Holzer, et al v. Barnard

Filing 31

ORDER denying 13 Motion for Reconsideration ; finding as moot 21 Motion to Dismiss.For the reasons set forth herein, Appellants' appeal of the Bankruptcy Court's decision denying Global's Claims Allowance Motion and granting the Trustee's Claims Objection Motion is denied. The Court affirms the rulings of the Bankruptcy Court in all respects. Appellee's motion to dismiss Appellants' appeal is denied as moot. The Clerk of the Court shall enter judgment accordingly and close the case.. Ordered by Judge Joseph F. Bianco on 7/27/2016. (Dolecki, Lauren)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
_____________________
No 15-CV-6277 (JFB)
_____________________

LAURENCE HOLZER AND GLOBAL APPRAISAL SOLUTIONS, LLC,
Appellants,
VERSUS

R. KENNETH BARNARD, CHAPTER 7 TRUSTEE OF IDEAL MORTGAGE BANKERS, LTD,
A/K/A LEND AMERICA, A/K/A CONSUMER FIRST LENDING KEY,
Appellee.
___________________
MEMORANDUM AND ORDER
July 27, 2016
___________________

JOSEPH F. BIANCO, District Judge:

I. BACKGROUND

Laurence Holzer (“Holzer”) and Global
Appraisal Solutions (“Global” and with
Holzer, collectively, “Appellants”) appeal
from Bankruptcy Judge Louis A. Scarcella’s
October 14, 2015 Memorandum Decision,
which denied Global’s Claims Allowance
Motion and granted the Trustee R. Kenneth
Barnard (“Trustee” or “Appellee”)’s Claims
Objection Motion. The Trustee has also filed
a motion to dismiss Appellants’ appeal. For
the reasons set forth below, the Court finds
that the Bankruptcy Court did not err in
denying Global’s Claims Allowance Motion
and granting the Trustee’s Claims Objection
Motion, and affirms the rulings of the
Bankruptcy Court in all respects.

A. Facts
The following facts, which are not in
dispute, are taken from the record of the
Bankruptcy Court in the underlying
proceeding.
1. Debtor’s Bankruptcy
Ideal Mortgage Bankers Ltd., a/k/a Lend
America, a/k/a Consumer First Lending Key
(“Debtor”) was a mortgage lender in Suffolk
County, New York that originated loans and
participated in mortgage orientation
programs sponsored by the United States
Department of Housing and Urban
Development (“HUD”). The Debtor was

1

2. Debtor’s
Global

approved by HUD to do business in 48 states
and the District of Columbia. By the end of
2009, the Debtor lacked sufficient funds to
continue its business, and on or about
December 1, 2009, the Debtor lost its ability
to originate loans backed by HUD. On
December 4, 2009, the New York State
Banking Department issued a cease and
desist order that required the Debtor to cease
engaging in activities as a mortgage banker.
Various officers of the Debtor, including
Michael Ashley (“Ashley”), chief business
strategist, and Helene DeCillis (“DeCillis”),
chief operating officer, were criminally
investigated, and allegations surfaced that the
Debtor misappropriated funds available
under its warehouse line of credit.

Relationship

with

As part of the Debtor’s loan origination
process, either the Debtor or the potential
borrower would select one of five appraisal
management companies on the Debtor’s
approved vendor list to conduct an appraisal
of the property for which the Debtor served
as the originating lender. Global was one of
the appraisal management companies on the
Debtor’s approved vendor list. Global is
wholly owned by Holzer, and did not directly
appraise properties, but instead, served as a
central source from which appraisals could
be ordered nationally and managed the
appraisal process. The Debtor and Global did
not have a written contract specifying the
terms of Global’s appraisal services; rather,
Global would charge the Debtor for the cost
of the appraisal upon the completion or
cancelation of each appraisal order. The cost
included both the appraiser’s fee and
Global’s management fee. If the Debtor
canceled an appraisal order, Global would
still charge the Debtor for its management
fee.

An involuntary chapter 7 petition was
filed against the Debtor by EAM Land
Services, PSS Settlement Services, LLC,
Evans National Leasing Inc., and Michael
and Kimberly McLean (“Petitioning
Creditors”) on November 30, 2010. On
December 2, 2010, Petitioning Creditors filed
a motion seeking the appointment of an
interim trustee, which Bankruptcy Judge
Dorothy T. Eisenberg granted on December
13, 2010.1 R. Kenneth Barnard was appointed
as interim trustee on December 15, 2010, and
subsequently became the permanent trustee
pursuant to 11 U.S.C. § 702(d). The order of
relief was entered on December 29, 2010, and
shortly thereafter, the Trustee sought and
obtained several orders pursuant to
Bankruptcy Rule 2004 authorizing him to
issue third party subpoenas to various
financial institutions, and some officers,
employees, and legal counsel of the Debtor.

On or about November 19, 2009, Global
filed an action against the Debtor in the
United States District Court for the Eastern
District of New York (the “Global Action”),
seeking to recover amounts that Global
claimed the Debtor owed it for unpaid
appraisals. The Debtor defaulted in the
Global Action, and as a result, on April 6,
2010, Global obtained a default judgment
against the Debtor in the amount of $763,157,
plus interest. The amount of the default
judgment was based on a February 19, 2010
affidavit by Holzer in which he claimed that
Debtor owed $45,417 for 158 completed but
unpaid appraisal reports ordered by the

1

The bankruptcy case was later assigned to
Bankruptcy Judge Scarcella due to the retirement of
Bankruptcy Judge Eisenberg.

2

Debtor, and $717,740 for 1,594 appraisals
ordered by the Debtor that were later
canceled. Holzer attached two lists to his
affidavit that detailed the appraisals
completed and cancelled. The default
judgment was docketed on May 17, 2010
with the Clerk of Suffolk County, New York.
On May 17, 2010, Global obtained an
execution judgment from the Suffolk County
Clerk that directed the Sheriff of Suffolk
County to satisfy the default judgment from
any of the Debtor’s real or personal property
within Suffolk County. The writ of execution
was returned unsatisfied.

On November 11, 2011, Global filed
Claim No. 4-2 as an amendment to Claim No.
4-1. Claim No. 4-2 asserted the same secured
claim of $765,296.62, based on the default
judgment and prepetition interest. With
Claim No. 4-2, Global attached (1) a May 13,
2010 amended retainer agreement between
Holzer and Fellheimer & Eichen, LLP
(“Fellheimer”), the law firm that represented
Global, and (2) a note explaining that, under
the amended retainer agreement, Global
agreed to pay Fellheimer 40% of any
recovery received by Global from its dispute
with the Debtor, minus the $25,000 retainer
Global paid the firm. Fellheimer requested
that all of Global’s proceeds under Claim 4-2
be disbursed jointly to Global and Fellheimer
because Fellheimer previously applied the
entire retainer to fees owed by Global.

On November 29, 2010, Global filed an
action in the United States District Court for
the Eastern District of New York (the
“Global Fraudulent Conveyance Action”)
seeking to recover alleged fraudulent
transfers made by the Debtor to Ashley,
Ashley’s relatives, and Ashley’s affiliated
entities. The involuntary bankruptcy petition
was filed the next day, and the Global
Fraudulent Conveyance Action was
automatically stayed pursuant to 11 U.S.C. §
362(a).

On May 2, 2012, this Court dismissed
the Global Fraudulent Conveyance Action,
finding that only the Trustee, not Global, had
standing post-petition to file a fraudulent
conveyance action to recover the Debtor’s
property from third parties on behalf of the
Debtor’s bankruptcy estate. Global then
terminated Fellheimer, and the two parties
entered into a mutual release on May 24,
2012, by which Fellheimer agreed to send
Global the executed assignment of Claim No.
4-2 and $5,000.2

3. Claims
On February 7, 2011, Global filed Claim
No. 4-1, asserting a secured claim of
$765,296.62 based on the default judgment
plus $2,139.62 of interest. With Claim No. 41, Global attached a copy of the default
judgment, an itemized statement of interest,
an abstract of the default judgment, and the
execution judgment.

