In re Kingston Square Associates
United States Bankruptcy Court for the Southern District of New York
214 B.R. 713 (1997)
- Written by Steven Pacht, JD
Facts
Morton L. Ginsberg controlled 38 real estate entities (Ginsberg entities) that were restructured via a 1991 mortgage from the Chase Manhattan Bank, N.A. (Chase) (creditor) and a 1993 mortgage from REFG Investor Two, Inc. (REFG) (creditor), a wholly owned subsidiary of DLJ, an investment bank. Both loans prohibited a voluntary bankruptcy filing by the Ginsberg entities without unanimous director approval (for corporations) or unanimous general and limited-partner approval (for limited partnerships). The Ginsberg entities had three-member boards: Ginsberg, a Ginsberg designee, and Laurence Richardson, a putatively independent director who was a DLJ consultant and former DLJ employee. In 1994, Chase and REFG issued notices of default and began foreclosing against the mortgaged properties. By mid-1996, Chase and REFG had won $370 million in judgments against the Ginsberg entities. Unable to petition for voluntary bankruptcy, Ginsberg arranged for a Ginsberg-entity trade creditor and several Ginsberg-entity professionals (collectively, petitioning creditors) to file involuntary-bankruptcy petitions against 11 Ginsberg entities (bankrupt entities) (debtors). Chase and REFG moved to dismiss the petitions under § 1112 of the Bankruptcy Code, arguing that the petitions were filed in bad faith because they were collusive. The bankruptcy court conducted a trial limited to bad faith. The trial evidence showed that, among other things, (1) the mortgaged properties might be worth more than the outstanding debt; (2) the Ginsberg entities never held director meetings, largely due to Ginsberg and his designee’s view that Richardson was DLJ’s pawn; (3) Richardson knew about the foreclosure proceedings but did nothing; (4) Richardson had a limited and incorrect understanding of the scope of his fiduciary duties to creditors and limited partners; (5) DLJ wound up as both a lender and shareholder after foreclosing on Ginsberg’s equity interests, putting DLJ in the position of owing fiduciary duties to creditors and limited partners while at the same time limiting the Ginsberg entities’ options; (6) the mortgaged properties were not adequately maintained or marketed, limiting their sale value; and (7) the petitioning creditors found at least one potential buyer for the mortgaged properties.
Rule of Law
Issue
Holding and Reasoning (Brozman, C.J.)
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