Distefano v. Endurance Am. Ins. Co.

• Decision Date: 07 August 2020
• Docket Number: 1:19-CV-1258 (LEK)
• Citation: 620 B.R. 687
• Parties: Stanley Lawrence DISTEFANO, Jr., Appellant, v. ENDURANCE AMERICAN INSURANCE COMPANY, et al., Appellees.
• Court: U.S. District Court — Northern District of New York

620 B.R. 687

Stanley Lawrence DISTEFANO, Jr., Appellant,

v.ENDURANCE AMERICAN INSURANCE COMPANY, et al., Appellees.

1:19-CV-1258 (LEK)

United States District Court, N.D. New York.

Signed August 7, 2020

Paul A. Levine, Lemery, Greisler Law Firm, Albany, NY, for Appellant.

Kevin S. Brotspies, McElroy, Deutsch, Mulvaney & Carpenter, New York, NY, for Appellee Endurance American Insurance Company.

Kevin Laurilliard, O'Connell & Aronowitz, P.C., Albany, NY, for Appellee Nancy Burbridge.

Douglas J. Wolinsky, Primmer, Piper Law Firm, Burlington, VT, for Appellee Douglas J. Wolinsky.

MEMORANDUM-DECISION AND ORDER

Lawrence E. Kahn, Senior U.S. District Judge

I. INTRODUCTION

This bankruptcy appeal involves debtor Stanley Lawrence DiStefano's claim of exemption with regard to property he and his wife own as tenants by the entirety in Hawaii. Dkt. Nos. 1 ("Notice of Appeal"); 3-24 ("Bankruptcy Order"). Endurance American Insurance Company ("Endurance") objected to DiStefano's claim of exemption in the United States Bankruptcy Court for the Northern District of New York (the "Bankruptcy Court"), and the Honorable Robert E. Littlefield, Jr., United States Bankruptcy Judge, sustained that objection. See Bankruptcy Order; see also In re DiStefano, 610 B.R. 419 (Bankr. N.D.N.Y. 2019). On appeal, DiStefano asserts that the Bankruptcy Court erred in sustaining Endurance's objection, Dkt. Nos. 9 ("Appellant Brief"); 12 ("Reply"), while Endurance, unsurprisingly, seeks affirmance, Dkt. No. 11 ("Appellee Brief"). For the reasons that follow, the Court affirms the decision of the Bankruptcy Court.

II. BACKGROUND

This appeal seeks to resolve the status of a condominium in Hawaii that DiStefano and his wife Christi acquired in 1988 as tenants by the entirety (the "Condo"). Dkt. No. 3-19 ("Joint Statement of Stipulated Facts" or "Joint Stip") ¶¶ 18-20;¹ see also Dkt. No. 19-3, Ex. D ("Deed"). The relevant facts are largely uncontested.

A. The Agreement

DiStefano was in the construction business. He served as managing member of Green Island Construction Group, LLC ("Green Island"), a company that built roads and other large-scale construction projects. Appellant Br. at 3; Bankruptcy Order at 2. In order to bid on and successfully win construction projects, Green Island required performance bonds. Appellant Br. at 3; Bankruptcy Order at 2. Endurance provided those bonds. Appellant Br. at 3; Bankruptcy Order at 2. Green Island, of course, promised to repay Endurance for any payments Endurance made on the bonds, but Endurance also asked for—and received—additional protection. Appellant Br. at 3; Bankruptcy Order at 2.

Specifically, DiStefano and six of his relatives by blood or marriage—including, crucially for this appeal, DiStefano's wife Christi—personally guaranteed Green Island's debts to Endurance. Appellant Br. at 3; Bankruptcy Order at 2. In 2011, they each signed a General Agreement of Indemnity that named Endurance as surety, Green Island as principal, and DiStefano, Christi, and the rest of his relatives as indemnitors. Dkt. No. 19-3, Ex. E ("Agreement") at 13.² The Agreement described DiStefano and each of his relatives as "individual indemnitor[s]," id. at 12–13, but it also stated that each of the indemnitors would be jointly and severally liable for any payments owed to Endurance, id. ¶ 3.3.³

Before the Agreement was signed, DiStefano disclosed to Endurance that he and his wife owned the Condo. Dkt. No. 3-20 ("DiStefano Affidavit") ¶ 2. He offered to grant Endurance a mortgage on the condo in exchange for Green Island's performance bonds, but Endurance declined that offer in favor of other consideration. Id. ¶ 3.

B. The Bankruptcy Proceedings

In 2016, DiStefano's sister Janice commenced this case by filing an involuntary Chapter 7 petition against him in the Bankruptcy Court. Joint Stip ¶ 1. In June 2017, DiStefano filed initial schedules with the Bankruptcy Court in which he listed his assets and claimed exemptions from the bankruptcy proceedings for certain of those assets. Id. ¶ 4. These initial schedules listed the Condo as having a value of $1,614,800 but did not claim any exemption with respect to the Condo. Id.

In December 2017, Endurance filed a claim against DiStefano in the Bankruptcy Court for $1,769,317.00. Appellant Br. at 4; Bankruptcy Order at 4.

