Wilk Auslander LLP v. Murray (In re Murray)

• Decision Date: 14 August 2018
• Docket Number: No. 17-1272-bk,August Term, 2017,17-1272-bk
• Citation: 900 F.3d 53
• Parties: IN RE: Matthew N. MURRAY. Wilk Auslander LLP, Creditor-Appellant, v. Matthew N. Murray, Debtor-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

900 F.3d 53

IN RE: Matthew N. MURRAY.Wilk Auslander LLP, Creditor-Appellant,

v.Matthew N. Murray, Debtor-Appellee.

No. 17-1272-bk

August Term, 2017

United States Court of Appeals, Second Circuit.

Argued: February 13, 2018

Decided: August 14, 2018

Eric J. Snyder (Eloy A. Peral, on the brief ), Wilk Auslander LLP, New York, NY, for Creditor-Appellant.

Brendan Scott (Tracy L. Klestadt, on the brief ), Klestadt Winters Jureller Southard & Stevens, LLP, New York, NY, for Debtor-Appellee.

Before: Walker, Hall, and Lohier, Circuit Judges.

John M. Walker, Jr., Circuit Judge:

Creditor-Appellant Wilk Auslander LLP appeals a judgment of the United States District Court for the Southern District of New York (Vernon S. Broderick, J. ) affirming the Bankruptcy Court’s (Robert E. Gerber, Bankr. J. ) dismissal of the Chapter 7 involuntary bankruptcy petition Wilk Auslander filed under 11 U.S.C. § 303(a) against Debtor-Appellee Matthew N. Murray.

The bankruptcy court dismissed for cause under 11 U.S.C. § 707(a) after concluding that the petition was simply a judgment enforcement tactic for a two-party dispute for which there were adequate remedies under state law and that continuing the case would not serve any bankruptcy purposes such as ensuring equal distribution among creditors or otherwise protecting assets from depletion. The district court affirmed, holding that the dismissal for cause was not an abuse of discretion. This appeal followed, and we AFFIRM the judgment below.

BACKGROUND

Creditor-Appellant Wilk Auslander LLP seeks to enforce a more than $19 million judgment against Debtor-Appellee Matthew N. Murray.¹ The judgment arose out of a Financial Industry Regulatory Authority arbitration that awarded Murray’s former employer, Rodman & Renshaw LLC ("Rodman"), $10.7 million in damages for New York law claims of defamation, tortious interference, breach of fiduciary duty, conversion, breach of contract, and prima facie tort.

The arbitral award was subsequently affirmed by the New York State Supreme Court and the Appellate Division and augmented with interest. After filing for Chapter 7 bankruptcy, Rodman’s estate assigned the judgment against Murray to Rodman’s law firm, Wilk Auslander, as part of a settlement of outstanding fees, with any recovery to be split 70/30 between the Rodman estate and Wilk Auslander, respectively.

Murray, who lost his job with Rodman in November 2011 and indicated to the bankruptcy court that he has no income, has not made any payments towards his debt. Wilk Auslander asserts that Murray, prior to entry of the judgment, took steps to shield his assets from creditors by selling his yacht, helicopter, and car and by transferring $169,000 from a United States bank account to an offshore asset-protection trust. The bankruptcy court, without discussing these transfers in depth, pointed out that if they were fraudulent, they could be avoided under state law without the need to file a bankruptcy action. See In re Murray , 543 B.R. 484, 487 n.15 (Bankr. S.D.N.Y. 2016) (citing N.Y. Debt. & Cred. Law § 271 et seq. ).

Murray’s sole asset consists of a residential cooperative apartment in Manhattan, the corresponding shares of which he holds with his wife in a tenancy by the entirety. In February 2013, Wilk Auslander secured a lien on the shares. In February 2014, the apartment was appraised at $4.6 million. The Murrays live in the apartment with their two children.

In February 2014, as part of an effort to collect on its judgment, Wilk Auslander filed an involuntary bankruptcy petition against Murray. See 11 U.S.C. § 303. It is undisputed that Wilk Auslander’s purpose in filing the petition was to take advantage of bankruptcy remedies that would allow it to force a sale of the apartment—notwithstanding Murray’s wife’s interest, which would be recognized after the sale—rather than state law remedies that would permit it to execute on Murray’s interest only. Murray moved to dismiss the petition under, inter alia , 11 U.S.C. §§ 303(i) and 305(a), with costs or damages to be awarded to Murray or, alternatively, for the bankruptcy court to abstain from entertaining the petition.

In January 2016, after discovery and oral argument, the bankruptcy court dismissed the petition sua sponte for cause under 11 U.S.C. § 707(a), rather than under Sections 303 or 305, holding that the petition amounted to an improper exploitation of the bankruptcy system.² Section 707(a) authorizes a bankruptcy court to dismiss a case for cause, with the determination of whether cause exists left to the discretion of the bankruptcy court.³ See In re Smith , 507 F.3d 64, 73 (2d Cir. 2007).

