MARTELLI v. COLTS NECK GOLF & COUNTRY CLUB, INC.
OPINION filed. Signed by Judge Freda L. Wolfson on 8/24/2015. (kas, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
Case No. 14-8101 (FLW)
COLTS NECK GOLF AND COUNTRY
WOLFSON, United States District Judge:
This matter comes before the Court on the appeal of Salvatore Martelli (“Appellant” or
“Martelli”) from the final order, dated December 23, 2014, of the United States Bankruptcy Court
for the District of New Jersey denying Appellant’s motion for reconsideration for, inter alia, an
order denying the appointment of a Chapter 11 trustee or examiner, and denying Appellant’s
request for a comfort order that the automatic stay does not act to prevent Appellant from filing a
case in the New Jersey Superior Court against Dr. Anthony DeGennaro (“DeGennaro”), Carmella
DeGennaro and Pegasus Properties, LLC (“Pegasus”), to recover an allegedly fraudulent transfer
or, in the alternative, for an order granting relief from the automatic stay to allow Appellant to file
the fraudulent transfer suit against the DeGennaros and Pegasus. This Court has jurisdiction to
review the decision of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). For the reasons set
forth below, the Court affirms in part and reverses in part the decisions of the Bankruptcy Court.
Specifically, the denial of Appellant’s motion for relief from the automatic stay is reversed; the
remaining decisions are affirmed.
The background of this dispute has been set forth in detail before the Bankruptcy Court.
Accordingly, the Court sets forth only those facts that are relevant to this appeal.1
In May 1998, Pegasus, which is wholly owned by Anthony and Carmella DeGennaro,
acquired land in Colts Neck, New Jersey, from Martelli for the purpose of building a golf course.
As part of the transaction, Martelli and DeGennaro formed Colts Neck Golf and Country Club,
Inc. (“Debtor” or “CNGCC”), with Martelli as a 10 percent shareholder and DeGennaro as a 90
percent shareholder. In May 2000, CNGCC entered into a lease with Pegasus to occupy the golf
course and clubhouse at a monthly rent of $75,000. The rent was determined based upon “a return
on capital without regard to net earnings.” Tr. of Decision by the Hon. Patricia Del Bueno Cleary,
April 16, 2014 (hereinafter “Tr. of Judge Cleary Decision”), 13. Throughout the duration of the
lease, CNGCC was never able to pay the full monthly rent to Pegasus, which accepted partial
payments and deferred the unpaid rent. Appellee Br. at 2.
In November 2010, Martelli filed suit against CNGCC and DeGennaro in the Superior
Court of New Jersey, Monmouth County, Chancery Division. In his suit, Martelli alleged breach
of contract, fraud, unjust enrichment, conversion, and he sought the appointment of an independent
accountant. Tr. of Judge Cleary Decision, 2–3. Following a 24-day bench trial before Judge Cleary,
the court entered a judgment on April 24, 2014 in favor of Martelli and against CNGCC for
$341,540 for past due earnings and ordered a buyout of $385,000 for Martelli’s ten percent
shareholder interest in CNGCC. Superior Ct. Order, April 24, 2014.
Facts are drawn from the record supplied on appeal.
On the breach of contract claim, the state court found that the Memorandum of
Understanding between the parties provided that Martelli was entitled to ten percent of the “net
earnings” attributable to revenue derived from “green fees” collected by the golf course; the court
found that the amount of net earnings due to Martelli was $341,540. Tr. of Judge Cleary Decision,
Martelli had also asserted that he was an oppressed shareholder, pursuant to N.J.S.A.
14A:12-7(1)(c). Judge Cleary found a “substantial element of unfairness in Anthony DeGennaro’s
dealings with Salvatore Martelli.” Tr. of Judge Cleary Decision, 12. The state court found that
DeGennaro operated CNGCC without considering its fiduciary duty to stockholders, constituting
unfairness under N.J.S.A. 14A:12–7(1)(c). Tr. of Judge Cleary Decision, 13–14. Judge Cleary
determined that Degennaro “fixed the rent, paid by [CNGCC] to Pegasus Properties, which is
wholly [owned] by Dr. and Mrs. DeGennaro, not at a fair market rate, but at a rate designed to give
Anthony DeGennaro a return on capital without regard to net earnings.” Tr. of Judge Cleary
Decision, 13. Judge Cleary accepted the testimony of Martelli’s expert on the issue of fair market
rent, but did not elaborate further on the issue. Judge Cleary also noted that after Pegasus Properties
received a settlement of $300,000—some of which would have been allocable to CNGCC—
DeGennaro refused to allow Martelli to review the corporate records or provide information about
the corporation’s financial institution. Tr. of Judge Cleary Decision, 17. Judge Cleary held that
this and other conduct by DeGennaro “frustrated the legitimate expectations of [Martelli] and his
conduct was contrary to the understanding between the parties,” and therefore she found that
Martelli was an oppressed shareholder. Tr. of Judge Cleary Decision, 14.
The court thus required a buy-out of Martelli’s ten percent stock interest in CNGCC, and
set the buy-out amount at $385,000. Tr. of Judge Cleary Decision, 17. However, the court found
that, while DeGennaro’s actions were unfair, they “did not rise to the level of fraud or illegality.”
Tr. of Judge Cleary Decision, 18. The court dismissed the counts alleging fraud, unjust enrichment,
and conversion against CNGCC, as well as all counts against the individual, DeGennaro. Judge
Cleary Final J., April 24, 2014.
Between May 27, 2014 and June 3, 2014, Martelli’s and CNGCC’s counsel communicated
by e-mail and telephone with respect to the judgment pending appeal. However, the parties could
not come to an agreement on the terms of a deposit and ceased communication on June 3, 2014.2
On June 9, 2014, DeGennaro, as the majority shareholder of CNGCC, filed an appeal of the trial
court’s decision with the New Jersey Superior Court, Appellate Division.
On or about June 11, 2014, CNGCC filed a voluntary petition seeking the protection of
Chapter 11 of the Bankruptcy Code. Since the filing, CNGCC has operated as debtor in possession
and retained special counsel. CNGCC has not yet submitted a reorganization or liquidation plan.
On July 25, 2014, Martelli moved to dismiss the Chapter 11 case, alleging that CNGCC filed the
Chapter 11 bankruptcy in bad faith to avoid posting a supersedeas bond, and CNGCC was highly
unlikely to file a confirmable plan. The Bankruptcy Court denied the motion to dismiss by order
dated September 17, 2014.
On October 14, 2014, Martelli filed a motion to (1) appoint a trustee under 11 U.S.C.
1104(a)(1)–(2); (2) appoint an examiner under 11 U.S.C. 1104(c); (3) order the United States
Trustee to file a motion requesting the appointment of a trustee pursuant to 11 U.S.C. 1104(e); and
(4) extend the Chapter 11 proceeding to include Pegasus as a debtor and then substantively
In the New Jersey Superior Court matter, Appellant was represented by Shannon Fury Curtis,
Esq., who signed a certification on June 24, 2014 detailing her communication with Debtor’s
counsel. Debtor’s counsel advised Appellant’s counsel that Debtor would be unable to obtain a
supersedeas bond, and would instead deposit cash in an interest bearing account in trust for
Appellant pending the appeal. Appellant alleges that Debtor ceased communication with
Appellant’s counsel about the deposit as of June 3, 2014. The parties allegedly engaged in
settlement negotiations in lieu of an appeal but were not successful.
consolidate the CNGCC and Pegasus cases by authority of 11 U.S.C. 105 and 11 U.S.C.
