IN THE UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

Transcription

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA IN RE CHAPTER THIRTEEN MICHAEL J. FAILLACE, BANKRUPTCY NO bk DEBTOR MICHAEL J. FAILLACE, PLAINTIFF vs. {Nature of Proceedings Complaint MARIE P. FAILLACE and for Equitable Subordination of Claims} LAWRENCE D. MacDONALD, DEFENDANTS ADVERSARY NO ap ************************************************************************ MICHAEL J. FAILLACE PLAINTIFF vs. Related Adversary MARIE P. FAILLACE {Nature of Proceedings Complaint for CHARLES DeHART, III, TRUSTEE Declaratory Judgment and other relief} DEFENDANTS ADVERSARY NO ap OPINION This 1999 bankruptcy began as a Chapter Seven and subsequently converted to a case under Chapter Thirteen. An adjudication of a dischargeability complaint on May 10, 2000 and filed to 5-99-ap-00119, has resulted in a determination that $90,000 of a domestic award and 60% of attorney s fees will survive discharge. (Faillace v. Faillace, No ap-00119, slip op. (M.D.Pa. May 10, 2000).) In that Opinion, I indicated that Marie Faillace, now known as Marie DiFlavis, having chosen to reside at 1161 Jackson [m\users\cathy\opinions\faillace_equit_sub.wpd]

2 Road, Lehman Township, Pennsylvania, after the property had been awarded to Michael Faillace, the Debtor, owed Michael a credit for fair rental value against the obligation owing Marie. This Adversary by Michael against Marie for Equitable Subordination followed. Shortly thereafter, Michael filed another Complaint against Marie for a Declaratory Judgment, primarily asking for an adjudication of the fair rental value of Marie s continued occupation of the premises awarded to Michael until it was subsequently turned over to a Trustee for liquidation. Trial on these matters took place on November 5, 2002 and April 29, On April 10, 2003, Michael initiated a Complaint to determine secured status against Marie and others to adjudicate the relative priorities of competing liens. This was filed to 5-03-ap It was apparent that lien priority should be determined prior to the disposition of the complaint seeking equitable subordination. Accordingly, an adjudication of the lien status of competing interests occurred on March 2, The Luzerne County Court awarded Michael the residential real estate at 1161 Jackson Road, among other property, and directed that $150,000 be paid to the spouse, Marie. Thereafter, Marie continued to live in the residence arguing that she wouldn t move out until she was paid. Michael, on the other hand, countered that he couldn t sell the real estate and raise the money needed to satisfy Marie until she moved out. The inflexibility of both positions and unyielding nature of the parties has occupied the combined attention of the Luzerne County Court and this Bankruptcy Court since In short, two issues remain First, what is the fair rental value of Marie s [m\users\cathy\opinions\faillace_equit_sub.wpd] 2

3 occupation of the real estate awarded to Michael, and, second, should Marie s claim be equitably subordinated under 510(c) of the Bankruptcy Code? With regard to the fair rental value of the premises, the only compelling evidence tendered was the testimony of a real estate appraiser who opined that the fair rental value of 1161 Jackson Road was $700 per month if in average condition. (Transcript of 11/5/02 at 204.) The appraiser qualified his statement by adding that the property is not now in average condition and was barely habitable. The expert s valuation was on the lower end of the range of average rental values for properties of this nature. Unaware of the property s condition during Marie s occupation, I find the expert s testimony determinative in concluding that the fair rental value of the property occupied by Marie was $700 per month. I compute the credit, from the date of the award of the marital property to Michael (January 18, 1996) to the date of bankruptcy filing (April 13, 1999), to be $27,300. That sum is calculated by multiplying 39 months by the fair monthly rental value of $700. I further find that the additional credit from the date of bankruptcy filing, to the date the premises were surrendered to the Trustee for sale, (April 13, 1999 to October 15, 2002), is $29,400 based on multiplying $700 by 42 months occupation. 1 Michael also seeks a credit for damages to the premises during the period of Marie s occupation. I find that the record in that regard sets forth evidence of little more 1 Both parties agreed that the total time of possession was 81 months. Defendant s Brief at 14 (Doc. #33A) and Plaintiff s Brief at (Doc.#10A). [m\users\cathy\opinions\faillace_equit_sub.wpd] 3

