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In re Tiana Queen Motel Inc.

November 29, 1984

IN RE TIANA QUEEN MOTEL, INC., TODEM HOMES, INC., ANTHONY DEMARCO, DEBTORS; A. ILLUM HANSEN, INC., PLAINTIFF-APPELLEE,
v.
TIANA QUEEN MOTEL, INC., TODEM HOMES, INC., ANTHONY DEMARCO, DEFENDANTS-APPELLANTS; *FN* IN RE PETITION FOR WRIT OF MANDAMUS V. A. ILLUM HANSEN, INC., STANLEY WEISZ, PHYLLIS H. WEISZ AND STANLEY WEISZ, P.C. RETIREMENT PLAN, PETITIONERS, V. ANTHONY DEMARCO, RESPONDENT



Appeal from order of the United States District Court for the Southern District of New York, Robert L. Carter, Judge, rejecting appeals from orders of the United States Bankruptcy Court for the Southern District of New York by John J. Galgay, Bankruptcy Judge, converting three Chapter 11 bankruptcy cases to Chapter 7 proceedings under the Bankruptcy Reform Act of 1978; by Prudence B. Abram, Bankruptcy Judge, denying an application to stay an auction of certain properties in debtors' estates; and by John J. Galgay, Bankruptcy Judge, authorizing Chapter 7 trustee to accept offer to purchase assets. Affirmed. Petition for writ of mandamus directing the United States District Court for the Southern District of New York, David N. Edelstein, Judge, to vacate restraining order barring any action with respect to property belonging to plaintiff in action under 42 U.S.C. § 1983. Case remanded for further proceedings.

Author: Feinberg

Before: FEINBERG, Chief Judge, KEARSE and PIERCE, Circuit Judges.

FEINBERG, Chief Judge:

Tiana Queen Motel, Inc. (Tiana Queen), Todem Homes, Inc. and Anthony DeMarco appeal from an order of the United States District Court for the Southern District of New York, Robert L. Carter, J., entered in September 1983, rejecting appeals from several bankruptcy court orders. The first three, by Bankruptcy Judge John J. Galgay, converted the Chapter 11 proceedings then pending for the three appellants to proceedings under Chapter 7 of the Bankruptcy Code; another order, by Bankruptcy Judge Prudence B. Abram, refused to stay an auction of certain assets in the three debtors' estates; and the last, by Bankruptcy Judge Galgay, authorized Dorothy Eisenberg, the Chapter 7 trustee in bankruptcy, to accept an offer to purchase assets.

In a related case, No. 84-3063, argued to us along with the appeal, A. Illum Hansen, Inc., Stanley Weisz, Phyllis H. Weisz and Stanley Weisz, P.C. Retirement Plan -- all secured creditors of Tiana Queen -- petition for a writ of mandamus directing Judge David N. Edelstein, of the Southern District of New York, to vacate an order restraining all actions with respect to any property in which Anthony DeMarco, or any entity in which Anthony DeMarco is a principal, has an interest. The secured creditors are joined in their petition by the Chapter 7 trustee.

For the reasons stated below, we affirm Judge Carter's order; on the petition for a writ of mandamus, we remand for further proceedings consistent with this opinion.

I. Appeal from Judge Carter's Order in the Bankruptcy Case

A. Facts

On July 17, 1981, Anthony DeMarco and two New York corporations in which he was and remains the sole stockholder, officer and director -- Tiana Queen and Todem Homes -- filed separate petitions for reorganization under Chapter 11 of the Bankruptcy Code. Resort to Chapter 11 was precipitated by a host of legal and financial difficulties that beset three properties belonging to DeMarco and the corporations. Tiana Queen owned land and a residential home in Lloyd Harbor, New York, and a parcel of land in Southampton, New York, upon which DeMarco sought to build a motel. To finance this construction, Tiana Queen had borrowed $310,000 from A. Illum Hansen, Inc., Stanley Weisz, Phyllis H. Weisz and Stanley Weisz, P.C. Retirement Plan, securing these loans with mortgages on both the motel and home properties. The Town of Southampton, however, alleged that the scope of the building permit had been exceeded. Litigation ensued, and in the meantime, the project came to a halt. At the time the three Chapter 11 petitions were filed, Tiana Queen faced judgments of foreclosure obtained by the secured creditors, who had received no payments since 1977.

The only asset of Todem Homes was an option to repurchase a seventeen-acre parcel of land in Lloyd Harbor, New York, which was being contested in the New York state courts. Todem Homes had been successful in the Appellate Division of the State of New York, Freidus v. Todem Homes, Inc., 80 A.D.2d 575, 435 N.Y.S.2d 786 (App. Div. 2d Dept. 1981), but an appeal was still pending in the New York Court of Appeals. When the petitions were filed, DeMarco and the two corporations also faced a number of judgments obtained by unsecured creditors, many of whom had represented DeMarco in his legal battles. The largest of these judgments dated back to December, 1979. The only significant assets in DeMarco's estate were his interests in the two corporations.

Dissatisfied with the progress of the reorganization proceedings, the creditors committee petitioned the bankruptcy court in February 1982 to convert the Chapter 11 proceeding for Tiana Queen into a Chapter 7 liquidation. Shortly thereafter, the debtors responded with plans of reorganization for all three estates. In March 1982, the creditors committee filed a motion to convert the Todem Homes Chapter 11 proceeding. Thereafter, in several hearings stretching over a period of many months, the creditors urged liquidation before Judge Galgay. Finally, at the conclusion of a hearing on October 26, 1982, over the debtors' objections, the judge ordered the conversion of three Chapter 11 cases to Chapter 7 liquidations. The debtors appealed from that order to the district court, and the case was assigned to Judge Carter.

In November 1982, Dorothy Eisenberg was appointed Chapter 7 trustee for Tiana Queen, Todem Homes and DeMarco. In early February 1983, the trustee gave notice of her intention to auction the Tiana Queen motel site and residential property and the Todem Homes option. DeMarco, apparently acting pro se, requested Bankruptcy Judge Abram to stay the auction, and, upon her refusal to do so, again appealed to the district court. The auction was held on February 23, 1983, and Robert Mantin made the highest bid for the Tiana Queen motel site. In June 1983, Judge Galgay authorized the acceptance of this bid; the debtors appealed to the district court form this order as well.

In September 1983, Judge Carter rejected the debtors' attach on the three orders. The district court held that the conversation orders were fully consistent with the requirements of 11 U.S.C. § 1112(b), that the appeal from Judge Abram's denial of a stay was moot and that the trustee could accept Mantin's bid. This appeal followed.

B. The Conversion Orders

Under the Bankruptcy Code, 11 U.S.C. § 1112(b), a Chapter 11 reorganization proceeding may be converted to a Chapter 7 liquidation case only upon the request of a party in interest, after notice and hearing, and for cause. Appellants contend that the district court erred in affirming the conversion orders because the bankruptcy court failed to comply with these requirements. We shall discuss each of them in turn.

In the Tiana Queen and Todem Homes Chapter 11 proceedings, counsel for the official creditors committees filed written conversion petitions in February 1982 and March 1982, respectively. Though these petitions do not appear to have been signed, appellants do not dispute that motions for conversation were made in both these cases. Appellants do argue, however, that no such motion was ever made with respect to DeMarco's personal estate. Appellee replies that during the course of various hearings DeMarco's ...


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