In re Kaiser Group Intern. Inc.

Decision Date25 February 2005
Docket NumberNo. 04-1634.,04-1634.
Citation399 F.3d 558
PartiesIn re: KAISER GROUP INTERNATIONAL INC., Debtor International Finance Corporation v. Kaiser Group International Inc., Appellant Frank J. Perch, III, Trustee.
CourtU.S. Court of Appeals — Third Circuit

George E. Rahn, Jr., (Argued), Saul Ewing, Philadelphia, PA, for Appellant.

Robert J. Stearn, Jr., Richards Layton & Finger, Wilmington, Warren E. Zirkle, (Argued), McGuire Woods, McLean, VA, for Appellee.

Before NYGAARD and GARTH, Circuit Judges and POLLAK,* District Judge.

OPINION

GARTH, Circuit Judge.

Appellant, Kaiser Group International ("International"), appeals from the District Court's decision granting International Finance Company's ("IFC")1 Motion to Dismiss International's Third Amended Complaint for Lack of Subject Matter Jurisdiction. In doing so, the District Court reversed the Bankruptcy Court to the extent that the bankruptcy decision concluded that International's claims were within the scope of the waiver of sovereign immunity by IFC pursuant to 11 U.S.C. § 106(b).

On appeal, International argues that its claims fall within the scope of IFC's waiver of sovereign immunity, thereby conferring subject matter jurisdiction on the bankruptcy court. It contends that its claims are both property of the estate and arise out of the same transaction or occurrence as the Proof of Claim filed by IFC in International's bankruptcy proceeding and that, therefore, the claims asserted by International in the Third Amended Complaint are viable and should be considered on the merits. We agree.

Accordingly, we will reverse the judgment of the District Court, remand to the District Court, and direct that the District Court remand this case to the Bankruptcy Court so that there may be a ruling on the merits of International's Third Amended Complaint.

I.

The District Court had jurisdiction over this case as an appeal from the determination of the Bankruptcy Court under 28 U.S.C. § 158(a)(1). We have jurisdiction under 28 U.S.C. § 158(d) and 28 U.S.C. § 1291.

The District Court dismissed the instant action upon IFC's Federal Rule of Civil Procedure 12(b)(1) motion for lack of subject matter jurisdiction predicated on sovereign immunity. We exercise plenary review over the District Court's dismissal under Rule 12(b)(1). In re Cybergenics Corp., 226 F.3d 237, 239 (3d Cir.2000). When reviewing a facial challenge to this Court's subject matter jurisdiction, we accept all well-pleaded allegations in the complaint as true and view them in the light most favorable to the plaintiff. See Turicentro, S.A. v. Am. Airlines Inc., 303 F.3d 293, 300 (3d Cir.2002).

II.

As we indicated above, because the present appeal is before us on the District Court's order granting IFC's 12(b)(1) motion to dismiss, we must accept the allegations of the Third Amended Complaint as true and view them in the light most favorable to International. Consequently, the following factual summary is drawn from the facts as alleged in the Third Amended Complaint.

A.

On July 18, 1994, Kaiser Engineers ("Engineers"),3 a debtor subsidiary of International, entered into a Letter of Intent with Nova Hut, a Czech steel manufacturer ("Nova Hut"), pursuant to which International agreed to provide certain advisory services to Nova Hut in connection with the construction of a continuous caster and reversing rolling mill, also known as a "minimill," to be located in the Czech Republic. Nova Hut agreed to pay a fee of $1.5 million for those services. In order to assist Nova Hut funding the project, International eventually agreed to defer $510,000 of that fee. According to International, that fee was never paid.

On November 8, 1996, International, Kaiser Netherlands, B.V. ("Netherlands"), a wholly-owned, non-debtor subsidiary of International, and Nova Hut, entered into a Memorandum of Understanding for the construction of the minimill which set the total purchase price for Phase 1 of the project at $168.5 million.

On June 27, 1997, Netherlands and Nova Hut entered into a contract for construction of Phase 1 of the minimill (the "Construction Agreement") pursuant to which Netherlands agreed to design and supply Nova Hut's existing steel mill with a "fully constructed, operational Phase 1 of the mini-mill for flat rolled products." It is undisputed that International was not a party to the Construction Agreement. In order to finance its obligations under the Construction Agreement, Nova Hut obtained a secured loan from IFC in the amount of $125 million.

