Milkowski v. Rejman et al

Filing 6

MEMORANDUM-DECISION AND ORDER re 1 Bankruptcy Appeal, filed by Michael Milkowski: ORDERED, that the appeal (Dkt. No. 1) is DISMISSED; it is further ORDERED that the case is REMANDED to the Bankruptcy Court (B.J. Davis) forfurther proceedings consistent with this opinion; it is further ORDERED that the Clerk of the Court shall serve copies of this Order upon the parties to this action. Signed by U.S. District Judge Mae A. D'Agostino on 5/14/12. (ban)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
____________________________________________
In Re: Andrew J. Rejman and
Pamela A. Rejman,

6:11-CV-966
(MAD)
Bankr. Case No. 09-60593
Chapter 13

Debtor/Appellee,
____________________________________________
APPEARANCES:

OF COUNSEL:

Costello, Cooney Law Firm
5701 West Genesee Street
Camillus, New York 13031
Attorneys for Appellant

Anthony R. Hanley, Esq.
Jennifer E. Mathews, Esq.

Office of Mark A. Wolber
239 Genesee Street
Utica, New York 13501
Attorneys for Debtor/Appellee

Mark A. Wolber, Esq.

Mark W. Swimelar, Esq., Chapter 13 Trustee
250 South Clinton Street
Suite 203
Syracuse, New York 13202
Mae A. D’Agostino, U.S. District Judge:
MEMORANDUM-DECISION AND ORDER
INTRODUCTION
This appeal stems from a proceeding filed by the debtors-appellees, Andrew J. Rejman
and Pamela A. Rejman (“debtors”) under Chapter 13 of the Bankruptcy Code. Presently before
this Court is an appeal by creditor-appellant Michael Milkowski (“creditor” or “Milkowski”)
from an Order signed by Hon. Diane Davis, United States Bankruptcy Judge for the Northern
District of New York, on July 7, 2011, which confirmed, over creditor’s objection, the debtor’s
Amended Chapter 13 Plan. (Dkt. No. 4). The debtors have not responded to the appeal.
BACKGROUND

