James J. Tancredi, United States Bankruptcy Judge.
Before the Court is the objection ("Objection," ECF No. 281) filed by the movant, Timothy G. Manners ("Mr. Manners"),
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and derives its authority to hear and determine this matter on reference from the District Court pursuant to 28 U.S.C. §§ 157(a) and (b)(1). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
The Court recites the following facts and procedural history, which are not in dispute:
1. The Debtor filed a Chapter 11 Voluntary Petition on October 22, 2015 (ECF No. 1).
2. On January 27, 2016, the case was converted to a Chapter 7 case (ECF No. 36).
3. On March 4, 2016, Mr. McMahon filed proof of claim 4-1 ("Claim 4-1") in the amount of $ 249,533.62 on the basis of a jury verdict in the New York Supreme Court, Orange County, Index No. 4523/2012 ("Suit 1").
4. On April 21, 2016, Mr. McMahon filed Claim 5-1 in the amount of $ 298,587.74 on the basis of a suit pending in the New York Supreme Court, Orange County, Index No. 297/2015 ("Suit 2").
5. Mr. Manners, the Debtor's principal, filed a motion for leave to object to Claim 5-1 on October 20, 2017 (ECF No. 212). Mr. McMahon objected to that motion (ECF No. 213). The Court granted Mr. Manners derivative standing on February 13, 2018 (ECF No. 257), and, in a supplemental order dated February 23, 2018 (ECF No. 263), the Court explained that the grant of derivative standing was to allow Mr. Manners to first seek relief from the automatic stay to reduce the jury verdict in Suit 1 to a final judgment and then file an objection to Claim 5-1.
6. Mr. Manners and the Chapter 7 Trustee, Richard M. Coan ("Trustee"), filed a joint motion for approval of stipulation for relief from the automatic stay to allow Mr. Manners to reduce the jury verdict in Suit 1 to judgment (ECF No. 269). Mr. McMahon objected, raising issues of standing, judicial estoppel, and equitable considerations (ECF No. 275).
7. On March 27, 2018, Mr. Manners filed his objection to Claim 5-1, raising issues of res judicata, judicial estoppel, and Mr. McMahon's employment status (ECF No. 281).
8. The Court granted the motion for relief from stay on April 26, 2018 (ECF No. 297). In its order, the Court noted that allowing formal judgment in Suit 1 to enter "would allow the issues related to res judicata, collateral estoppel, the [Rooker-Feldman] doctrine, and judicial estoppel
9. On May 5, 2018, Mr. McMahon appealed the Court's rulings on derivative standing and relief from stay to the District Court (ECF No. 306). The Court denied Mr. McMahon's motion to stay pending appeal (ECF No. 310) and request for a preliminary injunction (ECF No. 313) on May 22, 2018 (ECF No. 327).
10. On June 22, 2018, the District Court dismissed the appeal and remanded the case to this Court (ECF No. 359). In its ruling, the District Court held that Mr. McMahon lacked standing to appeal the grant of derivative standing and relief from stay (ECF No. 360).
11. On June 28, 2018, the New York Supreme Court, Orange County entered final judgment in Suit 1 (ECF No. 380).
12. Mr. McMahon filed the Motion to Strike on August 20, 2018, arguing that: (1) Mr. Manners lacks standing to contest Mr. McMahon's claims; (2) res judicata and collateral estoppel do not preempt Mr. McMahon's claims; and (3) Mr. Manners did not have permission from the Court to object to Claim 5-1 on the basis of judicial estoppel, which Mr. McMahon also argues is inapplicable (ECF No. 385).
13. The Court heard oral arguments on October 11, 2018 (ECF No. 403). At the hearing, the Court took judicial notice of the proceedings in Suit 1 and Suit 2, to which no party objected (ECF No. 407). The Court then requested and received copies of the operative complaint and jury instructions from Suit 1 and the defendants' answer to the complaint in Suit 2 (ECF Nos. 407 and 410). Later, the Court requested and received copies of all motions, responses, and replies filed by the parties, along with any judicial rulings, orders, and decisions in Suit 2 that predated the commencement of this bankruptcy case (ECF Nos. 411, 413, 414, and 415).
A properly filed proof of claim is prima facie evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f). Unless a party in interest objects, it is deemed allowed. 11 U.S.C. § 502(a). An objection must be lodged in accordance with Fed. R. Bank. P. 3007. The objecting party must "produce evidence at least equal in probative force to that offered by the proof of claim and which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency." In re Driscoll, 379 B.R. 415, 420 (Bankr. D. Conn. 2008) (citations omitted). "If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence. The burden of persuasion is always on the claimant." In re Vanegas, 290 B.R. 190, 193 (Bankr. D. Conn. 2003) (citations omitted).
