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In re Belmonte

United States Court of Appeals, Second Circuit

July 25, 2019

In re: Alice Phillips Belmonte, Debtor.
v.
The Brand Law Firm, P.A. Defendant-Appellant. Harold D. Jones, Plaintiff-Appellee,

          Submitted: May 30, 2019

          Robert N. Michaelson, Rich Michaelson Magaliff, LLP, New York, NY for Plaintiff-Appellee.

          Craig A. Brand, The Brand Law Firm, P.A., Orlando, FL for Defendant-Appellant.

          Before: Calabresi, Lynch, and Lohier, Circuit Judges.

          Gerard E. Lynch, Circuit Judge

         Defendant-Appellant the Brand Law Firm ("Brand") appeals from a judgment of the United States District Court for the Eastern District of New York (Azrack, J.) affirming a decision of the Bankruptcy Court for the Eastern District of New York (Trust, J.) ordering it to remit $59, 432 to the trustee of Alice Belmonte's bankruptcy estate. The amount that Brand was ordered to remit was part of the proceeds of an unauthorized post-petition transfer by the debtor of the estate's property. Brand argues that the order violates 11 U.S.C. § 550(d), prohibiting a trustee from recovering illegally transferred property more than once. We disagree, and AFFIRM the judgment.

         While an involuntary bankruptcy petition was pending against her, Alice Belmonte (the "Debtor"), executed a second mortgage on property of her bankruptcy estate in exchange for a $250, 000 loan. She then transferred the loan proceeds to the Brand Law Firm ("Brand") as payment for representing her in a criminal proceeding. Harold D. Jones, the trustee of the Debtor's estate (the "Trustee"), sought to have the mortgage and the transfer of the $250, 000 loan avoided as illegal post-petition transfers of the estate's property. He also sought to recover for the estate the $250, 000 that had been illegally transferred to Brand. Brand opposed, arguing that the Trustee's recovery of any part of the $250, 000 from Brand violated 11 U.S.C. § 550(d), which limits a trustee to a single recovery of the illegally transferred property. The Bankruptcy Court for the Eastern District of New York (Alan S. Trust, J.) avoided the two post-petition transfers and also ordered Brand to remit $59, 432 of the proceeds of the loan to the Trustee. The United States District Court for the Eastern District of New York (Joan M. Azrack, J.) affirmed the bankruptcy court's order. Both the bankruptcy court and the district court rejected Brand's argument that the Trustee's recovery of the $59, 432 from Brand constituted a double recovery for the estate. For the reasons that follow, we AFFIRM the judgment of the district court.

         BACKGROUND

         On October 5, 2012 (the "Petition Date"), an involuntary petition for bankruptcy was filed against the Debtor pursuant to Section 303(b) of the Bankruptcy Code in the Bankruptcy Court for the Eastern District of New York. The Debtor hired Craig Brand, a criminal defense and commercial litigator, and the proprietor and sole employee of Brand, to represent her in the bankruptcy proceedings.

         On December 13, 2012, the bankruptcy court entered an order enjoining the Debtor from transferring any property pending resolution of the involuntary petition. At such time, the Debtor and her husband, William Belmonte ("Belmonte"), owned the home and property located at 5 Crescent Court, Wading River, Suffolk County, New York (the "Crescent Court Property"), as tenants by the entirety. The Crescent Court Property was subject to a first mortgage dated October 4, 2011, issued by the Debtor and Belmonte in favor of People's United Bank in the original principal sum of $460, 000. As of the Petition Date the Debtor estimated the value of the Crescent Court Property at $721, 000. Under state law, the Debtor, as a tenant by the entirety with her husband, possessed an undivided 50% interest in the home's equity, meaning that half of the roughly $260, 000 equity cushion in the Crescent Court Property belonged to the Debtor.

         On April 8, 2013, the bankruptcy court held a trial on the involuntary petition against the Debtor. Then, on April 26, 2013, the court adjudicated the Debtor bankrupt and entered an order for relief against her, placing her into Chapter 7 bankruptcy. At that time the Debtor's interest in the Crescent Court Property, which consisted of half of the equity in the Crescent Court Property that was unencumbered by the first mortgage (roughly $130, 000), became property of her bankruptcy estate (the "Estate"). By force of 11 U.S.C. § 362, an automatic stay was imposed prohibiting the transfer of property belonging to the Estate.

         On October 17, 2013, the Debtor was arrested pursuant to a 49-count indictment filed in the Supreme Court of the State of New York, New York County, which alleged, inter alia, that the Debtor had engaged in a scheme to defraud, and had committed grand larceny against, certain creditors of the Estate. The Debtor hired Brand and two other attorneys, Brian D. Waller and Thomas A. Sadaka, to represent her in the criminal proceedings.

