MEMORANDUM DECISION AND ORDER DENYING MOTION TO DISMISS
The Debtor-Plaintiff here, DeFlora Lake Development Associates, Incorporated (“Debtor”), filed the instant complaint initiating this adversary proceeding against Defendant Hyde Park, LP’s (“Hyde Park”) and Lewis D. Wrobel, as Escrow Agent only, seeking a determination that certain escrow funds are property of the bankruptcy estate and turnover of property of the bankruptcy estate pursuant to 11 U.S.C. §§ 541 and 543, a declarar tory judgment determining whether Hyde Park has an allowable claim for attorneys’ fees, and the nature, extent.and validity of Hyde Park’s claims against the bankruptcy estate. Am. Compl. ¶¶ 1, 40, 41, ECF No. 8.
Background
Debtor filed a petition for reorganization under chapter 11 of the Bankruptcy Code on March 2, 2017. See Petition, In re DeFlora Lake Dev. Assocs., No. 17-35318 (Bankr. S.D.N.Y. Mar. 2,2017). Debtor is a real estate holding company. Local Bankr. Rule 1007-2 Aff. ¶ 3, In re DeFlora Lake Dev. Assocs., No. 17-35318. There are two shareholders of the Debtor. Id. ¶ 9. At the time of the filing of the petition, the Debt- or had no employees and generated no regular income. Id. ¶¶ 14-15.
The Debtor filed for chapter 11 in order to obtain the benefits of the automatic stay and to recover property for the benefit of the estate that is currently being held in a special escrow account held by Mr. Wrobel as deed escrow agent, Id. ¶4; Opp’n to Mot. Dismiss 3-4, ECF No. 14-5. The Debtor’s primary asset is a parcel of real estate located in Dutchess, and the monies in the special escrow fund, which are subject to the competing claims of Hyde Park and the subject of this adversary proceeding, See Local Bankr, Rule 1007-2 Aff,
Debtor’s predecessor, Ceasar DeFlora, and Hyde Park entered into a purchase agreement for the sale of land in 1980 (“the Land Contract”). Pursuant to the Land Contract, Hyde Park was to purchase 480 acres of land from the Debtor’s predecessor, subdivided into several lots of land. Am. Compl. ¶ 9. At this time a sale price was established, and Debtor’s predecessor agreed to extend the maturity date of the Land Contract upon Hyde Park’s execution of a $250,000 note. Opp’n to Mot. Dismiss 2.
The Land Contract was amended several times. In a fifth amendment (“Fifth Amendment”) to the Land Contract, executed in December of 1995, the parties agreed that Hyde Park owed Debtor $8,404,989.43 under the Land Contract and that Hyde Park would satisfy this debt solely from the proceeds of the management of the property and from the sale of parcels of the property. Id. ¶ 10; Mot. Dismiss 3. In the Fifth Amendment, the parties agreed that the obligation would be nonrecourse. Am. Compl. ¶ 13; Mot. Dismiss 3. The Fifth Amendment also provided that in satisfaction of Hyde Park’s debt, the first $1,800,000 in sales’ proceeds from the property would go to the Debtor. Am. Compl. ¶ 14; Mot. Dismiss 3. After the amount of proceeds reached $1,800,000, any additional revenue was to be equally divided between Hyde Park and the Debt- or until the entire debt was repaid. Am. Compl. ¶ 14; Mot. Dismiss 3.