Claims may be disallowed if "such claim is unenforceable against the debtor and property of the debtor, under any ... applicable law[.]" 11 U.S.C. § 502(b)(1). "To determine whether a claim is allowable by law, bankruptcy courts look to applicable nonbankruptcy law." In re Residential Cap., LLC, 513 B.R. 446, 458 (Bankr.
"Motions to strike are viewed with disfavor and [are] infrequently granted.... In order for a court to strike a defense as insufficient: (1) there must be no question of fact that might allow the defense to succeed; (2) there must be no substantial question of law that might allow the defense to succeed; and (3) the [respondent] must be prejudiced by the inclusion of the defense.... As the Second Circuit has noted [e]ven when a defense presents a purely legal question, the courts are very reluctant to determine disputed or substantial issues of law on a motion to strike; these questions quite properly are viewed as determinable only after discovery and a hearing on the merits. To do otherwise would be to run the risk of offering an advisory opinion on an abstract and hypothetical set of facts." In re Lehman Bros. Holdings Inc., 474 B.R. 441, 446-47 (Bankr. S.D.N.Y. 2012) (citations and internal quotation marks omitted).
Although motions to strike are viewed with disfavor, the Court's disposition of the Objection renders much of the Motion to Strike moot. The Court, therefore, need only address Mr. McMahon's standing argument, which is meritless. With that noted, the Court now addresses the parties' substantive arguments.
Mr. McMahon again challenges Mr. Manners's standing to object to Claim 5-1. As noted above in the factual recitation and footnote 1, the Court granted Mr. Manners derivative standing in order to object to Claim 5-1, among other things. Mr. McMahon appealed the Court's order granting derivative standing to the District Court, which dismissed Mr. McMahon's appeal, holding that Mr. McMahon lacks standing to contest this Court's order. Having taken his appeal no further, Mr. McMahon's lack of standing is now the law of the case, and this Court has no power to reject the express holding of an appellate court. See United States v. Ben Zvi, 242 F.3d 89, 95 (2d Cir. 2001) ("The mandate rule compels compliance on remand with the dictates of the superior court and forecloses relitigation of issues expressly or impliedly decided by the appellate court." [citation, emphasis, and internal quotation marks omitted]). Mr. McMahon's protestation that "the issue simply has not been raised before" (ECF No. 399) is both incorrect and irrelevant. Therefore, this Court must reject Mr. McMahon's argument that Mr. Manners does not have standing and DENY the Motion to Strike in this respect.
There is no dispute that the pending lawsuit underlying Claim 5-1 is premised on the same core facts as the judgment underlying Claim 4-1. Mr. Manners argues that res judicata, therefore, bars Claim 5-1. The Court reluctantly finds, despite its concerns about judicial efficiency, that res judicata does not apply to Claim 5-1 in this instance.
"Res judicata, or claim preclusion, provides that a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action. [T]he preclusive effect of a state court determination in a subsequent federal action is determined by the rules of the state where the prior action occurred .... In applying the doctrine of res judicata, [a
"In New York, res judicata, or claim preclusion, bars successive litigation based upon the same transaction or series of connected transactions if: (i) there is a judgment on the merits rendered by a court of competent jurisdiction, and (ii) the party against whom the doctrine is invoked was a party to the previous action, or in privity with a party who was[.]" People ex rel. Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105, 122, 863 N.Y.S.2d 615, 894 N.E.2d 1 (2008) (citations and internal quotation marks omitted), cert. denied sub nom. Cross Cty. Bank, Inc. v. New York, 555 U.S. 1136, 129 S.Ct. 999, 173 L.Ed.2d 292 (2009). It is also well established in New York "that the pendency of an appeal does not affect the use of an order or judgment as an estoppel[.]" In re Capoccia, 272 A.D.2d 838, 847, 709 N.Y.S.2d 640 (3d Dept.) (citing Parkhurst v. Berdell, 110 N.Y. 386, 392-393, 18 N.E. 123 (1888)), leave to appeal dismissed, 95 N.Y.2d 887, 738 N.E.2d 782, 715 N.Y.S.2d 378 (2000).
The New York Civil Practice Law and Rules ("CPLR"), however, provides in pertinent part that any objection or defense based upon a prior pending action or res judicata "is waived unless raised either by [a] motion [to dismiss] or in the responsive pleading." CPLR Rule 3211(e).
