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Kernan v. One Washington Park Urban Renewal Associates

June 12, 1998

RITA KERNAN, PLAINTIFF-RESPONDENT,
v.
ONE WASHINGTON PARK URBAN RENEWAL ASSOCIATES, DEFENDANT-APPELLANT,
v.
INTERNATIONAL SERVICE SYSTEM, INC., ABC CORPORATION 1-5, (SAID NAMES BEING FICTITIOUS), AND JOHN DOES 1-10, (SAID NAMES BEING FICTITIOUS), DEFENDANTS.



The opinion of the court was delivered by: Garibaldi, J.

Argued February 18, 1998

On certification to the Superior Court, Appellate Division.

The central question in this appeal is whether a commercial landowner in bankruptcy, who is judicially precluded from engaging in the management and control of its property by the court appointment of a trustee and managing agent, owes a duty to third persons to maintain an abutting public sidewalk in a reasonably safe condition.

I.

Following a severe snowstorm on January 17, 1994, Rita Kernan ("plaintiff") slipped and fell on an icy sidewalk abutting a commercial office building in Newark. Although the sidewalk had been sprinkled with pellets of calcium chloride, a layer of ice between one-quarter to one-half inch thick had accumulated on the sidewalk. As a result of her fall, plaintiff fractured her left hip. At all times relevant to this action, the building adjacent to the sidewalk has been owned by defendant-petitioner, One Washington Park Urban Renewal Associates ("OWPURA").

Prior to plaintiff's fall, OWPURA filed a Chapter 11 bankruptcy petition. Subsequently, the United States Bankruptcy Court appointed a Trustee in Bankruptcy ("Trustee") to oversee OWPURA's estate. On May 24, 1991, the Trustee obtained a court order authorizing him to retain McCormick Bank Street Investment Company, a real estate property management company doing business as McCormick Organization ("McCormick"), as managing and disbursing agent for the premises at One Washington Park. In his deposition, William Styles, McCormick's Executive Vice President, explained that his company was responsible for "manag[ing] the building and pay[ing] the bills." Specifically, McCormick's duties with regard to One Washington Park included "leasing, rental collection, tenant contact, daily tenant contact if necessary and submitting accounting reports to the courts or to the owners of the property monthly." In addition, McCormick was responsible for maintaining the interior and exterior of the building and hiring vendors to operate the building.

McCormick employed engineers from International Service System, Inc. ("ISS") to remove snow and ice from the sidewalks adjacent to the building. Specifically, that responsibility was delegated to the chief building engineer, Robert Lone. Styles instructed Lone to use rock salt on the blacktop and calcium chloride on the sidewalk when needed. Other than those limited directions, Styles provided the one-time instruction to Lone "to remove the ice or snow. How was left up to him." Nevertheless, McCormick remained an integral part of the management of One Washington Park. Styles stated at deposition that he frequently visited the premises and maintained daily contact with Lone regarding the maintenance of the exterior of the building at One Washington Park. Although Lone received the necessary funds to purchase supplies such as calcium chloride from OWPURA, McCormick paid the bills for snow and ice removal. McCormick also paid the employees of ISS.

On October 27, 1994, plaintiff filed a complaint against OWPURA and ISS in the Superior Court of New Jersey, Law Division, Essex County. In its answer, OWPURA recounted several affirmative defenses, including the defense that "plaintiff fail[ed] to state a claim on which relief [could] be granted," and that "[t]he alleged damages were caused by other persons over whom this defendant had no control." Subsequently, discovery between the parties ensued. Although plaintiff inquired about the owner of the building at One Washington Park in her interrogatories submitted to OWPURA, OWPURA at no time indicated its bankruptcy status. Rather, its answers to plaintiff included the cursory information that the premises were owned by OWPURA, but were in the care of a "Court appointed Manager." Although it would certainly have been prudent for plaintiff's counsel to inquire further regarding the position of the court-appointed manager, it is evident from the record that petitioner's counsel was less than forthcoming in revealing the fact that OWPURA had filed a Chapter 11 bankruptcy petition approximately three years prior to plaintiff's accident.

On July 1, 1996, defendant ISS moved to bifurcate the trial, severing the issues of liability and damages. That motion was granted and a trial regarding the liability of defendants ISS and OWPURA was held. At the Conclusion of plaintiff's case on liability, both defendants moved for an involuntary dismissal pursuant to Rule 4:37- 2(b). The trial court granted the motion based on two findings: (1) plaintiff failed to present a prima facie case of negligence on the part of either defendant, and (2) OWPURA owed no duty to plaintiff because it had no control over the operations at One Washington Park due to its bankruptcy status.

