Opinion
CASE NO. 19-CIV-60651-RAR
2020-03-30
Lynn Ann MARTIN, Appellant, v. Philip MARTIN, Appellee.
Craig Pugatch, Rice Pugatch Robinson Storfer & Cohen, PLLC, George Leo Zinkler, III, Rice Pugatch Robinson & Schiller, P.A., Fort Lauderdale, FL, for Appellant. Alan Roy Crane, Furr & Cohen, Boca Raton, FL, for Appellee.
Craig Pugatch, Rice Pugatch Robinson Storfer & Cohen, PLLC, George Leo Zinkler, III, Rice Pugatch Robinson & Schiller, P.A., Fort Lauderdale, FL, for Appellant.
Alan Roy Crane, Furr & Cohen, Boca Raton, FL, for Appellee.
ORDER AFFIRMING BANKRUPTCY COURT ORDER
RODOLFO A. RUIZ II, UNITED STATES DISTRICT JUDGE
This case addresses the interplay between state family law and federal law in the context of a bankruptcy proceeding. Appellant Lynn Ann Martin appeals the Order Granting Motion for Relief from Stay [ECF No. 5-1] ("R.") at 183 ("Stay Relief Order") entered by the United States Bankruptcy Court for the Southern District of Florida. The appeal boils down to one key issue: whether the bankruptcy court abused its discretion by lifting the automatic stay pursuant to 11 U.S.C. § 362(b)(2)(A)(iv) to allow Appellee to enforce an equitable distribution award stemming from a divorce proceeding. The equitable distribution award concerns Appellant's pension.
Appellant argues that the pension is property of her bankruptcy estate because her bankruptcy petition was filed before a final judgment of divorce was entered by the New York state court. Thus, Appellant maintains that Appellee's right in the pension never vested under New York law. Conversely, Appellee maintains the pension was never property of the bankruptcy estate because his ownership interest in the pension vested pre-petition—when the state court issued its "decision after bench trial"—but before it entered the "judgment of divorce." Further, Appellee argues that New York law restricts transfer of Appellant's interest in the pension to the bankruptcy estate.
Having carefully considered the record from the bankruptcy court proceeding, Appellant's Initial Brief [ECF No. 16] ("Initial Brief"), Appellee's Response Brief [ECF No. 21] ("Response"), and Appellant's Reply Brief [ECF No. 28] ("Reply"), it is hereby
ORDERED AND ADJUDGED that the Stay Relief Order is AFFIRMED as set forth herein. The Clerk is directed to CLOSE this case and any pending motions are DENIED as moot .
BACKGROUND
The relevant facts are undisputed. The parties were formerly married and lived in New York. See Initial Brief at 6; Resp. at 1. Appellant is a retired school teacher who earns income from the New York State Teachers Defined Benefits Pension Plan ("Pension"). Id. On October 1, 2015, Appellant initiated a divorce proceeding in the Supreme Court for the State of New York. Id. After more than two years of contentious litigation, the state court conducted a bench trial in November 2017. Id. The primary contested issue at trial was the equitable distribution of the Pension. See R. at 72.
On May 17, 2018, the state court entered a Decision After Bench Trial ("DABT") in the form of a 14-page written order that included credibility determinations, findings of fact, and conclusions of law. Id. The state court ordered, among other things, that Appellee was entitled to his 30% Majauskas share of the Pension benefit, and that all remaining amounts due by Appellant to Appellee shall be paid in the form of a 20% surcharge against the Pension. Id. at 73-74, 76, 82. The DABT also directed Appellee to "draft and submit a proposed judgment ... which is not inconsistent with this [DABT]." Id. at 82 (alteration added).
See Majauskas v. Majauskas , 61 N.Y.2d 481, 474 N.Y.S.2d 699, 463 N.E.2d 15, 19-21 (1984) (holding that vested rights in a noncontributory pension plan are marital property to the extent they were acquired between the date of marriage and commencement of a matrimonial action).
Despite the entry of the DABT, the saga continued. On June 4, 2018, 18 days after the entry of the DABT, Appellant filed for bankruptcy protection under Chapter 13 of the U.S. Bankruptcy Code. Id. at 7. The very next day, the parties filed requests to modify the DABT in the state court case. See Initial Brief at 9. And on June 21, 2018, apparently fed up with the case, the state court sent a letter to the parties stating that the process of scheduling a post-bench trial conference had "grown absurd" and instructed the parties to file their grievances with the DABT via motions instead. See R. at 118.
