626 B.R. 750
Bankr. S.D.N.Y.2021Background
- Debtor Nosson Sklar filed a Chapter 11 petition on August 29, 2017 (First Case), which was dismissed on October 31, 2018; he filed a second petition on May 29, 2019 that converted to Chapter 7 on August 27, 2019.
- Plaintiff Dulce Garcia sued Sklar and related entities in federal district court on November 16, 2017 for discrimination, sexual harassment, assault and battery, and gender-motivated violence; she obtained a default judgment against Sklar (and others) announced March 24–25, 2020.
- Sklar did not appear in the district action and his bankruptcy filings (as originally filed) did not disclose Garcia’s lawsuit or the judgment; Garcia asserts she lacked notice of Sklar’s bankruptcy.
- Garcia moved for prospective and retroactive relief from the automatic stay and filed an adversary complaint seeking denial/exception to discharge under multiple Bankruptcy Code sections; the trustee filed no objection to lifting the stay.
- The Bankruptcy Court held the district-court proceedings void ab initio as to Sklar (they occurred during his pending bankruptcy), denied retroactive annulment of the stay, granted prospective relief to permit Garcia to refile in district court, dismissed several discharge claims as inapplicable or untimely, and allowed amendment to plead 11 U.S.C. § 523(a)(3).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Effect of automatic stay on district-court action | District-court judgment should be enforced despite stay issues | Proceedings were filed while bankruptcy was pending and thus protected by the automatic stay | District-court action and all rulings are void ab initio as to Sklar because the complaint was filed during his First Bankruptcy Case |
| Retroactive annulment of the stay | Court should validate prior district proceedings and judgment retroactively | Retroactive validation would unfairly impose an obligation on debtor to defend a void action; debtor had no duty to act | Retroactive annulment denied — retroactive relief is disfavored and Stockwell/MarketXT factors do not support it |
| Prospective relief to proceed in district court | Grant lift to let Garcia restart and obtain adjudication/liquidation of damages | Debtor did not affirmatively consent to bankruptcy-court adjudication; disputes about notice/timeliness remain | Prospective relief granted — stay lifted to allow Garcia to refile her lawsuit in district court |
| Dischargeability and timing (523(a)(6) & 727(a)(4)(A)) | Claims are non-dischargeable; judgment already entered | Adversary complaint was filed well after Rule 4007/4004 deadlines following conversion | Claims under 523(a)(6) and 727(a)(4)(A) dismissed as untimely because deadlines ran after the first §341 date in the converted Chapter 7 |
| Unscheduled creditor/no notice (523(a)(3)) | Garcia lacked notice/actual knowledge of the bankruptcy and thus debts should be excepted from discharge | Debtor contends service/knowledge undermines Garcia’s lack-of-notice claim | Court permits adjudication of notice/actual-knowledge issue in adversary proceeding; grants leave to amend to assert §523(a)(3) claim |
| Forum for personal-injury torts (§157(b)(5)) | Plaintiff implicitly seeks bankruptcy-court resolution | Debtor refuses to consent to bankruptcy-court adjudication | Bankruptcy court cannot try personal-injury torts without all parties’ consent; claims must be tried in district court |
Key Cases Cited
- Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522 (2d Cir. 1994) (automatic stay takes effect on petition and proceedings in violation are void)
- Sonnax Indus. v. Tri Component Prods. Corp. (In re Sonnax Indus.), 907 F.2d 1280 (2d Cir. 1990) (factors for determining "cause" to lift or modify the automatic stay)
- E. Refractories Co. v. Forty Eight Insulations, 157 F.3d 169 (2d Cir. 1998) (distinguishing termination and annulment of the stay; annulment has retroactive effect)
- Soares v. Brockton Credit Union, 107 F.3d 969 (1st Cir. 1997) (endorsing treatment of stay-violating acts as void and cautioning against routine retroactive validation)
- F & M Marquette Nat’l Bank v. Richards, 780 F.2d 24 (8th Cir. 1985) (conversion from chapter 11 to chapter 7 gives creditors a fresh period to file dischargeability complaints)