Matter of Imperial Heights Apartments, Ltd., Bankruptcy No. 3-80-04065.
| Citation | 18 BR 858 |
| Decision Date | 19 March 1982 |
| Docket Number | Bankruptcy No. 3-80-04065. |
| Parties | In the Matter of IMPERIAL HEIGHTS APARTMENTS, LTD., Debtor. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio |
Robert N. Farquhar, Dayton, Ohio, for Ohio Suburban Water Co.
Robert W. Werth, Columbus, Ohio, for AFI.
Thomas R. Noland, Dayton, Ohio, for W&F Inv. Co.
Horace W. Baggott, Jr., Dayton, Ohio, for Frederic Gagel.
Herbert Ernst, Jr., Dayton, Ohio, for AFI.
Jack Pickrel, Dayton, Ohio, for Creditors' Committee.
DECISION AND ORDER
This matter is before the Court upon Motion to Dismiss filed on 19 August 1981 by American Fidelity Investments, hereinafter AFI. The Court held a hearing on 16 September 1981 to consider the Motion. The following decision is based upon the evidence adduced at the hearing, the parties' legal memoranda, and the record.
Debtor was brought before this Court by an Involuntary Petition filed on 24 December 1980 by Imperial Management, Inc. under the signature of Frederic E. Gagel. Debtor's Schedules list two secured creditors, Metropolitan Life Insurance Company in the amount of $1,980,356.00 and AFI with a junior mortgage of $350,000.00. The Schedules also list seven unsecured creditors, as follows:
Debtor filed a consent to the bankruptcy proceedings on 27 April 1981, under the signature of "Frederic E. Gagel, Managing General Partner of GWF, Investment, Ltd."
Debtor was created as part of a complex partnership arrangement, diagrammed, in relevant part, as follows:
Debtor—Imperial Heights Apartments, Ltd
owned by three parties
GWF Investment, Ltd., a 99% general Mr. Gagel, a .5% W&F, Investment Co., (owned originally
partner owned by two general limited partner by two parties, but presently
partners: owned entirely by H. Garrett
Frey, by transfer of the other
Mr. Gagel W&F Investment Co., owned originally party's interest on 30 January 1981)
by two parties, but presently a .5% limited partner
owned entirely by H. Garrett Frey, by
transfer of the other party's interest
on 30 January 1981
The linchpin of these arrangements is GWF Investment, Ltd. GWF Investment, Ltd. possesses a partnership or creditor interest in seven partnerships (including Debtor) each with a principal asset of an apartment complex, four of which, along with GWF Investment, Ltd., are involved in proceedings in this Court.
AFI contends that the instant proceeding is a sham, bad faith filing. AFI contends that Debtor lacks legal existence and capacity, possesses no assets, and has no creditors. AFI contends that Debtor is therefore, by definition, unable to effectuate a Plan under 11 U.S.C. Chapter 11, and possesses no likelihood of rehabilitation as contemplated in the Bankruptcy Code.
The key controversy focuses on ownership of the apartment complex which Debtor alleges is its single asset. The interested parties in this matter first became involved in the apartment complex when Mr. Gagel purchased the property on 7 April 1972 for $1,662,901.62. Debtor alleges that at the time of Mr. Gagel's purchase the property was worth approximately two million dollars, and that Mr. Gagel paid a "bargain price" for the property. AFI, the Movant herein, became involved in the property on 16 October 1972, when Mr. Gagel and AFI entered into arrangements which, in form, involved a sale and leaseback of the property with an option to repurchase. This was accomplished by two instruments, both signed and dated 16 October 1972. First, Mr. Gagel and his wife signed a warranty deed, whereby Mr. Gagel "granted, bargained, sold and conveyed" the property to AFI subject to the secured interest of mortgagee-assignee Metropolitan Life Insurance Company in the original amount of $1,350,000.00. Mr. Gagel's transfer of the deed was in exchange for $350,000.00 which was "given" to Mr. Gagel from AFI through transactions not made a part of the record. Second, Mr. Gagel and AFI entered into an Indenture of Lease whereby Mr. Gagel leased the property back from AFI. The terms of the lease included graduated monthly rent payments equal to the monthly mortgage payment to the Metropolitan Insurance Company, plus an amount equal to interest, set at an increasing rate starting at 11%, computed on $350,000.00 of principal.