In May 2018, DiStefano filed an amended schedule with the Bankruptcy Court that claimed an exemption for the Condo "pursuant to 11 U.S.C. § 522(b)(3)(B) and Haw. Rev. Stat. § 509-2." Joint Stip ¶ 13; see also Dkt. No. 19-3, Ex. C ("Second Amended Schedules"). In the Second Amended Schedules, DiStefano claims that the Condo is exempt from process by the Bankruptcy Court for "100% of [its] fair market value, up to any applicable statutory limit." Joint Stip ¶ 13.

Endurance filed timely objections (the "Objections") to DiStefano's claimed exemption for the Condo. Id. ¶ 16.⁴

C. The Bankruptcy Order

In the Bankruptcy Order, Judge Littlefield sustained Endurance's Objections to DiStefano's attempt to exempt the Condo from process by the bankruptcy. Bankruptcy Order at 19. In doing so, he addressed five issues.

First, Judge Littlefield held that even if DiStefano had acted in bad faith in claiming an exemption for the Condo, a debtor's bad faith did not defeat a claimed exemption. Id. at 8–9.

Second, Judge Littlefield rejected Endurance's argument that DiStefano was limited to the exemptions allowed him under New York state law, and that, therefore, the Condo was not exempt. Id. at 9–11.

Third, the Bankruptcy Court determined that the law of Hawaii—the situs of the property—rather than New York—the debtor's domicile—governed the question of whether DiStefano and his wife's tenancy by the entirety in the condo qualified for the exemption. Id. at 11–13.

Fourth, Judge Littlefield held that, under Hawaii law, DiStefano's and his wife's signatures on the Agreement allowed Endurance to "pierce the envelope of protection provided by the [tenancy by the entirety]." Id. at 13. This meant that the Condo was not exempt from process merely because DiStefano and his wife held the property as tenants by the entirety. Id. at 13–16.

Fifth, the Bankruptcy Court ruled that Endurance did not need a court judgment against DiStefano and his wife in order to reach their tenancy by the entirety interest in the Condo. Id. at 16–19.

In light of this analysis, Judge Littlefield sustained Endurance's Objections to the exemption. DiStefano then timely filed this appeal.

D. DiStefano's Appeal

DiStefano raises two issues on appeal.

First, he argues that the Bankruptcy Court erred in its fourth holding, when it determined that the tenancy by the entirety did not protect the Condo from Endurance's claims against DiStefano because both DiStefano and his wife had signed the Agreement. Appellant Br. at 12–18. Because of this error, says DiStefano, the Bankruptcy Court should not have sustained Endurance's Objection to the exemption DiStefano claimed for the Condo. Id.

Second, DiStefano argues his discharge by the Bankruptcy Court—which occurred after DiStefano had already filed this appeal—means that there is no longer any joint liability upon which Endurance can base its claim to the tenancy by the entirety. Id. at 18–21. Therefore, says DiStefano, even though the Bankruptcy Court has not previously ruled on this issue, this Court should overrule the Bankruptcy Court's decision to sustain Endurance's Objection, reverse the Bankruptcy Order, and uphold the exemption. Id. ⁵

III. LEGAL STANDARD

District courts have jurisdiction to hear both interlocutory and final appeals from orders of the bankruptcy court. See 28 U.S.C. § 158(a). In exercising its appellate jurisdiction, the district court distinguishes between findings of fact and conclusions of law, reviewing the former for clear error and the latter de novo. See R² Invs., LDC v. Charter Commc'ns, Inc., 691 F.3d 476, 483 (2d Cir. 2012) ; see also United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948) ("A finding is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed."). Where a finding is mixed—i.e., it contains both conclusions of law and factual findings—the de novo standard applies. See Travellers Int'l, A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1575 (2d Cir. 1994). After applying these standards to the questions of law and fact, the district court can "affirm, modify, or reverse a bankruptcy court's judgment, order, or decree[,] or remand with instructions for further proceedings." In re Indicon, 499 B.R. 395, 400 (D. Conn. 2013) (quoting former Federal Rule of Bankruptcy Procedure 8013 ).

IV. DISCUSSION

The Court addresses DiStefano's two principal arguments, in turn. As both involve pure questions of law, the Court considers each de novo.

A. Whether the Agreement Defeats the Tenancy by the Entirety

Judge Littlefield found that DiStefano's tenancy by the entirety interest in the Condo was not "exempt from process pursuant to Hawaiian law," Bankruptcy Order at 13, because DiStefano and his wife engaged in "joint action" sufficient to "enter the [tenancy by the entirety's] envelope of protection" when they both signed the Agreement, id. at 16. DiStefano argues that this conclusion was error. Appellant Br. at 12–18. The Court disagrees.

The Court begins by briefly addressing the burden of proof. " Federal Rule of Bankruptcy Procedure 4003(c) provides that the objecting party ... bears the burden of proof and must show by a preponderance of the evidence that a claimed exemption was improper." See In re Ventura, No. 10-79815, 2011 WL 1979864, at *2 (Bankr. E.D.N.Y. May 20, 2011). Additionally, "once the objecting party presents a prima facie case that the exemption has been improperly claimed, the burden then shifts back to the debtor to come forward with evidence to demonstrate that the exemption is...