On October 12, 2012, Global filed Claim
No. 27, which (1) asserted a secured claim of
$763,157 plus interest as per 28 U.S.C. §
1961 based on the default judgment, and (2)
asserted that, under section 507(a)(7) of the
Bankruptcy Code, the debt owed to Global

2

Global thereafter retained the Law Office of Morse
Geller, which filed a notice of appearance on July 11,
2012. On August 22, 2012, Global filed a notice to
substitute Marjory Cajoux as Global’s counsel. Cajoux
filed Claim No. 27, and at some point thereafter, was
terminated. Global then retained Douglas M.

Clemmons, who never filed a notice of appearance or
any other papers with the Bankruptcy Court, and who
was not admitted to practice in the Eastern District of
New York. At this point, Holzer proceeded to file
papers in the bankruptcy case pro se on behalf of both
himself and Global as its managing member.

3

was entitled to a priority in payment. Global
did not attach any supporting documentation.

expunge Claims No. 4-1 and No. 4-2 because
they were superseded by Claim No. 27, and
(2) to reclassify Claim No. 27 from a secured
claim to a general unsecured claim. The
Trustee also argued that Global did not have
standing to bring the Claims Allowance
Motion pro se, and thus, was required to
retain legal counsel to seek legal relief.

4. Claims Allowance Motion and
Claims Objection Motion
On April 22, 2014, Holzer, proceeding
pro se on behalf of himself and Global, filed
a Claims Allowance Motion seeking (1) to
lift the automatic stay and have Claim No. 41 paid immediately as either a secured claim
or an administrative expense claim, (2) to
have $25,000 of legal expenses Global
incurred to Fellheimer be reimbursed as an
administrative expense under 11 U.S.C. §
503(b), and (3) to have the Trustee and his
professionals removed for alleged conflicts
of interest.3

On June 10, 2014, Global filed a “Notice
of Transfer of Claim Other Than For
Security,” by which Global purported to
transfer Claim No. 4-2 to Holzer. On June 19,
2014, Global filed its opposition to the
Trustee’s Claims Objection Motion.
Bankruptcy Judge Scarcella held an
extended initial hearing on the Claims
Motions on July 22, 2014, and an additional
day of the evidentiary hearing on August 8,
2014.

On June 2, 2014, the Trustee filed an
objection to the Claims Allowance Motion,
asserting that (1) Claim No. 27 is a
prepetition money judgment and at best, a
disputed general unsecured claim because the
default judgment was not secured by a
consensual or judgment lien recorded against
the Debtor’s assets, and (2) there is nothing
in “Federal Mortgage Law” that indicates
that Claim No. 27 is secured or entitled to
administrative expense priority status
pursuant to 11 U.S.C. §§ 503 and 507. The
Trustee also argued that the default judgment
was recorded only in Suffolk County, where
the Debtor does not own or maintain real or
personal property, and that none of the cash
proceeds recovered during the administration
of the Debtor’s estate were derived from the
liquidation or disposition of assets that served
as collateral for the default judgment.

On October 14, 2015, Bankruptcy Judge
Scarcella issued a Memorandum Decision,
denying Global’s Claims Allowance Motion,
and granting the Trustee’s Claims Objection
Motion to the extent that Claim No. 4-1 and
Claim No. 4-2 were each to be disallowed
and expunged from the Bankruptcy Court’s
Claims Register, and Claim No. 27 was to be
reclassified from a secured claim to a general
unsecured claim. Bankruptcy Judge Scarcella
also denied Global’s request for relief from
section 362(a)’s automatic stay and the
request that the Trustee and his professionals
be removed.
B. Procedural History
On November 2, 2015, Appellants filed a
notice of appeal from the Bankruptcy Court’s
October 14, 2015 Memorandum. Appellants

On June 6, 2014, the Trustee filed a
Claims Objection Motion seeking (1) to

withdrawn and are subject to the Trustee’s Claim
Objection Motion.” In re Ideal Mortg. Bankers, Ltd.,
539 B.R. 409, 419 (Bankr. E.D.N.Y. 2015).

3

Although the Claims Allowance Motion mentioned
only Claim No. 4-1, the Bankruptcy Court addressed
Claim No. 4-2 and Claim No. 27 as well because “they
were filed on behalf of Global, have not been

4

filed their brief on February 19, 2016.
Appellee filed his brief on March 8, 2016.
Appellee also filed a motion to dismiss the
appeal on April 18, 2016. Appellants filed
“objections” to the motion to dismiss on May
16, 2016, and Appellee filed his reply on May
20, 2016.4 The Court has fully considered all
of the submissions of the parties.

argue that Claim No. 27 should be
“reclassif[ied] as an executory contract and
an administrative expense that the Trustee is
not able to avoid.” (Appellants’ Mem. at 1.)
For the reasons that follow, the Court, under
de novo review, affirms the Bankruptcy
Court’s October 14, 2015 Memorandum
decision denying Global’s Claims Allowance
Motion and granting the Trustee’s Claims
Objection Motion.

II. STANDARD OF REVIEW
This Court has jurisdiction to hear
appeals from bankruptcy courts under 28
U.S.C. § 158(a), which provides that “[t]he
district courts of the United States shall have
jurisdiction to hear appeals . . . from final
judgments, orders, and decrees; . . . [and]
with leave of the court, from other
interlocutory orders and decrees . . . of
bankruptcy judges.” 28 U.S.C. § 158(a)(1),
(3). Part VIII of the Federal Rules of
Bankruptcy Procedure outlines the procedure
governing such appeals. Fed. R. Bankr. P.
8001.

A. Standing
The Bankruptcy Court concluded that (1)
Global, as a limited liability company, could
not appear in the case other than through an
attorney, and (2) even if Global properly
assigned Claim No. 4-2 to Holzer (which it
did not), such assignment would not give
Holzer the right to appear on behalf of
Global. For the reasons set forth below, the
Court agrees and affirms the Bankruptcy
Court’s conclusions that Holzer may not
appear on behalf of Global, nor may Global
assign its claims to Holzer in order to
circumvent this standing issue.

In general, the Court reviews the
Bankruptcy Court’s legal conclusions de
novo, mixed questions of fact and law de
novo, and factual findings for clear error. See
R2 Invs., LDC v. Charter Commc’ns. Inc. (In
re Charter Commc’ns, Inc.), 691 F.3d 476,
482-83 (2d Cir. 2012); Denton v. Hyman (In
re Hyman), 502 F.3d 61, 65 (2d Cir. 2007);
Babitt v. Vebeliunas (In re Vebeliunas), 332
F.3d 85, 90 (2d Cir. 2003).

It is well-settled that a pro se litigant may
only represent his or her own interests in
federal court, and not the interests of another
individual, corporation, or any other entity.
See, e.g., Lattanzio v. COMTA, 481 F.3d 137,
139 (2d Cir. 2007) (“We have interpreted 28
U.S.C. § 1654, which governs appearances in
federal court, to allow two types of
representation: that by an attorney admitted
to the practice of law by a governmental
regulatory body and that by a person
representing himself. The statute does not
permit unlicensed laymen to represent
anyone else other than themselves. . . .
Accordingly, a layperson may not represent a
separate legal entity such as a corporation.”

III. DISCUSSION
Appellants challenge the Bankruptcy
Court’s October 14, 2015 Memorandum
decision denying Global’s Claims Allowance
Motion and granting the Trustee’s Claims
Objection Motion. In particular, Appellants
4

Holzer has also submitted a variety of other
documents to the Court. For example, on May 24,
2016, Holzer filed a “preliminary statement” in which

he largely restated prior arguments and requested that
the Bankruptcy Court’s decision be overturned.

