Philadelphia Entertainment & Development Partners, LP v. Commonwealth of Pennsylvania Department of Revenue ( 2018 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______________
No. 17-1954
______________
In re: PHILADELPHIA ENTERTAINMENT &
DEVELOPMENT PARTNERS, LP
d/b/a FOXWOODS CASINO PHILADELPHIA,
Debtor
PHILADELPHIA ENTERTAINMENT &
DEVELOPMENT PARTNERS, LP
d/b/a FOXWOODS CASINO PHILADELPHIA
v.
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF REVENUE;
COMMONWEALTH OF PENNSYLVANIA
PERSIL MANGEUR LLC, in its capacity as the trustee of the
Liquidation Trust for the estate of debtor
Philadelphia Entertainment & Development Partners, LP
d/b/a Foxwoods Casino Philadelphia,
Appellant
______________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civ. No. 2-16-cv-01992)
Honorable Joseph F. Leeson, Junior, District Judge
______________
Submitted under Third Circuit L.A.R. 34.1(a)
December 12, 2017
BEFORE: CHAGARES, RESTREPO, and GREENBERG,
Circuit Judges
(Filed: January 11, 2018)
______________
Jared D. Bayer
Stephen A. Cozen
F. Warren Jacoby
Cozen O’Connor
1650 Market Street
One Liberty Place, Suite 2800
Philadelphia, PA 19103
Jennifer M. McHugh
Cozen O’Connor
200 Four Falls Corporate Center
P.O. Box 800, Suite 400
West Conshohocken, PA 19428
Attorneys for Appellant
2
Richard A. Barkasy
Albert S. Dandridge, III
Bruce P. Merenstein
Schnader Harrison Segal & Lewis
1600 Market Street
Suite 3600
Philadelphia, PA 19103
Attorneys for Appellees
______________
OPINION
______________
GREENBERG, Circuit Judge.
I. INTRODUCTION
Persil Mangeur LLC, (“Persil”), the Trustee of the
Liquidation Trust established in debtor Philadelphia
Entertainment and Development Partners, LP’s (“PEDP”),
Chapter 11 plan, appeals from a District Court order affirming a
Bankruptcy Court order dismissing PEDP’s adversary complaint
against the Commonwealth of Pennsylvania and the
Commonwealth of Pennsylvania Department of Revenue
(together “Commonwealth”). We trace this case to 2006 when
the Pennsylvania Gaming Control Board (the “Board”) awarded
a slot machine license to PEDP, which paid a $50 million fee to
the Commonwealth for the license. The Board, however,
eventually revoked the license when PEDP failed to meet certain
of its requirements for its maintenance. PEDP unsuccessfully
3
appealed from the revocation order to the Pennsylvania
Commonwealth Court, following which the Supreme Court of
Pennsylvania denied PEDP’s application to review that decision.
After the Pennsylvania courts upheld the revocation,
thereby exhausting PEDP’s remedies through state procedures to
challenge the revocation, it filed a petition in bankruptcy.
During the bankruptcy proceedings, it brought an adversary
action against the Commonwealth alleging that the license
revocation should be avoided because it was a fraudulent
transfer under §§ 544 and 548 of the Bankruptcy Code and
under Pennsylvania law. Citing the Rooker-Feldman doctrine,
the Bankruptcy Court concluded that it lacked subject matter
jurisdiction over the fraudulent transfer claims in light of the
proceedings in the state courts which had upheld the revocation
order. By that time Persil had been appointed Trustee, and it
appealed to the District Court which affirmed the Bankruptcy
Court order. Persil then appealed to this Court. We will reverse
because the Bankruptcy Court erred when it held that the
Rooker-Feldman doctrine barred its review of the fraudulent
transfer claims. We are satisfied that in a review of those claims
the Bankruptcy Court did not need to review or reject the
Commonwealth Court’s judgment. We, however, do not reach a
conclusion on the question of whether any of PEDP’s fraudulent
transfer claims are meritorious, so our opinion should not be
overread as we only address the Rooker-Feldman issue.
II. BACKGROUND
The Pennsylvania Horse Racing Development and
Gaming Act (the “Gaming Act”), provides for slot machine
4
gaming in Pennsylvania. 4 Pa. Cons. Stat. § 1102 (2010). The
Gaming Act authorizes the Board to issue two slot machine
licenses for standalone gaming facilities in Philadelphia. Id. §
1304(b). As a condition for being granted a license, an
applicant must pay a one-time license fee of $50 million to the
Commonwealth. Id. § 1209(a).