4 than normal wear and tear and lack of upkeep. There is virtually no evidence of the home s actual value at the time of the domestic court order except for the order distributing the property, which does not necessarily equate to property value. Credit for damages is denied. Michael is also seeking a credit for the alimony received by Marie during a certain time period. Inasmuch as no support has been offered for this argument, this request is also denied. In addition to the rental adjustment, the Debtor is seeking to equitably subordinate the claim of Marie under 11 U.S.C. 510(c). Said Section provides Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court may-- (1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or (2) order that any lien securing such a subordinated claim be transferred to the estate. In Pepper v. Litton, the Supreme Court examined pre-code law and concluded that,... in the exercise of its equitable jurisdiction the bankruptcy court has the power to sift the circumstances surrounding any claim to see that injustice or unfairness is not done in administration of the bankrupt estate. 308 U.S. 295, 307, 60 S.Ct. 238, 246 (1939). As further explained by the Court in Raleigh v. Illinois Department of Revenue, within the limits of the Code, courts may reorder distributions from the bankruptcy estate, in whole or in part, for the sake of treating legitimate claimants to the estate equitably. But the [m\users\cathy\opinions\faillace_equit_sub.wpd] 4

5 scope of a bankruptcy court s equitable power must be understood in the light of the principle of bankruptcy law... that the validity of a claim is generally a function of underlying substantive law. Bankruptcy courts are not authorized in the name of equity to make wholesale substitution. 530 U.S. 15, 24-25, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). Michael argues that Marie has been inequitable in her conduct by first, not moving out of the home awarded to him by equitable distribution and, second, by damaging the property while she remained on the premises. The record does not support this position. It is true enough that the premises in question were awarded to Michael, but likewise, $150,000 was awarded to Marie. Neither award was timely delivered. The creditors of the estate seem hardly affected by this failure to act. Moreover, I cannot find that Marie and the parties children were abusive to the property. The property was barely maintained, but that could be expected from the circumstances. Furthermore, I find that the repairs offered as a counterclaim by Marie were of minor consequence considering the lack of maintenance of the property. In summary, I find that the bankruptcy has been little more than a continuation of the Parties state court litigation. There is nothing on this record that would suggest that Marie s claim would work an inequity to other creditors, and the impact on Michael is of no account under 510(c). The award of rental payments as a credit to the lien enjoyed by Marie is an adequate remedy for her occupation of the house for 81 months after the award. [m\users\cathy\opinions\faillace_equit_sub.wpd] 5

6 The Court, on its own motion, has moved to dismiss this case or convert it to Chapter seven. (See case no bk at Doc. #70). I find that granting the motion at this late stage of the case, with final orders forthcoming on pending litigation, would be counterproductive. My sua sponte motion is denied. An Order will follow. Date March 9, 2005 This electronic order is signed and filed on the same date. (CMS) [m\users\cathy\opinions\faillace_equit_sub.wpd] 6

7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA IN RE CHAPTER THIRTEEN MICHAEL J. FAILLACE, BANKRUPTCY NO bk DEBTOR MICHAEL J. FAILLACE, PLAINTIFF vs. {Nature of Proceedings Complaint MARIE P. FAILLACE and for Equitable Subordination of Claims} LAWRENCE D. MacDONALD, DEFENDANTS ADVERSARY NO ap ****************************************************************************** MICHAEL J. FAILLACE PLAINTIFF vs. Related Adversary MARIE P. FAILLACE {Nature of Proceedings Complaint for CHARLES DeHART, III, TRUSTEE Declaratory Judgment and other relief} DEFENDANTS ADVERSARY NO ap ORDER For those reasons indicated in the Opinion filed this date, IT IS HEREBY ORDERED that the lien of judgment in favor of Marie P. Faillace, now known as Marie DiFlavis, and against Michael Faillace is reduced by $56, IT IS FURTHER ORDERED that the request of Michael Faillace for equitable subordination is denied. is denied. IT IS FURTHER ORDERED that the Court s sua sponte motion to dismiss or convert Date March 9, 2005 This electronic order is signed and filed on the same date. (CMS) [m\users\cathy\opinions\faillace_equit_sub.wpd]