In re Brown

• Decision Date: 13 March 2020
• Docket Number: Case No. 18-10617 (JLG)
• Citation: In re Brown, 615 B.R. 725 (Bankr. S.D.N.Y. 2020)
• Parties: IN RE: Michael Rodger BROWN, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

615 B.R. 725

IN RE: Michael Rodger BROWN, Debtor.

Case No. 18-10617 (JLG)

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

Signed March 13, 2020

LAW OFFICES OF KENNETH L. BAUM LLC, 167 Main Street, Hackensack, New Jersey 07601, By: Kenneth L. Baum, Counsel to Michael Rodger Brown, Chapter 7 Debtor

FISCHER PORTER & THOMAS, P.C., 560 Sylvan Avenue, Suite 3061, Englewood Cliffs, NJ 07632, By: Arthur L. Porter, Jr., Aaron E. Albert, Counsel to Jennifer Brown

AKERMAN LLP, 666 Fifth Avenue, 20th Floor, New York, NY 10022, By: John P. Campo, Counsel to John S. Pereira, as Chapter 7 Trustee for the Estate of Michael Rodger Brown

MEMORANDUM DECISION ON DEBTOR'S MOTION TO APPROVE TITLE TO AND DISTRIBUTION OF MARITAL PROPERTY PURSUANT TO TERM SHEET IN MATRIMONIAL ACTION, AND EXPUNGE CLAIM NO. 6 OF JENNIFER BROWN PURSUANT TO 11 U.S.C. § 502(a) AND FED. R. BANKR. P. 3007

Honorable James L. Garrity, Jr., United States Bankruptcy Judge

Introduction

Michael Roger Brown (the "Debtor") filed a voluntary petition for relief under chapter 7 of title 11 of the United States Code (the "Bankruptcy Code") in this Court on March 5, 2018 (the "Petition Date"). That day, John S. Periera, Esq. was appointed chapter 7 trustee for the Debtor's estate (the "Chapter 7 Trustee") and qualified for and accepted that appointment. As of the Petition Date, the Debtor was a defendant in a divorce action (the "Matrimonial Action") commenced by his then-wife, Jennifer Brown ("Jennifer") in the Supreme Court of the State of New York, County of New York, Matrimonial Term (the "State Court").

The Matrimonial Action was automatically stayed upon the commencement of this case. Among the open issues in that action at that time was the extent of Jennifer's share of the marital assets. Jennifer timely filed a contingent claim in this case in the sum of $6,375,000. It represents her claim to equitable distribution of the marital assets, including to her share of the so-called Unaccounted For Marital Assets, that Jennifer says the Debtor failed to account for in the Matrimonial Action (the "Equitable Distribution Claim").¹ Shortly after the Petition Date, the Court granted Jennifer relief from the automatic stay and leave to continue the Matrimonial Action in all respects, including the issuance of a judgment determining the nature and extent of marital property, the nature and extent of Jennifer's interest in such property, and the equitable distribution of such property. In doing so, the Court denied the Debtor's request that this Court determine the extent of the Debtor's and Jennifer's interests in marital property. Without limitation, the lift stay order directed that if the Debtor and Jennifer entered into a settlement agreement in the Matrimonial Action, any provisions of such an agreement that purported to determine the distribution of or title to property of the bankruptcy estate would not be effective as to such property without this Court's approval.

The Matrimonial Action went forward in the State Court. After five days of a scheduled twenty-two day trial, Jennifer and the Debtor reached a global settlement that they embodied in a "So Ordered Term Sheet" (the "Term Sheet"). Among other things, the Term Sheet resolves all financial matters at issue in the Matrimonial Action. To that end, the Term Sheet fixes Jennifer's share of equitable distribution at $2,500,000 and provides that she will be paid that sum as her share of equitable distribution, not out of marital or estate property, but out of the Debtor's post-petition earnings. Moreover, it provides that Jennifer will turn over all her marital property to the Chapter 7 Trustee.

The State Court approved the Term Sheet and incorporated it (but did not merge it) in the Judgment of Divorce (the "Divorce Judgment") that it entered on November 8, 2018. The Debtor filed an objection to the Equitable Distribution Claim. See Notice of Objection to Claim [ECF 86] (the "Claim Objection"). The matter before the Court is the Debtor's Motion to Approve Title to and Distribution of Marital Property Pursuant to Term Sheet in Matrimonial Action and Expunge Claim No. 6 of Jennifer Brown Pursuant to 11 U.S.C. § 502(a) and Fed. R. Bankr. P. 3007 (the "Motion") [ECF 85].² In the Motion, the Debtor is seeking the entry of an order (i) pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") approving the distribution of his and Jennifer's marital property pursuant to the Term Sheet; and (ii) expunging the Equitable Distribution Claim. The Chapter 7 Trustee joins in and supports the Motion.³ Jennifer objects to the Motion.⁴

For the reasons set forth herein, the Court denies the Debtor's request for relief under Bankruptcy Rule 9019 as moot, and grants the Debtor's request to expunge the Equitable Distribution Claim.

