finding that at “no point prior to judgment does [DRL § 236] create any contingent or present vested interests, legal or equitable, by virtue of the parties’ marital status or prior to a judgment dissolving their union” (citation omitted)
How later courts described this case
- finding that at “no point prior to judgment does [DRL § 236] create any contingent or present vested interests, legal or equitable, by virtue of the parties’ marital status or prior to a judgment dissolving their union” (citation omitted)
- holding that, under the Bankruptcy Code, the court “‘shall allow’ [a] claim ‘except to the extent that’ the claim implicates any of the nine exceptions enumerated in § 502(b).”
- 11 U.S.C. § 502(b)(1) “is most naturally understood to provide that, with limited exceptions, any defense to a claim that is available outside of the bankruptcy context is available in bankruptcy.”
- “[T]he ultimate burden of persuasion is always on the claimant. Thus, it may be said that the proof of claim is some evidence as to its validity and amount. It is strong enough to carry over a mere formal objection without more.”
Written by the judges who cited it.
The opinion
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------x
:
In re: : Chapter 7
:
Michael Rodger Brown, : Case No. 18-10617 (JLG)
:
Debtor. :
:
---------------------------------------------------------------x
MEMORANDUM DECISION ON DEBTOR’S MOTION TO APPROVE TITLE TO AND
DISTRIBUTION OF MARITAL PROPERTY PURSUANT TO TERM SHEET IN
MATRIMONIAL ACTION, AND EXPUNGE CLAIM NO. 6 OF JENNIFER BROWN
PURSUANT TO 11 U.S.C. § 502(a) AND FED. R. BANKR. P. 3007
APPEARANCES:
LAW OFFICES OF KENNETH L. BAUM LLC
167 Main Street
Hackensack, New Jersey 07601
By: Kenneth L. Baum
Counsel to Michael Rodger Brown, Chapter 7 Debtor
FISCHER PORTER & THOMAS, P.C.
560 Sylvan Avenue, Suite 3061
Englewood Cliffs, NJ 07632
By: Arthur L. Porter, Jr.
Aaron E. Albert
Counsel to Jennifer Brown
AKERMAN LLP
666 Fifth Avenue
20th Floor
New York, NY 10022
By: John P. Campo
Counsel to John S. Pereira, as Chapter 7 Trustee for the Estate of Michael Rodger Brown
Introduction
Michael Roger Brown (the “Debtor”) filed a voluntary petition for relief under chapter 7
of title 11 of the United States Code (the “Bankruptcy Code”) in this Court on March 5, 2018
(the “Petition Date”). That day, John S. Periera, Esq. was appointed chapter 7 trustee for the
Debtor’s estate (the “Chapter 7 Trustee”) and qualified for and accepted that appointment. As of
the Petition Date, the Debtor was a defendant in a divorce action (the “Matrimonial Action”)
commenced by his then-wife, Jennifer Brown (“Jennifer”) in the Supreme Court of the State of
New York, County of New York, Matrimonial Term (the “State Court”).
The Matrimonial Action was automatically stayed upon the commencement of this case.
Among the open issues in that action at that time was the extent of Jennifer’s share of the marital
assets. Jennifer timely filed a contingent claim in this case in the sum of $6,375,000. It
represents her claim to equitable distribution of the marital assets, including to her share of the
so-called Unaccounted For Marital Assets, that Jennifer says the Debtor failed to account for in
the Matrimonial Action (the “Equitable Distribution Claim”).1 Shortly after the Petition Date,
the Court granted Jennifer relief from the automatic stay and leave to continue the Matrimonial
Action in all respects, including the issuance of a judgment determining the nature and extent of
marital property, the nature and extent of Jennifer’s interest in such property, and the equitable
distribution of such property. In doing so, the Court denied the Debtor’s request that this Court
determine the extent of the Debtor’s and Jennifer’s interests in marital property. Without
limitation, the lift stay order directed that if the Debtor and Jennifer entered into a settlement
agreement in the Matrimonial Action, any provisions of such an agreement that purported to
1 On the claims docket, the Equitable Distribution Claim is designated as “Claim No. 6.”
determine the distribution of or title to property of the bankruptcy estate would not be effective
as to such property without this Court’s approval.
The Matrimonial Action went forward in the State Court. After five days of a scheduled
twenty-two day trial, Jennifer and the Debtor reached a global settlement that they embodied in a
“So Ordered Term Sheet” (the “Term Sheet”). Among other things, the Term Sheet resolves all
financial matters at issue in the Matrimonial Action. To that end, the Term Sheet fixes Jennifer’s
share of equitable distribution at $2,500,000 and provides that she will be paid that sum as her
share of equitable distribution, not out of marital or estate property, but out of the Debtor’s post-
petition earnings. Moreover, it provides that Jennifer will turn over all her marital property to
the Chapter 7 Trustee.
The State Court approved the Term Sheet and incorporated it (but did not merge it) in the
Judgment of Divorce (the “Divorce Judgment”) that it entered on November 8, 2018. The
Debtor filed an objection to the Equitable Distribution Claim. See Notice of Objection to Claim
[ECF 86] (the “Claim Objection”). The matter before the Court is the Debtor’s Motion to
Approve Title to and Distribution of Marital Property Pursuant to Term Sheet in Matrimonial
Action and Expunge Claim No. 6 of Jennifer Brown Pursuant to 11 U.S.C. § 502(a) and Fed. R.
Bankr. P. 3007 (the “Motion”) [ECF 85].2 In the Motion, the Debtor is seeking the entry of an
order (i) pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy
Rules”) approving the distribution of his and Jennifer’s marital property pursuant to the Term
2 In support of the Motion, the Debtor filed: the Declaration of Michael Brown annexed as Exhibit 1 to the
Motion, dated November 26, 2019 [ECF 85-1] (the “Brown Decl.”); the Declaration of Lauren Crane, Esq. annexed
as Exhibit 2 to the Motion, dated November 19, 2019 [ECF 85-1] (the “Crane Decl.”); and the Reply Declaration of
Lauren Crane, Esq., In Response to Objection of Jennifer Brown to, and in Further Support of, Debtor’s Motion to
Approve Title to and Distribution of Marital Property Pursuant to Term Sheet in Matrimonial Action, and Expunge
Claim No. 6 of Jennifer Brown Pursuant to 11 U.S.C. § 502(a) and Fed. R. Bankr. P. 3007 [ECF 90] (the “Reply”).
Sheet; and (ii) expunging the Equitable Distribution Claim. The Chapter 7 Trustee joins in and
supports the Motion.3 Jennifer objects to the Motion.4
For the reasons set forth herein, the Court denies the Debtor’s request for relief under
Bankruptcy Rule 9019 as moot, and grants the Debtor’s request to expunge the Equitable
Distribution Claim.
Jurisdiction
The Court has jurisdiction over the Motion pursuant to §§ 1334(a) and 157(a) of title 28
of the United States Code, and the Amended Standing Order of Referral of Cases to Bankruptcy
Judges of the United States District Court for the Southern District of New York, dated January
31, 2012 (Preska, C.J.). This is a core proceeding. 28 U.S.C. §§ 157(b)(2)(A) & (B).
Facts
The Matrimonial Action
Jennifer and the Debtor were married on March 24, 2001. During their marriage the
couple experienced marital problems and prior to March of 2013, Jennifer and the Debtor were
separated for approximately one year. On March 26, 2013, Jennifer, as plaintiff, commenced the
Matrimonial Action in the State Court against the Debtor, as defendant. By order dated June 6,
2013, the State Court appointed the firm of Bollam Sheedy Torani & Co., LLP CPA (“BST”) to
3 See Joinder to, and Memorandum in Support of, Debtor’s Motion to Approve Title to and Distribution of
Marital Property Pursuant to Term Sheet In Matrimonial Action, and Expunge Claim No. 6 of Jennifer Brown
Pursuant to 11 U.S.C. § 502(a) and Fed. R. Bankr. P. 3007 and In Response to Opposition thereto [ECF 92] (the
“Chapter 7 Trustee’s Joinder”). In support of the Trustee’s Joinder, the Chapter 7 Trustee filed the Trustee’s Reply
to Jennifer Brown’s Response to Joinder To, and Memorandum in Support of, Debtor’s Motion to Approve Title To
and Distribution of Marital Property Pursuant to Term Sheet in Matrimonial Action and Expunge Claim No. 6 of
Jennifer Brown Pursuant to 11 U.S.C. § 502(a) and Fed. R. Bankr. P. 3007 [ECF 99] (the “Trustee’s Reply”).
4 See Declaration of Arthur L. Porter, Jr. [ECF No. 88] (the “Porter Decl.”); Memorandum of Law in Opposition
to Debtor’s Motion to Approve the Matrimonial Settlement and Expunge Jennifer Brown’s Claim No. 6 [ECF No.
89] (“Jennifer MOL”). With leave of the Court, Jennifer filed a sur-reply to the Debtor’s and Chapter 7 Trustee’s
submissions. See Jennifer’s Supplemental Letter Reply in Opposition [ECF 97] (the “Sur-Reply”).
serve as an independent expert in the case. BST’s mandate was to “appraise the defendant-
husband’s interest in various entities, including but not limited to Brown Management Company
LLC and HiTouch Business Services LLC,” and to “trace the source, use and application of
marital funds acquired and spent since May 2006.” See BST Report at 1.5 The BST Report
identified more than $40 million in deposits into marital accounts in addition to an existing
balance of $22.8 million. BST could not account for a total of $12.75 million of funds deposited
into the accounts (the “Unaccounted For Marital Assets”). See id. at 16, 26-27. After BST
produced its report, Jennifer retained Financial Research Associates (“FRA”), to serve as her
own expert and to review the findings set forth in the BST Report. FRA produced a report (the
“FRA Report”) in which it noted, among other things:
BST was unable to identify the disposition of certain funds, which included $8.55
million, that were not included in the ending account balances of the marital
accounts analyzed by BST. All told, $12.75 million in transfers could not be
traced to a bank account statement to confirm their ultimate disposition.
See FRA Report at 1.6
The Debtor Commences Chapter 7 Case and Jennifer Immediately Seeks To Dismiss It
The Matrimonial Action was extremely contentious. As of the Petition Date, Jennifer was
proceeding in the State Court to punish the Debtor for contempt based upon his refusal to pay
BST’s fees and his failure to pay State Court-ordered support for her and the couple’s minor
children. See Affirmation of Arthur L. Porter, dated February 26, 2018 ¶¶ 4-5.7 The Debtor
commenced his voluntary chapter 7 case on March 5, 2018. On March 12, 2018, Jennifer filed a
5 A copy of that report is annexed as Exhibit 3 to the Declaration of Arthur L. Porter, dated March 12, 2018 [ECF
6-5] (the “ March 12 Porter Decl.”).