Appellee filed a motion for relief from the automatic stay in the bankruptcy proceeding on August 1, 2018 ("Motion for Relief from Stay"), requesting that the court lift the automatic stay pursuant to 11 U.S.C. sections 362(b)(2)(A)(iv) and 541(c)(2). Appellee maintained the DABT was a "judgment of divorce" under New York law and the automatic stay was merely preventing the "ministerial act" of entering the judgment on the docket. See R. at 64. Further, Appellee argued that the Pension never became part of the bankruptcy estate in the first place due to a New York law restricting its transfer. See R. at 143. Moreover, Appellee requested that the bankruptcy court abstain from ruling on any matter related to the state court proceeding. See R. at 64.
Providing for an exception to the automatic stay "for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the [bankruptcy] estate."
Providing that "[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title."
After oral argument, the bankruptcy court entered an order granting the Motion for Relief from Stay in part. Id. at 128-129 ("Bankruptcy Order"). The bankruptcy court lifted the automatic stay and allowed the state court to proceed as to the dissolution of marriage. The Bankruptcy Order clarified that "the effect of the State Court judgment as it relates to the bankruptcy estate will be determined by this Court" and "[t]he State Court judgment shall not have the effect of transferring property of the Debtor absent further order of this Court or dismissal of the bankruptcy." Id. at 129.
On October 23, 2018, the state court entered the Divorce Decree, formally recording the decisions that it made in the DABT. See Initial Brief at 10, Resp. at 4. On February 14, 2019, the bankruptcy court entered the Stay Relief Order, wherein it found that a) the DABT had the effect of a final judgment under New York law and b) Appellee's interest in the Pension was never part of the bankruptcy estate. Stay Relief Order at 3, 5. Consequently, the bankruptcy court abstained from any further matters related to the divorce proceeding and held that "[n]either the Automatic Stay nor any provision of the Bankruptcy Code or order of this Court prohibits the State Court from entering a Qualified Domestic Relations Order (QDRO) to provide for payments to Creditor under the Terms of the Final Judgment, and the Creditor has relief from the Automatic Stay to enforce the Final Judgment." Id. Appellant appealed the Stay Relief Order after unsuccessfully moving for reconsideration. R. at 179.
STANDARD OF REVIEW
"The district court must accept the bankruptcy court's factual findings unless they are clearly erroneous, but reviews a bankruptcy court's legal conclusions de novo. " In re Englander , 95 F.3d 1028, 1030 (11th Cir. 1996) (citation and internal quotations omitted). "A finding is clearly erroneous when although there is evidence to support it, the reviewing court upon examining the entire evidence is left with the definite and firm conviction that a mistake has been committed." Kane v. Stewart Tilghman Fox & Bianchi, P.A. , 485 B.R. 460, 468 (S.D. Fla. 2013) (citing United States v. U.S. Gypsum Co. , 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948) ) (internal quotations omitted). "If the lower court's assessment of the evidence is plausible in light of the record viewed in its entirety, the reviewing court may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently." Id. (citing Anderson v. Bessemer City , 470 U.S. 564, 573–574, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ). "Under de novo review, this Court independently examines the law and draws its own conclusions after applying the law to the facts of the case, without regard to decisions made by the Bankruptcy Court." In re Brown , No. 08-1517-Orl-18, 2008 WL 5050081, at *2 (M.D. Fla. Nov. 19, 2008) (citing In re Piper Aircraft Corp. , 244 F.3d 1289, 1295 (11th Cir. 2001) ). A district court may affirm a bankruptcy court order on "any ground supported by the record." In re Gosman , 382 B.R. 826, 839 n.3 (S.D. Fla. 2007) (citing Bircoll v. Miami–Dade County , 480 F.3d 1072, 1088 n.21 (11th Cir. 2007) ) (internal citation omitted).
Moreover, "[a] decision to lift the [automatic] stay is discretionary with the bankruptcy judge, and may be reversed only upon a showing of abuse of discretion." In re Dixie Broad., Inc. , 871 F.2d 1023, 1026 (11th Cir. 1989) (citing Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc. , 814 F.2d 844 (1st Cir. 1987) ; In re Holtkamp , 669 F.2d 505 (7th Cir. 1982) ); see also In re Adelphia Commc'ns Corp. , 298 B.R. 49, 52 (S.D.N.Y. 2003) ("Because the inquiry required to evaluate whether to lift a stay is ‘very fact specific and involve[s] the weighing of numerous factors peculiar to the particular case,’ such decision by a bankruptcy court is committed to its sound discretion and is reviewable only for abuse-of-discretion.") (internal citations omitted) (alteration added). "An abuse of discretion occurs if the judge fails to apply the proper legal standard or to follow proper procedures in making the determination, or bases an award upon findings of fact that are clearly erroneous." In re Air Safety Int'l, L.C. , 336 B.R. 843, 852 (S.D. Fla. 2005) (citing In re Red Carpet Corp. of Panama Cty. Beach , 902 F.2d 883, 890 (11th Cir. 1990) ).
