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In re Karta Corp.

May 22, 2006


The opinion of the court was delivered by: McMahon, J.


By an Order of this Court dated May 5, 2006, granting Appellant's Motion for an Expedited Appeal, Appellant Pasquale Cartalemi, Sr. ("Pat") seeks appellate review of an Order of the Bankruptcy Court dated April 28, 2006, confirming Debtor's Fifth Amended Joint Plan of Reorganization (the "Plan") in the underlying bankruptcy action. In particular, Pat challenges provisions in the Plan which release certain Non-Debtors (including his son, Kenneth or "Ken" Cartalemi) from all claims held by Pat, and which provide for the Plan to be funded in part by a Non-Debtor corporation, in which Appellant has a 50% equity interest.

Appellees maintain that the appeal is barred by the doctrine of equitable mootness, and that the challenged provisions of the Plan are proper under the law of this Circuit and the New York Business and Corporation Law.

The Court concludes that Appellant's appeal is not equitably moot. However, in light of the unique facts and circumstances presented in this matter, the Court finds that the challenged provisions are supported by the controlling law. I thus affirm the Bankruptcy Court's confirmation of the Plan.

Under a separate docket number (06 Civ. 3602), Pat appeals from Judge Hardin's Judgment dated May 10, 2006, permanently enjoining him from prosecuting a certain action in the New York State Supreme Court. The appeals were consolidated by Judge Brieant for briefing and oral argument. A separate decision will issue concerning the injunction against the prosecution of the state court action.

Issues on Appeal

The issues on this appeal are:

* Whether this appeal is equitably moot on the basis of the closing of certain transactions approved in the Plan?

* Whether the Bankruptcy Court erred in granting a Non-Debtor release and channeling injunction of all claims held by Appellant?

* Whether the Bankruptcy Court erred in permitting Debtors to use all or substantially all of the property of Non-Debtor, Karta Industries, Inc., to fund the Plan and to guaranty payments under the Plan?


Factual Background

In February 1970, Pat Cartalemi formed Karta Diner, Inc., for the purposes of acquiring a diner in Croton-on-the-Hudson, New York. On or about February 9, 1981, Karta Diner acquired a parcel of property located at 1017 Lower South Street in Peekskill, New York (the "1017 property"). In April 1988, Karta Diner was renamed Karta Industries, Inc. ("KI"). Thereafter, Pat, who had initially been the sole shareholder of Karta Diner, assigned 50% of his equity interest in KI to his son Ken. Pat and Ken operated Ken-Mar Motors, an automotive repair business, on the property. They each owned 50% of Ken-Mar.

In November 1988, KI obtained a loan in the amount of $2,758,659, from the City of Peekskill Industrial Development Agency ("IDA"). The proceeds of the loan were used for the construction and operation of a recycling facility on the 1017 property. Under the Loan Agreement, KI conveyed title of the 1017 property to the IDA, and was granted a "lease back" of the property from the IDA. Pat and Ken guaranteed the obligations under the Loan Agreement. At or around the same time, KI obtained permits from the City of Peekskill and other applicable government agencies to operate a recycling facility on the 1017 property.

On July 1, 1989, KI subleased the 1017 property to Ken-Mar and Karta Container & Recycling, Inc. ("Karta Container"). Karta Container, a recycling and roll-off container rental business, had been formed in January 1988 by Pat and Ken, who were each 50% shareholders. Karta Container operated the recycling facility on the 1017 property until it ceased operations in March 2000. At that time, Karta Corporation ("Karta Corp."), the successor-in-interest to KenMar and Karta Container, which are now both defunct, assumed operations of the carting and recycling business. Both Karta Container and Karta Corp. are Debtors in the underlying bankruptcy action.

On July 23, 1984, Pat, Ken and other investors purchased a parcel of land adjacent to the 1017 property. Two years later, title to this second parcel, located at 1011 Lower South Street (the "1011 property"), was transferred to Travis Lane Association, another corporation in which Pat and Ken both had an equity interest. On July 27, 1998, Travis Lane transferred the 1011 property to Global Land, Inc., a real estate holding company owned by Kenneth, his wife Maria Cartalemi, and their children. Global Land paid approximately $950,000 for the property. Global Land then leased a portion of the 1011 property to one of the Debtors, Karta Corp. Karta Corp.'s recycling facility now operates on both the 1011 and 1017 properties, which are connected by a conveyor belt.