To secure Netherlands' timely and proper design, manufacture, and construction of the mini-mill, the Construction Agreement required Netherlands to submit a performance letter of credit in the amount of $11.1 million (the "Letter of Credit"). The Construction Agreement provided that Nova Hut could draw down against the Letter of Credit if Netherlands breached the contract or failed to renew the Letter of Credit as required. First Union Bank issued the Letter of Credit on July 8, 1997 (as amended on September 15, 1998).

It is also undisputed that Netherlands, not International, is listed as the "customer" on the Letter of Credit. At the same time, according to the Third Amended Complaint, First Union Bank required International to post collateral as security for the Letter of Credit. To meet this requirement, International deposited $11.1 million in cash with First Union Bank.

To further ensure Netherlands' performance under the Construction Agreement, International executed a written "Guaranty of the Performance of Kaiser Netherlands" pursuant to the agreement between Nova Hut and Netherlands (the "Performance Guaranty"). This Performance Guaranty provided that if Netherlands failed to prove that the mini-mill passed the requisite performance tests, and if Netherlands was unable to correct that deficiency or pay Nova Hut what it owed, then Nova Hut would have the right to seek liquidated damages from International.

On November 7, 1997, Nova Hut granted IFC a security interest in the Construction Agreement and Performance Guaranty. Nova Hut conditionally assigned its rights under the Construction Contract, but not its obligations, to IFC. Netherlands and International acknowledged and consented to this conditional assignment.

Thereafter, Netherlands commenced construction of the minimill. The Construction Agreement required Netherlands to pass a four week integrated production performance test (the "Performance Test") in connection with the minimill construction. The four week performance test was run from October 16, 2000 through November 13, 2000. After completing the test, Nova Hut informed Netherlands that it had failed to prove that the mini-mill performed as required by the Construction Agreement. Thus, Nova Hut notified Netherlands that it was in default. International, however, claims that Netherlands passed that test and met all of its other contractual obligations under the Construction Agreement.

In January 2001, a dispute arose over the Letter of Credit, which was set to expire on March 7, 2001. International agreed to extend the Letter of Credit in return for Nova Hut's and IFC's representations that they would not draw on the Letter of Credit if it was extended until July 31, 2001. Despite these representations, on February 16, 2001, Nova Hut drew down on the $11.1 million Letter of Credit and terminated the Construction Agreement (allegedly at the direction of IFC). That draw down, which International alleges was improper and in breach of the Construction Agreement and the additional agreements that it had with Nova Hut and IFC, forms the basis of the present litigation.

B.

On June 9, 2000, International and certain subsidiaries filed a petition under Chapter 11 of the Bankruptcy Code. On August 14, 2000, IFC filed a Proof of Claim in the bankruptcy case seeking recovery from International based on an assignment IFC had received from Nova Hut. It alleged claims in connection with the Performance Guaranty, the Letter of Credit and the Construction Agreement and sought damages in excess of $46 million. IFC further alleged that it was entitled to recover the $46 million from International because it had the "right to step into the shoes of Nova Hut and enforce the terms and provisions of the [Construction Contract] and the [Performance] Guaranty" pursuant to the Assignment.

At the same time, IFC stated that it was filing the Proof of Claim under the compulsion of the bar date and that the filing was not a consent by IFC to the jurisdiction of the court with respect to the subject matter of those claims.

On April 9, 2001, after Nova Hut drew down on the Letter of Credit, International filed an amended objection to Nova Hut's and IFC's proofs of claim and filed claims against IFC and Nova Hut.4 In response, on June 12, 2001, IFC filed a motion for leave to withdraw its proof of claim.

In an order dated January 9, 2002, the Bankruptcy Court granted IFC's motion, but only on the conditions that the Bankruptcy Court would retain jurisdiction over International's claims and that IFC was barred from asserting other claims against the debtors.

On October 21, 2002, International filed its Third Amended Complaint.

C.

The Third Amended Complaint alleges that at the time Nova Hut drew on the Letter of Credit, Netherlands had passed the Performance Test, had met all of the requirements for final acceptance of the minimill project, and was in compliance with the requirements of the Construction Amendment. Thus, the Third Amended Complaint alleges that the draw down on the Letter of Credit was wrongful and resulted in International sustaining damages of over $11.1 million in loss of collateral. International further charges that Nova Hut improperly drew down on the Letter of Credit at the direction of IFC.

As against IFC, International asserted both contract and equitable...

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