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In re Froman

United States District Court, S.D. New York

March 20, 2017

In re ANN FROMAN, Debtor.
JUDY FEIN, Appellee. ANN FROMAN, Appellant,

          Andrea B. Malin Genova & Malin Wappingers Falls, New York Counsel for Appellant

          Jil Mazer-Marino Meyer, Suozzi, English & Klein, P.C. Garden City, New York Counsel for Appellee


          CATHY SEIBEL, U.S.D.J.

         Before the Court are the appeals of Appellant Ann Froman (Doc. 1 (16-CV-5898); Doc. 1 (16-CV-5322); Doc. 1 (16-CV-5324)), from United States Bankruptcy Court Judge Cecelia G. Morris's July 1, 2016 and July 14, 2016 orders i) converting Ms. Froman's case under Chapter 13 of the Bankruptcy Code to one under Chapter 7 pursuant to 11 U.S.C. § 1307, (Bankr. Doc. 70), [1] ii) granting the motion of Appellee Judy Fein for relief from the automatic stay pursuant to 11 U.S.C. § 362(d), (Bankr. Doc. 56), and iii) denying Ms. Froman's motion pursuant to 11 U.S.C. § 362(a), (k) for an order finding that Ms. Fein violated the automatic stay and awarding attorneys' fees, costs, damages, and sanctions, (Bankr. Doc. 57).

         I. Background

         Only the facts relevant to this appeal will be discussed. In March 2011, Ms. Fein, individually and on behalf of the estate of Benjamin Fein, sued Ms. Froman in New York state court to recover “Survival, ” a sculpture that Ms. Froman allegedly removed without permission from Mr. Fein's premises in 2010. (Fein Mem. 5322 Part II, at ¶ 000068-75.)[2] On May 17, 2012, to resolve the state court action, the parties entered into a settlement agreement that required Ms. Froman to pay Ms. Fein $115, 000 and granted Ms. Fein a security interest in Survival. (Id. Part II, at ¶ 000084-89.) Ms. Froman did not make the agreed-upon payment and on July 7, 2014, a money judgment was entered in favor of Ms. Fein and the estate of Benjamin Fein in the amount of $137, 181.25. (Id. Part V, at ¶ 000293-94.) After a period of delay, during which Ms. Froman twice failed to appear for a deposition, (id. Part V, at ¶ 000317-22), and unsuccessfully sought a set-off of her debt to Ms. Fein, (id. Part VIII, at ¶ 000683-85), the Office of the Dutchess County Sheriff (the “Sheriff's Office”) seized Survival, and a sale of the sculpture was scheduled for December 12, 2015, (id. Part VIII, at ¶ 000721). At the sale Rodney Silvernail, to whom Ms. Froman sometimes refers as her husband, placed the winning bid of $180, 000, but he ultimately defaulted on the purchase. (Id. Part VIII, at ¶ 000690, ER000692-93, ER000723-24.)[3] On February 25, 2016, the state court issued to Ms. Froman, Mr. Silvernail, and the Sheriff's Office an order to show cause on May 6, 2016 why, among other things, an order should not issue directing the Sheriff's Office to schedule a new sale of the sculpture. (Id. Part IX, at ¶ 000804-07.)

         On April 5, 2016, Ms. Froman filed a voluntary Chapter 13 petition in the United States Bankruptcy Court for the Southern District of New York. (Bankr. Doc. 1.) Ms. Froman's bankruptcy schedules indicate that she had over $18, 000, 000 in assets and approximately $800, 000 in liabilities. (See Fein Mem. 5322 Part IX, at ¶ 000811.) Her proposed Chapter 13 plan obligated her to pay the trustee $300 per month from May 1, 2016 through April 1, 2021, and to sell Survival, in order to satisfy her creditors. (Id. Part IX, at ¶ 000859, ER000864.) On April 8, 2016, Ms. Froman demanded that the Sheriff's Office turn Survival over to her. (Id. Part XI, at ¶ 001032-34.) From approximately April 11, 2016 to May 4, 2016, as discussed in more detail below, the parties agreed that Survival would remain in the possession of the Sheriff's Office while arrangements were made to safely transport, store and ultimately sell the sculpture. (Id. Parts XI, XII, at ¶ 0001030-89.)

