Willis v. North Fork Bank & Trust Co. (In re Willis)

Citations: 64 B.R. 1000; 1986 Bankr. LEXIS 5233Docket: Bankruptcy No. 086-60070-21; Adv. No. 086-0024-21

Court: District Court, E.D. New York; September 29, 1986; Federal District Court

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Stefan Szwarce claims entitlement to specific performance of a settlement agreement from August 6, 1984, which stipulated that Barbara Willis would transfer certain properties to him. However, the court finds he holds no interest in the properties owned by Willis and Kato Restaurant, Inc., both of which filed for Chapter 11 bankruptcy on January 31, 1986, with Willis as the debtor-in-possession. Willis sought court approval to sell the School Street property, which was utilized by Kato for its restaurant business, free of liens. Szwarce responded by attempting to modify the automatic stay to pursue state court litigation against Willis and sought to prevent the sale of any assets pending resolution of his claims. A joint hearing on the sale of the School Street property and Kato's personal property resulted in approval for the sale, contingent upon resolving Szwarce's claims. The court has jurisdiction over this matter as it is a core proceeding under 28 U.S.C. 157(b). The findings of fact reveal that Willis owned two properties in Bridgehampton, with the School Street property having mixed zoning and housing a restaurant, Cato’s, operated by Kato, in which Willis held a 95% ownership stake. Cato's was a seasonal business with fluctuating revenue patterns.

Willis was minimally involved in the restaurant's operations prior to May 1983, with management primarily handled by Stefan Szwarce. By August 6, 1984, Willis's properties were heavily mortgaged to finance Cato’s restaurant, including a first mortgage of $35,000 on the Montauk Highway property and multiple encumbrances on the School Street property, totaling approximately $191,747.28 from North Fork Bank and Trust and Sherry Egan Bitz. Moreover, a second mortgage of $63,541.72 was placed on the Montauk Highway property as collateral for a loan to Kato, alongside an additional $50,000 mortgage to North Fork.

Kato faced several debts, including $16,500 to George Stavropoulos and at least $14,000 to One-Way Supply, Corp., along with outstanding sales and withholding taxes. On May 27, 1983, Szwarce filed a lawsuit against Willis to rescind their March 1983 agreement regarding property rights and to impose a constructive trust on the School Street property and Kato shares. This lawsuit led to a lis pendens being filed against the Montauk Highway property, hindering a prior sale contract.

The case was settled on August 6, 1984, via a stipulation that transferred the restaurant and School Street property to Szwarce. In exchange, Szwarce relieved Willis of liability for most debts tied to the restaurant, including mortgages on both properties and a $14,000 note to One-Way Supply. Szwarce also agreed to guarantee sales and withholding tax obligations incurred up to May 7, 1983, not exceeding $20,000, secured by a subordinate mortgage on the School Street property. The stipulation clarified that total liabilities should not exceed existing mortgage amounts.

Szwarce was to receive the School Street property and Kato's personal property upon completing specified undertakings, with the transfer subject to claims from North Fork, Egan Bitz, Stavropoulos, and One-Way Supply. Until the transfer, Willis was required to maintain current mortgages and was entitled to any profits from the restaurant business. Conforti indicated that the plaintiff had 45 days to perform these obligations, with the deadline set for September 20, 1984, taking into account the restaurant's seasonal business cycle. All communications between Willis and Szwarce were to occur through their attorneys, and Judge Baisley retained jurisdiction to resolve any disputes about personal property division.

On August 17, 1984, Willis’ attorney was authorized to release a lis pendens on the Montauk Highway property, but Willis delayed the sale until the promised mortgage releases were fulfilled. Szwarce, lacking funds except for some art, had Jeanette Dupee, a former employee of Kato, seek financing for the Stipulation. On September 18, 1984, Dupee's attorney applied for a $250,000 SBA guaranteed loan from Peconic Bank to purchase the School Street property and Kato's restaurant, with Dupee owning the newly formed Stefan Restaurant Corp. Despite submitting supporting documents, including her financial history, evidence regarding her assets was unconvincing.