5

(internal citation and quotation marks
omitted)); Eagle Assocs. v. Bank of Montreal,
926 F.2d 1305, 1308 (2d Cir. 1991) (same).
Thus, it is clear that Holzer could not proceed
on behalf of Global in the bankruptcy
proceeding (nor in his appeal before this
Court).5

proceed pro se). Therefore, the Bankruptcy
Court properly concluded that, even if Global
properly assigned its claims to Holzer, Holzer
could not proceed pro se to prosecute the
Claims Allowance Motion or oppose the
Claims Objection Motion.
Thus, because Holzer could not properly
proceed pro se on behalf of Global, nor could
Global assign its claim to Holzer to allow him
to prosecute the Claims Allowance Motion or
oppose the Claims Objection Motion,
sufficient grounds existed to deny the Claims
Allowance Motion based on a lack of
standing alone. However, because the
Bankruptcy Court reached the merits of the
Claims Motions as well, this Court will also
proceed to review the merits.

Further, the Bankruptcy Court properly
determined that Appellants could not
circumvent the standing issue by having
Global assign its claim to Holzer. Even
assuming that Global properly assigned its
claim to Holzer (which the Bankruptcy Court
found it did not), “[i]n light of [the] policy
reasons for preventing a lay person from
representing a corporation in litigation, the
federal courts have, in cases governed by
federal law, disapproved any circumvention
of the rule by the procedural device of an
assignment of the corporation’s claims to the
lay individual.” Jones v. Niagara Frontier
Transp. Auth., 722 F.2d 20, 23 (2d Cir. 1983).
The Second Circuit has clearly held that an
individual may not proceed pro se to assert a
claim that has been assigned to it by a
corporation. See id. at 23 (holding that
corporation could not assign its claim to its
sole stockholder and chief executive officer
to allow him to proceed pro se to pursue
claims); Sanchez v. Walentin, 526 F. App’x
49, 51 (2d Cir. 2013) (“Although Appellant’s
complaint alleged that a corporation . . . had
assigned its claims to him, we have
specifically barred the assignment of claims
by a corporation to a layperson so as to permit
the layperson to proceed pro se.”); Lupowitz,
Inc. v. Eclipse Holdings, Inc., 108 F.3d 1370
(2d Cir. 1997) (affirming district court’s
determination that individuals to whom
corporation assigned claims could not

B. The Claims Motions
With respect to the Claims Motions, the
Bankruptcy Court first concluded that Claims
Nos. 4-1 and 4-2 were disallowed and
expunged from the Bankruptcy Court’s
Claims Register because Claim No. 27 was
the most recent claim filed on behalf of
Global and asserted the same debt or claim.
The Bankruptcy Court then concluded that
Claim No. 27 should be reclassified from a
secured claim to a general unsecured claim.
For the reasons set forth below, the Court
agrees and affirms the Bankruptcy Court’s
conclusions.
1. Claims No. 4-1 and 4-2
As an initial matter, Appellants do not
dispute that Claims No. 4-1 and 4-2 were
superseded by Claim No. 27. (See
Appellants’ Legal Mem. at 2 (“[F]or the sake

5

Further, the Court notes that Holzer himself
acknowledged this principle in his “Motion for Leave
for the Filing of Brief and For Appearance” in which
he stated, “[t]his motion arises, Pursuant to Federal
Rules, in that typically a person who is an individual,

is not able to appear in representation of a Claim in
Federal Court . . . Holzer respectfully comes, and
requests leave to these limiting requirements by
judicial exception.” (Dkt. No. 14, at 1.)

6

of this hearing, there is ‘only one claim.’ The
claim, (Number 27 on the Claims Register in
Case 10-79280), which amended Claim 4-1
is a judgment for actual damages . . . .”).)
Further, the Bankruptcy Court correctly
noted that claims that are amended and
superseded by subsequent claims filed by the
same creditor are regularly disallowed and
expunged. See, e.g., In re Dewey & Leboeuf
LLP, No. 12-12321 (MG), 2014 WL 201586,
at *2 (Bankr. S.D.N.Y. Jan. 16, 2014)
(“[C]laim number 833 states a claim by the
same creditor for the same purported liability
identified in the later-filed Stanwyck Claim. .
. . The Court therefore concludes that claim
number 833 was amended and superseded by
the Stanwyck Claim, and claim number 833
should therefore be disallowed and
expunged.”); In re Enron Corp., No. 01 B
16034 (AJG), 2005 WL 3874285, at *1 n.1
(Bankr. S.D.N.Y. Oct. 5, 2005) (“Inasmuch
as the Initial Claim was amended and
superceded by the Amended Claim, it was
disallowed and expunged pursuant to this
Court’s Order.”); EDP Med. Computer Sys.,
Inc. v. United States, No. 03-CV-3619
(FB)(RLM), 2005 WL 3117433, at *2
(E.D.N.Y. Nov. 22, 2005) (noting that “the
bankruptcy court issued an order allowing the
Amended Proof of Claim and disallowing the
Proof of Claim as having been superseded by
the Amended Proof of Claim”), aff’d, 480
F.3d 621 (2d Cir. 2007). Claim No. 4-2
expressly indicated that it was amending a
previously filed claim (Claim No. 4-1), and
thus, was correctly disallowed and expunged
from the Court’s Claims Register. Although
Claim No. 27 did not indicate on its face that
it was amending a prior claim, it asserts a
claim based upon the same default judgment
as Claim No. 4-2 (apart from Claim No. 4-2’s
inclusion of Fellheimer’s contingency legal
fees). Therefore, because Claim No. 27 was a
subsequently filed claim that asserted the
same claim as Claim No. 4-2, the Bankruptcy
Court correctly found that Claim No. 4-2

should have been disallowed and expunged
from the Court’s Claims Register.
2. Claim No. 27
Appellants contend that Claim No. 27
should be classified as a secured claim, rather
than as a general unsecured claim. Appellee
argues that the Bankruptcy Court properly
reclassified Claim No. 27 as a general
unsecured claim. As explained in detail
below, the Court concludes that the
Bankruptcy Court properly found that Claim
No. 27 should be reclassified as a general
unsecured claim.
a. Secured or Unsecured Claim
Bankruptcy
provides that:

Code

section

506(a)(1)

An allowed claim of a creditor
secured by a lien on property in
which the estate has an interest . . .
is a secured claim to the extent of
the value of such creditor’s interest
in the estate’s interest in such
property . . . and is an unsecured
claim to the extent that the value of
such creditor’s interest . . . is less
than the amount of such allowed
claim.
11 U.S.C. § 506(a)(1). As filed, Claim No. 27
asserts a secured claim based on the default
judgment. A secured claim could arise
through either a voluntary agreement or an
involuntary lien.
The Bankruptcy Code defines “security
interest” as a “lien created by an agreement.”
11 U.S.C. § 101(51). According to Federal
Rule of Bankruptcy Procedure 3001(d), “[i]f
a security interest in property of the debtor is
claimed, the proof of claim shall be
accompanied by evidence that the security

