Tracey West, Plaintiff, Edwin Young and RYDER TRUCK RENTAL, INC., Defendants.
FERRO, KUBA, MANGANO ET AL Attys. For Plaintiff.
MINTZER, SAROWITZ, ZERIS Attys. For Defs/Third Party Plaintiffs.
ROBERT P. TUSA, ESQ. Attys. For Third-Party Defendants.
THOMAS F. WHELAN, J.S.C.
Upon the following papers numbered 1 to 7 read on this motion by the defendants for leave to amend their answer and for an accelerated judgment dismissing the complaint; Notice of Motion/Order to Show Cause and supporting papers 1 - 3; Notice of Cross Motion and supporting papers; Answering papers 4-5; Replying Affidavits and supporting papers 6-7; Other; (and after hearing counsel in support of and in opposition to the motion) it is,
ORDERED that this motion (#003) by the defendants for an order granting them leave to amend their answer to assert the affirmative defense of lack of capacity to sue and for dismissal of the complaint pursuant to CPLR 3211 on that basis is considered under CPLR 3025 and 11 USC §541 and is denied.
In this personal injury action, the plaintiff seeks the recovery of damages attributable to the personal injuries she sustained in a motor vehicle accident that occurred on August 2, 2006. Two and one-half weeks prior to the accident, the plaintiff filed a petition in bankruptcy with the United States District Court of New York. This July 14, 2006 bankruptcy filing was dismissed on March 2, 2007, on motion of the bankruptcy trustee due to the plaintiff's failure to make payments due under the terms of a Chapter 13 repayment plan. On October 4, 2008, the plaintiff commenced this action to recover on the personal injury claims that accrued on August 2, 2006, the date of the subject motor vehicle accident.
The defendants now move to amend their answer to include the affirmative defense of lack of capacity to sue and for an accelerated judgment dismissing the plaintiff's complaint on that ground. The lack of capacity to sue allegedly arises from the fact that the claim that is the subject of this action is an asset of the bankruptcy estate over which only the trustee may act. Although the claims were not in existence on the date the bankruptcy petition was filed, claims arising post-petition are allegedly part of the estate and the plaintiff was under a continuing duty to amend her filing to reflect such claim. The defendants further allege that only the bankruptcy trustee is vested with capacity to sue on the claim because the character of the undisclosed and unscheduled claim remained the property of the bankruptcy estate notwithstanding the dismissal of the bankruptcy proceeding prior to the commencement of this action. According to the defendants, the plaintiff's mere failure to disclose her claim once it arose during the pendency of the bankruptcy proceeding is sufficient to warrant the dismissal of her claims in this action, as it is immaterial whether such failure was due to inadvertence, mistake or purposeful concealment. The defendants thus seek leave to amend their answer to assert this lack of capacity to sue defense and for judgment thereon dismissing the complaint in its entirety.
It is well established that leave to amend an answer to assert an affirmative defense should generally be granted where the proposed amendment is neither palpably insufficient nor patently devoid of merit, and there is no evidence that it would prejudice or surprise the opposing party (see CPLR 3025[b]; Giuffre v DiLeo, 90 A.D.3d 602, 934 N.Y.S.2d 449 [2d Dept 2011]; Matter of Roberts v Borg, 35 A.D.3d 617, 618, 826 N.Y.S.2d 409 [2d Dept 2009]; Public Adm'r of Kings County v Hossain Constr. Corp., 27 A.D.3d 714, 815 N.Y.S.2d 621 [2d Dept 2006]). Mere lateness is not a basis for denying amendment unless the lateness is coupled with "significant prejudice to the other side" (see Giuffre v DiLeo. 90 A.D.3d 602, supra; U.S. Bank, Natl. Ass'n v Sharif, 89 A.D.3d 723, 933 N.Y.S.2d 293 [2d Dept 2011]). For the reasons stated below, the court denies the defendants' application to amend their answer to assert the affirmative defense of lack of capacity and for the other relief demanded on this motion.
