In Re Shea & Gould
DECISION ON MOTION OF RONALD L. DURKIN TO DISMISS CHAPTER 11 CASE
Ronald L. Durkin (“Durkin”), in his capacity as Trustee of the Benchmark Irrevocable Trust (the “Trust”), seeks an order pursuant to § 1112(b) of the Bankruptcy Code dismissing Shea & Gould’s (“S & G” or “debtor”) chapter 11 case. Debtor, the Official Committee of Unsecured Creditors (the “Committee”) and The Chase Manhattan Bank, as successor in interest to Chemical Bank (“Chase”), oppose the motion. We deny it.
Facts
The relevant facts are not in dispute. S & G is a New York partnership founded in 1964. Prepetition, it was engaged in the practice of law, with its principal office located in New York City and with offices also located in Washington, D.C., Albany, New York and Miami, Florida. As of January 1, 1994, S & G consisted of 71 partners, six of-counsel attorneys, 138 associates and 352 support staff personnel. On or about January 27, 1994, S & G’s partners voted to dissolve the firm effective as of March 31, 1994 and adopted a dissolution plan (the “Dissolution Plan”) which called for the winding up of the partnership in an orderly manner. That plan established a liquidation committee consisting of John B. Grant, Jr., James I. Hisiger, Peter C. Neger and Richard L. Spinogatti (the “Dissolution Committee”) to oversee the winding up of S & G’s affairs. The Dissolution Plan authorized members of the Dissolution Committee to take all actions necessary in connection with debtor’s liquidation, including the filing of a petition for relief under the Bankruptcy Code. S & G continued its law practice for a short time after the dissolution vote, but only to avoid disruption in the handling of ongoing client matters and to facilitate a smooth transition of personnel to new law firms. On January 28, 1994, in part to satisfy the requirements of the WARN Act, 29 U.S.C. § 2101 et seq., debtor notified its employees that it intended to dissolve as of March 31, 1994. Notwithstanding S & G’s attempts to wind up its affairs outside of court, creditors threatened it with involuntary bankruptcy. Accordingly, on December 22, 1995,. S & G filed a petition under chapter 11 of the Bankruptcy Code.
In 1992, Durkin commenced litigation (the “California Litigation”) against S & G and certain other defendants in the United States District Court for the Southern District of California, seeking more than $150 million on account of, among other things, S & G’s alleged malpractice. S & G denies liability to Durkin and is defending that litigation. Durkin has filed a proof of claim based on claims he is asserting therein. After learning of the commencement of this case, Durkin unsuccessfully lobbied the Office of the United States Trustee to appoint him to the Committee or to an additional committee of malpractice claimants. In November 1996, he moved this court for orders directing the appointment of an official committee of malpractice claimants and for relief from the automatic stay to liquidate the Trust’s claims in the California Litigation. In February 1997, Durkin withdrew his motion for the appointment of a separate committee. By order dated April 30, 1997, we granted Durkin stay relief to proceed to judgment in the California Litigation.
In support of its chapter 11 petition, S & G represents that it “intends to file a plan of liquidation under chapter 11 of the Bankruptcy Code.”
See
Local Bankruptcy Rule 52 (now 1007-2) Affidavit ¶18. Accordingly, S & G is the latest in a succession of law firm or professional partnerships in this district utilizing chapter 11 to wind up its affairs and liquidate its assets. Each confirmed a liquidating chapter 11 plan.
See In re Bower & Gardner,
94 B 44743(CB) (Bankr.S.D.N.Y.);
In re Gaston & Snow,
The Amended Plan calls for the payment (either in full or in part) of allowed claims against S & G from, among other sources: (i) cash on hand; (ii) the continued collection of receivables and work-in-progress retained by S & G under the Amended Plan; (iii) the pursuit of potential litigation claims and avoidance actions against third parties; and (iv) the liquidation of S & G’s non-receivable assets. S & G intends to satisfy allowed malpractice claims from applicable malpractice insurance. The Amended Plan contemplates that the primary source of recoveries for uninsured, unsecured, recourse creditors will be contributions from S & G partners who voluntarily contribute to the funding of the Amended Plan and who, in consideration therefor, will benefit from a permanent injunction under § 105(a) of the Bankruptcy Code. It also provides that a Plan Administrator will be appointed to seek appropriate recoveries from partners who do not elect (or who default in their commitment) to voluntarily contribute under the Amended Plan.
Discussion
We have subject matter jurisdiction of this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a) and the July 10,1984 “Standing Order of Referral of Cases to Bankruptcy Judges” of the United States District Court for the Southern District of New York (Ward, Acting C.J.). This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A) and (O).
