Jadeco Construction Corp.

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF NEW YORK

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In re:

JADECO CONSTRUCTION CORP., Chapter 7

Case No. 16-71508-reg

Debtor.

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ROBERT L. PRYOR as TRUSTEE OF THE

ESTATE OF JADECO CONSTRUCTION CORP.,

Plaintiff,

Adv. Pro. No. 18-08013-reg

-against-

TOWN OF SMITHTOWN,

Defendant.

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MEMORANDUM DECISION

Introduction

This matter is before the Court pursuant to a motion (“Motion”) by the Town of

Smithtown (the “Town” or the “Defendant”) for summary judgment to dismiss the complaint

filed by Robert Pryor, the Chapter 7 trustee (“Trustee” or “Plaintiff”) in which the Trustee seeks

to recover the value of labor and materials provided by the Debtor to the Town pre-petition as a

constructive fraudulent conveyance pursuant to 11 U.S.C. § 544. The Town asserts that the

Trustee is barred from recovering on any judgment entered against it by this Court because a

State Court has previously found that the underlying contract for which the Town received

services expired, and applicable non-bankruptcy law prohibits the Town for paying for services

rendered absent an enforceable contract. According to the Town, the important state interest of

protecting taxpayers from extravagance and collusion is superior to any right conferred by

Congress to the Trustee to recover transfers under § 544 of the Bankruptcy Code and the New

York constructive fraudulent conveyance statutes. The Town also asserts that the Trustee’s

claims are barred by the Rooker-Feldman doctrine, res judicata and/or collateral estoppel.

The Town is correct that the contract with the Debtor expired and cannot be enforced.

However, the enforceability of this contract is not dispositive of the issues raised in this

adversary proceeding. The Trustee seeks to use his strong-arm powers to recover the value of

the materials and labor provided by the Debtor as a constructive fraudulent conveyance. This in

fact is the very essence of the fraudulent conveyance statutes as adopted by both states and the

Bankruptcy Code. When a debtor has transferred assets pre-petition for little or no consideration,

the trustee is charged with recovering the specific assets or the value of those assets for the

benefit of creditors. In order to succeed in this adversary proceeding, the State Court decision

need not be disturbed or overturned. To the extent the Town asserts that the State’s interest in

protecting its taxpayers is greater than the Trustee’s right to recover fraudulent conveyances for

the benefit of the creditors in this bankruptcy case, the Court disagrees. The State’s interest is

admittedly strong, but that interest cannot overcome Congress’s decision to vest a bankruptcy

trustee or a debtor in possession with the power to avoid fraudulent conveyances on behalf of a

debtor’s estate. These powers reflect a federal policy of ensuring that a debtor’s creditors receive

reasonably equivalent value for transfers made by a debtor pre-petition. In this case, the Trustee

seeks to recover the value of what was transferred to the Town, not the profit the Debtor could

have obtained under a contract theory. Therefore, to the extent there is a conflict between the

Bankruptcy avoidance statutes and State law, the Supremacy Clause mandates that the right to

recover under a fraudulent conveyance theory remain unfettered by the State and local laws that

allegedly stand in the Trustee’s way.

Procedural History

On April 6, 2016, the Debtor filed a petition for relief under Chapter 11 of the

Bankruptcy Code. On January 31, 2017, the Debtor filed a motion to convert the case to Chapter

7, which was granted, and on March 24, 2017, an order converting the Debtor’s case to Chapter

7 was entered. On January 22, 2018, the Trustee commenced this adversary proceeding. On

February 21, 2018, the Town filed a motion to dismiss the adversary proceeding, which was

opposed by the Trustee. On May 3, 2018, an order was entered granting the motion to dismiss

only as to the First, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh causes of action. On

October 10, 2018, the Town filed the Motion, and on November 21, 2018, the Trustee filed a

Memorandum of Law in Opposition to the Motion. On January 11, 2019, the Town filed a

Reply. A hearing was held on January 16, 2019, and on January 31, 2019, the Town and the

Trustee filed supplemental memoranda of law. The matter was marked submitted thereafter.

Facts

The Debtor was in the business of providing asphalt and concrete paving of roadways,

curbs and sidewalks to local municipalities. Jacinto DeAlmeida was the owner, president and

sole officer of the Debtor. The Town is a municipal corporation existing under the laws of the

State of New York. In June 2008, the Debtor successfully submitted a proposal in connection

with Bid No. 08-050 (“Bid”) to perform certain work for the Town including the removal and

replacement of curbs and sidewalks. (Defendant’s Ex. C). The Bid was signed by Jacinto

DeAlmeida on behalf of the Debtor. The contract (“Contract”) awarded pursuant to the Bid

authorized the Debtor to perform work from June 15, 2008 through June 17, 2009. The Contract

provided for an extension by mutual consent for up to two years. The Debtor performed certain

work under the Contract and received payment. In a letter dated April 30, 2009, the Debtor and

the Town’s purchasing director, Joseph Kostecki, agreed to extend the term of the Contract

through June 17, 2010. (Defendant’s Ex. D). In a letter dated May 19, 2010, the Debtor and

Kostecki agreed to another extension of the Contract terms under the Bid through June 30, 2011.

