In re Lafayette Radio Electronics Corp.

• Decision Date: 13 February 1981
• Docket Number: Bankruptcy No. 880-00042.
• Citation: In re Lafayette Radio Electronics Corp., 8 B.R. 973, 3 C.B.C.2d 804 (Bankr. E.D. N.Y. 1981)
• Parties: In re LAFAYETTE RADIO ELECTRONICS CORP., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

8 B.R. 973 (1981)

In re LAFAYETTE RADIO ELECTRONICS CORP., Debtor.

Bankruptcy No. 880-00042.

United States Bankruptcy Court, E.D. New York.

February 13, 1981.

Levin & Weintraub, New York City, for debtor.

Phillips, Nizer, Benjamin, Krim & Ballon, New York City, for Haur Associates.

Gelberg & Kronovet, New York City, Special Counsel to debtor.

C. ALBERT PARENTE, Bankruptcy Judge.

Through a series of lease arrangements, on March 27, 1970, Lafayette Radio Electronics Corp. (hereinafter "debtor") became a subtenant of Haur Associates, Inc. (hereinafter "Haur"). Earl Equities, Inc., the prime lessee, defaulted in late 1975. Haur subsequently commenced a proceeding in the courts of the State of New York in 1977 against the debtor and the other parties to the lease arrangements. Since that time, the state court action has not gone forward, even to the discovery stage.

On April 21, 1980, the debtor moved in this Court by order to show cause why an order should not be entered permitting debtor to assume a lease for Location No. 19 at 49-53 West 45th Street, New York, New York. Haur filed a timely affidavit in opposition to the debtor's order to show cause. Coordinate therewith Haur seeks an order determining the debtor's exercise of the option to renew the sublease as null and void.

In August, 1980 Haur obtained new counsel. On October 14, 1980, Haur moved for an order of abstention pursuant to 28 U.S.C. § 1471(d), consonant with the deflection of jurisdiction to the pending action in the state court. Debtor interposed a cross-motion in opposition to Haur's motion to abstain, and requested that costs and attorney's fees be awarded to the debtor.

The motion for an order to show cause and the affidavit in opposition to that motion have been held in abeyance pending resolution of the motion for an order of abstention and the cross-motion in opposition. There are then two issues before the Court at this time for resolution:

(1) Should the Court abstain from consideration of the debtor's motion for an order to show cause and deflect said motion to the courts of the State of New York?

(2) If the motion for an order of abstention is denied, should the Court award to the debtors the cost and attorney's fees incurred in defending said motion?

I.

Haur relies principally on Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 60 S.Ct. 628, 84 L.Ed. 876 (1940) to support its motion for abstention. In Thompson, the Supreme Court was required to interpret Illinois state property law in a proceeding under the Bankruptcy Act. Neither the statutes of Illinois nor its case law were applicable to the issue before the Supreme Court. However, there existed conflicting decisions relative to the Illinois common law by the Courts of Appeals for the Seventh and Eighth Circuits. Due to the divergence between the circuits, the Supreme Court deflected the case to the Illinois state courts for a determination of the law in question. In so deflecting, the Supreme Court stated:

A court of bankruptcy has an exclusive and nondelegable control over the administration of an estate in its possession. But the proper exercise of that control may, where the interests of the parties will best be served, lead the bankruptcy court to consent to submission to state courts of particular controversies involving unsettled questions of state property law and arising in the course of bankruptcy administration.

Thompson, 309 U.S. 478 at 483, 60 S.Ct. at 630.

Haur contends that the case at bar involved unsettled New York State property law, and accordingly, this Court must abstain and deflect the case to the state courts for resolution of the unsettled property issues.

Thompson must be considered in light of Meredith v. City of Winter Haven, 320 U.S. 228, 64 S.Ct. 7, 88 L.Ed. 9 (1943). Again addressing the question of abstention, the Supreme Court held that:

. . . In the absence of some recognized public policy or defined principle guiding the exercise of the jurisdiction conferred, which would in exceptional cases warrant its non-exercise, it has from the first been deemed to be the duty of the federal courts, if their jurisdiction is properly invoked, to decide questions of state law whenever necessary to the rendition of a judgment.

Meredith, 320 U.S. 228 at 234, 64 S.Ct. 7 at 10, 88 L.Ed. 9.

In light of the above principle of law, it is clear that Thompson, 309 U.S. 478, 60 S.Ct. 628, 84 L.Ed. 876, is an exception to the general rule set down in Meredith, 320 U.S. 228, 64 S.Ct. 7, 88 L.Ed. 9. This was recognized by the Supreme Court in 1949 when it stated:

The submission of special issues is a useful device in judicial administration in such circumstances as existed in the Thompson v. Magnolia . . . case, but in the absence of special circumstances, Meredith, 320 U.S. at pages 236, 237 64 S.Ct. at pages 11, 12 . . . it is not to be used to impede the normal course of action where federal courts have been granted jurisdiction of the controversy.

