Kolath Hotels and Casinos, Inc. v. County of Greene, New York

Filing 22

MEMORANDUM-DECISION and ORDER - That the July 28, 2017 order of Bankruptcy Court (Dkt. No. 3, Attach. 12) is AFFIRMED. Signed by Senior Judge Gary L. Sharpe on 9/28/2018. (jel, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
________________________________
KOLATH HOTELS AND
CASINOS, INC.,
Appellant,

1:17-cv-883
(GLS)

v.
COUNTY OF GREENE,
NEW YORK,
Appellee.
________________________________
APPEARANCES:
OF COUNSEL:
FOR THE APPELLANT:
The Sgambettera Law Firm
480 Broadway, Suite 316
Saratoga Springs, NY 12866
DeLorenzo Law Firm
The Lupe Building
670 Franklin Street, Suite 100
Schenectady, NY 12305
FOR THE APPELLEE:
Greene County Attorney
411 Main Street
Catskill, NY 12414

MATTHEW J. SGAMBETTERA,
ESQ.

RICHARD H. WEISKOPF, ESQ.

EDWARD I. KAPLAN, ESQ.

Schiller, Knapp Law Firm
950 New Loudon Road
Suite 109
Latham, NY 12110

JOHN MICHAEL DUBUC, ESQ.

Goldman Attorneys PLLC

PAUL J. GOLDMAN, ESQ.

255 Washington Avenue Extension
Albany, NY 12205
Gary L. Sharpe
Senior District Judge
MEMORANDUM-DECISION AND ORDER
I. Introduction
Appellant Kolath Hotels and Casinos, Inc. (hereinafter “Kolath”)
appeals from an order of Bankruptcy Court (Littlefield, J.), which granted
appellee County of Greene, New York’s motion for judgment on partial
findings after a bench trial. (Dkt. No. 3, Attach. 12; Dkt. No. 6, Attach. 1 at
103.) For the reasons that follow, Bankruptcy Court’s order is affirmed.
II. Background
This controversy centers around Kolath’s former property in the Town
of Catskill, which previously included an operational hotel (hereinafter the
“property”). (Dkt. No. 6, Attach. 1 at 41.) Since December 2013, the
property has been condemned as an unsafe structure because it lacked
basic building services required for human habitation. (Id. at 27, 41-47.)
Given Kolath’s failure to pay property taxes, there was an aggregate
unpaid balance due to the County in the approximate amount of $830,000.
(Dkt. No. 53 ¶ 2, Bankr. Ct. Case No. 16-90033-1.)
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On June 9, 2016 (hereinafter the “vesting date”), the Greene County
Court granted summary judgment to the County in an in rem tax
foreclosure proceeding, such that title to the property vested in the County
in satisfaction of the outstanding real property tax liens. (Id. ¶¶ 1-3.)
On November 22, 2016, Kolath commenced an adversary
proceeding under 11 U.S.C. § 548 seeking to avoid transferring title to the
County under the theory that it was a fraudulent conveyance. (Dkt. No. 1,
Bankr. Ct. Case No. 16-90033-1.) Both parties filed motions for summary
judgment, which were denied by Bankruptcy Court. (Dkt. Nos. 23, 26, 40,
41, Bankr. Ct. Case No. 16-90033-1.)
On July 25, 2017, a bench trial was held. (See generally Dkt. No. 6,
Attach. 1.) Kolath presented testimony from three lay witnesses and one
expert witness regarding the appraisal of the property. (See id. at 12, 22,
40, 60.) Kolath’s President, Annie Kolath, testified regarding the physical
condition of the property, but did not testify regarding its value on the
vesting date.1 (Id. at 40-59.) Kolath’s appraisal expert, Scott Bellcourt,
testified regarding a restricted appraisal report, prepared in July 2016, that
hypothetically valued the property as a “going concern” in the amount of
1

Neither party discusses the testimony of the other two lay witnesses.

