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In re National Hospital and Instutsonal Builders Co.

August 17, 1981; As Amended August 17, 1981.


The Debtor's trustee in bankruptcy appeals from an order of the Southern District, Leval, J., which reversed an order of Bankruptcy Judge Galgay who had enjoined the City of New York under the automatic stay provision of Bankruptcy Rule 12-43 from seeking revocation of the Debtor's Certificate of Occupancy. Reversed and remanded for further findings of fact.

Author: Lumbard


LUMBARD, Circuit Judge :

James L. Garrity, acting as trustee for the National Hospital and Institutional Builders Company (Debtor), appeals from an order of Judge Leval of the Southern District reversing an order of the bankruptcy court. Bankruptcy Judge Galgay had applied the automatic stay imposed by Rule 12-43 of the Rules of Bankruptcy Procedure to prohibit the appellees -- various subdivisions and officers of the City of New York -- from instituting or continuing proceedings to revoke the Certificate of Occupancy for the Debtor's nursing home. Because the district court failed to review Bankruptcy Judge Galgay's critical finding that the City was pursuing the revocation in bad faith, we reverse and remand for further findings of fact.

The Debtor, a New York partnership, owns as its sole asset a nursing home and the land it occupies at 1000 Targee Street on Staten Island. The Debtor's four partners were Bernard Bergman and three members of his family. The New York City Department of Health initially granted approval for establishing the nursing home in April of 1966, and construction began in June of 1969. Construction was completed in June of 1973, and a final Certificate of Occupancy (C.O.) was issued in June of that year. Washington Heights Federal Savings and Loan Association (Washington Federal) held a mortgage on the property of approximately $2 million.

In 1975, Bergman was indicted by a federal grand jury for filing false tax returns, submitting false Medicaid claims, making false statements to the federal government, and conspiring to commit those offenses and to defraud the government. He was also indicted by a New York State grand jury for conspiracy, filing fraudulent reimbursement claims, larceny, and obstruction of government administration. Bergman pled guilty to a violation of the New York Public Officers Law as part of a larger plea agreement that settled both the federal and state indictments against him. Under that agreement, Bergman's assets, which included his interest in this and several other nursing homes, were assigned to a state-appointed receiver for purposes of collecting a $2.5 million judgment against Bergman held by the State. See Chase Manhattan Mortgage and Realty Trust v. Bergman (In re Bergman ), 585 F.2d 1171 (2d Cir. 1978).

From the building's completion until late 1979, the State of New York, which regulates the establishment and construction of nursing homes, had denied the approval necessary for the nursing home to open. The State contended that the initial establishment of the nursing home in 1966 was improper and that there was an excess of nursing home beds in Richmond County. Because the State denied that approval, the nursing home remained unopened, and the Debtor defaulted in its mortgage and tax payments.

On June 8, 1976, Washington Federal, the Debtor's mortgagee and principal creditor, commenced an action to foreclose in the Supreme Court of the State of New York, County of Richmond. On May 20, 1977, Washington Federal entered into an agreement with the City of New York to pay the delinquent real estate taxes and other assessments levied against the property. A final judgment of foreclosure and sale was entered on July 1, 1977, and the foreclosure sale was scheduled for September 1, 1977. On August 31, 1977, the Debtor filed its petition for an arrangement under Chapter XII of the Bankruptcy Act, 11 U.S.C. ยงยง 801-926, and the Bankruptcy Court notified all creditors, including the City of New York, of the filing of the petition. The automatic stay provision of Bankruptcy Rule 12-43 prevented the foreclosure sale scheduled for the next day.

On October 17, 1977, James L. Garrity was appointed trustee upon the Debtor's application. Faced with the State's continued refusal to approve the nursing Home's establishment, Bankruptcy Judge Galgay directed Garrity to investigate other possible uses of the facility. In March of 1978, Garrity discussed with the New York State Department of Health the possibility of selling the nursing home to an Hassidic Jewish organization, and the Department agreed that it would be willing to authorize such a group to establish the home under the religious-group exception to the State's public-need requirement.

