Hu v. Liu (In re Liu)

658 B.R. 231

IN RE: Margaret M. LIU, Debtor.

Shau Chung Hu, Plaintiff, v. Margaret M. Liu, Defendant.

Case No. 19-42127-nhl

Adv. Pro. No. 19-1098-nhl

United States Bankruptcy Court, E.D. New York

Signed February 12, 2024

David H. Pikus, Esq., Bressler Amery & Ross PC, 17 State Street, New York, NY 10004, Attorney for Plaintiff.

Oliver Zhou, Esq., Law Offices of Oliver Zhou, 749 61st Street, Suite 501, Brooklyn, NY 11220, Attorney for Defendant.

DECISION

NANCY HERSHEY LORD, United States Bankruptcy Judge

This matter comes before the Court on the motion of the plaintiff, Shau Chung Hu (the "Plaintiff"), for summary judgment against Margaret M. Liu (the "Defendant) excepting the debt owed to the Plaintiff from the Defendant's discharge pursuant to 11 U.S.C. § 523(a)(2), (a)(4) and (a)(6).¹ The Defendant opposes the motion. For the following reasons, the Plaintiff's motion for summary judgment is granted to the extent that the debt is excepted from discharge pursuant to § 523(a)(4).

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules").

BACKGROUND

Unless otherwise noted, the following facts are undisputed, deemed admitted pursuant to E.D.N.Y. Local Bankruptcy Rule 7056-1, or are matters of which judicial notice may be taken.²

The Plaintiff and the Defendant were married in 1985 and have been separated since 1995. (Pl.'s Stmt. of Undisputed Facts ¶ 1, ECF No. 48-20; Hu Aff. ¶ 2, ECF No. 48-1; Def.'s Stmt. of Material Facts ¶ 9, ECF No. 55-1.)³ The parties co-owned an interest in Lowbet Realty Corp. ("Lowbet"), which, in turn, owned commercial real property located at 973 44^th St., Brooklyn, NY (the "Property"). (Pl.'s Stmt. of Undisputed Facts ¶ 2, 3, ECF No. 48-20.)

In 2006, the Defendant initiated a divorce proceeding against the Plaintiff, which was ultimately dismissed on July 21, 2011, based upon the Defendant's failure to appear for trial. (Pl.'s Stmt. of Undisputed Facts ¶¶ 5, 6, ECF No. 48-20; Hu Decl. Exs. 2 and 3, ECF No. 48-3, 48-4.)

On October 5, 2011, after the dismissal of the Defendant's divorce action, the Plaintiff commenced a special proceeding (the "State Court Action") in the New York State Supreme Court, Kings County (the "State Court"), under the New York Business Corporations Law to dissolve Lowbet and to liquidate and distribute its assets, i.e., the Property. (Pl.'s Stmt. of Undisputed Facts ¶ 7, ECF No. 48-20; Hu Decl. ¶¶ 5, 6, Exs. 4 and 5, ECF Nos. 48-1, 48-5, 48-6.) The Plaintiff also sought (1) a determination that he is 75% owner of Lowbet; (2) the appointment of a receiver to sell the Property; and (3) the distribution of the sale proceeds according to their ownership interests, subject to a credit to him for monies that the Debtor dissipated from Lowbet. Id.

On October 5, 2011, the State Court issued a temporary restraining order (the "TRO"), which provided, in pertinent part:

ORDERED that pending the hearing of the motion, the status quo shall be maintained in that the management company currently managing the property shall continue to do so, unless otherwise directed by a justice of this court . . . . neither party shall, therefore, participate in the management of the realty or remove assets of the corporation without further direction by a justice of this Court.

(Pl.'s Stmt. of Undisputed Facts ¶ 8, ECF No. 48-20; Hu Decl. ¶¶ 5, 6, Exs. 4 and 5, ECF Nos. 48-1, 48-5, 48-6.)

On October 27, 2011, after issuance of the restraining order, the Defendant, on behalf of Lowbet, entered into a contract to sell the Property to a third party, 973 44th Street Realty LLC (the "Buyer"), without the Plaintiff's knowledge or consent and without authorization from the State Court. (Pl.'s Stmt. of Undisputed Facts ¶ 9, ECF No. 48-20; Hu Decl. ¶9, Ex. 10, ECF Nos. 48-1, 48-11.) The sale closed on or about February 22, 2012, without the Plaintiff's knowledge. (Pl.'s Stmt. of Undisputed Facts ¶ 10, ECF No. 48-20; Hu Decl. ¶ 10, Ex. 11, ECF Nos. 48-1, 48-12.) The Plaintiff alleges that, after payment of the mortgage and closing costs, the Defendant fled to Taiwan with over $1 million in net sale proceeds, and that the Plaintiff received nothing from the sale. (Hu Decl. ¶ 17, ECF Nos. 48-1.)