1123(a)(5)(c). Martelli argued that the facts set out in the record and a supporting certification
from Martelli’s state court counsel, Shannon Fury Cutis, Esq., evidenced sufficient cause—
specifically “fraud and dishonesty in the management of the affairs” of CNGCC—to appoint an
independent trustee as specified in Section 1104(a)(1). As evidence of this mismanagement,
Martelli cited DeGennaro’s rent “in excess of the fair market rental value, as a way of diverting
funds away from [CNGCC],” which CNGCC was allegedly still paying to Pegasus. 3 Martelli
further claimed that none of Pegasus’ $300,000 settlement in 2006, which included damages for
alleged lost profits of CNGCC, was paid to CNGCC. Moreover, Martelli noted Judge Cleary’s
findings that DeGennaro failed to provide access to CNGCC’s records, and also highlighted
several alleged discrepancies between DeGennaro’s completed Amended Schedule B and
CNGCC’s income tax returns.4
On November 18, 2014, the Bankruptcy Court held a hearing on the motion and issued an
oral decision denying Martelli’s motion. See Bankruptcy Decision Tr., November 18, 2014
(hereinafter “Bankruptcy Transcript I”), 18:5–6. The Bankruptcy Court “[did not] see the point of
appointing a trustee” because, as the largest unsecured creditor, Martelli had “a lot of control in
this case” and would be protected. Id., 16:11–24. The court further stated that between Martelli,
the United States Trustee, and the court, “we can certainly oversee the kind of decisions that the
Martelli also notes that Ms. Curtis certified that DeGennaro has “co-mingled [CNGCC’s] assets
and liabilities with that of Pegasus. . . .” and accuses DeGennaro of “continuing to enrich himself
While Appellant’s Brief in support of his motion for alternative forms of relief also requested (1)
the United States to order appointment of a trustee pursuant to 11 U.S.C. 1104(e), and (2) extension
of the proceeding to embrace Pegasus and consolidate the cases. Martelli does not appeal the denial
of these requests, and, accordingly, the Court finds it unnecessary to discuss the aforementioned
alternative forms of relief.
debtor is going to make with regard to the landlord and his ability to confirm.” Id., 16:18–20.
Moreover, the Bankruptcy Court did not agree that Judge Cleary found dishonesty and did not
believe there was enough in the state court decision to support the appointment of a trustee. See
Id., 17:17–22. The Bankruptcy Court therefore denied the motion on all issues: to appoint a trustee
or an examiner, to order the United States Trustee to move for the appointment of a trustee, and to
include Pegasus as a debtor in the present case.
Martelli then filed a motion on November 24, 2014 for (1) reconsideration of the denial of
Martelli’s motion to appoint a Chapter 11 trustee, (2) a comfort order that the automatic stay does
not prevent Martelli from filing a fraudulent transfer action against the DeGennaros and Pegasus
in the New Jersey Superior Court, or, (3) in the alternative, an order granting relief from the
automatic stay to permit Martelli to institute the fraudulent transfer suit against the DeGennaros
and Pegasus. Martelli argued that the Bankruptcy Court failed to consider the Rooker-Feldman
doctrine in the previous decision, and that the court was bound by the findings of Judge Cleary
with regard to the excessive rent and other issues.
At the hearing on the motion for reconsideration on December 23, 2014, the Bankruptcy
Court indicated that the parties had essentially reiterated their prior arguments, and that it did not
believe that it had previously misapplied the facts or the law. See Bankruptcy Decision Tr.,
December 23, 2014 (hereinafter “Bankruptcy Transcript II”), 19:17–20. Further, Debtor argued at
the hearing that it did not believe there was any fraudulent transfer; the Bankruptcy Court stated
that this determination was within Debtor’s business judgment. Id. at 16:7–8. Further, the
Bankruptcy Court stated its belief that “the rent [was] going to work itself out in the confirmation.”
Id. at 16:17–19. While the Bankruptcy Court found that it did not have any jurisdiction over
DeGennaro or Pegasus—so the automatic stay would not apply if Martelli chose to sue either of
those parties, id. at 20:6–10—the Bankruptcy Court nevertheless held that Martelli could not sue
Pegasus or DeGennaro for fraudulent transfer because that cause of action was an estate asset. Id.
at 20:23–25. It is from this decision that Martelli appeals.
II. Standard of Review
The standard of review for Bankruptcy Court decisions is determined by the nature of the
issues on appeal. Baron & Budd, P.C. v. Unsecured Asbestos Claimants Committee, 321 B.R. 147,
157 (D.N.J. 2005). Findings of fact are reviewed under a clearly erroneous standard, where a
factual finding may be overturned only when “the reviewing court on the entire evidence is left
with the definite and firm conviction that a mistake has been committed.” In re Cellnet Data
Systems, Inc., 327 F.3d 242, 244 (3d Cir. 2003) (citing U.S. v. U.S. Gypsum Co., 333 U.S. 364,
395, 68 S. Ct. 525, 92 L. Ed. 746 (1948)). “The fact that a reviewing court could have decided the
matter differently does not render a finding of fact clearly erroneous.” First Western SBLC, Inc. v.
Mac–Tav. Inc., 231 B.R. 878, 881 (D.N.J. 1999) (citing Anderson v. Bessemer City, 470 U.S. 564,
On the other hand, legal conclusions from the Bankruptcy Court are subject to de novo, or
plenary, review by the district court. Donaldson v. Bernstein, 104 F.3d 547, 551 (3d Cir. 1997). If
the issues on appeal present both findings of fact and conclusions of law, the applicable standard,
“clearly erroneous” or “de novo,” must be appropriately applied to each component. Meridian
Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir. 1992) (citing In re Sharon Steel Corp., 871 F.2d 1217,
1222 (3d Cir. 1989) and Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102–103
(3d Cir. 1981)).
Lastly, decisions on procedural bases are reviewed for abuse of discretion. In re United
Healthcare Sys., Inc., 396 F.3d 247, 249 (3d Cir. 2005). Deference is the hallmark of abuse of
discretion review. See Gen. Elec. Co. v. Joiner, 522 U.S. 136, 143 (1997); Koon v. United States,
518 U.S. 81, 98–99 (1996). Thus an exercise of discretion is not disturbed unless the court
committed a clear error of judgment in making its decision, meaning that it relied upon “a clearly
erroneous finding of fact, an errant conclusion of law or an improper application of law to fact.”
In re Nutraquest, Inc., 434 F.3d 639, 645 (3d Cir. 2006); see also In re Orthopedic Bone Screw
Prods. Liab. Litig., 246 F.3d 315, 320 (3d Cir. 2001); Int'l Union, UAW v. Mack Trucks, Inc., 820
F.2d 91, 95 (3d Cir. 1987). See generally In re United Healthcare Sys., Inc., 396 F.3d 247, 249
(3d Cir. 2005) (quoting In re Trans World Airlines, Inc., 145 F.3d 124, 130–31 (3d Cir.1998)) (a
district court reviews “the bankruptcy court's legal determinations de novo, its factual findings for
clear error and its exercise of discretion for abuse thereof.”).