On appeal, the Appellate Division reversed and remanded for further proceedings. The panel concluded that, viewing the evidence most favorably to plaintiff, she presented a prima facie case against both defendants. Although the panel recognized that "control is a critical factor" in determining the duty of a landowner to a third party, see, e.g., Wickner v. American Reliance Ins. Co., 141 N.J. 392, 397 (1995), the court declined to rule on the implications of OWPURA's bankruptcy status on its potential liability for plaintiff's fall because "the issue [did not] properly present itself for dispositive consideration." Noting that OWPURA did not raise its bankruptcy status as an affirmative defense, *fn1 the court emphasized that plaintiff did not learn of the bankruptcy proceeding until just a few days before trial. The Appellate Division held that plaintiff should be permitted to timely amend her complaint to add McCormick as a defendant should she choose to do so.

Both OWPURA and ISS filed petitions for certification. This Court denied ISS's petition, 151 N.J. 465 (1997), but granted OWPURA's petition, 153 N.J. 48 (1997). We now modify the Appellate Division decision and remand to allow plaintiff the opportunity to amend her complaint as is appropriate. With regard to OWPURA's liability, however, we find that OWPURA did not owe a duty to maintain the abutting public sidewalk. That finding is based, not on OWPURA's bankruptcy status, but rather on the bankruptcy court's appointment of a trustee and managing agent who assumed control of the premises at One Washington Park and precluded OWPURA's participation in maintaining the building and its adjacent sidewalks.

II.

To recover under a negligence theory, it is paramount that a defendant first owe the plaintiff a duty. Carvalho v. Toll Bros. & Developers, 278 N.J. Super. 451, 457 (App. Div. 1995), aff'd, 143 N.J. 565 (1996); see Strachan v. John F. Kennedy Mem'l Hosp., 109 N.J. 523, 529 (1988); Globe Motor Car Co. v. First Fidelity Bank, 273 N.J. Super. 388, 393 (Law Div. 1993), aff'd, 291 N.J. Super. 428 (App. Div.), certif. denied, 147 N.J. 263 (1996). "The question of whether a duty exists is a matter of law properly decided by the court, not the jury." Carter Lincoln-Mercury, Inc. v. EMAR Group, Inc., 135 N.J. 182, 194 (1994). In determining whether a duty exists, the Court's analysis "'involves identifying, weighing, and balancing several factors -- the relationship of the parties, the nature of the attendant risk, the opportunity and ability to exercise care, and the public interest in the proposed solution.'" Ibid. (quoting Hopkins v. Fox & Lazo Realtors, 132 N.J. 426, 439 (1993)); see also Goldberg v. Housing Auth., 38 N.J. 578, 588 (1962) ("[T]he question is one of fairness in the light of the nature of the relationship, the nature of the hazard, and the impact of such a duty on the public interest."). Whether OWPURA owes a duty to plaintiff depends on what effect the appointment by the bankruptcy court of a trustee and managing agent to manage the premises at One Washington Park has on OWPURA's ability to participate in the daily management of the premises and its authority to control the snow and ice removal on the day of plaintiff's fall.

A.

The filing of a bankruptcy petition suspends the normal operation of the rights and obligations between a debtor and its creditors. 9 Am. Jur. 2d Bankruptcy § 1 (1991). In this case, OWPURA filed a petition pursuant to Chapter 11 of the Bankruptcy Code ("Code"), 11 U.S.C.A. §§ 1101 to 1174. The primary purpose of Chapter 11, which is entitled "Reorganization," is the rehabilitation of financially troubled businesses, see NLRB v. Bildisco, 465 U.S. 513, 527, 104 S. Ct. 1188, 1196, 79 L. Ed. 2d 482, 496 (1983); In re 312 W. 91st St. Co., 35 B.R. 346, 347 (Bankr. S.D.N.Y. 1983); In re Langley, 30 B.R. 595, 605 (Bankr. N.D. Ind. 1983), and the prevention of unnecessary liquidations, see In re Piece Goods Shops Co., 188 B.R. 778, 790 (Bankr. M.D.N.C. 1995); In re Chugiak Boat Works, Inc., 18 B.R. 292, 293 (Bankr. D. Alaska 1982).

