Pryor v. Town of Smithtown (In re Jadeco Constr. Corp.)

• Decision Date: 10 July 2019
• Docket Number: Case No. 16-71508-reg,Adv. Pro. No. 18-08013-reg
• Citation: 606 B.R. 169
• Parties: IN RE: JADECO CONSTRUCTION CORP., Debtor. Robert L. Pryor as Trustee of the Estate of Jadeco Construction Corp., Plaintiff, v. Town of Smithtown, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

606 B.R. 169

IN RE: JADECO CONSTRUCTION CORP., Debtor.Robert L. Pryor as Trustee of the Estate of Jadeco Construction Corp., Plaintiff,

v.Town of Smithtown, Defendant.

Case No. 16-71508-reg

Adv. Pro. No. 18-08013-reg

United States Bankruptcy Court, E.D. New York.

Signed July 10, 2019

Fred S. Kantrow, Avrum J. Rosen, Alex E. Tsionis, Rosen & Kantrow, PLLC, Huntington, NY, for Plaintiffs.

Jonathan Ross Harrington, Patrick McCormick, Esq, Campolo Middleton & McCormick LLP, Ronkonkoma, NY, for Dependants.

MEMORANDUM DECISION

Robert E. Grossman, United States Bankruptcy Judge

Introduction

This matter is before the Court pursuant to a motion ("Motion") by the Town of Smithtown (the "Town" or the "Defendant") for summary judgment to dismiss the complaint filed by Robert Pryor, the Chapter 7 trustee ("Trustee" or "Plaintiff") in which the Trustee seeks to recover the value of labor and materials provided by the Debtor to the Town pre-petition as a constructive fraudulent conveyance pursuant to 11 U.S.C. § 544. The Town asserts that the Trustee is barred from recovering on any judgment entered against it by this Court because a State Court has previously found that the underlying contract for which the Town received services expired, and applicable non-bankruptcy law prohibits the Town for paying for services rendered absent an enforceable contract. According to the Town, the important state interest of protecting taxpayers from extravagance and collusion is superior to any right conferred by Congress to the Trustee to recover transfers under § 544 of the Bankruptcy Code and the New York constructive fraudulent conveyance statutes. The Town also asserts that the Trustee's claims are barred by the Rooker - Feldman doctrine, res judicata and/or collateral estoppel.

The Town is correct that the contract with the Debtor expired and cannot be enforced. However, the enforceability of this contract is not dispositive of the issues raised in this adversary proceeding. The Trustee seeks to use his strong-arm powers to recover the value of the materials and labor provided by the Debtor as a constructive fraudulent conveyance. This in fact is the very essence of the fraudulent conveyance statutes as adopted by both states and the Bankruptcy Code. When a debtor has transferred assets pre-petition for little or no consideration, the trustee is charged with recovering the specific assets or the value of those assets for the benefit of creditors. In order to succeed in this adversary proceeding, the State Court decision need not be disturbed or overturned. To the extent the Town asserts that the State's interest in protecting its taxpayers is greater than the Trustee's right to recover fraudulent conveyances for the benefit of the creditors in this bankruptcy case, the Court disagrees. The State's interest is admittedly strong, but that interest cannot overcome Congress's decision to vest a bankruptcy trustee or a debtor in possession with the power to avoid fraudulent conveyances on behalf of a debtor's estate. These powers reflect a federal policy of ensuring that a debtor's creditors receive reasonably equivalent value for transfers made by a debtor pre-petition. In this case, the Trustee seeks to recover the value of what was transferred to the Town, not the profit the Debtor could have obtained under a contract theory. Therefore, to the extent there is a conflict between the Bankruptcy avoidance statutes and State law, the Supremacy Clause mandates that the right to recover under a fraudulent conveyance theory remain unfettered by the State and local laws that allegedly stand in the Trustee's way.

Procedural History

On April 6, 2016, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. On January 31, 2017, the Debtor filed a motion to convert the case to Chapter 7, which was granted, and on March 24, 2017, an order converting the Debtor's case to Chapter 7 was entered. On January 22, 2018, the Trustee commenced this adversary proceeding. On February 21, 2018, the Town filed a motion to dismiss the adversary proceeding, which was opposed by the Trustee. On May 3, 2018, an order was entered granting the motion to dismiss only as to the First, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh causes of action. On October 10, 2018, the Town filed the Motion, and on November 21, 2018, the Trustee filed a Memorandum of Law in Opposition to the Motion. On January 11, 2019, the Town filed a Reply. A hearing was held on January 16, 2019, and on January 31, 2019, the Town and the Trustee filed supplemental memoranda of law. The matter was marked submitted thereafter.

