In re Encompass Services Corp.

• Decision Date: 26 January 2006
• Docket Number: Adversary No. 05-3465.,Bankruptcy No. 02-43582-11.
• Citation: 337 B.R. 864
• Parties: In re ENCOMPASS SERVICES CORPORATION, et al., Debtor. Gilbane Building Company, Plaintiff, v. Air Systems Inc. (fka Air Systems Acquisition, Inc.), Todd A. Matherne as Disbursing Agent, Encompass Services Holding Corp., and the Board of Regents of the University of California, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Texas

337 B.R. 864

In re ENCOMPASS SERVICES CORPORATION, et al., Debtor.

Gilbane Building Company, Plaintiff, v. Air Systems Inc. (fka Air Systems Acquisition, Inc.), Todd A. Matherne as Disbursing Agent, Encompass Services Holding Corp., and the Board of Regents of the University of California, Defendants.

Bankruptcy No. 02-43582-11.

Adversary No. 05-3465.

United States Bankruptcy Court, S.D. Texas, Houston Division.

January 26, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Weil Gotshal et al., Houston, TX, for Debtor.

MEMORANDUM OPINION ON ASA'S MOTION (i) TO ABSTAIN, OR ALTERNATIVELY (ii) FOR DISMISSAL OR SUMMARY JUDGMENT

JEFF BOHM, Bankruptcy Judge.

I. INTRODUCTION

This adversary proceeding presents an interesting attempt at using the Bankruptcy Code as a mechanism for forum shopping. In 2001, the plaintiff, Gilbane Building Company (Gilbane), entered into a contract with Air Systems Incorporated (ASI), which at the time was a wholly owned subsidiary of Encompass Services Corporation (Encompass or the Debtor). In late 2002, Encompass and ASI filed for Chapter 11. As part of the reorganization, Air Systems Acquisitions, Inc. (ASA) purchased all the assets of ASI, including assignments of the executory contracts, and this purchase was incorporated into the confirmed plan. In November 2003, after completion of the contract at issue, ASA sued Gilbane for breach of contract and other contractual claims in California state court. In that suit, the court granted a motion for summary judgment in favor of ASA after sanctioning Gilbane for discovery abuse. Gilbane has appealed this judgment. Meanwhile, in its capacity as plaintiff in this adversary proceeding, Gilbane has raised in this Court many of the same issues presented in its losing effort in the California suit.

Concurrent with Gilbane's appeal of the California trial court decision, Gilbane is attempting to have this Court review the validity of the assignment of the executory contract under Encompass's confirmed plan. ASA has questioned whether this Court has jurisdiction over this adversary proceeding. This Court finds that it does not have post-confirmation jurisdiction over this proceeding. Further, even if post-confirmation jurisdiction does exist, it is appropriate for this Court to permissively abstain from hearing this proceeding. The purpose of this Memorandum Opinion is to set forth how the Court has arrived at this decision.

II. FINDINGS OF FACT

The facts, either as stipulated to or admitted by counsel of record, or as determined from the record, in chronological order, are as follows:

1. On or about August 8, 2001, ASI entered into a contract with Gilbane to provide HVAC and mechanical services work at the Mission Bay Building at the University of California San Francisco (the "Subcontract"). Gilbane was the general contractor on the project and ASI was one of the subcontractors. (Declaration of Art Williams in Support of ASA's Summary Disposition Motion, Adversary Docket No. 40, Appendix A at ¶ 7). The contract contains a provision prohibiting ASI from assigning the contract without written consent from Gilbane. (Id. at Exhibit 1, ¶ 9.9).

2. On November 19, 2002, Encompass and its subsidiaries, including ASI, filed for Chapter 11 in the Southern District of Texas.

3. On February 21, 2003, ASI and Encompass filed an Expedited Motion to Sell Certain Assets of Air Systems, Inc. to ASA. (Docket No. 1393).

4. On February 24, 2003, ASA sent a letter to Scott Chilcote, Gilbane's project executive at the Mission Bay Building site, notifying him about the pending approval of the sale of ASI to ASA. (Declaration of Art Williams, supra, Exhibit 2).

5. On March 17, 2003, this Court approved the Purchase and Sale Agreement ("PSA") entered into among ASI, Encompass, and ASA. (Docket No. 1836). The PSA included a term prohibiting the transfer of assets not freely transferable without the consent of a third party. (Docket No. 1936, Exhibit A, at § 1.8). The transaction was completed the next day on March 18, 2003. (Declaration of Art Williams, supra, at ¶ 12). Thereafter, ASA performed under the Subcontract. (Id. at ¶ 14).

6. On May 23, 2003, this Court confirmed the Debtor's Second Amended Joint Plan of Reorganization of Encompass Services Corporation and Its Affiliated Debtors under Chapter 11 of the Bankruptcy Code (the "Plan" or the "Confirmed Plan"). (Docket No. 2072).

