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THE DEBT WAS ACCELERATED WHEN THE BANKRUPTCY STAY WAS LIFTED; THE FORECLOSURE ACTION WAS THEREFORE TIME-BARRED; DISAGREEING WITH THE 2ND DEPARTMENT, THE DEFENDANTS DID NOT NEED TO INTERPOSE A COUNTERCLAIM TO CANCEL THE MORTGAGE PURSUANT TO RPAPL 1501 (THIRD DEPT).

The Third Department, in a full-fledged opinion by Justice Clark, determined the debt was accelerated when the automatic bankruptcy stay was lifted. Therefore the foreclosure action was untimely and the mortgage was properly cancelled pursuant to RPAP 1501:

… [T]he mortgage was accelerated on December 8, 2011, the date on which the bankruptcy court issued the order lifting the automatic bankruptcy stay as to plaintiff’s predecessor in interest and its assignees and/or successors in interest … . By filing a proof of claim in the bankruptcy proceeding and shortly thereafter seeking affirmative relief from the automatic bankruptcy stay, plaintiff’s predecessor in interest communicated a clear and unequivocal intent to accelerate the entire mortgage debt … . …

Supreme Court did not err in discharging and canceling the mortgage. RPAPL 1501 (4) states, as relevant here, that, where the statute of limitations period for the commencement of a mortgage foreclosure action has expired, “any person having an estate or interest in the real property subject to such encumbrance may maintain an action . . . to secure the cancellation and discharge of record of such encumbrance, and to adjudge the estate or interest of the plaintiff in such real property to be free therefrom” … . Contrary to the Second Department, we do not read RPAPL 1501 (4) as stating that the cancellation and discharge of a mortgage can only be obtained by commencing an action or interposing a counterclaim for such relief … .

… [D]efendants did not interpose a counterclaim seeking to discharge and cancel the mortgage. However, defendants requested, in their answer, dismissal of the complaint and such “other and further relief as [Supreme Court] deem[ed] just and equitable” and thereafter specifically requested in their cross motion that the mortgage be discharged and canceled. MTGLQ Invs., L.P. v Wentworth, 2021 NY Slip Op 00064, Third Dept 1-7-21

 

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THE ADMINISTRATOR OF THE ESTATE COULD SUE FOR DECEDENT’S CONSCIOUS PAIN AND SUFFERING BUT, BECAUSE THE WRONGFUL DEATH ACTION HAD NOT BEEN LISTED AS AN ASSET IN THE BANKRUPTCY PROCEEDING, THE ADMINISTRATOR DID NOT HAVE THE CAPACITY TO SUE ON BEHALF OF THE DISTRIUBUTEE FOR WRONGFUL DEATH (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court in this wrongful death action, determined that the plaintiff, who was the administrator of the estate and the sole distributee, could bring an action for conscious pain and suffering because that claim was personal to the decedent and part of the estate. But, because the wrongful death action, which vested in the plaintiff/distributee upon death, was not listed as an asset in the plaintiff’s bankruptcy proceedings, to which the decedent was not a party, the plaintiff did not have the capacity to bring that claim:

… [T]he plaintiff, as the administrator of the decedent’s estate, had the capacity to prosecute the cause of action to recover damages for conscious pain and suffering. A cause of action brought on behalf of a deceased to recover damages for conscious pain and suffering is “personal to the deceased and belongs to the estate, not the distributees” … . The decedent was not a party to the bankruptcy proceeding. Accordingly, the bankruptcy did not affect the plaintiff’s capacity to prosecute the cause of action to recover damages for conscious pain and suffering on behalf of the decedent’s estate … .

The Supreme Court, however, should have granted those branches of the defendants’ separate motions which were to dismiss the cause of action to recover damages for wrongful death insofar as asserted against each of them. “A cause of action to recover damages for wrongful death is a property right belonging solely to the distributees of the decedent and vests in them at the decedent’s death” (… EPTL 5-4.4 [a]). It is undisputed that the cause of action to recover damages for wrongful death vested in the plaintiff as the sole distributee of the estate prior to the filing of the bankruptcy petition. Accordingly, as the plaintiff failed to schedule the wrongful death claim in the bankruptcy proceeding, it is subject to dismissal in this action on the ground that the plaintiff lacks the capacity to pursue the claim … . Vinogradov v Bay Plaza Apts Co., LLC, 2020 NY Slip Op 08104, Second Dept 12-30-20

 

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IN THE ABSENCE OF AN ORDER SUBSTITUTING THE BANKRUPTCY TRUSTEE FOR THE PLAINTIFF-DEBTOR, THE DEFENDANTS’ MOTION TO DISMISS THE COMPLAINT SHOULD HAVE BEEN GRANTED; SUPREME COURT SHOULD NOT HAVE DENIED DEFENDANTS’ MOTION AND DIRECTED PLAINTIFF TO SEEK RELIEF FROM THE BANKRUPTCY COURT (SECOND DEPT).