Claims 4-1 and 5-1 both concern commissions Mr. McMahon allegedly earned, and that Mr. Manners and the Debtor had failed to pay him. Claim 4-1, the suit of which has been reduced to judgment, was tried only as a breach of contract matter (ECF Nos. 213, Exs. 1 and 5; 410, Ex. A). Claim 5-1, which has remained pending since the implementation of the automatic stay, alleged that Mr. McMahon was an employee (ECF No. 213, Ex. 2). There is no dispute that the two suits concern the same series of connected transactions, albeit premised on alternative legal theories. It is also beyond dispute that there is a judgment
The problem, however, is that the Debtor did not raise res judicata as a defense until filing an objection to Mr. McMahon's motion for summary judgment in Suit 2 (ECF No. 395, Ex. A). In its answer to the complaint, neither res judicata nor prior pending action appear at all (ECF No. 410, Ex. C). Likewise, the Debtor did not file a motion to dismiss the action on the basis of either res judicata or prior pending action.
Assuming that res judicata does apply facially, Mr. McMahon has argued in his Motion to Strike that the Debtor and Mr. Manners acquiesced to the maintenance of Suit 2. The Court agrees.
Although New York does not ordinarily permit the splitting of claims arising from the same transaction or series of transactions, see Reilly v. Reid, 45 N.Y.2d 24, 29-30, 379 N.E.2d 172, 407 N.Y.S.2d 645 (1978), an exception to this rule is found where the defendant acquiesces to the maintenance of two suits. Restatement (Second) of Judgments § 26(1)(a) (1982). New York recognizes this exception. Brown v. Lockwood, 76 A.D.2d 721, 740-41, 432 N.Y.S.2d 186 (2d Dept. 1980) (citing to draft version of Restatement); see also Cowan v. Ernest Codelia, P.C., 149 F.Supp.2d 67, 76 (S.D.N.Y. 2001) (concluding "that the acquiescence rule stated in Section 26(1)(a) of the Restatement (Second) of Judgments is an accurate statement of the law in New York").
In Brown, the plaintiff had maintained two actions against the defendant, one sounding in fraud and the other in breach of contract. 76 A.D.2d at 738, 432 N.Y.S.2d 186. In determining not to apply res judicata, the court noted that "both actions were for a time pending undetermined in the same court. If defendant objected to the maintenance of the second suit he could have moved to dismiss it ... upon the ground that there was another action pending between the same parties for the same cause of action." Id. at 740, 432 N.Y.S.2d 186 (citations and internal quotation marks omitted). The court also noted that "if the defendant felt himself burdened by multiple suits he could have moved for consolidation or for a joint trial[.]" Id. The court was also persuaded that the defendant had acquiesced in the splitting of the plaintiff's claims because the defendant's counsel had told the court that, were the breach of contract claim consolidated with the fraud claim, "he might have defended it somewhat differently" and that "the proof would differ." Id. at 741, 432 N.Y.S.2d 186.
Unsurprisingly, Mr. McMahon has seized on the court's determination that the defendant in Brown acquiesced because he neither moved to dismiss nor moved to consolidate (ECF No. 385). Mr. Manners, likewise, has seized on the persuasiveness that the defendant's counsel in Brown explicitly stated he would have defended the case differently were the actions joined (ECF No. 223).
76 A.D.2d at 741, 432 N.Y.S.2d 186 (internal quotation marks omitted) (citing comments to Restatement (Second) of Judgments). Although Brown explicitly makes clear that motions to dismiss or consolidate and any colloquies with the court are relevant to whether Mr. Manners and the Debtor acquiesced, the Court is not convinced that those actions are the exclusive means of determining acquiescence.
Despite the Court's conviction, however, the Debtor took no action that would indicate an objection to the maintenance of both suits prior to responding to Mr. McMahon's motion for summary judgment, wherein res judicata was finally raised, but after the jury verdict in Suit 1 had already entered. By that point, under New York law, it was too late to raise prior pending action because Suit 1 had effectively concluded, see Brown, 76 A.D.2d at 741, 432 N.Y.S.2d 186, and too late to raise res judicata because the Debtor had already answered the complaint. See CPLR Rule 3211(e); see also Addesso v. Shemtob, 70 N.Y.2d 689, 690, 512 N.E.2d 314, 518 N.Y.S.2d 793 (1987). Therefore, the Court finds that Mr. McMahon has met his burden to prove acquiescence. Because res judicata does not apply to Claim 5-1, either facially or through the Debtor's acquiescence, the Court OVERRULES the Objection and DENIES the Motion to Strike as moot in this respect.
Mr. Manners also argues in the Objection that judicial estoppel bars Claim 5-1. Specifically, he contends that because Mr. McMahon claimed in Suit 1 that he was an independent contractor, he cannot assert in Suit 2 that he is an employee. Mr. McMahon argues in the Motion to Strike that the doctrine does not apply because the New York Supreme Court denied Mr. McMahon's eligibility for damages as an independent contractor.
