UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF NEW YORK
2010 Bankr. LEXIS 701
March 1, 2010, Decided
COUNSEL: For Debtor: Katherine A. Geraci, Esq., Thaler & Gertler LLP, EastMeadow, New York.
For Chapter 7 Trustee: Steven B. Sheinwald, Esq., Kirschenbaum & Kirschenbaum,Garden City, New York.
For James T. Williams: Jeffrey Herzberg, Esq., Zinker & Herzberg, LLP,Smithtown, New York.
JUDGES: HON. ALAN S. TRUST, United States Bankruptcy Judge.
OPINION BY: ALAN S. TRUST
MEMORANDUM OPINION ON RELIEF FROM STAY AND PARTIAL ABSTENTION
Issues Before this Court
Pending before the Court is the motion for relief from stay filed by creditorJames T. Williams ("Williams") in the above referenced main case. Williams seeksstay relief to continue litigation of a state court action involving Debtor andothers. Williams, as Plaintiff, has also filed the above referenced adversaryproceeding in which he asserts various claims against Debtor under Section523(a)(4) of the Bankruptcy Code, objecting to dischargeability of certainalleged debts. The claims in the adversary proceeding mirror those pendingbefore the state court.
This Court addresses the issue of whether it should lift the stay to allowthe state court action to continue, and, if so, whether this Court shouldabstain from hearing Plaintiff's Section 523(a)(4) claims in whole or in part.For the reasons stated herein, this Court will lift the stay to allow the statecourt action to proceed to judgment, and will abstain, in part, from hearing theadversary.
Debtor, David Horowitz ("Debtor") filed a voluntary petition for relief underChapter 7 of Title 11, United States Code (the "Bankruptcy Code") on July 28,2009 (the "Petition Date"). [dkt item 1] 1 As of the Petition Date, Debtor was aco-defendant in an action pending in the Supreme Court of the State of New York,County of Nassau (the "Supreme Court") styled "James T. Williams, Plaintiff, v.David Horowitz and Stacey Granat, Defendants," Index No. 09-7573 (the "StateCourt Action"). The State Court Action was commenced by summons and verifiedcomplaint dated April 8, 2009.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 Unlessotherwise indicated, all docket references are to the main bankruptcy case.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
This is an asset bankruptcy case. The Trustee filed a Notice of Discovery ofAssets on August 25, 2009, and the Court established a proofs of claim bar dateof November 23, 2009. [dkt item 10]
Williams filed his motion for relief from the automatic stay to continue theState Court Action on September 26, 2009 (the "Motion"). [dkt item 18] Also onSeptember 26, 2009, Williams filed adversary proceeding number 09-8434 againstDebtor (the "Adversary"). Williams has also filed a timely proof of claim.
Debtor filed his opposition to the Motion on October 19, 2009 (the"Opposition"). [dkt item 23]
Debtor received his discharge on November 3, 2009. [dkt item 26]
Williams filed a reply to the Debtor's opposition to the Motion on January12, 2010. [dkt item 33]
The Chapter 7 Trustee of the estate of the Debtor, Kenneth Kirschenbaum, Esq.(the "Trustee"), filed an opposition to the Motion on January 11, 2010 (the"Trustee's Opposition"). [dkt item 32] Williams filed a reply to the Trustee'sOpposition on January 12, 2010. [dkt item 34]
This Court conducted a hearing on the Motion, the Opposition, and theTrustee's Opposition on January 14, 2010 (the "Hearing").
The State Court Action
The State Court Action arises from various investments with which Debtor andWilliams were involved, relating to companies referred to as C&C Home Care, Inc.("C&C"), Extended Care Concepts, LLC ("Extended Care"), and DDJS Realty, LLC("DDJS"). C&C and Extended Care each have filed bankruptcy cases under Chapter11 of the Bankruptcy Code, both of which are assigned to this Court. 2 DDJS isnot the subject of a pending bankruptcy case.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -2 C&C hasbeen assigned case number 09-75460-ast; Extended Care has been assigned casenumber 09-75465-ast.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
As noted, the State Court Action is between Williams, Debtor and non-debtorStacey Granat ("Granat"). In the State Court Action, Williams alleges, interalia, that DDJS owned the premises known as 185 Express Street, Plainview, NewYork (the "Premises"), and that DDJS was owned in equal percentages by Debtor,Williams and Granat. Williams further alleges that he, Debtor and Granat alsoowned each interests in C&C and Extended Care. Williams further alleges that, onor about November 30, 2007, Debtor, as the managing member of DDJS, entered intoan agreement to sell the Premises for $ 3,150,000.00, and that the sale closedin March 2008. William further alleges that Debtor failed to remit or cause DDJSto remit to Williams several hundred thousand dollars to which Williams assertshe was entitled based upon his ownership interests in DDJS, C&C and ExtendedCare, and various agreements he had with Debtor and Granat. Williams alsoalleges his funds were diverted by Debtor and/or Granat to his prejudice andwithout his consent.
