United States District Court, S.D. New York
December 13, 2005.
IN RE ADORN GLASS & VENETIAN BLIND CORP., Debtor.
The opinion of the court was delivered by: RICHARD HOLWELL, District Judge
MEMORANDUM OPINION AND ORDER
Abraham Herbst seeks an interlocutory appeal from an order
issued in the Chapter 11 bankruptcy proceeding, In re Adorn
Glass & Venetian Blind Corp., Case No. 03-14423 (CB) (Bankr.
S.D.N.Y. 2003) (Blackshear, J.), which denied his motion to
dismiss the bankruptcy proceeding as having been filed in bad
faith. Herbst is a 40% shareholder in Adorn Glass & Venetian
Blind Corp. ("Adorn") and argues on appeal that Earl Brustowsky,
who owns the remaining 60% of Adorn shares, was not authorized to
file a petition in bankruptcy on behalf of the Company. Adorn
contends that the appeal should be dismissed because (i) it is
interlocutory in nature, and Herbst failed to obtain leave
pursuant to 28 U.S.C. § 158(a)(3); and (ii) even if the Court
construes the notice of appeal as a motion for leave to appeal,
it should not be granted because the requirements of
28 U.S.C. § 1292(b) have not been met.
The Court agrees, and therefore denies leave to appeal.
The following facts are taken from the record on appeal and,
unless otherwise noted, are not in dispute. Prior to filing for
Chapter 11 protection, Adorn was engaged in the business of
selling and installing glass doors and windows for nearly forty
years. Adorn was founded by Brustowsky who was its sole
shareholder until 1988. Herbst was hired by Adorn in 1980 and by 1988 was the "Manager" with
responsibility for day-to-day operations. (R. 9, Tr. 26:14)
Pursuant to a stock purchase agreement dated February 15, 1988,
(the "Agreement" R. 6, Ex. A), Brustowsky transferred a 40%
interest in the company to Herbst. The operative terms of the
Agreement provide that Brustowsky will no longer devote full time
to the operation of the company and that Herbst "shall be
responsible for all personnel relations, bookkeeping, production,
purchasing, selling, installation and any other matters relating
to the operation of the business." (Id. ¶ 7, 8.). The Agreement
further provides that the Board of Directors shall consist of the
two shareholders and that Brustowsky shall be President and
Herbst shall be Vice President, as long as they are shareholders.
(Id. ¶¶ 17-19). With respect to control of the company, the
parties agreed as follows:
Decisions shall be made by each shareholder for his
areas of responsibility. For decisions that
necessitate the involvement of both parties, should
there be any disagreement between the parties, the
Seller's [Brustowsky's] decision shall prevail.
(Id. ¶ 11). Finally the Agreement provides that all stock
certificates shall bear a legend reciting that shares are held
subject to the terms and conditions of the Agreement. (Id. ¶
21). None of the provisions of the Agreement were incorporated in
the company's Certificate of Incorporation or its By-Laws.
Several years after the Agreement was signed Herbst and
Brustowsky discussed the possibility that Herbst would purchase
the company outright. Although it is unclear precisely how far
those negotiations advanced, Brustowsky contended that the
parties reached a purchase agreement, and in October 2002
commenced a civil action in New York State Supreme Court against
Herbst for breach of contract. Brustowsky's state claim, captioned as Earl Brustowsky, et al. v. Abraham Herbst,
et al., Index No. 123313/02 (N.Y.Sup.Ct. 2002), was dismissed
in May or June 2003, allegedly because Brustowsky "fail[ed] to
comply with [a] [c]ourt [o]rdered deadline to proceed with
trial". (Appellant's Memo. 6).
On June 19 and June 25, 2003, Brostowsky and Herbst,
accompanied by counsel, held meetings regarding Adorn. (R. 9, Tr.
