Opinion
Civ. No. 99-180 (DRD), Chapter 11 Case 97-23503 (RG), Adv. Pro. No. 97-2533 (RG)
April 28, 1999.
Richard Paul Shapiro, Esq., Middlebrooks Shapiro, P.C., for Appellant Anuco, Inc.
Daniel M. Eliades, Esq., Forman Eliades, LLC, for Appellee Business Cards Tomorrow, Inc.
O P I N I O N
Debtor-in-possession and appellant Anuco, Inc. ("Anuco") appeals from the December 17, 1998, order of the Honorable Rosemary Gambardella of the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). The order issued by Chief Judge Gambardella granted creditor-appellee Business Cards Tomorrow's ("BCT") motion for summary judgment in the above captioned adversarial proceeding. Additionally, the order denied the Appellant's motions for estimation of BCT's claim. For the reasons set forth below, the Bankruptcy Court's order will be affirmed.
I. BACKGROUND
The parties made no objections to the Bankruptcy Court's factual findings in the underlying adversary proceeding. Moreover, a review of the record indicates that these factual findings are not "clearly erroneous." See Fed.R.Bankr.P. 8013(a). Accordingly, those findings are adopted for the purposes of this appeal.
BCT is a franchisor specializing in the wholesale printing business.See Adversary Complaint ¶ 5. In late 1987, Robert Nugent, Jr., son of Robert V. Nugent, Sr. and Marion Nugent (the "Nugents"), borrowed approximately $240,000 from his parents in order to facilitate the purchase of an existing BCT franchise located in East Hanover, New Jersey (the "East Hanover BCT Franchise"). Id. ¶¶ 6-8.
On March 10, 1988, BCT and Anuco executed a franchise agreement (the "Franchise Agreement"), pursuant to which Anuco became franchisee of the East Hanover BCT Franchise. Id. ¶ 11. Robert Nugent, Jr., as president of Anuco, signed the Franchise Agreement. Id. The Franchise Agreement identifies BCT as "Franchisor" and Anuco, Inc., Robert V. Nugent, Sr., and Marion Nugent, collectively, as "Franchisee." See Franchise Agreement at 1. The Franchise Agreement obligates the "Franchisee" to pay BCT, as Franchisor, during the term of the Franchise Agreement, "a continuing Royalty Fee of 6% of the Franchisee's Gross Sales for the use of Franchisor's trademarks, trade names and B.C.T. system." Id. at 3. It also provides that "[t]he royalty fee will be five (5%) percent for the first year of operation." Id.
The Franchise Agreement provided BCT with the option of terminating "Franchisee's rights and Franchise hereunder . . . if Franchisee commits a material breach of the Franchise Agreement or if he materially defaults in the payment of any indebtedness to the Franchisor." Id. at 10. With regard to its termination, the Franchise Agreement provided in part that:
[u]pon termination for any reason, Franchisee shall immediately pay all monies due Franchisor under this Franchise Agreement, and otherwise as a result of any purchase of supplies or inventories from [BCT] or any division thereof. Upon termination of this Agreement, all Franchisee's rights hereunder shall terminate and Franchisee shall cease to use any copyrights or other trade secrets and all . . . trademarks, service marks and trade names, paper or plastic goods, emblems and displays with the Franchisor's names imprinted thereon.Id. at 12.
The Nugents asserted that they executed the Franchise Agreement only in their respective capacities as Anuco's "nominal Vice-President" and "nominal Secretary." See Adversary Complaint ¶ 23. The Nugents also asserted that BCT never requested that they serve as individual franchisees under the Franchise Agreement. Id. ¶ 22. They also claimed that they never agreed to serve in such a capacity. Id. Additionally, they argued that "[a]fter the Franchise Agreement was signed by BCT, Robert Nugent, Jr. and [the Nugents], certain material provisions of the Franchise Agreement were altered by BCT and Anuco." Id. ¶ 15. They maintained that while Robert Nugent, Jr. and Marion Nugent initialed such alterations, "Robert Nugent, Sr. did not initial such material alterations, nor was he aware of such material alterations."Id.
