In re Anmuth Holdings LLC

600 B.R. 168

IN RE ANMUTH HOLDINGS LLC, Alleged Debtor.

In re Quest Funding LLC, Alleged Debtor.

Case No. 18-43216-CEC

Case No. 18-43272-CEC

United States Bankruptcy Court, E.D. New York.

Signed March 27, 2019

Paul A. Rubin, Esq., Hanh Huynh, Esq., Rubin LLC, 345 Seventh Avenue, New York, NY 10001, Attorneys for Alleged Debtors

Scott Markowitz, Esq., Michael Z. Brownstein, Esq., Tarter Krinsky & Drogin LLP, 1350 Broadway, New York, NY 10018, Attorneys for Petitioning Creditors: Abraham Leser, Chaim Miller, and Sam Sprei

DECISION

CARLA E. CRAIG, Chief United States Bankruptcy Judge

This case concerns abuse of the power given to creditors in 11 U.S.C. § 303 to file an involuntary bankruptcy petition. As the Second Circuit recently noted,

Involuntary bankruptcy petitions help ensure the orderly and fair distribution of an estate by giving creditors an alternative to watching nervously as assets are depleted, either by the debtor or by rival creditors who beat them to the courthouse. Despite these benefits, involuntary bankruptcy petitions have "serious consequences [for] the alleged debtor, such as loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment." "By giving creditors the ability to bring a debtor into bankruptcy, Congress created a power that could be abused." "Such a remedy exists as an avenue of relief for the benefit of the overall creditor body.... [It] was not intended to redress the special grievances, no matter how legitimate, of particular creditors.... [Such creditors] must seek redress under state law, in the state courts[,] and not in the bankruptcy court."

Wilk Auslander LLP v. Murray (In re Murray), 900 F.3d 53, 59–60 (2d Cir. 2018) (alterations in original) (citations omitted).

Hours after receiving an adverse decision in state court, denying a request for a stay pending appeal of a draw on letters of credit, Sam Sprei ("Sprei"), Abraham Leser ("Leser"), and Chaim Miller ("Miller") (the "Petitioning Creditors") filed involuntary chapter 7 petitions against Anmuth Holdings, LLC ("Anmuth") and Dupont Street Developers, LLC ("Dupont Developers") for the purpose of invoking the automatic stay to prevent the drawdown of the letters of credit that the state court had refused to stay.¹ Four days later, the Petitioning Creditors filed a Chapter 7 involuntary petition against Quest Funding LLC ("Quest").² Joseph Brunner is the principal of Anmuth, Dupont Developers, and Quest. After Anmuth and Quest (the "Alleged Debtors") moved to dismiss the involuntary petitions against them (the "Involuntary Petitions"), seeking sanctions in the form of attorneys' fees and costs, compensatory damages, and punitive damages, pursuant to 11 U.S.C. §§ 303(i) and 105 (the "Sanctions Motion"), the Petitioning Creditors conceded that their purported claims against the Alleged Debtors were subject to a bona fide dispute and that as such, they were ineligible to file the Involuntary Petitions.³ In dismissing the petitions against the Alleged Debtors, the Court retained jurisdiction to consider the Sanctions Motion.⁴ An evidentiary hearing was held on the Sanctions Motion on October 30 and October 31, 2018.⁵

I. JURISDICTION

This Court has jurisdiction of this proceeding pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C § 157(b)(2)(A) and (O). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.

II. BACKGROUND

A. Facts

The parties to these proceedings are involved in the purchase and sale of real estate in the New York City area, have known each other for many years, and share an extensive state court litigation history.

The following facts are either conceded by the Petitioning Creditors or were established at trial.

1. The Parties

Joseph Brunner is a real estate developer and lender who owns or controls various entities with real estate holdings of approximately 150 buildings, having an aggregate value in excess of $ 1 billion, and is the principal of both Alleged Debtors.⁶ (10/30 Tr. (Brunner) 121:17-23, 130:14-15.) Quest's business is private lending. (Id. at 122:14.) Anmuth is a holding company that indirectly owns eighty percent of Dupont Developers, a separate entity under the control of Brunner.⁷ (Id. at 122:25-123:1; 156:4-7, 157:14-16.)

Petitioning creditor Sam Sprei ("Sprei") regularly acts on behalf of the other two petitioning creditors with respect to a variety of business ventures. (10/30 Tr. (Sprei) 94:22-95:1; 10/30 Tr. (Miller) 71:6-13; 10/31 Tr. (Sprei) 14:19-15:10; Deposition Transcript of Abraham Leser ("Leser Dep. Tr.") 71:5-7, 104:16-17, 105:3-25.)⁸ Sprei makes his living working in real estate, "syndicat[ing] deals" and managing investments. (10/30 Tr. (Sprei) 81:11-13.) Sprei is twenty-nine years old and has known Leser and Miller for over twenty years. (Id. at 81:5-82:6.) Sprei testified that at all relevant times herein, he was "making decisions" on behalf of his investing "group," comprised of the Petitioning Creditors. (Id. at 96:6-8; 10/31 Tr. (Sprei) 45:10, 64:23-25.) Sprei grew up in the same community as Brunner and has known him for many years. (10/31 Tr. (Sprei) 40:8-15; 10/30 Tr. (Brunner) 125:25-126:3.) Sprei arranged for the Involuntary Petitions to be filed. (10/30 Tr. (Sprei) 96:6-8.)

