Matter of Nancant, Inc., Bankruptcy No. 80-00241-G.
| Decision Date | 23 February 1981 |
| Docket Number | Bankruptcy No. 80-00241-G. |
| Citation | 8 BR 1005 |
| Parties | In the Matter of NANCANT, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Jeffrey Kosberg, Boston, Mass., for Nancant, Inc.
Philip J. Hendel, Springfield, Mass., for Town of Monson.
MEMORANDUM AND ORDER ON MOTION TO DISMISS CHAPTER 11 PROCEEDINGS.
The Town of Monson ("Monson") is a tax creditor of Nancant, Inc. ("Debtor") in the amount of $180,000, which claim is listed in the debtor's schedules as unliquidated, disputed and contingent. Monson has filed a Motion To Dismiss these Chapter 11 proceedings pursuant to Section 1112(b) of the new Bankruptcy Code, in effect since October 1, 1979. That section provides, inter alia, that the Bankruptcy Court may, on request of a party in interest, and after notice and a hearing, dismiss a case under Chapter 11 for cause, including nine separate criteria which, it is clear from the legislative history and court decisions, is not an exclusive list.
Briefly, the facts are that Nancy Cantor, as Trustee of the Cantor Monson Trust, filed for Chapter XII relief under the old Bankruptcy Act. That proceeding was dismissed because such a trust was not deemed a "person" entitled to relief under Chapter XII. After appeal to the District Court and the Circuit Court of Appeals, my original decision was affirmed. Thus, on February 1, 1980 I reaffirmed my original order of dismissal of the Chapter XII proceeding.
On February 12, 1980, the sole asset of the Cantor Monson Trust, a parcel of property known as the Wilbraham-Monson Academy, was transferred to a newly formed corporation, Nancant, Inc. The subsequent day, February 13, 1980, Nancant, Inc. filed for Chapter 11 relief under the new Bankruptcy Code. It does not appear that the debtor has ever operated a business at this site. Further, the asset, which was the sole asset of the Cantor Monson Trust, is also the sole asset of the debtor, and is listed in the schedules as having a value of $300,000.
Monson has filed the within Motion arguing that, first, the transfer on the eve of bankruptcy of the trust property to the corporation was solely for the purpose of circumventing my earlier fundings denying Chapter XII relief and that, second, such a conversion from Chapter XII to Chapter 11 under the new Code constitutes a subversion of the intention of the Court in the original instance and is therefore not filed in good faith. The debtor has countered by averment that the organization of Nancant, Inc. and the transfer of the Monson Academy property was effected because of a realization that any rehabilitation of the property would require the involvement of investors who would require equity participation with limited liability, something which was impossible under the trust arrangement under which title to the property was originally held. The debtor has only one general unsecured creditor in the nominal amount of $200.00. The real estate is subject to a first and second mortgage totalling $345,814.88, and there is the $180,000 liability to Monson. Thus, this Chapter 11 involves only four creditors, only one of which is scheduled as unsecured. However, the amount of secured indebtedness and tax priorities greatly exceeds the value of the real estate in question. The debtor asserts that it has reached preliminary agreements with all creditors except Monson, and says further, that the first mortgagee has agreed to advance (invest) funds to refurbish the property to some business use other than as a private school. Finally, the debtor claims that the taxes assessed by Monson are excessive and seeks a reduction of that amount pursuant to Section 505 of the Bankruptcy Code. According to the debtor, without reduction of the allegedly excessive tax burden, there will be no new funds forthcoming for reorganization purposes.
Section 1112(b) of the new Bankruptcy Code provides a list of nine reasons sufficient for the court to find cause to dismiss a Chapter 11 proceeding. It is clear from the legislative history House Rep. No. 95-595, 95th Cong., 1st Sess. (1977) 405, 406 Senate Rep. No. 95-989, 95th Cong., 2d Sess. (1978) 117, U.S.Code Cong. & Admin. News 1978, 5787, 5903, 6362 that, Thus, what is "cause" for dismissal is subject to judicial discretion under the circumstances of each case.