Appellant appeals the decision of the Bankruptcy Court denying (1) reconsideration of the
denial of Appellant’s motion to appoint a Chapter 11 trustee, and (2) a comfort order that the
automatic stay does not apply to Appellant to stay him from filing a fraudulent transfer action
against the DeGennaros and Pegasus in the New Jersey Superior Court, or, in the alternative, (3)
relief from the automatic stay to allow Appellant to file the fraudulent transfer suit against the
DeGennaros and Pegasus. First, Appellant argues that Judge Cleary’s finding that Appellant is an
oppressed shareholder, based on the excessive rent charged by Pegasus, and Pegasus’ failure to
disperse its alleged $300,000 settlement proceeds, amounts to “cause” for the appointment of a
trustee. In that regard, Appellant argues that the Bankruptcy Court erred in not accepting the facts
found by Judge Cleary. Second, Appellant argues that there was sufficient “cause” to enter the
comfort order or grant stay relief to allow Appellant to file suit against Pegasus and the
DeGennaros on behalf of Debtor for the continued payment of excessive rent and the alleged
diversion of settlement proceeds from Debtor. With respect to the denial of relief from the
automatic stay, Appellant contends that the Bankruptcy Court erred in relying on the business
judgment rule, which Appellant perceives as the Bankruptcy Court’s reason for preventing the
fraudulent transfer suit.
A. Appointment of a Trustee
Section 1104 provides:
(a) At any time after the commencement of the case but before
confirmation of a plan, on request of a party in interest or the United
States trustee, and after notice and hearing, the court shall order the
appointment of a trustee—
(1) for cause, including fraud, dishonesty, incompetence, or gross
mismanagement of the affairs of the debtor by current management,
either before or after the commencement of the case, or similar
cause, but not including the number of holders of securities of the
debtor or the amount of assets or liabilities of the debtor; or
(2) if such appointment is in the interests of creditors, any equity
security holders, and other interests of the estate, without regard to
the number of holders of securities of the debtor or the amount of
assets or liabilities of the debtor.
[11 U.S.C. § 1104(a)].
A bankruptcy court’s decision to appoint a trustee pursuant to Section 1104(a) must be made
on a case-by-case basis. In re Sharon Steel Corporation, 871 F.2d 1217, 1226 (3d Cir. 1989). The
party moving for the appointment of a Chapter 11 trustee must prove the need for such appointment
under either subsection by clear and convincing evidence. In re G-I Holdings, Inc., 385 F.3d 313,
317–18 (3d Cir. 2004) (quoting In re Marvel Entertainment Group, 140 F.3d 463, 473 (3d. Cir.
1998)); see also Sharon Steel, 871 F.2d at 1226. The appointment of a trustee is an extraordinary
remedy and “should be the exception, rather than the rule.” Sharon Steel, 871 F.2d at 1226; see In
re Euro–American Lodging Corp., 365 B.R. 421, 426 (Bankr. S.D.N.Y. 2007) (“[T]he
appointment of a § 1104 trustee is an extraordinary remedy”). In fact, there is a “strong
presumption” against appointing an outside trustee because the fiduciary obligations of the debtor
to the creditors alleviate the need for a trustee. Marvel, 140 F.3d at 471; see G-I Holdings, 140
F.3d at 319 (clarifying that the “strong presumption” was simply another way of referring to the
clear and convincing evidence standard). “The strong presumption also finds its basis in the debtorin-possession’s usual familiarity with the business it had already been managing at the time of the
bankruptcy filing, often making it the best party to conduct operations during the reorganization.”
Marvel, 140 F.3d at 471.
While appointment of a trustee is mandated upon a finding of “cause” under subsection (1)
or upon a finding that a trustee would best serve the interests discussed in subsection (2), the
decision is within the Bankruptcy Court’s discretion. That is, a determination of “cause” for the
appointment of a trustee under subsection (1) is within the discretion of the court. See Sharon Steel,
871 F.2d at 1226 (citing Committee of Dalkon Shield Claimants v. A.H. Robins Co., Inc., 828 F.2d
239, 242 (4th Cir. 1987)); see In re Potts, 142 F.2d 883 (6th Cir. 1944) (“The bankruptcy court
has a broad discretion to appoint a trustee at any time in the course of the proceedings.”); In re
Adelphia Commc'ns Corp., 336 B.R. 610, 656 (Bankr. S.D.N.Y. 2006) (“The decision to appoint
a chapter 11 trustee is a factual determination entrusted to the discretion of the bankruptcy judge.”).
Subsection (2) is a “flexible standard” that also calls for discretion. See Sharon Steel, 871 F.2d at
1226 (citing Committee of Dalkon Shield Claimants, 828 F.2d at 242); see In re Fairwood Corp.,
2000 WL 264319 at *4 (S.D.N.Y. March 9, 2000) (“[b]ankruptcy courts have broad discretion in
deciding whether to . . . appoint a trustee for cause and to decide whether such appointment is in
the best interests of creditors or the estate under Section 1104(a).”). Therefore, the Bankruptcy
Judge’s factual determinations to appoint a trustee under either Section 1104(a)(1) or (2) are
reviewable under an abuse of discretion standard. See Sharon Steel, 871 F.2d at 1226; see In re
Lowenschuss, 171 F.3d 673, 685 (9th Cir. 1999); see Schuster v. Dragone, 266 B.R. 268 (D. Conn.
Here, Appellant moved under both subsections of § 1104(a); the Bankruptcy Court,
however, did not clearly explain or delineate how its ruling applied the different subsections.5
Nonetheless, I will examine the two subsections separately in reviewing the reasoning of the
1. § 1104(a)(1) – For Cause Appointment
Appellant argues that the Bankruptcy Court was bound to accept Judge Cleary’s findings
of facts, but instead ignored her findings in denying the motion to appoint a trustee and the
subsequent motion for reconsideration. In particular, Appellant focuses on two aspects of Judge
Cleary’s decision: (1) the determination that the rent exceeded the fair market value for the golf
course and (2) that the 2006 settlement proceeds were diverted away, at least in part, from Debtor
to Pegasus and the DeGennaros. Appellant asserts that Judge Cleary had determined that such
conduct was oppressive and dishonest, and that these determinations were binding on the
Bankruptcy Court.6 Appellant Br. at 7. Appellant maintains these state court findings constitute
Appellant’s original motion also requested the appointment of a trustee under § 1104(a) or (e),
or the appointment of an examiner under § 1104(c); however, the present appeal only raises the
issue of appointment of a trustee under § 1104(a).
On July 17, 2015, Appellant filed a Motion Objecting to Allowance of Claims, specifically
petitioning the Bankruptcy Court to disallow several filed claims. Subsequently, Appellant
submitted the Motion to this Court as “after-acquired evidence and/or as a supplemental
submission to [his] brief.” In Appellant Counsel’s Certification to Support the Motion, Mr. Rossi
alleges that several claims related to renovations to Pegasus-owned real estate were dishonestly
listed as Debtor’s assets, despite Mrs. DeGennaro testifying in state court that they were in fact
assets of Pegasus Properties. App. Cert. at 1–2.
Appellant asks the Court to consider the disputed claims with respect to Appellant’s motion to
appoint a trustee. Specifically, Appellant points to the claims, and Debtor’s failure to dispute them,
as illustrations of DeGennaro’s—and thus Debtor’s—dishonesty. However, this Court’s review is
limited to “review of the evidence before the Bankruptcy Court and which was made a part of the
record at the time” of the matter on appeal. Matter of Halvajian, 216 B.R. 502, 509 (D.N.J.) aff'd
sub nom. In re Halvajian, 168 F.3d 478 (3d Cir. 1998); see also United States v. Lockett, 406 F.3d
207, 212 (3d Cir. 2005) (“It is well settled that arguments asserted for the first time on appeal are
deemed to be waived and consequently are not susceptible to review in this Court absent
exceptional circumstances.”). Accordingly, this evidence is not properly before the Court and will
not be considered.
