ADVANCED TELECOMMUNICATION NETWORK, INC. v. ALLEN
Filing
39
OPINION. Signed by Judge Renee Marie Bumb on 7/19/2013. (TH, )
NOT FOR PUBLICATION
[Docket No. 1]
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
CAMDEN VICINAGE
ADVANCED TELECOMMUNICATIONS NETWORK
INC.,
Civil No. 1:12-CV-03793(RMB/GMB)
Appellant,
OPINION
v.
DANIEL W. ALLEN, SR.,
Appellee.
Appearances:
Edward L. Paul
Paul & Katz, P.C.
1103 Laurel Oak Road, Suite 105C
Voorhees, NJ 08043
Attorneys for Plaintiff-Appellant
Albert A. Ciardi, III
Kevin G. McDonald
Jennifer C. McEntee
Ciardi Ciardi & Astin
One Commerce Square
2005 Market Street, Suite 1930
Philadelphia, PA 19103
Attorneys for Defendant-Appellee
Bumb, UNITED STATES DISTRICT JUDGE:
On March 2, 2012, the Honorable Gloria M. Burns, U.S.
Bankruptcy Judge for the District of New Jersey (the “Bankruptcy
Court”), issued a detailed Memorandum Opinion denying Appellant
Advanced Telecommunications Network, Inc.’s (“ATN”) motion for
1
relief from an automatic stay of proceedings against Appellee
Daniel Allen (“Allen”). In re Allen, No. 11-37671, 2012 Bankr.
LEXIS 874, at *1 (Bankr. D.N.J. Mar. 2, 2012).
Two weeks later,
on March 16, 2012, the Bankruptcy Court entered an Order
formally denying ATN’s motion.
ATN now appeals that Order. For
the reasons that follow, the Bankruptcy Court’s Order is
AFFIRMED.
I.
Background1
In 1999, ATN transferred $6 million to Allen to settle a
lawsuit between the parties. Id. In 2003, ATN filed for
bankruptcy and sought, pursuant to 11 U.S.C. § 544, to recover
the $6 million as a fraudulent transfer under N.J.S.A § 25:227(a), § 25:2-25(b)(2), and § 14A:7-14.1. Advanced
Telecommunications Network, Inc. v. Allen, 321 B.R. 308, 316
(Bankr. M.D. Fla. 2005). In 2009, after many years of seemingly
bitter and costly litigation, including numerous appeals, the
United States Bankruptcy Court for the Middle District of
Florida (the “Florida Court”) ruled in favor of ATN, finding
that the transfer was constructively fraudulent. In re Advanced
Telecommunications Network, Inc., No. 6:03-bk-002299, 2009
Bankr. LEXIS 2028, at *1 (Bankr. M.D. Fla. July 10, 2009).
1
Two
The procedural history of this case is long and tortured. The
Bankruptcy Court comprehensively set it forth in its Memorandum
Opinion. Because this Court writes solely for the parties, it recounts
only the portions of the case’s history that are necessary for its
decision.
2
years later, in 2011, the Florida Court issued a recovery order
(“the Recovery Order”) pursuant to 11 U.S.C. § 550(a) allowing
ATN “to collect upon its judgment pursuant to proceedings
supplementary allowed by Bankruptcy Rule 7069(a)(1).” In re
Advanced Telecommunications Network, Inc., No. 6:03-bk-002299,
2011 Bankr. LEXIS 3069, at *3 (Bankr.M.D.Fla. July 28, 2011). 11
Under 11 U.S.C. § 550(a), “to the extent that a transfer is
avoided under section . . . 544 [or] 548 . . . of this title,
the trustee may recover, for the benefit of the estate, the
property transferred, or, if the court so orders, the value of
such property[.]”
11 U.S.C. § 550.
Rule 7069(a)(1) authorizes
the collection of a “money judgment.” FED. R. BANKR. P.
7069(a)(1).
Before ATN could avail itself of Rule 7069(a)(1) and
collect the money judgment, and on the eve of facing a contempt
proceeding, Allen filed for bankruptcy in the District of New
Jersey. In re Allen, 2012 Bankr. LEXIS 874, at *24. Allen’s
bankruptcy filing triggered an automatic stay under 11 U.S.C. §
362, barring all collection proceedings against him. On November
29, ATN filed a motion for relief from the stay with the
Bankruptcy Court. Id. at *25. It argued that it was not stayed
because: (1) the Florida Court’s avoidance finding and the
subsequent Recovery Order effectively made the property part of
ATN’s own estate; (2) the money at issue was held in a
3
constructive trust by Allen and thus was not part of his estate;
and (3) the elements of a constructive trust were res judicata
based on the Florida Court’s rulings. Id. at *25, *36.