The object of a bankruptcy proceeding commenced under Chapter 7 of the Bankruptcy Code is to provide the debtor with a "fresh start" upon discharge by the liquidation of all non-exempt property in the bankruptcy estate for the benefit of creditors. Pursuant to 11 USC §541(a)(1), the bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case" including, contingent civil claims for damages possessed by the debtor (11 USC §541[a]). It also includes "any interest in property that the estate acquires after the commencement of the case" (11 USC §541[a]). Referred to as a catchall provision, §541(a)(7) embodies the principle that the estate, having a separate legal identity from the debtor, is an active entity comprised of not only property interests the debtor held at the commencement of the case, but of property the estate itself generates while operating under the aegis of the Bankruptcy Code (see Wade v Bailey, 287 B.R. 874, 880—881 [S.D.Miss.2001]). It does not, however, serve as an independent basis for the creation of estate property. By its express terms, §541(a)(7) only operates when property is encompassed within the estate in the first instance, after which time any property generated by that estate property becomes, itself, included in the estate (see In re Doemling, 116 B.R. 48, 50 [Bankr.W.D.Pa.1991]).
Once an asset is deemed to belong to the bankruptcy estate, the asset may no longer be controlled by the debtor (see Matter of Educators Group Health Trust, 25 F.3d 1281');">25 F.3d 1281, 1284 [C.A 5 1994]). It is thus clear that a bankruptcy trustee appointed in a Chapter 7 proceeding has the exclusive authority to prosecute a non-bankruptcy cause of action belonging to the estate (see Matter of New Era, Inc., 135 F.3d 1206 [C.A. 7 1998]; Matter of Educators Group Health Trust, 25 F.3d 128, supra; Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1153—54 [C.A. 5 1987]; Long Is. Forum for Tech. v New York State, 85 A.D.3d 791, 925 N.Y.S.2d 535 [2d Dept 2011]). It is equally clear that a debtor is required to schedule such causes of action as assets on the bankruptcy petition so that the trustee can determine whether the claims should be abandoned or administered by the bankruptcy court for the benefit of the creditors (see Dynamics Corp. of Am. v Marine Midland Bank—New York, 69 N.Y.2d 191, 195—196, 513 N.Y.S.2d 91 ; Tri-State Sol-Aire Corp. v Martin Assoc., Inc., 7 A.D.3d 514, 776 N.Y.S.2d 99 [2d Dept 2004]; Mehlenbacher v Swartout, 289 A.D.2d 651, 734 N.Y.S.2d 290 [3d Dept 2001]). If an estate cause of action is not listed in the schedule of assets, it cannot be deemed to have been abandoned by the trustee (see 11 USC §554), and such cause of action remains the property of the estate (see 11 USC §554[d]; First Natl. Bank of Jacksboro v Lasater, 196 U.S. 115, 25 S.Ct. 206 ). A debtor has thus been held to lack the legal capacity to sue on all such undisclosed claims during or subsequent to the close of a Chapter 7 bankruptcy proceeding (see Dynamics Corp. of Am. v Marine Midland Bank—New York, 69 N.Y.2d at 195—196, supra; Whelan v Longo, 23 A.D.3d 459, 808 N.Y.S.2d 95 [2d Dept 2005], affirmed 7 N.Y.3d 821, 822 N.Y.S.2d 751 ; Santori v Met Life, 11 A.D.3d 597, 599, 784 N.Y.S.2d 117 ; Coogan v Ed's Bargain Buggy Corp., 279 A.D.2d 445, 719 N.Y.S.2d 260 [2d Dept 2001]).