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$3,900,000. (Id. at 63, 77.)
When Kolath rested, the County moved for a directed verdict, which
the court construed as a motion for judgment on partial findings under Fed.
R. Civ. P. 52(c). (Id. at 103; Dkt. No. 3, Attach. 12 at 2.) Bankruptcy Court
granted the County’s motion based upon Kolath’s failure to meet its burden
under 11 U.S.C. § 548 to prove that it received less than a reasonably
equivalent value in exchange for transfer of the property to the County and
that it was insolvent on the vesting date. (Id.) Kolath thereafter appealed
seeking reversal of Bankruptcy Court’s decision in its entirety and a
remand for further hearing. (Dkt. No. 1; Dkt. No. 15 at 12.)
III. Standard of Review
District courts have jurisdiction to hear both interlocutory and final
appeals from orders of the bankruptcy court. See 28 U.S.C. § 158(a). In
exercising its appellate jurisdiction, the district court distinguishes between
findings of fact and conclusions of law; reviewing the former under the
“clear error” standard, and the latter de novo. R² Invs., LDC v. Charter
Commc’ns, Inc., 691 F.3d 476, 483 (2d Cir. 2012). Given that, as
appellant agrees, “[t]he issues presented in this appeal are findings of
fact,” (Dkt. No. 15 at 1), the court reviews only for clear error. See United
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States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948) (“A finding is ‘clearly
erroneous’ when although there is evidence to support it, the reviewing
court on the entire evidence is left with the definite and firm conviction that
a mistake has been committed.”). After applying this standard to the
questions of fact, the district court “may affirm, modify, or reverse a
bankruptcy judge’s judgment, order, or decree or remand with instructions
for further proceedings.” Fed. R. Bankr. P. 8013.
IV. Discussion
Section 548 permits a trustee2 to avoid transfers of an interest in
property within two years of the date on which the petition was filed under
certain circumstances. In particular, as relevant here, the statute provides:
(a)(1) The trustee may avoid any transfer . . . of an interest of the
debtor in property, or any obligation . . . incurred by the debtor,
that was made or incurred on or within [two] years before the date
of the filing of the petition, if the debtor voluntarily or
involuntarily— . . .
(B)(i) received less than a reasonably equivalent
value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was
made or such obligation was incurred, or became
insolvent as a result of such transfer or obligation
....
11 U.S.C. § 548. Kolath argues that reversal is required because
2

Pursuant to 11 U.S.C. § 1107(a), a debtor in possession has all the rights of a trustee.

5

Bankruptcy Court clearly erred “in ruling that [it] failed to produce evidence
to establish that it was insolvent on the date of the transfer of the [p]roperty
to the County; and [it] received less than a reasonably equivalent value in
exchange for such transfer of the [p]roperty to the County.” (Dkt. No. 15 at
5.) Specifically, Kolath argues that Bankruptcy Court overlooked evidence
establishing that (1) the value of the property was either $3,900,00 or
$1,872,000 on the vesting date, so the County’s purchase price of
$830,000 resulted in it receiving less than a reasonably equivalent value
for the property and (2) Kolath had debts totaling $4,395,290.42 which
surpassed the assessed value of its sole property, proving it was insolvent
on the vesting date. (Id.) However, the record is clear that Bankruptcy
Court did not overlook any evidence, rather it appropriately found that the
evidence was entitled to no deference.
A.

Reasonably Equivalent Value (11 U.S.C. § 548(a)(1)(B)(i))
In support of its position, Kolath relies on the appraisal report of

