Honorable James L. Garrity, Jr., United States Bankruptcy Judge.
Michael Roger Brown (the "Debtor") filed a voluntary petition for relief under chapter 7 of title 11 of the United States Code (the "Bankruptcy Code") in this Court on March 5, 2018 (the "Petition Date"). That day, John S. Periera, Esq. was appointed chapter 7 trustee for the Debtor's estate (the "Chapter 7 Trustee") and qualified for and accepted that appointment. As of the Petition Date, the Debtor was a defendant in a divorce action (the "Matrimonial Action") commenced by his then-wife, Jennifer Brown ("Jennifer") in the Supreme Court of the State of New York, County of New York, Matrimonial Term (the "State Court").
The Matrimonial Action was automatically stayed upon the commencement of this case. Among the open issues in that action at that time was the extent of Jennifer's share of the marital assets. Jennifer timely filed a contingent claim in this case in the sum of $6,375,000. It represents her claim to equitable distribution of the marital assets, including to her share of the so-called Unaccounted For Marital Assets, that Jennifer says the Debtor failed to account for in the Matrimonial Action (the "Equitable Distribution Claim").
The Matrimonial Action went forward in the State Court. After five days of a scheduled twenty-two day trial, Jennifer and the Debtor reached a global settlement that they embodied in a "So Ordered Term Sheet" (the "Term Sheet"). Among other things, the Term Sheet resolves all financial
The State Court approved the Term Sheet and incorporated it (but did not merge it) in the Judgment of Divorce (the "Divorce Judgment") that it entered on November 8, 2018. The Debtor filed an objection to the Equitable Distribution Claim. See Notice of Objection to Claim [ECF 86] (the "Claim Objection"). The matter before the Court is the Debtor's Motion to Approve Title to and Distribution of Marital Property Pursuant to Term Sheet in Matrimonial Action and Expunge Claim No. 6 of Jennifer Brown Pursuant to 11 U.S.C. § 502(a) and Fed. R. Bankr. P. 3007 (the "Motion") [ECF 85].
For the reasons set forth herein, the Court denies the Debtor's request for relief under Bankruptcy Rule 9019 as moot, and grants the Debtor's request to expunge the Equitable Distribution Claim.
The Court has jurisdiction over the Motion pursuant to §§ 1334(a) and 157(a) of title 28 of the United States Code, and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York, dated January 31, 2012 (Preska, C.J.). This is a core proceeding. 28 U.S.C. §§ 157(b)(2)(A) & (B).
Jennifer and the Debtor were married on March 24, 2001. During their marriage
See FRA Report at 1.
The Matrimonial Action was extremely contentious. As of the Petition Date, Jennifer was proceeding in the State Court to punish the Debtor for contempt based upon his refusal to pay BST's fees and his failure to pay State Court-ordered support for her and the couple's minor children. See Affirmation of Arthur L. Porter, dated February 26, 2018 ¶¶ 4-5.
Motion to Dismiss at 7-10. In the alternative, she sought relief from the automatic stay to allow her to continue the Matrimonial Action, including the collection of current and overdue support obligations, identification of the Unaccounted For Marital Assets and a determination by the State Court of the equitable distribution of marital assets. Id. at 11. Jennifer submitted an affidavit in support of the motion (the "February 23 Affidavit").
The Debtor and Chapter 7 Trustee each opposed the Motion to Dismiss and both urged the Court to grant stay relief to permit the Matrimonial Action to proceed to a final judgment in the State Court.
After hearing argument on the Motion to Dismiss, on April 4, 2018, the Court entered an order denying Jennifer's request to dismiss the case but granting stay relief to permit the Matrimonial Action to proceed in all respects (the "April 4 Order").
April 4 Order at 2-3.
The claims bar date in the chapter 7 case was August 6, 2018. Eight claims totaling the sum of $12,594,446.96 were timely filed. See Claims Register Summary. On July 27, 2018, Jennifer filed the Equitable Distribution Claim. See Claim No. 6. She filed it as a contingent claim based on the alleged missing marital property identified and/or discussed in the BST Report and FRA Report. On October 8, 2018, the Court entered an order granting the Debtor his discharge in bankruptcy under § 727 of the Bankruptcy Code. See Order of Discharge [ECF 56].