         On May 5, 2016, after these negotiations broke down, Ms. Fein sent a letter to the Sheriff's Office stating that she did not consent to the removal of Survival from the Sheriff's Office and that she would be filing appropriate motion papers with the Bankruptcy Court. (Id. Part XII, at ¶ 001094-95.) On May 6, 2016, Ms. Froman demanded that the Sheriff's Office release Survival to her. (Id. Part XII, at 1099-1100.) That same day, Ms. Fein filed in the Bankruptcy Court a motion for i) relief from the automatic stay, pursuant to 11 U.S.C. § 362(d), ii) adequate protection, pursuant to 11 U.S.C. § 363(e), or iii) dismissal of Ms. Froman's Chapter 13 case for cause, pursuant to 11 U.S.C. § 1307. (Bankr. Doc. 15.) Ms. Fein requested a hearing on her motion on shortened notice and a temporary restraining order prohibiting Ms. Froman from moving Survival pending the Bankruptcy Court's ruling on her motion. (Id. ¶ 5.) On May 9, 2016, the Bankruptcy Court granted Ms. Fein's request for a hearing on shortened notice and enjoined Ms. Froman and her representatives and agents from removing Survival from the Sherriff's Office pending the decision on the motion. (Bankr. Doc. 21.) That same day - presumably before the Bankruptcy Court injunction came to Ms. Froman's attention - Mr. Silvernail retrieved Survival from the Sheriff's Office. (Fein Mem. 5322 Part XII, at ¶ 001113.)

         On May 17, 2016, the Bankruptcy Court held a preliminary hearing on Ms. Fein's motion, at which time Ms. Froman agreed to retain a broker and sell Survival by September 30, 2016. (See Bankr. Doc. 81 at 33:11-17.) The Bankruptcy Court adjourned the hearing on Ms. Fein's motion to allow Ms. Froman to begin to carry out the agreed-upon sale of Survival. (Id. at 32:13-33:12.) On May 24, 2016, Ms. Froman moved for an order finding that Ms. Fein had violated the automatic stay and awarding attorneys' fees, costs, damages, and sanctions pursuant to 11 U.S.C. § 362(a), (k). (Bankr. Doc. 36.)

         On June 28, 2016, the parties reconvened before the Bankruptcy Court to continue the hearing on Ms. Fein's motion and to address Ms. Froman's motion. (Bankr. Doc. 68.) The Bankruptcy Court analyzed the factors commonly regarded as indicative of bad faith warranting conversion or dismissal under 11 U.S.C. § 1307, (see Id. at 9:17-11:10), and found that Ms. Froman had filed her case in bad faith, (see Id. at 10:6-7; 14:3-5). Judge Morris therefore announced that she would convert the case to one under Chapter 7, (see Id. at 12:10), lift the stay, (see Id. at 14:7), and deny Ms. Froman's application for sanctions for the alleged stay violation, (see Id. at 14:8, 16:11-13).

         On July 1, 2016, the Bankruptcy Court entered its order granting Ms. Fein's motion for relief from the automatic stay because Ms. Froman had filed her petition in bad faith and allowing Ms. Fein to enforce her rights and remedies in and to Survival. (Bankr. Doc. 56.) That same day, the Bankruptcy Court entered its order denying Ms. Froman's motion brought under 11 U.S.C. § 362 for an order finding that Ms. Fein had violated the automatic stay and awarding attorneys' fees, costs, damages, and sanctions. (Bankr. Doc. 57.) On July 5, 2016, Ms. Froman appealed both of these decisions. (Doc. 1 (16-CV-5322); Doc. 1 (16-CV-5324).) On July 14, 2016, the Bankruptcy Court entered its order converting Ms. Froman's case from one under Chapter 13 of the Bankruptcy Code to one under Chapter 7 pursuant to 11 U.S.C. § 1307, (Bankr. Doc. 70), an order that Ms. Froman appealed on July 22, 2016, (Doc. 1 (16-CV-5898)).

