ROBERT E. LITTLEFIELD, JR., Bankruptcy Judge.
Currently before the Court is the Estate of Elena Duke Benedict's (the "Estate") motion to dismiss the Debtor's case for bad faith. The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 157(a), (b)(1), and (b)(2).
At the outset, this Court agrees with the Westchester County Surrogate (Scarpino, S.) when he described this dispute as a "Shakespearean tragedy." (ECF No. 58; Ex. A.) Below, the Court summarizes the decades long litigation between the Debtor and her mother, now the Estate.
Elena Duke Benedict ("Benedict") was the daughter of Dr. Herman Kohl, a founder of Tropicana Products, Inc. Benedict had six daughters (collectively "Daughters"), including the Debtor. In 1983, Benedict entered into an annuity agreement pursuant to which she was to receive $24,067.90 monthly for the rest of her life. In 1987, the Daughters assumed the obligation to pay the annuity to their mother in exchange for approximately $2.26 million (the "Annuity Funds"). The Daughters hired an agent to invest the Annuity Funds and make annuity payments to Benedict if the Daughters did not. As time passed, the Annuity Funds dissipated such that Benedict began receiving only partial payments in 1994.
In 1999, Benedict commenced an action against her Daughters for breach of the annuity agreement. In defense, the Debtor argued that her breach was due to gross mismanagement and self-dealing by the agent in charge of the Annuity Funds.
Benedict and 6D Farm Corporation ("6D") were equal partners in Benedict Dairy Farms ("BDF"), a partnership that has been in dissolution since 1998. The Debtor has a five-sixths interest in 6D. In 2005, the Debtor commenced an action against Benedict on the grounds that Benedict failed to make required capital contributions to BDF. The Debtor, on behalf of 6D, served a claim against the Estate in the amount of $2,595,697 on September 21, 2015, based on this alleged breach. According to the Debtor, the BDF litigation remains stalled over a dispute regarding document production and has been stayed since the Debtor filed her bankruptcy case.
The Debtor lives in a 66-acre, seven-bedroom,
The Debtor indicates that her husband was hospitalized three times during a span of twenty months and the transfers were made for estate planning purposes as a result of her husband's medical issues. (Neilson Aff. 1-2, ECF No. 77.) Further, the Debtor's disclosure statement provides that the transfers are "subject to being rescinded by the Bankruptcy Court" and indicates that she may need to commence an adversary proceeding "to recover the 87.5% of the house ownership she transferred. . . ." (Am. Disc. Statement 8.)
The Debtor filed a voluntary chapter 11 petition on April 4, 2017. Beginning on July 7, 2017, significant litigation developed between the parties in this Court:
On the parties' consent, the Court entered orders assigning the matters to mediation and appointing a mediator on December 21, 2017. The parties were unable to reach a resolution and oral argument on the Motion concluded on March 28, 2018. After the parties filed additional submissions, the Court took this matter under advisement on May 2, 2018.
The Estate argues that the Debtor filed her petition in bad faith as this case is simply a two party dispute without a bankruptcy purpose. In opposition, the Debtor claims to have filed this case to reorganize. Notwithstanding the Estate's $4 million judgment against her, the Debtor takes the position that the Estate may actually owe her money if she prevails on her appeal in the Annuity litigation and obtains a favorable result in the BDF litigation. In reply, the Estate asserts that it is improper for the Debtor to file bankruptcy solely to continue state court litigation.
Pursuant to 11 U.S.C. § 1112(b), the Court may dismiss a chapter 11 case for cause. While not specifically provided for in the statute's non-exhaustive list, bad faith has long been recognized as cause for dismissal. C-TC 9
Id. A court should not apply the C-TC factors mechanically or in isolation, and may choose to consider any one or all in its effort of analyzing the totality of the circumstances. See Pal Family Credit Co. Inc. v. Cty of Albany, 425 B.R. 1, 5 (N.D.N.Y. 2010); In re Loco Realty Corp., 2009 Bankr. LEXIS 1724 at *8-9 (Bankr. S.D.N.Y. June 25, 2009).
The present case, consisting of an individual debtor and a judgment creditor, does not lend itself to a rigid application of C-TC, which involved a partnership and a mortgage creditor. Under these facts and circumstances, the Court finds it more appropriate to rely on cases involving similar two party disputes to determine whether this case should be dismissed.