From March 1988 to May 1991, Anuco operated as Franchisee of the East Hanover BCT Franchise. Id. ¶ 17. On November 4, 1991, however, BCT filed a Complaint for Damages and Equitable Relief in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, against the Appellant and the Nugents for breach of the Franchise Agreement. See Willis Certif. ¶ 2. BCT sought damages resulting from Anuco's and the Nugents' failure to pay royalties pursuant to the Franchise Agreement. Id. The "General Allegations" portion of the state court complaint provided in relevant part:
3. That on or about March 10, 1988, the parties entered into a Franchise Agreement. . . .
* * *
5. That defendants are the Franchisees under said Franchise Agreement.Id.
Count II of the State Court Action provides in relevant part:
6. That defendants filed royalty reports through May 10, 1991, reflecting royalties due the plaintiff in the approximate sum of $74,251.30, however, Defendants have to date failed and refused to pay said royalties, as required of them under paragraph 4 of the aforementioned franchise agreement.
7. That Defendants have failed and refused to file their royalty reports since May 10, 1991, as required of them under paragraph 4 of the aforementioned franchise agreement.
8. That plaintiff has performed all conditions precedent, required of it.Id.
In their Answer and Affirmative Defenses (the "Answer"), Anuco and the Nugents claimed that BCT had engaged in deceptive and unfair trade practices, misrepresentation, fraud and unconscionable sales practices.See Answer ¶ 2. In response to General Allegation No. 5, they responded, "Admitted." Id. ¶ 5. The Answer also refers to a "Counterclaim." Id. ¶ 10 ("As their First Affirmative Defense, Defendants would state that the Franchise Agreement was procured through fraud as set forth more fully in the Counterclaim."). The parties did not, however, provide a copy of this counterclaim to the Bankruptcy Court.
The parties conducted discovery over the course of the next five years. See Willis Certif. ¶ 3. On February 3, 1997, the matter proceeded to trial before a judge and jury. Id. On February 10, 1997, the jury returned a unanimous verdict in favor of BCT and awarded damages of $938,000. Id. ¶ 5. Each of the defendants filed post-trial motions for judgment notwithstanding the verdict and/or for a new trial. Id. ¶ 6. BCT filed post-trial motions for counsel fees, taxation of costs, and pre-judgment interest. Id.
On or about March 20, 1997, Anuco filed a petition under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). See Panzer Cert. ¶ 5. On that same date, Anuco filed a motion for the entry of an order authorizing it to reject the Franchise Agreement. On March 25, 1997, the Nugents filed a petition under Chapter 11 of the Bankruptcy Code. Id.
On or about March 26, 1997, the Florida state court conducted a hearing concerning post-trial motions. See Willis Cert. ¶ 7. The state court denied Anuco's and the Nugents' post-trial motions and entered an order awarding counsel fees to BCT. Id. Due to the pending petitions for bankruptcy, however, the state court vacated these orders. See BCT's Application in Support of Motion For Summary Judgment ¶ 9.
On April 9, 1997, BCT filed a motion requesting the establishment of the effects of Anuco's purported rejection of the Franchise Agreement. On July 3, 1997, the Nugents filed the underlying Adversary Complaint. In Count I of their Adversary Complaint, the Nugents sought a determination that they were "not personally liable to BCT as franchisees under the Franchise Agreement." See Adversary Complaint ¶¶ 21-25. They alleged that "[b]y signing the Franchise Agreement in their capacities as nominal officers of Anuco, [they] cannot be personally liable to BCT under the Franchise Agreement." Id. ¶ 25.
In Count II, the Nugents sought a determination "that, if BCT claims that [they] are franchisees along with Anuco, or that [they] are somehow guarantors of Anuco's obligations under the Franchise Agreement, the Franchise Agreement is void as to [them]." Id. ¶¶ 26-28. The Nugents alleged, specifically, that "the Franchise Agreement is void as to [them] because it was materially altered by BCT and Anuco without [their] explicit or informed consent." Id. ¶ 28.
In Count III, the Nugents sought a determination that "any liability . . . for unpaid royalty fees under the Franchise Agreement would include liability only for unpaid royalty fees that accrued prior to the July 14, 1991 termination date of the Franchise Agreement." Id. ¶¶ 29-33. They alleged, specifically, that "[t]he term of the Franchise Agreement ended in May 1991 when BCT ceased operating as a BCT Franchise under the Franchise Agreement," and therefore, that "no royalty fees are owed under the Franchise Agreement for any period after the term of the Franchise Agreement ended in May 1991." Id. ¶¶ 31, 33.
