CIT Grp. Inc. v. Tyco Int'l Ltd. (In re CIT Grp. Inc.)
| Decision Date | 09 March 2012 |
| Docket Number | Case No. 09-16565 (ALG),Adv. Pro. No. 11-2267 (ALG) |
| Parties | In re: CIT GROUP INC., Reorganized Debtor. CIT GROUP INC., Plaintiff, v. TYCO INTERNATIONAL LTD., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
NOT FOR PUBLICATION
APPEARANCES:
SIDLEY AUSTIN LLP
By: Lee S. Attanasio, Esq.
John G. Hutchinson, Esq.
John J. Kuster, Esq.
Nicholas K. Lagemann, Esq.
GIBSON, DUNN & CRUTCHER LLP
By: Marshall R. King, Esq.
Janet M. Weiss, Esq.
Lisa D. Keith, Esq.
ALLAN L. GROPPER
Before the Court are two related motions filed as a consequence of this Court's recent opinion in CIT Group Inc. v. Tyco Int'l Ltd. (In re CIT Group Inc.), 460 B.R. 633 (Bankr. S.D.N.Y. 2011), now on appeal. The background can be briefly summarized. Reorganized Debtor CIT Group, Inc. ("CIT") and its former indirect parent company, Tyco International Ltd. ("Tyco"), are parties to a tax agreement (the "Tax Agreement") that was rejected in CIT's prepackaged plan of reorganization (the "Plan"), confirmed on December 8, 2009. After the rejection, Tyco filed a proof of claim asserting damages in an unliquidated amount, and, after a standstill period of approximately eighteen months, demanded arbitration proceedings to liquidate its claim, relying on an arbitration clause in the Tax Agreement. CIT thereupon commenced the instant adversary proceeding, seeking to subordinate any Tyco claim under § 510(b) of the Bankruptcy Code and to stay arbitration pending a decision on subordination, there being no dispute that, if Tyco's claim is subordinated, it would receive no distribution under CIT's Plan.
On January 20, 2012, after the Court had issued the above opinion granting summary judgment to Tyco on the subordination issue and an order had been entered, CIT filed a notice of appeal and the instant motion to enjoin arbitration proceedings pending a decision on the appeal [Adv. Pro. No. 11-2267, ECF Nos. 47 & 48]. Tyco responded with a motion to compel arbitration of its claim [Case No. 09-16565, ECF No. 294]. Following a hearing on the motions on February 14, 2012, CIT also moved to certify the order appealed from for direct appeal to the Second Circuit pursuant to 28 U.S.C. § 158(d)(2)(A)(i) and (iii) [Adv. Pro. No. 11-2267, ECF No. 64]. Tyco filed a response stating that it had no objection to certification pursuant to 28 U.S.C. § 158(d)(2)(A)(iii), which authorizes a direct appeal when doing so "may materiallyadvance the progress of the case or proceeding in which the appeal is taken." [Adv. Pro. No. 11-2267, ECF No. 65]. The Court is herewith certifying the matter for direct appeal, and it decides the pending motions as follows.
The Court will first address Tyco's motion to compel arbitration of its rejection damages claim. Tyco relies on a clause in the Tax Agreement that provides:
CIT further contends that permitting an arbitral panel to resolve a claim that derives from a § 365 rejection would "necessarily jeopardize" the objectives of the Bankruptcy Code because such a claim is "uniquely a creature of the Bankruptcy Code." Response to Tyco's Motion to Compel at 5 [Case No. 09-16565, ECF No. 296].