In 1999, Debtor informed Hyde Park that Debtor intended to sell three parcels of land for $900,000. Am. Compl. ¶ 16; Mot. Dismiss 3-4 (quoting DeFlora Lake Dev. Assocs. v. Hyde Park, No. 08-cv-8155, slip op. at 3-4 (S.D.N.Y. Mar. 30, 2011). Hyde Park objected on the grounds the sale price was too low. Am. Compl. ¶ 16; Mot. Dismiss 3-4 (quoting DeFlora Lake Dev. Assocs. v. Hyde Park, No. 08-cv-8155, slip op. at 3-4 (S.D.N.Y. Mar. 30, 2011). Hyde Park allowed the sale to go through on the condition that the Debtor deposit $207,116 in escrow with Mr. Wro-bel as Escrow Agent. See Opp’n to Mot. Dismiss Ex. 2, ECF No. 14-2. Mr. Wrobel deposited the funds into two separate accounts, one for Hyde Park and one for the Debtor, each with separate tax I.D. numbers. Am. Compl. ¶23; Mot. Dismiss 4. The funds have remained in escrow with Mr. Wrobel since that time. See Am. Compl. ¶¶ 21-24. There was no written escrow agreement, only a collection of four letters from Hyde Park, the Debtor, and Mr. Wrobel confirming receipt of the funds and advising that he would be depositing the funds into two separate escrow accounts. See Am. Compl. ¶ 24; Opp’n to Mot. Dismiss Ex. 2.
In 2008, Debtor filed suit in the District Court for the Southern District of New York (“District Court”), claiming Hyde Park had breached the Fifth Amendment to the Land Contract and seeking a declaration that Debtor was entitled to the special escrow funds. Am. Compl. ¶ 25; DeFlora Lake Dev. Assocs., Inc., v. Hyde Park, No. 08-cv-8155 (S.D.N.Y. filed Sept. 22, 2008) (“DeFlora I”). The District Court found that both the Debtor and Hyde Park’s breach of contract claims to the special escrow funds were time barred by the New York statute of limitations. Id. ¶ 26; Mot. Dismiss Ex. 2 at 7-8. The District Court ruled that the alleged breach of contract had occurred in 1999 when Debt- or deposited the $207,116 into escrow with Mr. Wrobel, which occurred over six years before either Debtor or Hyde Park brought suit in the District Court. Id.
In 2013, Debtor brought a second suit in the District Court seeking essentially the same relief. DeFlora Lake Dev. Assocs., Inc., v. Hyde Park, 13-cv-04811 (S.D.N.Y.
While the District Court dismissed the breach of contract claim, the District Court also specifically found that with respect to the special escrow funds, “the parties didn’t intend that money to sit there forever until the end of time. They intended it to be disposed of.” Id. at 23:10-12. The District Court also indicated that the parties retained the power to negotiate and agree on the disposition of the escrow funds. Otherwise, the funds were at risk of escheating to the state. See Mot. Dismiss Ex. 4 at 27. Hyde Park sought, and was awarded, attorneys’ fees as the prevailing party. Am. Compl. ¶¶ 29-30.
After the District Court dismissed the DeFlora II action, Hyde Park sought an order enforcing the award of attorneys’ fees, and turnover of the Debtor’s interest in the special escrow funds to satisfy the fee award pursuant to New York Civil Practice Law and. Rules § 5225 and § 5227. Mot. Dismiss Ex. 10 at 3,11, ECF No. 12-11. The District Court granted Hyde Park’s motion as to the attorneys’ fees, and denied the motion for a turnover order. Id. at 5, 11-12. The District Court held that the attorneys’ fees were to be paid by the Debtor “now” and not to be credited against Hyde Park’s debt to the Debtor under the Land Contract as a non-recourse debt. Id. at 5..The District Court denied Hyde Park’s motion for turnover on the grounds that Debtor did not have a “claim” to the escrow funds. See id. at 11-12. The Debtor appealed the District Court’s determination that the non-recourse nature of the Land Contract prohibited a setoff of attorneys’ fees against the special escrow fund. Hyde Park appealed the denial of that part of the motion seeking turnover of the special escrow funds. In separate summary orders, the Second Circuit affirmed the District Court’s rulings on both issues. See Deflora Lake Dev. Assocs. v. Hyde Park, Nos. 15-2653-cv, 16-3436-cv,
Motion to Dismiss
On June 15, 2017, Hyde Park filed a motion to dismiss the adversary case. Hyde Park asserts that under Federal
In response, Debtor argues that as the Debtor-in-possession in this chapter 11 bankruptcy case, Debtor has an obligation to marshal assets of the estate for the benefit of creditors. Opp’n to Mot: Dismiss 5-7. Debtor also argues that it must first be determined what property is property of the estate under Bankruptcy Code § 541. Id. at 8-10. Debtor asserts that a determination by the District Court that both the Debtor and Hyde Park’s breach of contract claims are time barred does not mean the special escrow funds are not property of the estate. Id. at 9. Debtor further alleges that a determination on property of the bankruptcy estate is a determination of a property right under the Bankruptcy Code, and not a breach of contract claim that would be time-barred under New York law. Id. at 12, 14, 15.