On July 25, 1997, BCT filed separate proofs of claim, each in the amount of $1,262,080.00, in the Nugents' and Anuco's respective bankruptcy proceedings. See Proofs of Claim Dated July 25, 1997. On August 15, 1997, the Bankruptcy Court entered an order declaring that Anuco's "non-monetary obligations" under the Franchise Agreement, including a covenant not to compete, "survive notwithstanding [Anuco's] rejection of the Agreement under 11 U.S.C. § 365."
On September 19, 1997, the Bankruptcy Court entered an order granting, subject to its August 15, 1997, Order, Anuco's application to reject the Franchise Agreement. Pursuant to this order, the Bankruptcy Court deemed rejected, as of the filing date of Anuco's case, the Franchise Agreement as between BCT and Anuco. Id.
On September 23, 1997, Anuco filed a motion for the entry of an order providing for the estimation and determination of BCT's claim pursuant to § 502. On November 12, 1997, the Bankruptcy Court entered orders granting BCT's motions for relief from the automatic stay in the respective bankruptcy cases for the purpose of allowing the Florida court to enter judgment in the state court action. Each order provided that "[t]he foregoing is without prejudice to the Debtors' right to object to the claim of BCT." Id.
On January 6, 1998, the Florida court, after conducting hearings, denied the Nugents' and Anuco's motions for judgment notwithstanding the verdict or for a new trial, and entered final judgment in the amount of $1,217,683.30 in favor of BCT (the "State Court Judgment"). See Willis Cert. ¶ 9. On January 20, 1998, the state court entered an order awarding attorneys' fees and costs in the amount of $124,023.61 in favor of BCT. On January 28, 1998, BCT filed amended proof of claims, each in the amount of $1,331,347.70, in the respective bankruptcy proceedings.
On February 5, 1998, the Nugents and Anuco filed appeals of the State Court Action to the District Court of Appeal for the Fourth District (the "Florida Court of Appeal"). On February 10, 1998, the Bankruptcy Court entered an order authorizing Anuco to intervene as a party plaintiff in the underlying adversary proceeding.
On February 23, 1998, BCT filed its motion for summary judgment in the adversary proceeding. On February 24, 1998, the Nugents and Anuco filed their own motions for the entry of an order providing for the estimation and determination of BCT's claim pursuant to § 365(g) and § 502. On February 26, 1998, BCT filed in the Nugents' case a motion for the entry of an order allowing and/or expunging claims.
A hearing on BCT's motion for summary judgment in the adversary proceeding, as well as the motions to estimate BCT's claim, was conducted by the Bankruptcy Court on March 31, 1998. After receiving supplemental submissions from the parties in September 1998, the Bankruptcy Court issued an opinion on November 30, 1998, granting BCT's motion for summary judgment on all counts and dismissing the adversary proceeding with prejudice. The Bankruptcy Court also denied the motions to estimate BCT's claim. These decisions were memorialized in an order entered on December 17, 1998. The Nugents and Anuco filed their notices of appeal and the designated record on appeal was filed with the district court on January 20, 1999.
Anuco's counsel stated at oral argument that Anuco was appealing not only the Bankruptcy Court's December 17, 1998, order, but the court's November 12 1997, order granting BCT relief from the automatic stay as well. Because Anuco failed to appeal this order within the ten day time period specified in the Federal Rules of Bankruptcy Procedure, the Court lacks jurisdiction to consider any such appeal.
The Nugents settled with BCT prior to oral argument and their appeal has been withdrawn.
II. STANDARD OF REVIEW
On appeal, a district court may set aside a bankruptcy court's factual findings only if they are clearly erroneous. Fed.R.Bankr.P. 8013(a). Issues committed to the discretion of the bankruptcy court may be disturbed only if the bankruptcy court abused its discretion. In re Vertientes, Ltd., 845 F.2d 57, 59 (3d Cir. 1988). The bankruptcy court's legal conclusions, however, are subject to the district court's plenary review. In re Modular Structures, Inc., 27 F.3d 72, 76 (3d Cir. 1994);Matter of J.P. Fyfe, Inc. of Florida v. Bradco Supply Corp., 891 F.2d 66, 69 (3d Cir. 1989); Hagaman v. State of New Jersey, Dep't of Environ. Protection and Energy, 151 B.R. 696, 698 (D.N.J. 1993).III. DISCUSSION
Anuco argues that Chief Judge Gambardella erred in determining that res judicata and the Rooker-Feldman Doctrine barred the re-litigation of their claims in the Bankruptcy Court, that the Rooker-Feldman Doctrine precluded the estimation of BCT's claim pursuant to § 502(c), and that irrespective of the Rooker-Feldman Doctrine, BCT's claim was neither contingent nor liquidated and was therefore not eligible for estimation under § 502(c). BCT contends, however, that the issues raised by Anuco in the adversary proceeding were thoroughly dealt with in the state court action and, therefore, its adversary proceeding is barred by res judicata and/or the Rooker-Feldman Doctrine. Accordingly, BCT argues that the Bankruptcy Court was correct in granting its motion for summary judgment.
