In re Faraldi

• Decision Date: 11 December 2002
• Docket Number: No. 02-CV-0679 TCP.,02-CV-0679 TCP.
• Citation: 286 B.R. 498
• Parties: In re Albert V. FARALDI, Debtor. Allan B. Mendelsohn, the Chapter 7 Trustee for the Estate of Albert Faraldi, Appellant, v. Andrew M. Thaler, the Chapter 7 Trustee for the Estate of George A. Gamaldi, Sr., Appellee. Andrew M. Thaler, the Chapter 7 Trustee for the Estate of George A. Gamaldi, Sr., Petitioner, v. Albert V. Faraldi, and Dorothy Faraldi, Respondents, and United States of America, Intervenor.
• Court: U.S. District Court — Eastern District of New York

Page 498

286 B.R. 498

In re Albert V. FARALDI, Debtor.

Allan B. Mendelsohn, the Chapter 7 Trustee for the Estate of Albert Faraldi, Appellant, v.Andrew M. Thaler, the Chapter 7 Trustee for the Estate of George A. Gamaldi, Sr., Appellee.

Andrew M. Thaler, the Chapter 7 Trustee for the Estate of George A. Gamaldi, Sr., Petitioner, v.Albert V. Faraldi, and Dorothy Faraldi, Respondents, andUnited States of America, Intervenor.

No. 02-CV-0679 TCP.

United States District Court, E.D. New York.

December 11, 2002.

Wendy J. Kisch, U.S. Department of Justice, Washington, DC, for U.S.

Harold J. Levy, Thaler & Gertler, L.L.P., Westbury, NY, for Andrew M. Thaler.

A. Scott Mandelup, Pryor & Mandelup, Westbury, NY, for Allan B. Mendelsohn.

Lawrence May, Angel & Frankel, New York City, for Albert V. Faraldi.

MEMORANDUM AND ORDER

PLATT, District Judge.

Before this Court are both an appeal and a motion.The Court heard oral argument on both the appeal and the motion on November 14, 2002.

The appeal is by Allen B. Mendelsohn, Esq., the Chapter 7Trustee of the bankrupt estate of Albert V. Faraldi("Appellant" or "Faraldi Trustee"), from the Memorandum and Order of the United States Bankruptcy Court for the Eastern District of New York dated February 1, 2002, ordering pursuant to 11 U.S.C. § 544(b) that the Faraldi Trustee abandon to Andrew M. Thaler, Esq., the Chapter 7Trustee of the bankrupt estate of George A. Gamaldi, Sr., ("Gamaldi Trustee"), certain claims alleged in a Special Proceeding pending before this Court("Special Proceeding"), to the extent that those claims seek to recover alleged fraudulent conveyances of Albert V. Faraldi's ("Faraldi") interests in a house in Huntington, New York and a condominium in Montauk, New York (collectively the "Real Property") transferred by Faraldi to his wife, Dorothy Faraldi, in 1991.

The Motion is brought by the United States of America ("United States" or "IRS") in this action to compel the Faraldi Trustee to abandon the fraudulent conveyance claims not only as to the Real Property, but also as to certain personal property.

Following the appeal by the Faraldi Trustee from the Bankruptcy Court's decision on February 1, 2002, this Court withdrew the reference to consider all the questions raised herein.For the reasons stated below, the Faraldi Trustee's Appeal is GRANTED to the extent discussed below and the IRS's Motion is DENIED.

BACKGROUND

The facts of this case have been set forth in detail in (i)this Court's Memorandum and Order dated August 15, 2002, which granted the United States motion to intervene in the present action and (ii) in the Bankruptcy Court's Memorandum and Order dated February 1, 2002, familiarity with which is presumed, and will not be restated in detail here.

At issue in both the Appeal and Motion is whether the Faraldi Trustee should be permitted to bring the fraudulent conveyance claims in the Special Proceeding as to the real and personal property Faraldi conveyed to his wife in July 1991, two months after Gamaldi had sent Faraldi a letter demanding payment under a guaranty that Faraldi had personally executed.Faraldi allegedly conveyed without consideration, (1) his tenancy by the entireties interest in a house in Huntington, New York; (2) a similar tenancy in an oceanfront condominium in Montauk, New York; (3) a forty-four foot yacht; and (4) approximately $700,000 in securities (collectively with the yacht the "Personal Property").Prior to the conveyance, the house in Huntington and the condominium were owned by Faraldi and his wife as tenants by the entirety.The yacht and liquid assets had been held in Faraldi's name.

On November 9, 1998, the Gamaldi Trustee commenced the Special Proceeding against Faraldi and his wife in this Court to: (1) enforce the default judgment that had previously been entered against Faraldi and (2) void the conveyances made to his wife in July 1991(hereinafter the "Fraudulent Conveyance Action").This Court subsequently scheduled jury selection in the Fraudulent Conveyance Action for May 15, 2000.However, jury selection was thwarted because on May 12, 2000, Faraldi individually filed a bankruptcy petition under Chapter 7 of the United States Bankruptcy Code and thereby received an automatic stay under Title 11 U.S.C. § 362.

