Before the bankruptcy filing, the state court ordered JJW Metal to suspend its operations. The bankruptcy filing did not automatically authorize JJW Metal to resume its otherwise unlawful operations. “A debtor in possession under Chapter 11 is not excused because of its bankruptcy from valid and enforceable state and local regulations.”

The Puerto Rico court of appeals correctly ruled that the superior court action was excepted by the automatic stay pursuant to section 362(b)(4). Carolina has the legal authority and duty to issue permits and pursue legal actions regarding violations to its regulations. “A state acts within its police and regulatory powers when it enforces ‘laws affecting the health, welfare, morals, and safety’ of the public, or when it acts to ‘effectuate a public policy.’”

And Carolina did not violate the automatic stay by asking the superior court and the court of appeals to review the subject matter jurisdiction of the state court. Having subject matter jurisdiction over case number CA2018CV03362, the superior court could continue with the proceedings, hold a hearing on June 8, 2022, and subsequently issue a ruling ordering JJW Metal to immediately suspend its operations.

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Carolina did not violate the automatic stay by pursuing state court proceedings excepted under section 362(b)(4). The orders entered by the superior court in case number CA2018CV03362 against JJW Metal are valid and enforceable. The filing of the JJW Metal’s bankruptcy petition did not sanction an operation otherwise prohibited under Carolina’s policies and regulations. Neither the plan provisions nor the confirmation order precluded Carolina from exercising its police and regulatory powers against JJW Metal.

It is worth noting that had this bankruptcy been filed much earlier, the Trustee would have had a solid preferential transfer avoidance action against Mr. Adams as an insider under 11 U.S.C. § 547(b). The Trustee’s position would be that Mr. Adams received that payment (i.e., the combination of credits and cash following the inventory liquidation) from an insolvent debtor, and that payment allowed him to recover more than he would have recovered had the transfer not been made and an orderly liquidation followed under chapter 7 of the Bankruptcy Code. A judgment avoiding the transfer and authorizing recovery against Mr. Adams under 11 U.S.C. §§ 547 and 550 would mirror exactly what the state court did in this case by ordering Mr. Adams to place the funds in the registry of the court.

So, if this were a successful avoidance action by the Trustee, it is undeniable that satisfaction of that judgment (i.e., paying the money back as Mr. Adams did) would give rise to an unsecured claim in favor of Mr. Adams under 11 U.S.C. § 502(d). That subsection provides in relevant part, “…, the court shall disallow any claim …that is a transferee of a transfer avoidable under section … 547, … of this title, unless such … transferee has paid the amount, … for which such … transferee is liable under section …550, … of this title.”35 In other words, the defendant in a preference action does not have a claim at all unless the adverse judgment is paid. Once paid, however, that defendant has rights as an unsecured creditor.

Of course, this is not an avoidance action, but the mechanics are identical and so should the equitable result be. The only substantive difference here is the Trustee already has the recovery in hand, despite being time barred on seeking avoidance of the initial payments to Mr. Adams following liquidation of the inventory. Yet the Trustee is trying to deprive Mr. Adams of his pro rata share as an unsecured creditor that he would have been entitled to had the preference action been available to him.

Alternatively, the Trustee contends Mr. Adams is judicially estopped from characterizing the deposit as a loan from Mr. Adams to the Debtor because Mr. Adams, as Debtor’s managing member, listed the funds as an asset in the Debtor’s bankruptcy schedules, more specifically identified as inventory liquidation proceeds. 36 The argument is unpersuasive. Loan proceeds are always assets of a borrower, subject, of course, to the security interest or claim of the lender. Even though the cash was being held by the Clerk of Court (and now the Trustee) rather than in the Debtor’s bank account, the cash was and always has remained an asset of the Debtor. The bankruptcy schedules confirm that reality. Indeed, the only party that would benefit from a different ruling (i.e., that the money was Mr. Adams’ property rather than Maison Royale’s) is Mr. Adams, and to the extent he could have claimed otherwise, he has long since waived that argument.

Before the court are the Motions filed by Luis Michael Virella (the “Debtor”) to: (1) Reinstate the Automatic Stay as to creditor TLOA of NJ, LLC (“TLOA”) in the above-referenced main bankruptcy case, Main Case Doc. No. 71; (2) Motion to Reconsider, Main Case Doc. No. 91; and (3) for a Preliminary Injunction filed in the above-captioned Adversary Proceeding, Adv. Pro. Doc. No. 13. The relief requested by all three Motions are inter-related as they basically rely on the identical premise of a substantial change in the law as a result of the decisions by the United States Supreme Court in Tyler v. Hennepin County, Minnesota, 598 U.S. 631 (2023) (“Tyler”) and by the Appellate Division of the Superior Court of New Jersey in 257-261 20TH Avenue Realty, LLC, v. Roberto, 477 N.J. Super. 339, 307 A.3d 19 (N.J. Super. Ct. App. Div. 2023) (“Roberto”) holding that the retention of the excess value (or surplus) above the tax lien in a tax sale foreclosed property by a municipality or a third-party purchaser of tax sale certificate like TLOA violated the Takings Clauses of the United States and New Jersey constitutions. The court also queried whether it should abstain from deciding the issue. After conducting a hearing on the Motions on May 28, 2024, reviewing the submissions of the parties, and listening to their arguments, the court concludes that as a result of the substantial change in the law and this matter being “in the pipeline” when that substantial change in the law occurred, permissive abstention is not warranted and relief under the Tyler and Roberto cases must be afforded to the Debtor.

