Business Funding Group v. Dommer Construction Corporation
Filing
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DECISION AND ORDER AFFIRMING the Order of the Bankruptcy Court, Western District of New York; DENYING AND DISMISSING the 1 appeal; DENYING as moot Appellant's Motion to Stay; LIFTING the 9 temporary stay; DIRECTING the Clerk of the Court to close this case. Signed by William M. Skretny, Chief Judge U.S.D.C. on 3/26/2012. (MEAL)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
BUSINESS FUNDING GROUP,
Appellant,
v.
DECISION AND ORDER
11-CV-565S
DOMMER CONSTRUCTION CORP.,
Appellee.
I. INTRODUCTION
Appellant and creditor, Business Financial Group (“BFG”), seeks reversal of the
Order of the Hon. Michael J. Kaplan, United States Bankruptcy Judge, Western District of
New York, which found that appellee and debtor, Dommer Construction Corp. (“Dommer”),
could offset certain debt it owed BFG.1 In rendering his judgment, Judge Kaplan expressly
disagreed with a previous New York State court decision that came to a contrary
conclusion. Specifically, BFG appeals Judge Kaplan’s finding that the Rooker-Feldman
doctrine did not apply, allowing him to come to a different conclusion than the New York
State court. For the following reasons, Judge Kaplan’s Order is affirmed.
II. BACKGROUND
The precise nature of Dommer’s underlying petition in the bankruptcy court and the
background explaining how Dommer became indebted to BFG are irrelevant to this action.
It suffices to note that Dommer is a general contractor that became liable to BFG for loans
that BFG provided to Dommer’s subcontractor, MBE Group Inc. See In re Dommer Constr.
Corp., No. 10-12764K, 2011 WL 832901, at *1 (W.D.N.Y. Mar. 3, 2011).
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BFG argues that Judge Kaplan’s Order is final and therefore subject to appeal under Rule 8002 of
the Federal Rules of Bankruptcy Procedure. To the extent that the Order is interlocutory, BFG is granted leave
to appeal pursuant to Bankruptcy Rule 8003.
BFG eventually sued on this debt in New York State court. On March 29, 2010, the
New York State Supreme Court, County of Erie, found Dommer liable in the amount of
$438,725.17. Bus. Funding Grp., Inc. v. Dommer Constr. Corp., Index No. 2005-5161 (N.Y.
Sup. Ct. Mar. 29, 2010) (unreported). Several months later, on June 22, 2010, the same
court denied Dommer’s motion for reconsideration and subsequently signed a judgment
in BFG’s favor for the aforementioned amount. (Dommer's Objection to BFG's Motion for
Leave to Appeal ("Objection"), ¶ 6; Docket No. 4-11.) But before that judgment was
entered at the Erie County Clerk’s Office, Dommer filed for relief in the bankruptcy court
under Chapter 11, thus automatically staying the entry of a final judgment. (Id., ¶ 11.)
There is, therefore, no dispute that the judgment was not final and binding under New York
State law. See N.Y. C.P.L.R. §§ 5017, 5018(a),(c) (McKinney 2011).
Thereafter, on July 26, 2011, Dommer filed a motion in the bankruptcy court
requesting that the automatic stay be lifted to allow entry of the New York judgment, thus
allowing Dommer to appeal the decision. (Objection, ¶ 11.) That motion was opposed by
BFG, but the parties eventually agreed that because the judgment was not final, the
bankruptcy court could review the state court decision. (Id., ¶ 13.)
Consequently, on March 3, 2011, Judge Kaplan issued an Order disagreeing with
the state court as it applied to Dommer’s debt and instructed BFG to amend its Proof of
Claim, which was premised on the state-court decision. In re Dommer, 2011 WL 832901.
However, despite the earlier agreement and a subsequent order concerning the
bankruptcy court’s ability to review the state court’s findings, BFG eventually reversed
course, sought reconsideration of the March 3, 2011 Order, and argued that the
bankruptcy court did not have subject-matter jurisdiction, pursuant to the Rooker-Feldman
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doctrine, to review or alter the state court’s decision as it applied to BFG’s Proof of Claim
in bankruptcy court.2 (Objection, ¶ 20.) After oral argument, Judge Kaplan found that he
was not barred by the doctrine and therefore denied BFG’s motion for reconsideration on
that ground. (Order on Motion for Reconsideration; Docket No. 3-16.)
This appeal followed.
III. DISCUSSION
A.
Standard of Review
Under its appellate jurisdiction, this Court conducts a de novo review of the law. In
re Porges, 44 F.3d 159, 162 (2d Cir. 1995); Teufel v. Schlant, No. 02-CV-81S, 2002 WL
33008689, at *4 (W.D.N.Y. Sept. 25, 2002). The facts, which would be reviewed for clear
error, are undisputed. See In re Alper Holdings USA, Inc., 398 B.R. 736, 747 (S.D.N.Y.
