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Kinney v. Gallagher

United States District Court, W.D. New York

January 23, 2015

KENNETH C. KINNEY, Appellant,
v.
KATHLEEN M. GALLAGHER, Appellee

For Kenneth C. Kinney, Appellant: Paul M. Aloi, LEAD ATTORNEY, Rochester, NY.

Kathleen M. Gallagher, Appellee: David H. Ealy, LEAD ATTORNEY, Trevett, Cristo, Salzer & Andolina P.C., Rochester, NY.

DECISION AND ORDER

ELIZABETH A. WOLFORD, United States District Judge.

I. INTRODUCTION

This is an appeal from an order of the United States Bankruptcy Court for the Western District of New York, entered on March 21, 2014. (Dkt. 1-1). In that order, Bankruptcy Judge Paul R. Warren granted Appellee Kathleen M. Gallagher's (" Gallagher") motion for contempt to the extent that he found the state court claim of Appellant Kenneth C. Kinney (" Kinney") constituted a claim as defined in 11 U.S.C. § 101(5) that was discharged as a matter of law in Gallagher's bankruptcy case. (Dkt. 6 at 27). Judge Warren directed Kinney to execute a Stipulation of Discontinuance of his pending state court action and ordered Gallagher to turn over to Kinney the hot tub that was partly the subject of the state court action. (Dkt. 1-1 at 2).

On appeal, Kinney challenges the contempt order, arguing that the Bankruptcy Court erred in finding that Kinney's claim of an equitable interest in real estate titled to Gallagher was a claim pursuant to the Bankruptcy Code, and that the Bankruptcy Court did not have the authority to enjoin Kinney's equitable claim asserted in state court. (Dkt. 1-3). Gallagher cross-appeals from the part of the Order denying her motion for an award of actual and punitive damages for willful violation of the discharge. (Dkt. 1-2). For the reasons that follow, the March 21, 2014 order of the Bankruptcy Court is affirmed in all respects.

II. BACKGROUND

Kinney and Gallagher were at one time involved in a personal relationship and agreed to purchase a house at 654 Lake Road, Webster, New York 14580. (Dkt. 8 at 5). Kinney's name was not placed on the deed because Kinney had tax arrears owed to the Internal Revenue Service and was participating in a tax repayment agreement. (Id.). The parties lived together on the premises until an argument on or about January 11, 2005, when Kinney moved from the premises. (Id.; Dkt. 6 at 35). Gallagher has continued to reside at the Lake Road property. (Dkt. 11 at 16).

On August 24, 2005, Kinney commenced an action in New York State Supreme Court against Gallagher seeking conveyance of an interest in the Lake Road property. (Dkt. 1-6 at 8-13; Dkt. 11 at 9). Kinney alleged that he and Gallagher orally agreed that he would be put on the deed and would be entitled to receive proceeds from the sale of the property because he had allegedly contributed funds ($10, 000) for the down payment on the property and had also made improvements to the property. (Dkt. 1-6 at 8-13; Dkt. 11 at 9).

On October 29, 2007, Gallagher filed a voluntary Chapter 7 petition with the Bankruptcy Court. (Dkt. 1-5). In her schedule of debts, Gallagher listed Kinney as the holder of an unsecured claim. (Id. at 20). Gallagher also indicated that there was an action by Kinney pending against her in the New York State Supreme Court for Monroe County. (Id. at 29). On January 23, 2009, counsel for Gallagher sent a letter to counsel for Kinney advising of the Chapter 7 filing and the effect of the automatic stay. (Dkt. 1-6 at 15). Gallagher's counsel directed Kinney's counsel to terminate the prosecution of the state court action in accordance with the automatic stay. (Id.).

During the Chapter 7 proceedings, the Trustee recovered assets for distribution to creditors, but Kinney did not file a claim or receive distribution of funds from the estate. (Dkt. 6 at 29).

On January 29, 2008, Gallagher was granted a discharge of her debts under Chapter 7. (Id.). Gallagher's bankruptcy case was closed on December 13, 2011, after the Trustee completed the administration of estate assets. (Id. at 29-30).

Kinney continued to pursue his state court action by filing a Note of Issue and Statement of Readiness on August 19, 2013. (Id. at 30).

On October 3, 2013, Gallagher filed a motion for contempt against Kinney before the Bankruptcy Court, arguing that continuation of the state court action was a violation of her Chapter 7 discharge. (Dkt. 1-7 at 2). Gallagher asked the Bankruptcy Court to find Kinney in contempt for violation of the discharge, and requested that the state court action be enjoined. (Id.).

In opposition, Kinney argued that he was not a creditor, and that his state court action was one of constructive trust for the return of personal property and for a determination of interest in property. (Dkt. 1-8 at 1-2). Kinney argued that he was not requesting a money judgment, and that therefore his continuation of the state court claim was not a violation of the discharge and stay in bankruptcy. (Id. at 2).

On October 17, 2013, the Bankruptcy Court heard arguments on Gallagher's contempt motion and adjourned the hearing to permit the parties to further brief the legal issues. (Dkt. 4). The parties returned to Bankruptcy Court on November 21, 2013, and the hearing was further adjourned so the parties could file response and reply briefs. (Dkt. 5). On January 23, 2014, the Bankruptcy Court held a final hearing on the motion, and the Bankruptcy Court's decision was read into the record. (Dkt. 6 at 26-50).

The Bankruptcy Court issued an order on March 21, 2014, granting Gallagher's motion for contempt to the extent that it found that Kinney's state court action was a claim as defined in 11 U.S.C. § 101(5), and was thus subject to the discharge injunction provided for under 11 U.S.C. § 524(a)(2). (Id. at 27). Kinney's state court claim was enjoined in accordance with the bankruptcy stay. (Dkt. 1-1). The Bankruptcy Court directed Gallagher to turn over Kinney's hot tub. (Id.).

Kinney filed a notice of appeal with the Bankruptcy Court on March 30, 2014, and on May 7, 2014, his appeal of the contempt order was filed with this Court. (Dkt. 1). Kinney seeks to be placed on the title of the Lake Road property, and argues that he can pursue his state court action seeking this relief even after Gallagher's discharge in Bankruptcy. (Dkt. 8 at 6). Gallagher cross-appeals ...


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