On February 7, 2019, the State Court issued an order directing, in part, that "a hearing and trial shall be conducted by a Special Referee in order to hear and report on all of the open financial issues in this matrimonial action." See Reference Order at 1.
Upon conclusion of the trial testimony on July 29, 2019, the Debtor and Jennifer, through their respective counsel, reached a settlement of the Matrimonial Action, including all open financial issues between the parties. Specifically, the Debtor and Jennifer agreed to resolve Jennifer's right to equitable distribution of the marital assets in accordance with the following terms:
Crane Decl. ¶¶ 10(a), 11. On the evening of July 29, 2019, Debtor's counsel forwarded Jennifer's counsel the proposed "So-Ordered Term Sheet" that included those terms. Id. ¶ 11. On July 30, 2019 (the "July 30 Hearing"), after five days of trial, the Special Referee reported that earlier that morning, she had been presented with the Term Sheet, executed by the parties. See H'rg Tr. 2:22-24.
At the July 30 Hearing, the Special Referee took allocutions from both Jennifer and the Debtor as to the Term Sheet. Jennifer and the Debtor were represented by their respective counsel. In her allocution, without limitation, Jennifer stated in substance, that:
July 30 H'rg Tr. 4:6-25; 5:1-9; 7:21-23; 8:10-23. At the conclusion of the allocutions the Special Referee accepted the Term Sheet as the basis for the parties' judgment of divorce. Id. at 14:8-14.
On September 25, 2019, the Debtor submitted a Proposed Judgment of Divorce in the Matrimonial Action. See Crane Decl. ¶ 12. In part, it provided that "in accordance with ... the Term Sheet, [the Debtor] shall pay to [Jennifer] a total amount of $2,500,000 as her share of equitable distribution[.]"
Affidavit in Support of Counter Judgment of Divorce ¶¶ 2(a)-(c).
See id. ¶¶ 2(a)-(d). On or about October 24, 2019, Jennifer submitted an affidavit to the State Court in connection with the resolution
Id. at ¶ 6.
On November 8, 2019, the State Court entered the Judgment of Divorce. The State Court apparently found no merit to Jennifer's objections to the proposed judgment, or the matters that she raised in her October 24 affidavit, as the court did not adopt Jennifer's distinction between her right to an equitable distribution of the marital assets and her contingent claim to those assets embodied in the Equitable Distribution Claim, and it did not modify, in any way, the Debtor's Proposed Judgment of Divorce. In part, the Judgment of Divorce orders that pursuant to the "Term Sheet, [the Debtor] shall pay to [Jennifer] or on behalf of [Jennifer] a total amount of $2,500,000 as her share of equitable distribution." Judgment of Divorce at 6. It also provides that the Term Sheet "shall be incorporated herein by reference, [and] shall survive and shall not be merged into [Judgment of Divorce.]" Id. at 9.
In his Motion, the Debtor seeks an order of this Court pursuant to Bankruptcy Rule 9019 approving that portion of the Term Sheet that calls for the Debtor to make the Equitable Distribution Payment to Jennifer, or for Jennifer's benefit, over a four year period, as her share of equitable distribution, and for Jennifer to (i) surrender any claim to marital property; (ii) submit to the Debtor, his attorneys, and the Chapter 7 Trustee, a comprehensive list of various personal property that either Jennifer or the Debtor acquired during the marriage and that Jennifer either retained possession of, donated, gifted, or sold after March 26, 2013; and (iii) deliver to the Chapter 7 Trustee all of such personal property that remained in her possession or was donated, gifted, or provided to a third party. See Motion ¶¶ 8-10. He also seeks to expunge the Equitable Distribution Claim pursuant to § 502(a) of the Bankruptcy Code and Bankruptcy Rule 3007(a) on the grounds that the Divorce Judgment directs that the Debtor pay Jennifer $2,500,000 as her share of equitable distribution, nothing in that judgment affords Jennifer any further right to equitable distribution, and the Debtor, not his estate, is obligated to pay Jennifer her share of equitable distribution. Id. ¶ 13-17. The Chapter 7 Trustee supports the Motion.
