In re: Crysen/Montenay Energy v. Shell Oil

Citation226 F.3d 160
Decision Date01 August 1999
Docket NumberDocket No. 99-5067
Parties(2nd Cir. 2000) In Re: CRYSEN/MONTENAY ENERGY CO., Debtor. CRYSEN/MONTENAY ENERGY CO., Debtor-Appellant, v. SHELL OIL CO. and SCALLOP PETROLEUM CO., Defendants-Appellees
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Appeal from a judgment of the United States District Court for the Southern District of New York (Miriam Goldman Cedarbaum, Judge) accepting the Proposed Findings of Fact and Conclusions of Law of the Bankruptcy Court (Cornelius Blackshear, Bankruptcy Judge) and dismissing, following arbitration, claims brought by a Chapter 11 debtor in a non-core adversary proceeding. We affirm the judgment, concluding that: (1) defendants' failure to replead in subsequent answers an affirmative defense of arbitrability that already had been rejected by the Bankruptcy Court did not constitute an express waiver of the defense; (2) the failure to pursue an interlocutory appeal from the denial in 1987 of a motion to stay in favor of arbitration did not prevent defendants from renewing the motion in 1995; (3) the Bankruptcy Court had the authority to stay the non-core proceeding in favor of arbitration; and (4) the District Court's review of the Bankruptcy Court's recommended disposition was legally sufficient.

Affirmed.

Richard N. Chassin (Joseph D. Becker and Zeb Landsman, on the brief), Becker, Glynn, Melamed & Muffly LLP, New York, NY, for Debtor-Appellant.

Mark L. Weyman, (James L. Michalak, on the brief), Anderson Kill & Olick, P.C., New York, NY, for Defendants-Appellees.

Before: NEWMAN, KEARSE, and CABRANES, Circuit Judges.

Jose A. Cabranes, Circuit Judge:

Debtor-appellant Crysen/Montenay Energy Co. ("Crysen") appeals from a judgment of the United States District Court for the Southern District of New York (Miriam Goldman Cedarbaum, Judge) accepting the Proposed Findings of Fact and Conclusions of Law of the Bankruptcy Court (Cornelius Blackshear, Bankruptcy Judge) and dismissing, following arbitration, claims brought in a non-core adversary proceeding. We affirm the judgment, concluding that: (1) defendants' failure to replead in subsequent answers an affirmative defense of arbitrability that already had been rejected by the Bankruptcy Court did not constitute an express waiver of the defense; (2) the failure to pursue an interlocutory appeal from the denial in 1987 of a motion to stay in favor of arbitration did not prevent defendants from renewing the motion in 1995; (3) the Bankruptcy Court had the authority to stay the non-core proceeding in favor of arbitration; and (4) the District Court's review of the Bankruptcy Court's recommended disposition was legally sufficient.

BACKGROUND

This action arises out of two contracts pursuant to which Crysen sold oil to defendant Scallop Petroleum Co. ("Scallop"), formerly a subsidiary of defendant Shell Oil Co. ("Shell"). In January 1986, Scallop rejected Crysen's delivery of over 200,000 barrels of oil because the sulfur content of the oil allegedly exceeded the limit specified by the relevant contract. Scallop then refused to allow Crysen to cure the alleged defect, relying on a "time is of the essence" provision to cancel the contract. As oil prices had fallen in the period between agreement and delivery, Scallop purchased less expensive replacement oil and Crysen was forced to re-sell the rejected oil at a lower price.

Crysen, which in June 1986 had filed a petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., commenced an adversary proceeding against Scallop on March 16, 1987. In its initial answer, Scallop relied on a contractual arbitration clause in asserting a "First Affirmative Defense of Arbitration." Scallop moved shortly thereafter to stay the adversary proceeding in order to submit Crysen's claims to arbitration, but the Bankruptcy Court denied the motion to stay on May 29, 1987.

Scallop filed three amended answers over the next fifteen months. After Crysen subsequently filed an amended complaint naming Shell as a co-defendant, defendants filed an answer on January 6, 1989, requesting a jury trial. Collectively, the four amended answers included thirteen defenses not pleaded in Scallop's original answer; in none of the four answers did Scallop or Shell reassert the arbitrability defense offered in Scallop's original answer.