Bellcourt, (Dkt. No. 3, Attach. 4 at 5-7), a stipulation of settlement
contained within a May 10, 2016 decision by the Greene County Court, (id.
at 13-21), and the pre-trial stipulation of facts the parties submitted to
Bankruptcy Court, (Dkt. No. 53, Bankr. Ct. Case No. 16-90033-1.) Kolath
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argues that this evidence “established that the value of the [p]roperty was
$1,872,000[] on the [vesting date]” and “demonstrated that [Kolath]
received less than a reasonably equivalent value in exchange for such
transfer.” (Dkt. No. 15 at 10-11.) Kolath concludes that Bankruptcy
Court’s failure to consider the figure contained within the stipulation of
settlement as the assessed value of the property at the vesting date was
clearly erroneous. (Id. at 11.) The court disagrees.
First, there is no dispute that Kolath relied on an appraisal at trial that
appraised the property as a going concern, even though the business was
not operational. (Dkt. No. 6, Attach. 1 at 77.) Not only was the property
condemned, (id. at 44-45), but most of its doors were bolted shut with steel
plates, (id. at 13), glass on an exterior window was shattered, (id. at 1617), there was room damage including toilets missing from rooms, (id. at
109), and signs of neglect and disrepair, (id. at 79). Furthermore, there
was no testimony regarding the scope of the renovations required to make
the property operational or a valuation of the cost to cure these defects that
could serve as a reliable estimate of the property’s “as is” value. Cf. Matter
of AG Properties of Kingston, LLC v. Town of Ulster Assessor, 138 A.D.3d
1273, 1275 (3d Dep’t 2016) (“Under th[e] ‘cost to cure’ analysis, it is
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necessary to both identify the scope of work needed and the
corresponding cost.”). As such, Bankruptcy Court’s decision to “ascribe no
credibility, no value to the appraisal” was proper because there was no
basis in the record “to interpret the going concern value when there [was]
no going concern . . . on the date of the transfer to see if there was
reasonably equivalent value.” (Dkt. No. 6, Attach. 1 at 107.) The court
finds no error in Bankruptcy Court’s finding that it would be “ludicrous” to
rely on an appraisal valuing the property as a going concern, when there
was no going concern. (Id. at 114.)
Next, Kolath’s alternative reliance on the estimated property value of
$1,872,0003 derived from the stipulation of settlement in the May 2016
Greene County Court case, (Dkt. No. 3, Attach. 4 at 13-21), is misplaced
for the reasons stated by the County, (Dkt. No. 16 at 13-15), which this
court now adopts, including that there was no evidence presented
regarding (1) how the estimate from the stipulation of settlement was
calculated; (2) the market trends between the date on which the estimated
valuation was calculated and the subsequent vesting date; (3) whether the

3

Kolath arrives at this figure by applying a 59% equalization rate to the $1,104,480 figure
contained within the stipulation of settlement. (Dkt. No. 15 at 10.)

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condition of the property was constant between the valuation date and the
vesting date; or (4) how this valuation reconciles with other conflicting
estimates in the record, like Annie Kolath’s verification that the value of the
property was actually much lower, (Dkt. No. 53 ¶ 5, Bankr. Ct. Case No.
16-90033-1). Given these uncertainties, Bankruptcy Court aptly described
Kolath’s proffered appraisal as “horse trading” by “two sides, both with
something to gain or lose.” (Dkt. No. 6, Attach. 1 at 108, 112.) The court
agrees that
[w]e have absolutely no idea what went into the horse trading,
who started where, and where in that number is a valid number as
opposed to a compromise, a settlement, to try and bring money
into the municipality and give the debtor an opportunity to go
forward. Whether that has anything to do with the value of the
property is speculative at best.
(Id. at 108.) As such, Kolath failed to prove that it received less than a
reasonably equivalent value in exchange for transferring the property to the
County.
Given that Section 548(a)(1) requires the plaintiff to prove both
elements, Kolath’s failure to meet their burden on this element alone is
enough to affirm Bankruptcy Court. Nonetheless, Kolath’s arguments
regarding the insolvency element also fail for many of the same reasons.

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B.

