Court Opinion

ID: 4056
Source: CourtListenerOpinion
Date Created: 2010-04-24 19:36:25+00
Date Added: 2024-06-11T16:42:28.566322
License: Public Domain

08-6026-bk
In re Algonquin Power Income Fund
                                    UNITED STATES COURT OF APPEALS
                                        FOR THE SECOND CIRCUIT

                                             SUMMARY ORDER
       Rulings by summary order do not have precedential effect. Citation to a summary
order filed on or after January 1, 2007, is permitted and is governed by Federal Rule of
Appellate Procedure 32.1 and this court’s Local Rule 32.1.1. When citing a summary order in
a document filed with this court, a party must cite either the Federal Appendix or an electronic
database (with the notation “summary order”). A party citing a summary order must serve
a copy of it on any party not represented by counsel.

       At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New
York, on the 20th day of January, two thousand and ten.

PRESENT:

                     JOSEPH M. McLAUGHLIN,
                     ROBERT A. KATZMANN,
                                  Circuit Judges,
                     EDWARD R. KORMAN,
                                  District Judge.*
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
ALGONQUIN POWER INCOME FUND, ALGONQUIN POWER CORPORATION, INC.,
ALGONQUIN POWER U.S. HOLDINGS, INC., ALGONQUIN POWER FUND, INC., and
ALGONQUIN POWER SYSTEMS, INC.,

                    Appellants,

                    -v.-                                                   No. 08-6026-bk

CHRISTINE FALLS OF NEW YORK, INC. and TRAFALGAR POWER, INC.,

                     Appellees.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

          *
          The Honorable Edward R. Korman, Senior United States District Judge for the Eastern
District of New York, sitting by designation.

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FOR APPELLANTS:                               JEFFREY A. DOVE (James C. Thoman, on the brief),
                                              Menter Rudin & Trivelpiece, P.C., Syracuse, NY.

FOR APPELLEES:                                LAURA W. SMALLEY (Paul J. Yesawich, III, on the
                                              brief), Harris Beach PLLC, Pittsford, NY.

       Appeal from a judgment of the United States District Court for the Northern District of New
York (David N. Hurd, Judge).

        UPON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment is VACATED and REMANDED for reconsideration of the
merits.

       Appellant Algonquin Power Income Fund, Inc., together with other Algonquin entities

(collectively, “Algonquin”), appeals from a judgment of the United States District Court for the

Northern District of New York (Hurd, J.), which was entered after Judge Hurd affirmed an order of

the Bankruptcy Court (Gerling, C.J.) granting summary judgment to Appellees Christine Falls of

New York, Inc. and Trafalgar Power, Inc. (collectively, “TPI”). Judge Gerling had held that

Algonquin was collaterally estopped from litigating its interest in a $7.6 million judgment that TPI

had obtained in a malpractice action. We conclude that this holding was erroneous.

       We briefly summarize the procedural background. TPI obtained a permanent loan in or about

February 1989. In January 1996, TPI restructured the loan and the original loan amount was broken

into “A Notes” and “B Notes.” Later that year, Algonquin purchased the B Notes. In 1999, TPI was

awarded a $7.6 million judgment in a malpractice action against Stetson-Harza and Neal Dunlevy

(“Stetson-Harza Judgment”). While pending on appeal, TPI assigned the judgment to an affiliate,

Pine Run, reciting consideration of “Five ($5.00) Dollars and other good and valuable

consideration.” Both TPI and Pine Run are wholly-owned subsidiaries of Marina Development, Inc.

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       Algonquin then filed an action against TPI for conversion and fraudulent transfer in the

United States District Court for the Northern District of New York (McCurn, J.). Algonquin based

its conversion claim on the argument that it has a security interest in the Stetson-Harza Judgment.

To establish a claim for conversion under New York law, a plaintiff must demonstrate legal

ownership or an immediate superior right of possession to specific money. Algonquin contended that

it had a superior right of possession to specific money because it had a security interest in the

Stetson-Harza Judgment.