In December 2006, the Board awarded a slot machine
license to PEDP. App’x 107 ¶ 14. PEDP paid the $50 million
fee in October 2007, and the Board issued the license the next
year. App’x 108 ¶¶ 19-22. The Board required PEDP to open
its facility and commence operations by May 2009, but PEDP
did not meet this deadline and has never opened the facility.
App’x 109 ¶¶ 23-24. Nevertheless, the Board extended the
deadline for opening the facility to May 2011, provided that
PEDP satisfy nine conditions that the Board required it to meet
at preset dates during the extension period, App’x 109-10 ¶¶ 25-
29. These conditions included requirements that PEDP submit
financial and architectural documents and development plans to
the Board. App’x 110 ¶ 29. PEDP did not satisfy these
conditions and unsuccessfully sought another extension to
satisfy the requirements for the license. App’x 110-12 ¶¶ 30-41.
In December 2010, the Board entered an order revoking
PEDP’s slot machine license by reason of PEDP’s failure to
follow Board orders and demonstrate its financial suitability.
App’x 113 ¶ 42, 116 ¶ 60.
PEDP appealed from the revocation order to the
Commonwealth Court of Pennsylvania. PEDP argued in the
Commonwealth Court that the Board applied the wrong test for
determining its financial suitability, the financial suitability
requirements were unconstitutionally vague, and the Board
denied PEDP due process of law for several reasons, one of
5
which was a contention that forfeiture of the license for which
PEDP had paid a $50 million fee was an excessive sanction to
impose by reason of its failures to satisfy the Board’s
requirements. App’x 851-52, 914-15. The Commonwealth
Court rejected PEDP’s appeal and affirmed the Board’s
revocation decision as it concluded that the Board had authority
under the Gaming Act to revoke the license, the Board used the
appropriate test under the Gaming Act in reaching its decision,
the requirements to show financial suitability were clear, and the
Board afforded PEDP due process because, among other things,
the revocation was not an unreasonably harsh sanction for
PEDP’s failure to satisfy the conditions for the license. Phila.
Entm’t & Dev. Partners, LP v. Pa. Gaming Control Bd., 34 A.3d
261, 268-80 (Pa. Commw. Ct. 2011). The Supreme Court of
Pennsylvania denied PEDP’s petition for allowance of appeal
from the Commonwealth Court’s decision on March 29, 2012.
Phila. Entm’t & Dev. Partners, LP v. Pa. Gaming Control Bd.,
41 A.3d 852 (Pa. 2012).
Two years later, on March 31, 2014, PEDP filed a
petition in bankruptcy under Chapter 11 of the Bankruptcy
Code, App’x 17, and then, two months after it filed the petition,
it filed its adversary complaint against the Commonwealth.
App’x 103. This appeal now before us centers on counts Two to
Four of the adversary complaint. In Counts Two and Three,
PEDP asserted claims to avoid what it claimed was a
constructively fraudulent transfer under 11 U.S.C. §§
548(a)(1)(B) and 544(b) and under Pennsylvania’s Uniform
Fraudulent Transfer Act (“PUFTA”), 12 Pa. Cons. Stat. §§ 5101
et seq.1 Specifically, PEDP claimed that the “revocation of the
1
Sections 548(a)(1)(B) and 544(b) deal with avoidance of
fraudulent transfers. Section 548(a)(1)(B) provides that
6
License was a transfer for which [PEDP] received no value from
the Commonwealth. . . .” App’x 123 ¶ 97. Thus, in Count Four,
PEDP sought recovery of what it claimed was a fraudulent
transfer under 11 U.S.C. §§ 550 and 551. PEDP sought to avoid
the transfer and recover payment from the Commonwealth of
the full value of the transfer, which PEDP estimated to be $50
million, the amount of the license fee it had paid. App’x 123 ¶¶
[t]he Trustee may avoid any transfer . . . of an interest of
the debtor in property, or any obligation . . . that was
made or incurred on or within 2 years before the date of
the filing of the petition, if the debtor voluntarily or
involuntarily …
(B)(i) received less than a reasonably equivalent
value in exchange for such transfer or obligation;
and
(ii)(I) was insolvent on the date that such transfer
was made or such obligation was incurred, or
became insolvent as a result of such transfer or
obligation . . . .
11 U.S.C. § 548(a)(1)(B).
Section 544(b) permits a trustee to pursue avoidance
claims under state law—here, the PUFTA. 11 U.S.C. § 544(b).
