In re Frigitemp Corp., 80 Civ. 3097 (PNL)-80 Civ. 3099 (PNL).

• Decision Date: 06 January 1981
• Docket Number: No. 80 Civ. 3097 (PNL)-80 Civ. 3099 (PNL).,80 Civ. 3097 (PNL)-80 Civ. 3099 (PNL).
• Citation: 8 BR 284
• Parties: In re FRIGITEMP CORP., Bankrupt. LITTON SYSTEMS, INC., d/b/a Ingalls Shipbuilding Division, Plaintiff, v. FRIGITEMP CORP., Defendant. Lawson F. BERNSTEIN, Trustee in Bankruptcy of Frigitemp Corp., Plaintiff, v. LITTON SYSTEMS, INC., d/b/a Ingalls Shipbuilding Division, Defendant.
• Court: U.S. District Court — Southern District of New York

8 B.R. 284 (1981)

In re FRIGITEMP CORP., Bankrupt.

LITTON SYSTEMS, INC., d/b/a Ingalls Shipbuilding Division, Plaintiff, v. FRIGITEMP CORP., Defendant.

Lawson F. BERNSTEIN, Trustee in Bankruptcy of Frigitemp Corp., Plaintiff, v. LITTON SYSTEMS, INC., d/b/a Ingalls Shipbuilding Division, Defendant.

Nos. 80 Civ. 3097 (PNL)-80 Civ. 3099 (PNL).

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

January 6, 1981.

COPYRIGHT MATERIAL OMITTED

Marc S. Kirschner, Gelberg & Kronovet, New York City, for Lawson F. Bernstein, trustee in bankruptcy of Frigitemp Corp.

Malcolm I. Lewin, Lans, Feinberg & Cohen, New York City, Robert L. Ackerly, Thomas L. Patten, Sellers, Conner & Cuneo, Washington, D.C., William J. Powers, Jr., Pascagoula, Miss., for Litton Systems Inc.

OPINION AND ORDER

LEVAL, District Judge.

This is a consolidation of appeals from related orders of Bankruptcy Judge Lewittes. The appellant is Lawson Berstein, the trustee in bankruptcy ("Trustee") for Frigitemp Corporation ("Frigitemp" or "bankrupt"). The appellee is Litton Systems, Inc., which does business in part as Ingalls Shipbuilding Division.

The Trustee appeals the following orders:

(1) Denial, without prejudice, of Trustee's motion for approval as against Litton of arbitration proceedings;

(2) Summary judgment vacating the stay of Litton's 1977 action against Frigitemp in federal court for the Southern District of Mississippi;

(3) Summary judgment granting Litton leave to proceed in Civ. Action No. S80-0371(R), filed on March 27, 1980 in federal court for the Southern District of Mississippi, and dismissing the trustee's suit to enjoin prosecution of that action; and

(4) Denial, in part, of the Trustee's motion to compel responses to interrogatories and to compel production of documents.

Facts

In 1969 and 1970 the United States Navy awarded several shipbuilding contracts to Litton's Ingalls Ship Building Division. Litton subcontracted work involving more than 100 million dollars to Frigitemp.

In early 1977 Frigitemp and Litton entered into an arrangement whereby Litton agreed to advance to Frigitemp the allowable costs under several of the subcontracts, subject to an accounting and possible recoupment for overpayment.

Litton and Frigitemp also entered into an arbitration agreement ("the first arbitration agreement") under which, inter alia, Frigitemp's claims against Litton arising prior to November 15, 1976 were to be settled by arbitration in New Orleans.

In October of 1977 Litton brought action against Frigitemp in federal court in Mississippi seeking an accounting for moneys advanced, recoupment of alleged overpayments, specific performance of certain obligations and injunctive relief. Frigitemp counterclaimed for breach of contract damages and pleaded the arbitration agreement as a defense and counterclaim.

The parties agreed to a consent order, providing that Frigitemp would continue working on the subcontracts. No further steps were taken thereafter in the 1977 action.

In March of 1978 Litton and Frigitemp entered into a second arbitration agreement ("the second arbitration agreement"). The second agreement provided, inter alia, for the arbitration of all disputes, but that Litton could unilaterally terminate arbitration proceedings and the agreement to arbitrate if Frigitemp became insolvent or filed a bankruptcy petition.

A few days later Frigitemp filed a petition under Chapter 11, 11 U.S.C. § 1101 et seq., in the Southern District of New York. All actions against Frigitemp were immediately stayed.

In May of 1979 Frigitemp was adjudicated a bankrupt. Litton had never filed a claim or otherwise appeared in the Chapter 11 or bankruptcy proceedings. Shortly thereafter Litton gave notice of termination of the arbitration agreements.

In September of 1979 Litton filed a complaint here in the Bankruptcy Court, appearing specially, seeking to vacate the bankruptcy court's stay of Litton's 1977 Mississippi action against Frigitemp. Discovery was conducted in that proceeding; in February of 1980 the trustee moved to compel answers to certain interrogatories and to obtain certain documents. Litton objected on grounds of relevance to discovery related to the validity or applicability of the arbitration agreements claiming that the Bankruptcy Court had no jurisdiction over the arbitration agreements. Litton also objected to other demands on grounds of privilege for attorney-client communications and trial preparation materials. In March, 1980 Litton moved for summary judgment to vacate the stay of the 1977 Mississippi action.

