On Appeal from the United States Bankruptcy Court for the Southern District of New York 05-24239 (ASH).
The opinion of the court was delivered by: McMahon, J.
DECISION AND ORDER REVERSING THE BANKRUPTCY COURT'S GRANTING OF ALLIANT'S MOTION FOR RELIEF FROM THE AUTOMATIC STAY AND INJUNCTIVE RELIEF IN THE RELATED ADVERSARY PROCEEDING
Appellant St. Casimir Development Corporation ("Debtor") seeks review of the United States Bankruptcy Court's order dated June 6, 2006, granting Appellees Alliant Tax Credit XIV, Inc. ("Alliant XIV") and Alliant Tax Credit Fund XIV, Ltd. ("Alliant Fund XIV" and, jointly with Alliant XIV, "Alliant") relief from the automatic stay in the Debtor's bankruptcy proceeding, and injunctive relief in a related adversary proceeding to effectuate Alliant's pre-petition removal of the Debtor as general partner of 11-23 St. Casimir Avenue, L.P. (the "Partnership").
Prior to the Debtor's bankruptcy proceeding, the Debtor served as general partner in a limited partnership with Alliant. The Partnership's goal was to construct and operate a low-income senior housing complex in Yonkers, New York. Under the Partnership Agreement, the Debtor was responsible for paying the monthly mortgage payments associated with the purchase of the housing complex property. After the Debtor fell behind in its mortgage payments and defaulted on other aspects of the Partnership Agreement, Alliant served the Debtor with two notices of default, thereby giving the Debtor fifteen days to cure the alleged defaults. Following the fifteen day cure period, Alliant served a notice of intent to remove on the Debtor. Upon the Debtor's subsequent promise to pay the mortgage balance, Alliant sent a letter to the Debtor indicating that Alliant would forbear from removing the Debtor as general partner until further notice was given. Four months later, after the Debtor still had not cured the mortgage default, Alliant sent a second letter notifying the Debtor that it was being removed as general partner effective immediately. Five days after sending this removal letter, Alliant filed a complaint in federal court seeking, inter alia, the court-ordered removal of the Debtor as general partner. The Debtor filed its Chapter 11 bankruptcy petition two days later, and the adversary proceeding was subsequently transferred to the bankruptcy court.
In granting Alliant's motions, the bankruptcy court found that Alliant had properly served the initial notice of default and notice of intent to remove, that the subsequent forbearance letter did not invalidate either of these notices, and that the final removal letter was therefore valid. Accordingly, the bankruptcy court granted Alliant relief from the automatic stay and enjoined the Debtor from acting as a general partner in the Partnership.
On appeal, the Debtor maintains that the bankruptcy court erred in granting Alliant relief because the forbearance letter effectively waived Alliant's rights to remove the Debtor pursuant to its earlier default and intent to remove notices, and Alliant therefore had to start the removal process anew. The Debtor further claims that Alliant did not strictly comply with the Partnership Agreement's notice provisions when Alliant served the forbearance letter and removal letter on the Debtor. Last, because the Debtor claims that it still maintains an interest in the Partnership, the Debtor contends that it may assume the Partnership Agreement under 11 U.S.C. § 365, and cure any remaining defaults.
For the reasons stated below, the bankruptcy court's decision is reversed.
The issues on appeal are 1) did the bankruptcy court err in finding that Alliant had properly served a notice of default, a notice of intent to remove, and a removal letter on Debtor in accordance with the Partnership Agreement provisions, and that Alliant's forbearance letter did not waive Alliant's right to remove the Debtor as General Partner pursuant to these notices, and 2) if the answer to the first question is yes, does the Debtor currently possess a sufficient interest in the Partnership such that the Debtor may assume the Partnership Agreement under 11 U.S.C. § 365 in the Debtor's subsequent bankruptcy proceeding.
St. Casimir Development Corporation ("Debtor" or "Appellant") is a General Partner of 11-23 St. Casimir Avenue, L.P. (the "Partnership"), a limited partnership formed in 1998 for the purpose of providing low-income housing through the construction, operation and leasing of a 107 unit senior housing complex in Yonkers, New York (the "Complex"). (Debtor's Designation of Record and Statement of Issues on Appeal ("Appellate Record"*fn1 ) D-3, ¶¶ 5-7 and Ex. A at § 2.5.) Until the Partnership was amended in 2001, the Partnership included two other members in addition to the Debtor: Alliant Tax Credit IX, Inc. (as the Administrative Limited Partner) and Alliant Tax Credit Fund IX, Ltd. (as the Investor Limited Partner).*fn2 (Appellate Record D-3, Ex. A.)
