In re Diloreto

• Decision Date: 19 June 2008
• Docket Number: No. 07-15413bf.,07-15413bf.
• Citation: 388 B.R. 637
• Parties: In re Jeanne S. DILORETO, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

388 B.R. 637

In re Jeanne S. DILORETO, Debtor.

No. 07-15413bf.

United States Bankruptcy Court, E.D. Pennsylvania.

June 19, 2008.

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Kenneth E. Aaron, Weir & Partners LLP, Philadelphia, PA, for Debtor.

MEMORANDUM

BRUCE FOX, Bankruptcy Judge.

Presently before me is the motion filed by Mrs. Jeanne Diloreto¹ seeking attorney's fees and costs under 11 U.S.C. § 303(i)(1) as well as damages, including punitive damages under section 303(i)(2), against Eric DiNallo, Superintendent of Insurance of the State of New York, in his capacity as liquidator of Nassau Insurance Co.² The respondent Liquidator opposes the requested relief.

An evidentiary hearing on this motion took place over two days, with the parties agreeing that the issue of punitive damages should be deferred until I had determined whether the Liquidator filed his involuntary petition in bad faith.³

The instant section 303(i) motion is determined against the following factual background, much of it undisputed (although the parties disagree as to the relevance of numerous facts). I shall detail these facts in narrative format.

I.

This section 303(i) dispute is but the latest piece of litigation to arise in, arise under, or be related to the efforts of the Liquidator, since 1985, to recover under reinsurance treaties issued in favor of Nassau. See Curiale v. Ardra Insurance Co., Ltd., 88 N.Y.2d 268, 271, 644 N.Y.S.2d 663, 667 N.E.2d 313 (1996).⁴ The Liquidator asserted in state court litigation that Nassau had improperly diverted funds to Ardra Insurance Company, a Bermudian entity, and that Ardra, in turn, diverted funds to other offshore entities all under the control of Mr. and Mrs. Diloreto.

The 1985 lawsuit eventually went to trial before a jury in New York state court. In June 2001, Mrs. Diloreto and her husband were found liable to Nassau as the alter egos of Ardra Insurance Co., which company had issued the reinsurance treaties. After consideration of post-trial motions, judgment was entered against Mrs. Diloreto on April 18, 2002 in the amount of $20,507,456.86. See Serio v. Ardra Insurance Co., Ltd., 304 A.D.2d 362, 761 N.Y.S.2d 1, (2003), appeal dismissed 100 N.Y.2d 576, 764 N.Y.S.2d 385, 796 N.E.2d 477 (2003), leave to appeal denied, 100 N.Y.2d 516, 769 N.Y.S.2d 202, 801 N.E.2d 423 (2003).⁵

Shortly after the entry of this judgment, the Liquidator sought to execute by transferring the judgment to Chester County, Pennsylvania, where Mrs. Diloreto owns real estate. Ex. 1. He also transferred the judgment to Lee County in Florida, where Mrs. Diloreto had purchased property in August 2001.⁶

In November 2005, Mrs. Diloreto commenced a malpractice suit in the Philadelphia County trial court against Pepper Hamilton ("Pepper"), the law firm that had unsuccessfully represented her in the New York state court case. Ex. 3. While that malpractice suit was pending, on March 16, 2007, the Liquidator served Pepper "as garnishee" with a writ of execution issued by the Chester County court. Ex. 1, docket entry 3/14/07; ex. 2. The Liquidator also sought to depose Mrs. Diloreto in connection with his execution efforts, but such deposition did not occur. Ex. PC-5.

In March 2007, Mrs. Diloreto's malpractice attorney met with counsel for the Liquidator in an effort to resolve the batter's execution efforts against his client. Mrs. Diloreto offered to tender future malpractice litigation proceeds to the Liquidator in return for satisfaction of the New York state court judgment. This offer was declined.

By September 2007, the Philadelphia trial in Mrs. Diloreto's malpractice action was imminent, and Mrs. Diloreto and Pepper were attempting to reach a settlement of that lawsuit. Pepper, however, was fearful of paying any settlement funds to Mrs. Diloreto while the writ of execution was pending against it. In September 2007, Pepper filed an emergency state court petition to set aside the writ of execution. Ex. 4. A hearing on that petition was scheduled for September 18, 2007.

Although the Liquidator had earlier considered filing an involuntary petition against Mrs. Diloreto, he did not do so until September 17, 2007. On that date the Liquidator, as the sole petitioning creditor, filed an involuntary chapter 7 bankruptcy petition against Mrs. Diloreto. He then argued in state court on September 18, 2007 that Pepper's petition to vacate his writ of execution was stayed by the bankruptcy filing. Apparently the court agreed, and no ruling was entered regarding the validity of the Liquidator's writ of execution.

