Rule 8005 Order to be consolidated with its appeal of the Lift Stay Order, on an expedited briefing schedule. The consolidated appeal is now before us.



Carteret appeals from the Lift Stay Order for three main reasons: 1) the petition should have been dismissed because the Petitioning Creditors lack standing and acted in bad faith (see 11 U.S.C. § 1112(b)); 2) Carteret's interest in the collateral is not adequately protected, because the adequate protection order does not provide for interest on accruing real estate taxes, insurance, and certain receiver's expenses (see 11 U.S.C. § 362(d)(1)); and 3) the stay should have been lifted because there is no effective reorganization in prospect, as the Proposed Plan cannot be confirmed (see 11 U.S.C. § 362(d)(2)).

A. Standing and Bad Faith

Carteret argues that the Petitioning Creditors lack standing to file an involuntary petition against the debtor, East-West Associates, because they do not have claims "against the debtor," as required by the Bankruptcy Code. We reject at the outset the Petitioning Creditors' contention that the question of standing is not before the Court because it was not raised below. As the Petitioning Creditors themselves point out in supplemental papers submitted to the Court, standing was addressed in the very early stages of this proceeding in the Bankruptcy Court, on the first day of hearings on the motions to dismiss or lift the stay, and to appoint a trustee or convert to Chapter 7. See Transcript of Hearing,2 August 24, 1988, at 6, 44-46; Letter Memorandum on the Standing Issue, dated October 26, 1989, at 2. Standing was also addressed at the closing arguments. See Transcript of Hearing, January 12, 1989, at 1229.

Section 303(b) of the Code, which governs the filing of involuntary cases, provides in relevant part:

(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title —
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute, or an indenture trustee representing such a holder, if such claims aggregate at least $5,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.

Thus, in order to be eligible, a petitioning creditor must have a claim (as defined in Section 101(4) of the Code) that meets the following requirements:

(a) is against "such person," i.e., the debtor;
(b) is not contingent as to liability;
(c) is not the subject of a bona fide dispute;
(d) is either unsecured or, when added to the claims of other eligible petitioning creditors, aggregates $5,000 in unsecured amount.
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See, 2 Collier on Bankruptcy, ¶ 303.08 (15th ed. 1989). Carteret argues that the Petitioning Creditors do not meet the first and fourth requirements.

Petitioning Creditors hold mechanics' liens, which claims, under New York law, are limited to the debtor's property specified in the notice of lien. New York Lien Law § 24. Since, under the Bankruptcy Code, a claim against the debtor includes a claim against the property of the debtor, 11 U.S.C. § 102(2), it seems that the Petitioning Creditors are eligible under Section 303(b). Carteret argues, however, that because the Petitioning Creditors' waived $5,000 of their secured mechanics' liens to meet the fourth requirement, that they be creditors with claims...

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