Petitioning creditor Chaim Miller ("Miller") works for a real estate management company owned by Leser. (10/30 Tr. (Miller) 70:7-19.) Miller has over twenty years' experience investing in real estate (10/31 Tr. (Miller) 79:20-22.) Some of Miller's investments, while held in his name, are funded by Leser, with Leser holding an interest. (10/30 Tr. (Miller) 71:14-20.) Miller is indebted to Leser for more than $ 8 million. (Id. at 72:12-19.) Miller has known Brunner for nearly thirty years, since Brunner was "very young." (10/31 Tr. (Miller) 66:5-10; 10/30 Tr. (Brunner) 125:19-24.)

Petitioning creditor Abraham Leser ("Leser") has been investing in real estate for approximately forty-five years and runs The Leser Group, a business that owns, leases, and manages real estate. (Leser Dep. Tr. 8:10-12, 10:7-10, 11:3-7.) Although Leser's testimony was evasive, it is clear that he has been very successful in commercial real estate and has raised millions of dollars investing in the Israeli bond market. (Id. at 13-17; 10/30 Tr. (Brunner) 124:3-11.) Leser has known Brunner "[s]ince he's a baby," for "close to 30 years," and they have worked together in the past. (Leser Dep. Tr. 109:2-8; 10/30 Tr. (Brunner) 123:21-124:15.)

Brunner, Sprei, Miller, and Leser attended the same synagogue in Brooklyn. (10/30 Tr. (Miller) 71:4-5; (Sprei) 81:17-19, 105:21-24; 10/31 Tr. (Sprei) 40:14-15; (Miller) 66:9-10; Leser Dep. Tr. 22:3-8, 109:2-8.)

2. The Dupont Street Property, The Letters of Credit, and the L/C Agreement ⁹

The parties' dispute arises from the purchase and sale of 49 Dupont Street, Brooklyn, New York (the "Dupont Street Property"). Under a contract of sale dated June 8, 2012 (the "Contract of Sale"), Brunner's company, Dupont Developers, agreed to purchase the Dupont Street Property from 49 Dupont Realty Corp. for approximately $ 20 million. (JTPO ¶ 5(C); Ex. A (Contract of Sale); 10/30 Tr. (Brunner) 175: 9-24.) The Contract of Sale prohibited assignment, and for this reason subsequent transfers of the rights under the Contract of Sale were effectuated by the sale of the membership interest in the purchaser, Dupont Developers. (10/30 Tr. (Brunner) 157:20-158:8.) Certain environmental conditions present at the Dupont Street Property resulted in an order on consent and administrative settlement with the New York State Department of Environmental Conservation ("NYSDEC"), pursuant to which the seller, 49 Dupont Realty Corp., was required to take several actions, including a remediation program. (JPTO ¶ 5(D).) Under the Contract of Sale, Dupont Developers agreed to assume 49 DuPont Realty Corp.'s obligations under the NYSDEC consent order. (JPTO ¶ 5(E).)

In June 2013, Brunner entered into a contract to sell the rights to purchase the Dupont Property to 49 Duponts Lofts, an entity owned by Miller (the "June 2013 Contract"). (Ex. B; 10/31 Tr. (Miller) 63:20-22.) At the time of the June 2013 Contract, a separate Brunner entity held the contract rights, through ownership of Dupont Developers, to purchase the Dupont Property. (Ex. B; 10/30 Tr. (Brunner) 155:17-24.) Through a series of transfers, Anmuth obtained the right to purchase under the Contract of Sale and was substituted as "Assignor" in the June 2013 Contract with 49 Dupont Lofts. (10/31 (Brunner) 156:9-16, 166:12-15.) Although the exact amount is disputed, all parties testified that certain payments were made by 49 Dupont Lofts to Brunner (or one of his entities) under the June 2013 Contract. Brunner testified that he received "more than $ 2.5 million." (10/30 Tr. (Brunner) 162:19-20.) Miller and Sprei testified that they made several payments totaling "close to five million dollars." (10/31 Tr. (Sprei) 16:8-11, (Miller) 64:13-16.) In January 2014, the June 2013 Contract was terminated and the parties to the June 2013 Contract reached an alternative agreement.¹⁰

The sale of the Dupont Street Property closed on May 19, 2014. (JPTO ¶ 5(F).) At closing, in order to ensure their performance under the NYSDEC consent order, Dupont Developers agreed to provide standby letters of credit ("SLOCs") in favor of the seller, 49 Dupont Realty Corp., and to maintain the SLOCs until the remediation work was completed and a certificate of completion was issued by NYSDEC. (JPTO ¶ 5(E).) Brunner testified that,

The letter[s] of credit[ ] were put into place for the benefit of the seller of the property to guarantee him that the environmental liability that exists on th[e] property will

...