Insolvency (11 U.S.C. § 548(a)(1)(B)(ii)(I))
After Kolath rested its case, Bankruptcy Court found “[t]here’s been

no proof whatsoever indicating that the debtor was insolvent or was going
to go into insolvency.” (Id. at 112.) At that time, Kolath could point to no
record evidence that demonstrated its insolvency, but instead merely
argued that Bankruptcy Court should take judicial notice that its insolvency
could be presumed by the filing of its Chapter 11 action and asserted that
“the property[,] which was the[ir] sole asset[,] . . . was taken from them and
they no longer have it, all they had was debt, they had no assets.” (Id.)
However, now Kolath concedes, “[it] is not presumed to have been
insolvent at the time of the [vesting date]” but rather “[it] was required to
establish its insolvency during the 90 days prior to the [p]etition [d]ate in
order to comply with [S]ection 548(a)(1)(B)’s requirement[s].” (Dkt. No. 15
at 7.)
In order to satisfy this element, Kolath relies on its petition,4 and pretrial stipulation of facts. (Dkt. No. 53, Bankr. Case No. 16-90033-1.)
Kolath posits that because the pre-trial stipulation of facts asserted that

4

Although Kolath fails to cite to this “petition,” the court construes this reference to be to its

adversary complaint. (Dkt. No. 1, Bankr. Ct. Case No. 16-90033-1.)

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Greene County Court granted summary in a tax foreclosure proceeding,
and conveyed the property to the County in satisfaction of the outstanding
tax lien of $830,000, (id. ¶ 2), and a representative of the mortgagee of a
mortgage on the property filed an affidavit in an unrelated Greene County
Supreme Court foreclosure proceeding that, as of May 21, 2015, there was
a balance of $3,565,290.42 owed on its mortgage secured by the property,
(id. ¶ 7), “[t]his resulted in a total prepetition debt of $4,395,290.42 as of
[the vesting date].” (Dkt. No. 115 at 7.) Kolath again relies on the
appraisal of $3,900,000 that rested on the assumption that the property
was operating as a going concern, (Dkt. No. 6, Attach. 1 at 71), and its
petition that contained an allegation by its attorney that the property was
Kolath’s sole asset, (Dkt. No. 1 ¶ 7, Bankr. Case No. 16-90033-1). Kolath
argues that “[f]or the purposes of establishing [its] insolvency . . . , the
Court should have used [its] $3,900,000[] valuation of the [p]roperty . . .
and then appl[ied] a basic retrojection analysis of [its] financial status on
the [vesting] date.” (Dkt. No. 115 at 8.) Kolath concludes that this would
have clearly resulted in a finding that it was insolvent on the vesting date.
(Id.)
The above-findings alone, regarding the lack of reliable evidence
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concerning the property’s value on the vesting date, are enough to refute
Kolath’s arguments on this ground as well. Moreover, it was not clear error
to conclude that Kolath’s reliance on the stipulation to prove its insolvency
was unavailing given that the stipulation does not demonstrate the actual
unpaid balance of any other secured indebtedness that may have been
encumbering the property on the vesting date. Likewise, Kolath’s
insistence that its complaint proved that it did not have any other assets is
not convincing. To be sure, Kolath’s attorney alleged in the complaint that
“[t]he property remaining in the ownership and control of [Kolath] after [the
transfer of its property to the County] was an unreasonably small capital
and the fair value of the property remaining in the ownership of [Kolath]
after such transfer was well less than the sum of [its] debts.” (Dkt. No. 1
¶ 7.) However, just like the statements made by Kolath’s counsel at trial,
an attorney’s allegation in a complaint is not evidence capable of proving
that the property was Kolath’s only asset on the vesting date. There was
simply no reliable evidence presented at trial that Kolath was insolvent on
the vesting date or made insolvent by the transfer of the property to the
County.
In sum, Bankruptcy Court considered all of the evidence presented
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by Kolath and properly found that it failed to satisfy its burden of proof with
regard to both of the required elements under 11 U.S.C. § 548. In the
absence of any clear error, the court affirms.
V. Conclusion
WHEREFORE, for the foregoing reasons, it is hereby
ORDERED that the July 28, 2017 order of Bankruptcy Court (Dkt.
No. 3, Attach. 12) is AFFIRMED; and it is further
ORDERED that the clerk provide a copy of this MemorandumDecision and Order to the parties.
IT IS SO ORDERED.
September 28, 2018
Albany, New York

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