In re Persky

• Decision Date: 03 December 1991
• Docket Number: 186-0066.,Adv. No. 186-0067,185-51446-352,Bankruptcy No. 185-51219-352
• Citation: 134 BR 81
• Parties: In re Stuart PERSKY, Debtor. In re Bernard PERSKY, Debtor. COMMUNITY NATIONAL BANK AND TRUST COMPANY OF NEW YORK, Plaintiff, v. Stuart and Ronni PERSKY, Defendants. COMMUNITY NATIONAL BANK AND TRUST COMPANY OF NEW YORK, Plaintiff, v. Bernard and Shirley PERSKY, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

134 B.R. 81 (1991)

In re Stuart PERSKY, Debtor.

In re Bernard PERSKY, Debtor.

COMMUNITY NATIONAL BANK AND TRUST COMPANY OF NEW YORK, Plaintiff, v.Stuart and Ronni PERSKY, Defendants.

COMMUNITY NATIONAL BANK AND TRUST COMPANY OF NEW YORK, Plaintiff, v.Bernard and Shirley PERSKY, Defendants.

Bankruptcy Nos. 185-51219-352, 185-51446-352, Adv. Nos. 186-0067, 186-0066.

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

December 3, 1991.

COPYRIGHT MATERIAL OMITTED

Corash, Hollender & Wilkens, Staten Island, N.Y. by Paul Hollender, for plaintiff.

Ballon, Stoll & Itzler, New York City by Harvey L. Woll, for defendants.

Marilyn Frier, Woodmere, N.Y., trustee.

DECISION ON DEFENDANTS' MOTION TO DISMISS PLAINTIFF'S COMPLAINTS UNDER FED.R.CIV.P. 12(b)(6) AND FED.R.BANKR.P. 7012(b)

MARVIN A. HOLLAND, Bankruptcy Judge:

This is the second of defendants' motions to dismiss complaints that seek a sale of real property pursuant to section 363(h) of the Bankruptcy Code(Title 11 U.S.C.).The court grants the defendants' motion and dismisses the complaint.

Facts and Prior Proceedings

The defendants' first motion to dismiss was granted on September 2, 1987.78 B.R. 657.The District Court affirmed, 108 B.R. 418, and the Court of Appeals reversed and remanded for further findings.893 F.2d 15.The relevant facts are set forth in the cited decisions and we will assume familiarity with them.By way of brief summary, however, in each of these two separate related casesthe trustee proceeded pursuant to 11 U.S.C. § 363(b)(1) by giving notice pursuant to 11 U.S.C. § 102(1)(B) of a sale of only the estates' interests in entireties property in which the estate had acquired the interest of only the debtor spouse.The plaintiff-creditor brought an adversary proceeding seeking to compel the trustee to sell the said interests of both the estate and the non-debtor spouse pursuant to section 363(h) of the Bankruptcy Code.The defendants' original motion to dismiss the complaints was granted on three grounds:

(i) That pursuant to CPLR § 5240, the defendants\' possessory rights are exempt from process under section 522(b)(2)(B) of the Bankruptcy Code.

(ii)That the benefit to the estate of a sale of the non-debtor spouse\'s right of survivorship is outweighed by the detriment to a family forced to move from its long-term home.

(iii)That the debtors\' interests in the entireties are not an "undivided interests" and therefore are not subject to section 363(h).

The Court of Appeals reversed and remanded holding that:

(a)CPLR § 5240 is a remedial tool which creates no substantive exemption for any property interest owned by the debtor, and therefore under New York law, a debtor\'s interest in an entireties property is not exempt from process.

(b) A hearing was necessary to determine the benefit to the estate and detriment to the non-debtor spouses which might result from a section 363(h) sale.

In light of the remand, the Court of Appeals declined to address the constitutional issues.

On remand, but prior to the remand hearing, the defendants moved to dismiss the complaint on the third ground set forth in this court's original decision: that the defendants' entireties interests are not amenable to sales under section 363(h) for the reason that entireties interests are not "undivided interests."

The plaintiff's answer argued that since the Court of Appeals had been presented with this point and had not considered it, they had therefore rejected it by implication and this court cannot now consider a new motion to dismiss on those grounds.

Since neither the Court of Appeals nor this court had addressed either the constitutionality of applying section 363(h) to the non-debtor spouses in this case or the appropriateness of applying that section to real property which may have vested in the non-debtor spouses prior to the enactment of the statute, the parties were directed to file proof of the respective marriage dates and were allowed to submit supplemental briefs.Although a supplemental brief was submitted only on behalf of the plaintiff, the parties did present a stipulation stating that Stuart and Ronni Persky were married in 1974 and that Bernard and Shirley Persky were married in 1952.

We agree with the defendants that their entireties interests are not amenable to involuntary sale under section 363(h) not only for the reasons urged by them, but also on the basis of the constitutional issues left open by the Court of Appeals.

In view of the constitutional issues, the United States was notified pursuant to 28 U.S.C. § 2403(a).They did not appear.

