In re Fama-Chiarizia

655 B.R. 48

IN RE: Christina FAMA-CHIARIZIA, Debtor.

Case No. 21-42341-ess

United States Bankruptcy Court, E.D. New York

Signed September 15, 2023

Sari Placona, Esq., Anthony Sodono III, Esq., McManimon, Scotland & Baumann, LLC, 75 Livingston Avenue (Suite 201), Roseland, NJ 07068, Attorneys for Christina Fama-Chiarizia.

Paul Fishman, Esq., Benjamin Mintz, Esq., Peta Gordon, Esq., Justin Imperato, Esq., Arnold & Porter Kaye Scholer LLP, 250 West 55th Street, New York, NY 10019, Attorneys for George and Linda Filosa.

MEMORANDUM DECISION ON THE OBJECTION TO THE DEBTOR CHRISTINA FAMA-CHIARIZIA'S SUBCHAPTER V DESIGNATION

Elizabeth S. Stong, United States Bankruptcy Judge

Introduction

This bankruptcy case began on September 15, 2021 (the "Petition Date"), when the debtor, Christina Fama-Chiarizia and her brother, Joseph Fama, Jr., each filed for protection under Subchapter V of Chapter 11 of the Bankruptcy Code. Ms. Fama-Chiarizia and Mr. Fama, Jr. each own a twenty-five percent interest in Industrial Urban Corp. ("IUC"), a construction and contracting business in New Jersey.

The filing of this bankruptcy case was precipitated by a judgment by the New Jersey Superior Court, finding IUC, Ms. Fama-Chiarizia, Mr. Fama, Jr., and other defendants jointly and severally liable to Triboro Hardware & Industrial Supply Corporation ("Triboro Hardware") in the amount of $3,353,219.18 (the "Triboro Judgment").¹ The Triboro Judgment is the result of an unpaid promissory note dated August 14, 2014, entered into between IUC, as the borrower, Ms. Fama-Chiarizia and Mr. Fama, Jr., as co-makers on the note, and George and Linda Filosa (the "Filosas") and Triboro Hardware ("Triboro"), a construction supply company, as lenders (the "August 2014 Note").

Subchapter V, which became effective on February 19, 2020, is part of the Small Business Reorganization Act (the "SBRA") and provides a special pathway for small business debtors to reorganize their debts. The purpose of the SBRA and of Subchapter V is "to streamline the bankruptcy process by which small business debtors reorganize and rehabilitate their financial affairs." H.R. Rep. No. 116-171, at 1, 116th Cong. 1st Sess. (2019), reprinted in 2019 U.S.C.C.A.N. 366, 366, 2019 WL 3401849 (July 23, 2019) (comments of Rep. Ben Cline)).

Not every Chapter 11 debtor is eligible to proceed under Subchapter V. Instead, the SBRA establishes eligibility requirements to assure that the benefits offered to debtors by the Subchapter V pathway are available only to those debtors for whom they are intended - that is, individuals or entities with a limited amount of debt, at least half of which arose from their commercial or business activities. Put another way, Subchapter V is not for - or available to - everyone. It is tailored to the needs of small businesses and small business operators, who seek to address debt that arose from their business activity in a Chapter 11 bankruptcy case.

As set forth in Bankruptcy Code Section 1182(1)(A), in order to be eligible to elect Subchapter V, a debtor must be:

A person engaged in commercial or business activities . . . that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition . . . in an amount not more than $7,500,000 . . . not less than 50 percent of which arose from the commercial or business activities of the debtor.

11 U.S.C. § 1182(1)(A). That is, the Subchapter V eligibility requirements are that the debtor is a "person," that the debtor is "engaged in commercial or business activities," that the debtor's undisputed debts, both secured and unsecured, do not exceed $7.5 million, and that at least half of that debt arose from the debtor's "commercial or business activities." Id.

Before the Court is the Objection of the Filosas to Ms. Fama-Chiarizia's designation of this Chapter 11 case as one under Subchapter V, on grounds that she is not eligible to be a debtor under Subchapter V. The Filosas argue, in substance, that Ms. Fama-Chiarizia is not engaged in commercial or business activities as required by Bankruptcy Code Section 1182(1)(A), and therefore cannot be a debtor in a Subchapter V case.²

Ms. Fama-Chiarizia makes several arguments in opposition to the Objection. As an initial matter, she argues that Subchapter V does not require a debtor to be currently engaged in business activity to be eligible to reorganize under this Subchapter. Ms. Fama-Chiarizia also points to the fact that the Triboro Judgment arises from a debt owed by IUC to the Filosas, and that she is a co-maker of the August 2014 Note and borrower on this debt. As a consequence, she argues, her liability to the Filosas arises from a business debt of IUC. Further, she notes that Congress did not define "commercial or business activities" in Subchapter V, and it is for the courts to decide what constitutes "commercial or business activities" on a case-by-case basis.

