In re Schick
| Decision Date | 26 April 1999 |
| Docket Number | Bankruptcy No. 96 B 42902(SMB),96 B 46282(SMB).,96 B 43969(SMB) |
| Parties | In re David SCHICK, Venture Mortgage Corp., and A & D Trading Group, L.L.C., Debtors. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
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Parker, Chapin, Flattau & Klimpl, LLP, New York City, for the Chapter 11 Trustee, Lee W. Stremba, of counsel.
Law Offices of Moshe Katlowitz, New York City, Employee Retirement Trust and Rochel Properties, Inc., for Claimants Arnav Industries, Inc., Moshe Katlowitz, of counsel.
The chapter 11 trustee objects to the claims of Arnav Industries, Inc. Employee Retirement Trust ("Arnav") in the amount of $4,828,275.03, and Rochel Properties, Inc. ("Rochel") in the sum of $11,823,044.62 (Arnav and Rochel are referred to collectively as the "Claimants"). The trustee relies on a prepetition judgment and related stipulation, described below, that limit the aggregate claims of Arnav and Rochel to approximately $2 million.
In response, the Claimants assert that the stipulation was induced by fraud and rife with mistake. They seek relief from the automatic stay to proceed in state court to vacate the judgment, and rescind or reform the stipulation. For the reasons that follow, the Claimants are barred as a matter of law from seeking rescission based on fraud. An evidentiary hearing is necessary to decide if they can vacate the judgment and reform the stipulation based on mistake, and whether the trustee is entitled to sanctions. However, the hearings will be conducted in this Court as part of the claims objection process, and accordingly, the Claimants' cross-motion for relief from the automatic stay is denied.
This dispute arises out of a venture involving the purchase and renovation of an apartment building in Philadelphia by Mayfair Renaissance Associates, L.P. ("Mayfair"). The debtor, David Schick, was a limited partner in Mayfair and a shareholder in its corporate general partner. Mayfair borrowed money from the Claimants, and issued promissory notes that Schick as well as several others personally endorsed. (See Application of Arnav Industries Etc., dated Nov. 16, 1998 ("Cross-Motion"), Ex. "A".) Schick apparently also executed separate guaranties of Mayfair's obligations, though these have not been proffered by either party.
The Mayfair project failed, and two state court lawsuits followed. In one action (the "Rochel Action"), Rochel sued Schick and the other obligors on the notes (collectively, the "Obligors"). In the course of the Rochel Action, Schick and his wife Chani confessed judgment, jointly and severally, in the amount of $400,000.00. (Affirmation of Lee W. Stremba in Further Support, Etc., dated Dec. 14, 1998 ("Stremba Aff. in Further Support"), Ex. "D".) The affidavit of confession recites that the judgment would not limit or prejudice the plaintiff's rights to pursue the individual Obligors under the notes and guaranties. (Id., ¶ 9.)
The second action was commenced by two of the Obligors, Abraham and Sharon Borenstein, against, inter alia, the Claimants and Schick. In early 1996, the Claimants, represented by the law firm of Brown, Raysman & Millstein ("Brown, Raysman"), entered into two successive stipulations of settlement with their co-defendant Schick. These stipulations lie at the core of the present dispute.
Brown, Raysman initially prepared a stipulation of settlement, dated January 29, 1996 ("First Stipulation"). (Cross-Motion, Ex. "C".) The First Stipulation recited that Schick was in default under the notes and guaranties, acknowledged the judgment by confession entered in the Rochel Action, and stated the parties' "desire to resolve all claims between and among them." It provided a schedule of payments totaling $2,080,000.00, commencing with an initial payment of $580,000.00 due by February 9, 1996, and ending with the final payment due by the end of 2002. (Id., ¶ 1.) Though not explained in the First Stipulation, the parties selected $2,080,000.00 because they had agreed to a $2,500,000.00 settlement amount, but Schick had previously paid the Claimants $420,000.00.
In exchange for the promised payments, the Claimants agreed to take all necessary steps to satisfy the judgment by confession against David and Chani Schick. (Id., ¶ 2.) In addition, and contemporaneously with the execution of the stipulation, the parties were obligated to execute mutual releases of all claims between them, except for any fraudulent transfer claims or claims to enforce the stipulation. (Id., ¶ 6.) The releases were fully enforceable upon execution of the stipulation. (Id.) Brown, Raysman would hold the stipulation in escrow, and upon Schick's failure to cure a default within five days' notice thereof, release the stipulation to the Claimants in order to enter a judgment in favor of Rochel in the amount of $4,353,038.98 plus interest, and in favor of Arnav in the amount of $1,770,663.97 plus interest. (Id., ¶ 13.)