7

interest has been perfected.” Fed. R. Bankr.
P. 3001(d); see also Sovereign Bank v.
Strother, No. 1:11-CV-1228 (LEK), 2013
WL 3243555, at *2 (N.D.N.Y. June 26,
2013). “In analyzing whether an alleged
secured creditor’s interest is perfected,
[courts] must look to state law.” In re Milton
Abeles, LLC, No. 812-70158 (REG), 2013
WL 5304014, at *3 (Bankr. E.D.N.Y. Sept.
20, 2013) (citing Butner v. United States, 440
U.S. 48, 55 (1979)); see also Buffalo Metro.
Fed. Credit Union v. Mogavero (In re
Cooley), No. 00-CV-0345E(M), 2001 WL
135822, at *2 (W.D.N.Y. Feb. 13, 2001)
(“Questions in bankruptcy matters regarding
the perfection of liens are decided under state
law.”). Global has admitted that it had no
written contracts with the Debtor (see Aug. 8,
2014 Tr. at 35, Ex. 2 to Appellee’s Mot. to
Dismiss (“[T]he answer is the debtor had no
contract with any of its five vendors. . . .”); In
re Ideal Mortg. Bankers, Ltd., 539 B.R. at
436 (“[A]fter extensive oral argument at the
Hearings on this issue, Global admitted at the
Aug. 8 Hearing that no written contract
existed between it and the Debtor.”)), and has
not alleged that it had any type of agreement
that granted it a security interest in Debtor’s
property. Thus, there is no evidence to
demonstrate that Global had a voluntary lien
as to Debtor’s property.

be docketed to have the same effect as a
judgment entered in the state supreme court
within that county. N.Y. C.P.L.R. § 5018(b).
However, in order for the judgment to attach
to judgment debtor’s real property, the
federal judgment must be docketed in the
clerk’s office of that county. See Sterling Die
Casting Co., Inc. v. Local 365 UAW Welfare
and Pension Fund (In re Sterling Die Casting
Co., Inc.), 126 B.R. 673, 677 (Bankr.
E.D.N.Y.) (“[U]nder New York law a federal
judgment must be docketed in the office of
the clerk of a county before it obtains the
status of a judgment lien on the judgment
debtor’s real property in that county.”), aff’d,
132 B.R. 99 (E.D.N.Y. 1991). Thus, as the
Bankruptcy Court properly noted, a judgment
itself does not give a creditor an interest in the
debtor’s property; rather, the judgment
creditor remains unsecured until the
judgment is recorded in a county where the
debtor owns real property.
Additionally, as to personal property, a
judgment creditor may deliver a writ of
execution to the sheriff, which directs the
sheriff to locate, seize, and sell property of
the judgment debtor so that the proceeds can
be paid to the debtor. N.Y. C.P.L.R. § 5232.
However, ninety days after a levy is made by
the sheriff, it becomes void except as to
property that has already been transferred. Id.

A secured claim could also arise through
an involuntary, judicial lien. The Bankruptcy
Code defines a “judicial lien” as a “lien
obtained by judgment, levy, sequestration, or
other legal or equitable process or
proceeding.” 11 U.S.C. § 101(36). “Once
docketed, a judgment becomes a lien on the
real property of the debtor in that county.”
Schiff Food Prods., Co. v. M & M Imp. Exp.,
924 N.Y.S.2d 158, 159 (N.Y. App. Div.
2011) (quotation marks and citation omitted);
see also N.Y. C.P.L.R. § 5203. A money
judgment entered by a federal court that is
filed in the clerk’s office for any county can

Accordingly, as the Bankruptcy Court
properly found, “the judgment itself does not
give the judgment creditor an interest in the
judgment debtor’s property, nor does it
accord priority in any of the judgment
debtor’s property or income. The judgment
creditor remains unsecured until either
‘execution’ is obtained on the judgment or a
judgment lien against real property is
obtained by recording the judgment in the
county in which the judgment debtor owns
real property.” In re Ideal Mortg. Bankers
Ltd., 539 B.R. at 427.

8

Further, “Bankruptcy Rule 3001 requires
a
claimant
to
attach
supporting
documentation to a proof of claim.” In re
Aiolova, No. 11-10503 (BRL), 2013 WL
5818893, at *2 (Bankr. S.D.N.Y. Oct. 29,
2013); see also Fed. R. Bankr. P. 3001(c)(1)
(“[W]hen a claim, or an interest in property
of the debtor securing the claim, is based on
a writing, a copy of the writing shall be filed
with the proof of claim.”). “If a proof of claim
is not supported by the requisite
documentation, it is not presumed to be
prima facie valid.” In re Aiolova, 2013 WL
5818893, at *3; see also In re Minbatiwalla,
424 B.R. 104, 112 (Bankr. S.D.N.Y. 2010)
(“Failure to attach the documentation
required by Rule 3001 will result in the loss
of the prima facie validity of the claim.”);
Green Tree Servicing, LLC v. Wilson (In re
Wilson), 532 B.R. 486, 490 (S.D.N.Y. 2015)
(same). Claim No. 27 does not include any
supporting documentation to demonstrate
that Appellants had a security interest in the
Debtor’s property. Therefore, Claim No. 27
is not presumed to be prima facie valid, and
Global needed to present evidence of a
security interest in response to the Trustee’s
objection to the claim.

secured, the Bankruptcy Court properly
found that Claim No. 27 should be
reclassified as an unsecured claim. See, e.g.,
Samson v. Western Capital Partners (In re
Blixseth), 489 B.R. 154, 202 (Bankr. D.
Mont. 2013) (finding claim should be
designated as unsecured where “[o]ther than
the default judgment and vague testimony,
[creditor had] not proved the validity of its
claim.”), aff’d, 514 B.R. 871 (D. Mont.
2014); In re Cruse, No. 12-8154-RLM-13,
2013 WL 323275, at *2 (Bankr. S.D. Ind. Jan.
28, 2013) (“Rule 3001(d) of the Federal Rule
of Bankruptcy Procedure further provides
that if a claimant contends that it has a
security interest in the debtor’s property,
evidence that the security interest has been
perfected must accompany the proof of
claim. No such evidence accompanied the
proof of claim. With no proof of a written
security interest or the filing a financing
statement in either the Dubois County
Recorder’s office or the Secretary of State’s
office, [creditor] has not proven that he holds
a secured claim. Without more, his claim is
unsecured.”).

Additionally, as the Bankruptcy Court
noted, even if the default judgment and
execution judgment that were attached to
Claim No. 4-1 (but not Claim No. 27) were
considered so that Claim No. 27 was
presumed to be prima facie valid, there is no
evidence that a judicial lien attached to
Debtor’s assets. Although the default
judgment was docketed in Suffolk County,
Debtor had no real property there. Further,
Global’s writ of execution, in which it
attempted to levy against the Debtor’s
personal property in Suffolk County, was
returned unsatisfied.

Section 726 of the Bankruptcy Code sets
forth the distribution scheme among creditors
in a chapter 7 case and directs that claims
under section 507(a) should be paid before
distribution is made to general unsecured
claims. 11 U.S.C. § 726(a)(1). Section 507(a)
sets forth ten categories of allowed unsecured
claims that are entitled to priority in payment.
11 U.S.C. § 507. Each category must be paid
in full before the next category can be paid.
See id.

Thus, based on the lack of evidence
demonstrating that Claim No. 27 was

Administrative expenses allowed under
section 503(b) have the second priority in

b. Section 507(a) Priority

i.

9

Section 507(a)(2) Administrative
Expense Priority

payment under section 507(a)(2). 11 U.S.C. §
507(a)(2). The term “administrative expense”
is not defined by the Bankruptcy Code.
However, section 503, which deals with the
allowance of administrative expenses,
enumerates nine categories of expenses that
are granted priority as allowed administrative
expenses. See 11 U.S.C. § 503(b). These
administrative expenses are generally costs
“incurred by the bankruptcy estate after the
commencement of the bankruptcy case.” In
re Norwalk Furniture Corp., 418 B.R. 631,
633 (Bankr. N.D. Ohio 2009). “The party
asserting the status of an administrative
claimant has the burden of proof.” In re
Patient Educ. Media, Inc., 221 B.R. 97, 101
(Bankr. S.D.N.Y. 1998); see also In re Helm,
335 B.R. 528, 538 (Bankr. S.D.N.Y. 2006).

entitled to administrative expense priority
under any of these theories, nor any of the
other theories considered by the Bankruptcy
Court.
1. Section 503(b)(1)(A)

Section
503(b)(1)(A)
grants
administrative expense priority for the
“actual, necessary costs and expenses of
preserving the estate.” 11 U.S.C. §
503(b)(1)(A). In order to be entitled to
priority under section 503(b)(1)(A), a party
“must demonstrate that (1) his claim arose
from a transaction with or on account of
consideration furnished to the debtor-inpossession, and (2) the transaction or
consideration directly benefitted the debtorin-possession.” In re Patient Educ. Media,
Inc., 221 B.R. at 101; see also In re Helm,
335 B.R. at 538. “A clear relationship
between the expenditures made and the
benefit conferred on the estate must therefore
be shown by the movant.” In re Drexel
Burnham Lambert Grp. Inc., 134 B.R. 482,
489 (Bankr. S.D.N.Y. 1991). “Ultimately,
administrative expense status should be
granted only to claims representing postpetition debts incurred by the debtor to
preserve the estate.” In re Keegan Util.
Contractors, Inc., 70 B.R. 87, 89 (Bankr.
W.D.N.Y. 1987).

