ROSEMARY GAMBARDELLA, BANKRUPTCY JUDGE.
Before the Court is a Motion to Dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and Fed R. Bankr. P. 7012, or in the alternative, for Summary Judgment pursuant to Fed. R. Civ. P. 56 and Fed. R. Bankr. 7056, filed by the Defendant seeking entry of an order dismissing the Chapter 7 Trustee's Adversary Complaint and compelling Plaintiff to discharge a Notice of Lis Pendens recorded with the Bergen County Clerk on April 19, 2016. David Wolff, Chapter 7 Trustee v. Helen Tzanides, Adv. Pro.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(a) and 157(b), and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984 and amended September 18, 2012. This matter constitutes a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H).
On November 25, 1992, Andrew Tzanides ("Debtor") and his wife, Helen Tzanides ("Defendant"), purchased real property located at 47 Eisenhower Drive, Cresskill, Bergen County, New Jersey (the "Cresskill Property"). By deed dated November 1, 1993, the Debtor transferred his ownership interest in the Cresskill Property to the Defendant, his wife, for $100. A deed was recorded with the Bergen County Clerk on November 15, 1993 ("1993 Deed"). On June 1, 2002, Defendant filed a corrective deed with the Bergen County Clerk ("2002 Deed").
On November 9, 2005, Defendant sold the Cresskill Property for $1,800,000. According to the Trustee, Defendant used the proceeds from the sale to purchase a single family residence located at 517 Witch Terrace, River Vale, New Jersey (the "River Vale Property"), where she currently resides with the Debtor. On April 19, 2016, Trustee caused a Lis Pendens to be recorded with the Bergen County Clerk concerning the River Vale Property.
Prior to Defendant's sale of the Cresskill Property, on December 12, 1997, the Debtor, Andrew Tzanides, filed a petition under chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey. In re Andrew Tzanides, Case No. 97-44472-RG ("Previous Case"). On April 21, 1998, the Court entered an Order converting the Chapter 13 case to Chapter 7. Albert Russo was appointed as the Chapter 7 Trustee ("Mr. Russo" or "Previous Trustee") by the Office of the United States Trustee. See Reiser Decl., Ex. 13, at Docket No. 17.
On July 31, 1998, Mr. Russo filed a Complaint (the "Russo Complaint") against the Debtor and the Defendant challenging the 1993 transfer of the Cresskill Property. Russo v. Tzanides, Adv. Pro. No. 98-02629-RG; see Reiser, Decl., Ex. 5. The Russo Complaint contained three counts. Count 1 alleged that the Debtor received less than reasonably equivalent value in exchange for the 1993 transfer of his interest in the Cresskill Property, and
On October 19, 1998, Mr. Russo filed an Information for Notice of Settlement of Controversy as to the First Fraudulent Transfer Case, which recited the terms of the proposed settlement as follows:
Reiser Decl., Ex. 15.
Two of Debtor's creditors, EVEREN Securities, Inc. represented by the law firm of Wasserman, Jurista & Stolz, P.C., and Stephen A. North and Barbara North, objected to the proposed settlement. Reiser Decl., Exs. 9, 10. Pursuant to an Order of this Court entered on February 1, 1999, the First Fraudulent Transfer Case was settled by and between the parties and "dismissed with prejudice" and the Debtor was granted a discharge of all of his dischargeable debts. ("1999 Settlement Order"). See Order Approving Settlement, Reiser Decl., Ex. 11. As part of the settlement, the objecting creditors each withdrew their respective objections. Id. In withdrawing the objection, Stephen A. North and Barbara North were represented by the law firm of Ventura, Miesowitz, Albano & Keough. As set forth in the preamble of the 1999 Settlement Order, Mr. Russo determined that there was no basis for the continued prosecution of the First Fraudulent Transfer Case, that the Debtor's transfer of the Cresskill Property in 1993 was not a fraudulent conveyance and was otherwise not avoidable, and that no facts existed to support an objection to the Debtor's bankruptcy discharge. Id. Lastly, by the Order the Debtor agreed to pay Mr. Russo's law firm, Albert Russo, P.C., $2,500 in exchange for the settlement. Id.
On March 15, 1999, the Debtor received a Discharge. Reiser Decl., Ex. 19. On February 23, 2000, Mr. Russo filed a Report of No Distribution. Reiser Decl., Ex. 20. On March 22, 2000, the Court issued a Final Decree and closed the Case. Reiser Decl., Ex. 21.
On January 28, 2016, more than nineteen years after the first bankruptcy filing, the Debtor filed a petition under Chapter 7 of the Bankruptcy Code ("Current Case"). Chapter 7 Petition, In re Andrew Tzanides, Case No. 16-11410, ECF No. 1. On January 29, 2016, the Office of the United States Trustee appointed David Wolff as Chapter 7 Trustee ("Trustee" or "Current Trustee"). ECF No. 4.
In Count 1 of the Complaint, the Trustee asserts that the Defendant transferred his interest in the Cresskill Property to Defendant with actual intent to defraud creditors, and seeks to avoid the transfer pursuant to Section 544 of the Bankruptcy Code and N.J.S.A 25:2-25(a). Because the Trustee initiated this action within one year of his appointment, the Trustee asserts that the action is timely under N.J.S.A. 25:2-31(a). The Trustee further alleges that "the fact that Debtor tended the Transferred Value to his wife, the Defendant, more than four years ago does not prohibit the Trustee from recovery of the Transferred Value from the Defendant." Id. ¶ 33. Trustee further alleges that "[a]ny subsequent transfer of the Transferred Value into another asset., i.e., the River Vale Property, does not defeat any claim of the Trustee for Recovery of the Transferred Value," which he contends is "now part of the equity in the River Vale property." Id. ¶¶ 34-35. By Count 1, the Trustee seeks to compel the Defendant to return the Transferred Value to the Estate by executing a Deed for the River Vale
In Count 2, the Trustee seeks to impose a "constructive trust" on the one-half ownership of the River Vale Property for the benefit of creditors pursuant to Section 105 of the Bankruptcy Code. Trustee alleges that the Debtor "enjoyed all of the benefits of the River Vale Property, while at the same time shielding same from his creditors", Id. ¶ 40, and "utilized the equity of the River Vale Property and its predecessor, the Cresskill Property for his benefit without regard to the fact he was not the titled owner." Id. ¶ 41. As a result, Trustee contends that "equity demands that a constructive trust be imposed on a one-half interest in the River Vale Property for the benefit of the Debtor's bankruptcy estate." Id. ¶ 42.
Count 3 seeks the authority to sell the bankruptcy estate's one-half in interest the River Vale Property, together with the Defendant's interest in the River Vale Property, for the benefit of the Estate and the Debtor's creditors pursuant to Section 363(h) of the Bankruptcy Code. Id. ¶¶ 43-48.
On April 22, 2016, Defendant filed the instant Motion to Dismiss the Trustee's Complaint for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6) and Fed. R. Bankr. P. 7012, or, in the alternative for summary judgment pursuant to Fed. R. Civ. P. 56 and Fed. R. Bankr. P. 7056 and to compel Discharge of Lis Pendens. Motion to Dismiss, Wolff v. Helen Tzanides, Adv. Pro. No. 16-01261, ECF No. 5.
First, Defendant contends that this matter can be properly decided by a motion to dismiss based upon the complaint and in the attached exhibits. Id. at 9. Alternatively, Defendant asserts that even if this Motion were treated as a motion for summary judgment, there are no facts that could support the relief requested by the Trustee. Id. at 11. In support of the Motion, the Declarations of Defendant Helen Tzanides and Glenn R. Reiser, Esq. are submitted along with, among other documents, relevant pleadings and orders from Debtor's Previous Bankruptcy Case.
