Hartley v. Esposito (In re Hartley)

479 B.R. 635

In re Richard and Kara HARTLEY, Debtors.Richard Hartley and Kara Hartley, Appellants,

v.Jennifer Esposito, Appellee.

No. 11 Civ. 9692 ER.

United States District Court, S.D. New York.

Sept. 26, 2012.

Lewis D. Wrobel, Esq., Poughkeepsie, NY, for Appellants Richard and Kara Hartley.

Stuart Kossar, Esq., Drake Loeb Heller Kennedy Gogerty Gaba & Rodd, New Windsor, NY, for Appellee Jennifer Esposito.

OPINION AND ORDER

RAOMS, District Judge.

Richard and Kara Hartley (the “Hartleys” or “Appellants”) appeal the Order of the Bankruptcy Court granting summary judgment in favor of Appellee Jennifer Esposito (“Ms. Esposito”). In the adversary proceeding below, Ms. Esposito sought to except from discharge in Appellants' personal bankruptcy petition a judgment she obtained against the defendants' business, Hartley's Catering, Inc. (“Hartley's Catering”). For the reasons set forth below, the judgment of the Bankruptcy Court is AFFIRMED.

I. Background

Ms. Esposito is a former employee of Hartley's Catering. The underlying bankruptcy court adversary proceeding involved her efforts to collect a judgment she obtained in New York state court in the amount of $352,400.80 against her former employer and a co-worker. The parties do not dispute the facts giving rise to the state court action; they are discussed here only to the extent relevant to the resolution of this appeal.

Appellants Mr. and Mrs. Hartley were the sole shareholders of Hartley's Catering from January 2004 to September 2009. (Bankr.Doc. 13 ¶ 2.) ¹ The business, located in New Windsor, New York was a delicatessen commonly known as Schlesinger's Deli Depot. ( Id. ¶ 3.) Ms. Esposito began working there as a deli clerk in November 2005. ( Id. ¶ 4.) Approximately one year later, in November 2006, Ms. Esposito began to be subjected to severe sexual intimidation and harassment, including sexual and physical assaults, by one of her co-workers. ( Id. ¶¶ 15–19, 21–25.) Ms. Esposito complained to Mrs. Hartley about the intimidation and assaults, but she was dismissive of her complaints and never investigated or disciplined the co-worker. ( Id. ¶¶ 26–32.) Mrs. Hartley advised Mr. Hartley of Ms. Esposito's complaints, but he did not investigate or discipline the co-worker, either. ( Id. ¶ 32.) On January 16, 2007, the continuing harassment prompted Ms. Esposito to give two-week's notice of her resignation, but she was fired two days later. ( Id. ¶¶ 32–34.)

On February 16, 2007, Ms. Esposito filed a verified complaint with the New York State Division of Human Rights (the “Division”) charging Hartley's Catering and the co-worker with employment discrimination based on multiple instances of physical and sexual abuse. ( Id. ¶¶ 43–44.) On February 21, 2008, after a public hearing, the Division issued a final order ruling in favor of Ms. Esposito and awarding her $300,000 in damages. ( Id. ¶ 50.)

On April 16, 2008, Hartley's Catering commenced an Article 78 proceeding to annul the Division's final order. ( Id. ¶ 51.) That proceeding was transferred to the New York State Supreme Court, Appellate Division, Second Department, on May 28, 2008. ( Id. ¶ 54.) On October 27, 2009, the Appellate Division affirmed the final order and directed the defendants to pay Ms. Esposito the principal sum of $300,000 plus interest. ( Id. ¶ 57.) On January 19, 2010, approximately three full years after she commenced her action, that judgment was entered in New York Supreme Court, Orange County, against Hartley's Catering and the co-worker, jointly and severally, in the amount of $352,400.80. ( Id. ¶ 58.)

It was only after the final entry of judgment in Orange County Supreme Court, while she was taking steps to enforce her judgment, that Ms. Esposito learned of two actions Appellants had taken since she first successfully petitioned the Division of Human Rights: (1) on July 31, 2008, approximately five months after the Division's final order, the Appellants dissolved Hartley's Catering ² ( id. ¶ 60); and (2) on October 9, 2009, the Appellants filed for personal bankruptcy protection. ( Id. ¶ 55.) Both of these actions were without notice to Ms. Esposito.

Ms. Esposito thereafter commenced the adversary proceeding against the Hartleys below. In her complaint, she alleged that the Hartleys purposely withheld the fact of the dissolution of the business from her, and thereafter continued to operate the business to prevent her from learning of the dissolution. (Bankr.Docs. 1 ¶¶ 17–18, 14 at 9–10.) At his deposition, Mr. Hartley admitted that he was aware that at the time he dissolved the business the Division had already ruled in favor of Ms. Esposito, and that the judgment was a factor in the decision to dissolve:

Q: So in or about July 2008 was when the corporation was dissolved?

