Case Law Summaries

In Re Brookdale Gardens Association, Inc.

• Opinion Date: May 20, 2010
• Business Law
• E-Mail

BANKRUPTCY —When a party controls an entity and attempts to place the entity into bankruptcy even though the entity is not in financial stress, and only does so to obtain a litigation advantage in a parallel state court litigation, the petition in bankruptcy will be rejected and the party who caused the filing will be sanctioned.

A not-for-profit condominium association was formed when 392 rental apartments were converted to condominium units. A sponsor owned or controlled 310 units. Thirty-four non-sponsor unit owners sued the sponsor in state court alleging mismanagement of the books, refusing or failing to maintain and repair the property, and failing to make timely and proper contributions to the association. After several years of litigation, the court appointed a special fiscal agent. The agent required that payments from the association’s operating account be made subject to his approval, and had a forensic accountant appointed to examine the association’s books and records and to assist him in preparing a budget. The agent also replaced the sponsor’s property management company with an independent company and ordered the sponsor to return specific funds received for alleged labor, management, and maintenance costs. As a result, the sponsor could not longer dominate the actions of the association. The sponsor opposed the appointment of the agent and then unsuccessfully asked the lower court to remove or limit its actions. Shortly after the sponsor transferred some special assessment and maintenance fees to the association at the agent’s direction, the association filed a Chapter 11 bankruptcy petition despite the lack of a financial emergency.

In the association’s certification, it expressed dissatisfaction with the management of the properties by the agent, and told of its desire to end the long litigation that gave rise to the agent’s powers. Shortly after the case was filed, the agent successfully moved to dismiss the case as a bad faith filing. The Bankruptcy Court held the association had not shown the need for financial restructuring because the association was operating under a break-even budget and all of its expenses were being met. All that the association’s papers reflected was a disagreement with managerial decisions made by the special fiscal agent and a desire to end the state court action.

The Bankruptcy Court believed the sponsor was the real party behind the Chapter 11 filing and merely was seeking to regain control over the association. It saw the bankruptcy filing as an attempt by the sponsor to seek another litigation platform where it could oust the agent and pursue a managerial and organizational restructuring. Therefore, the Court abstained and dismissed the case, believing that the Chapter 11 filing was used only a litigation strategy.

The Court also sanctioned the sponsor for its lack of good faith in filing a Chapter 11 case that served no valid bankruptcy purpose, and merely to obtain a tactical advantage. The Court used sanctions against the non-party sponsor to punish its litigation abuse, as its strategy was deemed a substantial participation in the proceeding.

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