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Home / Case News / A Trustee’s Avoidance Claim Under 11 U.S.C.S. § 544, Was Not Subject to Dismissal Despite the State Court’s Ruling That the Parties Contract was Unenforceable.

A Trustee’s Avoidance Claim Under 11 U.S.C.S. § 544, Was Not Subject to Dismissal Despite the State Court’s Ruling That the Parties Contract was Unenforceable.

July 22, 2019, Eastern District of New York – Debtor Jadeco Constr. Corp 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. In June 2008, the Debtor successfully submitted a proposal (“Bid”) to perform specific work for the Defendant Town of Smithtown regarding the removal and replacement of curbs and sidewalks. The contract awarded under the Bid authorized the Debtor to perform tasks 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 work under the contract and received payment. Subsequently, the parties agreed to extend the term of the contract through June 17, 2010, and later through June 30, 2011. This extension went beyond the two-year extension provided under the contract by thirteen days. Before June 17, 2011, the Defendant issued a request for a proposal (“Second Bid”), a successor contract for municipal work similar to the work under the Bid. The Debtor was notified that it was the low bidder on the Second Bid, and was instructed to provide certain affidavits regarding a required apprentice program. On June 29, 2011, the Town sent the Debtor a “blanket” purchase order for sidewalk and curbed replacement and repair. 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.

However, the Debtor was not awarded the Second Bid, and eventually, it went to some other company inAugust, 2011. The Debtor continued to perform work for the Town between June 17, 2011, and October 2011. However, the Town Board did not approve any work performed by the Debtor between June 17, 2011, and October 2011.

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. 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 was given adversary proceeding no. 16-8062. On June 10, 2016, the Town filed a motion to abstain and for remand, which the Debtor opposed. On January 3, 2017, the removed action was closed. However, 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. The Court 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.

On January 22, 2018, the Trustee commenced an adversary proceeding to recover the value of the labor and materials provided to the Town for $441,667.26, which corresponded with the amount alleged to be due and owing under the contract. The Defendant brought a motion to dismiss the Trustee’s complaint. The Defendant argued that the Trustee’s powers under § 544 could not be used to recover a transfer made according to a contract, which was unenforceable. Thus, it cant be asked to pay any judgment based on the work which was performed after expiry of the contract.

The Defendant further acknowledged that it did not pay any consideration for the materials and labor provided by the Debtor after the expiration of the contract. However, it also argued that the expiry of the contract foreclosed any ability to recover the value of the materials and labor provided by the Debtor to the Town. The Trustee opposed the Town’s motion alleging that the Trustee was not seeking to enforce the contract. Instead, he intends to use its powers under § 544 to recover transfers for the benefit of the creditors of the Debtor. The Trustee also claimed that the Town was not immune under any theory, including the Rooker-Feldman doctrine, res judicata or collateral estoppel.

The Bankruptcy Court agreed with the Trustee and denied the Town’s motion to dismiss. The Court held that the Trustee’s fraudulent conveyance claim under 11 U.S.C.S. § 544, to recover the value of labor and materials the Debtor supplied to a town, was not subject to dismissal. The Court reasoned that while a State Court found that the Debtor’s contract with the Town had expired and could not be enforced, the enforceability of the contract was not dispositive of the issues raised in the adversary proceeding.

The Court also added that the Rooker-Feldman doctrine did not apply in the case at bar because the State court decision did not need to be disturbed or overturned to succeed in an adversary proceeding. Further, the Court held that to the extent there was a conflict between the Bankruptcy avoidance statutes and State law, the Supremacy Clause mandated that the right to recover under a fraudulent conveyance theory remained unfettered by the state and local laws that allegedly stood in the Trustee’s way.