Jones v. Brand (In re Belmonte)

• Decision Date: 28 June 2016
• Docket Number: Adv. Pro. No.: 15–8156-ast,Case No.: 12–76045-ast
• Citation: 551 B.R. 723
• Parties: In re: Alice Phillips Belmonte, Debtor. Harold D. Jones, Chapter 7 Trustee, Plaintiff, v. Craig A. Brand and The Brand Law Firm, P.A., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

551 B.R. 723

In re: Alice Phillips Belmonte, Debtor.Harold D. Jones, Chapter 7 Trustee, Plaintiff

v.Craig A. Brand and The Brand Law Firm, P.A., Defendants.

Case No.: 12–76045-ast

Adv. Pro. No.: 15–8156-ast

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

Signed June 28, 2016

Robert N. Michaelson, Eric Todd Moser, Rich Michaelson Magaliff Moser, LLP, New York, NY, for Plaintiff.

Craig Alan Brand, The Brand Law Firm PA, Miami, FL, for Defendants.

DECISION AND ORDER GRANTING TRUSTEE'S MOTION TO STRIKE JURY DEMAND AND DENYING DEFENDANTS' MOTION FOR JUDGMENT ON THE PLEADINGS

Alan S. Trust, United States Bankruptcy Judge

This is an action commenced by the Plaintiff, Harold D. Jones, the chapter 7 trustee of the estate of Alice Phillips Belmonte (the “Trustee”) against the Defendants, Craig A. Brand and The Brand Law Firm, P.A. (collectively, the “Defendants”) to recover an alleged unauthorized post-petition transfer in the amount of $250,000. Defendants served as counsel to Debtor in various capacities prior and subsequent to the filing of an involuntary case against her and after an order for relief was entered. This action is brought pursuant to 11 U.S.C. §§ 549 and 550¹ .

Now pending before the Court are two motions: (i) the motion filed by the Trustee to strike Defendants' jury demand (the “Motion to Strike”); and (ii) Defendants' motion for judgment on the pleadings (the “Motion for Judgment”) on the Trustee's Complaint under Rule 12(c) of the Federal Rules of Civil Procedure (“Rules”), as incorporated by Rule 7012 of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”). For the reasons stated below, the Motion to Strike is granted and the Motion for Judgment is denied.

Jurisdiction

This Court has jurisdiction to decide the Motion to Strike and the Motion for Judgment pursuant to 28 U.S.C. §§ 157(b) and 1334(b), and the Standing Orders of Reference in effect in the Eastern District of New York dated August 28, 1986, and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011.

In Exec. Benefits Ins. Agency v. Arkison, the Supreme Court held that when a bankruptcy court is presented with a claim statutorily designated as core but which it lacks constitutional authority to finally adjudicate, a so called “Stern claim”² , the court is to issue proposed findings of fact and conclusions of law to the district court as it would when hearing non-core claims. ––– U.S. ––––, 134 S.Ct. 2165, 2170, 189 L.Ed.2d 83 (2014) (referring to 28 U.S.C. § 157(c)(1) and Bankruptcy Rule 9033). Defendants agree that the claims asserted against them by the Trustee are “core,” but they have not expressly consented to the entry of a final order or judgment by this Court, and argue that this Court lacks constitutional authority to enter a final order or judgment on the claims asserted in the Complaint. [dkt items 14, 18] This Court disagrees.

First, regardless of whether the Trustee's claims would qualify as Stern claims, this Decision and Order is interlocutory³ , not final, and as such, proposed findings of fact and conclusions of law need not be submitted to the District Court. See Am. Media, Inc. v. Anderson Mgmt. Servs. (In re Anderson News, LLC), 2015 WL 4966236, at *1–2, 2015 U.S. Dist. LEXIS 109896, at *4–6 (D.Del. Aug. 19, 2015) ; Residential Funding Co., LLC v. UBS Real Estate Sec., Inc. (In re Residential Capital, LLC), 515 B.R. 52, 69 (Bankr.S.D.N.Y.2014).

Second, the Court disagrees that the Trustee's Complaint implicates the constitutional concerns addressed in Stern and Executive Benefits ; unlike the counterclaim at issue in Stern and the fraudulent conveyance claims in Executive Benefits, a Section 549 action is a “special creature” of the Bankruptcy Code that could not exist outside its provisions. See Murphy v. Felice (In re Felice), 480 B.R. 401, 426–28 (Bankr.D.Mass.2012). Moreover, Section 549 does not seek to augment the estate but, rather, to recover property that should never have left the estate. Id. at 428 ; see also Coan v. MDC Corp. (In re Louis Gherlone Excavating, Inc.), 2014 WL 7246146, at *1 (Bankr.D.Conn. Dec. 19, 2014). As noted below, the Trustee's Section 550 claim is purely derivative of the Trustee's Section 549 claim. This Court is therefore not required to submit proposed findings of fact and conclusions of law to the District Court. However, this Order is subject to review by the District Court under 28 U.S.C. § 158(a)(3) and, in the event the District Court wishes to treat this Order as proposed findings of fact and conclusions of law, it certainly may do so pursuant to the authority it vested in this Court when it issued the Standing Orders of reference in effect in this District.⁴

Further, the District Court may determine to withdraw this matter back, as Defendants have also filed a motion to withdraw the reference [dkt item 13], which remains pending before the District Court; however, the pendency of that motion has no effect on this Court's continued administration of this adversary proceeding. See Fed. R. Bankr. P. 5011(c).

