Gregory Funding v. Ventura

• Decision Date: 21 April 2022
• Docket Number: 20-CV-1949 (WFK)
• Citation: 638 B.R. 499
• Parties: GREGORY FUNDING, Appellant, v. Deirdre VENTURA, Appellee.
• Court: U.S. District Court — Eastern District of New York

638 B.R. 499

GREGORY FUNDING, Appellant,

v.Deirdre VENTURA, Appellee.

20-CV-1949 (WFK)

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

Signed April 21, 2022

Salvatore LaMonica, LaMonica, Herbst & Maniscalco LLP, Wantagh, NY, for Appellee Salvatore LaMonica.

Christine Black, Office of the U.S. Trustee, Central Islip, NY, for Appellee Office of the United States Trustee.

Sarah M. Keenan, Sferrazza and Keenan, PLLC, Melville, NY, for Appellee Deirdre Ventura.

Michael Kwiatkowski, Bonnie Pollack, Matthew Glen Roseman, Cullen and Dykman LLP, Garden City, NY, for Appellant Gregory Funding.

DECISION & ORDER

WILLIAM F. KUNTZ, II, United States District Judge:

Appellant Gregory Funding ("Gregory") appeals the April 10, 2020 Memorandum Decision and Order ("Decision") of the United States Bankruptcy Court for the Eastern District of New York (Grossman, J.) permitting Appellee Dierdre Ventura's ("Debtor") to amend her petition for reorganization, designate herself as a Subchapter V debtor under the Small Business Reorganization Act ("SBRA"), and modify her mortgage. For the reasons set forth below, the Decision is REVERSED and this appeal is DISMISSED.

BACKGROUND

The facts below are drawn from the Bankruptcy Court's Decision and from the parties’ briefing on the instant appeal. On December 14, 2007, the Debtor purchased the Harbor Rose, a historic property located in Cold Springs Harbor, New York, to create a bed and breakfast. Decision at 3, ECF No. 1-3, Ex. A. To finance the transaction, the Debtor took out a $1,000,000.00 loan, secured by a mortgage on the Harbor Rose, and used the proceeds to purchase the property. See id. ; Appellant's Br. at 7, ECF No. 5; Appellee's Br. at 5, ECF No. 6. The loan and mortgage were assigned to Gregory in 2015. Decision at 3.

Not long after the purchase, the Debtor began renting out rooms in the Harbor Rose. Id. at 4. She also lived in the property. Id. at 6, 8; Appellee's Br. at 6. On January 18, 2013, the Debtor defaulted on her mortgage, and she filed a voluntary petition for Chapter 7 bankruptcy. Decision at 4; Appellee's Br. at 7. On May 1, 2013, she received a discharge, and her case closed shortly thereafter. Decision at 4; Appellee's Br. at 7. On February 6, 2014, the Debtor voluntary petition for relief under Chapter 13. Decision at 4. This petition was eventually dismissed on August 6, 2014, because the Debtor failed to file the proper documents. Id.

On February 18, 2015, the Debtor executed a loan modification, which granted her more favorable loan and mortgage terms. Id. at 5; Appellee's Br. at 9. On May 1, 2015, the Debtor nonetheless defaulted on her obligations under the loan, and on February 11, 2016, Gregory commenced a foreclosure action against the Debtor in the Supreme Court of the State of New York in Suffolk County. Decision at 5. On August 8, 2018, Gregory obtained a judgment of foreclosure and sale of the Harbor Rose. Id. at 6.

PROCEDURAL HISTORY

On October 24, 2018, the Debtor filed a voluntary petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Eastern District of New York. Id. At the time, the Harbor Rose was valued at $1,200,000.00, and the Debtor owed Gregory a total of $1,687,664.80. Id.

The Debtor's exclusive period in which to file a Chapter 11 plan lapsed on February 21, 2019. Id. at 8; Appellant's Br. at 8. On June 11, 2019, the parties agreed to extend this deadline to September 30, 2019. Decision at 7-8. Under the terms of this agreement, if Gregory rejected the Debtor's proposed disclosure statement and plan, Gregory could then file a competing plan which would provide for the sale of the Harbor Rose. Id. at 8.

The Debtor failed to file a proposed disclosure statement and plan by the September 30, 2019 deadline. Id. At a status conference on November 19, 2019, the Bankruptcy Court ordered the parties to each file a proposed plan of reorganization by December 13, 2019. Id. That day, Gregory filed its plan, which called for the sale of the Harbor Rose to satisfy the Debtor's outstanding obligations. Id. ; Appellee's Br. at 10-11. The Debtor's proposed plan, on the other hand, sought to modify the mortgage by reducing the secured portion of Gregory's claim to $1,050,000.00, which the Debtor would repay over 30 years at a rate of 4.25% interest per annum. Id. However, Gregory would receive no payment on the unsecured portion of its claim because the Debtor had previously received a discharge in her 2013 bankruptcy. Id.

