In re Ajunwa
| Decision Date | 04 September 2012 |
| Docket Number | Case No. 11-11363 (ALG) |
| Parties | In re NATHANIEL and REGINA AJUNWA Debtors |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
APPEARANCES:
LAW OFFICES OF GEORGE BASSIAS
By: George Bassias, Esq.
THE LAW OFFICE OF RENE MYATT
By: Rene Myatt, Esq.
Sean Hill (hereinafter "Hill) has moved for an order dismissing the Chapter 7 bankruptcy petition of Nathaniel and Regina Ajunwa (hereinafter the "Debtors") alleging that the case was filed in bad faith under 11 U.S.C. §§ 707(a) and 707(b). Hill asserts that the Debtors filed for bankruptcy only to avoid paying a tort judgment entered in his favor and have manipulated the Code to capitalize on an expanded homestead exemption and to ensure that no assets are available for distribution to creditors. As discussed below, Congress has established Chapter 7 as a means for a debtor to obtain a fresh start and has provided only limited reasons for dismissing a Chapter 7 petition as filed in bad faith. The courts have not lightly expanded these, and even if there is a non-statutory basis for dismissing a Chapter 7 case as filed in bad faith, this case does not merit such severe relief. The motion is denied.
The facts are not disputed.
On October 21, 2010, Hill obtained a judgment for $431,827.50 against debtor Nathaniel Ajunwa in the Kings County Supreme Court. The judgment was for damages in a car accident in which Ajunwa made an illegal turn and struck Hill, causing extensive harm, including the loss of Hill's spleen and a kidney. Ajunwa carried only the statutory minimum automobile insurance of $25,000 for non-fatal injuries, as required by N.Y.C.R.R. 60-1.1. Ajunwa has made no payments on the judgment, beyond whatever his insurance company has paid.
On November 9, 2010, Ajunwa and his wife filed for relief under Chapter 13 of the Code in this Court (Case No. 10-15981). The Debtors listed real property in Bronx county with avalue of $330,000 and a mortgage of $170,000 and no other substantial assets. The Debtors used the New York state exemptions then in effect, and pursuant to CPLR 5206(a) claimed a $100,000 homestead exemption ($50,000 each), resulting in $60,000 of non-exempt home equity.
Although the Debtors never proposed a Chapter 13 Plan, under 11 U.S.C. § 1325(a)(4) they would presumably have been required to pay over to their one substantial creditor, Hill, the value of the non-exempt equity in their home. Hill's judgment accounted for over 90% of the total claims listed, and he stood to receive almost all of the Plan payments. Ajunwa's one-half interest in the property would be $30,000, although it is assumed that his survivorship interest would be even less.
In 2010, the New York State Legislature passed S7034A-2009, a bill which amended the New York homestead exemption under CPLR 5206(a), increasing the exemption for homes in the five New York City counties from $50,000 to $150,000. The bill was signed by the Governor on December 22, 2010 and went into effect on January 21, 2011. The Memorandum in Support of the Bill stated that the purpose was to "allow a debtor to keep enough property and money exempt from the satisfaction of a money judgment to continue to live without becoming a ward of the State."1 The previous exemption of $50,000 was described as unrealistically low to achieve the purpose of the exemption: to keep debtors in their homes. CPLR 5206(a) (McKinney Supp. 2012).
On January 11, 2011, a few days before the effective date of the new law, the Debtors filed a motion to convert their case to a Chapter 7 proceeding. However, this motion was withdrawn the next day, and on January 28, 2011, the Debtors filed a motion to voluntarily dismiss the Chapter 13 proceeding. The Debtors have never denied that the purpose of the Chapter 13 dismissal was to take advantage of the revised CPLR 5206(a), which would allow them to exempt all of their home equity and to receive a discharge in a subsequent Chapter 7 case without the liquidation of any of their assets. The motion to dismiss the Chapter 13 proceeding of dismissal was unopposed, and an order of dismissal was signed on January 31, 2011. Docket #24 in Case No. 10-15981. On February 4, 2011, after the order was signed but prior to its entry on the docket, Hill filed a motion for relief from the automatic stay to foreclose on his judgment, which was alleged to be a lien on the Debtors' real estate. The motion was rendered moot by the closing of the case.2
On March 28, 2011, the Debtors filed for relief under Chapter 7 of the Bankruptcy Code. They listed the same real property of $330,000 on Schedule A with the same mortgage of $170,000 on Schedule D, but claimed a $300,000 ($150,000 each) homestead exemption on Schedule C. As a result, the petition on its face showed no assets available for distribution. The Debtors' current monthly income pursuant to § 101(10A) of the Code remained below the New York median for the Debtors' family size.
