In Re: Justo Reyes

CourtDistrict Court, S.D. New York
DecidedNovember 25, 2023
Docket7:23-cv-04185
StatusUnknown

This text of In Re: Justo Reyes (In Re: Justo Reyes) is published on Counsel Stack Legal Research, covering District Court, S.D. New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In Re: Justo Reyes, (S.D.N.Y. 2023).

Opinion

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK In re: JUSTO REYES, et al., Debtors. OPINION & ORDER LINDA TIRELLI,

Appellant, 23-CV-04185 (PMH) - against - WILLIAM K. HARRINGTON as United States Trustee, and THOMAS C. FROST as Chapter 13 Trustee, Appellees. PHILIP M. HALPERN, United States District Judge: Linda Tirelli (“Appellant”) appeals from the Memorandum Decision & Order dated April 28, 2023 (“Order”) entered by Judge Sean H. Lane of the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). A Notice of Appeal was filed in this Court on May 19, 2023 (Doc. 1). Appellant filed her brief, pursuant to the Court’s Scheduling Order (Doc. 10), on August 14, 2023. (Doc. 16, “App. Br.”). The U.S. Trustee (“Appellee”) filed its brief on September 27, 2023 (Doc. 18, “Opp. Br.”), and the appeal was fully submitted with the filing of Appellant’s reply brief on October 27, 2023 (Doc. 21, “Reply”). The Court heard argument from the parties on November 6, 2023.1 For the reasons set forth below, the Order is AFFIRMED.

1 Following oral argument, the Court ordered the parties to submit statements regarding the applicable standard of review for this appeal. The parties submitted their statements regarding the applicable standard of review on November 6, 2023. (Doc. 22; Doc. 23; Doc. 24). BACKGROUND I. Appellant’s Chapter 13 Repayment Plans Appellant is a consumer bankruptcy lawyer licensed to practice in Connecticut and admitted to practice before this Court. (App. at A371).2 She has represented numerous debtors

seeking chapter 13 relief in the Bankruptcy Court for the Southern District of New York. In at least 16 of those cases, Appellant’s chapter 13 plans stated that, for mortgage payments where the validity of the mortgage was disputed, payments would not be made to the chapter 13 trustee or the lender until the validity of the mortgage was decided. (Id. at A333-A335). The post-petition mortgage payments would instead be made to Appellant and held in escrow by Appellant or her firm. (Id.). Under the terms of these chapter 13 plans, if the validity of the mortgage was confirmed, the secured lender would thereafter receive the escrowed payments. (Id.). II. The Bankruptcy Court’s June 17, 2021 Order to Show Cause It came to the Bankruptcy Court’s attention, in June 2021, that funds were not being escrowed in numerous cases as required by the terms of these Chapter 13 plans. Nor were the funds

being remitted to the Chapter 13 Trustee for the benefit of creditors or paid directly to secured creditors as required by the Bankruptcy Code. (App. at A027-A033). Accordingly, the Bankruptcy Court issued an Order to Show Cause on June 17, 2021 (“OSC”) in these cases, directing Appellant to show cause as to: (1) whether misrepresentations were made by Appellant regarding the escrowing of post-petition mortgage payments, and if so, why Appellant should not be sanctioned for such misrepresentations; (2) whether all post-petition mortgage payments purportedly held in escrow by Appellant in the cases at issue should not immediately be turned over to the applicable

