Congress Credit Corp. v. AJC Intern., Inc., 94-1766

• Decision Date: 07 November 1994
• Docket Number: No. 94-1766,94-1766
• Citation: 42 F.3d 686
• Parties: CONGRESS CREDIT CORPORATION, Plaintiff, Appellant, v. AJC INTERNATIONAL, INC., et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 686

42 F.3d 686

26 Bankr.Ct.Dec. 450

CONGRESS CREDIT CORPORATION, Plaintiff, Appellant, v. AJC INTERNATIONAL, INC., et al., Defendants, Appellees.

No. 94-1766.

United States Court of Appeals First Circuit.

Heard Nov. 7, 1994.

Decided Dec. 15, 1994.

Ronald L. Rosenbaum, with whom Woods, Rosenbaum, Luckeroth & Perez Gonzalez, San Juan, PR, was on brief, for appellant.

Brian K. Tester, with whom Richard A. Lee Law Office, San Juan, PR, was on brief, for appellees.

Before CAMPBELL, Senior Circuit Judge, BOYLE ^* and FUSTE, ^** District Judges.

LEVIN H. CAMPBELL, Senior Circuit Judge.

Congress Credit Corporation ("Congress Credit") appeals from the district court's dismissal without prejudice of its diversity action to collect certain proceeds in the hands of the appellees, AJC International, Inc. ("AJC") and Fronex Commodities, Inc. ("Fronex") under a perfected factor's lien. The lien was allegedly granted to Congress Credit by United Western of Puerto Rico, Inc. ("United Western"), which later filed for bankruptcy. The district court has dismissed the lien action without prejudice, apparently believing that Congress Credit should not presently proceed with its lien action due to the pendency of several adversary proceedings brought in the bankruptcy court by the trustee of United Western to recover the same sums as preferences from these same defendants. This court initially affirmed, but upon considering Congress Credit's petition for rehearing, and after giving the matter further thought, has vacated its opinion and judgment of affirmance. We now hold that the district court was without authority to dismiss Congress Credit's diversity action to enforce its lien, and we vacate

and remand for further proceedings in the district court.

FACTUAL AND PROCEDURAL BACKGROUND

Congress Credit is a commercial finance company. It financed the accounts receivable and inventory of United Western and claims to hold a recorded Factor's Lien and Assignment of Accounts Receivable given by United Western pursuant to the Puerto Rico Factors Lien and Assignment of Accounts Receivable Acts. ¹ On March 2, 1990, United Western filed a petition in bankruptcy under Chapter 11 of the Bankruptcy Code, which was converted to Chapter 7 on September 7, 1990.

Appellees were suppliers of United Western, who allegedly, within the ninety days prior to the bankruptcy filing, received bulk transfers of inventory from United Western in payment of its outstanding indebtedness to them--$376,610.79 in the case of AJC and $81,178.60 in the case of Fronex. ² On May 11, 1990, United Western commenced adversary proceedings in the bankruptcy court against the appellees, alleging that the inventory sales constituted preferential transfers. After the conversion to Chapter 7 the trustee was substituted for the debtor as plaintiff. Congress Credit commenced this action in the district court under diversity jurisdiction to recover essentially the same assets, or their proceeds, on June 1, 1990, alleging that the merchandise thus transferred had been subject to its factor's lien.

On June 7, 1990 (some six days after filing its lien action in the district court) Congress Credit filed an adversary proceeding in the bankruptcy court, asserting a claim to any recovery the estate might obtain in the preference actions. The trustee did not contest this proceeding; accordingly, judgment was entered on February 11, 1992 in favor of Congress Credit, securing Congress Credit's right to any such recovery.

The appellees having successfully obtained a stay of the lien action on August 31, 1990, pending resolution of the adversary proceedings in the bankruptcy court, Congress Credit next moved the district court to lift that stay on August 27, 1992. The appellees opposed that motion and moved to dismiss on September 28, 1992. The district court denied the motion to vacate the stay and granted the motion to dismiss in an opinion and order dated April 16, 1993. Congress Credit's unsuccessful motion for reconsideration was denied in a second opinion and order dated June 8, 1994, which reiterated the grounds stated in the first opinion. Congress Credit then appealed.

Congress Credit represents that there are no funds in United Western's estate and that the bankrupt's business has long since been liquidated. ³ The record also shows that the bankruptcy judge has rejected a proposed agreement for Congress Credit to finance the trustee's preference actions and has ordered the trustee to show cause why the preference actions should not be dismissed, as none of the proceeds would benefit the estate (i.e. they would presumably all go to Congress Credit under the bankruptcy court's order of February 11, 1992).

