In re Gandy

• Decision Date: 22 July 2002
• Docket Number: No. 02-50185.,02-50185.
• Citation: 299 F.3d 489
• Parties: In the Matter of: Sarma GANDY, Debtor. James Gandy, Kartar Gandy, Hary Gandy Limited Partnership, Signtech USA, Ltd., Kartar Gandy Limited Partnership, and Hary Gandy, Appellants, v. Sarma Gandy, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

299 F.3d 489

In the Matter of: Sarma GANDY, Debtor James Gandy, Kartar Gandy, Hary Gandy Limited Partnership, Signtech USA, Ltd., Kartar Gandy Limited Partnership, and Hary Gandy, Appellants, v. Sarma Gandy, Appellee.

No. 02-50185.

United States Court of Appeals, Fifth Circuit.

July 22, 2002.

COPYRIGHT MATERIAL OMITTED

Paul Thomas Curl, Paul T. Curl, San Antonio, TX, Patrick Holder Autry, Matthews & Branscomb, San Antonio, TX, Michael G. Colvard, Martin, Drought & Torres, San Antonio, TX, Sam Collier Bashara, Law Office of Sam C. Bashara, San Antonio, TX, for Appellants.

Shelby A. Jordan, Jordan, Hyden, Womble & Culbreth, Corpus Christi, TX, Stephen Mark Murray, San Antonio, TX, for Appellee.

Appeal from the United States District Court for the Western District of Texas.

Before KING, Chief Judge, PARKER, Circuit Judge, and ELLISON^*, District Judge.

ELLISON, District Judge:

This is an appeal from an order denying Appellants' motion to compel arbitration. Specifically, Appellants, James Gandy, Kartar Gandy, Kartar Gandy Limited Partnership, Hary Gandy, and Hary Gandy Limited Partnership ("Gandys"), seek arbitration of claims asserted against them by Sarma Gandy, who is currently a debtor in possession ("Debtor") under Chapter 11 of the Bankruptcy Code. 11 U.S.C. §§ 1101 et seq. (2002). The United States Bankruptcy Court for the Western District of Texas, holding that it had discretion to refuse to order arbitration of core bankruptcy matters, denied the Gandys' motion to compel arbitration and to stay the adversary proceeding pending arbitration. The District Court affirmed. The Gandys now appeal to this court. We affirm.

Factual and Procedural History

This case evolved from a state court suit brought by the Debtor, prior to her bankruptcy, challenging the specifics of asset liquidation of Signtech USA, Limited ("Signtech"). Signtech was a Texas limited partnership, formed in 1993, that was in the business of making sign components and materials, printing sign faces and other large advertisements, and manufacturing and selling wide-format digital printers used in printing large advertising copy. When Signtech was formed, Debtor acquired a 33% ownership in Signtech as her sole and separate property. The remaining interest in Signtech was owned by Kartar Gandy Limited Partnership ("KGLP"), as owned and controlled by Kartar Gandy, Debtor's father-in-law, and by James Gandy, Debtor's brother-in-law. On October 10, 1997, Debtor entered into a post-marital agreement whereby Debtor transferred her 33% interest in Signtech to a new limited partnership, Hary Gandy Limited Partnership ("HGLP"). Hary Gandy, Debtor's husband, was HGLP's general partner and 20% owner, and Debtor was a limited partner and 80% owner. After the 1997 transfer, Signtech's ownership interests were distributed among HGLP, James Gandy, KGLP, and Gandy Group, Inc. HGLP, James Gandy, and KGLP were the limited partners and 33% owners, while Gandy Group, Inc. was the general partner and 1% owner.

Debtor's claims center on a series of transactions surrounding and following the 1997 transfer. Debtor alleges that Hary Gandy, motivated by the possibility of an impending divorce from Debtor, procured the transfer of Debtor's 33% ownership interest in Signtech to HGLP in order to secure his control over Signtech. Debtor argues that this enabled Hary Gandy to continue to conceal from Debtor the real value of her ownership interest.¹ After the transfer to HGLP, Hary Gandy also obtained from Debtor an increase from 20% to 20.35% of his ownership interest in HGLP. According to Debtor, Hary Gandy obtained the additional interest to forestall the invocation of a partnership clause permitting replacement of the general partner, with or without cause, upon a vote of 80% of the ownership interests in the partnership.

