Krohn v. Burton (In re Swift)

• Decision Date: 05 August 2013
• Docket Number: Adv. Pro. No. 12–1044–CEC,Case No. 94–10285–CEC
• Citation: 496 B.R. 89
• Parties: In re John Swift, Jr. aka John B. Swift and Linda Swift, Debtors. Paul I. Krohn, Chapter 7 Trustee, Plaintiff, v. Robert Burton and Jean Bismuth, Defendants. Robert Burton, Third Party Plaintiff, v. Joseph Tedeschi, Third Party Defendant. Robert Burton, Counter–Claimant, v. Joseph Tedeschi, Counter–Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

496 B.R. 89

In re John Swift, Jr. aka John B. Swift and Linda Swift, Debtors.

Paul I. Krohn, Chapter 7 Trustee, Plaintiff,

v.Robert Burton and Jean Bismuth, Defendants.

Robert Burton, Third Party Plaintiff,

v.Joseph Tedeschi, Third Party Defendant.

Robert Burton, Counter–Claimant,

v.Joseph Tedeschi, Counter–Defendant.

Case No. 94–10285–CEC

Adv. Pro. No. 12–1044–CEC

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

August 5, 2013

Adam Michael Levy, Esq., Goldberg Weprin Finkel Goldstein LLP, 1501 Broadway, 22nd Floor, New York, N.Y. 10036, Attorneys for Plaintiff.

Robert, Burton 345 East 93rd Street 18–G, New York, NY 10129, Pro Se.

Chapter 7

DECISION

CARLA E. CRAIG, Chief United States Bankruptcy Judge

In this adversary proceeding, the chapter 7 trustee, Paul I. Krohn (the “Trustee”) seeks to recover a one-half interest in cooperative apartments 2L, 2U, and 4M located at 44–14 Newtown Road, Astoria, N.Y. (the “Apartments”) from Robert Burton. Burton, a real estate investor and former attorney, currently has possession of the Apartments, which are rented to third parties.¹ Although debtor John Swift Jr. (“Swift” or “Debtor”) has at all relevant times held record ownership of a one-half interest in the Apartments, Burton claims to have purchased the beneficial interest in Swift's interest in the Apartments from Jean Bismuth, the Debtor's son-in-law, in a transaction that took place in 2004, ten years after this bankruptcy case was commenced. Burton asserts that he is the beneficial owner of the Apartments, and that the Apartments therefore are not property of the estate, and that the Trustee's claims are, in any event, barred by statutes of limitations and equitable defenses. Because there is no proof that Bismuth ever owned any interest in the Apartments, and because the undisputed facts do not support Burton's defenses, the Trustee's motion for summary judgment is granted, and Burton's motion for summary judgment is denied.

The Trustee also sought entry of a default judgment against Jean Bismuth for an accounting and turnover of all proceeds he received in connection with the Apartments. Because the affidavit of service does not reflect that Bismuth was served with the default judgment motion, and it is unclear whether he was served with the summons and complaint at a correct address, the motion for a default judgment against Bismuth is denied.

JURISDICTION

This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1996, as amended by order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (E). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Bankruptcy Rule 7052.

BACKGROUND

On January 12, 1994, John Swift, Jr. (“Swift”) and Linda Swift (together, the “Debtors”) filed a voluntary joint petition under chapter 7 of the Bankruptcy Code, and the Trustee was appointed as chapter 7 trustee of the Debtors' estates. The Debtors did not list any real property on Schedule A or stock in a cooperative corporation on Schedule B. Schedule F listed unsecured claims totaling $14,735,608, including $2,200 owed to “Equity Preservation Co., c/o Robert Burton, Esq., 2118 Utopia Pkw, Queens, New York 11357.” (Case No. 94–10285–CEC, ECF No. 1 at 13, Schedule B ¶ 19.)

On April 25, 1994, the Trustee commenced an adversary proceeding to deny the Debtors a discharge pursuant to § 727 ². In the complaint (the “Discharge Complaint”), the Trustee alleged, among other things, that “[u]pon information and belief, Swift has a one-half interest in three (3) co-op apartments located at 44–14 Newtown Road, Astoria, New York, which purportedly is owned jointly with Joseph Tedeschi.” (Compl. ¶ 26, Adv. Pro. No. 94–1146–MAH, ECF No. 1.) On September 30, 1994, a default judgment was entered against the Debtors denying them a discharge pursuant to § 727(a)(3) for failing to maintain books and records.

