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Although the Mortgage Note Was Discharged In Bankruptcy, the Bank Holding the Mortgage Note Had Standing to Bring a Foreclosure Action (In Rem) Seeking the Proceeds of the Foreclosure Sale—The Bank Could Not, However, Seek a Deficiency Judgment (In Personam) Against the Borrower

The Second Department, in a full-fledged opinion by Justice Cohen, determined that the assignee of a mortgage note discharged in bankruptcy (Deutsche Bank) has standing to bring a foreclosure action for the sale of the mortgaged property. The borrower, Stephanos, because of the discharge in bankruptcy, could not be held liable on the note in personam (no deficiency judgment was possible).  But the bank could proceed against the property in rem seeking the proceeds of a foreclosure sale:

Under New York law, in order to have standing to commence a foreclosure action, a plaintiff generally must be the holder or assignee of the note which the mortgage secures. On this appeal, we are asked to consider whether a note discharged in bankruptcy can be subsequently assigned, with the mortgage passing incident thereto, so as to convey standing to the assignee. … [W]e answer the question in the affirmative. Although a bankruptcy discharge extinguishes a debtor’s personal liability on a mortgage note, it does not impair a creditor’s right to assign that note, and an assignee who holds the discharged note and mortgage has standing to bring a foreclosure action and seek payment through the sale of the mortgaged property. Accordingly, even if the note at issue in this case was assigned or delivered to the plaintiff after it was discharged in bankruptcy, a fact which is not clear from this record, the defendant homeowners failed to establish their entitlement to dismissal of the complaint on the ground that the plaintiff lacked standing. * * *

A mortgage secures an obligation … . However, it is not necessary that an obligation involve personal liability in order for a mortgage to remain valid after a bankruptcy discharge. Here, Stefanos obtained a personal discharge in bankruptcy; thus, his personal liability for the obligation was released … . This did not affect the mortgage securing the note. Post-bankruptcy, the mortgage still secures an obligation; it is simply no longer personal, but in rem … . A discharge in bankruptcy is a discharge from personal liability only and, without more, does not affect a lien … . Although a bankruptcy discharge extinguishes one mode of enforcing a note—namely, an action against the debtor in personam, it leaves intact another—namely, an action against the debtor in rem … . * * *

… “[A]n assignee of a mortgage takes it subject to the equities attending the original transaction” … . After assignment, a note remains subject to any defense, legal and equitable, that existed between the original parties … . Thus, although Stefanos’s personal bankruptcy did not “extinguish” the note for every purpose, he maintains the right to assert, as a defense, his personal discharge in bankruptcy to the extent the note was to be enforced against him in personam. By amending the complaint to limit the relief sought against Stefanos, Deutsche Bank essentially recognized the defendants’ affirmative defense, such that, upon proof of a valid discharge in bankruptcy, Deutsche Bank would not seek a deficiency judgment against Stefanos. Deutsche Bank Trust Co. Ams. v Vitellas, 2015 NY Slip Op 05634, 2nd Dept 7-1-15

 

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“Bankruptcy” Exclusion in a Political Risk Insurance Policy Applied—Insurer Not Obligated to Cover Loss Occasioned by Bankruptcy Proceedings in Mexico

The First Department, in a full-fledged opinion by Justice Gonzalez, determined that the “bankruptcy” exclusion in a Political Risk Insurance Policy applied to court proceedings in Mexico and the insurer was therefore entitled to disclaim coverage for the related loss to plaintiff.  The core issue was the meaning of “bankruptcy.”  The plaintiff argued the term referred to a final adjudication of bankruptcy. But the court held the definition was much broader, and included the ongoing court proceedings in Mexico.  The fact that the plaintiff and defendant disagreed about the definition of “bankruptcy” did not render the policy-contract ambiguous.  Applying the plaintiff’s narrow definition would have rendered other provisions of the policy-contract superfluous:

We agree with defendant that plaintiff’s definition of bankruptcy (a final judgment of reorganization or liquidation) is overly narrow. Bankruptcy is generally understood to include being under the judicial protection of a bankruptcy court – or, according to dictionary definition – “a statutory procedure by which a (usu[ally] insolvent) debtor obtains financial relief and undergoes a judicially supervised reorganization or liquidation. . . for the benefit of creditors” (Black’s Law Dictionary 175 [10th ed 2014]; see Compact Oxford English Dictionary 934-935 [2d ed 1999][same]).