6 A copy of that report is annexed as Exhibit 4 to the March 12 Porter Decl. [ECF 6-6]
7 A copy of this affirmation is annexed as Exhibit 15 to the March 12 Porter Decl. [ECF 6-17]
motion herein seeking, alternatively, to dismiss the case or to obtain stay relief to permit her to
proceed with the Matrimonial Action (the “Motion to Dismiss”).8 In substance, Jennifer sought
to dismiss the Debtor’s bankruptcy case on the grounds that:
(i) The Debtor owed her $166,000 in alimony and domestic support obligations, which is a
non-dischargeable debt under the Bankruptcy Code and not properly subject to challenge
in this Court; and
(ii) The Debtor’s chapter 7 petition misrepresented the Debtor’s income, assets and liabilities
including the extent of his ownership interest in his family’s business; and failed to
provide a full accounting to trace the Unaccounted For Marital Assets.
Motion to Dismiss at 7-10. In the alternative, she sought relief from the automatic stay to allow
her to continue the Matrimonial Action, including the collection of current and overdue support
obligations, identification of the Unaccounted For Marital Assets and a determination by the
State Court of the equitable distribution of marital assets. Id. at 11. Jennifer submitted an
affidavit in support of the motion (the “February 23 Affidavit”).9 In that affidavit, she asserted
that during the couple’s a one-year separation prior to the commencement of the Matrimonial
Action, the Debtor made two trips to the Cayman Islands. February 23 Affidavit ¶ 6. She
suggests that the Unaccounted For Marital Assets might be on deposit in a Cayman bank
account. Id. ¶ 7.
The Court Grants Jennifer Stay Relief To Prosecute the Matrimonial Action
8 See Motion of Short Notice to Dismiss the Debtor’s Petition or, in the Alternative, for relief from the Automatic
Stay to Permit the Non-Debtor Spouse to Proceed with the State Court Matrimonial Action to Enforce Temporary
Support Orders, Identify Unaccounted-for Matrimonial Assets, Determine Custody and the Equitable Distribution of
Matrimonial Property, and Dissolve the Marriage. [ECF 6]
9 A copy of Jennifer Brown’s February 23, 2018 Affidavit is annexed as Exhibit 2 to the March 12 Porter Decl.
[ECF 6-4]
The Debtor and Chapter 7 Trustee each opposed the Motion to Dismiss and both urged
the Court to grant stay relief to permit the Matrimonial Action to proceed to a final judgment in
the State Court.10 However even as he urged the Court to grant stay relief, the Debtor asked the
Court to reserve for its own determination the issue of the equitable distribution of the marital
assets. In substance, the Debtor argued that allowing the issue of equitable distribution to
proceed in the State Court would very likely interfere with the expeditious administration of the
Debtor’s estate because Jennifer’s attorney was attempting to re-open discovery in the
Matrimonial Action, which could substantially delay the resolution of the equitable distribution
issue. See Debtor’s Opposition to MTD ¶ 20. The Debtor insisted that adjudication of the issue
of equitable distribution in this Court would allow for an expeditious resolution of the issue,
without the need to await a trial in the State Court. Id. ¶ 21. The Debtor argued that all creditors
and parties-in-interest would unquestionably benefit from a prompt determination of the issue, as
it would allow the Trustee to fully administer the Debtor’s estate without delay. Id.
After hearing argument on the Motion to Dismiss, on April 4, 2018, the Court entered an
order denying Jennifer’s request to dismiss the case but granting stay relief to permit the
Matrimonial Action to proceed in all respects (the “April 4 Order”).11 The Court denied the
10 See Letter to Judge Garrity from Chapter 7 Trustee In Response to Motion To Dismiss Case, Or In The
Alternative, Relief From Stay [ECF 11]; Declaration of Susan L. Bender, Esq, In Opposition To Motion To Dismiss
Case, Or In The Alternative, Relief From Stay [ECF 12]; Debtor’s Objection To Jennifer Brown’s Motion On Short
Notice To Dismiss The Debtor’s Petition Or, In the Alternative, For Relief From The Automatic Stay To Permit The
Non-Debtor Spouse To Proceed With The State Court Matrimonial Action To Enforce Temporary Support Orders,
Identify Unaccounted-For Matrimonial Assets, Determine Custody and The Equitable Distribution of Matrimonial
Property, and Dissolve the Marriage [ECF 13] (the “Debtor’s Opposition to MTD”)
11 See Order Partially Granting and Partially Denying Motion On Short Notice To Dismiss the Debtor’s Petition
Or, In The Alternative, For Relief From the Automatic Stay To Permit The Non-Debtor Spouse To Proceed With The
State Court Matrimonial Action To Enforce Temporary Support Orders, Identify Unaccounted-For Matrimonial
Assets, Determine Custody and The Equitable Distribution Of Matrimonial Property, and Dissolve The Marriage.
[ECF 17]
Debtor’s request that it reserve the issue of equitable distribution for its own determination.
Instead, it directed that litigation in the Matrimonial Action could proceed in all respects
including, without limitation, a determination of (i) the nature and extent of marital property, (ii)
the nature and extent of Jennifer’s interest in such property, and (iii) the equitable distribution of
such property. However, the Court directed that any determination regarding the distribution of
property of the bankruptcy estate and any determination of title to assets of the bankruptcy estate,
whether for collection of support, equitable distribution or otherwise, would be subject to the
Court’s review and approval. In part, the April 4 Order states that it is:
ORDERED that the Motion is granted to the extent that Jennifer is granted relief
from the Automatic Stay and leave to continue the Matrimonial Action in all
respects, including without limitation the determination of temporary and
permanent support, maintenance, and alimony; the enforcement of state court
orders for support; and the rendering of judgment determining the nature and
extent of marital property, the nature and extent of Jennifer’s interest in such
property, and the equitable distribution of such property, provided that while
Jennifer is free to seek to collect or obtain any property that is not part of the
Debtor’s bankruptcy estate, including without limitation post-petition income and
assets, any distribution of property of the bankruptcy estate and any determination
of title to assets of the bankruptcy estate, whether for collection of support,
equitable distribution or otherwise, shall be subject to this Court’s review and
approval; and it is further
ORDERED that in the event that Jennifer and the Debtor enter into a settlement
agreement, any provisions of such an agreement that purports to determine the
distribution of or title to property of the bankruptcy estate shall not be effective
with regard to such property without this Court’s review and approval.
April 4 Order at 2-3.
Jennifer Timely Files Claims In The Bankruptcy Case and Debtor Receives Discharge In
Bankruptcy
The claims bar date in the chapter 7 case was August 6, 2018. Eight claims totaling the
sum of $12,594,446.96 were timely filed. See Claims Register Summary. On July 27, 2018,
Jennifer filed the Equitable Distribution Claim. See Claim No. 6. She filed it as a contingent
claim based on the alleged missing marital property identified and/or discussed in the BST
Report and FRA Report. On October 8, 2018, the Court entered an order granting the Debtor his
discharge in bankruptcy under § 727 of the Bankruptcy Code. See Order of Discharge [ECF 56].
The Matrimonial Action Goes Forward In The State Court
On February 7, 2019, the State Court issued an order directing, in part, that “a hearing
and trial shall be conducted by a Special Referee in order to hear and report on all of the open
financial issues in this matrimonial action.” See Reference Order at 1.12 The open financial
issues included equitable distribution, spousal maintenance, child support and counsel fees.
Crane Decl. ¶ 4. Thereafter, on or about June 26, 2019, the parties stipulated and agreed that the
Special Referee would oversee the hearing and trial called for under the Reference Order.13 The
Special Referee conducted pre-trial conferences on April 15, 2019 and June 26, 2019, and
scheduled twenty-two days of trial commencing on July 18, 2019. Crane Decl. ¶ 5. Between
June 26, 2019 and June 30, 2019, the parties engaged in settlement negotiations with the Special
Referee. Id. ¶ 8. Of the many issues negotiated between the Debtor and Jennifer, the most
heavily negotiated were Jennifer’s share of equitable distribution, and the time period in which
the Debtor shall pay Jennifer her share of equitable distribution. Id. ¶ 9. The parties were unable
to reach a settlement, and on July 18, 2019 the Special Referee commenced the trial. Id. ¶ 5.
Jennifer and the Debtor Reach a Settlement of the Matrimonial Action and Execute a Term Sheet
Embodying the Terms of the Settlement
Upon conclusion of the trial testimony on July 29, 2019, the Debtor and Jennifer, through
their respective counsel, reached a settlement of the Matrimonial Action, including all open
12 A copy of the Reference Order is annexed as Exhibit B to the Crane Decl.
13 A copy of the stipulation is annexed as Exhibit C to the Crane Decl.
financial issues between the parties. Specifically, the Debtor and Jennifer agreed to resolve
Jennifer’s right to equitable distribution of the marital assets in accordance with the following
terms:
For her share of equitable distribution, the Debtor shall pay Jennifer Brown a total
amount of $2,500,000 over the course of four (4) years. The Debtor shall pay
$500,000 within thirty (30) days after entering into an agreement, and then
$250,000 in eight (8) equal installments. To ensure payment of the equitable
distribution payments, the Debtor's father, Howard Brown, shall be a guarantor. In
exchange, the Debtor and his bankruptcy estate shall retain ownership of all
personal property and assets acquired by either party from the date of marriage,
March 24, 2001, through the date of the commencement of the action for divorce,
March 26, 2013. Lastly, Jennifer Brown shall not interfere with the Debtor's
bankruptcy action.
Crane Decl. ¶¶ 10(a), 11. On the evening of July 29, 2019, Debtor’s counsel forwarded
Jennifer’s counsel the proposed “So-Ordered Term Sheet” that included those terms. Id. ¶ 11.
On July 30, 2019 (the “July 30 Hearing”), after five days of trial, the Special Referee reported
that earlier that morning, she had been presented with the Term Sheet, executed by the parties.
See H’rg Tr. 2:22-24.14 In substance, in regard to equitable distribution, the Term Sheet (i) states
that the Debtor will pay to Jennifer the sum of $2,500,000 out of his post-petition income as her
share of equitable distribution (hereinafter the Court will refer to that payment as the “Equitable
Distribution Payment”), and (ii) specifies the payment terms, including that the Debtor’s father,
Howard Brown, will execute a separate guarantee to secure the Equitable Distribution Payment.