ANALYSIS
The central dispute here is whether the Pension became property of the bankruptcy estate upon Appellant's filing of her bankruptcy petition. Appellant's position that the bankruptcy court erred in finding that the DABT constituted a "final judgment of divorce" under New York law is well taken. However, the Court affirms the Stay Relief Order on alternative grounds raised by Appellee and fully supported by the record. The Court will first address the bankruptcy court's error and then explain why, notwithstanding the error, the bankruptcy court did not abuse its discretion when it lifted the automatic stay.
I. The DABT did not constitute a final judgment of divorce under New York law.
A bankruptcy estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). "The scope of § 541(a)(1) is broad, and includes property of all types, tangible and intangible, as well as causes of actions." In re Meehan , 102 F.3d 1209, 1210 (11th Cir. 1997) ; see also Parker v. Wendy's Int'l, Inc. , 365 F.3d 1268, 1272 (11th Cir. 2004) (" Section 541 of the Bankruptcy Code provides that virtually all of a debtor's assets, both tangible and intangible, vest in the bankruptcy estate upon the filing of a bankruptcy petition."). However, while the scope of a bankruptcy estate is broad, it is not without exception. Section 362(b)(2)(A)(iv) provides, in relevant part, as follows:
(b) The filing of a petition ... does not operate as a stay—
(2) under subsection (a)—
(A) of the commencement or continuation of a civil action or proceeding—
(iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate;
11 U.S.C. § 362(b)(2)(A)(iv). Here, the parties fundamentally disagree as to whether the Pension was "property of the estate" at the time the bankruptcy petition was filed.
The parties agree that the Pension constitutes marital property subject to equitable distribution under New York Law. Initial Brief at 13; Resp. at 9; see also In re Witko , 374 F.3d 1040, 1043 (11th Cir. 2004) (holding that although federal law governs whether an interest is property of the bankruptcy estate, "[p]roperty interests are created and defined by state law.").
The bankruptcy court held that "[u]nder New York law, the entry of the judgment of divorce is a mere formality or ministerial act" and, consequently, Appellee's rights in the Pension vested with the entry of the DABT. See Stay Relief Order at 3-6. Thus, the Pension was never property of the bankruptcy estate. Id. In doing so, the bankruptcy court relied on Jayson v. Jayson , where the court held that a final judgment can be entered nunc pro tunc. 54 A.D.2d 687, 688, 387 N.Y.S.2d 274 (N.Y. App. Div. 1976). However, this proposition has been rejected by the Second Circuit's application of New York state law in the context of bankruptcy proceedings. See Musso v. Ostashko , 468 F.3d 99 (2d Cir. 2006).
In Musso , the Second Circuit held that marital assets awarded to a debtor's wife in a pre-petition state court matrimonial proceeding nevertheless became property of the debtor's bankruptcy estate because the final divorce judgment was not docketed until after the filing of debtor's bankruptcy petition. 468 F.3d at 105–106. The Second Circuit went on to specifically distinguish Jayson (as well as several cases cited by the Appellee), finding as follows:
See Estate of Agliata v. Agliata , 155 Misc.2d 385, 589 N.Y.S.2d 236 (N.Y. Sup. Ct. 1992) ; Cornell v. Cornell , 7 N.Y.2d 164, 196 N.Y.S.2d 98, 164 N.E.2d 395 (1959).
It may be the case that, as between spouses, actual entry of the divorce judgment is immaterial so long as a divorce has in fact been granted. Between spouses the dual policy concerns of notice and the ability of a judgment creditor to rely on its interest are absent because the spouses have had an opportunity to participate in the proceedings by which their respective rights in the property at issue have been determined. But as between a spouse and a third party (such as a judgment lien creditor), entry of the judgment is critical, under New York law, to cementing the spouse's interest in the property .
Id. at 107 (citations omitted) (emphasis added); see also In re Anjum , 288 B.R. 72, 76 (Bankr. S.D.N.Y. 2003) (holding creditor's respective rights in marital property did not vest under New York law until entry of the judgment dissolving the marriage); In re Cole , 202 B.R. 356, 360 (Bankr. S.D.N.Y. 1996) (internal citation omitted) ("If bankruptcy intervenes before the state court enters the [divorce] judgment, the trustee's status as hypothetical lien creditor cuts off the non-debtor spouse's inchoate rights in marital property, and leaves her with a general unsecured claim.").