On April 26, 2011, Hill filed a motion to dismiss the Debtors' proceeding under §§ 707(a) and 707(b) of the Code. The motion alleges that the Debtors manipulated the Code to avoid paying Hill, and that their repeat filings were abusive as efforts to capitalize on the amended homestead exemption. The motion also claimed that the Debtors' election to maintain minimal car insurance was a conscious decision that has now imposed significant costs on Hill.3
On August 26, 2011, the deadline to object to the Debtors' discharge under § 727 of the Code and the dischargeability of any debts under § 523 of the Code expired. The Chapter 7 trustee thereafter filed a report of no distribution. On December 7, 2011, the Debtors' discharge was granted. The discharge is subject to revocation if the instant motion is granted.
A number of issues are raised by Hill's argument that the Debtors are acting in bad faith and that their case should be dismissed under §§ 707(a) and 707(b) of the Code. First, the Court must determine whether the Debtors are eligible to claim the amended homestead exemption. Second, it must be determined whether the dismissal of the Chapter 13 proceeding and the refiling fifty-six days later of a Chapter 7 proceeding constituted bad faith. Finally, the Court must determine whether the Debtors have acted in good faith by filing for bankruptcy to discharge a tort judgment arising out of a car accident.
In CFCU Community Credit Union v. Hayward, 552 F.3d 253 (2d Cir. 2008), the Second Circuit held that a 2005 amendment to New York law, increasing the homestead exemption from$10,000 to $50,000, applied retroactively to debts incurred prior to the effective date of the amendment, noting that state law governs the scope of the exemption. The Circuit Court found that the issue was governed by the intent of the New York Legislature in adopting the amendment, and that the 2005 amendment, unlike a 1997 change to state exemptions that was expressly made non-retroactive, was intended to be remedial and therefore to protect assets against claims that arose prior to the effective date of the amendment. Id. at 265. The 2011 amendment to CPLR 5206(a), like the amendment in 2005, is not expressly non-retroactive. Moreover, the amendment is clearly remedial and was described as completing work left unfinished by the 2005 amendment. CPLR 5206(a) (McKinney Supp. 2012). It should therefore be interpreted in the same way as the 2005 amendment to apply to debts or liabilities incurred prior to the effective date of the amendment.4
As indicated above, the Debtors have never disputed that they dismissed their prior Chapter 13 case in order to take advantage of the amendment to New York law increasing the homestead exemption, and that the Debtors assumed that the prior exemption amount would have applied in their Chapter 13 case, which was filed when the prior law was in effect. See supra note 3, at p. 4. The question is thus whether the Debtors acted in good faith in dismissing their original proceeding and refiling shortly thereafter in Chapter 7.
The Bankruptcy Code authorizes the dismissal of a Chapter 13 proceeding in 11 U.S.C. §1307(b), which provides that "on request of the debtor at any time," the court "shall dismiss" acase under Chapter 13 if the case has not been previously converted under §§ 706, 1112 or 1208. The Second Circuit has held that this provision affords a debtor an absolute right to dismiss a Chapter 13 proceeding. Barbieri v. RAJ Acquisition Corp. (In re Barbieri), 199 F.3d 616 (2d Cir. 1999). If Barbieri remains good law, the Debtors were merely exercising a statutory right and were not acting in bad faith when they dismissed their case.
With respect to the dismissal of the Debtors' first case, the only question as to the continuing vitality of Barbieri is a consequence of the Supreme Court's decision in Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007). There the Court, construing the language of § 706(a) of the Bankruptcy Code, which is very similar to § 1307(b),5 held that a debtor does not have an absolute right to convert a Chapter 7 proceeding to a Chapter 13 proceeding where there is evidence of bad faith. Courts in this Circuit are split on whether the holding of Marrama extends to the dismissal of Chapter 13 proceedings. Compare In re Procel, 467 B.R. 297, 305 (S.D.N.Y. 2012) (); In re...
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