“cause per se” under 1104(a) to appoint a trustee, thereby removing any discretion that the
Bankruptcy Court would have. Id. Appellant further contends that even if the Bankruptcy Court
could exercise discretion, that discretion was abused on account of the state trial court’s findings
that Appellant was “the victim of dishonesty and oppressive conduct.” Appellant Br. at 8.
Appellant also invokes the Rooker-Feldman doctrine, arguing that the doctrine bars the
Bankruptcy Court from challenging the findings of the state trial court. Appellant Br. at 8. In that
regard, Appellant argues that the Bankruptcy Court ignored the findings of Judge Cleary, i.e., the
findings of excessive rent and the diversion of the $300,000 settlement proceeds from Debtor to
As discussed supra, the Bankruptcy Court’s factual determination of cause for appointment
of a trustee under § 1104(a)(1) is discretionary and reviewed for abuse of that discretion. See
Sharon Steel, 871 F.2d at 1226. In denying Appellant’s original motion to appoint a trustee, the
Bankruptcy Court stated “I don’t agree that [Judge Cleary] found dishonesty. . . . [Y]ou’re reading
it into it.” Bankruptcy Transcript I, 17:17–18. The Bankruptcy Court further stated that “it doesn’t
equate to take those findings [of the state court] to support the appointment of a trustee in this case.
Especially with the amount of assets that are available to pay a trustee and then also pay creditors.”
Id. at 17:3–6. Essentially, the Bankruptcy Court disagreed with Appellant’s interpretation of the
state court’s conclusions. And, at the hearing on the Motion for Reconsideration, the Bankruptcy
Court stated that neither party presented new arguments to establish any misapplication of the facts
or the law. See Bankruptcy Transcript II, 19:17–20. The Bankruptcy Court did not abuse its
discretion in making these findings
Indeed, despite Appellant’s insistence that Judge Cleary had found that Debtor acted
dishonestly, the state court decision lacks any finding regarding Debtor’s dishonesty. Rather, while
Judge Cleary found a “substantial element of unfairness” in DeGennaro’s dealings with Appellant,
she explicitly held that Debtor’s actions “while unfair, did not rise to the level of fraud or
illegality.” See id. 12:12, 18:5–7. Moreover, the New Jersey oppressed shareholder statute does
not require a finding of dishonesty; rather, the statute provides a remedy where “the directors or
those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their
authority as officers or directors or have acted oppressively or unfairly toward one or more
minority shareholders.” N.J.S.A. 14A:12-7(c). Judge Cleary only found that DeGennaro acted
“oppressively or unfairly,” which does not necessarily equate to dishonesty. “Unfairness,” in
contrast to “dishonesty”, is not one of the listed “causes” for appointment of a Chapter 11 trustee
under § 1104(a)(1), and therefore I disagree with Appellant that Judge Cleary’s decision gave right
to a “per se” cause under the statute.7
Here, Judge Cleary found that DeGennaro “fixed the rent . . . not at a fair market rate, but
at a rate designed to give Anthony DeGennaro a return on capital without regard to net earnings.”
Judge Cleary Decision, 13:5–9. She also found that DeGennaro settled a lawsuit for $300,000,
“some of which would have been allocable to [Debtor],” but “[DeGennaro] refused to allow Mr.
Martelli to review the books and records of the corporation.” Id. at 13:13–19. Indeed, the
Bankruptcy Court acknowledged Judge Cleary’s findings and the conduct described therein.
Specifically, the Bankruptcy Court expressed its concern with “the role that Mr. DeGennaro plays
I note that Judge Cleary’s factual findings, upon which the “unfairness” holding was based,
could have constituted cause to appoint a trustee. The language of § 1104(a)(1), “does not
promulgate an exclusive list of causes for which a trustee must be appointed.” Marvel, 140 F.3d
at 472. Rather, “the concepts of incompetence, dishonesty, gross mismanagement and even fraud
all cover a wide range of conduct, and courts must be given the discretion necessary to determine
if the debtor-in-possession's conduct shown rises to a level sufficient to warrant the appointment
of a trustee.” Id. (internal citations omitted). Although there was no dishonesty, the actions of
Debtor, and DeGennaro, could nonetheless have fallen within “wide range of conduct” covered
by the statute. However, the Bankruptcy Court considered the conduct, and found that it did not
fall within the statute. While a different conclusion could have been drawn, I do not find that the
Bankruptcy Court abused its discretion in this regard.
in the, his role with the debtor and his role with the landlord.” Bankruptcy Tr. I, 16:15–16. The
court also stated that Appellant “ma[de] a good point about the $21,000 fair market rent.”
Bankruptcy Tr. II, 8:17–18. Nonetheless, the court found, in its discretion, that the findings of the
state court were not “enough support to appoint a trustee in this case.” Bankruptcy Tr. I, 17:21–
22. In making this decision, the Bankruptcy Court did not rely upon “a clearly erroneous finding
of fact, an errant conclusion of law or an improper application of law to fact,” In re Nutraquest,
Inc., 434 F.3d at 645. Thus, I find that the Bankruptcy Court acted within its discretion on the
Furthermore, I find that Appellant’s application of the Rooker-Feldman doctrine is
misguided. “The Rooker–Feldman doctrine prevents ‘inferior’ federal courts from sitting as
appellate courts for state court judgments.” In re Knapper, 407 F.3d 573, 580 (3d. Cir. 2005) (citing
Port Auth. Police Benevolent Assoc., Inc. v. Port Auth. of N.Y. and N.J. Police Dept., 973 F.2d
169, 173 (3d Cir. 1992)). The doctrine is confined to “cases brought by state-court losers
complaining of injuries caused by state-court judgments rendered before the [federal] court
proceedings commenced and inviting [federal] court review and rejection of those judgments.”
Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284 (2005).
Here, Debtor, the “loser” in the state court proceeding, has not asked the Bankruptcy Court
to either reopen or reject Judge Cleary’s state court judgment. Although Debtor has a pending
appeal with respect to Judge Cleary’s decision, in the context of the present Bankruptcy Court
proceeding, Debtor has not asked the Bankruptcy Court to review or reject any factual findings
made by Judge Cleary. Rather, both the Debtor and the Bankruptcy Court have acknowledged the
state court findings and the Bankruptcy Court indicated that none of its findings contradict those
of the state court. Therefore, this Court finds that the Rooker-Feldman doctrine is not applicable
Appellant also alleges that, apart from Judge Cleary’s findings, the irreconcilable conflict
and acrimony between Martelli and DeGennaro, as evidenced, in part, from Martelli’s oppressed
shareholder suit, constitute “cause” for the appointment of a trustee. Appellant Br. at 8. However,
Appellant did not expressly raise the issue of acrimony before the Bankruptcy Court; rather,
Appellant’s motions both focused on the improper actions of the Debtor. Thus, the Bankruptcy
Court did not make any finding on this issue. But, it is clear that a conflict exists, as evidenced by
the pending appeal in state court, and acrimony and conflicts of interest may constitute “cause” for
the appointment of a trustee; nonetheless, the bankruptcy “court may find cause to appoint a trustee
for ‘acrimony’ only on a case-by-case basis, as opposed to a per se rule.” Marvel, 140 F.3d at 472.