On April 10, 2012, prior to the Plaintiff's discovery of the sale, a hearing in the State Court Action was held, at which the Plaintiff, the Plaintiff's counsel, and the Defendant's counsel appeared. (Hu Decl. ¶ 12, Ex. 12, ECF Nos. 48-1, 48-13.) At that hearing, the State Court, after inferring that the Defendant was "deliberately defaulting" by failing to appear at that hearing, struck the Defendant's answer in the State Court Action. (Hu Decl. ¶ 12, Ex. 12 at p. 4, 6, 22, ECF Nos. 48-1, 48-13.) The State Court also found that Lowbet was dissolved by operation of law and, after hearing testimony and receiving documentary evidence, the State Court determined that the Plaintiff owned 75% of Lowbet and concluded that a receiver be appointed to liquidate the Property. (Hu Decl. ¶ 13, Ex. 12 at 6, 28, 38, 39, ECF Nos. 48-1, 48-13.) Consistent with the record of that hearing, the State Court issued a Decision and Order on May 6, 2014, granting the Plaintiff a default judgment against the Defendant and declaring that the Plaintiff owns 75% of Lowbet and that the Defendant owns 25% of Lowbet. (Hu Decl ¶ 13, Ex. 13, ECF No. 48-48-1, 48-14.)

On April 23, 2012, after discovering that the Property had been sold, the Plaintiff moved in State Court to hold the Debtor in contempt for selling the Property in violation of the TRO. (Hu Decl. ¶ 14, ECF No. 48-1.) On April 30, 2012, the State Court held the debtor in civil and criminal contempt for selling the property in violation of the TRO and issued a Warrant of Arrest for Contempt. (Hu Decl. ¶ 14, Exs. 14, ECF Nos. 48-1, 48-15.) The Plaintiff alleges that the Defendant has evaded arrest by living in Taiwan. (Hu Decl. ¶ 16, ECF No. 48-1.)

In February 2013, the Plaintiff filed an amended petition in the State Court Action seeking relief related to the unauthorized sale of the Property, including, among other things, (1) rescission of the sale; (2) damages, including punitive damages, against the Defendant based upon her fraudulent conveyance of the Property, conversion of the sale proceeds, and breach of fiduciary duty to the Plaintiff as shareholder of Lowbet; (3) damages against the Defendant for unjust enrichment; (4) the sale of the Property by the receiver; and (5) the continuation of the TRO and for an injunction against the Defendant from accessing, using, or drawing from Lowbet's revenues and bank account, and from transacting business on Lowbet's behalf; (6) distribution of the sale proceeds in accordance with the State Court's determination that the Plaintiff owns 75% of Lowbet, subject to a credit to Plaintiff for monies dissipated from Lowbet by the Defendant; and (7) another injunction directing the Defendant to immediately provide the Plaintiff with access to Lowbet's books and records. (Hu Decl. ¶ 15, Ex. 5; ECF Nos. 48-1, 48-6.)⁴

On December 10, 2018, the State Court entered a money judgment in the Plaintiff's favor against the Defendant "on all claims asserted against her" in the State Court Action in the amount of $1,480,636.50, through November 6, 2018, with per diem interest of $227.66 through entry of judgment, and post-judgment interest from the date of entry (the "State Court Judgment"). (Hu Decl. ¶ 18; ECF No. 48-1; Compl., Ex. D, ECF No. 1-4.) The Defendant's motion in State Court to vacate the State Court Judgment was denied on the basis that she "failed to set forth a reasonable excuse for defaulting in the action following her appearance in the action". (Hu Decl. ¶ 18, Ex. 16; ECF Nos. 48-1, 48-17.) The Defendant is appealing that denial with the Supreme Court of New York, Appellate Division, Second Department. (Hu Decl. ¶ 19, ECF Nos. 48-1.)

On April 10, 2019, the date that the Plaintiff was scheduled to foreclose against two of the Defendant's properties to satisfy the State Court Judgment, the Defendant filed a voluntary petition under chapter 7 of the Bankruptcy Code, commencing Case No. 19-42127-NHL. (Petition, Case No. 19-42127-NHL ECF No. 1; Hu Decl. ¶ 20, ECF No. 48-1.) The chapter 7 trustee administered the estate and liquidated non-exempt property. The Plaintiff received a distribution of $652,438.50 from the chapter 7 estate and asserts that he is still owed $1,099,635.00 under the State Court Judgment, not including interest. (Hu Decl. ¶¶ 20, 21, ECF No. 48-1.)

On July 19, 2019, the Plaintiff timely commenced this adversary proceeding to declare the debt arising from the State Court Judgment nondischargeable pursuant to 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6). The Defendant failed to timely answer or otherwise respond to the complaint and the Defendant's default was noted by the Court at a pre-trial conference held on October 16, 2019. However, on November 4, 2019, the Defendant filed an answer to the complaint. (ECF No. 6.) Thereafter, the parties engaged in mediation with respect to the claims asserted in this adversary proceeding and other pending disputes between them, but the attempt was unsuccessful. (ECF No. 44.)

A pre-trial conference was held on January 12, 2023, at which David H. Pikus, Esq. appeared for the Plaintiff, and Oliver Zhou, Esq. appeared for the Defendant. At that conference, the Court directed that any motion for summary judgment be filed so as to be returnable on April 20, 2023. The Court recited that, pursuant to the E.D.N.Y. Local Bankruptcy Rules, the motion papers must be filed and served at least...