Eastern Savings Bank, FSB v. St. Germain et al

Filing 20

MEMORANDUM, RULINGS ON PENDING MOTIONS IN LIGHT OF AUTOMATIC BANKRUPTCY STAY, AND ORDER (see attached). Pursuant to 11 U.S.C. § 362(a), the case is STAYED against the St. Germain Defendants in light of the automatic stay which arose when they f iled their Chapter 13 petition in bankruptcy. See 19 Suggestion of Bankruptcy (filed 7/7/2014). In light of the stay, Plaintiff's 14 Motion for Default for Failure to Plead against the St. Germain Defendants and 15 Motion for Judgment by Strict Foreclosure and Order for Possession are both DENIED WITHOUT PREJUDICE to renewal if and when the bankruptcy stay is lifted. The Plaintiff shall file a brief consistent with this ORDER by August 22, 2014. T he Clerk is directed to serve a copy of this ORDER, along with a copy of the Clerk's entry of default [Doc. 12], upon non-bankrupt Defendants Windham Hospital and Connecticut Housing Finance Authority at the addresses at which the Summons and Co mplaint were served upon them in this action. See Doc. 9 and 10 . These Defendants are reminded that should this action proceed against them during the § 362(a) stay, they are currently in default so that their continuing failure to appear and defend may, if the action is not fully stayed, result in default judgments against them, Fed. R. Civ. P. 55(b). Signed by Judge Charles S. Haight, Jr. on July 22, 2014. (Dorais, L.)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF CONNECTICUT

EASTERN SAVINGS BANK, FSB,
Plaintiff,

Civil Action No.
3:13 - CV - 1816 (CSH)

v.
STEPHEN V. ST. GERMAIN, DARLENE L.
ST. GERMAIN, WINDHAM HOSPITAL , and
CONNECTICUT HOUSING FINANCE
AUTHORITY,

JULY 22, 2014

Defendants.

MEMORANDUM, RULINGS ON PENDING MOTIONS IN LIGHT OF AUTOMATIC
BANKRUPTCY STAY, AND ORDER
HAIGHT, Senior District Judge:
I.

INTRODUCTION
On December 6, 2013, Plaintiff Eastern Savings Bank, FSB ("Plaintiff" or "Eastern")

commenced this foreclosure action against defendants Steven V. St. Germain and Darlene L. St.
Germain (the "St. Germain Defendants"), seeking to foreclose on the mortgage for their residential
real property located at 422 Jerusalem Road, Windham, Connecticut (the "Windham property").
According to Eastern, on or about September 26, 2007, the St. Germain Defendants borrowed from
Eastern the original principal sum of $115,000.00 and executed and delivered to Eastern a
promissory note in that amount. Doc. 1, ¶ 6. Also, on September 26, 2007, in order to secure that
note, the St. Germain Defendants executed and delivered to Eastern a mortgage on the Windham
property, which was then recorded in the Windham Land Records on October 15, 2007. Id., ¶ 7.
Eastern alleges that the St. Germain Defendants have defaulted under the note and mortgage and
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"have failed and neglected to cure the default." Id., ¶ 9. Eastern has therefore "elected to accelerate
the entire unpaid balance due under the [n]ote to be immediately due and payable, together with
interest, pre-acceleration late charges, advancements for taxes and insurance, and all costs of
collection." Id., ¶ 10. The sum total of these amounts, calculated as of October 18, 2013, was
"$115.767.37." Id.
In this foreclosure action, Plaintiff also includes as named defendants Windham Hospital and
the Connecticut Housing Finance Authority, both of which allegedly possess "liens or
encumbrances" on the Windham property which are "subsequent" in right to the mortgage upon
which Eastern seeks to foreclose. Id., ¶ 13. Specifically, Windham Hospital allegedly "claims to
have an interest in the property pursuant to a judgment lien in the amount of $3,420.75 plus costs,
dated February 25, 2009," id., ¶ 12.A.; and Connecticut Housing Finance Authority, allegedly
"claims to have an interest in the [Windham] property pursuant to a mortgage in the original
principal amount of $23,016.00[,] dated July 18, 2013," id., ¶ 13.B.