The
Bankruptcy Court disagreed, rejecting each of ATN’s arguments.
Id. at *26-65.
ATN appealed, renewing the same arguments it pressed before
the Bankruptcy Court and raising two new arguments. First, ATN
additionally argues that it was error for the Bankruptcy Court
to address ATN’s argument that the property was part of ATN’s
own estate because that issue had also already been decided by
the Florida Court. Second, ATN now argues that the federal
courts in New Jersey do not have subject matter jurisdiction
over the funds at issue in this cases because those funds are
subject to the in rem jurisdiction of the Florida Court. Doc. 34
at 4.
II.
Standard of Review
This Court has jurisdiction to hear appeals of the
Bankruptcy Court’s final orders pursuant to 28 U.S.C. § 158(a).
The Bankruptcy Court’s legal determinations are reviewed de
novo, its factual findings for clear error, and its exercise of
discretion for abuse thereof. In re Markis, 482 F. App’x 695,
698 (3d Cir. 2012). This Court may consider its subject matter
jurisdiction at any time, even if the question has not been
raised in the lower court. Carroll v. Rochford, 123 Fed. App’x
4
456, 458 (3d Cir. 2005) (citing Louisville & N.R. Co. v.
Mottley, 211 U.S. 149 (1908)).
III. Analysis
The Court first addresses ATN’s subject matter jurisdiction
argument. It then addresses ATN’s res judicata argument. Third,
it addresses ATN’s argument that the funds at issue are its
property. Finally, it addresses ATN’s alternative argument that
the funds at issue are in a constructive trust for its benefit.
A.
Subject Matter Jurisdiction
ATN argues that, pursuant to the Princess Lida doctrine,
this Court does not have subject matter jurisdiction over the $6
million because it would interfere with the Florida Court’s
jurisdiction. [Docket No. 34 at 4 (referring to Princess Lida v.
Thompson, 305 U.S. 456 (1938)).2
Under the Princess Lida doctrine, a second court cannot
exercise jurisdiction over property that is the subject of in
rem proceedings in another court. LaSalle Nat. Bank v. First
Conn. Holding Group, LLC, 287 F.3d 279, 284-85, n.3 (3d Cir.
2002).
The doctrine applies when: (1) the litigation in the
first and second fora are in rem or quasi in rem; and (2) the
relief sought requires the second court to exercise control over
the property in dispute, when such property is already under
2
ATN’s raising of this issue was prompted by the Court’s concern that
two different bankruptcy courts could be at odds with one another and
produce an inconsistent disposition of property.
5
control of the first court. Dailey v. National Hockey League,
987 F.2d 172, 176 (3d Cir. 1993) (citing Princess Lida, 305 U.S.
at 456). Although bankruptcy proceedings are generally in rem,
the key difference in this case is that court orders pursuant to
11 U.S.C. § 550 to recover avoided transfers, like the Recovery
Order, are in personam where the relief sought is a money
judgment. See Central Virginia Community College v. Katz, 546
U.S. 356, 372 (2006) (finding that recover orders under § 550
may be in personam); Koken v. Viad Corp., 307 F. Supp. 2d 650,
655 (E.D.Pa. 2004)(holding that money judgments are in
personam); United States v. Bank of New York & Trust Co., 296
U.S. 463, 478 (1936) (characterizing in personam actions as
those that enforce personal liability); In re Allen, No. 1314348, 2013 WL 1952338, at *10 (Bankr.D.N.J. May 10, 2013).
Here, ATN cannot demonstrate either element of the Princess
Lida rule. First, the litigation in the Florida Court was, in
fact, for a money judgment and was therefore in personam. See
Koken, 307 F. Supp. 2d at 655. ATN was seeking to establish a
judgment that would be enforceable against Allen.
Second,
because ATN is seeking money, this Court does not need to
exercise control over any property under control of the Florida
Court. Id.
B.