34-36, 58-59). The parties disagree as to whether either meeting
constituted a meeting of the board of directors. However, on July
9, 2003, Brustowsky executed a "Corporate Resolution" stating
[t]he undersigned is the President of Adorn . . . and
is authorized to make this certification. The
undersigned certifies that on June 18, 2003 and June
25, 2003, Special Meetings of the Board of Directors
were regularly and duly held at [Adorn's offices]. . . .
At said meetings, a resolution was passed, as
follows: "RESOLVED that the President by and hereby
is individually authorized to file on behalf of
[Adorn] an application under Chapter 11 of the
Bankruptcy Code and to take all steps necessary and
proper for the filing of said application, including
the retention of [counsel] . . . for that purpose."
(R. 6, Ex. C). The next day, on July 10, Brustowsky caused Adorn
to file a voluntary petition for relief under Chapter 11 of the
On July 17, 2003, Herbst filed a motion to dismiss the
Bankruptcy Case, arguing that (i) "special meetings" of Adorn's
Board were never held; and (ii) he did not otherwise consent
and indeed expressly objected to the bankruptcy filing. On this
basis, Herbst claimed that the petition was filed in "bad faith",
and should therefore be dismissed pursuant to
11 U.S.C. § 1112(b). Brustowsky opposed the motion on the grounds, inter
alia, that the June meetings were directors' meetings and that,
despite Herbst's objection, he had the authority under the
Agreement to make the decision to file a petition. On January 6,
2004, a trial was held on Herbst's motion. On December 14, 2004,
after an unsuccessful mediation effort, the Bankruptcy Court
issued an order denying the motion and directing that a trustee be appointed. In
re Adorn Glass & Venetian Blind Corp., Case No. 03-14423 (CB),
slip op. (Bankr. S.D.N.Y. December 14, 2004) (the "Order").
Herbst now appeals that order.
Appeals from cases originating in the bankruptcy courts are
governed by § 28 U.S.C. § 158, which vests district courts with
appellate jurisdiction over bankruptcy court rulings.
28 U.S.C. § 158;*fn1 Bank Brussels Lambert v. Coan, 176 F.3d 610, 618
(2d Cir. 1999). Although "final orders of a bankruptcy court may
be appealed to the district court as of right,
28 U.S.C. § 158(a)(1), appeals from non-final bankruptcy court orders may be
taken only `with leave' of the district court." In re Orange
Boat Sales, 239 B.R. 471, 473 (S.D.N.Y. 1999); see also
Fed.R.Bankr.P. 8001(b);*fn2 28 U.S.C. § 158(a)(3). Here, both
parties agree that the Order was not "final," which means that
Herbst was required to obtain leave before bringing this appeal.
28 U.S.C. § 158(a)(3); Americare Health Group, Inc. v. Melillo,
223 B.R. 70 (E.D.N.Y. 1998) (order denying debtor's motion to
dismiss nondischargeability complaint was not a final order); In
re MacInnis, 235 B.R. 255, 262 (S.D.N.Y. 1998).
Having failed to do so, Herbst now asks the Court to treat his
notice of appeal as a motion for leave to appeal pursuant to Rule
8003(c) of the Federal Rules of Bankruptcy Procedure. Rule
8003(c) states, in pertinent part: (c) Appeal improperly taken regarded as a motion for
leave to appeal
If a required motion for leave to appeal is not
filed, but a notice of appeal is timely filed, the
district court . . . may grant leave to appeal or
direct that a motion for leave to appeal be filed.
The district court or the bankruptcy appellate panel
may also deny leave to appeal but in so doing shall
consider the notice of appeal as a motion for leave
Fed.R.Bankr.P. 8003(c). Because the Court concludes that leave
should be denied, See infra, it will treat Herbst's appeal as
an application for leave to appeal. See In re Holly Flor,
79 F.3d 281, 283 (2d Cir. 1996) (a district court has jurisdiction
to hear bankruptcy appeals not only from orders that are final,
but also from orders that are non-final if taken "with leave of"
the district court); In re MacInnis, 235 B.R. at 262 (noting
that leave to appeal can be granted by district courts as
opposed to the bankruptcy court from which appeal is taken in
the first instance).