Because neither of these

defendants has appeared or answered in this action, Eastern moved for and the Clerk entered a
default against each of them for "failure to plead or otherwise defend," Fed. R. Civ. P. 55(a) [Doc.
12]. To date, no default judgment has been sought by Eastern against these parties pursuant to Rule
55(b), Fed. R. Civ. P.
Meanwhile, the St. Germain Defendants remain "the owners of the equity of redemption" of
the Windham property and are "in possession" of it. Id., ¶ 14. Eastern estimates the value of the
property at $145,000.00 and claims that, "[i]f appropriate," Eastern is entitled to "a deficiency
judgment" in addition to foreclosure of the mortgage. Id., ¶ 18.

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II.

BANKRUPTCY FILING - Automatic Stay pursuant to 11 U.S.C. § 362(a)
On June 30, 2014, the St. Germain Defendants filed a voluntary petition for relief under

Chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the District of
Connecticut (Bankruptcy Petition No. 14-21288). In light of that filing, this action has been
automatically stayed against them pursuant to 11 U.S.C. § 362(a).1 See Doc. 19 ("Suggestion of
Bankruptcy").2 The filing of a bankruptcy petition operates as a stay of, inter alia, the following:
"the enforcement, against the debtor or against property of the estate, of a judgment obtained before
the commencement of the case under this title;" "any act to obtain possession of the property of the
estate;" "any act to create, perfect or enforce any lien against the property of the estate;" or "any act
to create, perfect, or enforce against property of the debtor any lien to the extent that such lien
secures a claim that arose before the commencement of the case." 11 U.S.C. § 362(a)(2)-(5).

III.

RULINGS ON PENDING MOTIONS & SCOPE OF AUTOMATIC STAY
On May 16, 2014, Eastern filed two motions which remain pending in this action: (1) a

motion for default against the St. Germain Defendants for failure to plead [Doc. 14] and (2) a motion

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As the Second Circuit has articulated, "the automatic stay provides the debtor with 'a
breathing spell from his creditors." In re Ionosphere Clubs, Inc., 922 F.2d 984 (2d Cir. 1990)
(quoting Teachers Ins. & Annuity Ass'n of America, 803 F.2d at 64 (2d Cir.1986) and citing In re
Petrusch, 667 F.2d 297, 299 (2d Cir.1981), cert. denied, 456 U.S. 974 (1982)). "In addition, the
automatic stay allows the bankruptcy court to centralize all disputes concerning property of the
debtor's estate in the bankruptcy court so that reorganization can proceed efficiently, unimpeded by
uncoordinated proceedings in other arenas."
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The Court clarifies that in the "Suggestion of Bankruptcy" [Doc. 19], Plaintiff mislabeled the St. Germain Defendants' bankruptcy petition as a Chapter 12 petition when, in fact, it was
a Chapter 13 petition. That fact is, however, of no significance to these proceedings.
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for judgment by strict foreclosure and order for possession of the Windham property [Doc. 15].3
The St. Germain Defendants were served with the summons and complaint on January 9, 2014 [Doc.
7 & 8], but as of the date of Eastern's motions for default and strict foreclosure, had not answered
or responded.
On June 6, 2014, in response to Eastern's motions for default and strict foreclosure, the St.
Germain Defendants filed an Answer to the Complaint [Doc. 17].4 They did not, however, file
opposing memoranda to Eastern's motions, as the Court had specified by Order on June 4, 2014. See
Doc. 16 ("Pursuant to Local Rule 7(a), the Defendants will have 21 days to file any opposing
memoranda, up to and including June 6, 2014."). Eastern replied to the Answer, contending that,
in light of the St. Germain Defendants' failure to file "opposing papers" to Eastern's motions, as
ordered by this Court, the motions should be granted. See Doc. 18 (Eastern's "Reply") at ¶¶ 4-5 ("the
pleading filed by the defendants was not an 'opposing memoranda' as ordered by the Court" and "the
answer filed by the defendants is not sufficient to prevent the entry of judgment of foreclosure").
Eleven days later, while the motions for default and strict foreclosure remained sub judice,

