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In re GCC Realty Co., LLC

United States District Court, S.D. Florida

March 24, 2017

In re GCC REALTY COMPANY, LLC, Debtor.
v.
PHILIP KASSOVER, individually and as executor of the Estates of Nathan Kassover and Ruth Kassover, and MARGARET SMITH, Trustee, Appellees. RICHARD J. SABELLA and ALLERAND 675 COMPANY, LLC, Appellants, In re GCC REALTY COMPANY, LLC, Debtor. RICHARD J. SABELLA and ALLERAND 675 COMPANY, LLC, Appellants,
v.
PHILIP KASSOVER, individually and as executor of the Estates of Nathan Kassover and Ruth Kassover, and MARGARET SMITH, Trustee, Appellees. In re GCC REALTY COMPANY, LLC, Debtor. MARGARET SMITH, as Chapter 7 Trustee of the Estate of GCC Realty Company, LLC, Plaintiff,
v.
PRISM VENTURE PARTNERS, LLC, RICHARD SABELLA, and RJS REALTY CORP., Defendants. RICHARD SABELLA, Appellant,
v.
MARGARET SMITH, Trustee, Appellee.

          CONSOLIDATED OPINION AND ORDER

          ROBIN L. ROSENBERG UNITED STATES DISTRICT JUDGE

         This Consolidated Opinion and Order addresses three bankruptcy appeals filed by Appellants, Richard J. Sabella and Allerand 675 Company, LLC.[1] Through these appeals, Appellants challenge the bankruptcy court's orders (1) dismissing the underlying Chapter 7 bankruptcy case and denying as moot a motion to approve the settlement of a related adversary proceeding, [2] (2) denying a motion to approve the sale by auction of the adversary proceeding, [3] and (3) dismissing the adversary proceeding.[4] The Court has carefully considered the briefs of the parties and the entire record on appeal. In addition, the Court heard oral argument on March 3, 2017, and is otherwise fully advised in the premises. For the reasons set forth below, the bankruptcy court's orders are AFFIRMED and Appellants' appeals are DENIED.

         I. BACKGROUND

         Appellee Philip Kassover and his family owned The Garden City Company, Inc. until 2002, when Appellant Richard Sabella acquired the company through merger following a bankruptcy auction. The Garden City Company, Inc. subsequently merged into what is now GCC Realty Company, LLC.[5] Several years after Sabella acquired GCC, Kassover obtained a judgment in New York state court against GCC and Peyton Gibson, the shareholder trustee of the GCC merger proceeds, for amounts owed in connection with Sabella's acquisition of GCC.

         To date, Kassover has not collected on that judgment. Kassover asserts that he has been unable to do so because Sabella has manipulated GCC's assets to ensure that the company never has cash on hand. For that reason, on August 14, 2008, Kassover initiated a fraudulent conveyance action in New York state court against GCC, Sabella, and others by filing a summons with notice.[6]

         One month later, on September 15, 2008, GCC filed a voluntary Chapter 11 bankruptcy case in the Southern District of Florida, staying Kassover's fraudulent conveyance action. After three years, on September 22, 2011, the Chapter 11 bankruptcy case was dismissed on GCC's own motion as a two-party dispute between Sabella and Kassover.

         Very shortly thereafter, on October 4, 2011, petitioning creditor Warren Malone initiated an involuntary Chapter 7 bankruptcy case[7] (the “Chapter 7 Case”) against GCC in the Southern District of Florida, which again stayed Kassover's fraudulent conveyance action. Kassover, Sabella, and Allerand 675 Company, LLC (“Allerand”), a company owned and controlled by Sabella, were among the creditors in the Chapter 7 Case. On November 10, 2011, Michael Bakst was appointed and immediately resigned as trustee in the Chapter 7 Case. Later that same day, Robert Furr replaced Bakst as trustee. After a couple of years, Sabella and Allerand filed a motion to remove Furr as trustee, asserting that he had failed to properly administer the bankruptcy estate. Before that motion was heard, on January 17, 2014, Furr resigned as trustee and was replaced by Margaret Smith (the “Trustee”).

         On March 5, 2015, Kassover's fraudulent conveyance action was removed from New York state court and transferred to bankruptcy court in the Southern District of Florida. The Trustee identified this action (the “Adversary Proceeding”)[8] as an asset of the bankruptcy estate and sought to substitute herself as plaintiff. On December 1, 2015, the bankruptcy court entered an order approving the substitution of the Trustee as plaintiff in the Adversary Proceeding.

