Summary
discussing New York law's "extraneous" or "collateral" fraud exception
Summary of this case from United Guar. Mortg. Indem. Co. v. Countrywide Financial Corp.Opinion
No. 04 Civ. 7950 (NRB).
February 14, 2005
Dean Hansell, Bennett G. Young, Herbert K. Ryder, LeBoeuf, Lamb, Green MacRae LLP, New York, New York, Attorneys for Plaintiffs.
Todd C. Norbitz, Jeremy L. Wallison, Foley Lardner LLP, New York, New York, James R. Clark, Andrew J. Wronski, Foley Lardner LLP, Milwaukee, WI, Attorneys for Defendant.
MEMORANDUM AND ORDER
Defendant Marathon Electric Manufacturing Corp. ("defendant" or "Marathon") moves for an order pursuant to 28 U.S.C. § 157(d) withdrawing the above-captioned adversary proceeding from the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). Plaintiffs Enron Wind Energy Systems, LLC ("Enron Wind"), Enron Wind Constructors, LLC, ("Constructors") and Zond Minnesota Construction Company, LLC ("Zond") (Enron Wind, Constructors and Zond will be collectively referred to as "plaintiffs"), oppose the motion. For the reasons that follow, defendant's motion is denied.
BACKGROUND
The following factual background is drawn from plaintiffs' complaint, and, except where noted, is not in dispute.
Plaintiffs allege that, from the outset, each of the Marathon Generators experienced failures due to defects in design or workmanship attributable to defendant. As a result, plaintiffs and the subsequent Third Party Purchasers suffered substantial monetary damages. In an attempt to resolve some of these issues, the parties entered into a Generator Warranty and Settlement Agreement and Release of All Claims ("Warranty Agreement") on January 24, 2001. The Warranty Agreement provided either for the repair, replacement, or refund of the Marathon Generators upon presentation of a warranty claim. Additionally, by signing the Warranty Agreement, the parties waived their right to a trial by jury over any disputes concerning the agreement. Plaintiffs allege that, following the parties' entry into the Warranty Agreement, plaintiffs issued various warranty violation notices to Marathon. Plaintiffs further allege that defendant ignored these notices.
On February 20, 2002, plaintiffs Enron Wind and Constructors filed voluntary petitions with the Bankruptcy Court for relief under chapter 11 of the Bankruptcy Code. In addition to the pre-petition notices, plaintiffs allege that they submitted two additional warranty claims to defendant after Enron Wind and Constructors filed their bankruptcy cases. The first of these notices was allegedly submitted by plaintiffs on June 28, 2002, and the second was submitted on July 30, 2002. According to plaintiffs, defendant sent a response denying the first of the claims on July 2, 2002 and denied the second claim on August 6, 2002. Plaintiff Zond filed a voluntary petition with the Bankruptcy Court for relief under chapter 11 on August 1, 2002.
During the bankruptcy proceedings, the Third Party Purchasers filed proofs of claims against plaintiffs' estates for problems with the power projects that plaintiffs sold. These claims include damage claims for failures of the Wind Turbine Systems due to the defects in design, materials, and/or workmanship of the Marathon Generators. In total, these claims amount to hundreds of millions of dollars.
While it is not clear what percentage of these claims are attributable to defects in the Marathon generators, it appears that the Third Party Purchasers purchased a significant percentage of the 564 generators sold to plaintiffs by defendant.
In March and April of 2004, plaintiffs entered into settlement stipulations with the Third Party Purchasers. These stipulations substantially reduce the aggregate amount of allowable claims each Third Party Purchaser can pursue against the plaintiffs' estates, and provide the Third Party Purchasers with certain minimum payment amounts from the estates. If these minimum payment amounts are not met, the Third Party Purchasers are entitled to seek reconsideration of the amount of allowed claims against the estates. In total, these stipulations reduce the allowed claims against the plaintiffs' estates from a sum of over $3 billion to approximately $423 million in claims, with total required minimum payments of $78.9 million. The bankruptcy court approved these settlements on April 1, 2004 and May 27, 2004.
Plaintiffs filed this adversary proceeding with the Bankruptcy Court on or about June 2, 2004. Plaintiffs have sued defendant for breach of contract, breach of implied covenant of good faith and fair dealing, promissory fraud, intentional interference with contractual relations, intentional interference with economic relations, negligent interference with economic relations, violation of California Business Professions Code § 17200, and contractual indemnity. On October 8, 2004, defendant filed the present motion to remove the suit from Bankruptcy Court.