(Defendant’s Ex. E). This extension went beyond the two-year extension provided under the

Contract by thirteen days. Prior to June 17, 2011, the Town issued a request for a proposal on

Bid 11-404 (“Second Bid”), a successor contract for municipal work similar to the work under

the Bid. By letter dated June 23, 2011, the Debtor was notified that it was the low bidder on the

Second Bid, and was instructed to return certain affidavits regarding a required apprentice

program. (Defendant’s Ex. F). On June 29, 2011, the Town sent the Debtor a “blanket”

purchase order for sidewalk and curb replacement and repair. (Defendant’s Ex. G). By letter

dated June 30, 2011, Glenn Jorgensen, the Town’s Highway Superintendent, issued the Debtor a

work order to perform curb, apron and sidewalk repairs and installation on three roadways.

(Defendant’s Ex. H). No extension of the Contract beyond June 17, 2011 was competitively bid

for, approved or authorized by the Town Board or the Town Superintendent. By letter dated July

27, 2011, the Debtor was reminded of its requirements to file affidavits related to the required

apprentice program related to the Second Bid. (Defendant’s Ex. I). The Debtor was not awarded

the Second Bid, and it was ultimately awarded to another company in August, 2011. The Debtor

continued to perform work for the Town between June 17, 2011 and October 2011. Any work

performed by the Debtor between June 17, 2011 and October 2011 was not approved by the

Town Board or the Town Supervisor.

On May 31, 2012, the Debtor commenced an action in New York State Supreme Court

(the “State Court Action”) seeking entry of a monetary judgment arising from the Town’s

alleged breach of contract. The Debtor sought recovery of $441,667.26, representing the amount

the Debtor asserted it was owed under the Contract, plus consequential damages of $336,125.79,

representing the amount the Debtor alleged to have borrowed to cover the operating costs

incurred as a consequence of the Town’s refusal to pay for the work performed. On April 6,

2016, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. On May

11, 2016, the Debtor filed a Notice of Removal of the State Court Action to the Bankruptcy

Court. The removed action (“Removed Action”) was given adversary proceeding no. 16-8062.

On June 10, 2016, the Town filed a motion to Abstain and for Remand, which was opposed by

the Debtor. On August 2, 2016, the Court entered Supplemental Facts and Conclusions of Law

concluding that mandatory abstention from hearing the Removed Action was appropriate

(“Abstention Decision”). On January 3, 2017, the Removed Action was closed.

Thereafter, the State Court Action continued in New York State Supreme Court. The

Town made a motion for summary judgment seeking dismissal of the complaint, which was

granted pursuant to a written decision by Justice Molia dated September 29, 2017 (“Contract

Decision”) (Defendant’s Ex. N). In the Contract Decision, Justice Molia found that although the

Debtor and the Town entered into a valid contract for work performed from June 15, 2008

through June 17, 2011, inclusive of appropriate extensions, the Contract was never further

extended through any formal resolution passed by the Town Board and executed by the Town

Supervisor, as required under Town Law § 64. As Justice Molia pointed out, the laws of New

York State require competitive bidding in the awarding of public contracts pursuant to General

Municipal Law § 103[1] (Contract Decision at p. 3). Because the alleged extension of the

Contract beyond June 17, 2011 did not comply with Town Law § 64, the Contract expired on

June 17, 2011. (Contract Decision at p. 3). Justice Molia also ruled that the alleged extension

of the Contract could not be ratified because the Town Board had no authority to excuse

compliance with Town Law § 64. Justice Molia further held that although there was a narrow

exception to Town Law § 64 if a party entered into the contract in good faith, the contract did

not violate public policy and circumstances indicated that the municipality would be unjustly

enriched, this exception was found to be inapplicable. According to Justice Molia, the policy of

safeguarding the taxpayers’ interest against extravagance and collusion on the part of public

officials would be contravened if the court determined that the alleged extension of the Contract

was enforceable.

On January 22, 2018, the Trustee commenced this adversary proceeding seeking, inter

alia, to recover the value of the labor and materials provided to the Town in the amount of

$441,667.26, which corresponds with the amount alleged to be due and owing under the

Contract. After ruling on the Town’s motion to dismiss the adversary proceeding and granting

it in part, the only claims remaining are Counts 2, 3, 4, 5 and 7 (“Remaining Claims”), which

invoke relief under the constructive fraudulent conveyance statutes of the New York Debtor and

Creditor Law. (“DCL”).1 These statutes are applicable under the Trustee’s strong-arm provisions

set forth in 11 U.S.C. § 544. While § 544 confers the Trustee with standing to bring these

actions, applicable state law provides the basis for the causes of action.

1 The second cause of action seeks relief under § 273 of the DCL, the third cause of action seeks relief under § 278

of the DCL, the fourth cause of action seeks relief under § 275 of the DCL, and the seventh cause of action seeks

relief under § 550 of the Bankruptcy Code.

By the Motion, the Town seeks dismissal of the Remaining Claims based on the Town’s

argument that the Trustee’s powers under § 544 cannot be used to recover a transfer made

pursuant to a contract which is unenforceable. According to the Town, since the Contract under

which the Trustee seeks payment expired, the Town cannot pay any judgment based on work

performed after expiration of the Contract. The Town acknowledges that no consideration was

paid for the materials and labor provided by the Debtor after expiration of the Contract, but

argues that any ability to recover the value of the materials and labor provided by the Debtor to

the Town is foreclosed by the findings in the Contract Decision. The Town also claims that the

important state interest in protecting the public from favoritism, corruption and extravagance

trumps any rights the Trustee has to recover from the Town under the constructive fraudulent

conveyance claims. The Trustee opposes the Motion on several grounds. According to the

Trustee, the Contract Decision is not an impediment to the Remaining Claims because the

Trustee is not seeking to enforce the Contract. Rather, the Trustee seeks to use its powers under

§ 544 to recover transfers for the benefit of the creditors of the Debtor, and the Town is not

immune from such suits under any theory, including the Rooker-Feldman doctrine, res judicata

or collateral estoppel.