Under § 1112(b) of the Bankruptcy Code, we can dismiss or convert a chapter 11 case “for cause”. See 11 U.S.C. § 1112(b). The statute lists ten non-exclusive bases for relief. Id.;
1
see also C-TC 9th Avenue Partnership v. Norton Co. (In re C-TC 9th Avenue Partnership),
Section 109(d) of the Bankruptcy Code governs who may be a debtor under chapter 11 of the Bankruptcy Code. In relevant part, it states that “[ojnly a person who may be a debtor under chapter 7 of [the Bankruptcy Code], except a stockbroker or a commodity broker, and a railroad may be a debtor under chapter 11 of [the Bankruptcy Code].” 11 U.S.C. § 109(d). With certain irrelevant exceptions, § 109(b) states that a “person” may be a debtor under chapter 7 of the Bankruptcy Code. 11 U.S.C. § 109(b).
2
For these
Debtor, the Committee and Chase dispute Durkin’s interpretation of In re C-TC and deny that it carries the weight of stare decisis and that it is binding on this court. They argue that we must deny Durkin’s motion because, at a minimum, a partnership in dissolution can liquidate under chapter 11. Alternatively, they contend that if we determine that Durkin’s reading of In re C-TC is correct, and that the decision carries the weight of stare decisis, we cannot give it retroactive effect because we will undo the myriad final orders entered to date herein. Finally, they contend that we should deny Durkin’s motion as barred by laches.
We first review our court of appeals’ decision in
In re C-TC.
There, the debtor (“C-TC”) was a New York partnership in dissolution, whose sole asset was Cloverleaf Distribution Center (“Cloverleaf’), a 21-acre warehouse complex. When C-TC commenced its ease, Cloverleaf was the subject of a prepetition judgment of foreclosure in favor of Norton Company (“Norton”), CTC’s largest creditor and only secured creditor.
C-TC was formed to acquire Cloverleaf. Prepetition, C-TC executed an agreement with Norton (then Cloverleaf s owner) to purchase Cloverleaf and then lease approximately one-half of the property back to Norton. The agreement obligated C-TC to pay $25,-000 in cash upon signing and another $850,-000 in cash at closing, and to execute a $2,850,000 note secured by a mortgage on Cloverleaf. Id. at 1306-07. C-TC executed the note and mortgage but for various reasons, it failed to make any of the required payments. Norton brought two actions against C-TC. The first alleged that C-TC breached its obligations under the note by failing to make the cash payments, and the second sought foreclosure of the mortgage on Cloverleaf due to C-TC’s breach of its obligations under the note and mortgage. Id. at 1307. C-TC counterclaimed in the foreclosure action, alleging breach of the purchase agreement and fraud. The state court severed the counterclaims from the foreclosure action. The court granted Norton summary judgment foreclosing the mortgage, and appointed a receiver for Cloverleaf. That day, C-TC filed its chapter 11 petition, thereby staying the state court proceedings. Id. Among other things, Norton moved to dismiss C-TC’s chapter 11 ease.
In its bankruptcy petition, and during the 13 months that its chapter 11 case was pending, C-TC held itself out as a reorganizable entity, notwithstanding that it (i) did hot qualify as a partnership under state law since it only had one partner, (ii) had no employees or pre or postpetition operations, (iii) failed to pay postpetition property and other taxes, and (iv) never filed a reorganization plan and likely could not have confirmed one over Norton’s objection. Id. at 1307, 1311-12.
The court of appeals found that C-TC’s sole asset was Cloverleaf, that it had few unsecured creditors and their claims were
Boston Post Road Ltd. Partnership v. Federal Deposit Insurance Corp. (In re Boston Post Road Ltd., Partnership), 21
F.3d 477 (2d Cir.1994),
cert. denied,
The doctrine of
stare decisis
mandates that we follow a decision of our court of appeals until it is overruled, provided it is “on all fours” with the matter before us. 18 Moore’S Federal Practice § 134.02[2] at 134-19, 134-28 (3d ed.1997);
see also United States v. R.J. Saunders & Co.,
In re C-TC is plainly not “on all fours” with this case. S & G did not commence this case in response to an adverse state court judgment or to delay the enforcement of legitimate claims against it. It filed the ease in response to threatened involuntary bankruptcy, after its failed attempt to wind up its affairs outside of court. This is not a single asset real estate case where the debtor has few creditors other than an undersecured lender. S & G has substantial liabilities spread among approximately 260 creditors and assets consisting of work in process, accounts receivables, non-receivable assets and avoidance causes of action. With the Committee’s support, S & G has filed its Amended Plan and Amended Disclosure Statement. Only this motion has delayed our consideration of debtor’s motion pursuant to § 1125 of the Bankruptcy Code for an order approving the Amended Disclosure Statement. Under the standard enunciated in In re C-TC, S & G plainly did not file this chapter 11 case in bad faith, and Durkin does not contend otherwise. Furthermore, the C TC court’s determination that a partnership in dissolution is not a person eligible to reorganize under chapter 11 does not mandate that we dismiss this case. Unlike C-TC, debtor has never represented that it will reorganize under chapter 11. It filed this chapter 11 case to wind up it affairs and liquidate its assets — not to reorganize them.