Tyco for its part relies on a separate Plan provision contemplating that claim disputes remain subject to the same liquidation processes that would have applied absent CIT's bankruptcy filing. As CIT's Plan was a fully prepackaged plan of reorganization, it principally impaired the financial creditors, and very few creditors were required to file claims. Article VI.A further provides:
Except as provided otherwise in the Plan or by the order of the Bankruptcy Court, holders of Claims shall not be required to file proofs of Claim with the Bankruptcy Court. The amount and validity of any disputed, contingent and/or unliquidated Claim shall be determined, resolved or adjudicated, as the case may be, in the manner in which such Claim would have been determined, resolved or adjudicated if the Chapter 11 Cases had not been commenced; provided, however, that the Debtors reserve the right to file with the Bankruptcy Court, on or before the Claims Objection Deadline, an objection to any Claim. The Debtors shall be authorized to, and shall, resolve all Disputed Claims by withdrawing or settling such objections thereto, or by litigating to judgment in the Bankruptcy Court or such other court having jurisdiction the validity, nature, and/or amount thereof.2
(emphasis added). There are thus two contradictory Plan provisions: Article VI.A, authorizing liquidation of Disputed Claims in a non-bankruptcy court, and Article XII(d), purporting to givethis Court exclusive jurisdiction, "to the fullest extent permitted by law," with respect to the liquidation of Disputed Claims arising from the assumption or rejection of executory contracts.
The short resolution of this apparent conflict is that the reservation of exclusive jurisdiction in this Court, "to the fullest extent permitted by law," should not be construed in a manner that is fundamentally at odds not only with another provision of the Plan but also with the strong "federal policy favoring arbitration agreements." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). A bankruptcy court has discretion to refuse to compel arbitration of core bankruptcy matters, which by their nature implicate interests central to the bankruptcy process, but only if the bankruptcy court concludes that the Bankruptcy Code provisions governing the proceeding "inherently conflict" with the text or objectives of the Federal Arbitration Act ("FAA"), or that arbitration would "necessarily jeopardize" the goals of the Bankruptcy Code. U.S. Lines, Inc. v. Am. S.S. Owners Mut. Prot. & Indem. Ass'n (In re U.S. Lines, Inc.), 197 F.3d 631, 640 (2d Cir. 1999). It is the burden of the party opposing arbitration to show that Congress intended to preclude arbitration of the claim at issue. MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006).3
In this case, CIT has not carried its burden of demonstrating that it should be able to avoid arbitration as agreed in the Tax Agreement. Despite CIT's contentions, liquidating the Tyco claim through arbitration would not conflict with, much less "necessarily jeopardize," the goals of the Bankruptcy Code. There is no need in this two-party dispute for "centralized proceedings," such as where "complex factual scenario[s] involv[e] multiple claims." In re U.S. Lines, 197 F.3d at 641; see also Alan N. Resnick, The Enforceability of Arbitration Clauses inBankruptcy, 15 AM. BANK. INST. L. REV. 183 (2007). There are instances where the bankruptcy court must reserve jurisdiction notwithstanding the parties' agreement to arbitrate certain issues; for example, in this case, there is no dispute that the issue of subordination of Tyco's claim under Bankruptcy Code § 510(b) is for the federal courts to decide. By contrast, the determination of damages in connection with rejection of the Tax Agreement will not require consideration of any bankruptcy law issues. Nor will the liquidation of Tyco's claim, if any, delay consummation of CIT's Plan, which became effective several years ago. In short, CIT has not shown that there is anything about arbitration of Tyco's claim that would "inherently conflict" with or "necessarily jeopardize" the Plan or the goals of CIT's reorganization.4
CIT argues that Article XII(d) of the Plan nonetheless binds Tyco to arbitrate its rejection damages claim. It contends that the Tax Agreement was the only contract rejected in connection with its prepackaged Plan, and that Tyco was sufficiently aware of the Plan's provisions to serve and file a proof of claim. This does not, however, suffice to demonstrate that the Court or Tyco understood the "exclusive jurisdiction" reservation in Article XII(d) to override the contradictory provisions of Article VI.A, which generally preserved pre-petition remedies, or that Tyco knowingly waived its arbitration rights. Under the circumstances, the record does not support CIT's claim of waiver. Compare Charter Behavioral Health Sys., LLC v. Managed HealthNetwork, 277 B.R. 54 (Bankr....
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