In re Kanaley
| Decision Date | 22 April 1999 |
| Docket Number | Bankruptcy No. 94-B-44647(PCB). Adversary No. 95-8047A. |
| Parties | In re John C. KANALEY, Debtor. Madison-Onondaga Corporation and Samuel G. Nappi, Plaintiffs, v. John C. Kanaley, Defendant. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
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James F. Selbach, Syracuse, NY, for plaintiffs.
John C. Kanaley, Syracuse, NY, pro se.
This matter is before the court upon its sua sponte issuance of a final notice of intent to dismiss this adversary proceeding for lack of prosecution. In the four years since this adversary proceeding was filed, the court had previously sua sponte issued two orders to show cause why this proceeding should not be dismissed.1 The court finds the plaintiffs' response inadequate to the final notice and for the reasons set forth below, the court dismisses this adversary proceeding for lack of prosecution, with prejudice.
John C. Kanaley (the "Debtor") filed a voluntary petition under chapter 7 of the Bankruptcy Code (the "Code") on October 4, 1994. On January 4, 1995 the plaintiffs, Madison-Onandaga Corporation ("Madison") and Samuel G. Nappi ("Nappi", together with Madison, the "Plaintiffs") timely filed this adversary proceeding seeking a determination that the Debtor's obligations to them, based on a warranty of certain debts owed to Madison, were not dischargeable under Code § 523(a)(2)(A) and requested that the court fix the amount of the obligations at $1 million including interest and costs.
The Plaintiffs allege that on March 6, 1989 a promissory note in the amount of $735,000 was executed by Bernard Mahoney and Peter Deljiorno to the benefit of Madison with respect to a certain real estate investment in the Town of Onandaga, New York (the "Stoneridge Manor Project"). The Plaintiffs allege that on or about May 21, 1989 the Debtor entered into an agreement with Deljiorno and took an assignment of Deljiorno's interest in the investment and agreed to "fully warrant and undertake the payments owed by Deljiorno to Madison." Complaint at ¶¶ 6, 7. A copy of the promissory note and assignment agreement are attached to the Complaint as Exhibits A and B, respectively.
In support of their Code § 523(a)(2)(A) cause of action, the Plaintiffs allege, "upon information and belief" that at the time the Debtor entered into the transaction concerning the Stoneridge Manor Project he (i) "either did not intend to repay the plaintiffs or, given his financial circumstances, should have know sic that he was unable to pay the plaintiffs"; (ii) "was unable to meet his existing financial obligations as they became due; (iii) implicitly represented that he had the ability to repay the monies due under the note when, in fact he had no such ability nor any intention to repay the sums reflected in the note"; and (iv) entered into the transaction "by false pretenses, false representation, or actual fraud." Complaint at ¶¶ 7-11.
The Debtor, who appears pro se, filed an answer on February 9, 1995 denying the essential elements of the Complaint and asserting as an affirmative defense that he was unable to complete the transaction due to the actions of the Plaintiffs. A.P. Doc. No. 2A. The Debtor's answer stated that (i) payments he made to the Plaintiffs were not used to pay down the mortgage as intended, but were "redirected" by Nappi for Nappi's personal use; (ii) the Plaintiffs "deliberately" urged the Debtor's investment partners to invest funds which they had committed to the Stoneridge Manor Project for other projects of the Plaintiffs, thus reducing funds available for Stoneridge Manor and "making the financing of that project impossible"; (iii) Nappi altered a check written by the Debtor from $6,000 to $16,000 and cashed this altered check without the Debtor's permission or consent; (iv) Nappi cashed checks written by the Debtor in excess of $15,000 "after notifying the Debtor that the said checks had been lost and the Debtor replaced them" and "both sets of checks were cashed prior to the stop payment order being issued"; and (v) Nappi deposited a $36,000 check drawn on the Debtor's account "while knowing full well that payment had been stopped on the check and being fully aware that it was noted on the check that it was not to be cashed." Answer at ¶ 5. The Debtor further stated that Nappi was indicted by an Onondaga County grand jury for this final action. Id.
The Plaintiffs did not file a response to the Debtor's affirmative defenses, some of which might be in the nature of counterclaims to which a response was required. Nor did the Plaintiffs take any action or make any motion in furtherance of the prosecution of this adversary proceeding. As a result, on May 21, 1996 this court issued, sua sponte, an Order to Show Cause scheduling a hearing as to why this adversary proceeding should not be dismissed for lack of timely and diligent prosecution, or in the alternative, to schedule a pretrial conference. A.P. Doc. No. 4A. A hearing was set for June 27, 1996. Service was made by the court to Plaintiffs counsel, to the Debtor at his Syracuse post office box address and to the Chapter 7 Trustee.