Second, Defendant argues that the Trustee's Complaint is time-barred by the applicable statute of limitations set forth in the New Jersey Uniform Fraudulent Transfer Act, N.J.S.A. 25:2-20, et seq. ("NJ UFTA") and N.J.S.A. 25:2-31(a). The NJ UFTA allows a creditor pursuing a fraudulent transfer claim under N.J.S.A. 25:2-25(a) to file a complaint within four years of the transfer or within one year after "the transfer ... was discovered by the claimant." (citing N.J.S.A. 25:2-31 (a))
Third, Defendant argues that the Settlement Order resolving the 1998 Adversary Proceeding and dismissing that action "with prejudice" bars Trustee's fraudulent transfer claims under the doctrine of res judicata. Id. at 15. The Defendant argues that all three elements of res judicata are met: (1) a final judgment on the merits, (2) the same parties or their privities, and (3) a later suit based upon the same cause of action. Id. at 16 (citing Mullarkey v. Tamboer (In re Mullarkey), 536 F.3d 215, 225 (3d Cir. 2008)). Defendant notes that res judicata bars claims that were brought in a previous proceeding and claims that could have been brought. Id. (citing Post v. Hartford Inc. Co., 501 F.3d 154, 169 (3d Cir. 2007)). With respect to the final judgment element, Defendant asserts that prior federal court judgments, such as the one entered in Debtor's Previous Case, "are controlled by federal res judicata rules." Id. at 15 (citing Burlington N. R.R. Co. v. Hyundai Merch. Marine Co., Ltd., 63 F.3d 1227, 1231 (3rd Cir. 1995); Agilectric Power Partners, Ltd. v. General Elec., Co., 20 F.3d 663, 664 (5th Cir. 1994); Barnett v. Stern, 909 F.2d 973, 977 (7th Cir. 1990); Steve D. Thompson Trucking Inc. v. Dorsey Trailers, Inc., 870 F.2d 1044, 1045 (5th Cir. 1989)). The Defendant argues that the "settlement approved by this Bankruptcy Court conclusively established that the Debtor had no legal or equitable interest in the Cresskill Property, and hence it was not part of the bankruptcy estate as relating to the 1997 bankruptcy filing." Id. at 19 (citing 11 U.S.C. § 541(a)). With respect to the privity element, Defendant contends that the Prior Trustee and the Current Trustee are in privity with one another because a trustee in bankruptcy is a successor to the Debtor's
Id. at 21-22.
Defendant therefore urges the Court to dismiss the Complaint pursuant to the doctrine of res judicata. Id. at 22.
Fourth, Defendant argues that Trustee's constructive trust theory is inapplicable. The Defendant notes that under New Jersey law a constructive trust is a remedial device that can be imposed upon a showing that property has been obtained by a wrongful act and the recipient will be unjustly enriched by retaining the property. Id. at 22 (citing Flanigan v. Munson, 175 N.J. 597, 608, 818 A.2d 1275 (2003) (citing D'Ippolito v. Castoro, 51 N.J. 584, 589, 242 A.2d 617 (1968))). The test as to whether a constructive trust is an appropriate remedy is proof of (1) a wrongful act which (2) resulted in an unjust enrichment. Id. (citing D'Ippolito, 51 N.J. at 589, 242 A.2d 617). Defendant contends that the Trustee cannot meet his burden under the prevalent case law, which cautions that a constructive trust may only be applied "when the equities of a given case clearly warrant it." Id. (citing Flanigan, 175 N.J. at 611, 818 A.2d 1275). Defendant further notes that the suitability of a constructive trust must be established by "clear, definite, unequivocal and satisfactory evidence." Id. (quoting Gray v. Bradley, 1 N.J. 102, 104, 62 A.2d 139 (1948)). Defendant contends that "the Trustee cannot avail himself of Section 105(a) to avoid application of the limitations periods imposed by Bankruptcy Code Section 544.", Id. at 25, and that as the Trustee is time-barred under New Jersey law from pursuing fraudulent conveyance claims against Defendant arising from the initial 1993 transfer of the Debtor's interest in the Cresskill Property, and Defendant's subsequent sale of the Cresskill Property in 2005 and use of those proceeds to purchase the River Vale Property in 2005, the Third Count of the Complaint must be dismissed as a matter of law. Id. at 25. Defendant further argues that the Settlement embodied in this Court's February 1, 1999 order dismissing
Lastly, Defendant requests that the Court compel the Trustee at his own expense to take all necessary steps to discharge the Notice of Lis Pendens recorded with the Bergen County Clerk against the River Vale Property. Id. at 25-27 (citing N.J.S.A. 2A:15-14; Polk v. Schwartz, 166 N.J.Super. 292, 299-300, 399 A.2d 1001 (App. Div. 1979)).
On May 27, 2016, the Trustee filed a Memorandum of Law in Opposition to Motion of Defendant Helen Tzanides to Dismiss Adversary Proceeding. Opposition Brief, Wolff v. Helen Tzanides, Adv. Pro. No. 16-1261, ECF No. 8. The Trustee argues that Defendant has not met her burden under a motion to dismiss or summary judgment standard. Id. at 4. Trustee asserts that "[i]t is not, and cannot, be disputed that the proceeds of sale of the Cresskill Property were the sole source of funding for acquisition of the River Vale Property." Id. at 2-3. The Trustee emphasizes that his claim in this Adversary Proceeding is one for actual fraud pursuant to N.J.S.A. 25:2-25(a), as opposed to an insolvency claim pursuant to subsection (b). The Trustee urges that the Complaint focuses on a 2002 transfer of the Cresskill Property and alleges that the Debtor transferred his interest in the Cresskill Property to Defendant with actual intent to avoid creditors. Id. at 11-12. The Trustee argues that to the extent he is able to avoid the transfer of the Cresskill Property as a fraudulent transfer, he is entitled to trace the proceeds of the sale of the Cresskill Property and assert an interest in the River Vale Property pursuant to 11 U.S.C. § 550 or assert a constructive trust on the River Vale Property for the benefit of creditors holding claims in the 2016 bankruptcy case. Id. The Trustee therefore argues that "it is wholly irrelevant whether the Debtor may have been solvent at the time of the transfer of the Cresskill Property to [Defendant]." Id. at 12.
In regard to the facts here, the Trustee urges that critical to the analysis (and missing from the movant's analysis) is that the debt held by creditors in the 1997 bankruptcy case no longer exist, as a Discharge was entered in that case. Id. at 2. The Trustee asserts that when the Debtor commenced the present bankruptcy case in 2016 it was, by its very nature, designed to address an entirely
Second, Trustee argues that his Complaint is not time barred by the applicable statute of limitations because the one-year tolling provision set forth in N.J.S.A. 25:2-31(a) applies to his actual fraud claim. Id. at 5. The Trustee notes that the statute was amended in 2002 at N.J.S.A. 25:2-31(a). Trustee notes that a New Jersey Appellate Division case has interpreted this amendment to mean that only a plaintiff's "actual knowledge," as opposed to his or her "constructive knowledge," can defeat a fraudulent transfer claim. Id. at 7 (citing Guido v. Spina, 2010 WL 1928985, at *1 (App. Div. May 14, 2010)). The Trustee contends that under this amendment, the one-year tolling rule applies to transfers of real property even if a deed was recorded. Id.
The Trustee asserts that pursuant to Section 544(b), he has the same rights as any unsecured creditors to avoid transfers under applicable state law. Id. at 9. Therefore, Trustee contends that under New Jersey law, a cause of action with respect to a fraudulent transfer must be brought within four years after the challenged transfer was made or, "if later, within one year after the transfer or obligation was discovered by the claimant." Id. (citing N.J.S.A. § 25:2-31(a)). The Trustee further asserts that the time limit on when he can bring a cause of action to avoid fraudulent transfers under the one-year safety web provisions of said statute does not begin to run until his appointment. Id. (citing In re Halpert & Co, Inc., 254 B.R. 104, 122 (Bankr. D.N.J. 1999)). Accordingly, Trustee argues that the instant action is timely because the Complaint was brought within one year of the Trustee's appointment and acquisition of powers under Section 544(b), and thus within the one-year discovery limitation period of N.J.S.A. 25:2-31(a) and the two (2) year period for Trustee causes of action under 11 U.S.C. § 546. The Trustee further contends that Defendant's reliance on SASCO, In re Bernstein, or "any other precedent applying New Jersey statutes, prior to 2002 is simply wrong." Id. at 10.
