In re Kenston Management Co., Inc.

Decision Date04 March 1992
Docket NumberAdv. No. 191-1277.,Bankruptcy No. 188-83014-260
PartiesIn re KENSTON MANAGEMENT CO., INC., Debtor. KENSTON MANAGEMENT CO., INC., Plaintiff, v. LISA REALTY CO., George Tassone, Salvatore Tassone, Vickie Tassone, and George Tassone, Jr., Poseidon Development Corp., Rose Marketing Corp., Poseidon Pools, Inc., Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York


Harvis, Trien & Beck by Gary Ginsburg, New York City, for debtor.

Parker, Chapin, Flattau & Klimpl by Philip H. Kalban, New York City, for defendants.



This is an adversary proceeding in which Kenston Management Co., Inc., the debtor and debtor-in-possession, ("Kenston" or the "Debtor") is the Plaintiff wherein it seeks a declaratory judgment against Lisa Realty Co., George Tassone, Salvatore Tassone, Vickie Tassone, George Tassone Jr., Poseidon Development Corp., Rose Marketing Corp., and Poseidon Pools, Inc., (the "Defendants") pursuant to a Stipulation of Settlement approved by this Court on July 24, 1990.

This matter came before this Court on the Defendants' motion for summary judgment seeking to dismiss the Debtor's complaint pursuant to Fed.R.Civ.P. 56, made applicable to bankruptcy proceedings pursuant to Fed.R.Bankr.P. 7056, and for sanctions against the Debtor pursuant to Fed. R.Bankr.P. 9011 and Fed.R.Civ.P. 11. After reviewing the documents on file in this Court and for the reasons stated below, the Defendants' motion for summary judgment is granted and the motion to impose sanctions is denied.


On October 31, 1988 the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. Prior thereto, the Debtor brought an action against Poseidon Pools of America, Inc. ("Poseidon"), S & V Pools and the Defendants in the Civil Court of the City of New York, County of Kings (Index No. 110239/88), for monies due from Defendants under a lease agreement. The lease was between the Debtor and one of the Defendants, Lisa Realty Co., and was guaranteed by the other Defendants. During the course of the pre-petition litigation, a judgment was entered in favor of the Debtor against all of the defendants in that action. In seeking to set aside the judgment, the Defendants were required to post a bond. Shortly after re-opening the judgment and posting the bond, the Debtor filed its Chapter 11 petition.

During the Chapter 11 case, the Debtor's principal, John Luhrs, engaged in settlement discussions with the principals of the Defendants herein. On June 22, 1990, the Debtor executed a Stipulation of Settlement (the "Stipulation" or the "Agreement") with Poseidon and various subsidiaries of Poseidon, namely: Poseidon Development Corp., S & V Pools, Inc., Poseidon Pools, Inc., and Rose Marketing Corp. (the "Poseidon Subsidiaries"). Pursuant to the terms of the Stipulation, the Debtor was to dismiss, with prejudice, all State Court actions commenced against Poseidon, the Poseidon Subsidiaries and Lisa Realty Co., George Tassone, Salvatore Tassone, Vickie Tassone, and George Tassone, Jr. (the "Non-Poseidon Defendants") by an exchange of general releases. The Stipulation was approved by an Order of this Court on July 24, 1990.

The Stipulation provides for the payment of $375,000.00 to be made to the Debtor in full settlement of all claims that the Debtor may have against Poseidon, the Poseidon Subsidiaries, and the Non-Poseidon Defendants. The $375,000.00 settlement would include a lump sum payment of $275,000.00 and ten subsequent monthly payments of $10,000.00 each.

The Stipulation further provides that:

In the event of a default in payment under this agreement, the non-defaulting party . . . is authorized to confess judgment for the unpaid balance under this agreement against the obligor hereunder without further notice before any court of competent jurisdiction within the State of New York or the Commonwealth of Pennsylvania.

Pursuant to the Stipulation and in reliance upon the full payment being made thereto, the Debtor executed and delivered general releases in favor of Poseidon, the Poseidon Subsidiaries, and the Non-Poseidon Defendants. The lump sum payment of $275,000.00 and two monthly installments amounting to $20,000.00 were timely made to the Debtor on or about October 18, 1990 and November 18, 1990 for a total of $295,000.00. In light of these advances, a balance of $80,000.00 remains due. More specifically, the monthly installments of $10,000.00 due on December 18, 1990, January 18, 1991, February 18, 1991, March 18, 1991 and April 18, 1991, under the terms of the Stipulation, have not been made.

