In re Murray

• Decision Date: 13 January 2016
• Docket Number: Case No. 14–10271 (REG)
• Citation: 543 B.R. 484
• Parties: In re: Matthew N. Murray, Alleged Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

543 B.R. 484

In re: Matthew N. Murray, Alleged Debtor.

Case No. 14–10271 (REG)

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

Signed January 13, 2016

WILK AUSLANDER LLP, Pro Se, 1515 Broadway, 43rd Floor, New York, New York 10036, By: Eric J. Snyder, Esq. (argued), Kimberly Reilly, Esq.

KLESTADT & WINTERS, LLP, Counsel for Matthew N. Murray, 570 Seventh Avenue, 17th Floor, New York, New York 10018–6314, By: Tracy L. Klestadt, Esq. (argued), Brendan M. Scott, Esq.

DECISION AND ORDER ON MOTION TO DISMISS INVOLUNTARY PETITION

ROBERT E. GERBER, UNITED STATES BANKRUPTCY JUDGE:

The Petitioning Creditor Wilk Auslander LLP (the "Law Firm "), the assignee of a judgment (the "Judgment ") originally obtained by its client (and then assigned to the Law Firm on account of unpaid fees), seeks to enforce that Judgment. To that end, the Law Firm filed this involuntary chapter 7 case, as the sole petitioning creditor—and only creditor, petitioning or otherwise—of the Alleged Debtor Matthew N. Murray ("Murray "). Shortly thereafter, Mr. Murray filed the motion now before this Court: to dismiss this case, for cause, under Bankruptcy Code section 707(a), and for an award of sanctions. Mr. Murray asserts, among other things, that the Law Firm filed the petition in bad faith.

This case presents a variant of a common practice in cases in this Court and elsewhere—the filing of a case under the Bankruptcy Code as a tactic in a two-party dispute—though much more commonly in such situations, the abuser is the debtor and not a creditor. But raising much more serious institutional concerns, Mr. Murray's motion requires the Court to consider whether an involuntary bankruptcy case, with only a single creditor,¹ appropriately can be used simply as a judgment enforcement mechanism: here, to enable a judgment creditor to exploit mechanisms to monetize a spousal interest in property jointly held with a debtor that are available only in a bankruptcy case.

For reasons set forth below, the Court concludes that this filing is an inappropriate invocation—and exploitation—of the bankruptcy system. Before it expanded to achieve other societal goals (none applicable here), bankruptcy was created as a collective remedy, to achieve pari passu distribution amongst creditors—not as a single creditor's judgment enforcement device. Here—where the filing arises solely from a two-party dispute; the bankruptcy case was filed solely as a judgment enforcement mechanism; the filing has been made solely to achieve a result unavailable under nonbankruptcy law; where there are no other creditors' needs and concerns to protect; and where there are no other bankruptcy goals to achieve—the Court will not countenance misuse of the bankruptcy system in this way.

Whether for "bad faith filing," or merely unenumerated cause, the petition must be, and is, dismissed for cause.²

The Court's Findings of Fact, Conclusions of Law, and bases for the exercise of its discretion in connection with this determination follow.

Facts³

The Law Firm (acting as both the petitioning creditor and its own counsel) filed this involuntary chapter 7 case against Mr. Murray in February 2014. The Law Firm is the only creditor in this case.⁴ Mr. Murray has no income,⁵ and his only material asset is an interest in a tenancy by the entirety with his wife in the apartment in which they reside.⁶

The Law Firm is the present holder, by assignment, of a judgment claim against Mr. Murray (in the approximate amount of $19 million), which remains unsatisfied to date.

The Law Firm's claim arises out of a Financial Industry Regulatory Authority ("FINRA ") arbitration award, obtained by Mr. Murray's former employer, Rodman & Renshaw ("R & R "). In 2006, Mr. Murray made disclosure to the U.S. Senate Finance Committee of intra-company electronic communications which Mr. Murray believed were suggestive of improper business activity within R & R.⁷ He was fired by R & R shortly thereafter.⁸ Mr. Murray subsequently contributed to two New York Times articles regarding the alleged improper activity.⁹ After that, he was dismissed by R & R, and R & R commenced the FINRA arbitration against him—alleging, among other things, that he had defamed R & R and was liable for breach of contract.¹⁰ The FINRA panel issued an award in favor of R & R, in the amount of $10.7 million, which later swelled to $16 million¹¹ with the accrual of pre-judgment interest, at the CPLR's 9% rate. The FINRA arbitration award was confirmed in New York State Supreme Court, and its determination was affirmed by the Appellate Division.¹² According to the Law Firm,¹³ the Judgment swelled further to over $19 million, with the accrual of post-judgment interest, again at a 9% rate.

