Musso v. Ostashko
| Decision Date | 06 November 2006 |
| Docket Number | No. 05-6935 BK.,05-6935 BK. |
| Citation | 468 F.3d 99 |
| Parties | Robert J. MUSSO, Petitioner-Appellant, v. Tanya OSTASHKO, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
Bruce Weiner, Rosenberg, Musso & Weiner, LLP, Brooklyn, New York, for Petitioner-Appellant.
David J. Doyaga, Doyaga & Schaefer, Brooklyn, New York, for Defendant-Appellee.
Before: B.D. PARKER, WESLEY and HALL, Circuit Judges.
Despite the complicated procedural history of this case and its related state court proceedings, the issue before this Court is relatively straightforward: When marital assets have been awarded to the wife in a state court matrimonial proceeding, are those assets nevertheless part of the husband's bankruptcy estate if a Chapter 7 petition is filed after the state court's decision but before the state court judgment is entered? The bankruptcy court ruled that, in New York, an equitable right to marital property does not arise until entry of the judgment awarding equitable distribution and, thus, the property must be included in the estate. On appeal, the district court reversed, finding that the entry of the state court judgment is "ministerial" and, thus, the rights of the wife, Tanya Ostashko, vested upon rendering of the state court's "Decision After Inquest."
We now vacate the decision of the district court. Four relevant premises require this result. First, under New York law an equitable distribution award is a remedy, and the enforcement of that remedy is no different than the enforcement of any other judgment. Second, New York adheres to the bright line rule that the priority of judgment creditors is determined on the basis of the order in which judgments are docketed or executed. Third, 11 U.S.C. § 544—the so-called "strong arm" provision of the Bankruptcy Code—gives the bankruptcy trustee the rights of a hypothetical perfected judgment lien creditor as of the petition date. Finally, while the Decision After Inquest determined the rights to the marital assets as between husband and wife, the decision did not purport to determine the rights to the assets as between Tanya Ostashko and all other judgment lien creditors. Based upon these considerations, and the undisputed fact that the matrimonial judgment was docketed after the filing of the Chapter 7 petition, we hold that the marital assets are part of the bankruptcy estate and subject to distribution in due course by the bankruptcy court.
Tanya and Vladimir Ostashko were married in Russia in 1992 and moved to the United States in 1994. That same year, Vladimir purchased a home on Staten Island in his name only with $400,000 in cash and a $400,000 mortgage from Green Point Bank. The couple separated in 1997. On January 15, 1998, Vladimir entered into a credit agreement with Informtechnika Bank ("Informtechnika") that provided him with an unsecured credit line of 5,900,000 rubles (equivalent to approximately $900,000, at that time), and, in April 1998, he drew down on the credit line by 5,500,000 rubles. Shortly thereafter, Vladimir defaulted on the loan payments, and Informtechnika sued in Supreme Court, New York County to collect on the debt. In March 1999, Vladimir and Informtechnika reached a settlement, whereby Informtechnika was given a consent judgment for $800,000, plus $10,000 in legal fees. Informtechnika then assigned this judgment to another Russian company, Zuritta-Teks.
In 1999, Tanya commenced an action in New York state court seeking to enjoin Informtechnika (later Zuritta-Teks) from enforcing the judgment and to avoid the judgment as a fraudulent conveyance. The case was later removed to federal court. The United States district court (Ross, J.) found that Vladimir intended to use the loan instrument to liquidate the value of the marital assets in the United States to the detriment of Tanya. The district court noted that Vladimir was one of Informtechnika's founders, served on its board of directors throughout most of the 1990s, and remained close friends with one of the directors and chairman of the bank at the time of the loan. In light of statements by Vladimir that Tanya "would not receive a single kopeck when the dust from the divorce settled," and the district court's finding that toward the end of 1997 and the beginning of 1998 Vladimir engaged in a wholesale liquidation of the marital assets to prevent Tanya from securing an interest in them, the district court found that "the loan was clearly the means by which Vladimir turned remaining marital assets into immediate cash." The district court further found that, while direct evidence of the bank's knowledge was lacking, "circumstantial evidence indicat[ed] that the bank was aware of Vladimir's intentions." In light of these findings, the district court held that the consent judgment was a constructively fraudulent conveyance.1 See Ostashko v. Ostashko, No. 00-cv-7162, 2002 WL 32068357, at *29 (E.D.N.Y. Dec.12, 2002), aff'd sub nom., Ostashko v. Zuritta-Teks, 79 Fed.Appx. 492 (2d Cir.2003).