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"Strict foreclosure, rather than foreclosure by sale, is appropriate when the fair market
value of real property is less than the amount of the mortgage debt." 59ACJS Mortgages § 881
(Westlaw update June 2014). "The decision whether to order a strict foreclosure or a sale lies within
the discretion of the court." Nat'l City Mortg. Co. v. Stoecker, 92 Conn.App. 787, 794 (2006), cert.
denied, 277 Conn. 925 (2006). "In Connecticut, strict foreclosure is the rule, foreclosure by sale the
exception." Nat'l City Mortg. Co., 92 Conn. App. at 793. "Most significantly, the effect of strict
foreclosure is to vest title to the real property absolutely in the mortgagee and to do so without any
sale of the property." Id. "A judgment of strict foreclosure, when it becomes absolute and all rights
of redemption are cut off, constitutes an appropriation of the mortgaged property to satisfy the
mortgage debt." Id. (citation and internal quotation marks omitted).
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In their Answer, the St. Germain Defendants "admitted" that they had executed the note
for the principal amount of $115,000 and delivered it to Eastern. See Doc. 17 ("Answer"), ¶ 6.
They also admitted that Eastern had provided them with written notice that they were in default
under the note and mortgage but they had "failed and neglected to cure the default." Id., ¶ 9.
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the St. Germain Defendants filed their Chapter 13 petition in bankruptcy and the automatic stay arose
pursuant to 11 U.S.C. § 362(a). See Doc. 17 ("Suggestion of Bankruptcy"). Due to the stay with
respect to the St. Germain Defendants, Plaintiff's pending motion for entry of default [Doc. 14] is
hereby DENIED without prejudice to renewal if and when the bankruptcy stay is lifted. Moreover,
Plaintiff's "Motion for Judgment by Strict Foreclosure and Order for Possession" [Doc. 15] is also
DENIED without prejudice to the extent that it seeks to wrest both title and possession of the
Windham property from the St. Germain Defendants without any sale of the property being
conducted.5 The stay of this action regarding the St. Germain Defendants will continue until the
bankruptcy case concludes or the bankruptcy court lifts the automatic stay.
With respect to the defaulting non-bankrupt co-defendants, Windham Hospital and
Connecticut Housing Finance Authority, "a suit against a codefendant is not automatically stayed
by the debtor's bankruptcy filing." Queenie, Ltd. v. Nygard Int'l, 321 F.3d 282, 287 (2d Cir.2003)
(quoting 3 Collier on Bankruptcy § 362.03[3][d] (15th ed.2002)). See also Koolik v. Markowitz, 40
F.3d 567, 568 (2d Cir. 1994) (per curiam) ("This Court has recognized that the automatic stay is
applicable only to proceedings 'against,' 11 U.S.C. § 362(a)(1), the debtor."); Teachers Ins. &
Annuity Ass'n of America v. Butler, 803 F.2d 61, 65 (2d Cir.1986) ("It is well-established that stays
pursuant to § 362(a) are limited to debtors and do not encompass non-bankrupt co-defendants.")
(collecting cases); In re Rubenstein,105 B.R. 198, 201 (Bankr. D.Conn. 1989) ("In general, the
automatic stay does not apply to proceedings against nondebtors.").
However, the Court recognizes that there are limited and unusual circumstances in which
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Eastern may file a notice that it seeks to renew its motions for default and strict
foreclosure against the St. Germain Defendants upon termination of the bankruptcy proceedings
or lifting of the automatic stay.
5

