Four Strikes and Yer Out

Posted by NCBRC - April 25, 2023

The debtor could not gain traction on any of the four appeals of bankruptcy court orders which approved two settlements negotiated by the trustee, limited his exemption, and overruled his motion to dismiss, where the district court found that the bankruptcy judge considered the appropriate factors and did not abuse her discretion. Delaney v. Messer (In re Delaney), No. 22-2432 (E.D.N.Y. March 20, 2023).

The debtor filed for chapter 7 bankruptcy listing approximately $44,500 in credit card debt. His schedules stated that he did not have any pending litigation. In fact, he had at least seven cases pending at the time. The trustee discovered the cases and the debtor amended his schedules to include them. Two of the cases were relevant here. In the debtor’s state court case against Sullivan & Cromwell, LLC, (S & C) he sought $13,000,000.00 in damages but represented to the bankruptcy court that the case had serious problems with statute of limitations and standing. In the other case, filed in the district court for the Southern District of New York, the debtor stated that his counterclaims against his former employer, HC2, had been dismissed by the district court but that the dismissal was on appeal.

The trustee negotiated settlements in both cases. HC2 settled for $25,000. S & C settled for $12,500. The bankruptcy court approved the settlements over the debtor’s objection. The debtor appealed the court’s approval of the S & C settlement. He moved to vacate the court’s decision on the HC2 settlement. The court denied the motion, and the debtor appealed that order.

While those appeals were pending, the debtor sought court approval to exempt the entire HC2 settlement. The bankruptcy court found, however, that the debtor’s exemption was limited to the $13,900 cap in section 522(d)(5). The debtor appealed that order, then asked the bankruptcy court to reconsider. The bankruptcy court declined to reconsider and the debtor did not appeal that order. The debtor also filed five, substantively similar, motions to dismiss his bankruptcy case. Two were withdrawn and the remaining three denied by the bankruptcy court. The debtor appealed the denial of one of them.

The district court consolidated the four appeals.

The court began its analysis with the debtor’s contention that the bankruptcy court should have dismissed his case because he was a resident of the Philippines and therefore ineligible to be a debtor under section 109(a). The court found that even a domiciliary of the Philippines may file for bankruptcy if he resides or owns property in the United States at the time of the petition. At the time the debtor filed his petition he averred that, over the previous 180 days, he had lived in the eastern district of New York more than anywhere else. That, as well as the lack of evidence supporting his claim that he lived outside the United States, was sufficient to find that he was a proper debtor under section 109(a).

The court also rejected the debtor’s argument that venue was improper. The court observed that the proper remedy for improper venue is a change of venue, not dismissal. The debtor failed to seek a change. The district court thus found that the debtor had forfeited the argument.

Turning to the substance of the debtor’s appeals, the court began with the debtor’s challenge to the S & C settlement. The court noted that it is within the bankruptcy court’s sound discretion to accept a settlement agreement and that, in In re Iridium Operating LLC, 478 F.3d 452, 462 (2d Cir. 2007), the Second Circuit identified seven factors the bankruptcy court should consider when making that decision. An eighth consideration is whether the settlement falls “below the lowest point of reasonableness.”

The debtor argued that because he sought $13.5 million in his lawsuit against S & C, the settlement of $12,500 was necessarily below the lowest point of reasonableness. The bankruptcy court compared the settlement with the value the debtor assigned the cause of action in his schedules: to wit, $0. Further, the bankruptcy court took the debtor at his word that the case suffered from serious problems with statute of limitations and standing. The district court found the bankruptcy court conducted the appropriate analysis and did not abuse its discretion in approving the settlement.

The court also rejected the debtor’s argument that the trustee failed to investigate the case before settling. It found the trustee could rely on the debtor’s valuation and depiction of the cause of action. Also, the court noted that as part of the settlement, the trustee got S & C to agree not to pursue sanctions against the debtor for filing a frivolous lawsuit.