As Signtech increasingly lost business and fell in debt, it began to sell various of its business components. After these asset sales, Signtech's remaining assets were its building, its digital printer manufacturing business, and its accounts receivable. On April 7, 2000, James Gandy, Hary Gandy (on behalf of HGLP), and Kartar Gandy (on behalf of KGLP) signed a plan of liquidation for Signtech and a series of assignments of Signtech's partnership interests in exchange for Signtech's assets. Effective as of March 1, 2000, the plan of liquidation and the assignments transferred to HGLP ownership of accounts receivable, and to James Gandy and KGLP 33% and 62%, respectively, of the remaining assets of Signtech, except for Signtech's building.² Debtor, in consultation with Hary Gandy, had agreed to receive Signtech's accounts receivable as HGLP's share of the distribution upon liquidation. Debtor alleges that, unbeknownst to her the accounts receivable consisted primarily of uncollectable foreign debts. In contrast, on April 3, 2000, four days before the signing of Signtech's liquidation plan, James Gandy began negotiating with one of Signtech's competitors for the sale of Signtech's digital printer business. The competitor agreed to purchase the digital printer business for $30,000,000.00 on April 17, 2000.

Debtor then sued the individual members of the Gandy family and the partnerships alleging causes of action for breach of fiduciary duty, negligence, fraud, constructive trust, and breach of contract. The Gandys filed a motion to compel arbitration based on arbitration clauses in the parties' partnership agreements.³ On February 28, 2001, the state court granted the motion and stayed the lawsuit. Debtor filed for bankruptcy that afternoon. The state court suit was subsequently removed to the bankruptcy court as an adversary proceeding. Debtor also filed a new adversary action in bankruptcy court, and then moved to consolidate the second adversary with the previously removed state action. With the Gandys' consent, the bankruptcy court allowed the consolidation of Debtor's claims in the two adversaries into a single complaint — the Third Amended Complaint. The Third Amended Complaint included causes of actions to avoid transfers pursuant to sections 544, 550, and 548 of the Bankruptcy Code, for civil RICO conspiracy, for insider fraud, and to establish alter ego claims and require substantive consolidation. The Gandys filed motions with the bankruptcy court to compel arbitration and for stay of the adversary proceeding pending arbitration. The bankruptcy court denied the motions after finding that Debtor's complaint essentially sought avoidance of fraudulent transfers. The district court affirmed the bankruptcy court's exercise of discretion, holding that Debtor had raised actual core proceedings in her capacity as debtor in possession. Back in the bankruptcy court, Debtor, based on allegations that the Gandys had transferred funds belonging to Debtor's estate to foreign "off-shore" trusts after she sought Chapter 11 protection, successfully obtained a temporary restraining order against the Gandys, except for Hary Gandy and HGLP, prohibiting them from further use of the funds.⁴ The Gandys now timely appeal to this court the denial of the motion to compel arbitration and for stay of the adversary proceeding pending arbitration.

Discussion

This court's appellate jurisdiction to review the bankruptcy court's refusal to stay an adversary proceeding pending arbitration is founded upon section 16(a)(1)(A) of the Federal Arbitration Act (the "FAA"), 9 U.S.C. §§ 1 et seq. (2002).⁵ Referring to this subsection, this court in In re National Gypsum, 118 F.3d 1056, 1061 (5th Cir.1997), stated that "[a] bankruptcy court's refusal to stay an adversary proceeding pending arbitration, though interlocutory in nature, is nevertheless appealable because of section 16 of the Federal Arbitration Act." See also Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1151-52 (3d Cir.1989) (holding that 9 U.S.C. § 16(a) establishes rule of immediate appealability with respect to orders denying motions to compel and to stay arbitration). Thus, under 9 U.S.C. § 16(a)(1)(A) and National Gypsum, this court has jurisdiction to hear the appeal from the order of the bankruptcy court refusing to stay Debtor's adversary proceeding pending arbitration.

On appeal, the Gandys argue that the district court erred in refusing to compel Debtor to arbitrate this case under the arbitration clauses of the partnership agreements for Signtech and HGLP. Whether a bankruptcy court has discretion to deny a motion to stay a bankruptcy proceeding pending arbitration is a question of law that we review de novo. National Gypsum, 118 F.3d at 1064. We also review de novo legal determinations of whether an adversary proceeding in bankruptcy court is "core" under 28 U.S.C. § 157(b). Id. at 1062. If we find that the bankruptcy court had discretion to assess whether arbitration would be consistent with the Bankruptcy Code, the exercise of that discretion is reviewable only for abuse. See In re United States Lines, Inc., 197 F.3d 631, 640-41 (2d Cir.1999).

The Gandys contend that Debtor, as a party to the Signtech and HGLP partnership agreements, had agreed to be bound by the arbitration clauses that appear in identical form in the two agreements. The Gandys contend that the FAA embodies a strong federal policy in favor of arbitration and, therefore, compels the arbitration of this case. The Gandys argue that Debtor, in an effort to avoid arbitration, has "window-dressed" her state law claims and artfully repled them as bankruptcy claims. The Gandys further argue that, even if Debtor could bring her "Bankruptcy Code-based" claims, they lack merit. The bankruptcy and district courts considered and rejected these arguments. The bankruptcy court found, and the district court affirmed, that Debtor's adversary proceeding raised actual core bankruptcy issues including, inter alia, issues of avoidance of fraudulent transfers.

The Gandys' argument that the decision of the...