Manners v. McMahon (In re David X. Manners Co.)

596 B.R. 217

IN RE: DAVID X. MANNERS CO., INC., Debtor.

Timothy G. Manners, Movant

v.Joseph McMahon, Respondent.

CASE No. 15-51490 (JJT)

United States Bankruptcy Court, D. Connecticut, Hartford Division.

Signed December 21, 2018

David X. Manners Company, Inc., Westport, CT, pro se.

Ellery E. Plotkin, Law Offices of Ellery E. Plotkin, LLC, Norwalk, CT, for Debtor.

Timothy D. Miltenberger, Coan Lewendon Gulliver & Miltenberger, New Haven, CT, for Trustee.

RULING ON OBJECTION TO CLAIM NO. 5-1 AND MOTION TO STRIKE OBJECTION TO CLAIM NO. 5-1

James J. Tancredi, United States Bankruptcy Judge

I. INTRODUCTION

Before the Court is the objection ("Objection," ECF No. 281) filed by the movant, Timothy G. Manners ("Mr. Manners"),¹ to Proof of Claim No. 5-1 ("Claim 5-1") filed by Joseph McMahon ("Mr. McMahon"), and Mr. McMahon's motion to strike the Objection ("Motion to Strike," ECF No. 385).² In the Objection, Mr. Manners objects to Claim 5-1 on the basis that it is barred by res judicata, judicial estoppel, and Mr. McMahon's status as an independent contractor. In the Motion to Strike, Mr. McMahon argues that: (1) Mr. Manners and the Debtor, David X. Manners Company, Inc. ("Debtor"), acquiesced in the second suit, which would eliminate any res judicata defense, and (2) judicial estoppel does not apply. For the reasons stated below, the Objection is OVERRULED in part and the Court ABSTAINS in part and the Motion to Strike is DENIED as to Mr. McMahon's standing argument and DENIED as moot as to the remainder.

II. JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and derives its authority to hear and determine this matter on reference from the District Court pursuant to 28 U.S.C. §§ 157(a) and (b)(1). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).

III. FACTS AND PROCEDURAL HISTORY

The Court recites the following facts and procedural history, which are not in dispute:

1. The Debtor filed a Chapter 11 Voluntary Petition on October 22, 2015 (ECF No. 1).

2. On January 27, 2016, the case was converted to a Chapter 7 case (ECF No. 36).

3. On March 4, 2016, Mr. McMahon filed proof of claim 4-1 ("Claim 4-1") in the amount of $ 249,533.62 on the basis of a jury verdict in the New York Supreme Court, Orange County, Index No. 4523/2012 ("Suit 1").

4. On April 21, 2016, Mr. McMahon filed Claim 5-1 in the amount of $ 298,587.74 on the basis of a suit pending in the New York Supreme Court, Orange County, Index No. 297/2015 ("Suit 2").

5. Mr. Manners, the Debtor's principal, filed a motion for leave to object to Claim 5-1 on October 20, 2017 (ECF No. 212). Mr. McMahon objected to that motion (ECF No. 213). The Court granted Mr. Manners derivative standing on February 13, 2018 (ECF No. 257), and, in a supplemental order dated February 23, 2018 (ECF No. 263), the Court explained that the grant of derivative standing was to allow Mr. Manners to first seek relief from the automatic stay to reduce the jury verdict in Suit 1 to a final judgment and then file an objection to Claim 5-1.

6. Mr. Manners and the Chapter 7 Trustee, Richard M. Coan ("Trustee"), filed a joint motion for approval of stipulation for relief from the automatic stay to allow Mr. Manners to reduce the jury verdict in Suit 1 to judgment (ECF No. 269). Mr. McMahon objected, raising issues of standing, judicial estoppel, and equitable considerations (ECF No. 275).

7. On March 27, 2018, Mr. Manners filed his objection to Claim 5-1, raising issues of res judicata, judicial estoppel, and Mr. McMahon's employment status (ECF No. 281).

8. The Court granted the motion for relief from stay on April 26, 2018 (ECF No. 297). In its order, the Court noted that allowing formal judgment in Suit 1 to enter "would allow the issues related to res judicata, collateral estoppel, the [Rooker–Feldman ] doctrine, and judicial estoppel to be distinctively and properly briefed and tried in a contested hearing where the legal significance of the jury verdict and judgment in Suit 1 can be evaluated consistent with applicable law."

9. On May 5, 2018, Mr. McMahon appealed the Court's rulings on derivative standing and relief from stay to the District Court (ECF No. 306). The Court denied Mr. McMahon's motion to stay pending appeal (ECF No. 310) and request for a preliminary injunction (ECF No. 313) on May 22, 2018 (ECF No. 327).

10. On June 22, 2018, the District Court dismissed the appeal and remanded the case to this Court (ECF No. 359). In its ruling, the District Court held that Mr. McMahon lacked standing to appeal the grant of derivative standing and relief from stay (ECF No. 360).

