Butko v. Ciccozzi

Decision Date26 April 2021
Docket Number2:21-cv-150-NR
CourtU.S. District Court — Western District of Pennsylvania
PartiesRICHARD P. BUTKO and LORRAINE E. BUTKO, Appellants, v. RONALD A. CICCOZZI, Appellee
OPINION

This is an appeal from an order of the bankruptcy court dated July 1, 2020, granting Appellee Ronald Ciccozzi relief from the mandatory stay in the bankruptcy proceedings filed by Appellants Richard and Lorraine Butko. Mr. Ciccozzi sought relief so that he could foreclose on a residence that he owns and rents to the Butkos under a land installment agreement. The bankruptcy court found that "cause" existed for relief from stay because the Butkos defaulted under the parties' agreement and had no remaining cure rights.

The Butkos now raise several issues on appeal. This Court, however, cannot address the merits of those issues because they are all barred by res judicata. The Butkos litigated (or had a full and fair opportunity to litigate) all their issues from a judgment entered by the bankruptcy court against them in late 2018. They never appealed that judgment and now res judicata prevents them from filing a collateral attack to re-litigate it. As a result, the Court finds that the bankruptcy court correctly granted Mr. Ciccozzi relief from stay and will affirm the July 1, 2020, order.

BACKGROUND

I. The parties' original agreements.

The bankruptcy court accurately observed that this "acrimonious dispute" has a "tortured history." In re Butko, 624 B.R. 338, 344 (Bankr. W.D. Pa. 2021) ("Butko III"). That tortured history begins in December 2009, when the Butkos entered into a lease with a purchase option with Mr. Ciccozzi and his late wife, Joan, for a house located at 120 Heather Drive, Monaca, Pennsylvania. That option allowed the Butkos to acquire title to the house once they paid the option price of $200,000.

In what would be a sign of things to come, that agreement would not be completed. In December 2014, the parties executed a second lease with option to purchase that, among other things, terminated the 2009 agreement and released any related rights. Id. at 344. This new lease called for a monthly rental payment and an eventual option to purchase for a lump sum on a date certain. Id. Unfortunately, before that could happen, the Butkos defaulted on their rental-payment obligation, prompting them to seek bankruptcy protection. Id.

II. The 2016 bankruptcy.

On October 1, 2016, the Butkos filed a chapter 13 petition for bankruptcy. Butko III, 624 B.R. at 344. Mr. Ciccozzi, for his part, filed a motion for stay relief, claiming that the Butkos had no more than a limited possessory interest in the house because of their earlier default. Id. The Butkos opposed that motion, arguing that the "lease" for the house was not a "true lease," but, rather, was a disguised financing agreement in the form of an installment land contract governed by a Pennsylvanialaw known as "Act 6."1 Id. at 344-45. The bankruptcy court agreed with Mr. Ciccozzi because the lease was terminable at will. Id. at 345. But the court denied stay relief because the cure period in the lease had not yet expired before the petition date. See In re Butko, 584 B.R. 97, 109-10 (Bankr. W.D. Pa. 2018) ("Butko I").

III. The settlement agreement.

After some procedural maneuvering, the bankruptcy court steered the parties toward a mediation before the Honorable Judith K. Fitzgerald, a former chief judge of the bankruptcy court. Butko III, 624 B.R. at 345. This mediation was ultimately successful and led to an agreement that gave the Butkos another chance to complete the sale of the house. ECF 8-1. The settlement agreement called for a new round of monthly payments that would apply to a new, increased purchase price. Id. And unlike the lease, the Butkos would receive full credit for each monthly payment until the final balance was paid. Id. At that point, the deed would be released to them from escrow. Id.

The settlement agreement also contained strict default provisions. Id. at ¶¶ 12-19. The Butkos were provided a tight ten-day cure period upon a payment default. Id. at ¶ 12. Mr. Ciccozzi did not have to notify the Butkos of any nonpayment. Id. at ¶ 13. If a default was not timely cured, "then all rights that [the] Butkos may have in the Property shall finally and permanently terminate" and they "will have 30 days from the 17th day of the calendar month to remove voluntarily from the Property." Id. at ¶ 15. And in the event of an uncured default, Mr. Ciccozzi would receive stay relief upon an affidavit of default. Id. at ¶ 18. The bankruptcy court would also be authorized, at that point, to enter a judgment for possession in favor of Mr. Ciccozzi in an agreed-upon form attached to the settlement agreement. Id. at ¶ 17.

In September 2017, the parties presented the settlement agreement to the bankruptcy court for approval under Bankruptcy Rule 9019. Butko III, 624 B.R. at 346. At the hearing on the settlement agreement, the Butkos were fully aware of the serious repercussions of a future default. Id. Despite concerns over the harsh nature of the default provisions, the bankruptcy court approved the settlement agreement, subject to certain modifications. Id. at 346-47.