         On December 8, 2015, the Trustee filed a Motion to Approve Settlement Agreement Between (I) Margaret Smith, Trustee; and (II) Richard J. Sabella; and for Entry of Bar Order (the “Second Settlement Motion”).[9] Pursuant to the parties' settlement agreement, the Trustee would voluntarily dismiss the Adversary Proceeding in exchange for a $200, 000 payment from Sabella and the waiver, subordination, and release of certain claims by Sabella and Allerand. Kassover objected to the Second Settlement Motion and sought dismissal of the Chapter 7 Case.

         On December 10, 2015, Kassover filed his Third Renewed Motion to Dismiss the Chapter 7 Case. In that Motion, Kassover argued that the Chapter 7 Case had become a two-party dispute between Sabella and Kassover since Allerand had acquired six other creditors' claims on November 24, 2015. Kassover also argued that dismissal was appropriate because there was nothing left to administer-the Adversary Proceeding was the bankruptcy estate's only asset and the value of that asset was insufficient to allow a meaningful distribution to GCC's creditors.

         On January 13, 2016, the bankruptcy court held a hearing on the Trustee's Second Settlement Motion and Kassover's Third Renewed Motion to Dismiss. During that hearing, the court explained that it would either approve the settlement of the Adversary Proceeding or dismiss the Chapter 7 Case:

I think it boils down to whether your proposed settlement is reasonable settlement. That's what I really think it boils down to. Because if it is a reasonable settlement, the case shouldn't be dismissed. If it is not a reasonable settlement, the case should be dismissed. I really think that's what it boils down to.
Mr. Mrachek's client [Kassover] thinks it's worth a lot of money. The trustee's proposed settlement, I think says it's not with a lot of money, it's worth a couple hundred grand. I think I have to hear testimony on that issue, and either approve or not approve the settlement. And if I approve it, I'm not going to dismiss the case. If I don't approve it, I'll dismiss the case.

See Hrg. Tr. 16:19-17:8. The court later reiterated: “And I've told you all what's going to happen. If I approve the compromise, the case is not going to get dismissed. If I don't, it's going to get dismissed.” See Hrg. Tr. 20:23-21:1. Following this hearing, it became clear that pursuing the Second Settlement Motion would require extensive discovery and additional fees.

         In recognition of that fact, on April 11, 2016, the Trustee filed a Motion for Entry of Order Approving Sale by Auction of Cause of Action, Free and Clear of Liens, Claims and Encumbrances (the “Auction Motion”), seeking to sell the Adversary Proceeding at auction as an alternative to settlement. The Second Settlement Motion was not, however, withdrawn; it remained pending as a backup in the event the bankruptcy court denied the Auction Motion. The Trustee disclosed in the Auction Motion that Sabella had made an initial bid of $25, 000 for the Adversary Proceeding. Kassover objected to the Auction Motion and, on April 14, 2016, filed an Amended Third Renewed Motion to Dismiss the Chapter 7 Case.

         On May 3, 2016, the bankruptcy court held a hearing on the Trustee's Auction Motion. During that hearing, counsel for the Trustee represented that Sabella's $25, 000 bid was intended only as a starting point and that she expected there to be “vigorous bidding” at the auction. For example, counsel for the Trustee stated: “We had hoped for a higher offer to start the bidding. And this is just a starting offer of $25, 000.” See Hrg. Tr. 5:22-24. Counsel for the Trustee also said: “So far we have gotten four serious inquiries. We've sent out a bunch of documents, and hopefully we can get some more interest. Mr. Kassover has indicated he is going to bid at the auction. We expect there to be vigorous bidding at the auction.” See Hrg. Tr. 6:14-19. Finally, counsel for the Trustee stated: “[W]e think that this will be a good way to determine what the parties think this cause of action is worth, and have Your Honor decide if it's a fair price. If not we can always go back to the settlement.” See Hrg. Tr. 9:18-22. Also during that hearing, the bankruptcy court noted that it was inclined to dismiss the Chapter 7 Case as a two-party dispute rather than approve the Auction Motion:

I'm going to continue this until next week and just see what I do on the motion to dismiss. I will tell you, I'm inclined to dismiss the case, because it really is a two party dispute now. That's my inclination. . . . I frankly, don't see the benefit to the estate any longer.”

