Opinion
02-03322-JKC-7
December 9, 2002
This matter comes before the Court on the Motion for Summary Judgment filed by the Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit (the "Board") and Excel Legacy Corporation ("Excel") (collectively, the "Objecting Creditors"). The Court, having reviewed the parties' designated evidence and supporting briefs, denies the Motion for Summary Judgment and concludes that dismissal of this case is not warranted on the grounds asserted by the Objecting Creditors.
Discussion and Decision Summary Judgment Standard
Under Federal Rule of Civil Procedure 56(c), made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). With a motion for summary judgment, the burden rests on the moving party to demonstrate "that there is an absence of evidence to support the nonmoving party's case." Id. at 325. After the moving party demonstrates the absence of a genuine issue for trial, the responsibility shifts to the non-movant to "go beyond the pleadings" to cite evidence of a genuine factual dispute precluding summary judgment. Id. at 322-23. If the non-movant does not come forward with evidence that would reasonably permit the finder of fact to find in its favor on a material question, then the court must enter summary judgment against it. Waldridge v. American Hoechst Corp., 24 F.3d 918, 920 (7th Cir. 1994) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-87 (1986)).
Statement of Facts and Procedural History
The facts material to the Objecting Creditors' motion are not in dispute. In 1994, Entercitement purchased a 510-acre track of land in Hendricks and Morgan Counties to build a theme park (the "Real Property"). At the time, Entercitement was owned by the Board, the Indiana Carpenters Pension Trust Fund (the "Carpenter Fund"), Indiana Electrical Workers Pension Trust Fund (the "Electrical Workers Fund") and GRP Development. Construction began on the project, with Manhattan Construction, Inc. ("Manhattan") serving as the general contractor, on November 11, 1996. In May of 1997, all of the obligations under the Manhattan-Entercitement contract were completed and fully paid, and the contract was concluded.
In June of 1998, Entercitement entered into a contract with PCL/Calumet, a Joint Venture ("PCL") to serve as general contractor on the project. Approximately five months later, PCL sent a notice to Entercitement terminating their contract due to non-payment. Nevertheless, PCL remained on the project and entered into a subsequent agreement with Entercitement. In the end, Entercitement failed to pay PCL for the work done under either the initial contract or subsequent agreement. On December 4, 1998, PCL filed a Notice of Intention to Hold Mechanic's Lien on the Real Property with the Hendrick's County Recorder's Office in the amount of $6,061,521.00.
In November of 1997, Kennedy Funding, Inc. ("Kennedy") loaned Entercitement $2,000,000.00, as evidenced by a Promissory Note (the "Note"). As security for the loan, Kennedy obtained and recorded a mortgage on the Real Property (the "Mortgage"). The Mortgage was recorded in Hendricks County on November 7, 1997, and in Morgan County on November 13, 1997. On January 22, 1999, Kennedy assigned the Note and Mortgage to the Board, which was acting as an agent for itself, the Electrical Workers Fund and the Carpenter Fund. As consideration for the assignment, the Board paid Kennedy $2,029,333.33, which included outstanding principal, all accrued and unpaid interest, and other charges due under the Note. The Board also loaned Entercitement an additional $475,000.00, pursuant to a future advance clause in the Mortgage and made various modifications to the Mortgage, i.e., the loan amount was increased from $2,000,000.00 to $2,504,333.33; the interest became due when the principal was due, rather than monthly; and the lender list was revised to reflect the new lenders. On February of 1999, the Board assigned a partial interest in the Note and Mortgage to Excel, which was acting as an agent for itself, the Board, the Electrical Workers Fund, and the Carpenter Fund.
On October 22, 1999, PCL filed a complaint seeking to foreclose its mechanic's lien, for breach of contract, account stated, and unjust enrichment. The complaint requested that judgment be entered in favor of PCL against Entercitement in an amount not less than $6,466,381.00. On May 11, 2000, PCL and Entercitement executed an Offer, Acceptance and Entry of Judgment for $7,050,000.00 payable by Entercitement to PCL. The judgment deemed PCL's mechanic's lien valid and enforceable, ordered that the lien be foreclosed and ordered that the property be sold in the event Entercitement did not satisfy he judgment. However, several issues, including the relative priorities of the liens held by the Board, Excel and PCL, were left unresolved.
Eventually, the trial courts rejected PCL's contention that its mechanic's lien related back to the beginning of Manhattan's work on the project and found instead the lien dated back to June of 1998, the date PCL began work under its contract with Entercitement. The courts also found that the Board and Excel's lien on the property related back to the date the Mortgage was first recorded by Kennedy in November of 1997 and, thus, that the Mortgage had priority over PCL's lien. Summary judgment was entered in favor of the Board and Excel on that basis.
The matter was tried before and judgment was entered jointly by the superior courts in both Hendricks and Morgan Counties.