Still, Durkin contends that we must dismiss this liquidating chapter 11 case because under
In re C-TC,
S & G is ineligible to be a
We disagree with Durkin that
In re CTC
holds that a partnership in dissolution cannot liquidate under chapter 11. As noted, throughout the life of its case C-TC held itself out as an entity seeking to reorganize in chapter 11. After unsuccessfully defending Norton’s motion to dismiss in the bankruptcy court and failing to persuade the district court on appeal to reverse the bankruptcy court, C-TC retained new counsel. Among other things, he argued to the court of appeals that even if C-TC could not reorganize, it was eligible for chapter 11 relief because the Bankruptcy Code permits a debtor to liquidate under chapter 11.
[i]n any event, while a debtor may conclude Chapter 11 proceedings by liquidating and may even enter them with an intent to liquidate if necessary, there is no reason a debtor should be permitted to enter these proceedings without a possibility of reorganization. C-TC has not claimed that there was (or is) any possibility of reorganization here. Hence, although the issue is waived, we believe that it is, in any event, without merit.
Id.
The doctrine of
stare decisis
“is limited to actual determinations in respect to litigated and necessarily decided questions”
Warner Bros., Inc. v. Dae Rim Trading, Inc.,
Durkin insists that even if that portion of the court’s decision is dictum, it nevertheless is persuasive authority, and that if faced with the issue, our court of appeals will find that a New York partnership in dissolution is ineligible to wind up its affairs and liquidate its assets under chapter 11. However justified the court was in finding that C-TC could not reorganize under chapter 11, we do not think that the court would bar S & G from liquidating thereunder. Under New York law,
see
N.Y. Partnership Law § 62(5) (McKinney 1997), and the laws of most states,
see
Uniform Partnership Act § 31, a bankruptcy filing by a partnership or one of its partners causes the partnership to dissolve. Thus, if a “partnership in dissolution” could neither liquidate nor reorganize under chapter 11, partnerships would be foreclosed from filing chapter 11 cases. We do not believe that our court of appeals would reach that conclusion. It flies in the face of the statute which authorizes a partnership to be a chapter 11 debtor,
see
11 U.S.C. §§ 101(41), 109, permits the
Finally, we think that there is case law in this circuit which supports the notion that a partnership in dissolution can liquidate in chapter 11. In
New Haven Radio, Inc. v. Meister (In re Martin-Trigona),
To deny New Haven Radio, Inc. the benefits of reorganization or liquidation under the federal bankruptcy law would be contrary to the central purpose of the federal code. On the other hand, carrying out theliquidation of New Haven Radio, Ine. under the federal code is fully consistent with the plan and purpose of the Connecticut statute authorizing dissolution by forfeiture. In short, on this point, we hold that the filing by the Secretary of State of a certificate of forfeiture which effected the dissolution of the debtor corporation on May 30, 1980, did not deprive the bankruptcy court of jurisdiction over the voluntary Chapter 11 reorganization proceeding filed in September 1980.
Id. at 1342-43.
In
Cedar Tide Corp. v. Chandler’s Cove Inn, Ltd. (In re Cedar Tide Corp.),
In
In re C-TC,
the court of appeals cited
Cedar Tide
in making the point that while a New York corporation in dissolution can be reorganized in chapter 11 provided it is reinstated, a partnership in dissolution cannot be reinstated and thus, cannot be reorganized in chapter 11.