It also addresses Jennifer’s obligations in respect of her receipt of the Equitable Distribution
Payment. In substance, it provides that Jennifer (a) will make a list of particular types of assets
acquired by the Debtor or Jennifer during the marriage that remain in her possession and, for
14 A copy of the Transcript of July 30, 2019 State Court hearing is annexed as Exhibit E to the Crane Decl. A
copy of the Term Sheet is annexed as Exhibit D to Crane Decl.
certain of those assets, that Jennifer donated, gifted or provided to a third party, (b) provide the
list to the Debtor, his counsel and counsel to the Chapter 7 Trustee, and (c) deliver the items
contained on her list to the Chapter 7 Trustee or his counsel.15 In other words, in that agreement
15 As relevant, the Term Sheet states, as follows:
2. The Defendant . . . shall pay to the Plaintiff . . . $2,500,000 as her share of equitable distribution.
The Defendant shall pay $15,924.33 to The Law Firm of Laurence Greenberg by August 16, 2019
to satisfy the January 6, 2015 Charging Lien. The Defendant shall [pay] (sic) to the Plaintiff’s current
attorney, Arthur “Scott” L. Porter, Jr.’s, escrow account in the amount $184,075.67 by August 16,
2019. The Defendant shall pay to the Plaintiff’s current attorney, Arthur “Scott’’ L. Porter, Jr. ‘s,
escrow account an additional $300,000 by August 31, 2019. The Defendant shall pay the remaining
$2,000,000 in eight (8) equal installments in the amount of $250,000 to the Plaintiff. The Defendant
shall pay $250,000 on the following dates: (a) February 28, 2020; (b) August 31, 2020; (c) February
28, 2021; (d) August 31, 2021; (e) February 28, 2022; (f) August 31, 2022; (g) February 28, 2023;
and (h) August 31, 2023.
3. The Defendant’s father, Howard Brown, shall execute a separate guarantee to secure the
distributive award as set forth in paragraph 2 within five (5) business days from execution of this
term sheet. This is a material term of this term sheet.
4. The Plaintiff shall prepare a list of the following: (a) jewelry acquired by either the Plaintiff and/or
Defendant during the marriage that she sold from March 26, 2013 to the present; (b) furniture and/or
furnishings acquired by either the Plaintiff and/or Defendant during the marriage that she sold from
March 26, 2013 to the present; (c) artwork acquired by either the Plaintiff and/or Defendant during
the marriage that she sold from March 26, 2013 to the present; (d) handbags, clothing, shoes, or any
other possession acquired by either the Plaintiff and/or Defendant during the marriage that she sold
from March 26, 2013 to the present; (e) jewelry acquired by either the Plaintiff and/or Defendant
during the marriage that remains in her possession; (f) furniture and/or furnishings acquired by either
the Plaintiff and/or Defendant during the marriage that remains in her possession; (g) artwork
acquired by either the Plaintiff and/or Defendant during the marriage that remains in her possession;
(h) handbags, clothing, shoes, or any other possession acquired by either the Plaintiff and/or
Defendant during the marriage that remains in her possession; (i) jewelry acquired by either the
Plaintiff and/or Defendant during the marriage that Plaintiff donated, gifted, or provided to a third
party; (j) furniture and/or furnishings acquired by either the Plaintiff and/or Defendant during the
marriage that Plaintiff donated, gifted, or provided to a third party; (k) artwork acquired by either
the Plaintiff and/or Defendant during the marriage that Plaintiff donated, gifted, or provided to a
third party; and (l) handbags, clothing, shoes, or any other possession acquired by either the Plaintiff
and/or Defendant during the marriage that Plaintiff donated, gifted, or provided to a third party.
Within ten (10) days after execution of this Term Sheet, the Plaintiff shall provide the list of items
set forth in this paragraph to the following: (a) Defendant, Michael Brown, located at 778 Park
Avenue, 5th Floor, New York, New York 10021; (b) Defendant’s counsel, Bender & Rosenthal LLP,
located at 451 Park Avenue South, 8th Floor, New York, New York 10016; (c) Bankruptcy Trustee’s
attorney, John P. Campo, Esq., located at 666 Fifth Avenue, New York, New York, 10103; and (d)
Bankruptcy Trustee, John S. Pereira, Esq., located at 641 Lexington Avenue, New York, New York
10022.
5. Within thirty (30) days after execution of this Term Sheet, the Plaintiff shall provide all of the
items that are listed in paragraph (4)(e), (4)(f), (4)(g), (4)(h), (4)(i), (4)(j), ( 4)(j), ( 4)(k), and ( 4)(1)
set forth herein to either the Bankruptcy Trustee’s attorney, John P. Campo, Esq., located at 666
Fifth Avenue, New York, New York, 10103 or the Bankruptcy Trustee, John S. Pereira, Esq.,
Jennifer surrendered any right to retain marital property in consideration for the Equitable
Distribution Payment.16
After announcing that Jennifer and the Debtor had executed the Term Sheet, the Special
Referee marked the Term Sheet as an exhibit to the record of the hearing and advised that she
would “ask [Jennifer] the necessary questions for [the Special Referee] to determine whether or
not [Jennifer] wishes [the Term Sheet] to be the agreement that resolves the financial issues in
her divorce action.” July 30 H’rg Tr. 2:12-22.
The Special Referee Takes Allocutions from the Debtor and Jennifer
At the July 30 Hearing, the Special Referee took allocutions from both Jennifer and the
Debtor as to the Term Sheet. Jennifer and the Debtor were represented by their respective
counsel. In her allocution, without limitation, Jennifer stated in substance, that:
She executed the Term Sheet.
located at 641 Lexington Avenue, New York, New York 10022. The Plaintiff shall provide
Defendant and his matrimonial counsel notice that she delivered all of the above items to the
Bankruptcy Trustee or his counsel.
Term Sheet ¶¶ 2-5
16 In negotiating the Term Sheet, Jennifer rejected an option to be paid her share of equitable distribution that
would have permitted her to retain marital property, as follows:
For her share of equitable distribution, the Debtor shall pay Jennifer Brown a total amount of
$2,250,000 over the course of three and a half (3.5) years. The Debtor shall pay $500,000 within
thirty (30) days after entering into an agreement, and then $250,000 in seven (7) equal installments.
In addition, Jennifer Brown shall retain ownership of all personal property acquired by either party
from the date of marriage, March 24, 2001, through the date of the commencement of the action for
divorce, March 26, 2013. In exchange, the Debtor and his bankruptcy estate retain ownership of all
other assets acquired during the marriage. To ensure payment of Jennifer Brown’s share of equitable
distribution, the Debtor’s father, Howard Brown, shall be a guarantor. Lastly, Jennifer Brown shall
not interfere with the Debtor’s bankruptcy action.
Crane Decl. ¶10(b).
Prior to executing the Term Sheet she (i) read the entire Term Sheet, (ii)
initialed each page of the Term Sheet as she read it, and (iii) reviewed the
Term Sheet with her attorney before executing it.
She believed that she had sufficient information about the Debtor’s
finances to be able to enter into the Term Sheet.
She was aware that the Term Sheet had been discussed and negotiated
over a substantial period of time and was satisfied with the work done by
her counsel in connection with the Term Sheet.
She understood each part of the Term Sheet and believed the Term Sheet
to embody a fair and reasonable settlement of the economic issues in the
Matrimonial Action.
She was not under the influence of any duress or coercion to enter into the
Term Sheet.
She understood that once the Special Referee accepted the Term Sheet as
the basis for her judgment of divorce, it was extremely difficult to change
or modify it in any way, except as laid out in the agreement.
July 30 H’rg Tr. 4:6-25; 5:1-9; 7:21-23; 8:10-23. At the conclusion of the allocutions the Special
Referee accepted the Term Sheet as the basis for the parties’ judgment of divorce. Id. at 14:8-
14.17
The State Court Enters Judgment of Divorce
17 The Special Referee stated, as follows:
Okay. Then based on the parties’ allocution, I accept this agreement as the basis for your judgment
of divorce, understanding, of course, that it is anticipated there will be a more comprehensive
agreement within the next 30 days. So that would be by August 30th. But in the event there is not,
that this can be the basis for your judgment of divorce.
July 30 H’rg Tr. 14:8-14.
On September 25, 2019, the Debtor submitted a Proposed Judgment of Divorce in the
Matrimonial Action. See Crane Decl. ¶ 12. In part, it provided that “in accordance with . . . the
Term Sheet, [the Debtor] shall pay to [Jennifer] a total amount of $2,500,000 as her share of
equitable distribution[.]” See Judgment of Divorce at 6.18 Jennifer objected to the entry of the
Debtor’s Proposed Judgment of Divorce and submitted a Proposed Counter Judgment of Divorce
and supporting affidavit (the “Affidavit in Support of Counter Judgment of Divorce”), dated
October 3, 2019, to the State Court. In that affidavit, and without limitation, Jennifer asserts
that:
In the negotiations leading up to the execution of the Term Sheet, the parties never
discussed or agreed that she would withdraw the Equitable Distribution Claim.
She agreed to accept $2,500,000.00 in payments from the Debtor, as guaranteed by his
father Howard Brown, as “possibly a credit against the [Equitable Distribution Claim]
claim, but certainly . . . not . . . in satisfaction of [the Equitable Distribution Claim].”
At no time, did she agree to provide to the Debtor a release of the bankruptcy claim or
her rights to equitable distribution of funds that are subject to and/or owned by the
Debtor’s bankruptcy estate of Michael Rodger Brown. As support, she asserts that:
The So-Ordered Term Sheet does not contain a release and/or
discharge of her equitable distribution rights against the Debtor.
The sworn testimony she gave to the Special Referee in approving
the settlement does not contain a release of her equitable
distribution rights.
Although the So-Ordered Term Sheet requires her to turn over to the Trustee a list of
marital items in her possession and that she turn those items over to the Trustee, nowhere
on the Term Sheet does it say that she also agreed to withdraw her proof of claim, or that
she has resolved her claims against the bankruptcy estate.
18 A copy of the Judgment of Divorce is annexed as Exhibit A to the Crane Decl. The Debtor did not attach a
copy of his Proposed Judgment of Divorce; however, the Debtor represents, and Jennifer does not dispute, that the
Judgment of Divorce is identical to the Debtor’s Proposed Judgment of Divorce.
Affidavit in Support of Counter Judgment of Divorce ¶¶ 2(a)-(c). 19 Jennifer asserts that
“[s]imply put, on July 30, 2019, I resolved financial issues against Mr. Brown in the matrimonial
matter, except I did not and never intended to resolve my claims against the bankruptcy estate
nor my rights to assert and enforce my equitable distribution rights in bankruptcy court or
subsequently in this court.” Id. ¶ 2(c). As support she asserts that
Paragraph 21 of the Term Sheet recognizes that her claim in the
bankruptcy court would proceed in spite of receiving
$2,500,000.00, because in that paragraph she agreed to "not
interfere and/or block the Defendant's bankruptcy actions."