Mr. Manners argues in the Objection that the doctrine applies because Mr. McMahon's position in Suit 1 "was that he was entitled to damages under New York Labor Law § 191-c" as an independent contractor, and he, therefore, cannot maintain Suit 2, which alleges that Mr. McMahon was an employee of the Debtor. The problem with Mr. Manners's argument is that the only count in the operative complaint of Suit 1 that was tried and went to the jury was a breach of contract claim (ECF Nos. 213, Exs. 1 and 5; 410, Ex. A). Mr. McMahon's count alleging that he was entitled to damages under Labor Law § 191-c was dismissed prior to trial commencing without any determination of its merits because the trial court found that that law only applies to independent contractors in manufacturing and the Debtor's business did not involve manufacturing (ECF No. 213, Ex. 5). There is nothing, then, in the breach of contract claim in Suit 1 that "assumes a contrary position" to the breach of employee contract claim in Suit 2 (ECF No. 213, Ex. 2). Mr. McMahon did not secure a favorable judgment on his independent contractor claim because it was not tried in Suit 1. Therefore, Mr. Manners's judicial estoppel argument must fail. Thus, the Court OVERRULES the Objection and DENIES the Motion to Strike as moot in this respect.
Finally, Mr. Manners argues in the Objection that, because Mr. McMahon was an independent contractor, not an employee, Claim 5-1 must be disallowed. That, however, is the entirety of Mr. Manners's argument in this regard. Mr. McMahon takes umbrage with Mr. Manners's assertion of this argument as improper in his Motion to Strike but does not actually address the argument. In his previously filed response to the Objection, however, Mr. McMahon asserted as a legal and factual matter than he was an employee of the Debtor (ECF No. 288). Neither party addressed the issue during oral argument, and no evidence was presented that would allow this Court to make a determination in this regard.
Given the nature of the shifting burden of proof in filing and objecting to proofs of claim and the contingent nature of Claim 5-1, the Court finds that it would work a miscarriage of justice to make any factual or legal determinations as to Mr. McMahon's employment status absent admissible evidence. Under 28 U.S.C. § 1334(c)(1), nothing prevents this Court "in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11." Additionally, although "[t]he bankruptcy court normally supervises the liquidation of claims against the estate[,] [t]he rule is not inexorable.... [W]hen a claim can be as expeditiously liquidated in a suit pending in another forum, and the expertise of the bankruptcy court is not
The analysis the Court must undertake in considering permissive abstention under 28 U.S.C. § 1334(c)(1) is substantively the same as when the Court considers equitable remand under 28 U.S.C. 1452(b). Marah Wood Prods., LLC v. Jones, 534 B.R. 465, 477 (D. Conn. 2015). The list of factors the Court should consider includes:
Id.
On balance, these factors favor abstention. The first factor does not weigh in favor either way because the issue of Mr. McMahon's employment status can be effectively litigated in either forum. The second, third, and fourth factors weigh heavily in favor of abstention because the question of employment status is one of New York state law and one that, as evidenced by the law, is a fact-intensive inquiry, which leads this Court to conclude that the New York courts are in a better position to decide the issue, especially in light of the fact that that issue should be the only unresolved question in Suit 2. The fifth factor seems to weigh against abstention because Mr. McMahon is the largest creditor of the estate but may have less significance pending the outcome of the adversary proceeding against Mr. Manners and others. The sixth factor weighs in favor of abstention because Mr. McMahon is entitled to a jury trial in New York in Suit 2. The final factor also weighs in favor of abstention because it would be more convenient for Mr. McMahon to litigate his employment claim in New York. Despite his apparently having moved to Ohio, his attorney is based in New York, as were the Debtor's attorneys in Suit 2. Therefore, the Court finds that, in the interests of justice and comity with state courts and law, abstention is proper regarding the issue of whether Mr. McMahon was an independent contractor or employee of the Debtor. The Court retains jurisdiction to decide whether Claim 5-1 is to be disallowed pending the outcome of Suit 2.
Having considered the parties' arguments, the Court ADJUDGES, ORDERS, and DECREES that:
IT IS SO ORDERED at Hartford, Connecticut this 21st day of December 2018.
Additionally, the Court notes the order granting Mr. Manners derivative standing arguably does not address any rights to appeal. The Second Circuit has not conclusively decided whether overruling an objection to a proof of claim is a final judgment, order, or decree under 28 U.S.C. § 158(a)(1) subject to appeal as of right, see EDP Med. Comput. Sys., Inc. v. United States, 480 F.3d 621, 626 (2d Cir. 2007), but other circuits have done so. See, e.g., Perry v. First Citizens Fed. Credit Union (In re Perry), 391 F.3d 282, 285 (1st Cir. 2004). Although this ruling does not conclusively determine the propriety of Claim 5-1, the Court's overruling the Objection in part coupled with its decision to abstain from the rest of the Objection may provide a right of appeal. See Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 712, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996). Therefore, if Mr. Manners wishes to appeal, he should make such a desire known before the appeal period runs its course.