Res Judicata
6
ATN next argues that “[i]t is res judicata that the funds
are ATN’s property.” Doc. 13-1 at 11. Although ATN’s res
judicata argument fails to distinguish between issue and claim
preclusion, ATN’s argument is without merit under either theory
of preclusion.
Claim preclusion requires: (1) a final judgment on the
merits in a prior suit involving; (2) the same parties or their
privies; and (3) a subsequent suit based on the same cause of
action. See Chen v. Twp. of Fairfield, 354 Fed. App’x 656, 658
(3d Cir. 2009)(citing Bd. Of Trs. Of Trucking Employees of N.
Jersey Welfare Fund, Inc. v. Centra, 983 F.2d 495 (3d Cir.
1992)). Issue preclusion applies when: (1) the identical issue
was decided in a prior adjudication; (2) there was a final
judgment on the merits; (3) the same parties or their privies;
and (4) the party against whom the bar is asserted had a full
and fair chance to litigate in the previous forum. Trucking
Employees, 983 F.2d at 505.
Here, while the Florida Court found the transfer of money
in 1999 was an avoidable fraudulent transfer and issued a
recovery order pursuant to § 550, the Florida Court did not
consider the questions before this Court: (1) whether the
property was part of ATN’s estate under § 541; and (2) whether
the money was held in a constructive trust. See, e.g., In re
Advanced Telecommunications Network, Inc., 2011 Bankr. LEXIS
7
3069, at *1; In re Advanced Telecommunications Network, Inc.,
2009 Bankr. LEXIS 2028, at *1. Nor did the Florida Court render
a decision as to the subsidiary questions of whether the
transfer constituted a wrongful act or whether Allen was
unjustly enriched, which are the elements of a constructive
trust claim. See Flanigan v. Munson, 818 A.2d 1275, 1281 (N.J.
2003). Accordingly, step (3) of claim preclusion analysis and
step (1) of issue prelusion analysis are not satisfied, and
Appellant’s preclusion arguments must be rejected.3
C.
Applicability of the Stay
The filing of a bankruptcy petition automatically stays
“the commencement or continuation, including the issuance or
employment of process, of a judicial, administrative, or other
action or proceeding against the debtor . . . [or] any act to
obtain possession of property of the estate or of property from
the estate[.]” 11 U.S.C. § 362(a)(1)-(3). Under 11 U.S.C. §
541(a)(1), commencement of a bankruptcy proceeding creates an
estate that includes “all legal or equitable interests of the
debtor in property as of the commencement of the case.”
U.S.C. § 541(a)(1).
3
11
Under 11 U.S.C. § 541(a)(3), property of
Indeed, issue preclusion supports this Court’s decision discussed below
that the Recovery Order was not tantamount to a finding that the
property at issue was property of ATN. The Florida Court itself
acknowledged that its order would yield to an automatic stay. In re
Advanced Telecommunications Network, Inc., 2011 Bankr. LEXIS 3069, at
*12 (recognizing that the recovery order was subject to an automatic
stay insofar as it was against David Allen, Daniel Allen’s co-defendant
in the Florida action, who was in the midst of bankruptcy proceedings).
8
the estate also includes property recovered pursuant to 11
U.S.C. § 550.
11 U.S.C. § 541(a)(3).
Here, Allen’s bankruptcy filing stayed all proceedings
against his estate. ATN argues that its suit is not subject to
the stay because, under 11 U.S.C. § 541(a)(1), the $6 million at
issue is ATN’s own property and not Allen’s.
It argues that
either the Florida Court’s avoidance judgment or Recovery Order
were sufficient to bring the $6 million into ATN’s estate. Doc.
13-1 at 9. This Court disagrees for the same reasons articulated
by the Bankruptcy Court.
The property at issue here is not property of the estate
under 11 U.S.C. § 541(a)(1), as claimed by Allen.
Unrecovered
property, like the property at issue here, is outside the ambit
of that provision.4
Rather, in order for a debtor to avoid a
fraudulent transfer of property and then “bring” that property
into the bankruptcy estate, the debtor must follow a strict
4
ATN argues that, under the Fifth Circuit’s decision in In re
MortgageAmerica Corp., 714 F.2d 1266 (5th Cir. 1983), the property at
issue became part of its estate under 11 U.S.C. § 541(a)(1) when the
Florida Court found that the property had been fraudulently
transferred. But that court’s reasoning was rejected by the Second and
Tenth Circuits. See In re Colonial Realty Co., 980 F.2d 125, 131 (2d
Cir. 1992)(holding that avoided transfers are recovered by § 550 and
then brought into the estate per § 541(a)(3)); Rajala v. Gardner, 709
F.3d 1031, 1038 (10th Cir. 2013). Those courts found, and this Court
agrees, that including unrecovered property within the ambit of
property of the estate, as defined by 11 U.S.C. § 541(a)(1), would
inappropriately render superfluous § 541(a)(3), which includes as
property of the estate property recovered in an avoidance action. Id.;
Disabled in Action of Pennsylvania v. Southeastern Pennsylvania Transp.