Global argued to the Bankruptcy Court
that it was entitled to administrative expense
priority under several different provisions of
section 503(b) due to its “substantial
contribution to the estate.” Namely, Global
argued that: (a) the Trustee used appraisals
that Global provided to the Debtor prior to the
bankruptcy case in order to close on
mortgage transactions that were pending on
the Petition date; (b) it should be
compensated for the $25,000 retainer it paid
to Fellheimer as an administrative expense
because Fellheimer produced copies of the
Debtor’s bank statements that it obtained
during its representation of Global to the
Trustee; (c) it brought a fraudulent
conveyance action against Ashley prior to the
commencement of the bankruptcy case,
which resulted in the settlement of the
Trustee’s fraudulent conveyance action
against Ashley and other defendants for over
$1,000,000; and (d) its pre-bankruptcy
litigation against the Debtor and its officers
caused criminal charges to be brought against
Ashley and DeCillis. For the reasons set forth
below, the Court affirms the Bankruptcy
Court’s determination that Global is not

Claim No. 27 is clearly based on Debtor’s
failure to pay Global for appraisals, which
resulted in a default judgment. Even
Appellants admit that Global was “a prepetition judgment creditor against Ideal
Mortgage” rather than a post-petition
creditor. (See Appellants’ Legal Mem. at 1.)
Thus, it is clear that Claim No. 27 was not a
cost incurred postpetition in preserving the
bankruptcy estate.
Further, although Global argued that the
Trustee used prepetition appraisals to close
on mortgages and administer the estate’s
10

Trustee in preserving or locating the Debtor’s
assets. Thus, there is no indication that
turning over these duplicative bank records
made a substantial contribution to the
Trustee’s administration of the estate.
Therefore, the Court finds that the
Bankruptcy Court correctly found that the
$25,000 retainer paid to Fellheimer was not
entitled to administrative priority under
section 503(b)(1)(A).

assets, and thus, that such appraisals were an
actual, necessary cost of preserving the
estate, Global did not offer any evidence of
this. Without any evidence of benefit to the
estate, Global failed to meet its burden of
proof in demonstrating that it was entitled to
administrative expense priority under section
503(b)(1)(A). See, e.g., In re Enron Corp.,
279 B.R. 695, 706 (Bankr. S.D.N.Y. 2002)
(“A potential benefit is not sufficient. . . . In
order for a creditor’s claim to be entitled to
administrative status, there must be actual use
of the creditor’s property by the debtor-inpossession.”).

2. Section 503(b)(3)(B)

Section 503(b)(3)(B) provides for
administrative expense priority for “the
actual, necessary expenses . . . incurred by . .
. a creditor that recovers, after the court’s
approval, for the benefit of the estate any
property transferred or concealed by the
debtor.” 11 U.S.C. § 503(b)(3)(B).

Global also argued that it made a
substantial contribution to the estate by
producing the Debtor’s bank statements that
Fellheimer obtained in connection with the
Global Fraudulent Conveyance Action, and
thus, that Fellheimer’s legal fees should be
given administrative priority status. It is
possible for a creditor to be granted an
administrative expense claim where it used
its own funds to obtain information that a
trustee would otherwise have incurred an
expense to obtain if the information is shared
with the trustee and the trustee benefits from
this information. See In re Pappas, 277 B.R.
171, 179 (Bank. E.D.N.Y. 2002) (finding
judgment creditor could recover, as an
administrative expense, expenses incurred in
hiring private investigator and obtaining
documents where trustee’s counsel conceded
that trustee benefitted from this information
and would have incurred expenses if creditor
had not made information available to
trustee). However, the documents at issue
were produced pursuant to a document
subpoena ordered by the Bankruptcy Court
and were duplicative because Trustee had
already obtained the documents through a
separate subpoena issued to Capital One
Bank. Further, Global did not offer any
evidence to demonstrate that the bank
statements it produced were used to assist the

Global argued that Claim No. 27 was
entitled to priority under section 503(b)(3)(B)
because its prepetition litigation against
Ashley and related entities resulted in a
favorable recovery to the bankruptcy estate.
However, the Bankruptcy Court properly
found that Global failed to show how any
expense incurred in this litigation qualified as
an administrative expense under section
503(b)(3)(B). Global brought the Global
Action and Global Fraudulent Conveyance
Action prior to the commencement of the
bankruptcy case, and thus, could not have
obtained the Bankruptcy Court’s approval as
required under section 503(b)(3)(B). Further,
the Global Action concluded prior to the
bankruptcy case and resulted in the entry of
the default judgment, in favor of Global, not
the estate. Similarly, Global’s litigation
against the Debtor’s officers in the Global
Fraudulent Conveyance Action was intended
for Global’s benefit, and was dismissed by
this Court because Global lacked standing to
pursue a fraudulent conveyance action on
behalf of Debtor’s estate. Thus, the Global
Fraudulent Conveyance Action also failed to
11

generate any benefit for the bankruptcy
estate.

Second, the applicant must prove that the
prosecution of the criminal offense relates to
a debtor’s case, business, or property.” In re
Summit Metals, Inc., 379 B.R. 40, 59 (Bankr.
D. Del. 2007) (collecting cases), aff’d, 406 F.
App’x 634 (3d Cir. 2011).

Further, to the extent that Global believes
that it is entitled to recover $1,000,000 based
on the Trustee’s adversary proceeding
against Ashley, Cooper Capital Group Ltd.,
and other Ashley related entities (the “No.
12-8443 Action”), it is clear that Global was
not involved in this action. Instead, the No.
12-8443 Action was commenced and
negotiated by the Trustee, and when the
Trustee sought approval of the negotiated
settlement, Global filed an objection
asserting that “‘the Trustee and his attorneys
and HUD investigators, knowingly chose not
to interview Global or include Global in its
complaint against the Debtor and its officer,
Ashley.’” In re Ideal Mortg. Bankers, Ltd.,
539 B.R. at 433-34 (quoting Ashley
Settlement Objection, at 3). Thus, by
Global’s own admission, it was not involved
in the pursuit or settlement of the 12-8443
Action.