The underlying facts are not in dispute and are taken from the parties’ Joint Stipulation of
Facts dated February 11, 2011:
Debtor, Andrew J. Rejman, is the owner of a parcel of commercial
property on 907 Park Avenue, Syracuse, New York 13204 (“Syracuse
Property”). Creditor, Michael Milkowski, is the holder of a Note and
Mortgage for the Syracuse Property (“Syracuse Mortgage”). The
mortgage was recorded with the Onondaga County Clerk on January
23, 1991. On December 30, 1991, the Note and Mortgage was
modified. On December 30, 1991, the Mortgage Modification
Agreement was recorded with the Onondaga County Clerk.
Debtors, Andrew J. Rejman and Pamela A. Rejman, own a one-family
home at 6192 Trenton Road, Utica, New York 13502 (“Utica
Property”). The Utica Property is debtors’ residence. In October
1993, debtors executed a Note and Mortgage to Milkowski secured by
the Utica Property (“Utica Mortgage”). On October 7, 1993, the
mortgage was recorded in the Oneida County Clerk’s Office.
On December 1, 2005, debtors executed a Consolidated Mortgage
which states:
This mortgage is a consolidation and continuation except as noted of
two previous separate mortgages into one monthly payment entity.
The two mortgaged properties were previously recorded in Liber
2766, pages 497+ in Oneida County, and also in Liber 6105, page
173+ in Onondaga County and still are valid. The conditions for first
mortgages are the same as in the Note and Mortgage dated October 6,
1993 and also as in Modification Agreement dated December 30,
1991, except as noted throughout this document.
The Consolidated Mortgage was never recorded.
On March 15, 2009, debtors filed a Chapter 13 Bankruptcy petition
and a proposed Chapter 13 Plan which Plan did not provide for
payment of the Consolidated Mortgage. On July 10, 2009, creditor
filed a Proof of Claim in the amount of $298,402.24. Creditor
obtained, without opposition, an order lifting the stay as it related to
the Syracuse Property and commenced a foreclosure action on the
Syracuse Property. The action is pending in Onondaga County
Supreme Court. On January 26, 2011, debtors filed a Proposed
Amended Plan and proposed to surrender the Syracuse Property and
pay what they claim is the full amount of the fair market value of the
Utica Property, $142,000.00, in full satisfaction of the Utica Mortgage
lien. Creditor disputes debtors’ value of the Utica Property.
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On September 22, 2010, the creditor filed an Objection to Confirmation of Debtors’
Chapter 13 Plan arguing that the proposal was not in good faith and not in compliance with 11
U.S.C. §§ 1322 and 1325.
The debtors, Chapter 13 trustee and creditor filed memorandums of law relating to the
Proposed Plan and Objections. The debtors and trustee argued that the unrecorded consolidated
mortgage between the creditor and debtor was a valid mortgage, regardless of the fact that it was
never filed. Further, they argued because that binding and valid mortgage is secured by both
residential and nonresidential property, the debtors could modify the consolidated mortgage and
“cramdown” the mortgage pursuant to 11 U.S.C. § 1322(b) by paying creditor the full value of
their residence. Debtors further claimed that upon payment of the full value, debtors were
entitled to a discharge of any mortgage liens held by creditor on the Utica property. Conversely,
creditor claimed that because the consolidated mortgage was never recorded, it could not be
foreclosed upon, discharged or released pursuant to New York State Tax Law, Section 258(1).
Accordingly, there were two enforceable, separate mortgages at issue. Further, creditor asserted
that the Utica Mortgage was secured solely by the Utica Property and therefore, pursuant to §
1322(b)(2), debtors could not cramdown the Utica Mortgage because it was secured by their
principal residence.
On March 31, 2011, Judge Davis held a confirmation hearing. The court issued an oral
decision on creditor’s objection to confirmation of debtors’ amended plan. Relying on a prior
decision by retired Chief Judge Stephen D. Gerling in the case of In Re Hotel Syracuse, Inc., 271
B.R. 443 (Bankr. N.D.N.Y. 2001), the Court noted, “New York Tax Law § 258(1) . . . is not
substantive but, rather, ‘it is a revenue raising statute, nothing more’”. The Court continued,
“New York courts have held that a mortgage could be admitted in a foreclosure action by the
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mortgagee simply by paying the mortgage recording tax”. The Court held, “Milkowski’s
argument that he may not have foreclosed on the consolidated mortgage necessarily fails.
Accordingly, Milkowski cannot now invalidate the consolidated mortgage in order to avoid the
consequences of Section 1322(b)(2).” Further, the Court held:
As the parties recognize, this Court subscribes to the rule articulated
by the Third Circuit in Scarborough v. Chase Manhattan Mortgage
Corp., 461 F.3d 406 (3d Cir. 2006) that, “when a mortgagee takes an
interest in real property that includes by its nature at the time of the
transaction income producing rental property, the mortgage is also
secured by property that is not the debtors’ principal residence and the
claim, therefore, may be modified in a debtors’ later Chapter 13
proceeding”; id. at 412, employing a literal and narrow reading of
1322(b)(2). The Court formally adapted this rule in In Re Moore,
Chapter 13 Case Number 09-61990, slip op. (Bankr. N.D.N.Y.
November 18, 2010). Applying the rule to the facts of this case, the
Court must now overrule Milkowski’s objection.
(Dkt. No. 2-2).
On July 7, 2011, Judge Davis confirmed debtors’ Amended Plan. On July 20, 2011,
creditor filed a Notice of Appeal of the decision of the bankruptcy court. Appellant requests that
this Court reverse the decision and deny confirmation of debtors’ Proposed Amended Plan.
Appellant contends that the Bankruptcy Court erroneously confirmed debtors’ proposed Chapter
13 Plan in violation of the anti-modification provision of 11 U.S.C. § 1322(b)(2) thereby
permitting the cramdown of creditor’s mortgage claim secured by debtors’ Utica Property, their
primary residence.

DISCUSSION
I.