However, because Appellant did not raise the issue until the present appeal, leaving this Court with
nothing to review, I will not consider this issue further. See Hormel v. Helvering, 312 U.S. 552,
556 (1941) (“an appellate court does not give consideration to issues not raised below”); United
States v Lockett., 406 F.3d 207, 212 (3d Cir. 2005) (“It is well settled that arguments asserted for
the first time on appeal are deemed to be waived and consequently are not susceptible to review in
this Court absent exceptional circumstances.”); Bell Atl.-Pennsylvania, Inc. v. Pennsylvania Pub.
Util. Comm'n, 273 F.3d 337, 344 n. 3 (3d Cir. 2001) (“Our general practice is not to address legal
issues not raised below, absent exceptional circumstances.”); see also In re Stone Resources, Inc.,
482 Fed.Appx. 719, 723 (3d Cir. 2012) (noting that when a district court reviews bankruptcy court
determinations, “[i]ts jurisdiction is circumscribed in the same way that an appellate court's
In addition, Appellant argues that the oppressive conduct of DeGennaro, acting on behalf
of Debtor, inherently constitutes a breach of the fiduciary obligations that officers and directors of
corporations have to stockholders. Appellant Br. at 9. Appellant contends that Debtor’s past and
present breaches of fiduciary obligations—namely, the deprivation of access to Debtor’s books
and records, and the continued payment of excess rent—satisfy the requirement of cause to appoint
a trustee, because § 1104 includes cause which arose “either before or after the commencement of
the case.” Id.
It is true that Debtor, both past and present, owes a fiduciary duty to Appellant. “When the
chapter 11 petition . . . [was] filed . . ., the debtor-in-possession assumed the same fiduciary duties
as would an appointed trustee . . . .” Marvel, 140 F.3d at 474. “These obligations include ‘[o]pen,
honest and straightforward disclosure to the Court and creditors.’” Id. (citing V. Savino Oil, 99
B.R. at 526). “Also among the fiduciary obligations of a debtor-in-possession is the ‘duty to protect
and conserve property in its possession for the benefit of creditors.’” Id. (citing In re Ionosphere
Clubs, Inc., 113 B.R. 164, 169 (Bankr. S.D.N.Y. 1990)).
Further, Appellant’s allegations that Debtor breached fiduciary duties in the past are
substantiated by the record. In her state court decision, Judge Cleary found that DeGennaro, as
director of Debtor, owed a fiduciary duty to stock holders such as Appellant but “operated the
corporation without considering his duty, . . . [constituting] unfairness under the provisions of
N.J.S.A. 14:A12–7(1)(c).” Tr. of Judge Cleary Decision 13–14. Specifically, Judge Cleary found
that DeGennaro refused to allow Appellant to review Debtor’s books and records or give him any
information about the financial institution. 8 Id. at 13. Appellant additionally claims that the
continued payment of excessive rent is a breach of Debtor’s fiduciary duty.
Appellant cites and provides to the Court an unreported New Jersey Appellate Division case to
“provide additional guidance when considering the dishonesty of the DeGennaros and Debtor.”
Appellant Br. at 9. The case, Munoz v. Perla, et al., No. A-5922-08T3, 2011 WL 6341182 (N.J.
App. Div. Dec. 20, 2011), involved a lawsuit by one member of a partnership against the other
partners for, inter alia, breach of fiduciary duty. The primary issue in the case involved rental
leases with other companies—owned by the same partners—which charged below-market rent. Id.
at *3, *6. The defendants argued that the below-market rent issue was barred by the statute of
limitations, because such leases had originally been signed in 1994; the Appellate Division upheld
the trial court’s determination that, because the leases were renewed in 2003, there was no statute
of limitations bar. Id. at *14–15. Appellant asserts that Munoz demonstrates that “breaches of
While Debtor appears to have breached its fiduciary duties to Martelli prior to filing for
bankruptcy, Appellant has not alleged that Debtor continues to refuse access to Debtor’s books,
records, or information. In fact, both the Bankruptcy Court and attorney representing the Office of
the United States Trustee indicated that Debtor has provided the court with all mandatory
disclosures. Furthermore, Debtor’s continued payment of rent is not inherently a breach of
fiduciary duty. Although Judge Cleary found that Debtor paid rent that was “not at a fair market
rate,” she did not void the lease; the finding of the excessive rent was simply evidence of Martelli’s
oppressed shareholder status. See Judge Cleary Decision, 13:2–12, 14:17. Similarly, the
Bankruptcy Court asked the parties, with regard to the amount of rent to be paid, “is there a written
lease?” The parties answered in the affirmative. Bankruptcy Tr. I, 11:8–9. Moreover, the evidence
before the court indicated that Debtor was not paying the full amount of rent. Bankruptcy Tr. I,
9:24–25, 10:1–2; Bankruptcy Tr. II, 10:7–12.9 In sum, the record does not show that Debtor has
continued to breach its fiduciary duties as debtor-in-possession after the Bankruptcy petition was
filed. Thus, this Court does not find that the Bankruptcy Court abused its discretion in failing to
appoint a trustee for this reason.
2. § 1104(a)(2) – Appointment of Trustee in the Best Interests of Creditors or Estate
Under § 1104(a)(2), the bankruptcy court may appoint a Chapter 11 trustee if it finds the
appointment to be in the best interest of the creditors, equity security holders, or other interests of
fiduciary duty may be continuous.” Appellant Br. at 9. This Court has already recognized Judge
Cleary’s findings that DeGennaro and Debtor breached their fiduciary duty when restricting access
to the books and records, and in the initial setting of the rent; it is unclear what else Munoz adds to
Appellant’s argument, and therefore, this case is not helpful.
The Office of the United States Trustee, represented by Jeffrey Sponder, Esq., indicated at oral
argument that he had reviewed Debtor’s monthly operating reports and found that during the five
months since the bankruptcy case had been filed, Debtor had only paid $31,000 per month, as
opposed to the $75,000 per month rent found in the lease agreement. See Bankruptcy Transcript
the estate. 11 U.S.C. § 1104(a)(2). This subsection “envisions a flexible standard,” which gives
the bankruptcy court discretion to appoint a trustee “when to do so would serve the parties’ and
estate’s interests.” Marvel, 140 F.3d at 474 (citing Sharon Steel, 871 F.2d at 1226). In many cases,
the bankruptcy court’s findings with regard to cause under § 1104(a)(1) and the best interests of
the debtor’s creditors under § 1104(a)(2) are “intertwined and dependent upon the same facts.” In
re Gasso, 490 B.R. 500, 506 (Bankr. E.D. Pa. 2013); see also Marvel, 140 F.3d at 474 (finding
that the “level of acrimony” permitted appointment under § 1104(a)(1) for cause and was also in
the best interests of the parties and the estate pursuant to § 1104(a)(2)). “Because subsection (a)(2)
envisions a flexible standard, an abuse of discretion standard offers the most appropriate type of
review for this subsection as well.” Sharon Steel Corp., 871 F.2d at 1226.
Here, Appellant moved for the appointment of a trustee under both subsections (a)(1) and
(a)(2); the Bankruptcy Court denied the motion entirely, but did not make specific findings with
respect to subsection (a)(2). However, the Bankruptcy Court found that the appointment of a
trustee was inappropriate, based in part on “the amount of assets that are available to pay a trustee
and then also pay creditors.” Bankruptcy Tr. I, 17:5–6. This Court will construe that statement as
a finding that, based on the finances of the debtor, the appointment of a trustee was not in the best
interests of the creditors.