Third, the Trustee argues that Defendant cannot prove all the requisite elements of res judicata. The Trustee contends that failure to prove one element of res judicata is fatal to the application of the defense. Id. at 14 (citing In re Hensler, 248 B.R. 488, 491 (Bankr. D.N.J. 2000) (stating that in order invoke the doctrine of res judicata all three prongs must be satisfied)). With respect to the privity element, the Trustee "asks this Court to focus on the relationship between the 1997 Trustee and the Trustee herein." Id. The Trustee contends that "[s]ince the Trustee herein and the 1997 Trustee are neither the same party, nor in privity, the Court must find that res judicata does not apply." Id. In support, the Trustee cites to the principle that a trustee is the representative of the creditors in a bankruptcy estate and has a fiduciary relationship to such creditors. Id. at 15 (citing 11 U.S.C. § 704(1); In re Martin, 91 F.3d 389, 394 (3d Cir. 1996)). The Trustee here argues that he represents an entirely different set of creditors whose claims arose after the discharge was entered in the 1997 bankruptcy case. Id. That the Trustee here is not a successor trustee, as would be prescribed by 11 U.S.C. 703, but serves in a different case with a different set of creditors. The Trustee contends that none of
Lastly, the Trustee addresses his constructive trust claim, noting that "as an equitable remedy, if the Court finds that the tracing of the funds does not give the Estate an actual ownership right, the Trustee legally is entitled to impose a constructive trust on the River Vale Property for the benefit of the creditors holding the 2016 Debt whose rights have never been adjudicated by any court." Id. at 3.
On May 31, 2016, the Defendant filed a Reply Brief in further support of the Motion to Dismiss Complaint for Failure to State a Claim, or in the alternative for Summary Judgment Dismissing the Complaint, and Compelling Plaintiff to Discharge Notice of Lis Pendens. Reply Brief, Wolff v. Helen Tzanides, Adv. No. 16-11410, ECF No. 9. Defendant argues that this matter is ripe for summary judgment and the Court must accept Defendant's Statement of Undisputed Material Facts as true because the Trustee did not challenge these facts and because the Trustee did not dispute that the Motion is ripe for summary judgment. Id. at 2. Defendant further argues that "at a minimum" this Court must dismiss Count 2 of Trustee's Complaint because Trustee failed to set forth a basis other than 11 U.S.C. § 105 to warrant imposition of the remedy of a constructive trust. Id. Next, Defendant argues that while the Trustee inappropriately focuses on the 2002 deed transaction between the Defendant and Debtor, there is no issue as to the 1993 Deed or that the transfer of the Debtor's interest in the Marital Property to Defendant occurred in 1993, as that Deed is a matter of public record and was properly filed with the Bergen County Clerk's Office. Id. at 4. The Defendant urges that the Trustee's reference to the 2002 deed, a corrective deed, is erroneous. Id. at 3.
The Defendant urges that the Debtor's transfer of his interest in the Cresskill Property to Defendant was the subject of the 1998 Adversary Complaint, and that many of the same allegations and badges of fraud now cited by the current Trustee, including that the Debtor made the 1993 Deed transfer with actual intent to hinder, delay or defraud creditors, were contained in the 1998 action and that 1998 Complaint was dismissed "with prejudice". Id. at 3. Defendant further notes that the 1998 Adversary Complaint plead a cause of action under the New Jersey fraudulent transfer law seeking avoidance by the Trustee of the transfer pursuant to N.J.S.A. 25:2-1 et seq. as applied by 11 U.S.C. § 544. Id. at 5. The Defendant argues that this Court's February 1, 1999 Order established that the Debtor held no legal or equitable interest in the Cresskill Property and was not part of his 1997 bankruptcy estate; and the Cresskill Property is not an asset of the Debtor's 2016 estate. Id. Defendant urges that the Trustee here is impermissibly
Defendant urges that there is no legal authority permitting the Current Trustee to challenge the exact same transfer nunc pro tunc to 1993 merely because the Debtor incurred debt after receiving his bankruptcy discharge in 1999. Id. at 6. The Defendant notes that the preamble to this Court's February 1, 1999 Settlement Order states "and the Court having considered the Trustee's assertion that there is no basis for the continued prosecution of the adversary proceeding and that his analysis has resulted in a determination that the transfer by the Debtor of his interest in the residence to his wife in November 1993 was not a fraudulent conveyance and is otherwise not avoidable." Id. Despite this, the Defendant asserts that the Current Trustee's Complaint mentions only the 2002 Deed and repeats many of the same allegations first asserted by Trustee Russo 18 years ago in the 1998 Adversary Complaint. Id.
In her Reply, the Defendant again asserts that as the Trustee has failed to cite the existence of any genuine issues of material fact, the matter is ripe for summary judgment. Id. at 9. Defendant argues that the Trustee's statute of limitations argument is premised on the false pretense that the 2002 Deed controls, when the 1993 Deed is the operative transfer document as demonstrated by the Court's February 1, 1999 Settlement Order — and that the recording of the 1993 Deed is the trigger date for statute of limitations purposes, and as well that the February 1, 1999 Settlement Order cuts off the rights of the Debtor's future creditors to challenge the same transfer nunc pro tune. Id. at 9-10. Defendant asserts that there is no current creditor who can challenge the original 1993 Deed transfer under New Jersey law. Id. at 10.
Furthermore, with respect to the statute of limitations defense, Defendant argues that the Trustee's claims fail because he has not identified the existence of an unsecured creditor on whose behalf he can maintain a timely cause of action pursuant to New Jersey fraudulent transfer law and Section 544(b) of the Bankruptcy Code. Id. at 9 (citing In re Bernstein, 259 B.R. 555; In re NJ Affordable Homes Corp., 2013 WL 6048836, 2013 Bankr. LEXIS 4798 (Bankr. D.N.J. Nov. 8, 2013)). Defendant contends that it is hornbook law that when relying on Section 544(b), the Trustee stands in the shoes of an unsecured creditor who could bring a timely claim against the Defendant; therefore, the Trustee must at least be able to point to at least one unsecured creditor who satisfies the NJ UFTA statute of limitations. Id. at 10-11 (citing In re D'Angelo, 491 B.R. 395, 404 (E.D. Pa. 2013); In re Cybergenics Corp., 226 F.3d 237, 243 (3d Cir. 2000); In re G-I Holdings, Inc., 313 B.R. at 632). The Defendant contends that the Trustee cannot base his claim on the New Jersey Division of Taxation's creditor status because the New Jersey Division of Taxation, as alleged by the Trustee, holds a 2007 judgment lien against the Property and is therefore adequately protected by a lien against non-debtor assets. Id. at 11 n.9. Defendant further argues that because the 1993 Deed is the operative transfer document, the September 1, 1999 Settlement Order cuts off the rights of the Debtor's future creditors to go back in time and challenge the transfer nunc pro tunc. Id.
Next, in support of her res judicata argument, Defendant argues that the Previous Complaint and the Current Complaint allege the exact same causes of action and facts. Defendant argues that the settlement of the earlier fraudulent transfer
Defendant argues that the defense of claim preclusion may be raised on a motion to dismiss and the court may take judicial notice of the record from a previous court proceeding between the parties. Id. at 12 (citing Oneida Motor Freight Inc. v. United Jersey Bank, 848 F.2d 414, 416 n.3 (3d Cir. 1988) (noting that claim preclusion and issue preclusion are the currently accepted terms for two different applications of the doctrine of res judicata); Lubrizol Corp. v. Exxon Corp., 929 F.2d 960, 961, n.1 (3d Cir. 1991)). Defendant asserts that settlement agreements involve claim preclusion, not issue preclusion. Id. at 12 (citing United States v. Int'l Bldg. Co., 345 U.S. 502, 505-506, 73 S.Ct. 807, 97 S.Ct. 1182 (1953); Bandai Am. Inc. v. Bally Midway Mfg. Co., 775 F.2d 70, 74 (3d Cir. 1985), cert. den. 475 U.S. 1047, 106 S.Ct. 1265, 89 L.Ed.2d 574 (1986)).
