In re Ben Franklin Hotel Assoc.

• Decision Date: 09 August 1999
• Docket Number: No. 98-1280,98-1280
• Citation: 186 F.3d 301
• Parties: (3rd Cir. 1999) IN RE: BEN FRANKLIN HOTEL ASSOCIATES, DEBTOR BEN FRANKLIN HOTEL ASSOCIATES, APPELLANT
• Court: U.S. Court of Appeals — Third Circuit

Page 301

186 F.3d 301 (3rd Cir. 1999)

IN RE: BEN FRANKLIN HOTEL ASSOCIATES, DEBTOR

BEN FRANKLIN HOTEL ASSOCIATES, APPELLANT

No. 98-1280

U.S. Court of Appeals, Third Circuit

Argued December 17, 1998

Filed August 09, 1999

On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. No. 97-cv-07449) District Judge: Hon. Thomas N. O'Neill, Jr.

Doron A. Henkin, Esq. (Argued) Toll, Ebby, Langer & Marvin Two Logan Square, 18th Floor Philadelphia, PA 19103 Counsel for Appellant

Steven M. Coren, Esq. Peter J. Leyh, Esq. (Argued) Kaufman, Coren, Ress & Weidman 1525 Locust Street, 17th Floor Philadelphia, PA 19102 Counsel for Appellees Alfred A. Gilbert and B.f. General Associates

Before: Sloviter and Cowen, Circuit Judges and Rodriguez,^* District Judge

OPINION OF THE COURT

Cowen, Circuit Judge.

In this appeal we must decide whether an equitable demand for reinstatement of an interest in a partnership constitutes a "claim" within the meaning of section 101(5)(B) of the Bankruptcy Code. Both the Bankruptcy Court and the District Court held that it was not and refused to enjoin appellee B.F. General Associates ("BFG") from pursuing the demand in state court litigation against debtor Ben Franklin Hotel Associates ("Ben Franklin" or "debtor") after confirmation of debtor's reorganization plan. Although we analyze the matter somewhat differently than the Bankruptcy Court and the District Court, we will affirm.

I.

Debtor is a limited partnership created to own and redevelop a property in downtown Philadelphia formerly known as the Ben Franklin Hotel, a widely known institution located at the intersection of Ninth and Chestnut Streets in Philadelphia. At the time of its formation in 1984, debtor's general partners were a group a California investors and BFG. Appellee Alfred Gilbert held a non-controlling general partnership interest in BFG.

In July 1991, debtor issued a "cash call," requiring that all of the partners contribute a certain amount of additional capital to the partnership. When BFG failed to respond, debtor foreclosed on BFG's ownership interest, as provided for in the partnership agreement. Although BFG did not object to this foreclosure, Gilbert did. On October 6, 1992, Gilbert filed a lawsuit in the Pennsylvania State Court against debtor, BFG, and their respective interest holders. Gilbert alleged, inter alia, that the foreclosure and sale of BFG's partnership interest was a sham, intended to divest him of his indirect interest in debtor.¹ In his lawsuit, Gilbert sought damages in excess of $2,000,000, as well as equitable relief that included the reinstatement of BFG's partnership interest in debtor.

Approximately fourteen months after Gilbert filed suit, debtor filed a voluntary petition for Chapter 11 bankruptcy, which listed a California corporation known a Civicorp as Ben Franklin's only general partner. The petition was signed solely by Civicorp's president.² By order dated January 11, 1994, the Bankruptcy Court set March 1, 1994 as the bar date for filing proofs of claim. Prior to the bar date, Gilbert filed a proof of claim in the amount of "$2,000,000+" based on the "[w]rongful exclusion from partnership interest in debtor," app. at 27, and attached a copy of his state court complaint to the proof of claim. BFG did not file a proof of claim.

The Bankruptcy Court confirmed debtor's proposed plan of reorganization by order dated March 3, 1994. The Bankruptcy Court subsequently modified the automatic stay to allow Gilbert's state court action to proceed, subject to the Court's continuing jurisdiction to determine the allow ability of any monetary judgment that Gilbert obtained in the state proceeding.

After Ben Franklin's reorganization plan was confirmed, Gilbert settled the state court claims against BFG and his partners in their entirety. As a result of the settlement, Gilbert obtained a controlling interest in BFG. Gilbert then obtained leave of the state court to file an amended complaint to change BFG's status from a defendant to a co-plaintiff. The amended complaint also added a cause of action for conversion against debtor, increased the request for damages from $2,000,000 to over $5,000,000, and added a demand for punitive damages. In response to these amendments, debtor moved the Bankruptcy Court to enforce the discharge injunction by: (i) enjoining Gilbert from maintaining any "new" causes of action against it other than those incorporated by Gilbert's original proof of claim; (ii) enjoining BFG from asserting any causes of action against it; and (iii) holding BFG and Gilbert in contempt. Debtor argued, inter alia, that Gilbert's new allegations and demands (i.e., the claims for conversion, increased monetary damages, and punitive damages) and BFG's entire lawsuit were pre-petition "claims" within the meaning of the § 101(5) of the Bankruptcy Code, and were, therefore, discharged upon confirmation of debtor's reorganization plan.