Defendant argues that the court should grant its motion because: (1) the motion is timely, (2) this proceeding is non-core, (3) it would be time and cost-efficient to hear this proceeding in the district court, and (4) withdrawal will not affect the uniformity of bankruptcy administration. Plaintiffs oppose the motion on the grounds that: (1) the proceeding is core, (2) cost and efficiency factors weigh in favor of keeping the proceeding in Bankruptcy Court, and (3) withdrawal is not appropriate because the proceeding is not ready for trial.
DISCUSSION
Defendant moves for permissive withdrawal of this matter from the Bankruptcy Court pursuant to 28 U.S.C. § 157(d). Under that section, a district court "may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." 29 U.S.C. § 157(d). While the statute does not define what constitutes "for cause shown," the Second Circuit has identified a number of factors to consider in determining if there is cause for withdrawal. Specifically, districts courts should evaluate: (1) whether the proceeding is core or non-core; (2) the efficient use of judicial resources; (3) delay and costs to the parties; (4) uniformity of bankruptcy administration; (5) prevention of forum shopping; (6) presence of a jury demand; and (7) other related factors. See In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir. 1993).
Courts in this circuit have interpreted other related factors to include the presence of a jury demand, expedition of the bankruptcy process, and whether the claim is legal or equitable in nature. Compare In re County Seat Stores, Inc., No. 01 Civ. 2966, 2002 WL 141875, at *4 (S.D.N.Y. Jan. 31, 2002)with In re Enron Power Mktg, Inc., 01 Civ. 7964, 2003 WL 68036, at *6 (S.D.N.Y. Jan. 8, 2003).
A. The Core/Non-Core Determination
In considering an application for discretionary withdrawal, a district court "should first evaluate whether the claim [involves a] core or non-core" aspect of the bankruptcy proceeding. Id. Although not dispositive of the withdrawal decision, this determination influences the remainder of the court's analysis because "it is upon this issue that questions of efficiency and uniformity will turn." Id. For example, a bankruptcy court may hear non-core matters, but bankruptcy proceedings on non-core matters will be subject to de novo review by the district court. 28 U.S.C. § 157(c)(1). Therefore, it may be more efficient to hold such non-core proceedings in the district court to prevent duplication of judicial efforts. Conversely, a bankruptcy judge has the power to enter final judgments on core matters, and is much more likely to be familiar with the facts and issues in core matters. Accordingly, such matter are more efficiently adjudicated in the bankruptcy court. Id.
In a contract proceeding, there are two principal questions a court must address in order to make the core determination: (1) whether the contract is antecedent to the reorganization petition and (2) the degree to which the proceeding is independent of the reorganization. In re U.S. Lines, Inc., 197 F.3d 631, 637 (2d. Cir. 1999). In evaluating the first factor, courts consider both when the contract was formed and when the breach occurred in relation to the timing of the bankruptcy filing.
While agreeing that the contract was formed pre-petition, the parties dispute whether the claims under the Warranty Agreement arose pre- or post-petition. The Second Circuit has established a clear rule that post-petition causes of action that arise from post-petition contracts are core proceedings. See In re Ben Cooper, Inc., 896 F.2d 1394, 1400 (2d. Cir. 1990). However the law on pre-petition contracts is less clear. Pre-petition claims arising from pre-petition contracts are usually non-core proceeding, see In re U.S. Lines, Inc., 197 F.3d at 638, but there is no clear rule regarding the core/non-core status for post-petition causes of action arising from pre-petition contracts. Compare In re 1115 Third Avenue Rest. Corp., No. 98 Civ. 4007, 2000 WL 1346824, at *2 (S.D.N.Y. September 19, 2000) (noting time of breach is more important than time of formation in determining if proceeding is core) with In re Enron Power Mktg., 2003 WL 68036, at *9 (rejecting argument that post-petition breach of pre-petition contract was core). Therefore, the determination of this proceeding's core status cannot be resolved on the question of the contract's timing alone.
Defendant contends that plaintiffs' claims for violation of the Warranty Agreement arose when defendant first denied plaintiffs' notices of violations in 2001, prior to the bankruptcy filing. Plaintiffs maintain that the defendant's denial of warranty notices after the bankruptcy filing constitutes additional post-petition breaches of the contract.