Jennifer opposes the Motion. Briefly, she says that the Term Sheet does not require this Court's review or approval because it does not call for the distribution of property of the Debtor's estate or determine title of assets of the estate. See Porter
The Court considers those matters below.
In relevant part, Bankruptcy Rule 9019 states that "[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement." Fed. R. Bankr. P. 9019(a). As noted previously, in granting Jennifer stay relief, the Court authorized her to proceed with all issues in the Matrimonial Action, including "leave to continue the Matrimonial Action in all respects, including without limitation ... the rendering of judgment determining the nature and extent of marital property, the nature and extent of Jennifer's interest in such property, and the equitable distribution of such property[.]" April 4 Order at 2. In doing so, however, the Court directed that:
Id. at 2-3. As discussed above, under the Term Sheet, the Debtor and Jennifer (i) agreed to liquidate and fix Jennifer's share of equitable distribution at in the sum of $2,500,000, (ii) the Debtor agreed to satisfy that claim over time by making scheduled payments to or for Jennifer's benefit out of his post-petition income, and (iii) Jennifer agreed to turn over her marital assets to the Chapter 7 Trustee. The Term Sheet does not purport to resolve, or even address, matters relating to the allocation of estate assets among Jennifer and the Debtor and does not call for the distribution of estate property among them. As such, the Court finds merit to Jennifer's objection and finds that the Term Sheet is not subject to Court approval. Accordingly, the Court denies this aspect of the Motion as moot.
Under § 502(a) of the Bankruptcy Code, "a claim ... proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest... objects." 11 U.S.C. § 502(a).
Section 502(b) sets forth the grounds for disallowing a properly filed proof of claim. See 11 U.S.C. § 502(b); see also Travelers Cas. and Sur. Co. of America v. Pacific Gas and Elec. Co., 549 U.S. 443, 449, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) (holding that, under the Bankruptcy Code, the court "`shall allow' [a] claim `except to the extent that' the claim implicates any of the nine exceptions enumerated in § 502(b)."); HSBC Bank USA, N.A. v. Calpine Corp., No. 07 Civ. 3088 (GBD), 2010 WL 3835200 at *5 (S.D.N.Y. Sept. 15, 2010) ("All claims are allowed unless specifically proscribed by one of the nine exceptions listed in § 502(b).") (citing Travelers, 549 U.S. at 449, 127 S.Ct. 1199). As relevant, § 502(b) states that if a party in interest objects to a claim, the Court:
11 U.S.C. § 502(b)(1). The Debtor contends that the Judgment of Divorce was a final settling of accounts between the Debtor and Jennifer, including resolution of all matters relating to their respective rights to equitable distribution of the marital assets, and that it cannot be amended or revisited by this or any other court. Reply ¶ 8. He asserts that through that judgment, Jennifer's share of equitable distribution was fixed at $2,500,000, to be paid by the Debtor out of his post-petition assets, with Jennifer surrendering all marital assets in her possession or control to the Chapter 7 Trustee. See Judgment of Divorce at 6-7. In his joinder to the Motion, the Chapter 7 Trustee contends that the Term-Sheet, together with the Judgment of Divorce,
In New York, the "[p]arties to an action for dissolution of a marriage are entitled to anticipate the final resolution of all issues relating to the marriage relationship without fragmentation and are obligated to litigate all issues affecting the marriage in that action." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Benjamin, 1 A.D.3d 39, 40, 766 N.Y.S.2d 1 (1st Dept. 2003) (citing Borono w v. Boronow, 71 N.Y.2d 284, 290-91, 525 N.Y.S.2d 179, 519 N.E.2d 1375 (1988)). For that reason, "important issues ancillary to the dissolution of the marriage, such as title to marital property, must be raised in the divorce proceeding, and if they could have been, but were not, raised they may not thereafter be raised in a separate action." Id. (citation omitted). In the Matrimonial Action, Jennifer sought a judgment of divorce pursuant to § 170(7) of the of the New York Domestic Relations Law (the "DRL"). That section states that an action for divorce may be maintained by a husband or wife to procure a judgment divorcing the parties and dissolving the marriage on the grounds that:
DRL § 170(7). Under the plain language of the statute, the court cannot grant a judgment of divorce under § 170(7) unless it determines that the relationship between husband and wife has broken down irretrievably for a period of at least six months, and the economic issue of, the equitable distribution of marital property, among others, is determined by the court and incorporated into the judgment of divorce. Id. See also Trbovich v. Trbovich, 122 A.D.3d 1381, 1382, 997 N.Y.S.2d 855 (N.Y. App. Div. 2014) ("The requirements for a divorce under [§ 170(7)] are (1) a statement under oath by one party that the relationship has broken down irretrievably for a period of at least six months; and (2) a resolution of `the economic issues of equitable distribution of marital property, the payment or waiver of spousal support, the payment of child support, the payment of counsel and experts' fees and expenses as well as the custody and visitation with the infant children of the marriage[.]'" (quoting § 170(7)).