The main constructive fraud provisions of the PUFTA, §§ 5104
and 5105, are similar to constructive fraud under § 548(a)(1)(B),
except that the PUFTA increases the statutory “look back”
period from two years to four years. 12 Pa. Cons. Stat. § 5109.
7
96-104, 125 ¶ 114.
PEDP also asserted separate claims for turnover of the
amount of the license fee that the Commonwealth did not return
(Count One), for an unconstitutional taking (Count Five), and on
theories that the Commonwealth had been unjustly enriched and
PEDP was entitled to a recovery on the basis of promissory
estoppel (Counts Six and Seven). We, however, are not
concerned with counts One, Five, Six, and Seven on this appeal
as their dismissal is not presently challenged.
In July 2014, the Bankruptcy Court confirmed PEDP’s
liquidation plan, which called for the creation of a liquidation
trust supervised by Persil. App’x 17-18. Persil as Trustee
succeeded to all claims belonging to PEDP. App’x 3; First
Modified Chapter 11 Liquidation Plan 21-22, In re Phila. Entm’t
& Dev. Partners, LP, No. 14-12482, ECF No. 88 (Bankr. E.D.
Pa. May 27, 2014).
On April 8, 2016, the Bankruptcy Court dismissed the
adversary complaint. In re Phila. Entm’t & Dev. Partners, LP,
549 B.R. 103, 110-11 (Bankr. E.D. Pa. 2016). The Bankruptcy
Court found that the Rooker-Feldman doctrine divested it of
subject matter jurisdiction to consider a claim for the avoidance
of the license revocation. Id. at 111, 139. It stated,
the Rooker-Feldman Doctrine precludes the Trustee from
attempting to challenge the prepetition revocation of the
License. The Debtor lost in state court. To the extent the
Trustee alleges that some interest in the License inured to
the benefit of the estate, the Trustee would be
complaining of injuries caused by the Revocation Order
that was subsequently confirmed by the Commonwealth
8
Opinion. The Revocation Order and the Commonwealth
Opinion were entered prepetition. Finally, if this Court
was to determine that the Debtor held an interest in the
License or some right to be compensated for its value,
this Court would necessarily be required to review the
merits of the earlier state court decisions. Accordingly . .
. this Court is thereby prevented from addressing or
otherwise modifying the prepetition revocation of the
Debtor’s interest in the License.
Id. at 139 (emphasis removed).
The Bankruptcy Court then addressed the Trustee’s claim
for compensation for the value of the license. The Bankruptcy
Court stated that a claim to undo the revocation and to obtain
compensation for the revocation are “opposite sides of the same
coin”; that is, the right to be compensated for the value of the
license is the “functional equivalent” of the right to retain the
license, a conclusion that led the Court to hold that the Rooker-
Feldman doctrine barred any claim for the value of the license.
Id. at 140-41.
The Bankruptcy Court also addressed the fraudulent
transfer claim by treating the relevant transfer as the
Commonwealth’s failure to refund the license fee after the
revocation rather than the revocation of the license. Id. at 141-
42. The Bankruptcy Court declined to decide whether the
Rooker-Feldman doctrine barred this alternative reading of the
claim because the Commonwealth Court had not explicitly
addressed the question of whether PEDP was entitled to a refund
of the license fee upon the license revocation. Id. at 142. But
what the Bankruptcy Court did hold was that the refund theory
failed to state a claim under §§ 544 or 548 of the Bankruptcy
9
Code. It concluded that PEDP’s payment of the license fee to
the Board in October 2007 was not an actionable transfer
because PEDP made the payment outside the statutory lookback
periods under § 548 and the PUFTA, and the Commonwealth’s
alleged failure to pay a refund after the revocation was not an
actionable omission because nonpayment of property cannot be
a transfer of property. Id. at 152-54. The Bankruptcy Court also
dismissed the §§ 550 and 551 claims for recovery of the transfer
because it believed that the adversary complaint failed to plead
any valid avoidance claim under §§ 548 or 544. Id. at 155.2
2
The Commonwealth raised an Eleventh Amendment defense in
its pleadings which the Bankruptcy Court upheld with respect to
state law claims that PEDP advanced in its adversary complaint
but with which we are not concerned on this appeal. On the
other hand the Court did not consider that defense with respect
to the fraudulent transfer claims that we do address. The
Commonwealth does not advance an Eleventh Amendment issue
on this appeal even though the Eleventh Amendment concerns
subject matter jurisdiction as the Commonwealth believes that,
inasmuch as the Bankruptcy Court did not consider the defense,
the issue had not been preserved for presentation to this Court.