The district court, nonetheless, reasoned that Congress Credit's interests were fully protected by and could await the results of the trustee's preference actions. The court The trustee's adversary proceeding and this case involve the same transactions, property and parties. The only difference between the cases lies in the legal bases for challenging the validity of the transfers. A judgment in the civil action would most certainly have an effect on the debtor's estate.... [M]aintenance of two proceedings adjudicating the same issues consumes scarce judicial resources.

seemed to base the dismissal of the lien action on its understanding that it was merely duplicative of the pending preference actions:

ANALYSIS

Shortly after hearing this appeal, we summarily affirmed the district court's judgment of dismissal as, at first blush, it seemed sensible to permit matters to be pursued and, if possible, concluded in the bankruptcy court. Like the district court, we were unhappy at the prospect of the two cases--the preference actions and the lien action--wasting scarce resources by proceeding on separate tracks in different courts, with the risk of multiple judgments. We are now persuaded, however, that the district court's proposed solution to this dilemma was legally insupportable. The correct, as well as most efficient solution, is for both proceedings to be consolidated for disposition in the district court, which is the only court with clear jurisdiction over both.

While the lien action and the preference actions apparently involve the identical property, they are not one and the same action, permitting dismissal of one as surplus to the other. They do not involve the same parties nor the same causes of action. The law suit from which this appeal is taken--the lien action--is a diversity action to enforce a lien created under Puerto Rico law. P.R. Laws Ann. tit. 10, Secs. 551-60, 581-88 (1976). Congress Credit must prove the existence and validity of the lien, and, in addition, that the lien attached to the inventory transferred to the appellees and followed to any claimed proceeds now in their hands. The trustee, on the other hand, must show, inter alia, that the inventory was property of the estate when transferred to appellees so that its transfer to them was a preference. 11 U.S.C. Sec. 547(b) (1988) ("the trustee may avoid any transfer of an interest of the debtor in property") (emphasis added); see generally 4 Collier on Bankruptcy, Sec. 547.01 (Lawrence P. King, ed. 1994) (discussing elements of a preference claim). This may require consideration of the extent to which Congress Credit's asserted lien removed the inventory from the debtor's property and made it instead the property of Congress Credit prior to the filing of United Western's bankruptcy petition. ⁴ Thus, the legal operation and validity of the lien is an issue of some importance to both cases. However, the plaintiffs and the legal theories for recovery in each case are different.

The district court apparently viewed the two cases as based on identical, parallel theories, giving the earlier preference cases a right to proceed exclusive of the subsequent lien action. This analysis overlooked the major differences between the two causes of action. A district court may certainly dismiss an action which is merely "duplicative" of another action pending in another federal court. See Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 1246, 47 L.Ed.2d 483 (1976); Small v. Wageman, 291 F.2d 734, 735 (1st Cir.1961); 17A Charles Alan Wright et al., Federal Practice and Procedure Sec. 4247 nn. 7-8 and accompanying text (2nd ed. 1988). But for an action to be "duplicative" of another, so as to warrant its dismissal for that reason alone, the one must be materially on all fours with the other. The present lien action is not at all in that category. The plaintiff in the lien action is different from that in the preference actions, and the theory of recovery is altogether different. See, e.g. Thermal Dynamics Corp. v. Union Carbide Corp., 214 F.Supp. 773, 774 (S.D.N.Y.1963) (in order to properly enjoin suit in another court, the issues "must have such an identity that a determination in one action leaves little or nothing to be determined in the other"); Radio Corp. of America v. Rauland Corp., 16 F.R.D. 160, 163 (N.D.Ill.1954) (federal court should not stay proceedings in its own jurisdiction unless it appears that parties and issues are the same), mandamus denied, 217 F.2d 218 (7th Cir.1954), cert. denied, 348 U.S. 973, 75 S.Ct. 533, 99 L.Ed. 758 (1955), mandamus denied, 348 U.S. 968, 75 S.Ct. 543, 99 L.Ed. 754 (1955).

We think it clear, therefore, that there is no justification for dismissing the present lien action on the basis of a supposed identity between it and the preference actions. Nor can we see any bankruptcy-related theory allowing the district court to force Congress Credit to depend upon the preference proceedings in the bankruptcy court for the collection of its lien. We are advised that the automatic stay as to Congress Credit has long since been vacated. See 11 U.S.C. Sec. 362(a) (1988) (staying actions against the debtor, property of the...