Bethpage Fed. Credit Union v. Town of Huntington (In re Joe's Friendly Serv. & Son, Inc.)

In re JOE'S FRIENDLY SERVICE & SON, INC.,

d/b/a THATCHED COTTAGE AT THE BAY, Debtor.

In re THATCHED COTTAGE LP, Debtor.

BETHPAGE FEDERAL CREDIT UNIONand BUSINESS SERVICES GROUP, LLC, Plaintiffs, v. THE TOWN OF HUNTINGTON, JOSEPH F. CLINE,

INDIVIDUALLY, RICHARD VACCHIO, INDIVIDIUALLY,

and TERENCE "TERRY" MCNALLY, INDIVIDUALLY, Defendants.

Case No. 8-14-70001-reg

Case No. 8-14-70002-reg

Adv. Pro. No. 8-16-8035-reg

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK

June 11, 2020

Chapter 7

(Jointly Administered)

Decision

Before the Court is the defendants' motion for a determination that this Court lacks subject matter jurisdiction over this adversary proceeding filed by non-debtors Bethpage Federal Credit Union ("BFCU") and Business Services Group, LLC ("BSG") (together, the "Plaintiffs") against non-debtors the Town of Huntington (the "Town"), Joseph F. Cline, individually ("Cline"), Richard Vacchio, individually ("Vacchio"), and Terence "Terry" McNally, individually ("McNally") (collectively, the "Defendants"). The Debtors, Joe's Friendly Service & Son, Inc., d/b/a Thatched Cottage at the Bay ("Joe's Friendly") and Thatched Cottage LP ("Thatched LP") (collectively, the "Debtors"), are not parties to this adversary proceeding.

On September 24, 2014, pursuant to an Order of this Court, the chapter 7 trustee of the Debtors' jointly administered estates conducted an auction sale of substantially all the Debtors' assets under section 363 of the Bankruptcy Code (the "Code"). These assets consisted of real property and an accompanying well-known catering hall located in Centerport, NY. Pursuant to the terms of this sale, and as a result of the failure of the successful bidder to close on the purchase, the Plaintiffs as the backup bidder, were required to purchase the property from the estate. The Plaintiffs assert the Defendants' "placarding" (i.e., condemnation) of the catering hall building in the midst of the sale process was a primary cause of the winning bidder's decision to default on his contractual obligation and that this resulted in the Plaintiffs economic loss and other damages. The Plaintiffs assert that the Defendants did not follow proper procedures when placarding the building and allege due process and equal protection violations, negligence, and various other state tort claims. The Plaintiffs allege the Defendants conspired with the Debtors' principal to make the property economically unattractive to potential buyers which caused material harm to the Debtors' creditors and that these actions by the Defendants were done in violation of the Bankruptcy laws and in violation this Court's order mandating a sale of the property to the highest bidder.

The Plaintiffs chose the state court as its forum to assert these claims alleging damages in connection with the placarding of the building. It was the Defendants who removed the subject action to this Court and asserted that this Court has subject matter jurisdiction over the lawsuit and should exercise that jurisdiction. The Plaintiffs, having selected the state court to litigate these claims, moved to remand the action. However, the parties reached an agreement by whichthey stipulated to have this matter heard before this Court and memorialized the agreement in a stipulation which was so-ordered by this Court on July 11, 2016. As per the stipulation, the Plaintiffs withdrew their motion to remand and submitted to the entry of final orders by this Court. Despite having removed this action to this Court and despite having entered into the July 11, 2016 so-ordered stipulation, which is a final non-appealable order of this Court, the Defendants filed an answer to the amended complaint on December 27, 2016 contesting this Court's jurisdiction to hear this matter.¹ This Court's lack of subject matter jurisdiction was most recently raised by Defendants' motion, dated December 17, 2019 [ECF No. 164] ("Motion"). The Court denied that Motion at the commencement of trial on January 13, 2020 and indicated that this written decision would follow.

The Defendants' Motion suffers from a litany of infirmities. First, it is the Defendants themselves who argued that this Court has subject matter jurisdiction over this lawsuit; the Plaintiffs wanted to be in state court. The representations in the Defendants' current motion are in direct conflict with prior representations that the Defendants made to ensure removal of this proceeding from state court. Second, by so-ordering the stipulation which caused the Plaintiffs to withdraw their motion to remand and submit to this Court's final orders, the Court necessarily found that it had subject matter jurisdiction over the dispute. That order is now final and non-appealable. Finally, the Defendants cite no change in fact or law to support or justify their change in position. In essence, the Defendants denied the Plaintiffs their desired forum and induced them to accept the change based on representations that the Defendants now seek todisavow. There is no tenable justification for the change in position other than Defendants' change in legal counsel subsequent to the date of the so-ordered stipulation.

