Blackstone Inv. Partners, LLC v. Arcuri (In re Krowel)

631 B.R. 277

IN RE Tracy L. KROWEL, Debtor.

Blackstone Investment Partners, LLC, Appellant,

v.Santo Arcuri and Joseph H. Baldiga, Chapter 7 Trustee, Appellees.

BAP NO. MW 20-019

Bankruptcy Case No. 11-43854-CJP

United States Bankruptcy Appellate Panel of the First Circuit.

September 10, 2021

David Baker, Esq., on brief for Appellant.

Philip F. Coppinger, Esq., on brief for Appellee, Santo Arcuri.

No brief submitted for Appellee, Joseph H. Baldiga, Chapter 7 Trustee.

Before Lamoutte, Cabán, and Fagone, United States Bankruptcy Appellate Panel Judges.

Fagone, U.S. Bankruptcy Appellate Panel Judge.

The interest of the debtor, Tracy L. Krowel, in real property located at 49 Olde Colony Drive, Shrewsbury, Massachusetts—the subject of litigation in other courts for more than a decade—is now at the heart of this appeal. Blackstone Investment Partners, LLC ("Blackstone") appeals from the bankruptcy court's order denying its request to reopen Krowel's chapter 7 bankruptcy case to facilitate, among other things, Blackstone's contemplated purchase of the property from the chapter 7 trustee. Discerning no concrete, pecuniary harm to Blackstone stemming from the bankruptcy court's refusal, as discussed below, we DISMISS this appeal on account of Blackstone's lack of appellate standing.

FACTS ¹

In 2009, Santo Arcuri obtained a state court judgment against Krowel for approximately $200,000. Around the same time, Shrewsbury Street Development Companies, Inc. ("SSDC") used Krowel's money, together with a mortgage loan, to acquire a home in Shrewsbury, Massachusetts. Krowel and her husband intended to use that property as their principal residence. Immediately after acquiring the property, SSDC transferred it to a trust. Krowel's brother was the trustee and Krowel was a guarantor of SSDC's mortgage debt.

In 2010, Arcuri brought a fraudulent transfer action against Krowel and the successor trustee of the trust. The state court granted Arcuri a prejudgment attachment against the property. Arcuri's exercise of remedies prompted Krowel to resort to bankruptcy and, in 2011, she filed a voluntary petition under chapter 7—her fifth bankruptcy filing over a five-year period. Krowel did not include the property on her bankruptcy schedules; instead, she scheduled a "Possible Claim against Santo Arcuri" with an unknown value and identified the pending litigation with Arcuri on her Statement of Financial Affairs.

Arcuri filed a proof of claim for $230,000. According to Arcuri, this claim was based on the 2009 state court judgment and was secured by the property (on account of the prejudgment attachment) to the extent of $200,000. Later, the bankruptcy court entered an order granting Arcuri relief from the automatic stay to pursue his rights and remedies against the property, including continuing the state court fraudulent transfer action.²

Krowel received a chapter 7 discharge in April 2012 and, shortly after that, the chapter 7 trustee filed a report of no distribution, indicating that the case was a "no-asset case" and that the estate had been fully administered. The case was closed in August 2013.

More than a year later, the state court entered a judgment in favor of Arcuri, declaring that Krowel was "the one hundred ... percent beneficial owner" of the property and that she had fraudulently transferred it to the trust. The court found that Krowel and her husband had purchased the property as their primary residence and "contemplated" that the property "would be put in trust" to protect it from their creditors, including Arcuri. The court also found that SSDC was created to further the fraudulent transfer scheme, and ruled:

Since the transfer was fraudulent the plaintiff [Arcuri] has broad rights under [the Massachusetts Uniform Fraudulent Transfer Act § 8(a) ] to obtain "avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim", "an attachment or other provisional remedy against the asset", "an injunction against further disposition of the asset" and "any other relief the circumstances may require". Where the creditor has obtained a judgment on the claim against the debtor as is the case here the creditor "may levy execution on the asset transfer[red] or its proceeds". [ Mass. Gen. Laws ch. 109A, § 8(b) ].

Consequently, the state court ordered the property to be sold and the net proceeds of the sale to be applied to Arcuri's judgment.