Propper v. Clark, 337 U.S. 472, 492, 69 S.Ct. 1333, 1344, 93 L.Ed. 1480 (1949); accord, Colorado River Water Conservation District v. U.S., 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976).

Haur notes that jurisdiction in Thompson was based on the Bankruptcy Act, while jurisdiction in Meredith and its progeny was based on diversity. Haur contends that this distinction mandates that the bankruptcy courts should more readily abstain than the federal district courts. In support of this allegation, Haur relies upon First National Bank of White River Jct., Vermont v. Reed, 306 F.2d 481 (2nd Cir., 1962) where the Second Circuit Court of Appeals deflected a bankruptcy case to the state court. Distinguishing Meredith, 320 U.S. 228, 64 S.Ct. 7, 88 L.Ed. 9, as a case predicated on diversity jurisdiction, the court in First National Bank declared, ". . . Here federal jurisdiction rests on bankruptcy, and the Bankruptcy Act contains several provisions looking toward state court determination of issues arising in the administration of bankrupt estates . . ." 306 F.2d 481 at 488.

Haur's contention fails to take notice of the pervasive jurisdiction granted to the courts under the new Bankruptcy Code. Of particular import is 28 U.S.C. § 1471(c) which grants the bankruptcy courts the same jurisdictional powers as the federal district courts in all bankruptcy matters. In the Matter of Epps, 2 B.R. 737, 1 C.B.C. 368 (D.C., S.D.N.Y.1980); In the Matter of Troy Indus. Catering Service, 2 B.R. 521, 1 C.B.C. 321 (Bkrtcy., E.D.Mich.1980).

Despite this pervasive grant of jurisdiction to the bankruptcy courts under the Code, Haur alleges that the legislative history supports its contention that bankruptcy courts should still abstain when faced with issues requiring state court expertise, and cites the following portion of the House Report:

. . . Occasions arise when determination of an issue is best left to a court that decides similar issues regularly, especially if the issue is one that requires a particular expertise that the bankruptcy court does not have.

H.R.Rep.No.95-595, 95th Cong., 1st Sess. at p. 51 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6012.

It is crucial to a full understanding of the legislative history that one consider the rest of the paragraph which follows the section quoted by Haur:

. . . For example, in Thompson v. Magnolia Petroleum, the Supreme Court required a bankruptcy court to defer to a state court for determination of a particularly unusual question of state real property law. The power of abstention is necessary to the effective and meaningful exercise of the expanded jurisdiction granted by this bill.

H.R.Rep.No.95-595, supra at 51, U.S.Code Cong. & Admin.News 1978, p. 6012 (emphasis added).

The key word in this paragraph is "unusual." The legislative history does not propose that bankruptcy courts abstain whenever faced with a question of state property law. Abstention, as the Supreme Court expressed in Meredith and its progeny, should be exercised only when there are unusual or exceptional circumstances. Meredith, 320 U.S. 228, 64 S.Ct. 7, 88 L.Ed. 9; Propper, 337 U.S. 472, 69 S.Ct. 1333, 93 L.Ed. 1480; Colorado River, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483.

In the case at bar, Haur contends that the exceptional circumstance is the fact that there are neither previous cases nor applicable New York statutes which deal with the same factual situation. It is implicit that no case will ever be precisely on all fours with a previous fact situation. The mere presence of a unique question of fact does not mandate abstention. Haur contends that there is a question of unsettled state law, not just fact. It is not necessary to decide if there is a question of fact or of law because, as the Supreme Court declared in Meredith, 320 U.S. 228 at 234-35, 64 S.Ct. 7 at 10-11, 88 L.Ed. 9, that the incident of state courts not having yet settled an issue of law is not by itself sufficiently exceptional to warrant abstention. There must be something more than just unsettled state law.

Haur's reliance on Thompson, 309 U.S. 478, 60 S.Ct. 628, 84 L.Ed. 876, is misplaced because in Thompson, although the property law was unsettled, there was also an actual conflict between the two Circuit Courts of Appeals as to the proper construction of Illinois law. In the case at bar, notwithstanding the fact that no other courts have dealt with the exact issue in question, there is only a potential for conflict between this Court and any New York State court facing the same issue in the future. The actual conflict between the courts served as the exceptional circumstance mandating abstention in Thompson, while the mere potential for conflict, if any does in fact exist, in the case at bar is not sufficiently exceptional. In the most recent restatement of the abstention doctrine, the Supreme Court stated that ". . . the mere potential for conflict in the results of adjudications, does not, without more,...