Discussion

Summary Judgment Standards

In order to grant summary judgment, “there [must be] no genuine issue as to any material

fact.” Fed. R. Civ. P. 56(c). The moving party has the burden of providing the proper support for

the motion in the form of pleadings and documentary evidence. Adickes v. S.H. Kress & Co.,

398 U.S. 144, 157-159 (1970). Once the movant shows “…the absence of a genuine issue of

material fact…”, the burden is on the non-moving party to set forth specific facts raising a

genuine issue of fact for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986); United

States ex. rel. Romano v. New York Presbyterian, 426 F. Supp. 2d 174, 177 (S.D.N.Y. 2006). In

any event, all justifiable inferences are to be drawn in favor of the non-moving party. Anderson

v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986) (other citations omitted).

Roles of the Parties

Before analyzing the issues raised in the Motion, the roles of the parties as transferor and

transferee must be sorted out, and the subject matter of the transfer must be determined. First, in

its initial moving papers, the Town incorrectly asserted that the Debtor is the creditor and not the

transferor, and fails to identify the “transfer” as the materials and labor provided by the Debtor to

the Town. The Town’s arguments seem to be largely predicated on what appears to be a

fundamental misunderstanding of sections 544 and 550 of the Bankruptcy Code, and the effect

the relevant State statutes have on these Bankruptcy Code provisions.

Section 544 of the Bankruptcy Code confers upon the trustee the rights and powers of a

creditor of the debtor, including the power to “avoid any transfer of property of the debtor or any

obligation incurred by the debtor that is voidable” by such creditor. 11 U.S.C. § 544(a)(1).

Using these powers, the trustee may avoid any transfer of property of the debtor or any

obligation incurred by the debtor that would be voidable under applicable law by a creditor

holding an unsecured claim. 11 U.S.C. § 544(b)(1). Under Section 544, the trustee steps “into

the shoes of a creditor under state law” to avoid any transfers that the creditor could have

avoided. Univ. Church v. Geltzer, 463 F.3d 218, 222, n. 1 (2d Cir. 2006). The Second Circuit

Court of Appeals has opined that while constructive fraudulent conveyance claims under Section

544 borrow applicable state law regarding avoiding the transfer, “[a] constructive fraudulent

conveyance action brought by a trustee et al. under Section 544 is a claim arising under federal

law.” In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d 98, 111 (2d Cir. 2016)

(citing In re Intelligent Direct Mktg., 518 B.R. 579, 587 (E.D.Cal.2014); In re Trinsum Grp.,

Inc., 460 B.R. 379, 387–88 (S.D.N.Y.2011); In re Sunbridge Capital Inc., 454 B.R. 166, 169 n.

16 (Bankr. D. Kan. 2011); and In re Charys Holding Co., Inc., 443 B.R. 628, 635-36 (Bankr. D.

Del. 2010)).

While a fraudulent conveyance claim belongs to the debtor’s creditors prepetition, courts

have held that the claim becomes an asset of the debtor’s estate upon the filing of a bankruptcy

petition. In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d at 117.2 The targeted

asset does not become property of the debtor’s estate until the trustee obtains a favorable

judgment. Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 212 (2d Cir. 2014). In the instant

case, the Trustee stands in the shoes of a creditor of the Debtor, which vests the Trustee with

standing to recover fraudulent conveyances. Under Article 10 of the DCL, a “conveyance” is

defined as “every payment of money, assignment, release, transfer, lease, mortgage or pledge of

tangible or intangible property, and also the creation of any lien or incumbrance.” DCL § 270.

The property alleged to have been conveyed in this case are the materials and labor provided by

the Debtor to the Town, for which the Debtor received no consideration. While personal

services provided by a judgment debtor are not included within the definition of conveyances

under DCL § 270, the Trustee is not seeking a recovery based on any personal services provided

by the Debtor. The Debtor, as a corporation, could not provide “personal services.” Rather, it is

the value of the labor and materials provided by the Debtor that the Trustee seeks to recover.

2 There is some dispute over whether the filing of a bankruptcy renders these claims property of the debtor’s estate

or whether the claims belong to the transferor’s creditors, but this split in authority is irrelevant with respect to the

issues raised in the Motion. In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d at 116.

Once a transfer is avoided under Section 544, the remedy is set forth in Section 550,

which provides that “the trustee may recover, for the benefit of the estate, the property

transferred, or, if the court so orders, the value of such property” from the transferee. 11 U.S.C.

§ 550(a). In this case, there is no doubt that if the Trustee is successful, it is the value of the

property, and not the sidewalks and curbs, that would be recovered by the Trustee. It is critical to

understand that in this adversary proceeding, the Trustee is not entitled to seek recovery of the

amounts allegedly due and owing to the Debtor under the Contract. In fact, the Contract terms

are not relevant to the resolution of the issues remaining in this adversary proceeding. The Court

must determine whether the Town, as the recipient of labor and materials for which it gave no

consideration, is liable to the Debtor’s estate and its creditors under § 544 of the Bankruptcy

Code. The Town is correct to assert that the Contract between the Town and the Debtor expired,

and the Trustee may not merely seek the amount due under the Contract as there was no

enforceable contract as of June 17, 2011. However, the finding by Justice Molia that the Contract

expired on June 17, 2011 does not preclude the Trustee from commencing a proceeding to

recover the value of the labor and materials transferred by the Debtor as a fraudulent conveyance

under the DCL.