Broadly speaking, "res judicata means that a matter once judicially decided is finally decided." Murphy v. Gallagher, 761 F.2d 878, 879 (2d Cir. 1985). The doctrine of res judicata dictates 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." Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981).
Nevada v. United States, 463 U.S. 110, 129-30, 103 S.Ct. 2906, 2918, 77 L.Ed.2d 509 (1983) (internal quotation marks omitted). In New York, res judicata is akin to the doctrine of "claim preclusion." Murphy v. Gallagher, 761 F.2d at 879. Under that doctrine
Id. In that way, res judicata is an absolute bar "not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose." SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1463 (2d Cir. 1996) (internal citation and quotation marks omitted).
The nature and extent of Jennifer's share in the marital assets was an issue before the State Court in the Matrimonial Action. In the Term Sheet, Jennifer accepted the Equitable Distribution Payment as her share of equitable distribution. The Term Sheet is incorporated into the Judgement of Divorce, and the State Court had jurisdiction to issue the judgment. The Judgment of Divorce is a final judgment on the merits that resolves all matters that were or could have been raised in the Matrimonial Action, including all those related to equitable distribution of the marital assets. Jennifer relied on the BST Report and FRA Report in pursuing her equitable distribution claim in the Matrimonial Action. All matters relating to the equitable distribution of the marital property, including Jennifer's right to a share of the Unaccounted For Marital Property, necessarily were resolved in the Judgement of Divorce. See Boronow v. Boronow, 71 N.Y.2d 284, 290, 525 N.Y.S.2d 179, 183, 519 N.E.2d 1375 (1983) ("In a matrimonial action, where the essential objective is to dissolve the marriage relationship, questions pertaining to important ancillary issues like title to marital property are certainly intertwined and constitute issues which generally can be fairly and efficiency resolved with the core issue. The courts and the parties should ordinarily be able to plan for the resolution of all issues relating to the marriage relationship in the single action."). See also Harrison v. Harrison, 134 A.D.2d 567, 568, 521 N.Y.S.2d 466, 468
First, Jennifer contends that the Court should not expunge the Equitable Distribution Claim because she is entitled to satisfy it out of the Debtor's pre and post-petition assets, and that in agreeing in the Term Sheet to accept the Equitable Distribution Payment as her "share of equitable distribution," she did not liquidate the Equitable Distribution Claim or compromise her alleged right to satisfy that claim out of the property of the Debtor that comprises the bankruptcy estate. Sur-Reply at 1-2; Porter Decl. ¶ 2. She maintains that the Equitable Distribution Claim cannot be expunged pursuant to § 502(b)(1), because it remains subject to resolution in this chapter 7 case and that once liquidated, she will have a claim that is enforceable against estate property. Jennifer MOL at 16; Sur-Reply at 1-2. The Court finds no merit to that argument.