Applicable Legal Standard
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The District Court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a)(1). A
reviewing court may set aside findings of fact made in a bankruptcy proceeding only if they are
“clearly erroneous.” Fed. R. Bankr. P. 8013. A bankruptcy court's conclusions of law are subject
to de novo review. See In re Vebeliunas, 332 F.3d 85, 90 (2d Cir. 2003). Where an appellee has
failed to file a responsive brief in a bankruptcy appeal, generally the appropriate remedy is not the
automatic granting of the appellant's appeal, but a review of the merits of the appeal, and the
preclusion of the appellee from being heard at oral argument.
Swimelar v. Baker, 2009 WL 3644336, at *1 (N.D.N.Y. 2009) (citing Fed. R. Bankr. Proc. 8009).
For the following reasons, the matter is remanded to the Bankruptcy Court for further
proceedings.
II.

Unrecorded Consolidated Mortgage
In large part, creditor asserts the same arguments that he made before the Bankruptcy

Court regarding the validity of the unrecorded consolidated mortgage. Creditor argues that
pursuant to New York State Tax Law § 258(1)1, the unrecorded consolidated mortgage may not
be foreclosed upon, released or discharged. Creditor also argues, as he did before Judge Davis,
that he can no longer record the consolidated mortgage without violating the automatic stay and
further, that he had no obligation to record the Consolidated Mortgage. The Bankruptcy Court
overruled appellant’s objections relying solely upon the decision in In re Hotel Syracuse. The

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New York State Tax Law § 258(1) provides, in pertinent part:
No mortgage of real property shall be recorded by any county clerk or register, unless there shall be
paid the taxes imposed by and as in this article provided. No mortgage of real property which is
subject to the taxes imposed by this article shall be released, discharged of record or received in
evidence in any action or proceeding, nor shall any assignment of or agreement extending any such
mortgage be recorded unless the taxes imposed thereon by this article shall have been paid as
provided in this article. . . . No judgment or final order in any action or proceeding shall be made
for the foreclosure or the enforcement of any mortgage which is subject to any tax imposed by this
article or of any debt or obligation secured by any such mortgage, unless the taxes imposed by this
article shall have been paid as provided in this article . . .
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Bankruptcy Court rejected appellants’ claim that he could not record an unrecorded mortgage
after bankruptcy proceedings commenced. Appellant challenges the Bankruptcy Court’s reliance
upon In re Hotel Syracuse.
In Judge Davis’ oral decision, the Court cited portions of the In re Hotel Syracuse
decision. Specifically, Judge Davis stated:
New York’s courts have held that a mortgage could be admitted in a
foreclosure action by the mortgagee simply by paying the mortgage
recording tax. Thus, Milkowski’s argument that he may not have
foreclosed on the consolidated mortgage necessarily fails.
In his decision, Judge Gerling continued:
New York's courts have held that a mortgage could be admitted in a
foreclosure action by the mortgagee by simply paying the mortgage
recording tax. See The Mutual Life Ins. Co. of New York v. Nicholas,
144 A.D. 95, 98–99, 128 N.Y.S. 902 (N.Y.App.Div. 1911); see also
Commonwealth Land Title Ins. Co. v. Lituchy, 161 A.D.2d 517, 518,
555 N.Y.S.2d 786 (N.Y.App.Div. 1990) (noting that “the failure to
record the mortgage and pay the tax does not render the mortgage and
note unenforceable (citations omitted). Thus, Commonwealth
[plaintiff to whom note and mortgage were assigned] may be entitled
to obtain a judgment on the debt simply by paying the required tax any
time prior to judgment or final order. (citations omitted).”). In the
bankruptcy context, Titan would arguably be prevented from
paying any mortgage recording tax that might be owed given the
existence of the Code § 362(a) automatic stay.
In re Hotel Syracuse, Inc., 271 B.R. 443, 447 (N.D.N.Y. 2001) (emphasis added).
As Judge Davis’ decision was rendered orally, it is difficult for this Court to discern
whether the Bankruptcy Court considered the implications of the above portions of the In re Hotel
Syracuse opinion. While the Court agrees with appellant that, based upon the facts herein,
reliance solely upon In re Hotel Syracuse may be misplaced, appellant oversimplifies the issue.
Section 362(a)(4) provides that, “a petition filed in bankruptcy automatically stays any act
to create, perfect or enforce any lien against the property of the estate”. See In re Berg, 387 B.R.
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524, 563-64 (N.D.Ill. 2008) (recording of the eHome Mortgage against the property after the