While parties cannot by consent vest a court with subject matter
jurisdiction and the Eleventh Amendment is jurisdictional, see
Blanciak v. Allegheny Ludlam Corp., 77 F.3d 690, 693 n.2 (3d
Cir. 1996), we will not address an Eleventh Amendment issue
on this appeal as the Commonwealth does not raise it and a party
may waive an Eleventh Amendment defense. See In re
Hechinger Inv. Corp. v. Hechinger Liquidation Tr., 335 F.3d
243, 249 (3d Cir. 1996). We, however, express no opinion on
whether the Commonwealth should be deemed to have waived a
possible Eleventh Amendment defense on the remand that will
10
PEDP appealed, but the District Court affirmed. It held
that the Bankruptcy Court correctly characterized the fraudulent
transfer claims “as a challenge to the legitimacy of the
revocation of the Debtor’s license,” and not, as the Trustee
claimed, a “challenge only [to] the Commonwealth’s failure to
return the value of the license after its revocation.” In re Phila.
Entm’t & Dev. Partners, LP, 569 B.R. 394, 399 (E.D. Pa. 2017).
Based on that reasoning, the District Court adopted the
Bankruptcy Court’s Rooker-Feldman doctrine conclusions. Id.
at 399-400.
The District Court also held that the Bankruptcy Court
correctly dismissed on the merits any part of the fraudulent
transfer claim that application of the Rooker-Feldman doctrine
did not bar. Id. at 400-01. It held that the Bankruptcy Court
correctly determined that PEDP’s only two transfers were the
license fee payment in 2007 (the claim to repayment that was
time-barred) and the loss of the license which it found occurred
in 2012 (which claim the Rooker-Feldman doctrine barred from
review). Id. at 401. The District Court agreed with the
Bankruptcy Court that there had not been a “transfer” based on
the Commonwealth’s failure to pay PEDP $50 million after the
revocation because nonpayment did not constitute a disposing of
or parting with property. Id. The District Court entered its
judgment on March 28, 2017. The Trustee timely appealed.
III. STATEMENT OF JURISDICTION AND
STANDARD OF REVIEW
follow the proceedings in this Court.
11
The Bankruptcy Court had jurisdiction to hear the
adversary proceeding under 28 U.S.C. §§ 157(b) and 1334(b).
The District Court had jurisdiction to hear the appeal from the
Bankruptcy Court’s order under 28 U.S.C. § 158(a). We have
jurisdiction of the appeal from the District Court’s order under
28 U.S.C. §§ 158(d) and 1291. We review the Bankruptcy
Court’s legal determinations de novo. In re Trans World
Airlines, Inc., 145 F.3d 124, 130-31 (3d Cir. 1998).
IV. DISCUSSION
On appeal, the Trustee challenges the Bankruptcy and
District Courts’ conclusions that the Rooker-Feldman doctrine
barred their review of PEDP’s fraudulent transfer claims. The
Rooker-Feldman doctrine deprives federal district and
bankruptcy courts of jurisdiction “over suits that are essentially
appeals from state-court judgments. . . .” Great W. Mining &
Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159, 165 (3d Cir.
2010); see In re Madera, 586 F.3d 228, 232 (3d Cir. 2009).
There is some tension between the application of the Rooker-
Feldman doctrine and the prosecution of avoidance claims under
the Bankruptcy Code as an avoidance of a claim seems to
authorize what the Rooker-Feldman doctrine prohibits—
appellate review of state court judgments by federal courts other
than the Supreme Court. See In re Knapper, 407 F.3d 573, 583
n.22 (3d Cir. 2005) (“In apparent contradiction to Rooker-
Feldman theory, bankruptcy courts are empowered to avoid state
judgments. . . .”) (quoting In re Gruntz, 202 F.3d 1074, 1079
(9th Cir. 2000) (en banc)). But we have noted that the Rooker-
Feldman doctrine does not necessarily bar actions that properly
are based on the Bankruptcy Code’s fraudulent transfer statutes.
12
See id. (rejecting “suggest[ion] that Rooker-Feldman bars an
action that is properly based on § 544(b)(1)”). We must decide,
then, whether the federal courts had jurisdiction to review the
Trustee’s fraudulent transfer claims or whether the Rooker-
Feldman doctrine barred them from doing so.
Our initial task is to identify the transfer on which the
Trustee predicates its §§ 548 and 544 fraudulent transfer claims.
