In re Allocco

In re: PATRICK STANLEY ALLOCCO, Debtor.

CASE NO.: 16-10634 (SLM)

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEW JERSEY

May 11, 2018

NOT FOR PUBLICATION

CHAPTER 7

OPINION

APPEARANCES:

Paul E. Rusen

Collins, Toner & Rusen

123 Columbia Turnpike

Florham Park, NJ 07932

Counsel for the Debtor, Patrick Stanley Allocco

David E. Sklar

Scura, Wigfield, Heyer & Stevens, LLP

1599 Hamburg Turnpike

Wayne, NJ 07470

Counsel for Deja Vu Entertainment, LLC and Miami Music & Arts Production, Inc.

STACEY L. MEISEL, UNITED STATES BANKRUPTCY JUDGE

Movants Deja Vu Entertainment, LLC and Miami Music & Arts Production, Inc. (the "Movants") seek dismissal of debtor Patrick Stanley Allocco's ("Debtor") no-asset Chapter 7 case as presumptively abusive because he fails the net disposable income analysis set forth in section 707(b)(2) (the "Means Test") of the Bankruptcy Code.¹ In the alternative, Movants argue that dismissal is warranted for "abuse" of Chapter 7 based on the totality of circumstances. The crux of Movants' arguments is that the Court must exclude Debtor's so-called "phantom" monthly mortgage payments as permissible expenses in its Means Test analysis because Debtor failed to make any payments on account of his mortgage loan from its inception in 2007, and indeed, never will because the mortgaged property—Debtor's former primary residence—was abandoned, foreclosed upon, and ultimately sold at a sheriff sale post-petition. Movants assert that inclusion of these "phantom" secured debt payments results in a distortion of Debtor's actual financial condition and repayment ability.

Debtor disputes Movants' arguments in their entirety. He asserts, irrespective of pre-petition payment history or the post-petition sale of the property, the Means Test permits inclusion of his monthly mortgage payments as expenses because the payments were "scheduled as contractually due" as of the petition date.² Alternatively, Debtor argues that the totality of circumstances weighs in his favor because his current financial situation will not provide a substantial repayment to creditors nor and is not otherwise abusive.

The parties invite this Court to wade in to a national split amongst bankruptcy courts regarding the proper statutory treatment of "phantom" secured debts for purposes of the Means Test. But, the Court need not enter those murky waters because the water in this case is crystalclear. Here, Debtor owes no "average monthly payment" on account of a mortgage debt—let alone a "phantom" one—because his personal obligation on the mortgage loan was discharged in Debtor's prior 2007 Chapter 7 case. To the extent that any "phantom" contractual obligation remained, it was subsequently eradicated when Debtor's secured creditor-mortgagee obtained a foreclosure judgment prior to the commencement of this Chapter 7 case. Pursuant to the doctrine of merger, the mortgage merged into the foreclosure judgment, and the mortgage ceased to exist. As a matter of law, Debtor cannot claim any contractual payments on account of his mortgage loan because only a judgment claim remained. Once this mortgage expense is properly excluded from the Means Test, Debtor's Chapter 7 case is presumptively abusive. Dismissal is warranted because Debtor failed to rebut the presumption of abuse. Alternatively, the Court finds that dismissal is warranted based upon the totality of circumstances. The record demonstrates Debtor has an actual ability to repay his pre-petition debts after his monthly income is adjusted to reflect his legitimate expenses.

JURISDICTION AND VENUE

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b), 157(a), and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984, as am ended September 18, 2012. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(O) because Movants object to Debtor's Chapter 7 discharge. Venue is proper under 28 U.S.C. §§ 1408 and 1409(a). Pursuant to Federal Rule of Bankruptcy Procedure 7052, the Court issues the following findings of fact and conclusions of law.

BACKGROUND

Debtor's Prior Bankruptcy Cases

Debtor is no stranger to this Court. Prior to the instant case, he filed four other petitions for bankruptcy relief under various Chapters, with varying degrees of success, over the course of nearly three decades. The Court takes judicial notice of the following dockets and their contents:³ (i) Chapter 7 Case No. 91-28039 (WFT); (ii) Chapter 7 Case No. 07-26152 (MS) (the "2007 Chapter 7 Case"); (iii) Chapter 13 Case No. 13-22503 (DHS) (the "2013 Chapter 13 Case"); and (iv) Chapter 13 Case No. 15-27065 (SLM) (the "2015 Chapter 13 Case").⁴ The relevant question here is: what is the impact of Debtor's prior bankruptcies?

