LFMG-S&B, LLC v. Fortress Credit Corp.
| Decision Date | 06 March 2015 |
| Docket Number | 11 Civ. 4260 (LGS) |
| Court | U.S. District Court — Southern District of New York |
| Parties | LFMG-S&B, LLC, Plaintiff, v. FORTRESS CREDIT CORP., et al., Defendants. |
Plaintiff LFMG-S&B, LLC filed this action against Fortress Credit Corp. ("Fortress" or "Defendant") and various unnamed defendants for damages arising from allegedly fraudulent conveyances in violation of New York Debtor and Creditor Law § 275 and California Civil Code § 3439.04. Defendant moves to dismiss the Complaint under the doctrine of res judicata. Defendant also moves for sanctions against Plaintiff's counsel, pursuant to 28 U.S.C. § 1927. For the following reasons, Defendant's motion to dismiss is granted, and Defendant's motion for sanctions is denied.
The following facts are taken from the Complaint.
In February 2005, non-party S&B Surgical Center ("S&B") borrowed money from, and entered into a loan agreement with Defendant, a financial investment management company incorporated in Delaware with its principal place of business in New York. Under the loan agreement, S&B granted Defendant security interests in all of its assets and agreed to make monthly payments. Plaintiff is a limited liability company and claims to be the assignee andowner of all of the claims and rights of the S&B Surgery Center Creditor Trust, which was created after S&B filed for bankruptcy under chapter 11 of the Bankruptcy Code.
The Complaint alleges that, although "S&B never received any of the loan amount paid by Fortress under the Financing Agreement, payments were transferred on a daily basis from S&B accounts to Fortress in an amount totaling $21,869,817.64." The Complaint further alleges that "[b]ecause S&B accounts were being emptied to [re]pay the Fortress loan, S&B was unable to pay its other obligations" and "filed a petition for bankruptcy as a result of the debts, including the Financing Agreement."
In its bankruptcy proceeding, S&B filed an amended plan of reorganization (the "Plan"). The Plan divided S&B's creditors into five classes. Claims of the largest class -- "Class 4 Creditors" -- would be satisfied by the proceeds of a "Class 4 Creditor Trust." The Plan provided that this trust would be funded, in part, by the transfer of "all right, title and interest in the Causes of Action and the Avoidance Actions." The Plan defined "Cause of Action" as:
any and all claims, demands, rights, actions, Rights of Action, causes of action and suits of [S&B] or the Estate, of any kind or character whatsoever, known or unknown, suspected or unsuspected, whether arising prior to, on or after the Petition Date, in contract or in tort, at law or inequity or under any other theory of law, that [S&B] or [S&B]'s Estate has or asserts or may have or assert against third parties, whether or not brought as of the Effective Date, and which haven't been settled or otherwise resolved by Final Order as of the Effective Date, including but not limited to (1) rights of setoff, counterclaim or recoupment, and claims on contracts or for breaches of duties imposed by law, (2) such claims and defenses as fraud, mistake, duress and usury, (3) claims or tax refunds, (4) claims to recover outstanding accounts receivable, and (5) any other claims which may be asserted against third parties.
The Plan defined "Avoidance Action" as:
An adversary proceeding, lawsuit or other proceeding with respect to Causes of Action arising under, relating to, or similar to sections 502(d), 506, 510, 542, 543, 544, 545, 547, 548, 549, 550, 551, 552 or 553 of the Bankruptcy Code, or any fraudulent conveyance, fraudulent transfer or preferential laws, or any Cause of Action arising under, or relating to, any similar state law or federal law that constitutes property of the Estate under section 54 of the Bankruptcy Code, whether or not an action is initiated on or before the Effective Date.
(Emphasis added.)
The bankruptcy court confirmed the Plan on December 1, 2009. In an order dated January 4, 2010, the bankruptcy court set June 1, 2010, as the deadline (the "Litigation Bar Date") for filing Avoidance Actions as defined in the Plan. The bankruptcy court closed the case on September 2, 2010.
On February 14, 2011, Plaintiff filed an action in the Superior Court of California against Fortress, Randy Rosen -- the founder of S&B -- and various unnamed defendants. The Complaint asserted two claims of fraudulent conveyance (one under California law and one under New York law) seeking to set aside the payments made by S&B to Fortress, and a claim for breach of fiduciary duty against Rosen and the unnamed defendants. In April 2011, Fortress removed the action to federal court in the Central District of California, where it was heard by the bankruptcy judge who had presided over the S&B Bankruptcy.
