In re Covelli

• Decision Date: 13 May 2016
• Docket Number: Case No. 15–36090 CGM
• Parties: In re: Edward M. Covelli, Jr. and Rita B. Covelli, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

550 B.R. 256

In re: Edward M. Covelli, Jr. and Rita B. Covelli, Debtors.

Case No. 15–36090 CGM

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

Signed May 13, 2016

Edward M. Covelli, Jr and Rita B. Covelli, Pro Se Debtors

Corbally Gartland Rappleyea LLP, 35 Market Street, Poughkeepsie, N.Y. 12601, Attorneys for William Clement By: Patrick T. Gartland, Karen E. Hagstrom

MEMORANDUM DECISION GRANTING DEBTORS' MOTION TO REOPEN AND FOR SANCTIONS AND DENYING WILLIAM CLEMENT'S MOTION FOR AN ORDER ON THE PETITION DATE

CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE

Before the Court are the motions of Edward M. Covelli, Jr. and Rita B. Covelli (“Debtors”) to reopen their chapter 7 bankruptcy case and to impose sanctions on creditor William Clement (“Clement”) for his alleged violation of the discharge injunction. Amended Mot. to Reopen and for Sanctions, Feb. 23, 2016, ECF No. 36 (“Mot. for Sanctions”).¹ Also before this Court is Clement's motion for an order declaring the Debtors' chapter 7 petition date to be the earlier petition date from Debtors' chapter 13 case. Mot. for Order Determining Petition Date, Mar. 22, 2016, ECF No. 39 (“Mot. for Petition Date”). As explained below, the Court grants the Debtors' motions to reopen the case and for sanctions and denies Clement's motion to use the chapter 13 petition date as the petition date for purposes of the Debtors' chapter 7 discharge.

Jurisdiction

This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(A), as it is a matter concerning the administration of the estate.

Background

Debtors filed their first petition for relief under chapter 13 of the Bankruptcy Code on December 2, 2014. See Vol. Petition, In re Covelli, No. 14–37379 (Bankr.S.D.N.Y. Dec. 2, 2014), ECF No. 1.² Debtors' chapter 13 petition indicated Debtors owned and lived in certain real property located at 231 Ressique Road, Stormville, New York (the “Property”). See id. at 9. The chapter 13 petition also listed the Property as encumbered by a first mortgage, held by Clement. Id. at 15.

Clement, a contractor who builds homes, holds a note secured by a mortgage on the Property. Mot. for Order Terminating Stay ¶¶ 2–5, No. 14–37379, ECF No. 30 (“Chapter 13 Mot. Lift Stay”). On November 6, 2013, prior to Debtors' chapter 13 filing, Clement commenced a foreclosure action in New York state court. Id. ¶ 7. On October 24, 2014, Clement obtained a judgment of foreclosure and sale on the Property. Id. ¶ 8; Mot. for Petition Date 2. Clement scheduled a foreclosure sale for December 27, 2014, which was stayed by the filing of Debtors' chapter 13 petition. Amended Compl. ¶¶ 7–8, Clement v. Covelli, Adv. No. 15–09024 (Bankr.S.D.N.Y. Sept. 14, 2015), ECF No. 3³ (“Amended Compl.”).

On March 12, 2015, Clement filed a secured proof of claim in the Debtors' chapter 13 case in an amount of $448,189.56, stating the claim was secured by a note and mortgage on the Property. See Proof of Claim No. 14–1, No. 14–37379. On the same day, Clement filed a motion for relief from the automatic stay. See Chapter 13 Mot. Lift Stay. The Court granted Clement relief from the stay in the Debtors' chapter 13 case by order entered on April 6, 2015. Order, No. 14–37379, ECF No. 35. Roughly two months later, on June 8, 2015, Debtors voluntarily dismissed their chapter 13 case prior to receiving a discharge. See Mot. to Dismiss, No. 14–37379, ECF No. 46; Order on Mot. to Dismiss, No. 14–37379, ECF No. 48.

On June 15, 2015, only seven days later and before the chapter 13 case had been closed, Debtors filed a petition for relief under chapter 7 of the Bankruptcy Code. See Vol. Petition, June 15, 2015, ECF No. 1. On June 16, 2015, Clement filed a motion to dismiss Debtors' chapter 7 case, or in the alternative, for relief from the automatic stay. See Mot. to Dismiss or for Relief, June 15, 2015, ECF No. 7. In support of the motion to dismiss, Clement argued that Debtors were ineligible to be chapter 7 debtors under 11 U.S.C. § 109(g)(2). Id. ¶¶ 10–11. In the alternative, Clement sought relief from the stay to proceed with the foreclosure sale of the Property scheduled for June 17, 2015. Id. ¶¶ 12, 13.

At the June 30, 2015 hearing on the motion to dismiss, the parties informed the Court they had settled the matter. The parties agreed to lift the stay as to Clement's interest in the Property, with prejudice, which was approved by order of this Court (“Chapter 7 Lift Stay Order”). See Order, July 7, 2015, ECF No. 10. The Court did not rule on the motion to dismiss. The Debtors' chapter 7 case proceeded, and Debtors received a discharge of their debts in chapter 7 on September 30, 2015. Order Discharging Debtor, Sept. 30, 2015, ECF No. 18.