Preemption

A threshold issue for the Court to consider is whether the preemption doctrine applies to

this proceeding. One of the Town’s major arguments in favor of dismissing the Remaining

Claims is that directing the Town to pay for the materials and labor supplied by the Debtor

would violate GML § 103(1) and Town Law § 64(6). According to the Town, Congress did not

intend that the Bankruptcy Code be used to force a municipality to violate State laws that protect

important State interests. The important State interests the Town alleges are at stake include the

desire to protect the public from governmental misconduct, and the need to protect the public

interest in the prudent and economical use of public funds. By seeking a ruling that the Trustee

may not utilize § 544 of the Bankruptcy Code, the Town is challenging whether this bankruptcy

provision lacks effectiveness in the face of State laws governing contractual relationships

between a municipality and a third party. The Court is not convinced that there is an actual

conflict requiring application of the preemption doctrine because the Trustee does not seek to

compel the Town to honor the Contract. However, to the extent that the Debtor’s and the

Town’s relationship commenced due to a contract between the parties, it is advisable to undergo

an analysis of this issue.

Congress is vested with the exclusive power under the Bankruptcy Clause of the U.S.

Constitution to enact uniform laws governing bankruptcy. U.S. CONST., ART. 1, CL. 8. The

Supremacy Clause of the U.S. Constitution provides that federal laws, such as those concerning

bankruptcy “shall be the supreme Law of the Land.” U.S. CONST., ART. VI, CL. 2. The federal

preemption doctrine provides that federal law will preempt state law when a discernible conflict

or inconsistency arises. See Arizona v. United States, 567 U.S. 387, 399 (2012); Gibbons v.

Ogden, 9 Wheat. 1, 210–211 (1824). When preemption applies, states are deprived of the power

to act under the applicable state law and the governing federal law becomes paramount. See

Hillsborough County, Fla. v. Automated Med. Laboratories, Inc., 471 U.S. 707, 712 (1985).

Federal law preempts state law in three circumstances: (1) express preemption; (2) field

preemption; and (3) conflict preemption. New York SMSA Ltd. Partnership v. Town of

Clarkstown, 612 F.3d 97, 104 (2d Cir. 2010). The question of whether preemption applies is

always dependent on Congressional intent. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 45 (1987)

(“The purpose of Congress is the ultimate touchstone.”). Express preemption occurs when

Congress identifies state law it considers to be inconsistent with goals of the federal law at issue.

See id. When Congress expressly states that its laws pre-empt state law, then preemption is clear

and unequivocal. English v. General Elec. Co., 496 U.S. 72, 79 (1990). It has been recognized

that where express preemption is lacking, a “preemptive effect may be inferred where it is not

expressly provided.” In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d at 109. In

the absence of express preemption by Congress, state law is impliedly preempted when there is

field preemption or conflict preemption. Altria Group, Inc. v. Good, 555 U.S. 70, 76-77 (2008).

Field preemption occurs “when Congress intends that federal law occupy a given field.” In re

Enron Corp., 327 B.R. 526, 530 (Bankr. S.D.N.Y 2005). “Field preemption reflects a

Congressional decision to foreclose any state regulation in the area even if it is parallel to federal

standards.” Arizona v. United States, 587 U.S. 387, 400 (2012). Conflict preemption may occur

in two circumstances: first, where it is impossible to comply with the state and federal law, or

where state law “‘stands as an obstacle to accomplishment and execution of the full purposes and

objectives of Congress.’” English v. General Elec. Co., 496 U.S. at 79 (other citations omitted).

What qualifies as a sufficient obstacle is to be determined by reviewing the federal statute as a

whole, and examining its purpose and effects. In re Westby, 473 B.R. 392, 412 (Bankr. D. Kan.

2012).

Even if there is an apparent conflict, the Supreme Court has recognized that the

Bankruptcy Code will not preempt a state statute that is “reasonably designed to protect the

public health or safety from identified hazards.” Midlantic Nat. Bank v. New Jersey Dept of

Environmental Protection, 474 U.S. 494, 507 (1986). In addition, there is an assumption that the

historic police powers of a state will not be superseded by a federal law absent a finding of clear

Congressional intent to preempt state law. Altria Group, Inc. v. Good, 555 U.S. at 77.

In its supplemental papers, the Town claims that New York State’s interest in ensuring

that public contracts are only awarded after competitive bidding, in strict compliance with the

applicable statutory requirements, prevails over any right the Trustee has to prosecute a

fraudulent conveyance claim against the Town. The Town relies heavily on In re Murphy, 331

BR 107 (Bankr. S.D.N.Y. 2005), but the Town misconstrues the Murphy decision. In the

Murphy case, the Chapter 7 trustee filed an adversary proceeding seeking to avoid a town’s tax

forfeiture of the debtor’s real property as a fraudulent conveyance because, inter alia, the debtor

did not receive reasonably equivalent value for the forfeiture.3 In addition, the debtor was

permitted to file an intervenor complaint which included the same causes of action brought by

the Chapter 7 trustee. The town filed a motion to dismiss the Chapter 7 trustee’s complaint and

the debtor’s intervenor complaint. The Bankruptcy Court denied the portion of the defendant

town’s motion to dismiss the Chapter 7 trustee’s fraudulent conveyance action regarding the

failure to provide reasonably equivalent value as follows:

Certainly, New York State has a strong interest in assuring that its

citizens meet their tax obligations and to enforce those obligations

when they remain unmet. However, that interest cannot overcome

Congress’ policy choice that reasonably equivalent value must be

obtained for a transfer of a debtor’s property in the bankruptcy

context, where the rights of other creditors are prejudiced. . . . The

Bankruptcy Code affords taxing authorities no exception, and a

taxing authority is bound by the Bankruptcy Code to the same

extent as any other creditor.