"Under New York law, one spouse's rights in marital property owned by the other are inchoate and do not vest until entry of a judgment of divorce." DiGeronimo v. Weissberg (In re DiGeronimo), 354 B.R. 625, 637 (Bankr. E.D.N.Y. 2006); see also In re Anjum, 288 B.R. 72, 76 (Bankr. S.D.N.Y. 2003); In re Cole, 202 B.R. 356, 360 (Bankr. S.D.N.Y. 1996). As a consequence, "[i]f the state court enters a divorce decree, makes an equitable distribution award and transfers title to the nondebtor spouse prior to bankruptcy, the property will not become property of the debtor spouse's estate." Schachter v. Lefrak (In re Lefrak), 223 B.R. 431, 439
Jennifer and the Debtor agreed that the Equitable Distribution Payment would be made from the Debtor's post-petition earnings. However, Jennifer had no right to payment from those assets because the Debtor's post-petition earnings do not constitute property of the Debtor's estate available for distribution to his creditors. Section 541(a)(6) of the Bankruptcy Code excludes from the bankruptcy estate "earnings from services performed by an individual debtor after the commencement of the case." 11 U.S.C. § 541(a)(6). "The decisive factor in determining whether post-petition income of the debtor will be deemed property of the estate is whether that income accrues from post-petition services of the debtor." In re Sloan, 32 B.R. 607, 611 (Bankr. E.D.N.Y. 1983). Neither party asserts that the Debtor's post-petition income accrued on account of prepetition services or contracts or would otherwise be part of the bankruptcy estate. Moreover, the Debtor's post-petition earnings are not part of the Debtor and Jennifer's marital assets. The theory underlying New York's equitable distribution law is that "marriage represents an economic partnership to which both parties contribute as spouse, parent, wage earner or homemaker." U.S. v. Butler, 543 F. App'x. 95, 96 (2d Cir. 2013) (quoting Commodity Futures Trading Comm'n v. Walsh, 17 N.Y.3d 162, 927 N.Y.S.2d 821, 826, 951 N.E.2d 369 (2011). Section 236 of the Domestic Relations Law provides that "all property acquired either by both spouses during the marriage and before the execution of a separation agreement or the commencement of a matrimonial action, regardless of the form in which title is held" is marital property. DRL § 236(B)(1)(c). The Matrimonial Action was pending when the Debtor commenced this bankruptcy case. Prior to the dissolution of the marriage the court "shall determine the respective rights of the parties in their separate or marital property, and shall provide for the disposition thereof in the
Next, Jennifer complains that Debtor's counsel "grossly overstates and mischaracterizes the settlement actually reached by the parties, as memorialized in the Term Sheet" when counsel asserts that "Jennifer agreed to settle the issue of equitable distribution in the Matrimonial Action through her receipt of the Equitable Distribution Payment, which will be made in installments over the next 3 ½ years." Porter Decl. ¶ 7. Jennifer denies that the Term Sheet provides for that treatment of her Equitable Distribution Claim and denies that she agreed to such treatment of the claim. Id. She asserts that a careful review of the Term Sheet will show that she did not discharge or release the Debtor and did not explicitly agree to withdraw her proof of claim or waive her rights to a share of undisclosed assets. Sur-Reply at 1; Porter Decl. ¶ 6; Jennifer MOL at 14. She maintains that her proof of claim survived the settlement embodied in the Term Sheet. Sur-Reply at 1. In particular, she says that "the Term Sheet does not contain any explicit release language, any acknowledgment that adequate financial disclosures were made, or any waiver of the right to reopen the agreement in the event the Debtor is shown to have concealed assets, as [Jennifer] believes he did." Id.; Jennifer's MOL at 14; Porter Decl. ¶ 6 (in negotiating the Term Sheet, Jennifer did not agree "either explicitly or implicitly that [she] would waive, release, or withdraw her contingent claim in this Court for her equitable share of marital assets concealed by the debtor and recovered by the Bankruptcy Trustee[.]"). Indeed, Jennifer maintains that a "desirable aspect[] of the settlement as memorialized in the Term Sheet is that it does not provide for distribution to Jennifer of bankruptcy estate assets, which would be subject to approval (or disapproval) by this Court." Porter Decl. ¶ 8; Jennifer MOL at 1, 13-14. According to Jennifer, the only issue that this Court must decide in considering whether to expunge the Equitable Distribution Claim is whether the Term Sheet contains a sufficiently explicit waiver of her right to a share of the Unaccounted For Marital Assets. Jennifer MOL at 14; Sur-Reply at 3-4. She maintains that given the complete absence of any explicit language waiving the claim in the Term Sheet, there was no such waiver.
