Restructuring

When a court reaches a decision in a case, the law of the case doctrine generally provides that parties should not be able to relitigate the same issue in that case, and for the court to adhere to its prior decision.¹  The doctrine does not, however, apply to every decision a court reaches. Two recent decisions by Judge Elizabeth Stong in the Brizinova chapter 7 cases in the Bankruptcy Court for the Eastern District of New York explore when the doctrine may or may not apply in bankruptcy cases.

Judge Stong’s decisions suggest that the law of the case doctrine has limited application in the bankruptcy context because it may only be applicable when (i) there is identity of parties between the prior decision and the matter at issue and (ii) the prior decision was a final judgment.²  In Brizinova I, Judge Stong ruled that the chapter 7 trustee (the “Trustee”) adequately alleged that certain proceeds constituted property of the Debtors’ estate.³  In two subsequent Brizinova decisions, Soshkin and Brizinova II, the Trustee argued that the court must adhere to the court’s prior ruling in Brizinova I and apply the law of the case doctrine to deny defendants’ request to dismiss the Trustee’s complaint.⁴  In both decisions, Judge Stong refused to apply the law of the case doctrine because the court did not enter a final order in Brizinova I. In Soshkin, the identity-of-parties requirement was also not met because the Trustee litigated against a separate party.

What Happened in Brizinova I?

In Brizinova I, Estella Brizinova and Edward Soshkin (together, the “Debtors”), who were husband and wife, jointly filed a chapter 7 case, and the Trustee was immediately appointed on the petition date. Ms. Brizinova held 100% of the stock of ENSI Consulting, Inc. (“ENSI”), an online auto supply parts company that employed both Ms. Brizinova and Mr. Soshkin, with Mr. Soshkin serving as ENSI’s bookkeeper. The Debtors’ schedules listed a value in the amount of zero dollars for Ms. Brizinova’s shares in ENSI. The Trustee asserted that the Debtors continued to operate ENSI to generate post-petition sale proceeds after filing their chapter 7 case (the “Sale Proceeds”), and that the Sale Proceeds were property of the Debtors’ estate. The Debtors refused to turn over the Sale Proceeds to the Trustee.

In response, the Trustee filed a complaint against the Debtors to recover the Sale Proceeds and seeking damages for conversion and violation of the automatic stay arising from the transfer of the Sale Proceeds. The Debtors filed a motion to dismiss the Trustee’s complaint arguing, inter alia, that the Sale Proceeds were not property of the Debtors’ estate because ENSI was not operating when the bankruptcy petition was filed and that the allegations were too speculative and, therefore, the element of each claim was not adequately pleaded.

The court sustained the Trustee’s turnover and automatic stay violation claims, but denied in part the Trustee’s conversion claim because the complaint did not identify specifically the property that was allegedly converted.⁵  The court granted the Trustee leave to replead the denied conversion claim.

What Happened in Soshkin?

Rather than repleading the denied conversion claim, the Trustee commenced another adversary proceeding alleging substantially similar claims to the Sale Proceeds as in Brizinova I against Zlata Soshkin, the daughter-in-law of the Debtors. Ms. Soshkin moved to dismiss the Trustee’s complaint but argued an additional defense that was not included in the Debtors’ motion to dismiss in Brizinova I — that the Sale Proceeds were property of ENSI and were not the property of the Debtors’ estate. In response, the Trustee argued that the law of the case doctrine required the court to reach the same conclusions as those ruled in Brizinova I and find that the Trustee adequately pleaded that the Sale Proceeds were property of the Debtors’ estate.

When considering the law of the case doctrine, Judge Stong found that “[t]wo considerations stand out as fundamental: whether there is identity of parties between the prior and subsequent matters; and whether the prior decision is a final one.”⁶  Here, the identity of parties was not met because the parties in Brizinova I were the Trustee and the Debtors, but the parties in Soshkin were the Trustee and Ms. Soshkin. Since Ms. Soshkin was not party to the prior proceeding, applying the law of the case doctrine would have deprived Ms. Soshkin the opportunity to be heard, which is a fundamental right of due process. Judge Stong noted that this right was an opportunity for Ms. Soshkin and not her counsel, who also represented the Debtors in Brizinova I. Moreover, Judge Stong found that there was no final judgment in Brizinova I because the decision denying the motion to dismiss allowed the case to continue and did not end the case.

After refusing to apply the law of the case doctrine, Judge Stong held that the Trustee did not adequately plead that the Sale Proceeds were property of the Debtors’ estate.⁷  The complaint only alleged that the Sale Proceeds collected from the sale of auto parts belonging to ENSI were property of the Debtors’ estate, but ENSI was not a Debtor. Therefore, Soshkin’s motion to dismiss was granted with leave to replead.

What Happened in Brizinova II?

In Brizinova II, the Debtors used the same argument made in Soshkin — that the Sale Proceeds were property of ENSI and not the Debtors’ estate — in a second attempt to dismiss the Trustee’s adversary proceeding against the Debtors by filing a motion for summary judgment. The Trustee opposed this motion because the court previously held in Brizinova I that the Trustee adequately alleged that the Sale Proceeds were property of the Debtors’ estate and, therefore, the law of the case doctrine required the court to reach the same conclusion for the motion for summary judgment.

Judge Stong, applying a substantially similar analysis as she did in Soshkin, held that the law of the case doctrine did not apply and that the Trustee did not adequately plead that the Sale Proceeds were property of the Debtors’ estate.⁸  Although, unlike Soshkin, the requirement for the same identity of parties was met, Judge Stong declined to apply the law of the case doctrine because there was no final order in Brizinova I. The court’s denial of the motion to dismiss in Brizinova I was not a final order because it allowed the parties to engage in further dispositive motion practice and allowed the case to continue to trial.⁹  Judge Stong noted that the finality requirement also cannot be satisfied by a refusal to grant summary judgment.

When May a Bankruptcy Court Apply the Law of the Case Doctrine?

Although Soshkin and Brizinova II did not involve situations where the law of the case doctrine was applicable, they do provide some guidance for when it may apply in a bankruptcy case. Clearly, the parties to the old and new litigation must be the same. The question of whether the first order was a final judgment may be trickier. Presumably, an order granting a motion to dismiss or granting summary judgment in an adversary proceeding would satisfy the final judgment requirement because that order would end the litigation. Similarly, a judgment in favor of a plaintiff in an adversary proceeding presumably would also satisfy the final judgment requirement. Whether orders granting or denying motions in the main bankruptcy case are final judgments may be harder to determine. As Judge Stong noted, however, the requirement of a final judgment in the law of the case doctrine is similar to the same requirement for the related rule of res judicata. Accordingly, case law considering the application of res judicata in bankruptcy cases should provide an additional source of guidance. Regardless, as demonstrated by the decisions in the Brizinova case, parties should not assume that the law of the case doctrine will apply and should ensure that they also fully argue the underlying merits in the matter at hand.