With jurisdiction established to issue this decision, this Court now turns to the factual background and legal dispute.

Factual Background and Procedural History

On October 5, 2012, various petitioning creditors⁵ filed an involuntary chapter 7 petition against Ms. Belmonte (“Debtor”) pursuant to § 303(b) of the Bankruptcy Code. At the time the involuntary petition was filed, Debtor was licensed to practice law in the state of New York. However, the petition sought relief against her for investment-related activities, not for her actions taken as an attorney. Defendants were among the counsel who unsuccessfully represented Debtor in opposing the involuntary petition.

On April 25, 2013, the Court entered an order for relief under chapter 7. [main case dkt item 88] Shortly thereafter, an interim trustee was appointed. On June 12, 2013, the Office of the United States Trustee filed a report certifying the results of an election of a trustee conducted pursuant to § 702. [main case dkt item 104] Mr. Jones was elected and subsequently appointed as the chapter 7 trustee of Debtor's bankruptcy estate.

The Trustee, as plaintiff, commenced this adversary proceeding on April 22, 2015 (the “Complaint”). The Complaint, as amended, asserted two causes of action for the avoidance and recovery of an alleged unauthorized post-petition transfer in the amount of $250,000, pursuant to Bankruptcy Code §§ 549 and 550. [dkt item 12] According to the Complaint, in January 2014, after the order for relief had been entered, Debtor and her husband borrowed $250,000 from a Patrick Thompson and granted Mr. Thompson a second mortgage against their home to secure the loan (the “Thompson Mortgage”). The Trustee further alleges Debtor requested that the $250,000 be paid directly to Defendants and that, in fact, in either January or February 2014, the $250,000 was disbursed directly to the Defendants, all without Debtor first obtaining this Court's permission to either borrow the money or encumber this estate's property with a lien.

On May 20, 2015, Defendants filed a demand for a jury trial on all of the claims asserted against them; Defendants indicated that they do not consent to the jury trial being tried before the Bankruptcy Court. [dkt item 11]

On May 23, 2015, Defendants interposed an answer asserting general denials and fourteen (14) affirmative defenses, including setoff. [dkt item 14] Defendants attached as exhibits to their answer the Trustee's complaint against Debtor, her husband and Mr. Thompson in adversary proceeding number 14–8322–ast and this Court's March 24, 2015, Order approving the parties' settlement of that adversary proceeding, which resulted, inter alia, in the Thompson Mortgage being avoided for the benefit of the estate.

On September 28, 2015, the Court issued an order directing the parties to provide briefing on the Defendants' jury demand. [dkt item 15]

On October 22, 2015, the Trustee filed his Motion to Strike, contending that the Defendants lack either a constitutional or statutory right to a jury trial on any of the claims asserted against them. [dkt item 22] On November 9, 2015, Defendants filed a statement in support of their jury demand; the statement lacks any legal analysis and merely references the Supreme Court's decision in Granfinanciera v. Nordberg for the proposition that they are entitled to a jury trial. [dkt item 28] Also on November 9, 2015, Defendants filed their Motion for Judgment. [dkt items 29, 30] In the Motion for Judgment, Defendants essentially argue that because the Trustee was successful in avoiding the Thompson Mortgage, the estate was thereby made whole and cannot recover the $250,000 paid to Defendants. Like Defendants' statement in support of their jury demand, Defendants' Motion for Judgment also lacks any meaningful legal analysis.

On November 13, 2015, the Trustee filed a reply brief in support of his Motion to Strike. [dkt item 32]

On November 27, 2015, the Trustee filed opposition to the Motion for Judgment. He argued, among other things, that as a matter of law the estate was not made whole because, while the pleadings show that the Thompson Mortgage was avoided, they do not show that the estate recovered the $250,000 Debtor borrowed which was allegedly disbursed directly to Defendants. [dkt item 33]

On November 28, 2015, Defendants filed a motion for leave to file a reply to the Trustee's Opposition along with a proposed reply, to which the Trustee filed opposition on December 14, 2015. [dkt items 34, 35]

In the main bankruptcy case, the Trustee had also sought to disgorge fees from Defendant Brand, among other counsel for Debtor, pursuant to § 329(b) and Bankruptcy Rules 2016 and 2017 (the “Disgorgement Motion”). Because the Disgorgement Motion also seeks the return of the $250,000 at issue in this adversary, on June 7, 2016, the Court entered an order consolidating the trial of this adversary proceeding with...