In March, 1980 Litton filed two suits against the Trustee in federal court in Mississippi, one S80-0371(R) seeking declaratory judgment that the arbitration agreements were null and void, the other S80-0372(C) seeking damages for breach of contract.

The Trustee meanwhile instituted two arbitration proceedings, one in New Orleans and one in Washington, D.C., and moved in Litton's action in the bankruptcy court here for an order approving arbitration as the method for the settlement of the dispute between the Trustee and Litton. The Trustee then filed a complaint against Litton in the bankruptcy court here seeking to enjoin Litton from prosecuting the two 1980 Mississippi actions. Litton counterclaimed for leave to prosecute the two 1980 Mississippi actions and moved for summary judgment.

The trustee also filed several other suits during the spring of 1980: one in Superior Court, New Castle County, Delaware, for breach of contract, one in federal court in Louisiana, and a third in federal court for the District of Columbia, the latter two seeking to compel Litton to arbitrate.

As noted above in May 1980 Judge Lewittes denied the Trustee's motion to compel the disputes to be settled by arbitration; granted summary judgment in favor of Litton lifting the stay of Litton's 1977 Mississippi action; and granted summary judgment to Litton lifting the stay so as to permit Litton to prosecute its 1980 Mississippi action contesting the validity of the arbitration agreements. The Judge denied Littons's motion to lift the stay as to the 1980 Mississippi action for contract damages. In addition Judge Lewittes refused to compel certain disclosure on Litton's part.

Jurisdiction over Litton on the Arbitration Dispute

The cornerstone of Judge Lewittes' rulings was his finding that the bankruptcy court is without jurisdiction to adjudicate, as against Litton, the validity or applicability of the arbitration agreements or the rights arising under these agreements.

Litton did not file a claim in the bankruptcy proceeding; it has accordingly waived any rights it may have had to recover its entitlements under the 1977 action as against the bankrupt estate; its recovery rights in the prosecution of that action would lie only against a surplus which survived the satisfaction of all claiming creditors in the bankruptcy proceeding, or, as a set-off, against any liability of Litton to Frigitemp.

The Trustee, on the other hand, is seeking to assert contract rights of two types against Litton, the first being its claimed contractual right to arbitrate disputes, the second being its claimed rights to further payments and damages under the shipbuilding subcontracts. (The Trustee claims that his major assets are his contract claims against Litton.)

Under these circumstances the bankruptcy judge correctly found no basis for assertion of jurisdiction over Litton.¹ There is no res in the hands of the Trustee against which Litton is asserting any claim, other than against a theoretical surplus after satisfaction of all the Trustee's obligations. Nor can Litton be required to submit to the summary jurisdiction of the bankruptcy court for adjudication of the Trustee's contract rights against it. See In re Roman, 23 F.2d 556 (2 Cir. 1928). A different result would follow if the dispute centered on conflicting rights over property in the Trustee's possession. See Board of Trade v. Johnson, 264 U.S. 1, 44 S.Ct. 232, 68 L.Ed. 533 (1924). But where there is no property in the possession of the trustee (or the bankruptcy court) and a third party asserts a substantial (and not merely colorable) claim adverse to the trustee involving disputed issues of fact, the third party has the right to have the merits adjudicated in a plenary action. Hollywood Nat'l Bank v. Bumb, 409 F.2d 23 (9 Cir. 1969); Dexter v. Gilbert (In re Kirchoff Frozen Foods, Inc.), 496 F.2d 84 (9 Cir. 1974), aff'g 375 F.Supp. 156 (D.Ariz.1972); In re Eakin, 154 F.2d 717 (2 Cir. 1946); In re Roman, supra.

The Trustee claims that his rights under the arbitration agreement constitute property within his possession and subject to the jurisdiction of the bankruptcy court (like the stock exchange seat in Bd. of Trade v. Johnson, supra). While the distinction may be difficult to delineate with precision, it seems clear that the Trustee's rights under the arbitration agreements are not a res in his possession but fall more in the category of a chose in action which cannot be enforced against the adverse party except in a court of plenary jurisdiction. The Trustee seeking to enforce those rights must do so in a court of plenary jurisdiction over the adversary, to the same extent as the bankrupt entity would have had to do so had it not become bankrupt and come within the bankruptcy court's protection. See In re Roman, supra; 2 Collier on Bankruptcy ¶ 23.05 at 492 (14th ed.).

The cases of Tobin v. Plein, 301 F.2d 378 (2 Cir. 1962), and Truck Drivers Local Union No. 807 v. Bohack Corp., 541 F.2d 312 (2 Cir. 1976), do not support the Trustee's position, for in neither case did the adverse party to the arbitration agreement contest the jurisdiction of the bankruptcy court over that agreement. The question here disputed was therefore not discussed in either decision.

Nor does Litton's filing of its complaints in the bankruptcy court seeking vacation of the stay of its actions in other courts...