A. Res Judicata
Res judicata, or claim preclusion, bars a party from litigating claims in a subsequent lawsuit that were or could have been raised in a prior action involving the parties or their privies when the prior action had been resolved by entry of a final judgment. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979). Federal courts are required by statute to give state court judgments "the same full faith and credit . . . as they have by law or usage in the courts of such State." 28 U.S.C. § 1738; see also Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980) ("Congress has specifically required all federal courts to give preclusive effect to state court judgments whenever the courts of the State from which the judgments emerged would so do.").
"It has long been established that [the Full Faith and Credit Statute] does not allow federal courts to employ their own rules of res judicata [or issue preclusion] in determining the effect of state judgments."Kremer v. Chemical Constr. Co., 456 U.S. 461, 481-82, 102 S.Ct. 1883, 72 L.Ed.2d 262, reh'g denied, 458 U.S. 1133, 103 S.Ct. 20, 73 L.Ed.2d 1405 (1982); see also Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274, reh'g denied, 471 U.S. 1062, 105 S.Ct. 2127, 85 L.Ed.2d 491 (1985); McNasby v. Crown Cork and Seal Co., 888 F.2d 270, 271 (3d Cir. 1989), cert. denied, 494 U.S. 1066, 110 S.Ct. 1783, 108 L.Ed.2d 784 (1990); In re Chen, 227 B.R. 614, 624-25 (D.N.J. 1998). "This statute directs a federal court to refer to the preclusion law of the State in which the judgment was rendered." Marrese, 470 U.S. at 380, 105 S.Ct. 1332; see also Kremer, 456 U.S. at 482, 102 S.Ct. 1883 (holding that a federal court must "accept the rules chosen by the State from which the judgment is taken"). Accordingly, in determining the preclusive effect of the Florida state court action, Florida law is applied.
The Supreme Court of Florida, in Albrecht v. State, 444 So.2d 8 (Fla. 1984), announced its rule concerning the preclusive effect of prior final judgments. The Florida court stated that
[t]he general principle behind the doctrine of res judicata is that a final judgment by a court of competent jurisdiction is absolute and puts to rest every justiciable, as well as every actually litigated, issue. However, this principle only applies when the elements of res judicata are present and the doctrine is properly applied. Where the second suit is upon the same cause of action and between the same parties as the first, res judicata applies. The first judgment is conclusive as to all matters which were or could have been determined. It has been well settled by this Court that several conditions must occur simultaneously if a matter is to be made res judicata: identity of the thing sued for; identity of the cause of action; identity of parties; identity of the quality in the person for or against whom the claim is made.Id. at 11-12 (citations omitted). Additionally, when a Florida court makes a decision based on res judicata, it will look to whether or not the original claim was disposed of on the merits, see Florida Patient's Compensation Fund v. St. Paul Fire Marine Ins. Co., 535 So.2d 335, 336 (Fla.Dist.Ct.App. 1988), and whether the facts or evidence necessary to maintain the suit are the same in both actions. Albrecht, 444 So.2d at 12.
Looking to the individual criteria set forth by the Florida Supreme Court, it is clear that the Bankruptcy Court did not err as a matter of law when it dismissed Anuco's adversary action based upon the doctrine of res judicata. The first criterion, "identity of the thing sued for," has been met because Anuco sought relief from liability under the franchise agreement in both the Florida action and the adversary proceeding in the Bankruptcy Court. See University Drive Prof'l Complex, Inc. v. Federal Sav. and Loan Ins. Corp., 101 B.R. 790, 793 (S.D.Fla. 1989). The mere fact that the remedy sought in each case is different, however, does not prevent the application of res judicata. See Brennan v. Lyon, 915 S. Supp. 324, 329 (M.D.Fla. 1996). A request for a different type of relief in the second action will not prevent the first suit from serving as a bar. Maison Grande Condominium Ass'n v. Dorten, Inc., 621 So.2d 762, 764 (Fla.Dist.Ct.App. 1993), review denied, 634 So.2d 625 (Fla. 1994). Accordingly, this part of the Albrecht test has been satisfied.