The Partnership acquired the Complex in 2000 and subsequently sold it to the Yonkers Industrial Development Agency ("Yonkers IDA"), which leased it back to the Partnership in a lease agreement dated December 1, 2000. (Appellate Record D-3, ¶ 9 and Ex. D.) In order to finance the acquisition and construction of the Complex, the Partnership obtained a $9,697,400 mortgage loan ("Mortgage") from Arbor National Commercial Mortgage, LLC ("Arbor"). (Appellate Record D-3, ¶ 10; D-17, Exs. A-B to Supplemental Declaration of Brian Doran in Support of Alliant's Motions for Relief ("Doran Decl.").) In connection with this Mortgage, the Yonkers IDA also issued a series of GNMA Collateralized Mortgage Housing Bonds ("GNMA Bonds"). Thus, the Partnership's debt is structured such that the Partnership makes monthly payments on the Mortgage to Arbor, who then uses these mortgage payments to pay the GNMA Bondholders. The Mortgage is secured by the Complex and insured by the United States Department of Housing and Urban Development ("HUD"). (Appellate Record D-3, ¶ 10.)
A. The Amended Partnership Agreement
On March 26, 2001, the original three Partnership members and Gary Flocco, President of the Debtor (Appellate Record D-4, ¶ 1), entered into an Amended and Restated Agreement of Limited Partnership ("Partnership Agreement"), with Mr. Flocco listed as the pre-existing limited partner. Under the amended Partnership Agreement, the Debtor assumed responsibility for assuring payment of the Mortgage. (Appellate Record D-3, Ex. A at §§ 4.2 and 5.2(E).)
In a separate Guaranty Agreement, also dated March 26, 2001, Mr. Flocco and Rodney James Mondello -- the sole shareholders and executive officers of the Debtor -- and St. Casimir Development Company, LLC (collectively, the "Guarantors") guaranteed several of the Debtor's obligations under the Partnership Agreement, "in order to induce the Investor Limited Partner to enter into the Partnership Agreement." (Appellate Record D-3, Ex. C.) Among these guaranteed provisions was Section 4.2, which obligates the General Partner to pay any Development Deficits including the Mortgage.
Under the Partnership Agreement, failure to make monthly Mortgage payments is considered a "Major Default" by the General Partner:
Section 11.4 Special Removal Rights.
A. Notwithstanding any other provision of this Agreement to the contrary, the following events shall be considered a "Major Default":
(i) Any General Partner . . . shall:
(a) Materially violate its fiduciary responsibilities as a General Partner of the Partnership;
(b) Violate the Completion guaranty set forth in Section 4.1 hereof;
(c) Be in material breach of any provision . . . of this Agreement . . . or any other document for fifteen (15) days after notice thereof has been given . . . ; provided, however, that if such breach is of the type that cannot reasonably be cured within fifteen (15) days, the Administrative Limited Partner shall not have the right to remove a General Partner under this Section 11.4(A)(i)(B) with respect to such breach for a ninety (90) day period after such notice is given so long as such General Partner is diligently pursuing a cure of such breach . . . and accomplishes such cure within such ninety (90) day period;
(d) Willfully violate any law, regulation or order applicable to the Partnership which has or is likely to have a material adverse effect on the Partnership or the Apartment Complex; or
(e) Become Bankrupt . . . (Appellate Record D-3, Ex. A at § 11.4(A)(i).) A Major Default also occurs when the Partnership is "in material breach of any Project Document or any other material agreement or document . . . affecting the Partnership, which breach has failed to have been cured within any applicable cure or grace period." (Id. at § 11.4(A)(ii)(a).) The Mortgage and its underlying mortgage note are such Project Documents. (Id. at Art. 1, defining "Project Documents.")
