Vista-Pro Auto. v. Coney Island Auto Parts Unlimited, Inc., 21 Civ. 8906 (PAE)

• Decision Date: 21 April 2022
• Docket Number: 21 Civ. 8906 (PAE)
• Parties: VISTA-PRO AUTOMOTIVE, LLC, Plaintiff-Judgment-Creditor and Appellee, v. CONEY ISLAND AUTO PARTS UNLIMITED, INC., Defendant-Judgment-Debtor and Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

VISTA-PRO AUTOMOTIVE, LLC, Plaintiff-Judgment-Creditor and Appellee, v. CONEY ISLAND AUTO PARTS UNLIMITED, INC., Defendant-Judgment-Debtor and Appellant.

No. 21 Civ. 8906 (PAE)

United States District Court, S.D. New York

April 21, 2022

OPINION & ORDER

PAUL A. ENGELMAYER UNITED STATES DISTRICT JUDGE

This appeal is from an order by the United States Bankruptcy Court for this District (the "New York Bankruptcy Court") denying, on comity grounds, a motion by appellantConey Island Auto Parts Unlimited, Inc.("Coney Island") to vacate a default judgment order entered by a different court-the United States Bankruptcy Court for the Middle District of Tennessee(the "Tennessee Bankruptcy Court").On appeal, Coney Island argues that it was error for the New York Bankruptcy Court(1) not to grant the motion to vacate and (2) to do so on a ground that had not been briefed or argued.AppelleeVista-Pro Automotive, LLC("Vista") defends the order.For the reasons below the Court affirms the order.

I.Factual and Procedural Background

On November 17, 2014, an involuntary bankruptcy petition against Vista was filed under Chapter 7 of the Bankruptcy Code in the Tennessee Bankruptcy Court.Dkt. 17at 5.On February 11 2015, Vista commenced an adversary proceeding against Coney Island in that court, ^[1] seeking unpaid invoices totaling $48, 696.91, plus reasonable attorney's fees and expenses.SeeDiet. 6 ("Ginzburg DecL"), Ex. 1.On February 23, 2015, Vista served Coney Island by sending, via first class regular mail, a copy of the summons and complaint, to:

Coney Island AutoParts Unltd., Inc. 2317 McDonald Ave. Brooklyn, NY 11223.

Id.,Ex. 2.On May 19, 2015•-•with Coney Island having not appeared before the Tennessee Bankruptcy Court-the Hon. Randal S. Mashburn, United States Bankruptcy Judge, entered a default judgment against it in the amount of $48, 696.21, plus $7 per diem.Id.,Ex. 5(the "Judgment").

More than five years later, on July 22, 2020, Vista registered the Judgment in the New York Bankruptcy Court.Id., Ex. 6.On January 13, 2021, Vista recorded the Judgment in the Office of the County Clerk in Kings County.Id.,Ex. 7.On February 3, 2021, Vista served Coney Island's bank, Metropolitan Commercial Bank ("Met Bank"), with an information subpoena and restraining notice.Id.On February 5, 2021, Met Bank notified Coney Island that it had received the restraining notice and placed a hold on its account in the amount of $97, 392.42. Id., Ex.. 8.

On September 23, 2021, Coney Island filed a motion in the New York Bankruptcy Court seeking vacatur of the Judgment entered by the Tennessee Bankruptcy Court.Coney Island argued that (1) it had already paid the invoices at issue in the adversary proceeding; and (2) service in the adversary proceeding had been improper as it did not comply with Bankruptcy Rule 7OO4(b)(3)'s requirement that service upon a corporation via first class mail be to the attention of a corporate officer, ^[2] On September 30, 2021, Vista opposed Coney Island's motion.On October 4, 2021, Coney Island replied.

On October 7, 2021, the Hon. Cecelia G. Morris, United States Bankruptcy Judge-and at the time the court's Chief Judge-held a hearing on Coney Island's motion.She determined that the decision whether to vacate the Judgment should be made by the court that had issued it-the Tennessee Bankruptcy Court.She explained:

[T]he debtor's Chapter 7 bankruptcy remains open in the Middle District of Tennessee....Coney Island needs to go back to Tennessee.The trustee's litigation with Coney Island will potentially enlarge the assets available to the debtor's creditors.That adversary [proceeding] was filed in Tennessee.Judge Mashburn granted motions to compel in relation to the entry of the default.Coney Island may be successful in vacating that default.From the papers submitted to this Court, it seems to appear that Coney Island was not served attention to the officer.The Court, though, in its discretion, believes Coney Island's recourse . . . lies in Tennessee.Again, [quoting] 11 Federal Practice and Procedure [Section] 2787, "Regardless of the power of the registration court to act, it has been thought desirable as a matter of comity to require the moving party to seek relief from the court in which the judgment originally was rendered."So I'm going to deny Coney Island's motion[.]... I understand it's not over, but it belongs in Tennessee, not here.