2 Citations to “App. at A___” are to the Appendix of Appellee William K. Harrington, United States Trustee. (Doc. 18-1; Doc. 18-2; Doc. 18-3). secured creditors or the Chapter 13 Trustee; and (3) why the Chapter 13 Plans in the cases should not immediately be amended to require that all post-petition mortgage payments be paid either directly to the secured creditors or to the Chapter 13 Trustee. (Id. at A031-032). The Bankruptcy Court also required Appellant to submit a comprehensive list of all her

pending Chapter 13 cases filed in White Plains, Poughkeepsie, and Manhattan in which the Chapter 13 plan provided for the escrow of post-petition mortgage payments. (Id. at A037). On August 4, 2021, Appellant filed a list containing a single case. (Id. at A040). Appellant responded to the Order to Show Cause on September 20, 2021, asserting that (1) that “no misrepresentation was ever knowingly made to the Court by the undersigned or person under her direction or control at any time;” (2) that the escrowing practices in question had been continued “with the knowledge, consent and actual direction” of the previous bankruptcy judge; and (3) “ethical considerations precluded her from volunteering the fact that a particular Debtor/Client had not made certain payments to” her. (Id. at A053). The Bankruptcy Court held its first hearing on the OSC on October 20, 2021 during which

it banned the practice of escrowing post-petition mortgage payments and issued four directives to Appellant with respect to the OSC. (Id. at A073). The Bankruptcy Court: (i) requested confirmation in writing that the escrow practice in question had ceased; (ii) directed Appellant to report whether there had been other cases in which these escrow provisions were included in the Chapter 13 plans; (iii) asked that Appellant consult with the U.S. Trustee and Chapter 13 Trustee to provide a proposal as to what should happen to the escrowed funds; and (iv) directed Appellant to provide details about the escrow accounts that were set up by Appellant. (Id. at A078-A089). As to the fourth directive, the United States Trustee discussed its desire for primary source bank account documents, as opposed to summaries, and the Bankruptcy Court stressed the importance of providing statements and financial records associated with the account that speak for themselves. (Id. at A106-A108). Despite the Bankruptcy Court’s instruction, Appellant did not provide financial records or bank account statements, resulting in the Bankruptcy Court entering an order directing Appellant to submit the bank records for in camera review. (Id. at A110-A115).

Appellant made an in camera production of the escrow account statements in March 2022 and the Bankruptcy Court held a hearing on the OSC on March 24, 2022. (App. at A116-A149). The U.S. Trustee, at the hearing, raised a concern about a shortfall in Appellant’s account lasting from June 17, 2021 through early August 2021 in the amount of approximately $24,000. (Id. at A121-A122). Appellant acknowledged that there was indeed a shortfall—one that began two years earlier than the U.S. Trustee had suggested, lasting from June 5, 2019 to August 2021—and clarified that the shortfall during that longer period was for $21,300.3 (Id. at A134). Appellant further stated that the shortfall occurred due to a “bookkeeping error” which was remediated with a deposit in August 2021. (Id.). The Bankruptcy Court then directed the parties to brief their views on the merits of the OSC. (Id.). Appellant sought to seal the briefing on the OSC. (Id. at A142).

The Bankruptcy Court ordered the parties to file their briefs under seal and directed the parties to brief whether to maintain the pleadings under seal. (Id. at A352). The parties all filed sealed briefs on the merits of the Order to Show Cause. (Id at A392-A436; A469-A481, A150-A170). Appellees moved to unseal those briefs, which Appellant opposed. (Id. at A437-A468; A482-A485, A171-

3 Appellant does not challenge the shorter two-month shortfall of approximately $24,000 identified by the U.S. Trustee. (Order at n.32). On May 31, 2021, Appellant’s escrow account held a total balance $77,977.40. (Id.). Appellant withdrew $10,000 from the account on June 3, 2021, resulting in a shortfall of funds held in escrow in the amount of $4,533.92. (Id.). By June 30, 2021, the shortfall in the account had increased to $24,440. (Id.). On that date, the account’s balance was $48,071.17, but the amount of post- petition mortgage payments deposited by the Debtors was still $72,511.32. (Id.). As of July 31, 2021, the Account still had a shortfall of $24,440.15. (Id.). On August 11, 2021, the shortfall ended when Ms. Tirelli deposited $30,000 of funds into the Account. (Id.). A182).

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Bluebook (online)
In Re: Justo Reyes, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-justo-reyes-nysd-2023.