MA Salazar, Inc. v. Incorporated Village of Atlantic Beach
Filing
19
MEMORANDUM OF DECISION AND ORDER - It is hereby: ORDERED, that the Debtors appeal is granted in part, denied in part, and remanded to the Bankruptcy Court for further findings consistent with this Order, namely whether (1) that court lifted the autom atic stay or the stay never existed in the first place; (2) that courts inherent authority supported sanctioning the Village for proceeding with the Demolition without submitting a proposed order to that court regarding the stay; and (3) that courts inherent authority supported sanctioning the Village for violating the Fence Order; and it is further ORDERED, that the Clerk of the Court is directed to close this case. So Ordered by Judge Arthur D. Spatt on 9/17/2013. (Coleman, Laurie)
FILED
CLERK
9/17/2013 9:26 am
U.S. DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
LONG ISLAND OFFICE
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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MA SALAZAR, INC.
Appellant,
MEMORANDUM OF
DECISION AND ORDER
12-CV-3458 (ADS)
-againstINCORPORATED VILLAGE OF ATLANTIC
BEACH.
Appellee.
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APPEARANCES:
Lester & Associates, P.C.
Attorneys for the Appellant
600 Old Country Road
Suite 229
Garden City, NY 11530
By: Robert J. Lester, Esq., Of Counsel
Miranda Samburksy Slone Sklarin Verveniotis LLP
Attorneys for the Appellee
240 Mineola Boulevard
Mineola, NY 11501
By: Michael Anthony Miranda, Esq.
Maurizio Savoiardo, Esq.
Robert E. B. Hewitt, III, Esq., Of Counsel
Office of US Trustee
Attorneys for the United States Trustee
560 Federal Plaza
Central Islip, NY 11722
By: Stan Yuon Yang, Esq., Of Counsel
SPATT, District Judge.
Presently before the Court is an appeal by the Appellant-Debtor MA Salazar, Inc. (“the
Debtor”) of an order entered by the United States Bankruptcy Court for the Eastern District of
New York, dated June 14, 2012, denying the Debtor’s motion pursuant to 11 U.S.C. § 362(k) and
11 U.S.C. § 362(a) seeking sanctions against the Appellee-creditor Incorporated Village of
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Atlantic Beach (“the Village”). For the reasons set forth below, the appeal is granted in part and
denied in part.
I. BACKGROUND
The Debtor is the owner of a parcel of real property located at 2035 Park Street, Atlantic
Beach, New York (“the Property”). The Property was improved and contained a mixed use
commercial and residential building (“the Building”). On July 6, 2011, following a trial
conducted in the Village of Atlantic Beach Justice Court, the Debtor was found guilty of
maintaining unsafe premises in violation of the New York State Property Maintenance Code,
Chapter 1, Section 107.1.1.
On September 26, 2011, the Debtor filed an order to show cause in Supreme Court,
Nassau County seeking a temporary restraining order (“TRO”) prohibiting the demolition of the
Building. Justice Roy S. Mahon denied the request for a TRO, reasoning that the Building had
“fallen into a state of disrepair” and that the Village properly stopped the Debtor’s attempts to
repair the structure because “it was discovered that the extent of the disrepair rendered the
project unsafe.” The Debtor neither appealed the order denying the request for a TRO nor
sought an interim stay from the Appellate Division.
On October 14, 2011, the Debtor filed a voluntary petition for Chapter 11 Bankruptcy.
Section 362(a)(1) of the Bankruptcy Code provides that the filing of a bankruptcy petition
creates an automatic stay against “the commencement or continuation . . . of a judicial,
administrative, or other action or proceeding against the debtor that was or could have been
commenced before the commencement of the case under this title. . . .” 11 U.S.C. §362(a)(1).
Indeed, the Debtor concedes that the “filing of its Petition was necessitated by the pending
demolition of the Building by the Village.” (Debtor Brf, at 2.)
