In re Lockwood

• Decision Date: 21 September 1981
• Docket Number: Bankruptcy No. 880-01884-20,Adv. No. 880-0575-20.
• Citation: 14 BR 374
• Parties: In re Francis J. LOCKWOOD, Sr., and Joan Lockwood, Debtors. SOCIETA INTERNAZIONALE TURISMO, S.p.A., Plaintiff, v. James BARR, as Trustee in Bankruptcy of Francis J. Lockwood, Sr. and Joan Lockwood, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

14 B.R. 374 (1981)

In re Francis J. LOCKWOOD, Sr., and Joan Lockwood, Debtors.

SOCIETA INTERNAZIONALE TURISMO, S.p.A., Plaintiff, v. James BARR, as Trustee in Bankruptcy of Francis J. Lockwood, Sr. and Joan Lockwood, Defendants.

Bankruptcy No. 880-01884-20, Adv. No. 880-0575-20.

United States Bankruptcy Court, E.D. New York, at Westbury.

September 21, 1981.

Seymour Chagrin, Freeport, N.Y., for defendants.

Herzfeld & Rubin, New York City, for plaintiff.

James Barr, New York City, trustee.

ROBERT JOHN HALL, Bankruptcy Judge.

I.

Societa Internazionale Turismo, S.p.A. (hereinafter "Plaintiff"), has commenced an adversary proceeding seeking relief from the automatic stay provisions of 11 U.S.C. section 362(a). For the reasons set forth below, the Plaintiff's request for the aforesaid relief is denied.

II.

The Plaintiff is a judgment creditor of the debtors, Francis and Joan Lockwood, in the amount of $87,212.58 pursuant to a judgment entered on March 15, 1977, in the Supreme Court of the State of New York, County of New York (hereinafter "State Court judgment").

On March 23, 1977, the State Court judgment was docketed with the County Clerk of Nassau County, thereby placing a lien on any real property owned by the debtors in Nassau County. N.Y.C.P.L.R. section 5203 (McKinney 1980). On October 30, 1978, to satisfy the Plaintiff's judgment, the Plaintiff issued a property execution to the Sheriff of Nassau County to levy on and sell the realty owned by the debtors. The Sheriff scheduled a sale of the realty, the debtor's residence, located at 50 North Main Street, Town of Farmingdale, New York (hereinafter "the Property") for April 21, 1980. Prior to that date, on April 17, 1980, the debtors filed a petition under Chapter 7 of the Bankruptcy Code. Thereafter, the Plaintiff commenced this adversary proceeding.

At a preliminary hearing the parties agreed that the only issue in this matter is the validity of the Plaintiff's claim. It is undisputed that the State Court judgment was entered against the debtors after their answers were stricken for failure to comply with orders of the state court requiring them to provide the Plaintiff with discovery. Thus it is clear that the State Court action was not resolved upon the merits of the Plaintiff's claim.

The debtors allege that the Plaintiff procured the State Court judgment through fraud or other wrongful conduct and thus the judgment and judgment lien are void or voidable. Specifically, the debtors allege that while the Plaintiff may have had a claim against Francis J. Lockwood Associates, Inc.,¹ (hereinafter "the Corporation"),² a co-defendant in the State Court action, it has no claim against them as individuals. In addition, the debtors contend that the entry of the State Court judgment on default was occasioned solely by their attorney's negligence. The debtors argue that under these circumstances the Plaintiff should not benefit from its wrongful conduct to the detriment of the debtors and their creditors.

Subsequent to this preliminary hearing, the court issued its decision and order denying the Plaintiff's request for relief from stay pending a final hearing. In re Lockwood, 11 B.R. 291 (Bkrtcy.E.D.N.Y.1981).

At the final hearing the debtors adduced evidence which showed:

1. The Plaintiff did business with the corporation, not with the debtors as individuals.

2. Francis J. Lockwood was a 100% shareholder of the Corporation.

3. Francis J. Lockwood did not personally guarantee the debts of the Corporation.

4. During the time that the Corporation dealt with the Plaintiff, Francis J. Lockwood did not engage in the travel business, either individually or with a partner.

5. Joan Lockwood was not a director, officer, shareholder or employee of the Corporation, nor did she personally guarantee the debts of the Corporation.

6. When the debtors received the Plaintiff\'s papers in the State Court action, they turned them over to their attorney, Harold Hamilton, who told them "not to worry."

The Plaintiff, relying on the "Full Faith and Credit" clause of the United States Constitution, did not introduce any evidence as to the underlying merits of its claim on which the State Court judgment was based and objected to the debtors introducing any such evidence.³

III. Relief from Stay

The filing of a bankruptcy petition stays the enforcement of a pre-petition judgment against the debtor or property of the estate, stays any act to enforce a lien against the debtor which secures a claim that arose prior to the commencement of the case, and stays a claim against property of the estate. 11 U.S.C. section 362(a)(2), (4), (5). A party may obtain relief from the stay by commencing an adversary proceeding. See 11 U.S.C. section 362(d); Fed.R.Bankr.P. 701(6).

The Plaintiff requests relief from stay on the ground that it has a valid judgment lien on the property and the debtors and the trustee have no equity in it.⁴ The debtors admit that if the Plaintiff's claim is valid, they have no equity in the property. However, the debtors challenge the validity of the Plaintiff's claim, and hence its judgment lien. The only issue before this court is the validity of the Plaintiff's claim.

