Law of the Case Doctrine in Bankruptcy

When a court reaches a decision in a case, the law of the case doctrine generally provides that parties should not be able to relitigate the same issue in that case, and for the court to adhere to its prior decision.¹ The doctrine does not, however, apply to every decision a court reaches. Two recent decisions by Judge Elizabeth Stong in the Brizinova chapter 7 cases in the Bankruptcy Court for the Eastern District of New York explore when the doctrine may or may not apply in bankruptcy cases.

Judge Stong’s decisions suggest that the law of the case doctrine has limited application in the bankruptcy context because it may only be applicable when (i) there is identity of parties between the prior decision and the matter at issue and (ii) the prior decision was a final judgment.² In Brizinova I, Judge Stong ruled that the chapter 7 trustee (the “Trustee”) adequately alleged that certain proceeds constituted property of the Debtors’ estate.³ In two subsequent Brizinova decisions, Soshkin and Brizinova II, the Trustee argued that the court must adhere to the court’s prior ruling in Brizinova I and apply the law of the case doctrine to deny defendants’ request to dismiss the Trustee’s complaint.⁴ In both decisions, Judge Stong refused to apply the law of the case doctrine because the court did not enter a final order in Brizinova I. In Soshkin, the identity-of-parties requirement was also not met because the Trustee litigated against a separate party.

In Brizinova I, Estella Brizinova and Edward Soshkin (together, the “Debtors”), who were husband and wife, jointly filed a chapter 7 case, and the Trustee was immediately appointed on the petition date. Ms. Brizinova held 100% of the stock of ENSI Consulting, Inc. (“ENSI”), an online auto supply parts company that employed both Ms. Brizinova and Mr. Soshkin, with Mr. Soshkin serving as ENSI’s bookkeeper. The Debtors’ schedules listed a value in the amount of zero dollars for Ms. Brizinova’s shares in ENSI. The Trustee asserted that the Debtors continued to operate ENSI to generate post-petition sale proceeds after filing their chapter 7 case (the “Sale Proceeds”), and that the Sale Proceeds were property of the Debtors’ estate. The Debtors refused to turn over the Sale Proceeds to the Trustee.

In response, the Trustee filed a complaint against the Debtors to recover the Sale Proceeds and seeking damages for conversion and violation of the automatic stay arising from the transfer of the Sale Proceeds. The Debtors filed a motion to dismiss the Trustee’s complaint arguing, inter alia, that the Sale Proceeds were not property of the Debtors’ estate because ENSI was not operating when the bankruptcy petition was filed and that the allegations were too speculative and, therefore, the element of each claim was not adequately pleaded.

The court sustained the Trustee’s turnover and automatic stay violation claims, but denied in part the Trustee’s conversion claim because the complaint did not identify specifically the property that was allegedly converted.⁵ The court granted the Trustee leave to replead the denied conversion claim.

Rather than repleading the denied conversion claim, the Trustee commenced another adversary proceeding alleging substantially similar claims to the Sale Proceeds as in Brizinova I against Zlata Soshkin, the daughter-in-law of the Debtors. Ms. Soshkin moved to dismiss the Trustee’s complaint but argued an additional defense that was not included in the Debtors’ motion to dismiss in Brizinova I — that the Sale Proceeds were property of ENSI and were not the property of the Debtors’ estate. In response, the Trustee argued that the law of the case doctrine required the court to reach the same conclusions as those ruled in Brizinova I and find that the Trustee adequately pleaded that the Sale Proceeds were property of the Debtors’ estate.

When considering the law of the case doctrine, Judge Stong found that “[t]wo...