As to the debtor’s claim that the court failed to acknowledge his objection to the settlement, the district court found that, notwithstanding what may have been a clerical error in the docket stating that there was no objection to the settlement, the bankruptcy in fact addressed the debtor’s objections during the hearing.

The district court affirmed the bankruptcy court’s approval of the settlement with S & C.

The court turned next to the debtor’s appeal of the bankruptcy court’s denial of his motion to vacate the order approving the settlement with HC2. That lawsuit involved the debtor’s counterclaims against his former employer, HC2, which had been dismissed by the district court. In addressing the settlement, the bankruptcy court applied the Iridium factors and found the debtor’s likelihood of success in the litigation was low. The court also noted that the debtor had valued the claim in his bankruptcy schedules at $0.

The basis for the debtor’s motion to vacate was a footnote in the unrelated case of Arazi v. Cohen Bros. Realty Corp., No. 20-CV-8837, 2022 WL 912940 (S.D.N.Y. Mar. 28, 2022), where that court said that the district court that heard the debtor’s case against HC2 “appears to have relied, in part, on [outdated] law.” The debtor presented that footnote to the bankruptcy court arguing that it was likely the Second Circuit would reinstate his counterclaims.

The district court found that the bankruptcy court’s refusal to vacate its order approving the HC2 settlement was properly based on its finding that the Arazi decision did not overturn the debtor’s case, and, in any event, there was an alternate basis for the Southern District’s dismissal of the debtor’s counterclaims against HC2.

In addition, the bankruptcy court reasonably concluded that even if the debtor obtained a favorable ruling in his case against HC2, the settlement reached by the bankruptcy trustee reflected the lengthy and expensive litigation likely to accompany further pursuit of that case. The bankruptcy court did not err in declining to vacate the settlement order.

Because the debtor didn’t appeal the underlying settlement order, the court declined to address the debtor’s argument that the settlement amount was too low.

The court turned next to the issue of the debtor’s claimed exemption of the entire amount of $25,000 from the settlement with HC2. The bankruptcy court order capped his exemption at the catch-all amount of $13,900 provided for in section 522(d)(5). For the first time on his motion for reconsideration to the bankruptcy court, the debtor asserted that he was entitled to the exemption for compensation for loss of future earnings under section 522(d)(11)(E). The bankruptcy court found the settlement did not consist of future earnings, but was a payment by HC2 to rid itself of an “endless stream of litigation.”

The district court noted that the debtor failed to claim the future earnings exemption in his schedules. Section 522(l) provides that to claim an exemption a “debtor shall file a list of property that [he] claims as exempt under subsection (b).” The district court found the debtor was required to list his exemptions on his bankruptcy schedules and warned that “[w]ithout such notice, a debtor could sandbag creditors and the trustee with exemptions and file endless motions for reconsideration suggesting yet new exemptions, thus delaying prompt resolution of his creditors’ claims and wasting estate money on litigation.”

Finally, the court addressed the debtor’s contention that the bankruptcy court erred in denying his motion to dismiss. Finding that an order denying a motion to dismiss is interlocutory, the court treated the debtor’s notice of appeal as a motion for leave to appeal. Courts will grant leave when “the order (1) involves a controlling question of law (2) as to which there is a substantial ground for difference of opinion, and (3) an immediate appeal from the order may materially advance the ultimate termination of the litigation.”

Here, the bankruptcy court’s decision was governed by equitable principles rather than a pure question of law. Finding that the bankruptcy court applied the correct standards for review of a motion to dismiss, and based her ultimate decision on her interpretation of the relevant facts, the district court found that the debtor simply wanted to substitute a new judgment for one he didn’t like. The court denied leave to appeal.

The court affirmed.

The debtor filed several notices of appeal which the second circuit consolidated under case no. 23-434. The district court denied the debtor’s motion to file in forma pauperis, finding “that any appeal would not be taken in good faith, because there are no non-frivolous issues to appeal.”

Delaney ED NY March 2023

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