In a recent opinion, the Bankruptcy Court for the Eastern District of New York concluded that the “law of the case” doctrine did not bind the court to its prior ruling that a trustee had adequately alleged claims against debtors for turnover, conversion, and violations of the automatic stay.
In Geltzer v. Brizinova, et al., the court considered a second attempt by the debtors to obtain an order dismissing the adversary proceeding filed against them based on the new theory that the property at issue was not property of the estate. Adv. Pro. No. 15-01073-ess (Bankr. E.D.N.Y. Sept. 26, 2018). The trustee had commenced an adversary proceeding against the debtors, who are husband and wife, alleging that the debtors improperly refused to turn over estate property in the form of post-petition sale proceeds (the “Post-Petition Sale Proceeds”) from an auto supply parts company (the “Company”) listed on the debtors’ schedules as owned one hundred percent by the wife.
The debtors initially filed a motion to dismiss the complaint for failure to state a claim (the “Motion to Dismiss”). In Geltzer v. Brizinova (In re Brizinova), 554 B.R. 64 (Bankr. E.D.N.Y. 2016) (“Brizinova I”), the court denied the Motion to Dismiss and sustained the Trustee’s turnover and stay violation claims. The court also dismissed the trustee’s conversion claim with respect to the Post-Petition Sale Proceeds on grounds that the Trustee did not adequately allege that the debtors converted specifically identifiable funds.
Soon thereafter, the trustee commenced a second adversary proceeding against the debtors’ daughter-in-law, (the “Soshkin Complaint”) seeking to recover the same Post-Petition Sale Proceeds. Once again, the trustee asserted claims for turnover, stay violations, and conversion of the Post-Petition Sale Proceeds. The daughter-in-law moved to dismiss the Soshkin Complaint, and arguing, for the first time, that the property at issue was property of the Company – not property of the estate. On this theory, the court granted the motion and dismissed the Soshkin Complaint.
Following the court’s dismissal of the Soshkin Complaint, the debtors filed a motion for judgment on the pleadings and for the entry of an order dismissing the complaint for lack of subject matter jurisdiction (the “Motion for Judgment”). The debtors adopted the theory that the Company’s assets were not assets of the debtors and did not form any part of the estate. Therefore, the debtors argued that they were entitled to judgment in their favor on the trustee’s claims and also that the court lacked subject matter jurisdiction over the complaint.
In response, the trustee argued that in Brizinova I the court not only ruled that he had adequately pled that the Post-Petition Proceeds were property of the estate, but that the court explicitly held that it had jurisdiction over the trustee’s claims for turnover, conversion and violation of the automatic stay. Such holdings, according to the trustee, constituted “the law of the adversary proceeding.” Therefore, in light of the court’s decision in Brizinova I and the law of the case doctrine, the court should conclude that the trustee’s claims were adequately pled, and deny the Motion for Judgment.
In considering the trustee’s argument on the “law of the case” doctrine, the court relied on a recent Second Circuit case that noted “that [the doctrine of law of the case] is not a rule that bars courts from reconsidering prior rulings, but is rather ‘a discretionary rule of practice [that] generally does not limit a court’s power to reconsider an issue.’” Colvin v. Keen, 900 F.3d 63, 68 (2d Cir. 2018) (quoting In re PCH Assocs., 949 F.2d 585, 592 (2d Cir. 1991)). The court acknowledged that courts generally consider a range of circumstances in determining whether to apply the law of the case doctrine, however, two such considerations stood out as fundamental: (i) whether there is identity of parties between the prior and subsequent matters; and (ii) whether the prior decision is a final one.
Applying those considerations to the case at hand, the court found that neither its prior decision in Brizinova I, nor the “law of the case” doctrine required it to deny the Motion for Judgment. While there was an identity of parties, the decision in Brizinova I on the debtors’ Motion to Dismiss was not a final judgment. Ultimately, the court agreed that the Post-Petition Sale Proceeds were not property of the estate and granted the debtors’ Motion for Judgment as to all claims.