Matter of Verrazzano Towers, Inc.

• Decision Date: 31 March 1981
• Docket Number: Bankruptcy No. 180-02375-16.
• Citation: 10 BR 387
• Parties: In the Matter of VERRAZZANO TOWERS, INC., a New York Corporation, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

10 B.R. 387 (1981)

In the Matter of VERRAZZANO TOWERS, INC., a New York Corporation, Debtor.

Bankruptcy No. 180-02375-16.

United States Bankruptcy Court, E.D. New York.

March 31, 1981.

COPYRIGHT MATERIAL OMITTED

Jessel Rothman, P.C., Mineola, N.Y., for Flushing Savings Bank, for the motion; Jessel Rothman, Mineola, N.Y., of counsel.

Franklin Rand Weiss, P.C., Corona, N.Y., for debtor, in opposition; Franklin Rand Weiss, Corona, N.Y., and Leon Rock, Corona, N.Y., of counsel.

MANUEL J. PRICE, Bankruptcy Judge.

This is a motion, brought by way of order to show cause by the Flushing Savings Bank ("FLUSHING") on May 13, 1980, to dismiss the petition for relief under Chapter 11 of the Bankruptcy Reform Act of 1978 ("THE CODE"), 11 U.S.C. Section 101 et seq. filed by Verrazzano Towers, Inc. ("THE DEBTOR") on May 6, 1980, on the ground that "the filing of the petition was not authorized by the corporation. . . ." (Order to Show Cause signed on May 14, 1980). The sole asset of the debtor is a large, mostly undeveloped parcel of real estate located at 9975 Shore Road, Brooklyn, New York ("THE PROPERTY").

James C. Gherardi ("GHERARDI"), the individual who executed the Chapter 11 petition as the alleged president of the debtor, submitted an affidavit dated May 16, 1980, and counsel for the debtor submitted a memorandum of law also dated May 16, 1980 in opposition to the motion. Both documents argue, inter alia, that Flushing, as a secured creditor, has no "standing to raise the issue as to the authorization of the filing of the petition by the corporation. . . ." ("MEMORANDUM OF LAW SUBMITTED ON BEHALF OF THE DEBTOR, VERRAZZANO TOWERS, INC., IN OPPOSITION TO THE MOTION BY THE FLUSHING SAVINGS BANK, A SECURED CREDITOR OF THE BANKRUPT CORPORATION, TO VACATE THE VOLUNTARY PETITION IN BANKRUPTCY," dated May 16, 1980.) After a brief hearing on May 19, 1980 and submission of a memorandum of law by Flushing, for the motion, and a reply memorandum by the debtor, on May 23, 1980, I heard oral argument on the issue of Flushing's standing to question the propriety of the filing of the petition.

The debtor, at page 3 of its memorandum of law dated May 16, 1980, argued, inter alia, that Flushing's motion:

"specifically states that the petition should be vacated `on the grounds that the filing of the petition was not authorized by the corporation.\' There is no claim being made by the Bank as to the lack of jurisdiction of the Bankruptcy Court or that a fraud has been perpetrated on the Bankruptcy Court."

It cites cases which question the standing of creditors to challenge the filing of a petition on the ground that the board of directors lacked authority to file a voluntary petition, or to consent to the filing of an involuntary petition. See e.g. In re Guanacevi Tunnel Co., 201 F. 316, 318 (2d Cir. 1912); In re E.T. Russell Co., 291 F. 809, 818 (D.Mass.1923); In re United Grocery Co., 239 F. 1016, 1018 (S.D.Fla.1917).

Flushing, in its memorandum of law dated May 21, 1980 and at the hearing of the motion (Trial Transcript "TR.", May 23, 1980, p. 6, l. 8 — p. 8, l. 4), argued that the motion went beyond the mere allegation that the board of directors of the debtor did not authorize the filing of the petition; that it raised the issues of fraud and lack of jurisdiction by alleging, inter alia, that Gherardi was not the president of the debtor, that he secretly transferred the property from an entity known as RGR Associates ("RGR") to the debtor in order to file the petition, and that he secretly filed the petition without consulting or informing the other directors and stockholders of the debtor. (Affidavit of Jessel Rothman, Esq. dated May 13, 1980, in support of Flushing's Order to Show Cause). In support of this position, Flushing's memorandum of law cites such cases as Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U.S. 434, 457-58, 60 S.Ct. 1044, 1054, 84 L.Ed. 1293 (1940); In re Ettinger, 76 F.2d 741, 742 (2d Cir. 1935); Cornwall Press, Inc. v. Ray Long & Richard R. Smith, Inc., 75 F.2d 276, 277 (2d Cir. 1935); Chicago Bank of Commerce v. Carter, 61 F.2d 986, 989 (8th Cir. 1932).