The Bankruptcy Court granted the motion in part and denied it in part. In a decision not challenged on appeal, the Court enjoined BFG from pursuing monetary damages for injuries caused by the allegedly fraudulent cash call because such a demand constituted a claim against debtor's estate that was barred by confirmation of debtor's reorganization plan. The Bankruptcy Court refused, however, to enjoin BFG from pressing its demand for reinstatement of its partnership interest on the ground that an ownership interest in a partnership is not a claim or debt of the partnership and, therefore, not subject to bankruptcy discharge. The Bankruptcy Court also declined to enjoin Gilbert at all, holding that each of the new demands and allegations to which debtor was objecting was encompassed within Gilbert's original proof of claim. Finally, the Bankruptcy Court declined to hold either BFG or Gilbert in contempt. On appeal, the District Court affirmed, largely approving the reasoning of the Bankruptcy Court. This appeal followed.

Because the District Court sat as an appellate court reviewing an order of the Bankruptcy Court, we exercise plenary review. In re Trans World Airlines, Inc., 145 F.3d 124, 130 (3d Cir. 1998). "[W]e review the bankruptcy court's legal determinations de novo, its factual findings for clear error and its exercise of discretion for abuse thereof." Id. at 131.

II.

Debtor's primary argument on appeal is that the Bankruptcy Court and District Court erred in concluding that BFG was not barred from pursuing its equitable demand for reinstatement of its partnership interest in the state court action. It maintains that BFG lost its right to assert this equitable demand by failing to raise the issue during the bankruptcy proceedings before debtor's reorganization plan was confirmed.

Section 1141(d)(1)(A) of the Bankruptcy Code states: "Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan . . . discharges the debtor from any debt that arose before the date of such confirmation . . . ." 11 U.S.C. § 1141(d)(1)(A). Section 524(a)(2) of the Bankruptcy Code further implements the statutory discharge and finality provided by § 1141. It provides that the discharge "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor." 11 U.S.C. § 524(a)(2). Interpreting these provisions, among others, this court has held that "[a] confirmation order is res judicata as to all issues decided or which could have been decided at the hearing on confirmation." Donaldson v. Bernstein, 104 F.3d 547, 554 (3d Cir. 1997) (quoting In re Szostek, 886 F.2d 1405, 1408 (3d Cir. 1989)).

Here, the parties do not dispute that BFG's demand for reinstatement of its partnership interest arose before debtor's reorganization plan was confirmed. Instead, they contest whether BFG's equitable demand can properly be classified as a "debt" or "claim" within the meaning of the Bankruptcy Code.

Under the Code, a "debt" is defined as a "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined, in relevant part, as:

"[the] right to an equitable remedy for breach of performance if such breach gives rise to a right of payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputes, undisputed, secured, or unsecured[.]"

11 U.S.C. § 101(5)(B).

This provision was interpreted by the Supreme Court in Ohio v. Kovacs, 469 U.S. 274 (1985). In that case, Ohio had obtained an injunction ordering Kovacs to clean up a hazardous waste site. When Kovacs failed to comply with the injunction, a receiver was appointed to take possession of Kovacs' property and to implement the injunction. Kovacs then filed for bankruptcy before the cleanup was completed. The question before the Court was whether the obligation of Kovacs under the injunction was a "debt" or "liability on a claim" under the Bankruptcy Code. Id. at 276-77. Endorsing the reasoning of the lower courts, the Supreme Court held that because Kovacs had been dispossessed from the property and the only thing that Ohio sought from him was the money to defray cleanup costs, the cleanup order had essentially been converted into a monetary obligation. Id. at 282-83. Accordingly, the Court held, the injunctive order was a "claim" that was dischargeable in bankruptcy. Id.

Interpreting § 101(5)(B) in light of Kovacs, this court has stated that an equitable remedy will "give rise to a right of payment," and therefore be deemed a "claim," when the payment of monetary damages is an alternative to the equitable remedy. Air Line Pilots Association v. Continental Airlines, 125 F.3d 120, 133 (3d Cir. 1997) (citing Matter of Udell, 18 F.3d 403, 407 (7th Cir. 1994) ("[O]ne example of a `claim' is a right to an equitable remedy that can be...