Defendant contends that the three elements of res judicata here have been met. Defendant argues that the February 1, 1999 Settlement Order satisfies the final judgment element. Id. at 15 (citing In re Medomak Canning, 922 F.2d 895, 900 (1st Cir. 1990) (stating that court-approved settlements "receive[ ] the same res judicata effect as a litigated judgment)). Defendant contends that same principle applies to bankruptcy proceedings. Id. at 15 (citing, e.g., In re Patel, 43 B.R. 500, 503 (N.D. Ill. 1984) ("bankruptcy [court] order approving a settlement is final and appealable under [28 U.S.C.] § 1334(a) because it determines the rights of the parties to the settlement"); Cho v. Seventh Avenue Fine Foods Corp., 2016 WL 1717214, 2016 U.S. Dist. LEXIS 56603 (S.D.N.Y. April 28, 2016)). Defendant argues that the second element of res judicata, that the claim must involve the same parties or those in privity, is met. While not conceding a lack of privity between the Current and Prior Trustees, Defendant asserts that the Current Trustee is in privity with the Debtor who was a Defendant in the 1998 Adversary Proceeding and settled his claim with the Prior Trustee for $2,500.00. Id. at 13-14. Defendant argues that the Debtor is bound by the February 1, 1999 Settlement Order and therefore the Current Trustee, who is in privity with the Debtor is equally bound. Id. The Defendant further asserts that res judicata can apply to nonparties by "nonparty preclusion" if privity existed between the prior and present litigants. Id. at 14 (citing Taylor v. Sturgell, 553 U.S. 880, 892, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008); In re Montgomery Ward, LLC, 634 F.3d 732 (3d Cir. 2011)). Defendant asserts that it is well established that collateral estoppel, the issue preclusion component within the larger doctrine of res judicata applies where a nonparty is in privity with someone who was a party in the prior suit. Id. at 14 (citing Richards v. Jefferson County, 517 U.S. 793, 798-799, 116 S.Ct. 1761, 135 L.Ed.2d 76 (1996)). Defendant notes that among the exceptions to the general rule against nonparty preclusion is where a special statutory scheme, such as the Bankruptcy Code expressly forecloses subsequent litigation. Id. (citing Taylor, 553 U.S. at 893-896, 128 S.Ct. 2161; Nationwide Mut. Fire Ins. Co.
Lastly, Defendant argues that the settlement of the 1998 Adversary Action renders the Current Trustee's claims moot. The Defendant alleges that the settlement of the 1998 adversary proceeding, which dismissed the prior fraudulent transfer claims against the Debtor and the Defendant arising from the Cresskill Property with prejudice, moots every "badge of fraud" that the Current Trustee has alleged in his Complaint. The Defendant asserts that affording finality to judgments of the Bankruptcy Court is an important part of bankruptcy proceedings in furtherance of orderly reorganization and settlement of debtor estates. Id. at 20 (citing In re Revere Copper & Brass, Inc., 78 B.R. 17, 23 (S.D.N.Y. 1987)).
On May 31, 2016, Defendant filed a Supplemental Declaration of Glenn R. Reiser. Wolff v. Helen Tzanides, Adv. No. 16-1261, ECF No. 10. Attached to the Certification is a Proof of Claim filed in the present bankruptcy case by Raymond Cohen, C.P.A. in the amount of $4,928.00. Id.; see also Proof of Claim No. 3, dated April 6, 2016 filed on April 11, 2016. This Proof of Claim is based upon bills from Mr. Cohen dated March 2, 2006, October 12, 2006, and March 23, 2007. See Proof of Claim No. 3, at Page 4.
On June 1, 2016, Defendant filed a Second Supplemental Declaration of Glenn R. Reiser. Wolff v. Helen Tzanides, Adv. No. 16-1261, ECF No. 11. Defendant attached the May 22, 2002 Deed and the November 1, 1993 Deed to the Certification. Defendant describes the 2002 Deed as "a corrective Deed" and points to the following distinctions between the May 22, 2002 Deed and the 1993 Deed.
Second Supplemental Declaration of Glenn R. Reiser, at ¶¶ 4-5; Declaration of Helen Tzanides, ¶ 5.
This Court held a Hearing on the present Motion on October 11, 2016.
Defendant first argued that the Complaint fails to state a claim under a motion to dismiss standard because the Trustee did not assert the right of an unsecured creditor and did not name an unsecured creditor in the Complaint itself. Defendant urged, however, that the factual record is uncontested and that this Court could resolve this motion under the summary judgment standard. Defendant argued that the February 1, 1999 Settlement Order entered in the Previous Case is a valid and binding agreement and that creditors had notice of the settlement and even objected to it. Next, Defendant argued that the Complaint filed by Mr. Russo in the Previous Case and the Trustee's Current Complaint contains the same causes of action and relevant factual allegations. Defendant noted that Mr. Russo's Complaint challenged the validity of the 1993 deed transfer of the Property and asserted actual intent to hinder, delay, and defraud under the NJ UFTA. Defendant argued that res judicata applies to bar Trustee's claims in this Action because the Settlement Order reflects this Court's finding that there was no fraudulent transfer and that the Cresskill Property was not part of the Debtor's bankruptcy estate. Debtor argued that the settlement was binding on Debtor's previous creditors and is also binding upon his creditors in the Current Case. Defendant asserted that Debtor's current creditors could not have relied on the fact that he owned a home because he did not own the Cresskill Property by virtue of the February 1, 1999 Settlement Order in the Previous Action. Defendant emphasized that case law in the Third Circuit favors settlements, especially in the bankruptcy context.
Defendant argued that the privity requirement for res judicata is met because there is privity between the two Trustees as to this transaction and because there is privity between the Current Trustee and the Debtor. Defendant argued that the Third Circuit has recognized that privity element of res judicata does not require an exact party matchup under certain circumstances, referred to as "nonparty preclusion," citing Montgomery Ward; Taylor v. Sturgell, Richards v. Jefferson County. Defendant argued that in Montgomery Ward the court recognized that substance rather than the form governs the privity requirement.
Defendant further argued that the Trustee inappropriately ignored the 1993 Deed which was searchable in favor of the 2002 Deed. Defendant noted that the 2002 Deed, a quitclaim deed, was merely a corrective deed because the 1993 deed had cited the wrong New Jersey statute for equitable distribution. Thus, Defendant concluded that the 1993 deed is controlling in this matter for determining the date of transfer, as it was in the Previous Case. Defendant asserted that the Trustee does not appear to dispute that the September 1, 1999 Settlement Order is a final order for purposes of res judicata and that the
Next, Defendant disputed Trustee's contention that the state court statute of limitations did not begin to run until the date the Trustee was appointed. Defendant argued that under Bernstein the Trustee must identify an unsecured creditor as a foundation for his Section 544(b) claim. Defendant argued that the Trustee has not identified a qualifying creditor. Defendant argued that the Trustee may not rely upon Mr. Cohen's proof of claim for accounting services rendered to the Tzanideses in 2006 and 2007 in support of his Section 544(b) argument because the six-year statute of limitations for breach of contract on that claim has expired.
Defendant argued that res judicata also bars Defendant's constructive trust claim, as that claim relies upon the same transfer that was found to not be property of the estate under the February 1, 1999 Settlement Order. Defendant further argued that there is no "wrongful act" to support a constructive trust theory because the Debtor and the Defendant justifiably relied on the 1999 Settlement Order with respect to the later transfers and further that reliance on § 105 and constructive trust principles is not appropriate when the Trustee is also relying on specific Bankruptcy Code provisions regarding fraudulent transfers. Lastly, the Defendant requested that the Trustee be compelled to remove the lis pendens on the Defendant's current property.
