In re Mitchell

• Decision Date: 16 November 1998
• Docket Number: Bankruptcy No. 98 B 42014(SMB),Adversary No. 98/8915A.
• Parties: In re Gail MITCHELL, Debtor. ALDUS GREEN COMPANY and Kraus Management, Inc., Plaintiffs, v. Gail MITCHELL, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

227 B.R. 45 (1998)

In re Gail MITCHELL, Debtor.

ALDUS GREEN COMPANY and Kraus Management, Inc., Plaintiffs, v. Gail MITCHELL, Defendant.

Bankruptcy No. 98 B 42014(SMB), Adversary No. 98/8915A.

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

November 16, 1998.

COPYRIGHT MATERIAL OMITTED

Kraus & Kraus, Long Island City, New York, Rita M. Rizzo, of counsel, for plaintiffs.

Gail Mitchell, Bronx, New York, pro se.

MEMORANDUM DECISION DETERMINING NON-DISCHARGEABILITY OF RENT OBLIGATION

STUART M. BERNSTEIN, Bankruptcy Judge.

The Plaintiffs, Aldus Green Company ("Aldus") and its managing agent, Kraus Management, Inc. ("Kraus"), seek a determination that the debtor's unpaid rent obligation, accruing between June 1, 1997 and November 30, 1997, is not dischargeable.¹ They rely on sections 523(a)(2)(A) and 523(a)(6) of the Bankruptcy Code. The Court conducted a trial on October 20, 1998, heard the testimony of four witnesses, including the debtor, and received documentary evidence. The Court concludes that Kraus, as agent for Aldus — a disclosed principal — holds no claim against the debtor, and accordingly, its claim in this adversary proceeding is dismissed. In addition, the Court concludes that Aldus has failed to satisfy its burden of proof under 11 U.S.C. § 523(a), and accordingly, its rent claim is dischargeable.

BACKGROUND

A. Introduction

Aldus owns HUD-subsidized housing located at 990 Aldus Street in the Bronx. To get the HUD subsidy, the tenant undergoes an annual certification process which determines the portion of the rent HUD will subsidize. In simplest terms, the annual recertification involves a three part process: the tenant must (1) complete a questionnaire, (2) supply certain employment, financial and personal documentation and (3) sign the certification. If the tenant does not comply, she may lose her subsidy.

The existence and amount of the subsidy do not affect the aggregate rent obligation. The landlord is entitled to receive the HUD-approved market rent for each apartment. The landlord collects the subsidized portion from HUD and the unsubsidized portion from the tenant. Thus, as the subsidy decreases, the amount that the tenant must pay goes up. It is, therefore, in the tenant's economic interest to satisfy the requirements for certification. It makes no difference to the landlord, except to the extent that HUD is a better payment risk than the tenant.

Here, the debtor and Aldus entered into a one year lease, dated September 3, 1991, (Plaintiff's Exhibit ("PX") 5), for apartment 6B, and the debtor began her occupancy at that time. The lease renewed automatically each year. The debtor could terminate the lease for any reason on thirty days notice. (Id., § 38(a).) Aldus could only terminate the lease for material breach, material failure to comply with obligations imposed under state landlord-tenant law or "other good cause." (Id., § 38(b), (c).) The lease obligated the debtor, among other things, to pay rent in a timely fashion, (id., §§ 3, 20), and comply with Aldus's requests for information and certifications regarding the HUD rent subsidy program. (Id., § 6(c)). If the debtor breached the latter duty, Aldus's remedies were limited; it could require her to pay the HUD-approved market rent and effectuate rent increases without first providing the thirty day notice otherwise required. (Id., § 32.)

B. The Eviction Proceedings

Prior to June 1997, the debtor met her obligations vis-a-vis Aldus' certification efforts, and generally (though not always) paid her rent without incident. She stopped paying her rent completely beginning with June 1997. At that time, the HUD-approved market rent was $1,350.00 per month. The debtor paid $412.00 and HUD paid the balance. On or about July 3, 1997, Aldus commenced a nonpayment proceeding, (PX 6), which culminated in a judgment of possession against the debtor, by default, on August 1, 1997. (PX 7.)² By order to show cause, issued at 2:46 p.m. that same day, the debtor moved to vacate the judgment, and obtained a stay against the issuance of the warrant of eviction. (PX 8, p. 1.) The accompanying affidavit, (id., p. 2), signed by the debtor, stated:

I would like to make arrangements with landlord to pay the sum of $824 by the 21st of August.

I missed my court date because I was at the hospital with my sister since 4 a.m. this morning.

The debtor failed to appear on August 8, 1997, the return date. As a result, the stay issued on August 1st was vacated, and her motion was denied. (PX 9.)