Plaintiff contends that since the parties have conflicting interpretations of the term “bankruptcy,” the policy must be ambiguous on this point, and points out that settled principles of interpretation of insurance contracts require resolution of any ambiguity in favor of the insured … . However, “provisions in a contract are not ambiguous merely because the parties interpret them differently” … . Here, common understanding supports interpreting the term bankruptcy as the court proceeding in which the debtor is afforded judicial protection while it reorganizes or liquidates.

Further, settled law requires that the terms of a contract be read in context … . Plaintiff’s definition of bankruptcy, i.e. the state of having been declared bankrupt, would render the accompanying alternatives in Section 4.12 of the policy (insolvency and financial default) superfluous. The redundancy can be eliminated only by accepting defendant’s definition, an interpretation that gives meaning to every “sentence, clause, and word of [the] contract of insurance” … . CT Inv. Mgt. Co., LLC v Chartis Specialty Ins. Co., 2015 NY Slip Op 04051, 1st Dept 5-12-15

 

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Tenant’s Filing for Bankruptcy Precluded County from Proceeding with Efforts to Collect on a Property Tax Lien

The Fourth Department determined the county properly concluded it could not proceed to collect on a tax lien after the tenant in the relevant property filed for bankruptcy:

The Village contends that the County used an improper basis for its determination to withdraw the properties from the in rem foreclosure proceeding and to cancel the tax liens, i.e., the bankruptcy proceeding filed by plaintiff’s tenant. Although the County does not explicitly respond to the Village’s contention that the bankruptcy petition of plaintiff’s tenant did not operate to stay the in rem proceeding because plaintiff is the property owner, we nevertheless reject that contention. “[A] leasehold, like all other interests of the debtor, immediately becomes property of the [debtor’s] estate whenever bankruptcy relief is sought” … . Thus, the tenant’s petition operated as a stay to “enforce any lien against property of the estate” (11 USC § 362 [a] [4]). We therefore conclude that the County properly determined that the in rem foreclosure proceeding with respect to the subject parcels was stayed pursuant to RPTL 1140 (1), and properly withdrew those parcels from the proceeding. Herkimer County Indus Dev Agency v Village of Herkimer, 2015 NY Slip Op 00053, 4th Dept 1-2-15

 

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Rent-Stabilized Apartment Lease Is Exempt from the Bankruptcy Estate

The Court of Appeals, in a full-fledged opinion by Judge Abdus-Salaam, over a dissent, determined that a rent-stabilized apartment lease is exempt from the bankruptcy estate because it qualifies as a “local public assistance benefit” under Debtor and Creditor Law (DCL) 282 (2):

Section 522 (b) of the Bankruptcy Code permits the debtor to exempt certain property from the bankruptcy estate, and section 522 (d) provides a list of property that may be exempt. However, the Code also permits states to create their own list of exemptions, and New York has done so. DCL § 282 sets forth the permissible exemptions in personal bankruptcy. Debtors domiciled in New York have the option of choosing either the federal exemptions or New York exemptions (11 USC § 522 (b); DCL § 285). DCL § 282 (2), entitled “Bankruptcy exemption for right to receive benefits” lists the following as exemptions:

“The debtor’s right to receive or the debtor’s interest in: (a) a social security benefit, unemployment compensation or a local public assistance benefit; (b) a veterans’ benefit; (c) a disability, illness, or unemployment benefit; (d) alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor; and (e) all payments under a stock bonus, pension, profit sharing, or similar plan or contract on account of illness, disability, death, age, or length of service . . . “

When the rent-stabilization regulatory scheme is considered against the backdrop of the crucial role that it plays in the lives of New York residents, and the purpose and effect of the program, it is evident that a tenant’s rights under a rent-stabilized lease are a local public assistance benefit.   Matter of Santiago-Monteverdi, 2014 NY Slip Op 08051, CtApp 11-20-14

 

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Severance of Action Against Defendant Which Filed for Bankruptcy Proper

In a medical malpractice case, the Second Department determined Supreme Court properly severed the action against a defendant which had filed for bankruptcy from the actions against the other defendants.  Plaintiff was 86 years old and delaying the proceedings would therefore have prejudiced him:

“In furtherance of convenience or to avoid prejudice the court may order a severance of claims, or may order a separate trial of any claim, or of any separate issue. The court may order the trial of any claim or issue prior to the trial of the others” (CPLR 603).

