Lubonty v. R. Kenneth Barnard, Chapter 7 Tr., Als Hibiscus, LLC

Decision Date21 March 2015
Docket Number14-cv-3945 (ADS)
PartiesGREG LUBONTY Appellant, v. R. KENNETH BARNARD, Chapter 7 Trustee, ALS HIBISCUS, LLC, and the UNITED STATES TRUSTEE Appellees.
CourtU.S. District Court — Eastern District of New York

and the UNITED STATES TRUSTEE Appellees.

14-cv-3945 (ADS)


March 21, 2015



Lester & Associated, P.C.
Attorneys for the Appellant
600 Old Country Road, Suite 229
Garden City, NY 11530
By: Peter Kuldip Kamran, Esq., Of Counsel

Lamonica Herbst & Maniscalco, LLP
Attorneys for the Appellee R. Kenneth Barnard
3305 Jerusalem Avenue
Wantagh, NY 11793
By: Gary F. Herbst, Esq.
Melanie A Fitzgerald, Esq., Of Counsel

Otterbourg P.C.
Attorneys for the Appellee ALS Hibiscus, LLC
230 Park Avenue
New York, NY 10169
By: Jennifer S. Feeney, Esq., Of Counsel

Office of US Trustee
560 Federal Plaza
Central Islip, NY 11722
By: Stan Yuon Yang, Counsel to the United States Trustee

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SPATT, District Judge.

On June 23, 2014, the Appellant Greg Lubonty ("Appellant") filed an appeal from a March 3, 2014 order (the "March 3, 2014 Order") by the United States Bankruptcy Court, Eastern District of New York (Trust, J). The March 3, 2014 Order approved the terms of an amended stipulation (the "Amended Stipulation") entered into on February 26, 2014 between ALS Hibiscus, LLC ("ALS") and R. Kenneth Barnard, as Chapter 7 Trustee of the Bankruptcy Estate (the "Trustee"). The Amended Stipulation, among other things, (i) granted ALS a secured claim against the Bankruptcy Estate in the amount of $4,655,412.45; (ii) granted the Trustee permission to sell the Appellant's residential property located in Miami Florida (the "Miami Property") under certain terms and conditions; (iii) permitted ALS to commence a foreclosure proceeding on the Miami Property; and (iv) adjourned a hearing on the Appellant's objection to ALS's secured claim against the Appellant's Bankruptcy Estate.

The Order was entered over the Appellant's objection, and this appeal followed. For the reasons set forth below, the Bankruptcy Court's Order is affirmed.


A. The Underlying Facts

1. The Mortgages on the Miami Property

On April 11, 2005, the Appellant executed a note and mortgage (collectively, the "Mortgage") in favor of the Wachovia Mortgage Corporation ("Wachovia") in the principal amount of $3,000,000 on the Appellant's Miami Property. (App. Rec. 10, Ex. C.) The mortgage has a maturity date of May 1, 2035. The original principal amount due under the Mortgage was $3 million and interest accrued at a rate of 5.875% per year. (Id.)

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Wells Fargo held a second mortgage on the Miami Property in the amount of $550,000. (App. Rec. 17 at 75:11-17.) The record does not specify the terms of the second mortgage, nor when the Appellant obtained the second mortgage.

From January 2007, the debtor has failed to make any payments on the Mortgage, nor has he paid any fees, taxes, insurance, or other expenses associated with the Miami Property. (See App. Rec. 8, Ex. 1.) On May 11, 2007, Wachovia commenced a mortgage foreclosure proceeding on the Miami Property in the Circuit Court of 11th Judicial District in Miami-Dade County, Florida. (See id.)

At an unspecified time Wachovia assigned its interest in the Note to Wells Fargo Home Mortgage ("Wells Fargo"). (See App. Rec. 10, Ex. B.) In a September 18, 2011 letter to the Appellant, Wells Fargo wrote that its records indicated that the Appellant was delinquent under the terms of the Mortgage in a total amount of $1,474,040.46 and that to "avoid the possibility of acceleration, you must pay this amount on or before October 18, 2011." (Id.)

On January 8, 2011, the Eleventh Judicial Circuit dismissed the mortgage foreclosure proceeding without prejudice because Wachovia failed to appear at several case management conferences. (See App. Rec. 8, Ex. 2.)

2. The Bankruptcy Action

On October 19, 2011, the Appellant filed a voluntary petition with the Bankruptcy Court for relief under Chapter 11 of the Bankruptcy Code (the "Bankruptcy Action"). (App. Rec. 17 at Tr. 71:22-24-72:1.) The case was assigned to United States Bankruptcy Judge Alan S. Trust. Pursuant to 11 U.S.C. § 362(a), any other actions to foreclose on the Miami property were stayed during the pendency of the Bankruptcy Action.

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On April 2, 2012, Wells Fargo filed a secured proof of claim in the amount of $4,655,412.47. (App. Rec. 1.) Wells Fargo's claim became Claim No. 13 in the Bankruptcy Action. (Id.)

