In re Brown

1

In re: Michael Rodger Brown, Debtor.^[1]

No. 18-10617 (JLG)

United States Bankruptcy Court, S.D. New York

September 15, 2023

NOT FOR PUBLICATION

AKERMAN LLP Attorneys for John S. Pereira, as Chapter 7 Trustee for the Estate of Michael Rodger Brown John P. Campo Darryl R. Graham.

COLE SCHOTZ P.C. Attorneys for Howard Brown Steven L. Klepper David S. Gold Jacob S. Frumkin.

MEMORANDUM DECISION AND ORDER SUSTAINING CHAPTER 7 TRUSTEE'S OBJECTION TO CLAIM OF HOWARD BROWN

HON JAMES L. GARRITY, JR. U.S. BANKRUPTCY JUDGE.

Introduction^[2]

Michael Roger Brown ("Michael" or the "Debtor") is a chapter 7 debtor herein. On August 6, 2018, Howard Brown ("Howard"), the Debtor's father, filed an unsecured claim against the Debtor in the sum of $2,801,410.04, which he subsequently voluntarily reduced to the sum of $2,726,252.61 (the "Claim"). John S Pereira, as the chapter 7 trustee (the "Trustee") for the Debtor's estate, filed an objection (the "Objection")^[3] to the Claim. He seeks to disallow expunge, and/or subordinate the Claim pursuant to sections 502(b), 502(d), and 510(c) of title 11 of the United States Code (the "Bankruptcy Code") and Rules 3003 and 3007 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). Howard filed a response (the "Response")^[4] to the Objection, including a declaration (the "Declaration" or "Decl.")^[5] in support of the Response. Howard denies that the Court should disallow and expunge his Claim and asserts that the Court should allow the Claim in full. The Trustee filed a reply (the "Reply")^[6] to the Response and in support of the Objection. The Court conducted a hearing on the Objection.

For the reasons discussed below, the Claim is not prima facie valid, and Howard has not met his burden of proving the validity and enforceability of the Claim, by a preponderance of the evidence. Accordingly, the Court sustains the Objection pursuant to section 502(b) of the Bankruptcy Code and disallows and expunges the Claim. Section 502(d) will not be triggered unless and until the Trustee obtains a judgment against Howard on one or more of the fraudulent conveyance counts in the Adversary Proceeding. Accordingly, the Court denies the Trustee's request to disallow the Claim under section 502(d), without prejudice, and pending the resolution of the Adversary Proceeding. To the extent the Claim is allowed in any amount in the interim, it will remain a disputed claim until such time that the Adversary Proceeding is finally resolved. The Court denies the Trustee's request pursuant to section 510(c) of the Bankruptcy Code to subordinate the Claim, without prejudice to his right to seek such relief pursuant to an adversary proceeding, should the Claim be allowed under section 502 of the Bankruptcy Code.

Jurisdiction

The Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b).

Background

On or about March 26, 2013, the Debtor's then-wife, Jennifer Brown ("Jennifer") commenced a divorce action (the "Matrimonial Action") in the Supreme Court of the State of New York, County of New York, Matrimonial Term.

In September 2013, Michael and Howard, as co-borrowers, entered into that certain Business Loan Agreement and Note with ConnectOne Bank ("ConnectOne") and obtained a $1.0 million Line of Credit from ConnectOne (with the Business Loan Agreement and Note, the "ConnectOne Loan"). See Decl. ¶ 4; see also Decl., Ex. 1 (Note and Business Loan Agreement); Decl., Ex. 2 (Commercial Lines of Credit Agreements). Howard pledged his residence as collateral for the ConnectOne Loan. During the period of July 2014 through July 2017, at Michael and Howard's requests, ConnectOne increased the Line of Credit three times.^[7] As of July 18, 2017, CreditOne renewed the then-existing $2.0 million Line of Credit pursuant to that certain Commercial Line of Credit Agreement and Note dated July 18, 2017. See id.

Between April 27, 2017, and March 27, 2018, Howard issued nine checks aggregating $193,000 (the "Checks") from his joint bank account with his wife, Nancy D. Brown. Each is payable either to Susan Bender, the law firm of Bender Rosenthal LLP (together with Susan Bender, the "Law Firm"), Jennifer, or the Debtor. The "memo" line on each Check is redacted or blank. Decl., Ex. 4 (Checks).

On March 5, 2018, the Debtor filed a voluntary petition (the "Petition") commencing a case (the "Chapter 7 Case") under chapter 7 of the Bankruptcy Code in this Court.^[8] That day, the Trustee was appointed as the chapter 7 trustee for the Debtor's estate; he continues to serve in that role. In support of his Petition, the Debtor filed his schedules of assets and liabilities (the "Schedules"). As relevant, Debtor's "Schedule E/F: Creditors Who Have Unsecured Claims" lists nonpriority unsecured claims, including:

Schedule E/F (Item 4.5): $2,000,000.00 as due and owing to ConnectOne (the "ConnectOne Claim"). The claim is not listed as contingent, unliquidated, or disputed. The Debtor asserts that he incurred the debt underlying the ConnectOne Claim on September 9, 2013, and that the basis of the claim is a "commercial line of credit cosigned by my father."

