PBCBA BAR BULLETINS pbcba_bulletin_Sept. 2019 | Page 9

BANKRUPTCY CORNER
Supremacy of Federal Bankruptcy Law and
the Right of a Bankruptcy Trustee
JASON S. RIGOLI
Recently I was involved in a case
representing a trustee seeking to recover
an asset for the benefit of the estate.
The parties opposing me in that effort
consistently argued that certain state law
applies preventing the alienation of the
asset and that res judicata applied because
one creditor had sued on certain issues
in a state court proceeding and lost. The
position we had taken was, no, the trustee
in the bankruptcy case has independent
rights arising from the Bankruptcy Code
itself and res judiciata does not apply,
because our issue could not have been
litigated outside of bankruptcy. When
Judge Grossman’s opinion in Pryor v. Town
of Smithtown (In re Jadeco Construction
Corp.), 2019 WL 3026841 (Bankr. E.D.N.Y
July 10, 2019) came to my attention my
interest was piqued as it addressed many
of these issues.
Factual Background
In Jadeco the trustee sued to recover the
value of labor and materials provided by
the debtor prepetition to Smithtown as a
constructively fraudulent transfer under
§§ 544 and 550 of the Bankruptcy Code.
Prepetition a state court found that the
underlying contract for which Smithtown
received services, expired and the
applicable nonbankruptcy law prohibited
Smithtown from paying for services
rendered absent an enforceable contract.
Smithtown, therefore, asserted that the
trustee could not recover because: (i) the
important state interest of protecting
taxpayers – requiring the enforceable
contract – overrode the rights conferred by
Congress on the Trustee under § 544; and
(ii) that the claims were barred by Rooker-
Feldman, res judicata, and/or collateral
estoppel.
Conflict Preemption
Judge
Grossman
first
addressed
preemption, Jadeco at *5-7, stating that
“Congress is vested with the exclusive
power under the Bankruptcy Clause of the
U.S. Constitution to enact uniform laws
governing bankruptcy,” Id . at *5 ( citing U.S.
Const., art. 1, CL. 8), and that federal law
“will preempt state law when a discernible
conflict or inconsistency arises.” Ibid.
(citing U.S. Const., art. VI, CL. 2; Arizona
v. United States , 567 U.S. 387, 399 (2012);
Gibbons v. Ogden , 9 Wheat. 1, 210–211
(1824)).
Smithtown argued that the state’s interest
in protecting its tax payers by awarding
public contracts in strict compliance
with statutory requirements prevailed
over the avoidance rights of the trustee
under § 544. Judge Grossman disagreed
and distinguished the case law on which
Smithtown relied and stated that the
trustee’s suit would not compel the city to
violate state law, the trustee was recovering
the value of the assets transferred for
which no consideration was paid by
Smithtown to benefit the creditors of the
estate, not the debtor, and was not suing on
a contract or quantum meruit . Id at *7.
Judge Grossman then ruled that the
Sections 544 and 550 preempted state law
under “conflict preemption” and that “the
interests protected by these state laws
must be subservient to [the bankruptcy
laws enacted by Congress], which
promote the objectives of protecting a
debtor’s creditors from harm as a result of
transfers made by a debtor for less than
fair consideration.” Ibid.
Rooker-Feldman and Red Judicata and/or
Collateral Estoppel
544 and 550 only exists in bankruptcy
and could not have been litigated in the
state court proceeding, meaning res
judicata is not applicable. Id at *10. The
trustee was seeking to avoid and recover
the transfer of the labor and materials
provided to Smithtown by the debtor for
which Smithtown paid no consideration,
the trustee was not seeking to enforce
the contract, meaning the first prong for
collateral estoppel is not satisfied. Id. at *9
(applying New York law, “(1) the identical
issue necessarily was decided in the prior
action, and (2) the party to be precluded
from relitigating the issue had a full and
fair opportunity to litigate the issue in the
prior action.” (citations omitted)). Florida’s
standard for applying collateral estoppel is
similar: “an identical issue must have been
presented in the prior proceeding, the issue
must have been a critical and necessary
part of the prior determination, there must
have been a full and fair opportunity to
litigate that issue, and the issue must have
been actually litigated.” Ward v. State, 111
So.3d 225, 227 ( quoting Larimore v. State , 76
So.3d 1121, 1123 (Fla. 1st DCA 2012) ( quoting
M.C.G. v. Hillsborough Cnty. Sch. Bd ., 927
So.2d 224, 227 (Fla. 2d DCA 2006)).
This article is submitted by Jason S.
Rigoli, Esq., Furr Cohen, 2255 Glades Road,
Suite 301E, Boca Raton, FL 33431, jrigoli@
furrcohen.com
Judge Grossman quickly dismissed
these arguments by Smithtown. Judge
Grossman explained that the Rooker-
Feldman does not apply because the
trustee was not seeking a “review and
rejection” of the earlier state court ruling
that the contract had expired, the trustee
was seeking recovery of the materials and
labor provided by the debtor without the
benefit of a contract.” Id . at *9.
And, res judicata and collateral estoppel
do not apply because the issue the
trustee was litigating could not have
been litigated in state court and was not
identical to the issue litigated in state
court. The avoidance action under section
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