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Chord Associates LLC v. Protech 2003-D

March 25, 2010

CHORD ASSOCIATES LLC, JOPAL ENTERPRISES LLC; AND BARBARA M. SAEPIA, PLAINTIFFS,
v.
PROTECH 2003-D, LLC, AMTAX HOLDINGS 520, LLC; PROTECH HOLDINGS 128, LLC; CAPMARK AFFORDABLE EQUITY HOLDINGS INC; CAPMARK FINANCE INC. (FORMERLY KNOWN AS GMAC COMMERCIAL MORTGAGE CORPORATION), ITS SUCCESSORS AND ASSIGNS; CAPMARK CAPITAL INC. (FORMERLY KNOWN AS GMAC COMMERCIAL HOLDING CORPORATION), DEFENDANTS.
AMTAX HOLDINGS 520, LLC, PROTECH 2003-D, LLC, CAPMARK FINANCE, INC., CAPMARK CAPITAL, INC. AND PROTECH HOLDINGS 128, LLC, COUNTERCLAIM-PLAINTIFFS
v.
CHORD ASSOCIATES LLC, BARBARA M. SAEPIA, JOPAL ENTERPRISES LLC, JOPAL ASSOCIATES, INC., AND ROLAND CONDE, COUNTERCLAIM-DEFENDANTS.



The opinion of the court was delivered by: A. Kathleen Tomlinson, Magistrate Judge

MEMORANDUM AND ORDER

This case arises out of Defendants' assumption of duties as developers of the affordable housing project known as Belmont Villas, a planned retirement community. Compl. ¶¶ 15, 17.

Plaintiff Jopal Enterprises("Jopal")purchased an 11 acre parcel of land in February 2001 to develop this retirement community in West Babylon, New York. Id., ¶ 17. In October 2003, Belmont Villas LLC was formed, consisting of two members - - Plaintiff Chord Associates LLC ("Chord") as the Managing Member and Plaintiff Barbara Saepia ("Saepia") as the second member. Saepia was and remains the sole member of Chord. Id., ¶ 19. In 2003, Jopal began discussions with GMAC (later known as Capmark Finance Inc. ("Capmark")), along with other financial institutions, to underwrite and syndicate the project's financing. Id., ¶ 24. In December 2003, Jopal transferred title to the project to Belmont Villas. Id., ¶ 20. The project was financed in part through bonds issued by the Suffolk County Industrial Development Agency ("IDA") and the sale of Low Income Housing Tax Credits. Id., ¶¶ 21, 23. Ultimately, Capmark arranged for permanent financing with Fannie Mae. Id., ¶ 25.

Multiple problems ensued with the construction of the project, including but not limited to environmental law violations. Those problems generated this litigation in which Plaintiffs seek damages for alleged (1) breach of contract by Capmark and its Affiliates for purportedly submitting false information to the Town of Babylon, failing to provide financial information to Plaintiffs, and failing to achieve project completion in a timely manner and at the agreed-upon cost; (2) negligence based on Defendants' breach of their duty to Plaintiffs under the Construction Agreement Amendment to achieve completion by October 31, 2006 at a specified cost; (3) breach of the obligation of good faith and fair dealing under New York law based on Defendants' alleged frustration of Plaintiffs' essential purpose in entering into the various agreements; (4) breach of fiduciary duty based upon Defendants' assumption of the duties and responsibilities of Managing Member of Belmont; (5) Defendants' exercise of improper control, upon execution of the Amendments, resulting in unjustified cost overruns and loss of income; (6) fraudulent misrepresentations by Capmark and its Affiliates concerning financial and environmental issues in the sworn Owner's Statements and the wrongful removal of Chord as Managing Member; (7) Defendants' transmittals of certain emails causing damage to Plaintiffs' reputations in the Housing Tax Credit, Town, Government and local communities; (8) tortious interference with contracts; and (9) conflicts of interest created by Defendant Capmark and its Affiliates.

On November 5, 2009, counsel for all of the corporate Defendants in this action notified the Court [DE 148] that Defendants Capmark Affordable Equity Holdings Inc., Capmark Finance Inc. and Capmark Capital Inc. filed voluntary Chapter 11 petitions under the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Proof of the bankruptcy filings was attached to Defendants' motion. As Defendants' counsel notes, this action, as against these three Defendants, is now automatically stayed, pursuant to 11 U.S.C. § 362(a).

However, Defendants' counsel seeks a stay of this entire litigation based upon the bankruptcy filings. According to counsel, Defendants Protech Holdings 128, LLC, Amtax Holding 520, LLC and Protech Holdings 128 LLC are each special-purpose entities and are wholly owned subsidiaries of Capmark Affordable Equity Holdings, Inc. Plaintiffs oppose the motion on the grounds that the "gravamen of plaintiffs' complaint is against non-debtors Defendants Amtax Holdings 520, LLC, Protech 2003-D, LLC and Protech Holdings 128, LLC ('Membership Entities'), which have various membership roles with the apartment complex at issue, Belmont Villas LLC ('Project'), which also is not a debtor." DE 149 at 1. Although Plaintiffs do not oppose a stay as to the Capmark entities which filed bankruptcy petitions, they do object to a stay of all pending proceedings. Plaintiffs also note that the Counterclaim is asserted by the Membership Entities, not the Capmark Defendants who filed for bankruptcy, and so the counterclaim is clearly not stayed. DE 149 at 2. Based upon the parties' submissions, the positions proffered at oral argument, and the applicable case law, Defendants' motion is determined as set forth below.

