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In re Karta Corp.

June 1, 2006

IN RE: KARTA CORP. 02-22028 (ASH) KARTA CONTAINER & RECYCLING, INC. 02-22029 (ASH) GLOBAL RECYCLING & COLLECTION, INC., 02-22030 (ASH) DEBTORS.
PASQUALE CARTALEMI, INDIVIDUALLY AND IN HIS CAPACITY AS A SHAREHOLDER OF KARTA INDUSTRIES, INC. AND AS A PARTNER OF P&K REALTY CO., APPELLANT,
v.
KARTA CORP., KARTA CONTAINER & RECYCLING, INC., GLOBAL RECYCLING & ON APPEAL FROM THE COLLECTION, INC., KENNETH CARTALEMI, BANKRUPTCY COURT MARIA CARTALEMI AND GLOBAL LAND, INC., APPELLEES.



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

Confirmed Chapter 11

(Jointly Administered)

DECISION AND ORDER MODIFYING AND AFFIRMING ORDER OF BANKRUPTCY COURT CONFIRMING DEBTORS' FIFTH AMENDED JOINT PLAN OF REORGANIZATION

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?

Facts

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 ...


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