PCL timely appealed the trial courts' ruling to the Indiana Court of Appeals. In an opinion dated December 21, 2001, a panel of the court unanimously affirmed the trial courts' conclusion that the Mortgage lien had priority over PCL's mechanic's lien. PCL/Calumet, a Joint Venture v. Entercitement, LLC, 760 N.E.2d 633 (Ind.Ct.App. 2001). The appellate court also rejected PCL's assertion that it "should apply the doctrine of equitable subordination," stating in part:
It appears from the designated evidence that PCL raised the issue of the Objecting Creditors' allegedly "unclean hands" at some point before the trial courts. However, it is not clear from the record whether PCL asserted a claim before the trial courts for "equitable subordination" or whether that term was first used on appeal. In any event, the trial courts did not discuss the equities of this case in any of the rulings that were designated as evidence before this Court.
As recognized by a panel of this court, reliance on this doctrine in a priority dispute unrelated to a bankruptcy proceeding is unwarranted because all three of the conditions that must be met in order for the doctrine to apply "hinge in great part upon the Bankruptcy Code itself." Citing First Bank of Whiting v. Samocki Bros. Trucking Co., 509 N.E.2d 187, 197-98 (Ind.Ct.App. 1987) (citing In re Mobile Steel Co., 563 F.2d 692, 700 (5th Cir. 1977)). Because this is not a bankruptcy proceeding, like the First Bank of Whiting court, we find that "we can ignore these arguments of the parties and address the law as we found it to be." Id. at 198.
Id. at 640 (footnote omitted). Notwithstanding this language, the appellate court went on to discuss the Objecting Creditors' actions with respect to the assignment of, alterations to, and additional lending under the Mortgage, ultimately finding that all such actions were proper. The Court concluded its decision by stating, "[b]ecause we find that the bankruptcy doctrine of equitable subordination does not directly apply to this case and the mortgage and applicable statutes supported all of the actions taken by [the Board] and Excel, we conclude that . . . the mortgage is not subordinate to PCL/Calumet's mechanic's lien." Id. PCL timely filed a petition to transfer to the Indiana Supreme Court, but the petition was eventually denied.
On March 1, 2002, PCL, Gradex, Inc. ("Gradex"), and Alt Witzig ("AW") (collectively, the "Petitioning Creditors") filed an involuntary petition under Chapter 7 of the United States Bankruptcy Code against Entercitement. In response to the petition, the Objecting Creditors filed a Motion to Dismiss, wherein they explicitly challenged the petition under §§ 303 and 305 of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq. (the "Code"), and implicitly under Code § 707. As part of their Motion, the Objecting Creditors directed the Court to consider certain extrinsic evidence, over the objection of the Petitioning Creditors.
Ultimately, the Petitioning Creditors asked the Court to consider extrinsic evidence in their response to the Motion to Dismiss.
In an order dated May 22, 2002, the Court found that the Objecting Creditors lacked standing to object to the involuntary petition under Code § 303 and that, because the Debtor did not contest the petition, an order for relief had to be entered. However, the Court did not resolve the Objecting Creditors' arguments that the case should be dismissed under either §§ 305 or 707. So that it could more properly consider the parties' extrinsic evidence, the Court requested the Objecting Creditors to resubmit their arguments by way of a motion for summary judgment.
The Objecting Creditors timely complied with the Court's request and, in their Motion for Summary Judgment, assert that the case should be dismissed because it is merely an improper attempt by PCL to overturn the state court judgment in contravention of the Rooker-Feldman doctrine. PCL challenges this characterization and insists that they filed the petition in a good-faith effort to pursue a claim for equitable subordination against the Objecting Creditors in the only forum where such a claim can be brought. For the reasons stated below, the Court agrees with PCL.
PCL has, in fact, recently initiated an action against the Objecting Creditors, seeking to equitably subordinate their claims and to avoid them as fraudulent transfers.
The Rooker-Feldman Doctrine
"The Rooker-Feldman doctrine derives its name from two decisions of the Supreme Court, Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983)." Remer v. Burlington Area Sch. Dist., 205 F.3d 990, 996 (7th Cir. 2000). Simply put, the Rooker-Feldman doctrine "precludes lower federal court jurisdiction over claims seeking review of state court judgments . . . [because] no matter how erroneous or unconstitutional the state court judgment may be, the Supreme Court of the United States is the only federal court that could have jurisdiction to review a state court judgment." Id. Thus, if a claim is barred by the Rooker-Feldman doctrine, a federal court lacks subject matter jurisdiction over the case. Id.
Rooker-Feldman is based on the recognition that inferior federal courts generally do not have the power to exercise appellate review over state court decisions. Garry v. Geils, 82 F.3d 1362, 1365 (7th Cir. 1996). In Rooker, the Supreme Court held that even if a state court decision was wrong, only the Supreme Court has the power to reverse or modify that judgment, since the jurisdiction of federal district courts is strictly original. Rooker, 263 U.S. at 415-16, 44 S.Ct. at 150. Similarly, the Supreme Court held in Feldman that "a United States District Court has no authority to review final judgments of a state court in judicial proceedings." Feldman, 460 U.S. at 482, 103 S.Ct. at 1315. The Feldman Court emphasized that, under 28 U.S.C. § 1257 (which gives the Supreme Court the power to review final judgments of the highest state courts), only the Supreme Court itself is empowered to review the final determinations of state courts. Garry, 82 F.3d at 1365. The Seventh Circuit has "consistently emphasized that `taken together, Rooker and Feldman stand for the proposition that lower federal courts lack jurisdiction to engage in appellate review of state court determinations.'" Id. (quoting Ritter v. Ross, 992 F.2d 750, 752 (7th Cir. 1993) (citations omitted), cert. denied, 510 U.S. 1046, 114 S.Ct. 694 (1994)).
