In re Schlesinger

1

In re: LINDA SCHLESINGER, Debtor.

No. 24-10190 (DSJ)

United States Bankruptcy Court, S.D. New York

August 15, 2024

NOT FOR PUBLICATION

Chapter 11

PICK & ZABICKI LLP

Counsel for the Debtor, Linda Schlesinger

Douglas Pick

FEIN SUCH, KAHN & SHEPARD, P.C.

Counsel for HSBC Bank USA, N.A.

Peter Adel Lawrence

DECISION DENYING IN-PART THE DEBTOR'S APPLICATION FOR AN ORDER REDUCING THE CLAIM ASSERTED AGAINST THE DEBTOR BY HSBC BANK USA, N.A. (CLAIM NO. 5)

DAVID S. JONES UNITED STATES BANKRUPTCY JUDGE

Before the Court is the motion of debtor Lisa Schlesinger (the "Debtor") titled Debtor's Application for an Order Reducing the Claim Asserted Against the Debtor by HSBC Bank USA, N.A. (Claim No. 5) [ECF No. 44] (the "Motion"). The Motion asserts that the proof of claim of HSBC Bank USA, N.A. ("HSBC"), which relates to a judgment in a foreclosure action, should be reduced for two reasons: first, that the claim is not sufficiently supported by documentary evidence, and second, that HSCB's asserted delay in protecting its rights under the mortgage justify equitably reducing or eliminating HSBC's asserted entitlements to interest and fees. See Motion ¶¶ 11-13. HSBC filed an Opposition to the Motion [ECF No. 58] (the "Opposition") asserting that the Rooker-Feldman and res judicata doctrines bar the Court from reducing the interest awarded to HSBC in the foreclosure action and attaching documentation from its internal recordkeeping systems in an attempt to support aspects of its claim. Opposition ¶ 42; Ex. P. In response, the Debtor filed a Reply to the Opposition [ECF No. 73] (the "Reply") asserting that the Motion does not ask the Court to review or revisit the judgment issued by the state court in the foreclosure action, and rather seeks a determination that: (1) the interest owed to HSBC post-dating the state court judgment should be equitably written down; and/or (2) the dollar amount of HSBC's claim should be reduced due to an erroneous and/or unsupported computation of the amount of interest due to HSBC. Reply ¶¶ 6-7.

The Court heard oral argument on the Motion on August 8, 2024 (the "Hearing For reasons stated on the record at the Hearing, the Court determined that some of the issues raised by the Motion and the Opposition could be resolved based on the current record, but others required further factual development. The Court subsequently entered an order on August 8, 2024 [ECF No. 76] (the "Order") indicating the Court's intention to issue this written decision ("Decision") to partially but not completely resolve the Motion. This Decision resolves the Motion to the extent it contends that HSCB's alleged delay in prosecuting its rights under the mortgage justify equitably reducing or eliminating HSBC's asserted entitlements to interest and fees. This Decision does not resolve the Motion to the extent it questions whether HSBC's proof of claim reflects the proper dollar amount due to HSBC under the relevant mortgage, specifically as to amounts accrued after the state court judgment was entered^[1]. For the reasons discussed below, the Motion is DENIED to the extent it contends that HSBC's entitlement to interest and fees should be equitably reduced or eliminated. The Court need not decide a separate issue that HSBC argued, namely whether the Debtor is barred from collaterally attacking the state-court judgment, because the Debtor has now disavowed any attempt to do so.

FACTS

1. The Foreclosure Action.

The Debtor filed for chapter 11 bankruptcy on February 5, 2024 (the "Petition Date") [ECF No. 1], one day prior to a scheduled foreclosure sale on the Debtor's home located at 186 Dune Road, Quogue, New York 11959, and an undeveloped parcel of land located near the home at 189 Dune Road, Quogue, New York 11959 (together, the "Property"). Motion ¶ 1. On May 17, 2007, the Debtor and her husband, Stuart Schlesinger ("Mr. Schlesinger") signed a 30-year promissory note^[2] (the "Note") for the sum of $5,000,000, secured by a jointly executed mortgage (the "Mortgage") on the Property. Motion ¶ 3. The Mortgage was assigned to HSBC on February 14, 2012. See Opposition, Ex. C. The Debtor's first date of default on the Note occurred on November 1, 2012. Opposition ¶ 10.

On March 17, 2015, HSBC commenced a foreclosure action (the "Foreclosure Action") in the Suffolk County Supreme Court (the "State Court"). See Motion, Ex. B at 1. The Debtor and Mr. Schlesinger did not file an answer to the Foreclosure Action. Opposition ¶ 11; Motion ¶ 4.