Global offered no evidence that it
participated in any way in a criminal
investigation or proceeding against the
Debtor and its agents and officers, or that it
accrued related expenses. Instead, Global
merely claimed that it sued the Debtor and its
officers in a civil suit. Clearly, pursuing a
civil suit does not entitle Global to
administrative expense priority under section
503(b)(3)(C).
4. Section 503(b)(3)(D)

Section 503(b)(3)(D) provides for
administrative expense priority for “the
actual, necessary expenses . . . incurred by . .
. a creditor . . . in making a substantial
contribution in a case under chapter 9 or 11
of this title.” 11 U.S.C. § 503(b)(3)(D). There
is no similar provision for expenses incurred
in making a substantial contribution in a
chapter 7 case – the type of bankruptcy
proceeding at issue here. As articulated by the
Bankruptcy Court, courts have come to
different conclusions as to whether section
503(b)(3)(D) can be applied outside of the
chapter 9 or 11 context. Compare In re
Hackney, 351 B.R. 179, 205 (Bankr. N.D.
Ala. 2006) (“[T]his Court must conclude that
if Congress intended for there to be a
‘substantial contribution’ administrative
expense in Chapter 7 cases, Congress would
not have limited 503(b)(3)(D) to cases under
Chapter 9 and Chapter 11.”) and Lebron v.
Mechem Fin. Inc., 27 F.3d 937, 945 (3d Cir.
1994) (“Expenses incurred after a chapter 11
case is converted to one under chapter 7,
however, are not recoverable pursuant to
[section
503(b)(3)(D)].”)
with
Mediofactoring; Coface Argentina v.

Therefore, because Global has not put
forth any evidence to demonstrate it incurred
any expense that resulted in a recovery to the
estate, the Bankruptcy Court correctly found
that it was not entitled to administrative
expense priority under section 503(b)(3)(B).
3. Section 503(b)(3)(C)

Section 503(b)(3)(C) provides for
administrative expense priority for “the
actual, necessary expenses . . . incurred by . .
. a creditor in connection with the prosecution
of a criminal offense relating to the case or to
the business or property of the debtor.” 11
U.S.C. § 503(b)(3)(C). To obtain
administrative expense priority under section
503(b)(3)(C), the applicant “bears the burden
of satisfying a two-prong test. First, the
applicant must show a direct relationship
between the expenses sought and the
prosecution of the criminal activity. . . .
12

McDermott (In re Connolly N. Am. LLC), 802
F.3d 810, 819 (6th Cir. 2015) (“[W]e hold
that § 503(b)(3)(D) of the Bankruptcy Code
does not divest bankruptcy courts of
authority to allow reimbursement under §
503(b) of reasonable administrative expenses
of creditors whose efforts substantially
benefit the bankruptcy estate and its creditors
in a Chapter 7 proceeding.”). However,
assuming arguendo that section 503(b)(3)(D)
could be applied in the chapter 7 context,
Global must still show that it “bestowed a
substantial benefit to the estate and assisted
in the contribution of assets.” In re Pappas,
277 B.R. at 176. Further, “to the extent that a
creditor is claiming that it ‘assisted the
trustee,’ it is necessary that the trustee agree
that the creditor’s efforts actually ‘assisted’
the trustee.” Id. (considering application for
administrative expense status under section
503(b) generally where claim did not fall into
specific 503(b) category, but noting that
substantial benefit must still be shown).

ii.

Section 507(a)(7)

Although Global did not rely upon
section 507(a)(7) in its Claims Allowance
Motion or opposition to the Claims Objection
Motion, the Bankruptcy Court also
considered whether it applied because, on its
face, Claim No. 27 asserted an entitlement to
be paid as a priority unsecured claim under
section 507(a)(7). Section 507(a)(7) provides
for priority for “allowed unsecured claims of
individuals, to the extent of $2,850 for each
such individual, arising from the deposit,
before the commencement of the case, of
money in connection with the purchase,
lease, or rental of property, or the purchase of
services, for the personal, family, or
household use of such individuals, that were
not delivered or provided.” 11 U.S.C. §
507(a)(7). “The two limitations imposed on
those seeking priority distribution under
section 507(a)(7) are (1) that the claim arise
from the deposit of money and (2) that the
services or goods remain undelivered.”
Marshack v. Hammond (In re Four Star Fin.
Servs., LLC), 469 B.R. 30, 32 (C.D. Cal.
2012).

Here, the Trustee clearly disputes the
notion that Global made a substantial
contribution to the estate. Further, the Court
agrees with the Bankruptcy Court’s
conclusion that Global failed to show how its
prepetition litigation against the Debtor or
individual defendants, or producing bank
statements in response to the subpoena
constituted “substantial contribution.” Thus,
the Court concludes that Global failed to
demonstrate that it is entitled to
administrative priority under section
503(b)(3)(D).

For the reasons articulated by the
Bankruptcy Court, section 507(a)(7) clearly
does not apply to Claim No. 27. First, section
507(a)(7) applies to unsecured claims of
individuals whereas Global is a corporate
entity. Further, Global never gave the Debtor
a deposit, nor was there an expectation that
the Debtor would provide Global with goods
or services. Instead, the default judgment was
based on Holzer’s claim that Debtor owed
money to Global for Global’s services in
providing appraisals. Thus, the Court agrees
with the Bankruptcy Court’s conclusion that
Global failed to demonstrate that Claim No.
27 qualified for priority status under section
507(a)(7).

Thus, because Global failed to
demonstrate that it was entitled to priority
under the various subsections of section 503,
the Court affirms the Bankruptcy Court’s
conclusion that Global was not entitled to
administrative priority under section 503.

13

c. Executory Contract

that the failure of either to complete
performance would constitute a material
breach excusing performance of the other.’”
Id. (quoting Vern Countryman, Executory
Contracts in Bankruptcy: Part I, 57 Minn. L.
Rev. 439, 460 (1973)). “In other words, under
Countryman’s ‘material breach’ test, a
prepetition contract is executory when both
sides are still obligated to render substantial
performance.” In re Calpine Corp., No. 0560200 (BRL), 2008 WL 3154763, at *3
(Bankr. S.D.N.Y. Aug. 4, 2008). This test
expressly excludes contracts where the only
remaining performance is the payment of
money. See id. at *4 (collecting cases); In re
Chateaugay Corp., 102 B.R. 335, 347
(Bankr. S.D.N.Y. 1989) (“[I]t is clear that
such obligations merely represent obligations
for the payment of money only and are
therefore insufficient to make these TBT
Agreements executory.”). Under the
“Countryman approach,” assuming there was
a contract regarding the appraisals between
the parties, it would not qualify as executory
because Global fully performed prior to the
Petition date and the only outstanding
obligation was for Debtor to pay Global. The
notion that Global fully performed is
supported by the fact that it was able to obtain
a default judgment against the Debtor for the
unpaid appraisals. Thus, under the
Countryman approach, the purported contract
could not be executory, and thus, cannot be
assumed under section 365.

Global alternatively argued that Claim
No. 27 was entitled to priority as an
executory contract under section 365 of the
Bankruptcy Code. The Bankruptcy Court
determined that (1) no written contract
existed between the parties, and thus, section
365 was inapplicable to Claim No. 27, and (2)
even if the absence of a written contract was
not dispositive, (i) no executory contract
existed between the parties, and (ii) even if
there was an executory contract, it was
deemed rejected by operation of law under 11
U.S.C. § 365(d)(1). For the reasons explained
below, the Court agrees with the Bankruptcy
Court and affirms its conclusions.
As an initial matter, as discussed supra,
Global admitted at the hearing before the
Bankruptcy Court that there was no written
contract between it and the Debtor. Instead,
Global would charge the Debtor upon the
completion or cancelation of each appraisal
order.
In any event, even if section 365 was
applicable, there was no executory contract
between the parties. The term “executory
contract” is not defined in the Bankruptcy
Code, but it has been characterized as one “on
which performance remains due to some
extent on both sides.” COR Route 5 Co. v.
Penn Traffic Co. (In re Penn Traffic Co.), 524
F.3d 373, 379 (2d Cir. 2008) (internal
quotation marks and citation omitted). Courts
in the Second Circuit have adopted two
different standards as to executory contracts.
As the Bankruptcy Court concluded, Global
failed to demonstrate that it had an executory
contract under either standard.