On March 3, 1998, Tanya Ostashko commenced a matrimonial proceeding in New York Supreme Court, Richmond County. Between December 1998 and May 1999, several decisions by the state court granted Tanya use and possession of various marital assets (including the marital home on Staten Island). The parties were also enjoined from transferring, encumbering, or in any other way disposing of property in which either party had an interest. In June 2002, the matrimonial action was removed from the calendar pending the disposition of the fraudulent conveyance action in federal court. Once that case concluded, the matrimonial action was restored to the state court calendar on January 23, 2003. On July 1, 2003, an inquest was held on the merits of the divorce, and on October 23, 2003, the state court issued a Decision After Inquest awarding Tanya 100 percent of the marital assets. In addition, the court awarded Tanya $211,093.72 for maintenance arrears real estate taxes, and other charges, and $135,000.00 for counsel fees.
On December 18, 2003, Zuritta-Teks filed an involuntary Chapter 7 bankruptcy petition against Vladimir. At that time, the final judgment of divorce was neither signed nor entered. At a hearing on April 20, 2004, the bankruptcy court modified the automatic stay to permit Tanya to seek entry of a final judgment in the matrimonial action, with that relief to become effective after the appointment of a trustee so that the trustee could determine whether to pursue an appeal of the state court judgment. Before the bankruptcy court entered its order modifying the automatic stay, the state court judgment was signed and entered. The bankruptcy court then modified the automatic stay nunc pro tunc.
On May 20, 2004, the bankruptcy trustee (the "Trustee") commenced an adversary proceeding in the bankruptcy court. The complaint sought control of Vladimir's property and avoidance of any interest by Tanya in that property. In her answer on June 21, 2004, Tanya made cross- and counterclaims against the debtor and the Trustee seeking, inter alia, a declaration that the marital assets were not part of Vladimir's bankruptcy estate. On December 6, 2004, Tanya filed a motion for summary judgment seeking declaration that the marital assets were not property of the bankruptcy estate by operation of the Decision After Inquest, and that she was entitled to enforce the state court judgment and take title to the marital assets. In a comprehensive opinion, the bankruptcy court denied the motion; Tanya appealed. The district court reversed and directed the bankruptcy court to enter judgment in favor of Tanya. Ostashko v. Ostashko, 333 B.R. 625, 636 (E.D.N.Y.2005). This appeal followed.
This case involves the intersection of three bodies of law: Federal Bankruptcy Law, New York Domestic Relations Law, and New York Law on the Enforcement and Execution of Judgments. Each has a distinct role, but each must be understood in the context of the others when one partner to a marriage goes to the federal courthouse for bankruptcy relief.
Section 541 of the Bankruptcy Code provides that the commencement of a bankruptcy case creates an estate, to be comprised of "all legal and equitable interests" of the debtor, "wherever located and by whomever held." 11 U.S.C. § 541(a). The scope of this section is broad, and is intended to maximize the amount of property available for distribution to creditors according to priorities established by the Code. The estate created by section 541 is protected from the piecemeal reach of creditors by section 362, which imposes an automatic stay on all actions and proceedings that may affect the debtor's property. See 11 U.S.C. § 362. "It is this central aggregation of property that promotes the effectuation of the fundamental purposes of the Bankruptcy Code: the breathing room given to a debtor that attempts to make a fresh start, and the equality of distribution of assets among similarly situated creditors ...." 5 COLLIER ON BANKRUPTCY ¶ 541.01 (15th ed. Rev. 2005).
Section 544 of the Bankruptcy Code gives the trustee in bankruptcy the status of a hypothetical judgment lien creditor. 11 U.S.C. § 544(a)(1). The trustee hypothetically extends credit to the debtor at the time of filing and, at that moment, obtains a judicial lien on all property in which the debtor has any interest that could be reached by a creditor. The advantage of this status derives not from the Bankruptcy Code but, rather, from the relevant state law defining creditor rights. See In re Kors, Inc., 819 F.2d 19, 22-23 (2d Cir.1987) (); In re Vienna Park Properties, 976 F.2d 106, 115 (2d Cir.1992). Section 544(a)(1) thus puts the trustee in the...
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