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PLANTIFF HAD NOT INFORMED THE BANKRUPTCY COURT OF THIS PERSONAL INJURY CAUSE OF ACTION; DEFENDANTS WERE ENTITLED TO SUMMARY JUDGMENT DISMISSING THE COMPLAINT PURSUANT TO THE DOCTRINE OF JUDICIAL ESTOPPEL (SECOND DEPT).

The Second Department, reversing Supreme Court, determined plaintiff’s failure to inform the Bankruptcy Court of this personal injury action triggered the doctrine of judicial estoppel entitling defendants to summary judgment dismissing the complaint:

While a chapter 13 bankruptcy debtor has standing to litigate cases that belong to the estate … , here the “[p]laintiff’s prolonged failure to disclose this lawsuit to the [b]ankruptcy [c]ourt renders him judicially estopped from pursuing it” … . The plaintiff took an inconsistent position in the bankruptcy proceeding by, in effect, representing that he did not have the instant legal claim. The characterization of his assets was accepted and endorsed by the bankruptcy court throughout the duration of the bankruptcy proceeding, which included, among other things, confirmation of the plaintiff’s plan … .

Based on the defense of judicial estoppel, [defendants] established their prima facie entitlement to judgment as a matter of law dismissing the amended complaint insofar as asserted against each of them … . Cussick v R.L. Baxter Bldg. Corp., 2024 NY Slip Op 03028, Second Dept 6-5-24

Practice Point: Failure to inform the Bankruptcy Court of a cause of action (here a personal-injury suit) triggers the doctrine of judicial estoppel, prohibiting the plaintiff from bringing the suit.

 

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EVEN THOUGH THE DEBTOR TRANSFERRED THE PROPERTY TO THE NON-DEBTOR CODEFENDANT YEARS BEFORE FILING FOR BANKRUPTCY, THE BANKRUPTCY TOLLED THE FORECLOSURE STATUTE OF LIMITATIONS FOR THE ACTION AGAINST THE DEBTOR; THE TOLL DID NOT APPLY TO THE ACTION AGAINST THE NON-DEBTOR WHICH NEVER FILED FOR BANKRUPTCY (SECOND DEPT).

The Second Department, in a full-fledged opinion by Justice Connolly, reversing (modifying) Supreme Court, determined the foreclosure statute of limitations was tolled by the bankruptcy stay for the action against the defendant who filed for bankruptcy, but not for the defendant to which the property was transferred (who did not file for bankruptcy):

This appeal requires us to examine whether the stay provided by section 362 of the 1978 Bankruptcy Code (11 USC § 362[a]) operates as a “statutory prohibition” under CPLR 204(a) to toll the statute of limitations to commence a mortgage foreclosure action against a defendant debtor who no longer owns the property that is the subject of the mortgage foreclosure action. We hold that the bankruptcy stay pursuant to subsection 362(a)(1) (see 11 USC § 362[a][1]) tolls the statute of limitations for commencing a mortgage foreclosure action against the defendant debtor, regardless of whether that defendant owns the property at the time of the bankruptcy filing.

This appeal also requires us to determine whether the bankruptcy stay pursuant to subsection 362(a) applies to a nondebtor codefendant to which the defendant debtor transferred the property years before filing for bankruptcy. On the record before this Court, the plaintiff failed to meet its burden of raising a question of fact as to whether the bankruptcy stay applied to the nondebtor codefendant. Bank of N.Y. Mellon v DeMatteis, 2023 NY Slip Op 05242, Second Dept 10-18-23

Practice Point: Filing for bankruptcy tolls the foreclosure statute of limitations, even if the property had been transferred before the filing.

 

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IN THIS FORECLOSURE ACTION, THE BANKRUPTCY STAY DID NOT TERMINATE WHEN DEFENDANT BOUGHT THE SUBJECT PROPERTY FROM THE BANKRUPTCY ESTATE; THE STAY TERMINATED LATER WHEN DEFENDANT RECEIVED A DISCHARGE FROM THE BANKRUPTCY COURT; THE FORECLOSURE ACTION WAS THEREFORE TIMELY (SECOND DEPT).

The Second Department, in a full-fledged opinion by Justice Dowling, in a matter of first impression, determined the foreclosure action, which had been stayed when defendant twice filed for bankruptcy, was timely brought. If the stay ceased when defendant bought the subject property from the bankruptcy estate, the foreclosure would have been untimely. But the Second Department held that the stay did not cease until the subsequent discharge order, rendering the action timely:

… [D]efendant’s purchase of the Middle Pond Road property from the bankruptcy estate pursuant to the November 26, 2013 order did not terminate the automatic bankruptcy stay barring commencement of the instant foreclosure action, but rather, under the circumstances of this case, the automatic bankruptcy stay terminated when the defendant received a discharge from the Bankruptcy Court on November 3, 2014.