Defendant moved to dismiss Plaintiff's claims, arguing that the claims were untimely first, because the Litigation Bar Date Order required the filing by June 1, 2010, and second, because section 546(a)(2) of the Bankruptcy Code prohibits the commencement of avoidance actions under section 544 after the bankruptcy case is closed, which occurred on September 2,2010. The Bankruptcy Court accepted both arguments and dismissed Plaintiff's claims on July 26, 2011.
Plaintiff filed a notice of appeal on August 8, 2011. On January 21, 2014, the U.S. District Court for the Central District of California affirmed the bankruptcy court's decision. Plaintiff filed a notice of appeal from the district court's order on February 13, 2014. However, Plaintiff never filed an opening brief, and the Ninth Circuit dismissed the case for lack of prosecution.
Plaintiff filed this action against Fortress in New York state court on February 16, 2011, two days after filing its California action. Although Plaintiff's New York Complaint omitted the breach of fiduciary duty claim against Rosen and omitted Rosen as a party, the New York Complaint made the same general allegations and asserted the same claims of fraudulent conveyance under both New York and California law as had been alleged in the California action. On June 22, 2011, Defendant removed the New York state action to this Court.
Defendant moves to dismiss Plaintiff's claims on the ground that they are barred by the doctrine of res judicata. As Plaintiff's exact same claims were held to be time-barred by the bankruptcy court in the Central District of California, and the dismissal was affirmed by the district court, these claims are precluded by res judicata. Defendant's motion to dismiss is therefore granted.
Res judicata "bars a subsequent action -- involving either the same plaintiffs or parties in privity with those plaintiffs -- from asserting claims that were, or could have been, raised in aprior action that resulted in an adjudication on the merits." Bank of N.Y. v. First Millennium, Inc., 607 F.3d 905, 918 (2d Cir. 2010) (citing Allen v. McCurry, 449 U.S. 90, 94 (1980)). The doctrine of res judicata "applies with full force to matters decided by the bankruptcy courts." EDP Med. Computer Sys., Inc. v. United States, 480 F.3d 621, 624 (2d Cir. 2007).
To establish res judicata, the moving party must show that (1) the previous action involved an adjudication on the merits, (2) the previous action involved the plaintiffs or those in privity with them and (3) the claims asserted in the subsequent action were, or could have been, raised in the prior action. TechnoMarine SA v. Giftports, Inc., 758 F.3d 493, 499 (2d Cir. 2014) (quoting Monahan v. N.Y.C. Dep't of Corr., 214 F.3d 275, 285 (2d Cir. 2000)). The second and third elements of res judicata are clearly satisfied here, as Plaintiff here was also the plaintiff in the California action, and the same claims were raised in both actions.
At issue, however, is the first element -- whether the bankruptcy court's dismissal was an adjudication on the merits. Here, the Central District of California bankruptcy court dismissed, and the district court affirmed the dismissal of, Plaintiff's claims because they were time-barred both under the Litigation Bar Date Order and section 546(a)(2).
Section 546(a)(2) provides in relevant part, "An action or proceeding under section 544 . . . of this title may not be commenced after . . . the time the case is closed or dismissed." 11 U.S.C. § 546(a)(2). Thus, any avoidance action filed in S&B's bankruptcy case after September 2, 2010, is untimely. See Global Crossing Estate Representative v. Winnick, No. 04 Civ. 2558, 2006 WL 2212776, at *5 (S.D.N.Y. Aug. 3, 2006). On appeal, Plaintiff had argued, and the district court agreed, that section 546(a) is a statute of limitations, rather than a jurisdictional bar, citing Gross v. Petty (In re Petty), 93 B.R. 208 (B.A.P. 9th Cir. 1988), and Ernst & Young v. Matsumoto (In re United Insurance Management, Inc.), 14 F.3d 1380 (9th Cir. 1994). AccordPryor v. Barbara (In re Rodriguez), 283 B.R. 112, 120 (Bankr. E.D.N.Y. 2001) () (citing Pugh v. Brook (In re Pugh), 158 F.3d 530, 538 (11th Cir. 1998)).
Similarly, bar dates issued by bankruptcy courts are "likened to statutes of limitations which must be strictly observed." Maxwell Macmillan Realization Liquidating Trust v. Aboff (In re Macmillan, Inc.), 186 B.R. 35, 49 (Bankr. S.D.N.Y. 1995) (); accord Clark v. Valley Fed. Sav. & Loan Ass'n (In re Reliance Equities, Inc.), 966 F.2d 1338, 1345 (10th Cir. 1992) (); In re W.T. Grant Co., 53 B.R. 417, 420 (Bankr. S.D.N.Y. 1985) ().
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