Appellant, however, contends that appointment of a trustee under subsection (a)(2) is in
the best interest of the creditors, equity security holders, and the estate. Appellant Br. at 10.
Appellant asserts that Debtor’s refusal10 to bring a fraudulent transfer action against Pegasus for
While Appellant contends that Debtor refuses to file a fraudulent transfer action against Pegasus,
Debtor indicates that, though it does not believe such a suit would result in recovery for the estate,
it has not yet made a determination whether to pursue any avoidance actions. Pursuant to § 546,
“an action or proceeding under section . . . 548[, the fraudulent transfer code provision,] of this
title may not be commenced after the earlier of (1) the later of (A) 2 years after the entry of the
order for relief; or (B) 1 year after the appointment or election of the first trustee . . . .” 11 U.S.C.
the alleged excessive rent and the 2006 settlement proceeds amounting to $300,000, is evidence
that appointment of a trustee would be in the best interest of the estate and its creditors. Id. at 11.
Appellant initially argues that this case is similar to In re Cloudeeva, Inc., a case where the
bankruptcy court found that appointment of a Chapter 11 trustee was in the best interest of creditors
and thus warranted under § 1104(a)(2). No. BR 14–24874, 2014 WL 6461514 (Bankr. D.N.J. Nov.
18, 2014). In Cloudeeva, the bankruptcy court appointed a trustee because, inter alia, the chief
executive officer had voted to pay himself a $550,000 bonus while simultaneously claiming that
the company was experiencing a liquidity crisis. Id. at *7. The bankruptcy court in Cloudeeva
found that the debtor’s CEO “demonstrated utter disregard for the best interest of the estate” in
determining to pay himself a performance bonus after filing for Chapter 11 bankruptcy. Id. at *7.
Appellant argues that the large bonus in Cloudeeva “is clearly akin” to the excessive rent
paid by Debtor to Pegasus, both of which are allegedly “a way to enrich the principal.” Appellant
Br. at 10. This Court finds Appellant’s comparison to be exaggerated. Whereas the majority
shareholder in Cloudeeva voted to pay himself a discretionary performance bonus while the
company was financially struggling, Debtor, here, has continued to honor, to the extent financially
maintainable, an existing lease agreed upon by the two parties fifteen years ago. To the extent that
Appellant is alleging that the existence of the lease is, itself, not in the best interest of the creditors,
I note that Appellant has not been paying the full amount owed—the Office of the United States
Trustee, represented by Jeffrey Sponder, Esq., indicated at oral argument that he had reviewed
Debtor’s monthly operating reports and found that during the five months since the bankruptcy
case had been filed, Debtor had only paid $31,000 per month, as opposed to the $75,000 per month
§ 546(a). Therefore, Debtor would have until June 10, 2016 to determine whether it will pursue
such actions. However, as Debtor has repeatedly indicated, both at oral argument and in briefings
to this Court, that it does not believe a suit would be worth pursuing, the Court will assume,
arguendo, that Debtor has refused to file suit.
rent required by the lease agreement. See Bankruptcy Transcript II, 10:7–9. The fact that Debtor
continues to pay a fraction of the money owed under a pre-existing lease does not amount to “utter
disregard” for the best interests of the creditors.
Appellant further argues that recovery of the excessive rent and “all or part of the $300,000
settlement to which Debtor is entitled” will allow Debtor to satisfy in full all non-insider debt, and
that such a recovery would therefore be in the interests of the creditors. Appellant Br. at 11.
Appellant concludes that, because Debtor continues to pay the rent and will not sue to recover
these allegedly “misappropriated funds,” the Debtor’s actions are inconsistent with the best
interests of the creditors. Id.
However, as Appellant acknowledges, Judge Cleary’s opinion did not void or modify the
terms of Debtor’s obligation to pay rent to Pegasus pursuant to the lease, but only found it unfair
to Appellant. In fact, Debtor remains contractually obligated to pay $75,000 rent per month until
Debtor files a disclosure statement and repayment plan. Indeed, Debtor has been instructed by the
Bankruptcy Court to “fix the rent with Pegasus” in the repayment plan. Bankruptcy Transcript I,
21:1. Similarly, Mr. Sponder agreed that Debtor and Pegasus should determine a rent amount that
is “fair” going forward. Id. at 20:12–14. In the meantime, Pegasus has accepted markedly less than
the agreed upon $75,000 per month since Debtor’s filing of the Chapter 11 bankruptcy. 11
Accordingly, the Bankruptcy Court did not abuse its discretion by failing to hold that payment of
the rent is sufficient evidence that a trustee is required to protect the interests of the creditors.
Moreover, as already stated, the Bankruptcy Court based its decision, at least in part, on
the limited amount of assets available to pay a trustee and the various creditors. Bankruptcy
Transcript I, 17:5–6. At the time of its Chapter 11 petition, Debtor valued its assets at
As noted supra n.9, following the bankruptcy petition Debtor’s paid, on average, $31,000 in
rent, including two months where Debtor failed to pay any rent. Bankruptcy Transcript II, 10:12.
approximately $240,000 with scheduled total debts of $6,040,466.80, including fourteen noninsider creditors with debts totaling $1,422,878.80. Whether “appointment of a trustee would entail
substantial costs [is a] relevant factor to be considered in determining whether [the clear and
convincing] burden has been met in a particular case.” G-I Holdings, 385 F.3d at 320–21; see also
In re Brown, 31 B.R. 583, 585 (D.D.C. 1983) (stating that “Section 1104(a)(2) embodies a more
flexible standard under which the court may engage in a cost benefit analysis”); In re SunCruz
Casinos, 298 B.R. 821, 829 (Bankr. S.D. Fla. 2003) (quoting legislative history of § 1104(a) as
stating that “The court may order appointment only if the protection afforded by a trustee is needed
and the costs and expenses of a trustee would not be disproportionately higher than the value of
the protection afforded.” (quoting H.R. Rep. 95-595, U.S. Code Cong. & Admin. News 1978, pp.
5963, 6358–6359 (1977)). In its discretion, the Bankruptcy Court appropriately considered the
substantial costs of a trustee relative to the benefit to the creditors and found that appointment of
a trustee was not in the creditors’ best interests.
In sum, while a close call as to whether a trustee should be appointed, this Court finds that
the Bankruptcy Court did not abuse its discretion in denying Appellant’s request for appointment
of a trustee.
B. Comfort Order and Relief from Automatic Stay
In his motion for reconsideration, Appellant requested a comfort order stating that he was
permitted to file a fraudulent transfer action against the DeGennaros and Pegasus in New Jersey
Superior Court. In the alternative, Appellant moved for an order granting relief from the automatic
stay to pursue the fraudulent transfer action. 12 In his brief, however, Appellant presents only
Debtor contends that Appellant’s request for a comfort order or relief from the automatic stay
was improperly raised in the motion for reconsideration because Appellant had not requested this
relief in his original motion to appoint a Chapter 11 trustee. Debtor also states that Appellant failed
pay the $176 filing fee to file a motion to vacate the automatic stay. Debtor did not raise these
arguments for relief from an automatic stay under 11 U.S.C. § 362(d). Accordingly, this Court will
focus only on this inquiry.