She reasons that if she had agreed to withdraw her claim against
the bankruptcy estate, the Term Sheet would have called for her to
agree "not interfere and/or block" dismissal of the bankruptcy
matter and that she affirmatively waived her rights and withdrew
her claim and gave up her claim for equitable distribution.
See id. ¶¶ 2(a)-(d). On or about October 24, 2019, Jennifer submitted an affidavit to the State
Court in connection with the resolution of a dispute among the Debtor and Jennifer. In part, in
the affidavit, Jennifer addressed the scope of the Term Sheet, and, in particular, the effect of the
Term Sheet on her Equitable Distribution Claim, as follows:
The Defendant's demand that I withdraw my proof of claim in the bankruptcy
matter is really a thinly veiled attempt to change the Term Sheet. At no time did I
ever agree to withdraw the proof of claim and I cannot be forced to do so. The
Defendant fails to recognize that when the Trustee establishes that the Defendant
has hidden $12,000,000.00, the Term Sheet will be vacated on the basis of
Defendant's fraud. At such time, my rights to equitable distribution, as
recognized by Judge Garrity, will be recognized and subject to enforcement.
Clearly, the Defendant mistakenly believed that he had escaped the microscope
that the U.S. Trustee will now put him under to explain where the missing funds
are, as reported by BST.
19 A copy of the Affidavit in Support of Counter Judgment of Divorce is annexed as Exhibit F to the Crane Decl.
Id. at ¶ 6.20
On November 8, 2019, the State Court entered the Judgment of Divorce. The State Court
apparently found no merit to Jennifer’s objections to the proposed judgment, or the matters that
she raised in her October 24 affidavit, as the court did not adopt Jennifer’s distinction between
her right to an equitable distribution of the marital assets and her contingent claim to those assets
embodied in the Equitable Distribution Claim, and it did not modify, in any way, the Debtor’s
Proposed Judgment of Divorce. In part, the Judgment of Divorce orders that pursuant to the
“Term Sheet, [the Debtor] shall pay to [Jennifer] or on behalf of [Jennifer] a total amount of
$2,500,000 as her share of equitable distribution.” Judgment of Divorce at 6. It also provides
that the Term Sheet “shall be incorporated herein by reference, [and] shall survive and shall not
be merged into [Judgment of Divorce.]” Id. at 9.
The Debtor’s Motion
In his Motion, the Debtor seeks an order of this Court pursuant to Bankruptcy Rule 9019
approving that portion of the Term Sheet that calls for the Debtor to make the Equitable
Distribution Payment to Jennifer, or for Jennifer’s benefit, over a four year period, as her share
of equitable distribution, and for Jennifer to (i) surrender any claim to marital property; (ii)
submit to the Debtor, his attorneys, and the Chapter 7 Trustee, a comprehensive list of various
personal property that either Jennifer or the Debtor acquired during the marriage and that
Jennifer either retained possession of, donated, gifted, or sold after March 26, 2013; and (iii)
deliver to the Chapter 7 Trustee all of such personal property that remained in her possession or
was donated, gifted, or provided to a third party. See Motion ¶¶ 8-10. He also seeks to expunge
the Equitable Distribution Claim pursuant to § 502(a) of the Bankruptcy Code and Bankruptcy
20 A copy of that affidavit is annexed as Exhibit G to the Crane Decl.
Rule 3007(a) on the grounds that the Divorce Judgment directs that the Debtor pay Jennifer
$2,500,000 as her share of equitable distribution, nothing in that judgment affords Jennifer any
further right to equitable distribution, and the Debtor, not his estate, is obligated to pay Jennifer
her share of equitable distribution. Id. ¶ 13-17. The Chapter 7 Trustee supports the Motion.
Jennifer opposes the Motion. Briefly, she says that the Term Sheet does not require this
Court’s review or approval because it does not call for the distribution of property of the
Debtor’s estate or determine title of assets of the estate. See Porter Decl. ¶ 8. She also asserts
that in agreeing to accept the Equitable Distribution Payment, she did not release or waive her
contingent Equitable Distribution Claim to the extent that the Chapter 7 Trustee can identify and
recover marital assets. Id. ¶ 2.
The Court considers those matters below.
Discussion
Request for Relief Under Rule 9019
In relevant part, Bankruptcy Rule 9019 states that “[o]n motion by the trustee and after
notice and a hearing, the court may approve a compromise or settlement.” Fed. R. Bankr. P.
9019(a). As noted previously, in granting Jennifer stay relief, the Court authorized her to
proceed with all issues in the Matrimonial Action, including “leave to continue the Matrimonial
Action in all respects, including without limitation . . . the rendering of judgment determining
the nature and extent of marital property, the nature and extent of Jennifer’s interest in such
property, and the equitable distribution of such property[.]” April 4 Order at 2. In doing so,
however, the Court directed that:
[I]n the event that Jennifer and the Debtor enter into a settlement agreement, any
provisions of such an agreement that purports to determine the distribution of or
title to property of the bankruptcy estate shall not be effective with regard to such
property without this Court’s review and approval.
Id. at 2-3. As discussed above, under the Term Sheet, the Debtor and Jennifer (i) agreed to
liquidate and fix Jennifer’s share of equitable distribution at in the sum of $2,500,000, (ii) the
Debtor agreed to satisfy that claim over time by making scheduled payments to or for Jennifer’s
benefit out of his post-petition income, and (iii) Jennifer agreed to turn over her marital assets to
the Chapter 7 Trustee. The Term Sheet does not purport to resolve, or even address, matters
relating to the allocation of estate assets among Jennifer and the Debtor and does not call for the
distribution of estate property among them. As such, the Court finds merit to Jennifer’s
objection and finds that the Term Sheet is not subject to Court approval. Accordingly, the Court
denies this aspect of the Motion as moot.
Request for Relief Under Section 502 and Bankruptcy Rule 3007(a)
Under § 502(a) of the Bankruptcy Code, “a claim . . . proof of which is filed
under section 501 of this title, is deemed allowed, unless a party in interest . . . objects.” 11
U.S.C. § 502(a).21 Upon the filing of an objection to a claim, “[t]he burden of proof . . . rests on
different parties at different times.” In re Allegheny Intern., Inc., 954 F.2d 167, 173 (3d Cir.
1992). Initially, the claimant must allege facts sufficient to support the claim. In that regard, “a
claim that alleges facts sufficient to support a legal liability to the claimant satisfies the
claimant's initial obligation to go forward.” Id. The claim will be prima facie valid, “[i]f the
averments in [the] filed claim meet this standard of sufficiency[.] Id. (citation omitted). See also
Fed. R. Bankr. P. 3001(f) (“A proof of claim executed and filed in accordance with these rules
shall constitute prima facie evidence of the validity and amount of the claim.”). The burden then
21 Bankruptcy Rule 3007 addresses the procedures for “Objections to Claims.” There is no dispute that the Debtor
has adhered to those procedures in filing his Claim Objection.
shifts to the objector to rebut the presumption of the prima facie validity of the claim. To do so,
“the ‘objecting party must produce evidence equal in force to the prima facie case which, if
believed, would refute at least one of the allegations essential to the claim’s legal sufficiency.’”
Scafuro v. PennyMac Loan Servs., LLC (In re Scafuro), No. 12-10902, 2013 WL 4776740 at *2
(Bankr. D. Vt. Sept. 4, 2013) (citation omitted). If it does so, the burden shifts back to the
claimant to prove by a preponderance of the evidence that under applicable law the claim should
be allowed. In re Rockefeller Ctr. Props., 272 B.R. 524, 539 (Bankr. S.D.N.Y. 2000) (“Once an
objectant offers sufficient evidence to overcome the prima facie validity of the claim, the
claimant is required to meet the usual burden of proof to establish the validity of the claim.”)
See also In re Holm, 931 F.2d 620, 623 (9th Cir. 1991) (“[T]he ultimate burden of persuasion is
always on the claimant. Thus, it may be said that the proof of claim is some evidence as to its
validity and amount. It is strong enough to carry over a mere formal objection without more.”)
(internal quotation marks and citation omitted.). Jennifer executed and filed the Equitable
Distribution Claim in accordance with the Bankruptcy Rules. There is no dispute that the filed
claim constitutes prima facie evidence of the validity of the contingent claim. Accordingly, in
resolving this aspect of the Motion, the Court must determine whether the Debtor has rebutted
the presumption of the prima facie validity of that claim and, if so, whether Jennifer has met her
burden of demonstrating the validity of the Equitable Distribution Claim.
Section 502(b) sets forth the grounds for disallowing a properly filed proof of claim. See
11 U.S.C. § 502(b); see also Travelers Cas. and Sur. Co. of America v. Pacific Gas and Elec.
Co., 549 U.S. 443, 449 (2007) (holding that, under the Bankruptcy Code, the court “‘shall allow’
[a] claim ‘except to the extent that’ the claim implicates any of the nine exceptions enumerated
in § 502(b).”); HSBC Bank USA, N.A. v. Calpine Corp., No. 07 Civ. 3088 (GBD), 2010 WL
3835200 at *5 (S.D.N.Y. Sept. 15, 2010) (“All claims are allowed unless specifically proscribed
by one of the nine exceptions listed in § 502(b).”) (citing Travelers, 549 U.S. at 449, 127 S.Ct.
1199). As relevant, § 502(b) states that if a party in interest objects to a claim, the Court:
[A]fter notice and a hearing, shall determine the amount of such claim in lawful
currency of the United States as of the date of the filing of the petition, and shall
allow such claim in such amount, except to the extent that—
(1) such claim is unenforceable against the debtor and property of
the debtor, under any agreement or applicable law for a reason
other than because such claim is contingent or unmatured[.]
11 U.S.C. § 502(b)(1). The Debtor contends that the Judgment of Divorce was a final settling of
accounts between the Debtor and Jennifer, including resolution of all matters relating to their
respective rights to equitable distribution of the marital assets, and that it cannot be amended or
revisited by this or any other court. Reply ¶ 8. He asserts that through that judgment, Jennifer's
share of equitable distribution was fixed at $2,500,000, to be paid by the Debtor out of his post-
petition assets, with Jennifer surrendering all marital assets in her possession or control to the
Chapter 7 Trustee. See Judgment of Divorce at 6-7. In his joinder to the Motion, the Chapter 7
Trustee contends that the Term-Sheet, together with the Judgment of Divorce,22 render any claim
by Jennifer against the Debtor with respect to the equitable distribution of marital assets
unenforceable. Chapter 7 Trustee’s Joinder ¶ 6. He also contends that because the Term Sheet
was incorporated into the Judgement of Divorce entered by the State Court, Jennifer is barred by
principles of res judicata and collateral estoppel from seeking to revise the Term Sheet and
Judgement of Divorce through the prosecution of her claim. Id. ¶ 7. Thus, he maintains that the
Court must disallow and expunge the Equitable Distribution Claim pursuant to § 502(b)(1) of the
22 The Chapter 7 Trustee uses the term “Settlement Order” in reference to the Judgment of Divorce dated
November 8, 2019, which incorporated the settlement terms under the Term Sheet.