First, Trustee argued that the summary judgment standard should not apply to this case because there are factual issues with respect to intent and that a statement of undisputed facts is not required under the Local Rules as amended.
Trustee argued that under the New Jersey state fraudulent transfer statute future creditors are considered and that for purposes of this motion the 1993 deed transfer should govern. The Trustee urged that the Prior Trustee's dismissal of the action with prejudice based on an allegation of insolvency did not settle the actual intent fraudulent conveyance claim but merely dismissed the claim. The Trustee urged that future creditors should not be bound by the prior September 1, 1999 Settlement Order such that Defendant may not rely upon this Court's approval of the settlement for purposes of establishing a judgment on the merits as to the actual fraud claim. While the Trustee acknowledged that the previous claim and the current claim contain the same operative facts, he argued that there was no final judgment on the merits because the previous actual fraudulent intent claim was dismissed and there was no judicial determination as to actual fraud. The Trustee suggested that approval of this settlement is akin to a matrimonial court's approval of a property settlement agreement.
Next, Trustee argued that there is no privity between the Prior Trustee and the Current Trustee. The Trustee argued that the Current Trustee represents an entirely different set of creditors, and that in exercising his business judgment, the trustee may make different determinations with respect to the causes of actions he wishes to pursue. The Trustee asserted that even if the prior bankruptcy case was reopened, any claims that arose after the claims bar date in the prior case would not be subject to the discharge granted to the Debtor in the Previous Case. The Trustee also disputed Defendant's argument that the Debtor and the Current Trustee are in privity as to this matter. The Trustee argued that the former Trustee, Mr. Russo could not have been in privity with the Debtor because they were opposed to one another in the Previous Action and, nor could the Current Trustee be in privity with the Debtor here. As to constructive trust, the Trustee urged that it is a remedy designed to implement the provisions of § 550 of the Bankruptcy Code as the Cresskill Property has been sold and the Trustee is seeking to trace the proceeds of
Defendant argued that the Trustee has not disputed any material fact here and that the September 1, 1999 Settlement Order should be treated as a final judgment for res judicata purposes. Defendant noted that in the Previous Action, the Debtor paid Trustee Russo the sum of $2,500 as consideration for the settlement. Defendant further noted that two creditors initially objected to the Settlement although they ultimately withdrew their objections before the September 1, 1999 Settlement Order was entered. The Defendant asserted that this Court approved the settlement as fair and reasonable and that the Trustee is improperly attempting to collaterally attack the September 1, 1999 Settlement Order. Defendant argued that the Current Trustee cannot bring the Cresskill Property into this bankruptcy estate as that property was previously determined not to be part of the prior bankruptcy estate. Defendant argued that the Current Trustee stands in the shoes of the Debtor, and because the Debtor could not challenge the transfer, neither can the Current Trustee. The Defendant further argued that no future creditor could have relied upon the Debtor's ownership of the Cresskill Property because the Debtor did not own the Property as a result of the 1993 transfer.
The Trustee responded that under the NJ UFTA a transfer can be fraudulent as to a future creditor. The Trustee urged that the $2,500 was paid by the Debtor, also a Defendant in the prior action on a § 727 claim. The Trustee did not contest that the Cresskill Property was not property of the estate as it had been transferred and was during the prior case the subject of the Prior Trustee's avoidance action.
On November 10, 2016, the Defendant filed a letter to inform the court of additional case law in support of her res judicata defense. Reiser Letter, Wolff v. Helen Tzanides, Adv. No. 16-1261, ECF No. 16. The letter cites a case from the Third Circuit, Martinez v. Bank of Amer., N.A., 664 Fed.Appx. 250 (3d Cir. 2016). Defendant notes that while the case is not directly on point, it cites cases that support the proposition that an earlier dismissal based upon a settlement agreement constitutes a final judgment on the merits in a res judicata analysis. See id. at 254 (citing Ford-Clifton v. Dep't of Veterans Affairs, 661 F.3d 655, 660 (Fed. Cir. 2011) ("It is widely agreed that an earlier dismissal based on a settlement agreement constitutes a final judgment on the merits in a res judicata analysis," and collecting cases); Interdynamics, Inc. v. Firma Wolf, 653 F.2d 93, 96-97 (3d Cir. 1981)).
On November 11, 2016, the Trustee filed a response to Defendant's letter. Andrea Dobin Letter, Wolf v. Helen Tzanides, Adv. No. 16-1261, ECF No. 17. The Trustee asserts that Martinez is neither controlling i.e. precedential, nor relevant, and that the letter amounts to an attempt by the Defendant to cite case law not previously presented in the submitted briefs.
On November 11, 2016, Defendant filed a response to Trustee's Letter. Resier Second Letter, Wolff v. Helen Tzanides, Adv. No. 16-1261, ECF No. 17. Defendant asserted that Martinez and the cases cited are pertinent to the instant Motion and that Plaintiff is not prejudiced by them having been cited to the Court post-hearing. Id.
A motion to dismiss is brought pursuant to Federal Rule of Civil Procedure 12(b)(6), which is made applicable in bankruptcy court by Federal Rule of Bankruptcy Procedure 7012. Fed. R. Civ. P. 12(b)(6); Fed. R. Bankr. P. 7012. When considering a motion to dismiss, a court must accept all well-pleaded allegations in the complaint as true, view them in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief. Phillips v. Cty. of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008). To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1973, 167 L.Ed.2d 929 (2007); Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009). "A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955).
The United States Supreme Court has set forth a two-step analysis for adjudicating a motion to dismiss. Iqbal, 129 S.Ct. at 1949-50. First, a court should identify and reject labels, conclusory allegations, and formulaic recitation of the elements of a cause of action. Second, a court must draw on its judicial experience and common sense to determine whether the factual content of a complaint plausibly gives rise to an entitlement to relief. The court must infer more than the mere possibility of misconduct. Id. This does not impose a "probability requirement" at the pleading stage, but requires a showing of "enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element." Phillips, 515 F.3d at 234 (quoting Twombly, 550 U.S. at 556, 127 S.Ct. 1955).
In deciding motions to dismiss under Rule 12(b)(6), courts generally consider only the allegations in the complaint, exhibits attached to the complaint, matters of public record, and documents that form the basis of the claim. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997). A court may also take judicial notice of a prior judicial opinion. McTernan v. City of York, 577 F.3d 521, 526 (3d Cir. 2009); Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006).
The Third Circuit has held that if a claim is vulnerable to dismissal under Rule 12(b)(6) and the plaintiff moves to amend, "leave to amend generally must be granted unless the amendment would not cure the deficiency." Shane v. Fauver, 213 F.3d 113, 115 (3d Cir. 2000). See also Long v. Wilson, 393 F.3d 390, 400 (3d Cir. 2004); Lundy v. Adamar of New Jersey, Inc., 34 F.3d 1173, 1196 (3d Cir. 1994).
A Rule 12(b)(6) motion may be based on res judicata if the defense is apparent on the face of the complaint. Rycoline Prod's v. C & W Unlimited, 109 F.3d 883, 886 (3d Cir. 1997). The same is true when the motion is premised on a statute of limitations defense. Id.
Federal Rule of Civil Procedure 56(a), made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7056, provides that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. The court should state on the record the reasons for
The United States Supreme Court has defined an "issue of material fact" as a question which must be answered in order to determine the rights of the parties under substantive law, and which can only properly be resolved "by a finder of fact because [it] may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); see also Justofin v. Metro. Life Ins. Co., 372 F.3d 517, 521 (3d Cir. 2004) ("A fact is material when its resolution `might affect the outcome of the suit under the governing law,' and a dispute about a material fact is genuine `if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'") (citing Anderson, 477 U.S. at 248, 106 S.Ct. 2505).
The moving party bears the initial burden of demonstrating that there is no genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Knauss v. Dwek, 289 F.Supp.2d 546, 549 (D.N.J. 2003). Once the movant meets its burden, the burden shifts to the nonmoving party, who must present evidence establishing that a genuine dispute of material fact exists, making it necessary to resolve the difference at trial. Knauss, 289 F.Supp.2d at 549. Summary judgment is appropriate "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Cardenas v. Massey, 269 F.3d 251, 254-55 (3d Cir. 2001) (citation omitted).
