Myer's Lawn Care Servs. v. Pryor

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Myer's Lawn Care Services, Inc., Appellant, v. Robert Pryor, Appellee.

No. 2:23-cv-3346 (NJC)

United States District Court, E.D. New York

August 6, 2024

OPINION AND ORDER

NUSRAT J. CHOUDHURY,, UNITED STATES DISTRICT JUDGE.

This appeal arises from a contract dispute between Appellant Myer's Lawn Care Services, Inc. (“Myer's”) and Russ Fragala Landscape Corporation (the “Corporation”). Myer's seeks to recover damages for breach of contract from Russell Fragala (“Fragala”), the president of the Corporation, in Fragala's individual bankruptcy proceeding (“Bankruptcy Action”^[1]).^[2] Appellee Robert Pryor (“Pryor”), the trustee of Fragala's bankruptcy estate, moved to expunge Myer's' claim against the estate. (Bankr. ECF No. 85, R. at 961.) After receiving full briefing and conducting two hearings on the motion the bankruptcy court issued an order expunging Myer's' claim (“Expungement Order”).^[3]Myer's now appeals. For the following reasons, I affirm the bankruptcy court's order.^[4]

BACKGROUND

I. State Court Action

In September 2017, Myer's sued the Corporation and Fragala who was alleged to be an “employee/agent” of the Corporation, in Maryland state court for breach of a series of snow-removal contracts (“State Court Action”).^[5](See Bankr. Claims Register, Claim No. 1-1 (“Proof of Claim”), Ex. 2; Bankr. ECF No 97-1, R. at 1020-224.)^[6]Myer's alleged that the Corporation and Fragala failed to provide full payment to Myer's for its snow-removal services. (Id.) The snow-removal contracts at issue are not in the record on this appeal.

On January 1, 2018, Fragala and the Corporation together served a countercomplaint on Myer's alleging that Myer's damaged the work sites from which snow was removed, requiring the Corporation to incur $83,755 in expenses for repairs. (Bankr. ECF No. 21-8, R. at 230.) Myer's filed an amended complaint. (See Bankr. ECF No. 21-8, R. at 226.)

On May 31, 2018, Fragala moved to dismiss the amended complaint against him, arguing that, as president of the Corporation, he could not be held liable for any breach of the Corporation's contracts with Myer's. (Id. ¶¶ 2, 4.)

II. Bankruptcy Action

Fragala filed an individual petition for bankruptcy under Chapter 7 of the Bankruptcy Code on August 15, 2019. (Bankr. ECF No. 1, R. at 10.) On October 7, 2019, the Maryland court issued an order staying and suspending the State Court Action because of the pending Bankruptcy Action. (Bankr. ECF No. 12 at 76, R. at 166.)^[7]

On November 19, 2019, Myer's filed a proof of an unsecured claim in Fragala's Bankruptcy Action (the “Claim”), claiming that Fragala individually owed Myer's a debt of $92,366.80 for breach of the snow-removal contracts. (Proof of Claim, Bankr. Claims Register, Claim No. 1-1, R. at 1020-22.) Myer's attached two supporting exhibits. (Id.) First, Myer's submitted a short document titled “Statement of Account of Russell Fragala” stating that Fragala owed Myer's $92,366.80, which was calculated by adding a $58,4600 “Unpaid Balance as of March 3, 2017” and $33,906.80 in “[l]ate charges @ 2% per month up to August 3, 2019.” (Proof of Claim, Ex. 1, R. at 1023.)

Second, Myer's submitted a document filed in the State Court Action titled “Plaintiffs' [sic] Pretrial Statement.” (Proof of Claim, Ex. 2, R. at 1024.) In this document, Myer's referred to Fragala and the Corporation collectively as “Fragala.” (Id. at 1, R. at 1024.) The Pretrial Statement asserts that the Corporation was “neither registered as a Corporation or a Limited Liability Company with the Maryland State Department of Assessments and Taxation on the date of the contracts[] from which this case arises.” (Id.) It further asserts that “Fragala”-defined as the individual and Corporation collectively-“withheld $58,460.00[] rightfully owed Myer's” under snowremoval contracts “under the false representation that Myer's had caused considerable damage to all of the [snow-removal] sites.” (Id. at 9, R. at 1032.) It also alleges that “Fragala filed a Counter-Complaint against Myer's, dated January 10, 2018, demanding[] ‘$83,755.00 plus travel expenses, reasonable attorney fees, interest and costs' as compensation for expenses Fragala allegedly incurred to repair the damages he claims Myer's caused.” (Id. at 6, R. at 1029.) The Pretrial Statement references numerous exhibits, but none of them were filed in support of Myer's' Proof of Claim in Fragala's Chapter 7 bankruptcy proceeding. (See Proof of Claim.) While Myer's represents in its briefing to this Court that the snow removal contracts were in writing, Myer's did not file any written contracts in connection with the Claim. (See Myer's' Br. at 3, ECF No. 24 (“The Subcontracts were signed on November 3, 2016.”); see also Proof of Claim, Ex. 2 at 2, R. at 1025.)