11. On June 28, 2018, the New York Supreme Court, Orange County entered final judgment in Suit 1 (ECF No. 380).

12. Mr. McMahon filed the Motion to Strike on August 20, 2018, arguing that: (1) Mr. Manners lacks standing to contest Mr. McMahon's claims; (2) res judicata and collateral estoppel do not preempt Mr. McMahon's claims; and (3) Mr. Manners did not have permission from the Court to object to Claim 5-1 on the basis of judicial estoppel, which Mr. McMahon also argues is inapplicable (ECF No. 385).

13. The Court heard oral arguments on October 11, 2018 (ECF No. 403). At the hearing, the Court took judicial notice of the proceedings in Suit 1 and Suit 2, to which no party objected (ECF No. 407). The Court then requested and received copies of the operative complaint and jury instructions from Suit 1 and the defendants' answer to the complaint in Suit 2 (ECF Nos. 407 and 410). Later, the Court requested and received copies of all motions, responses, and replies filed by the parties, along with any judicial rulings, orders, and decisions in Suit 2 that predated the commencement of this bankruptcy case (ECF Nos. 411, 413, 414, and 415).

IV. CONCLUSIONS OF LAW

A. Applicable Law

1. Objections to Claims

A properly filed proof of claim is prima facie evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f). Unless a party in interest objects, it is deemed allowed. 11 U.S.C. § 502(a). An objection must be lodged in accordance with Fed. R. Bank. P. 3007. The objecting party must "produce evidence at least equal in probative force to that offered by the proof of claim and which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency." In re Driscoll , 379 B.R. 415, 420 (Bankr. D. Conn. 2008) (citations omitted). "If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence. The burden of persuasion is always on the claimant." In re Vanegas , 290 B.R. 190, 193 (Bankr. D. Conn. 2003) (citations omitted).

Claims may be disallowed if "such claim is unenforceable against the debtor and property of the debtor, under any ... applicable law[.]" 11 U.S.C. § 502(b)(1). "To determine whether a claim is allowable by law, bankruptcy courts look to applicable nonbankruptcy law."

In re Residential Cap., LLC , 513 B.R. 446, 458 (Bankr. S.D.N.Y. 2014) (citation and internal quotation marks omitted).

2. Motions to Strike

"Motions to strike are viewed with disfavor and [are] infrequently granted.... In order for a court to strike a defense as insufficient: (1) there must be no question of fact that might allow the defense to succeed; (2) there must be no substantial question of law that might allow the defense to succeed; and (3) the [respondent] must be prejudiced by the inclusion of the defense.... As the Second Circuit has noted [e]ven when a defense presents a purely legal question, the courts are very reluctant to determine disputed or substantial issues of law on a motion to strike; these questions quite properly are viewed as determinable only after discovery and a hearing on the merits. To do otherwise would be to run the risk of offering an advisory opinion on an abstract and hypothetical set of facts." In re Lehman Bros. Holdings Inc. , 474 B.R. 441, 446–47 (Bankr. S.D.N.Y. 2012) (citations and internal quotation marks omitted).

Although motions to strike are viewed with disfavor, the Court's disposition of the Objection renders much of the Motion to Strike moot. The Court, therefore, need only address Mr. McMahon's standing argument, which is meritless. With that noted, the Court now addresses the parties' substantive arguments.

B. Mr. Manners Has Standing to Object to Claim 5-1

Mr. McMahon again challenges Mr. Manners's standing to object to Claim 5-1. As noted above in the factual recitation and footnote 1, the Court granted Mr. Manners derivative standing in order to object to Claim 5-1, among other things. Mr. McMahon appealed the Court's order granting derivative standing to the District Court, which dismissed Mr. McMahon's appeal, holding that Mr. McMahon lacks standing to contest this Court's order. Having taken his appeal no further, Mr. McMahon's lack of standing is now the law of the case, and this Court has no power to reject the express holding of an appellate court. See United States v. Ben Zvi , 242 F.3d 89, 95 (2d Cir. 2001) ("The mandate rule compels compliance on remand with the dictates of the superior court and forecloses relitigation of issues expressly or impliedly decided by the appellate court." [citation, emphasis, and internal quotation marks omitted] ). Mr. McMahon's protestation that "the issue simply has not been raised before" (ECF No. 399) is both incorrect and irrelevant. Therefore, this Court must reject Mr. McMahon's argument that Mr. Manners does not have standing and DENY the Motion to Strike in this respect.

C. Res Judicata Does Not Bar Claim 5-1

There is no dispute that the pending lawsuit underlying Claim 5-1 is premised on the same core facts as the judgment underlying Claim 4-1. Mr. Manners argues that res judicata, therefore, bars Claim 5-1. The Court reluctantly finds, despite its concerns about judicial efficiency, that res judicata does not apply...