45 F.3d 702 (2nd Cir. 1995), 1813, In re S.G. Phillips Constructors

Docket Nº:1813, 1950, Dockets 94-5009(L), 94-5011XAP.
Citation:45 F.3d 702
Party Name:In re S.G. PHILLIPS CONSTRUCTORS, INC., Debtor. S.G. PHILLIPS CONSTRUCTORS, INC., Appellant-Cross-Appellee, v. CITY OF BURLINGTON, VERMONT, Appellee-Cross-Appellant.
Case Date:January 25, 1995
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 702

45 F.3d 702 (2nd Cir. 1995)

In re S.G. PHILLIPS CONSTRUCTORS, INC., Debtor.

S.G. PHILLIPS CONSTRUCTORS, INC., Appellant-Cross-Appellee,

v.

CITY OF BURLINGTON, VERMONT, Appellee-Cross-Appellant.

Nos. 1813, 1950, Dockets 94-5009(L), 94-5011XAP.

United States Court of Appeals, Second Circuit

January 25, 1995

Argued June 8, 1994.

John J. Kennelly, Rutland, VT (Carroll, George & Pratt, of counsel), for appellant-cross-appellee.

John L. Franco, Jr., Burlington, VT (McNeil, Leddy & Sheahan, P.C., of counsel), for appellee-cross-appellant.

Before: WINTER and WALKER, Circuit Judges, and WARD, District Judge. [*]

Page 703

WALKER, Circuit Judge:

Debtor in bankruptcy S.G. Phillips Constructors, Inc. ("Phillips") appeals from a final order of the United States District Court for the District of Vermont (Franklin S. Billings, Jr., Chief Judge). On appeal, Phillips, a construction company from which the City of Burlington, Vermont ("the City") is seeking damages in contract, argues principally that the district court erred in holding that the bankruptcy court was without jurisdiction to disallow the claim asserted by the City. Phillips contends that by filing a proof of claim in the bankruptcy proceedings, the City submitted itself to the bankruptcy court's jurisdiction. The City, which had commenced a separate action on the claim in state court, counters that 1) even if the bankruptcy court had jurisdiction pursuant to the Bankruptcy Code, jurisdiction under the circumstances is unconstitutional under Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (plurality opinion); 2) since the district court's decision was based on mandatory abstention, 28 U.S.C. Sec. 1334(c)(2), this court does not have jurisdiction to review the decision to abstain; and 3) Phillip's failure to remove the action from state court to the bankruptcy court left the bankruptcy court without jurisdiction to decide the claims asserted therein.

We hold that the determination of the City's claim was a proper exercise of the bankruptcy court's jurisdiction. Furthermore, because the determination of claims is a "core" bankruptcy function, mandatory abstention was not proper. We reverse the district court's order and reinstate the bankruptcy court's decision and order disallowing the City's claim.

BACKGROUND

Debtor Phillips is a general contractor and construction management company. Phillips won a $3.7 million contract to make improvements to one of the City's wastewater treatment plants and, in April 1991, began work on the project. During the course of performance, Phillips made numerous demands to amend the terms of the original contract, including an increase in the payment over and above the contract price. The City refused these demands. On December 11, 1991, Phillips sent notice to the project engineer that it intended to terminate its work on the project.

The day following Phillip's notice of intent to stop work, the City filed a complaint against Phillips in Vermont Superior Court that sought damages for Phillip's alleged breach of contract. In its answer, Phillips counterclaimed alleging, among other contentions, breach of contract and wrongful termination of the contract by the City.

During its contract dispute with the City, Phillips experienced severe cash shortages resulting in the termination of several other of its contracts. Phillips tried to settle with subcontractors on a number of contracts. As a result of its failure to do so, Phillips was named a defendant in several additional state court lawsuits. Ultimately, on July 1, 1992, Phillips filed a bankruptcy petition seeking Chapter 11 protection. Among the major assets Phillips identified were its counterclaims against the City.

Almost two years earlier, in December of 1990, Phillips and the "Sargent Group," which consisted of two principals of a Maine construction company who each owned 25.5% of Phillips stock, had executed an agreement under which the Sargent Group agreed to assume liabilities and acquire rights in Phillips's projects, including the City contract, if Phillips defaulted in payment or performance. On June 3, 1992, as a result of payment defaults by Phillips on subcontracts, the Sargent Group, as Phillips's assignee, executed an agreement with the City to complete the wastewater treatment contract and assume all of Phillips's rights under the contract. Under this new contract, the City and the Sargent group agreed to discharge the claims and counterclaims arising from the disputes over the original wastewater treatment contract.

After executing the agreement with the Sargent Group, the City filed a motion in state court on June 9, 1992 to dismiss its claims and Phillips's counterclaims. The Vermont Superior Court granted the motion on July 2, 1992 but later vacated its order

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after Phillips argued that its Chapter 11 Petition, filed on July 1, had stayed the state court's authority to dismiss the claims and counterclaims. Phillips, however, did not seek to remove the suit from state to bankruptcy court.

On September 4, 1992, over two months after Phillips filed its Chapter 11 Petition, the City filed a proof of claim in the bankruptcy court. Phillips responded by filing an objection to the claim on May 3, 1993. Thereafter, the City became immersed in the bankruptcy matter by filing numerous objections; by moving to convert the case from a Chapter 11 to a Chapter 7 case; and, more than ten months after filing its proof of claim, by filing in the bankruptcy court a motion for relief from the stay.

On July 15, 1993, the bankruptcy court confirmed Phillips's plan of reorganization. The bankruptcy court dismissed the City's claim on the ground that the agreement executed between the City and the Sargent Group "unambiguously" released any claims by the City against Phillips. Thus, the City was "no longer a party in interest in this case." However, Phillips's counterclaims against the City were preserved. The court explicitly limited its ruling to claims in bankruptcy, stating that "[w]hatever you do in the state court that's another issue." A few weeks later, the bankruptcy court granted the City's unopposed motion for relief from the automatic stay to allow it to proceed in state court, noting that "[i]n light of the Debtor's confirmation this order...

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