At the May 23, 1980 hearing, I rendered the following decision on the record:

"I am going to examine into the execution of the petition in Chapter XI (sic), since it contends `contends\' should be `contains\' a secretary (sic) or an officer\'s certificate signed by Mr. Gherardi, which states as follows, I shall reprint the original certificate rather than its transcription contained in the record.

`MINUTES of Special Meeting of the directors of VERRAZZANO TOWERS, INC. held on the 5th day of May, 1980 at 10:00 in the forenoon of that day at the offices of the Corporation.

The Chairman announced that a quorum was present and that the meeting had been called for the purpose of considering the filing of a petition in Chapter XI of the Bankruptcy Act. After due discussion and on motion duly made and duly adopted in accordance with the By-Laws of the Corporation, it was

RESOLVED, that the Corporation file a Petition under Chapter XI of the Bankruptcy Act and that the officers and directors of the Corporation and their designated agents be authorized to execute all documents and take all steps to file and effectuate said petition in Chapter XI of the Bankruptcy Act and take all other steps necessary and desirable to carry out the intent and purpose of this resolution.

There being no further business, the meeting was duly adjourned.

Dated: May 5, 1980

(signed) James C. Gherardi President-Secretary'"

"It is the contention here that Mr. Gherardi was neither the president nor the secretary, that no meeting took place, that there was no authority for the filing of the petition. . . .

* * * * * *

"What I am gong to do is I am going to take testimony on the execution of the petition on the ground that what has not the word `not\' should be deleted been raised is a jurisdictional attack on the . . . authority of that particular individual to file the petition, on the ground that he had no standing whatever or no authority whatever to file." bracketed material added

(Tr. May 23, 1980, p. 9, l. 12 — p. 10, l. 16; p. 12, l. 20 — p. 13, l. 4.)

I now take the opportunity to state my adherence to that decision, and to amplify it. To reiterate, the debtor's argument that Flushing, as a creditor, has no standing to contest the filing of its Chapter 11 petition, seeks to limit Flushing's contention to the narrow ground that the petition was not authorized by the corporation. It insists that no claim is raised pertaining to fraud, or lack of jurisdiction in this court. Let us examine this contention.

In the case In re Guanacevi Tunnel Co., 201 F. 316 (2d Cir. 1912), the only case cited by the debtor decided in this circuit, a judgment creditor of a voluntary bankrupt corporation sought to vacate the adjudication in bankruptcy on a number of grounds. It was undisputed that an individual named Meloy, alleged in the petition to be a director of and the president of the bankrupt, filed the petition with the authority of the board of directors. With respect to the judgment creditor's contentions that the corporation was solvent and that, under Arizona law, only a majority of the stockholders can dissolve a corporation, the court stated, at page 318: "We will examine this contention, although we think it is one which a creditor has no standing to make in the case of a voluntary petition." With regard to the judgment creditor's allegation that Meloy was not the president or a director of the bankrupt at the time the board authorized him to file the petition, the court stated, at page 319: "We will consider this, assuming that a creditor has standing to make the objection." With regard to the judgment creditor's contention that the Southern District of New York was without jurisdiction to entertain the petition because the bankrupt had not maintained its principal place of business in New York for the greater part of six months before the filing of the petition, the court stated, at page 319: "This objection, being jurisdictional, may be made by a creditor."

It is clear from the above that whether or not a creditor has standing to contest the filing of a voluntary petition depends upon the nature of his allegations. Those, for example, centering on the board of directors' power or authority, as provided in state law or in the corporation's by-laws, may not be raised by a creditor. Those questioning the jurisdiction of the court may be raised by a creditor. Other cases, which I shall discuss below, reveal that allegations of fraud also fit into this category. With respect to the allegations that Meloy was not the president or a director, the Guanacevi court is not clear on the question of the creditor's standing, choosing instead to assume such standing and to proceed to inquire into the substance of the allegation. It must be borne in mind, however, that, in Guanacevi, unlike the instant case, there was no question but that the board met and authorized the filing of the petition. The court nevertheless, made inquiry into the substance of all of the judgment creditor's allegations, even those which the court held him to be without standing to raise. This indicates to me that the courts in this circuit should generally be loath to dismiss challenges to voluntary petitions by creditors without making any inquiry into their substance.

On the other hand, however, allegations which question the jurisdiction of the court, or fraud upon it, may be raised by a creditor. In the case of In re Ettinger, 76 F.2d 741 (2d Cir. 1935), a creditor sought vacation of a voluntary petition on the ground that the bankrupt in his petition, "falsely stated therein that he had a principal place of business within the Southern District of New YOrk." (Id. at 742) (emphasis mine). The court, in granting the creditor's motion to vacate the adjudication,...