In case of a Major Default, the Partnership Agreement grants Alliant XIV -- as the Administrative Limited Partner -- the power to remove the Debtor as General Partner:
Upon a Major Default, the Administrative Limited Partner shall have . . . the right, but not the obligation, in the sole discretion of the Administrative Limited Partner, upon ten (10) days' prior notice to such General Partner, to remove such General Partner (and, if the Administrative Limited Partner so elects) all other General Partners who are Affiliates of such General Partner and to appoint itself or any of its Affiliates or any other Person to succeed General Partners(s) as a General Partner in accordance with the provisions of Section 11.2 hereof. (Appellate Record D-3, Ex. A at § 11.4.) When the Administrative Limited Partner removes the General Partner from the Partnership, the General Partner's rights and interests in the Partnership terminate automatically, though the General Partner remains liable to the Partnership for any past and/or future obligations:
In the event of . . . the removal of a General Partner pursuant to Section 11.4 . . . the Interest of the General Partner shall immediately and automatically terminate on the effective date of such Withdrawal . . . and such General Partner shall have no further right to participate in the management or operation of the Partnership or to receive any future allocations of Profits and Losses, any distributions from the Partnership or any other funds or assets of the Partnership, nor shall it be entitled to receive or to be paid by the Partnership any further payments of fees . . . or to be paid any outstanding loans made by it to the Partnership. From and after the effective date of such Withdrawal . . . the rights of such Withdrawing General Partner to receive or be paid such allocations, distributions, funds, assets, fees or repayments shall be reallocated to the other General Partners, or if there is no other General Partner at that time, to the Administrative Limited Partner.
Notwithstanding such Withdrawal . . . such Withdrawing General Partner shall remain liable to the Partnership and the other Partners for all obligations theretofore incurred by it under this Agreement, or which may arise upon . . . such Withdrawal. (Appellate Record D-3, Ex. A at §11.1(B).)
The Partnership Agreement prescribes several notice provisions which the Administrative Limited Partner must utilize in order to effect such a removal of the Debtor as General Partner. § 15.4 of the Partnership Agreement requires the following method of notice for communications between the Debtor (as the General Partner) and Alliant XIV (as the Administrative Limited Partner):
All notices, demands, solicitations of consent or approval, and other communications hereunder required or permitted shall be in writing and shall be deemed to have been given (i) when personally delivered or telecopied, (ii) one business day after the date when deposited with an overnight courier, or (iii) five (5) days after the date when deposited in the United States mail and sent postage prepaid by registered or certified mail, return receipt requested, addressed as follows:
A. If to the Partnership and/or the General Partners, to the intended recipient at:
St. Casimir Development Corp. 294 Bronxville Road, #2H Bronxville, New York 10708 Attention: Mr. Gary Flocco Telephone: (914) 395-1180 Telecopy: (914) 329-0720 with a copy to:
Jenkens & Gilchrist Parker Chapin LLP 405 Lexington Avenue New York, New York 10174 Attention: Mark A. Limardo, Esq. Telephone: (212) 704-6046 Telecopy: (212) 704-6288 ***
C. If to the Administrative Limited Partner, to the intended recipient at: c/o Alliant Asset Management Company LLC 21550 Oxnard Street, Suite 1020 Woodland Hills, California 91367 Attention: Tony Palaigos, Esq.
Telephone: (818) 668-6800 Telecopy: (818) 668-2828 with a copy to:
Riordan & McKinzie 300 South Grand Avenue, 29th Floor Los Angeles, California 90071 Attention: Lance Bocarsly, Esq. Telephone: (213) 229-8454 Telecopy: (213) 229-8550 (Appellate Record D-3, Ex. A at § 15.4.)
B. The Debtor's Mortgage Default and Alliant's Notices of Default and Removal
According to the Debtor's own calculations, the Mortgage has been in some measure of default continuously since June 2004. (Appellate Record D-16, Ex. 6.) At the close of March 2005, the outstanding Mortgage balance stood at $185,901.91. (Id.) At the close of May 2005, the outstanding balance totaled $246,894.65. (Id.) Between May and September 2005, the Mortgage balance grew to $269,295.88. (Id.) And by the time oral argument on Alliant's motions took place in the bankruptcy court on April 4, 2006, the balance had ballooned to approximately $560,000.*fn3 (Appellate Record A-11 at 2:16-20.)
In light of these mortgage defaults, Alliant took action to remove the Debtor as the General Partner. On April 4, 2005, Alliant sent a letter via facsimile and overnight mail to Debtor, notifying Debtor that it was "in Major Default under the Partnership Agreement" and "demand[ing]" that Debtor "take immediate action to cure each and every default listed in the" notice letter "within 15 days," as prescribed by the Agreement ("First Default Notice"). (Appellate Record D-3, Ex. J.) The First Default Notice alleged three separate Major Defaults by the Debtor, as General Partner: 1) Debtor "is severely delinquent in making its required mortgage payments to [Arbor, which] . . . constitute[s] Development Deficits under Section 4.2 of the Partnership Agreement, which [Debtor] is required to fund, [and] defaults under Section 5.2(E)," 2) Debtor has "failed to submit both preliminary and final drafts of the annual financial statements of the Partnership," and 3) Debtor has "failed to submit to the limited partners the Partnership's ...