In re Bagen

• Decision Date: 07 August 1995
• Docket Number: Bankruptcy No. 92-32517. Adv. No. 93-7004.
• Citation: In re Bagen, 185 B.R. 691 (Bankr. S.D.N.Y. 1995)
• Parties: In re Gregory W. BAGEN, d/b/a Gregory W. Bagen, Attorney at Law, and Carol K. Bagen, Debtors. PUTNAM COUNTY SAVINGS BANK, Plaintiff, v. Gregory W. BAGEN and Carol K. Bagen, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

185 B.R. 691 (1995)

In re Gregory W. BAGEN, d/b/a Gregory W. Bagen, Attorney at Law, and Carol K. Bagen, Debtors PUTNAM COUNTY SAVINGS BANK, Plaintiff, v. Gregory W. BAGEN and Carol K. Bagen, Defendants.

Bankruptcy No. 92-32517. Adv. No. 93-7004.

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

August 7, 1995.

COPYRIGHT MATERIAL OMITTED

McCabe & Mack by Richard R. DuVall, Poughkeepsie, NY, for movant.

Michael R. Gottlieb, Middletown, NY, for respondent.

DECISION ON MOTION FOR SUMMARY JUDGMENT — CONSIDERATION OF CREDITOR STATUS AND DISCRETIONARY ABSTENTION

JEREMIAH E. BERK, Bankruptcy Judge.

INTRODUCTION

The Debtors herein filed for bankruptcy protection on October 22, 1992. Plaintiff commenced the instant adversary proceeding on February 2, 1993 objecting to the Debtors' discharge and the dischargeability of their alleged indebtedness. Debtors have moved for summary judgment contending that the Plaintiff is not a creditor and, therefore, lacks the requisite standing to object to discharge and dischargeability. The motion raises the issue of whether an entity's claim must be enforceable under state law for creditor status to arise in bankruptcy.¹

FACTS

Gregory W. Bagen and Carol K. Bagen (Debtors) executed and delivered to Putnam County Savings Bank (PCSB) a promissory note for $250,000 on February 8, 1989. The note was secured by a second mortgage on a parcel of real property owned by the Debtors and located in the Town of South East, Putnam County, New York (the "Property").

On December 3, 1990, the Debtors transferred, for a nominal sum, all of their right, title, and interest in the Property to Allview Estates, Inc. (Allview). Allview, which was owned and controlled by the Debtors, acquired title to the Property subject to the mortgage. After the Debtors defaulted, PCSB commenced an action on the note against the Debtors in the New York Supreme Court on April 11, 1991. That court entered an order in November 1991 granting PCSB judgment against the Debtors in the sum of $250,000 plus interest and late charges. On October 9, 1992, a judgment, based on the November 1991 order, was entered against the Debtors for $311,677.84 (the "Money Judgment"). Shortly thereafter, on October 22, 1992, the Debtors filed for bankruptcy relief under chapter 7 of the Bankruptcy Code (the "Code"). The Debtors listed PCSB as a secured creditor for $311,677.84 on their schedule of liabilities.²

PCSB subsequently moved in the New York State Supreme Court, pursuant to New York Real Property Actions and Proceedings Law (RPAPL) section 1301(3), for leave to foreclose. Leave was granted on January 25, 1993.

The foreclosure action was commenced by PCSB on January 29, 1993. Only Allview and the People of the State of New York were named as defendants.³ The Debtors were not named in the foreclosure action, they were not served and they did not appear. The foreclosure action proceeded unopposed, and on April 27, 1993 a judgment of foreclosure and sale was rendered. The judgment did not provide for the payment of any deficiency. The Property was sold at a foreclosure sale to PCSB for $1.00, and title was conveyed by delivery of a Referee's Deed to PCSB on June 26, 1993.

At or about the time the foreclosure action was commenced, PCSB commenced this adversary proceeding objecting to the Debtors' discharge pursuant to Code section 727(a) and seeking to except from dischargeability its monetary claim against the Debtors pursuant to Code section 523(a)(2). Debtors here move for summary judgment, arguing that PCSB does not have standing to bring this proceeding. They contend that PCSB's failure to seek a deficiency judgement in the foreclosure action bars it from enforcing the Debtors' obligation under state law and, therefore, PCSB is not a creditor and lacks the requisite standing to bring this action.

SUMMARY JUDGMENT

A motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, applicable herein through Federal Rule of Bankruptcy Procedure 7056, shall be granted if there is "no genuine issue as to any material fact." See Fed.R.Civ.Proc. 56; see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). Based on the affidavits, admissions on file, and the Stipulated Chronology of Relevant Facts, there would appear to be no genuine issues of material fact. However, for the reasons discussed below, I believe it premature to decide this motion until the issue of creditor status, i.e., the enforceability of PCSB's claim, is resolved by the state foreclosure court.