In accordance with those principles, it is ordinarily presumed that a debtor who files a Chapter 11 bankruptcy will remain in control of its estate. 9 Am. Jur. 2d Bankruptcy §§ 275, 343 (1991); In re Heck's Properties, Inc., 151 B.R. 739, 756 (S.D. W. Va. 1992). That presumption has been characterized as "strong." 9 Am. Jur. 2d Bankruptcy § 275 (citing In re Clinton Centrifuge, Inc. 85 B.R. 980, 984 (Bankr. E.D. Pa. 1988)). Following the bankruptcy petition, the debtor becomes the "debtor in possession." 11 U.S.C.A. § 1101. The debtor and the debtor in possession, while remaining the same business entity, are no longer the same legal entity. In re Harms, 10 B.R. 817, 821 (Bankr. D. Colo. 1981). Rather, the debtor in possession is a new entity with its own rights and duties, subject to the supervision of the bankruptcy court. 9 Am. Jur. 2d Bankruptcy § 342 (1991); see also Raymond T. Nimmer & Richard B. Feinberg, Chapter 11 Business Governance: Fiduciary Duties, Business Judgment, Trustees and Exclusivity, 6 Bankr. Dev. J. 1, 20-21 (1989) [hereinafter Chapter 11 Business Governance] ("The DIP [debtor in possession] is a legal fiction through which are channeled various important functions in Chapter 11 bankruptcy. . . . The DIP does not exist and has no role except in relationship to the bankruptcy."). However, it is important to note that the debtor becomes the debtor in possession only in cases where a trustee has not been appointed. 11 U.S.C.A. § 1101(1). Therefore, in this case, OWPURA was divested of the status of a debtor in possession on the appointment of the Trustee.

Plaintiff argues that OWPURA should not be absolved of liability because the debtor and the debtor in possession are only nominally separate entities. Consequently, plaintiff argues, the liabilities of the debtor should not be altered by the filing of a bankruptcy petition. If OWPURA remained "in possession" of the premises at One Washington Park, then plaintiff's argument would follow logically. After all, "unless or until a trustee steps into the picture, there are no separate entities or reason for making a further, artificial separation. The debtor has merely taken on additional obligations and powers." Chapter 11 Business Governance, supra, 6 Bankr. Dev. J. at 23. Here, however, there was a trustee appointed and, as a result, there is a distinction between the debtor and its bankruptcy estate. In order to administer the debtor's estate, "one must either give control to the management [of the business debtor] . . . to the owners . . . to the court, or to a trustee." Chapter 11 Business Governance, supra, 6 Bankr. Dev. J. at 23. In this case, the control was granted to the Trustee. "The important conceptual transformation here is that the owners of the prebankruptcy debtor do not necessarily retain sole or even primary control of their managers or the legal entity after filing." Id. at 25.

The appointment of a trustee in a Chapter 11 reorganization case is the exception and not the rule. 9 Am. Jur. 2d Bankruptcy § 271 (1991). Following the commencement of a Chapter 11 bankruptcy, a "party in interest" may request the bankruptcy court to appoint a trustee to oversee the debtor's estate, provided the request is made prior to confirmation of a plan. 11 U.S.C.A. § 1104; see also 9 Am. Jur. 2d Bankruptcy §§ 271, 275, 278 (1991); Chapter 11 Business Governance, supra, 6 Bankr. Dev. J. at 55. In deciding whether to appoint a Chapter 11 trustee, the bankruptcy court is called upon to make "a close and careful scrutiny of the debtor in possession's prior and present conduct and determine that a trustee will accomplish the goals of a Chapter 11 plan more efficiently and effectively." 9 Am. Jur. 2d Bankruptcy § 276 (1991).

Specifically, the court must consider

(1) the overall management of the debtor corporation;

(2) the experience, skills, and competence of the debtor in possession to manage; (3) the performance of the debtor in possession, both past and present; and (4) the trust and confidence in the debtor in possession by members of the business community with whom the debtor in possession has had, and must of necessity continue to have, business transactions.

[Ibid. (citing In re Parker Grande Dev., Inc. 64 B.R. 557, 561 (Bankr. S.D. Ind. 1986)).]

In addition, the bankruptcy courts have considered (1) the trustworthiness of the debtor; (2) the reasons the debtor acted as he did; (3) reliance and harm to another party; (4) conclusive evidence of detriment to the estate; and (5) possibilities of future rehabilitation.