         In order to fund her defense in the criminal case, Patrick Thompson, a personal friend of the Debtor, agreed to lend $250, 000 (the "Thompson Loan") to the Debtor and her husband, secured by a lien on the Crescent Court Property (the "Second Mortgage"). In January 2014, Craig Brand drew up the paperwork for the transaction by which Belmonte and the Debtor executed a promissory note in favor of Thompson, and by which Belmonte, on his own behalf and via power of attorney for the Debtor, executed the Second Mortgage in favor of Thompson. At the time that the Second Mortgage was executed both Thompson and Belmonte knew of the bankruptcy case pending against the Debtor.

         To effectuate the funding of the Debtor's criminal defense, Thompson wired the $250, 000 loan from one of his wholly owned subsidiaries to Brand in two separate installments. Per an agreement between Brand and the Debtor's other two criminal defense attorneys Brand transferred $73, 147 to Sadaka and $54, 490 to Waller as payment for their legal services. Brand retained $118, 864 of the Thompson Loan.

         On November 21, 2014, the Trustee filed an adversary proceeding in the bankruptcy court against the Debtor, Belmonte, and Thompson, seeking to avoid the Second Mortgage. The Trustee alleged that the mortgage was a transfer of the Estate's property that violated the automatic stay on any transfers of the Estate's property. He thus sought to have the transaction avoided pursuant to 11 U.S.C. § 549, which allows a trustee to avoid a transfer of property of an estate that occurs after the commencement of the bankruptcy case and is not otherwise authorized by the Bankruptcy Code or by the court. On February 27, 2015, the bankruptcy court approved a settlement between the Trustee and Thompson, in which the adversary proceeding against Thompson was dismissed, the Second Mortgage was avoided pursuant to § 549, and the lien created by the Second Mortgage was preserved for the benefit of the Debtor's Estate pursuant to § 551.

         In April 2015, the Trustee filed an adversary proceeding against Belmonte seeking to force the sale of the Crescent Court Property pursuant to 11 U.S.C. § 363(h), which allows a trustee to sell property in which the estate has an interest, despite the interest of a non-debtor co-owner, if various criteria are satisfied. A trial in that proceeding was held on March 29, 2016, and the bankruptcy court subsequently entered an oral order denying the forced sale. The bankruptcy court recognized that the Estate held a lien on the Crescent Court Property by virtue of the avoided Second Mortgage, and that a sale would allow the Trustee to realize the value of the Estate's interest in the property for the benefit of the creditors. However, mindful that the Crescent Court Property was owned as a tenancy by the entirety, [1] the bankruptcy court refused to approve the sale of the Crescent Court Property on the ground that noneconomic factors-Belmonte's and his daughter's interest in remaining in their home-outweighed the economic benefit to the Estate.

         Almost simultaneously with his filing the proceeding against Belmonte to compel the sale of the Crescent Court Property, the Trustee also filed a complaint in the bankruptcy court against Brand, seeking to have the Thompson Loan avoided. The Trustee alleged that the money the Debtor obtained from the Thompson Loan was property of the Estate, because the loan was secured by the Crescent Court Property and 11 U.S.C. § 541(a)(6) makes the "[p]roceeds, product, offspring, rents, or profits of or from property of the estate" also property of the estate. Because the transfer took place when the Debtor was not authorized to transfer Estate property, the Trustee concluded, the transfer of the Thompson Loan to Brand was avoidable pursuant to § 549. The Trustee therefore sought to recover the value of the Thompson Loan proceeds from Brand pursuant to 11 U.S.C. § 550(a), which allows a trustee to recover from the transferee "the property transferred, or . . . the value of such property" to the extent that a transfer is avoided under § 549, "for the benefit of the estate."

         In the answer to the complaint, Brand alleged that the Trustee's claim was barred by the election of remedies doctrine and the prohibition on double recovery, as a result of the Trustee's settlement with Thompson avoiding the Second Mortgage and preserving the lien created by the Second Mortgage for the benefit of the Estate. In a June 28, 2016, interlocutory order, the bankruptcy court rejected Brand's contention that, because the Trustee had successfully avoided the Second Mortgage, he was prohibited from recovering any of the loan proceeds as a double recovery. See Jones v. Brand (In re Belmonte), 551 B.R. 723, 732 (Bankr. E.D.N.Y. 2016). The bankruptcy court reasoned that, "until finally paid, litigants may look ...


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