Neither the Bankruptcy Code nor the Federal Rules of Bankruptcy
Procedure provide standards for district courts to follow in
determining whether to grant leave to appeal an interlocutory
order. Without firm guidance, the majority of courts in this
district simply apply the analogous standard for certifying an
interlocutory appeal from a district court order, which is set
forth in 28 U.S.C. § 1292(b). See, e.g., Urban Retail Props. v.
Loews Cineplex Entm't, 2002 WL 535479, at *4 (S.D.N.Y. Apr. 9,
2002) ("The standard for determining whether leave to appeal from
an interlocutory bankruptcy order should be granted . . . is
given by 28 U.S.C. § 1292(b), which governs interlocutory appeals
from the district courts to the courts of appeal."); In re
Alexander, 248 B.R. 478, 483 (S.D.N.Y. 2000); In re MacInnis,
235 B.R. at 263. This Court will do likewise, keeping in mind
that "only exceptional circumstances will justify a departure
from the basic policy of postponing appellate review until after the entry
of a final judgment." Flor v. Bot Fin. Corp., 79 F.3d 281, 284
(2d Cir. 1996).*fn3
As noted, those circumstances are set forth in
28 U.S.C. § 1292(b), which provides that leave should only be granted if the
order being appealed (1) "involves a controlling question of
law"; (2) "as to which there is substantial ground for difference
of opinion"; and (3) "an immediate appeal from the order may
materially advance the ultimate termination of the litigation."
28 U.S.C. § 1292(b). These three requirements are conjunctive,
and should be carefully applied. See Westwood Pharm., Inc. v.
Nat'l Fuel Gas Dist. Corp., 964 F.2d 85, 89 (2d Cir. 1992)
(district courts should "exercise great care in making a
[Section] 1292(b) certification").
On appeal in this case, Herbst would claim that Judge
Blackshear erred in failing to dismiss Adom's Chapter 11 case
pursuant to Section 1112(b) of the Bankruptcy Code. Under Section
1112(b), bankruptcy courts "may convert a [Chapter 11] case . . .
to a case under Chapter 7 . . . or dismiss [the] case . . .,
whichever is in the best interest of creditors and the estate,
for cause." 11 U.S.C. § 1112(b). Section 1112(b) contains a
nonexhaustive list of ten "causes," including:
(1) continuing loss to or diminution of the estate
and absence of a reasonable likelihood of
rehabilitation; (2) inability to effectuate a plan;
(3) unreasonable delay by the debtor that is
prejudicial to creditors; (4) failure to propose a
plan under section 1121 of this title within any time
fixed by the court; (5) denial of confirmation of
every proposed plan and denial of a request made for
additional time for filing another plan or a
modification of a plan; (6) revocation of an order of
confirmation under section 1144 of this title, and
denial of confirmation of another plan or a modified plan under section 1129 of this title; (7)
inability to effectuate substantial consummation of a
confirmed plan; (8) material default by the debtor
with respect to a confirmed plan; (9) termination of
a plan by reason of the occurrence of a condition
specified in the plan; or (10) nonpayment of any fees
or charges required under chapter 123 of title 28.
11 U.S.C. § 1112(b).
The crux of Herbst's appeal is that dismissal was appropriate
for a reason not on this list, namely, because the petition was
filed in "bad faith." To support this position, Herbst would
argue that Judge Blackshear ignored "unambiguous documentary
evidence," and "uncontroverted testimony" that Brustowsky "did
not have authority to commence the Chapter 11 case" without
Herbst's approval; Herbst would also claim that Brustowsky knew
he did not have authority to file the petition, and manufactured
a "false `Corporate Resolution'" in an effort to deceive the
bankruptcy court. (Appellant's Memo. 2). According to Herbst,
"established case law makes clear" that these facts would prove
"abject bad faith," and therefore "cause" for dismissal pursuant
to 11 U.S.C. § 1112(b). (Id. 3).
