Wilk Auslander LLP v. Murray (In re Murray)

Citation: 565 B.R. 527Docket: 16-CV-771 (VSB)

Court: District Court, S.D. New York; March 31, 2017; Federal District Court

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Appellant Wilk Auslander LLP appeals the Bankruptcy Court's dismissal of an involuntary bankruptcy petition against alleged debtor Matthew N. Murray. The appeal stems from a dispute involving Murray, who was terminated from his position at Rodman Renshaw after disclosing alleged improper practices to the Senate Finance Committee. Following his termination, Rodman Renshaw, represented by Wilk Auslander, pursued arbitration against Murray, resulting in a $10.7 million award, later confirmed to $16 million by the New York courts.

After the judgment, the Law Firm conducted discovery into Murray’s finances, revealing he was unemployed and had limited assets, primarily a mortgaged cooperative apartment valued at approximately $4.6 million. In early 2013, Rodman Renshaw entered Chapter 7 bankruptcy, and the judgment against Murray was assigned to the Law Firm.

Seeking to enforce the judgment, the Law Firm filed an involuntary petition against Murray, despite having already secured a lien on his apartment shares. The Bankruptcy Court noted that while New York law allowed the Law Firm to execute on Murray's interest, it would not permit the sale of the entire jointly held property with his wife, potentially limiting the recovery. The Bankruptcy Code, however, could facilitate a more advantageous sale of jointly held property. The court ultimately affirmed the dismissal of the bankruptcy petition, concluding that the Law Firm's actions were unnecessary given its existing lien under state law.

Section 363 of the Code allows a bankruptcy trustee to sell jointly held property free of co-owners' interests if the conditions of section 363(h) and related provisions are met, without needing co-owners' consent. The non-debtor retains a right of first refusal and their share of sale proceeds. On March 18, 2015, Murray sought to dismiss the Involuntary Petition under various legal provisions and requested attorneys’ fees and damages. During a hearing on June 30, 2014, Judge Gerber, while not prompted by Murray, suggested a potential dismissal under section 707(a). On January 4, 2016, the Bankruptcy Court dismissed the case for cause under section 707(a), finding that the Law Firm was misusing the bankruptcy process for a two-party dispute to achieve a result—selling jointly held property—that could not be attained outside bankruptcy. The court ruled that the petition was an inappropriate exploitation of the bankruptcy system.

The appellate court has jurisdiction to review final bankruptcy court judgments, examining factual findings for clear error and legal conclusions de novo, while reviewing dismissals for cause under an abuse of discretion standard. The determination of 'cause' is within the court's discretion, which may be exceeded if based on legal errors or clearly erroneous factual findings. The appellant raised three arguments for reversal: (1) the Bankruptcy Court improperly bypassed section 303, (2) the dismissal under 707(a) was based on the incorrect finding that the appellant was the sole creditor, and (3) the appellant satisfied section 303(b)(2), indicating that bankruptcy relief was necessary.

The appellant contended that the dismissal was procedurally improper for bypassing section 303, but the court found that the Bankruptcy Court acknowledged that section 303's requirements were met, which would allow the case to progress as a chapter 7. The appellant did not dispute that the Law Firm’s petition complied with section 303, which permits involuntary petitions by a single creditor under certain conditions, implying that, if there were no cause for dismissal, the involuntary case could have continued.

The Bankruptcy Court had the discretion to dismiss the case under section 707(a) without first entering a formal order of relief or appointing an interim trustee, as these steps occur only post-relief order. The court's dismissal was justified under section 707(a) for cause, particularly because the involuntary petition was filed in bad faith, with the intent to improperly harm the debtor. This dismissal was supported by findings under sections 303(i), 306(a)(1), and 707(a), highlighting that the Bankruptcy Court can dismiss both voluntary and involuntary cases for cause, as indicated by the statute's language. Section 707(a) applies to all cases, and its purpose extends beyond voluntary petitions, allowing courts to address abuses by creditors. The Appellant's claim that the Bankruptcy Court erred in identifying the Law Firm as the sole creditor is unfounded, as the Appellant had previously conceded to this characterization in court filings, thereby waiving any argument regarding the existence of additional creditors.

Appellant argues that its change in position is irrelevant since the wife and Bank of America are creditors 'as a matter of law.' However, the failure to raise this argument earlier constitutes a waiver, and Appellant has not shown that failing to consider it would result in 'manifest injustice' or that no additional fact-finding is necessary. 

Under Section 707(a) of the Bankruptcy Code, a bankruptcy court may dismiss a Chapter 7 case for 'cause,' which includes unreasonable delay, nonpayment of fees, and failure to comply with debtor duties. These examples are illustrative, allowing for a case-by-case analysis to determine if dismissal serves the best interest of all parties. The debtor's best interest typically lies in achieving a fresh start and minimizing administrative expenses. Creditors generally do not suffer prejudice from dismissal since they can pursue claims in state court, except if dismissal occurs after a significant delay that prevents them from collecting debts.

Judge Gerber’s decision considered several factors: the case is a continuation of a long-standing dispute, it serves solely as a judgment enforcement mechanism, there are no competing creditors, and the Law Firm has adequate remedies outside bankruptcy. The court noted that the Law Firm seeks bankruptcy to gain a benefit not available under nonbankruptcy law, and that no assets would be lost if the case did not proceed. Appellant claims that the Bankruptcy Court erred in dismissing the case despite the sole creditor situation, but the court's consideration of this factor, among others, was not an abuse of discretion. Additionally, Appellant's assertion that it cannot achieve the desired remedy under state law does not negate the availability of other enforcement mechanisms for its judgment against the debtor.

Murray's interest is diminished due to his wife's shared interest and New York's legal framework regarding tenancies in entirety. However, New York law still provides a defined remedy for judgment holders, which limits the Appellant's entitlements. The Appellant's inability to execute on the wife's interest under New York law does not warrant bankruptcy relief. Consequently, the Bankruptcy Court's decision is affirmed, and the case is dismissed. The Clerk of Court is instructed to close the case. Wilk Auslander LLP serves as both the Appellant and its own counsel. The Bankruptcy Court's conclusions were based on undisputed facts, which the Appellant does not contest, aside from one creditor-related issue. Under Section 707(a), a bankruptcy case may only be dismissed after notice and a hearing for specific causes, including unreasonable delay prejudicial to creditors or nonpayment of fees. Section 521 outlines the debtor's obligations post-bankruptcy filing.