Bankruptcy Code because it is unenforceable against the Debtor or property of the Debtor. Id. ¶
6.
In New York, the “[p]arties to an action for dissolution of a marriage are entitled to
anticipate the final resolution of all issues relating to the marriage relationship without
fragmentation and are obligated to litigate all issues affecting the marriage in that action.”
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Benjamin, 1 A.D. 3d 39, 40 (1st Dept 2003)
(citing Boronov v. Boronov, 71 N.Y. 2d 284, 290-91 (1988)). For that reason, “important issues
ancillary to the dissolution of the marriage, such as title to marital property, must be raised in the
divorce proceeding, and if they could have been, but were not, raised they may not thereafter be
raised in a separate action.” Id. (citation omitted). In the Matrimonial Action, Jennifer sought a
judgment of divorce pursuant to § 170(7) of the of the New York Domestic Relations Law (the
“DRL”). That section states that an action for divorce may be maintained by a husband or wife
to procure a judgment divorcing the parties and dissolving the marriage on the grounds that:
The relationship between husband and wife has broken down irretrievably for a
period of at least six months, provided that one party has so stated under oath. No
judgment of divorce shall be granted under this subdivision unless and until the
economic issues of equitable distribution of marital property, the payment or
waiver of spousal support, the payment of child support, the payment of counsel
and experts' fees and expenses as well as the custody and visitation with the infant
children of the marriage have been resolved by the parties, or determined by the
court and incorporated into the judgment of divorce.
DRL § 170(7). Under the plain language of the statute, the court cannot grant a judgment of
divorce under § 170(7) unless it determines that the relationship between husband and wife has
broken down irretrievably for a period of at least six months, and the economic issue of, the
equitable distribution of marital property, among others, is determined by the court and
incorporated into the judgment of divorce. Id. See also Trbovich v. Trbovich, 122 A.D. 3d 1381,
1382 (N.Y. App. Div. 2014) (“The requirements for a divorce under [§ 170(7)] are (1) a
statement under oath by one party that the relationship has broken down irretrievably for a period
of at least six months; and (2) a resolution of ‘the economic issues of equitable distribution of
marital property, the payment or waiver of spousal support, the payment of child support, the
payment of counsel and experts' fees and expenses as well as the custody and visitation with the
infant children of the marriage[.]’” (quoting § 170(7)).
The Judgment of Divorce meets those standards. Specifically, the State Court determined
that there were grounds for “dissolv[ing] the marriage between the Plaintiff, Jennifer Brown, and
the Defendant, Michael Brown, by reason of: the relationship between Plaintiff and Defendant
has broken down irretrievably for a period of at least six months pursuant to Domestic Relations
Law § 170(7).” See Judgment of Divorce at 2. In addition, it found that “[t]he Parties settled the
. . . financial and custody issues by the So-Ordered Term Sheet dated July 30, 2019,” and that “in
accordance with Paragraph 2 on pages 1 through 2 of the Term Sheet, Defendant shall pay to the
Plaintiff or on behalf of the Plaintiff a total amount of $2,500,000 as her share of equitable
distribution[.]” Id. at 1, 6. In that regard, the Judgment of Divorce resolved all matters relating
to the identification and distribution of marital property and plainly was “a final settling of
accounts between marital partners with an equitable interest in all marital property[.]” Pangea
Capital Mgmt. LLC, 34 N.Y. 3d 38, 46 (2019) (internal quotation marks omitted) (citation
omitted). It is binding on both the Debtor and Jennifer.
Broadly speaking, “res judicata means that a matter once judicially decided is finally
decided.” Murphy v. Gallagher, 761 F.2d 878, 879 (2d Cir. 1985). The doctrine of res judicata
dictates that a “final judgment on the merits of an action precludes the parties or their privies
from relitigating issues that were or could have been raised in that action.” Federated Dep't
Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981).
Simply put, the doctrine of res judicata provides that when a final judgment has
been entered on the merits of a case, [i]t is a finality as to the claim or demand in
controversy, concluding parties and those in privity with them, not only as to
every matter which was offered and received to sustain or defeat the claim or
demand, but as to any other admissible matter which might have been offered for
that purpose.
Nevada v. United States, 463 U.S. 110, 129–30, 103 S.Ct. 2906, 2918, 77 L.Ed.2d 509 (1983)
(internal quotation marks omitted). In New York, res judicata is akin to the doctrine of “claim
preclusion.” Murphy v. Gallagher, 761 F.2d at 879. Under that doctrine
a judgment, once rendered by a court of competent jurisdiction, will be treated
thereafter as the “full measure of relief to be accorded between the same parties
on the same ... ‘cause of action.’ ” Kaspar Wire Works, Inc. v. Leco Engineering
& Machine, Inc., 575 F.2d 530, 535 (5th Cir.1978). Claim preclusion prevents
litigation of a matter that could have been raised and decided in a previous suit,
whether or not it was raised. See Migra v. Warren City School District Board of
Education, 465 U.S. 75, 104 S.Ct. 892, 894 n. 1, 79 L.Ed.2d 56 (1984); 18 C.
Wright, A. Miller & E. Cooper, Federal Practice and Procedure §§ 4402, 4403
(1981); Restatement (Second) of Judgments, Introductory Note before ch. 3 at
131 and §§ 18, 19 (1982). Although fair play demands that a party have his day in
court, the doctrine of res judicata forecloses a second day.
Id. In that way, res judicata is an absolute bar “not only as to every matter which was offered
and received to sustain or defeat the claim or demand, but as to any other admissible matter
which might have been offered for that purpose.” SEC v. First Jersey Secs., Inc., 101 F.3d 1450,
1463 (2d Cir. 1996) (internal citation and quotation marks omitted).
Claim preclusion applies if the previous decision was: “(1) a final judgment on the
merits, (2) by a court of competent jurisdiction, (3) in a case involving the same parties or their
privies, and (4) involving the same cause of action.” Hecht v. United Collection Bureau, Inc.,
691 F.3d 218, 221–22 (2d Cir. 2012). In considering the preclusive effect of the Divorce
Judgment, the Court must look to New York law. See New York v. Sokol (In re Sokol), 113 F.3d
303, 306 (2d Cir. 1997) (“[T]he preclusive effect of a state court determination in a subsequent
federal action is determined by the rules of the state where the prior action occurred[.]”) (citing
28 U.S.C. § 1738). See also Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81
(1984) (“It is now settled that a federal court must give to a state-court judgment the same
preclusive effect as would be given that judgment under the law of the State in which the
judgment was rendered.”) New York has adopted a “transactional approach” to res judicata.
Burgos v. Hopkins, 14 F.3d 787, 790 (2d Cir. 1994). That approach “bar[s] a later claim arising
out of the same factual grouping as an earlier litigated claim even if the later claim is based on
different legal theories or seeks dissimilar or additional relief.” Id. (citation omitted). See also
O'Brien v. City of Syracuse, 54 N.Y.2d 353, 357, 445 N.Y.S.2d 687, 429 N.E.2d 1158 (1981)
(Under New York's transactional analysis approach to deciding res judicata issues, “once a claim
is brought to a final conclusion, all other claims arising out of the same transaction or series of
transactions are barred, even if based upon different theories or if seeking a different remedy.”
(citation omitted)). In general, in New York, “a final judgment of divorce issued by a court
having both subject matter and personal jurisdiction has the effect of determining the rights of
the parties with respect to every material issue that was actually litigated or might have been
litigated[.]” Rainbow v. Swisher, 72 N.Y.2d 106, 110, 531 N.Y.S.2d 775, 777 (1988). In that
regard, “absent unusual circumstances or explicit statutory authorization, the provisions of the
judgment are final and binding on the parties, and may be modified only upon direct challenge.”
Id.
The nature and extent of Jennifer’s share in the marital assets was an issue before the
State Court in the Matrimonial Action. In the Term Sheet, Jennifer accepted the Equitable
Distribution Payment as her share of equitable distribution. The Term Sheet is incorporated into
the Judgement of Divorce, and the State Court had jurisdiction to issue the judgment. The
Judgment of Divorce is a final judgment on the merits that resolves all matters that were or could
have been raised in the Matrimonial Action, including all those related to equitable distribution
of the marital assets. Jennifer relied on the BST Report and FRA Report in pursuing her
equitable distribution claim in the Matrimonial Action. All matters relating to the equitable
distribution of the marital property, including Jennifer’s right to a share of the Unaccounted For
Marital Property, necessarily were resolved in the Judgement of Divorce. See Boronow v.
Boronow, 71 N.Y.2d 284, 290, 525 N.Y.S.2d 179, 183 (1983) (“In a matrimonial action, where
the essential objective is to dissolve the marriage relationship, questions pertaining to important
ancillary issues like title to marital property are certainly intertwined and constitute issues which
generally can be fairly and efficiency resolved with the core issue. The courts and the parties
should ordinarily be able to plan for the resolution of all issues relating to the marriage
relationship in the single action.”). See also Harrison v. Harrison, 134 A.D.2d 567, 568, 521
N.Y.S.2d 466, 468 (2d Dep't 1987) (“Inasmuch as the matrimonial action was the appropriate
forum within which to properly adjudicate the marital property and financial issues that are
raised herein, the parties had the right to expect that any matters of that sort not considered in the
matrimonial action would not be litigated elsewhere.”) Jennifer incorporated the BST Report
and FRA Report in her Equitable Distribution Claim. In substance, in that claim she is asserting
the same claim against the Debtor that she settled in the Matrimonial Action. She is barred from
doing so by application of the principle of res judicata. The Debtor has rebutted the presumption
of the prima facie validity of the Equitable Distribution Claim, and demonstrated that Jennifer is
entitled to no more than the Equitable Distribution Payment in full satisfaction of her Equitable
Distribution Claim.23 Accordingly, the Debtor has demonstrated grounds for expunging the
claim. Travelers Cas. & Sur. Cor. Of America v. Pac. Gas & Elec. Co., 549 U.S. 443, 127 S.Ct.
1199, 1204 (2007) (11 U.S.C. § 502(b)(1) “is most naturally understood to provide that, with
limited exceptions, any defense to a claim that is available outside of the bankruptcy context is
available in bankruptcy.”); see also In re LightSquared Inc., 504 B.R. 321, 336 (Bankr. S.D.N.Y.