In re Murphy, 331 B.R. at 120. The Bankruptcy Court in Murphy recognized that a forfeiture of

property, even if valid under applicable non-bankruptcy law, could still be subject to avoidance

under the Bankruptcy Code for providing less than reasonably equivalent value:

Forfeiture of property to the taxing authority under the R.P.T.L. for

persistent refusal to pay taxes is a matter of state law, which is

3 The Chapter 7 Trustee’s complaint in Murphy also contained other causes of action not relevant to the Motion.

heavily invested with public interest for the State of New York and

its local communities. State law and public interest must be

respected except to the extent that federal law [supersedes] the

under the Supremacy Clause of the Constitution. Art VI c. 2. The

Bankruptcy Code is not concerned with the obligation and rights of

taxpayers and taxing authorities under state laws, except (in the

context of this case) to the extent that the bankruptcy objectives

expressed in Section 548 must preempt state law. The bankruptcy

objective of the avoidance powers . . . is to protect creditors

generally from prejudice resulting from transfers of the debtor’s

property for less than fair consideration, resulting in diminution of

the debtor’s estate available to pay creditors.

Id. at 122.

The conflict between New York forfeiture law and federal bankruptcy avoidance law was

resolved in favor of the bankruptcy law under the Supremacy Clause, but only to the extent that

recovery of the transfer would benefit the creditors. Id. The Court concluded that there was no

federal bankruptcy interest in upsetting state property interests to allow the debtor to personally

benefit from an avoidance action. Id at 125. Therefore, the Bankruptcy Court granted the

motion to dismiss the debtor’s intervenor complaint to the extent that the debtor sought to

recover a substantial surplus that would result from the avoidance.

The Murphy decision clearly supports the Trustee’s argument that the rights of the

creditors in this case to recover the value of a fraudulent transfer are superior to the admittedly

strong interest New York state has in protecting the public interest in the prudent and economical

use of taxpayer funds. There does not appear to be any threat that the Debtor would receive any

surplus in this case, so the factors considered in limiting any recovery in the Murphy case do not

apply to this adversary proceeding.

In this case, there is some basis to the argument that the New York General Municipal

Law §§ 103 and 104-b as well as Chapter 57 of the Procurement Policy of the Town of

Smithtown appear to be in conflict with the enforcement of rights created by Congress in the

Bankruptcy Code. According to the Town, it cannot comply with a judgment directing payment

to the Trustee because the Contract expired and was no longer enforceable. As a result, the

Debtor’s estate is not entitled to recover any amount on account of the unenforceable contract, or

on a quantum meruit basis. S.T. Grand, Inc. v. City of New York, 32 N.Y.2d 300, 305, 298

N.E.2d 105, 108 (1973) (other citations omitted). In this instance, a conflict arises between the

State and local statutes on the one hand, and the objectives of the Bankruptcy law to permit the

trustee to recover the value of constructive fraudulent conveyances for the benefit of the creditors

on the other hand.

The Town asserts that compelling State interests override the federal bankruptcy laws

regarding recovery of the value of the labor and materials provided by the Debtor. The state

interests the Town identifies concern protection of the public, the prevention of corruption, and

the safeguarding of taxpayer dollars from unscrupulous vendors and municipal employees.

While the Bankruptcy Code does not concern itself with the rights of taxing authorities under

applicable state law, the interests protected by these state laws must be subservient to the statutes

passed by Congress and incorporated into the Bankruptcy Code, which promote the objectives of

protecting a debtor’s creditors from harm as a result of transfers made by a debtor for less than

fair consideration.

The Town’s claim that the State interests it seeks to protect are so great that the

avoidance statutes in the Bankruptcy Code must give way is unavailing. While there is

significant interest in protecting the public from extravagance and collusion, the public health or

safety would not be threatened if the Trustee were to prevail on the Remaining Claims. Unlike

the case of Midlantic Nat. Bank v. New Jersey Dept of Environmental Protection, 474 U.S. 494,

the public’s health and safety is not at risk if the Trustee is permitted to recover the value of the

materials and labor provided to the Town under §§ 544 and 550 of the Bankruptcy Code.