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On October 21, 2011, the Village’s mayor, Stephen R. Mahler, sent a letter to the
Bankruptcy Court stating that the Village was “mindful of [the automatic] stay and will . . . delay
demolition” of the Debtor’s Building, but sought leave to disconnect the utilities in furtherance
of its efforts. Thereafter, the Bankruptcy Court issued an order authorizing the Village to
discontinue utility service to the Building and allowing the Debtor to either consent to the
demolition of the Building or erect a fence surrounding the Building (the “Fence Order”). The
Fence Order stated that “after 5:00 p.m. on October 21, 2011, it will be unlawful for any person
to enter, remain or reside on the [Debtor’s] Property.” Furthermore, the Fence Order obligated
the Debtor, in the event that it became aware of any person entering, remaining, or residing on
the Property after 5:00 p.m. on October 21, 2011, to “take all steps necessary to remove them
from the property.” The Fence Order has not been appealed and the statutory time to do so has
expired. On October 25, 2011, the debtor filed an affirmation attesting to the fact that a fence
had been erected around the Building.
On November 10, 2011, the Village moved for “the entry of an Order vacating the Stay in
effect herein preventing the Inc. Village of Atlantic Beach from demolishing a building owned
by petitioner located at 2035 Park Street, Atlantic Beach, New York.” The Debtor opposed the
motion.
On November 28, 2011, the Bankruptcy Court held a hearing; granted the Village’s
motion; and instructed the Village to “submit an order” to that effect. At the hearing, the
Bankruptcy Court opined that the case was “a poster child” for the “police and regulatory power”
exception to the automatic stay provision of the Bankruptcy Code. The Bankruptcy Court
reasoned that the “stay [was] inapplicable for the reasons set forth in [the Village’s] papers.”
Notably, at the hearing, neither party made reference to the Fence Order.
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Less than 24 hours later, with the Fence Order still in effect and without a formal order
regarding the automatic stay, the Village entered onto the property and began the demolition of
the Building. On November 30, 2011, the Village completed demolition of the Building. The
Village never submitted a proposed order regarding the automatic stay to the Bankruptcy Court.
Rather, on December 19, 2011, the Debtor submitted a proposed order to the Bankruptcy
Court requesting that the automatic stay be vacated. On December 27, 2011, the Bankruptcy
Court entered an order that “the automatic stay is vacated to the extent requested in the Motion
so as to allow the Village to demolish the structure located on the Debtor’s Property.” This order
has not been appealed and the time to do so has expired.
On January 16, 2012, the Debtor brought a motion pursuant to 11 §U.S.C. §362(a) and 11
U.S.C. §362(k) seeking sanctions against the Village for violating the automatic stay and to hold
the Village in contempt for violating the Fence Order. The Village opposed the motion.
On April 16, 2012, the Bankruptcy Court stated on the record “the [Village’s] action was
within the police power and, therefore, the automatic stay did not apply.” The Bankruptcy Court
also expressed reservations about sanctioning the Village for violating the automatic stay as the
Bankruptcy Court “didn’t think the circuit allows [the Bankruptcy Court] to find that [the Village
is] in violation of the stay.” The Bankruptcy Court observed that 11 U.S.C. §362(k) authorizes
recovery of damages for individuals, not corporations such as the Debtor.
With regard to the alleged violation of the Fence Order, the Bankruptcy Court stated that
[t]he problem is that the fencing order, as pointed out by – by the city, whether
intentionally or not, doesn’t allow me to hold somebody in contempt because it
didn’t require anybody to do or not do anything. It was either inartfully drafted or
whatever it was.” The Bankruptcy Court further stated that “whatever was in my
mind, if it’s not on paper in a contempt action, I can’t hold someone responsible
for either my ability to clearly define what should be in an order or someone
else’s failure to have the order specific. Contempt is very specific. That order
has to unequivocally put folks on notice that if you do A, B, and C, I’m holding
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you in contempt. It’s not where they have to extrapolate and say, I think the judge
meant this.
On June 13, 2012, the Bankruptcy Court seemed to suggest that the automatic stay had
been lifted, rather than that the stay never applied in the first instance. Specifically, in relation to
the Fence Order, the Bankruptcy Court asked counsel for the Debtor whether “the fence being
put up to protect [the Building] then prevent[ed the Village] from exercising its rights where the
Court had already . . . agreed that the stay should be lifted?” (Emphasis added). At the same
hearing, the Bankruptcy Court also found that the Fence Order “was [designed] to preserve the
property in the current format and to ensure that nobody could be hurt. It didn’t clearly say
enough to sanction the Village for it, that even though the stay was lifted they were prevented
from exercising their rights.” (Emphasis added).