       Algonquin also sought a preliminary injunction “and/or” an order of attachment precluding

TPI from assigning the judgment to Pine Run. Judge McCurn granted Algonquin a preliminary

injunction but denied its request for an order of attachment. In his Memorandum-Decision, dated

January 16, 2001, he said that he would “briefly examine[] Algonquin’s claim for conversion.”

Trafalgar Power, Inc. v. Aetna Life Ins. Co., 131 F. Supp. 2d 341, 348 (N.D.N.Y. 2001). Judge

McCurn then explained that Algonquin’s argument that it has a superior right of possession to

specific money because it has a security interest in TPI’s $7.6 million judgment “lacks merit.” Id.

Consequently, he concluded that Algonquin was not entitled to an order of attachment because it

could not demonstrate a probability of success on the merits “at this time.” Id. at 349. Judge McCurn

also found Algonquin’s argument for a preliminary injunction on its conversion claim—which was

likewise premised on Algonquin’s claim that it has a security interest in the Stetson-Harza

Judgment—“unpersuasive,” id. 352, although he granted Algonquin’s motion on other grounds. The

January 16th Memorandum-Decision directed the parties “to submit proposed orders consistent with

th[e] decision.” Id. at 353

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        On February 1, 2001, before the submission of any proposed orders, the parties entered into

a stipulation (“Escrow Agreement”) “for the purpose of maintaining, during the pendency of the

Algonquin Litigation, that portion of the proceeds of the Stetson-Harza Judgment that will be paid

to TPI and Pine Run in a manner consistent with Judge McCurn’s Memorandum-Decision.” The

stipulation provided that the amount of the full Stetson-Harza Judgment would be placed into an

escrow account and that it could be released only with permission of the Escrow Agents and a court

order. The stipulation was so ordered by the United States magistrate judge assigned to the case.

Twelve days later, on February 13, 2001, Judge McCurn entered an order which, inter alia, formally

granted the motion for preliminary injunction and denied the motion for an order of attachment.

        About six months later, TPI filed a Chapter 11 petition in the Eastern District of North

Carolina. As a result, Judge McCurn stayed the proceedings in the district court. Shortly thereafter,

venue for the bankruptcy case was transferred to the Northern District of New York. In 2002, Judge

McCurn dissolved the preliminary injunction and directed that the escrow funds be disbursed only

pursuant to an order of the bankruptcy court. There the funds remained until 2006, when TPI filed

an adversary proceeding against several Algonquin entities seeking a declaration that Algonquin did

not have a security interest in the proceeds of the Stetson-Harza Judgment that were still being held

in escrow. Subsequently, both parties filed motions for summary judgment. Judge Gerling granted

summary judgment for TPI because he determined that Judge McCurn’s preliminary ruling precluded

Algonquin from litigating the issue whether it holds a security interest in the proceeds of the Stetson-

Harza Judgment. Judge Gerling also addressed the merits of the issue and determined that Algonquin

had no valid interest in the proceeds of the Stetson-Harza Judgment. On Algonquin’s appeal to the

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district court, Judge Hurd affirmed the decision on collateral estoppel grounds without reaching the

merits. This appeal followed.

        Because the decision claimed to have preclusive effect was rendered by a district court sitting

in diversity, we apply the preclusion law “that would be applied by state courts in [New York,] the

State in which the federal diversity court sits.” Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S.

497, 508 (2001); see also, e.g., Smith v. Woosley, 399 F.3d 428, 435–36 (2d Cir. 2005).

Nevertheless, “there is no discernible difference between federal and New York law concerning res

judicata and collateral estoppel.” Marvel Characters, Inc. v. Simon, 310 F.3d 280, 286 (2d Cir.

2002); accord Pike v. Freeman, 266 F.3d 78, 91 n.14 (2d Cir. 2001) (“[T]here appears to be no

significant difference between New York preclusion law and federal preclusion law . . . .”). This

observation applies with particular force to the issues on which this appeal turns. Specifically, there

are two principles that apply here that compel the reversal of the judgment from which the appeal

is taken.

