Brown v. Brown (In re Brown)

In re MICHAEL RODGER BROWN,

JENNIFER BROWN, Appellant v. MICHAEL RODGER BROWN, Appellee.

1:20-cv-03943 (MKV)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

February 11, 2021

OPINION AND ORDER

MARY KAY VYSKOCIL, United States District Judge:

Appellant Jennifer Brown ("Appellant" or "Jennifer") appeals from an April 27, 2020, decision of the Bankruptcy Court (Garrity, J.) which, inter alia, granted in part the Debtor-Appellee Michael Brown's ("Appellee" or "Michael") motion to approve title to and distribution of the Parties' marital property and to expunge Jennifer's Equitable Distribution Claim (the "April 26 Order"). For the reasons that follow, the April 27 Order is AFFIRMED. Because the facts and legal arguments regarding this appeal are adequately presented in the briefs and in the record, Appellant's request for oral argument on the appeal is denied. See Fed. R. Bankr. Pro. 8019(b)(3).

FACTUAL BACKGROUND

The facts underlying the dispute before the Court are discussed in detail in Judge Garrity's comprehensive Memorandum Decision. See Dkt. No. 112, In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. March 13, 2020), reported at 615 B.R. 725. The Court recounts them here only to the extent necessary for this decision.

Jennifer and Michael Brown were married in 2001. Op. at 3. In March 2013, Jennifer commenced an action in state court to dissolve the marriage (the "Divorce Action"). Op. at 3. Shortly thereafter, the state court appointed an accounting firm, Bollam Sheedy Torani & Co., LLP CPA ("BST") to serve as an independent expert in the case. Op. at 3-4. Relevant here, BST was entrusted to "trace the source, use and application of marital funds acquired and spent since 2006." Op. at 4. Jennifer also retained an accounting firm, Financial Research Associates ("FRA"), to act as her own expert and to review the report produced by BST. Op. at 4. Both firms determined that there were approximately $12.75 million in marital assets for which the experts could not account. Op. at 4. The Bankruptcy Court labeled them the "Unaccounted For Marital Assets."

While the Divorce Action was pending, on March 5, 2018, Michael filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Op. at 4. Jennifer filed a contingent claim in the bankruptcy case. See Op. at 7-8; Claim No. 6, In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. April 4, 2018). Jennifer's claim asserted a right to an "equitable distribution" of the Unaccounted For Marital Assets (the "Equitable Distribution Claim"). Op. at 8.

After she filed the Equitable Distribution Claim, Jennifer moved to dismiss the bankruptcy action or, alternatively, for relief from the automatic bankruptcy stay to allow the Divorce Action to proceed. Op. at 4-5. Michael and the Trustee opposed the motion to dismiss, but urged the Bankruptcy Court to grant the stay relief. Op. at 6. Michael, however, went further and asked the Bankruptcy Court to retain exclusion jurisdiction over questions related to the equitable distribution of marital assets (both then-known and then-unaccounted-for). Op. at 6. The Bankruptcy Court granted the motion insofar as it granted relief from the automatic stay, Op. at 6, but denied Michael's motion to reserve the issue of equitable distribution of assets to the Bankruptcy Court action. Op. at 6-7. In relevant part, the Bankruptcy Court's Order stated:

ORDERED that the Motion is granted to the extent that Jennifer is granted relief from the Automatic Stay and leave to continue the Matrimonial Action in all respects, including without limitation the determination of temporary and permanent support, maintenance, and alimony; the enforcement of state court orders for support; and the rendering of judgment determining the nature and extent of marital property, the nature and extent of Jennifer's interest in such property, and the equitable distribution of such property, provided that while Jennifer is free to seek to collect or obtain any property that is not part of the Debtor's bankruptcy estate, including without limitation post-petition income and assets, any distribution of property of the bankruptcy estate and any determination of title to assets of the bankruptcy estate, whether for collection of support, equitable distribution or otherwise, shall be subject to this Court's review and approval; and it is further

ORDERED that in the event that Jennifer and the Debtor enter into a settlement agreement, any provisions of such an agreement that purports to determine the distribution of or title to property of the bankruptcy estate shall not be effective with regard to such property without this Court's review and approval.

Op. at 7; Order, Dkt. No. 17, In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. April 4, 2018) (emphasis added).