The Bankruptcy Court identified three possible transfers: the
payment of the license fee, the loss of the license, and the
Commonwealth’s failure to refund the license fee. But the
Trustee contends that the only operative transfer for which it
seeks relief is from the loss of the license. Trustee’s Opening
Br. 26 (identifying PEDP’s “transfer of the slot machine license
upon revocation” as “the transfer on which the Fraudulent
Transfer Claims are based”).
The Trustee’s position is consistent with the allegations
in the adversary complaint that identify the license revocation as
the operative transfer. App’x 123 ¶ 97.3 In particular, the
3
Much of the Bankruptcy and District Courts’ conclusions
regarding the two other “transfers” accordingly have no bearing
on this appeal. We appreciate why the Bankruptcy Court had
difficulty pinning down with precision the fraudulent transfer
theory of which the Trustee complains. While the adversary
complaint is relatively clear in asserting that the relevant transfer
was the revocation, the Trustee’s briefs and oral arguments
before the Bankruptcy and District Courts often conflated the
claim with other claims in the adversary complaint that sought a
refund of the license fee. See, e.g., App’x 1165 (stating at oral
argument that “any fair reading of Count One, Two, Three, and
Four is that what we are asking for is a return of the license fee
13
Trustee does not contend that the revocation was illegal under
the Gaming Act or violated due process of law. Rather, it
contends that the Bankruptcy Code’s avoidance rules imposed
an independent obligation on the Commonwealth to pay some
value when it revoked the license. Trustee’s Opening Br. 18
(“[T]he federal courts may accept as a matter of fact and law
that the License was revoked and is lost to the Debtor; the
question here, however, is whether, under fraudulent transfer
law, the Commonwealth must, but failed to, pay reasonably
equivalent value for the Debtor’s property interests which were
transferred by way of such revocation. . . .”). But neither the
Bankruptcy Court nor the District Court reviewed the merits of
that argument as they concluded that the Rooker-Feldman
doctrine barred such review. The Trustee argues that both
Courts erred and that the Trustee is entitled to a merits
determination of its claim that the license revocation was a
fraudulent transfer. Accordingly, we turn to an analysis of that
contention.
In Exxon Mobil Corp. v. Saudi Basic Industries Corp. the
Supreme Court indicated that the federal courts had been
that the transfer was the involuntary revocation of the license,
but . . . what we’re asking to be avoided is the failure of the -- of
the Commonwealth to repay the license fee”). And to further
complicate the matter, the relief for the fraudulent transfer
claims is the value of the license, not a refund of the fee. In
theory, the license’s value could be measured by an amount
differing from the fee. But the Trustee used the $50 million
license fee as a proxy for the value of the license. Despite this
confusion, we are guided by the allegations in the adversary
complaint and will limit our discussion to the transfer as defined
in the pleadings.
14
applying the Rooker-Feldman doctrine too broadly and
consequently it clarified that the doctrine is confined to “limited
circumstances” where “state-court losers complain[] of injuries
caused by state-court judgments rendered before the district
court proceedings commenced and invit[e] district court review
and rejection of those judgments.” 544 U.S. 280, 284, 291, 125
S. Ct. 1517, 1521-22, 1526 (2005). In Great Western, which we
decided after the Supreme Court decided Exxon Mobil, we said
the doctrine applies when four requirements are met: (1) the
federal plaintiff lost in state court, (2) the plaintiff complains of
injuries caused by the state-court judgment, (3) that judgment
issued before the federal suit was filed, and (4) the plaintiff
invites the district court to review and reject the state-court
judgment. Great Western, 615 F.3d at 166. Our analysis
focuses on the fourth requirement.4
4
The Trustee does not contend that the third requirement for the
Rooker-Feldman doctrine to apply was not met, i.e., that the
state-court judgment issued before the federal suit was filed, but
the Trustee does make glancing arguments with respect to the
first requirement. It argues that PEDP, not the Trustee, was the
plaintiff who lost in state court because the Trustee joined this
case after the bankruptcy began and it acts on behalf of the
estate’s creditors. Trustee’s Opening Br. 20 (“In contesting the
revocation of the License, the Debtor was complaining of the
injuries it would sustain as a result of the loss of the License.