Having reviewed the issues to be considered on appeal, as well
as the "established case law" to which Herbst refers, the Court
finds that the question on appeal whether Adom's petition was
filed in "bad faith" is not a "controlling question of law"
over which there is a "substantial ground for difference of
opinion." To begin, the question on appeal would depend
critically on factual determinations made by the bankruptcy
court. Indeed, Herbst's bad faith claim is based almost entirely
on the contention that Brustowsky lacked the authority to file
the bankruptcy petition. (See, e.g., Appellant's Memo. 22). As
the Bankruptcy Court noted, resolution of that issue raises
several factual questions: The determination as to whether . . . Brustowsky had
the authority to file a bankruptcy petition is a
fact-sensitive inquiry that is based in part on the
following factors: (1) whether Adorn is the type of
"corporation" that requires the board of directors to
follow corporate formalities in order to take
specific actions on behalf of the company, (2)
whether Adorn is a "closely held corporation," and
therefore does not hold itself or its
shareholders/directors to the rigors imposed by
corporate formalities with respect to any issue; and
(3) whether Paragraph 11 of the Agreement purports to
give . . . [Brustowsky] a "voting advantage" over . . .
[Herbst, therefore] obviating the need for . . .
[Herbst's] consent . . . [when] act[ing] on behalf of
(Order 9) (emphasis added).
Although the Order does not go into detail, it is clear that
Judge Blackshear considered those factors in denying Herbst's
motion concluding that even if Brustowsky failed to follow all
corporate formalities, this did not constitute bad faith and that
dismissal would needlessly promote "form over substance." (Id.)
An appeal of this conclusion would turn heavily on questions of
fact, which counsels against granting leave. See Harriscom
Svenska AB v. Harris Corp., 947 F.2d 627, 631 (2d Cir. 1991)
("Where the controlling issues are questions of fact . . . the
federal scheme does not provide for an immediate appeal solely on
the ground that such an appeal may advance proceedings in the
[court below].") (citing Chappell & Co. v. Frankel,
367 F.2d 197, 200 n. 4 (2d Cir. 1966)).
But even were the appeal to turn solely on questions of law,
the Court concludes that there is not "a substantial ground for a
difference of opinion" on the issue of whether the Bankruptcy
Court abused his discretion in declining to dismiss under §
1112(b) of the Bankruptcy Code. See In re Gusam Rest. Corp.,
737 F.2d 274, 277 (2d Cir. 1984) (bankruptcy court's
determination under § 1112(b) is reviewed for abuse of
discretion). In deciding whether there is a "substantial ground for a
difference of opinion," the fact that there may be disagreements
among courts outside the Second Circuit or that an issue "is a
question of first impression" within the Circuit is insufficient.
See Flor, 79 F.3d at 284; Colon v. BIC USA, Inc., 2001 WL
88230, at *2 (S.D.N.Y. Feb. 1, 2001). Rather, the legislative
history of Section 1292(b) indicates that to satisfy this
prerequisite there must be "substantial doubt" that the district
court's order was correct. S. Rep. No. 85-2434, at 3 (1958), as
reprinted in 1958 U.S.C.C.A.N. 5255, 5257. To determine whether
there is a "substantial doubt," a court must examine "the
strength of the arguments in opposition to the challenged
ruling." In re Flor, 79 F.3d at 284 (citation omitted).