See Hrg. Tr. 19:14-24.

         On May 10, 2016, the bankruptcy court held a hearing on Kassover's Amended Third Renewed Motion to Dismiss and the Trustee's Auction Motion. During that hearing, the bankruptcy court noted that the Chapter 7 Case had essentially become a two-party dispute, but explained that it may not technically be one in light of the fact that, in addition to the claims of Sabella, Allerand, and Kassover, there remained a relatively small claim by the IRS and the Trustee's administrative fees and expenses. See Hrg. Tr. 4:5-16. The court also noted Kassover's concerns about the auction-in which Sabella (a creditor holding the majority of claims) had placed an initial bid of $25, 000 for the Adversary Proceeding that had begun as a fraudulent conveyance action brought by Kassover against Sabella and others-and about whether there would ever be enough in the bankruptcy estate to allow a meaningful distribution to GCC's creditors after payment of administrative expenses:

I'll make the other observations concerning the motion to sell. And Mr. Mrachek [counsel for Kassover] has raised a couple of issues. Most-the two large issues is, number one, there's no benefit to the estate, because there will never be enough money from the sale, in his opinion, and his client's opinion, to pay off the administrative expenses. And if even if there were, one of the potential purchasers of the cause of action would potentially receive 90 percent of the proceeds. And that's a valid concern.
The other is, if one of the potential purchasers is the prevailing purchaser, there's an issue concerning good faith, or lack thereof, in making the-in being the successful bidder. I'm not sure I agree with that position, but is it a valid concern.
Ms. Cloyd [counsel for the Trustee] has also indicated that she, her firm, her firm is owed in excess of $200, 000, but that she recognizes that, or concedes that her firm may not get paid in full, and has not made any concrete offers, this is not an offer, but in essence saying, her firm may have to cut some of their fees.

See Hrg. Tr. 4:17-5:13. Next, the court explained that it would allow the auction to proceed but would wait until it had additional information before final approval of the sale:

So this is what I'm going to do. I'm going to authorize the sale to go forward, but not approve the results of the sale. I am going to wait to see who the successful bidder is, the amount of the bid.
And in deciding whether to accept the bid or not, I'm going to consider a number of criterions, including the amount of the successful bidder, that the successful bidder bid, who the successful bidder is, whether Ms. Cloyd's firm has finalized an agreement to reduce their fees. And I am in no way requiring Ms. Cloyd's firm to do so, but I think it's important for the trustee to make a guesstimate after the sale as far as what distributions there will be to the various creditors, whether there will be money payable to the various creditors above the administrative expenses, and the IRS, including the proceeds of any potential settlement with Mr. Furr.
At that point I think I can make an educated decision as to whether I should approve the sale, and/or dismiss the case. Without that information I really can't make an educated decision, an informed decision. Everything else until then is hypothesis theories. I don't know what the answer is. Okay.

See Hrg. Tr. 5:20-6:17. The court ultimately decided:

“[T]his is my inclination, unless someone has got a strong feeling otherwise. Set the sale for the 14th, and set the motion to dismiss and the approval of the sale for the 21st. And the reason I say that is, have the bid, everyone understands who the ultimate high bidder is. That gives Ms. Smith time to, in essence, comply with what I've just said, that is, give me a guesstimate of what the distributions are for the creditors.”

See Hrg. Tr. 8:17-25. Also during that hearing, the bankruptcy court granted the Trustee's motion for extension of time to file a complaint in the Adversary Proceeding through July 11, 2016. See Hrg. Tr. 13:13-14.[10] Finally, the court noted that it would either approve the auction or dismiss the Chapter 7 Case:

If the sale price is low, and is not even enough to pay a portion of the administrative expenses, that is a double edged sword. The double edged sword in that means that the cause of action isn't worth very much, and therefore, I should probably approve the sale.
At the same time, it accents, or emphasizes, that there is really nothing here for the Court to do, and the case maybe should be dismissed. It's a double edged sword. Just so both sides know. I'm not sure how I will come out on that sword, one way or the other.

See Hrg. Tr. 14:8-19.

         Consistent with what it stated on the record during the that hearing, on May 16, 2016, the bankruptcy court entered a written order setting the auction of the Adversary Proceeding for June 14, 2016, and setting a hearing for final approval of the sale for June 21, 2016. The minimum opening bid (made ...


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