This is the same argument that Jennifer made to the State Court when she unsuccessfully objected to the Debtor's Proposed Judgment of Divorce. As discussed above, in her Affidavit in Support of Counter Judgment of Divorce, Jennifer argued that she "never ... agreed to ... abandon and/or withdraw [the Equitable Distribution Claim]," that she "did not and never intended to resolve ... [her] rights to assert and enforce [her] equitable distribution rights in bankruptcy court[,]" and the "Term Sheet does not contain a release and/or discharge of [her] equitable distribution rights against [the Debtor]." See Affidavit in Support of Counter Judgment of Divorce ¶¶ 2(a)-(c). The State Court rejected that argument and adopted the form of the Judgement of Divorce submitted by the Debtor. Jennifer did not appeal or otherwise challenge the entry of the Judgment of Divorce. To the contrary, Jennifer has embraced the Judgement as
Third, Jennifer contends that the Term Sheet is not enforceable because the Debtor, not the Chapter 7 Trustee, is party to the agreement. The Court finds no merit to that argument. Although the Chapter 7 Trustee is not a party to the Term Sheet, he supports the Debtor and, as the estate's representative, wholly endorses the Motion. Jennifer also asserts that the agreement is not enforceable because the Term Sheet implicitly acknowledges that it does not represent the entire agreement between the parties. Jennifer's MOL at 17. As support, Jennifer cites to the following provisions in the Term Sheet:
Term Sheet at 16, 18. Jennifer contends that the agreement expressly contemplates and provides for the possibility of further agreements between Jennifer and the Debtor resolving issues not expressly resolved in the Term Sheet. Jennifer MOL at 17. Jennifer's contention is belied by the plain language of the agreement. The Term Sheet is clear that it encompasses the material terms of the Debtor and Jennifer's agreement because it states that any additional Stipulation of Settlement "shall not alter the material agreed-upon terms herein." The terms of the agreement addressing the resolution of Jennifer's share of equitable distribution plainly are "material agreed-upon terms" in the Term Sheet. Moreover, as set forth above, the Term Sheet states that "[a]lthough the parties intend to enter into a more detailed agreement, in the event that they are unable to do so, this Term Sheet shall remain in full force and effect and shall constitute an agreement pursuant to DRL § 236(B)(3)."
Fourth, Jennifer contends that the Debtor's efforts to expunge her Equitable Distribution Claim are inconsistent with his contention that he has not concealed assets. She reasons that if there are no concealed assets to discover, the Chapter 7 Trustee will find nothing, and Jennifer's contingent claim would be worthless. Jennifer MOL at 18. She asserts that on the other hand, if there are concealed assets that the Chapter 7 Trustee discovers, it will be clear that her settlement under the Term Sheet was made in reliance of false representations by the Debtor and her Equitable Distribution Claim has value. Id. She concludes that there is no reason to expunge her claim before the Chapter 7 Trustee completes his investigation and it would be inequitable to deprive Jennifer of her right to assert her "claim to her rightful share of assets, if any, that have been concealed by the Debtor." Id. at 19. In support, Jennifer relies on the BST Report, which she asserts, establishes that the Debtor "has not accounted for his wealth and assets, or that another party is holding assets for him[.]" Id. at 18. The Court finds no merit to this argument. Jennifer executed the Term Sheet upon the advice of her counsel in the early stages of the trial before the Special Referee to resolve all of the open economic and financial issues in the Matrimonial Action, including, specifically, the whereabouts of the Unaccounted For Marital Assets. Moreover, there is no merit to Jennifer's contention that she relied on false information in agreeing to the Term Sheet. She was fully aware of the contents of the BST Report and retained her own expert that produced the FRA Report. In agreeing to the Term Sheet, she advised the Special Referee that (i) she had sufficient information about the Debtor's finances to be able to enter into the Term
Based on the foregoing, the Court denies the Debtor's request for relief under Bankruptcy Rule 9019 and grants the Debtor's motion to expunge the Equitable Distribution Claim.