IV. The first alleged default and the issuance of Butko I.

The Butkos defaulted again. About two months later, Mr. Ciccozzi filed an affidavit of default and requested enforcement of the forfeiture provisions. Butko III, 624 B.R. at 347. The Butkos tried to block Mr. Ciccozzi's requested relief by arguing that the settlement agreement was an installment land contract subject to Act 6—meaning that they were entitled to an unwaivable right to a statutory notice ofdefault and 30-day cure period. Id. Essentially, the Butkos sought a ruling that the Act 6 requirements still applied to the parties' relationship despite the much harsher default and cure provisions in the settlement agreement. Id.

Ultimately, the bankruptcy court entered an order in which it made three key findings. See generally Butko I, 584 B.R. 97. First, the court found that the settlement agreement was an installment land contract governed by Act 6. Id. at 102-04. Second, the court found that the Butkos were judicially estopped from asserting any Act 6 defenses because they had asked the court to approve the settlement agreement and bind the parties to their deal. Id. at 108. Third, Mr. Ciccozzi waived the default provisions by accepting late payment. Id. at 109-10.

In other words, the decision was a mixed bag for the parties. On the one hand, the Butkos were right about the nature of the settlement agreement being an installment land contract and the ultimate relief was in their favor. On the other hand, the court found that they would be judicially estopped from asserting Act 6 defenses going forward. Given this outcome, neither party appealed the ruling. Butko III, 624 B.R. at 350.

V. The judgment for possession.

The next stage of the proceedings is the most critical for purposes of the present appeal. The Butkos defaulted again under the settlement agreement. In September 2018, Mr. Ciccozzi filed another affidavit of default. Butko III, 624 B.R. at 351. In response, the bankruptcy court granted Mr. Ciccozzi relief from stay in accordance with the settlement agreement. Case No. 2:16-bk-23695, ECF 255. The Butkossought reconsideration of that order based, in part, on an Act 6 defense. Case No. 2:16-bk-23695, ECF 257. In making this argument, the Butkos contended that the bankruptcy court's earlier judicial estoppel ruling was "dicta." Butko III, 624 B.R. at 352. The bankruptcy court denied the Butkos' request for reconsideration. Case No. 2:16-bk-23695, ECF 267.

With reconsideration denied, the parties made a flurry of oral motions. For his part, Mr. Ciccozzi requested that the bankruptcy court enter a judgment for possession as contemplated by the settlement agreement. Butko III, 624 B.R. at 354-55. At that point, the Butkos questioned the bankruptcy court's subject-matter jurisdiction and authority to enter the requested judgment for possession. Case No. 2:16-bk-23695, ECF 267. The court ordered supplemental briefing from the parties on this issue. Id. In their brief, the Butkos conceded that the bankruptcy court had jurisdiction to enter judgment, but argued that the bankruptcy court should abstain from all matters decided since Butko I, so that a Pennsylvania state court could determine whether the Butkos' Act 6 defenses were valid under state law. Case No. 2:16-bk-23695, ECF 272.

After briefing, the bankruptcy court found it had jurisdiction and entered a judgment for possession in favor of Mr. Ciccozzi on December 4, 2018. Case No. 16-23695, ECF 273 and 274. Importantly, the Butkos elected not to appeal that entry of judgment for possession. Butko III, 624 B.R. at 355.

VI. The state-court action.

Soon after the bankruptcy court entered the judgment for possession, the chapter 13 trustee moved to dismiss the Butkos' bankruptcy case. Butko III, 624 B.R. at 355-56. The Butkos didn't oppose the motion, and the bankruptcy court dismissed the chapter 13 case without prejudice on March 4, 2019. Id. at 356.

In the meantime, the Butkos filed a declaratory-judgment action in the Court of Common Pleas of Beaver County, seeking to confirm that Mr. Ciccozzi was required to comply with Act 6 requirements before executing on the judgment for possession. Case No. 2:16-bk-23695, ECF 286-1. The state court directed Mr. Ciccozzi to "show cause how this Court...could possibly enforce the [judgment for possession] without running afoul of Act 6[.]" Case No. 2:20-bk-21255, ECF 56-3. After a review of the record and a pretrial conference, the state court dismissed the case. ECF 8-3. The state court held that the Butkos were barred from challenging the bankruptcy court's judicial estoppel ruling because of res judicata. Id. at pp. 2-3.

VII. The second bankruptcy, and the issuance of Butko II.

After their defeat in state court, the Butkos filed a second chapter 13...

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