On October 20, 2016, HSBC filed a Motion for Summary Judgment in the State Court, and shortly thereafter a Cross-Motion for Summary Judgment was filed by the Debtor and Mr. Schlesinger's defendant-counterclaimants, Donald P. Perry as trustee of the Helen S. Julien Trust f/b/o Stephen Julien, and Gana LLP. Opposition ¶ 14; Motion Ex. B at 3. On June 26, 2017, the State Court granted summary judgment for HSBC and appointed a referee to compute the total debt owed to HSBC on the Note. See Opposition ¶ 14, Ex. F. On January 10, 2018, HSBC filed its Motion for Judgment of Foreclosure and Sale, which it ultimately withdrew five days later. See Motion, Ex. B at 4. HSBC did not file a substitute Motion for Judgment of Foreclosure and Sale until December 2, 2020. See Motion, Ex. B at 7. During the approximately three-year period between HSBC's filing of the two motions for judgment of foreclosure and sale, the Debtor changed counsel, the Debtor and HSBC allegedly attempted to negotiate a short sale and other home retention options, the COVID-19 pandemic began, and the parties engaged in motion practice initiated by the Debtor seeking dismissal of the Foreclosure Action and vacatur of the default judgment entered against the Debtor and Mr. Schlesinger. See Motion, Ex. B; Opposition ¶¶ 15-27.

On May 13, 2022, the State Court signed an Order Confirming Referee Report and Judgment of Foreclosure and Sale (the "State Court Judgment"). Motion ¶ 8, Ex. F. The State Court Judgment confirms the Referee Report of Peter R. McGreevy, Esq., dated October 13, 2020, showing the sum of $6,938,997.35 due as of March 31, 2020 [Motion, Ex. F at 2] and states that HSBC shall be paid the:

Amount due per the Referee's Report: [$6,938,997.35 with interest at the note rate from March 31, 2020, together with any advances as provided for in the note and mortgage which Plaintiff has made for taxes, insurance, principal, and interest, and any other charges due to prior mortgages or to maintain the property pending consummation of this foreclosure sale, not previously included in the computation, upon presentation of receipts for said expenditures to the Referee, all together with interest thereon pursuant to the note and mortgage, and then with interest from the date of entry of this judgment at the statutory rate until the date the deed is transferred];

Motion, Ex. F at 6.

2. The Motion, Opposition, and Reply.

The Motion asserts that HSCB delayed in protecting its rights under the Mortgage, and that these asserted delays justify equitably reducing or eliminating HSBC's asserted entitlements to interest and fees. See Motion ¶¶ 11-13. The Motion specifically highlights a three-year period between January 15, 2018, which is the date that HSBC withdrew its first Motion for Judgment of Foreclosure and Sale, and December 2, 2020, the date that HSBC filed a substitute Motion for Judgment of Foreclosure and Sale, but the Motion does not limit its allegations of delay to this period. Motion at ¶ 7. Rather, the Debtor seeks a reduction of interest accruing after March 31, 2020, which is the date used by the Referee's Report to calculate the amount due to HSBC. Motion ¶ 13; Ex. F at 2.

The Opposition asserts that the Rooker-Feldman and res judicata doctrines bar the Court from reducing the interest awarded to HSBC in the Foreclosure Action. Opposition ¶ 42. HSBC addresses the Debtor's allegations of delay in prosecuting the Foreclosure Action by asserting that any such delay was caused by the Debtor's own repeated attempts to dismiss the foreclosure complaint and prevent the entry of a judgment of foreclosure and sale. Opposition ¶ 39.

The Debtor's Reply attempts to clarify the scope of relief sought by the Motion and asserts that it does not ask the Court to review or revisit the State Court Judgment, and rather seeks a determination that the interest owed to HSBC post-dating the entry of the State Court Judgment should be equitably written down. Reply ¶ 6. As to any interest preceding the State Court Judgment, the Reply seeks permission from this Court to return to the State Court to pursue a correction or explanation of the interest accrued. Reply ¶¶ 5,6.

DISCUSSION

1. The Debtor's Request to Return to the State Court.

The Debtor's request to return to State Court to pursue a correction or explanation of the interest accrued and/or owed to HSBC preceding the entry of the State Court Judgment is not properly before the Court as a result of the Motion and is not resolved by this Decision. At the August 8, 2024 Hearing, the Court observed that the Debtor's Motion is not styled as an application to lift the automatic stay or other authorization to litigate in the State Court, and rather in substance is merely a claim objection. Specifically, the Motion, as submitted, asks only that the Court engage in its own analysis to determine that, for equitable reasons, the Court should write down interest post-dating the State Court Judgment. Because lift-stay or similar relief was not sought in the Motion as filed, this Decision does not consider the merits of the Debtor's request to return to the State Court. This Decision is without prejudice to any future applications properly brought by the Debtor to seek...