As noted, the issue raised by Herbst on appeal is whether the
bankruptcy petition was filed in good faith. Although "bad faith"
can constitute "cause" for dismissal under Section 1112(b), the
concept of bad faith has limited application in bankruptcy law
indeed, a filing is made in bad faith only "[w]hen it is clear
that, from the date of filing, the debtor has no reasonable
probability of emerging from the bankruptcy proceedings and no
realistic chance of reorganizing," or when there is no subjective
intent to reorganize. In re C-TC 9th Ave. P'ship,
113 F.3d 1304, 1310 (2d Cir. 1997).
The Second Circuit has cited with approval a list of eight
factors it considers "indicative" of bad faith:
(1) the debtor has only one asset;
(2) the debtor has few unsecured creditors whose
claims are small in relation to those of the secured
(3) the debtor's one asset is the subject of a
foreclosure action as a result of arrearages or
default on the debt;
(4) the debtor's financial condition is, in essence,
a two party dispute between the debtor and secured
creditors which can be resolved in the pending state
foreclosure action; (5) the timing of the debtor's filing evidences an
intent to delay or frustrate the legitimate efforts
of the debtor's secured creditors to enforce their
(6) the debtor has little or no cash flow;
(7) the debtor can't meet current expenses including
the payment of personal property and real estate
(8) the debtor has no employees.
Id. at 1311 (citing Pleasant Pointe Apartments, Ltd. v.
Kentucky Hous. Corp., 139 B.R. 828, 832 (W.D. Ky. 1992)). At
least one other court in this district has identified a ninth
factor, namely, whether the debtor made misrepresentations in its
petition. In re MacInnis, 235 B.R. at 262. It is on this ninth
factor, and Judge Scheindlin's decision in In re MacInnis, that
Herbst would base his appeal.
Having reviewed that decision, the Court finds that it does not
raise substantial doubt as to whether the Bankruptcy Court abused
its discretion. In In re MacInnis, the court found that a
debtor filed a petition in bad faith, and therefore concluded
that the bankruptcy court abused its discretion in not finding
"cause" to dismiss the action, where the "bad faith" was based on
a host of factors, several of which were ignored by the
bankruptcy court: (1) the debtor possessed a single asset that
was the subject of a two-party dispute; (2) the debtor used the
threat of bankruptcy as a tactic to pressure settlement of the
two-party dispute; (3) there were few other creditors, and their
claims were de minimus compared with claims of the parties
fighting over the single asset; (4) the debtor had no employees,
minimal cash flow, and no apparent income to sustain a plan of
reorganization; (5) the debtor demonstrated no intention of
rehabilitation, disobeyed court orders, and otherwise failed to
file a reorganization plan by a set date; and (6) the debtor made
misrepresentations in his Chapter 11 petition. In re MacInnis,
235 B.R. at 261-62. Few, if any, of these factors are present here. In particular,
there is no evidence that Adorn (i) possessed a single asset;
(ii) used the bankruptcy filing to force a settlement of a "two
party dispute"; (iii) had few creditors other than the party
involved in the dispute; (iv) had no employees, cash flow, or
reorganization plan; or (v) failed to demonstrate a
reorganization plan, or otherwise follow court orders. To the
contrary, Adorn has "a forty-year . . . reputation and . . .
solid client base," has filed a reorganization plan, and has
several significant creditors, including JPMorgan Chase Bank.
(See generally Order 11). In contrast to the debtor in In re
MacInnis, Adorn is, as Judge Blackshear found, a company that
may "truly benefit from reorganization." (Id.)
At best then, Herbst is left with his contention that
Brustowsky made misrepresentations in the petition regarding his
authority to act on behalf of Adorn. Brustowsky's authority,
however, was firmly rooted in the Agreement. While inartfully
drafted perhaps not surprising for a two-person business its
intent appears unambiguous: for actions requiring approval by
both parties, Brustowsky's decision prevails in the event of a
disagreement. (R. 6, Ex. A ¶ 11). There can be little doubt that
any major corporate action, including the filing of a bankruptcy
petition, is the type of decision that would ordinarily require
joint action either by the vote of directors at a board meeting
or by shareholder consent. N.Y. Bus. Corp. Law § 701, 615
(McKinney 2003); Regal Cleaners & Dyers, Inc. v. Merlis, 274
F.915, 916 (2d Cir. 1921). This being said, it is also the case
that shareholders of a closely held corporation may agree to
adopt voting agreements that place control of the corporation
directly in the hands of one shareholder, in this case
Brustowsky. N.Y. Bus. Corp. Law § 620(a)(b). Such an arrangement
should have been put in Adorn's certificate of incorporation.