The third element, identity of the parties, is also satisfied. The four parties to the adversary proceeding are the same four parties involved in the Florida state court action. Similarly, the fourth criterion, identity of the quality of the person for or against whom the claim is made, has also been met. In order to ascertain whether or not this element is present, a court will look to "whether the parties in the state action had the incentive to adequately litigate the claims in the same character or capacity as would the parties to the federal action." McDonald v. Hillsborough County Sch. Bd., 821 F.2d 1563, 1566 (11th Cir. 1987). As the Bankruptcy Court aptly noted, there is no question that the parties to these actions had the incentive to litigate the claims adequately in state court. A review of the record reveals that the parties spent over five years in discovery and motion practice in the state court case before ever making it to trial. Additionally, once it went to trial, a verdict was entered, and an appeal was filed. It is clear that the parties had the requisite incentive. Accordingly, this prong of theAlbrecht test has also been met.
The final element, the identity of the cause of action, requires the court to determine "whether the facts or evidence necessary to maintain the suit are the same in both actions." Albrecht, 444 So.2d at 12. The facts in the two lawsuits are identical because both suits arose out of the same transaction and occurrence. Specifically, the Florida state court action consisted of a breach of contract action filed by BCT and arising out of a franchise agreement with Anuco. Anuco, however, claimed that it was not liable to BCT for any fees or royalties called for under the Franchise Agreement. It also argued that the Franchise Agreement was void because of material alterations made by BCT. Additionally, Anuco asserted claims in that action and charged BCT with deceptive and unfair trade practices, misrepresentation, fraud, and unconscionable sales practices.
Likewise, in count one of the complaint in the adversary proceeding, Anuco sought a determination that it was "not personally liable to BCT as franchisees under the Franchise Agreement." See Adversary Complaint ¶¶ 21-25. In the second count of the complaint, Anuco sought a determination "that, if BCT claims that [the Nugents] are franchisees along with Anuco, or that [the Nugents] are somehow guarantors of Anuco's obligations under the Franchise Agreement, the Franchise Agreement is void as to [the Nugents]." Id. ¶¶ 26-28. Finally, in the third count of the complaint Anuco sought a determination that "any liability of . . . for unpaid royalty fees under the Franchise Agreement would include liability only for unpaid royalty fees that accrued prior to the July 14, 1991 termination date of the Franchise Agreement." Id. ¶¶ 29-33.
As the Bankruptcy Court accurately noted, "each proceeding concerns the same transaction or occurrence, namely, the execution and subsequent breach of the Franchise Agreement, [and therefore,] the State Court action and [the adversary proceeding] share the same operative facts and evidence." See November 30, 1998, Opinion of the Bankruptcy Court, at 17-18 [hereinafter Opinion]. "In fact, all of the facts giving rise to this action, namely, the execution of the Franchise Agreement, BCT's alleged `material alteration' of the agreement, and Anuco's purported cessation of operation as a Franchise under this agreement, existed prior to the filing of the State Court Action." Id. at 18. "Therefore, although the record does not reveal that the parties litigated the [specific] issues in Count II, namely, whether BCT `materially altered' the Franchise Agreement, or the issue in Count III, namely, whether the Franchise Agreement terminated in May 1991, [Anuco] could have introduced these issues in the State Court Action." Id. (footnote and citation omitted).
Florida has a strict rule against splitting causes of action which flow from the same transaction or occurrence. If there is a logical relationship between the operative facts and claims between parties in a lawsuit, then each party must bring all its claims in that suit or risk being barred from doing so at a later time. See Department of Agric. and Consumer Serv. v. Mid-Florida Growers, Inc., 570 So.2d 892, 901 (Fla. 1990); Stanley Builders, Inc. v. Nacron, 238 So.2d 606 (Fla. 1970); Signo v. Florida Farm Bureau Cas. Inc. Co., 454 So.2d 3, 5 (Fla. dist. Ct. App. 1984); see Fla.R.Civ.P. 1.170(a) ("A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, provided it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties over whom the court cannot acquire jurisdiction."); Londono v. Turkey Creek, Inc., 609 So.2d 14, 19 (Fla. 1992) ("Failure to raise a compulsory counterclaim in the first suit will result in a waiver of that claim."). All three claims in Anuco's adversary proceeding complaint amount to compulsory counterclaims under Florida's procedural rules and case law. Because Florida courts would not permit Anuco from pursuing these claims after BCT received its final judgment, the Bankruptcy Court was correct in dismissing these claims on the basis of res judicata. "To deny the preclusive effect in this case would reward [Anuco] for not fully and vigorously litigating in the State Court Action the issues arising from the execution and breach of the Franchise Agreement, and could foster . . . negative effects such as costly multiple lawsuits." See Opinion, at 24 (citations omitted).
