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IN RE 127 JOHN STREET ASSOCIATES

April 18, 2005.

In re: 127 JOHN STREET ASSOCIATES, Debtor.


The opinion of the court was delivered by: SIDNEY STEIN, District Judge

OPINION & ORDER

The purchaser of assets in a bankruptcy proceeding, 127 John Street Realty LLC, (the "Purchaser"), seeks leave to appeal from a November 12, 2004 order of the bankruptcy court. The Purchaser contends first that the order appealed from is a final order and thus may be appealed as of right, and alternatively, that leave to appeal should be granted. This motion is opposed by Sage Realty Corporation, acting in its capacity both as agent for the debtor in the bankruptcy proceeding, John Street Leasehold, LLC, f/k/a 127 John Street Associates (the "Debtor"), and as assignee of interests of certain former tenants of 127 John Street (the "Building"). The Debtor claims to act as fiduciary for all former tenants of the Building with potential claims to a share of a real property tax refund obtained by the Purchaser.

The November 12, 2004 Order directs that approximately $6.2 million dollars in tax refund proceeds obtained by the Purchaser be put in escrow, and that the Purchaser send a second notice to former tenants of the Building advising them of a right to assert a claim to a share of the tax refund. The Order, granting relief sought by Sage, effectively vacates two prior orders issued by the bankruptcy court on October 4, 2002 and January 16, 2003 that had approved of a notice and refund request procedure proposed and implemented by the Purchaser to accept and resolve any potential claims by former tenants to the tax refund proceeds and to vest in the Purchaser the right to any unclaimed portion of the tax refund. On November 22, 2004, the bankruptcy court granted a stay of its order pending appeal.

  Because the Order from which the Purchaser seeks to appeal is not a final order, and because the Purchaser has failed to demonstrate that an immediate appeal from the interlocutory order is warranted, leave to appeal is denied.

  I. BACKGROUND

  The Debtor was a New York partnership that owned, managed and operated the commercial office building known as the 127 John Street Building. It filed a voluntary petition for Chapter 11 bankruptcy relief in 1993. A standard clause in the Building's leases required tenants to pay a pro rata share of real property tax escalations, and also afforded each tenant the right to receive its pro rata share of any net recovery or reduction of those taxes pursuant to any proceeding successfully challenging the tax assessment of the Building. Sometime prior to filing the bankruptcy petition, the Debtor had commenced tax certiorari proceedings pursuant to Article 7 of the New York Real Property Tax Law to challenge the assessment of real property taxes on the Building.

  In 1995, before the tax certiorari proceedings had been resolved, the bankruptcy court confirmed the Debtor's amended reorganization plan. The plan provided for the auction sale of the ground lease, the Building, and related assets, (referred to in the plan as "Transferred Assets"), and provided that creditors would be paid from proceeds of the auction sale. Pursuant to an Order dated August 17, 1995, the ground lease and Transferred Assets were sold, and ultimately transferred to the Purchaser. On January 27, 1997, the bankruptcy court ordered the case closed.

  The parties disagree as to whether the Purchaser received — as part of the Transferred Assets — any right to the Building's former tenants' pro rata shares of any potential tax refund. The Purchaser contends that the Transferred Assets included all tax certiorari proceedings and tax refunds attributable thereto, subject to such tenants' rights, if any, as may remain after the entry of the order confirming the Debtor's reorganization plan. Sage argues that the bankruptcy court determined in 1995 that the Purchaser had no right to the amount of any potential tax refund that was attributable to the former tenants' pro rata shares. It was clear, however, that the Purchaser had acquired the right to prosecute the tax certiorari proceedings, and accordingly, it did continue the prosecution of those proceedings.

