In re DiStefano

• Decision Date: 30 September 2019
• Docket Number: Case No. 16-10694
• Citation: 610 B.R. 419
• Parties: IN RE: Stanley Lawrence DISTEFANO, Jr., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of New York

610 B.R. 419

IN RE: Stanley Lawrence DISTEFANO, Jr., Debtor.

Case No. 16-10694

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

Signed September 30, 2019

Lemery Greisler LLC, Attorneys for the Debtor, 50 Beaver Street, Albany, NY 12207

McElroy, Deutsch, Mulvaney & Carpenter, LLP, Attorneys for Endurance American Insurance Company, 88 Pine Street, 24th Floor, New York, NY 10005

Primmer Piper Eggleston & Cramer PC, Attorneys for Chapter 7 Trustee, 30 Main Street, Suite 500, P.O. Box 1489 Burlington, VT 05402-1489

McNamee Lochner P.C., Attorneys for Nancy Burbridge and Janice DiStefano, 677 Broadway, Post Office Box 459, Albany, NY 12201-0459

MEMORANDUM-DECISION AND ORDER

Robert E. Littlefield, Jr., United States Bankruptcy Judge The current matters before the Court are objections by Endurance American Insurance Company ("Endurance" or "Creditor"), Douglas J. Wolinsky, Esq., Chapter 11 Trustee ("Trustee"), and Nancy Burbridge ("Burbridge") to an amended exemption claimed by Stanley Lawrence DiStefano, Jr. ("DiStefano" or "Debtor") regarding certain real property in Hawaii located at 68-1050 Mauna Lani Point Drive, Kamuela, Hawaii ("the Property"). The Court has jurisdiction pursuant to 28 U.S.C. §§ 157(a), (b)(1), (b)(2)(A), (b)(2)(B), and 1334.

BACKGROUND

The Debtor served as managing member of Green Island Construction Group, LLC ("LLC"). Due to certain financial requirements involving projects that the LLC bid on, a performance/payment bond was necessary. Endurance provided the necessary bond. The LLC, and a second company that the Debtor managed, guaranteed repayment to Endurance should the bond ever be called into play. However, personal guarantees by seven individuals were the true quid pro quo for the issuance of the required bonding. That warranty of repayment was given by the Debtor, his wife, two of his sisters, a brother-in-law, and two nephews. Four of the seven, the Debtor, his sisters, and one of the nephews are/or have been in this Court due to the collection efforts of Endurance.

These parties have experienced multiple bouts of mediation in this Court and litigation in New York State Supreme Court. The guarantors have battled Endurance and each other. One of the nephew guarantors filed suit post-petition against the Debtor in New York State Supreme Court averring fiduciary improprieties; the Debtor responded in this Court by seeking damages for an alleged violation of the automatic stay. Even the Debtor's mother-in-law has written to the Court asserting financial malfeasance involving certain family members including the Debtor. Familial ties have meant little or nothing; this situation represents the perfect storm of family dysfunction. These cases have also presented a plethora of watershed issues leading to several appeals. In the Debtor's chapter 7, the interesting question concerns the Property, DiStefano's second amended claim of exemption for it, and party in interest objections to it.

FACTS

The following facts are taken from the pleadings and the "Joint Statement of Stipulated Facts and Issues of Law" ("Joint Stip") filed February 1, 2019. (ECF No. 334.)

1) Petitioning Creditor Janice M. DiStefano commenced this involuntary chapter 7 case against the Debtor on April 20, 2016.¹ (ECF No. 1.)

2) An Order for Relief, on consent, was entered on June 9, 2017. (ECF No. 67.)

3) On his "Schedule A/B: Property" filed on June 23, 2017, the Debtor discloses a 100% interest in 10 Sage Estate, Albany, New York ("Sage Estate"). (ECF No. 79.)

4) The Debtor also discloses an ownership interest in the Property. The nature of the interest claimed is a tenancy by the entirety ("TBE") with "[a]t least one of the debtors and another."²Id.

5) On his "Schedule C: The Property You Claim as Exempt" filed on June 23, 2017, the Debtor, in response to the question, "Which set of exemptions are you claiming?" elects "state and nonbankruptcy exemptions under 11 U.S.C. § 522(b)(3)." Id.

6) In furtherance of this election, the Debtor asserts an exemption for Sage Estate in the amount of $125,000 pursuant to the New York Civil Practice Law and Rules (CPLR) § 5206(a). Id. ; CPLR § 5206(a) (McKinney 2017).

7) No exemption was claimed for the Property. (ECF No. 79.)

8) The Debtor filed amended schedules on June 28, 2017 that did not change his original Schedule A/B or C real property information or elections. (ECF No. 85.)

9) The Debtor's case was converted from chapter 7 to chapter 11 on July 6, 2017. (ECF No. 88.)

10) On December 20, 2017, Endurance timely filed a Proof of Claim for $1,769,317.00.³ (Claim 13-1.)

11) On May 15, 2018, the Debtor amended his schedules a second time. (ECF No. 242.)