The nexus of Monson's Motion is that a) the transfer on the eve of bankruptcy, from an otherwise unqualified debtor to one which is qualified, was merely an attempt via a change in form to circumvent the court's decision that it lacked jurisdiction, and b) that, if jurisdiction did not lie in the first instance, it should not lie upon reapplication under the new Code. More simply, Monson is arguing that this petition was not filed in "good faith". That term is not found in the new Bankruptcy Code, but was extensively applied by the bankruptcy court in Chapter X and XII cases under the old Act. However, the "good faith" requirement has been carried over to cases under the new Code in order to protect the jurisdictional integrity of the court. See, In re Northwest Recreational Activities, Inc., 4 B.R. 36, 6 B.C.D. 164 (Bkrtcy.N.D.Ga. 1980), In re Joseph Mass, 2 B.C.D. 973 (D.Mass.1977); Shapiro v. Wilgus, 287 U.S. 348, 53 S.Ct. 142, 77 L.Ed. 355 (1932). This is so because the bankruptcy court has always had the inherent power to effect dismissal where a fraud or improper action of the debtor so adversely affected creditors by, for example, altering the rights of the parties respecting the property in the estate, so that the jurisdictional integrity of the court was in issue. In re Northwest Recreational Activities, Inc., supra at 38. A number of decisions support the view that "good faith" is still a requirement for filing in Chapter 11 under the Code. In re Northwest Recreational Activities, Inc., supra, In re G-2 Realty Trust, 6 B.R. 549, 6 B.C.D. 1072 (D.Mass.1980), In re Dutch Flat Investment Co., 6 B.R. 470, 6 B.C.D. 1134 (Bkrtcy. N.D.Cal.1980).
Essentially, the court is concerned that the "schemes of improper petitioners seeking to circumvent jurisdictional restrictions" and those with "demonstrably frivolous purposes absent any economic reality" be dismissed so as to protect its jurisdictional integrity. In re Northwest Recreational Activities, Inc., supra at 39.
In re Francfair, Inc., 13 F.Supp. 513 (S.D.N.Y.1935) is an example of a case where a trust transferred property solely for the purpose of filing under former Section 77B of the Bankruptcy Act. Since the trust itself would not have qualified to file under § 77B, the court found a lack of good faith.
In cases of this type, where dismissal has been granted, the sole purpose of the transfer to another entity was to confer jurisdiction of the court upon the new entity and thereby allow reorganization of property which otherwise could not be reorganized under the statute. It is important to remember that Chapter 11 is titled "business reorganization", and not "property" reorganization. The test of Shapiro v. Wilgus, supra, and all those cases which follow from its reasoning appears to be not merely whether the transfer and change of entity occurred on the eve of bankruptcy, but whether in so doing, the debtor is merely seeking to alter or erode the rights of creditors, either by forestalling them under the guise of reorganization or by availing itself of a type of relief which it otherwise would not be entitled to absent the creation of a new entity. Such was the case in Mongiello Bros. Coal Corp. v. Houghtaling Properties, Inc., 309 F.2d 925 (5th Cir. 1962). There, individuals conveyed property, along with the property of another corporation which they owned, into another new corporation created solely for the purpose of utilizing Chapter X under the old Act, and thereby to avoid, among other things, the foreclosure by a secured party. The court there held that the petition was not filed in good faith since the individuals who owned the property prior to the transfer to the new entity would not have qualified for Chapter X relief. In Shapiro v. Wilgus, supra, the leading case in this area, the Supreme Court dismissed a receivership proceeding saying that had the aim of filing the receivership been to administer the assets of a corporation legitimately conceived for a normal business purpose and functioning or designed to function according to normal business methods, it would not have dismissed the proceeding. Shapiro v. Wilgus, supra at 355, 53 S.Ct. at 144.
The court in In re Dutch Flat Investment Co., 6 B.R. 470, 6 B.C.D. 1134 (Bkrtcy.N.D. Cal.1980) found bad faith where the corporation was organized immediately prior to the filing of the Chapter 11 petition, for the sole purpose of commencing the proceedings so as to forestall the exercise by the secured creditor of its rights, the debtor's had little or no assets, no ongoing business, employees, or unsecured creditors other than a nominal amount owing to one unsecured creditor, and finally, there was no reasonable prospect for reorganization. The court reasoned that it was in the best interest of creditors, particularly where there were no...
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