Anuco's argument that res judicata does not apply because the Florida court's judgment was not final is misguided. Anuco argues that the orders issued by Judge Gambardella lifting the automatic stay to permit the Florida state court to conclude its proceedings and enter final judgment prohibit the application of res judicata. Anuco relies on the portion of the order that stated the limited stay relief "is without prejudice to the [Anuco's] right to object to the claim of BCT." The Bankruptcy Court's orders lifting the automatic stay do not prohibit the application of res judicata or the allowance of BCT's claim. What they do is allow Anuco the right to object to the claim in the Chapter 11 proceeding pursuant to Fed.R.Bankr.P. 9014.
B. Rooker - Feldman Doctrine
In deciding to grant BCT's motion for summary judgment, the Bankruptcy Court held that the Rooker-Feldman doctrine barred the claims set forth by Anuco in its complaint. See Opinion, at 26-29. Anuco claims that its adversary proceeding consisted of separate claims which were not subject to the final judgment issued by the Florida state court. Anuco argues that because these claims were not a part of the judgment, the Bankruptcy Court erred in dismissing them under the Rooker-Feldman doctrine.
The doctrine, which was first published in Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923), and later revised in District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 476, 103 S.Ct. 1303, 1311-12, 75 L.Ed.2d 206 (1983), essentially prohibits lower federal courts from sitting as effective courts of appeal for state court judgments. See In re Wilson, 116 F.3d 87, 90 (3d Cir. 1997). The Third Circuit has applied the doctrine not only to district courts, but to bankruptcy courts as well. Id. (a bankruptcy court is prohibited from reviewing a state court's judgment by the Rooker-Feldman doctrine); In re Besing, 981 F.2d 1488, 1496 (5th Cir.) ("The Bankruptcy Code was not intended to give litigants a second chance to challenge a state court judgment nor did it intend for the Bankruptcy Court to serve as an appellate court [for state court proceedings."), cert. denied sub nom.Besing v. Hawthorne, 510 U.S. 821, 114 S.Ct. 79, 126 L.Ed.2d 47 (1993).
The Rooker-Feldman doctrine provides an additional reason for dismissing Anuco's adversary proceeding. Anuco's complaint effectively asked the Bankruptcy Court to re-calculate the damage award issued by a Florida jury. Anuco argues that the award was incorrect and that it should be reduced if not completely discounted. Essentially, what Anuco asked the Bankruptcy Court to do is review the decision and judgment of a Florida state court. Judge Gambardella is not permitted to do so and did not err when dismissing the adversary proceeding under theRooker-Feldman doctrine.
Anuco also argues that the Bankruptcy Court erred by not exercising its equitable power to set aside the judgment of the Florida state court. This argument is without merit. While it is true that a bankruptcy court can reexamine a judgment of another court, such equitable principles exist in cases where the judgment "was obtained by collusion of the parties or [was] founded upon no real debt." Margolis v. Nazareth Fair Grounds Farmers Mkt . , 249 F.2d 221, 224 (2d Cir. 1957); see also Heiser v. Woodruff , 327 U.S. 726, 736-37, 66 S.Ct. 853, 90 L.Ed. 970, reh'g denied , 328 U.S. 879, 66 S.Ct. 1335, 90 L.Ed. 1647 (1946) (a bankruptcy court can use its equitable power to set aside a judgment that was obtained by fraud of a party or on the ground that the court that issued it did not have the requisite jurisdiction to do so). Because there was no allegation of fraud, collusion, or lack of jurisdiction, the Bankruptcy Court did not err when it refused to invoke its equitable powers to set aside the Florida judgment.