Thereafter, R & R filed a voluntary chapter 7 case,¹⁴ and the Judgment was assigned by R & R's chapter 7 trustee to the Law Firm, with R & R's chapter 7 estate sharing in any recovery on it.

Mr. Murray holds an interest with his wife, as tenants by the entirety, in the shares of a cooperative apartment (the "Apartment ").¹⁵ Mr. Murray, his wife, and their two children currently reside at the Apartment.¹⁶

The reason for the Law Firm's resort to the bankruptcy system is obvious, and admitted.¹⁷ As a judgment creditor, the Law Firm has the ability, under nonbankruptcy law (here, New York law), to execute on Mr. Murray's interest in the Apartment and to cause it to be sold in a judgment execution sale.¹⁸ But the judgment the Law Firm acquired was solely against Mr. Murray—and not against his wife. And the sale of Mr. Murray's interest alone would fetch less in a sale than it would if he were the sole owner, because New York state law respects the rights of a tenant by the entirety. New York law would permit the Law Firm to execute on Mr. Murray's interest in the Apartment, but not on the entire interest held by both Mr. Murray and his wife.¹⁹

By contrast, the Bankruptcy Code includes provisions with the potential to increase the amount that can be realized when jointly held property is sold. Section 363 of the Code provides in substance that when the requirements of section 363(h), quoted in full below,²⁰ and its companion provisions²¹ are satisfied, a bankruptcy trustee can sell the jointly held property free and clear of both owners' interests, without the co-owners consent, leaving the nondebtor only with a right of first refusal to match the sale offer (and thus to stay in residence), and with her share of the proceeds of the forced sale.

The Law Firm wants the bankruptcy case to proceed to effect the sale of the Apartment by means of Bankruptcy Code section 363(h), even though its realization on that sale would be diluted by the commissions and fees of a chapter 7 trustee.²²

Discussion

I.Compliance with Section 303

Mr. Murray does not dispute that the Law Firm's petition complies with section 303 of the Code,²³ which authorizes the filing of involuntary petitions, in certain instances, by only a single creditor. An involuntary petition (filed under section 303 of the Code), like the much more common voluntary petition (filed under section 301 of the Code), can result in an "order for relief" which would cause a case under the Code (as applicable here, under chapter 7) then to be pending.

Accordingly, the Court assumes, for the purposes of this analysis, that if there were not cause for dismissal, the involuntary case commenced by the Law Firm's could continue.

II.Dismissal for Bad Faith Filing and Other Cause

But even when a case under the Bankruptcy Code has been commenced, and an order for relief has been entered, it can be dismissed. And cases under the Code, filed under diverse chapters, frequently are dismissed, for inability to succeed; for failures to meet obligations imposed under the Code; or other cause—including bad faith filing and "unenumerated cause."²⁴ The Court finds that cause—unenumerated cause, if not also bad faith filing—to be present here.

This involuntary case was commenced under chapter 7, whose section 707(a) governs dismissal for cause. Under section 707(a) of the Bankruptcy Code,²⁵ a chapter 7 case may be dismissed for cause.²⁶ But the Bankruptcy Code does not define "cause." And as the language of sections 707(a) and 102(3) makes clear²⁷ —as do principles emerging from the Second Circuit's ruling in C–TC, the seminal case involving dismissal for cause in the Second Circuit,²⁸ though C–TC was decided under the Code's closely similar section 1112(b)—the three examples given in section 707(a), which follow the word "including," are illustrative, not exclusive.²⁹

Many courts, including this one, have recognized that cause for dismissal (or relief from the stay, whose standards are not substantively different)³⁰ may result from circumstances not specifically mentioned in the Code—whether for bad faith³¹ or circumstances falling short of bad faith but nevertheless representing an inappropriate use of the Code.³² The seminal case in this Circuit so holding, as previously noted, is C–TC, which, while involving a case under chapter 11—and thus a motion under section 1112(b)—dealt with the same right of a bankruptcy court to dismiss a case before it for cause.

In C–TC, the Circuit affirmed the decision initially made by Judge Littlefield of the Northern District of New York wherein Judge Littlefield found that the circumstances surrounding the filing "indicated a lack of good faith on its part."³³ Though the district court had affirmed Judge Littlefield's decision on a second ground, the Circuit came back to Judge Littlefield's bad faith analysis and expressly endorsed it.³⁴ Among the several things that Judge Littlefield had found as establishing bad faith, which supported the Circuit's conclusion when Judge Littlefield's dismissal was once again affirmed, were the facts that the filing was the outgrowth of a two-party dispute;³⁵ that the dispute "could be fully resolved in a non-bankruptcy forum";³⁶ and that the primary function of the petition was to serve as a ...