Plaintiffs counsel, James Selbach ("Selbach"), filed an affirmation in opposition to the Order to Show Cause stating that he thought that his clients had hired new counsel who had settled this proceeding and that the matter would be ready to be placed on the trial calendar within 180 days. He also made a motion for an examination of the Debtor under Bankruptcy Rule ("BR") 2004. A.P. Doc. No. 5A.
The Debtor filed two letters in response to the Order to Show Cause. The first, dated June 21, 1996, merely stated that he supported the dismissal of this adversary proceeding and that he would be unavailable to attend a hearing on the prescribed date. A.P. Doc. No. 6A.
The second letter, dated June 28, 1996, set forth an additional statement by Debtor in which he asserted that he and Nappi had met and spoken on the telephone on "a number of occasions since the filing of the Petition" and that Nappi "has always indicated * * * that he did not intend to continue" this adversary proceeding. The Debtor stated that subsequent to the filing of the papers in this case, Nappi offered him equity positions in various proposed real estate projects and that Nappi, in those calls and meetings, "had discussed with the Debtor the possibility that the Debtor not testify against Mr. Nappi in a particular criminal Grand Jury investigation of Mr. Nappi's business practices." The Debtor stated that Nappi "instructed his criminal defense attorney to meet with the Debtor for the express purpose of discussing Mr. Nappi's criminal activity and it's sic relation to the instant case before this Court" and that the Debtor rejected Nappi's offers. The Debtor states that he testified against Nappi before the Onondaga County Grand Jury and that Nappi "was indicted and, upon information and belief, entered a guilty plea." Throughout this period, the Debtor states that Nappi never made any reference to a change of counsel. A.P. Doc. No. 7A.
In his second letter, the Debtor also stated that he had met with Plaintiffs' counsel prior to the filing of his petition "so that he could avail himself of Mr. Selbach's expertise in bankruptcy law to assist the Debtor in the filing of his bankruptcy petition." Although the Debtor did not ultimately retain Selbach he contends that he relied on Selbach's advice and counsel and that it is therefore improper for Selbach to continue as Nappi's counsel in this proceeding. Id.
Neither the Plaintiffs nor Selbach filed a response addressing the statements made by the Debtor in his June 28th letter. Instead, on July 8, 1996 the Plaintiffs filed a Notice of Deposition pursuant to BR 7030 and scheduled the deposition of the Debtor for July 26, 1996. A.P. Doc. No. 8A.
This deposition never took place. The adversary docket reflects that the Plaintiffs filed no other motions or notices in this proceeding. On May 8, 1998, two years after the court's first Show Cause Order was issued, the court issued a second Order to Show Cause scheduling another hearing as to why this adversary proceeding should not be dismissed for lack of timely and diligent prosecution. A hearing was set for June 4, 1998. None of the parties responded to this second Show Cause Order, nor did any of them appear on the prescribed date.
Having received no papers from the Plaintiffs since the July 1996 Notice of Deposition, on January 20, 1999 the court issued a final "Notice of Intent to Dismiss Adversary Proceeding" which stated that unless written objections to this Notice were filed with the court on or before February 8, 1999, this adversary proceeding would be dismissed by the court on February 10th. A.P. Doc. No. 10A.
Prompted by the court's Notice of Intent, both parties filed responsive papers on February 9, 1999. The Plaintiffs, through an affirmation of their counsel, object to the dismissal of this proceeding on the grounds that this "is a proceeding objecting to the debtor's discharge on the grounds of fraud based on certain checks that were given to the plaintiffs by the Debtor which were later returned unpaid based on insufficient funds." The Plaintiffs also imply that because the Debtor's mailing address is a post office box in Syracuse, New York and because the Debtor previously resided in Syracuse he does not meet the residency requirements for the Southern District of New York. Finally, the Plaintiffs state that the Debtor had informed them that he was unavailable to be deposed in July 1996, that he did not appear on the subsequently scheduled date, that further attempts to obtain his deposition have been unsuccessful and that the Plaintiffs cannot proceed to trial until the deposition has been completed. A.P. Doc. No. 12A.
The Debtor responded to the...
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