On February 15, 1991, Poseidon and certain of its subsidiaries, including S & V Pools, Inc., filed petitions for relief under Chapter 11 of the Code in the United States Bankruptcy Court for the Southern District of New York. As a result, the automatic stay prohibits the Debtor from commencing an adversary proceeding against Poseidon and S & V Pools, Inc.1 However, the Poseidon Subsidiaries, as well as, the Non-Poseidon Defendants, have not sought protection under the Bankruptcy Code and, therefore, the provisions of the automatic stay do not apply.

On May 17, 1991, the Debtor commenced this adversary proceeding against the Poseidon Subsidiaries and the Non-Poseidon Defendants pursuant to Fed.R.Bankr.P. 7001(1) and Section 542(b) of the Bankruptcy Code seeking a declaratory judgment and to compel the turnover of $80,000 to the Debtor's estate. Furthermore, the Debtor asserts that this adversary proceeding is a core proceeding pursuant to 28 U.S.C. Section 157(b)(2).

In opposition, the Defendants filed the instant motion for summary judgment to dismiss the Debtor's complaint and to impose sanctions against the Debtor for commencing a frivolous action. The Defendants claim that this Court is without subject matter jurisdiction, and that pursuant to the Stipulation of Settlement, the $80,000 in arrears is solely the contractual obligation of Poseidon Pools of America, Inc.

Subject Matter Jurisdiction

Section 157(b)(1) of Title 28 of the United States Code confers on the federal bankruptcy court jurisdiction to "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11. . . ." 28 U.S.C. § 157(b)(1). Pursuant to this section, a bankruptcy court "may enter appropriate orders and judgments." Id.

Section 157(b)(2) provides in pertinent part:

Core proceedings include, but are not limited to —
(A) matters concerning the administration of the estate;
. . . . .
(E) orders to turn over property of the estate; and
. . . . .
(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship. . . .

28 U.S.C. § 157(b)(2). In addition, the bankruptcy court is the proper forum to bring a motion to determine whether a proceeding is core or non-core. Pursuant to 28 U.S.C. § 157(b)(3), "the bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is otherwise related to a case under Title 11." 28 U.S.C. § 157(b)(3).

The mere characterization of an adversary proceeding within the terms included as core in 28 U.S.C. §§ 157(b)(2)(A)(O) will not be dispositive of whether the proceeding is core. In re General American Communications Corp., 130 B.R. 136, 155 (S.D.N.Y.1991). Furthermore, the fact that the resolution of some action may turn on the application of state law will not, in and of itself, turn the adversary proceeding into a non-core proceeding. Ben Cooper, Inc. v. The Insurance Company of the State of Pennsylvania (In re Ben Cooper), 896 F.2d 1394, 1400 (2d Cir.1990); Mann v. Kreiss (In re Kreiss), 58 B.R. 999, 1004 (E.D.N.Y.1986). The legislative history of section 157 "indicates that Congress intended that `core proceedings' would be interpreted broadly, close to or congruent with constitutional limits. The sponsors repeatedly said that ninety-five percent of the proceedings brought before bankruptcy judges would be core proceedings." Ben Cooper, 896 F.2d at 1398 (quoting In re Arnold Print Works, Inc., 815 F.2d 165, 168 (1st Cir.1987)).

The Defendants argue that the Debtor's claim does not constitute a core proceeding in that it is based on state law. However, the statutory language expressly maintains that a case should not be deemed a non-core proceeding simply on this basis. 28 U.S.C. § 157(b)(3). Section 157(b)(3) clearly provides that a "determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law." Id. "The relevant inquiry is whether the adversary proceeding, rather than the state or federal basis for the claim, falls within the core of federal bankruptcy power." Gulf States Exploration Co. v. Manville Forest Products Corp. (In re Manville Forest Products Corp.), 896 F.2d 1384, 1389 (2d Cir.1990).

In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the Supreme Court considered constitutional restraints on bankruptcy court jurisdiction. The plurality distinguished those issues "at the core of the federal bankruptcy power . . . from the adjudication of state-created private rights." Id. at 71, 102 S.Ct. at 2871.

The adjunct bankruptcy courts created by the Act 1978, 28 U.S.C. § 1471 exercise jurisdiction behind the facade of a grant to the district courts, and of exercising powers far greater than those lodged in the adjuncts approved in either Crowell Crowell v. Benson, 285 U.S. 22, 52 S.Ct. 285, 76 L.Ed. 598 (1932) or Raddatz United States v. Raddatz, 447 U.S. 667, 100 S.Ct. 2406, 65 L.Ed.2d 424 (1980), reh

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