On September 11, 2015, Clement filed an adversary proceeding against the Debtors to contest the dischargeability of the deficiency amount Debtors allegedly owed him on the note and mortgage. See Amended Compl ¶¶ 2, 5, 17. Clement argued that the deficiency on the note and mortgage was a non-dischargeable debt under 11 U.S.C. § 523(a)(6), as a debt incurred for willful and malicious injury by the Debtors to the Property. Id. ¶¶ 13, 17. Clement claimed that after this Court entered the Chapter 7 Lift Stay Order, Debtors agreed to vacate the Property by August 1, 2015. Id. ¶ 12. Clement claimed that on July 23, 2015, a neighbor of the Debtors informed him that the back door to the Property was open. Id. ¶ 13. Clement claimed that upon receiving this information he went to secure the Property. Id. Clement contended Debtors had removed appliances and fixtures from the Property that were subject to the mortgage, damaged electrical wiring, and left wiring exposed without turning the electricity off. Id. Clement claimed that the appliances and fixtures were in fact subject to the mortgage, and that he had the right to foreclose on the personal property as well. Id. ¶¶ 12–14.

Clement asserted that but for the removal of the appliances and fixtures and the damage caused to the Property, the fair market value of the Property would have been $364,933. Id. ¶ 17. Clement claimed the Debtors' actions had resulted in actual damages of $93,207 and correspondingly reduced the fair market value of the property by $93,207 from $364,933 to $271,726. Id. ¶¶ 15, 17. Clement argued he was entitled to the difference between the face value of the note, $501,944, and the reduced fair market value of the Property of $271,726, resulting in a deficiency claim of $230,218.⁴ Id. ¶¶ 16–17. Clement argued that the personal debt of $230,218 was not dischargeable, as Debtors' had created the deficiency through their willful and malicious injury to the Property. Id. ¶ 19.

On September 25, 2015, Debtors filed a motion to dismiss the adversary proceeding. Mot. to Dismiss, Adv. No. 15–09024, ECF No. 6. Debtors argued Clement had not pled sufficient facts to establish a claim for relief under § 523(a)(6). See id. ¶ 3. Debtors argued that Clement could not establish an injury to the Property, that any alleged injury was inflicted by the Debtors, or that any injury had been inflicted in a willful and malicious manner. Id. Debtors argued that the personal property was not subject to the mortgage and the only alleged injury was the wrongful removal of personal property. Id. ¶ 4.

At the hearing on the Debtors' motion to dismiss, the Court ruled that Clement's amended complaint, “as written, does not plead facts to state a claim for which bankruptcy court can grant relief under § 523(a)(6).” Tr. Nov. 3, 2015 Hrg. Mot.Dismiss 12:5–7, Adv. No. 15–09024, ECF No. 19. The Court reasoned that a deficiency judgment on a note and mortgage is a dischargeable contract debt, and Clement had only argued that Debtors' removal of property subject to the mortgage had caused a deficiency in the fair market value, not that a mere contract debt could be transformed into a tortious debt for willful and malicious injury. Id. at 12:22–13:4. Even if Clement had argued the separate existence of tort damages that were not based on the mortgage deficiency, the alleged tortious conduct had all occurred post-petition. Id. at 13:6–10. A state court action to pursue damages in tort based on post-petition conduct of the Debtors in a chapter 7 would not have been stayed by the bankruptcy proceeding. See id. at 13:11–18. The Court granted Debtors' motion to dismiss the complaint. The Court gave Clement 14 days' to replead his complaint to allege either (1) the existence of a single debt based on the note and mortgage, and that a contract claim for a deficiency judgment could be transformed into a tortious debt that would be rendered non-dischargeable under § 523(a)(6) ; or (2) the existence of a second separate debt for damages based on tortious conduct that occurred pre-petition. See id. at 13:19–25. Clement failed to file an amended complaint, and the adversary proceeding was closed on December 14, 2015.

Instead of filing an amended complaint, Clement filed a motion in the Debtors' chapter 7 bankruptcy case to clarify this Court's Chapter 7 Lift Stay Order. Mot. for Order to Clarify, Dec. 18, 2015, ECF No. 26. On January 14, 2016, this Court entered an order in an attempt to clarify the Chapter 7 Lift Stay Order. See Order Regarding Discharge of Debts, Jan. 14, 2016, ECF No. 29. The clarifying order provided “that the debt owed to Clement ... is discharged except that any postpetition damages inflicted on the [P]roperty ... are not discharged by the Debtors' chapter 7 case, are not included in the bankruptcy estate and are not subject to the automatic stay,” with the understanding that the order did not address whether, in fact, such damages had occurred. Id. The clarifying order only addressed those potential postpetition damages that would not have been included in the bankruptcy estate to begin with....