SETTLE ORDER.
Term Sheet ¶¶ 2-5
Crane Decl. ¶10(b).
July 30 H'rg Tr. 14:8-14.
DRL § 236(B)(3).
July 30 H'rg Tr. 3:12-20.
In Jarry v. Nat'l Collegiate Student Loan Tr., 2019 WL 3326165 (E.D.N.Y. April 23, 2019), the plaintiffs sought damages from the defendants based upon their alleged violations of the Fair Debt Collection Act and New York General Business Law. Prior to the commencement of that action (the "EDNY Action"), certain of the defendants (the "Moving Defendants") sued the plaintiffs in state court (the "New York Action") for damages based upon their alleged defaults under their student loans. Id. at *1. The parties resolved that action pursuant to a Settlement Stipulation which resulted in the discontinuation, but not dismissal, of the action. The Moving Defendants sought summary judgment dismissing the EDNY Action pursuant to the doctrines of res judicata and collateral estoppel on the grounds that the matters at issue in the EDNY Action had been resolved on the merits pursuant to the Settlement Stipulation in the New York Action. Id. at *2. In her Report and Recommendation, Magistrate Judge Lindsay recommended denying summary judgement. In part, she reasoned that the Settlement Stipulation did not constitute a final judgement on the merits of the matters at issue in the New York Action for purposes of res judicata, because the stipulation did not result in the dismissal of that action, with prejudice. Id. at *4. ("Under New York law the doctrines of collateral estoppel and res judicata are inapplicable to cases disposed of by a stipulation of settlement [b]ecause no order or final judgment was ever entered dismissing the prior action. ... There is nothing in the record indicating that an order or judgment has been entered which can serve as the basis for the application of the doctrines of collateral estoppel and res judicata. ... Thus, at this juncture, there is no final judgment in place in the New York Action. Accordingly, the undersigned respectfully recommends that Defendants' motion for summary judgment be denied.") (internal quotation marks and citations omitted).
In Dunleavy v. First Am. Tit. Ins. Co. of N.Y., 117 A.D.2d 952, 499 N.Y.S.2d 264 (3d Cir. 1986), the plaintiff ("Agent"), in his capacity as agent for defendant ("Title Insurer"), obtained title insurance for a third party (the "Insured") covering certain real property. A dispute involving that property subsequently arose, and the Insured was named as a defendant in an action based on trespass and encroachment. Id. at 265. The Agent and Title Insurer denied coverage and the Insured commenced a third-party action against them. The Title Insurer refused to defend the Agent in the third-party action, and the Agent cross-claimed against the defendant for indemnification, in the event the Insured recovered a judgment against him. The cross-claim did not include a claim for counsel fees. Id. The parties to the original action entered into an in-court stipulation of settlement. As part of that stipulation, the Agent agreed to deliver to Title Insurer a general release limited to the cause of action set forth in the complaint and third-party complaint. Id. The Agent also agreed to discontinue his cross-claim against the Title Insurer upon the merits and with prejudice. Id. After the Agent was billed $15,400 for counsel fees, the Agent sued to collect those fees from the Title Company, based upon the Agent's contract with the Title Company. Id. The Title Company moved to dismiss the complaint based on, among other things, the defenses of documentary evidence, collateral estoppel and res judicata. Special Term granted the motion, holding that the in-court stipulation in the original action precluded plaintiff from now seeking counsel fees. Id. The Appellate Court reversed. It found that the trial court failed to disclose in its decision which of defendant's theories it relied upon in dismissing the complaint. However, it rejected the defenses of res judicata and collateral estoppel because those two theories depend upon a final determination of issues by the forum in which the proceeding took place, and no such determination was entered by the trial court. Id. ("Special Term did not disclose in its decision which of defendant's theories it relied upon in dismissing the complaint. At the outset, we reject the defenses of res judicata and collateral estoppel. Those two theories depend upon a final determination of issues by the forum in which the proceeding took place. In this instance, it can only be assumed that the terms of the settlement became sufficiently attractive to all of the parties in the original action that they decided to forego issue determination by the court.").