See
Contrary to Durkin’s assertion, a New York partnership does not cease to exist when it dissolves. Rather, it continues to exist to the extent necessary to wind up partnership affairs. N.Y. Partnership Law, § 64 (McKinney 1997); see also id. § 60 (distinguishing between dissolution of partnership and winding up of partnership’s business). The attributes of a corporation in dissolution under New York law are substantially identical to those of a New York partnership in dissolution, except that a partnership cannot be reinstated. Significantly, under both corporation and partnership law, the dissolved entity has a cognizable legal existence for the purpose of winding up its affairs. See N.Y. Partnership Law § 60 (McKinney 1997), N.Y. Bus. Corp. Law §§ 1005, 1006 (McKinney 1997). Moreover, as with. New York corporations, nothing in the New York partnership laws prohibits a partnership in dissolution from conducting its ■winding up proceedings under the Bankruptcy Code. Martin-Trigona permitted a corporation in dissolution to wind up its affairs and liquidate its assets pursuant to a liquidating chapter 11 plan. We do not read the opinion as making the fact that the corporate debtor had the option under state law to seek reinstatement and then reorganize relevant to the court’s decision to permit the debtor to wind up its affairs pursuant to a liquidating chapter 11 plan. Given the substantial similarities between New York partnership and New York corporation law, and the plain language of the Bankruptcy Code, we believe that our court of appeals would permit S & G to wind up its affairs and liquidate its assets pursuant to a liquidating chapter 11 plan.
As a general rule, we must apply the law m effect when we render our decision.
See Scelsa v. City University of New York,
S & G argues that if, as Durkin contends, In re C-TC promulgates a new rule of law in tMs circuit regardmg a partnersMp’s eligibility for chapter 11 relief, we cannot apply it retroactively to somehow undo the myriad final orders entered in this chapter 11 case, mcludmg, most importantly, the order for relief issued on December 22, 1995 and not questioned until now. Given our reading of In re C-TC, we need not address this issue. However, in the exercise of judicial economy, and to provide a complete record for any reviewing court, we consider and reject the argument.
S & G contends that the Bankruptcy Code treats the order for relief as a judgment in
rem
that fixes the parties’ rights to estate property as of the time the debtor files its bankruptcy petition.
See
2 Collier On Bankruptcy ¶ 301.07 at p. 301-14-15 (15th ed. rev.1997). Since the order for relief has never been appealed or reconsidered, S & G argues that it is a final order impervious to any retroactive impact of
In re C-TC.
An order for relief m a voluntary bankruptcy ease is entered automatically under § 301 of the Bankruptcy Code.
See
11 U.S.C. § 301. It imtiates the bankruptcy process. The entry of an order for relief does not determine a debtor’s eligibility to be a debtor under the Bankruptcy Code, or any other substantive legal matter. It does not end litigation on the merits. As such, it is not “final” for purposes of application of the doctrine of retroactivity. Moreover, Durkin is not attemptmg to invalidate or otherwise vacate a particular final order. Thus, if
In re C-TC
Laches is “an equitable defense based on the ... maxim vigilantibus non dormientibus aequitas subvenit (equity aids the vigilant, not those who sleep on their rights).”
Ivani Contracting Corp. v. City of New York,
As a general rule, “when a plaintiff brings a federal statutory claim seeking legal relief, laches cannot bar that claim, at least where the statute contains an express limitations period within which the action is timely.”
Id.
Because § 1112(b) contains no express limitations period, courts exercise their equitable discretion to deny a § 1112(b) motion as untimely based in whole or in part on the doctrine of laches.
See Peterson v. Atlas Supply Corp. (In re Atlas Supply Corp.),
Durkin filed this motion approximately 19 months after S & G commenced this case. He denies that he is guilty of laches and argues that his motion is timely since he moved promptly after the court of appeals issued its In re C-TC decision. It is undisputed that Durkin brought In re C-TC to the court’s attention seven days after the court of appeals issued its decision and that he filed his motion approximately one month later. If In re C-TC states a new legal principle in this circuit regarding the eligibility of a dissolved partnership to file a liquidating chapter 11 case, laches cannot bar Durkin’s motion since he promptly moved for relief after the court of appeals issued its opinion. However, if, as we have found, the case does not state such a new legal principle, the doctrine of laches precludes Durkin’s motion.
Whether a partnership in dissolution is eligible for chapter 11 relief has been an issue in this district since at least 1983. See
In re Fitzgerald Group,
Durkin could have advanced the same legal arguments he is making now 19 months ago when debtor filed this ease. Rather, he embraced the chapter 11 process and now, when debtor is seeking approval of its Amended Disclosure Statement in anticipation of presenting its Amended Plan to its creditors, he is attempting to manipulate the Bankruptcy Code to the detriment of other similarly situated creditors. There is prejudice to the estate and creditors. Debtor has expended time and money in dealing with the administration of its case and, particularly, in negotiating the Amended Plan with interested parties. All of that will be lost if we dismiss the case. Creditors will suffer additional prejudice because they will be forced to initiate or reinitiate potentially time consuming and expensive litigation to liquidate and satisfy their claims. If granted, the relief Durkin has unjustifiably waited 19 months to seek would result in a “race to the courthouse” and the inequitable distribution, if any, among like creditors. That is precisely what the Bankruptcy Code seeks to prevent.