2013) (the “language could not be plainer – if a claimant would be estopped under non-
bankruptcy law from having a valid claim against the debtor, a party may seek disallowance of
the claim under section 502(b)(1).”); In re Ernst, 382 B.R. 194, 197 (S.D.N.Y. 2008) (“[T]here is
nothing in [section 502] that requires a court to ignore that the claim is no longer valid under
state law.”). In reaching this conclusion, the Court finds no merit to Jennifer’s contentions to the
contrary and objections to the Motion. The Court reviews them below.
First, Jennifer contends that the Court should not expunge the Equitable Distribution
Claim because she is entitled to satisfy it out of the Debtor’s pre and post-petition assets, and that
in agreeing in the Term Sheet to accept the Equitable Distribution Payment as her “share of
equitable distribution,” she did not liquidate the Equitable Distribution Claim or compromise her
alleged right to satisfy that claim out of the property of the Debtor that comprises the bankruptcy
estate. Sur-Reply at 1-2; Porter Decl. ¶ 2. She maintains that the Equitable Distribution Claim
cannot be expunged pursuant to §502(b)(1), because it remains subject to resolution in this
chapter 7 case and that once liquidated, she will have a claim that is enforceable against estate
property. Jennifer MOL at 16; Sur-Reply at 1-2. The Court finds no merit to that argument.
23 When the elements for res judicata are satisfied, bankruptcy courts may look behind a state court decision only
where such judgment was obtained by fraud or collusion, or where the state court lacked jurisdiction. Kelleran v.
Andrijevic, 825 F.2d 692, 694 (2d Cir.1987) (citations omitted). Jennifer does not assert that the Divorce Judgment
was obtained by fraud or collusion.
“Under New York law, one spouse’s rights in marital property owned by the other are
inchoate and do not vest until entry of a judgment of divorce.” DiGeronimo v. Weissberg (In re
DiGeronimo), 354 B.R. 625, 637 (Bankr. E.D.N.Y. 2006); see also In re Anjum, 288 B.R. 72, 76
(Bankr. S.D.N.Y. 2003); In re Cole, 202 B.R. 356, 360 (Bankr. S.D.N.Y. 1996). As a
consequence, “[i]f the state court enters a divorce decree, makes an equitable distribution award
and transfers title to the nondebtor spouse prior to bankruptcy, the property will not become
property of the debtor spouse’s estate.” Schachter v. Lefrak (In re Lefrak), 223 B.R. 431, 439
(Bankr. S.D.N.Y. 1998); see also In re Greenwald, 134 B.R. 729, 731 (Bankr. S.D.N.Y. 1991).
In contrast, where a spouse that is party to a divorce action files for bankruptcy before the state
court determines the parties’ rights to marital property, the non-debtor spouse will not have a
recognizable property interest in the debtor’s property. In re DiGeronimo, 354 B.R. at 637. In
such a case, “[t]he debtor’s property comes into the bankruptcy estate free from the [non-debtor]
spouse’s inchoate interest, and the [non-debtor] spouse has a claim to the debtor’s property to the
same extent as does any other unsecured creditor.” Id. See also Musso v. Ostashko, 468 F.3d
99, 105 (2d Cir. 2006) (finding that at “no point prior to judgment does [DRL § 236] create any
contingent or present vested interests, legal or equitable, by virtue of the parties’ marital status or
prior to a judgment dissolving their union” (citation omitted)). The Judgement of Divorce
became effective post-petition on November 8, 2019. Since the Debtor’s and Jennifer’s marriage
was not dissolved prepetition, Jennifer’s right to the Equitable Distribution Payment agreed by
the Debtor and Jennifer in the Term Sheet, and fixed by the State Court in the Judgment of
Divorce, gave rise to a general unsecured claim in that amount against the Debtor’s estate. See
In re DiGeronimo, 354 B.R. at 637; see also Osekavage v. Mergenthaler (In re Mergenthaler),
2015 WL 13227954, No. 15-CV-02031(JS) at *3 (E.D.N.Y. 2015); In re Bellafiore, 492 B.R.
109, 116, 117 (Bankr. E.D.N.Y. 2013); In re Anjum, 288 B.R. at 77; In re Lefrak, 223 B.R. at
439; In re Cole, 202 B.R. at 360; Goldberg v. Hilsen (In re Hilsen), 100 B.R. 708, 711 (Bankr.
S.D.N.Y. 1989), rev’d on other grounds, 119 B.R. 435 (S.D.N.Y. 1990).
Jennifer and the Debtor agreed that the Equitable Distribution Payment would be made
from the Debtor’s post-petition earnings. However, Jennifer had no right to payment from those
assets because the Debtor’s post-petition earnings do not constitute property of the Debtor’s
estate available for distribution to his creditors. Section 541(a)(6) of the Bankruptcy Code
excludes from the bankruptcy estate “earnings from services performed by an individual debtor
after the commencement of the case.” 11 U.S.C. § 541(a)(6). “The decisive factor in
determining whether post-petition income of the debtor will be deemed property of the estate is
whether that income accrues from post-petition services of the debtor.” In re Sloan, 32 B.R. 607,
611 (Bankr. E.D.N.Y. 1983). Neither party asserts that the Debtor’s post-petition income
accrued on account of prepetition services or contracts or would otherwise be part of the
bankruptcy estate. Moreover, the Debtor’s post-petition earnings are not part of the Debtor and
Jennifer’s marital assets. The theory underlying New York’s equitable distribution law is that
“marriage represents an economic partnership to which both parties contribute as spouse, parent,
wage earner or homemaker.” U.S. v. Butler, 543 F. App’x. 95, 96 (2d Cir. 2013) (quoting
Commodity Futures Trading Comm’n v. Walsh, 927 N.Y.S. 2d 821, 826 (N.Y. 2011). Section
236 of the Domestic Relations Law provides that “all property acquired either by both spouses
during the marriage and before the execution of a separation agreement or the commencement of
a matrimonial action, regardless of the form in which title is held” is marital property. DRL §
236(B)(1)(c). The Matrimonial Action was pending when the Debtor commenced this
bankruptcy case. Prior to the dissolution of the marriage the court “shall determine the
respective rights of the parties in their separate or marital property, and shall provide for the
disposition thereof in the final judgment.” DRL § 236(B)(5)(a). The Equitable Distribution
Claim is a general unsecured claim against the Debtor’s estate. Jennifer had no right to satisfy
that claim out of the Debtor’s post-petition assets, or the couple’s marital assets. She settled the
claim in exchange for the Equitable Distribution Payment from the Debtor out of his post-
petition income (which she was not otherwise entitled to), and her promise to identify and
turnover marital assets in her possession to the Chapter 7 Trustee. See Term Sheet ¶¶ 2-5.
Next, Jennifer complains that Debtor’s counsel “grossly overstates and mischaracterizes
the settlement actually reached by the parties, as memorialized in the Term Sheet” when counsel
asserts that “Jennifer agreed to settle the issue of equitable distribution in the Matrimonial Action
through her receipt of the Equitable Distribution Payment, which will be made in installments
over the next 3 ½ years.” Porter Decl. ¶ 7. Jennifer denies that the Term Sheet provides for that
treatment of her Equitable Distribution Claim and denies that she agreed to such treatment of the
claim. Id. She asserts that a careful review of the Term Sheet will show that she did not
discharge or release the Debtor and did not explicitly agree to withdraw her proof of claim or
waive her rights to a share of undisclosed assets. Sur-Reply at 1; Porter Decl. ¶ 6; Jennifer MOL
at 14. She maintains that her proof of claim survived the settlement embodied in the Term Sheet.
Sur-Reply at 1. In particular, she says that “the Term Sheet does not contain any explicit release
language, any acknowledgment that adequate financial disclosures were made, or any waiver of
the right to reopen the agreement in the event the Debtor is shown to have concealed assets, as
[Jennifer] believes he did.” Id.; Jennifer’s MOL at 14; Porter Decl. ¶ 6 (in negotiating the Term
Sheet, Jennifer did not agree “either explicitly or implicitly that [she] would waive, release, or
withdraw her contingent claim in this Court for her equitable share of marital assets concealed by
the debtor and recovered by the Bankruptcy Trustee[.]”). Indeed, Jennifer maintains that a
“desirable aspect[] of the settlement as memorialized in the Term Sheet is that it does not provide
for distribution to Jennifer of bankruptcy estate assets, which would be subject to approval (or
disapproval) by this Court.” Porter Decl. ¶ 8; Jennifer MOL at 1, 13-14. According to Jennifer,
the only issue that this Court must decide in considering whether to expunge the Equitable
Distribution Claim is whether the Term Sheet contains a sufficiently explicit waiver of her right
to a share of the Unaccounted For Marital Assets. Jennifer MOL at 14; Sur-Reply at 3-4. She
maintains that given the complete absence of any explicit language waiving the claim in the
Term Sheet, there was no such waiver.
This is the same argument that Jennifer made to the State Court when she unsuccessfully
objected to the Debtor’s Proposed Judgment of Divorce. As discussed above, in her Affidavit in
Support of Counter Judgment of Divorce, Jennifer argued that she “never . . . agreed to . . .
abandon and/or withdraw [the Equitable Distribution Claim],” that she “did not and never
intended to resolve . . . [her] rights to assert and enforce [her] equitable distribution rights in
bankruptcy court[,]” and the “Term Sheet does not contain a release and/or discharge of [her]
equitable distribution rights against [the Debtor].” See Affidavit in Support of Counter Judgment
of Divorce ¶¶ 2(a)-(c). The State Court rejected that argument and adopted the form of the
Judgement of Divorce submitted by the Debtor. Jennifer did not appeal or otherwise challenge
the entry of the Judgment of Divorce. To the contrary, Jennifer has embraced the Judgement as
there is no dispute that she has accepted payments under the Judgement from the Debtor totaling
$500,000. In that way, Jennifer has ratified the agreement in the Term Sheet that is incorporated
in the Judgment of Divorce. See Phillips S. Beach LLC v. ZC Specialty Ins. Co., 867 N.Y.S. 2d
386, 387 (N.Y. Sup. Ct. 2008) (A ratification occurs when a party accepts the benefits of a
contract and fails to act promptly to repudiate it.); see also Panaggio v. Panaggio, 684 N.Y.S. 2d
732, 733 (N.Y. App. Div. 1998) (Wife could not obtain rescission of separation agreement on
grounds of fraud and duress because wife was represented by counsel during protracted
settlement negotiations and agreed to stipulation in open court, and wife ratified agreement by
continuing to accept benefits under the agreement for years). There is no merit to Jennifer’s
arguments to the contrary.
Third, Jennifer contends that the Term Sheet is not enforceable because the Debtor, not
the Chapter 7 Trustee, is party to the agreement. The Court finds no merit to that argument.