Inferences and facts should be construed in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Sempier v. Johnson & Higgins, 45 F.3d 724, 727 (3d Cir. 1995). However, parties opposing summary judgment "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., 475 U.S. at 586, 106 S.Ct. 1348. The nonmovant may not rely on mere allegations but must present actual evidence raising a genuine dispute of material fact. Anderson, 477 U.S. at 249, 106 S.Ct. 2505. In addition, a motion for summary judgment will not be defeated by "the mere existence" of some disputed facts. Am. Eagle Outfitters v. Lyle & Scott Ltd., 584 F.3d 575, 581 (3d Cir. 2009). "If the evidence [offered by the nonmoving party] is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505 (citations omitted). "[O]nly disputes over those facts `that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.'" DeHart v. Horn, 390 F.3d 262, 267 (3d Cir. 2004) (citing Anderson, 477 U.S. at 248, 106 S.Ct. 2505).
Summary judgment may be proper even though some material facts remain disputed if, after all inferences are drawn in favor of the non-moving party, the moving party is entitled to judgment as a matter of law. "[T]he inquiry involved in a ruling on a motion for summary judgment ... necessarily implicates the substantive evidentiary standard of proof that would apply at the trial on the merits." Anderson, 477 U.S. at 252, 106 S.Ct. 2505.
The purpose of fraudulent conveyance law is to make available to creditors those assets of the debtor that are rightfully a part of the bankruptcy estate, even if they have been transferred away. In re G-I Holdings, Inc., 313 B.R. 612, 632 (Bankr. D.N.J. 2004) (citing Buncher Co. v. Official Comm. of Unsecured Creditors of GenFarm Ltd. P'ship IV, 229 F.3d 245, 250 (3d Cir. 2000)).
Although the Bankruptcy Code provides the trustee with the rights of a judgment creditor, the extent of the trustee's rights is determined by applicable state and federal law. 5 Collier on Bankruptcy P 544.06 (16th 2016); see In re Bridge, 18 F.3d 195, 200 (3d Cir. 1994) ("although the trustee's strong arm powers arise under federal law, the scope of these avoidance powers vis-a-vis third parties is governed entirely by the substantive law of the state in which the property in question is located as of the bankruptcy petition's filing.").
The Trustee's ability to pursue fraudulent transfers premised on state law is found at 11 U.S.C. § 544(b)(1), which provides in part as follows:
11 U.S.C. § 544(b)(1).
"When recovery is sought under section 544(b) of the Bankruptcy Code, any recovery is for the benefit of all unsecured creditors, including those who individually had no right to avoid the transfer." Buncher Co., 229 F.3d at 250; see also Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 226 F.3d 237, 250 (3d Cir. 2000).
It is well-settled that for a trustee to bring a cause of action pursuant to the Section 544(b) avoiding power, a Trustee must demonstrate the existence of an actual unsecured creditor that existed on the bankruptcy petition date who could have also brought the claim under applicable state or federal law. In re G-I Holdings Inc., 313 B.R. at 632; In re Bernstein, 259 B.R. at 559; In re NJ Affordable Homes Corp., No. 05-60442, 2013 WL 6048836, at *32-33 (Bankr. D.N.J. Nov. 8, 2013); In re Dwek, No. 09-1256, 2011 WL 1300188, at *2 (Bankr. D.N.J. Apr. 4, 2011).
In G-I Holdings, this Court explained: Significantly, to invoke § 544(b), the trustee or debtor-in-possession must show that at least one of the present unsecured creditors holds an allowable claim against whom the transfer or obligation was invalid. Young v. Paramount Communications, Inc. (In re Wingspread Corp.), 178 B.R. 938, 945 (Bankr.S.D.N.Y.1995)(citing 5 Collier on Bankruptcy ¶ 544.03[1] (15th ed.1994));
313 B.R. at 633.
Section 546(a) establishes certain limitations on the trustee's avoidance powers. It provides:
11 U.S.C. § 546(a).
Section 546(a) is designed to "give[] the trustee some breathing room to determine what claims to assert under § 544." Matter of Princeton-N.Y. Inv'rs, Inc., 219 B.R. 55, 65 (D.N.J. 1998) (citing Matter of Princeton-N.Y. Inv'rs, Inc., 199 B.R. 285, 297 (Bankr. D.N.J. 1996)). Notably, however, a trustee has no cause of action under Section 544(b) and does not receive the extension of time afforded to him or her to sue under Section 546(a) "if the creditor in whose place the Trustee stands could not bring a timely action at the commencement of the Debtor's global bankruptcy proceeding." In re NJ Affordable Homes Corp., 2013 WL 6048836, at *33 (citing In re Bernstein, 259 B.R. at 559). "The Code does not resurrect a cause of action which did not exist as of the petition date." In re Bernstein, 259 B.R. at 559. Therefore, the Trustee has no cause of action under Section 544(b) if the creditor in whose place the Trustee stands could not have brought a timely action under state law at the commencement of the Debtor's bankruptcy proceeding.
Actual and constructive fraudulent transfers may be avoided pursuant to New Jersey's Uniform Fraudulent Transfer Act, N.J.S.A. 25:2-20 et seq. ("UFTA"). The purpose of the NJ UFTA is to prevent a debtor from placing his or her property
N.J.S.A. 25:2-25, entitled "Transfers fraudulent as to present and future creditors" provides:
N.J.S.A. 25:2-25.
Further, N.J.S.A. 25:2-27 provides an additional avenue for avoiding fraudulent transfers under New Jersey law as to present creditors. It provides as follows:
N.J.S.A. 25:2-27.
Significantly, N.J.S.A. 25:2-31 contains the statute of limitations periods for avoiding fraudulent transfer actions under the New Jersey UFTA. This section provides in relevant part:
N.J.S.A. 25:2-31 (2002) (emphasis added).
The prior version of this Statute stated that a claim brought pursuant to N.J.S.A. 25:2-25(a) was extinguished unless the action was brought within four years after the transfer was made or the obligation was incurred or, if later, "within one year after the transfer or obligation was or could reasonably have been discovered by the claimant." L. 2002, c. 100, § 1 (amending
N.J.S.A. 25:2-31(a) was amended to delete from the statute the phrase "or could reasonably have been" preceding the word "discovered". As a result, the statute set a one-year limitations period from the date the allegedly fraudulent transfer "was discovered" by the creditor. See Rosario v. Marco Const. & Management Inc., 443 N.J.Super. 345, 348, 128 A.3d 1131 (App. Div. 2016); Guido v. Spina, 2010 WL 1928985, at *2 (App. Div. May 14, 2010). In Guido, plaintiffs obtained a judgment against the defendants in 2006. Id. at *1. After obtaining judgment, plaintiffs discovered that in June 2001, a deed was recorded by which one of the defendants transferred his undivided joint interest with his wife in real property in Chester, New Jersey to her individually for $10. Id. Plaintiffs then filed a second complaint asking the court to void the transfer under N.J.S.A. 25:2-29 to the extent necessary to satisfy plaintiffs' judgment against the defendant. Id. at *2. The defendant moved to dismiss the complaint under the NJ UFTA's statute of limitations. The trial court granted the motion after conducting a plenary hearing. Id. at *3. The Appellate Division reversed, finding that "[n]othing in the record demonstrates that plaintiffs actually discovered the June 2001 transfer of the Chester property before entry of that judgment." Id. Plaintiff Guido testified that his attorney conducted a judgment search after the judgment was entered, and Plaintiffs learned then about the June 2001 transfer of the Chester property. Plaintiffs filed their complaint alleging fraudulent transfer on May 24, 2007. This chronology establishes that plaintiffs filed their amended complaint more than four years after but within one year of discovering the transfer. Therefore, the complaint was timely filed under the amended statute. Id. at *3.