On January 13, 2020, the Bankruptcy Court determined the relief sought by the Debtor—modification of her mortgage—was precluded by 11 U.S.C. § 1123(b)(5) because the Debtor lived in the Harbor Rose. Id. at 9; Appellant's Br. at 8; Appellee's Br. at 10. The Bankruptcy Court thus held the Debtor's plan was unconfirmable on its face, approved Gregory's disclosure statement, and set a hearing for February 26, 2020 to confirm Gregory's plan of reorganization. Decision at 9; Appellant's Br. at 8. In advance of the confirmation hearing, Gregory solicited the necessary votes and filed a certification of ballots on February 20, 2020. Decision at 9; Appellant's Br. at 8.

On February 19, 2020, the SBRA came into effect. Decision at 9. Designed to provide a more cost-effective and streamlined option for small businesses to reorganize, the SBRA created a new Subchapter V within Chapter 11 of the Bankruptcy Code. See Small Business Reorganization Act of 2019, Pub. L. No. 116-54 § 5, 133 Stat. 1079, 1087. Subchapter V offers several powerful tools to qualifying small business owners. It also created an exception to § 1123(b)(5) that allows for small business debtors to modify claims secured by liens on their principal place of residence if certain requirements are met. See 11 U.S.C. § 1190(3). Subchapter V also provides debtors with the sole right to confirm a plan of reorganization. See 11 U.S.C. § 1189(a) ("Only the debtor may file a plan under this subchapter.").

To elect for Subchapter V relief, Chapter 11 debtors must "state in the petition whether the debtor is a small business debtor and, if so, whether the debtor elects to have subchapter V of chapter 11 apply." Interim Fed. R. Bankr. P. 1020(a) ;¹ see Interim Fed. R. Bankr. P. 1020 committee's note ("The title and subdivision (a) of the rule are amended to ... require a small business debtor to state in its voluntary petition ... whether it elects to proceed under subchapter V.").

Because the SBRA was not in effect at the time she filed her petition for reorganization, the Debtor did not make this designation. See Decision at 10, 15. Thus, to proceed under Subchapter V, she needed to amend her petition to proceed as a small business debtor. Although neither the Bankruptcy Code nor the Bankruptcy Rules discuss making a small business designation after a petition has been filed, there is a general right to amend a voluntary petition under Bankruptcy Rule 1009. See Fed. R. Bankr. P. 1009(a) (providing that a debtor may amend a voluntary petition "as a matter of course at any time before the case is closed").

At the February 26, 2020 confirmation hearing, the Bankruptcy Court informed the Debtor of the SBRA and adjourned the hearing without confirming Gregory's plan to give the Debtor time to decide whether to proceed under the SBRA. Decision at 9-10. On March 6, 2020, the Debtor sought to amend her petition to designate herself as a Subchapter V debtor. Id. at 10.

On March 9, 2020, Gregory filed an objection to the Debtor's designation. Id. Gregory argued the Debtor's amendment prejudiced Gregory's rights, including its "vested right" to file and pursue its plan of reorganization. Id. Gregory also averred the Debtor was not eligible for Subchapter V relief because she failed to meet the definition of a "small business debtor" under 11 U.S.C. § 101(51D)(A) and, even if she did meet the definition, she nonetheless could not modify the terms of her mortgage under 11 U.S.C. § 1190(3) because she used the mortgage to purchase the Harbor Rose. Id. at 10-11.

The United States Trustee ("Trustee") also objected to the Debtor's proposed amendment. Id. at 11. The Trustee raised several procedural and timing issues with the Debtor's amendment—namely that the Trustee could no longer perform its duty to facilitate a consensual plan of reorganization because the Debtor's petition had been pending for nearly sixteen (16) months, and the SBRA's statutory deadlines had passed. Id. at 16.

In a memorandum decision dated April 10, 2020, the Bankruptcy Court overruled both objections, thus allowing the Debtor to amend her petition and proceed as a Subchapter V debtor and modify her mortgage. See Decision. On April 24, 2020, Gregory filed a notice of appeal of the Decision, raising the same arguments it raised in its original objection to the Debtor's March 6, 2020 election.² Notice of Appeal, ECF No. 1-1, Ex. A. On May 6, 2020, Gregory filed its Statement of Issues on Appeal and Designation of Record. Appellant's Br. at 6. The Debtor filed her Designation of Additional Items on Appeal on May 27, 2020. Id.

JURISDICTION AND STANDARD OF REVIEW

"District Courts have appellate jurisdiction over ‘final judgments, orders, and decrees’ entered in bankruptcy court."

Satti v. Nechadim Corp. , No. 17-CV-683, 2018 WL 1010206, at *3, 2018 U.S. Dist. LEXIS 26799, at *6 (E.D.N.Y. Feb. 16, 2018) (Brodie, J.) (quoting 28 U.S.C. § 158(a) ). "A district court sitting in a bankruptcy appeal has the power to consider any issue presented by the record on appeal." In re Hilsen , 119 B.R. 435, 439 (S.D.N.Y. 1990) (Patterson, J.); see In re Lyondell Chem. Co. , 585 B.R. 41, 57 n.5 (S.D.N.Y. 2018) (Cote, J.). "Findings of fact are reviewed for clear error, whereas findings that involve questions of law, or mixed questions of fact and law, are reviewed de novo." In re Genco Shipping & Trading Ltd. , 550 B.R. 676, 679 (S.D.N.Y. 2015) (Scheindlin, J.) (citation omitted). "A bankruptcy court's equitable discretion ... is reviewed for...