Although the Chapter7 Trustee is not a party to the Term Sheet, he supports the Debtor and, as
the estate’s representative, wholly endorses the Motion. Jennifer also asserts that the agreement
is not enforceable because the Term Sheet implicitly acknowledges that it does not represent the
entire agreement between the parties. Jennifer’s MOL at 17. As support, Jennifer cites to the
following provisions in the Term Sheet:
¶ 22. This Term Sheet is intended to be a fully binding agreement between the
parties. Although the parties intend to enter into a more detailed agreement, in
the event that they are unable to do so, this Term Sheet shall remain in full force
and effect and shall constitute an agreement pursuant to DRL § 236(B)(3).
* * * *
THE PARTIES HEREBY AGREE, that the terms set forth above shall be set
forth in a Stipulation of Settlement resolving all of the financial and custodial
issues between them in the dissolution of their marriage and that neither party
shall demand a change to the terms as set forth herein, noting that where certain
items are to be determined, discussed, defined, set forth more fully in a
Stipulation, or any other like language, the clarification and addition of those yet-
un-finalized terms shall not alter the material agreed-upon terms set forth herein.
The parties further agree that this Term Sheet may be executed in counterparts.
Term Sheet at 16, 18. Jennifer contends that the agreement expressly contemplates and
provides for the possibility of further agreements between Jennifer and the Debtor
resolving issues not expressly resolved in the Term Sheet. Jennifer MOL at 17.
Jennifer’s contention is belied by the plain language of the agreement. The Term Sheet is
clear that it encompasses the material terms of the Debtor and Jennifer’s agreement
because it states that any additional Stipulation of Settlement “shall not alter the material
agreed-upon terms herein.” The terms of the agreement addressing the resolution of
Jennifer’s share of equitable distribution plainly are “material agreed-upon terms” in the
Term Sheet. Moreover, as set forth above, the Term Sheet states that “[a]lthough the
parties intend to enter into a more detailed agreement, in the event that they are unable to
do so, this Term Sheet shall remain in full force and effect and shall constitute an
agreement pursuant to DRL § 236(B)(3).”24 The Special Referee made that point on the
record before asking Jennifer to allocute to the agreement,25 and in so allocuting, Jennifer
acknowledged that the Term Sheet resolved all financial issues in the Matrimonial
Action. See July 30 H’rg Tr. 3:12-20. Finally, the Term Sheet was incorporated into the
Judgment of Divorce, which necessarily resolved all economic issues between the parties
24 Domestic Relations Law § 236(B)(3) provides, in relevant part:
An agreement by the parties, made before or during the marriage, shall be valid and enforceable in
a matrimonial action if such agreement is in writing, subscribed by the parties, and acknowledged
or proven in the manner required to entitle a deed to be recorded.
DRL § 236(B)(3).
25 The Special Referee stated, as follows:
I am incredibly pleased that following discussions this morning with attorneys again, that I've been
presented with what is called a so-ordered term sheet, which I have, in fact, so-ordered six copies
of. And I use the term "term sheet" loosely. Most term sheets are one or two pages. This is
actually a 20-page document including the signatures. But it is anticipated that there will be an
even more fully-formed agreement between the parties. Indeed, the term sheet so provides in
Paragraph 22 that this term sheet is intended to be a fully binding agreement between the parties,
although the parties intend to enter into a more detailed agreement. In the event they are unable to
do so, this term sheet shall remain in full force and effect and shall constitute an agreement
pursuant to DRL Section 263 (b) (3).
July 30 H’rg Tr. 3:12-20.
including equitable distribution pursuant to DRL § 170(7). See A.C. v. D.R., 927 N.Y.S.
2d 496, 507 (N.Y. Sup. Ct. 2011) (holding that court could not grant partial summary
judgment as to grounds for divorce and reserve for trial issues of equitable distribution of
marital assets. The court commented that the DRL “directs that a judgment of divorce
may not be ‘granted’ [under DRL § 170(7)] until all the financial issues are complete”
(emphasis in original)).
Fourth, Jennifer contends that the Debtor’s efforts to expunge her Equitable
Distribution Claim are inconsistent with his contention that he has not concealed assets.
She reasons that if there are no concealed assets to discover, the Chapter 7 Trustee will
find nothing, and Jennifer’s contingent claim would be worthless. Jennifer MOL at 18.
She asserts that on the other hand, if there are concealed assets that the Chapter 7 Trustee
discovers, it will be clear that her settlement under the Term Sheet was made in reliance
of false representations by the Debtor and her Equitable Distribution Claim has value. Id.
She concludes that there is no reason to expunge her claim before the Chapter 7 Trustee
completes his investigation and it would be inequitable to deprive Jennifer of her right to
assert her “claim to her rightful share of assets, if any, that have been concealed by the
Debtor.” Id. at 19. In support, Jennifer relies on the BST Report, which she asserts,
establishes that the Debtor “has not accounted for his wealth and assets, or that another
party is holding assets for him[.]” Id. at 18. The Court finds no merit to this argument.
Jennifer executed the Term Sheet upon the advice of her counsel in the early stages of the
trial before the Special Referee to resolve all of the open economic and financial issues in
the Matrimonial Action, including, specifically, the whereabouts of the Unaccounted For
Marital Assets. Moreover, there is no merit to Jennifer’s contention that she relied on
false information in agreeing to the Term Sheet. She was fully aware of the contents of
the BST Report and retained her own expert that produced the FRA Report. In agreeing
to the Term Sheet, she advised the Special Referee that (i) she had sufficient information
about the Debtor’s finances to be able to enter into the Term Sheet and (ii) she
understood each part of the Term Sheet and believed the Term Sheet to embody a fair and
reasonable settlement of the economic issues in the Matrimonial Action. July 30 H’rg Tr.
4:20-22; 5:6-9; 8:10-13. Jennifer could have tried the open economic issues to
conclusion before the Special Referee. Upon advice of counsel, she elected to settle
those matters on the terms set forth in the Term Sheet. Any doubt that Jennifer was
uncertain of the path she was taking in agreeing to the Term Sheet is dispelled by her
allocution to the Special Referee, also with the guidance of her counsel. The Debtor’s
effort to expunge the Equitable Distribution Claim is not inconsistent with his contention
that he has not concealed assets, as much as it is consistent with the parties’ resolution of
that claim by means of the Equitable Distribution Payment.
Finally, Jennifer contends that the Term Sheet, as a stipulation of settlement, is not
entitled to res judicata. In substance, she argues that the Term Sheet is simply an agreement
regarding equitable distribution and other issues, made in reliance on the facts disclosed in
discovery in the Matrimonial Action. Sur-Reply at 5. She notes that it contains no stipulations
of fact regarding the assets considered and divided in the equitable distribution provisions, nor
does it state that she is releasing her claim to a share of the Unaccounted For Marital Assets. Id.
However, as noted, the agreement does not call for the division of assets in connection with the
equitable distribution provisions. In satisfaction of her share of equitable distribution, Jennifer
agreed to take the Equitable Distribution Payment (out of the Debtor’s otherwise exempt post-
petition earnings) and to surrender her marital property to the Chapter 7 Trustee. Jennifer also
contends that for the Term Sheet to be res judicata on her claim, it required a stipulation to
findings of fact, which is absent from the Term Sheet because it did not settle, release, or dispose
of her Equitable Distribution Claim to assets that were wrongfully concealed from both the State
Court and this Court. Id. at 2, 5. In support of this proposition, Jennifer relies on Arizona v.
California, 530 U.S. 392, 414 (2000) and several other cases. But, as noted previously, Jennifer
never had a claim to specific assets in this bankruptcy case to resolve her claim to equitable
distribution. Moreover, the cases she cites are inapposite because they address the issue of
whether settlement agreements are entitled to res judicata, while here, the Term Sheet was
incorporated into the Judgment of Divorce and it is the judgment, not the Term Sheet, to which
this Court gives res judicata effect. The cases Jennifer cites support the proposition that a
settlement agreement that results in a final judgment on the merits is entitled to res judicata
effect. In Arizona v. California, the Supreme Court recognized the distinction between the
preclusive effect of a settlement as opposed to a consent judgment like the Judgment of Divorce.
530 U.S. 392, 414 (2000). The Supreme Court observed that “settlement agreements ordinarily
occasion no issue preclusion . . . unless it is clear . . . that the parties intend their agreement to
have such an effect.” Id. However, the Supreme Court recognized that consent judgments
ordinarily support res judicata. Id. 26
26 The other cases that Jennifer cites are: Jarry v. Nat’l Collegiate Student Loan Tr., No. 18-CV-0315 (SJF)
(ARL), 2019 WL 3326165 (E.D.N.Y. April 23, 2019); Dunleavy v. First Am. Tit. Ins. Co. of N.Y., 499 N.Y.S. 2d
264 (3d Cir. 1986); Ott v. Barash, 491 N.Y.S. 2d 661, 668 (2d Dep’t 1985); and Peterson v. Forkey, 376 N.Y.S. 2d
560, 561-62 (1st Dep’t 1975). As noted, they support the proposition that a settlement agreement that results in a
final judgment on the merits is entitled to res judicata effect.
In Jarry v. Nat’l Collegiate Student Loan Tr., 2019 WL 3326165 (E.D.N.Y. April 23, 2019), the plaintiffs sought
damages from the defendants based upon their alleged violations of the Fair Debt Collection Act and New York
General Business Law. Prior to the commencement of that action (the “EDNY Action”), certain of the defendants
(the “Moving Defendants”) sued the plaintiffs in state court (the “New York Action”) for damages based upon their
alleged defaults under their student loans. Id. at *1. The parties resolved that action pursuant to a Settlement
Stipulation which resulted in the discontinuation, but not dismissal, of the action. The Moving Defendants sought
summary judgment dismissing the EDNY Action pursuant to the doctrines of res judicata and collateral estoppel on
the grounds that the matters at issue in the EDNY Action had been resolved on the merits pursuant to the Settlement
Stipulation in the New York Action. Id. at *2. In her Report and Recommendation, Magistrate Judge Lindsay
recommended denying summary judgement. In part, she reasoned that the Settlement Stipulation did not constitute
a final judgement on the merits of the matters at issue in the New York Action for purposes of res judicata, because
the stipulation did not result in the dismissal of that action, with prejudice. Id. at *4. (“Under New York law the
doctrines of collateral estoppel and res judicata are inapplicable to cases disposed of by a stipulation of settlement
[b]ecause no order or final judgment was ever entered dismissing the prior action. . . . There is nothing in the record
indicating that an order or judgment has been entered which can serve as the basis for the application of the
doctrines of collateral estoppel and res judicata. . . . Thus, at this juncture, there is no final judgment in place in the
New York Action. Accordingly, the undersigned respectfully recommends that Defendants' motion for summary
judgment be denied.”) (internal quotation marks and citations omitted).