I. PROCEDURAL STATUS

Following Defendants' letter motion and Plaintiffs' opposition, Defendants submitted a letter request to Judge Bianco seeking a telephone conference to address the request for this action to be taken off the calendar and held in a suspense mode due to the bankruptcy filings. See DE 150. Newly added Counterclaim-Defendant Roland Conde, who is proceeding pro se in this matter, filed a letter objecting to any stay, stating that "because a debtor's counterclaims are not covered by the automatic stay, there exists no stay requiring the suspension of my discovery" and that given his current physical and financial circumstances, if a stay were to be granted he "will be prejudiced more so than any party to this litigation." See DE 151. After speaking with the parties during a phone conference on November 30, 2009, Judge Bianco directed that the motion to stay was referred/assigned to me based upon my familiarity with the case at that juncture. See Electronic Order of November 30, 2009. I scheduled oral argument of the motion for December 17, 2009.

At the conclusion of the hearing, I gave the parties until December 31, 2009 to file an additional submission to address the issues I raised at the hearing which had not been fully answered by the parties. Defendants filed three pages of supplemental briefing, with eight confidential exhibits filed under seal. See DE 157. Plaintiffs did not file any supplemental briefing. Third-party Defendant Roland Conde submitted a letter dated December 30, 2009 [DE 159]. Several weeks later, Mr. Conde filed a response [DE 160] to Defendants' December 31, 2009 filing, without obtaining any permission from the Court to make such a filing. Consequently, the Court will not consider DE 160. In light of that determination, the Court also denies Defendants' motion to supplement its prior submission [DE 161] to address Mr. Conde's January 15, 2010 reply.

With the final submissions having been made, the Court now turns to analyzing Defendants' motion for a discretionary stay, or, in the alternative, for a ruling that the § 362 automatic stay currently in place for the three Capmark Defendants encompasses the wholly owned subsidiaries (i.e., the Membership Entities) on the grounds that these non-debtor Defendants are "inextricably intertwined" with the Capmark Defendants as applied to this case.

II. APPLICABLE LAW

The automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362(a)(1), states that

[e]xcept as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of-(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title . . . (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate. . . . "It is well-established that stays pursuant to § 362(a) are limited to debtors and do not encompass non-bankrupt co-defendants." Teachers Ins. & Annunity Ass'n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir. 1986); Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, 516 (2d Cir. 1998); Koolik v. Markowitz, 40 F.3d 567 (2d Cir.1994); Dorsett-Felicelli, Inc. v. County of Clinton, Civ. No. 1:04-CV-1141, 2009 WL 1652183, at * 3 (N.D.N.Y. June 5, 2009); Kilmer v. Flocar, Inc., 212 F.R.D. 66, 73 (N.D.N.Y.2002). "Chapter 11, unlike Chapter 13, contains no provision to protect non-debtors who are jointly liable on a debt with the debtor." Teachers Ins. & Annunity Ass'n of Am., 803 F.2d at 65.

By its terms, section 362 applies only to debtors, property of the debtor, or property of the estate, and does not apply to stay proceedings against non-debtors. In re Calpine Corp., 365 B.R. 401, 408 (S.D.N.Y. 2007). However, courts have extended the automatic stay to non-bankrupt co-defendants in "unusual circumstances." One of the earliest decisions reflecting this exception is A. H. Robins Co., Inc. v. Piccinin, 788 F.2d 994 (4th Cir. 1986) where the court granted a preliminary injunction restraining the prosecution of a products liability case against the debtor's co-defendants. Id.at 1016. In doing so, the Fourth Circuit provided some guidance as to the parameters of such "unusual circumstances":

This "unusual situation," it would seem, arises when there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor. An illustration of such a situation would be a suit against a third-party who is entitled to absolute indemnity by the debtor on account of any judgment that might result against them in the case. To refuse application of the statutory stay in that case would defeat the very purpose and intent of the statute.

Id. at 999. The Second Circuit provided some further clarification in Queenie Ltd. v. Nygard Int'l, 321 F.3d 282 (2d Cir. 2003):

The automatic stay can apply to non-debtors, but normally does so only when a claim against the non-debtor will have an immediate adverse economic consequence for the debtor's estate. Examples are a claim to establish an obligation of which the debtor is a guarantor (citation omitted), a claim against the debtor's insurer (citation omitted), and actions where "there is such identity between the debtor and a third party defendant that the debtor may be said to be the real party defendant. . . " (citation omitted).

Queenie, 321 F.3d at 287-288 (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986). With these principles in mind, the Court now turns to the facts of the instant case.

III. DISCUSSION

It should be noted at the outset that none of the parties contest the fact that Defendants Capmark Affordable Equity Holdings Inc., Capmark Finance Inc. and Capmark Capital Inc. come within the automatic stay provisions of 11 U. S. C. ยง 362 (a). The dispute arises over the treatment of the non-filing defendant entities. In addition, the Court further notes that the Defendants have brought no information to the Court's attention showing that the Delaware Bankruptcy Court also stayed all actions as to the wholly owned subsidiaries who are Defendants in this case. It seems clear, ...


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