In re CIS Corp.
| Decision Date | 14 September 1994 |
| Docket Number | 91 Civ. 6647. |
| Parties | In re CIS CORPORATION, Continental Information Systems Corporation, et al., Debtors. James P. HASSETT, as Chapter 11 Trustee of CIS Corporation, Continental Information Systems Corporation, et al., Plaintiffs, v. BANCOHIO NATIONAL BANK, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Kirkland & Ellis, New York City, for James P. Hassett.
Lawrence P. Gottesman, Jones, Day, Reavis & Pogue, New York City, for BancOhio Nat. Bank.
In this Chapter 11 bankruptcy case I am asked to withdraw the reference to the bankruptcy court for the Southern District of New York with respect to an adversary proceeding filed by the Debtors' Trustee, James P. Hassett (the "Trustee"), against defendant BancOhio National Bank ("BancOhio"). BancOhio moves to withdraw the reference. For the reasons discussed below, I decline to do so.
CIS is in the business of marketing and managing computer equipment. BancOhio is a national banking corporation. On January 13, 1989, CIS and eleven of its affiliates (collectively the "Debtors") each filed petitions for relief under Chapter 11 of the bankruptcy code. On July 12, 1991, the Debtors' Trustee commenced an adversary proceeding in bankruptcy court against BancOhio and Indiana Bell Telephone. On August 20, 1991, the Trustee filed an amended complaint in the adversary proceeding, deleting the claims against Indiana Bell.
BancOhio has not filed a claim in the bankruptcy proceeding. On March 7, 1990, however, it filed a motion with the bankruptcy court pursuant to 11 U.S.C. § 365(d)(2) to compel the Trustee to assume or reject certain of the Remarketing Agreements. The adversary proceeding has its roots in a series of transactions between CIS and BancOhio taking place from December 1987 to November 1988. CIS takes the position that these transactions constituted a method of clever "financing" by BancOhio of computer equipment which had been initially purchased by CIS and leased to third parties (the "Leases"). Each Lease was assigned as part of the transaction to BancOhio, who thereby became entitled to the quarterly lease payments. In connection with each transaction, CIS and BancOhio also entered into an agreement in which CIS was appointed as the exclusive agent to remarket the equipment upon expiration of the Lease (the "Remarketing Agreement"). Pursuant to this agreement, CIS received a fee from the proceeds of any subsequent sale or lease of the equipment.
BancOhio strenuously disputes the characterization of these transactions as financing transactions, contending instead that CIS "sold" the equipment to BancOhio. BancOhio avers that it was not merely a lender, but an equity investor and the legal titleholder to the equipment. This distinction lies at the heart of the adversary proceeding.
In the adversary proceeding, the Trustee asserts eight causes of action against BancOhio. The First Claim seeks to have the transactions recharacterized as financing transactions; the Second Claim seeks a declaration that BancOhio does not have a perfected security interest in the equipment; the Third Claim seeks a declaration that the Trustee may avoid any unperfected security interest of BancOhio in the equipment; the Fourth Claim alleges that the Trustee may use, sell or lease the equipment pursuant to 11 U.S.C. § 363; the Fifth and Eighth Claims allege that BancOhio wrongfully converted certain equipment, as well as an "accidental" payment of a sum of money made by CIS to BancOhio; and the Sixth and Seventh Claims seek an order requiring BancOhio to turn over to the estate the wrongfully converted equipment and payment, or the value thereof.
Shortly after BancOhio filed its answer and jury demand in the adversary proceeding, it filed the motion presently before this Court. BancOhio contends that the claims in the proceeding are non-core and that it is entitled to trial by jury of the facts underlying the claims. Because the law of this circuit prohibits bankruptcy courts from holding jury trials in non-core matters, BancOhio avers that the adversary proceeding must be withdrawn from consideration by the bankruptcy court. In a letter to this Court dated August 25, 1992, BancOhio for the first time also advances the argument that mandatory withdrawal under § 157(d) is required in light of a summary judgment motion made by CIS in the adversary proceeding, which allegedly "raises issues which will require substantial and material consideration of both non-Bankruptcy Code federal statutes and Title 11."