Where a defendant in an action files for chapter 11 bankruptcy relief, the automatic stay provisions of 11 USC § 362(a) do not extend to the nonbankrupt defendants … . Therefore, in such circumstances, it is within the discretion of the trial court to direct a severance of the action as against the bankrupt defendant … . Generally, the balance of the equities lies with plaintiffs when severance is sought because the case against one defendant is stayed pursuant to 11 USC § 362(a), and that is particularly so in this personal injury action where a delay would be prejudicial to the plaintiffs … .

Here, as the prejudice to the 86-year-old injured plaintiff in being required to await the conclusion of the bankruptcy proceeding before obtaining any remedy outweighs any potential inconvenience to the defendants, the Supreme Court providently exercised its discretion in granting the plaintiffs’ motion pursuant to CPLR 603 to sever the action … and directing the action to proceed against the remaining defendants … . Katz v Mount Vernon Dialysis LLC, 2014 NY Slip Op 06947, 2nd Dept 10-15-14

 

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Case Against Non-Debtor Not Entitled to Automatic Stay

The Second Department, in reversing Supreme Court’s granting of a stay, explained the circumstances when cases by and against non-debtors can be stayed under the bankruptcy law (11 USC 362(a)):

“[T]he bankruptcy court can stay actions against any party, even a non-debtor, whenever the objective of the action is to obtain possession or exercise control over the debtor’s property. Unless a case involves unusual circumstances, however, the bankruptcy court cannot halt litigation by non-debtors, even if they are in a similar legal or factual nexus with the debtor.

“The unusual circumstances in which the bankruptcy court can stay cases against non-debtors are rare. They typically arise where there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor. In other words, the automatic stay will apply to non-debtors only when a claim against the non-debtor will have an immediate adverse economic consequence for the debtor’s estate” … . Bankdirect Captial Fin v Insurance Co of State of PA, 2014 NY Slip Op 05824, 2nd Dept 8-20-14

 

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Plaintiff’s Chapter 13 Bankruptcy Did Not Preclude Lawsuit—Question of Fact Re: Applicability of Emergency Doctrine

In affirming the denial of summary judgment to the defendant driver who struck plaintiff when the defendant turned toward the shoulder to avoid an on-coming car, the Third Department noted that plaintiff’s Chapter 13 bankruptcy did not preclude the suit and there were questions of fact about the applicability of the emergency doctrine:

Initially, we reject defendants’ assertion that plaintiff lacks the capacity to sue by virtue of his failure to disclose his personal injury claim in his chapter 13 bankruptcy schedule of assets.  “While [c]hapter 7 and [c]hapter 11 debtors lose standing to maintain civil suits – which must be brought and/or maintained by their bankruptcy trustees – it is clear that [c]hapter 13 debtors like plaintiff are not subject to this restriction” … .   Accordingly, Supreme Court properly concluded that plaintiff’s omission in this regard was not fatal. …

“Under the emergency doctrine, a driver who confronts a sudden and unexpected circumstance which leaves little or no time for thought, deliberation or consideration may be relieved of liability if the actions taken in response are reasonable and prudent in the emergency context” … .  The reasonableness of the driver’s conduct, as well as whether he or she could have done something to avoid the accident, typically present questions of fact for a jury to resolve … .  Thus, in order to be granted summary judgment in this regard, “a driver must establish as a matter of law that he or she did not contribute to the creation of the emergency situation, and that his or her reaction was reasonable under the circumstances such that he or she could not have done anything to avoid the collision” …Defendants failed to meet that burden here.  Collins v Suraci, 516138, 3rd Dept 10-17-13

 

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Affirmative Defense of Recoupment Not Extinguished by Bankruptcy Sale

