Opinion
01 Civ. 5207 (RWS)
September 27, 2001
OPINION
Defendants Ahava Dairy Products Corp. ("Ahava"), Lewis County Dairy Corp. ("Lewis County Dairy") and Moise Banayan ("Banayan") have moved under 28 U.S.C. § 157(d) to withdraw the adversary proceeding commenced against them by American Equities Group, Inc. ("AEG") in the Bankruptcy Court and upon withdrawal to transfer the action to a New Jersey court. For the reasons set forth below, the motion to withdraw is granted, and the motion to transfer is denied.
Prior Proceedings On November 21, 2000, AEG filed a voluntary petition for relief under Chapter 11, Title 11, United States Code (the "Bankruptcy Code") and is continuing to operate its business and manage its property as a debtor-in-possession. On December 5, 2000, AEG Financial Services, Inc., American Equities Special Purpose Corporation, American Equities SPP Series 1000, Ltd., American Equities SPP series 2000, Ltd., American Equities SPP 3000, Ltd., American Equities SPP 4000, Ltd., American Equities SPP 500, Ltd., (collectively "AEG Subsidiaries") filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code and are continuing to operate their businesses and manage their properties as debtors-in-possession. By order dated December 11, 2000, the AEG Subsidiaries are being jointly administered with AEG under the above caption.
On January 3, 2001, American Equities Income Fund, Inc., and American Equities Group L.P. ("Additional AEG Subsidiaries"), filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code and are continuing to operate their businesses and manage their properties as debtors-in-possession, and by order of January 10, 2001, the Additional AEG Subsidiaries are being jointly administered with AEG under the above caption.
On April 17, 2001, AEG commenced an adversary proceeding against Ahava, Lewis County Dairy and Banayan to recover an account balance of over $8 million arising out of a Master Purchase Sale Agreement of November 6, 1996 (the "Agreement") to provide factoring of Ahava's accounts.
On June 12, 2001, the defendants answered the complaint, asserting affirmative defenses but no counterclaims. On June 13, 2001, by order to show cause, defendants moved in this Court for a stay pending the determination of the instant motion which was filed on June 11, 2001. The stay was denied and the motion to withdraw was marked submitted on July 5.
The Facts
AEG is a corporation organized and existing under the laws of the State of New York, with its principal place of business in Wayne, New Jersey, doing business as a financial services company engaged principally in the business of accounts receivable factoring.
Ahava is a corporation organized and existing pursuant to the laws of the State of New York, with its principal place of business in the State of New York, engaged in the sale of dairy products.
Lewis County Dairy is a corporation organized and existing pursuant to the laws of the State of New York, with its principal place of business in the State of New York.
Banayan is a resident of the State of New York.
AEG and Ahava entered into the Agreement in which AEG agreed to purchase and Ahava agreed to sell and assign, under the terms set forth in the Agreement, Ahava's accounts receivable to AEG. Under the Agreement, AEG is entitled to charge Ahava's "Book Account" for certain fees as specified in the Agreement, and for the amount of any of Ahava's accounts receivable which were purchased by AEG and not collected within 90 days of the invoice date. The Agreement provides that if at any time a deficit in the Book Account exists (such deficit being referred to in the Agreement as an "Overdraft"), it shall be payable on demand, with interest at the rate of 18% per annum.
To induce AEG to extend financial accommodations to Ahava under the terms of the Agreement, Lewis County Dairy and Banayan executed and delivered to AEG a guaranty of payment of any and all of Ahava's obligations arising under the Agreement and undertook in the event of a breach of or default under the Agreement by Ahava to pay all of the indebtedness of Ahava to AEG immediately due and payable.
The Agreement also contained a waiver of trial by jury and a provision that New Jersey law and the New York Uniform Commercial Code would apply, as well as a consent to jurisdiction in New Jersey state and federal courts.
By letter dated August 26, 1999, AEG claimed that it was owed in excess of $5 million under the Agreement. In a response of September 14, Ahava stated that it is unable "to pay exorbitant interest rates" and that "no new funding has been made by AEG for eighteen months." According to AEG, Ahava was making payments up to the week preceding November 30, 2000, and the Agreement did not terminate until November 30, a claim which is unrebutted by Ahava.
The Adversary Proceeding is Non-Core
Under 28 U.S.C. § 157(d), "a district court may withdraw . . . any case or proceeding under this section, on its own motion or on timely motion of any party, for cause shown."
The factors to determine whether withdrawal is appropriate or not are: "whether the claim or proceeding is core or non-core, whether it is legal or equitable, and considerations of efficiency, prevention of forum shopping, and uniformity in the administration of bankruptcy law." Orion Pictures Corp. v. Showtime Networks, Inc., 4 F.3d 1095, 1101 (2d Cir. 1993).
An action for breach of contract "by a debtor against a party to a pre-petition contract, who has filed no claim with the bankruptcy court, is non-core." Orion Pictures Corp., supra, 4 F.3d at 1102. See St. Paul Fire and Marine Insurance Co. v. Pepsico, Inc., 884 F.2d 688, 701 (2d Cir. 1989); Tultex Corp. v. Freeze Kids, L.L.C., 252 B.R. 32, 37 (S.D.N.Y. 2000) ("a pre-petition breach of contract claim is not a core proceeding"). Here the Agreement under which the accounting is sought was pre-petition. Any payments by Ahava post-petition in the absence of any counterclaims, do not convert the action into a core proceeding.
Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858 (1982), addressed the jurisdictional limits of the bankruptcy courts and involved a debtor's breach of contract action. The Supreme Court held that state-created private rights such as contract claims must be determined by an Article III judge. 458 U.S. at 69-70 n. 5. Thus,
following Marathon, it is well settled that Article III prohibits bankruptcy courts from adjudicating pre-petition contract claim — that is, claims arising prior to the commencement of the debtor's bankruptcy — against a non-party to the bankruptcy.