Chase contends that it will be severely prejudiced if we dismiss this case. Chase was S & G’s pre-bankruptcy lender and pursuant to a series of stipulations so ordered by this court initially on April 23, 1996 and most recently on October 14,1997 (collectively, the “Cash Collateral Stipulations”), it has agreed to permit the use of its cash collateral to fund administrative and other expenses herein. As security for amounts advanced by Chase under its pre-petition loan agreement, S & G granted to Chase a security interest in substantially all of its assets, including receivables, work in progress and any proceeds thereof. Because the proceeds of that collateral constituted Chase’s “cash collateral” when S & G filed its chapter 11 petition, there was no source of working capital to fund the orderly liquidation contemplated by S & G when it filed. Pursuant to the Cash Collateral Stipulations, Chase agreed to provide that funding, in exchange for which it received, among other things, partial adequate protection in the form of a superpriority administrative expense claim, to the extent that S & G expends more than $400,000 of Chase’s cash collateral, and a replacement lien on any avoidance recoveries. As of July 31, 1997, S & G had utilized approximately $630,000 of Chase’s cash collateral. Chase also agreed to assume responsibility for paying the law firm retained to collect S & G’s receivables, and to the use of its cash collateral to fund a $125,000 settlement among S & G, its landlords and Chase.
The effect of a dismissal of a case is “to place the parties in the same position that they were in before the bankruptcy petition was filed.” 7 Collier On Bankruptcy ¶ 1112.09 at p. 1112-78 (15th ed. rev.1997). Pursuant to § 349 of the Bankruptcy Code, the only orders vacated upon dismissal of a case are those avoiding a transfer or recovering a setoff. 11 U.S.C. § 349(b)(2). The Bankruptcy Code affords us considerable discretion “to make whatever orders may be necessary and appropriate to protect rights acquired in reliance on the title 11 case.” 3 Collier On Bankruptcy ¶349.03[2] at p. 349-12 (15th ed. rev.1997). However, upon dismissal of a case, we cannot restore prepetition property rights where estate property has been distributed to third parties.
See In re Searles,
Conclusion
We deny Durkin’s motion.
SETTLE ORDER.
Notes
. In relevant part, the statute provides that
after, notice and a hearing, the bankruptcy court may convert a case under [chapter 11] to a case under chapter 7 of this title or may dismiss a case under [chapter 11], whichever is in the best interests of creditors and the estate, for cause, including—
(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;
(2) inability to effectuate a plan;
(3) unreasonable delay by the debtor that is prejudicial to creditors;
(4) failure to propose a plan under section 1121 of this title within any time fixed by the court;
(5) denial of confirmation of every proposed plan and denial of a request made for additional time for filing another plan or a modification of a plan;
(6) revocation of an order of confirmation under section 1144 of this title, and denial of confirmation of another plan or a modified plan under section 1129 of this title;
(7) inability to effectuate substantial consummation of a confirmed plan;
(8) material default by the debtor with respect to a confirmed plan;
(9) termination of a plan by reason of the occurrence of a condition specified in the plan; or
(10) nonpayment of any fees or charges required under chapter 123 of title 28.
11 U.S.C. § 1112(b).
. Section 109(b) states as follows:
A person may be a debtor under chapter 7 of this title only if such person is not—
(1) a railroad;
(2) a domestic insurance company, bank, savings bank, cooperative bank, savings and loan association, building and loan association, homestead association, a small business investment company ..., credit union, or industrial bank or similar institution ...; or
(3) a foreign insurance company, bank, savings bank, cooperative bank, savings and loan association, building and loan association, homestead association, or credit union, engaged in such business in the United States.
11 U.S.C. § 109(b).
. In relevant part, § 303 permits the filing of an involuntary case "under chapter 7 or 11 ... if such person is a partnership ... by fewer than all of the general partners in such partnership.” 11 U.S.C. § 303(b)(3)(A). Moreover, it expressly contemplates that an involuntary chapter 11 case may be filed against a dissolved partnership since § 303 permits a general partner, its trustee or a partnership creditor to file a chapter 7 or 11 case against the partnership if “all of the general partners in such partnership” have filed for bankruptcy, id. § 303(b)(3)(B), and, as noted, the filing of a bankruptcy petition against one of the partners in a partnership results in dissolution of the partnership under non-bankruptcy law. See N.Y. Partnership Law § 62(5) (McKinney 1997); Uniform Partnership Act § 31.