In re Armenakis, 05-13671 (AJG).

• Decision Date: 22 May 2009
• Docket Number: No. 05-13671 (AJG).,05-13671 (AJG).
• Citation: 406 B.R. 589
• Parties: In re Diana L. ARMENAKIS, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

406 B.R. 589

In re Diana L. ARMENAKIS, Debtor.

No. 05-13671 (AJG).

United States Bankruptcy Court, S.D. New York.

May 22, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Harold S. Berzow, Ruskin Moscou Faltischek, P.C., Uniondale, NY, for Debtor.

ORDER AND OPINION

ARTHUR J. GONZALEZ, Bankruptcy Judge.

Before the Court is a request for relief contained within the motion of Diana L. Armenakis (the "Debtor") to reconsider (the "Motion to Reconsider") the Court's order of August 14, 2008, lifting the automatic stay (the "Lift Stay Order"), pursuant to Rule 9024 of the Federal Rules of Bankruptcy Procedure ("FRBP") and Rule 60 of the Federal Rules of Civil Procedure. The Debtor's request is to avoid the judicial lien (the "Lien") of Smithbuilt Financial, LLC ("Smithbuilt"), successor-in-interest to creditor National Loan Investors, L.P. ("NLI"), pursuant to 11 U.S.C. § 522(f) and Rule 4003(d) FRBP (the "Request to Avoid"). Also before the Court is Smithbuilt's motion for relief from the automatic stay (the "Lift Stay Motion") pursuant to 11 U.S.C. § 362(d) and Rules 4001(a) and 9014 FRBP. Smithbuilt seeks relief from the automatic stay so that it may exercise its rights and remedies under the Lien against the cooperative apartment (the "Apartment")¹ owned by Debtor and her non-debtor spouse (the "Non-Debtor Spouse"). For the reasons stated below, (i) the Lien against Debtor's interest in the Apartment is reduced to not less than $8,923.07 (the "Reduced Lien"),² (ii) the balance of the Lien is avoided, and (iii) the Lift Stay Motion is granted so that Smithbuilt may exercise its rights and remedies against Debtor with respect to the Reduced Lien.

BACKGROUND

1. Factual Background

On May 18, 2005 (the "Petition Date"), Debtor filed a voluntary petition (the "Petition") for chapter 7 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York. On May 19, 2005, Robert L. Geltzer was appointed as interim trustee, and on June 28, 2005, he held a § 341(a) meeting, after which he became the trustee (the "Trustee") pursuant to § 702(d).³ On August 8, 2005, NLI moved for relief from the automatic stay (i.e., the Lift Stay Motion) in order to enforce its rights and remedies under the Lien granted pursuant to a judgment entered in the Supreme Court of the State of New York, County of New York (the "State Court"), in an action entitled "National Loan Investors, L.P. v. James J. Armenakis and Diana L. Armenakis," bearing Index No. 109166/04 (the "Judgment"). A hearing was scheduled for August 31, 2005.

The Judgment against Debtor and Non-Debtor Spouse was granted on April 15, 2005, in a special proceeding conducted pursuant to § 5206(e) of the New York Civil Practice Law and Rules (the "CPLR") directing the sale of the Apartment to satisfy a money judgment entered against Debtor and the Non-Debtor Spouse on March 10, 2004, in the amount of $245,000.00 for their default on a promissory note to NLI's predecessor-in-interest (the "Money Judgment"). The Judgment was filed on May 2, 2005, and it directed the Sheriff of New York County (the "Sheriff") to sell the Apartment subject to and in compliance with Rivercross's restrictions, rules, regulations, law, and requirements, and that (i) the proceeds of the "said sale" be paid to Debtor and Non-Debtor Spouse, jointly, in an amount not exceeding $10,000.00; (ii) the Money Judgment, plus interest from March 10, 2004, be adjudged to be a lien upon the "surplus" of the "said sale" (i.e., the Lien); and (iii) the "surplus" be applied to the Money Judgment and to any charges lawfully accruing to Rivercross for unpaid maintenance charges, fees, and expenses to Rivercross (i.e., the "Maintenance," as defined supra fn. 2). Debtor and Rivercross, in its own motion for relief from the stay, assert in substance that the Maintenance constitutes a consensual first lien on the Apartment. Smithbuilt does not concede this point and has reserved its rights to challenge it, see infra fn. 13.

The Petition stayed enforcement of the Judgment and prevented the sale of the Apartment. Rivercross's amended secured proof of claim indicated that Debtor and Non-Debtor Spouse owed Rivercross $40,253.21⁴ in Maintenance at the Petition Date. As of November 3, 2008, Debtor and Non-Debtor Spouse owed Rivercross $75,803.65 in Maintenance, but as of February 4, 2009, Debtor and Non-Debtor Spouse owed Rivercross $45,760.04 in Maintenance. At the Petition Date, the New York homestead exemption was $10,000.00, but, on August 30, 2005 (the "Enactment Date"), "the New York State Legislature amended [CPLR] § 5206 to increase the state's homestead exemption from $10,000.00 to $50,000.00." CFCU Cmty. Credit Union v. Hayward, 552 F.3d 253, 256 (2d Cir.2009) (citing 2005 N.Y. Laws Ch. 623) (hereinafter, the "2005 Amendment"). The new exemption amount became effective immediately on that date. See CFCU, 552 F.3d at 261.