Under 11 U.S.C. § 362(a)(3), a Chapter 11 bankruptcy petition “operates as a stay,
applicable to all entities, of . . . any act to obtain possession of property of the estate or of property
from the estate or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3). Appellant
seeks relief from the automatic stay under 11 U.S.C. § 362(d), which states:
On request of a party in interest and after notice and a hearing, the
court shall grant relief from the stay provided under subsection (a)
of this section, such as by terminating, annulling, modifying, or
conditioning such stay—
(1) for cause, including the lack of adequate protection of an interest
in property of such party in interest . . . .
11. U.S.C. § 362(d)(1). The bankruptcy court's decision to grant or deny relief from the automatic
stay is reviewed for abuse of discretion. See In re Stone Res., Inc., 482 F. App'x 719, 722 (3d Cir.
2012) (citing In re Myers, 491 F.3d 120, 128 (3d Cir. 2007)). “Section 362(d)(1) does not define
‘cause,’ leaving courts to consider what constitutes cause based on the totality of the circumstances
in each particular case.” Stone Res., 482 F. App'x at 722 (citing Baldino v. Wilson, 116 F.3d 87,
90 (3d Cir. 1997)). “A bankruptcy court is granted wide discretion to determine whether to lift an
automatic stay for cause.” In re Mid-Atl. Handling Sys., LLC, 304 B.R. 111, 130 (Bankr. D. N.J.
2003) (citing In re Rosen, 208 B.R. 345, 356 (D. N.J. 1997)). Although lack of adequate protection
is the most common basis for granting a relief from the automatic stay for “cause,” other bases
issue before the Bankruptcy Court, nor did the Bankruptcy Court address it in oral argument. The
Court will not consider this argument for the first time on appeal. See United States v. Lockett, 406
F.3d 207, 212 (3d Cir. 2005) (“It is well settled that arguments asserted for the first time on appeal
are deemed to be waived and consequently are not susceptible to review in this Court absent
exist, including when it may be necessary to permit litigation to be concluded in another forum.
See id. (citing In re Telegroup, Inc., 237 B.R. 87, 91 (Bankr. D. N.J. 1999)).
Appellant contends that, in light of the Bankruptcy Court’s obligation to accept Judge
Cleary’s findings under the Rooker-Feldman doctrine13, the excessive rent and settlement proceeds
channeled away from Debtor to Pegasus constitute “cause” under § 362(d)(1). Appellant Br. at 13.
Appellant concludes that “[D]ebtor will not sue the related parties to retrieve the assets fraudulently
transferred by [D]ebtor,” in effect, violating its duty as the debtor in possession.14 Id. Further,
Appellant argues that the Bankruptcy Court erred in deferring to the Debtor’s business judgment.
Id. at 14.
With respect to the requested relief from the automatic stay, Appellant argued to the
Bankruptcy Court that he intended to sue DeGennaro and Pegasus for fraudulent transfer, and he
stated that he believed the “debtor is not going to seek to” do so. Id. 15:26 to 16:6. However, the
Bankruptcy Court responded that “the debtor is telling me that in his business judgment it’s not a
fraudulent transfer.” Id., 16:7–8. The Bankruptcy Court then found “I don’t have any jurisdiction
over the DeGennaros or Pegasus Properties. There is no stay . . . applicable.” Id. at 20:6–8.
However, when asked for clarification as to whether Appellant could sue, with respect to Martelli’s
proposed cause of action, a suit for “fraudulent transfer and money to come back into the estate,”
This Court has already rejected Appellant’s arguments relating to the Rooker-Feldman
doctrine. See supra.
This Court agrees that a debtor in possession has the rights and shall perform the functions and
duties of a Chapter 11 trustee. See 11 U.S.C. § 1107(a). Section 1106 specifies the duties of a
Chapter 11 trustee or examiner, which include several of the duties of a Chapter 7 trustee “as
specified in paragraphs (2), (5), (7), (8), (9), (10), (11), and (12) of section 704(a).” 11 U.S.C. §
1106(a)(1). However, Appellant errs in asserting that a debtor-in-possession has the duty to
“collect and reduce to money the property of the estate which such trustee serves, and close such
estate as expeditiously as is compatible with the best interests of parties in interest . . .” pursuant
to Section 704(a)(1). This section is not one of the aforementioned specified paragraphs referred
to in the Chapter 11 code, rather, it only appears in Chapter 7 proceedings.
the Bankruptcy Court stated that, “you can’t sue them for that . . . [b]ecause that’s an estate asset
and I’m going to let [Debtor’s attorney] protect the estate assets.” See id. at 20:23–25. 11 U.S.C.
At the outset, I note that it is unclear whether Appellant was, in fact, barred from bringing
suit against Pegasus and DeGennaro, who are non-debtors. “Although the scope of the automatic
stay is broad, the clear language of section 362(a) indicates that it stays only proceedings against
a ‘debtor’—the term used by the statute itself.” Maritime Elec. Co. v. United Jersey Bank, 959
F.2d 1194, 1204 (3d Cir. 1991), reh'g granted and opinion vacated (Jan. 10, 1992), opinion
reinstated on reh'g (Mar. 24, 1992). In other words, according to the Third Circuit, the automatic
stay applies to “a proceeding [that] was originally brought against the debtor.” Id. Here, Appellant
does not intend to sue Debtor; rather, Appellant would bring the suit on Debtor’s behalf as a
shareholder.15 However, courts in the Third Circuit, as well as other federal courts, have extended
the automatic stay to proceedings against non-debtors who were directors or officers of a debtorcorporation. See, e.g., In re Zenith Laboratories, 104 B.R. 659, 664–66 (D.N.J. 1989); see also In
re Continental Airlines, 177 B.R. 475, 479 (D. Del. 1993), id. at 479 n.4 (citing cases). Thus, while
a suit against Pegasus could go forward regardless of the automatic stay, a suit against DeGennaro,
as a director of Debtor, may be subject to the stay. No party, however, has raised this question;
accordingly, I will not address it further.
Nonetheless, assuming arguendo that the automatic stay could bar Appellant’s proposed
state lawsuit, I find that the Bankruptcy Court did not adequately articulate its reasoning for the
It is true that creditors ordinarily lack standing to bring a cause of action that is “property of
the estate,” see In re Emoral, Inc., 740 F.3d 875, 879 (3d Cir. 2014) (subsequent history
omitted); however, as Appellant appears to remain a shareholder of the debtor while the state
court appeal is pending, Appellant would be bringing the proposed suit in that capacity. I express
no opinion here as to whether Appellant has met the requirements to bring such a suit.
denial of the motion for relief from the automatic stay. Indeed, the only reason given by the court
for the denial is that the proposed lawsuit is “an estate asset,” and that Debtor’s attorney should be
the one to protect the asset. While the fact that the lawsuit is property of an estate might deny a
creditor standing to bring suit on the estate’s behalf, see supra n.14, it is not a sufficient reason to
deny Appellant, a shareholder, the opportunity to do so. Simply, the Bankruptcy Court did not
conduct a full analysis under § 362(d)(1). As the Bankruptcy Court’s explanation does not provide
sufficient reason for its denial, I find that the Bankruptcy Court abused its discretion. Cf. Forman
v. Davis, 371 U.S. 178, 182 (1962) (stating that “the grant or denial of an opportunity to amend is
within the discretion of the District Court,” but “outright refusal to grant the leave without any
justifying reason appearing for the denial is not an exercise of discretion; it is merely abuse of that
Further, this Court finds that there was sufficient cause to grant Appellant relief from the
stay. While Debtor protests that it has not yet decided whether to pursue a fraudulent transfer
action, Appellee Br. at 11, it is apparent that Debtor will not pursue a fraudulent transfer action
against Pegasus or DeGennaro, for the simple reason that DeGennaro, who is one of two
shareholders in Pegasus, is also the primary shareholder and sole officer of Debtor. See Tr. of
Judge Cleary Decision, 4:22–24, 13:20–21. Indeed, at oral argument on the initial motion to
appoint a trustee, the Bankruptcy Court noted the deeply intertwined relationship between Debtor,
DeGennaro, and Pegasus. See Bankruptcy Tr. I, 11:3–5 (“My only question was if Anthony
DeGennaro is the principal of both the country club and a 50 percent or better owner of Pegasus,
and he’s the one who’s controlling the case and making decisions on the case, how does he
determine what the fair market rent is.”); 16:15–16 (“My biggest concern was that the decision
maker is also one of the larger creditors in the case. As far as Mr. DeGennaro, the role that Mr.