Finally, via a real estate holding partnership, P&K Realty Co., Pat and Ken purchased two parcels of land across the street from the 1017 and 1011 properties. While no formal lease agreements have been executed, these additional properties, located at 1014 and 1016 Lower South Street (the "1014 property" and the "1016 property") are used by Karta Corp. as parking lots for its recycling vehicles.

On September 1, 1992, Pat resigned from all corporate positions, including his position as president of KI and as an officer and director of Karta Container. He remains a shareholder in both corporate entities.

Kenneth Cartalemi and/or his wife, Maria Cartalemi, are President and/or Vice President of each of the corporate Appellees, Debtors Karta Corp., Karta Container, and Global Recycling & Collection, Inc. ("Global Recycling") (which owns various pieces of equipment leased by Karta Corp. and used in Karta Corp.'s business operations). They are also the officers of Non-Debtor Global Land, the owner of the 1011 property.

Procedural History

In January 2002, Debtors Karta Corp., Karta Container and Global Recycling voluntarily filed Petitions for Relief under Chapter 11. KI, the lessor (from the IDA) of the 1017 property, did not file for bankruptcy; all parties concede that this was to avoid defaulting on its IDA lease. Karta Corp., Karta Container and Global Recycling remained debtors-in-possession of their businesses.

On November 3, 1999, Pat commenced an action against Karta Container in the New York State Supreme Court, seeking repayment of a loan he allegedly had made to Karta Container (the "1999 state court action"). That action was still pending at the time Karta Container entered bankruptcy.

On April 28, 2002, Pat commenced an adversary proceeding against Karta Container in the Bankruptcy Court, seeking a declaration that he had an unsecured claim against Karta Container and that he was an equity security holder of Karta Container in the underlying bankruptcy matter (the "2002 adversary proceeding"). On July 18, 2003, the Bankruptcy Court recharacterized Pat's claims in both the 1999 state court action (which had been stayed) and the 2002 adversary proceeding as equity investments, rather than loans. Accordingly, Pat's claims against Karta Container were expunged.

In April 2005, the Bankruptcy Court approved and the District Court affirmed a Settlement between the City of Peekskill and Debtors, who had filed three adversary proceedings and an Article 78 proceeding against the City. Pursuant to the Agreement, Debtors granted the City the option to purchase both the 1011 property, and (in 2010 when the IDA loan is paid in full) the facility located on the 1017 property. To date, the City has not exercised its option with respect to the 1011 property.

On March 16, 2006, Pat commenced an action in the New York State Supreme Court against Non-Debtors Ken and Maria Cartalemi and Global Land, the owner of the 1011 property (the "2006 state court action"). Pat sought damages for alleged self-dealing and breach of fiduciary duty for requiring Karta Corp. to lease a portion of the 1011 property from Global Land, but not requiring Debtors to lease the 1017 property from KI or the 1014 and 1016 properties from P&K Realty, as well as for a purported disparity in rent charged to Karta Corp. on property 1011 and to Tarrytown R&T Corp. ("TRAT"), a company owned by Ken's cousins which is currently managing the recycling facility, on property 1017. Pat also sought damages for Ken's alleged failure to pay Pat proportionate proceeds from the sale of property 1011 to Global Land (which occurred in 1988); Ken's transfer of permits owned by KI; Ken and Maria's breach of fiduciary duty in connection with the Peekskill Settlement; and Ken and Maria's failure to obtain KI shareholder approval in connection with KI's guarantee of the Plan. Pat also accused Ken and Maria of oppressive and malicious conduct and fraud and deception. Pat sought imposition of a constructive trust on property 1011 and property 1070 (another parcel of land owned by Global Land), and an accounting of the income, rents and profits of KI, Travis Lane, P&K Realty and Global Land. Because the state court complaint did not name any Debtors in the caption, the action was not removed to federal court.

On April 4, 2006, Debtors commenced an adversary proceeding in the Bankruptcy Court to enjoin Pat from proceeding with his 2006 state court action. On April 24, 2006, the Bankruptcy Court heard argument on Debtor's Application for Permanent Injunctive Relief, but reserved decision.

On April 27, 2006, the Bankruptcy Court confirmed Debtors' Fifth Amended Plan of Reorganization ("the Plan"), which provides for, inter alia, the payment of administrative and priority claims and a minimum 45% distribution to unsecured creditors. The Plan is to be funded by: (i) proceeds from the management of the Debtors' transfer station by TRAT; (ii) proceeds from equipment lease rental fees pursuant to an equipment lease agreement with TRAT; (iii) proceeds from the settlement of an insurance claim; (iv) proceeds from the Peekskill ...

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