The opinion of the court was delivered by: Seybert, District Judge
Bankr. Case No. 896-80189-478
Pending before this Court is an appeal by Mr. Richard Smith (the "Debtor"), his wife, Mrs. Nelsi Smith and, his sister, Ms. Carole Ann Caruso (collectively referred to as the "Smiths" or "Appellants") from the January 26, 2009 Memorandum and Order by United States Bankruptcy Judge Dorothy Eisenberg denying a motion to reopen Mr. Smith's Chapter 7 bankruptcy case. For the reasons set forth below, the Bankruptcy Court's decision is AFFIRMED.
On January 12, 1996, Mr. Smith filed a petition seeking relief under Chapter 13 of the Bankruptcy Code. On July 11, 1996, the petition was converted to a Chapter 11 reorganization. On April 24, 1997, it was converted to a Chapter 7 liquidation. Kenneth Silverman, Esq. was appointed the estate's Trustee on April 29, 1997. Mr. Silverman acted as the Chapter 7 Trustee until the final decree was issued on February 13, 2007.
On or about July 11, 1990, approximately six years prior to filing the initial bankruptcy petition, Mr. and Mrs. Smith, as shareholders, sought dissolution of Meadow Mechanical Corporation ("Meadow") in the Supreme Court of the State of New York, County of Queens ("Dissolution Action"). Mr. and Mrs. Smith commenced the Dissolution Action because the Meadow shareholders removed Mr. Smith as Meadow's President and, after his removal, allegedly conveyed assets, business, and business opportunities to a new business incorporated as Fresh Meadow Corporation ("Fresh Meadow"). According to Mr. and Mrs. Smith, these actions purportedly gave rise to a variety of claims against the Meadow shareholders.*fn2
Contemporaneous with the Dissolution Action, Mr. and Mrs. Smith commenced a separate action against Meadow to collect upon a promissory note worth $275,000 ("Note Action"). In 1992, Mr. and Mrs. Smith moved for summary judgment on the Note Action in the New York Supreme Court, Queens County. On June 18, 1992, the Supreme Court denied the motion. On appeal the Appellate Division, Second Department affirmed the decision. Smith v. Meadow Mech. Corp., 203 A.D.2d 356 at *356-357 (1994).
On June 5, 2002, the Trustee filed a motion with the Bankruptcy Court seeking approval to settle the Dissolution Action and the Note Action for $350,000. Citibank, which held a lien on any proceeds the Debtor might recover,*fn3 supported the Trustee's settlement. But Mr. Smith objected to it and filed a cross-motion seeking permission to prosecute these claims on his own behalf.*fn4
On March 8, 2004 the Bankruptcy Court denied the proposed settlement, reasoning that even though the Trustee "is experienced and competent," his analysis of the value of the claims was "deficient and incomplete." Therefore, the Bankruptcy Court held that the Trustee could either propose another settlement or continue the Dissolution Action, Note Action, and any other causes of action against Meadow in state court. The Bankruptcy Court also denied Debtor's cross-motion without prejudice. The Trustee appealed, but this Court affirmed the Bankruptcy Court order.
On April 20, 2005, the Debtor moved to compel the Trustee to prosecute the Dissolution Action, Note Action, and the other claims the Debtor purportedly had. Specifically, the Debtor moved to have the Trustee amend the Dissolution Action to include additional defendants, and to add two claims against the Meadow shareholders for breach of fiduciary duty and fraudulent conveyance. The Trustee opposed the motion, but offered to permit the Debtor or Citibank to prosecute the alleged claims. On May 10, 2005, the Bankruptcy Court denied the motion to compel. The Bankruptcy Court stated that it would not force the Trustee to prosecute claims that the Trustee believed would not benefit the estate, and thus, compromise the Trustee's business judgment.*fn5
This decision was not appealed, and thus became a final order.
On July 14, 2005, the Bankruptcy Court authorized the Trustee to abandon to the Debtor the Dissolution Action, Note Action, and any other claims the Debtor purportedly had. The Bankruptcy Court further directed the Trustee to hold the escrow for the Dissolution Action, pending a disposition between the Debtor and the Meadow defendants.*fn6 The Debtor then moved in State Court to amend the Dissolution Action to include the additional claims and parties. The State Court denied the motion, finding that the statute of limitations had expired many years before. (J. Kelly, October 16, 2006 Order) (citing N.Y. C.P.L.R. §§ 213, 214).
On or about July 2, 2008, the Smiths moved to reopen Mr. Smith's Chapter 7 case to sue the Trustee's counsel for malpractice. Specifically, they alleged that the Trustee's counsel failed to prosecute and investigate the purported breach of fiduciary duty and fraudulent conveyance claims. On July 10, 2008 the Bankruptcy Court denied the motion holding that no privity existed between the Debtor and the Trustee's counsel. No appeal of that decision was made, and thus, the order became final.
On or about October 24, 2008, the Smiths filed another motion to reopen, this time to commence adversary proceedings against the Trustee and his bond. The Smiths alleged that the Trustee was negligent and breached his fiduciary duty by failing to pursue and investigate certain claims, and that the insurance companies, Liberty Mutual Insurance Company, National Union Fire Insurance Company, and the Fireman's Fund Insurance Company ("Bondholders") who issued the blanket bonds, failed to ensure the Trustee's faithful performance of his duties. Specifically, the Smiths argue that the Trustee failed to bring: (i) a malpractice claim against the Trustee's former counsel; (ii) a fraudulent conveyance claim against the Meadow shareholders; (iii) a breach of fiduciary duty claim against the Meadow shareholders; and (iv) a failure to collect on a promissory note claim. The Bankruptcy Court denied the Smiths' motion on January 26, 2009, concluding that the estate would not benefit from allowing the Smiths to reopen the bankruptcy case, since the proposed complaint "could not withstand a motion to dismiss." In re Smith, 400 B.R. 370, 381 (E.D.N.Y. ...