Following the entry of the fraudulent transfer judgment, Krowel moved to reopen her chapter 7 case, asking the bankruptcy court to determine her ownership interest in the property. After initially denying the motion, the bankruptcy court reconsidered the denial, entered an order reopening the case, and ordered the appointment or reappointment of a chapter 7 trustee. The court did not, however, permit Krowel to amend her schedules to disclose her interest in, or claim a homestead exemption in, the fraudulently transferred property. The court reasoned that the chapter 7 trustee—fully aware of Arcuri's fraudulent transfer action and the property—had not taken the position that either the lawsuit or the property was an asset that needed to be administered for the benefit of creditors.

The state court-ordered auction of the property was conducted in summer 2016 and, after the winning bidder failed to close on the sale, Arcuri acquired the property as a result of his back-up bid. Prior to the auction, Krowel and her husband sued Arcuri and the auctioneer to determine, among other things, their homestead and redemption rights. The state court dismissed their complaint but also determined, on Arcuri's surviving counterclaim, that the auction was conducted in full compliance with prior court orders and, further, that the sale was reasonable. Following some litigation over possession of the property, Arcuri was finally able to sell the property to a third party in November 2017.

Meanwhile, in May 2017, Krowel's chapter 7 case was closed for a second time. Over a year later, in August 2018, Blackstone—the appellant here—arrived on the scene. Blackstone asked the bankruptcy court to reopen Krowel's case under § 350(b).³ More particularly, Blackstone sought an order directing Krowel "to amend her bankruptcy [s]chedules, or alternatively, granting Blackstone leave to do so, in order to schedule" an "unscheduled, un-administered asset," namely, "[t]he bankruptcy estate's interest" in Arcuri's fraudulent transfer action. (emphasis omitted). Blackstone asserted that the fraudulent transfer action "was a pre-petition asset of the bankruptcy estate that never was scheduled by [Krowel] ... and thus never either exempted by [Krowel] or abandoned or administered by the duly appointed chapter 7 trustee ...." (emphasis omitted). Blackstone added that it had offered to acquire the estate's interest in the litigation and that the chapter 7 trustee had made a counteroffer, which Blackstone presumed "confirm[ed]" the trustee's belief that the litigation was estate property. The chapter 7 trustee and Arcuri both opposed Blackstone's motion.

The bankruptcy court denied Blackstone's motion without a hearing. First and foremost, the court ruled that Blackstone was not a "party in interest" entitled to seek reopening of the case under Rule 5010. Noting that Rule 5010 does not define "party in interest," the court joined those courts that "have found the examples of parties in interest set forth in § 1109(b) useful when examining" Rule 5010. The court then observed that under § 1109(b), a party in interest includes "the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee." It added that courts have determined that the term party in interest "includes all persons whose pecuniary interests are directly affected by the bankruptcy proceedings" and is "implicitly confined to debtors, creditors, or trustees, each with a particular and direct stake in reopening cognizable under the Bankruptcy Code." In concluding that Blackstone did not qualify as a party in interest under these standards, the court reasoned:

Blackstone is not a party enumerated in § 1109(b) and, although it claims to be a "stalking horse bidder" that would have a pecuniary interest if the case is reopened, that interest is too speculative to confer Blackstone standing to reopen the case under the circumstances. There is no agreement with the Trustee with respect to sale of the purported asset, and the Trustee is not seeking to reopen the case for the purpose of pursuing the purported asset.

The court then declared that even if Blackstone qualified as a party in interest, it "would decline to exercise its discretion to reopen the case," reasoning:

[T]here would be no purpose served that would substantially benefit the estate given the remoteness for recovery to creditors or benefit to the Debtor and other factors, such as the passage of time and prejudice to parties in interest, including the Trustee, weigh heavily against the Court exercising its discretion. Blackstone seeks to reopen the case so that a purported "unscheduled, un-administered asset of the estate," which the Trustee described as ... "some ephemeral interest" in the [fraudulent transfer action], can be scheduled in order to impact the validity of the litigation and the orders the [state court] has entered in that matter. Notwithstanding the allegations in the Motion, however, the existence of the [fraudulent transfer action] was disclosed by the Debtor in her Statement of Financial Affairs, and the Debtor's potential claims against Arcuri were disclosed in the Debtor's Schedule B. The Debtor never claimed an exemption in the potential claim against Arcuri. There is a final order ... allowing Arcuri to pursue his rights and remedies with respect to the [p]roperty, including to proceed with the pending [fraudulent transfer action], and [that action] was referenced in countless pleadings and the

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