On February 17, 2012, the Trustee commenced this adversary proceeding against Burton and Bismuth, the Debtors' son in law. The Trustee alleges that he was informed by a creditor “on the eve of the Final Meeting of Creditors scheduled for March 21, 2011” that Swift was the record holder of shares of stock in 44–14 Newtown Road Apartment Corporation, with an ownership interest in, and proprietary lease to, the Apartments. (Compl. ¶ 15, Adv. Pro. No. 12–1044–CEC, ECF No. 1.) Upon investigation, the Trustee confirmed that the stock certificate and the co-op's records reflect that Swift is a 50% owner, and that Joseph Tedeschi owns the remaining 50% interest. The Trustee points out that the co-op board has never recognized any owners of the stock other than Swift and Tedeschi. Based upon these facts, the Trustee sought a declaratory judgment that the estate is the 50% owner of the stock and Apartments, and sought turnover of the Apartments, which are managed and controlled by Burton.

In his answer, Burton contends that he purchased the beneficial interest in Swift's interest in the Apartments in April or May 2004 from Bismuth, more than a decade after the Debtors commenced this bankruptcy case, for $30,000. Burton maintains that the Apartments are not property of the estate because, although Swift holds legal title to a 50% interest in the shares, he never held the beneficial interest; rather, Bismuth, who, Burton asserts, provided the funds to purchase the Apartments, was the beneficial owner. Burton also asserted various affirmative defenses, including the equitable defenses of waiver, estoppel, time bar, laches, evidence spoliation, unclean hands, unjust enrichment, acquiescence, and equitable subordination. Burton admits that he knew that Swift was record owner of 50% of the Apartments, and that Swift was in bankruptcy, at the time of his alleged purchase of the beneficial interest in the Apartments from Bismuth. (Compl. ¶ 22, Adv. Pro. No. 12–1044–CEC, ECF No. 1; Answer ¶ 1, Adv. Pro No. 12–1044–CEC, ECF No. 5.) Burton asserts that he relied on representations made by Tedeschi and Tedeschi's attorney, Jack D'Emic, that Bismuth was the beneficial 50% owner of the Apartments. Burton also asserted a counterclaim seeking compensation for time and money he claims that he spent on supervisingrenovations to the Apartments, and renting and managing the Apartments.

On August 9, 2012, Burton filed a motion to amend his answer to include a third party claim against Tedeschi, to include a counterclaim against the Trustee for equitable subordination, and seeking to “surcharg[e]” the Trustee “for 100% of any financial harm” incurred by him.

On August 28, 2012, the Trustee filed a motion seeking summary judgment declaring that the estate is the owner of a one-half interest in the Apartments and directing that they be turned over to the Trustee pursuant to § 542, together with an accounting of rents and income. Alternatively, the Trustee seeks summary judgment avoiding the transfer of Swift's interest in the Apartments to Burton pursuant to § 549 and seeking turnover pursuant to § 550.

On January 22, 2013, Burton filed a motion for summary judgment seeking dismissal of this adversary proceeding based upon the defenses of waiver, estoppel, time bar, laches, unclean hands, acquiescence, and equitable subordination.

LEGAL STANDARD

Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A fact is considered material if it “might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc.,477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). No genuine issue exists “unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the evidence is merely colorable, or is not significantly probative, summary judgment maybe granted.” Id. at 249–50, 106 S.Ct. 2505 (citations omitted). “More specifically, it must do more than simply show that there is some metaphysical doubt as to the material facts, and may not rely on conclusory allegations or unsubstantiated speculation.” Brown v. Eli Lilly & Co., 654 F.3d 347,358 (2d Cir.2011) (internal quotations omitted).

Here, no genuine issue of material fact has been raised as to the estate's ownership of a 50% interest in the Apartments or the Trustee's right to obtain turnover of that interest.

DISCUSSION

The Trustee argues that summary judgment should be granted in his favor declaring that the estate is 50% owner of the Apartments, and that this interest is property of the estate, because it is undisputed that Swift has been the record owner of 50% of the Apartments since prior to the commencement of this case, and Burton has not established that Bismuth was ever the beneficial owner of any interest in the Apartments. Alternatively, the Trustee seeks summary judgment avoiding any post-petition transfer of any interest in the Apartments to Burton pursuant to § 549, and recovery pursuant to § 550.

Burton argues that summary judgment should be granted in his favor dismissing the complaint because the Trustee had actual knowledge of Swift's interest in the Apartments since 1994, but failed to commence this action until 2012, and therefore, the Trustee has unclean hands. Burton also argues that the Trustee failed to diligently investigate and recover the Debtors' assets, and should be equitably barred from seeking recovery now.

1. Section 549 is inapplicable because there was no post-petition transfer of property of the estate.

Under § 541(a), the commencement of a bankruptcy case creates an estate,which includes, subject to certain exceptions, “all legal or equitable interests of the debtor in property as of the commencement of the case,”...