In Ott v. Barash, 109 A.D.2d 254, 491 N.Y.S.2d 661, 662 (2d Dep't 1985), the question before the court was whether the plaintiff, who was allegedly injured as a result of negligence of a New York state (the "State") employee could maintain a cause of action for negligence against that employee after having settled a prior action against the State to recover damages for the same injuries. The plaintiff was allegedly injured after she was thrown from a horse while riding on State property. She sued the State for damages in the Court of Claims and ultimately settled the claim. By its terms, the release in the settlement agreement (the "Settlement Agreement") made no provision for the release of the State's employees. Id. at 663. Thereafter, the plaintiffs sued the State employee in New York State Supreme Court for damages based upon causes of action sounding in negligence and intentional tort. The defendant moved to dismiss the action on several grounds, including that the State was the real party in interest and that the action was barred by principles of res judicata based upon the release of the State in the Settlement Agreement. Id. The trial court granted the motion to dismiss the causes of action sounding in tort but denied it as to the negligence claims. In affirming the trial court's denial of the motion to dismiss the negligence claim, the Appellate Division reasoned, in part, that the doctrine of res judicata was not applicable because the Settlement Agreement with the release did not constitute a final judgment of the claims against the State in the Court of Claims on the merits. Id. at 668. ("It is evident that a general prerequisite to invocation of either res judicata or collateral estoppel is the existence of a final judgment, i.e., a final judicial determination which necessarily decided the very cause of action or issue that a party now seeks to litigate in a subsequent action or proceeding ... In this case it is clear that the foregoing prerequisite was not met. The proceedings in the Court of Claims were not terminated by entry of a final judgment or other judicial determination on the merits. Rather, the claim was terminated upon the execution of a settlement and release. The settlement, prior to the entry of judgment, served to finalize the action without regard to the validity of the original claim, and the action was accordingly considered, in contemplation of law, as if it had never begun. ... Therefore, there is no basis upon which to apply either res judicata or collateral estoppel.") (internal quotations and citation omitted).
Finally, in Peterson v. Forkey, 50 A.D.2d 774, 376 N.Y.S.2d 560 (1st Dep't 1975), the defendant appealed a state court order granting summary judgment on plaintiff's claim for negligence in connection with an automobile accident based on a prior jury verdict decisive on the issue of negligence of the defendant. Id. at 561. In that case, Peterson was driving an automobile in which Barcus was a passenger. The Peterson car collided with a truck driven by Forkey. Barcus sued Peterson and Forkey, and Peterson sued Forkey. Id. The Barcus case was tried to a jury on the issue of liability only. The jury returned a special verdict in favor of Barcus and specifically found Peterson to be free of negligence and found Forkey solely negligent. Id. After the verdict on liability, Barcus settled his claim and the action was never reduced to judgment by any party. Id. Based on the special verdict finding him free of negligence, Peterson moved for summary judgment in her action against Forkey, and the trial court granted the motion. Id. On appeal, the Appellate Division reversed. In doing so, it noted, in part, that "[b]oth the doctrines of res judicata and collateral estoppel have as their prerequisites the entry of a judgment[,]" and that "[n]either the verdict of a jury nor the findings of a court in a prior action upon the precise point involved in a subsequent action between the same parties constitute a bar, unless followed by a judgment based thereon, or into which the verdict or findings entered." Id. (internal quotations and citations omitted). Since no judgment had been entered in the prior litigation, the special verdict in favor of Peterson was not res judicata on the issue of her negligence. Id.