DeGennaro plays in the, his role with the debtor and his role with the landlord.”). Thus, any refusal
by Debtor to pursue a lawsuit against Pegasus or DeGennaro cannot be said to have been made by
a disinterested party, see infra. Accordingly, there is a “lack of adequate protection of an interest
in property of such party in interest,” as required by § 362(d)(1): that is, Debtor refuses to protect
its own interest in recovering the allegedly fraudulent transfers.
To the extent that the Bankruptcy Court deferred to Debtor’s “business judgment” that no
fraudulent transfer occurred, I agree with Appellant that this was in error. Under New Jersey law,
“the business judgment rule” protects the full and free exercise of directorial decision-making from
“judicial interference and constant hindsight.” See Jurista v. Amerinox Processing, Inc., 492 B.R.
707, 759 (D. N.J. 2013); see Maul v. Kirkman, 270 N.J. Super. 596, 614, 637 A.2d 928 (N.J. Super.
1994). The rule typically operates as a rebuttable presumption that corporate director decisions
have been made in good faith; to overcome the presumption, the challenger must show that the
director engaged in some form of “some form of self-dealing or other disabling conduct.” Jurista,
492 B.R. at 759. Importantly, “the business judgment rule will not shield directors' decisions in
instances of fraud, self-dealing, or unconscionable conduct.” See id.; Maul, 270 N.J. Super. at 614.
In this case, the evidence strongly suggests that DeGennaro, the primary shareholder and
sole officer of Debtor, was engaging in self-dealing. “Classic self-dealing” occurs where “a
director stands on both sides of a transaction.” Deutscher Tennis Bund v. ATP Tour, Inc., 610 F.3d
820, 840 n.17 (3d Cir. 2010). Indeed, though Judge Cleary did not use such a phrase, the state
court’s findings amount to a showing of self-dealing: DeGennaro was on both sides of the
transaction when he “fixed the rent . . . not at a fair market rate, but at a rate designed to give
Anthony DeGennaro a return on capital without regard to net earnings.” Tr. of Judge Cleary
Decision, 13:5–9. Similarly, by allegedly failing to properly allocate the settlement proceeds
received by Pegasus, see id. at 13:13–16, the proceeds likely benefited DeGennaro and his wife,
the sole owners of Pegasus. Accordingly, as a finding of self-dealing overcomes the business
judgment rule, there exists evidence to show that DeGennaro was not acting impartially in this
Nevertheless, Debtor argues that the automatic stay should not be lifted, as any suit brought
by Appellant in state court would be futile, because it would be barred by the entire controversy
doctrine. Appellee Br. at 11 n.4. Debtor also asserts that any suit regarding the settlement proceeds
would be barred by the statute of limitations. Id. at 9. Both the entire controversy doctrine and the
statute of limitations, however, are defenses to the proposed suit. They have no bearing on whether
Appellant should be permitted to attempt to bring his claim.
Moreover, as a matter of equity, permitting Appellant to pursue a lawsuit against Pegasus
and DeGennaro will not result in any harm to Debtor’s estate. Indeed, such a suit can only benefit
the estate: no estate funds will go toward the litigation, and any recovery will be added to the
estate, which can be distributed to creditors. Thus, I reverse the Bankruptcy Court’s denial of
Appellant’s motion for relief from the automatic stuff.
I briefly note one additional argument that Appellant made in support of its right to obtain
relief from the automatic stay. Appellant asserts that the Bankruptcy Court is authorized to bestow
derivative standing upon creditors to assert claims on behalf of and for the benefit of a bankruptcy
estate. Appellant Br. at 14–15. Appellant did not raise the issue of derivative standing in the
Bankruptcy Court and this issue will therefore not be considered in this appeal. See United States
v Lockett., 406 F.3d 207, 212 (3d Cir. 2005) (“It is well settled that arguments asserted for the
I also note that Appellant refers the Court to Stern v. Marshall, and argues that the Bankruptcy
Court should have granted relief from the automatic stay because it does not have jurisdiction to
render final judgment in fraudulent transfer actions. Appellant Br. at 16. It is not clear why this
argument is relevant: Stern addressed the question of when a bankruptcy court has the
constitutional authority to pronounce a final judgment on a so-called “core proceeding” related to
a bankruptcy petition, under 28 U.S.C. § 157. Stern v. Marshall, 131 S. Ct. 2594, 2601 (2011).
Here, the Bankruptcy Court did not address the question of where Appellant should bring a
first time on appeal are deemed to be waived and consequently are not susceptible to review in this
Court absent exceptional circumstances.”). I note, however, that if Appellant is unable to meet the
requirements for a shareholder suit, he may potentially be able to acquire standing for a creditor
derivative suit. See Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel.
Cybergenics Corp. v. Chinery, 330 F.3d 548, 568 (3d Cir. 2003) (finding that congressional intent
and policy concerns weigh in favor of the bankruptcy court’s power to confer derivative standing
where a debtor refuses to bring an action that would benefit the estate). Again, I make no findings
on the viability of such an action.
For the foregoing reasons, the Court affirms in part and reverses in part the Bankruptcy
Court Decision. Specifically, this Court affirms the denial of Appellant’s motion to appoint a
trustee under 11 U.S.C. § 1104. However, the portion of the Bankruptcy Court’s decision which
denied Debtor’s request for a relief from the automatic stay is reversed. An appropriate Order shall
Date: August 24, 2015
_/s/_Freda L. Wolfson_____
Hon. Freda L. Wolfson, U.S.D.J.
fraudulent transfer suit, nor did the Bankruptcy Court rule on the fraudulent transfer allegations,
much less pronounce a final judgment.
Moreover, I note that while the fraudulent transfer claim in this case may be a “Stern”
claim—that is, a proceeding that is “defined as ‘core’ by 11 U.S.C. § 157(b), but may not, as a
constitutional matter, be adjudicated as such,” Executive Benefits Ins. Agency v. Arkison, 134 S.
Ct. 2165, 2172 (2014)—the Supreme Court has held that the bankruptcy courts may hear such
claims in the first instance, and submit proposed findings of fact and law to the District Court to
be reviewed de novo. Thus, to the extent that Appellant is suggesting that the Bankruptcy Court
did not have jurisdiction to apply or grant relief from the automatic stay on the fraudulent
transfer claim, this suggestion is incorrect. First, such a ruling is not a “final judgment.” Second,
the Bankruptcy Court is permitted to rule even on “Stern” claims, so long as those rulings are
subject to de novo review by the district court.
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