Pursuant to the plain language of 11 USC § 362(c)(1), the discharge of the … property from the bankruptcy estate pursuant to the November 26, 2013 order terminated the stays of an act against “property of the estate,” which stays are established by 11 USC § 362(a)(3) and (4). Here, however, upon the defendant’s purchase of the … property from the bankruptcy estate pursuant to November 26, 2013 order, ownership of the … property returned to the defendant, as debtor in the bankruptcy proceeding … . Consequently, the termination of the stay of an act against “property of the estate” provided for by 11 USC § 362(c)(1) has no bearing on the stays established by 11 USC § 362(a)(1) and (5), which expressly apply to acts taken against “the debtor” or “property of the debtor,” and which continued in effect. Deutsche Bank Natl. Trust Co. v Lubonty, 2022 NY Slip Op 04288, Second Dept 7-6-22

Practice Point: Here whether the foreclosure action was timely depended on when the bankruptcy stay terminated. The defendant in the foreclosure action was the “debtor” in the bankruptcy proceeding. The defendant bought the property which was the subject of the foreclosure action from the bankruptcy estate. Based on the applicable bankruptcy statute, the bankruptcy stay did not terminate when defendant bought the property. It terminated later when defendant received a discharge from the Bankruptcy Court. Because the stay terminated on the later date, the foreclosure action was timely.

 

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A CLAIM WHICH ARISES AFTER THE FILING OF A BANKRUPTCY PETITION BELONGS TO THE DEBTOR, NOT TO THE BANKRUPCTY ESTATE (FIRST DEPT).

The First Department, noting its prior rulings to the contrary, determined a claim which arises after the filing of a bankruptcy petition belongs to the debtor, not the bankruptcy estate:

This Court has previously held that a claim which arose after the filing of a bankruptcy petition was the property of the estate (see Barranco v Cabrini Med. Ctr., 50 AD3d 281, 282 [1st Dept 2008]; Williams v Stein, 6 AD3d 197, 198 [1st Dept 2004]). When those cases were decided, there was a split among the federal courts which had addressed the issue. However, there is now uniformity among the Federal Courts of Appeals, which have held that pursuant to section 541(a) of the Bankruptcy Code, a claim which arose after the filing of a bankruptcy petition belongs to the debtor and not the estate … . As this Court is bound by federal law when making a determination on this issue … we follow the … federal holdings and find that because the claims at issue arose after the filing of the bankruptcy petition, the claims belong to Realty [plaintiff]. Thus, Realty has the capacity to sue [defendants]. Moncho v Miller, 2021 NY Slip Op 06960, First Dept 12-14-21

 

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PLAINTIFF BROUGHT A PERSONAL INJURY ACTION AFTER FILING FOR BANKRUPTCY AND BEFORE THE BANKRUPTCY ESTATE WAS FULLY ADMINISTERED BUT DID NOT DISCLOSE THE CAUSE OF ACTION IN THE BANKRUPTCY PROCEEDING; DEFENDANT WAS ENTITLED TO ASSERT THE JUDICIAL ESTOPPEL DEFENSE IN AN AMENDED ANSWER AND TO SUMMARY JUDGMENT DISMISSING THE COMPLAINT (SECOND DEPT).

The Second Department, reversing Supreme Court, determined defendant in a personal injury action should have been allowed to amend its answer to assert judicial estoppel and should have been granted summary judgment on the ground the plaintiff did not disclose the cause of action in the bankruptcy proceeding:

On July 6, 2012, the plaintiff filed a chapter 13 bankruptcy petition … in the United States Bankruptcy Court for the District of New Jersey … . … On September 3, 2014, the plaintiff allegedly was injured due to the defendant’s negligence. Thereafter, on July 2, 2015, the plaintiff commenced this action to recover damages for his injuries. … On December 4, 2017, a final decree was entered declaring the bankruptcy estate fully administered, and the bankruptcy case was closed. …

… [T]he plaintiff is judicially estopped from pursuing this action because he failed to disclose its existence to the bankruptcy court during the pendency of the chapter 13 bankruptcy proceeding … . The plaintiff had a continuing obligation to update his asset schedules throughout the pendency of the bankruptcy proceeding … . Flanders v E. W. Howell Co., LLC, 2021 NY Slip Op 02276, Second Dept 4-14-21

 

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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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