C. Claim Estimation Motions
Both the Nugents and Anuco filed separate motions for the estimation and determination of BCT's claim pursuant to § 502(c). Anuco's motion, filed before the entry of the state court judgment, alleges that the jury's award was meant to compensate BCT for royalties through the year 2013. Anuco further alleges that its rejection of the Franchise Agreement was an event that transpired after the Florida jury award against them and substantially affects BCT's claim and award. Anuco therefore requested that the Bankruptcy Court estimate BCT's claim against its and let BCT prove the amount really due and owing under the Franchise Agreement.
Section 502(c) of Title 11 states that:
[t]here shall be estimated for purpose of allowance under this section; (1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case[;] or (2) any right to payment arising from a right to an equitable remedy for breach of performance.11 U.S.C. § 502(c).
In arguing that the Bankruptcy Court should not hold them liable for royalty fees accruing after the rejection date, the Anuco emphasizes that it was unable to use, and had not used as of the rejection date, BCT's trademarks, trade names, and/or the BCT System from which would generate any and all royalty fees. Anuco argues, further, that because it ceased operating as a BCT franchise in June 1991, royalty fees can only be owed through June 1991.
The Bankruptcy Court, in denying Anuco's motion for estimation, relied on several different legal theories. First, Judge Gambardella denied the motions based on the Rooker-Feldman doctrine. The court held that BCT filed proofs of claim based on a state court judgment. The court stated that the Florida judgment, like the judgment in Audre, Inc. v. Casey, 216 B.R. 19 (B.A.P. 9th Cir. 1997), was not a complete nullity and without legal effect. 216 B.R. at 29. The court continued by stating that just as "`[t]he Rooker-Feldman doctrine . . . provides that a federal district court lacks the jurisdiction to hear a collateral attack on a state court judgment or to review final determinations of state court decisions," it also precludes the estimation of a claim based on a state court judgment. See Opinion 37; Audre, 216 B.R. at 29-30; In re Keenan, 210 B.R. 263, 267 (Bankr.S.D.Cal.). The Bankruptcy Court held that Anuco, like the debtor in Keenan, "`[is] really . . . seeking to have a second try at [its] defense to the state case'" and "`to substitute [this Court's] judgment for the judgment already reached by a state court jury and judge.'" See Opinion at 37 (quoting Keenan, 201 B.R. at 267). The court held that because BCT's claim is based on a state court judgment, the Rooker-Feldman doctrine precluded it from applying § 502(c) of the Bankruptcy Code. Id.
The Bankruptcy Court's conclusions are correct. As previously stated, the Rooker-Feldman doctrine prohibits lower federal courts from reviewing decisions and judgments issued by state courts. See In re Wilson, 116 F.3d at 90. This is true in the context of claim estimation as well as areas of substantive law. For example, in In re Keenan, the creditor was awarded $21 million by a jury in a state court action. Subsequent to the entry of final judgment, the debtor filed a notice of appeal and a Chapter 11 bankruptcy proceeding. About one month later, the debtor filed a motion to estimate the creditor's claim pursuant to § 502(c). When reviewing the motion, the court noted that the debtor's sole basis for the estimation motion was alleged errors and mistakes in the state court judgment. Id. at 267. The court also recognized that what the debtor was seeking to do was relitigate the damages issue already decided by the state court. Id. It appeared to the court that what the debtor sought was to have the
the state court judgment ignored, and for [the bankruptcy court] to estimate under state law what a state court or jury would find the claim was worth, so that the debtor can confirm a plan to provide for allowed claims, and to receive a discharge as to all other claims, or portions of claims not paid through the plan.Id. In the Keenan court's view, the debtor's argument was disingenuous. The court noted that what the debtor really sought was a second try at his defense to the state case. Id. He wanted the bankruptcy court to substitute its judgment for the judgment already reached by a state court judge and jury. Id. The court held that the Rooker-Feldman doctrine precluded such a result. Id. Accordingly, the court denied the debtor's motion to estimate the creditor's claim.
This is the precise situation that Judge Gambardella faced in the underlying motions for the estimation of BCT's claim. Anuco filed its motion seeking nothing more than a recalculation of the Florida court's judgment. Anuco essentially sought, just as they did through their adversary proceeding, to have the Bankruptcy Court review the judgment of the state court. The Rooker-Feldman doctrine prohibits exactly that.