The Court will not permit the Defendants to now argue that this Court lacks subject matter jurisdiction where this action was brought to this Court by the Defendants themselves; the Defendants represented that this Court has subject matter jurisdiction over this matter; the Plaintiffs relied on Defendants representations and their agreement to have this Court issue final orders in connection with this case; and this issue was previously determined by a so-ordered stipulation of the parties which has not been appealed.

Even so, examined on the merits, the Court finds that it has subject matter jurisdiction over this matter. Where a proceeding between non-debtors alleges damages resulting from a concerted effort to interfere with the administration of the estate pursuant to a court-ordered sale of estate assets, the proceeding is "core," and the bankruptcy court has subject matter jurisdiction over the dispute. See 28 U.S.C. § 157(b). The allegations against the Defendants raise issues which directly affect the integrity of this Court and the bankruptcy sale process. This Court surely has jurisdiction to hear such a dispute.²

For these and the reasons that follow, the Defendants' Motion is denied.

Factual Background³

Pre-petition, the Debtor, Thatched LP, owned property at 445 East Main Street, Centerport, New York (the "Property"). A catering hall operated by Debtor, Joe's Friendly, was located on the Property (the "Thatched Cottage"). The Property was encumbered by a mortgage held by Plaintiff, BFCU. Non-debtor, Ralph Colamussi ("Colamussi") was the principal of both Debtors and was integral to the day-to-day management of the Thatched Cottage.

The Property, located on the waterfront, was allegedly damaged by hurricanes in August of 2011 and October of 2012. Despite apparent efforts by Colamussi to obtain the funds to implement repairs to the Thatched Cottage, the record reflects that the damage was largely unremediated. During this time, although Colamussi was informed that improvements to the Property encroached onto property belonging to the Town, at no time did the Town inform Colamussi that the encroachments or hurricane damage necessitated a shutdown of the catering facility. The Debtors eventually defaulted on the BFCU loan, and BFCU commenced a foreclosure action on September 6, 2013.

On January 2, 2014, Thatched LP and Joe's Friendly filed separate voluntary petitions pursuant to chapter 11 of the Code. See In re Joe's Friendly Serv. & Son, Inc., No. 14-BK-70001 (Bankr. E.D.N.Y.) (Grossman, Bankr. J.); In re Thatched Cottage LP, No. 14-BK-70002 (Bankr. E.D.N.Y.) (Grossman, Bankr. J.). The cases were jointly administered but not substantively consolidated. The Property constitutes the most valuable asset in Debtors' estates. The Thatched Cottage continued operations as a debtor-in-possession with no restrictions placed on it by theTown. In fact, the Town inspected the Property in its ordinary course and issued an occupancy and assembly permit on August 18, 2014.

After issues regarding Colamussi's mental health and fitness to operate the Thatched Cottage arose, the Court found that a chapter 11 trustee should be appointed. R. Kenneth Barnard was appointed as the chapter 11 trustee on July 14, 2014. The chapter 11 trustee moved to sell the Property pursuant to section 363(b) of the Code on July 24, 2014, which motion was granted. Pursuant to Court order entered August 11, 2014 authorizing the chapter 11 trustee to sell the Property (the "Sale Order"), a sale of the Property "as is" and "without all faults," was scheduled for September 24, 2014. At the auction sale, the chapter 11 trustee determined that Yama Raj ("Raj") was the highest bidder at $4,650,000 plus a buyer's premium of $186,000 for a total of $4,836,000, and that BFCU was the second highest bidder with a credit bid of $4,600,000 (the "Sale"). BFCU was bound by the terms of the Sale and required to close in the event of Raj's default pursuant to the bidding procedures approved by this Court. The Sale was originally scheduled to close on November 15, 2014.

Prior to the auction sale, on August 27, 2014, Colamussi emailed to the chapter 11 trustee engineering reports allegedly documenting unsafe conditions and costly repairs required at the Thatched Cottage. Colamussi also discussed the damage to the Thatched Cottage with the auctioneer prior to the sale. On September 23, 2014 Colamussi attempted suicide.

On October 6, 2014, the chapter 11 trustee, who had been winding down operations light of the impending sale, ceased operations at the Thatched Cottage.

On November 13, 2014, Colamussi hand-delivered to the Town's Fire Marshall's Office a package containing engineering reports indicating that the Thatched Cottage was unsafe (the "Colamussi Reports"). The Colamussi...