In their memoranda, both the Appellant and ALS state that Wells Fargo assigned the Mortgage and its claim in the Bankruptcy Action to BSI Financial Services, Inc. ("BSI"). (See The Appellant's Mem. of Law at 3-4; The Appellee's Mem. of Law at 5.) Both parties also claim that on December 14, 2012, BSI filed a motion seeking relief from the automatic stay pursuant to 18 U.S.C. § 362(d) to foreclose on the Miami Property in a separate state court proceeding. (See App. Rec. at Tr. 75:17-23.) 18 U.S.C. § 362(d) provides that a "party in interest" can make motion for relief from an automatic stay "for cause, including the lack of adequate protection of an interest in property of such party in interest."

However, the Court has not found any support in the appellate record for the parties' contention that Wells Fargo transferred its interest in the Mortgage to BSI. To the contrary, a document entitled, "Corporate Assignment of Mortgage," dated August 28, 2012, indicates that Wells Fargo assigned the Mortgage to MCM Capital Partners LLC ("MCM"). (App. Rec. 1, at p. 32.) Another document entitled, "Assignment of Mortgage/Security Deed/Deed of Trust", states that on October 28, 2012, the Mortgage was assigned by MCM to Newbury Place REO IV, LLC ("Newbury"). (Id. at p. 40.) BSI is not indicated anywhere in these documents, nor do the parties clarify what, if any, relationship MCM or Newbury had to BSI.

Despite these inconsistencies, it is clear from the record, and the parties appear to agree, that on June 10, 2013, Newbury assigned the Mortgage to the Appellee ALS. (App. Rec. 2.)

On June 20, 2013, ALS filed a motion seeking entry of an order converting the case from a Chapter 11 action to a Chapter 7 action. (App. Rec. 4, at p. 3.)

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On the same day, Judge Trust "so ordered" a stipulation pursuant to which ALS and the Appellant agreed that ALS's claim would be fixed in the amount of $4,378,209.67 subject to the Bankruptcy Court's determination of the value of the Miami Property. (App. Rec. 3, at ¶ 3.)

On July 2, 2013, Judge Trust granted the motion by ALS and converted the case to a Chapter 7 action because the court found that a conversion was in the "best interests of creditor and the estate under 11 U.S.C. § 1112(b)(1)." (Id.) On the same day, Judge Trust appointed Appellee Barnard as the interim Trustee of the Appellant's Estate. (App. Rec. 5.) Barnard later became the permanent trustee of the Appellant's Estate; however, the record does not specify when he was so appointed.

On July 3, 2013, Judge Trust granted permission to ALS to commence a foreclosure proceeding on the Miami Property. (See Feb. 3, 2014 Hearing Tr. 75:17-23.) Rule 4001 of the Federal Rules of Bankruptcy Procedure ("Fed. R. Bankr. P.") 4001(a)(3) provides that "[a]n order granting a motion for relief from an automatic stay made in accordance with Rule 4001(a)(1) is stayed until the expiration of 14 days after the entry of the order, unless the court orders otherwise." As such, the order lifting the automatic stay did not become effective until July 18, 2013. (See App. Rec. 17 at Tr. 75:17-23.)

On October 7, 2013, ALS filed a proof of claim amending Claim No. 13 in the Bankruptcy Action. (App. Rec. 9, Ex. 1.) The proof of claim sought to amend the total amount due to ALS under the Note from $4,378,209.67 to $4,586,884.16 "plus certain other fees, expenses, indemnification claims, and interest." (Id.) The Bankruptcy Court assigned Claim No. 18 in the Bankruptcy Action to ALS. (Id.)

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3. The Original Stipulation to Sell the Miami Property

On December 4, 2013, the Trustee and ALS entered into a stipulation regarding the sale of the Miami Property (the "Original Stipulation"). (App. Rec. 6.) The Original Stipulation provided that:

(i) ALS would have an "allowed claim" in the amount of $4,586,884.16 and if the Trustee sells the Miami Property for more than that amount, "interest and fees accrued and accruing since the Petition Date until the date that the ALS Claim is paid"; (ii) the Trustee would proceed with the sale and marketing of the Miami Property; and (iii) ALS agreed to "carve out from the proceeds of the sale of the Miami Property" in the amount of $125,000 for the Trustee to use in its discretion to pay out other claims on the Bankruptcy Estate and costs and commissions related to closing the transaction.

(Id.) On December 20, 2013, the Trustee filed a motion for entry of an order approving the Original Stipulation. (Id.)

4. The Appellant's Objection to the Original Stipulation and ALS's Claim

On January 2, 2014, the Appellant filed a motion objecting to the Original Stipulation. (App. Rec. 8

On January 3, 2014, the Appellant filed an objection to ALS's Claim No. 18 asserting the same objections as he did in his motion objecting to the Original Stipulation. (Id.)

On January 31, 2014, the Trustee and ALS filed an amended stipulation regarding the sale of the Miami Property (the "Amended Stipulation"). The Amended Stipulation, increased the "Carve-Out" for the Bankruptcy Estate from $125,000 to $250,000. (App. Rec. 19, at ¶ 5.) It also provided several additional terms, including that "[i]n the event that the Miami Property sells for a purchase price in excess of $5,000,000, the estate and ALS will share the additional funds in a 50%/50% division." (Id. at ¶ 6.) The Amended Stipulation further provided that "ALS would be authorized and allowed to commence

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and or continue its foreclosure action on the [Miami] Property up to the point of sale." (Id. at ¶ 8.)

In support of the Amended Stipulation, the Trustee filed a...

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