Relates to the enforcement of state court judgments

Such was the outcome in Musso v Ostashko (468 F3d 99 {2d Cir 2006}). In Musso, Supreme Court granted a divorce in favor of the wife and awarded her the marital home after the husband fraudulently conveyed other marital assets to a foreign company on whose board the husband sat. Before final judgment could be docketed, however, the foreign company, ostensibly at the husband's behest, brought an involuntary bankruptcy petition against the husband. Under the Bankruptcy Code, the mere filing of a bankruptcy petition conveys to the bankruptcy trustee the status of a creditor with a perfected judicial lien on all property in which the alleged debtor has any interest that could be reached by any creditor (see 11 USC § 544). The priority of this bankruptcy lien relative to other property interests, however, is a creature of state law (see Musso, 468 F3d at 104-105; In re Kors, Inc., 819 F2d 19,22-23 {2d Cir 1987}; In re Vienna Park Properties, 976 F2d 106,115 {2d Cir 1992}; see also In re Halabi, 184 F3d 1335, 1337 {11th Cir 1999}; In re Hartman Paving, Inc., 745 F2d 307,311 {4th Cir 1984}). Under CPLR 5203(a), Supreme Court's award of the marital home could not be enforced until docketed. The Second Circuit therefore held that, because the bankruptcy petition was filed before this docketing could occur, State law recognized the seniority of the bankruptcy lien and the marital home thus was part of the bankruptcy estate - rendering the wife's claim (and the essence of Supreme Court judgment) junior to claims of the husband and his putative creditors, including his foreign company and even his attorneys.

This result, while valid under current federal and State law, invites manipulation of the worst kind. Unlike most New York court actions and all New York court judgments, federal bankruptcy petitions are filed electronically. Thus, with the aid of now-routine technology, a party fully and fairly can litigate a matrimonial, commercial or other action in State court and then, immediately upon losing the case, e-file a petition in bankruptcy to stymie the property judgment. The resulting injustice to the prevailing litigant and to the primacy of State courts cannot be overstated. Moreover, because unparalleled economic conditions are likely to generate more bankruptcy filings and property claims, the coming period raises the disturbing prospect that the Bankruptcy Code could become a common tool to undermine many State court judgments.

To redress this problem, the instant measure would amend CPLR 5203 to deem a State court award of real property senior in priority to a bankruptcy lien where (1) the court makes the property award on the record (whether orally or in writing), (2) the bankruptcy petition is filed on or after the date of the award, and (3) the award properly is reduced to final judgment, entered and docketed within 30 days of the award. Under these strict conditions only, the mere filing of a bankruptcy petition during the window between the making and entry of a State court property award would not defeat that award, the equities it represents or the judicial proceedings that produced it.

This technical amendment would have no effect on any other property interests: it would not alter any other lien or its priority, and thus would not cast doubt on title or the alienation of real property in any respect. Neither would it affect personal property ( e.g. cash or securities) or frustrate bona fide bankruptcy petitions.

This measure, which would have no fiscal impact on the State, would take effect immediately and would apply to all actions and proceedings pending or commenced on or after such date.

Legislative History:

None. New proposal.