The Court concludes that the Debtor did not file this case for a proper purpose because (1) the Debtor lacks income, (2) the Debtor refused to pursue the state court litigation, and (3) the Debtor has failed to fulfill her fiduciary duties as Debtor-in-possession ("DIP").
Whether a Debtor has the ability to fund a plan often determines whether a case is a proper reorganization or a case filed in bad faith.
However, where a debtor has minimal income, a court may find that such a case was filed as a litigation tactic and not in an effort to reorganize. See In re Encore Property Management of Western New York, LLC, 585 B.R. 22, 30 (Bankr. W.D.N.Y. 2018) (dismissing a case for bad faith where the debtor had "no cash flow and no employees" and where it seemed like the debtor's "only `business' [was] to litigate with [the judgment creditor] . . ."); In re Artisanal 2015, LLC, 2017 Bankr. LEXIS 3813, at *40-41 (Bankr. S.D.N.Y. Nov. 3, 2017) (dismissing a case for bad faith where the Debtor had no cash flow and the only purpose of the bankruptcy filing was "a hope to relitigate a state court action").
In the present case, the Debtor has not worked in 35 years and has reported $5.00 or less of income in eight of the sixteen months for which she has filed operating reports. (Debtor's 2004 Tr. 31:25-32:3). In stark contrast, the Debtor's monthly disbursements since May 2017 have ranged between $1,577.00 and $31,601.00. She meets her monthly obligations by using funds within her DIP checking account, which has decreased in value from $129,168.00 at the start of her case to $9,040.46 as of August 17, 2018. According to the Debtor's July 2018 operating report, the Debtor's net cash flow from the commencement of the case through the end of July 2018 is negative $113,070.00. Given the Debtor's reluctance to avoid transfers and sell assets, the Debtor objectively has no hope of funding a plan of reorganization. See C-TC, 113 F.3d at 1310 ("When it is clear that, from the date of filing, the debtor has no reasonable probability of emerging from the bankruptcy proceedings and no realistic chance of reorganizing, then the Chapter 11 petition may be frivolous.").
Notwithstanding her negative monthly net cash flow, the Debtor argues she can reorganize. The Debtor's Plan proposes a three tiered approach dependent on varying outcomes in state court. In the first instance, if she wins in all respects, she contends that she may be able to fund the plan in full using only the cash which she has on hand. Second, if all does not go in her favor, she proposes to sell her twelve and a half (12.5%) percent interest in the property. Finally, if she does not succeed in either the Annuity or BDF litigation, the Debtor proposes to commence an adversary proceeding against her husband and her son, as executor for the trust, to recover the entirety of the property for the benefit of the estate.
From the Debtor's Plan it is clear that the Debtor believes the success of her bankruptcy case depends largely, if not entirely, on changing the landscape in state court. However, her actions after the commencement of her bankruptcy case show a concerted effort to avoid the litigation altogether. On February 3, 2017, the Appellate Division, Second Department denied the Debtor's motion for a stay pending appeal in the Annuity litigation. (ECF No. 58; Ex. E.) Once the Debtor filed her bankruptcy case, the Second Department indicated that her bankruptcy filing stayed the appeal and that she would need to obtain an order lifting the stay for her to perfect her appeal.
The same can be said for the BDF litigation which, despite the Debtor's position that it is her most valuable asset and is central to her bankruptcy case, similarly remains stayed. On one hand, the Debtor attempts to defeat the Estate's motion by relying on this alleged asset while, on the other hand, she chooses not to pursue the action. The Debtor's conduct as it relates to both the Annuity and BDF litigation undermines her arguments that her case should not be dismissed and cements that this case is a two party dispute that belongs in state court. See In re Purpura, 170 B.R. 202, 207 (Bankr. E.D.N.Y. 1994) (dismissing for bad faith where "the filing for relief represented a litigation tactic to stall and impede the enforcement of legal rights against the debtor . . ."); In re Wally Findlay Galleries, Inc., 36 B.R. 849, 851 (Bankr. S.D.N.Y. 1984) ("The debtor filed its petition herein to avoid the consequences of adverse state court decisions while it continues litigation. This court should not, and will not, act as a substitute for a supersedeas bond of state court proceedings.").