As an additional reason to deny the Debtor’s motion for sanctions against the Village, the
Bankruptcy Court explained that “there was no order that one could hold [the Village] in
contempt of relative to the [section] 362 because it was signed after the building was gone.”
Eventually, on June 14, 2012, the Bankruptcy Court entered a written order denying the
Debtor’s motion for sanctions. The Order simply stated that “[the Debtor]’s motion seeking
sanctions against the Village is denied.” The Bankruptcy Court also noted on the record that
imposing sanctions with respect to the Fence Order would not be equitable because that order
was ambiguous as to the issue of demolition. The Debtor subsequently appealed the June 14,
2012 order to this Court.
Subsequent to the above events, but relevant to the appeal, on July 18, 2012, the
Bankruptcy Court held a hearing and read into the record a decision dismissing the Debtor’s
bankruptcy case. At that hearing, the Court noted that “on June 14th, 2012, determining the
Village did not violate the automatic stay – excuse me – did violate the automatic stay, but
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declined to award sanctions.” On July 20, 2012, the Bankruptcy Court dismissed the Debtor’s
bankruptcy petition.
II. DISCUSSSION
A. Standard of Review
A district court hearing an appeal from a bankruptcy court reviews that court's findings of
fact under the “clearly erroneous” standard, see Fed. R. Bankr. P. 8013, while its conclusions of
law are reviewed under the de novo standard. In re Vouzianas, 259 F. 3d 103, 107 (2d Cir.
2001); In re Arochem Corp., 176 F.3d 610, 620 (2d Cir. 1999) (holding that “we review the
bankruptcy court decision independently, accepting its factual findings unless clearly erroneous
but reviewing its conclusions of law de novo”) (citation omitted); In re Bennett Funding Group,
Inc., 146 F.3d 136, 138 (2d Cir. 1998) (same) (citations omitted); see also In re Porges, 44 F.3d
159, 162 (2d Cir. 1995) (same) (citations omitted).
“On appeal, a district court ‘may affirm, modify, or reverse a bankruptcy judge's
judgment, order, or decree or remand with instructions for further proceedings.’” In re McNally,
No. 02-CV-85, 2003 U.S. Dist. LEXIS 25856, at *3 (S.D.N.Y. June 2, 2003) (citing Fed. R.
Bankr. P. 8013).
B. The Parties’ Arguments
The Debtor maintains that its commencement of the bankruptcy action triggered an
automatic stay. The Debtor asserts that it could not appeal the Bankruptcy Court order until
entry of a lift stay order. The Debtor argues that the Village’s actions in demolishing the
Building prior to entry of the lift stay order foreclosed the Debtor’s ability to seek further judicial
intervention to stop the demolition of the Building. The Debtor further asserts that while a
corporate debtor may not obtain damages under 11 U.S.C. §362(k), a Bankruptcy Court retains
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the power to find, and sanction for, violations of the automatic stay pursuant to 11 U.S.C.
§105(a). The Debtor also contends that the Bankruptcy Court erred in finding that the Village
was not in contempt of the Fence Order.
In opposition, the Village contends that it did not violate the automatic stay because no
such stay was in effect in the first instance, as the Village was acting pursuant to its police
powers. The Village further contends that the Debtor failed to preserve its request seeking
sanctions under 11 U.S.C. §105 for violating the automatic stay. The Village also asserts that, in
any event, it cannot be sanctioned for violating the automatic stay as it did not act with
maliciousness or bad faith. Finally, the Village asserts that it did not violate the Fence Order.
C. As to Whether the Village Should have been Sanctioned in Proceeding with the Demolition
without submitting an order to the Bankruptcy Court
11 U.S.C. §105(a) gives the court authority to “sua sponte, tak[e] any action or mak[e]
any determination necessary or appropriate to enforce or implement court orders or rules, or to
prevent an abuse of process.” The applicability and use of §105(a) is typically left to the
bankruptcy court. See Adams v. Zarnel (In re Zarnel), 619 F.3d 156, 172 (2d Cir. 2010) (citing
In re Morgan, 182 F.3d 775, 780 (11th Cir. 1999)).
