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Small v. Neighborhood Housing Services of New Haven, Inc.

United States District Court, D. Connecticut

July 5, 2018

LEIGH SMALL and AMY SMALL, Appellants-Debtors,
v.
NEIGHBORHOOD HOUSING SERVICES OF NEW HAVEN, INC., Appellee-Creditor.

          ORDER AFFIRMING DECISION OF BANKRUPTCY COURT

          JEFFREY ALKER MEYER UNITED STATES DISTRICT JUDGE

         Appellants-debtors Leigh and Amy Small (“the Smalls”) have appealed from an order of the United States Bankruptcy Court that granted a motion for extension of time by appellee Neighborhood Housing Services of New Haven, Inc. (“Neighborhood Housing”) to file an objection to discharge pursuant to 11 U.S.C. § 727 and to dischargeability pursuant to 11 U.S.C. § 523(a), and that further denied a motion by the Smalls to quash subpoenas served on them under Fed.R.Bankr.P. 2004. See Doc. #124 to In re Small, No. 16-31683 (Bankr. D. Conn. 2017) (Nevins, J.). For the reasons stated below, I will affirm the judgment of the Bankruptcy Court.

         Background

         The issues in this bankruptcy appeal trace back to a construction contracting deal that went bad. Neighborhood Housing is a quasi-public agency with a mission to rehabilitate houses for residence by low-income individuals. According to Neighborhood Housing, it hired a company known as ACT to be its general contractor for a project in New Haven. But ACT abruptly left the job, leaving Neighborhood Housing to pay off subcontractors and hire a new contractor to finish the job at great expense. This incident led to a state court lawsuit and a state court judgment for Neighborhood Housing against ACT in the amount of $300, 498.20. App. 200-01.

         ACT was allegedly 49% owned by Crystal Property Restoration, LLC, and 51% by Yul Watley. Debtor Leigh Small in turn is a 50% member of Crystal. Doc. #17 at 22. Neighborhood Housing claims that debtor Leigh Small was de facto in charge of ACT's operations notwithstanding his nominally indirect ownership control.

         On October 31, 2016, the Smalls filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On one of their schedules for identifying creditors with unsecured claims, they listed Neighborhood Housing as a general unsecured creditor with a contingent, unliquidated, and disputed claim of $300, 498 stemming from the lawsuit against ACT. App. 1.

         On December 2, 2016, there was a meeting of the Smalls' creditors pursuant to 11 U.S.C. § 341. Neighborhood Housing did not attend this meeting. On January 31, 2017, Neighborhood Housing filed a motion for extension of time until May 1, 2017, to file a nondischargeability complaint under 11 U.S.C. § 523 and an objection to discharge under 11 U.S.C. § 727. The Smalls objected to this filing on grounds that Neighborhood Housing lacked standing to file a nondischargeability complaint or an objection to discharge.

         On March 15, 2017, Neighborhood Housing filed a motion pursuant to Fed.R.Bankr.P. 2004 to authorize the examination of Leigh Small, as well as of Yul Watley (the alleged majority owner of ACT) and Bruce Small (who was allegedly the bookkeeper for ACT). About three weeks later, on April 11, 2017, Neighborhood Housing sought a further extension of time to file a nondischargeability complaint or objection to discharge, as well as to file a proof of claim by June 30, 2017. The Smalls objected, and they also moved to quash the motions for Rule 2004 examinations.

         Yet another round of extension requests by Neighborhood Housing followed, along with similar objections from the Smalls, and the Bankruptcy Court held a hearing on pending motions on July 26, 2017. By order and oral ruling dated September 29, 2017, the Bankruptcy Court concluded in relevant part that Neighborhood Housing “has standing as a party in interest and creditor to seek extension of the deadline to file a complaint objecting to discharge or dischargeability, ” that “Neighborhood Housing has sufficiently shown cause permitting an extension of the deadlines to object to discharge and/or discharageability, ” and that “Neighborhood Housing is entitled to conduct the Rule 2004 examinations of Leigh Small, Yul Watley, Bruce Small, Webster Bank and TD Bank.” App. 171. This appeal followed.

         Standing

         The Smalls first argue that Neighborhood Housing lacked standing to participate at all in the bankruptcy proceeding. I don't agree for substantially the reasons well-stated by Judge Nevins in her oral ruling:

Regarding Neighborhood Housing's standing, the court starts with an acknowledgement that the definition of claim, creditor and party in interest, while not limitless, [is] exceedingly broad.
In the context of a Chapter 7 case, the term party in interest includes creditors who hold a claim. Here Neighborhood Housing asserts that it has a potential claim against Mr. Small for a debt owed by ACT to Neighborhood Housing based upon a possible fraudulent scheme perpetrated by Mr. Small in controlling and operating ACT. Those are the allegations.
The court notes that to recover from the individual members of the limited liability company, the judgment creditor here, Neighborhood Housing, would need to succeed on an ...

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