2008)
B.
Rooker-Feldman Doctrine
Federal district and bankruptcy courts are “courts of limited jurisdiction.” Exxon Mobil
Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 552, 125 S. Ct. 2611, 162 L. Ed. 2d 502
(2005) (internal quotations omitted). The Rooker-Feldman doctrine, named for a pair of
Supreme Court cases, Rooker v. Fidelity Trust Co., 263 U.S. 413, 414-15, 44 S. Ct. 149,
68 L. Ed. 362 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462,
486, 103 S. Ct. 1303, 75 L. Ed. 2d 206 (1983), emphasizes the limited nature of this
jurisdiction. Even if “otherwise [] empowered to adjudicate” a dispute, the doctrine bars all
2
Such a reversal is not barred by waiver or estoppel as “[s]ubject-m atter jurisdiction can never be
waived or forfeited” and objections thereto “m ay be resurrected at any point in the litigation.” Gonzalez v.
Thaler, --- U.S. ---- 132 S. Ct. 641, 648, 181 L .Ed. 2d 619 (2012).
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federal courts, except the Supreme Court, from hearing “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.” Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284, 291, 125
S. Ct. 1517, 161 L. Ed. 2d 454 (2005).
There is no dispute that the bankruptcy court was “otherwise [] empowered to
adjudicate” the Proof of Claim at issue there. See Id., 544 U.S. at 291. However, BFG
argues that because the state court already adjudicated that very issue, the bankruptcy
court was divested of its jurisdiction by operation of the Rooker-Feldman doctrine. If BFG’s
argument is correct, the bankruptcy court would be precluded from disagreeing with statecourt’s findings and BFG’s Proof of Claim would remain at $438,725.17. If not, BFG must
amend its Proof of Claim and “must resort to the traditional means of supporting a Proof
of Claim, as if the matter had not been decided by the state court at all” in accordance with
Judge Kaplan’s order. In re Dommer, 2011 WL 832901, at *9.
In this Circuit, the Rooker-Feldman doctrine has been consistently interpreted to
impose four conditions, each of which must be met for it to apply: (1) the party raising the
claim must have lost in state court; (2) that party's injuries must be caused by the state
court judgment; (3) that party's claims must invite the district court to review and reject the
state court judgment; and (4) the state court judgment must have been rendered prior to
the commencement of the federal court proceedings. Hoblock v. Albany Cnty. Bd. of
Elections, 422 F.3d 77, 85 (2d Cir. 2005).
BFG argues that each of the four elements have been met in this case. But the
bankruptcy court, under an admittedly narrow understanding of the second factor, found,
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as Dommer now argues, that no injuries were “caused by” the state court’s judgment.
Under recent Supreme Court and Second Circuit precedent, the bankruptcy court’s position
is correct.
In 1983, the Supreme Court held that district courts do not have jurisdiction “over
challenges to state court decisions.” Feldman, 460 U.S. at 462. Under that broad
understanding, it would appear that the doctrine would have barred the bankruptcy court
from hearing Dommer’s claim, since it amounted to a challenge to a state-court decision.
However, in 2005, in Exxon Mobil Corp., the Court made it clear that the doctrine should
be “confined to cases of the kind from which the doctrine acquired its name: cases brought
by state-court losers complaining of injuries caused by state-court.” 554 U.S. 284
(emphasis added).
Soon thereafter, the Second Circuit had occasion to define Rooker-Feldman’s reach
in light of Exxon Mobil Corp. See Hoblock, 422 F.3d 77. It cautioned that the
Rooker-Feldman doctrine is meant to occupy “narrow ground,” and characterized the
Supreme Court’s holding as “paring back the Rooker-Feldman doctrine to its core.” Id. at
85; see also Green v. Mattingly, 585 F.3d 97, 101 (2d Cir. 2009) (noting that before Exxon
Mobil Corp., “[t]here was a time when this Circuit applied the Rooker-Feldman doctrine
‘expansively,’ viewing it as ‘effectively coextensive with the doctrines of claim and issue
preclusion’”) (internal citations omitted). The Hoblock court then detailed the four
requirements necessary for the doctrine to apply. Under the second requirement – the
“caused by” requirement – the court noted that “an ‘independent’ (and therefore
non-barred) claim may ‘den[y] a legal conclusion’ reached by the state court[,]” suggesting
“that a plaintiff who seeks in federal court a result opposed to the one he achieved in state
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court does not, for that reason alone, run afoul of Rooker–Feldman.” 422 F.3d at 85
(quoting Exxon Mobil Corp., 544 U.S. at 293).