The Second Department, reversing Supreme Court, noted that, as a matter of comity, based upon an order in bankruptcy court, a New York court will substitute the bankruptcy trustee as a party in a suit involving the plaintiff/debtor. Here there was no such order and the defendants’ motion to dismiss the complaint should have been granted:

“‘[T]he integrity of the bankruptcy system depends on full and honest disclosure by debtors of all of their assets'” … . “By failing to list causes of action on bankruptcy schedules of assets, the debtor represents that it has no such claims” … .

“[O]nce a bankruptcy proceeding is commenced, all legal or equitable interests of the debtor become part of the bankruptcy estate, including any causes of action (… see 11 USC § 541[a][1]). Accordingly, where a debtor has sought chapter 7 bankruptcy protection, “the causes of action formerly belonging to the debtor . . . [vest] in the trustee for the benefit of the estate . . . [and] [t]he debtor has no standing to pursue such causes of action” … .

In cases where a plaintiff-debtor has successfully petitioned the bankruptcy court to reopen the bankruptcy to include a pending action, this Court has invoked the doctrine of comity to permit substitution of the bankruptcy trustee as a plaintiff … . Here, however, the Supreme Court went further, directing [plaintiff] to seek such relief from the bankruptcy court and denying the defendants’ motion to dismiss the complaint … . …

Under these circumstances, the court should have granted that branch of the defendants’ motion which was to dismiss the complaint … . Nevertheless, the trustee, if he or she should chose to re-commence the case in his or her own name, will enjoy the protection offered by CPLR 205 … . Turner v Owens Funeral Home, Inc., 2020 NY Slip Op 07238, Second Dept 12-2-20

 

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PLAINTIFFS SOUGHT TO FORECLOSE ON LOANS TO THE BORROWERS WHO THEN STARTED BANKRUPTCY PROCEEDINGS; PLAINTIFFS THEN SUED DEFENDANTS, WHO ARE NOT PARTIES TO THE FORECLOSURE/BANKRUPTCY ACTIONS, FOR TORTIOUS INTERFERENCE WITH THE LOAN AGREEMENTS; THE TORTIOUS INTERFERENCE WITH CONTRACT ACTIONS ARE NOT PREEMPTED BY FEDERAL BANKRUPTCY LAW (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Stein, over a three-judge dissent, determined the tortious interference with contract claims, against defendants who are not parties in the foreclosure/bankruptcy proceedings, were not preempted by federal law. Plaintiff sought to foreclose on a loan and the borrowers commenced bankruptcy proceedings. Plaintiff then sued defendants, who are not parties to the foreclosure, alleging tortious interference with the loan agreements. The opinion focuses on the law of preemption:

It is not disputed that valid contracts existed between plaintiff and the borrowers. Plaintiff’s claims arising out of the borrowers’ breach of those contracts as asserted against the borrowers were resolved by the bankruptcy proceeding. Here, plaintiff alleges that defendants knew of the relevant contractual terms and deliberately induced the borrowers’ violations of those terms prior to the bankruptcy proceedings. In other words, plaintiff’s allegations state a claim for tortious interference with contract, and the remedy for that tort will not affect the debtor’s estate. As such, these claims will not encroach upon the province of the bankruptcy court. Stated simply, plaintiff’s claims “do[] not require the adjudication of rights and duties of creditors and debtors under the Bankruptcy Code” … . Sutton 58 Assoc. LLC v Pilevsky, 2020 NY Slip Op 06939, Ct App 11-24-20

 