Effect of the Contract Decision on This Adversary Proceeding

In addition to claiming that the State’s interest in protecting the taxpayers outweighs any

interest in maintaining a fraudulent conveyance action for the benefit of the creditors of the

Debtor, the Town asserts that the findings in the Contract Decision preclude this Court from

ruling in favor of the Trustee with respect to the Remaining Claims.

i. Rooker-Feldman Doctrine

According to the Town, Justice Molia’s prior rulings in the Contract Decision bar

recovery by the Trustee in this adversary proceeding. First, the Town alleges that the issues

raised in the Remaining Claims have already been litigated and should be dismissed for lack of

jurisdiction under the Rooker-Feldman doctrine. The Rooker-Feldman doctrine concerns the

application of 28 U.S.C. § 1257, which provides that “[f]inal judgments or decrees rendered by

the highest court of a State in which a decision could be had, may be reviewed by the Supreme

Court.” This doctrine precludes federal district courts from acting as appellate courts in

reviewing state court judgments. Dist. of Columbia Court of Appeals v. Feldman, 460 U.S. 462,

482-86 (1983); Rooker v. Fid. Trust Co., 263 U.S. 413, 415-16 (1923).

As the Supreme Court enunciated in Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544

U.S. 280, 284 (2005), the Rooker-Feldman doctrine “is confined to cases . . . brought by state-

court losers complaining of injuries caused by state-court judgments rendered before the district

court proceedings commenced and inviting district court review and rejection of those

judgments.” In Exxon Mobil Corp., the Supreme Court recognized that the Rooker Feldman

doctrine is a narrow jurisdictional bar to litigation where the losing party “repairs to federal court

to undo the [state court] judgment in its favor.” Id. at 293. However, the Supreme Court

cautioned that “Rooker-Feldman does not otherwise override or supplant preclusion doctrine or

augment the circumscribed doctrines that allow federal courts to stay or dismiss proceedings in

deference to state-court actions.” Id. at 284. In fact, “[i]f a federal plaintiff ‘present[s] some

independent claim, albeit one that denies a legal conclusion that a state court has reached in a

case to which he was a party . . . , then there is jurisdiction and state law determines whether the

defendant prevails under principles of preclusion.’” Id. (quoting GASH Assocs. v. Village of

Rosemont, 995 F.2d 726, 728 (7th Cir. 1993)).

Courts examining the reach of the Rooker-Feldman doctrine have concluded that it has

little to no application in the context of avoidance actions under the Bankruptcy Code. The

reason is aptly explained by the Ninth Circuit in In re Gruntz, 202 F.3d 1074, 1078-79 (9th Cir.

2000):

[The Rooker-Feldman] doctrine arises out of a pair of negative

inferences drawn from two statutes: 28 U.S.C. § 1331, which

establishes the district court’s ‘original jurisdiction of all civil

actions arising under the Constitution, laws, or treaties of the

United States’; and 28 U.S.C. § 1257, which allows Supreme

Court review of ‘[f]inal judgments or decrees rendered by the

highest court of a State in which a decision could be had.’

Rooker itself relied upon the ‘legislation of Congress,’ namely the

predecessors of these statutes in the Judicial Code. . . . Of course,

the statutes that form the basis of the Rooker-Feldman doctrine co-

exist among other federal jurisdictional laws. To derive a coherent

theory of federal jurisdiction, one must consider the entire federal

jurisdictional constellation. . . . It is well-settled that the Rooker-

Feldman doctrine does not touch the writ of habeas corpus. . . .

[H]abeas corpus is not an ‘exception’ to Rooker-Feldman, but a

procedure with roots in statutory jurisdiction parallel to- and in no

way precluded by, the doctrine. So, too, it is with bankruptcy law.

In apparent contradiction to the Rooker-Feldman theory,

bankruptcy courts are empowered to avoid state judgments, see,

e.g., 11 U.S.C. §§ 544, 547, 548, 549; to modify them . . ., and to

discharge them. . . .

Courts have routinely held that the Rooker- Feldman doctrine is simply not relevant

where federal statutes, such as Sections 544 and 548 of the Bankruptcy Code, confer upon

bankruptcy courts the power to modify or avoid state court judgments. In re Hopkins, 346 B.R.

294, 302 (Bankr. E.D.N.Y. 2006); In re Maui Indus. Loan & Finance Co., 454 B.R. 133, 136

(Bankr. D. Haw. 2011) (“The Rooker-Feldman doctrine does not apply to avoidance actions

under sections 544 and 548.”); In re Martyak, 432 B.R. 25, 31 (Bankr. N.D.N.Y. 2010) (“Since

Rooker - Feldman does not apply when a federal statute specifically authorizes a lower court to

vitiate a state court judgment, the doctrine is inapplicable to [the debtor’s] avoidance action

asserted under Code section 548.”). Under such circumstances, the Rooker-Feldman doctrine

does not bar the action because the Bankruptcy Court has been granted specific authority to

exercise its jurisdiction over the judgment in question.

Even if the Court were to apply the Rooker-Feldman analysis to determine whether the

Remaining Actions were barred, the Town cannot satisfy the requirements. In our case, the

Trustee does not seek to disturb the findings in the Contract Decision. The Trustee asserts

independent federal claims, and is not inviting review and rejection of the Contract Decision.

The Third Circuit’s decision In re Philadelphia Entertainment & Development Partners, 879

F.3d 492 (3d Cir. 2018) is most instructive. In In re Philadelphia Entertainment & Development

Partners, the Third Circuit Court of Appeals was called on to determine whether the District

Court, which affirmed the Bankruptcy Court, erred when it held that the Rooker-Feldman

doctrine barred the Chapter 11 trustee from commencing a fraudulent transfer action against the

Pennsylvania Gaming Board for revoking the Chapter 11 debtor’s slot machine license, for

which the debtor paid $50 million. In analyzing whether to grant the motion to dismiss the

complaint, the Bankruptcy Court held that the estate’s right to be compensated for the value of

the license was the “functional equivalent” of the right to retain the license, which required a

conclusion that the Rooker-Feldman doctrine barred any claim for the value of the license. 879

F.3d at 497 (citing lower court decision).

