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holding that "when a creditor . . . seeks to recover from a guarantor of a debtor's indebtedness . . . action constitutes a case `related to' a Chapter 11 bankruptcy proceeding" because the resulting "shift in the constellation of creditors" can "affect the administration of the bankruptcy proceeding during the confirmation process"
Summary of this case from TD Bank, N.A. v. SewallOpinion
Civil Action No. 04-3471 Section "C" (3).
May 19, 2005
ORDER AND REASONS
This matter comes before the Court on Defendant Torch, Inc.'s ("Torch") Motion to Refer the above-captioned proceeding to the Bankruptcy Court. (Rec. Doc. 9). Having reviewed Defendant's Motion, Plaintiff's Opposition thereto, Defendant's Reply, the Complaint, and the applicable law, the Court hereby rules that Defendants' Motion to Refer be GRANTED.
I. Background
Plaintiff Adams Vessel (Bilbao) Limited's ("AVBL") Complaint alleges that on May 15, 1998 its affiliate, Khalifia A. Algosaibi Diving and Marine Company ("ADAMS") entered into a time-charter agreement with Torch for charter of the M/V MIDNIGHT ARROW ("the Vessel"). On September 24, 2001, ADAMS, AVBL, Torch and Torch Offshore, LLC ("Torch Offshore") executed a Novation Agreement, under the terms of which AVBL was substituted for ADAMS as the Vessel's owner, and Torch Offshore was substituted for Torch as charterer, under the Charter. Also on September 24, 2001, Torch executed a "Deed of Guarantee" under which Torch guaranteed to AVBL the performance of Torch Offshore under the Novation Agreement and Charter as well as "under agreements other than the Novation Agreement and Charter." ( See generally Rec. Doc. 1, Complaint, ¶¶ 5-7).
On June 4, 2004, after a number of months of Torch Offshore's nonpayment for the charter hire, Torch Offshore and AVBL entered into a Termination and Settlement Agreement, which, among other things, included a payment plan but otherwise relieved the parties of their obligations under the Charter and Novation Agreement. When AVBL determined in December 2004 that Torch Offshore was still in default, it notified both Torch Offshore and Torch of obligations under Termination and Settlement Agreement. On December 17, AVBL served a written demand that Torch perform in the stead of Torch Offshore under the Deed of Guarantee. In the face of nonperformance of the Termination and Settlement Agreement, AVBL filed suit against both Torch entities for breach of contract. ( See generally id. at ¶¶ 7-11).
In this action, Plaintiff asserts that Torch remains liable to AVBL under the Deed of Guarantee for the indebtedness of Torch Offshore. As guarantor of Torch Offshore's indebtedness to AVBL, Torch is allegedly liable to AVBL for the principal amount of $1,800,000 plus interest and attorneys fees. AVBL's recovery of this debt thus lies at the heart of the litigation before this Court. Concurrently, AVBL has filed in New York an identical suit against Torch Offshore, also under the Termination and Settlement Agreement ("the New York suit"). Subsequently, Torch Offshore ("Debtor") filed for Chapter 11 bankruptcy in the Eastern District of Louisiana on January 7, 2005, which resulted in an automatic stay of the New York suit.
In re Torch Offshore, Chapter 11, No. 05-10138, Bankruptcy Court, Eastern District of Louisiana.
II. Law and Analysis
In its instant motion, Defendant Torch, as guarantor of the alleged debt owed to AVBL by Torch Offshore, requests that the above-captioned matter be referred to the Bankruptcy Court because it is "related to" the bankruptcy case. Plaintiff resists such a referral on the grounds that this Court should not exercise its discretion under 28 U.S.C. § 157 to transfer a "non-core proceeding" because the outcome of this case will not affect the Debtor's rights, liabilities, or options.
Despite Plaintiff's assertion, the Court does not address the question of whether the above-captioned matter is a "core" or "non-core" proceeding under 28 U.S.C. § 157(b)(2).
Despite the Court's original jurisdiction over the matter under 28 U.S.C. § 1334, "[e]ach district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district." 28 U.S.C. § 157(a). The Fifth Circuit has set forth a two-prong test to determine whether a case before the district court under is sufficiently "related to" a bankruptcy proceeding to warrant transfer:
A proceeding is "related to" a bankruptcy if "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." More specifically, "an action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and . . . in any way impacts upon the handling and administration of the bankruptcy estate." This test is obviously conjunctive: For jurisdiction to attach, the anticipated outcome of the action must both (1) alter the rights, obligations, and choices of action of the debtor, and (2) have an effect on the administration of the estate.Bass v. Denney (In re Bass), 171 F.3d 1016, 1022 (5th Cir. 1999) (internal citations omitted).
