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In re Hirsch

March 10, 2006


The opinion of the court was delivered by: Amon, United States District Judge.


I. Introduction

Before the Court are two appeals of orders of the United States Bankruptcy Court for the Eastern District of New York ("the bankruptcy court"). The first, filed under docket number 05-CV-1454, challenges an order on the record reducing the proof of claim filed by appellant Nachama Hirsch ("Nachama") against the bankruptcy estate of her former husband, Benjamin Hirsch (the "Debtor," or "Benjamin"). Nachama first contends that the bankruptcy court should have increased her claim to compensate her for the value of certain marital property which had been fraudulently transferred away from Benjamin's estate. Nachama alternatively contends that the bankruptcy court lacked jurisdiction to determine the size of her equitable distribution claim, since that claim arose from a decision of the state court hearing the parties' action for divorce which had not yet been reduced to a judgment.

In the second case, filed under docket number 05-CV-2266, Nachama appeals an order of the bankruptcy court finding that she violated the automatic stay provisions of the Bankruptcy Code, and exceeded the scope of relief which the court had granted from that stay, by moving for entry of a judgment (the "Third Amended Judgment") in the state court matrimonial action.

II. Background

The issues presented in these cases arise from the relationship between the bankruptcy of appellee Benjamin Hirsch and the divorce proceedings between him and his former wife, appellant Nachama Hirsch.

A. The State Court Proceedings

On October 30, 2000, the Supreme Court of the State of New York ("the state court") granted a judgment of divorce in favor of Nachama on the grounds of constructive abandonment, but stayed entry of judgment to allow the parties to resolve ancillary matters including the equitable distribution of marital property. Nachama subsequently amended her complaint to include additional defendants, including Coney Island Land Co., LLC, Digby Apartments, Inc., Fiduciary Holding, LLC., Sheldrake Holding Co., LP, (collectively, "the Entity Debtors"), and the Hirsch Family Trust ("the Trust"), an irrevocable family trust which owns the shares (or partnership or membership interests, as appropriate, but referred to herein as "shares") of the Entity Debtors. In the amended complaint, Nachama sought the imposition of a constructive trust, alleging that Benjamin had wrongfully transferred certain properties (the "Trust Properties") from the marital estate to the Trust and to the Entity Debtors after the commencement of the divorce action.*fn1

On May 10, 2002, the state court issued a Decision After Trial in which it declined to impose a constructive trust but found, inter alia, that Benjamin had fraudulently conveyed the Trust Properties to the Entity Debtors and the Trust, in violation of Sections 275 and 276 of New York's Debtor and Creditor Law ("DCL"). See Decision After Trial, Hirsch v. Hirsch, Index No. 20231/97 (N.Y. Sup. Ct. May 10, 2002). The court held that the transactions should be set aside under Section 278 of the DCL, and that title to the Trust Properties and ownership of the shares of the Entity Debtors should revert to Benjamin's estate. Id. at 22--23. The decision also held that Nachama would receive 50% of the marital property, or $2,444,111.80, consisting of title to the Trust Properties and three other real properties (collectively, the "Marital Properties"),*fn2 valued at $333,063.62, and fifteen annual payments of $140,736.54. The property at 2513 Ave. I in Brooklyn, NY would be sold to reduce the parties' debt to the IRS. The court ordered the parties to settle judgment within 60 days.

B. The Bankruptcy Proceedings

1. History

On June 21, 2002 ("the Filing Date"), before judgment was entered in the state court, Benjamin and the Entity Debtors filed separate Chapter 11 bankruptcy petitions, thus triggering the automatic stay provisions of 11 U.S.C. § 362. Nachama nevertheless settled a judgment for presentment in the state court and a judgment of divorce was entered on July 1, 2002, despite Benjamin's objection that the matrimonial proceedings had been stayed. The bankruptcy court agreed with Benjamin, and on February 18, 2004 held that this judgment was void because it violated the automatic stay.