In Dunleavy v. First Am. Tit. Ins. Co. of N.Y., 499 N.Y.S. 2d 264 (3d Cir. 1986), the plaintiff (“Agent”), in his
capacity as agent for defendant (“Title Insurer”), obtained title insurance for a third party (the “Insured”) covering
certain real property. A dispute involving that property subsequently arose, and the Insured was named as a
defendant in an action based on trespass and encroachment. Id. at 265. The Agent and Title Insurer denied
coverage and the Insured commenced a third-party action against them. The Title Insurer refused to defend the
Agent in the third-party action, and the Agent cross-claimed against the defendant for indemnification, in the event
the Insured recovered a judgment against him. The cross-claim did not include a claim for counsel fees. Id. The
parties to the original action entered into an in-court stipulation of settlement. As part of that stipulation, the Agent
agreed to deliver to Title Insurer a general release limited to the cause of action set forth in the complaint and third-
party complaint. Id. The Agent also agreed to discontinue his cross-claim against the Title Insurer upon the merits
and with prejudice. Id. After the Agent was billed $15,400 for counsel fees, the Agent sued to collect those fees
from the Title Company, based upon the Agent’s contract with the Title Company. Id. The Title Company moved
to dismiss the complaint based on, among other things, the defenses of documentary evidence, collateral estoppel
and res judicata. Special Term granted the motion, holding that the in-court stipulation in the original action
precluded plaintiff from now seeking counsel fees. Id. The Appellate Court reversed. It found that the trial court
failed to disclose in its decision which of defendant's theories it relied upon in dismissing the complaint. However,
it rejected the defenses of res judicata and collateral estoppel because those two theories depend upon a final
determination of issues by the forum in which the proceeding took place, and no such determination was entered by
the trial court. Id. (“Special Term did not disclose in its decision which of defendant's theories it relied upon in
dismissing the complaint. At the outset, we reject the defenses of res judicata and collateral estoppel. Those two
theories depend upon a final determination of issues by the forum in which the proceeding took place. In this
instance, it can only be assumed that the terms of the settlement became sufficiently attractive to all of the parties in
the original action that they decided to forego issue determination by the court.”).
In Ott v. Barash, 491 N.Y.S.2d 661, 662 (1st Dep’t 1975), the question before the court was whether the plaintiff,
who was allegedly injured as a result of negligence of a New York state (the “State”) employee could maintain a
cause of action for negligence against that employee after having settled a prior action against the State to recover
damages for the same injuries. The plaintiff was allegedly injured after she was thrown from a horse while riding on
State property. She sued the State for damages in the Court of Claims and ultimately settled the claim. By its terms,
the release in the settlement agreement (the “Settlement Agreement”) made no provision for the release of the
State’s employees. Id. at 663. Thereafter, the plaintiffs sued the State employee in New York State Supreme Court
for damages based upon causes of action sounding in negligence and intentional tort. The defendant moved to
dismiss the action on several grounds, including that the State was the real party in interest and that the action was
barred by principles of res judicata based upon the release of the State in the Settlement Agreement. Id. The trial
court granted the motion to dismiss the causes of action sounding in tort but denied it as to the negligence claims. In
affirming the trial court’s denial of the motion to dismiss the negligence claim, the Appellate Division reasoned, in
Jennifer also contends that application of the doctrine of res judicata does not bar her
from asserting the Equitable Distribution Claim because the issue that was resolved in the
Matrimonial Action was the “equitable distribution” of marital property while the matter at issue
in the Bankruptcy Court is the recovery of fraudulently concealed and undisclosed pre-petition
assets. See Sur-Reply at 2. But Jennifer had no general unsecured claim against the Debtor in
this case other than her claim to her share of equitable distribution. That is the claim that the
parties resolved in the Term Sheet. Alternatively, she asserts the issue should be the treatment
that is afforded to “undisclosed and unaccounted-for assets that could not be included in the
equitable distribution scheme because they were undisclosed[.]” Id. The Court finds no merit to
this contention either. The Court directed the parties to resolve all matters relating to equitable
part, that the doctrine of res judicata was not applicable because the Settlement Agreement with the release did not
constitute a final judgment of the claims against the State in the Court of Claims on the merits. Id. at 668. (“It is
evident that a general prerequisite to invocation of either res judicata or collateral estoppel is the existence of a final
judgment, i.e., a final judicial determination which necessarily decided the very cause of action or issue that a party
now seeks to litigate in a subsequent action or proceeding . . . In this case it is clear that the foregoing prerequisite
was not met. The proceedings in the Court of Claims were not terminated by entry of a final judgment or other
judicial determination on the merits. Rather, the claim was terminated upon the execution of a settlement and
release. The settlement, prior to the entry of judgment, served to finalize the action without regard to the validity of
the original claim, and the action was accordingly considered, in contemplation of law, as if it had never begun. . . .
Therefore, there is no basis upon which to apply either res judicata or collateral estoppel.”) (internal quotations and
citation omitted).
Finally, in Peterson v. Forkey, 376 N.Y.S. 2d 560 (1st Dep’t 1975), the defendant appealed a state court order
granting summary judgment on plaintiff’s claim for negligence in connection with an automobile accident based on
a prior jury verdict decisive on the issue of negligence of the defendant. Id. at 561. In that case, Peterson was
driving an automobile in which Barcus was a passenger. The Peterson car collided with a truck driven by Forkey.
Barcus sued Peterson and Forkey, and Peterson sued Forkey. Id. The Barcus case was tried to a jury on the issue of
liability only. The jury returned a special verdict in favor of Barcus and specifically found Peterson to be free of
negligence and found Forkey solely negligent. Id. After the verdict on liability, Barcus settled his claim and the
action was never reduced to judgment by any party. Id. Based on the special verdict finding him free of negligence,
Peterson moved for summary judgment in her action against Forkey, and the trial court granted the motion. Id. On
appeal, the Appellate Division reversed. In doing so, it noted, in part, that “[b]oth the doctrines of res judicata and
collateral estoppel have as their prerequisites the entry of a judgment[,]” and that “[n]either the verdict of a jury nor
the findings of a court in a prior action upon the precise point involved in a subsequent action between the same
parties constitute a bar, unless followed by a judgment based thereon, or into which the verdict or findings entered.”
Id. (internal quotations and citations omitted). Since no judgment had been entered in the prior litigation, the special
verdict in favor of Peterson was not res judicata on the issue of her negligence. Id.
distribution in the State Court. That is what the parties resolved in the Term Sheet. Finally,
Jennifer argues that the Matrimonial Action should not be considered to be concluded because
the settlement agreement would have to be modified in the event that the Trustee finds the
Unaccounted For Martial Assets. Sur-Reply at 2. She contends that under those circumstances,
the Matrimonial Action would be reopened, and the equitable distribution provisions of the Term
Sheet revisited if the Trustee found substantial funds that the Debtor had failed to disclose. Id.
However, the Judgment of Divorce does not provide for such treatment. To the contrary, the
Divorce Judgment finally resolved all property issues that could have or should have been raised
in the Matrimonial Action. See DRL § 170(7); see also Boronov v. Boronov, 71 N.Y. 2d 284,
290-91 (1988); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Benjamin, 1 A.D. 3d 39, 40 (1st
Dept 2003); Jackson v. Brinkman, 814 N.Y.S. 2d 561 (N.Y. Sup. Ct. 2006); Siegel v. Siegel, 197
A.D.2d 569 (2d Dept 1993).27 In executing the Term Sheet and incorporating it into the Divorce
27 The Court notes that a stipulation of settlement which is incorporated but not merged into a judgment of divorce
survives the judgment by its terms and as matter of law. Siegel v. Siegel, 197 A.D.2d 569, 570 (2d Dept 1993). It is
a contract subject to the principles of contract construction and interpretation. See, e.g., Matter of Tannenbaum v.
Gilberg, 134 A.D. 3d 846, 847 (2d Dept. 2015); Hanau v. Cohen, 121 A.D.3d 940, 941 (2d Dept. 2015). Thus, “[i]t
is well settled that either party can bring a separate plenary action after the divorce judgment in order to enforce or
challenge the terms of a stipulation of settlement which is not merged into the judgment.” Sacks v. Sacks, 220
A.D.2d 736, 737 (2d Dept 1995). Nonetheless, where, like here, the stipulation addresses property issues which
could and should only be resolved in a divorce action, the parties are barred from revisiting those issues by
application of the principle of res judicata. The case of Siegel v. Siegel, 197 A.D.2d 569, 570 (2d Dept 1993) is
instructive. There an ex-husband appealed the dismissal of four claims he asserted against his former wife for
accounting of insurance proceeds received by the ex-wife pursuant to a prior stipulation in an action for a separation,
conversion of a 1979 Audi which was alleged to be marital property, conversion of the furnishings in the parties’
former marital home and breach of their separation agreement, which required the ex-wife’s to submit proof of her
entitlement to $886.75 for medical bills. Id. at 569-70. Prior to the commencement of that action the parties entered
into a separation agreement that was incorporated but not merged into the judgment of divorce. Id. at 570. On
appeal, the Appellate Division affirmed the dismissal of the husband’s claims for accounting and conversion of the
1979 Audi; but reversed the dismissal of the claims for conversion of the furnishings from the marital home and
breach of the separation agreement. It found that the claims for accounting and conversion of the 1979 Audi were
properly dismissed under principles of res judicata and collateral estoppel because they raised “property issues
which could and should have been resolved in the divorce action.” Id. at 571 (citing Boronow v. Boronow, 71 N.Y.
2d 284). Conversely, the Appellate Division found that claims for conversion of the furnishings from the marital
home and breach of the separation agreement could proceed because that the ex-husband merely sought to enforce
the terms to the separation agreement; and since the separation agreement survived as a matter of law, either party
could bring an action after the judgment of divorce to enforce its terms. Id. at 570. Here, the principle of res
Judgment, Jennifer assumed the risk that the Chapter 7 Trustee would uncover the Unaccounted
For Marital Assets when she agreed to the Term Sheet. Moreover, Jennifer resolved the
Equitable Distribution Claim by accepting the Equitable Distribution Payment and surrendering
her rights to marital property to the estate (through the Chapter 7 Trustee). All marital property –
including claims regarding the Unaccounted For Marital Assets – constitute property of the
Debtor’s chapter 7 estate.
Conclusion
Based on the foregoing, the Court denies the Debtor’s request for relief under Bankruptcy
Rule 9019 and grants the Debtor’s motion to expunge the Equitable Distribution Claim.
SETTLE ORDER.
Dated: New York, New York
March 13, 2020
/s/ James L. Garrity, Jr.
Honorable James L. Garrity, Jr.
United States Bankruptcy Judge
judicata bars Jennifer from asserting the property issues underlying the Equitable Distribution Claim. They were
finally resolved in the Divorce Judgment.