A: Yes.

Q: As you had already told me when you decided to dissolve the corporation, you were aware of the State Division of Human Rights' findings against Hartley Catering, correct?

A: Yes.

Q: And just so I get it right, from the time the corporation was dissolved in July 2008 until September 2009 continued to operate the business [sic]?

A: Yes.

(Bankr.Doc. 14 at 10–11.)

Ms. Esposito argues that the Hartleys, as the sole shareholders of the business, became personally jointly and severally liable to her by operation of New York law because they purposely failed to give her notice of the dissolution. ( Id. at 12.) As a result, the Hartleys were required to schedule their indebtedness to her in the bankruptcy petition and provide her with notice of the filing ( id. p. 11), which they admittedly did not do. (Bankr.Docs. 13 ¶¶ 55–56, 24 ¶¶ 55–56.) Accordingly, she concludes, the Hartleys cannot discharge her judgment in bankruptcy.

The Hartleys do not dispute that they did not provide Ms. Esposito with notice of either the dissolution or the bankruptcy filing. They argued below, however, that they had no duty to do so because—as regards the dissolution—they were not required to provide notice to creditors under applicable New York law, and—as regards the bankruptcy filing—Ms. Esposito was not a creditor of Mr. and Mrs. Hartley (as opposed to their business) and therefore was not entitled to notice. (Bankr.Doc. 25 at 3–4.)

Ms. Esposito moved for summary judgment on her claims in the bankruptcy court. In its Memorandum Decision Granting Plaintiff's Motion for Summary Judgment (Bankr.Doc. 26), the bankruptcy court found that the Hartleys intentionally and fraudulently concealed the fact of the dissolution from Ms. Esposito and therefore the state court judgment was not dischargeable under section 523(a)(2)(A) of the Bankruptcy Code, ( id. at 1–2), which excepts from discharge any debt “for money property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). Building on that determination, the bankruptcy court found that the Hartleys were therefore required to list the judgment in their bankruptcy petition and provide notice to Ms. Esposito. Their failure to do so resulted in a violation of section 523(a)(3) of the Bankruptcy Code, which excepts from discharge any debt known to a debtor but not listed. 11 U.S.C. § 523(a)(3). In so concluding, the bankruptcy court made the following findings of fact:

Here, the defendants gave verbal notice to some of the corporation's creditors, such as its landlord and mortgagees and dissolved their corporation in secrecy to those creditors who they did not see fit to pay .... Any attempt by the plaintiff to enforce her judgment against the corporation at this time would prove impossible. The corporate assets were distributed to other creditors and to the defendants, years ago.

* * *

Despite Mr. Hartley, as President of the corporation, signing and filing the certificate of dissolution on July 31, 2008 and New York law prohibiting a dissolved corporation from engaging in new business, the Hartleys continued to operate the deli until September 2009 and never notified plaintiff of the dissolution. The Hartleys actively concealed the corporation's dissolution from plaintiff as well as from the state court by filing and litigating an appeal of plaintiff's award from May of 2008 until October 2009 in the New York State Appellate Division. At no time during the appellate process, did the Hartleys inform the court or the plaintiff of a critical fact regarding a party to the lawsuit: Hartley's Catering no longer existed.

* * *

The Hartleys intended to deceive the plaintiff by secretly dissolving the corporation without providing her with notice of the dissolution; continuing to operate their business in violation of state law; and continuing to actively pursue appellate litigation against the plaintiff in the name of their dissolved corporation.(Bankr.Doc. 26 pp. 7, 9, 10 (citations omitted, emphasis added).)

The bankruptcy court concluded that the Hartleys could not discharge Ms. Esposito's judgment in bankruptcy. The Hartleys timely filed a notice of appeal on November 30, 2011.

II. Discussion

A. Standard of Review

This Court has jurisdiction to hear appeals from decisions of a bankruptcy court pursuant to 28 U.S.C. § 158(a), which provides in relevant part that “[t]he district courts of the United States shall have jurisdiction to hear appeals ... from final judgments, orders, and decrees; ... [and,] with leave of court, from other interlocutory orders and decrees ... of bankruptcy judges.” 28 U.S.C. § 158(a). A district court reviews a bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Overbaugh v. Household Bank, N.A. (In re Overbaugh), 559 F.3d 125, 129 (2d Cir.2009); see Fed. R. Bankr.P. 8013 (a district court may “affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree,” and “[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous”).

B. The...