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THE FACT THAT THE DEFENDANT IN THIS FORECLOSURE ACTION FILED FOR BANKRUPTCY DID NOT RELIEVE THE PLAINTIFF OF THE OBLIGATION TO COMPLY WITH THE NOTICE REQUIREMENTS OF REAL PROPERTY ACTIONS AND PROCEEDINGS LAW (RPAPL) 1304; PLAINTIFF’S SUMMARY JUDGMENT MOTION SHOULD NOT HAVE BEEN GRANTED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the fact that defendant had filed for bankruptcy did not relieve the plaintiff in this foreclosure action from the obligation to comply with the notice requirements of Real Property Actions and Proceedings Law (RPAPL) 1304:

… [T]he plaintiff submitted, among other things, the affidavit of Kyle Lukas, a Senior Loan Analyst for … the purported parent company of the plaintiff’s loan servicer. Lukas averred that a 90-day notice was not required to be sent to the defendant pursuant to RPAPL 1304(3) due to the defendant’s bankruptcy filing … . In addition, while the plaintiff submitted, inter alia, copies of the note and mortgage, the pleadings, and the notice of default, it did not submit any documentation evidencing service of the 90-day notice required by RPAPL 1304. Contrary to the plaintiff’s contention, the fact that the defendant previously filed for bankruptcy protection did not relieve the plaintiff of its obligation to send the RPAPL 1304 notice to her prior to commencing the action … . Accordingly, since the plaintiff did not demonstrate its strict compliance with the statute, the Supreme Court should have denied those branches of the plaintiff’s motion which were for summary judgment on the complaint insofar as asserted against the defendant, to strike her answer, and for an order of reference, regardless of the sufficiency of the opposing papers … . Mastr Adjustable Rate Mtges. Trust 2007-1 v Joseph, 2020 NY Slip Op 04935, Second Dept 9-16-20

 

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BANKRUPTCY EXCEPTION TO THE INSURED VS INSURED EXCLUSION IN THIS DIRECTORS & OFFICERS LIABILITY INSURANCE POLICY APPLIED TO THE CREDITOR TRUST FORMED TO PURSUE THE BANKRUPTCY ESTATE’S LEGAL CLAIMS ON BEHALF OF UNSECURED CREDITORS (FIRST DEPT).

The First Department, reversing Supreme Court, in a full-fledged opinion by Justice Renwick, in a matter of first impression, determined the bankruptcy exception to the insured vs. insured exclusion applied to the Directors & Officers (D & O) liability insurance policy:

Plaintiff Westchester Fire Insurance Co. … commenced this action seeking a declaration that it has no coverage obligations to defendants insureds, arguing primarily that the “insured versus insured” exclusion of a Directors and Officers (D & O) liability insurance policy, procured by RCS Capital Corporation (RCAP), bars coverage of claims asserted against defendants, … RCAP’s former directors and officers. Defendants insureds contend, among other things, that coverage exists under the bankruptcy exception to the insured vs. insured exclusion. The claims, herein, arose after RCAP’s bankruptcy.

The Creditor Trust was formed, pursuant to the reorganization plan, to pursue the bankruptcy estate’s legal claims on behalf of the unsecured creditors … . …

This appeal raises an issue of apparent first impression of whether a D & O liability policy’s bankruptcy exception, which allows claims asserted by the “bankruptcy trustee” or “comparable authority,” applies to claims raised by a Creditor Trust, as a post-confirmation litigation trust, to restore D & O coverage removed by the insured vs. insured exclusion. For the reasons that follow, we find that the bankruptcy exception to the insured vs. insured exclusion, applies to restore coverage. Specifically, we interpret the broad language “comparable authority” to encompass a Creditor Trust that functions as a post-confirmation litigation trust, given that such a Creditor Trust is an authority comparable to a “bankruptcy trustee” or other bankruptcy-related or “comparable authority” listed in the bankruptcy exception. Westchester Fire Ins. Co. v Schorsch, 2020 NY Slip Op 04627, First Dept 8-20-20

 

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THE BANKRUPTCY EXCEPTION TO THE INSURED VS INSURED EXCLUSION IN THE DIRECTORS AND OFFICERS LIABILITY POLICY APPLIED TO THE CREDITOR TRUST WHICH WAS SET UP TO PURSUE THE BANKRUPTCY ESTATE’S LEGAL CLAIMS ON BEHALF OF UNSECURED CREDITORS; THE CREDIT TRUST SUED THE DIRECTORS AND OFFICERS OF THE INSURED ALLEGING BREACH OF FIDUCIARY DUTY (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Renwick, in a matter of first impression, determined that the bankruptcy exception to the insured vs. insured exclusion of a Directors and Officers (D & O) liability insurance policy applied to a Creditor Trust. The Creditor Trust was formed pursuant to a Chapter 11 bankruptcy reorganization plan for the insured, RCS Capital Corporation (RCAP), to pursue the bankruptcy estate’s legal claims on behalf of unsecured creditors of the insured:

… [T]he Creditor Trust sued RCAP’s directors and officers alleging they had breached their fiduciary duties to the company. The directors and officers sought coverage under RCAP’s D & O liability policy with Westchester (the insurer). Westchester commenced this action in response, seeking a declaratory judgment that it has no coverage obligations.