In contrast to Chapter 7 proceedings, the object of a Chapter 13 filing is the rehabilitation of the debtor under a plan that adjusts debts owed to creditors by the debtor's regular periodic payments derived principally from income (see 11 USC §1301, et. seq.; First Capital Asset Mgt., Inc. v Satinwood, 385 F.3d 159 [C.A. 2 2004]). The bankruptcy estate under Chapter 13 is broader than the estate in Chapter 7 proceedings since a Chapter 13 estate continues to accumulate property following the filing of the petition. Under USC §1306, all property specified in §541 that the debtor acquires after the commencement of the action, but before the case is closed, dismissed or converted is the property of the estate. Inclusion of both pre-petition assets and post-petition assets in a Chapter 13 estate is due to the following: 1) that distribution of the estate assets administered by the trustee, principally income, must be made only in accordance with a plan that has been confirmed by the court; 2) except as to income and assets controlled by the trustee under the terms of the plan, the debtor is deemed to remain in possession of all property of the estate (see 11 USC §1306[b]; 1327[b]); and 3) the confirmation of the plan "vests all the property of the estate in the debtor" (see 11 USC §1327[b]). Assets acquired post-confirmation are not included as property of the estate, unless they are necessary to maintain the plan (see 11 USC §1306[a]; §1326]). Unlike Chapter 7 cases, there is no real disconnect of the estate property from the debtor under a Chapter 13 filing, except to the extent that the plan, as confirmed by order of the court, places control over an asset in the hands of the trustee.
A filing under Chapter 13 thus changes the calculus in determining the issue of standing or the capacity to prosecute civil causes of action from that applied to Chapter 7 cases. "While Chapter 7 and Chapter 11 debtors lose standing to maintain civil suits - which must be brought and/or maintained by their bankruptcy trustees - it is clear that Chapter 13 debtors like plaintiffs are not subject to this restriction" (Murray v Board of Educ. of City of New York, 248 B.R. 484, 486 [S.D.N.Y.2000], citing Olick v Parker & Parsley Petroleum Co., 145 F.3d 513 [2d Cir.1998]). In Olick, the Second Circuit addressed for the first time the differences between Chapter 7 and Chapter 11 cases and found "that a Chapter 13 debtor, unlike a Chapter 7 debtor, has standing to litigate causes of action that are not part of a case under title 11" (id. 45 F.3d at 515). This holding was premised, in part, upon the fact that the focus of a Chapter 13 bankruptcy is the repayment of debts, regularly, through future earnings rather than from a liquidation of assets owned by the debtor at the time of filing. The Olick court also relied upon the legislative history of §1303 of Chapter 13 as drawn from remarks in the Congressional Record: "[C]ertainly it is intended that the [Chapter 13] debtor has the power to sue and be sued" (id. at 516 quoting 124 Cong. Rec. H. 11, 106; S. 17, 423).
Numerous other federal cases have also held that Chapter 13 debtors are not deprived of standing to assert pre-petition causes of action and others accruing post-petition (see Ponton v AFSCME, 395 Fed.Appx. 867 [C.A.3 2010]; Smith v Rockett, 522 F.3d 1080 [C.A.10 2008]; Autos Inc. v Gowin, 244 Fed.Appx, 2007 WL 2269443 [C.A.10 2007]; Crosby v Monroe County, 394 F.3d 1328 [C.A. 11 2004]; Cable v Ivy Tech., 200 F.3d 467, 472-74 [C.A. 7 1999]; Bennett v Flagstar Bank, 2011 WL 6152940 [S.D. Ga. 2011]; M & T Mtge. Corp. v White, 736 F.Supp.2d 538 [E.D.N.Y 2010]; In re Stewart, 373 B.R. 801 [Bankr. S.D. Ga. 2007]; Snowden v Fred's Stores of Tennessee, 419
F.Supp.2d 1367 [M.D Al. 2006]; In re Bowker, 245 B.R. 192 [D.N.J. 2000]). While it is unclear from these case authorities whether a Chapter 13 debtor has an exclusive right to sue (see In re Bowker, 245 B.R. 192, supra) or possesses such right concurrently ...