In affirming Supreme Court’s denial of a motion to dismiss a recoupment affirmative defense, the First Department noted the defense is not extinguished by a bankruptcy sale:

The affirmative defense of recoupment is not an “interest” that is extinguishable by a “free and clear” sale under the Bankruptcy Code … . Further * * * [d]efendant’s recoupment defense arises out of the same transaction (i.e., the same contract) that forms the basis for plaintiff’s action against defendant… . Hispanic Ind Tel Sales LLC v Unaa Vez Mas LP, 2013 NY Slip Op 06518, 1st Dept 10-8-13

 

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Acknowledgment of Debt in Bankruptcy Proceeding Restarted Statute of Limitations 

The First Department, in a full-fledged opinion by Justice Roman, determined the defendant’s acknowledgment of a debt in his bankruptcy petition restarted the 20 statute of limitations for the enforcement of a judgment:

Contrary to defendant’s contention, enforcement of the judgment issued against him is not barred by CPLR 211(b). While [plaintiff] first sought to enforce the judgment in 2011, more than 20 years after the judgment could have first been enforced, defendant acknowledged the judgment in 2005 within his bankruptcy petition, thereby recommencing the statute of limitations from that date. Based on the 2005 acknowledgment, the statute of limitations to enforce the judgment ran anew in 2005 and [plaintiff] has until 2025 to enforce the judgment … . Since a debtor sufficiently acknowledges a debt pursuant to a judgment simply by admitting to the creditor in writing that a debt is owed, here, defendant’s listing of the judgment within his bankruptcy petition constitutes such an admission and is thus, an acknowledgment under the statute. Moreover, insofar as an acknowledgment need not specify the amount nor the character of the debt owed …, defendant’s failure to list the correct amount of the judgment or the court in which it was obtained does not constitute a shortcoming which avails defendant. First NY Bank for Bus. v Alexander, 2013 NY Slip Op 01796, 4800/90, 9377, 1st Dept. 3-19-13

 

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Doctrine of Equitable Mootness for Bankruptcy Ruling ​

In this contract action, the issue at the heart of the case before the Second Department was the preclusive effect of a bankruptcy court ruling and the doctrine of “equitable mootness” which prohibits disturbing a bankruptcy plan already implemented.  The easiest way to convey the nature of the legal issues in the case is to quote the relevant discussions in the Second Department’s decision:

In light of authority holding that a court should apply the rules of res judicata followed in the jurisdiction that rendered the earlier decision …, we apply federal res judicata law in determining whether the doctrine of res judicata bars this action … .

Under federal res judicata law, subsequent litigation is prohibited if a prior court ruling ” was (1) a final judgment on the merits, (2) by a court of competent jurisdiction, (3) in a case involving the same parties or their privies, and (4) involving the same cause of action” … . This rule applies with full force to matters decided by the bankruptcy courts, including those concerning Chapter 11 reorganization … . Moreover, in the bankruptcy context, the court must also consider whether an independent judgment in a separate proceeding would ” impair, destroy, challenge, or invalidate the enforceability or effectiveness'” of the reorganization plan … .

The plaintiffs contend that there was no final judgment on the merits because the appeal from the 2009 New York bankruptcy court order was dismissed on the ground of equitable mootness. Equitable mootness is invoked to avoid disturbing a reorganization plan once implemented …. When a plan has been substantially consummated, an appeal should be dismissed unless several requirements, the most important of which is that the appellant sought a stay of confirmation, are satisfied … .

Here, the District Court dismissed the appeal from the 2009 New York bankruptcy court order because the Kmart reorganization plan had been implemented and RM 18 had failed to seek a stay of the confirmation. Once the appeal was dismissed as moot, the 2009 New York bankruptcy court order became final …. Since there was no vacatur of the 2009 New York bankruptcy court order, it has preclusive effect … . …[T]he plaintiffs may not maintain the present litigation, which challenges [the] final adjudication by a court of competent jurisdiction … .  RM 18 Corp. v Bank of NY Mellon Trust Co., N.A., 2013 NY Slip Op 01541, 2011-o9112, Index No 15992/10, 2nd Dept. 3-13-13

 

 

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