In 1990, Crysen moved and defendants cross-moved for summary judgment. The Bankruptcy Court denied the motions on the ground that there existed a genuine factual dispute as to whether the oil had conformed to specifications. Following the decision, the parties engaged in extensive discovery, which was not completed until September 1, 1995. Crysen then filed a renewed motion for summary judgment, after which defendants moved by order to show cause why the adversary proceeding should not be stayed in favor of arbitration The Bankruptcy Court signed the order, entertained argument, and on November 20, 1995, granted the motion to stay. In revisiting and reversing its 1987 decision, the Bankruptcy Court relied exclusively on Hays and Co. v. Merrill Lynch, Inc., 885 F.2d 1149 (3d Cir. 1989), in which the Third Circuit had reversed its own earlier decision and concluded that district courts lack discretion to deny enforcement of an arbitration clause in a non-core adversary proceeding.

The parties then shifted to arbitration. After the arbitration panel issued an Award on January 27, 1997, denying Crysen's claims in their entirety, the matter was returned to the Bankruptcy Court. Finding no reason to vacate the arbitration award, the Bankruptcy Court issued Proposed Findings of Fact and Conclusions of Law recommending that the adversary proceeding be dismissed with prejudice. The District Court accepted the proposed disposition and dismissed the action. See In Re: Crysen/Montenay Energy Co., 240 B.R. 166 (S.D.N.Y. 1999). This appeal followed.

DISCUSSION

On appeal, Crysen principally asserts three arguments: that defendants waived their contractual right to arbitrate, that the Bankruptcy Court lacked the authority to stay the non-core proceeding in favor of arbitration, and that the District Court's review of the Bankruptcy Court's recommended disposition was legally insufficient. We address each of these arguments in turn.

I. Waiver
A. Express Waiver

Crysen asserts that defendants expressly waived the affirmative defense of arbitrability by failing to include it in any of the four amended answers that were filed after the Bankruptcy Court had rejected Scallop's May 1987 motion to stay in favor of arbitration. It is well settled that an amended pleading ordinarily supersedes the original and renders it of no legal effect. See, e.g., Harris v. City of New York, 186 F.3d 243, 249 (2d Cir. 1999). However, we have not yet addressed whether there is a futility exception to this rule where a party fails to advance in a subsequent pleading a claim or defense that already has been rejected by the court. Somewhat surprisingly, there exists a Circuit split on this issue; the Ninth Circuit requires repleading despite obvious futility, see Marx v. Loral Corp., 87 F.3d 1049, 1055-56 (9th Cir. 1996) (enforcing the Circuit rule but acknowledging that it has been criticized as unduly formalistic, rigid, and mechanical), while the Tenth and Eleventh Circuits do not, see Dunn v. Air Line Pilots Ass'n, 193 F.3d 1185, 1191 n.5 (11th Cir. 1999), cert. denied, 120 S. Ct. 2197 (2000); Davis v. TXO Production Corp., 929 F.2d 1515, 1517 (10th Cir. 1991). We see no reason to require repleading of a claim or defense that explicitly has been denied. Accordingly, we hold that defendants' failure to include an arbitration defense in the amended answers filed after the Bankruptcy Court had denied the initial motion to stay did not constitute an express waiver of the defense.

B. Implied Waiver

Nor did defendants impliedly waive their ability to move to enforce their contractual arbitration rights. We have explained:

Federal policy strongly favors arbitration as an alternative means of dispute resolution. This preference for arbitration [has] led to its corollary that any doubts concerning whether there has been a waiver are resolved in favor of arbitration. We have often stated that waiver of arbitration is not to be lightly inferred.

Nonetheless, a party waives its right to arbitration when it engages in protracted litigation that prejudices the opposing party. [P]rejudice as defined by our cases refers to the inherent unfairness-in terms of delay, expense, or damage to a party's legal position-that occurs when the party's opponent forces it to litigate an issue and later seeks to arbitrate that same issue. Incurring legal expenses inherent in the litigation, without more, is insufficient evidence of prejudice to justify a finding of waiver. Thus, we have found that a party waived its right to arbitration where it engaged in extensive pre-trial discovery and forced its adversary to respond to substantive motions, delayed invoking arbitration rights by filing multiple appeals and substantive motions while an adversary incurred unnecessary delay and expense, and engaged in discovery procedures not available in arbitration.

Therefore, in determining whether [a party] has waived its right to arbitration, we will consider such factors as (1) the time elapsed from commencement of litigation to the request for arbitration, (2) the amount of litigation (including any substantive motions and discovery), and (3) proof of prejudice. There is no bright-line rule, however, for determining when a party has waived its right to arbitration: the determination of waiver depends on the particular facts of each case.

PPG Industries, Inc. v. Webster Auto Parts Inc., 128 F.3d 103, 107-08 (2d Cir. 1997) (emphases added) (internal citations and quotation marks omitted) (alteration in original) (concluding that a party...

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