Auth., 539 F.3d 199, 211 (3d Cir. 2008)(holding that courts must
construe statutes to give effect to every provision, so that no part
will be superfluous).
9
statutory process. The debtor must first seek to avoid a
fraudulent transfer, relying on its powers under 11 U.S.C. § 544
or § 548. If the transfer is successfully avoided under one of
these provisions, 11 U.S.C. § 550 provides that the debtor “may
recover, for the benefit of the estate, the property
transferred, or if the court so orders, the value of such
property[.]” 11 U.S.C. § 550 (emphasis added). A debtor must
then seek a writ of execution to enforce the judgment and
actually take possession of the property. FED. R. BANKR. P. 7069;
see e.g., In re Teknek, LLC, 343 B.R. 850, 870 (Bankr.D.Conn.
2006)(noting that the next step after a recovery judgment is to
seek writ of execution to acquire recoverable property).
Only
then is the property permitted to be considered property of the
estate pursuant to 11 U.S.C. § 541(a)(3), which, as discussed
above, includes property recovered pursuant to 11 U.S.C. § 550.
11 U.S.C. § 541(a)(3); See, e.g., In re Colonial Realty Co., 980
F.2d 125, 131 (2d Cir. 1992)(holding that transfers is avoided
under 548 but not recovered and part of the estate until
recovered under § 550); Rajala v. Gardner, 709 F.3d 1031, 1038
(10th Cir. 2013)(agreeing with Colonial Realty).5
5
See also In re Wagner, 353 B.R. 106, 112 (Bankr. W.D.Pa. 2006) (holding
that trustee must make a tangible recovery of property before it can
become part of the estate); In re Saunders, 101 B.R. 303, 305 (Bankr.
N.D.Fla. 1989)(finding property was not part of bankruptcy estate where
a fraudulent transfer judgment had been obtained, but property had not
actually been recovered); In re Thielking, 163 B.R. 543, 545 (Bankr.
S.D.Iowa 1994)(finding property was not part of bankruptcy estate where
it had not yet been recovered); In re Teligent, Inc., 307 B.R. 744, 751
10
In this case, because ATN was prevented from completing the
statutory process described above by filing a writ of execution
and physically collecting the property, the Bankruptcy Court
correctly held that the property remained subject to the
automatic stay.
D.
Constructive Trust
ATN alternatively argues that the Bankruptcy Court should
have imposed a constructive trust over the funds held by Allen.
This would allow ATN to take advantage of 11 U.S.C. § 541(d),
which excludes property held in trust for another from an
estate. 11 U.S.C. § 541(d).
Under New Jersey law, which this Court applies in
considering whether a constructive trust was formed,6 courts may
(Bankr. S.D.N.Y. 2004)(“Fraudulently transferred property does not,
however, become property of the estate until after it has been
recovered.”); In re Lehman Bros. Holdings Inc., 480 B.R. 179, 192
(S.D.N.Y. 2012)(“ However, it is well settled that property transferred
by the debtor is not ‘property of the estate’ until the debtor succeeds
in compelling the property's return.”).
6
ATN argues that this Court should apply a federal common law standard
in determining whether a constructive trust was formed. Doc. 13-1 at 14
(arguing that Allen was a “conduit” of the funds under the federal
constructive trust standard in In re Columbia Gas Systems, Inc., 997
F.2d 1039, 1055 (3d Cir. 1993) (holding that federal constructive trust
law governed funds set aside by a bankrupt utility company pursuant to
the federal Natural Gas Act)). This Court disagrees. The law of the
forum state, and not federal common law, applies to this inquiry absent
a showing that three factors are met: (1) there is a need for national
uniformity; (2) a federal program might be frustrated; and (3)
commercial expectations are that federal law should govern. Id. Here,
however, there is no reason to use federal constructive trust law,
because no federal property rights are at issue, no separate federal
program is at stake, and the parties’ expectations should be that state
law applies. See In re Orion Refining Corp., 341 B.R. 476, 483
(Bankr.D.Del. 2006)(holding that because the movant was owed money
under state law fraud claims, movant’s claim for a constructive trust
11
impose a constructive trust if the party holding the property
has been unjustly enriched as a result of a wrongful act.