Facts

The Debtor was in the business of providing asphalt and concrete paving of roadways, curbs and sidewalks to local municipalities. Jacinto DeAlmeida was the owner, president and sole officer of the Debtor. The Town is a municipal corporation existing under the laws of the State of New York. In June 2008, the Debtor successfully submitted a proposal in connection with Bid No. 08-050 ("Bid") to perform certain work for the Town including the removal and replacement of curbs and sidewalks. (Defendant's Ex. C). The Bid was signed by Jacinto DeAlmeida on behalf of the Debtor. The contract ("Contract") awarded pursuant to the Bid authorized the Debtor to perform work from June 15, 2008 through June 17, 2009. The Contract provided for an extension by mutual consent for up to two years. The Debtor performed certain work under the Contract and received payment. In a letter dated April 30, 2009, the Debtor and the Town's purchasing director, Joseph Kostecki, agreed to extend the term of the Contract through June 17, 2010. (Defendant's Ex. D). In a letter dated May 19, 2010, the Debtor and Kostecki agreed to another extension of the Contract terms under the Bid through June 30, 2011. (Defendant's Ex. E). This extension went beyond the two-year extension provided under the Contract by thirteen days. Prior to June 17, 2011, the Town issued a request for a proposal on Bid 11-404 ("Second Bid"), a successor contract for municipal work similar to the work under the Bid. By letter dated June 23, 2011, the Debtor was notified that it was the low bidder on the Second Bid, and was instructed to return certain affidavits regarding a required apprentice program. (Defendant's Ex. F). On June 29, 2011, the Town sent the Debtor a "blanket" purchase order for sidewalk and curb replacement and repair. (Defendant's Ex. G). By letter dated June 30, 2011, Glenn Jorgensen, the Town's Highway Superintendent, issued the Debtor a work order to perform curb, apron and sidewalk repairs and installation on three roadways. (Defendant's Ex. H). No extension of the Contract beyond June 17, 2011 was competitively bid for, approved or authorized by the Town Board or the Town Superintendent. By letter dated July 27, 2011, the Debtor was reminded of its requirements to file affidavits related to the required apprentice program related to the Second Bid. (Defendant's Ex. I). The Debtor was not awarded the Second Bid, and it was ultimately awarded to another company in August, 2011. The Debtor continued to perform work for the Town between June 17, 2011 and October 2011. Any work performed by the Debtor between June 17, 2011 and October 2011 was not approved by the Town Board or the Town Supervisor.

On May 31, 2012, the Debtor commenced an action in New York State Supreme Court (the "State Court Action") seeking entry of a monetary judgment arising from the Town's alleged breach of contract. The Debtor sought recovery of $441,667.26, representing the amount the Debtor asserted it was owed under the Contract, plus consequential damages of $336,125.79, representing the amount the Debtor alleged to have borrowed to cover the operating costs incurred as a consequence of the Town's refusal to pay for the work performed. On April 6, 2016, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. On May 11, 2016, the Debtor filed a Notice of Removal of the State Court Action to the Bankruptcy Court. The removed action ("Removed Action") was given adversary proceeding no. 16-8062. On June 10, 2016, the Town filed a motion to Abstain and for Remand, which was opposed by the Debtor. On August 2, 2016, the Court entered Supplemental Facts and Conclusions of Law concluding that mandatory abstention from hearing the Removed Action was appropriate ("Abstention Decision"). On January 3, 2017, the Removed Action was closed.

Thereafter, the State Court Action continued in New York State Supreme Court. The Town made a motion for summary judgment seeking dismissal of the complaint, which was granted pursuant to a written decision by Justice Molia dated September 29, 2017 ("Contract Decision") (Defendant's Ex. N). In the Contract Decision, Justice Molia found that although the Debtor and the Town entered into a valid contract for work performed from June 15, 2008 through June 17, 2011, inclusive of appropriate extensions, the Contract was never further extended through any formal resolution passed by the Town Board and executed by the Town Supervisor, as required under Town Law § 64. As Justice Molia pointed out, the laws of New York State require competitive bidding in the awarding of public contracts pursuant to General Municipal Law § 103[1] (Contract Decision at p. 3). Because the alleged extension of the Contract beyond June 17, 2011 did not comply with Town Law § 64, the Contract expired on June 17, 2011. (Contract Decision at p. 3). Justice Molia also ruled that the alleged extension of the Contract could not be ratified because the Town Board had no authority to excuse compliance with Town Law § 64. Justice Molia further held that although there was a narrow exception to Town Law § 64 if a party entered into the contract in good faith, the contract did not violate public policy and circumstances indicated that the municipality would be unjustly enriched, this exception was found to...