Dkt. 8, Ex. 1(Transcript, or "Tr."), at 6-7.On October 12, 2021, Chief Judge Morris entered an order formally denying the motion, for the reasons she had given at the hearing.Id., Ex. 2.

On October 18, 2021, Coney Island filed a notice of appeal in the New York Bankruptcy Court.On October 28, 2021, the Marshal of the City of New York("New York Marshal") served Met Bank a Property Execution with Notice to Garnishee, effectively ordering it to satisfy the Judgment.Dkt. 14("Blansky DecL"), Ex. B. On October 29, 2021, Coney Island filed a notice of appeal in this Court.Dkt. 1.

On November 12, 2021, Coney Island filed its opening brief.Dkt. 5("Mot.").On December 20, 2021, Vista filed its opposition brief.Dkt. 15("Opp.").On January 7, 2022, Coney Island filed its reply.Dkt. 16("Reply").

Coney Island did not move to stay satisfaction of the Judgment pending its appeal.On December 6, 2021, while its appeal to this Court was being briefed, the New York Marshal seized from Met Bank a sum sufficient to satisfy the Judgment.Blansky Decl., Ex. C.

II.Standard of Review

"District courts review the legal conclusions of the Bankruptcy Courtde novo, and its findings of fact under the clearly erroneous standard."In re AMR Corp.,610 B.R. 434, 444(S.D.N.Y.2019)(internal quotation and alterations omitted)."Matters left to the court's discretion are reviewed for abuse of discretion."In re Adelphia Commc'ns Corp.,342 B.R. 122, 126(S.D.N.Y, 2006)(internal citation omitted).

III.Discussion

A. Mootness

At the threshold, Vista argues that this appeal is moot because the Judgment has been satisfied.SeeOpp.at 8, 11-12; Blansky Decl., Ex. C ("[A] sum sufficient to satisfy the Judgment was seized by the Marshal of the City of New York in satisfaction of the Judgment.").Its premise is that satisfaction of the Judgment is a "comprehensive change in circumstance" which "cannot be unwound."Opp.at 12;seeIn re Chateaugay Corp.,988 F.2d 322, 325(2d Cir.1993)(appeal should be dismissed as moot when "events occur that would prevent the appellate court from fashioning effective relief or where "implementation of... relief would be inequitable").Vista is mistaken.

Generally, when a party seeks restitution of funds collected from it pursuant to an invalid judgment, "the baseline rule in this Circuit is that 'a party against whom an erroneous judgment or decree has been carried into effect is entitled, in the event of a reversal, to be restored by his adversary to that which he has lost thereby.'"Vera v. Banco Bilbao Vizcaya Argentaria, S.A.,946 F.3d 120, 145(2d Cir.2019)(quotingLiButti v. United States,178 F.3d 114, 120(2d Cir.1999));see alsoIn re Lozito,43 F.Supp. 149, 153(E.D.N.Y.1941)(in bankruptcy case, finding that restitution should be made where the grounds for order pursuant to which funds had been paid no longer applied);see generallyRestatement (First) of Restitution§ 74 cmt. a ("The reversing tribunal can itself direct restitution either with or without conditions, or the tribunal which is reversed can on motion or upon its own initiative direct that restitution be made.").Whether a party"is entitled to [this] equitable remedy of restitution is a discretionary matter for a trial court."LiButti,178 F.3d at 121.

Vista does not point to any authority barring courts from exercising such discretion in the context of Chapter 7 bankruptcy proceedings.To be sure, in some circumstances, equitable considerations have been held to justify dismissal of an appeal.See, e.g., In re Chateaugay Corp.,988 F.2d at 326(in bankruptcy reorganization matter, upholding dismissal, on equitable mootness grounds, of challenge to order requiring funds to be disbursed, where payments had been "key component" of a settlement agreement, and the payments had already been issued to "faultless beneficiaries who are not parties to th[e] appeal" and had "presumably used the [payments]they ... received to meet their living expenses").Here, however, the equities do not favor terminating at the jump Coney Island's challenge to the default judgment.Vista's only argument for doing so is the incorrect one that, categorically, a court may not award restitution of funds paid out on a judgment that is later held void.SeeOpp.at 12.And in contrast to In re Chateaugay Corp., where the funds had been disbursed to third parties who had likely spent the money, the funds of Coney Island's that are at issue here been have disbursed to a party(Vista) from which they can presumably be readily reclaimed.The Court therefore declines to dismiss the appeal as equitably moot.

B.The New York Bankruptcy Court's Decision to Abstain

The Court next turns to the New York Bankruptcy Court's decision to decline to resolve Coney Island's motion to vacate, in deference to its Tennessee counterpart.

The parties agree that the New York Bankruptcy Courtcould have reached the merits of that motion.The Judgment was registered in the New York Bankruptcy Court.SeeMot.at 8(citingJames Moore, 7 Moore's Federal Practice¶ 60.28 (2d ed. 1979)("[B]y registering the judgment in a particular forum the creditor seeks to utilize the enforcement machinery of that district court[, and] it is not unreasonable to hold that the latter court has the power to...