United States District Court, E.D. New York
For Appellant: Paul A. Levine, Lemery Greisler, Albany, NY.
For Appellee: Robert L. Pryor, Pryor & Mandelup, LLP, Westbury, NY.
MEMORANDUM AND ORDER
JOSEPH F. BIANCO, United States District Judge.
Rockstone Capital LLC (" Rockstone" ) appeals from an order entered by the United States Bankruptcy Court for the Eastern District of New York (the " Bankruptcy Court" ) in the bankruptcy proceeding of debtor Keith Bub (" Bub" or " debtor" ). By Order dated July 22, 2013, the Honorable Robert E. Grossman denied Rockstone's motion objecting to the priority of a claim filed by debtor's former spouse, Alisa Metal (" Metal" ). The Bankruptcy Court determined that Metal's claim represented a claim for a domestic support obligation (" DSO" ), a claim which has the highest priority pursuant to Section 507 of the Bankruptcy Code.
On appeal, Rockstone argues that the Bankruptcy Court's July 22, 2013 Order should be vacated and remanded on the following grounds: (1) the Bankruptcy Court reached its decision without holding an evidentiary hearing, and without allowing Rockstone to conduct discovery; and (2) the Bankruptcy Court's finding that Metal's claim was a DSO was clearly erroneous. For the reasons set forth below, this Court vacates the Bankruptcy Court's July 22, 2013 Order and remands the case to the Bankruptcy Court for the purpose of conducting further factual development before deciding whether Metal's claim is a DSO. Specifically, the Bankruptcy Court correctly recognized that an income discrepancy between husband and wife at the time of separation or divorce is an important factor to consider in deciding whether a debtor's obligation to his former spouse represents a DSO. However, the Bankruptcy Court did not make a finding related to debtor's and Metal's relative incomes at the time of their separation agreement. Because the factual record is thus incomplete (and there appears to be a factual dispute on this issue), the Court remands the case to the Bankruptcy Court for further factual development on this issue.
In 1993, Bub and Metal purchased a home in Hauppauge, New York (the " marital residence" ) for approximately $300,000.
(R-4 & R-5, Dep. of Alisa Metal, Jan. 11, 2011 (" Metal N.Y. Dep." ), at 18-20. Bub and Metal each contributed $50,000, and they financed the rest of the purchase with a $200,000 loan from Metal's father, David Metal. ( Id.) In exchange, David Metal was granted a mortgage on the marital residence. ( Id.) At the time of purchase, the deed to the marital residence was in Metal's and David Metal's names. ( Id. at 47.) Sometime in 1993 or 1994, the deed to the marital residence was transferred to Bub and Metal. ( Id.)
Bub and Metal married on October 2, 1994. (R-1, at 18, Separation Agreement (" Separation Agreement" ), at 1.) Over the course of their marriage, Bub and Metal granted three additional mortgages against the marital residence. First, they granted a mortgage to the Small Business Administration (" SBA" ) in exchange for a loan to one of Bub's businesses. (Metal N.Y. Dep. at 44-47.) Bub made all the loan payments to the SBA. ( Id. at 62; R-16, Dep. of Alisa Metal, Sept. 19, 2011 (" Metal Fla. Dep." ), at 42 (" From the time the SBA loan was acquired, it was Keith's and Keith's responsibility. He took care of it. He made his payments. He did everything that he needed to do." ). However, Metal was a co-signor on the loan. (Metal Fla. Dep. at 29; Metal N.Y. Dep. at 44-45; Settlement Agreement, at 7). The monthly payments on the SBA loan were $961 per month. (R-14, Dep. of Keith L. Bub, Jan. 14, 2010 (" Bub Dep." ), at 74 Metal Fla. Dep. at 16-17.) Second, the couple granted a mortgage to CitiMortgage in exchange for a loan to one of Bub's businesses. (Metal N.Y. Dep. at 61-62.) Third, Bub and Metal took out a Bank of America Equity Credit Line to pay off automobile loans and to assist Bub's business. ( Id. at 44, 57-58.) The monthly payments on the home equity loan were approximately $1,500 per month. ( Id. at 60.)
Bub and Metal maintained separate bank accounts and split most of their expenses evenly. ( Id. at 26-27, 50.) According to Metal, their incomes were approximately equal for most of the marriage. ( Id. at 26.) However, for a period of several months in 2004, Metal believed that she earned less than Bub because she was unemployed for a few months. ( Id. at 52). In an affidavit submitted in support of her priority claim in Bub's bankruptcy proceeding, Metal averred that she earned $52,900 in 2004. (R-6, Aff. of Alisa Metal, July 17, 2012 (" Metal Aff." ) ¶ 11.) In 2005, Metal claimed that her earnings had more than doubled to $115,000. ( Id. ¶ 12.) After taxes and mortgage payments to David Metal and Bank of America, she claimed that she had a discretionary income of $146.66 per month. ( Id.) Bub, who ran his own business, testified that he did not " even know if [he] drew a salary" between 2005 and 2006, but that he certainly
earned less than $100,000. (Bub Dep. at 85.) Moreover, Bub testified in 2010 that he had not drawn a salary from any of his businesses between 2006 and 2010. ( Id. at 89-90.)
Sometime in 2005, after discovering that Bub had been unfaithful to her, Metal filed a petition for divorce in a New York state court. (Metal N.Y. Dep. at 37-38, 42.) Bub and Metal executed a Settlement Agreement on November 13, 2007 (Settlement Agreement, at 1), and a New York court entered a judgment of divorce, which incorporated the terms of the settlement agreement, on January 24, 2008 (R-1, at 40-42, Judgment of Divorce). The Settlement Agreement provided for no maintenance payments. It stated, in relevant part:
The parties hereby waive payment of maintenance from one to the other and represent that each is capable of being self-supporting. Each releases and discharges the other, absolutely and forever, for the rest of his and her life from any and all claims and demands, past, present or future for support and maintenance. Neither party seeks maintenance from the other.
( Id. at 4-5.) According to Metal's affidavit, Bub received $610,000 in real property and cars. (Metal Aff. ¶ 4.) Metal stated that she received $491,000 in assets, to wit: the marital residence and a car. ( Id. ¶ 5.) Bub and Metal have no children together. (Settlement Agreement, at 1.)
As part of the Settlement Agreement, Metal also agreed to assume sole responsibility for the loans from David Metal and Bank of America. ( Id. at 6.) Bub agreed to assume sole responsibility for the loans from CitiMortgage and the SBA. ( Id. at 7.) With regard to the SBA loan, the Settlement Agreement states the following:
The wife, who is a co-signor to the SBA loan, shall be entitled to security for the payment by the husband of the SBA loan in a timely fashion so as not adversely effect [sic] her credit and/or put in jeopardy her free and unencumbered use of or disposal of the residence at 24 Shandon Court, Hauppauge, NY. In addition, the lien by SBA shall be removed from the marital residence and from ...