In its most straight-forward presentment, the Rooker-Feldman doctrine bars federal jurisdiction when the federal plaintiff alleges that his injury was caused by a state court judgment. Remer, 205 F.3d at 995. However, the doctrine also extends to those claims that are "inextricably intertwined" with a state court decision. A.D. Brokaw v. Weaver, 305 F.3d 660, 664 (7th Cir. 2002); Remer, 205 F.3d at 996. "The crucial point is whether the [federal] court is in essence being called upon to review the state-court decision.'" Ritter, 992 F.2d at 754 (quoting Feldman, 460 U.S. at 483-84 n. 16, 103 S.Ct. 1303). Stated differently, "[t]he pivotal inquiry . . . is whether the federal plaintiff seeks to set aside the state court judgment or whether he is, in fact, presenting an independent claim." Remer, 305 F.3d at 996 (citations omitted).
As suggested by the Indiana Court of Appeals in its decision, equitable subordination is a doctrine exclusive to bankruptcy. "The notion of equitable subordination, as embodied in Code § 510(c), is peculiar to bankruptcy law and an issue which can only be decided in a bankruptcy setting." Poughkeepsie Hotel Ass'n Joint Venture, 132 B.R. 287, 292 (Bankr.S.D.N.Y. 1991). "Equitable subordination is distinctly a power of federal bankruptcy courts, as courts of equity, to subordinate the claims of one creditor to those of others." HBE Leasing Corp. v. Frank, 48 F.3d 623, 633 (2d Cir. 1995). "This broad equitable power to disallow and reorder claims, first announced in bankruptcy case law and now codified in the Bankruptcy Code . . . derives from the Bankruptcy Court's role as administrator of the debtor's estate for the equal benefit of all creditors." Id. (internal citations omitted).
A number of other courts have cited Poughkeepsie for this proposition. See, e.g., Minnesota Corn Processors, Inc. v. American Sweeteners, Inc. (In re American Sweeteners, Inc.), 248 B.R. 271, 280 (Bankr.E.D.Penn. 2000); The Merchants Bank v. C.R.Davidson Co., (In re CRD Sales Leasing, Inc.), 231 B.R. 214, 219 n. 22 (Bankr.D.Vt. 1999); N. Parent, Inc. v. Cotter Co. (In re N. Parent, Inc.), 221 B.R. 609, 630 (Bankr.D.Mass. 1998);
It seems clear that the adjudication of PCL's equitable subordination claim does not require the Court to overturn the fundamental and determinative conclusion reached by the state courts, i.e., that the Objecting Creditors' mortgage lien attached and was recorded prior to the attachment and filing of PCL's mechanic's lien. The Indiana Court of Appeals finding that the Objecting Creditors did nothing inequitable does not alter the Court's conclusion. That finding was arguably unnecessary to the appellate court's holding in light of its somewhat contradictory statement that it had to "ignore" PCL's equitable subordination argument. Furthermore, as stated by the Seventh Circuit, "`an issue cannot be inextricably intertwined with a state court judgment if the plaintiff did not have a reasonable opportunity to raise the issue in state court proceedings.'" Brokaw, 305 F.3d at 668 (quoting Long v. Shorebank Devel. Corp., 182 F.3d 548, 558 (7th Cir. 1999)). It can hardly be said that PCL had a "reasonable opportunity" to raise the issue of equitable subordination before the state court if such a claim does not exist outside bankruptcy law.
Based on the foregoing, the Court cannot conclude that Rooker-Feldman deprives the Court of subject matter jurisdiction over either this case or its related adversary proceeding. To conclude otherwise would deprive PCL of the only forum in which it can properly assert a claim for equitable subordination. PCL's pursuit of its claim for equitable subordination does not offend the principles behind Rooker-Feldman and is consistent with the Bankruptcy Code's goal of an equitable distribution to creditors. Accordingly, the Court rejects the Objecting Creditors' contention that PCL's initiation of this case constitute bad faith and denies the Objecting Creditors' Motion for Summary Judgment. A separate judgment order is entered herewith.
This is not to say that PCL's claim are necessarily meritorious or that the state court judgment and/or appellate court decision do not have any preclusive effect on either or both of PCL's claims against the Objecting Creditors. See, e.g., Garry, 82 F.3d at 1365-1369 (discussing the distinction between res judicata and Rooker-Feldman). See also, SUZANNA SHERRY, Rooker-Feldman, from the Ground Up, 74 NOTRE DAME L.R 1085, 1097-1100 (1999) (distinguishing between res judicata and Rooker-Feldman).