The State Court has issued a discovery schedule and scheduled the State CourtAction for trial commencing on November 15, 2010. The State Court has alsodenied Granat's motion to dismiss Williams's complaint.
This Court must address two issues. First, this Court must determine whetherthe stay should be lifted to allow the State Court Action to proceed. If thestay is lifted, the second issue becomes how this Court should manage theAdversary.
Williams relies on Section 362(d)(1) and asserts he has established cause toobtain stay relief. Williams cites to In re Sonnax Indus., Inc., 907 F.2d 1280(2d Cir. 1990), and the non-exclusive list of factors discussed therein that maybe relevant in determining whether the stay should be lifted to allow litigationto continue outside of bankruptcy court. These factors include:
1. Whether relief would result in a resolution of the issues;
2. Whether a special tribunal with the necessary expertise has been established to hear the cause of action;
3. Judicial economy;
4. Whether relief would result in a partial or complete resolution of the proceeding;
5. The lack of interference with the bankruptcy case;
6. Whether litigation in another forum would prejudice the interests of other creditors;
7. Whether litigation is already pending;
8. Bad faith; and
9. The impact of the stay on the parties and the balance of the harm.
In re Sonnax Indus., Inc., 907 F.2d 1280, 1286 (2d Cir. 1990)(citing In reCurtis, 40 B.R. 795, 799-800(Bankr. D. Utah 1984).
After analyzing these factors here, this Court has determined that:
1. The granting of the automatic stay would result in a greater resolution of the pertinent issues than if this Court retained jurisdiction, as this Court does not presently have jurisdiction over the claims asserted against Granat;
2. All the pertinent issues concerning the State Court Action pertain to issues of state law and are not creatures of the Bankruptcy Code;
3. Judicial economy is better served by permitting one forum to decide all of the pertinent issues between Williams and Debtor and Granat, inclusive of the amount of debt, if any, that the Debtor owes Williams, subject possibly to a future order deeming the debt to be non-dischargeable;
4. There should be no interference with the administration of the pending bankruptcy case;
5. Litigation before the State Court should not prejudice the rights of any other creditor of the estate of the Debtor; and
6. The State Court Action is already pending.
The Trustee opposes stay relief by asserting that Williams's claim can beestimated by this Court for distribution and allowance purposes under Section502(c), and that, because this is an asset case, the estate may be compelled tointervene in the State Court Action and, thereby incur unnecessary expense. TheCourt, however, is not persuaded by either of these arguments.
First, the Trustee can invoke Section 502(c) and seek an estimation ofWilliams's claims if awaiting trial of the State Court Action in November 2010would cause any undue delay in the administration of this estate. Theavailability of the estimation process does not weigh against lifting the stay.
Further, at the Hearing, the parties conceded that no counterclaims had beenfiled by Debtor against Williams in the State Court Action, and that Debtor hadnot scheduled any claims against Williams. As such, there are no assets of thisbankruptcy estate to be protected by the Trustee in the State Court Action.
Further, if this Court were to liquidate Williams's claim against Debtor,that would be undertaken in the Adversary, to which the Trustee is not a party.Thus, if the Trustee desires to be a direct party to the liquidation of theWilliams claim, and if the stay were not lifted, he would need to intervene inthe Adversary.
Additionally, the Trustee asserts that Williams should be denied stay reliefand required to litigate his Section 523(a)(4) action before this Court.However, the Trustee has no interest as to whether any debts due Williams shouldsurvive Debtor's discharge.
Finally, it would be a waste of judicial resources and the parties' resourcesto liquidate Williams's claim in a proof-of-claim proceeding as a contestedmatter, and have separate trials between Williams and Debtor in the Adversary ondischargeability and between Williams and Granat in the State Court Action.
Thus, stay relief should be granted to allow the State Court Action toproceed to judgment. However, Williams will not be allowed to seek collection ofany judgment in his favor, absent further order of this Court.
This Court Should Abstain in Part From Hearing the Adversary
Having concluded that the stay should be lifted, the question becomes howthis Court should manage the Adversary. This Court has determined thatabstention in part from the Adversary is permissible and appropriate here,pursuant to Section 1334(c)(1) of Title 28, which provides as follows: 3
Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
28 U.S.C. Â§ 1334(c)(1).
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -3 ThisCourt is considering abstention sua sponte, which is permitted by 28 U.S.C. Â§1334(c)(1). By its terms, Â§ 1334(c)(1) does not require a motion be filed. Bycontrast, abstention under Â§ 1334(c)(2) expressly must be by motion:
(c)(2) Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
28 U.S.C. Â§ 1334(c)(2).- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
When considering whether permissive abstention is appropriate, bankruptcycourts have considered one or more--although not necessarily all--of twelvefactors. Wallace v. Guretzky, No. CV-09-0071, 2009 U.S. Dist. LEXIS 91284, 2009WL 3171767, *2 (E.D.N.Y. Sept. 29, 2009); Cody, Inc. v. County of Orange (In reCody, Inc.), 281 B.R. 182, 190 (S.D.N.Y. 2002), aff'd in part, appeal dismissedin part, 338 F.3d 89 (2d Cir. 2003); Barbaro, Jr., et al. v. Wider (In re Wider), Adv. No. 09-8313-ast, 2009 Bankr. LEXIS 3981, 2009 WL 4345411, *2 (Bankr.E.D.N.Y. Nov. 30, 2009). These factors are:
1. The effect or lack thereof on the efficient administration of the estate if a court recommends abstention;
2. The extent to which state law issues predominate over bankruptcy issues;
3. The difficulty or unsettled nature of the applicable state law;
4. The presence of a related proceeding commenced in state court or other non-bankruptcy court;
5. The jurisdictional basis, if any, other than 28 U.S.C. Â§ 1334;
6. The degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
7. The substance rather than the form of an asserted 'core' proceeding;
8. The feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
9. The burden of [the court's] docket;
10. The likelihood that the commencement of the proceeding in a bankruptcy court involves forum shopping by one of the parties;
11. The existence of a right to a jury trial; and
12. The presence in the proceeding of non-debtor parties.
Wallace, 2009 U.S. Dist. LEXIS 91284, 2009 WL 3171767 at *2.
Recently, this Court determined to abstain in a case also involvingprepetition state court litigation between a debtor, Ms. Wallace, and anondebtor party, Mr. Guretzky. The adversary proceeding commenced in that casesought to block the dischargeability of certain debts under Section 523(a)(6).After applying the above outlined abstention factors, this Court issued an orderof partial abstention. Guretzky v. Wallace, ch. 7 No. 07-75231, Adv. No.08-8048-ast, docket item 12 (Bankr. E.D.N.Y. Oct. 20, 2008). The United StatesDistrict Court for the Eastern District of New York affirmed that decision onappeal. Wallace, 2009 U.S. Dist. LEXIS 91284, 2009 WL 3171767, at *5-6; seealso, Wider, Adv. No. 09-8313-ast, 2009 Bankr. LEXIS 3981, 2009 WL 4345411(addressing similar issues to determine abstention).
Here, too, the relevant factors weigh in favor of abstention. The underlyingliability issues between Williams and Debtor in the State Court Action arematters of New York State substantive law. The fraud alleged against Williams iscommon law fraud and not a creature of the Bankruptcy Code. As noted, Williams'sSection 523(a)(4) claims mirror the subject claims of the State Court Action.Thus, in the Adversary, the issues potentially giving rise to determinations ofnondischargeability are issues of state law, with the sole exception of theconclusions of nondischargeability to be made under Section 523(a)(4).
Specifically, of the twelve abstention factors, the following weigh in favorof abstention here:
1. the lack of the effect of abstention on the efficient administration of this estate;
2. state law issues predominate over bankruptcy issues;
4. the presence of a related proceeding commenced in state court or other nonbankruptcy court;
5. the jurisdictional basis, if any, other than 28 U.S.C. Â§ 1334;
6. the degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
8. the lack of feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
11. the existence of a right to a jury trial; and
12. the presence in the proceeding of nondebtor parties.
Issues 4, 8, 11, and 12 are particularly impactive here. The State CourtAction is a multiparty action, including a party other than Williams and Debtor.This Court has no core jurisdiction over the claims of the nondebtor Williamsagainst the nondebtor Granat. Further, all of the parties have jury trial rightsbefore the State Court; however, absent full consent, this Court could notpreside over the State Court Action if removed to this Court, and the parties'jury trial rights were properly exercised.
Thus, the stay will be lifted to allow the State Court Action to proceed tojudgment; however, enforcement of any judgment shall remain stayed, pendingfurther order of this Court. This Court will abstain from hearing the Adversary,in part, as to Williams's claims that the debts claimed by Williams to be owedto him should survive Debtor's discharge, pursuant to Section 523(a)(4) of theBankruptcy Code. Williams and/or Debtor shall return to this Court following thetrial of the State Court Action and ask this Court to enter a judgment underSection 523(a)(4) based on the findings and/or jury verdict(s) of the trier offact in the State Court Action.
Consistent with the ruling herein, Plaintiff's Counsel is hereby directed tosubmit to the Court within ten days from entry of this memorandum opinion,separate proposed orders for the main case and the Adversary.
Dated: March 1, 2010
Central Islip, New York
/s/ Alan S. Trust
Alan S. Trust
United States Bankruptcy Judge