Debtor amended Schedule C attached to the Petition and claimed the new homestead exemption of $50,000.00 on September 9, 2005. The time to object to the Debtor's exemption was extended a number of times by stipulation with the Trustee to October 17, 2006. No timely objection to Debtor's amended exemption claim was filed. Smithbuilt raised the issue of which exemption should apply in one of its pleadings and during at least one hearing related to the Lift Stay Motion, each of which occurred after the October 17, 2006 date.⁵

Since its filing, the Lift Stay Motion was adjourned numerous times on request of the parties as they attempted to work out a resolution. On January 12, 2007, Debtor received her discharge. On May 1, 2008, the Trustee certified that Debtor's estate (the "Estate") had been fully administered. Eventually, the parties informed the Court that they were unable to resolve the Lift Stay Motion and a hearing was held on July 16, 2008. On August 14, 2008, the Court granted the Lift Stay Order to Smithbuilt.

2. Motion to Reconsider

On August 18, 2008, Debtor filed the Motion to Reconsider, with a hearing date set for September 24, 2008. In the Motion to Reconsider, Debtor argued that the Court should relieve Debtor from the Lift Stay Order because Debtor either had no equity (i.e., an amount in excess of the Maintenance and her exemption, hereinafter the "Equity") in the Apartment to which the Lien could attach, or to the extent the Lien attached, § 522(f) gave her the right to avoid the Lien because it impaired her claimed $50,000.00 homestead exemption for the Apartment. Debtor therefore requested that the Court avoid the Lien (i.e., the Request to Avoid). At the September 24, 2008, hearing, Debtor argued that the Apartment had a fixed value, as of the Petition Date, of $78,099.35,⁶ which was set in accordance with the New York Private Housing Finance Law. Smithbuilt argued that the Judgment allowed the Sheriff to auction the right to purchase the Apartment for this purported fixed value and that this "right to purchase" had a fair market value of approximately $500,000.00. Because this question depended solely on New York state law,⁷ principally, the Private Housing Finance Law, the Court stated that it had lifted the stay so that the State Court could decide the value of the Apartment and thus whether there was Equity in the Apartment to which the Lien could attach. Further, when the Court determined the Lift Stay Motion, it focused on the adequate protection issue as opposed to whether Smithbuilt had an interest that was entitled to adequate protection. The Court also stated that Debtor had a right to have her exemption adjudicated in bankruptcy court. Apparently, rather than having this Court address the amount of the exemption and thereby delaying the issue of lifting the stay until the exemption issue was decided, Smithbuilt stated that it would not challenge Debtor's claimed exemption in the State Court.⁸

The Court then determined that it would hold another hearing on the Motion to Reconsider because the value issue raised significant questions as to Smithbuilt's interest in the Apartment and, therefore, whether it had "cause" for relief from the stay. The hearing was scheduled for November 6, 2008, and adjourned at the request of the parties to December 10, 2008. At the conclusion of the hearing on the Motion to Reconsider, the Court issued a minute order (the "Minute Order") granting the Motion to Reconsider, vacating the Lift Stay Order, reimposing the automatic stay,⁹ and instructing the parties to brief the issue of Smithbuilt's interest in the Apartment. Further, the Court stated that because it would hear the value issue, Smithbuilt would not be bound in considering the § 522(f) issue by its concession regarding whether it would raise the exemption issue in the State Court. The Court held another hearing on March 18, 2009, regarding the parties' submissions on Smithbuilt's interest in the Apartment.

3. Request to Avoid

As previously stated, Debtor made the Request to Avoid in the Motion to Reconsider. Debtor argued that the fixed value of the Apartment less the Maintenance, which constituted a consensual first lien on the Apartment, either left no Equity to which the Lien could attach, or to the extent the Lien attached, § 522(f) provided to Debtor the right to avoid the Lien because it impaired her claimed $50,000.00 homestead exemption for the Apartment. Smithbuilt noted that Debtor never formally moved to avoid the Lien,¹⁰ and at the September 24, 2008, hearing, the Court told Debtor's counsel that a motion to reconsider could not be considered a motion to avoid a lien.¹¹

Despite these possible procedural defects with respect to the Request to Avoid, as previously discussed, Debtor's underlying argument challenges the basis of the Lift Stay Order, namely, that Smithbuilt had an interest in the Apartment entitled to protection, thus establishing "cause" for...