Additionally, per the Second Circuit’s determination on appeal in DeFlora II, Debtor states that the parties’ respective interests in the special escrow funds remain unresolved and are not subject to res judicata. Id. at 9-10, 17. Debtor asserts that only the breach of contract claim has been decided, and that it is alleging a separate cause of action here before the Bankruptcy Court. Id. at 15. As part of the turnover proceeding, Debtor must show that Mr. Wrobel is a custodian of property of the bankruptcy estate. Debtor asserts that Mr. Wrobel is a custodian of property of the estate pursuant to the definition in the Bankruptcy Code at § 101(11). Id. at 19. Regarding judicial estoppel, Debtor argues that it has not changed its position in the context of this bankruptcy case. Id. at 17-18. Debtor is alleging that the special escrow funds are property of the bankruptcy estate—that legal position is not judicially estopped. Id.
As for jurisdiction, Debtor maintains that a determination of property of the estate is a core proceeding, and that this involves a matter concerning administration of the estate, a determination of a claim against the estate, and a proceeding on a turnover action, all of which are core proceeding under 28 U.S.C. § 157(b)(2). See id. at 18. Debtor maintains that Hyde Park’s jurisdictional argument is predicated on the assumption that the special escrow funds are not property of the estate. Id. A proceeding to determine property of the estate is a core proceeding and squarely within this Court’s jurisdiction. Id. at 18-19.
Of relevance when deciding a motion to dismiss the complaint, Debtor points out that Hyde Park’s motion does not address the counts in Debtor’s complaint regarding turnover of the deeds and other ancillary documents from Mr. Wrobel. Id. at 4 n.4. Hyde Park’s motion to dismiss only addresses the special escrow funds and the status of Mr. Wrobel as a custodian under the Bankruptcy Code.
In reply, Hyde Park asserts that the escrow funds are not property of the estate. Reply 1, 4, ECF No. 15. Hyde Park argues that what is being determined here is whether Debtor has a claim to payment from the escrow funds and that this is what the District Court already determined. Id. at 1-3. Hyde Park also argues that the cause of action does not depend on whether one sues under the Bankruptcy
Discussion
Jurisdiction
Before this Court can proceed with a determination on the motion to dismiss, the Court must determine the issue of jurisdiction. This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. Under 28 U.S.C. § 157(b)(2)(a), matters concerning administration of the estate, allowance or disal-lowance of claims against the estate, and orders to turn over property of the estate are core proceedings. Debtor’s complaint alleges sufficient jurisdictional facts to place these proceedings within this Court’s core jurisdiction.