The alternate “functional approach”
provides that “a contract is not executory if
the bargained for benefits were received by
the debtor pre-petition, or if the assumption
would saddle the estate with potentially
onerous obligations, while rejection would
confer benefits.” In re Chateaugay Corp.,
102 B.R. at 345 n.11; see also In re Bluman,
125 B.R. 359, 363 (Bankr. E.D.N.Y. 1991).
Under the functional approach,

The first approach provides that an
executory contract is one “‘under which the
obligation of both the bankrupt and the other
party to the contract are so far unperformed

14

parties’ rights to future performance under
the contract or lease.” In re Penn Traffic Co.,
524 F.3d at 378 (citing 11 U.S.C. § 365(b)).
Alternatively, “the rejection of an executory
contract . . . constitutes a breach of such
contract.” 11 U.S.C. § 365(g); see also In re
Penn Traffic Co., 524 F.3d at 378. “In the
event of rejection, the non-debtor party is
generally relegated to pursuing an unsecured
prepetition claim against the estate.” In re
Penn Traffic Co., 524 F.3d at 378 (citation
omitted). If a trustee does not assume or
reject an executory contract within a certain
time period, the executory contract is
considered rejected. See 11 U.S.C. §
365(d)(1) (“In a case under chapter 7 of this
title, if the trustee does not assume or reject
an executory contract or unexpired lease of
residential real property or of personal
property of the debtor within 60 days after the
order for relief, or within such additional time
as the court, for cause, within such 60-day
period, fixes, then such contract or lease is
deemed rejected.”). Here, the order for relief
was entered in the bankruptcy case on
December 29, 2010. The Trustee did not
assume or reject any contract between the
Debtor and Global in the 60-day period after
relief was entered, nor did he request
additional time to do so. Accordingly, under
section 365(d)(1), the Trustee is considered
to have rejected any executory contract
between the Global and Debtor by the lack of
action during the requisite time period. Thus,
any claim based on a contract between the
parties would be an unsecured claim for
breach of contract, rather than a claim with
priority as an executory contract.

a court does not consider remaining
mutual material performance but
instead considers the goals that
assumption or rejection were
expected to accomplish. . . . These
goals include: (1) taking advantage
of contracts which will benefit the
estate; (2) relieving the estate of
burdensome
contracts;
(3)
promoting the debtor’s fresh start;
(4) permitting the allowance and
determination of claims; and (5)
preventing parties from remaining
in doubt concerning their status visa-vis the estate.
In re Bradlees Stores, Inc., No. 00-16033,
2001 WL 34809984, at *5 (Bankr. S.D.N.Y.
Mar. 28, 2001) (internal quotation marks and
citations omitted), aff’d, No. 00-16033
(BRL), 2001 WL 1112308 (S.D.N.Y. Sept.
20, 2001); see also In re Bluman, 125 B.R. at
363 (same). Any contract based on the
appraisals would fail to qualify under the
functional approach because the Debtor
already received the benefit of the appraisals
pre-petition. Further, assuming the contract
would saddle the estate with the burden of
paying Global’s unsecured claim ahead of
other claims and would be particularly
onerous considering much of the default
judgment was based on canceled appraisal
orders for which the Debtor did not incur any
benefit. Thus, the purported contract would
not qualify as executory under the functional
approach.
Finally, even if there was an executory
contract, it was deemed rejected by operation
of law under 11 U.S.C. § 365(d)(1). Section
365(a) provides that “the trustee, subject to
the court’s approval, may assume or reject
any executory contract.” 11 U.S.C. § 365(a).
“Assumption is in effect a decision to
continue performance” and “requires the
debtor to cure most defaults and continues the

d. Earmarking Doctrine
Global also argued that funds held by the
Debtor were earmarked for Global. “The
earmarking doctrine applies where a third
party lends money to the debtor for the
specific purpose of paying a selected creditor.

15

. . . In such situations, the loan funds are said
to be ‘earmarked’ and the payment is held not
to constitute a voidable preference.” Cadle
Co. v. Managan (In re Flanagan), 503 F.3d
171, 184 (2d Cir. 2007) (internal quotation
marks and citations omitted). The earmarking
doctrine applies “where a debtor receives
funds subject to a clear obligation to use that
money to pay off a preexisting debt, and the
funds are in fact used for that purpose.” Id. at
185. However, “where a new creditor
provides funds to the debtor with no specific
requirement as to their use, the funds do
become part of the estate and any transfer of
the funds out of the estate is potentially
subject to trustee’s avoidance powers.” Id.
Global put forth no evidence to demonstrate
that the Debtor had an agreement with a thirdparty to pay its debt to Global. Thus, Global
failed to demonstrate that the earmarking
doctrine applies.

request for relief from the stay should be
denied.
Section 362(a) of the Bankruptcy Code
provides that the filing of a bankruptcy
petition “operates as a stay, applicable to all
entities, of . . . (2) the enforcement, against
the debtor or against property of the estate, of
a
judgment
obtained
before
the
commencement of the case under this title . .
. [and] (6) any act to collect, assess, or
recover a claim against the debtor that arose
before the commencement of the case under
this title.” 11 U.S.C. § 362(a). However,
section 362(d) provides that a court may
terminate or modify the automatic stay “(1)
for cause, including the lack of adequate
protection of an interest in property of such
party in interest” or “(2) with respect to a stay
of an act against property under subsection
(a) of this section, if – (A) the debtor does not
have an equity in such property; and (B) such
property is not necessary to an effective
reorganization.” 11 U.S.C. § 362(d).

In sum, the Court concludes that the
Bankruptcy Court properly found that Claim
No. 27 should be reclassified as a general
unsecured claim. Global failed to put forth
any evidence to demonstrate that Claim No.
27 qualified as a secured claim. Further,
Claim No. 27 does not qualify for
administrative expense priority under any of
the subsections of section 503 claimed by
Global, nor does it qualify for priority under
section 507(a)(7). Finally, Claim No. 27
plainly does not qualify for priority as an
executory contract, nor is there any indication
that funds held by the Debtor were earmarked
by Global. Thus, Claim No. 27 was properly
reclassified as a general unsecured claim.

“Section 362(d)(1) requires an initial
showing of cause by the movant, while
Section 362(g) places the burden of proof on
the debtor for all issues other than ‘the
debtor’s equity in property.’” Sonnax Indus.,
Inc. v. Tri Component Prods. Corp. (In re
Sonnax Indus., Inc.), 907 F.2d 1280, 1285 (2d
Cir. 1990) (quoting 11 U.S.C. § 362(g)(1)).
“If the movant fails to make an initial
showing of cause, however, the court should
deny relief without requiring any showing
from the debtor that it is entitled to continued
protection.” Id. Although “cause” is not
defined by the Bankruptcy Code, the Second
Circuit has “adopted 12 factors to consider
when deciding whether or not to lift a stay in
order that litigation may continue to
completion in another tribunal.” Spencer v.
Bogdanovich (In re Bogdanovich), 292 F.3d
104, 110 (2d Cir. 2002) (citing Sonnax
Indus., Inc., 907 F.2d at 1285-86). However,

C. Request for Relief from Stay
Global also sought to lift the automatic
stay in order to have its claim against the
estate be paid immediately. For the reasons
explained below, the Court agrees with the
Bankruptcy Court’s conclusion that Global’s

16

courts consider the term “for cause” to be “a
broad and flexible concept that must be
determined on a case by case basis.” In re
AMR Corp., 485 B.R. 279, 295 (Bankr.
S.D.N.Y. 2013) (citing Bogdanovich, 292
F.3d at 110 (“Not every one of these factors
will be relevant in every case. . . . The
ultimate determination whether to lift a stay
depends upon the facts underlying a given
motion.” (citations omitted)). The Court
agrees with the Bankruptcy Court’s
conclusion that, despite this flexible standard,
Global failed to make an initial showing of
cause. Section 362(a)’s automatic stay is
meant to protect creditors to prevent “‘those
who acted first [from] obtain[ing] payment of
the claims in preference to and to the
detriment of other creditors.’” In re AmpalAm. Israel Corp., 502 B.R. 361, 369 (Bankr.
S.D.N.Y. 2013) (quoting H.R. Rep. No. 95–
595, at 340 (1977)). Global has not
articulated any reason why it should be
entitled to payment for its general unsecured
claim ahead of other creditors, nor why it
should be entitled to proceed outside of
bankruptcy to pursue claims against third
parties who may have received the estate’s
assets. Thus, the Bankruptcy Court correctly
denied Global’s request for relief from the
stay under section 362(d)(1).