On October 16, 1984, Szwarce contracted to sell the School Street property and personal property to Dupee and Stefan Restaurant Corp. for $250,000. The Peconic Bank arranged an appraisal of the property, which concluded its value at $337,000, based solely on income generated by the restaurant.

On October 24, 1984, Peconic Bank's Discount Committee recommended a $250,000 loan to Stefan Restaurant Corp., secured by a mortgage on a restaurant valued at $337,000 and Southampton property valued at $85,000. Following approval, loan documents were sent to the SBA on November 26, 1984, detailing the collateral as a first mortgage on the restaurant. On December 3, the SBA informally agreed to guarantee the loan. By December 7, an “Authorization and Loan Agreement” was forwarded to Peconic Bank, which specified that the SBA would receive a first mortgage on the land and building, along with security interests in machinery, equipment, inventory, and a second mortgage on another property owned by Dupee.

The agreement outlined conditions, including a requirement for Jeanette Dupee to inject at least $53,000 into the business before loan disbursement and that the borrower not assume liabilities from the previous restaurant operator. Peconic Bank sent the agreement to Dupee for signature, but she never returned an executed copy or confirmed any loan commitment to Szwarce. Consequently, the $250,000 loan was never executed, and on April 23, 1985, Peconic Bank informed the SBA that Stefan Restaurant Corp. was withdrawing its application and not paying a required fee.

During the negotiation period, Szwarce arranged a deal on behalf of Stefan Restaurant Corp. with Stavropoulos and Bitz, where Stavropoulos agreed to purchase a portion of the School Street property for $53,500, involving a first mortgage assumption and a second mortgage. Egan Bitz consented to accept a first mortgage on the purchased portion in exchange for a second mortgage on the entire property. The SBA was not informed of this contract, nor did it agree to limit its collateral interest to only part of the property.

Szwarce did not possess or control funds to satisfy his obligation to One-Way Supply before May 3, 1985, and he indicated he would not use any part of the anticipated $250,000 from the sale to Stefan Restaurant Corp. and Dupee for that obligation. Willis was not informed about Szwarce's actions regarding the Stipulation until January 1985, when her attorney learned of a mortgage commitment, but Szwarce refused to show it. From September 1984, Willis believed a closing was imminent, prompting her to grant Szwarce three extensions while she continued to operate the restaurant and pay mortgages on two properties.

On September 25, 1984, Willis's attorney sought details about a loan from Peconic Bank to assess whether to extend the performance deadline, as it was critical to ensure the pre-1983 taxes would be paid through a stipulated mortgage. The deadline had expired on September 20, and Willis did not receive a response until October 24, when Conforti inaccurately stated the loan application was for the outstanding balances of two mortgages, which totaled less than $205,000, while the application was for $250,000.

Twomey informed Conforti on October 23 that the sale of the Montauk Highway residence was set for October 29 and reminded him of the need to release the North Fork and Brill mortgages per the Stipulation. However, on October 26, Conforti reported that Szwarce could not close by the scheduled date, prompting Twomey to request an amendment to the Stipulation to ensure Willis was reimbursed for mortgage payments and to place $20,000 in escrow for IRS/sales tax liabilities. The amended stipulation proposed a new closing date of November 15, 1984.

Additionally, Twomey's letter requested the return of a 1979 Jeep pickup truck, which Szwarce had taken in 1983, transferred to Dupee, and sold without proper authorization. The request for the Jeep's return went unanswered.

No amended stipulation was received from Conforti. On November 2, 1984, Willis sold the Montauk Highway property, which remained subject to mortgages owed to North Fork and Brill. Willis paid these mortgages, totaling $113,541, from the sale proceeds and also paid $8,582 to the purchasers for a delay in closing, leaving her with less than $4,000. Although the Stipulation's execution was deemed impossible after this date, Willis's attorney communicated on November 15, 1984, that she agreed to extend the closing date to November 21, 1984. 