Issues of Law

In order to dispose of the motions to dismissthe court needs to address four questions:

(A) What is the effect of the Court of Appeals\' decision on defendants\' second motion to dismiss;

(B) Is the estates\' interest in the entireties\' properties an "undivided interest" subject to section 363(h);

(C) Is Section 363(h) applicable to real property acquired prior to the adoption of the Bankruptcy Code;

(D) Is section 363(h) constitutional with regard to both the bankruptcy powers granted to Congress in Article I and also the limitations imposed upon those powers by the Fifth Amendment?

DISCUSSION

A.WHAT IS THE EFFECT OF THE COURT OF APPEALS' DECISION ON THE SECOND MOTION TO DISMISS?

We find no merit to plaintiff's assertion that this court is barred from reconsidering the legal sufficiency of the complaint by the "law of the case" doctrine.

This decision on debtor's second motion to dismiss is based on principles of retroactivity, statutory interpretation, and constitutional law.Although some constitutional issues were briefed prior to the court's first decision, since no court has ruled on them, the constitutional issues still remain.The Court of Appeals' decision clearly indicated that "absent an order directing a § 363(h) sale, the expression of our views would be merely advisory."In re Persky,893 F.2d 15, 21(2d Cir.1989).It is settled law that "questions that have not been decided do not become law of the case merely because they could have been decided."Wright, Miller & Cooper, Federal Practice and Procedure, Jurisdiction, § 4478 at 789 (1981 & 1990 Supp.)See also, Liona Corporation Inc. v. PCH Associates(In re PCH Associates),949 F.2d 585(2d Cir.1991);Sprague v. Ticonic National Bank,307 U.S. 161, 59 S.Ct. 777, 780-81, 83 L.Ed. 1184(1939);Banco Nacional de Cuba v. Farr,383 F.2d 166, 177-78(2d Cir.1967), cert. denied390 U.S. 956, 88 S.Ct. 1038, 19 L.Ed.2d 1151, reh. denied390 U.S. 1037, 88 S.Ct. 1406, 20 L.Ed.2d 298(1968);Pegues v. Morehouse Parish School,706 F.2d 735, 738(5th Cir.1983).See, e.g., Dick Warner v. Aetna,746 F.2d 126, 135(2d Cir.1984).

B.IS THE DEBTOR'S INTEREST IN THE ENTIRETIES PROPERTIES AN "UNDIVIDED INTEREST" SUBJECT TO SECTION 363(h)?

Section 363(h) authorizes a trustee to "sell both the estate's interest" and "the interest of any co-owner" only with regard to "property in which the debtor had . . . an undivided interest . . ."(emphasis added).Prerequisite to an analysis of the trustee's authority to so sell is a determination of whether at the time of the commencement of the case the debtor had such an "undivided interest."The lack of clarity as to the meaning of this term is occasioned by the lack of uniformity in the manner in which the term is used by both courts and commentators when it is applied to any of the three forms of concurrent ownership specified in section 363(h).We are convinced, however, that in spite of the uncertainty as to the precise meaning of "undivided interest", there is sufficient agreement as to when and where it exists for us to determine whether the statutory criteria apply.Therefore, unless otherwise specifically indicated, our citation of authority with regard to the existence of undivided interest should not be taken as our concurrence with the view expressed in such authority as to the definition of that term.

Section 363(h) purports to provide a trustee with greater power and authority to dispose of certain specific property interests than would be available either to the debtor or his creditors under State law.It does not, however, purport to alter or redefine the property rights upon which it was designed to operate.Therefore it is state law, and not bankruptcy law, to which we must look to identify and define those aspects of the property interests in question which determine their applicability to section 363(h).That this is so is evident from the fact that section 363(h) speaks in terms of property interests "at the time of the commencement of the case" prior to their alteration or modification by the bankruptcy process.

State law and not federal law determines the nature and extent of a debtor\'s interest in property as of the date of the commencement of his bankruptcy case under all of the authorities.Butner v. United States,440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136(1979), Erie Railroad etc. v. Tompkins,304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487(1938), In re Kravitz,278 F.2d 820(3d Cir.1960), and many others.

In re Bundy,53 B.R. 582, 584(Bankr. W.D.Pa.1985).

"The rule is that property interests and estates are to be dealt with in the bankruptcy courts in such a manner as to give full respect to the rules of property followed in the state where the property is located."Reid v. Richardson,304 F.2d 351(4th Cir.1962).SeeIn re Abdallah,39 B.R. 384, 386(Bankr.D.Mass.1984);In re Lambert,34 B.R. 41, 42(Bankr.D.Colo.1983);In re Cipa,11 B.R. 968, 970(Bankr. W.D.Pa.1981).See alsoFarrey v. Sanderfoot,___ U.S. ___, 111 S.Ct. 1825, 114 L.Ed.2d 337(1991).

Three distinct property rights are identified with regard to tenancy by the entirety: ownership, use and enjoyment, (hereinafter "usufruct") and survivorship.Before the plaintiff can be successful in compelling a sale under section 363(h), it must show that the interests of the...