         II. Jurisdiction and Standard of Review

         This Court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1) to hear appeals from final judgments, orders, and decrees of a bankruptcy court. “On appeal, the [district] court ‘may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.'” W. Milford Shopping Plaza, LLC v. The Great Atl. & Pac. Tea Co. (In re Great Atl. & Pac. Tea Co.), No. 14-CV-4170, 2015 WL 6395967, at *2 (S.D.N.Y. Oct. 21, 2015) (quoting former Fed.R.Bankr.P. 8013).[4] A district court reviews a bankruptcy court's findings of fact for clear error and reviews its legal conclusions de novo. See Overbaugh v. Household Bank N.A. (In re Overbaugh), 559 F.3d 125, 129 (2d Cir. 2009) (per curiam). “Mixed questions of fact and law are subject to de novo review.” Babitt v. Vebeliunas (In re Vebeliunas), 332 F.3d 85, 90 (2d Cir. 2003); see Parmalat Capital Fin. Ltd. v. Bank of Am. Corp. (In re Parmalat), 639 F.3d 572, 580 (2d Cir. 2011).

         III. Discussion

         A. Conversion of the Case to Chapter 7

         1. Legal Standard

         11 U.S.C. § 1307(c) “enumerates 11 specific occurrences which constitute sufficient cause for the dismissal or conversion of a chapter 13 case to chapter 7. The grounds enumerated in subsections 1307(c)(1) through (11) are not exhaustive.” 8 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 1307.04 (16th ed. 2016). “Although bad faith is not expressly enumerated in the statute, it is well established that lack of good faith may also be cause for conversion or dismissal under § 1307(c).” In re Prisco, No. 11-CV-474, 2012 WL 4364311, at *4 (N.D.N.Y. Sept. 24, 2012) (alteration and internal quotation marks omitted), aff'd, 574 F. App'x 19 (2d Cir. 2014). Bad faith may be found where at the time of filing, there is “no reasonable probability of emerging from bankruptcy” or successfully reorganizing, In re C-TC 9th Ave. P'ship, 113 F.3d 1304, 1310 (2d Cir. 1997), or “where there is evidence of an intent to delay or frustrate the efforts of secured creditors to enforce their legitimate rights, ” In re Northtown Realty Co., L.P., 215 B.R. 906, 914 (Bankr. E.D.N.Y. 1998); see In re RCM Glob. Long Term Capital Appreciation Fund, Ltd., 200 B.R. 514, 522 (Bankr. S.D.N.Y. 1996) (bad faith inquiry “is meant to insure that the Debtor actually intends to use chapter 11 to reorganize and rehabilitate itself and not simply to cause hardship or delay to its creditors by invoking the automatic stay”). In determining whether a petition was filed in bad faith, a bankruptcy court “must review the totality of the circumstances, ” In re Eatman, 182 B.R. 386, 392 (Bankr. S.D.N.Y. 1995), including the following factors:

(1) whether the debtor has few or no unsecured creditors; (2) whether there has been a previous petition filed by the debtor or a related entity; (3) whether the debtor's conduct pre-petition was proper; (4) whether the petition permits the debtor to evade court orders; (5) whether the petition was filed on the eve of foreclosure; (6) whether the foreclosed property is the sole or major asset of the debtor; (7) whether the debtor's income is sufficient such that there is a likely possibility of reorganization; (8) whether the reorganization essentially involves the resolution of a two party dispute, and (9) whether the debtor filed solely to obtain the protection of the automatic stay.

In re Cornelius, 195 B.R. 831, 836 (Bankr. N.D.N.Y. 1995); see Campora v. HSBC Bank USA, N.A. (In re Campora), No. 14-CV-5066, 2015 WL 5178823, at *11 n.10 (E.D.N.Y. Sept. 3, 2015) (listing similar factors). “[A]n order converting a bankruptcy case for cause is reviewed for an abuse of discretion.” Blaise v. Wolinsky (In re Blaise), 219 B.R. 946, 950 (B.A. P.2d Cir. 1998).

         2. Discussion

         Ms. Froman appeals the conversion of her case on the basis that the Bankruptcy Court i) failed to apply the totality of the circumstances test, ii) did not provide the parties with notice that it was considering converting the case, and iii) did not conduct an evidentiary hearing on the motion. (See, e.g., App. Mem. 5898 at 14.)[5]

         a. Totality of ...

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