  A. Initial Notice to Former Tenants of a Potential Right to Claim a Share of the (Potential) Tax Refund

  On September 6, 2002, prior to the conclusion of the tax certiorari proceedings, the Purchaser moved to reopen the bankruptcy proceedings for the purpose of obtaining the bankruptcy court's approval of a procedure by which the Purchaser would notify the Building's former tenants of their right to claim a share of any potential tax refund. The Purchaser served its motion on the trustee, the Debtor and the Debtor's counsel. The motion included a list of former tenants and their addresses compiled by the Purchaser, most of whom had vacated the Building prior to the bankruptcy filing. No objections or responses were made to the motion or the tenant list. The next month — in October 2002 — the bankruptcy court reopened the case and issued an order granting the Purchaser's motion. The bankruptcy court found, inter alia, that the proposed form of notice was "fair, reasonable and appropriately designed to notify all Tenants of the potential for a Tax Refund and of their need to assert their rights therein," and that the distribution procedures were "fair and reasonable and will serve to conclusively determine all respective rights of Tenants and the Purchaser in the Tax Refund." (Order of The Honorable Cornelius Blackshear, dated October 4, 2002, Exhibit F to Sage's Motion for an Order Re-Opening the Chapter 11 Case).

  Pursuant to that order, the Purchaser sent notice to the former tenants and then made a second motion, again served on the trustee, the Debtor, and Debtor's counsel, requesting an order re-closing the bankruptcy proceeding and authorizing the transfer of rights to the (potential) tax refund in accordance with the October 4, 2002 Order. The Debtor objected to the motion, but only to the extent that it sought re-closing of the case, and requested that the case be kept open for the limited purpose of allowing the Debtor to assert a motion disallowing disputed utility tax claims. In opposing the motion to re-close the proceedings, the Debtor expressly stated that it did not oppose the relief sought by the Purchaser.

  On January 16, 2003, the bankruptcy court ordered that the case remain open for the limited purpose requested by the Debtor and issued an Order Authorizing Purchaser to Transfer Property and Perform Other Functions In Accordance With Procedures Set Forth In Order Reopening Case, providing that the notice and allocation distribution procedures followed by the Purchaser were "fair and reasonable," that any former tenants — whether or not they had been included on the approved list — that failed to submit a refund request within the deadline would be "deemed to have conclusively forfeited any and all rights in connection with the Tax Refund (if any) with all such rights, title and interest in and to such Tax Refund (if any) irrevocably vesting with Purchaser." (Order of The Honorable Cornelius Blackshear, dated January 16, 2003, at ¶ 3, Exhibit I to Sage's Motion for an Order Re-Opening the Chapter 11 Case).*fn1 The Order directed that further steps, consistent with the October 4, 2002 Order, were to be taken upon receipt of the Tax Refund. (Id.). On February 20, 2003, the bankruptcy court ordered that the case be closed.

  B. The Tax Refund

  According to Sage, at the time the initial notice procedure was approved by the bankruptcy court, both the bankruptcy court and the Debtor were operating under the assumption that the total of the former tenants' share of the potential tax refund would be approximately $1 million. However, on January 21, 2003 — five days after the bankruptcy court signed the order approving the Purchaser's notice and refund request procedure — the Purchaser entered into an agreement with the City of New York, settling the tax certiorari proceedings for an amount in excess of $15 million, of which approximately $6.2 million was attributable to the pro rata shares of the Building's former tenants. (Notice to Certain Former Tenants, at 2, attached to Order of The Honorable Cornelius Blackshear, dated November 12, 2004, Exhibit A to Purchaser's Motion for Leave to Appeal). The amount of the tax refund exceeded the amount of the largest pre-petition claim on the Debtor's estate — the satisfaction of which required that the Building be sold — and was three times greater than the auction sale price of the ground lease and related assets. The tax refund was actually received by the Purchaser in August 2003. The Debtor learned of the amount of the tax refund the same month the Purchaser received the tax refund, and immediately began contacting former tenants to see whether they had knowingly waived their rights to the tax refund. Sage ultimately acquired assignments of interest to pursue a claim for their pro rata shares of the tax ...


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