On July 18, 1978, Garrity executed a contract with Beth Rifka, Inc., the Hassidic group, for the sale of the nursing home.The parties established as a condition precedent, however, the granting of establishment approval and various other state and federal approvals. On August 24, 1979, after both Beth Rifka and Garrity had submitted information to and answered questions from various health-care bodies, the Public Health Council of the State of New York, the final state licensing authority, granting Beth Rifka's application for establishment approval subject to several minor conditions. Because of certain improper procedures on its own part, the Public Health Council afterwards rescinded its approval, resubmitted the application, and approved it once again on December 21, 1979.

During the next several months, the parties arranged financing for the sale and eventually came to an accord. However, because interest rates had risen substantially between the Health Council's approval and the spring of 1980, Beth Rifka had to obtain an additional approval from the Health Council. This final approval was obtained on September 19, 1980, and the sale was ready to be consummated, thus providing the economic foundation for the Bankruptcy Court's Chapter XII plan of arrangement.

However, a few months before the State granted the final approval and seven years after the final C.O. was issued by the City, the New York City Department of Buildings first suggested that it might initiate proceedings to invalidate the nursing home's C.O. Borough Superintendent of Buildings Philip Goldstein raised this possibility in a letter of May 7, 1980 which stated that the Debtor's intended use of the facility was a non-conforming use and that therefore he would initiate proceedings before the Board of Standards and Appeals to revoke the C.O. Under Goldstein's view of the City zoning law, the nursing home became a nonconforming use when the zoning ordinances were amended in 1974, after the C.O. was granted; and nonconforming uses forfeited their C.O.'s if they did not do business for two years, as the Debtor's nursing home clearly had not.

On June 11, 1980, Garrity's counsel advised Goldstein that the Department of Buildings was stayed, pursuant to Bankruptcy Rule 12-43, from appealing to the Board of Standards and Appeals to revoke the C.O. Goldstein thereafter advised Garrity's counsel that he intended to proceed with the revocation on the advice of the Department's counsel that the automatic stay was inapplicable. In a letter dated August 4, 1980, Goldstein applied to the Board of Standards and Appeals for such revocation without leave of the bankruptcy court. He also stated, however, that Garrity could reobtain a C.O., despite the nonconforming use, merely by requesting a Special Permit from the Board. He added that the City did not intend to oppose the grant of the Special Permit. Thus, Goldstein's letter requested revocation of the C.O. but established that the City's interest was not sufficient for it to oppose a Special Permit that would nullify the revocation.

By an order to show cause dated August 7, 1980, Garrity moved in the bankruptcy court for an order staying Goldstein, the Department of Buildings, and the Board of Standards and Appeals from instituting or continuing proceedings to revoke the Debtor's C.O., or, in the alternative, for an order adjudging Goldstein in contempt of the automatic stay imposed by Rule 12-43. Because the parties did not dispute the material facts, the bankruptcy court did not take testimony but rather invited the parties to submit proposed findings. By order dated October 8, 1980, Bankruptcy Judge Galgay granted Garrity's motion for injunctive relief and denied the alternative order of contempt. He first held that the C.O. was "property" within the exclusive jurisdiction of the bankruptcy court under section 411 of the Bankruptcy Act. He then held that Bankruptcy Rule 12-43's automatic stay of state proceedings against a debtor's property therefore applied to this Debtor's C.O. Finally, he held that the City had failed to demonstrate the good cause required for the court to vacate the stay and that the facts demonstrated that the proposed revocation of the C.O. was not a valid exercise of the police power. The bankruptcy court based that finding of bad faith on two observations. First, Bankruptcy Judge Galgay found that the City's attempted revocation was not undertaken to protect the public health and welfare of the surrounding community because, if that had been the true concern, it would not have taken seven years for the City to act. Indeed, Goldstein began the proceedings only after being prodded by three community organizations which Garrity asserts were motivated by a dislike of Hassidic Jews. Second, Bankruptcy ...

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