Matter of Bertoli

• Decision Date: 06 March 1986
• Docket Number: Civ. A. No. 85-4324.
• Citation: 58 BR 992
• Parties: In the Matter of Richard O. BERTOLI, Debtor-in-Possession. John E. BERTOLI, Plaintiff-Respondent, v. Bernard J. D'AVELLA, Jr., Trustee, Defendant-Appellant-Movant, and Cameron F. MacRae, III, Defendant-in-Intervention.
• Court: U.S. District Court — District of New Jersey

58 B.R. 992 (1986)

In the Matter of Richard O. BERTOLI, Debtor-in-Possession John E. BERTOLI, Plaintiff-Respondent, v. Bernard J. D'AVELLA, Jr., Trustee, Defendant-Appellant-Movant and Cameron F. MacRae, III, Defendant-in-Intervention.

Civ. A. No. 85-4324.

United States District Court, D. New Jersey.

March 6, 1986.

Ronald M. Sturtz, Hannock & Weisman, Roseland, N.J., for trustee Bernard D'Avella, Jr.

Jack M. Zackin, Ravin, Greenberg & Zackin, P.A., Roseland, N.J., for trustee Cameron F. MacRae, III.

Robert A. Baime, Sills Beck Cummins Zuckerman Radin Tischman & Epstein, P.A., Newark, N.J., for John Bertoli.

OPINION

SAROKIN, District Judge.

In this interlocutory appeal of the bankruptcy court's order denying the trustee's motion to dismiss plaintiff Richard Bertoli's adversary complaint, the court is called upon to decide two issues. First, it must determine whether an interlocutory appeal is appropriate in this matter. If so, the court must next determine whether the bankruptcy court erred in concluding that the claim was not barred by principles of res judicata in light of a state court adjudication of a related matter. Having reviewed the standards for interlocutory appeals of bankruptcy matters under 28 U.S.C. § 158(a), the court concludes that interlocutory adjudication is proper in this case. Further, having examined the nature of the state court proceeding and its relation to the issues presented here, the court concludes that the bankruptcy court's determination must be reversed on the basis of res judicata.

BACKGROUND

A detailed analysis of the facts surrounding John Bertoli's participation in the state court proceeding entitled Executive Securities Corp. v. Bertoli, Civil No. C-5088-79 (N.J.Super. Feb. 23, 1983), is essential to this court's evaluation of this bankruptcy appeal. According to the findings made by Judge Castano in that proceeding, John Bertoli's brother, Richard, is the former president and chief operating officer of Executive Securities Corporation, which went bankrupt in 1975. After Cameron MacRae III was appointed trustee, he brought suit on behalf of Executive Securities alleging that three months after the company shut down Richard Bertoli fraudulently transferred personal and corporate assets in the effort to put them beyond the reach of creditors, whose claims exceeded $2,000,000. The principal defendants originally named in that action were Richard Bertoli, SYS Industries (a Bertoli family holding company), Door Openings Corporation (another family corporation), and John Bertoli in three capacities: individually, as custodian for Richard Bertoli's three minor children, and as the sole general partner of Rutherford Corporation. Prior to trial, a settlement was reached in which John Bertoli in his individual capacity only and Door Openings were released as defendants. John Bertoli remained before the court, however, in his capacity as the general partner of Rutherford and as the custodian for the children of Richard Bertoli.

After a lengthy trial in which John Bertoli testified, the court found that Richard Bertoli had transferred Executive Securities' assets to Rutherford and Door Openings in order to defraud Executive's creditors and shareholders. The court's accompanying opinion described in detail the numerous and intricate indirect transfers used by the defendants Richard and John to "systematically strip a number of entities in which Richard had a substantial direct or indirect interest of all their valuable assets." (op.at 4). The opinion noted further that "all of the assets were effectively conveyed to one transferee, Rutherford Construction Corporation (RCC), a New Jersey limited partnership, formed at the time of the transfers and obviously for the express purpose of being the transferee. The partnership was made up of John, as general partner, and Richard's three minor children as limited partners." Id. at 4-5. Devoting an entire section of the opinion to John Bertoli's participation, and entitling it "John's Fraud", the court proceeded to explain that the systematic nature of the transfer plan established "that John was an informed participant in his brother's plan," and thus that "the fraud was equally attributable to the debtor, Richard, and to the transferee, John." Id. at 10. Finally, the court explicitly addressed, and rejected, the Bertolis' attempts to justify the transactions as being in good faith, commenting that the various facets of their story were "a fiction", "absurd", "unconvincing", "ludicrous", and "immeasurably complicated by the numerous gaps and contradictions in the Bertolis' account of the disputed transaction". Based on these findings, the court entered judgment "(a) restraining John Bertoli individually and as custodian of Richard's minor children from disposing of any property of RCC or DOC/NJ, and (b) appointing a receiver for all of the property of RCC and DOC/NJ".

Subsequently, John Bertoli appealed to the Appellate Division and the Supreme Court of New Jersey, claiming that the trial court's judgment against him was null and void because it bound him in his individual capacity even though the pretrial settlement established that he was not a party to the state court proceeding in that capacity. Although the Appellate Division agreed that the judgment could only touch John Bertoli "in his capacity as custodian and the person in control of Rutherford and Door Openings," Executive Securities Corp. v. Bertoli, Civil No. A-3164-82T2 (N.J.App.Div. May 22, 1984), it nonetheless concluded that there was no fatal infirmity in the trial court's judgment since the limitation on his activities would be identical whether the judgment were worded to enjoin him "individually" or as a "custodian". The New Jersey Supreme Court denied the petition for certification.

Then, on October 11, 1983, Richard Bertoli's own estate filed for Chapter 11 reorganization. On April 1, 1985, John Bertoli instituted an adversary proceeding in bankruptcy court under Bankruptcy Rule 7001 against Bernard D'Avella, the chapter 11 trustee of the Richard Bertoli estate. The purpose of that suit was to establish that John Bertoli individually had some enforceable rights to the property in the estate involved. In making this claim, Richard Bertoli asked that the judgment of the Superior Court be ignored as null and void because it enjoined him in his individual capacity from receiving or disposing of any of that property. The trustee filed a motion to dismiss the bankruptcy court complaint on the grounds of res judicata and collateral estoppel. On August 15, 1985 the bankruptcy court denied the trustee's motion to dismiss, accepting John Bertoli's argument that since he was not a participant in the state court litigation in his individual capacity, he was not bound by its judgment.

The trustee Bernard D'Avella, joined by Cameron F. MacRae III, trustee for Executive Securities, now requests leave to appeal the bankruptcy court's judgment under 28 U.S.C. § 158(a), claiming that the bankruptcy court erred in refusing to accept trustee D'Avella's res judicata and collateral estoppel arguments. Plaintiff John Bertoli responds that the court's decision to entertain an interlocutory appeal would be improvident, or in the alternative, that the bankruptcy court's decision should be affirmed.

DISCUSSION

1. The Propriety of this Interlocutory Appeal

28 U.S.C. § 158(a) reads in relevant part:

The district courts of the United States shall have jurisdiction to hear appeals . . . with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title.

While the statute sets forth no standard for determining when the district court should grant leave to hear interlocutory appeals, courts construing the provision have adopted the approach set forth in 28 U.S.C. § 1292(b), which provides that standard by which the courts of appeals are to accept interlocutory appeals from the district courts. According to that standard, appeals of interlocutory orders should be permitted where there...