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In re Murray

United States District Court, S.D. New York

March 31, 2017

IN RE MATTHEW N. MURRAY Debtor.
v.
MATTHEW N. MURRAY, Appellee. WILK AUSLANDER LLP, Appellant,

          Eric J. Snyder Wilk Auslander LLP New York, New York Counsel for Appellant.

          Tracy L. Klestadt Brendan M. Scott Klestadt, Winters, Jureller, Southard & Stevens LLP New York, New York Counsel for Appellee.

MEMORANDUM & OPINION

          VERNON S. BRODERICK, United States District Judge.

         Appellant and Petitioning Creditor Wilk Auslander LLP[1] appeals the Decision and Order of the Bankruptcy Court for the Southern District of New York (Gerber, B.J.) granting the motion of Appellee and Alleged Debtor Matthew N. Murray and dismissing the involuntary bankruptcy petition pursuant to § 707(a) of Title 11 of the United States Bankruptcy Code. For the reasons stated herein, the appeal is DISMISSED and the Bankruptcy Court's decision is AFFIRMED.

         I. Factual Background [2]

         This case relates back to a 2006 dispute between Murray and his former employer, Rodman & Renshaw. While employed by Rodman & Renshaw, Murray made certain disclosures about what he believed to be improper business practices within the company to the United States Senate Finance Committee. (App'x 45-47.)[3] He was fired shortly thereafter and contributed to two New York Times articles about the alleged improper practices. (Id. at 47-48.) Rodman & Renshaw commenced arbitration proceedings before the Financial Industry Regulatory Authority (“FINRA”) alleging, inter alia, defamation and breach of contract. (Id. at 48.) Wilk Auslander (the “Law Firm”) represented Rodman & Renshaw in the FINRA arbitration proceedings. The FINRA panel issued an award in favor of Rodman & Renshaw in the amount of $10.7 million, which, with prejudgment interest, later grew to $16 million. (Id.) The FINRA arbitration award was confirmed by the New York State Supreme Court, and affirmed by the Appellate Division (the “Judgment”). (Id. at 48-49.)

         After the Judgment was entered against Murray, the Law Firm, still representing Rodman & Renshaw, engaged in post-judgment discovery of Murray's assets and liabilities. (Id. at 49.) Murray and his wife each served responses, which demonstrated that Murray is unemployed and his only material asset is an interest in a tenancy by the entirety that he shares with his wife in a cooperative apartment they live in with their two daughters. (Id. at 49, 51.) The shares that represent the interest in the apartment are encumbered by a mortgage held by Bank or America, N.A. in the approximate amount of $590, 000. (Id. at 51, 11.5) The apartment was appraised at approximately $2.98 million as of January 2013. (Id. at 51.) In February 2014, Appellant had it appraised at approximately $4.6 million. (Id. at 11.6.)

         On January 11, 2013, Rodman & Renshaw filed for voluntary Chapter 7 bankruptcy. (Id. at 422 (citing In re Rodman & Renshaw LLC, No. 13-10087 (REG) (Bankr. S.D.N.Y.).) Pursuant to an agreement settling outstanding legal fees, the Rodman & Renshaw bankruptcy trustee assigned the Judgment to the Law Firm, provided that Rodman & Renshaw would share in any recovery on it. (Id. at 335-40.) After the assignment, the Law Firm caused the New York County Sheriffs Office to levy on Murray's shares in the cooperative apartment, thereby securing a lien on them effective February 26, 2013. (Id. at 249-51.)

         II. Procedural History

         The Law Firm commenced this action by filing an Involuntary Petition on February 6, 2014, which it amended the next day. (Id. at 9-11.) As explained by Judge Gerber, and admitted by Appellant, the Law Firm-despite already having secured a lien-sought to pursue bankruptcy remedies, rather than rely on state law judgment enforcement mechanisms, so that it could force the sale of the apartment:

As a judgment creditor, the Law Firm has the ability, under non-bankruptcy law (here, New York law), to execute on Mr. Murray's interest in the Apartment and to cause it to be sold in a judgment execution sale. But the judgment the Law Firm acquired was solely against Mr. Murray-and not against his wife. And the sale of Mr. Murray's interest alone would fetch less in a sale than it would if he were the sole owner, because New York state law respects the rights of a tenant by the entirety. New York law would permit the Law Firm to execute on Mr. Murray's interest in the Apartment, but not the entire interest held by both Mr. Murray and his wife.
By contrast, the Bankruptcy Code includes provisions with the potential to increase the amount that can be realized when jointly held property is sold. Section 363 of the Code provides in substance that when the requirements of section 363(h) . . . and its companion provisions are satisfied, a bankruptcy trustee can sell the jointly held property free and clear of both owners' interests, without the co-owners['] consent, leaving the nondebtor only with a right of first refusal to match the sale offer (and thus to stay in residence), and with her share of the proceeds of the forced sale.

(Id. at 422-24 (citations omitted).)

         On March 18, 2015, Murray filed a motion to dismiss the Involuntary Petition under 11 U.S.C. §§ 303(i) and 305(a), 28 U.S.C. § 1334(c), and Federal Rule of Bankruptcy Procedure 1003(a), and for an award of attorneys' fees and damages. (App'x 45.) On June 30, 2014, Judge Gerber held a hearing on the motion to dismiss. Although Murray had not raised the possibility of a § 707(a) dismissal in his moving papers, Judge Gerber raised it during the hearing. (Id. at 403-06.)

         On January 4, 2016, the Bankruptcy Court issued its Decision and Order dismissing the case for cause under section 707(a). (Id. at 418-37.) Specifically, the Bankruptcy Court found that the Law Firm was attempting to use the bankruptcy court as a judgment-enforcement mechanism in a two-party dispute, that the involuntary petition was filed solely to achieve a result not available outside of bankruptcy (i.e., the sale of the jointly held property), no other creditors existed, and there was no legitimate bankruptcy purpose for the case. It held that the involuntary petition was “an inappropriate invocation-and exploitation-of the bankruptcy system, ” and dismissed the case for cause. (Id. at 420.)

         III. 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 such an appeal, a district court reviews the bankruptcy court's findings of fact for clear error, and any conclusions of law de novo. In reMomentum Mfg. Corp ., 25 F.3d 1132, 1136 (2d Cir. 1994). Because a bankruptcy court's decision to dismiss for cause is guided by equitable principles, it is reviewed for abuse of discretion. In re Smith,507 F.3d 64, 73 (2d Cir. 2007); see also In re Chovev, 559 B.R. 339, 343-44 (E.D.N.Y. 2016) (“The determination of what constitutes ‘cause' to dismiss an individual debtor's chapter 7 case is left to the discretion of the court.”). “A bankruptcy court exceeds its allowable discretion where its decision (1) ‘rests on an error of law (such as application of the wrong legal principle) or a clearly erroneous factual finding, ' or (2) ‘cannot be located within the range of permissible ...


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