Shortly thereafter, the Gamaldi and Faraldi Trustees and their counsel were reportedly ready to prove on behalf of their respective estates that the properties were transferred with actual intent to hinder, delay, or defraud a creditor and without receiving reasonably equivalent value in return.

The Gamaldi Trustee argues that the Faraldi Trustee should be compelled to abandon the Fraudulent Conveyance Action as to the Real Property, since it is burdensome and inconsequential to the estate based on the fact that the Gamaldi Trustee was a pre-petition secured creditor of Faraldi based on Gamaldi's filing of a judgment in the amount of $9,117,795.10, with the Suffolk County Clerk on September 29, 1997, and the fact that the judgment exceeds the value of the Real Property.¹The IRS similarly argues that the Faraldi Trustee should abandon the Fraudulent Conveyance Action, as to both the Real and Personal Property, since the IRS was a pre-petition secured creditor by way of its tax lien filed with the Suffolk County Clerk on October 27, 1993, which exceeded the value of the assets at issue.²As noted by the Bankruptcy Court, the IRS's tax lien is greater than $1.8 million.

The Bankruptcy Court agreed with the Gamaldi Trustee and ordered that the Faraldi Trustee abandon the Fraudulent Conveyance Action as to the Real Property based on a finding that there was no non-exempt equity in the Real Property and that the Real Property was burdensome or of inconsequential value and benefit to the estate pursuant to 11 U.S.C. § 554(b).The Bankruptcy Court's holding was based on the fact that the Gamaldi Trustee had a valid lien on the Real Property.The Bankruptcy Court found that under New York Law, the docketing of a judgment creates a lien on real property, notwithstanding the fact that the property had been transferred prior to the docketing of the judgment.

The Faraldi Trustee argues the Bankruptcy Court erred and that he has the right to bring the Fraudulent Conveyance Action, in part based on a May 16, 2000, stipulation between the Faraldi Trustee, Dorothy Faraldi and the Gamaldi Trustee's law firm, Thaler & Gertler, LLP, ("Thaler")"So Ordered" by this Court on June 3, 2000, substituting the Faraldi Trustee for the Gamaldi Trustee as the Petitioner in the Special Proceeding (the "Stipulation").The relevant portion of the "So Ordered" Stipulation stated, "The [Faraldi]Trustee shall be substituted as the Petitioner in the above action [the Special Proceeding], as successor-in-interest to Andrew M. Thaler, the Chapter 7Trustee for the Estate of George A. Gamaldi, Sr."³

No appeal was taken and no formal motion has ever been made to date to vacate or modify this Court's Order.The Bankruptcy Court's order makes no mention of the Stipulation and it appears that the Faraldi Trustee did not adequately bring it to the attention of the Bankruptcy Court.⁴

The Faraldi Trustee further argues that under New York law a fraudulent conveyance is voidable, not void ab initio.Therefore the docketing of the judgment after real property has been transferred, even if the transfer is later found to be fraudulent, does not create a lien against the real property unless and until the transfer is avoided and the property is reconveyed to the debtor.

While the Court does not disagree with the legal analysis of the Bankruptcy Court regarding the status of the Gamaldi Trustee as a secured creditor, the Court reverses the Bankruptcy Court's decision to the extent it prevents the Faraldi Trustee from bringing the Fraudulent Conveyance Action.The Bankruptcy Court failed to consider the Stipulation "So Ordered" by this Court, which expressly states that the Faraldi Trustee is the successor-in-interest to Gamaldi Trustee in regards to the Special Proceeding.Similarly, while this Court agrees that the IRS was a pre-petition secured creditor, it also denies the IRS's Motion because the Court finds that the "So Ordered" Stipulation is the law of this case and that at the Court's discretion abandonment is improper in this case.While the "So Ordered" Stipulation allows the Faraldi Trustee to bring the Fraudulent Conveyance Action, the Stipulation does not prohibit either the Gamaldi Trustee or the IRS from assisting in the prosecution of the action and the Court agrees that they should do so.

DISCUSSION

A.The Faraldi Trustee's Appeal of the Bankruptcy Decision

1.Standard of Review

On appeal of a decision of a bankruptcy court, a district court"may affirm, modify or reverse a bankruptcy judge's judgment, order or decree."Fed. R. Bankr.P. 8013.It is well established that in examining a bankruptcy court's conclusions of law, the district court applies a de novo standard of review.See, e.g., Fellows, Read & Associates, Inc. v. Rieder,194 B.R. 734, 736(S.D.N.Y.1996)aff'd116 F.3d 465(2d Cir.1997)("This [District] Court ... is not bound by the Bankruptcy Court's view of the law, which is reviewed de novo.")

On the other hand, findings of fact made by a bankruptcy court may not be set aside unless clearly erroneous.SeeFed. R. Bankr.P. 8013("Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous ....").See alsoIn re Manville Forest Prods. Corp.,896 F.2d 1384, 1388(2d Cir.1990).In applying the "clearly erroneous" standard of review, a district court may reverse the bankruptcy court where it is "left with the definite and firm conviction that a mistake has been committed."BP Energy Co. v. Bethlehem Steel Corp.,2002 WL 31548723 at *2, 2002 U.S. Dist. LEXIS 22052 at *7(S.D.N.Y.2002)(quotingUnited States v. United States Gypsum Co.,333...