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[T]he Debtor is entitled to retroactive application of Tyler and Roberto and that the Adversary Proceedings should go forward.

Because the Debtor has finally gotten around to pleading a proper cause of action invoking the takings theory set forth in the Tyler and Roberto cases, and because the court finds that this case was in the pipeline when those cases were decided, and finally, because the court declines to permissively abstain from deciding the matter, the Debtor may proceed with the Adversary Proceeding seeking to set aside the transfer of the Property to TLOA as an unlawful taking. Consequently, the court will grant the preliminary injunction enjoining TLOA from enforcing it rights and remedies against the Property until the Adversary Proceeding is finally concluded.

In its first order, the bankruptcy court held that the Chapter 13 debtor, Andrea Groves, had satisfied the requirements under 11 U.S.C. § 363(f)(4) and § 363(h) to sell a piece of real property “free and clear of liens.” The court had previously determined that Appellee A&S Lending, LLC (“A&S”) had a valid lien against Consultants’ one-half interest in the property, but not against Groves’s one-half interest. The court approved Groves’s motion to sell the property but ordered that A&S be paid half of the net sales proceeds. Upon receiving this payment, A&S was ordered to execute a release of its lien.

We agree with the BAP that the Bankruptcy Code does not authorize a sale free and clear of liens under these circumstances. By its terms, § 363(f) only allows a bankruptcy estate to sell “property of the estate” free and clear of liens. 11 U.S.C. § 363(f) (emphasis added); accord id. § 363(b)(1) (“The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate . . . .” (emphasis added)). Because Consultants was not a debtor, its one-half interest in the real property here was not “property of the estate.” See 11 U.S.C. § 541(a)(1) (defining “property of the estate” to include, inter alia, “all legal or equitable interests of the debtor in property as of the commencement of the case”). The fact that Consultants consented to the sale does not mean that its interest was converted into “property of the estate.”

The Trustee asks that the Court require the IRS seek payment exclusively from the probate estate (which holds assets exempted from the bankruptcy estate) so that the Trustee may use estate funds for greater distributions to general unsecured creditors.

The IRS’s summary judgment motion asks that the Court deny the Trustee’s marshaling request because the “probate exception” bars the marshaling of exempt probate assets; marshaling does not apply to the United States; and even if marshaling does apply, it could not and should not be used in this case.

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[T]he Court, in determining the marshaling issue, is not determining the distribution of the probate estate. The IRS contends that the practical effect of directing the IRS to marshal the assets of the probate estate is the same as ordering a distribution of probate estate assets. The Court disagrees. The Court would not be determining heirs or their respective shares, rather the Court would be determining how the IRS should collect its debt from the two pools of assets available to the IRS (the bankruptcy estate and the homestead exempted from the bankruptcy estate). Texas courts have expressed similar views that an order marshaling assets “does not dispose of the assets and does not determine final ownership of the assets in question.”

Here, because the Trustee is not asking the Court to administer property of the probate estate, the question of marshaling assets of the probate estate does not trigger the probate exception to the Court’s jurisdiction.

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Despite the guidance referenced from the Ninth and Second circuit cases, the Court is reluctant to hold that, as a matter of law, imposing marshaling on the IRS would be an undue burden. Instead, the Court should address the equitable remedy based on the facts of the case before the Court.

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The substantive argument the IRS makes is that the Trustee failed to allege or establish the threshold requirements of marshaling.

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The IRS’s strongest argument from the cited test is that it requires the two claimants have secured claims.

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The policy underlying both the doctrine of marshaling and bankruptcy—to maximize recovery for all affected creditors—is undercut by the test that limits marshaling to disputes between two secured creditors.