Flanigan v. Munson, 818 A.2d 1275, 1281 (N.J. 2003); Leibholz v.
Hariri, No. 05-5148 2011 WL 1466139, *1 (D.N.J. April 15, 2011).
A wrongful act is generally defined as “fraud, mistake, undue
influence, or breach of a confidential relationship.” D’Ippolito
v. Castoro, 51 N.J. 584, 589 (N.J. 1968). A constructive trust
is an equitable remedy, to be used “only when the equities of a
given case clearly warrant it,” Flanigan, 818 A.2d at 1283, and
only upon a showing of “clear, definite, unequivocal, and
satisfactory evidence.” Gray v. Bradley, 1 N.J. 102, 104 (N.J.
1948). Constructive trusts are particularly disfavored in
bankruptcy because they disrupt the policy of ensuring a ratable
distribution to creditors. See In re Haber Oil, 12 F.3d 426 (5th
Cir. 1994); In re Rogan, No. 08-23221 2009 Bankr. LEXIS 2090, at
*50 (Bankr.D.Ind. July 23, 2009); see also In re Day, 443 B.R.
338, 346 (Bankr.D.N.J. 2011)(noting that courts exercise “the
greatest caution” when considering post-petition constructive
trusts); In re Ades & Berg Group Investors, 550 F.3d 240, 244
(2d Cir. 2008) (holding that for constructive trust analysis,
“the equities of bankruptcy are not the equities of the common
law.”).
to that money in the § 541(d) context did not invoke any national
interest); In re Brockway Pressed Metals, Inc., 363 B.R. 431, 452
(Bankr.W.D.Pa. 2007).
12
In light of this heavy burden, ATN’s constructive trust
claim fails. First, ATN has not established a wrongful act, as
required. See Flanigan, 818 A.2d at 1281.7 ATN claims that the
Florida Court’s finding that the transfer was constructively
fraudulent under New Jersey law supports a finding here of a
wrongful act. Doc. 13-1 at 20. It does not. See SEC v. Antar,
120 F. Supp. 2d 431, 448 (D.N.J. 2000) (distinguishing between
actual and constructive fraudulent transfers, and requiring
actual fraud in order to impose constructive trust).
Second, ATN has not shown that Allen was unjustly enriched.
Courts considering the unjust enrichment prong of Flanigan are
guided by the equities of the case. Moscato v. C.B.P.B. Assocs.,
LLC, No. A-4756-05T3 2007 N.J. Super. Unpub. LEXIS 2596, at *1112 (N.J. App. Div. Aug. 7, 2007) (measuring unjust enrichment
based on equitable interests of the parties); Flanigan, 818 A.2d
at 1281 (holding that courts impose constructive trusts
“wherever specific restitution in equity is appropriate on the
facts.”). Considering the equities of this case, despite the
unfortunate posture this case presents, there is no great
injustice that separates this case from the many cases in which
7
Appellant argues that this Court does not need to find a wrongful act
in order to impose a constructive trust (See Pension Fund-Mid-Jersey
Trucking Industry v. Omni Funding Group, 687 F. Supp. 962, 966 (D.N.J.
1988)), but the New Jersey Supreme Court’s 2003 decision in Flanigan
made clear that, in order to impose a constructive trust, “a court must
find that a party has committed a wrongful act.” 818 A.2d at 1281.
13
a creditor is unable to have his full claim satisfied.
Accordingly, this Court cannot find that the enrichment was
unjust. Holding otherwise and allowing a finding of an unjust
enrichment on this basis alone would allow almost any creditor
to claim entitlement to a constructive trust, and significantly
disrupt the ordinary bankruptcy process. In re Allen, 2012
Bankr. LEXIS 874, at *63-65.
IV.
Conclusion
For the foregoing reasons, the Bankruptcy Court is
AFFIRMED.
s/Renée Marie Bumb
RENÉE MARIE BUMB
United States District Judge
Date:
July 19, 2013
14
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