The debtor filed a second order to show cause on August 12, 1997. (PX 10.) Her brother, Dexter Lucas, signed the accompanying affidavit in the debtor's name but with her knowledge and consent. The affidavit stated, in substance, that the debtor could not attend court on August 8th because she was renewing her lease at the landlord's headquarters in Long Island City and did not finish until 12:00 noon.³ The affidavit also stated that the debtor would like to pay her rent by the end of the month, and have the opportunity to apply for "Jiggetts," another benefits program. The court signed the second order to show cause, again staying any further eviction efforts, and made the motion returnable on August 19, 1997.

Mr. Lucas appeared on the return date, again with the debtor's knowledge and consent. At that time, the parties entered into a stipulation, (PX 11), which provided, in material part, that (1) the debtor's motion was granted and the prior judgment was vacated, (2) the debtor consented to a final judgment in the sum of $1,236.00 (the unpaid rent for June, July and August),⁴ and (3) the issuance of the warrant of eviction was stayed through September 19, 1997. The stipulation did not include a payment schedule. Instead, it required the debtor to pay the past due rent by September 19th to avoid eviction. However, the warrant could issue before then. The stipulation required the debtor to remain current in the payment of future rent, (id., ¶ 6), and authorized Aldus to execute the warrant without further notice in the event of a default. (Id., ¶ 4.)

The debtor did not make any payments after the stipulation, and twice sought a further stay from the housing court without success. On September 9, 1997, the debtor submitted a third order to show cause. (PX 14.) The accompanying affidavit, signed by the debtor's sister, stated that the debtor did not have the money to pay the rent, and would like to have more time to move from the apartment. (Id., p. 2.) The court refused to sign the order to show cause because it offered "no valid reason to vacate the prior agreement." (Id., p. 1.) The debtor submitted a similar application on September 19, 1997, "supported" by another affidavit from her sister substantially identical to her September 9 affidavit. (PX 15.) The court again refused to sign the order to show cause because it did not show a meritorious defense and was presented by the debtor's sister. (Id., p. 1.)

It is unclear whether the debtor was ever actually evicted, although a warrant of eviction issued on October 29, 1997. (See PX 13.) She moved out on or about November 1, 1997, to live with her mother.

C. The Recertification Efforts

In May, 1997, Aldus began the recertification process. On May 19, Kraus sent the debtor a list of documentation that she should bring with her to a meeting with Gladys Prospere at the management office located at 996 Aldus Street. (PX 18.) Ms. Prospere was available to interview the debtor on June 2, 1997; if the debtor could not make it on that day, she should contact Ms. Prospere to schedule an appointment.

The debtor did not supply the information or schedule an appointment, and Kraus wrote several follow up letters. (See PX 18.) The first, dated June 17, 1997, advised the debtor that "HUD regulations requires sic that your recertification be entirely completed by August 10, 1997 or we may terminate your subsidy." (Emphasis in original.) It directed the debtor to submit the recertification information by July 2, 1997. The next follow up letters, dated June 26 and July 30, 1997, informed the debtor that her monthly rent would increase to $1,350.00 on September 1 if she did not complete the recertification process by August 10, 1997.

Eventually, the debtor submitted most of the information that Kraus had requested. On the morning of August 8, 1997, the debtor wrote to Julissa Peralta, a Kraus employee, that she could not keep their 2:00 p.m. appointment — which had apparently been prearranged — because she had to go to court.⁵ (PX 19, p. 1.) She faxed the recertification documentation with the letter, including a letter from her current employer, recent pay stubs, a 1996 Form W-2, and school reports relating to her two children. (Id., pp. 2-9.) She inquired if Ms. Peralta could "fix all the paper work up, and I come to your office today at 4:00pm or Monday morning to sign my new lease." (Id., p. 1.) The letter to Peralta concluded:

It is very important to me that I get my new lease signed. I do not want my rent to go up to the market rent. I hope all this paperwork is sufficient.

I should be home by 2:00pm. Please call me (XXX-XXX-XXXX).

(Id.)

Peralta never called the debtor. No one else from Kraus or Aldus did either. Instead, on August 27, 1997, Kraus sent the debtor a "Final Notice." (PX 18.) It referred to Kraus's July 30th letter, did not mention the debtor's August 8th letter or transmission, stated that the debtor had not complied with Kraus's requests relating to the annual certification, and declared that effective September 1, 1997, the debtor's monthly rent would rise to $1,350.00.

DISCUSSION

A. Introduction

Aldus's complaint asserts two grounds for declaring its rent claim nondischargeable. At the outset, exceptions to discharge must be literally and strictly construed against the creditor and liberally in favor of the debtor. Colonial Nat'l Bank, USA v. Carrier (In re Carrier), 181 B.R. 742, 746 (Bankr...