The Third Circuit reversed, holding that trustee was not inviting review and rejection of

the underlying state court decision to revoke the gaming license:

The Bankruptcy Court could have answered these

questions without rejecting or even reviewing the

Commonwealth Court’s decision. And, if it accepted

the Trustee’s argument, the Bankruptcy Court would have

concluded that the Bankruptcy Code permitted avoidance

of the transfer, not that the Commonwealth Court had

committed legal error.

Id. at 501 (footnote omitted). Based on its analysis, the Third Circuit concluded that the

Pennsylvania Gaming Board had not met the standard for invoking the Rooker Feldman doctrine.

The Court finds this analysis equally applicable to this case. The Trustee does not seek to

overturn the Contract Decision, but seeks recovery for the materials and labor provided by the

Debtor without the benefit of a contract. For these reasons, the portion of the Motion seeking

dismissal of the Remaining Claims based on the Rooker – Feldman doctrine is denied.

ii. Res Judicata and Collateral Estoppel

Under New York law, collateral estoppel prevents parties from relitigating an issue when

“(1) the identical issue necessarily was decided in the prior action, and (2) the party to be

precluded from relitigating the issue had a full and fair opportunity to litigate the issue in the

prior action. Denton v. Hyman (In re Hyman), 502 F.3d 61, 65 (2d Cir. 2007) (citations omitted),

cert denied, 555 U.S. 1097 (2009); Evans v. Ottimo, 469 F.3d 278, 281 (2d Cir. 2006).

The first prong is not satisfied in this case. The issues raised in the State Court Action,

and distilled and decided in the Contract Decision concerned whether the Contract was

enforceable based on applicable State and municipal law. The State Court Action did not

involve whether the transfer of materials and labor by the Debtor to the Town constituted a

fraudulent conveyance. The Town mistakenly argues that the property the Trustee is seeking to

recover is the payment from the Town under the Contract. However, the Trustee is not claiming

that the monies owed under the Contract are property of the Debtor’s estate. Therefore, the

Town’s argument is easily rejected. Clearly, the estate has no interest in monies due under a

contract that is invalid as a matter of law. The property conveyed is labor and materials provided

to remove and build the curbs sidewalks, not the moneys allegedly owed under the Contract.

Section 550 of the Bankruptcy Code states that if a transfer is avoided under § 544, “the trustee

may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the

value of such property.” In this case, the Trustee is only entitled to recover the value of such

property transferred as an appropriate remedy in this case.

The Town also incorrectly argues that the Remaining Claims could have been asserted in

the State Court Action. However, these are claims under § 544, and could not have been brought

in State Court by the Debtor. These claims belong to the Trustee, who derives his standing from

the unsecured creditors of the Debtor.

Res judicata does not bar this proceeding either. The doctrine of res judicata is grounded

in the Full Faith and Credit Clause of the United States Constitution. U.S. Const. art. IV, §1. It

prevents a party from re-litigating any issue or defense that was finally decided by a court of

competent jurisdiction and which could have been raised or decided in the prior action. See

Burgos v. Hopkins, 14 F.3d 787, 789 (2d Cir. 1994) (applying New York preclusion rules);

Swiatkowski v. Citibank, 745 F. Supp.2d 150, 171 (E.D.N.Y. 2010 (citing Waldman v. Vill. of

Kiryas Joel, 39 F. Supp.2d 370, 377 (S.D.N.Y. 1999). According to the Second Circuit, the test

for determining whether res judicata applies is whether 1) the prior decision was a final decision

on the merits, 2) the litigants were the same parties, 3) the prior court was a court of competent

jurisdiction, and 4) the causes of action were the same. Corbett v. MacDonald Moving Services,

Inc., 124 F.3d 82, 87-88 (2d Cir. 1997) (citing In re Teltronics Servs., Inc., 762 F.2d 185, 190

(2d Cir. 1985)).

Under the doctrine of res judicata, this Court is bound to accept the State Court’s

determinations, which would include that the Contract expired as a matter of law. The Town also

asserts that the remaining elements of res judicata are met, and that as a result, the Remaining

Claims are barred. However, res judicata does not apply to a chapter 7 trustee:

[T]he trustee in bankruptcy . . . represents all creditors.” . . . As

such, the trustee is not simply the successor in interest to the

debtor; he represents the interest of all creditors of the debtor’s

bankruptcy estate. . . .

Because the trustee is invested with ‘extraordinary rights . . . as a

general representative of . . . creditors,’ he is ‘not bound, either on

res judicata or judicial collateral estoppel [grounds] by the prior

state proceedings.

In re DLC, Ltd., 295 B.R. 593, 602 (8th Cir. B.A.P. 2003) (citing In re Marlar, 252 B.R. 743,

757 (8th Cir. B.A.P. 2000) (other citations omitted)).