2007 Chapter 7 Case

In the petition for the 2007 Chapter 7 Case, Debtor listed a mortgage in the amount of $655,000 (the "Mortgage") on his primary residence at 20 Turtle Road, Morris Township, New Jersey (the "Property").⁵ The Mortgage is evidenced by: (a) a Mortgage, dated as of December 29, 2006, by and among Debtor, his wife, Abigail Allocco (with Debtor, the "Borrowers"), and the lender, Mortgage Lenders Network, USA, Inc. (the "Original Lender"); (b) an Interest Only/Adjustable Rate Note, dated December 29, 2006, in the amount of $655,000, by and among the Borrowers and the Original Lender (the "Promissory Note"); (c) an Interest Only/Adjustable Rate Rider to the Promissory Note, dated as of December 29, 2006, by and among the Borrowers and the Original Lender; and (d) a Waiver of Marital Rights, dated as of December 29, 2006, byand among the Borrowers and the Original Lender.⁶ The Borrowers' first monthly mortgage payment was due March 1, 2007.⁷

In the 2007 Chapter 7 Case, Debtor sought to reaffirm the Mortgage.⁸ However, the Property was already subject to a pre-petition foreclosure action brought by Aurora Loan Services, LLC ("Aurora"), the then-current holder of the Mortgage.⁹ Aurora asserted that the amount due on the Mortgage Loan, inclusive of foreclosure fees and costs, was $736,574.35¹⁰ Aurora received relief from the automatic stay from the Bankruptcy Court to continue its foreclosure action.¹¹ Debtor received a discharge order.¹² The Chapter 7 Trustee subsequently abandoned the Property.¹³

2013 Chapter 13 Case

In his 2013 Chapter 13 Case, Debtor proposed a Chapter 13 plan that sought to, inter alia, modify the monthly payments on the Mortgage and discharge his debt to Movants.¹⁴ Debtor acknowledged that he had not made any monthly payment on the Mortgage since its inception in March 2007.¹⁵ Debtor also asserted that the Mortgage was "in dispute" in the Superior Court of New Jersey.¹⁶ Accordingly, Debtor sought to "re-establsh a payment schedule" pursuant to a loan modification with CPCA Trust 1^st ("CPCA"),¹⁷ the then-current holder of the Mortgage, to"account for [the then-market] valuation" of the Property to $325,000.¹⁸ However, CPCA objected to Debtor's Chapter 13 plan arguing it was not feasible and failed to provide for payment in full of its claim.¹⁹ Other creditors and the Chapter 13 Trustee also objected to plan confirmation. Debtor's Chapter 13 plan was subsequently denied, and the 2013 Chapter 13 Case was dismissed.²⁰ Debtor sought reinstatement,²¹ which was denied.²² The case was closed.²³

2015 Chapter 13 Case

Debtor commenced a second Chapter 13 case in the Fall of 2015.²⁴ He listed the amount owed on the Mortgage (with default interest) as $1,194,050.00.²⁵ The Chapter 13 Trustee sought dismissal because Debtor's unsecured debts exceeded the statutory limit applicable to Chapter 13 cases pursuant to section 109(e) of the Bankruptcy Code.²⁶ The Court dismissed Debtor's 2015 Chapter 13 Case as abusive.²⁷

The Instant Chapter 7 Case

This Chapter 7 case was commenced on January 14, 2016 (the "Petition Date"),²⁸ only one month after dismissal of Debtor's 2015 Chapter 13 Case, and on the same day the sheriff scheduled a foreclosure sale of the Property.²⁹ Importantly, prior to scheduling of the sheriff sale, the then-mortgagee, Castle Peak 2012-1 Loan Trust (the "Mortgagee"),³⁰ had already obtained a foreclosure judgment against the Property from the Superior Court of New Jersey.³¹

Debtor maintains this bankruptcy was precipitated by challenging personal and business-related disruptions, and his main objective was to negotiate a mortgage modification for the Property.³² Movants challenge the credibility of Debtor's assertions.

Events Precipitating Debtor's Financial Distress

Beginning in 2002,³³ Debtor owned and operated a live concert promotion business throughout the United States, Latin America, and in Puerto Rico.³⁴ This business was his sole source of income.³⁵ However, in 2012, his financial situation drastically changed.³⁶ Specifically, when the headline American artist for a New Year's Eve 2011 concert in Luanda, Angola failed to appear for the show, Debtor's Angolese business partner took him and his son hostage in an effort to recover from Debtor some portion of a $300,000 advance given to the defaulting artist.³⁷ With the assistance of United States legislative representatives,³⁸ the kidnappers freed Debtor and his son, and they returned to the United States on February 19, 2012, ultimately settling the New Year's Eve dispute for $85,000.³⁹

It was during Debtor's detent ion in Angola that an existing litigation with Movants also matured. In 2010, Movants sued Debtor in Florida state court seeking to recover certain profits earned, and expenses paid, in connection with a joint concert promotion venture in Mexico in March 2010.⁴⁰ When Debtor was unable to appear at a hearing (due to his continuing detention in Angola), the Florida court issued a default judgment against him on January 5, 2012, in the amount of $445,580.00 (which Movants now estimate to be approximately $525,721.64).⁴¹ Upon returning to the United States fro m Angola, Debtor ceased operating his concert promotion...