Within a few days, Brown, Raysman notified Schick and Joseph Wassner ("Wassner"), a trustee of Arnav and vice president of Rochel, that it would be necessary to execute a second stipulation to correct an error in the First Stipulation. (Compare Cross-Motion, Ex. "B" (Transcript of Schick Deposition, held Nov. 10, 1998 ("Schick Dep.")) at 19-20 with Affirmation of Joseph Wassner, affirmed Nov. 16, 1998 ("Wassner Aff."), ¶¶ 1, 10.) All agree that the First Stipulation contained a typographical error. The schedule of payments correctly totaled $2,080,000.00, but the introductory text to the schedule referred to "the sum of Two Million Eight Hundred and 00/100 Dollars ($2,800,000.00)." (See First Stipulation, ¶ 1.) Brown, Raysman prepared a new stipulation, dated February 6, 1996 ("Second Stipulation"), which corrected the typographical error and extended the date of the initial $580,000.00 payment to February 15. (See Cross-Motion, Ex. "D".) For reasons that have not been explained, Brown Raysman also changed paragraph 13 to provide that if Schick defaulted, the Claimants could enter judgment in the amount of $2,080,000.00, rather than the approximate $6 million stated in the First Stipulation. Schick, Wassner and the escrow agent signed the Second Stipulation.
Schick failed to make the February 15 payment, and paid only $100,000.00 on February 29, 1996. He made no further payments under the Second Stipulation, and on May 3, 1996, the Claimants, by their attorney James Landau, Esq. of Brown, Raysman, entered a judgment (the "Judgment") in New York county pursuant to the Second Stipulation and New York Civ.Prac.L. & R. ("CPLR") 3215(i).1 (See Motion for an Order Expunging Claims, Etc., dated June 3, 1998 ("Claim Objection"), Ex. "D".) The Judgment was in the amount of $1,980,000.00 (representing the amount provided in paragraph 13 of the Second Stipulation less the $100,000.00 payment) plus interest, for a total of $2,021,986.85.
Only four weeks later, on May 29, 1996, Schick's creditors commenced an involuntary chapter 11 case. The Court ordered relief, and appointed the plaintiff as trustee on July 8 of that year. On February 27, 1997, the Claimants filed their proofs of claim aggregating over $16 million. The trustee objected by motion dated June 3, 1998, arguing that the claims merged into and were limited by the $2 million Judgment. In response, the Claimants cross-moved for relief from the automatic stay to obtain vacatur of the Judgment in state court and rescission or reformation of the stipulation.
A federal court must give a state court judgment the same preclusive effect as would the state where it is entered. 28 U.S.C. § 1738; State of New York v. Sokol (In re Sokol), 113 F.3d 303, 306 (2d Cir. 1997); Kelleran v. Andrijevic, 825 F.2d 692, 694 (2d Cir.1987), cert. denied, 484 U.S. 1007, 108 S.Ct. 701, 98 L.Ed.2d 652 (1988). Under the law of New York, a valid default judgment is res judicata as to all claims and counterclaims that could have been brought in the earlier action. Baker v. Latham Sparrowbush Assocs., 72 F.3d 246, 255-56 (2d Cir.1995); Com Cor Holding, Inc. v. F.A. Tucker Transmission Co., No. 93 Civ. 8440, 1998 WL 283348, at *3 (S.D.N.Y. June 1, 1998); Rizzo v. Ippolito, 137 A.D.2d 511, 524 N.Y.S.2d 255, 257 (N.Y.App.Div.1988). The same rule applies to a judgment on consent. See Silverman v. Leucadia, Inc., 156 A.D.2d 442, 548 N.Y.S.2d 720, 721 (N.Y.App.Div.1989).
The Judgment was entered pursuant to CPLR 3215(i)(1), which governs entry of default judgments for failure to comply with a stipulation of settlement made after commencement of an action. The Second Stipulation immediately released "all claims" between Schick and the Claimants, with exceptions not relevant here.2 The Claimants are thus limited, under principles of res judicata and by the plain language of the Second Stipulation, to a claim in the principal sum of $1.98 million. In order to circumvent this barrier, the Claimants attack the validity of the Judgment, and ultimately, the underlying stipulations, on theories of fraud and mistake.
The Claimants assert that they were fraudulently induced to enter into what they call "the stipulation process," and therefore, seek to vacate the resulting Judgment and rescind both stipulations. They maintain that Schick fraudulently misrepresented "that he had the intent and the assets, thus the ability and willingness, to abide by all of the terms and conditions set forth in the Stipulation." (Wassner Aff., ¶ 8.)3 According to the Claimants, Schick never intended to...
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