Jurisdiction

This Court has jurisdiction and the authority to enter a final judgment pursuant to Judiciary Code Sections 1334(a) and 157(a), and the Standing Order of Reference dated August 28, 1986, as amended by the Order dated December 5, 2012, of the United States District Court for the Eastern District of New York, as this is a core matter. This is a core matter pursuant to Judiciary Code Section 157(b)(2)(A), and venue is proper before this Court pursuant to Judiciary Code Section 1409.

Background

The New Jersey Superior Court Action

The history of this bankruptcy case begins with a promissory note dated August 14, 2014, entered into between IUC, as the borrower and Triboro, as the lender. As the New Jersey Superior Court found, Ms. Fama-Chiarizia and Mr. Fama, Jr. agreed to be co-makers on the August 2014 Note and to be jointly and severally liable for IUC's debt in the event that IUC did not fulfill its obligations to repay the loan and interest. Memorandum of Decision (the "NJ Sup. Court Mem."), ECF No. 56, Exh. A at 2. On May 31, 2019, Triboro and the Filosas commenced an action to recover on the August 2014 Note as well as on certain other trade debts owed by IUC (the "New Jersey Superior Court Action"). NJ Sup. Court Mem. at 15; Complaint, Triboro Hardware & Industrial Supply Corp. v. Industrial Urban Corp., Case No. HUD-L-2176-19 (N.J. Super. Ct. May 31, 2019).

On December 22, 2020, the New Jersey Superior Court granted the Filosas' motion for summary judgment, and found Ms. Fama-Chiarizia and Mr. Fama, Jr. to be jointly and severally liable in the amount of $3,353,219.18, to the Filosas for the debt arising from the August 2014 Note. Affidavit of Christina Fama-Chiarizia Pursuant to Local Bankruptcy Rule 1007-4, ECF No. 5 (the "Fama-Chiarizia Aff."), at ¶¶ 7-9.

This Bankruptcy Case

On September 15, 2021, Ms. Fama-Chiarizia filed a voluntary petition for relief under Subchapter V of Chapter 11, together with her schedules and statements. ECF No. 1. In her Schedule E/F, "Creditors Who Have Unsecured Claims," she lists a debt to the Filosas and Triboro Hardware in the amount of $1,453,000, and in her amended Schedule E/F, she lists an amended amount of $3,353,219.18. Schedule E/F, ECF No. 1; Amended Schedule E/F, ECF No. 48.

On November 19, 2021, the Filosas filed a proof of claim arising from the Triboro Judgment in the amount of $3,430,969.41, and on May 10, 2023, they filed an amended proof of claim listing the Triboro Judgment in the amount of $3,859,094.60. Proof of Claim 10-1; Proof of Claim 10-2.

The Filosas' Objection to Ms. Fama-Chiarizia's Subchapter V Designation

On October 29, 2021, and November 2, 2021, the Filosas filed an objection and amended objection to Ms. Fama-Chiarizia's election to proceed as a Subchapter V debtor, on grounds that she is not engaged in commercial or business activities as defined by Bankruptcy Code Section 1182(1)(A), and as required to be a Subchapter V debtor. ECF Nos. 44, 47 (the "Objection" or "Obj.").

By way of background, the Filosas state that Ms. Fama-Chiarizia and Mr. Fama, Jr. are each personally liable to them on the August 2014 Note that they executed on behalf of IUC. Obj. at 3. They also state that the New Jersey Superior Court granted their motion for summary judgment on that Note, and found that Ms. Fama-Chiarizia and Mr. Fama, Jr. are jointly and severally liable to them in the amount of $3,353,219.18. Id. And the Filosas note that prior to the Petition Date, Ms. Fama-Chiarizia was engaged in a separate litigation with former business associates Nicole and Anthony Frisina, and that this action is still pending in the New Jersey Superior Court, Essex County, Law Division. Obj. at 4.

The Filosas argue that while Ms. Fama-Chiarizia owns twenty-five percent of IUC, she is not engaged in commercial or business activities because she has had "no involvement with IUC since approximately 2016." Obj. at 6. They observe that consistent with this, other than the Triboro Judgment, Ms. Fama-Chiarizia's bankruptcy schedules list only consumer debts. Obj. at 5.

They state that "[w]hen a debtor's eligibility to elect to proceed under Subchapter V is challenged, the burden is on the debtor to establish such eligibility." Obj. at 7-8 (citing cases). As a consequence, they argue, "if [Ms. Fama-Chiarizia and Mr. Fama, Jr.] are not 'engaged in commercial or business activities' or if less than or equal to 50% of each [of their] noncontingent liquidated debts as of the Petition Date arose from 'commercial or business activities,' [they] are not eligible to proceed under Subchapter V." Obj. at 8-9. And they note that the Bankruptcy Code does not define "commercial or business activities," but does define "consumer debt" in Bankruptcy Code Section 101(8) as "debt incurred by an individual primarily for a personal, family, or household purpose." Obj. at 9.

The Filosas also argue that "an individual debtor must have been 'engaged in commercial or business activities' as of the petition date to be eligible to proceed under Subchapter...