Jurisdiction

The Court has jurisdiction over the Motion pursuant to §§ 1334(a) and 157(a) of title 28 of the United States Code, and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York, dated January 31, 2012 (Preska, C.J.). This is a core proceeding. 28 U.S.C. §§ 157(b)(2)(A) & (B).

Facts

The Matrimonial Action

Jennifer and the Debtor were married on March 24, 2001. During their marriage the couple experienced marital problems and prior to March of 2013, Jennifer and the Debtor were separated for approximately one year. On March 26, 2013, Jennifer, as plaintiff, commenced the Matrimonial Action in the State Court against the Debtor, as defendant. By order dated June 6, 2013, the State Court appointed the firm of Bollam Sheedy Torani & Co., LLP CPA ("BST") to serve as an independent expert in the case. BST's mandate was to "appraise the defendant-husband's interest in various entities, including but not limited to Brown Management Company LLC and HiTouch Business Services LLC," and to "trace the source, use and application of marital funds acquired and spent since May 2006." See BST Report at 1.⁵ The BST Report identified more than $40 million in deposits into marital accounts in addition to an existing balance of $22.8 million. BST could not account for a total of $12.75 million of funds deposited into the accounts (the "Unaccounted For Marital Assets"). See id. at 16, 26-27. After BST produced its report, Jennifer retained Financial Research Associates ("FRA"), to serve as her own expert and to review the findings set forth in the BST Report. FRA produced a report (the "FRA Report") in which it noted, among other things:

BST was unable to identify the disposition of certain funds, which included $8.55 million, that were not included in the ending account balances of the marital accounts analyzed by BST. All told, $12.75 million in transfers could not be traced to a bank account statement to confirm their ultimate disposition.

See FRA Report at 1.⁶

The Debtor Commences Chapter 7 Case and Jennifer Immediately Seeks To Dismiss It

The Matrimonial Action was extremely contentious. As of the Petition Date, Jennifer was proceeding in the State Court to punish the Debtor for contempt based upon his refusal to pay BST's fees and his failure to pay State Court-ordered support for her and the couple's minor children. See Affirmation of Arthur L. Porter, dated February 26, 2018 ¶¶ 4-5.⁷ The Debtor commenced his voluntary chapter 7 case on March 5, 2018. On March 12, 2018, Jennifer filed a motion herein seeking, alternatively, to dismiss the case or to obtain stay relief to permit her to proceed with the Matrimonial Action (the "Motion to Dismiss").⁸ In substance, Jennifer sought to dismiss the Debtor's bankruptcy case on the grounds that:

(i) The Debtor owed her $166,000 in alimony and domestic support obligations, which is a non-dischargeable debt under the Bankruptcy Code and not properly subject to challenge in this Court; and

(ii) The Debtor's chapter 7 petition misrepresented the Debtor's income, assets and liabilities including the extent of his ownership interest in his family's business; and failed to provide a full accounting to trace the Unaccounted For Marital Assets.

Motion to Dismiss at 7-10. In the alternative, she sought relief from the automatic stay to allow her to continue the Matrimonial Action, including the collection of current and overdue support obligations, identification of the Unaccounted For Marital Assets and a determination by the State Court of the equitable distribution of marital assets. Id. at 11. Jennifer submitted an affidavit in support of the motion (the "February 23 Affidavit").⁹ In that affidavit, she asserted that during the couple's a one-year separation prior to the commencement of the Matrimonial Action, the Debtor made two trips to the Cayman Islands. February 23 Affidavit ¶ 6. She suggests that the Unaccounted For Marital Assets might be on deposit in a Cayman bank account. Id. ¶ 7.

The Court Grants Jennifer Stay Relief To Prosecute the Matrimonial Action

The Debtor and Chapter 7 Trustee each opposed the Motion to Dismiss and both urged the Court to grant stay relief to permit the Matrimonial Action to proceed to a final judgment in the State Court.¹⁰ However even as he urged the Court to grant stay relief, the Debtor asked the Court to reserve for its own determination the issue of the equitable distribution of the marital assets. In substance, the Debtor argued that allowing the issue of equitable distribution to proceed in the State Court would very likely interfere with the expeditious administration of the Debtor's estate because Jennifer's attorney was attempting to re-open discovery in the Matrimonial Action, which could substantially delay the resolution of the equitable distribution issue. See Debtor's Opposition to MTD ¶ 20. The Debtor insisted that adjudication of the issue of equitable distribution in this Court would allow for an expeditious resolution of the issue, without the need to await a trial in the State Court. Id. ¶ 21. The Debtor...