The Divorce Action proceeded to trial in front of a Special Referee. Op. at 8. On July 20, 2019, after several days of trial, Michael and Jennifer reached a settlement of the Divorce Action, memorialized in a "So-Ordered Term Sheet (the "Term Sheet"). See Op. at 8-9; So-Ordered Term Sheet, Dkt. No. 85-1 at 41-60 ("Term Sheet"), In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. Nov. 26, 2019). In relevant part, the Term Sheet states: "The Defendant [Michael] shall pay to the Plaintiff [Jennifer] $2,500,000 as her share of equitable distribution." Term Sheet ¶ 2. The Term Sheet provided that the payment would come from Michael's post-petition earnings, rather than the marital or bankruptcy estate.¹ Op. at 9. The Term Sheet also provided that "The Plaintiff [Jennifer] or her agents shall not interfereand/or block the Defendant's [Michael's] bankruptcy action, entitled In re Michael Rodger Brown in the United States Bankruptcy Court, Southern District of New York, Case No. 18-10617." Term Sheet ¶ 21. Finally, the Parties agreed that the Term Sheet would bind them even in the absence of a more fulsome settlement agreement:

This Term Sheet is intended to be a fully binding agreement between the parties. Although the parties intend to enter into a more detailed agreement, in the even they are unable to do so, the Term Sheet shall remain in full force and effect and shall constitute an agreement pursuant to DRL § 263(B)(3).²

Id. ¶ 22.

On July 30, 2019, the Special Referee overseeing the Divorce Action interrogated both Jennifer and Michael regarding the Term Sheet. Op. at 11. Most relevant to this action, Jennifer confirmed that she had read the Term Sheet, discussed it with her lawyers, signed it, and believed it to be a "fair and reasonable settlement of the economic issues in [the] matrimonial action." See Op. at 11-12; Tr. of July 30, 2019 H'rg ("H'rg Tr.") at 4-7, Dkt. No. 85-1 at 62-82, In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. Nov. 26, 2019). After allocuting Michael on the same topics and receiving similar answers, the Special Referee accepted the Term Sheet as the basis for the Parties' Judgment of Divorce. Op. at 12; H'rg Tr. at 14:8-14. The Parties' Term Sheet was also so-ordered that day by the Special Referee overseeing the trial. See H'rg Tr. at 2:23-25.

The Judgment of Divorce was entered on November 8, 2019. See Op. at 15; Final Judgment of Divorce, Dkt. No. 85-1 at 23-33, In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. Nov. 26, 2019). The state court incorporated the Term Sheet into the Final Judgment of Divorce, including by specifically referencing the payment of $2,500,000 as "[Jennifer's] share of equitable distribution." Op. at 15; Final Judgment of Divorce at 6. The Judgment of Divorce provided that the Term Sheet (along with another stipulation relating to custody and the July 30 hearing transcript) "shall survive and shall not be merged in this Judgment." Op. at 15; Final Judgment of Divorce at 9.³

Following entry of final judgment in the Divorce Action, Michael moved in the Bankruptcy Court for an Order approving the Term Sheet as a settlement of Jennifer's Equitable Distribution Claim and filed an objection seeking to expunge Jennifer's Equitable Distribution Claim. See Op. at 15; Motion to Approve Title To and Distribution of Marital Property pursuant to Term Sheet in Matrimonial Action, and Expunge Claim No. 6 of Jennifer Brown pursuant to 11 U.S.C. § 502(A) and Fed. R. Bankr. P. 3007, Dkt. No. 85, In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. Nov. 26, 2019); Notice of Objection, Dkt No. 86, In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. Nov. 26, 2019). The Chapter 7 Trustee filed a statement in support of the Motion. See Joinder to, and Memorandum in Support of, Debtor's Motion, Dkt. No. 92, In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. Jan. 3, 2020). Jennifer opposed the Motion. See Op. at 16; Opposition to Debtor's Motion, Dkt. No. 88, In re Michael Rodger Brown, Case No. 18-bk-10617-JLG (Bankr. S.D.N.Y. December 27, 2019).

After argument, the Bankruptcy Court declined to enter any relief approving the Term Sheet under Federal Rule of Bankruptcy Procedure 9019. April 27 Order at 1; Op. at 16-17. Judge Garrity held that the Term Sheet was not subject to Court approval because, in granting Jennifer's motion for relief from the automatic stay to permit the Divorce Action to proceed, the Bankruptcy Court only retained jurisdiction over equitable distribution payments to the extent such payments were to be made from the bankruptcy estate. See Op. at 16-17. Because the Term Sheet did not provide for any payment from the estate, but instead clearly stipulated that Michael would make payments from post-petition income, the Court denied as moot Michael's request for approval of the Term Sheet as a settlement subject to Bankruptcy Court approval. Op. at 17.

The Bankruptcy Court did, however, expunge Jennifer's Equitable Distribution Claim, see April 27 Order at 2, explaining in a...