606 B.R. 169
Bankr. E.D.N.Y.2019Background
- Debtor Jadeco Construction performed municipal paving work under a contract with Town of Smithtown that was valid June 15, 2008–June 17, 2009 with authorized extensions; the Town later failed to formally authorize extensions required by Town Law and the contract expired June 17, 2011.
- Despite the contract expiration, Jadeco continued to perform work for the Town between June–October 2011 and provided labor and materials for which it received no consideration.
- Jadeco sued the Town in New York Supreme Court seeking contract damages; the state court granted summary judgment to the Town, holding the contract expired and could not be enforced (Contract Decision).
- Jadeco later filed bankruptcy; the Chapter 7 Trustee brought this adversary proceeding under 11 U.S.C. § 544 and New York Debtor & Creditor Law (DCL) to recover, as constructive fraudulent conveyances, the value of labor and materials transferred to the Town pre-petition.
- The Town moved for summary judgment arguing (inter alia) that: the state court ruling bars recovery (Rooker–Feldman, res judicata, collateral estoppel); state procurement laws prevent payment and thus preempt § 544 recovery; and certain DCL elements (conveyance, intent, insolvency) are not met.
- The bankruptcy court denied the Town’s motion in its entirety, holding the Trustee may pursue avoidance claims under § 544/DCL to recover the value of the materials and labor; the state court contract ruling did not preclude those claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal bankruptcy avoidance (§ 544) is preempted by state/local procurement laws | Trustee: § 544 authorizes avoidance to benefit creditors; recovery is for value of transfers, not enforcement of the expired contract | Town: enforcing § 544 would force violation of GML §103 and Town Law §64 and undermine public procurement policy | Held: No preemption; Supremacy Clause allows trustee to avoid transfers to protect creditors; state interests do not outweigh bankruptcy avoidance here |
| Whether Rooker–Feldman bars the Trustee’s action because state court decided contract enforceability | Trustee: Seeks independent federal avoidance claims, not review/rejection of state judgment | Town: Trustee is state-court loser seeking to undo state-court ruling via federal court | Held: Rooker–Feldman inapplicable; Trustee raises federal claims authorized to invalidate state judgments/transfers and does not ask court to overturn Contract Decision |
| Whether res judicata / collateral estoppel preclude Trustee’s fraudulent conveyance claims | Trustee: Avoidance claims belong to estate/creditors and are distinct from state contract claim; Trustee not bound by debtor’s prior state litigation | Town: State judgment determined related issues; Trustee could/should have litigated | Held: Preclusion doctrines do not bar proceeding—state court decided contract enforceability, not whether transfers were fraudulent; trustee’s standing and different causes of action defeat preclusion |
| Whether elements of DCL claims (conveyance, intent, insolvency) are established as a matter of law | Trustee: Transfers were materials and labor (conveyances), presumption of insolvency applies where no fair consideration; intent and insolvency are for trial | Town: Labor is personal services (not conveyance); Trustee cannot prove fraudulent intent or insolvency at summary judgment | Held: Summary judgment denied on these merits issues—materials and third‑party labor count as conveyances; factual issues including intent under §275 and insolvency under §273 remain for trial |
Key Cases Cited
- Arizona v. United States, 567 U.S. 387 (2012) (preemption framework and limits)
- Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280 (2005) (narrow scope of Rooker–Feldman)
- Midlantic Nat. Bank v. New Jersey Dept. of Environmental Protection, 474 U.S. 494 (1986) (state public‑safety statutes may survive bankruptcy preemption in narrow circumstances)
- Univ. Church v. Geltzer, 463 F.3d 218 (2d Cir. 2006) (trustee ‘‘steps into the shoes’’ of creditors under § 544)
- In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d 98 (2d Cir.) (trustee’s fraudulent conveyance actions arise under federal law while borrowing state law standards)
- In re Murphy, 331 B.R. 107 (Bankr. S.D.N.Y.) (state interests do not automatically defeat trustee’s avoidance powers; avoidability may prevail to protect creditors)