Id. However, as between shareholders of a close corporation,
New York courts will enforce a shareholders agreement even though corporate formalities
necessary to implement the agreement have not been undertaken.
Zion v. Kurtz, 50 N.Y.2d 92 (N.Y. 1980) (applying Delaware
law); Ench v. Breslin, 659 N.Y.S.2d 893 N.Y. App. Div. 1997)
(citing Zion v. Kurtz); Herbert H. Lehman Coll. Found., Inc.
v. Fernandez, 739 N.Y.S.2d 375 (N.Y.App.Div. 2002); Garson v.
Garson, 481 N.Y.S.2d 162 (N.Y.App.Div. 1984). In Zion, the
shareholders of a close corporation incorporated under Delaware
law agreed that the corporation would not engage in certain
business activities without the consent of a minority
shareholder. As the New York Court of Appeals noted, Delaware law
generally provides that the board of directors shall manage a
corporation. Zion, 50 N.Y.2d at 100. However, further
provisions permit written shareholder agreements that "restrict
or interfere with the discretion or powers of the board of
directors." Del. Code. Ann. tit. 8, §§ 141, 354 (2005). Such
agreements should be reflected in the company's certificate of
incorporation, but where that is not the case, a court will still
enforce an agreement as between the consenting shareholders. See
Zion, 50 N.Y.2d at 101-02 (where all shareholders assented to
agreement which limited rights of directors, defendant held
estopped to rely on absence of amendment to the certificate of
While Zion dealt with an issue of Delaware law, New York's
Business Corporation Law also permits shareholder agreements in
derogation of the powers of directors and has been similarly
applied. N.Y. Bus. Corp. Law § 620(b); Ench v. Breslin, supra.
In the instant case, Herbst and Brustowsky were Adorn's only
shareholders, and while they were both to act as the company's
sole directors, Herbst agreed that Brustowsky would have the
controlling vote on decisions that would otherwise require the
consent of both parties. Although the Agreement does not spell
out whether this was to be achieved through direct action by the
shareholders or through action taken at a directors meeting, the intent to cede control is clear. In these
circumstances, it was appropriate to estop Herbst from seeking to
avoid the implementation of an agreement that provided Brustowsky
with authority to cause Adorn to file the bankruptcy petition. As
the bankruptcy court correctly concluded, to do so would promote
"form over substance." (Order 10); see Zion, 50 N.Y.2d at 96;
Ench, 659 N.Y.S.2d at 894-95.
Assuming, arguendo, that Brustowsky's authority under the
shareholder agreement to cause Adorn to file a bankruptcy
petition, was not properly implemented, Herbst's motion to
dismiss the petition was still properly denied. As the bankruptcy
court noted, there were unresolved issues as to whether Herbst
had made unauthorized transfers to himself prior to the
bankruptcy, which transfers might not be recoverable if the
petition was dismissed. (Order 11). In such a situation, estoppel
will also operate to preclude a shareholder of a close
corporation who may have engaged in unauthorized preferential
transfers from arguing that a petition was filed without
compliance with all corporate formalities. In re American Globus
Corp., 195 B.R. 253, 266 (Bankr. S.D.N.Y. 1996).
For the foregoing reasons, the Court finds that Herbst has not
met the standard set forth in 28 U.S.C. § 1292(b), and declines
to grant leave to appeal the Bankruptcy Court's December 14, 2004
order. The Clerk of the Court is directed to close this case.
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