This appeal raises an issue of apparent first impression of whether a D & O liability policy’s bankruptcy exception, which allows claims asserted by the “bankruptcy trustee” or “comparable authority,” applies to claims raised by a Creditor Trust, as a post-confirmation litigation trust, to restore D & O coverage removed by the insured vs. insured exclusion. For the reasons that follow, we find that the bankruptcy exception, to the insured vs. insured exclusion, applies to restore coverage. Specifically, we interpret the broad language “comparable authority” to encompass a Creditor Trust that functions as a post-confirmation litigation trust, given that such a Creditor Trust is an authority comparable to a “bankruptcy trustee” or other bankruptcy-related or “comparable authority” listed in the bankruptcy exception. Westchester Fire Ins. Co. v Schorsch, 2020 NY Slip Op 02895, First Dept 5-14-20

 

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ALTHOUGH THE PARTY TWICE FILED FOR BANKRUPTCY WITHOUT LISTING THE MEDICAL MALPRACTICE ACTION AS AN ASSET, THE BANKRUPTCY PROCEEDING WAS SUBSEQUENTLY REOPENED AND THE ACTION WAS ADDED AS AN ASSET; AT THAT POINT THE BANKRUPTCY TRUSTEE BECAME THE PLAINTIFF IN THE MEDICAL MALPRACTICE ACTION AND THE DOCTRINE OF JUDICIAL ESTOPPEL, BASED UPON THE PARTY’S INITIAL FAILURE TO LIST THE ACTION AS AN ASSET, DID NOT APPLY TO THE TRUSTEE (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the defendant’s motion to dismiss the medical malpractice complaint on judicial estoppel grounds should not have been granted. Vormnadiryan commenced a medical malpractice action in 2006. In two bankruptcy proceedings in 2008 and 2016 the medical malpractice action was not listed as an asset by Vormnadiryan. In 2017 Vormnadiryan opened the 2008 bankruptcy action and the medical malpractice action was added as an asset, making the bankruptcy trustee the plaintiff in that action. The Second Department determined Vormandiryan’s initial failure to list the malpractice action as an asset did not subject the bankruptcy trustee, as the plaintiff in the malpractice action, to the judicial estoppel doctrine:

“The integrity of the bankruptcy system depends on full and honest disclosure by debtors of all of their assets. By failing to list causes of action on bankruptcy schedules of assets, the debtor represents that it has no such claims. Thus, the doctrine of judicial estoppel may bar a party from pursuing claims which were not listed in a previous bankruptcy proceeding” … . “Because the doctrine is primarily concerned with protecting the judicial process, relief is granted only when the risk of inconsistent results with its impact on judicial integrity is certain” … . …

Here, the 2008 bankruptcy proceeding was reopened by the Bankruptcy Court so that the 2006 medical malpractice action could be identified as an asset of the bankruptcy estate. Therefore, judicial estoppel cannot be predicated on Vormnadiryan’s failure to list the action as an asset when she originally filed the 2008 bankruptcy petition … . Further, once a bankruptcy proceeding is commenced, all legal or equitable interests of the debtor become part of the bankruptcy estate, including any causes of action (see 11 USC § 541[a][1] … ). The trustee in bankruptcy, as representative of the estate, “has capacity to sue and be sued” … . Pereira v Meisenberg, 2020 NY Slip Op 02815, Second Dept 5-13-20

 

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FEDERAL BANKRUPTCY STAY TOLLED THE STATUTE OF LIMITATIONS IN A FORECLOSURE ACTION COMMENCED BEFORE THE STAY WENT INTO EFFECT (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Garcia, over a three-judge dissent, determined an automatic bankruptcy stay tolls the statute of limitations where a party has a pending action at the time the stay was imposed:

New York law tolls the statute of limitations where “the commencement of an action has been stayed by a court or by statutory prohibition” (CPLR 204 [a]). Federal bankruptcy law automatically stays the commencement or continuation of any judicial proceedings against a debtor upon the filing of a bankruptcy petition (see 11 USC § 362 [a]). We must determine whether the bankruptcy stay qualifies as a “statutory prohibition” under CPLR 204 (a), and, if so, whether a party may later avail itself of the toll where, at the time the stay was imposed, that party had a pending action asserting the same claim. … [W]e answer yes to both questions … . * * *

CPLR 204 (a) provides, “[w]here the commencement of an action has been stayed by a court or by statutory prohibition, the duration of the stay is not a part of the time within which the action must be commenced.” The result here depends on our reading of the term “commencement.”

Plaintiff argues that it is impossible for defendant to have been prohibited from “commencing” an action because a foreclosure action had been commenced prior to plaintiff’s bankruptcy filing. Application of plaintiff’s rule would be as follows: Because defendant filed the first foreclosure claim and defendant responded by filing a bankruptcy petition, invoking the automatic stay, commencement of that first action was not “stayed” under the statute and the toll is inapplicable. And when defendant filed a second foreclosure action, and plaintiff again responded by again filing a bankruptcy petition that invoked the automatic stay, “commencement” of that second action was not stayed, once again making the toll inapplicable … . * * *

Neither this Court nor the Legislature has restricted the term “commencement” to the first time a party files a complaint asserting a cause of action; instead the term may also include the commencement of subsequent actions asserting the same claim … . Lubonty v U.S. Bank Natl. Assn.., 2019 NY Slip Op 08520, CtApp 11-25-19

 

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BANKRUPTCY TRUSTEE PROPERLY SUBSTITUTED FOR PLAINTIFF IN A PERSONAL INJURY ACTION, DESPITE PLAINTIFF’S FAILURE TO LIST THE ACTION AS AN ASSET IN HIS VOLUNTARY PETITION FOR CHAPTER 7 BANKRUPTCY (SECOND DEPT).

The Second Department determined the bankruptcy trustee was properly substituted, by the Bankruptcy Court, for plaintiff in a personal injury action, despite the fact that the action had not been listed as an asset when plaintiff filed a voluntary petition for chapter 7 bankruptcy:

The rule that a substitution cannot be made is grounded in Reynolds v Blue Cross of Northeastern N.Y., Inc. (210 AD2d 619). In that case, the plaintiffs commenced an action against the defendants to recover damages for personal injuries. Thereafter, the plaintiffs filed a voluntary petition for chapter 7 bankruptcy, and failed to list the action on the schedule of assets. After the plaintiffs were discharged from bankruptcy, the defendants moved to dismiss the complaint, alleging that the plaintiff lacked the capacity to sue. During the pendency of the motion, the plaintiffs moved in the Bankruptcy Court to reopen the bankruptcy proceeding and to have a successor trustee appointed. A successor trustee was appointed, and both the plaintiffs and the interim trustee opposed the defendants’ motion to dismiss. The Appellate Division, 3rd Department, determined that substitution was not available to cure the deficiency, on the ground that a party with no capacity to sue could not be replaced with one who had the capacity to sue, citing Matter of C & M Plastics (Collins) (168 AD2d 160, 161-162). However, in Matter of C & M Plastics (Collins), the proceeding in the Supreme Court was commenced after a bankruptcy petition was filed; therefore, in that case, the plaintiff did not have capacity to sue at the time of the commencement of the action.

Although subsequent cases have held that a substitution of the bankruptcy trustee for the plaintiff cannot be made, even if the plaintiff had the capacity to sue at the time the action or proceedings was commenced (see Rivera v Markowitz, 71 AD3d 449, 450; Pinto v Ancona, 262 AD2d 472), other cases have held that where a motion for substitution was made at the direction of a bankruptcy court, the motion should be granted, as a matter of comity (see Berry v Rampersad, 21 Misc 3d 851 [Sup Ct, Kings County]). … As a matter of comity, and in deference to the determination of the Bankruptcy Court, we agree with the Supreme Court’s determination to grant the plaintiff’s cross motion, inter alia, to substitute the bankruptcy trustee as the plaintiff, and to deny the defendants’ motion for leave to amend their answer to assert the affirmative defense of lack of capacity to sue, and thereupon, to dismiss the complaint. Fausset v Turner Constr. Co., 2019 NY Slip Op 08173, Second Dept 11-13-19

 

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