The Trustee, in contrast, is complaining of the injuries sustained
by the Debtor’s creditors . . . .”) (emphasis in original); Reply
Br. 8 (“The Trustee does not stand in the pre-petition Debtor’s
shoes in pursuing the Fraudulent Transfer Claims.”). The
District Court rejected this argument, App’x 8. But we need not
reach this question because we find that the Trustee’s claim does
15
By asking the Bankruptcy Court to find that the license
revocation was an avoidable fraudulent transfer, the Trustee did
not invite that Court to “review and reject” the revocation order.
See Great Western, 615 F.3d at 166. The “review and reject”
requirement concerns whether the federal court must conduct
“prohibited appellate review” of state-court decisions. Id. at
169. “Prohibited appellate review” means “a review of the
proceedings already conducted by the ‘lower’ tribunal to
determine whether it reached its result in accordance with law.”
Id. (internal citation and quotation marks omitted).
Such a prohibited review differs from mere “attempts to
litigate in federal court a matter previously litigated in state
court. . . .” Id. (quoting Exxon Mobil, 544 U.S. at 293, 125
S.Ct. at 1527). When the plaintiff attempts to litigate previously
litigated matters, the federal court has jurisdiction “as long as
the ‘federal plaintiff present[s] some independent claim,’ even if
that claim denies a legal conclusion reached by the state court.”
Id. (quoting Exxon Mobil, 544 U.S. at 293, 125 S.Ct. at 1527)
(internal quotation marks omitted; alteration in original). In
other words, if the federal court’s review does not concern “the
bona fides of the prior judgment,” the federal court “is not
conducting appellate review, regardless of whether compliance
with the second judgment would make it impossible to comply
with the first judgment.” Id. (internal citation and quotation
marks omitted). In that situation, the Rooker-Feldman doctrine
would not apply because the plaintiff is not “complaining of
legal injury caused by a state court judgment because of a legal
error committed by the state court.” Id. (internal citation and
quotation marks omitted).
not come within the fourth requirement for the doctrine to bar
this action.
16
The Trustee’s fraudulent transfer claims did not ask the
Bankruptcy Court to make an appellate review of the revocation
order. The Commonwealth Court considered whether the Board
had authority under the Gaming Act to revoke the slot machine
license due to PEDP’s noncompliance with the Board’s orders,
and whether the requirements were sufficiently clear and
afforded due process to the licensee during the revocation
proceedings. The Bankruptcy Court did not need to consider the
bona fides of that decision or review the Commonwealth Court
proceedings, and the Trustee does not argue that the Bankruptcy
Court should make such a review. Rather, the Bankruptcy Court
could have started from the premise that the Board and
Commonwealth Court reached the correct result under state law.
The Court then could have decided whether that revocation,
which occurred because of valid state proceedings, could
nonetheless be avoided under the Bankruptcy Code. To decide
that question, the Bankruptcy Court should have determined if
the revocation of the license was a fraudulent transfer, i.e., it
should have considered whether PEDP had an interest in the
license, transferred it within the lookback period, became
insolvent as a result of the transfer, and did not receive
reasonably equivalent value in return for the transfer. See In re
Fruehauf Trailer Corp., 444 F.3d 203, 210-11 (3d Cir. 2006)
(listing elements of constructive fraudulent transfer claim). The
Bankruptcy Court could have answered these questions without
rejecting or even reviewing the Commonwealth Court’s
decision. And, if it accepted the Trustee’s argument, the
Bankruptcy Court would have concluded that the Bankruptcy
Code permitted avoidance of the transfer, not that the
Commonwealth Court had committed legal error.5
5
When we say that the Bankruptcy Court would have permitted
17
We recognize, as did the Bankruptcy Court, that the
fraudulent transfer claims and the claims before the
Commonwealth Court raised overlapping legal issues. But that
circumstance did not mean that the Bankruptcy Court was
required to reject or even review the Commonwealth’s order for
the Bankruptcy Court to decide whether the license revocation
was a fraudulent transfer. Consider, for example, the
overlapping question of interest in the license. In deciding that
the Board had authority to revoke the license, the
Commonwealth Court considered whether PEDP had an interest
in the license of which PEDP could not be deprived without due
process of law. Phila. Entm’t & Dev. Partners, 34 A.3d at 276.
The Bankruptcy Court held, however, that if it “was to
determine that the Debtor held an interest in the License . . . this
Court would necessarily be required to review the merits of the
earlier state court decisions.” In re Phila. Entm’t & Dev.
Partners, 549 B.R. at 139. The Bankruptcy Court, however, did
not explain why if it made that determination it would have been
required to review the merits of the Commonwealth Court
decision, and we see no reason why it would have had to have
done so.