Judge Gambardella also denied the motions because such an estimation was barred by 11 U.S.C. § 502(c)(1). The Bankruptcy Court held that BCT's claim was neither contingent nor unliquidated and therefore could not be estimated under § 502(c). See Opinion at 42. The court based this conclusion on several facts in the record. First, the Florida action arose from Anuco's pre-petition breach of the Franchise Agreement, and the state court entered a final judgment on the basis of that breach.Id. Second, Anuco's appeal, under Florida law, does not affect the finality of the state court judgment for the purposes of the application of res judicata. Id. at 43. Thus, "`[a]ll of the events upon which liability could be imposed occurred prepetition.'" Id. (quoting Keenan, 201 B.R. at 265). Accordingly the court held that the claim was not contingent. Id.
The Bankruptcy Court also noted that BCT's claim, as of the petition filing dates, was capable of ready determination. Id. Judge Gambardella noted that the state court, following a five-year discovery period and a trial, had already determined the amount of BCT's claim against Anuco at that time. The court stated that, as in Keenan, "`[h]ad the case not proceeded to trial and judgment, it might have been difficult to conclude that the amount of the claim was susceptible to ready determination'"Id. (quoting Keenan, 201 B.R. at 266). The court emphasized, however, that the Florida case did proceed to judgment based on a jury verdict, and as of the date of the filing of the bankruptcy was readily calculable. Id. Thus, the court held that BCT's claim was not unliquidated. Id. Accordingly, the Bankruptcy Court held that, because the claim was neither contingent nor unliquidated, estimation, regardless of the applicability of the Rooker-Feldman doctrine, would be inappropriate. Id.
Several federal courts applying § 502(c) in similar factual situations have expressly ruled that a bankruptcy court is not permitted to estimate a claim when a final judgment on that claim has been entered by a non-bankruptcy court. See, e.g., In re Keenan, 201 B.R. at 266; see also In re Ford, 967 F.2d 1047, 1053 (5th Cir.), reh'g denied, 974 F.2d 1337 (5th Cir. 1992); In re Continental Airlines, 981 F.2d 1450, 1461 (5th Cir. 1993); In re Audre, Inc., 202 B.R. 490 (Bankr.S.D.Cal. 1996), aff'd, 216 B.R. 19 (9th Cir. BAP 1997); In re Casey, 198 B.R. 910, 915 (Bankr.S.D.Cal. 1996); In re Rhead, 179 B.R. 169 (Bankr.D.Ariz. 1995). For example, the Keenan court held that because the creditor's claim had been reduced to a final judgment in a state court, the claim was liquidated and not contingent and therefore not amenable to estimation under § 502(c). In denying the debtor's motion to estimate the claim in that case, the Keenan court stated that
[s]ection 502(c) contemplates that a bankruptcy court will estimate a claim that is either contingent or unliquidated if failure to do so would unduly delay administration of the bankruptcy case. Estimation, in turn, contemplates that the bankruptcy court will, in effect, put itself in the place of a nonbankruptcy court or jury to estimate whether a debtor is liable to the claimant and, if so, to estimate the amount of the debt. In either instance, § 502(c) presupposes that a nonbankruptcy court has not already done so. It would stand comity on its head and misuse the limited scope of § 502(c) for a bankruptcy court to proceed as if a nonbankruptcy court or jury had not acted at all when a case has already proceeded to judgment.Id.
It is clear that BCT's claim is neither contingent or unliquidated. The final judgment in the Florida case which outlines the amount of the claim is conclusive on this issue. Section 502(c) does not apply in this case and Judge Gambardella did not err in denying the Anuco's' motions.
Anuco also argues that the Bankruptcy Court erred in denying its motions because its rejection of the Franchise Agreement changed the basis for the calculation of BCT's claim. Anuco fails to realize, however, that BCT's claim for damages arose when the Franchise Agreement was breached in 1991. Anuco's subsequent rejection of the Franchise Agreement several years later does not change this. Judge Gambardella was correct in denying Anuco's motion for estimation.
IV. CONCLUSION
For the reasons set forth above, the December 17, 1998, order of the Bankruptcy Court will be affirmed on all counts. An appropriate order will issue.O R D E R
Debtor-in-possession and appellant, Anuco, Inc. (the "Appellant"), having appealed the December 17, 1998, order of the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court") granting creditor-appellee's motion for summary judgment in the above captioned adversary proceeding; and the Court having heard oral argument on April 26, 1999, and having considered all papers submitted;
IT IS this, ___ day of April, 1999, hereby
ORDERED that the December 17, 1998, order of the Bankruptcy Court be and hereby is AFFIRMED.