property.”); In re U.S. Physicians, Inc., 236
B.R. 593, 596 (Bankr. E.D. Pa. 1999) (“The
absence of a valid security interest eliminates
11 U.S.C. § 362(d)(2) as a basis for the
Motion.”). As discussed supra, Global failed
to demonstrate that it was a secured creditor
as to any of the Debtor’s property. Because
there is no evidence that the Debtor granted
Global a security interest or lien in its
property, or that the default judgment or writ
of execution attached as a lien to Debtor’s
assets, the Bankruptcy Court properly denied
Global’s request for relief under section
362(d)(2).6
D. Allegations Against Trustee and
His Professionals
Global also argued that the Trustee and
his professionals should be removed because:
(1) they put the Trustee and his professionals’
fees ahead of Global’s claim; (2) they
allegedly made false statements and material
omissions to the Bankruptcy Court in order to
defraud Global; and (3) they failed to
commence legal action against HUD. For the
reasons explained below, the Court agrees
with the Bankruptcy Court’s conclusion that
these arguments are without merit.
Section 324(a) provides that “[t]he court,
after notice and a hearing, may remove a
trustee, other than the United States trustee,
or an examiner, for cause.” 11 U.S.C. §
324(a). “In defining ‘cause’ for removal, [the
Second Circuit has] ‘traditionally stressed the
elements of fraud and actual injury to the
debtor interests.’” Dieffenbach v. Haworth
(In re Haworth), 356 F. App’x 529, 530 (2d
Cir. 2009) (quoting In re Freeport Italian

Section 362(d)(2) requires the party
requesting the stay to have a security interest
or lien in the property. See, e.g., In re Hunt’s
Pier Assocs., 143 B.R. 36, 50 (Bankr. E.D.
Pa. 1992) (“[R]elief under § 362(d)(2),
requiring, as it does, a debtor’s lack of equity
in the property regarding which relief is
sought, is only appropriately granted when
the movant has a security interest in that
6

To the extent that Global sought relief to pursue
action for alleged “federal crimes” arising from the
Debtor’s failure to pay Global’s claim, the Court
agrees with the Bankruptcy Court’s conclusion that it
need not address whether any potential conduct by
Global in commencing or continuing a criminal action

would violate the automatic stay based on section
362(b)(1)’s exemption for the commencement or
continuation of a criminal action or proceeding against
a debtor because such action is speculative at this
juncture.

17

Bakery, Inc., 340 F.2d 50, 54 (2d Cir. 1965)).
“A trustee should not be removed for
mistakes in judgment where that judgment
was discretionary and reasonable under the
circumstances.” In re Lundborg, 110 B.R.
106, 108 (Bankr. D. Conn. 1990) (citations
omitted). Further, “courts should consider the
best interests of the estate, rather than those
of a single movant-creditor, when
determining whether to remove a trustee.” Id.
The party seeking removal bears the burden
of proof. See, e.g., In re Belmonte, 524 B.R.
17, 27-28 (Bankr. E.D.N.Y. 2015).

insufficient to demonstrate that the Trustee
and his professionals should be removed.
Global similarly failed to demonstrate
that the Trustee should be disqualified for
cause based on allegations of false statements
and material omissions. Unsupported
allegations that the Trustee made false
statements and material omissions are plainly
insufficient to demonstrate cause under
section 324(a). See, e.g., Reagan v. Wetzel (In
re Reagan), 403 B.R. 614, 623 (B.A.P. 8th
Cir. 2009) (affirming denial of motion to
remove trustee where debtor “did no more
than
raise
conclusory
contentions
unsupported by specific facts and disagree
with the trustee’s business management.”)
aff’d, 374 F. App’x 683 (8th Cir. 2010).

The Bankruptcy Code provides that
compensation and reimbursement to a trustee
may be awarded prior to distribution to
holders of allowed general unsecured claims.
Namely, section 330(a)(1) provides that
“[a]fter notice to the parties in interest and the
United States Trustee and a hearing, and
subject to sections 326, 328, and 329, the
court may award to a trustee . . . (A)
reasonable compensation for actual,
necessary services rendered by the trustee . .
. ; and (B) reimbursement for actual,
necessary expenses,” 11 U.S.C. § 330(a)(1),
and section 503(b)(2) provides priority for
“compensation and reimbursement awarded
under section 330(a).” 11 U.S.C. § 503(b)(2).

Further, Global’s argument that cause is
demonstrated by the Trustee’s failure to
pursue claims against HUD is without merit.
Global raised this issue before the
Bankruptcy Court in its objection to the
Ashley Settlement and at the March 4, 2014
hearing on the Trustee’s motion to approve
the settlement. After considering the issue,
Judge Eisenberg found that the Trustee’s
decision not to file an adversary proceeding
against HUD did not mean that he was acting
improperly. See In re Ideal Mortg. Bankers,
Ltd., 539 B.R. at 445 (citing Mar. 4, 2014 Tr.
at 16 [No 12-8443 Action, Dkt. No. 27]).
Further, the decision whether to pursue
claims against a potential adversary qualifies
as a discretionary decision that falls within
the Trustee’s purview and was reasonable
under the circumstances. See, e.g., Mobile
Diagnostech, Inc. v. Cohen (In re EquiMed,
Inc.), 267 B.R. 530, 534 (D. Md. 2001) (“A
trustee is granted complete authority and
discretion regarding the prosecution of any
litigation involving the debtor’s estate.”
(citation omitted)); In re Reed, 178 B.R. 817,
821-22 (Bankr. D. Ariz. 1995) (“The trustee
is granted complete authority and discretion

Thus, the Trustee and his professionals’
right to be paid before general unsecured
creditors is clearly established by the
Bankruptcy Code. Although Global filed an
objection when the Trustee and his
professionals submitted their first interim
application
for
compensation
and
reimbursement to the Bankruptcy Court,
Global’s objection was overruled by
Bankruptcy Judge Eisenberg and there was
no objection by the United States Trustee or
finding by the Bankruptcy Court that the
Trustee and his professionals were not
entitled to compensation. Global’s contention
that it should be paid sooner is simply

18

regarding the prosecution and defense of any
litigation of the debtor’s estate.” (citation
omitted)).
Thus, based on the lack of evidence to
support Global’s claim that the Trustee and
his professionals acted improperly, the Court
affirms the Bankruptcy Court’s conclusion
that Global failed to demonstrate that the
Trustee should be removed for cause
pursuant to section 324.
III. CONCLUSION
For the foregoing reasons, Appellants’
appeal of the Bankruptcy Court’s decision
denying Global’s Claims Allowance Motion
and granting the Trustee’s Claims Objection
Motion is denied. The Court affirms the
rulings of the Bankruptcy Court in all
respects. Appellee’s motion to dismiss
Appellants’ appeal is denied as moot. The
Clerk of the Court shall enter judgment
accordingly and close the case.

SO ORDERED.

______________________
JOSEPH F. BIANCO
United States District Judge
Dated: July 27, 2016
Central Islip, New York
***
Appellants are proceeding pro se.
Appellee is represented by Anthony C.
Acampora, Justin S. Krell, and Ronald J.
Friedman, of Silverman Acampora, LLP, 100
Jericho Quadrangle, Suite 300, Jericho, NY
11753.

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