III. Adversary Proceeding

On November 25, 2019, Myer's initiated a related adversary proceeding against Fragala (the “Adversary Proceeding”), alleging that Myer's' Claim against Fragala's estate was not dischargeable in the Bankruptcy Action pursuant to the statutory exceptions to discharge for cases of “false representation” or “willful and malicious injury” under 11 U.S.C. §§ 523(a)(2)(A) and (a)(6). (Bankr. ECF No. 27, R. at 286305.)^[8]

IV. Lack of Assets in the Bankruptcy Action

On April 12, 2021, Pryor filed a report of no distribution in the Bankruptcy Action. (Bankr. Not., Apr. 12, 2021, R. at 1100.) In that report, Pryor reported that he

ha[d] neither received any property nor paid any money on account of this estate; that [he] . . . made a diligent inquiry into the financial affairs of the debtor(s) and the location of the property belonging to the estate; and that there is no property available for distribution from the estate over and above that exempted by law.

(Id.)

V. Trial in the Adversary Proceeding

In May 2022, Judge Grossman presided over a two-day bench trial in the Adversary Proceeding. (See Adv. Proc. Min. Entries, May 2, 2022 & May 3, 2022.) On September 22, 2022, the bankruptcy court issued a memorandum of decision (“Dischargeability Opinion”) in which the court made several factual findings and legal determinations. (See Dischargeability Op., Bankr. ECF No. 120, R. at 1154-70.) First, the court found that New York law governed Myer's' allegations in the adversary complaint, and that the allegations “did not satisfy the necessary elements of corporate veil piercing under New York law.” (Id. at 9, R. at 1162.) The court found, however, that “the outcome of this veil piercing analysis is not determinative of whether Myer's has a claim against the Debtor [Fragala] in this case,” and that “as of this writing [on September 22, 2022] Myer's has an allowed claim in the amount of $93,366.80” against Fragala's estate “by virtue of the uncontested proof of claim filed by Myer's against [Fragala]” under 11 U.S.C. § 502(a) and Rule 3001(f), Fed.R.Bankr.P. (Id. at 1, 8, R. at 1154, 1161.)

Lastly, the court found that the Claim was dischargeable in bankruptcy because Myer's failed to prove that the Claim satisfied the exception to discharge for “false representation” or for “willful and malicious injury” under 11 U.S.C. §§ 523(a)(2)(A) or (2)(6). (Id. at 12-15, R. at 1165-68.) Judgment was entered for Fragala in the Adversary Proceeding on September 22, 2022. (Bankr. ECF No. 121, R. at 1172.) On October 5, 2022, Myer's filed a notice of appeal of the Dischargeability Opinion. Fragala et al. v. Fragala, No. 22-cv-5980, ECF No. 1 (“Dischargeability Appeal”).)

VI. Discovery of Assets in the Bankruptcy Action

On May 18, 2022, after the conclusion of trial in the Adversary Proceeding, Pryor rescinded his prior report of no distribution in the Bankruptcy Action. (Bankr. ECF No. 56, R. at 584.) Pryor filed this recission when he became aware that Fragala had understated the value of real property he owned, and that contrary to Pryor's previous belief, this property was likely not encumbered by a mortgage. (Pryor's Br. at 5, ECF No. 26; see also Bankr. ECF No. 64 at 4-5, R. at 590-91.) Based on this new information, Pryor determined that the estate likely had “significant equity” due to the property. (Bankr. ECF No. 64 at 4-5, R. at 590-91.) On November 28, 2022, two months after judgment entered in the Adversary Proceeding, the court issued an order in the Bankruptcy Action authorizing Pryor to sell Fragala's real property. (Bankr. ECF No. 80, R. at 933.)

VII. The Bankruptcy Court's Ruling on Pryor's Motion to Expunge

On February 2, 2023, Pryor filed a Motion to Expunge Myer's' Claim against Fragala's estate pursuant to 11 U.S.C. §§ 502(a), 502(b)(1) and Rule 3007 of the Federal Rules of Bankruptcy Procedure or, in the alternative, to “reconsider[] the Court's decision of September 22, 2022 [the Dischargeability Opinion]” pursuant to 11 U.S.C. § 502(j) and Rule 3008, Fed.R.Bankr.P. (Bankr. ECF No. 85 at 1, 6, R. at 963, 968.) The parties submitted briefing, and the bankruptcy court heard argument on Pryor's Motion on March 13, 2023 and April 14, 2023.^[9]The court heard argument on the two primary contested issues raised by the parties: (1) whether Pryor's objection was timely, and (2) whether Myer's could recover from Fragala's individual bankruptcy estate damages for the Corporation's alleged breach of contract on the theory that Fragala waived the protections of the corporate form by answering and filing a counter-complaint in his individual capacity in the prior State Court Action. (Bankr. ECF Nos. 85, 94, 97, R. at 966, 970, 1013; Mar. 13 Hr'g, R. at 1116; Apr. 24 Hr'g.)

The court orally ruled that Pryor's motion was timely and permitted the parties to submit supplemental briefing relating to the second issue, which concerned whether Pryor when objecting to a claim, is bound by...