S.G. Phillips Constructors, Inc., In re

• Decision Date: 25 January 1995
• Docket Number: 1950,D,Nos. 1813,s. 1813
• Citation: 45 F.3d 702
• Parties: 32 Collier Bankr.Cas.2d 1425, 26 Bankr.Ct.Dec. 799, Bankr. L. Rep. P 76,361 In re S.G. PHILLIPS CONSTRUCTORS, INC., Debtor. S.G. PHILLIPS CONSTRUCTORS, INC., Appellant-Cross-Appellee, v. CITY OF BURLINGTON, VERMONT, Appellee-Cross-Appellant. ockets 94-5009(L), 94-5011XAP.
• Court: U.S. Court of Appeals — Second Circuit

Page 702

45 F.3d 702

32 Collier Bankr.Cas.2d 1425, 26 Bankr.Ct.Dec. 799,

Bankr. L. Rep. P 76,361

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.

Argued June 8, 1994.

Decided Jan. 25, 1995.

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. ^*

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 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.

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 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 may not be necessary."

The City subsequently appealed the bankruptcy court's dismissal of its claim to the United States District Court. The district court held that the bankruptcy court lacked jurisdiction over the City's claims against Phillips because they were not "core" claims under 28 U.S.C. Sec. 157(b)(2) and were "wholly independent" of the Chapter 11 petition. The district court also rejected the view that in filing the proof of claim the City impliedly consented to bankruptcy jurisdiction since the City was compelled to file its claim or face eradication of its claim in bankruptcy. The district court further concluded that the bankruptcy court lacked jurisdiction under the mandatory abstention rule. Finally, the district court determined that the reorganization plan violated the "absolute priority rule," and therefore the plan was invalid. Consequently, the court vacated the bankruptcy court's order dismissing the City's claim and remanded for further proceedings.

This appeal followed.

DISCUSSION

I. The Bankruptcy Court's Jurisdiction

We turn first to whether the bankruptcy court had jurisdiction to determine the City's claim in the first instance. Phillips contends that the bankruptcy court properly exercised jurisdiction over the City's claim since determination of claims is a "core" bankruptcy function. The City argues that even if the Bankruptcy Code vests jurisdiction in the bankruptcy court to determine its claim, that jurisdiction 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). We conclude that the bankruptcy court had jurisdiction over the City's proof of claim.

A. Core v. Non-Core Claims

The Bankruptcy Code divides claims in bankruptcy proceedings into the categories "core" and "non-core" (or "related"). In re Manville Forest Prods. Corp., 896 F.2d 1384, 1389 (2d Cir.1990). Bankruptcy judges have the authority to "hear and determine all ... core proceedings arising under title 11 ... and may enter appropriate orders and judgments, subject to review under section 158 of [title 28]." 28 U.S.C. Sec. 157(b)(1). With respect to non-core claims, unless the parties consent, the bankruptcy court can only make recommended findings of fact and conclusions of law which are subject to de novo review in the district court. 28 U.S.C. Secs. 157(c)(1) and (2). We think it plain that under the Bankruptcy Code and the overwhelming weight of precedent, the bankruptcy court had "core" jurisdiction over the City's proof of claim.

The Bankruptcy Code provides a non-exclusive list of matters that Congress considered to be within the bankruptcy court's core The City argues that In re Manville is not controlling because the City filed its claim in state court before the petition was filed, while in In re Manville it was not clear whether a state court action was initiated, much less, when, and the decision appeared to presume that no such action existed. We find this distinction immaterial. Nothing in the Bankruptcy Code suggests that debtors may not file petitions while they have prepetition suits pending against them. Debtors frequently file for bankruptcy protection precisely because a growing number of creditors have brought suit. Indeed, the Code recognizes the prevalence of prepetition state court claims by automatically staying all prepetition actions to provide breathing space and to allow the bankruptcy court to protect its jurisdiction over the debtor's property. See ...