bankruptcy petition filing date was an act to perfect a lien against property which included
property of the Estate in violation of the automatic stay). When a mortgage against real property
of the debtor is filed after the debtor files a petition for relief under the bankruptcy code, “the key
question is whether the mortgage was ‘created’, ‘perfected’ or ‘enforced’ by the act of recording
the mortgage”. Sloan v. Sloan, 1991 WL 1301288, at *2 (D.N.D. 1991). While not controlling
in this district, the Sloan case provides some guidance.
In that matter, the debtor (Gary Sloan) signed a real estate mortgage to his brothers, Gene
and Claude for the farmland in 1981. The mortgages were not recorded. Some years later, before
the bankruptcy petition, Gary failed to make any payments under the terms of the mortgages. In
April 1987, the debtor filed a petition for relief under Chapter 12 and in May 1987, Gene filed
and recorded his mortgage. The debtor filed suit alleging that the post-petition recording of the
mortgage was in violation of § 362(a)(4) and (5) and claimed that he suffered “irreparable harm
since it interfered with his attempt to sell the farmland”. The Court noted that Section 47-19-46
of the North Dakota Century Code provides, “[a]n unrecorded instrument is valid as between the
parties thereto and those who have notice thereof”. Id. at *3. The Court held “[b]ecause North
Dakota recognizes that an unrecorded mortgage is valid, the ‘creation’ of the mortgage lien
occurred at the close of the mortgage transaction back in August 1981.” Id. Accordingly, the
Court found “the lien against [the] property interest under the mortgage was created long before
the filing of [the] Chapter 12 petition: and therefore, the mere act of recording the mortgage after
the Chapter 12 filing does not further create a lien against the property of the estate”. Id.
Here, debtors did not file a response to creditor’s appeal, however, in the underlying
action, debtors argued:
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Section 291 of the Real Property Law provides that an unrecorded
conveyance of an interest in real property is valid between the parties
even if unrecorded.
. . . as further evidence that the parties considered the consolidated
mortgage as the replacement for the two recorded mortgages, for over
three years following the execution of the consolidated mortgage, the
debtors made a single payment, as required by the consolidated
mortgage, and the creditor accepted this payment.
See Dkt. No. 2-6.
In the underlying proceeding, the Trustee presented a similar argument noting,
“Milkowski’s inability to foreclose upon this consolidated mortgage, due to his failure to properly
file this document, bears no impact on its validity”. See Dkt No. 2-8.
Upon review, the Court finds the record on appeal to be insufficient with respect to this
issue. It is unclear from the oral decision whether the Bankruptcy Court considered all the facts
and applicable New York State law, including but not limited to Real Property Law § 291, to
determine whether the appellant could record the consolidated mortgage without violating the
automatic stay. Moreover, creditor does not cite to any case law or authority to support his
position. The issues presented herein are more appropriate for the Bankruptcy Court to determine
in the first instance. See In re Jacob, 418 B.R. 37, 41 (N.D.N.Y. 2009). Accordingly, remand to
the Bankruptcy Court for further proceedings is necessary.
III.

Anti-Modification and 11 U.S.C. § 1322(b)(2)
Section 1322(b)(2) provides:
the plan may–
modify the rights of holders of secured claims, other than a claim
secured only by a security interest in real property that is the debtor's
principal residence, or of holders of unsecured claims, or leave
unaffected the rights of holders of any class of claims.

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Appellant claims that since the Consolidated Mortgage is unrecorded and unenforceable,
the only recorded mortgage is on the Utica Property and the Bankruptcy Court should have
determined whether this statute applied. Based upon the Court’s decision in Part II, the Court
cannot make a determination with regard to this issue. An analysis of this issue is inextricably
intertwined with the decision of the Bankruptcy Court on remand. To wit, whether the creditor
may record the Consolidated Mortgage without violating the automatic stay provision.
IV.

CONCLUSION
It is hereby
ORDERED, that the appeal (Dkt. No. 1) is DISMISSED; it is further
ORDERED that the case is REMANDED to the Bankruptcy Court (B.J. Davis) for

further proceedings consistent with this opinion; it is further
ORDERED that the Clerk of the Court shall serve copies of this Order upon the parties to
this action.
IT IS SO ORDERED.
Dated: May 14, 2012
Albany, New York

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