Kittay v. Korff (In the Matter of Palermo)

Docket Nos. 11-848-cv (L), 11-849-cv (Con) (2nd Cir. Jan. 7, 2014)
Held that the district court did not err in refusing to dismiss the complaint as untimely on the basis that the bankruptcy court's direction to file amended and/or separate claims constituted a de facto severance under Bankruptcy Rule 7021 (even though the court never referenced the Rule), such that the amended complaint related back to the timing of filing of the original complaint. Also held that the district court did not err in applying state law to the award of prejudgment interest, but because the court has discretion on the issue of whether to award such interest, and the district court did not explain the basis for its award, the case was remanded to allow the district court to (i) exercise its discretion or (ii) explain that it was aware of its discretion and did in fact exercise it.
Procedural context:
The Chapter 7 trustee commenced a proceeding in the bankruptcy court alleging fraudulent conveyance under New York’s Debtor and Creditor Laws §§ 273, 274, 275 and 276 and Bankruptcy Code §§ 544(b)(1) and 550. The defendant sought to withdraw the reference from the bankruptcy court pursuant to 28 U.S.C. §157(e) and Federal Rule of Bankruptcy Procedure 5011, and the proceeding was transferred to the district court. After a trial, a jury found in favor of the trustee on all counts and the defendant appealed to the Court of Appeals arguing (i) that the complaint was untimely and (ii) that the district court failed to articulate why it applied New York law in the prejudgment interest calculation. The defendant also argued that the district court erred in denying his motion for judgment as a matter of law and that there were errors in the jury charge. Such arguments were addressed in a separate summary order.
Debtor Douglas Palermo filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code on October 14, 2005. David Kittay (Plaintiff-Appellee) was appointed as trustee in Palermo’s case and timely commenced proceedings against several defendants, including Joseph Korff (Defendant-Appellant) alleging that such defendants had received fraudulent transfers from Palermo. After the bankruptcy court questioned whether it was permissible to include all of the multiple defendants in one proceeding, Kittay filed an amended complaint removing all defendants other than Palermo and filed separate complaints against each group of defendants. The amended complaint against Korff was filed outside of the limitations period. The case was tried in the district court, and the jury found for Kittay, and the district court included an award for prejudgment interest under New York law without a specific explanation of the basis.

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