        1. The Supreme Court has observed that the law “is clear that res judicata and collateral

estoppel do not apply if a party moves the rendering court in the same proceeding to correct or

modify its judgment.” Arizona v. California, 460 U.S. 605, 619 (1983). We have likewise recognized

that res judicata and collateral estoppel “do[] not speak to direct attacks in the same case, but rather

[apply only] in subsequent actions.” Rezzonico v. H & R Block, Inc., 182 F.3d 144, 148 (2d Cir.

1999); see also Quatraro v. Vill. of Kenmore Zoning Bd. of Appeals, 716 N.Y.S.2d 508, 509 (App.

Div. 1989) (holding that “principles of res judicata, as well as the doctrine[] of collateral

estoppel . . . are not applicable” because “the original determination and the determination upon a

rehearing arise from the same proceeding”); Moezinia v. Damaghi, 544 N.Y.S.2d 8, 11 (App. Div.

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1989) (“[P]rinciples of res judicata are inapplicable when . . . the two determinations arise in the

same action.”).

       In this case, the order from which the appeal is taken is for all practical purposes a final order

entered in the same proceeding as the interlocutory order on which TPI relies in invoking the

doctrine of collateral estoppel. Specifically, the record shows that when TPI filed an adversary

proceeding in the bankruptcy court seeking a declaration that Algonquin did not have a security

interest in the proceeds of the Stetson-Harza Judgment, the action represented a continuation of the

original action. Thus, the adversary complaint recited the entire prior history of the case, including

the fact that the proceeds of the judgment were still being held in an escrow fund, and sought, inter

alia, the following relief: (1) “[a]n order declaring that the Algonquin Entities do not have a security

interest in the Escrow Funds,” (2) elimination of “the existing Algonquin Escrow Agent from the

escrow account,” and (3) authorization “to establish a new [debtor-in-possession] account subject

to the continuing jurisdiction of the Bankruptcy Court.”

       In sum, TPI sought an order dissolving the escrow account, which protected Algonquin’s

alleged security interest in the proceeds of the Stetson-Harza Judgment, as well as a final judgment

confirming that Algonquin did not have such an interest. Indeed, Judge Gerling acknowledged that

the issues raised on the summary judgment motions had their “genesis” in the pre-bankruptcy

proceeding in the district court and were inextricably intertwined. See Christine Falls of N.Y., Inc.

v. Algonquin Power Corp., Inc. (In re Trafalgar Power, Inc.), 377 B.R. 32, 34 (Bankr. N.D.N.Y.

2007). Consequently, notwithstanding the meandering detour this case took as a result of TPI filing

the bankruptcy petition, Algonquin was not precluded from relitigating its security interest in the

proceeds of the tort judgment or raising the issue on appeal.

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        2. Collateral estoppel generally does not apply unless a party had both ample opportunity and

sufficient incentive to litigate vigorously. “[A] determination whether the first action or proceeding

genuinely provided a full and fair opportunity requires consideration of ‘the realities of the [prior]

litigation, including the context and other circumstances which . . . may have had the practical effect

of discouraging or deterring a party from fully litigating the determination which is now asserted

against him.’” Ryan v. N.Y. Tel. Co., 62 N.Y.2d 494, 501 (1984) (quoting People v. Plevy, 52 N.Y.2d

58, 65 (1980) (alteration in original)). A full and fair opportunity to litigate includes the right to an

appeal “if the loser wants it.” David D. Siegel, New York Practice § 465, at 782 (4th ed. 2005); see

also Pinkney v. Keane, 920 F.2d 1090, 1096 (2d Cir. 1990). Indeed, the Restatement of Judgments

§ 28, which sets out five separate grounds for avoiding issue preclusion, lists as the first ground the

rule that “[t]he party against whom preclusion is sought could not, as a matter of law, have obtained

review of the judgment in the initial action.” Restatement (Second) of Judgments § 28(1) (1982).