Debtor contends that the "sale-leaseback with option to repurchase" arrangement was, in fact, a disguised security interest. Debtor argues that the $350,000.00 "purchase price" was actually a loan secured by transfer of the deed to the property. Debtor argues that Mr. Gagel and AFI never intended an outright transfer of the property, but instead intended that title pass only for the period during which AFI's "loan" of $350,000.00 would otherwise be unsecured.
Debtor contends that the terms of the Indenture of Lease are indicative of Mr. Gagel's and AFI's actual intent. Specifically, Debtor emphasizes that, aside from the implicit fact of Mr. Gagel's continued possession, Mr. Gagel was responsible for all taxes, assessments, license fees, and utilities. Mr. Gagel was also responsible for repairs, maintenance, and improvements. In addition, the Indenture of Lease contained an "Option for Lessee (Mr. Gagel) to Repurchase" which, in essence, permitted Mr. Gagel to "repurchase" by reassumption of the mortgage held by the Metropolitan Life Insurance Company and repayment of the $350,000.00 "loan." Debtor contends that the "purchase price" set in the Indenture of Lease is nominal in relation to the value of the property, and that both Mr. Gagel and AFI "believed" that Mr. Gagel would "repurchase" the property as soon as Mr. Gagel had the financial capacity.
Debtor also contends that additional facts of record attest to Mr. Gagel's and AFI intention that the sale-leaseback arrangement was, in fact, the creation of a disguised mortgage. On the same day that the warranty deed and Indenture of Lease were entered into, AFI and Mr. Gagel executed a Guarantee Agreement, not made a part of the record, whereby Mr. Gagel affirmed his absolute and personal liability on the mortgage held by Metropolitan Life Insurance Company. The agreement provided that Mr. Gagel's liability could be accelerated in the event of default. Debtor argues that outright sales of property do not ordinarily include guarantees of this nature, and that the right of acceleration indicated that the parties viewed Mr. Gagel as primarily liable on the mortgage, a liability typically assumed by an owner of property. Debtor also argues that under 26 U.S.C. § 856(a)(4) of the Internal Revenue Code, (which has since been amended), AFI, operating as a real estate investment trust, was "(forbidden) from holding properties for sale when the seller intended to repay the loan as soon as it became economically feasible," and that AFI's claim of ownership is counter to intent as inferred from the tax law as it existed when the sale-leaseback arrangement was entered into.
On the basis of the foregoing, Debtor contends that, despite the transfer of title to AFI in 1972, Mr. Gagel retained equitable title to the property. Debtor contends that as a court of equity, the Bankruptcy Court should declare AFI's deed to be a mortgage on the property, and that equitable title, having been retained by Mr. Gagel, should be found to be held by subsequent transferees of Mr. Gagel's interest.
Debtor then contends that Mr. Gagel's interest was made transferable by the vesting of the equitable title in the partnership of Gagel, Gagel and Anderson; in Debtor's own words, "Pursuant to (the) Guarantee Agreement, Imperial Heights Apartments became the property of a partnership known as Gagel, Gagel and Anderson." Debtor contends that equitable title is presently vested in Debtor by "sale" of the property by Gagel, Gagel and Anderson to GWF Investment, Ltd. on 9 March 1977, and successive "transfer" of the property by GWF Investment, Ltd. to Debtor. The Court notes that documentation of these transactions is not established by the record.
AFI disputes Debtor's allegation of ownership. AFI contends that Debtor has not documented the alleged transfer of the alleged equitable title by Mr. Gagel, or successive transfers of the alleged equitable title, in particular the transfer to Debtor. AFI contends, therefore, that resolution of the question of equitable title is not necessary for disposition of the case at bar. In the alternative, AFI contends that the sale-leaseback arrangement was bona fide, that AFI has owned the property outright since 16 October 1972, and that alleged transfer of Mr. Gagel's lease interest without written consent is specifically prohibited by terms of the Indenture of Lease, and that such consent was never given. Furthermore, AFI indicates that Mr. Gagel ratified the nontransferability of his leasehold interest by his execution on 27 August 1980 of a Cancellation and Termination of Lease, filed in the Montgomery County, Ohio Recorder's Office on 16 December 1980, whereby Mr. Gagel "surrender(ed) all rights in and to the Leased Premises and declare(d) that Lessor (AFI) shall be entitled to...
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