7. In the latter part of 2003, the Subcontract was completed. (Declaration of Art Williams, supra, at ¶ 17).

8. On November 7, 2003, ASA filed suit against Gilbane in the Superior Court of California, County of San Francisco. This suit is styled Air Sys. Acquisition, Inc. v. Gilbane Bldg Co., Case No. CGC-03-426218. ASA sought damages that it claimed Gilbane owed under the Subcontract. (Declaration of Gretchen E. Dent in Support of ASA's Summary Disposition Motion, at ¶ 2).

9. On March 30, 2005, the California state court sanctioned Gilbane with both evidentiary and monetary sanctions for discovery abuse. (Id. at Exhibit 2). This order prevented Gilbane from adducing evidence relating to the Interrogatories, Requests for Admissions, and Request for Production to which it failed to respond. (Id.)

10. On June 3, 2005, Gilbane submitted to the California court its (and co-defendant, Traveler's Insurance's) Joint Supplemental Opposition to ASA's Motion for Summary Judgment/Adjudication. This response argued that Gilbane failed to give consent to the assignment in writing and that the bankruptcy estates of ASA and Encompass could not have "validly assigned the subcontract without Gilbane's prior written consent because the Air Systems Bankruptcy Estate (a) did not assume the subcontract; and (b) ASI did not provide adequate assurance of future performance, both of which are mandatory under Section 365(f) of the United States Bankruptcy Code." (Declaration of Gretchen E. Dent, Exhibit 3 at 2:8-18).

11. On June 10, 2005, Gilbane initiated this adversary proceeding. (Adversary Docket No. 1). Gilbane's initial complaint named as defendants ASA, Encompass Holding, Todd A. Matherne (the Dispersing Agent appointed to the main bankruptcy case), and the Board of Regents of the University of California. All defendants except ASA were dismissed from the suit on July 28, 2005. (Adversary Docket No. 24). In its complaint, Gilbane argues that ASA has no standing to sue because the assignment from Encompass/ASI was invalid. Gilbane also asserts that this Court has post-confirmation jurisdiction over the claims which Gilbane asserts. As relief, Gilbane seeks (i) a declaration that the assignment was invalid; (ii) a declaration that the Subcontract remains in the Debtor's estate; and (iii) an injunction against ASA from further prosecuting the Subcontract claims in California state court. (Adversary Docket No. 1).

12. On September 26, 2005, Gilbane moved for summary judgment against ASA in the present proceeding. (Adversary Docket No. 38). On the same day, ASA filed a Motion to (i) Abstain, or alternatively (ii) for Dismissal or Summary Judgment. (Adversary Docket No. 40). Both parties thoroughly briefed the issues raised in these motions, including the jurisdictional issue.

13. On October 6, 2005, a hearing was held on the competing Motions for Summary Judgment and Motion for Abstention. The jurisdictional issues were extensively argued, and this Court requested further briefing on certain issues raised at the hearing. The Court took the matter under advisement pending the additional briefing to be done.

14. On November 16, 2005, this Court issued its ruling orally from the bench.

III. CONCLUSIONS OF LAW REGARDING JURISDICTION

Gilbane strenuously argues that this Court has subject matter jurisdiction over this post-confirmation suit because (a) it is a core proceeding; (b) it relates to pre-confirmation orders; and (c) it concerns rights arising from Bankruptcy Rule 6006 and Section 365 of the Bankruptcy Code. Gilbane has also argued that this Court has exclusive jurisdiction because these issues relate to the clarification of one of its own orders, namely the Sale Order that approved the PSA, which was incorporated by reference into the Confirmed Plan. ASA argues that this Court does not have jurisdiction over this dispute or, alternatively, even if it does, it should abstain.

A. Congressional Authorization of Bankruptcy Jurisdiction

Bankruptcy courts are courts of limited jurisdiction, only having the authority to hear that class of cases "`endowed [upon them] by the Constitution and . . . conferred by Congress.'" In re Kevco, Inc., 309 B.R. 458, 464 (Bankr. N.D.Tex.2004) (quoting Epps v. Bexar-Medina-Atascosa Counties Water Improvement Dist. No. 1, 665 F.2d 594, 595 (5th Cir.1982)). Because bankruptcy judges are non-Article III judges, they are only permitted to hear that class of cases which Congress has determined the district courts may assign to them. See, e.g., Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 132 n. 2, 116 S.Ct. 494, 133 L.Ed.2d 461 (1995)(Ginsburg, J., concurring). Congress has endowed the district courts with "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). This Congressional mandate provides the district courts with jurisdiction over four types of bankruptcy matters: "(1) `cases under title 11,' (2) `proceedings arising under title 11,' (3) proceedings `arising in' a case under title 11, and (4) proceedings `related to' a case under title 11." U.S. Brass Corp. v. Travelers, Ins. Group (In re U.S. Brass Corp.), 301 F.3d 296, 303 (5th Cir.2002) (quoting Sections 28 U.S.C. 1334(a)-(b)). The Fifth Circuit has described these four classes of cases as the jurisdictional boundaries drawn around the bankruptcy courts. See id. at 304.

The district courts are authorized to refer to the bankruptcy courts for adjudication of "any or all cases...