Here, the Debtor fails to show that a theory based on the imposition of sanctions pursuant
to 11 U.S.C. §105 with respect to the automatic stay was properly before the Bankruptcy Court.
See Lewis v. Morris, 06-CV-15510, 2007 WL 2875255 (E.D. Mich. Sept. 28, 2007)(deeming
unpreserved trustee’s request for sanctions under 11 U.S.C. §105(a)).
“Where a bankruptcy appellant has failed to raise and preserve an objection during
bankruptcy proceedings, [the appellant] cannot raise it on appeal.” In re Kassover, 268 B.R. 698,
702 (S.D.N.Y. 2001), aff'd sub nom., Kassover v. Gibson, 29 Fed. Appx. 747 (2d Cir. 2002)
(citing In re Blackwood Associates, L.P., 153 F.3d 61, 67 (2d Cir. 1998)). In such cases, the
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Court will not consider an unpreserved issue unless failure to do so will result in manifest
injustice. See In re Lionel Corp., 29 F.3d 88, 92 (2d Cir. 1994); In re Macrose Indus. Corp., 186
B.R. 789, 802 (E.D.N.Y. 1995). In this case, no such manifest injustice is apparent and therefore
the Court declines to consider whether sanctions were warranted under 11 U.S.C. §105(a) with
respect to the automatic stay. In re Regal Cinemas, Inc., 213 Fed. Appx. 369, 376 (6th Cir. Nov.
29, 2006) (unpublished) (finding that where party failed to raise an issue before the bankruptcy
court, that argument is properly disregarded).
Alternatively, the Debtor contends that the Bankruptcy Court retained its inherent
authority to sanction the Village for violating the automatic stay which, in the Debtor’s view,
was in place at the time of the demolition. “Federal courts, including bankruptcy courts, possess
inherent authority to impose sanctions against attorneys and their clients. [The] court's inherent
power to sanction derives from the fact that courts are vested, by their very creation, with power
to impose submission to their lawful mandates.” In re Plumeri, 434 B.R. 315, 327–28 (S.D.N.Y.
2010) (quotations and citations omitted). “Inherent-power sanctions ordinarily require a clear
showing of bad faith on the part of the party to be sanctioned. Imposition of sanctions under a
court's inherent powers requires a specific finding that an attorney acted in bad faith, and
inherent-power sanctions are appropriate only if there is clear evidence that the conduct at issue
is (1) entirely without color and (2) motivated by improper purposes.” Id. at 328 (citations and
quotations omitted). A court may infer bad faith where the action was “so completely without
merit as to require the conclusion that they must have been undertaken for some improper
purpose such as delay.” See Salovaara v. Eckert, 222 F.3d 19, 35 (2d Cir. 2000) (quotations
omitted) (discussing sanctions under 28 U.S.C. §1927).
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Here, the Court need not discern whether the Bankruptcy Court lifted the automatic stay
or rather held that the automatic stay never applied in the first instance, and the separate question
of whether any such ruling was proper. Instead, the Court only considers whether the Village
acted in bad faith in proceeding with the demolition notwithstanding its failure to submit an
order regarding the automatic stay as required by the Bankruptcy Court. It appears the
Bankruptcy Court did not consider the issue of bad faith, but rather declined to award sanctions
with respect to the automatic stay on the ground that there was no formal prior order of the court
for which the Village could be held in contempt. However, where applicable, “[t]he automatic
stay provisions of 11 U.S.C. §362 are ‘specific and definite’ orders of the court.” In re Hammett,
28 B.R. 1012, 1019 (E.D. Pa. 1983). In other words, the absence of a formal order regarding the
automatic stay did not preclude the Bankruptcy Court from sanctioning the Village for
proceeding with the demolition without submitting a proposed order regarding the automatic
stay. For these reasons, the Bankruptcy Court is directed to clarify whether it lifted the
automatic stay or the stay never existed in the first place. Relatedly, the Bankruptcy Court is
directed to consider whether, pursuant to its inherent authority, it should have sanctioned the
Village for proceeding with the Demolition in that fashion, and more specifically, whether the
Village acted in bad faith.