On one level this case presents the Court with a fairly routine issue of fixing the appropriate remedy for a violation of the automatic stay. The automatic stay is the bedrock of the relief a debtor seeks when filing for bankruptcy protection. This is true for the largest corporations or the individual seeking a fresh start. However, over the recent past, the Court has seen a dramatic increase in individuals filing multiple bankruptcy petitions with no intention of utilizing the process for any purpose other than to frustrate and delay secured lenders and other creditors from pursuing their contractual rights. The law protects these debtors and creditors cannot disregard the automatic stay. This can be frustrating and may sometimes seems inequitable, but it is critical to the integrity of the system that this process is followed. How the Court determines the economic injury to a debtor for a violation of the stay must be viewed through the prism of the facts of each case. The law relied upon by the Debtor provides for the form of relief requested and it is the scope of that relief that the Court must decide. At the heart of the Court’s objective is how to stay true to the law and at the same time balance the equities with respect to matters before the Court. However, in that pursuit of equity, bankruptcy courts are bound by the statutes and case law. Bankruptcy judges, as do all judges, come to their position with personal beliefs as to what may be a desired outcome in each particular matter. However, we must guard against allowing those beliefs from hindering our obligation to enforce the law as provided in the statutes. Clearly, judges can and do have a variety of views regarding how a particular statute should be read, but our responsibility is clear. The matter before the Court requires just such a nuanced analysis in applying the law while recognizing the equitable rights of the parties.

For the vast majority of chapter 13 cases, balancing the equities often requires the Court to temper the demands of the secured creditors in deference to a good faith debtor who seeks to remain in their home and repay their debts. However, where a debtor uses the system to prevent a creditor from exercising their legal rights without making an effort to comply with the requirements under the Bankruptcy Code, the Court must take this into consideration. The Debtor defaulted on the mortgage over sixteen years ago and lost her legal ownership interest in the property almost two years ago. The Debtor has embarked on a new course of action designed to keep her in possession of the property. While the Debtor does have rights and creditors must abide by the law, the Court may consider the Debtor’s conduct when fashioning a remedy for acts taken in violation of the automatic stay. In its analysis, it is equitable for the Court to look at the Debtor’s conduct and award, when appropriate, recourse to a lender or aggrieved creditor. The Court will hold a hearing to determine the extent to which a credit may be given for the value of the Debtor’s use and occupancy of the Property during this case.

This Adversary Proceeding presents a familiar scenario: a bankruptcy debtor’s failure to pay a creditor (in this case, her landlord) swelled into a contentious dispute concerning more than the amount of debt. The Debtor owes the Plaintiff $41,500.00 in unpaid rent. The landlord creditor, Ann Ashton, sued the Debtor and her husband, Andrew Brenner (now deceased), for payment of rent and related relief in state court and has followed the Debtor to Bankruptcy Court in an ongoing effort to collect.

The collection effort has been robust. After suing the Debtor in state court, the Plaintiff filed a Complaint in this Court stating sixteen (16) causes of action, ranging from an accusation of bankruptcy fraud to many allegations that the Debtor should not receive a bankruptcy discharge and that the debt to the Plaintiff should not be discharged. Pretrial proceedings in this matter have been equally vexatious, characterized by numerous motions, objections, and delays. The culmination of the proceeding is the pending cross-motions for summary judgment.

The wide-ranging Complaint lacks both form2 and substance. The pre-trial proceedings and discovery process failed to shed any light; the Plaintiff, even at this late stage, offers no support for the myriad causes of action. As analyzed below, the Debtor’s Motion for Summary Judgment will serve to dispose of this matter entirely in her favor. While summary judgment will be granted to the Debtor with regard to the seven (7) causes of action in which the Plaintiff seeks to deny discharge, two (2) causes of action will be dismissed for lack of jurisdiction, two (2) counts will be dismissed for lack of standing, and five (5) counts will be dismissed as moot. Accordingly, the Plaintiff’s Motion for Partial Summary Judgment will be denied.

When the Court granted the Compromise Motion, the Court did not decide whether Debtor could prosecute causes of action held by the estate under §§ 544, 550 and 551, when the Rental Properties had been deemed abandoned to Debtor under the Settlement Agreement, and the estate would not receive any benefit from Debtor’s prosecution of such causes of action. Moreover, assuming Debtor and the Trustee are willing to amend the Settlement Agreement so that Debtor’s prosecution of this adversary proceeding may provide a benefit to the estate, no motion seeking approval of such an amended agreement has been filed.

Regarding Debtor’s contention that he has the power to avoid a transfer of his property under § 522(h), Debtor disregards the portion of that statute which provides that Debtor may do so if the transfer was not voluntary.

Defendant is a corporate entity organized under the laws of France with a registered address in Paris, France. Defendant alleges that it was a fonds commun de placement, represented by its portfolio management company, Olympia Capital Management SA. In a May 2022 letter to former counsel for the Plaintiffs, Defendant’s counsel explained that Altipro “does not have independent legal status or employees of its own; it can only act in legal matters through, and as represented by, its portfolio management company.” Declaration of David Molton in Support of Liquidators' Opposition (“Molton Decl.”) Counsel further stated that Altipro is a “diversified fund of funds investing in many funds” and that it does not buy or sell long-term investments.

Defendant is alleged to have retained BNP Paribas Securities Services, S.A. (“BNP SS”) as its agent to invest in and recover redemption payments from Sentry. Opp’n at 2. From 2005 to 2007, Defendant allegedly subscribed through BNP SS for 19,507.62 shares of Sentry.