On November 18, 2002, Nachama filed complaints against Benjamin and the Entity Debtors in bankruptcy court, seeking a declaratory judgment that the Marital Properties were not part of the debtors' respective bankruptcy estates, and an order that the properties be transferred to Nachama. Granting summary judgment motions by Benjamin and the Entity Debtors, the bankruptcy court held that the Marital Properties belonged to the debtors' bankruptcy estates, except for the two properties to which Nachama held title. This Court affirmed that decision in an Order issued on December 13, 2004. See Memorandum & Order, Hirsch v. Coney Island Land Co., No. 03-CV-3128 (December 13, 2004). This Court's decision was not appealed.

2. Relief from the Automatic Stay (05-CV-1454)

In August of 2003, Nachama again sought to enter a judgment in the state court matrimonial proceedings, and moved the bankruptcy court for relief from the automatic stay for that purpose. On February 18, 2004, the bankruptcy court granted Nachama limited relief from the stay, but noted that any judgment entered in the state court would not transfer title to the real properties "because of the bankruptcy." Decision and Order 8, In re. Benjamin Hirsch, No. 02-17966-633 (Bankr. E.D.N.Y. February 18, 2004) [hereinafter, "Lift Stay Order"]. Nachama has since proposed three separate judgments to be entered in the state court matrimonial proceeding. The bankruptcy court has found each to violate the provisions of the automatic stay.

Nachama moved to enter the First Amended Judgment in state court on August 6, 2004. At a conference before the bankruptcy court on August 26, 2004, Nachama's counsel agreed to redraft two paragraphs in the First Amended Judgment to reflect that any statements in the judgment directing Benjamin to make payments to Nachama would be subject to further order of the bankruptcy court. The Second Amended Judgment, inter alia, directed the Trust to convey the shares of the Entity Debtors directly to Nachama. The bankruptcy court found that this constituted an attempt to recover on a fraudulent conveyance claim, and that such actions were prohibited by the automatic stay imposed by 11 U.S.C. § 362(a), as construed by the Second Circuit in In re Colonial Realty, 980 F.2d 125 (2d Cir. 1992). Finally, on December 6, 2004, Nachama proposed a Third Amended Judgment to the state court, seeking to have the shares in the Entity Debtors conveyed from the Trust to Benjamin's bankruptcy estate. See Proposed Resettled/Amended Judgment of Divorce, Hirsch v. Hirsch, Index No. 20231/97, at 7 (N.Y. Sup. Ct.) [hereinafter, "Third Amended Judgment"]. On December 23, 2004, the bankruptcy court issued a Decision and Order stating that the court "had difficulty" with two decretal paragraphs in this proposed judgment, but allowing Nachama to settle a proposed judgment without those paragraphs pending the court's ultimate decision on the Third Amended Judgment. The court clarified its objections to the proposed judgment in a Decision and Order dated March 31, 2005, which Nachama presently appeals to this Court under docket number 05-CV-2266. See Decision and Order on Application for Sanctions with Regard to Settling Judgment on State Court Decision, In re. Hirsch, No. 1-02-17966 (Bankr. E.D.N.Y. March 31, 2005) [hereinafter "Decision on Third Amended Judgment"].

The first paragraph (the "First Decretal Paragraph") that the bankruptcy court had difficulty with stated:

ORDERED AND ADJUDGED, that the defendant, HIRSCH FAMILY TRUST, assigns its entire interest representing 100% ownership of the membership interests, stock interests, or other interests in the following entities: FIDUCIARY HOLDINGS, LLC, CONEY ISLAND LAND COMPANY, LLC, DIGBY APARTMENTS, INC., SULLIVAN LAND COMPANY, INC., and SHELDRAKE HOLDING COMPANY, L.P., to the defendant, BENJAMIN HIRSCH, which shall subject such membership interest to the jurisdiction of the bankruptcy court having jurisdiction over the Chapter 11 proceeding involving BENJAMIN HIRSCH....

Third Amended Judgment, at 7. The second problematic paragraph (the "Second Decretal Paragraph") stated:

ORDERED AND ADJUDGED, that as a result of the impact of the bankruptcy court's Decision and Order dated March 31, 2003 (the "Adversary Order") which, inter alia, held that title to the Properties would not be transferred to NACHAMA in accordance with the Decision, a hearing will be held before this court on __________ 2005 at 9:30 to determine the amount of a supplemental distributive award if any (the "Supplemental Distributive Award") to which ...

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