Thus, cases like Musso , In re Anjum , and In re Cole make clear that the entry of a final judgment of divorce is not merely "ministerial" under New York law as advocated by Appellee and found by the bankruptcy court. Consequently, de novo review indicates that the bankruptcy court erred by finding that the DABT operated as a "final judgment" so as to exclude the Pension from the bankruptcy estate. However, the inquiry does not end here. As explained below, the Pension is nonetheless excluded from the bankruptcy estate for a separate and distinct reason: it is subject to a valid restriction under New York law.
II. The Pension is excluded from the bankruptcy estate due to a valid restriction.
Although the bankruptcy court misapplied New York law, Appellee submits—and the record supports—an independent basis for affirmance of the Stay Relief Order. Appellee has consistently maintained that the automatic stay never applied to the Pension under 11 U.S.C. section 541(c)(2) and New York Education Law section 524. See Resp. at 18-20; Hearing Transcript [ECF No. 7] at 6:22-8:25; Supplement to Motion for Stay Relief. R. at 143.
Notably, Appellant raises no authority to rebut this argument and fails to address it whatsoever.
Section 541(c)(2) reads: "A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title." 11 U.S.C. § 541(c)(2) ; see also In re Brown , 303 F.3d 1261, 1265 (11th Cir. 2002) ("Where there is a restriction on transfer of the debtor's interests under applicable non-bankruptcy law ... such restriction remains effective even in bankruptcy. As a result ... trusts are excluded from a debtor's bankruptcy estate to the extent they are protected from creditors under applicable state law.") (citing 11 U.S.C. § 541(c)(2) ); In re Estate of King , 196 Misc. 2d 250, 255, 764 N.Y.S.2d 519 (N.Y. Sur. 2003) (holding that the exemption created by New York Education Law § 524 protected a party's interest in the New York State Teacher's Retirement System from creditors).
Here, the applicable nonbankruptcy law at issue is section 524 of the New York Education Law, which states as follows:
The right of a teacher to a pension, an annuity, or a retirement allowance, to the return of contributions, any benefit or right accrued or accruing to any person under the provisions of this article, and the moneys in the various funds created hereunder, are hereby exempt from any state or municipal tax, and shall not be subject to execution, garnishment, attachment or any other process whatsoever , and shall be unassignable except as in this article specifically provided.
N.Y. EDUC. LAW § 524 (emphasis added). Thus, the plain language of section 524 of the New York Education Law —when interposed with section 541(c)(2) of the Bankruptcy Code —creates an enforceable restriction on the transfer of the Pension in this case. See In re Barry , 52 F. Supp. 496, 497–98 (E.D.N.Y. 1943), aff'd sub nom. Barry v. Morris Plan Indus. Bank of New York , 141 F.2d 1021 (2d Cir. 1944) (finding that predecessor statute identical to section 524 created an enforceable restriction on transfer of the debtor's beneficial interest in her teacher's pension).
Ultimately, "[a]ny interest in any funds that [Appellant] had in the New York [State] Teachers Retirement System was not an asset of the bankrupt's estate and the court is bound by [New York] State law with respect to exemptions. " Id. at 498 (emphasis added). Given this valid and enforceable restriction, Appellant's interest in the Pension was never property of the bankruptcy estate to begin with. Therefore, the bankruptcy court did not abuse its discretion when it lifted the automatic stay.
CONCLUSION
In the end, the bankruptcy court was correct when it found that:
Neither the Automatic Stay nor any provision of the Bankruptcy Code or order of this Court prohibits the State Court from entering a Qualified Domestic Relations Order (QDRO) to provide for payments to Creditor under the Terms of the Final Judgment, and the Creditor has relief from the Automatic Stay to enforce the Final Judgment.
Stay Relief Order at 5. The Court notes that in reaching its decision, the bankruptcy court was guided by the Eleventh Circuit's caution against the danger of bankruptcy courts second-guessing state courts in family law matters, which "could produce conflicting court decrees further aggravating an already delicate situation." In re Zhuk , 576 B.R. 273, 278 (Bankr. S.D. Fla. 2017) (citing Carver v. Carver , 954 F.2d 1573, 1579 (11th Cir. 1992) ; Cummings v. Cummings , 244 F.3d 1263, 1267 (11th Cir. 2001) ). This Court shares the bankruptcy court's concern, and by affirming the Stay Relief Order intends to effectuate transfer restrictions and protections afforded by New York law—without disturbing the underlying state court divorce proceedings. Thus, for the reasons stated herein, it is hereby
ORDERED AND ADJUDGED that the Stay Relief Order is AFFIRMED . The Clerk is directed to CLOSE this case. Any pending motions are DENIED as moot .
DONE AND ORDERED in Fort Lauderdale, Florida, this 30th day of March, 2020.