Subsequently, on November 28, 1984, One-Way Supply sued Kato and Willis for approximately $25,000, a debt that increased due to off-season restaurant operations required by the Stipulation. By December 1984, Kato's total trade debts reached around $55,000. After November 21, Willis considered the Stipulation expired but was open to its performance if Szwarce could position her as if the closing had occurred as planned. She sought reimbursement for mortgage payments made in October, November, and December, which totaled $3,100 monthly.

On January 16, 1985, Conforti refused to reimburse the interest on the mortgages paid by Willis after August 6, 1984, and suggested a meeting to discuss the matter. Willis declined the meeting invitation. Szwarce confirmed that Conforti never provided written notice to set a closing date. Willis corroborated this, stating no closing date was ever established. The failure to close resulted in Willis losing tax benefits related to a capital loss on her residence and potential interest earnings from the stipulated proceeds. 

Neither party moved to restore the original action to the trial calendar as required by the Stipulation. Instead, on February 15, Conforti filed a motion to compel compliance with the Stipulation, which was denied on April 15, 1985, without prejudice to either party's right to initiate a plenary suit to enforce their rights.

On May 3, 1985, Szwarce initiated a suit for specific performance and requested a modification of the Stipulation to establish a new performance timeline. A general denial was filed by Willis. On May 1, 1986, American Mortgage and Loan Association agreed to lend Szwarce $255,000 secured by a mortgage on part of a property, with its current value supporting the loan. However, performance at that time would not provide Willis with equivalent value as initially stipulated.

To succeed in his lawsuit, Szwarce must demonstrate that he tendered performance and that this was refused before May 5, 1985, or prove that Willis excused him from such a tender. Due to restrictions in their communication, the only individuals with firsthand knowledge of the tender were their attorneys, Twomey and Conforti, neither of whom testified. Consequently, the evidence relied heavily on limited correspondence and hearsay, with Szwarce and Dupee lacking credibility during cross-examination.

A party seeking specific performance must show substantial performance or a willingness to perform within the agreed timeframe. Szwarce argued that time was not essential since he received the SBA loan approval only on December 3, 1984, while the performance deadline was September 20, 1984. Nonetheless, he failed to prove readiness or a tender of performance before his complaint was filed. Furthermore, Szwarce's ability to satisfy the Stipulation hinged on the SBA loan, which was never finalized, and Dupee lacked the financial means required to support the business, as evidenced by her financial statement showing only $35,000 in liquid assets.

Szwarce's suggestion that Dupee's mother could assist in securing the $14,000 to pay One-Way Supply reflects a lack of confidence in her financial resources. He quoted Mrs. Dupee as saying she could seek help from her mother, indicating limited support. Szwarce argued that the $53,000 price in the Stavropoulos contract would meet the SBA's requirement for Dupee's cash investment; however, this claim is undermined by several factors. The sale was to be executed by Stefan Restaurant Corp., not Dupee, meaning the proceeds would not benefit her directly, and the transaction would not provide cash for working capital. The agreement involved Stavropoulos assuming a $46,000 mortgage and providing a second mortgage, along with forgiving $16,500 owed by Willis, which conflicted with SBA conditions prohibiting the assumption of prior liabilities. Additionally, this arrangement raised doubts about whether the SBA could accept a first mortgage on the School Street property, especially if a portion was sold to Stavropoulos, which would compromise the collateral's value. Szwarce contended that both Peconic Bank and the SBA were aware of the back piece's sale but provided no supporting testimony. The back piece constituted over 50% of the total property appraised at $337,000, making it improbable that the SBA would accept a lien on only part of the real estate for a significant loan. Even if the SBA loan conditions were met, Szwarce still needed to resolve the debt to One-Way Supply and provide guarantees regarding taxes to Willis, under a stipulation requiring a subordinate mortgage on the School Street property, which was already encumbered by $205,000 in existing mortgages as of the closing date.

