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IN RE MALLARD ASSOCS.

January 25, 1979

In the Matter of MALLARD ASSOCIATES, a Limited Partnership


The opinion of the court was delivered by: CARTER

This is an appeal from Bankruptcy Judge Joel Lewittes's denial of a secured creditor's motion to dismiss a debtor's Chapter XII petition for an arrangement. Judge Lewittes's oral order was based on a holding that good faith in filing a petition is not a prerequisite to a debtor's proceeding under Chapter XII of the Bankruptcy Act.

The facts pertinent to the appeal are these: *fn1" In October, 1977, a secured creditor, Greenwich Savings Bank, commenced a proceeding in New York State court to foreclose its mortgage upon property located at 45 West 45th Street. Since Greenwich sought to extinguish existing leaseholds, the tenants were notified of the action and named as defendants. Two of the principal tenants, a textile company owned by Benjamin Solomon and a motion picture sound studio owned by Robert J. Hopkins, began negotiating with the bank to preserve their leaseholds. By April, 1978, it became clear that no agreement would be reached. Thereafter, Greenwich contracted to sell the property to SJK Realty Corp. at such time as the bank may purchase it at a foreclosure sale.

 On September 5, 1978, Solomon and Hopkins purchased 45 West 45th Street from the owners for $ 10,000, *fn2" taking title in the name of 4545 Realty Corp., a nominee corporation owned by them. On September 13, 1978, Greenwich moved in the pending state proceeding for summary judgment of foreclosure. Solomon and Hopkins then formed a limited partnership, Mallard Associates, whose general partner is 4545 Realty Corp. and whose limited partners are Solomon and Hopkins. Further discussions about Solomon's and Hopkins's businesses' remaining in the building, now between Mallard Associates and the bank, again led nowhere. On October 25, 1978, Mallard filed its petition for an arrangement under Chapter XII of the Bankruptcy Act. Greenwich moved to dismiss the petition. Judge Lewittes's denial of the motion on the ground that good faith in filing a petition is not a condition for Chapter XII proceedings prompted the instant appeal.

 Whether good faith is required when initially filing a Chapter XII petition is a narrower question than first appears. The parties agree that Chapter XII requires that the debtor later present its Proposal in good faith. 11 U.S.C. § 872(4). They also agree that Chapter XII, unlike Chapter X, *fn3" does not require that the judge, Sua sponte, review the bona fides of the petition before allowing the action to proceed. The bank asserts, however, and the debtor denies that Upon motion of a secured creditor, prior to the submission of a plan of arrangement, a debtor in a Chapter XII proceeding must show that his petition was filed in good faith or suffer dismissal of the action.

 Support for the proposition that the debtor's good faith is not at issue until after the submission of a plan comes from the language of Chapter XII and the interpretation of that language in Sumida v. Yumen, 409 F.2d 654 (9th Cir. 1969). Where Chapter X has an explicit requirement that the judge initially determine the bona fides of a petition, Chapter XII is silent. The omission gains significance from the following provision, which introduces each separate chapter of the current Bankruptcy Act:

 
The provisions of this chapter shall apply exclusively to proceedings under this chapter.

 11 U.S.C. §§ 501, 701, 801. Thus the debtor argues that the statutory scheme of Chapter XII simply does not contemplate dismissal of a petition for lack of good faith until the judge is required by 11 U.S.C. § 872(4) to review the plan of arrangement.

 On the strength of the statutory language, the Ninth Circuit in Sumida v. Yumen, 409 F.2d 654 (9th Cir. 1969), reversed a district court's dismissal of a Chapter XII petition filed in bad faith because the dismissal came too early in the process. The Court of Appeals remanded for further proceedings, saying:

 
"Good faith" is considered by a court in a Chapter XII proceeding only after the plan has been approved by creditors and confirmation is requested by the debtor.

 409 F.2d at 659.

 The First Circuit's opinion in In re Colonial Realty Investment Co., 516 F.2d 154 (1st Cir. 1975), contradicts the strict holding of Sumida. The court in Colonial Realty held that a preliminary determination that the Chapter XII proceeding is likely to benefit, or at least not harm, the secured creditor must precede an order charging to the property the debtor's costs of maintaining the action. After mandating this preliminary hearing, the court continued:

 
Within a reasonable time, however, upon motion of a secured creditor, the court should conduct hearings adequate to determine whether the petition of the debtor has been filed in good faith, and whether there is a sufficient possibility of a successful arrangement to justify whatever risk to the collateral of the secured parties may be entailed.

 516 F.2d at 160-61. By asking that the court consider whether there is a sufficient Possibility of a successful arrangement, the court clearly showed that it contemplated a hearing on the debtor's bona fides Before the plan was actually presented, approved, and submitted for confirmation.

 Bankruptcy Judges Norton and Cyr have attempted to confine the consequences of the holding in Colonial Realty. In In the Matter of Samoset Associates, 3 Bankr. Ct. Dec. (CRR) 393 (D.Maine 1977), Judge Cyr concluded that the preliminary hearings mandated by Colonial Realty were intended to provide a ...


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