Additionally, this matter involves a determination of property of the estate. It is widely held that “mattei-s requiring a declaration of whether certain property comes within § 541’s definition of ‘property of the estate’ are core proceedings.” Koken v. Reliance Grp. Holdings, Inc. (In re Reliance Grp. Holdings, Inc.),
Hyde Park’s arguments that this Court does not have jurisdiction to declare Hyde Park’s rights in the special escrow funds or to enter a turnover order depend on the assumption that the special escrow funds are not property of the estate. Hyde Park puts the cart before the horse—a turnover proceeding requires that the property sought to be turned over is, in fact, property of the estate. In re Broten,
A determination on whether certain property is property of the bankruptcy estate is not only a core proceeding, it is a proceeding that involves this Court’s exclusive jurisdiction. “The Court has exclusive jurisdiction over all property of the debtor as of the commencement of the case, as well as property of the estate, regardless of where the property is located.” In re Salander O’Reilly Galleries,
Legal Standard on a Motion to Dismiss
Under Federal Rule of Civil Procedure 8(a), incorporated and made applicable by Federal Rule of Bankruptcy Procedure 7008, to state a claim for relief the complaint must contain “a short and plain statement of the claim showing that the
“ ‘[W]hen ruling on a defendant’s motion to dismiss, a judge must accept as true all of the factual allegations contained in the complaint.’ ” Pearl River Union Free Sch. Dist. v. Duncan,
“On a motion to dismiss, the court may consider ‘any written instrument attached to [the complaint] as an exhibit or any statements or documents incorporated in it by reference.’” Yak v. Bank Brussels Lambert,
“While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do,” Bell Atl. Corp. v. Twombly,
Res Judicata
“The doctrine of res judicata, or claim preclusion, holds that ‘a final judgment on the merits of an action precludes the parties or their privies from relitigat-ing issues that were or could have been raised in that action.’” Monahan v. N.Y. City Dep’t of Corr.,
“ ‘To determine whether the doctrine of res judicata bars a subsequent
“Whether or not the first judgment will have preclusive effect depends in part on whether the same transaction or connected series of transactions is at issue, whether the same evidence is needed to support both claims, and whether the facts essential to the second were present in the first.” N.L.R.B. v. United Techs. Corp.,
A motion to dismiss under Rule 12(b)(6) may assert that res judicata or collateral estoppel bars any claim for which relief could be granted. See, e.g., Day v. Moscow,
Two elements of res judicata are not disputed here—the prior District Court and Second Circuit decisions undoubtedly involved the same parties, and the District Court and Second Circuit were competent courts of jurisdiction. The issues here involve whether Debtor is alleging the same cause of action that was asserted in the prior cases, and whether there was a final determination on the merits of these same causes of action. The answer to these questions must be “no.”
Hyde Park argues that res judicata applies to bar the Debtor’s complaint on the grounds that both the District Court and the Second Circuit “have already determined that Debtor has no claim to the Escrow Funds.” Mot. Dismiss 8. Hyde Park argues that DeFlora I and DeFlora II involved precisely the same issues, the same transactions, and the same evidence that will be presented here in this adversary proceeding. Id. at 9. In Hyde Parks’ reply, Hyde Park insists that the identity of the causes of action depend on whether the same series of factual transactions are being alleged. Reply 6. Hyde Park asserts that both the District Court and the Second Circuit already determined neither party has an interest in the special escrow funds, and that the same determination
Hyde Park misstates the Second Circuit’s holding on the parties’ respective interests in the escrow funds. The Second Circuit explicitly held that there had been no determination of the parties’ interests in the special escrow funds, stating that the issue “remained unresolved.” See DeFlora,
In DeFlora I, Debtor asserted a breach of contract claim against Hyde Park. Mot. Dismiss Ex. 2 at 7-8. Debtor sought a declaratory judgment that Hyde Park had breached the contract, Debtor was entitled to. recover the special escrow funds and that Hyde Park was not. Id. at 1. Hyde Park counterclaimed, seeking a declaratory judgment that Debtor had breached the contract and Hyde Park was entitled to the special escrow funds. Id. at 1-2. Both causes of action stemmed from a breach of contract claim.
In DeFlora I, the District Court determined that the alleged breaching conduct occurred no later than 1999, as the District Court found the Debtor’s complaint “addresses events that occurred in 1999 and mentions no conduct occurring thereafter.” Id. at 7. Debtor’s DeFlora I suit had been filed on September 22, 2008, well over six years later. Based on either the catchall provision in New York Civil Practice Law and Rules § 213(1) or the specific statute of limitations provided for a breach of contract under § 213(2), the District Court found that “[Debtor’s] breach of-contract claim is governed by the six-year statute of limitations.” Id. (citing N.Y. C.P.L.R. § 213(2)). The District Court then determined that “[s]ince the declaratory judgment causes of action in [Debtor’s] Complaint and [Hyde Park’s] Counterclaim arise from the parties’ contractual relationship, they too are governed by the six-year state of limitations. Id. (citations omitted). The District Court then held that the statute of limitations “bars both [Debtor’s] claims and [Hyde Park’s] counterclaim.” Id. The ruling was limited to the right to sue on a breach of contract claim, where the breaching activity occurred more than six years before the complaint was filed, based on the statute of limitations in the New York Civil Practice Law and Rules.