12) The Debtor did not amend Schedule A/B. Id.

13) The Debtor's second amended Schedule C maintains the same exemption for Sage Estate. Id.

14) The second amended Schedule C claims, for the first time, an exemption in the Property pursuant to 11 U.S.C. § 522(b)(3)(B) ("(b)(3)(B)") and Hawaii Revised Statute § 509-2. Id.

15) The amount of the exemption stated is "100% of fair market value, up to any applicable statutory limit." Id.

16) Timely objections to the second amended Schedule C were filed by Endurance, Douglas J. Wolinsky, Esq., Chapter 11 Trustee, and Nancy Burbridge.⁴ (ECF Nos. 305, 303, 260.)

17) On or about September 22, 2011, the Debtor and his wife executed a General Agreement of Indemnity ("Agreement", ECF No. 334, Ex. E) as indemnitors, in favor of Endurance, as indemnitee.⁵ (Joint Stip ¶ 24.)

18) As part of said indemnification, the Debtor and his spouse agreed to joint and several liability.⁶ (Agreement ¶ 3.3.)

19) On December 8, 2014, the New York State Supreme Court, index number 65371412014, issued an order to show cause requiring the Debtor and his spouse, among five others, to deposit certain collateral and, if not, the order was to "operate as a lien, mortgage or other encumbrance on the assets of each Defendant in the amount of $859,474.09 and Plaintiff is authorized to file the [December 8, 2014] Order ... wherever ... the Defendants' property may be located." (ECF No. 277, Ex. C.)

20) The Debtor and his spouse consented to continuations of the December 8 order via stipulation and order signed on January 13, 2015 (Id. , Ex. D), February 6, 2015 (Id. , Ex. E), and March 10, 2015 (Id. , Ex. G).

ARGUMENTS

Endurance states broadly that the Debtor's attempt to exempt the Property should be denied because it was done in bad faith. This is shown by DiStefano's failure to disclose, proposing an unconfirmable plan, and his "pattern of delay and obfuscation ...." (Endurance's Obj. Debtor's Am. Exemptions 12, ECF No. 305.) Endurance further argues that the Debtor, as a New York domiciliary, is limited by New York Debtor and Creditor Law ("NYDCL") Section 282 to the exemptions found in the CPLR Sections 5205 and 5206. Endurance's conclusion is that the only real property subject to exemption pursuant to CPLR 5206 is the Debtor's principal residence and not the Property. As an alternative, if the exemption is not prohibited, the Creditor states that (b)(3)(B)'s mention of "nonbankruptcy law" should be interpreted as referring to New York law. However, Endurance's very narrow, main point is that the Property is not exempt from process as to Endurance because of the joint liability created when the Debtor and his spouse signed the Agreement. Thus, the Creditor concludes that the second amended claimed exemption is ineffective at least as to Endurance under Hawaiian law.

The Debtor responds that New York law is irrelevant; Hawaiian law controls on the exemption applicability. The Debtor further states that pursuant to the Supreme Court's decision in Law v. Siegel , 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014), bad faith is not a factor in the rise or fall of a claimed exemption. However, the heart of the Debtor's defense is his conclusion that Endurance does not have the type of joint obligation necessary to overcome the protection offered by the Property's TBE. He asserts that the other side relies too heavily on the Agreement. He reasons that Endurance has not shown that signing the Agreement is the kind of joint action contemplated by Sawada v. Endo , 57 Haw. 608, 561 P.2d 1291 (1977). Specifically, the Debtor says that because each person signed only as an "individual indemnitor", that action does not meet the "joint liability" that is necessary. Also problematic, according to DiStefano, is that Endurance is not a joint creditor of only the Debtor and his spouse because of the five other co-indemnitors. A further quandary is that the Agreement does not specifically state that Endurance may pursue the Debtor and his wife as a marital couple. The Debtor also posits that Endurance is guilty of not following the Sawada suggestion to insist on the subjection of the Property as a condition for the issuance of the Agreement. Other complications from the Debtor's perspective include an issue raised by Laurie Todd that she is not bound by the Agreement, the Property is not even mentioned in the Agreement, and any liability flowing from it is not backed by a judgment.⁷

In response, Endurance restates its earlier positions and emphasizes the joint nature and obligation of the Agreement. It further argues that the Debtor offers no legal basis for his position regarding the Agreement and points out that regardless of Laurie Todd's liability, Section 6.7 of the Agreement binds all other indemnitors.⁸

ISSUES

In order to rule on the objections to the Debtor's exemption, the Court must address the following legal issues:

I. May bad faith defeat a claim to an exemption?

II. Is the NYDCL dispositive?

III. If the answer to the preceding question is in the negative, for purposes of the "applicable nonbankruptcy law" standard provided in (b)(3)(B), does the state law of domicile (New York) or situs (Hawaii) control?

IV. If Hawaiian law applies, what type of obligation would allow a creditor to defeat a TBE?

V. Does that obligation need to have been reduced to

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