an extension of the stay to a non-bankrupt co-defendant is proper – e.g., "when a claim against the
non-debtor will have an immediate adverse economic consequence for the debtor's estate." Queenie,
Ltd., 321 F.3d at 287. See also Teachers Ins. & Annuity Ass'n of America, 803 F.2d at 65
(automatic stay may extend to non-debtor if the extension "contributes to the debtor's efforts to
achieve rehabilitation" or the debtor and non-bankrupt co-defendant are so closely related that the
liability of the non-debtor may be imputed to the debtor"); In re Johns–Manville Sales Corp, 33
B.R. 254, 263–64 (S.D.N.Y.1983) (court "may extend the automatic stay under Section 362 of the
Bankruptcy Code to stay and enjoin proceedings or actions by or against non-debtors where such
actions would interfere with, deplete or adversely affect property of the [debtor's] estates"); In re
Metal Center, 31 B.R. 458, 462 (Bankr. D.Conn. 1983) ("[w]here . . . a debtor and a nondebtor are
so bound by statute or contract that the liability of the nondebtor is imputed to the debtor by
operation of law, then the Congressional intent to provide relief to debtors would be frustrated by
permitting indirectly what is expressly prohibited in the Code").
As Judge Krechevsky ably summarized in the Matter of Colonial Realty Company, 122 B.R.
1 (Bankr. D. Conn. 1990):
"[W]here a non-debtor's interest in property is intertwined . . . with that of a bankrupt
debtor [and] [i]f action taken against the non-bankrupt party would inevitably have
an adverse impact on property of the bankrupt[cy] estate, then such action should be
barred by the automatic stay." In re 48th Street Steakhouse, Inc., 835 F.2d 427, 431
(2nd Cir.1987)[,] cert. denied[,] 485 U.S. 1035 [(1988)] (Landlord's notice of
termination of prime lease violated automatic stay where if prime lease terminated,
debtor's subtenancy would be destroyed.). Code § 362(a)(3) stays "any action,
whether against the debtor or third-parties, to obtain possession or to exercise
control over property of the debtor." A.H. Robbins Co., Inc. v. Piccinin, 788 F.2d
994, 1001 (4th Cir.1986) (emphasis in original)[,] cert. denied[,] 479 U.S. 876
[(1986)].
122 B.R. at 5 (parallel citations omitted).
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As set forth supra, it is indisputable that the automatic stay bars further litigation of this
foreclosure action against the St. Germain Defendants at this time. The question, however, arises
as to whether the co-defendants' interests in the Windham property are sufficiently "intertwined"
with those of the bankrupt debtors (i.e., the St. Germain Defendants) such that action – in this case
potential default judgement – against the non-debtors would have an adverse impact on the
bankruptcy estate.
Eastern has included the judgment lienholder Windham Hospital and subsequent mortgagee
Connecticut Housing Finance Authority in this foreclosure action in the interest of resolving all
parties' claims with respect to title and possession of the Windham property in one proceeding. As
set forth supra, the Clerk has entered default against both of them pursuant to Rule 55(a), Fed. R.
Civ. P. See Doc. 12 (Order granting Motion for Default Entry, Doc. 11). Therefore, if the action is
allowed to proceed against the non-bankrupt defendants, Eastern may move for entry of default
judgment pursuant to Rule 55(b), Fed. R. Civ. P.
In general, one may note that neither of these two defendants, who are essentially junior
lienholders, is directly liable to Eastern. Rather, all remaining parties in this action claim interests
in the Windham property against the St. Germain Defendants. After all, both co-defendants possess
claimed interests in the Windham property, but neither has any direct relationship with Eastern or
appears to have acted directly to harm Eastern in any way. In sum, the interests of Eastern, Windham
Hospital, and Connecticut Housing Finance Authority are aligned, albeit competing, claims against
the St. Germain Defendants and, specifically, the Windham property. Whether named as "plaintiff"
or "defendant," "mortgagee" or lienholder," or for that matter "Montague" or "Capulet," all three
parties claim interests in the same real property in possession of the debtors, the St. Germain
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Defendants.6
With that in mind, it is important to remember that "[t]he operation of the [automatic] stay
[pursuant to § 362] does not necessarily depend on the debtor having either a legal or equitable
interest in the property as it applies to property merely in the debtor's possession." Matter of
Colonial Realty Co., 122 B.R. 1, 4 (Bankr. D. Conn. 1990) (emphasis added). Here, the Windham
property at issue is in the possession of the St. Germain Defendants and thus, pursuant to the
automatic stay, no foreclosure actions or liens may be enforced against it. See, e.g., In Re 48th St.
Steakhouse, Inc., 835 F.2d 427, 430 (2d Cir.1987) ("mere possessory interest in real property,
without any accompanying legal interest, is sufficient to trigger protection of the automatic stay"),
cert. denied, 485 U.S. 1035 (1988). It also follows that the automatic stay serves to bar actions of
junior lienholders as well as those of senior lienholders. See, e.g., In re Capital Mortg. & Loan,
Inc., 35 B.R. 967, 971 (Bankr. E.D.Cal. 1983) ("In general, in a foreclosure action, all junior lien[-]
holders of record should be included;" "[h]owever, it is well established that bankruptcy law
provides that the filing of a bankruptcy petition operates as a stay of any act to enforce a lien against
property in custody of the bankruptcy court.").
In addition to the legality of continuing to pursue the present action during the automatic stay,
one may query the feasibility of proceeding on claims "inextricably intertwined" with, or actually
part of, the foreclosure claim which is now stayed against the St. Germain Defendants. See, e.g.,
M.E.S., Inc. v. M.J. Favorite Elec., Inc., No. 08-CV-183 (JG)(JMA), 2010 WL 959604, at *4 (E.D.
Pa Mar. 15, 2010) (court exercised its "discretion to stay the remainder of the case" due to the