The SBA's proposed $250,000 mortgage would surpass existing mortgages by $45,000, preventing Szwarce from providing Willis the collateral for pre-existing tax obligations. Szwarce claims he was excused from delivering a second mortgage, as Willis accepted a $20,000 escrow fund instead. However, there is no evidence that Szwarce offered the escrow, and the renegotiated Stipulation he referenced never materialized. A letter from Conforti on January 16, 1985, contradicts Szwarce’s assertion that the escrow was accepted, as it reiterates adherence to the original Stipulation contingent on receiving certain tax documents, which were not part of the initial agreement. Szwarce was negotiating a first mortgage, thereby rendering him unable to fulfill the original Stipulation terms, and both parties agree that no performance, other than lifting the lis pendens, was provided to Willis. Szwarce acknowledged that no specific closing date was set, and while he assumed the process would proceed swiftly, there was no formal notification to Willis about readiness to close.

Willis and Szwarce did not establish a closing date for their transaction, with Willis confirming under questioning that no demands for closing were made by Szwarce or his representatives. Although Willis had previously refused to attend a closing in January, the correspondence between her attorney and Conforti indicated that a meeting was proposed, which did not fulfill the performance requirements outlined in a stipulation that mandated completion by September 20th. By January 1985, the performance deadline had already passed. Szwarce's attorney argued that time was not of the essence in the contract, asserting that Szwarce was not in default due to the failure to perform within the original 45 days or subsequent extensions. The determination of whether time is of the essence depends on surrounding circumstances, with a focus on the nature of the transaction. In this case, the stipulation involved not merely a real estate sale but the transfer of an ongoing business, including its liabilities, which made timely performance critical. The associated financial burden for Willis, in terms of mortgage payments, further underscored the importance of adhering to the stipulated timeline.

The Stipulation granted Willis the profits from the restaurant until the deal closed, but starting Labor Day, the restaurant became a liability, disadvantaging her with each month of delay. Additionally, any delay could increase Willis's liability to the buyer and jeopardize her ability to offset a capital gain from the sale of her residence with a capital loss if the transfer was not concluded in 1984. Thus, performance in January 1985 was significantly less valuable than in September 1984. Conforti argued that Willis should have asserted that time was of the essence when the Stipulation was presented. However, any ambiguity in the Stipulation should be interpreted against Conforti, who recorded the terms. Szwarce's actions, including his requests for extensions, contradicted his claim that the 45-day period imposed no deadline. Willis' attorney's letter dated November 15, 1984, clearly established a performance deadline, making it evident that performance was required by November 21, 1984. Even if the letter were insufficient, performance was expected within a reasonable timeframe, which had expired well before November 21, 1984. Szwarce did not tender performance until May 5, 1985, and thus is not entitled to specific performance. His ability to perform later, due to an increase in property value, is irrelevant. Szwarce also contended that if he is not entitled to specific performance under the Stipulation, he should be allowed to pursue the original cause of action. However, since he chose to enforce the Stipulation rather than reviving his lawsuit, he forfeited that right, as he was the one in breach.

Allowing Szwarce to proceed would undermine Willis's contractual rights. The Stipulation can be seen as either an executory accord or a superseding agreement, with the same legal outcome. An executory accord is a future promise to fulfill a current claim, and under New York’s General Obligation Law 15-501, the injured party may choose to enforce either the original contract or the accord, but not both. This principle holds for a superseding agreement as well, which is binding and enforceable based on its terms. The purpose of a settlement agreement is to conclude litigation, as judges cannot manage claims piecemeal.

Szwarce, having attempted to enforce the contract linked to his settlement with Willis and failing due to his own default, cannot revive his earlier claims. The election of remedies doctrine aims to prevent prolonged litigation. Before initiating state court proceedings for specific performance, Szwarce did not fulfill his part of the Stipulation and was not in a position to do so. His prior default has harmed Willis, altering her circumstances detrimentally, thereby barring specific performance. By electing to pursue specific performance instead of reinstating the prior action for trial, Szwarce has made a binding choice.

Judgment is awarded in favor of Barbara Willis, denying Szwarce's claims from his May 3, 1985 complaint, dismissing it with costs, and affirming that Szwarce has no interest in the School Street or Kato properties. The court questions Szwarce's ability to meet the SBA's requirements for a security interest, but notes that Willis's obligations under the Stipulation likely would not have posed an issue had the loan been available, as she could have used her settlement payments to satisfy existing liens.