[Ibid. (citing In re Evans, 48 B.R. 46, 48 (Bankr. W.D. Tex. 1985); In re Tyler, 18 B.R. 574, 576 (Bankr. S.D. Fla. 1982)).]

Moreover, the courts have held that neither dissatisfaction with a debtor's management nor slight evidence of imprudent business decisions is sufficient in itself to permit the appointment of a trustee. Id. §§ 276, 347; see also Chapter 11 Business Governance, supra, 6 Bankr. Dev. J. at 55-57, 60 ("The Code does not contemplate that the DIP be replaced by a trustee simply because a court believes that someone else would operate the business more effectively."). The Code provides for the appointment of a trustee either "for cause," 11 U.S.C.A. § 1104(a)(1), or if such appointment is "in the interests of creditors . . . and other interests of the estate," 11 U.S.C.A. § 1104(a)(2). The most common bases for granting the request of a party in interest to appoint a trustee include "gross mismanagement and incompetence" and "DIP misconduct or self-dealing." Chapter 11 Business Governance, supra, 6 Bankr. Dev. J. at 57-58.

The United States Supreme Court has noted that "the Bankruptcy Code gives the trustee wide-ranging management authority over the debtor." Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 352, 105 S. Ct. 1986, 1993, 85 L. Ed. 2d 372, 381 (1985). Upon appointment, the trustee is automatically substituted for the debtor in possession in any pending action, proceeding, or matter. 9 Am. Jur. 2d Bankruptcy § 271 (1991). In addition, a trustee has broad rights, powers, and duties under Chapter 3 of the Code, including the capacity to sue and be sued, 11 U.S.C.A. § 323(b), the authority to retain professional persons, 11 U.S.C.A. § 327, and the power to use, sell, or lease property of the estate, 11 U.S.C.A. § 363. In a Chapter 11 reorganization, a trustee has additional duties to the general powers listed above. Of relevance to this case, a Chapter 11 trustee is required to investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a [reorganization] plan.

[11 U.S.C.A. § 1106.]

As part of that authority, the trustee may operate the business of the debtor, 11 U.S.C.A. § 1108, and has considerable leeway to exercise his business judgment in running that business, 9 Am. Jur. 2d Bankruptcy § 310 (1991).

In this case, the bankruptcy court granted a party's petition to appoint a trustee. Although the record does not indicate the reasons why the court deemed it necessary to appoint the Trustee, given the extraordinary nature of such an appointment in a Chapter 11 reorganization it is evident that the bankruptcy court found that it was required and that OWPURA's estate would best be managed and controlled by someone other than the debtor. A similar finding of cause or necessity to the estate formed the basis of the court's granting of the Trustee's application to authorize the employment of McCormick as managing agent of the premises at One Washington Park. A trustee must obtain leave of the court before he can delegate any of his specific duties as representative of the court. See In re Lowry Graphics, Inc., 86 B.R. 74, 76 (Bankr. S.D. Tex. 1988). Such court authorization was obtained by the Trustee in his application to the bankruptcy court in May 1991, at which time, McCormick was retained as the management company for One Washington Park.

B.

The crux of OWPURA's defense is not that it should be immunized from liability for plaintiff's fall simply because it filed for bankruptcy, but that because of the appointment of the Trustee and McCormick, as well as the subsequent employment of ISS, it owed no duty to plaintiff. According to OWPURA, it lacked the ability to participate in the daily management of One Washington Park and had no authority to control the snow and ice removal on the day of plaintiff's fall. We agree.

The Third Circuit has recognized that, upon appointment, a trustee is vested with title to all of a debtor's property. Hanover Ins. Co. v. Tyco Indus., Inc., 500 F.2d 654, 656 (1974). Other courts similarly have recognized the exclusive authority of the trustee to exercise control over the res of the debtor's bankruptcy estate. See, e.g., In re Moffitt, 146 B.R. 364, 367 (Bankr. S.D. Tex. 1992) (recognizing that funds of bankrupt's estate "constitute a res over which a Chapter 11 Trustee has care, custody, control and responsibility"); In re United Church of the Ministers of God, 74 B.R. 271, 279 (Bankr. E.D. Pa. 1987) (granting request to appoint trustee in Chapter 11 case based on consensus of all parties involved that "it is in the best interests of everyone and the public interest to place the assets of the estates of the [debtor and debtor ...


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