Specifically, in arguing against referral, Plaintiff asserts that the only effect on the bankruptcy proceeding by this Court's retention of the case would be "that Torch would be subrogated to AVBL's rights, and thus Torch would be the creditor in the bankruptcy proceedings in lieu of AVBL." (Rec. Doc. 10 at 5). In response, Defendant contends that Plaintiff admits that the effect of the referral will be that "Torch will be substituted as a creditor in the bankruptcy proceeding." (Rec. Doc. 16 at 2).
Despite what amount to equity arguments by the Plaintiff, AVBL essentially concedes that a decision by this Court to retain the matter will have some impact on the bankruptcy proceeding. Specifically, the effect will alter the creditors to whom Torch Offshore will be liable by substituting Torch for AVBL. This shift in the constellation of creditors will further affect the administration of the bankruptcy proceeding during the confirmation process because, as Defendant points out, Torch's "insider" status under 11 U.S.C. § 1129 (a)(10) would inhibit it from voting on the acceptance of a plan. ( See Rec. Doc. 16 at 2-3).
Plaintiff apparently seeks to prevent a referral because it would diminish the value of Torch's guaranties "because a creditor would have at least the delay of a bankruptcy proceeding in collecting against a non-bankrupt guarantor." (Rec. Doc. 10 at 6). The Plaintiff also objects to Torch's seeking Chapter 11 bankruptcy protection, due to the filing of its wholly owned subsidiary, when Torch itself has not filed under Chapter 11. This latter point carries little weight, however, since § 157(a) applies to "any and all proceedings . . . related to a case under title 11." Therefore, whether Torch or Torch Offshore initiated the Chapter 11 proceeding is immaterial. See also In re Red Ash Coal Coke Corp., 83 B.R. 399, 401 (W.D. Va. 1988) (finding that "a case falls within the `related to' jurisdiction when the action involving the non-debtor has an effect on the administration of the bankruptcy estate").
The Court notes that Plaintiff failed to cite a case on point to support the proposition that a referral is ill-advised, whereas the Defendant cited cases of persuasive authority in favor of transfer from courts inside and outside the Fifth Circuit. In Worldcom Network Services, Inc. v. Al-Khatib, No. 96 CIV. 4492 (RLC), 1998 WL 23254 (S.D.N.Y., Jan. 22, 1998), the district court faced a factual scenario where plaintiff WorldCom required that the defendants' wives execute guaranties providing full payment when due of all indebtedness, liabilities, and obligations of the plaintiffs' company (Conetco) to WorldCom. Once the defendants were in Chapter 11 proceedings, the New York district court found that "the extent of defendants' liability on their respective guaranties will impact plaintiff's recovery in its Chapter 11 claim against the debtor Conetco [, such that] plaintiff's action to recover money under the guaranties are at least `related' proceedings to a Title 11 action and within the bankruptcy court's purview under 28 U.S.C. § 157(c)(1)." Al-Khatib, 1998 WL 23254 at *3. In In re Red Ash Coal Coke Corp., 83 B.R. 399 (W.D. Va. 1988), the district court found "an action by a creditor against a guarantor of a debtor's obligations will necessarily affect that creditor's status, vis-a-vis, other creditors, and that the administration of the estate therefore depends upon the outcome of that litigation." 83 B.R. at 402 (internal citations omitted) (emphasis added).
Plaintiff's reliance on GATX Aircraft Corp. v. M/V COURTNEY LEIGH, 768 F.2d 711, 715-717 (5th Cir. 1985), is misplaced because that case discussed the question of whether a nondebtor, even if related as a co-tortfeasor, could be subject to an automatic stay brought about by the debtor's Chapter 11 filing. Unlike the case at bar, the jurisdictional issue under 28 U.S.C. §§ 157(a) and 1334 was entirely absent from the Fifth Circuit's analysis.
Having reviewed these cases, the undersigned is sufficiently convinced that when a creditor, such as the Plaintiff, seeks to recover from a guarantor of a debtor's indebtedness, such as the Defendant, this action constitutes a case "related to" a Chapter 11 bankruptcy proceeding. While the Fifth Circuit has not ruled on this precise issue, it is evident for the reasons stated above that the Court's retention of the case qualifies as "relating to" the bankruptcy proceeding because it would "alter the rights, obligations, and choices of action of the debtor, and (2) have an effect on the administration of the estate." Bass, 171 F.3d at 1022. By satisfying the two-part test in Bass, the Court finds in its discretion that transfer of the case to the Bankruptcy Court is proper. In addition, the Bankruptcy Court is far better positioned to determine the competing creditor claims, including that of AVBL, due to the Bankruptcy Judge's familiarity with the case.
Accordingly,
IT IS ORDERED that the above-captioned matter be REFERRED to the Bankruptcy Court under the case heading In re Torch Offshore, Chapter 11, No. 05-10138, Bankruptcy Court, Eastern District of Louisiana.