The bankruptcy court identified nine factors supporting its conclusion that the petition should be dismissed as an improper use of the bankruptcy system: (1) the bankruptcy court was the most recent battlefield in a long-running, two-party dispute; (2) Wilk Auslander brought the case solely to enforce a judgment; (3) there were no competing creditors; (4) there was no need for pari passu distribution; (5) assuming there were fraudulent transfers to be avoided, Wilk Auslander could do so in another forum; (6) Wilk Auslander had adequate remedies to enforce its judgment under non-bankruptcy law; (7) Wilk Auslander invoked the bankruptcy laws solely to secure a benefit—the ability to execute on both Murray and his wife’s interests in their apartment under 11 U.S.C. § 363(h) —that it does not have under non-bankruptcy law and without a creditor community to protect; (8) no assets would be lost or dissipated in the event that the bankruptcy case did not continue; and (9) Murray did not want or need a bankruptcy discharge. The bankruptcy court further held that a case could be dismissed for cause based on the behavior of a creditor as opposed to that of a debtor because Section 707(a) has no restraints to the contrary.

The bankruptcy court made the following additional determinations: it declined to reach the question of whether Wilk Auslander filed the petition in bad faith; it declined to grant Murray’s request for an award of sanctions; and it found no need to act on Murray’s motion to abstain under Section 305(a).

Wilk Auslander appealed to the district court arguing, as relevant here, that the bankruptcy court erred in dismissing its petition for cause because the petition met the statutory requirements of 11 U.S.C. § 303, was not found to have been filed in bad faith, and would provide Wilk Auslander with relief not available outside of the bankruptcy forum.

The district court, concluding that the bankruptcy court did not abuse its discretion in dismissing the petition for cause, affirmed. The district court agreed with the bankruptcy court that New York law provides a sufficient means for Wilk Auslander to enforce its judgment and Wilk Auslander’s inability to execute on Murray’s wife’s interest under that law does not, under these circumstances, justify a need for relief in bankruptcy court. This appeal followed.

DISCUSSION

"We exercise plenary review over a district court’s affirmance of a bankruptcy court’s decisions, reviewing de novo the bankruptcy court’s conclusions of law, and reviewing its findings of facts for clear error." In re MPM Silicones, L.L.C. , 874 F.3d 787, 794 (2d Cir. 2017) (internal quotation marks omitted); see also In re TPG Troy, LLC , 793 F.3d 228, 231 (2d Cir. 2015) (applying the same standard when reviewing the dismissal of an involuntary petition).

The Bankruptcy Code does not define "cause" for dismissal under Section 707(a), and the statute’s three examples of cause are illustrative, not exhaustive. See In re Smith , 507 F.3d at 72. Courts must "engage in case-by-case analysis in order to determine what constitutes ‘cause’ sufficient to warrant dismissal." In re Dinova , 212 B.R. 437, 442 (2d Cir. BAP 1997). We "determine[ ] whether cause exists by looking at whether dismissal would be in the best interest of all parties." In re Smith , 507 F.3d at 72 (internal quotation marks omitted). We conclude in this case that a similar analysis governs our review of the bankruptcy court’s sua sponte decision to dismiss. Here we consider whether dismissal would be in the best interest not only of the parties but of the bankruptcy system.

In the usual case, the best interest of a debtor "lies generally in securing an effective fresh start upon discharge and in the reduction of administrative expenses," id. (internal quotation marks omitted), whereas the best interest of the creditor goes to whether it is prejudiced by dismissal, such as when the motion to dismiss is brought after a significant amount of time, during which the creditors were prevented from taking other measures to collect, see id. Generally, however, creditors are not prejudiced by dismissal when they may exercise their rights outside of bankruptcy. See In re Segal , 527 B.R. 85, 94 (Bankr. E.D.N.Y. 2015).

A bankruptcy court’s decision to dismiss a case for cause under Section 707(a) is guided by equitable considerations and is committed to the sound discretion of the bankruptcy court. In re Smith , 507 F.3d at 73 (internal quotation marks omitted); see also In re Krueger , 812 F.3d 365, 369–75 (5th Cir. 2016) ; 6 Collier on Bankruptcy § 707.03 [1] (Richard Levin & Harry J. Sommers eds., 16th ed. 2018) [hereinafter "Collier on Bankruptcy "]. Accordingly, we disturb a dismissal for cause only if the bankruptcy court has abused its discretion. See In re Smith , 507 F.3d at 73. A bankruptcy court abuses its discretion if its decision rests on an error of law or a clearly erroneous factual finding or cannot be located within the range of permissible decisions. See id.

At the outset, the following factors favor dismissal in this case: Wilk Auslander is a sole creditor; judgment enforcement remedies exist under state law; and no assets would be lost or dissipated in the event the bankruptcy case does not continue. Wilk Auslander does not dispute the existence of these factors but...