Schedule E/F (Item 4.7): $500,000.00 as due and owing to "Howard and Nancy Brown." The claim is not listed as contingent, unliquidated, or disputed. The Debtor asserts that he incurred the debt underlying the claim on June 1, 2015. He does not identify an agreement or other document evidencing the debt. He states that the basis of the claim is that Howard and Nancy Brown "pay[] interest on commercial loan and lend[] money for lawyers and expenses."

Additionally, the Debtor's "Schedule H: Your CoDebtors" identifies Howard as his codebtor with respect to the ConnectOne Claim listed at Schedule E/F (Item 4.5). Schedule H (Item 3.1).

On May 4, 2018, the Court established August 6, 2018, as the last day for creditors to file proofs of claim in the Chapter 7 Case.^[9] On May 29, 2018, ConnectOne filed a claim against the Debtor in the sum of $2,000,000.00 arising in connection with the ConnectOne Loan. See Claim No. 2-1 (the "ConnectOne Claim"). In support of the claim, ConnectOne attached the Commercial Line of Credit Renewal Agreement and Note dated July 18, 2017, which Michael and Howard signed as co-borrowers.

On June 12, 2018, ConnectOne sent a letter to Howard, addressing him as a "co-borrower" with respect to the ConnectOne Loan. See Decl., Ex. 6 (June 12 Letter).^[10] On June 22, 2018, ConnectOne sent Howard a payoff letter with respect to the Line of Credit, again addressing him as a "co-borrower." Decl., Ex. 7 (Payoff Letter). On June 27, 2018, Howard, as co-borrower, paid off the then-existing balance of the Line of Credit, $2,003,305.56. Id. ¶ 5.

On July 3, 2018, ConnectOne withdrew the ConnectOne Claim.^[11] On August 6, 2018, Howard filed the Claim, in the sum of $2,801,410.04, on the basis of "Money loaned." Claim No. 7-1, Part 2, Item 8. The Claim does not include interest or other charges; however, Howard purported to "reserve[] the right to include interest at a later time." Id., Part 2, Item 7. Howard did not attach a narrative or any documentation in support of the Claim.

On March 5, 2020, the Trustee filed a complaint (the "Complaint")^[12] commencing an adversary proceeding (the "Adversary Proceeding") against Howard, the Debtor, and others. Through the Adversary Proceeding, the Trustee seeks "an accounting and to recover pre- and post-petition transfers of assets of the Debtor's estate." Complaint ¶ 1. The Trustee asserts that the causes of action result from, among other things, "the Debtor's efforts, together with his family members and related entities, to transfer assets of the estate in an effort to hide and keep those assets out of the Debtor's estate and out of the reach of creditors, including the Debtor's ex-wife." Id. The Trustee seeks to avoid these transfers as (i) Actual Fraudulent Transfers pursuant to sections 548(a)(1)(A), 550(a), and 551 of the Bankruptcy Code (Count I), id. ¶¶ 58-61; (ii) Constructively Fraudulent Transfers pursuant to sections 548(a)(1)(B), 550(a), and 551 (Count II), id. ¶¶ 62-69; and (iii) Post-Petition Transfers pursuant to sections 549(b), 550(a), and 551 (Count VII), id. ¶¶ 90-94. The Trustee also seeks to avoid, preserve, and recover transfers under New York state law pursuant to sections 273, 274, 275, and 276 of the New York Debtor & Creditor Law, made applicable in this Chapter 7 Case pursuant to sections 544(b), 550(a), and 551 of the Bankruptcy Code (Counts III-VI). Id. ¶¶ 70-89. Finally, in the Complaint, the Trustee asserts a cause of action for conversion and seeks an accounting and turnover of assets (Counts VIII-X). Id. ¶¶ 95-109. The Trustee names Howard as a defendant in each of the Counts, with the exception of Count IX. The Adversary Proceeding is pending.

The Claim Objection

The Trustee seeks entry of an order disallowing and expunging the Claim pursuant to section 502(b)(1) and, alternatively disallowing the Claim under section 502(d) of the Bankruptcy Code. Objection ¶¶ 9-10. As a further alternative, he seeks to subordinate the Claim pursuant to section 510(c). Id. ¶ 11.

The Trustee maintains that the Court should expunge the Claim pursuant to section 502(b)(1) because it is unenforceable against the Debtor. Id. ¶ 9. He says that is so because, in violation of Bankruptcy Rule 3001(c), the Claim fails to include documentation in support of the Claim and as such, fails to provide sufficient information to...