565 B.R. 42
S.D.N.Y.2017Background
- Stillwater Liquidating LLC (Appellant) is pursuing recoveries for creditors of Stillwater funds, claiming the Debtor held a beneficial/trust interest in a loan secured by the Hillandale property.
- In Jan. 2010 the Funds purportedly transferred assets (including the Top Flight loan) to Gerova; Appellant alleges the Funds received worthless stock and were left insolvent.
- Tax sales and subsequent transfers led Ponce (then SFN) to initiate a Georgia judicial foreclosure on Hillandale in Jan. 2012; SFN obtained a Foreclosure Order on Feb. 11, 2013 and purchased the property at a foreclosure sale in Apr. 2013.
- The Debtor filed Chapter 11 on Oct. 3, 2012, creating an automatic stay; Appellant later moved in bankruptcy court to void the Foreclosure Order, the foreclosure deed, and SFN’s later sale to CL-RP as violative of the stay.
- The Bankruptcy Court denied relief, finding (1) the foreclosed property was not property of the Debtor’s estate at the time of the foreclosure because transfers to Gerova occurred prepetition and fraudulently transferred property is not estate property until recovered, and (2) the foreclosure was not an action to recover a claim against the Debtor.
- The district court affirmed the Bankruptcy Court’s order, holding the foreclosure and subsequent transfers did not violate 11 U.S.C. § 362.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Foreclosure Order was an "act to obtain property of the estate" under § 362(a)(3) | Appellant: Debtor retained a trust/beneficial interest under the TFPA; that interest remained property of the estate despite transfers, so foreclosure sought estate property | Respondents: Debtor’s interests were transferred prepetition to Gerova and were not estate property; fraudulently transferred property is not estate property until recovered | Court: No stay violation — property was not estate property at time of foreclosure (Colonial Realty governs) |
| Whether the foreclosure constituted a "claim against the debtor" under § 362(a)(1) | Appellant: Foreclosure effectively enforced a claim against the Debtor because it diminished the Debtor’s alleged interests; precedent treats foreclosures affecting debtor interests as claims | Respondents: Foreclosure enforced independent property obligations; Debtor was not a party and held no recorded interest at foreclosure time | Court: No stay violation — foreclosure was independent and not a claim against the Debtor |
| Whether transfers to Gerova amounted to conversion preserving estate property | Appellant: Transfers were colorable conversions; trust beneficiary retains title despite transfer | Respondents: Transaction with Gerova was a closing/counterparty transfer (not internal conversion); any fraud claim is distinct and property is not estate property absent recovery | Court: Finding: transfers did not make the property estate property; conversion/beneficiary arguments insufficient to show stay violation |
| Applicability of cases like 48th Street Steakhouse and Colonial Realty | Appellant: Those cases support treating related non-debtor actions as stayed when they inevitably affect estate property | Respondents: Those precedents apply only when impact on estate property is legally certain; here any impact is not inevitable | Court: Followed Second Circuit clarifications — only legally certain impacts are stayed; foreclosure here was not legally certain to affect estate property |
Key Cases Cited
- In re Colonial Realty Co., 980 F.2d 125 (2d Cir. 1992) (fraudulently transferred property is not property of the estate until recovered; third‑party suits to recover may be stayed when they seek to recover a claim against the debtor)
- Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir. 2014) (clarifies that third‑party actions are stayed under § 362 only when they are legally certain to impact estate property)
- Chartschlaa v. Nationwide Mut. Ins. Co., 538 F.3d 116 (2d Cir. 2008) (broad definition of property of the estate under § 541)
- 48th Street Steakhouse, Inc. v. Rockefeller Ctr. Realty Corp., 835 F.2d 427 (2d Cir. 1987) (action against non‑debtor that inevitably and legally impacts estate property can be barred by automatic stay)
- In re Prudential Lines Inc., 928 F.2d 565 (2d Cir. 1991) (limits the reach of the automatic stay to its purposes and explains its scope)