The Appellant Dawn Prosser appealed from a judgment of the District Court in favor of James Carroll, the Chapter 7 Trustee of the bankruptcy estate of Jeffrey Prosser, Dawn’s husband. Dawn challenged the District Court’s denial of her motion to dismiss, as well as other pleadings. She argued that the court erroneously allowed recovery for transfers of property made more than two years before the bankruptcy petition was filed, and that the Trustee failed to prove the post-petition transfers were out of the ordinary course of business.

In 2006, the Delaware Chancery Court found Jeffrey Prosser, jointly and severally liable for roughly $56,000,000 (“Greenlight judgment”) for his fraudulent acquisition of the outstanding public stock of the predecessor corporation to Innovative Communication Corporation (“New ICC”). He subsequently filed a Chapter 11 bankruptcy petition. The Bankruptcy Court converted the case from Chapter 11 to Chapter 7 and appointed James Carroll as the Trustee for Jeffery Prosser’s estate.

From the time the Greenlight judgment was pending until after he filed his bankruptcy petition, Jeffrey Prosser acquired and transferred millions of dollars of real and personal property to his wife, Dawn. During this period, he also made millions of dollars of improvements to the couple’s main residence, the Estate Shoy on St. Croix in the U.S. Virgin Islands, which they claimed he had given to Dawn.

Seeking to recover the money they were awarded, the Greenlight judgment creditors filed an involuntary Chapter 11 bankruptcy petition against New ICC. The Chapter 11 trustee, later joined by Trustee Carroll, commenced proceedings against members of the Prosser family in the Bankruptcy Court. They sought turnover of the property Jeffrey Prosser had given Dawn, his wife, on the theory that there had been no legal transfer of ownership (the “Turnover Action”). The Tustees argued that, because Jeffrey Prosser retained ownership, the property belonged to his bankruptcy estate

After the Turnover Action was filed but before it was tried, Trustee Carroll filed a complaint against Dawn Prosser in Bankruptcy Court, asserting that, to the extent that she owned the gifted property, she acquired ownership through fraudulent transfers from her husband which, the Trustee alleged, were designed to shield Jeffrey’s substantial income taken from New ICC (“Fraudulent Transfer Action”). Dawn successfully obtained a withdrawal of the reference to the Bankruptcy Court, and the matter proceeded in the District Court in December 2008.

The Bankruptcy Court issued an order in February 2001 in the Turnover Action, resolving Jeffrey and Dawn Prosser’s respective ownership of the contested property, which stated that all of Jeffrey’s interest in the property be turned over to the estate. The parties tried the Fraudulent Transfer Action before a jury in June 2011. A verdict was returned finding that the transfers were fraudulent.
Circuit Judge Thomas I. Vanaskie wrote the opinion for the Third Circuit Court of Appeals and addressed the four theories Dawn provided in support of her argument that the District Court erred in denying her motion to dismiss.

Doctrine of Collateral Estoppel

She asserted that this case was barred by the doctrines of collateral estoppel, judicial estoppel, and election of remedies, and that, by allowing the Trustee to pursue relief under multiple statutes for the same set of facts, the District Court rendered the statutes “redundant and superfluous.” Judge Vanaskie and the court didn’t buy any of the arguments.

As to her collateral estoppel theory, the District Court determined that the Bankruptcy Court’s ruling in the Turnover Action had no preclusive effect on this case because the elements of collateral estoppel were not met. Collateral estoppel bars relitigation of an issue where: 

(1) the issue sought to be precluded is the same as that involved in a prior action;
(2) that issue was actually litigated;
(3) it was determined to be a final and valid judgment; and
(4) the determination was essential to the prior judgment.

Dawn Prosser argued that the Turnover Action barred the Fraudulent Transfer Action because both actions arose out of the same “nucleus of facts.” Judge Vanaskie explained that the focus was not on whether the facts underlying the cases are the same, but instead on whether the same issue had been conclusively determined in a prior decision. The issues decided in each case here were different: the bankruptcy issue in the Turnover Action was whether Jeffrey Prosser retained ownership of the property he attempted to transfer to Dawn. To the extent it determined that Jeffrey retained ownership interests in the property, the Bankruptcy Court required his interest to be turned over to the bankruptcy estate. The issue in the case before this court dealt with whether Dawn’s ownership interests resulted from a fraudulent conveyance from Jeffrey. The issues decided in each action were distinct. As a result, the Third Circuit rejected Dawn’s argument. Collateral estoppel did not preclude the Fraudulent Transfer Action.

Judicial Estoppel

The Court of Appeals also rejected Dawn’s second theory that the Trustee was judicially estopped from pursuing the Fraudulent Transfer Action. Judicial estoppel, the Judge Vanaskie remarked, is an equitable doctrine, which courts may apply at their discretion “to prevent a litigant from asserting a position inconsistent with one that she has previously asserted in the same or in a previous proceeding.” Consequently, the Court of Appeals held that a party’s purportedly inconsistent litigation positions should be judicially estopped only if they meet the following criteria:

1) The party to be estopped must have taken two positions that are irreconcilably inconsistent.
2) Judicial estoppel is unwarranted unless the party changed his or her position in bad faith—i.e., with the intent to "play fast and loose with the court."
3) A district court may not employ judicial estoppel unless it is tailored to address the harm identified and no lesser sanction would adequately remedy the damage done by the litigant’s misconduct.
Judge Vanaskie said that here the Trustee merely plead alternative theories in the two actions. This alternative pleading, which is permitted by Federal Rule of Civil Procedure 8(d), was not barred by judicial estoppel. The alternative theories were not “irreconcilably inconsistent.” The Trustee simply conceded the Bankruptcy Court’s conclusions as to ownership, thereby ensuring that there was no double recovery by the estate.

Election of Remedies

The appellate court likewise rejected Dawn Prosser’s theory on the election of remedies doctrine, which seeks to prevent a party from “occupy[ing] inconsistent positions in relation to the facts which form the basis of his respective remedies.” As with judicial estoppel, the election of remedies doctrine does not prevent a party from pleading in the alternative. The District Court was correct in ruling that the election of remedies doctrine did not bar the Fraudulent Conveyance Action.

Redundancy and Superfluousness

In similar fashion, the Court of Appeals saw no merit in Dawn Prosser’s final argument that, by permitting the Trustees to pursue relief against Jeffrey and Dawn Prosser under numerous statutes, the District Court rendered the statutes “redundant and superfluous.” Congress chose to authorize various types of relief for Trustees seeking to recover assets for distribution to creditors under the Bankruptcy Code. The fact that Jeffrey Prosser’s actions violated several provisions of the Bankruptcy Code did not make those provisions superfluous.

Based on those reasons, the Third Circuit Court of Appeals affirmed the judgment of the District Court.  In re Prosser, — Fed.Appx. —-, 2013 WL 3943548 (C.A.3 (Vir.Is.) Aug. 1, 2013)

Lisa M. Komives is a Senior Associate in the Litigation Practice Group of BoltNagi PC.  If you have need of experienced and effective litigation counsel contact Attorney Komives.  BoltNagi PC is a full service business law firm in St. Thomas, U.S. Virgin Islands.