6

As Juliet astutely declared, courtesy of the Bard, "a rose [b]y any other name would
smell as sweet." William Shakespeare, Romeo and Juliet, Act II, Scene I.
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"inextricably intertwined" claims – thereby staying the litigation "in its entirety"– and reminded the
parties that any of them "wishing to proceed with this litigation may seek an order from the
Bankruptcy Court lifting the automatic stay" under 11 U.S.C. § 362(d)).

IV.

CONCLUSION AND ORDER
This case is hereby STAYED against the St. Germain Defendants pursuant to 11 U.S.C.

§ 362(a) unless or until the bankruptcy court concludes the proceedings on their Chapter 13 petition
or lifts the automatic stay. Eastern is reminded, however, that any "party in interest" may seek an
order from the bankruptcy court to lift the stay pursuant to the provisions of 11 U.S.C. § 362(d).
With respect to the defaulting non-debtor defendants in this action, the Court hereby
ORDERS that on or before August 22, 2014, plaintiff Eastern shall file a brief with this Court
stating its position with respect to whether the automatic stay should be extended to these
defendants under 11 U.S.C. § 362(a) or the case should proceed against them.7 If the Court
determines that the case must be stayed in its entirety, it will be placed on the suspense docket until
the St. Germain Defendants' bankruptcy claim is resolved by the bankruptcy court. Plaintiff may
also, if so advised, take the necessary steps to voluntarily withdraw the present action without
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If the defaulting non-bankrupt co-defendants Windham Hospital and Connecticut
Housing Finance Authority appear in the case prior to August 22, 2014 and contemporaneously file
motions to set aside their defaults pursuant to Rule 55(c), Fed. R. Civ. P., the Court will accept briefs
from them regarding the scope of the automatic stay. The scope of the stay will directly affect these
defaulting parties in that, absent extension of the stay to them, Eastern may seek default judgments
against them pursuant to Fed. R. Civ. P. 55(b). In appropriate circumstances, "courts throughout this
Circuit have ruled upon, or allowed to stand, pleadings and motions filed while the filing party was
in default." Success Village Apartments v. Amalgamated Local 376, 34 F.R.D. 36, 38 (D.Conn.
2006) (collecting cases). However, acceptance of said brief(s) from the defaulting parties by the
Court will in no way alter their defaulted status. To open the defaults, these parties must each file
a motion to set aside the default for "good cause," Fed. R. Civ. P. 55(c), and receive a favorable
ruling by the Court.
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prejudice to renewal should the bankruptcy stay be lifted. See Fed. R. Civ. P. 41(a)(1)(A).
The foregoing is SO ORDERED.
Dated: New Haven, Connecticut
July 22, 2014
/s/Charles S. Haight, Jr.
CHARLES S. HAIGHT, JR.
Senior United States District Judge

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