Tultex Corp., supra, 252 B.R. at 36-37 (footnote omitted).
Because this case is a non-core proceeding, defendants would be entitled to a trial by jury. The "constitution prohibits bankruptcy courts from holding jury trials in non-core matters." Orion Pictures Corp., supra, 4 F.3d at 1101. Withdrawal of the reference would, therefore, be appropriate because,
A jury trial in the bankruptcy court, unless with the consent of all parties [which will not be obtained in the instant case] would be essentially an advisory and duplicative proceeding; it could, at most, culminate in a recommendation by the bankruptcy court to the district court for a final judgment.
Interconnect Telephone services, Inc. v. Farren, 59 B.R. 397, 399 (S.D.N.Y. 1986) (quoting In re George Woloch Co., 49 B.R. 68, 70 (E.D.Pa. 1985)).
Thus, the withdrawal of the reference would promote judicial economy. Holland Industries, Inc., supra, 1989 U.S. Dist. LEXIS 12698 at *4-5.
AEG has claimed that Ahava waived its right to a jury trial by the last sentence of paragraph 10 of the Agreement. However, according to Ahava under New Jersey law the inclusion of such boiler-plate language does not defeat Ahava's right to a jury trial, citing Fairfield Leasing Corp. v. Technigraphics, Inc., 256 N.J. Super. 538, 607 A.2d 703 (N.J. Superior Ct. 1992). This authority is unrebutted by AEG which simply relies on the language of the Agreement and appears to have no objection to a trial by jury. The issue can be resolved by motion in accordance with the conclusions reached in this opinion.
A withdrawal of the reference is also compelled by the remaining factors articulated by Orion Pictures Corp., "prevention of forum shopping and uniformity in the administration of bankruptcy law." 4 F.3d at 1101. Uniform in bankruptcy law compels the withdrawal of garden variety breach of contract matters like the one at issue here.
Accordingly, the adversary proceeding will be withdrawn.
This Court Has Jurisdiction Over the Dispute Pursuant to 28 U.S.C. § 1334
Though not raised by the parties, jurisdiction over this action appears to rest upon 28 U.S.C. § 1334(b) which provides that, "the district courts shall have original but not exclusive jurisdiction of all proceedings arising under title 11 or arising in or related to a case under title 11." (emphasis added). In Northern Pipeline, 458 U.S. at 72 n. 26, the Court said that even in the absence of diversity, the claim in question (a state law claim in tort and contract brought by the petitioner for reorganization against a private party) "could have been adjudicated in federal court on the basis of its relationship to the petition for reorganization."
Transfer to New Jersey is Not Warranted
According to Ahava, this action should be transferred to New Jersey because of the choice of law provision, the consent to jurisdiction, and because New Jersey is a more convenient forum, because Ahava's accountant, books and records are located there, and certain witnesses, including AEG's signatory on the Agreement, reside in New Jersey.
This Court has the authority to transfer an action to an alternate district pursuant to 28 U.S.C. § 1404(a), which states in relevant part that:
for the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.28 U.S.C. § 1404(a).
"'[M]otions for transfer lie within the broad discretion of the courts and are determined upon notions of convenience and fairness on a case-by-case basis.'" Linzer v. EMI Blackwood Music Inc., 904 F. Supp. 207, 216 (S.D.N Y 1995) (quoting In re Cuyahoga Equip. Corp., 980 F.2d 110, 117 (2d Cir. 1992)) (citing Stewart Org. Inc. v. Ricoh Corp., 487 U.S. 22, 29 (1988)). The burden of demonstrating the desirability of transfer lies with the moving party. See, e.g., Hubbell Inc. v. Pass Seymour, Inc., 883 F. Supp. 955, 962 (S.D.N.Y. 1995).
Thus, the Court must determine whether, considering the "convenience of parties and witnesses" and the "interest of justice," a transfer is appropriate. Wilshire, 976 F. Supp. at 180.
In determining whether transfer is warranted "for the convenience of the parties and witnesses [and] in the interest of justice," courts generally consider several factors, including: (1) the convenience of witnesses, (2) the convenience of the parties, (3) the locus of operative facts, (4) the availability of process to compel the attendance of unwilling witnesses, (5) the location of relevant documents and the relative ease of access to sources of proof, (6) the relative means of the parties, (7) the forum's familiarity with the governing law, (8) the weight accorded the plaintiff's choice of forum, and (9) trial efficiency and the interest of justice, based on the totality of the circumstances. See Orb Factory, Ltd. v. Design Science Toys, Ltd., 6 F. Supp.2d 203 (S.D.N.Y. 1998) (citing Wilshire, 976 F. Supp. at 181); see also Constitution Reinsurance Corp. v. Stonewall Ins. Co., 872 F. Supp. 1247, 1250 (S.D.N.Y. 1995); Cento Group, S.P.A v. OroAmerica, Inc., 822 F. Supp. 1058, 1060 (S.D.N.Y. 1993).
Here, all the parties are New York residents. Additionally, all the witnesses and documents are within the subpoena power of this Court. Because there is no significant travel distance involved, the relative mean of the parties is not a crucial factor. Though the choice of law clause likely mandates the application of New Jersey law, New York courts — and federal courts sitting in New York — are fully competent to apply the laws of New Jersey and frequently do so. Finally, AEG's choice of forum should be respected upon a balancing of other § 1404 considerations.
Conclusion
The motion of Ahava, Lewis County Dairy and Banayan to withdraw the adversary action, a non-core proceeding, from the Bankruptcy Court is granted. The motion to transfer the action to New Jersey is denied.
Discovery will be completed within sixty days and a pretrial order filed November 27, 2001.
It is so ordered.