Additionally, the Court cannot otherwise conclude that the Debtor filed this case for a proper purpose because such a holding would also condone the Debtor's dereliction of her fiduciary duties to creditors and the estate as DIP. As it relates to creditors, "[t]he job of a [DIP] remains under the Code as that described by Judge Friendly — to get the creditors paid." In re Pied Piper Casuals, Inc., 40 B.R. 723, 727 (Bankr. S.D.N.Y. 1984) (quoting Grayson-Robinson Stores, Inc. v. Sec. & Exch. Comm'n, 320 F.2d 940 (2d Cir. 1963)); see also In re Ionosphere Clubs, Inc., 113 B.R. 164, 169 (Bankr. S.D.N.Y. 1990). While a chapter 11 DIP is not under a statutory duty to liquidate assets, the DIP must maximize the value of the estate for creditors. See In re Breitburn Energy Partners LP, 582 B.R. 321, 355 (Bankr. S.D.N.Y. 2018); In re Ancona, 2016 Bankr. LEXIS 4114, at *32-33 (Bankr. S.D.N.Y. Nov. 30, 2016); see also In re Reliant Energy Channelview LP, 594 F.3d 200, 210 (3rd Cir. 2010).
This duty requires, among other things, the DIP to pursue avoidance actions and "to sell when the [DIP] is worth more dead than alive." Breitburn Energy, 582 B.R. at 355; see also Wolf v. Weinstein, 372 U.S. 633, 649-51 (1963); In re Casco Fashions, Inc., 490 F.2d 1197, 1201 (2d Cir. 1973); Ionosphere Clubs, Inc., 113 B.R. at 169. Given the Debtor's lack of income, the Debtor can only pay creditors by selling property and avoiding transfers — this is the Debtor's nonnegotiable fiduciary duty in chapter 11. See Commodore Int'l v. Gould (In re Commodore Int'l Ltd.), 262 F.3d 96, 99 (2d Cir. 2001) (holding that "[t]he [debtor in possession] has an obligation to pursue all actions that are in the best interests of creditors and the estate.").
Failure to exercise these duties may be grounds for dismissal or conversion under 11 U.S.C. § 1112(b), or appointment of a trustee pursuant to 11 U.S.C. § 1104. See Canadian Pac. Forest Prods. v. J.D. Irving, Ltd. (In re Gibson Grp.), 66 F.3d 1436, 1442 (6th Cir. 1995); United Phosphorus, Ltd. v. Fox (In re Fox), 305 B.R. 912, 915-16 (B.A.P. 10th Cir. 2004); Ancona, 2016 Bankr. LEXIS 4114, at *32-33 ("If a debtor-in-possession defaults in its responsibilities, the debtor may be dispossessed of control of its business and a chapter 11 trustee should be appointed."); In re AdBrite Corp., 290 B.R. 209, 217 (Bankr. S.D.N.Y. 2003) (holding that "[a] debtor-in-possession's dereliction of its fiduciary duty to creditors" is a ground for dismissal or conversion pursuant to § 1112(b)).
As more fully set forth above, it is clear that the Debtor only intends on exercising her fiduciary duties once she exhausts all of her rights in the Annuity and BDF litigation. Since the Debtor has minimal income, the only way for the Debtor to maximize the estate's value is to avoid preferences, recover transfers, and to sell, or otherwise extract value from, her assets. Under the facts of this case, refusing to recover the Property until state court litigation concludes is a violation of her fiduciary duty as the obligation to pay creditors cannot wait until a time that suits the Debtor. The litigation history between the parties makes clear that the Debtor's proposal would result in significant delay since it took seventeen years for the annuity litigation to be reduced to a judgment, which is now on appeal, and the BDF litigation has been pending since 2005 without a judgment, which too will surely be appealed whenever it is entered.
In summary, this filing was designed to further delay agonizing family litigation stretching nearly twenty years. The Debtor has negative monthly income and has not made any effort to proceed with the Annuity litigation appeal or the BDF litigation despite conceding that success in state court is vital to her bankruptcy case. The Debtor does not cite to a single case which would support her ability to stay in chapter 11 while proceeding in this manner. For all of these reasons, the Court concludes that the Debtor did not file this case for the proper purpose of reorganizing but rather for the improper purpose of relitigating and continuing to litigate. See Encore, 585 B.R. at 30; Artisanal, 2017 Bankr. LEXIS 3813, at *40-41; Purpura, 170 B.R. at 207; Wally Findlay Galleries, 36 B.R. at 851. If the Court were to find that this case was filed for a proper purpose, it would legitimize a "wait and see" approach that permits the Debtor to use the bankruptcy process as a litigation tactic and prejudicially delay creditors, all under the guise of reorganization.
For all of the foregoing reasons, the Estate's Motion is granted and the Debtor's case is DISMISSED.
It is SO ORDERED.