Even if the Trustee were deemed to be in privity with the Debtor with respect to the State

Court Action, the State Court Action, which was a contract dispute, did not concern the same

claims as the fraudulent transfer claims asserted in this adversary proceeding. In re DLC, Ltd.,

295 B.R. at 604. Whether the Contract is enforceable is not relevant to the Remaining Claims.

The Trustee is not entitled to recover the monies allegedly due under the Contract. This is an

entirely separate claim to recover the value of the labor and materials transferred to the Town for

no consideration. Therefore, the Town cannot satisfy the fourth element of res judicata.

iii. Abstention

The Town asserts that because this Court previously granted its request to abstain from

deciding the Removed Action, the Court should abstain from hearing the Remaining Claims as

well. This Court did find that the Removed Action was not, as alleged by the Debtor, akin to a

turnover action under Bankruptcy Code § 542 because there was no unconditional property of

the estate subject to a turnover proceeding. Without a determination that the Contract remained

in full force and effect, the Debtor was not entitled to demand payment under the Contract.

Because the enforceability of the Contract was not a core proceeding, and the Bankruptcy Court

was not in a position to resolve the adversary proceeding faster than the State Court, the Court

granted the Town’s motion to abstain. However, the Remaining Claims do not concern the

enforceability of the Contract. The same reasoning that compelled this Court to abstain from

hearing the Removed Action now compels this Court to conclude that abstention is not

warranted. The Remaining Claims are all core proceedings under the Bankruptcy Code, and

therefore, the requirements for mandatory abstention pursuant to 28 U.S.C. § 1334(c)(2)4 cannot

be met.

Remaining Arguments Raised by the Town

4 28 U.S.C. § 1334(c) (2) states:

Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a

case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action

could not have been commenced in a court of the United States absent jurisdiction under this section, the district

court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a

State forum of appropriate jurisdiction.

Having analyzed the Town’s arguments regarding subject matter jurisdiction, the Court

now turns to the Town’s challenges to the specific elements of the Remaining Claims. First, the

Town asserts that under the DCL, personal services do not constitute conveyances that may be

recovered by the Trustee. Second, the Town alleges that the Trustee cannot establish the

requisite intent on the part of the Debtor for the purposes of the fourth cause of action under §

275 of the DCL. The Town also claims that the Trustee has failed to establish the element of

insolvency, which is relevant under the second cause of action pursuant to § 273 of the DCL.

Article 10 of the New York Debtor & Creditor Law defines a “conveyance” as “every

payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or

intangible property, and also the creation of any lien or incumbrance.” DCL § 270.   The Town is

correct that personal services provided by a debtor are not considered conveyances under this

definition. State Farm Ins Co. v. Shanley & Schwartz, Inc., 111 A.D.3d 918, 919-20, 975

N.Y.S.2d 757 (3d Dep’t 2013). According to the Town, the labor provided by employees of the

Debtor or contractors hired by the Debtor constitute “personal services” and therefore do not fit

within the definition of “conveyance.” However, the labor provided by the Debtor is not in the

nature of personal services by a debtor, which distinguishes this from the facts in State Farm Ins

Co. v. Shanley & Schwartz, Inc. In that case, the judgment debtor was an individual who

provided his services to a defendant corporation solely owned by his wife. In our case, the

Debtor either paid employees or paid contractors to provide the work for the Town’s benefit. The

Trustee does not seek recovery of the value of “personal services.” The Trustee seeks to recover

the value of the labor of third parties hired by the Debtor, and materials the Debtor provided to

the Town. In addition, the materials provided (cement, bricks and other materials) are certainly

included within the definition of “conveyance” under DCL § 270.

As to whether summary judgment can be granted in the Town’s favor as to the fourth

cause of action under DCL § 275, the Court finds that the Town has not established that there is

no genuine issue of material fact in dispute. Section 275 of the DCL states as follows:

Every conveyance made and every obligation incurred without fair

consideration when the person making the conveyance or entering

into the obligation intends or believes that he will incur debts

beyond his ability to pay as they mature, is fraudulent as to both

present and future creditors.

The Town states that the Trustee cannot establish as a matter of law that at the time the Debtor

provided the labor and materials pursuant to the Town’s directive, the Debtor intended to incur

debts beyond its ability to repay. While the Debtor may not have had such intent, the Town has

failed to address whether the Debtor believed that by performing the work in question, it would

incur debts beyond its ability to pay them as they mature. Therefore, the Debtor will have its

chance to establish the elements of this cause of action at trial.

The Town also states that the Trustee cannot establish that the Debtor was insolvent or

rendered insolvent as a result of the transfers. Proof of insolvency is an element of DCL § 273,

but there is a presumption of insolvency where a debtor makes a conveyance without fair

consideration. In re USA United Fleet, Inc., 559 B.R. 41, 60 (Bankr. E.D.N.Y. 2016) (citing

Geron v. Schulman (In re Manshul Constr. Corp.,) 2000 WL 1228866 at *53 (S.D.N.Y. Aug. 30,

2000); and Feist v. Druckerman, 70 F.2d 333, 334 (2d Cir. 1934)). Given that the Town must

overcome the presumption of the Debtor’s insolvency, the Town cannot merely claim at the

summary judgment stage that the Trustee is unable to establish that the Debtor was insolvent or

rendered insolvent as a result of the services provided to the Town. At trial, it will be the

Town’s burden to overcome the presumption of the Debtor’s insolvency. Therefore, summary

judgment is denied as to the second cause of action.

Conclusion

For the reasons set forth above, the Motion is denied in its entirety. The Court shall enter

an order consistent with this Memorandum Decision, along with a Pretrial Order scheduling a

trial on the Remaining Claims.

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Dated: Central Islip, New York 2 ee << Robert E. Grossman

July 10, 2019 United States Bankruptcy Judge

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