In re Brentano's, Inc., Bankruptcy No. 82 B 10955.

• Decision Date: 31 January 1983
• Docket Number: Bankruptcy No. 82 B 10955.
• Citation: In re Brentano's, Inc., 10 B.C.D. 157, 27 BR 90 (Bankr. S.D.N.Y. 1983)
• Parties: In re BRENTANO'S, INC., Brentano's Texas, Inc., Brentano's Missouri, Inc., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

27 B.R. 90 (1983)

In re BRENTANO'S, INC., Brentano's Texas, Inc., Brentano's Missouri, Inc., Debtors.

Bankruptcy No. 82 B 10955.

United States Bankruptcy Court, S.D. New York.

January 31, 1983.

Cleary, Gottlieb, Steen & Hamilton, New York City, for MacMillan, Inc.

Levin & Weintraub & Crames, New York City, for debtors.

Frankfurt, Garbus, Klein & Selz, New York City, for Pine Realty, Inc.

JOHN J. GALGAY, Bankruptcy Judge.

MacMillan Inc. moved to stay Pine Realty, Inc., a California corporation, from proceeding in California state court, or any other forum other than this bankruptcy court, against MacMillan, upon or in connection with a lease entered into by Brentano's, Inc., the chapter 11 debtor in this Court, with Pine Realty. MacMillan is a guarantor for the lease. A hearing was held on November 23, 1982, at which time this Court orally granted the relief sought by MacMillan, requested briefs and urged parties to explore settlement. Parties involved undertook settlement discussions regarding the claim. The Court was notified that the parties were unable to resolve the matter. The Court issues this memorandum to substantiate and memorialize the oral order previously granted.¹

Background

In December 1977, Brentano's entered into a lease with Pine Realty for premises located in Westwood, California for the period September 1, 1978 through August 31, 1983. In connection with this lease, MacMillan executed a guaranty agreement. Pine Realty asserts that the guaranty was accepted in lieu of a security deposit and that it guaranteed full performance of the lease. On May 21, 1982, Brentano's filed a petition under chapter 11 of the Bankruptcy Reform Act of 1978 ("Code"). Pine Realty has filed a claim for pre-petition rent due and an administrative claim for post-petition arrears. In July 1982, Pine Realty commenced a suit in California Superior Court against MacMillan based upon the guaranty.

Brentano's is obligated to indemnify MacMillan for liability incurred by MacMillan on the guaranty. MacMillan has executed similar guaranty agreements in connection with 11 Brentano's leases. Brentano's is also liable for indemnification of MacMillan on those guaranty agreements. Brentano's contingent liability on these indemnification obligations approaches $8 million (including trade debt, MacMillan's potential claims exceed $8 million). MacMillan is the largest unsecured creditor; the disposition of its claim is one of the most important aspects (if not the most important) of the debtor's efforts to reorganize.

Issue

The issue before this Court is whether the California suit is "related to" the Chapter 11 proceeding before this Court, thus conferring jurisdiction upon the Bankruptcy Court pursuant to section 1471 of title 28 of the United States Code. If such jurisdiction exists, the Court must determine whether an order staying the California suit is "necessary and appropriate to carry out the provisions of title 11." 11 U.S.C. § 105(a).

Jurisdiction

Section 1471, 28 U.S.C. § 1471, in pertinent part, states:

(b) ... The district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11.

(c) The Bankruptcy court for the district in which a case under title 11 is commenced shall exercise all of the jurisdiction conferred by this section on the district courts.

In order to determine whether a proceeding is "related to" a reorganization case,

"the fundamental question ... is whether the determination of the claims against the Non-Debtor will or will not effect the Debtor\'s assets and/or liabilities as they existed at the date of the petition and its bankruptcy schedules. The criteria to be adopted in such a situation will undoubtedly be related to a determination of whether the outcome of the proceeding could conceivably have any effect upon the estate being administered in bankruptcy. 1 Collier on Bankruptcy ¶ 3.01 at 3-49 (15th ed. 1979)."

In re U.S. Air Duct Corp., 8 B.R. 848, 851 (Bkrtcy.N.D.N.Y.1981).

It has been held that the bankruptcy court has jurisdiction over a non-debtor third party guarantor of a debt. In re Lucasa International, Ltd., 6 B.R. 717 (Bkrtcy.S.D.N.Y.1980). In Lucasa the trustee of the debtor commenced an adversary proceeding to recover a preference from a creditor. The creditor commenced a third party action against an alleged guarantor. On a motion to dismiss the third party complaint, the Court held that it had jurisdiction over the third party guarantor. The Court found that the third party action was sufficiently related to the debtor's bankruptcy proceeding. The Court reasoned that since the trustee's preference action was a civil proceeding clearly arising under the bankruptcy case, "it follows, therefore, that the defendant's third party suit against ... its guarantor ..., is also a civil proceedings arising in and related to the Lucasa bankruptcy. Manifestly, therefore, this court has jurisdiction for all of this within the pervasive jurisdiction given bankruptcy courts by new 28 U.S.C. § 1471(b) read with subsection (c)." Id. at 719.

Further support for the pervasiveness of the bankruptcy court's jurisdiction may be found in In re Brothers Coal Company, Inc., 6 B.R. 567 (Bkrtcy.W.D.Va.1980). In the Brothers Coal case the bankruptcy court held that it had jurisdiction over an action by a creditor against a non-debtor guarantor of the debtor's obligation. See also In re Hartley, 16 B.R. 777 (Bkrtcy.N.D.Ohio 1982); In re Maine Marine Corporation, 20 B.R. 426 (Bkrtcy.D.Me.1982); see generally In re Wesco Products Co., 19 B.R. 908 (Bkrtcy.N.D.Ill.1982).

The California state court action is clearly a "related to" the Brentano's reorganization case before this Court and falls within this Court's jurisdictional grant. Underlying the entire matter is Brentano's lease (which Brentano's has rejected). If Pine Realty prevails against MacMillan, MacMillan can recover from Brentano's under its indemnification agreement. The disposition of this claim and other similar claims involving Brentano's leases, MacMillan guaranties, and the Brentano's-MacMillan indemnification agreement will ultimately determine the fate of this reorganization effort. This Court has jurisdiction over the Pine Realty action against MacMillan which...