Bankruptcy courts in this District have similarly applied the amended Statute in the context of Section 544(b) claims. In G-I Holdings, Inc., 313 B.R. 612, this Court considered a motion filed by the Official
In NJ Affordable Homes, Bankruptcy Judge Donald Steckroth considered a case in which the chapter 7 trustee brought approximately 400 adversary complaints against any individual or entity that held an interest in 390 real properties either owned by the debtor or in which the debtor held an interest on the petition date. 2013 WL 6048836, at *1. The complaints sought to, among other things, avoid liens of the individual defendants and preserve the mortgages for the benefit of the debtor's estate. Id. at *2. Prior to the bankruptcy filing the debtor purportedly acted as a real estate investment corporation registered in the State of New Jersey. Id. at *3. The trustee's complaint identified a "Ponzi scheme" whereby the debtor defrauded investors, using funds borrowed from investors and financial institutions to purchase, renovate and sell residential and commercial properties. Id. The Debtor and its principal caused the debtor and its affiliates to repeatedly transfer real estate properties among themselves in an effort to artificially inflate property values and sale prices. Id. The trustee sought to avoid pre-petition transfers of the debtor's property and its affiliates pursuant to the actual and constructive fraud provisions of the Bankruptcy Code and the New Jersey UFTA. The defendants filed motions to dismiss based, in part, on the NJ UFTA's statute of limitations. In considering whether the one-year tolling provision applied, the court recognized that "the statute as amended alters the tolling provision to provide a one-year limitation upon actual discovery." Id. at *31 (citing N.J.S.A 25:2-31(a)). Looking to the legislative history of the UFTA, Judge Steckroth noted that, "[a]s reflected in the Assembly Notes, the Legislature made a conscious choice in eliminating the constructive discovery rule." Id. at *32 (citing N.J. Leg. 100, 220
Id. at *33 (emphasis added) (citing In re Bernstein, 259 at 560).
The United States Supreme Court has held that the full faith and credit statute, 28 U.S.C. § 1738, requires federal courts to apply state-law rules of res judicata based on "concerns of comity and federalism." Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985) (citations omitted).
According to the New Jersey Supreme Court,
First Union Nat'l Bank v. Penn Salem Marina, Inc., 190 N.J. 342, 352, 921 A.2d 417 (2007) (citations omitted).
The Third Circuit has explained that
In re Mullarkey, 536 F.3d at 225; accord McNeil v. Legislative Apportionment Comm'n of N.J., 177 N.J. 364, 395, 828 A.2d 840 (2003).
"Although the contours of a bankruptcy case make its application somewhat more difficult than in other contexts, the doctrine of res judicata is fully applicable to bankruptcy court decisions." In re Target Indus., Inc., 328 B.R. 99, 115-16 (Bankr. D.N.J. 2005) (citing Katchen v. Landy, 382 U.S. 323, 334, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966)). Moreover, res judicata is applicable to final orders issued by the bankruptcy court. See, e.g., NovaCare Holdings, Inc. v. Mariner Post-Acute Network, Inc. (In re Mariner Post-Acute Network, Inc.), 267 B.R. 46, 52-53 (Bankr. D.Del. 2001) (citing numerous cases for the proposition that final orders of a bankruptcy court are given res judicata effect).
"A privy is one who is so identified in interest with another that he represents the same legal right." In re Silver Mill Frozen Foods, Inc., 32 B.R. 783, 785 (Bankr. W.D. Mich. 1983) (citing U.S. v. California Bridge & Construction Co., 245 U.S. 337, 38 S.Ct. 91, 62 S.Ct. 332 (1917)). The Third Circuit has noted that "[res] judicata may apply to a successor in interest despite the general rule against non-party preclusion." In re Montgomery Ward, LLC, 634 F.3d 732, 737, n.5 (3d Cir.
553 U.S. at 894, 128 S.Ct. 2161 (internal citation omitted).
To assess conformance with the third prong, which requires the "same cause of action" or the "same transaction or occurrence," courts must consider the following four factors:
Culver v. Ins. Co. of N. Am., 115 N.J. 451, 461-62, 559 A.2d 400 (1989) (citations omitted); accord Mattson v. Hawkins (In re Hawkins), 231 B.R. 222, 229 (D.N.J. 1999) (Wolfson, J.).
A constructive trust is an available remedy to a trustee or creditor in bankruptcy if such remedy is also available to the creditor under state law. See In re Allen, No. 11-37671, 2012 WL 693461, at *12 (Bankr. D.N.J. Mar. 2, 2012) (Burns, J.). Under New Jersey law, "a constructive trust is a measure through which a court of equity can prevent unjust enrichment and compel a restoration of property to a plaintiff that `in good conscience does not belong to the defendant.'" Id. at *13 (quoting Flanigan, 175 N.J. at 608, 818 A.2d 1275; see also The Dime Savings Bank of N.Y. v. Rietheimer, 2009 N.J. Super. Unpub. LEXIS 211, 2009 WL 17871, at *7 (App. Div. Jan. 2, 2009)). New Jersey courts apply a two-part test when determining whether a constructive trust is an appropriate remedy, requiring proof of (1) a wrongful act, which (2) resulted in an unjust enrichment. Flanigan, 175 N.J. at 608, 818 A.2d 1275 (citing D'Ippolito v. Castoro, 51 N.J. 584, 589, 242 A.2d 617 (1968)). The Supreme Court of New Jersey has "caution[ed] courts generally that a constructive trust is a powerful tool to be used only when the equities in a given case clearly warrant it." Flanigan, 175 N.J. at 611, 818 A.2d 1275. Thus, the suitability of imposing a constructive trust must be established by the movant by "clear, definite, unequivocal and satisfactory evidence." Gray v. Bradley, 1 N.J. 102, 104, 62 A.2d 139 (1948).
Defendant has framed her Motion as a Motion to Dismiss, or in the alternative,
As previously noted, N.J.S.A. 25:2-31(a) provides that any claim to avoid a transfer with actual intent to hinder, delay, or defraud any creditor of the debtor must be brought "within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was discovered by the claimant." N.J.S.A. 25:2-31(a); In re G-I Holdings, Inc., 313 B.R. at 636. In this case, Debtor transferred his interest in the Cresskill Property to the Defendant by deed dated November 1, 1993. The Debtor filed the instant bankruptcy petition on January 28, 2016, more than twenty years after the date of the transfer. Therefore, the Trustee's claim is time-barred unless the one-year tolling provision applies. This Court agrees with the Trustee that
However, it is also well-established that in order to bring a fraudulent transfer claim pursuant to Section 544(b), the Trustee must first identify a creditor that could have brought that cause of action under the applicable state or federal law at the time the bankruptcy petition was filed. In re G-I Holdings Inc., 313 B.R. at 632; In re Bernstein, 259 B.R. at 560; In re Dwek, 2011 WL 1300188, at *2; NJ Affordable Homes, 2013 WL 6048836 at *33.
Here, the Trustee has not identified a qualifying unsecured creditor in the Complaint. The Trustee argues that he need not identify a creditor because the tolling provision runs from the date of his appointment pursuant to N.J.S.A. 25:2-31. Thus, Trustee contends that he has one year from the date of his appointment to assert a timely fraudulent transfer claim. This Court disagrees. Trustee's argument rests on the mistaken premise that he himself is a creditor as of the date of the filing. The Trustee, however, is not a creditor under the NJ UFTA.
As an alternative, the Trustee has requested the opportunity to amend the Complaint to identify a qualifying unsecured creditor. The Third Circuit has held that if a claim is vulnerable to dismissal under Rule 12(b)(6), "leave to amend generally must be granted unless the amendment would not cure the deficiency." Shane, 213 F.3d 113 at 115; see also Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). Here, in his Opposition Brief and at Oral Argument, Trustee Wolff identified the Proof of Claim filed by Raymond B. Cohen, an unsecured creditor asserting a claim for unpaid professional accounting fees from the period of 2006 through 2007. While the Defendant argued here that the Cohen claim is subject to state statute of limitations defenses and as well took issue with the IRS being a qualifying creditor, it remains plausible that a qualifying unsecured creditor exists that could have filed a timely NJ UFTA claim. Thus, the Trustee shall be given the opportunity to amend his complaint to identify a qualifying unsecured creditor pursuant to Section 544(b) and the NJ UFTA.