D. As to Whether Debtor Should Have Been Held in Civil Contempt of the Fence Order
It is generally held that a party is in contempt of court if (1) there is a “specific and
definite” order of the court which that party has violated and (2) the party had actual knowledge
of that order. See, e.g., Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47 (2nd
Cir. 1976), cert. denied, 429 U.S. 1093, 97 S. Ct. 1107, 51 L. Ed. 2d 540 (1977); United States
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v. Christie Industries, Inc., 465 F.2d 1002 (3d Cir. 1972); In re Mealey, 16 B.R. 800 (Bkrtcy.
E.D. Pa. 1982); In re Norton, 15 B.R. 623 (Bkrtcy. E.D. Pa.1981).
As noted above, the Bankruptcy Court determined that the Fence Order was not
sufficiently specific and definite and thus the Village was not in civil contempt of that order in
proceeding with the demolition without a formal order revoking or otherwise limiting the order.
It appears that the Bankruptcy Court rendered this determination under both 11 U.S.C. §105(a)
and its inherent authority.
The Fence Order stated that “after 5:00 p.m. on October 21, 2011, it will be unlawful
for any person to enter, remain or reside on the [Debtor’s] property.” The Village contends that
the Fence Order did not expressly prohibit demolition. Rather, the Village asserts that it was
under the impression that the Fence Order was designed solely to make the property as safe as
possible until the hearing on the automatic stay. However, in the Court’s view, the Fence
Order was sufficiently specific and definite in its terms. Furthermore, it is undisputed that the
Village received notice of the entry of the Fence Order. Finally, because the demolition
necessarily required entry of persons onto the Debtor’s property, the Court finds that the
Village violated the Fence Order. The Bankruptcy Court’s finding to the contrary is reversed.
Whether the Bankruptcy Court possessed the authority to issue the Fence Order – and thereby
effectively halt demolition efforts – presents a separate question the parties fail to adequately
address.
Having found that the Village violated the Fence Order, the Court turns to the question
of whether sanctions should be imposed. The Second Circuit has stated that “[t]he Bankruptcy
Court's discretion to award sanctions may be exercised only on the basis of the specific
authority invoked by that court. Because an award might be based on ‘any of a number of rules
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or statutory provisions,’ each ‘governed by differing standards,’ we have found it ‘imperative
that the court explain its sanctions order with care, specificity, and attention to the sources of its
power.’” Solow v. Kalikow (In re Kalikow), 602 F.3d 82, 96 (2d Cir. 2010) (quoting Sakon v.
Andreo, 119 F.3d 109, 113 (2d Cir. 1997)).
Even assuming the issue of sanctions under section 105(a) for violating the Fence Order
was properly before the Bankruptcy Court, that provision’s “equitable scope is plainly limited
by the provisions of the [Bankruptcy] Code.” In re Smart World Technologies, LLC, 423 F.3d
166, 183 (2d Cir. 2005); New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. (In
re Dairy Mart Convenience Stores, Inc.), 351 F.3d 86, 91-92 (2d Cir. 2003) (finding §105(a)
inapplicable where no provision of the Bankruptcy Code could be invoked to support the
appellant's claim for relief). Therefore, absent a violation of the specific provision of the
Bankruptcy Code, §105(a) does not provide an independent basis for relief for the Debtor.
However, as previously stated, the Bankruptcy Court retains the inherent authority to
enforce its own orders. Therefore, the Bankruptcy Court should determine whether, pursuant to
its inherent authority, the Village acted in bad faith in violating the Fence Order.
III. CONCLUSION
For the foregoing reasons, it is hereby:
ORDERED, that the Debtor’s appeal is granted in part, denied in part, and remanded
to the Bankruptcy Court for further findings consistent with this Order, namely
whether (1) that court lifted the automatic stay or the stay never existed in the first
place; (2) that court’s inherent authority supported sanctioning the Village for
proceeding with the Demolition without submitting a proposed order to that court
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regarding the stay; and (3) that court’s inherent authority supported sanctioning the
Village for violating the Fence Order; and it is further
ORDERED, that the Clerk of the Court is directed to close this case.
SO ORDERED.
Dated:
Central Islip, New York
September 17, 2013
Arthur D. Spatt
ARTHUR D. SPATT
United States District Judge
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