In DeFlora II, Debtor alleged another breach of contract claim against Hyde Park based on new developments. This time, Debtor argued a new breach of contract theory to try and reach the special escrow funds based on the escrow letters sent to Mr. Wrobel. Mot. Dismiss Ex. 5 at 7:19-8:20. The District Court dismissed Debtor’s new breach of contract theory, finding that the escrow letters did not provide a plausible basis to conclude the parties intended to settle the dispute over the fair market value of the parcels sold in 1999 after all the land parcels had been sold. Id. at 22:22-24:8 In the alternative, assuming no new contract was created, the District Court found that the issue was res judicata, as the District Court already de
Res judicata will not bar an entirely separate cause of action, where there was no final determination on the merits. The District Court determined that the parties’ breach of contract claims are barred by New York state’s statute of limitations law. The District Court did not determine whether either party had a property interest in the escrow funds. While the District Court determined that both Debtor and Hyde Park’s contract claims were barred, that was not a determination of an interest in property. As the Second Circuit explicitly said on appeal in DeFlora II, “Hyde Park attempts [to] distinguish ‘claims’ on the funds (it concedes that DeFlora has none) from an ‘interest’ in them; but the nature of the parties’ respective iinterests’ in the escrow funds (and the extent to which they have any) is the very thing that has been disputed in this duplicative litigation, and remains unresolved.” DeFlora,
Although the contract claim based on the alleged breach of forced escrow in 1999 was time-barred, that does not extinguish the parties’ respective interests, whatever they may be, in the escrow funds. The District Court acknowledged the distinction between a claim for payment and an interest in property when it noted that “the parties didn’t intend that money to sit there [in the escrow account] forever until the end of time. They intended it to be disposed of.” Mot. Dismiss Ex. 5 at 23:1Q-12, ECF No. 12-6. Even the District Court acknowledged the parties intended to dispose of the escrow funds in some manner, implicitly recognizing that some interest in the property remained. The parties had simply waited too long to resolve that dispute in District Court under New York law on a breach of contract claim. The District Court further urged the parties to negotiate a release of the funds between themselves. Mot. Dismiss Ex. 4 at 27:17-25. The time-barred nature of the contract claim does not extinguish rights in the property, otherwise neither party would be able to negotiate any release of the funds.
Even though the adversary proceeding before this Court may involve some overlapping facts that were alleged in the parties’ breach of contract claims in the District Court, the causes of action' are not the same and this proceeding for turnover of property of the estate and for a determination of Hyde Park’s bankruptcy claims could not have been raised in the District Court. The issue before this Court involves a turnover proceeding under 11 U.S.C. § 543. Under Bankruptcy Code § 543(a),
[a] custodian with knowledge of the commencement of a [bankruptcy] case ... concerning the debtor may not make any disbursement from, or take any action in the administration of, property of the debtor, proceeds, product, offspring, rents, or profits of such property, or property of the estate, in the possession, custody, or control of such custodian, except such action as is necessary to preserve such property.
The Bankruptcy Code further directs that a custodian shall
(1) deliver to the trustee any property of the debtor held by or transferred to such custodian, or proceeds, product, offspring, rents, or profits of such property, that is in such custodian’s possession, custody, or control on the date that such custodian. acquires knowledge of the commencement of the case; and (2) file an accounting of any property of thedebtor, or proceeds, product, offspring, rents, or profits of such property, that, at any time, came into the possession, custody, or control of such custodian.