Assuming that the Trustee is capable of identifying a qualifying unsecured creditor, this Court will now turn, to Defendant's argument that the February 1, 1999 Settlement Order entered by this Court in the Previous Case bars the Trustee's claims under the doctrine of res judicata. As stated by the Third Circuit, res judicata has three elements: "(1) a final judgment on the merits in a prior suit involving; (2) the same parties or their privities; and (3) a subsequent suit based on the same cause of action." Bd. of Trustees of Trucking Emps. of N. Jersey Welfare Fund, Inc. Pension Fund v. Centra, 983 F.2d 495, 504 (3d Cir. 1992).
Although trustee does not dispute that the February 1, 1999 Settlement Order is a final judgment, he contends that it is not a judgment on the merits because the claim was settled and not actually litigated. This argument is unpersuasive. Courts have consistently held that an order based upon a settlement agreement constitutes a binding order for res judicata purposes. See Weber v. Henderson, 33 Fed.Appx. 610, 611-13 (3d Cir. 2002) ("For purposes of res judicata, final judgment on the merits occurred when the District Court approved settlement and dismissed the case ..."); Rein v. Providian Fin. Corp., 270 F.3d 895, 903 (9th Cir. 2001) ("A judicially approved settlement agreement is considered a final judgment on the merits." (citations omitted); In re Am. Metrocomm Corp., 303 B.R. 32, 34 (Bankr. D. Del. 2003) (On trust administrator's motion for summary judgment, the bankruptcy
Here, the Previous Trustee and all of the creditors in the Previous Case had an opportunity to object to the proposed settlement. This Court conducted a hearing and approved the settlement as fair and reasonable under applicable law, at which time the Settlement Order became appealable as a final order. Consequently, the February 1, 1999 Settlement Order satisfies the first res judicata element as a final judgment on the merits in a prior suit.
The third element cannot be in substantial dispute. Mr. Russo's Complaint in the Previous Case and the Trustee's Complaint in this Case allege the same causes of action under Section 544(b) and the NJ UFTA for actual fraud. Moreover, it is undisputed for purposes here that the 1993 transfer of the Debtor's interest in the Cresskill Property forms the basis for both claims. Accordingly, Defendant satisfies the third element of a subsequent suit based on the same cause of action.
The primary dispute among the parties concerns the privity element. Defendant asserts that the privity element is satisfied because the Current Trustee and the Debtor share privity, or, in the alternative, the Previous Trustee and the Current Trustee are in privity. "A privy is one who is so identified in interest with another that he represents the same legal right." In re Silver Mill Frozen Foods, Inc., 32 B.R. at 785 (citing U.S. v. Cal. Bridge & Constr. Co., 245 U.S. 337, 38 S.Ct. 91, 62 S.Ct. 332 (1917)). Substance rather than form governs the parties' identities in a particular case. In re Good Time Charley's Inc., 54 B.R. 157, 160 (Bankr. D.N.J. 1984) (citing L.M. Ericsson Telecommunications, Inc. v. Teltronics Services, Inc. (In re Teltronics Services Inc.), 18 B.R. 705, 706 (E.D.N.Y. 1982)).
The Third Circuit has explained:
In re Montgomery Ward, LLC, 634 F.3d at 738.
The Third Circuit's decision in Montgomery Ward, like this Case, involved two bankruptcy filings by the same debtor. In the first case, the debtor-in-possession, which operated retail merchandising organizations in the United States, confirmed a Chapter 11 plan of reorganization and assumed a certain lease and sublease agreement. (Ward I) Id. at 734-35. Thereafter, the debtor filed a second Chapter 11 petition approximately 18 months after emerging from the first bankruptcy, this time with the goal of winding down operations and liquidating its assets. (Ward II) Id. at 735. As part of the plan in the second case, the debtor-in-possession rejected
Id. at 737-38 (footnotes omitted).
The Third Circuit emphasized that plan administrator's challenge to the lease and sublease was for the benefit of the Ward II estate and its general unsecured creditors, whereas the Ward I debtor in the previous case did not have a similar incentive to challenge the lease as it wanted Montgomery Ward to continue operating the department store. Id. at 738. The court held that "[t]hese misaligned incentives" indicate that when the Plan Administrator raised this challenge to the lease and sublease agreement he did not have a substantive legal relationship with the Ward I debtor of the kind contemplated in Taylor, and therefore res judicata did not apply. Id. at 738-39.
In re Good Time Charley's Inc., 54 B.R. 157 is also instructive. In that case, the Chapter 7 trustee, Peter W. Rodino, III, filed a fraudulent conveyance action pursuant to Section 544 of the Bankruptcy Code and the New Jersey Business Corporation Act, N.J.S.A. 14A: 14-10[2] and [3] law to set aside a prepetition mortgage given by the debtor to a third-party. Id. at 158. Prior to the petition date, a New Jersey state court had entered judgment declaring that the mortgage was valid. Id. The defendant's argument before the bankruptcy court was that the state court order barred the trustee's avoidance claims under
Id. at 160.
The court, in a decision by Bankruptcy Judge D. Joseph DeVito, reasoned that the interests of the debtor at stake in the state court action were distinct from those of the trustee and creditors in the bankruptcy case. Id. at 160. Therefore, the Court held that there was no privity between the trustee and the prepetition debtor corporation. Id.
Similarly, this Court does not find that the privity element is satisfied for purposes of res judicata. First, as in Montgomery Ward and Good Time Charley's, this Court finds that the Current Trustee is not in privity with the Debtor. Although a trustee may, under certain circumstances, be bound by the pre-petition acts of the debtor, the legal relationship between the trustee and the pre-petition debtor is incomplete "particularly when the interests of the creditors diverge from those of the debtor." Montgomery Ward, 634 F.3d at 738. Here, the Trustee is challenging a transfer of real property from the Debtor to the Defendant, his spouse. The Trustees' interest in asserting this claim for the benefit of creditors is directly opposite to the Debtor's interest in shielding the property from his creditors. These "misaligned incentives" defeat the Defendant's argument that the Current Trustee and Debtor are in privity for purposes of res judicata. Id. at 738.
Second, this Court finds that the Previous Trustee and the Current Trustee are not in privity because they represent an entirely different body of creditors. It is
Because Defendant cannot establish all three elements, Defendant's res judicata defense fails.
Defendant by this Motion has raised res judicata and the statute of limitations defenses to prevent the Trustee from relying upon the 1993 Deed Transfer to support his claims. By this Opinion, this Court has rejected these defenses in the context of the Motion to Dismiss, and finds that the fraudulent transfer claim may proceed on the condition that the Trustee amends the Complaint to identify a qualifying unsecured creditor pursuant to Section 544(b) and the NJ UFTA.
This Court also finds that the Trustee's constructive trust claim should proceed. As noted above, a constructive trust is a remedy available to a trustee in bankruptcy, if available under state law. In re Allen, 2012 WL 693461, at *2. As well, under New Jersey law a constructive trust is a measure through which a court of equity can prevent unjust enrichment. Id. at *13. Here the Court is satisfied that the Trustee has set forth a plausible claim for such equitable remedy to at least allow discovery to proceed on this claim. Given the decision today to allow the litigation to proceed, the Defendant's request to compel the Plaintiff Trustee to discharge the Notice of Lis Pendens is also denied at this time.
For the foregoing reasons, Defendant's Motion to Dismiss the Complaint or alternatively for Summary Judgment and to compel Plaintiff to Discharge the Notice of Lis Pendens is DENIED without prejudice. The Trustee shall have 21 days from the date of the Opinion to amend the Complaint in conformance with this Opinion.
An Order shall be submitted in accordance with this Opinion.
D.N.J. LBR 7056-1.
The comment to the rule explains:
