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Adirondack Mines, Inc. v. United States Trustee

November 16, 2010


The opinion of the court was delivered by: Gary L. Sharpe District Court Judge


I. Introduction

Appellant Adirondack Mines, Inc. filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code, which was dismissed by the bankruptcy court pursuant to 11 U.S.C. § 1112(b). (See Dkt. No. 2:9.) Pending is Adirondack's appeal of the bankruptcy court's order. (See Dkt. No. 1.) For the reasons that follow, the bankruptcy court's order is affirmed and the appeal is dismissed.

II. Background

Adirondack Mines, Inc., a New York corporation, was formed on March 19, 2009. (See Voluntary Pet. at 28, Dkt. No. 3.) Christine Thomas is the president and sole shareholder of Adirondack. (See id. at 4, 22.) On April 1, 2009, shortly after Adirondack's formation, five rental properties located in Las Vegas, Nevada, were transferred to Adirondack by quitclaim deed, four from Thomas and one from a grantor with the same address as Thomas. (See Appellant Exs. 1-5, Dkt. No. 2:5.) While each deed recites a money amount for consideration, there is no evidence that any payment was made or received.

At the time of the transfer, all five properties were subject to, among other things, a note and deed of trust executed by Christine Thomas or her husband, Anthony Thomas. (See Appellee Exs. B-D, F, H, Dkt. Nos. 7:7-9, 8:1, 8:3.) Each deed of trust requires the lender's approval of any successor in interest and further includes a "due on sale" clause, which protects the lender's right to demand immediate full payment if the property is sold or transferred without the lender's written consent. (See id.) At no point prior to the April 1, 2009 transfer of the five properties did Thomas notify or seek to obtain the consent of the lender. (See Thomas Aff. ¶ 5, Dkt. No. 7:3.)

At some point after April 1, 2009, Adirondack issued a promissory note in the amount of $950,000 to International Mining, Inc. for a "[c]laim against [the] State of New York for failure to renew [a] mining permit in Groton, NY." (See Voluntary Pet. at 11, Dkt. No. 3; see id. at 16 (identifying International Mining, Inc. as an unsecured creditor with a claim for $950,000).) Adirondack later submitted that "the value of the claim is speculative." (See Proposed Disclosure Statement at 3, Dkt. No. 2:4.) There is no evidence that Adirondack has ever commenced litigation against New York State on this claim. (See Lodico Decl. ¶ 3, Dkt. No. 2:6.) This claim appears to be the only basis for Adirondack's otherwise unsupported assertion that its business includes "[m]ining, sand and gravel exploration." (See Voluntary Pet. at 4, Dkt. No. 3.)

On June 18, 2009, Adirondack filed a voluntary chapter 11 petition, allegedly to reorganize and initiate a chapter 11 plan. (See generally id.)

The monthly operating reports submitted by Adirondack showed, inter alia, that Adirondack had made no mortgage payments and thereby accumulated $88,578 in unpaid post-petition secured debt for the period of July 2009 through December 2009. (See Dkt. Nos. 3:3-5, 4:9, 4:16, 4:24.) In explaining how it intended to pay this debt, Adirondack only managed to state repeatedly that "[s]ecured [d]ebts have not been paid." (Id.)

On February 10, 2010, acting on the U.S. Trustee's motion to dismiss, (see Dkt. No. 2), the bankruptcy court issued an oral decision dismissing Adirondack's case under 11 U.S.C. § 1112(b) based on the determination that Adirondack acted in bad faith in acquiring the Las Vegas rental properties and in filing its chapter 11 petition. (See Feb. 10, 2010 Hr'g Tr. at 5-6, Dkt. No. 2:12; see also Bankr. Order, Dkt. No. 2:9 (memorializing oral decision).)

On April 7, 2010, Adirondack filed a notice of appeal of the bankruptcy court's order with the United States District Court for the Northern District of New York. (See Dkt. No. 1.) Adirondack and the U.S. Trustee each filed a Designation of Items to be Included in the Record. (See Dkt. Nos. 2-8.) Both parties also filed their briefs with the court. (See Dkt. Nos. 10, 12; see also Reply Brs., Dkt. Nos. 13, 15.)

III. Discussion

The district court sits as an appellate court when a bankruptcy order is appealed. See 28 U.S.C. § 1334. The district court may affirm, reverse, or modify the bankruptcy court's ruling, or remand the case for further proceedings. FED. R. BANKR. P. 8013. This court reviews the bankruptcy court's findings of fact for clear error, and its conclusions of law de novo. See Nat'l Union Fire Ins. Co. v. Bonnanzio (In re Bonnanzio), 91 F.3d 296, 300 (2d Cir. 1996). The finding of bad faith is generally considered a factual issue that is subject to clear error review. See C-TC 9th Ave. P'ship v. Norton Co. (In re C-TC 9th Ave. P'ship), 113 F.3d 1304, 1312 n.6 (2d Cir. 1997); see also U.S. Fid. & Guar. Co. v. DJF Realty & Suppliers, Inc., 58 B.R. 1008, 1011 (N.D.N.Y. 1986). And a dismissal for bad faith, which involves a bankruptcy court's exercise of equitable discretion, is reviewed for abuse of discretion. See In re First Conn. Consulting Group, Inc., 254 Fed. Appx. 64, 68 (2d Cir. 2007).

Under 11 U.S.C. § 1112(b), a bankruptcy court may dismiss a chapter 11 petition if the party moving for dismissal can establish cause. In addition to the non-exhaustive list of examples enumerated in § 1112(b)(4), cause for dismissal may exist where a chapter 11 petition is filed in bad faith. See C-TC 9th Ave. P'ship, 113 F.3d at 1310-11. To establish bad faith, the movant must satisfy a two-pronged test by a preponderance of the evidence. First, the movant must demonstrate the objective futility of the reorganization process such that at the time of filing there was "no reasonable probability that [the debtor] would eventually emerge from bankruptcy proceedings." In re Cohoes Indus. Terminal, Inc., 931 F.2d 222, 227 (2d Cir. 1991) (citing, inter alia, Carolin Corp. v. Miller, 886 F.2d 693, 698-702 (4th Cir. 1989)). Second, in demonstrating subjective bad faith, the movant must show that there "was no reasonable likelihood that the ...

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