        In this case, Algonquin could not have appealed as a matter of right from either the order

granting the preliminary injunction or the order denying its application for attachment. As the

prevailing party on the motion for preliminary injunction, Algonquin was not aggrieved and did not

have a right to appeal. See Parochial Bus Sys., Inc. v. Bd. of Educ. of City of New York, 60 N.Y.2d

539, 544–45 (1983) (“Generally, the party who has successfully obtained a judgment or order in his

favor is not aggrieved by it, and, consequently, has no need and, in fact, no right to appeal.”); N.Y.

C.P.L.R. 5511, Comment 1 (McKinney 1995) (“Only a person ‘aggrieved’ by a determination may

appeal the judgment or order that embodies it.”). Nor could Algonquin have appealed from the order

granting a preliminary injunction simply because the court rejected one of the grounds on which

Algonquin relied. Indeed, issue preclusion does not apply to the resolution of an issue that was not

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“necessary to the prior decision.” Laaman v. United States, 973 F.2d 107, 112 (2d Cir. 1992); see

also Statter v. Statter, 2 N.Y.2d 668, 672 (1957); O’Connor v. G & R Packing Co., 426 N.Y.S.2d

557, 562–63 (App. Div. 1980). Moreover, a party does not have standing to appeal “[m]erely

because the order appealed from ‘contain[s] language or reasoning which [plaintiffs] deem adverse

to their interests.’” M.J. & K. Co., Inc., v. Matthew Bender & Co., Inc., 631 N.Y.S.2d 938, 938 (App.

Div. 1995) (quoting Pa. Gen. Ins. Co. v. Austin Powder Co., 68 N.Y.2d 465, 472–73 (1986)).

        Nevertheless, TPI claims that Algonquin was aggrieved by the denial of its application for

an order of attachment and could have appealed from the denial. The problem with this argument

is that Algonquin had requested a preliminary injunction or an order of attachment. When Algonquin

and TPI entered into the stipulation creating the escrow fund, before the formal entry of the order

granting a preliminary injunction, they effectively settled the dispute over the appropriate provisional

remedy. This was a complete victory for Algonquin because it obtained the security it needed to

assure that funds would be available to pay any judgment that it might obtain.

        This consideration aside, it is hardly clear that Algonquin would have been able to appeal

even if it had been aggrieved by the denial. An order denying an attachment is appealable only when

“the appeal presents an important question of law whose resolution will guide courts in other cases.”

Kensington Int’l Ltd. v. Republic of Congo, 461 F.3d 238, 241 (2d Cir. 2006). The issue in this

case—whether Algonquin has a security interest in the proceeds of a tort action—involves New York

or possibly Connecticut law. A resolution of this claim by a federal appellate court on an appeal from

a denial of a provisional remedy would not seem to satisfy that standard.

        Moreover, because the order on appeal here constituted the final judgment resolving the issue

of Algonquin’s security interest in the proceeds of the Stetson-Harza Judgment, Algonquin’s failure

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to appeal the intermediate order should not preclude a district court or this Court from reconsidering

the issue. As the leading treatise on federal practice cautions:

       Great care should be taken . . . to avoid exten[ding preclusion] to continuing
       proceedings before the first honestly final judgment. The fact that appeal might have
       been taken from various intermediate orders under an interlocutory appeal statute or
       an expanded version of the final judgment rule should not preclude reconsideration
       by the trial court or review on appeal from a traditional final judgment. The
       opportunity for an earlier appeal is intended to protect the appellant, not to forfeit the
       right to later review.

18A Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure

§ 4433, at 77 (2d ed. 2002).

                                          CONCLUSION
       Because Judge Hurd erroneously applied the doctrine of collateral estoppel without reaching

the issue of Algonquin’s claimed security interest in the proceeds of the tort judgment, we VACATE

and REMAND for consideration of the merits of Algonquin’s security interest in the proceeds of the

malpractice action.

                               FOR THE COURT:
                               Catherine O’Hagan Wolfe, Clerk of Court

                               By________________________________

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