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IN RE MALLARD ASSOCS.

August 31, 1979

In the Matter of: MALLARD ASSOCIATES, A Limited Partnership.


The opinion of the court was delivered by: SAND

BEFORE: HON. LEONARD B. SAND, District Judge

Greenwich Savings Bank ("Greenwich") appeals from the order of Bankruptcy Judge Joel Lewittes, dated June 14, 1979, denying Greenwich's motion to dismiss the petition on the grounds that the petition of Mallard Associates ("Mallard") was not filed in good faith and that as a matter of law, the petition must be dismissed because the only secured creditor has rejected the debtor's plan of arrangement. For the reasons hereinafter stated, the order is affirmed.

 Procedural History

 On October 25, 1978, Mallard filed a petition for an arrangement under Chapter XII of the Bankruptcy Act, 11 U.S.C. Sections 801 et seq. Greenwich, the only secured creditor of the property, moved for dismissal of the petition on the ground that it was not filed in good faith. The Bankruptcy Court, Lewittes, J., denied the motion and Greenwich appealed.

 On appeal, Judge Carter vacated the order and remanded for a hearing on the issue of good faith. *fn1" / Pursuant to that order, the Bankruptcy Court held an evidentiary hearing on February 12, 1979.

 On February 15, 1979, Greenwich rejected Mallard's amended plan of arrangement. Greenwich then moved for dismissal on the ground that the sole secured creditor had rejected the arrangement. Judge Lewittes denied both motions. Greenwich appeals to this Court.

 Facts

 In October 1977, Greenwich instituted a proceeding in New York State Court to foreclose its mortgage on commercial property located at 45 West 45th Street, New York, New York. At the time of foreclosure, Mallard was not the owner of the subject property. Its two limited partners, Robert J. Hopkins and Benjamin Solomon, however, were major tenants of the premises. *fn2" / In June 1977, several tenants, including Hopkins and Solomon, dissatisfied with the lack of maintenance being provided by the original owners, first discussed the possibility of purchasing the building. After the tenants received notice of the foreclosure in November 1977, these discussions intensified. The foreclosure proceeding was particularly threatening to the tenants because their lease reserved a right of attornment to the fee owner rather than the landlord. In the event of foreclosure, this clause gave both the fee owner and the foreclosure purchaser the right to terminated the existing leases. Hopkins then drafted a letter to the other tenants in the building, proposing that the tenants buy the building.

 At this time, Solomon consulted with his accountant of over thirty years, Robert Gruber, about the prospect of purchasing the property. Gruber advised Solomon that in order for Solomon to take advantage of certain tax benefits, the entity which owned the property should be in the form of a limited partnership. Solomon relaved this advice to Hopkins, who agreed to it sometime in November-December 1977.

 In late November 1977, Hopkins contacted Frank Fitzgerald, an employee of Greenwich, to inform him that some of the tenants were interested in purchasing the property. Hopkins met with Mr. Fitzgerald, and spoke with him on the telephone at least two times per week until March 1978. Mr. Fitzgerald expressed some interest in Hopkins' proposals, but stated that Greenwich would prefer a proposal which contained fewer investors, investing a larger amount of money per person. *fn3"

 Hopkins formally proposed the purchase of the property from Greenwich in a letter to Fitzgerald dated March 15, 1978. Greenwich rejected the proposal, stating that it had already made arrangements to sell the property to another party.

 Hopkins and Solomon then decided to purchase the property from the fee owner. Hopkins and Solomon thought that in order to keep the price at a minimum and prevent Greenwich and its prospective purchaser from thwarting their efforts, it was imperative to keep their identities as purchasers secret. Hopkins and Solomon believed that the only way to protect their anonymity would be to form a corporation to purchase the property.

 This corporation was formed and incorporated in July 1978 under the name 4545 Realty Corporation. Negotiations with the fee owners were conducted by Hopkins and Solomon's attorneys who were instructed not to reveal the identity of their clients. The deed was acquired by the corporation on September 5, 1978 for $10,000, subject to the existing mortgage of $1,003,000 and subject to arrears of interest, taxes, and other fees and expenses.

 Although the parties agreed in late 1977 that the entity which owned the property would be a limited partnership, formation of this partnership was delayed because of a disagreement over whether the agreement would include a survivorship right and a first refusal to buy out. Two days after the purchase of the deed, Hopkins and Solomon, who had apparently settled their disagreement, instructed their attorneys to draft a limited partnership agreement. Under the terms of the agreement, 4545 Realty Corp. transferred the deed to the limited partnership (Mallard) in exchange for a 2% interest in the limited partnership, and became its general partner. Hopkins and Solomon became limited partners. The agreement was signed on September 29, 1978.

 One day prior to the formation of the limited partnership, a meeting was held between Gerald and Lawrence Blumberg, representatives of Hopkins and Solomon and Benjamin Golub, a representative of SJK Realty, who had agreed to purchase the property from Greenwich upon foreclosure. *fn4" / Hopkins and Solomon hoped to persuade SJK to allow them to either become partners of SJK, or take over SJK's right to purchase the deed in the event of foreclosure. At the hearing before Judge Lewittes, Mr. Golub testified that Gerald Blumberg stated at the meeting, that if SJK did not accept any of Hopkins and Solomon's proposals, "they would proceed in the Bankruptcy Court pursuant to a Chapter XII proceeding which would tie up the property for years to come.... and that my clients would not be able to acquire the property." *fn5" / Despite Mr. Blumberg's warning, SJK rejected the proposals on October 20, 1978.

 In a letter dated October 6, 1978, Mallard informed Greenwich that it was the new owner of the property. Mallard also requested that Greenwich provide it with information on the amount due on the mortgage for principal and interest, any arrearages on taxes and expenses, and fees, the amount of money collected by the receiver, and a copy of the contract to sell the property to SJK. Despite two letters from Mallard requesting response to the original letter, Greenwich never responded.

 On October 25, 1978, the deed transferring the property from 4545 Realty to Mallard was recorded. On that same day, one day prior to the return date of Greenwich's motion for summary judgment in the foreclosure proceeding, Mallard filed its Chapter XII petition. Good Faith

 Chapter XII requires that a petition must be filed in good faith. 11 U.S.C., Section 872(4). On the initial appeal of this case, Judge Carter expressed the view that a petition is not filed in good faith where the debtor fraudulently invokes the jurisdiction of the Bankruptcy Court.In re Mallard Associates, Supra, 463 F. Supp. at 1262. The opinion, however, did not provide a specific test for determining whether the debtor fraudulently ...


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