The second factor in assessing whether a contract is core is "the degree to which the proceeding is independent to reorganization." In re U.S. Lines, Inc., 197 F.3d at 637. This question in turn depends on "the nature of the proceeding." Id. Proceedings can be core by virtue of their nature if either "(1) the type of proceeding is unique to or uniquely affected by the bankruptcy proceedings or (2) the proceedings directly affect a core bankruptcy function." Id.
Plaintiffs argue that the outcome of this proceeding will affect their ability to fulfill their settlement obligations with the Third Party Purchasers. Accordingly, plaintiffs urge us to follow the reasoning of In re U.S. Lines, Inc. and In re County Seat Stores, Inc. and hold this proceeding to be core because its resolution will determine plaintiffs' ability to satisfy its creditors demands. In re U.S. Lines, Inc., 197 F.3d at 638 (finding pre-petition contract to be core because of its impact on bankruptcy proceeding); In re County Seat Stores, Inc., 2002 WL 141875, at *6 (same). While defendant argues that these cases are distinguishable because they involved the availability of debtors' indemnity insurance policies to pay creditors' claims, not the availability of a Warranty Agreement to pay creditors' claims, we find the issues similar and the plaintiffs' argument to have merit. Accordingly, this proceeding is likely core by virtue of its nature.
We further recognize, however, that "it is generally preferable for the bankruptcy court to make the initial determination as to whether a claim should be classified as core or non-core." In re Loral Space Communications, No. 04 Civ. 4547, 2004 WL 1586466, at *1 (S.D.N.Y. July 14, 2004) (citing In re Enron Corp., No. 04 Civ. 2527, 2004 WL 1197243, at *4 (S.D.N.Y. May 28, 2004)). Under the circumstances here and applying this general principal, we find that the Bankruptcy Judge is better situated to assess whether this proceeding is independent of the bankruptcy proceeding. Accordingly, we decline to decide the core/non-core issue at this juncture, and defer for the time being to the Bankruptcy Judge's determination.
B. Withdrawal is Inappropriate Regardless of Core/Non-Core Status
Whether or not the proceeding is core does not end our withdrawal inquiry. In re Enron Power Mktg, Inc., 2003 WL 68036, at *7. Indeed, In re Orion dictates that in all applications for withdrawal the court should also consider judicial efficiency, resource constraints, and a variety of other factors in making its decision. In re Orion, 4 F.3d at 1101. After assessing these factors, we find that there is no cause for withdrawal at this time.
First, the substantial overlap between the claims in this proceeding and those of the Third Party Purchasers make the Bankruptcy Court the more efficient forum to adjudicate this proceeding. See In re Enron Power Mktg, 2003 WL 68036, at *10 (rejecting withdrawal of non-core proceeding because of similarity to analogous claims in bankruptcy proceeding). If the settlement stipulations with the Third Party Purchasers collapse, the Third Party Purchasers will likely reassert their claims against the plaintiffs for the alleged defects in the Marathon generators. That litigation, a core proceeding against the debtors' estates, would be highly duplicative of the proceeding here, raising the same issues regarding the nature of the alleged defects in Wind Turbine Systems, plaintiffs' operation and maintenance of those turbines, and the extent of monetary damages suffered. Accordingly, the most efficient use of judicial resources would be to keep all of the proceedings concerning these Wind Turbine Systems before the Bankruptcy Judge. Id.
Second, the procedural status of this proceeding also argues against withdrawal, regardless of its core status. This claim is a non-jury claim in its very initial stages, both factors which weigh against withdrawal. A bankruptcy court may not hold a jury trial in non-core proceedings because bankruptcy court findings in non-core proceedings are reviewed de novo. In re Orion, 4 F.3d at 1101 (holding that reexamination clause of Seventh Amendment prevents non-core jury trials). However, such concerns are absent from the case at hand. In addition, this proceeding is "in its earliest stages," Def.'s Mem. of Law in Support of Motion at 7, and can be properly overseen by a Bankruptcy Judge during its pretrial phases. Accordingly, courts often find "it appropriate to defer withdrawing the reference until a case is trial ready." Loral Space Communications, 2004 WL 1586466, at *2; see also In re Enron Power Mktg, 2003 WL 68036, at *10 (calling core/non-core "a distinction without a difference" in the early stages of proceedings).
A party that is seeking pretrial withdrawal of any proceeding, even a non-core one, must establish that "withdrawal is in the interests of judicial economy and that it will be prejudiced by having the bankruptcy court oversee pretrial matters." In re Enron Power Mktg, 2003 WL 68036, at *7. As defendant has established neither, there is not cause to warrant permissive withdrawal at this time.