The state and federal courts would address the similar
question of property interest, but the Bankruptcy Court would
not need to review the Commonwealth Court’s decision to reach
its conclusion. The Bankruptcy Court instead would apply its
independent reading of the law governing whether PEDP had an
interest in the license. That inquiry would not have implicated
avoidance of the transfer we mean only that the Rooker-
Feldman doctrine did not bar the Court from finding that there
had been a fraudulent transfer. We are not expressing an
opinion on the merits of the claim.
18
the Rooker-Feldman doctrine. As we explained in Great
Western, a federal court can address the same issue “and reach[]
a conclusion contrary to a judgment by the first court,” as long
as the federal court does not reconsider the legal conclusion
reached by the state court. Great Western, 615 F.3d at 169.
Our above conclusion brings us to the next question,
which concerns the relief requested by the Trustee. In the
adversary complaint, PEDP prayed for payment by the
Commonwealth of the full value of the transfer. App’x 123 ¶
104, 125 ¶ 114.6 The Bankruptcy Court held that the Rooker-
Feldman doctrine barred review of the fraudulent transfer claim
because payment for the value of the license was the functional
equivalent to invalidating the state court decision. We again
disagree. Because the fraudulent transfer claim in the
Bankruptcy Court was independent of the Gaming Act and due
process claims previously advanced in the state court, it does not
matter for Rooker-Feldman doctrine purposes that the relief that
6
The Trustee does not contend that the Board should reissue the
slot machine license to PEDP. The Trustee’s sole argument in
terms of remedy is that the Commonwealth must pay for the
value of the license. See, e.g., Trustee’s Opening Br. 4 (“As a
result [of the fraudulent transfer], the Trustee is entitled to
recover the value of the Debtor’s transferred interests in the
License for the benefit of the Debtor’s creditors.”); id. 12
(“[T]he Trustee challenged the dismissal of the Fraudulent
Transfer Claims on the basis that the Bankruptcy Court
fundamentally misconstrued the Trustee’s claims and improperly
conflated the state court revocation proceedings with the
Trustee’s claim that no value was payed [sic] for the Debtor’s
property interests which were transferred through revocation of
the Debtor’s License.”).
19
the Trustee sought, if granted, would frustrate the
Commonwealth Court’s order. See Great Western, 615 F.3d at
169 (finding the Rooker-Feldman doctrine inapplicable to
independent claims “regardless of whether compliance with the
second judgment would make it impossible to comply with the
first judgment”).
In reaching its contrary conclusion, the Bankruptcy Court
relied on Maple Lanes, Inc. v. Messer, 186 F.3d 823 (7th Cir.
1999). But we conclude that that case is unpersuasive given the
Supreme Court’s refinements to the Rooker-Feldman doctrine
after the court of appeals decided Maple Lanes. In that case, the
plaintiff, Maple Lanes, lost its liquor license after the local
sheriff told a newspaper that there had been drug sales in its
liquor store. Maple Lanes unsuccessfully challenged the
revocation in a state court. Maple Lanes then sued the sheriff in
federal court for defamation under 42 U.S.C. § 1983. It alleged
that his statement caused the city to revoke its license and it
sought as damages the monetary value of the license. The court
of appeals dismissed the complaint pursuant to the Rooker-
Feldman doctrine as it held that the federal claim was an end-run
around the revocation: “In essence, Maple Lanes seeks to undo
the effects of the revocation of its liquor license by collecting an
amount of damages from [the sheriff] . . . equal to the monetary
value of the license.” Id. at 825. The court stated that “[i]f a
federal court were to award the relief,” the “result would
effectively reverse the state court judgment upholding the
revocation of the liquor license. There is little difference
between awarding Maple Lanes the monetary value of the
license and the license itself.” Id. at 826.
In our view, the result in Maple Lanes does not comport
with the Rooker-Feldman doctrine as it now is understood. The
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court of appeals decided Maple Lanes several years before the
Supreme Court decided Exxon Mobil and a decade before we
decided Great Western. It is clear that both Exxon Mobil and
Great Western call the reasoning in Maple Lanes into question.7
In particular, Maple Lanes focused on the effect of the relief
i.e., that damages would functionally “undo the effect of the
revocation” even though the revocation order would still be
valid, but it did not address whether the federal court in making
its adjudication needed to review the state court decision for
legal error. The focus, we now know, should be the other way
around. That is, the crux of a Rooker-Feldman doctrine inquiry
is whether it requires the federal court to look at the “bona fides
of the prior judgment,” not whether “compliance with the
second judgment would make it impossible to comply with the
first judgment.” Great Western, 615 F.3d at 169. Thus, contrary
to Maple Lanes’ reasoning, the Rooker-Feldman doctrine does
not apply merely because the claim for relief if granted would as
a practical matter undermine a valid state court order.