When a party seeks relief from the stay, the validity of his claim is always a proper matter to be heard and considered in determining whether such relief should be granted. See H.R.Rep.No.595, 95th Cong. 1st Sess. (1977) 344, U.S.Code Cong. & Admin.News 1978, 5787. For if the claim of a secured party seeking relief from stay is not allowable, or if the claim is subordinated and the claimant's lien is transferred to the estate, then the secured status ceases to exist and the party is not entitled to such relief. See United Companies Financial v. Brantley, 6 B.R. 178, 184 (Bkrtcy.N.D.Fla. 1980).

While the court may consider the validity of the Plaintiff's claim for purposes of determining whether to grant relief from stay, the decision of the court on this issue apparently has no res judicata or collateral estoppel effect. See 2 Collier on Bankruptcy, ¶¶ 362.083, 362-55, 56 (15th ed. 1981). That is to say that if the debtors or the trustee wish to have the Plaintiff's claim disallowed, or if the trustee wishes to have the Plaintiff's claim subordinated, they must commence the appropriate proceedings. If the debtor or the trustee fails to take such action, the Plaintiff's lien will survive the Chapter 7 proceeding and can be enforced after the automatic stay terminates. See 3 Collier on Bankruptcy, ¶¶ 524.013 524-13, 14 (15th ed. 1981).

By its terms, the "Full Faith and Credit Clause" of the United States Constitution does not require that Federal Courts give res judicata effect to state court judgments.⁵Cf. Yacovone v. Bolger, 645 F.2d 1028 (D.C.Cir.1981) (constitutional full faith and credit clause, Art. 4, § 1 does not reach the question of what effect federal entities must give state pardons). However, by enacting 28 U.S.C. section 1738,⁶ and its predecessor statute 28 U.S.C. section 687, Congress extended the breadth of the Full Faith and Credit requirement so that "the principles of collateral estoppel and res judicata are made applicable to federal courts with respect to prior state court judgments." Kremer v. Chemical Construction Corp., 464 F.Supp. 468, 471 (S.D.N.Y.1978); accord, Winters v. Lavine, 574 F.2d 46, 54 (2d Cir. 1978); Batiste v. Furnco Construction Corporation, 503 F.2d 447, 450 (7th Cir. 1974); In re Trans Ocean Tender Offer Securities Litigation, 427 F.Supp. 1211, 1219 (N.D.Ill.1977).

28 U.S.C. section 1738 requires that a federal court presented with a state court judgment give the judgment the same force and effect as it has in the state in which it was rendered. See Winters v. Lavine, 574 F.2d 46, 54 (2d Cir. 1978); accord, Midgett v. United States, 603 F.2d 835, 845 (Ct.Cl. 1979); Kremer v. Chemical Construction Corp., 464 F.Supp. 468, 472 (S.D.N.Y.1978). In the instant case, this would appear to necessitate an analysis of the res judicata effect accorded by New York Courts to New York judgments. See Winters v. Lavine, 574 F.2d 46, 54 (2d Cir. 1978). However, several courts have held that since the extent to which a federal court must attach conclusive effect to a prior state court proceeding is a federal question, the federal court is not necessarily bound by the state's interpretation of res judicata and collateral estoppel. See Yacovone v. Bolger, 645 F.2d 1028, 1036 (D.C.Cir.1981); Red Fox v. Red Fox, 564 F.2d 361, 365 n. 3 (9th Cir. 1977); Batiste v. Furnco Construction Corporation, 503 F.2d 447, 450 (7th Cir. 1974); American Mannex Corporation v. Rozands, 462 F.2d 688, 690 (5th Cir.), cert. denied, 409 U.S. 1040, 93 S.Ct. 524, 34 L.Ed.2d 489 (1972); Kremer v. Chemical Construction Corp., 464 F.Supp. 468, 472 (S.D.N.Y.1978); Williams v. Sclafani, 444 F.Supp. 906, 916 (S.D.N.Y. 1978), aff'd mem., 580 F.2d 1046 (2d Cir. 1978); In re Transocean Tender Offer Securities Litigation, 427 F.Supp. 1211, 1219 (N.D.Ill.1977); Schwegmann Brothers Giant Supermarkets v. Louisiana Milk Commission, 365 F.Supp. 1144 (M.D.La.1973), aff'd mem., 416 U.S. 922, 94 S.Ct. 1920, 40 L.Ed.2d 279 (1974).

In the bankruptcy context this circuit has held that where equitable principles require re-examination by the bankruptcy court of a claim that has been reduced to judgment, the doctrine of res judicata is inapplicable. Margolis v. Nazareth Fair Grounds and Farmers Market, 249 F.2d 221, 224 (2d Cir. 1957). In Margolis, the Court of Appeals for the Second Circuit held that a bankruptcy court could exercise its equitable powers to inquire into the validity of claims that had been previously reduced to judgment. 249 F.2d at 222. The court stated that a judgment offered as a claim against the estate could be collaterally attacked "for the purpose of showing that it was obtained by collusion of the parties or is founded upon no real debt." 249 F.2d at 223-24 (emphasis added).

The court in...