Accompanying the involuntary petition in this court was the Liquidator's motion for the appointment of a bankruptcy trustee under section 303(g), which motion was opposed by Mrs. Diloreto and ultimately denied without prejudice after a hearing. Mrs. Diloreto, in turn, filed a motion for me to recuse under 28 U.S.C. § 455(a) and Fed. R. Bankr.P. 5004(a)—based solely upon my having made credibility findings adverse to Mr. Diloreto in an adversary proceeding filed in connection with Mr. Diloreto's earlier chapter 7 case, see In re DiLoreto, 266 Fed.Appx. 140, 143 (3d Cir. 2008) ("[T]hough DiLoreto offers benign explanations for these transactions, he does not persuasively contradict the Bankruptcy Court's finding that he `embarked upon a complex plan over many years to control his personal assets and the assets of various entities, which assets and entities were titled in the name of family members or numerous corporations but subject to his complete control.'")—which recusal motion was also denied.

In addition to Mrs. Diloreto's motion to recuse, she filed a separate motion to dismiss under section 305(a)(1). Ex. PC-3. This motion, dated September 20, 2007, alleged that Mrs. Diloreto had reached an "agreement in principal to settle" her malpractice lawsuit and was willing to escrow the settlement proceeds with the state court to determine the rights of the parties to those proceeds. Id., ¶¶ 10-13. Thus, she maintained that dismissal was appropriate. In further support of discretionary dismissal under section 305(a)(1), this motion alleged that: the dispute over execution upon malpractice settlement proceeds was a state law issue that could best be determined by the state court; the settlement funds could be escrowed pending that state court decision; this involuntary case was merely a two-party dispute between the Liquidator and Mrs. Diloreto, as the latter was current in payments to certain creditors; and this involuntary case would jeopardize the malpractice settlement agreement. Id., ¶ 18.

Among her assertions under section 305(a) that an order for relief on the involuntary petition was inappropriate as a manifestation of a two-party dispute, Mrs. Diloreto pled that she "currently has at most seven total creditors (including Petitioning Creditor)." Id., ¶ 25. Four of those creditors were identified as mortgagees, and two were credit card issuers, with all six obligations purportedly being current. Id., ¶¶ 25-26.

Before there was any ruling on Mrs. Diloreto's motion under section 305(a), two other pleadings were filed. First, on September 25, 2007, Pepper sought relief from the bankruptcy stay so that its petition to set aside the writ of execution could be adjudicated in state court. That stay relief motion was withdrawn without prejudice on September 28, 2007, when Pepper and Mrs. Diloreto reached a settlement of the state court litigation, the terms of which were accepted by the Liquidator and involved the escrowing of certain funds.

Second, on October 9, 2007, Mrs. Diloreto filed another motion to dismiss the involuntary petition, relying upon Fed. R. Bankr.P. 1011(b) and 7012. This new dismissal request asserted that Mrs. Diloreto was ineligible for bankruptcy relief because she had not received prepetition credit counseling under 11 U.S.C. § 109(h). In addition, she argued that this court lacked personal jurisdiction over her because the involuntary petition and summons were served upon her separately, and because the involuntary petition was served upon her by Federal Express, rather than by first class mail as specified by Fed. R. Bankr.P. 1010 and 7004(b). Third, Mrs. Diloreto sought dismissal because of the Liquidator's alleged failure to comply with the three petitioning creditor requirement of section 303(b).

Separate from this second dismissal motion, but also filed on October 9, 2007, was an alternative motion to transfer venue of this involuntary proceeding to Florida.

On October 17, 2007, I entered an order scheduling a hearing on the transfer of venue motion as well as the second dismissal motion, but excluded from consideration at that time the debtor's allegations regarding section 303(b). I noted that Rule 1003(b) set out a procedure for determination of section 303(b) compliance in the context of an answer to the involuntary petition, rather than via a motion to dismiss.

On October 31, 2007, Mrs. Diloreto withdrew her abstention/dismissal motion under section 305.

On November 9, 2007, an evidentiary hearing was held on the second dismissal motion, including the venue transfer request. At the conclusion of that November 9th hearing, both parties agreed to participate in mediation prior to my rendering any ruling on the dismissal request.

The parties jointly requested that one of my judicial colleagues serve as mediator, and that request was honored. Apparently, two mediation sessions were held, which sought to resolve not simply the disputed involuntary petition against Mrs. Diloreto but also the various litigation that the Liquidator had pending against Mr. and Mrs. Diloreto. Those mediation efforts proved unsuccessful.

On January 8, 2008, I issued a memorandum and order, docketed on January 11, 2008. In that decision, I rejected Mrs. Diloreto's contention that she was ineligible to become an involuntary chapter 7 debtor as the provisions of 11 U.S.C. § 109(h) were...