Accordingly, we respectfully disagree with the holding in Maple
Lanes and so, too, with the Bankruptcy Court’s reliance upon it.
The same reasoning undoes the Bankruptcy Court’s last
conclusion. To support its argument that payment for the value
of the license was the functional equivalent of returning the
license, the Bankruptcy Court discussed apparently
contradictory legal positions in the state and federal
proceedings. The Bankruptcy Court noted that the Board and
Commonwealth Court accepted PEDP’s argument that it would
not recoup any money after the revocation; but the Trustee now
7
We are not suggesting that Great Western if decided before
Maple Lanes would have been binding on the Maple Lanes
court.
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claims a right to payment for the license because of the
revocation. In re Phila. Entm’t & Dev. Partners, 549 B.R. at
141. The Commonwealth keys in on this point as well, arguing
that “it was clear to all involved in those proceedings that
revocation of PEDP’s license would not entitle PEDP to return
of any portion of its $50 million license fee. . . .”
Commonwealth’s Br. 19. But even if the Trustee has taken
inconsistent positions before the different tribunals, “attempts
merely to relitigate an issue determined in a state case are
properly analyzed under issue or claim preclusion principles
rather than Rooker-Feldman.” In re Miller, 666 F.3d 1255, 1261
(10th Cir. 2012).
In sum, the Trustee is not “complaining of an injury
caused by the state-court judgment and seeking review and
rejection of that judgment.” Exxon Mobil, 544 U.S. at 291, 125
S.Ct. at 1526. The Bankruptcy Court applied the Rooker-
Feldman doctrine too broadly in finding that the fraudulent
transfer claims require the federal courts to void the state court
order. Accordingly, we conclude that the Bankruptcy Court
erred in holding that the Rooker-Feldman doctrine barred it from
considering the Trustee’s fraudulent transfer claims, and we will
reverse its grant of dismissal as to Counts Two, Three, and Four
of the adversary complaint.8
Usually, the final step in a Rooker-Feldman doctrine
8
Because we find that the Rooker-Feldman doctrine does not
bar review of the Trustee’s claims, we will not reach the
Trustee’s alternative argument that the doctrine never can apply
when the Bankruptcy Court is enforcing substantive provisions
of the Bankruptcy Code. Trustee’s Opening Br. 21-25.
22
analysis is to “apply state law to determine the preclusive effect
of the prior state-court judgments.” Great Western, 615 F.3d at
173. Although the Commonwealth raised issue preclusion
issues before the Bankruptcy Court, that Court did not address
the argument and neither party has raised those issues on this
appeal. And although the parties have briefed the merits of the
fraudulent transfer claims, the Commonwealth focused, as had
the Bankruptcy and District Courts, on whether a fraudulent
transfer claim arises from the payment of the license fee or the
refund, not the revocation of the license itself as urged by the
Trustee—a result likely attributable to the unclear nature of the
Trustee’s claims, as we explained above. It is not surprising,
therefore, that we do not have adequate briefing on the
preclusion issues. Accordingly, we will remand this matter to
the District Court to address inter alia (1) whether claim or issue
preclusion bars judicial review of the Trustee’s claim that the
license revocation was a constructively fraudulent transfer under
§ 548(a)(1)(B) or § 544(b) and the PUFTA; and if not (2)
whether the Trustee has stated a claim that the license
revocation constitutes a fraudulent transfer under § 548(a)(1)(B)
or § 544(b) and the PUFTA; and (3) whether the Eleventh
Amendment bars judicial review of the Trustee’s claim that the
license revocation was a constructively fraudulent transfer under
§ 548(a)(1)(B) or § 544(b) and the PUFTA.
V. CONCLUSION
For the foregoing reasons, we will reverse the District
Court’s affirmance of the Bankruptcy Court’s dismissal of the
Trustee’s fraudulent transfer claims in Counts Two, Three, and
Four of the adversary complaint, which the Bankruptcy Court
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predicated on its belief that the federal courts lacked subject
matter jurisdiction over the claims. We will remand the case for
further proceedings to the District Court which, at its option,
may decide the remaining issues that come before it on the
remand or may, in turn, remand the matter to the Bankruptcy
Court for further proceedings.
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