Not surprisingly, the Trustee disputes each of these contentions. The Trustee preliminarily contends that this Court should remand the case to the bankruptcy court to initially characterize the nature of the proceeding as core or non-core. If this Court declines to remand the case and makes the initial decision, the Trustee argues that BancOhio has failed to demonstrate justification for either mandatory or discretionary withdrawal. According to the Trustee, the matters are core, BancOhio is not entitled to a jury trial, and even if a jury trial were available, withdrawal of the reference is not required because the bankruptcy court may hold jury trials in core matters.
28 U.S.C. § 157(d) provides:
Mandatory withdrawal pursuant to the second sentence of § 157(d) is narrowly applied. It is warranted when resolution of the matter would require the bankruptcy judge to "engage in significant interpretation, as opposed to simple application," of federal non-bankruptcy statutes. City of New York v. Exxon Corporation, 932 F.2d 1020, 1026 (2d Cir. 1991); see also In re Adelphi Institute, Inc., 112 B.R. 534, 536 (S.D.N.Y.1990) (); In re Chateaugay Corp., 108 B.R. 27, 28 (S.D.N.Y.1989) (same). As then-District Judge Leval explained:
In re Johns-Manville Corp., 63 B.R. 600, 603 (S.D.N.Y.1986) (emphasis in original.)
It follows that mandatory withdrawal is appropriate when "substantial and material" potential conflicts exist between non-bankruptcy federal laws and Title 11, see In re Chateaugay Corp., 88 B.R. 581, 588 (S.D.N.Y.1988), or when complicated interpretive issues of first impression are raised under non-bankruptcy federal laws. See In re Oil Co., Inc., 140 B.R. 30, 35 (E.D.N.Y. 1992).
In his motion for summary judgment in the adversary proceeding, the Trustee argues that the transactions should be recharacterized as loans because the National Bank Act, the Competitive Equality Banking Act (the "CEBA") and certain related regulations issued by the Comptroller of the Currency prohibit banks from engaging in leasing unless the leasing transaction constitutes the functional equivalent of a loan. BancOhio contends that this argument infuses the case with issues which will require the bankruptcy court to substantially interpret these statutes and regulations. BancOhio suggests that the court will be required to examine the purpose underlying the laws and regulations and the interplay of the statutes and regulations with various provisions of Title 11.
The Trustee counters that the issues presented by his argument require straightforward application of the laws and regulations, a factor which prevents the case from being subject to mandatory abstention. I agree.
There is no substance to BancOhio's averment that mandatory withdrawal applies in this case. I cannot conclude that resolution of the claims in the adversary proceeding will require any more than straightforward application or routine interpretation of the National Banking Act, the CEBA and the identified regulations. Although BancOhio offers the sweeping conclusion that significant interpretation of the statutes and regulations and their underlying policy considerations is compelled, it does not explain why that must be so or offer the slightest support for its conclusion.
Nor does BancOhio identify any potential conflict between provisions of Title 11 and the identified statutes and regulations. BancOhio says cryptically, "Any court addressing CIS' arguments will have to examine . . . the interplay of these statutes and regulations with numberous sic provisions of Title 11." No doubt that is often the case in an adversary proceeding involving application of non-bankruptcy federal laws. But, unless it desires evisceration of Title 11, BancOhio can hardly suggest that this Court is required to withdraw the reference in order to scrutinize whether there might be a conflict between the federal law and Title 11 when it has not identified the substance of conflict.
Finally, BancOhio suggests that because there is a "paucity of case law addressing the issue of `recharacterization' in the context of the National Bank Act and CEBA," mandatory withdrawal applies. Yet, the fact that there may be relatively few cases app...
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