The Hoblock court then reiterated that the source of the injury must be the statecourt judgment and provided an example:
Suppose a plaintiff sues his employer in state court for
violating both state anti-discrimination law and Title VII and
loses. If the plaintiff then brings the same suit in federal court,
he will be seeking a decision from the federal court that denies
the state court's conclusion that the employer is not liable, but
he will not be alleging injury from the state judgment. Instead,
he will be alleging injury based on the employer's
discrimination. The fact that the state court chose not to
remedy the injury does not transform the subsequent federal
suit on the same matter into an appeal, forbidden by RookerFeldman, of the state-court judgment.
Hoblock, 422 F.3d at 87-88.
In accordance with the above-stated example and explanation, Dommer was not
seeking relief caused by a state-court judgment because the state court’s judgment, as
both parties agree, had no legal effect on Dommer until it was properly filed with the Erie
County Clerk. Since it was not so filed, it cannot be said that Dommer sought relief caused
by the state-court’s ruling because the judgment caused no legally recognizable change
in Dommer’s bottom line. Certainly, Dommer sought a result “opposed to the one he
achieved in state court” but under Hoblock, such relief does not implicate Rooker-Feldman.
The bankruptcy merely “den[ied] a legal conclusion” reached by the state court, as it was
free to do under Exxon and Hoblock.
Of course, once the state action is complete, “[d]isposition of the federal action . .
. would be governed by preclusion law.” Exxon Mobil Corp., 544 U.S. at 293. As the court
explained, “[i]n parallel litigation, a federal court may be bound to recognize the claim- and
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issue-preclusive effects of a state-court judgment, but federal jurisdiction over an action
does not terminate automatically on the entry of judgment in the state court.” Id. In other
words, “Rooker-Feldman and preclusion are entirely separate doctrines.” Hoblock, 422
F.3d at 85. But preclusion is inapplicable here because the preclusive effect of a state
court's judgment is a matter of state law, see id., at 92-93, and there is no dispute that the
state court’s judgment does not have such an effect under New York law.
Accordingly, the Rooker-Feldman doctrine did not apply to the bankruptcy court’s
adjudication of BFG’s Proof of Claim and the court properly exercised its subject-matter
jurisdiction.3
C.
Stern v. Marshall
On the final pages of its reply brief, BFG, for the first time, argues that the
bankruptcy court did not have “jurisdiction to hear [Dommer’s] subrogation claim” pursuant
to the Supreme Court’s holding in Stern v. Marshall, a decision that was issued before this
appeal was commenced. 131 S. Ct. 2594, 180 L. Ed. 475 (2011). This issue was never
raised in the bankruptcy court.
New arguments, however, may not be made in a reply brief and this Court
accordingly declines to entertain this new theory. See Ernst Haas Studio v. Palm Press,
Inc., 164. F.3d 110, 112 (2d Cir. 1999).
Moreover, even if this Court were to consider this argument, it has been prematurely
and insufficiently raised 4 The Court in Stern held that a bankruptcy court cannot enter a
3
In an effort to argue that Judge Kaplan conducted an im perm issible appeal of the state-court’s ruling,
BFG raises several concerns regarding the adequacy of his fact-finding process. But this issue, if it is an issue
at all, is not presently before this Court.
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BFG’s argum ent applying Stern to this case is lim ited to one paragraph.
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judgment on a counterclaim that is based exclusively on a right assured by state law. But
here, Judge Kaplan has not yet entered a judgment on Dommer’s “subrogation claim,” and,
among other issues that go unaddressed by BFG, is it unclear whether BFG consented to
the bankruptcy court’s jurisdiction to hear Dommer’s claim. See Stern,131 S. Ct. at 2621
(Scalia, J. concurring) (counting at least seven different factors, lack of consent among
them, to be considered before ruling that an Article-III judge is required to adjudicate a
lawsuit).
BFG’s motion on this ground is therefore denied.
IV. CONCLUSION
For the foregoing reasons, this Court affirms the Order of the bankruptcy court.
V. ORDERS
IT HEREBY IS ORDERED, that the Order of the Bankruptcy Court, Western District
of New York, is AFFIRMED.
FURTHER, that the appeal (Docket No. 1) is DENIED and DISMISSED.
FURTHER, that the Appellant’s Motion to Stay is DENIED as moot.
FURTHER, that the temporary stay (Docket No. 9) is lifted.
FURTHER, that the Clerk of the Court shall take the steps necessary to close this
case.
SO ORDERED.
Dated:
March 26, 2012
Buffalo, NY
/s/William M. Skretny___
WILLIAM M. SKRETNY
Chief Judge
United States District Court
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