DISCUSSION

1. Creditor Status

A party objecting to a debtor's discharge and dischargeability has standing if that the party is a "creditor" within the meaning of the Code sections 727(c)(1)⁴ and 523.⁵ Miller v. Boles (In re Boles), 150 B.R. 733, 735 (Bankr.W.D.Mo.1993); Horizon Financial, F.A. v. Gresham (In re Gresham), 95 B.R. 836, 837 (Bankr.S.D.Fla.1988).

The Code defines creditor as an "entity that has a claim against the debtor that arose at the time of or before the order for relief. . . ." 11 U.S.C. § 101(10)(A) (1988) (emphasis added). A "claim" is defined as a "right to payment, whether . . . such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. . . ." 11 U.S.C. § 101(5)(A) (1988) (emphasis added).

A "right to payment," and whether an entity is entitled to it, is determined by examining the applicable state substantive law. In re Mandalay Shores Coop. Hous. Ass'n, 54 B.R. 632, 635 (Bankr.M.D.Fla.1984). The Supreme Court has concluded that a right to payment "is nothing more nor less than an enforceable obligation. . . ." Pennsylvania Dep't of Public Welfare v. Davenport, 495 U.S. 552, 559, 110 S.Ct. 2126, 2131, 109 L.Ed.2d 588 (1990). Thus, resolution of the standing issue requires this Court to determine whether under New York law PCSB holds an enforceable claim, or whether its right to payment has been entirely lost.

In Stanley v. Vahlsing (In re Vahlsing), 829 F.2d 565 (5th Cir.1987), a prepetition creditor objected to the debtor's discharge. The bankruptcy court terminated the automatic stay and allowed the alleged creditor to pursue her claim in state court. Although the state court dismissed the claim, the bankruptcy court allowed the objection to discharge proceeding to continue and, eventually, granted the complaint and denied the discharge. After the district court affirmed, the Fifth Circuit Court of Appeals reversed, concluding that the prepetition creditor, who had her claim adjudicated and "finally dismissed" in state court during the bankruptcy case, lost creditor status and, therefore, could not object to a debtor's discharge.

Recently, however, in Norwich Savs. Society v. Flonnes (In re Flonnes), 183 B.R. 37 (Bankr.D.Conn.1995), a bankruptcy court concluded that a creditor did not lose standing to object to the debtor's discharge even though its claim was unenforceable. As in this proceeding, the mortgagee in Flonnes held an enforceable claim at the commencement of the bankruptcy case.⁶ After the debtor filed for bankruptcy, the mortgagee completed its foreclosure action without seeking a deficiency judgment. Like New York, applicable state law required mortgagees to elect between an action at law on the note or in equity to foreclose. The mortgagee was thus precluded from bringing an action on the note and, therefore, could not enforce its claim. Nevertheless, the bankruptcy court held that the mortgagee had standing to object to the debtor's discharge. It reasoned that although the claim was unenforceable, the underlying debt had not been extinguished and, therefore, the mortgagee remained a creditor, albeit a creditor without a remedy for enforcement. I respectfully disagree.

In my view, once an obligation is entirely unenforceable under applicable law, creditor status in bankruptcy is lost. See Davenport, 495 U.S. at 559, 110 S.Ct. at 2131; Vahlsing, 829 F.2d at 567. If PCSB does not have a right to payment under state law, it cannot be a creditor in bankruptcy and, thus, lacks the requisite standing.⁷

2. New York Foreclosure Law — The Single-Action Rule

Article 13 of the RPAPL governs a mortgagee's right to payment in a foreclosure action. RPAPL § 1301 provides in pertinent part:

1. Where final judgment for the plaintiff has been rendered in an action to recover any part of the mortgage debt, an action shall not be commenced or maintained to foreclose the mortgage, unless an execution against the property of the defendant has been issued upon the judgment to the sheriff . . . and has been returned wholly or partly unsatisfied.

. . . .

3. While a foreclosure action is pending or after final judgment for the plaintiff therein, no other action shall be commenced or maintained to recover any part of the mortgage debt, without leave of the court in which the former action was brought.

N.Y.Real Prop. Acts. § 1301 (McKinney 1979).

RPAPL § 1371 governs a mortgagee's right to a deficiency judgment. It provides in pertinent part:

1. If a person who is liable to the plaintiff for the payment of the debt secured by the mortgage is made a defendant in the action, and has appeared or has been personally served with the summons, the final judgment may award payment by him of the whole residue, or so much thereof as the court may determine to be just and equitable, of the debt remaining unsatisfied, after a sale of the mortgaged property and the application of the proceeds, pursuant to the directions contained in such judgment, the amount thereof to be determined by the court as herein provided.

2. Simultaneously with the making of a motion for an order confirming the sale, provided such motion is made within ninety days after the date of consummation of the sale by the delivery of the proper deed of conveyance to the purchaser, the party to whom such residue shall be

...