Compliance with § 543 is not optional. Property of the bankruptcy estate held by a custodian must be turned over to the estate. Further, “the default position under the Bankruptcy Code is that a debtor is entitled to custody of its property, and 11 U.S.C. § 543 directs custodians of estate property to turnover such property to the Trustee.” In re Bullitt Utilities, Inc.,
Here, the facts that must be alleged to successfully litigate whether something is property of the bankruptcy estate, and for turnover to the bankruptcy estate are different than the facts alleged to show breach of contract. For example, Hyde Park’s motion to dismiss alleges that Mr. Wrobel is not a custodian and the special escrow funds are not property of the estate. Under Bankruptcy Code § 541, property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case ....” All of the Debtor’s interests in property become property of the estate. While neither Hyde Park nor the Debtor can bring a breach of contract claim based on the Debtor’s deposit of $207,116 into the escrow account with Mr. Wrobel, those facts are not determinative of the parties’ rights to those special escrow funds. Taking judicial notice of the proceedings held before the District Court and the Second Circuit, this Court cannot see any clear discussion of facts that would determine the interests of the parties in the special escrow funds.
Further, a determination of property of the estate could not have been made by the District Court or the Second Circuit prior to Debtor’s filing for bankruptcy. Such a determination is not only a separate cause of action under Bankruptcy Code § 541 and § 543, it is also a determination within the exclusive province of the Bankruptcy Court. See In re McGuire,
The legal cause of action for turnover under the Bankruptcy Code is also separate from a breach of contract claim under New York law or an action for turnover to enforce an award of attorneys’ fees under New York law. The Bankruptcy Code creates a separate cause of action that is only available to a Debtor in bankruptcy, and is different from a cause of action created under state law. See In re Prof'l Coatings (N.A.),
On a motion to dismiss, the Court must treat the facts alleged in the complaint as true and draw all inferences in the plaintiffs favor. Koch v. Christie’s Int’l Pub. Ltd, Co.,
Judicial Estoppel
“Judicial estoppel is an equitable doctrine that provides that, ‘[wjhere a party assumes a certain position in a legal proceeding, and succeeds in that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.’” Fernandez v. Windmill Distrib. Co.,
Judicial estoppel applies to inconsistent factual positions, not alternative legal theories of the case. The Supreme Court has held that judicial estoppel will not bar alternative legal theories. In discussing why judicial estoppel was not appropriate at the summary judgment stage in the case before it, the Supreme Court explained that
[o]ur ordinary rules recognize that a person may not be sure in advance upon which legal theory she will succeed, and so permit parties to “set forth two or more statements of a claim or defense alternately or hypothetically,” and to “state as many separate claims or defenses as the party has regardless of consistency.”
Cleveland v. Policy Mgmt. Sys. Corp.,
“The courts invoke judicial estop-pel as a means to ‘preserve the sanctity of the oath’ or to ‘protect judicial integrity by avoiding the risk of inconsistent results in two proceedings.’” Simon v. Safelite Glass Corp,,
On a motion to dismiss, the Court must assume all factual allegations to be true and draw all factual inferences in favor of the plaintiff. Pearl River Union Free Sch. Dist. v. Duncan,
More importantly, Hyde Park’s judicial estoppel argument is not based on any factual inconsistencies asserted by the Debtor. Instead, Hyde Park’s judicial es-toppel argument rests on Debtor’s allegedly inconsistent legal theory of the case, i.e., that Debtor and Hyde Park have no breach of contract claim with respect to the special escrow funds, and yet the special efecrow funds are still property of the estate. Even if arguing there is no breach of contract claim is inconsistent with the position Debtor advances now, these are legal positions, not factual. Judicial estop-pel is inapplicable here.
Conclusion and Order
Debtor’s complaint adequately alleges facts sufficient to state a claim for relief before this Bankruptcy Court. Upon Hyde Park’s motion to dismiss, Debtor’s opposition to the motion, Hyde Park’s reply, and for the foregoing reasons, it is now
ORDERED that Hyde Park’s motion to dismiss is DENIED.
Notes
. Unless otherwise indicated, all citations to litigation documents are to the docket of adversary proceeding 17-09006.