In re Leco Enterprises, Inc.
| Decision Date | 06 August 1992 |
| Docket Number | Adv. No. 90-5742A.,Bankruptcy No. 89 B10949 PBA-89 B10952 PBA,No. 91 Civ. 4844 (PKL),91 Civ. 4844 (PKL) |
| Citation | 144 BR 244 |
| Parties | In re LECO ENTERPRISES, INC., Lord International, Inc., Halfhill Electrical Company, Ltd. and Lord Electric Company, Inc., Debtors. Kenneth P. SILVERMAN, Trustee of the Estate of Leco Enterprises, Inc., Lord International, Inc., Halfhill Electrical Company, Ltd. and Lord Electric Company, Inc., Plaintiff-Appellee, v. GENERAL RAILWAY SIGNAL COMPANY, a unit of General Railway Signal Corporation, Defendant. GENERAL RAILWAY SIGNAL COMPANY, a unit of General Railway Signal Corporation, Third-Party Plaintiff, v. The CITY OF NEW YORK, acting by the NEW YORK CITY TRANSIT AUTHORITY, Third-Party Defendant-Appellant. |
| Court | U.S. District Court — Southern District of New York |
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O. Peter Sherwood, Corp. Counsel of City of New York, New York City (David A. Bagley, of counsel), for third-party defendant-appellant.
Jaspan, Ginsberg, Ehrlich, Schlesinger, Silverman & Hoffman, Garden City, N.Y. (Eugene P. Cimini, of counsel), for plaintiff-appellee.
This is an appeal from an Order of the Hon. Prudence B. Abram, United States Bankruptcy Judge for the Southern District of New York, dated March 19, 1991 ("March 19 Order"), which denied the motion of third-party defendant-appellant the City of New York (the "City"), for an order abstaining from the exercise of jurisdiction, pursuant to 28 U.S.C. § 1334(c), but rather ordered a stay of the bankruptcy proceeding. For the following reasons, the order of the bankruptcy court is reversed, and the Court abstains from exercising its jurisdiction over this action.
In this bankruptcy appeal, the standard of review of the bankruptcy court's findings of fact is clearly erroneous; the standard of review of the conclusions of law of the bankruptcy court is de novo. See Gulf States Exploration Co. v. Manville Forest Products Corp. (In re Manville Forest Products Corp.), 896 F.2d 1384, 1388 (2d Cir.1990).
This appeal arises out of a voluntary bankruptcy petition filed on May 1, 1989 by Leco Enterprises, Inc. and its procedurally consolidated subsidiaries ("Leco" or the "debtor"), in the United States Bankruptcy Court for the Southern District of New York, pursuant to chapter 7 of title 11 of the United States Code;1 out of an adversary proceeding commenced by the Trustee against General Railway Signal Company, a unit of General Railway Signal Corp. ("General Railway"), on April 3, 1990 (the "first-party adversary proceeding"); out of General Railway's impleader of the City as third-party defendant in the adversary proceeding (the "third-party adversary proceeding"); and out of a state court action in the Supreme Court of the State of New York, New York County, which contains claims essentially identical to the claims asserted in the third-party adversary proceeding (the "state court action").
The third-party adversary proceeding, which is the primary focus of the instant appeal, concerns a contract dated November 9, 1981 (the "subway contract"), between General Railway and the New York City Transit Authority, under which General Railway, as general contractor, was to furnish and install signal and communications systems for a subway route in Brooklyn, Queens and Manhattan. The first-party adversary proceeding concerns a subcontract, dated December 7, 1981 (the "subcontract"), between General Railway and Lord Electric Company, Inc. ("Lord"), one of Leco's procedurally consolidated subsidiaries, which required Lord to install certain electrical equipment necessary for General Railway's performance under the subway contract. Significantly, Leco does not have a contractual relationship with the City under either the subway contract or the subcontract, and, therefore, does not have the right to assert any claims directly against the City. See Transcript of Oral Argument before Hon. Prudence B. Abram, dated November 27, 1990, ("Tr."), at 9-10.
Appellee's Brief, at 2-3. In contrast, the City has asserted that it is not liable on the claims asserted against it by General Railway. For example, as affirmative defenses, the City relies on contractual notice and exculpatory provisions that are peculiar to City contracts. Moreover, the City has asserted a counterclaim to recover liquidated damages from General Railway for unexcused delays by General Railway and Lord. However, the bona fides of the parties' various claims arising out of these purported delays and breaches have not yet been resolved in any judicial forum.
Although the preceding discussion suggests that all three interested parties in this proceeding — Leco, General Railway and the City — have antagonistic positions, the adversary position of General Railway and Leco, as plaintiff and defendant in the first-party adversary proceeding, is belied by the fact that these litigants entered into an Agreement and Order, so ordered by Judge Abram on April 23, 1990 ("Agreement and Order"). The central provisions of the Agreement and Order are that General Railway will be liable to Leco for 83% of all sums recovered by General Railway against the City; that General Railway will in no circumstances be liable to Leco unless it recovers from the City; and that all other claims between General Railway and Leco arising out of the subcontract are waived. Agreement and Order ¶¶ 2, 4, 5. General Railway and Leco also have agreed to prosecute the action against the City jointly, with the Trustee assuming responsibility for 83% of the cost of the litigation, and General Railway waiving all objections to the jurisdiction of the bankruptcy court. Id. ¶¶ 3, 10. Moreover, the Agreement and Order provides that Leco will dismiss the first-party adversary proceeding without prejudice if the third-party adversary proceeding is dismissed, and will wait to reinstate the first-party adversary proceeding until the state court action between General Railway and the City is resolved. Id.
Thus, the record indicates that there is no contractual relationship between Leco and the City, and that the first-party adversary proceeding between Leco and General Railway has been settled.2 However, notwithstanding the absence of either a claim by the debtor against the City or a bona fide dispute in the first-party adversary proceeding, Leco and General Railway have agreed to prosecute the third-party adversary proceeding, which involves claims between non-debtors on a contract to which the debtor was not a party, in the bankruptcy court. In response to this seemingly anomalous situation, the City moved, before Judge Abram, for abstention pursuant to 28 U.S.C. § 1334(c), arguing that it should not be forced to litigate its contract dispute with General Railway in bankruptcy court.
During the November 27, 1990 oral argument in the bankruptcy court, it appeared that Judge Abram agreed with the City that the pendency of General Railway's third-party action in the bankruptcy court rested on a weak foundation:
It is very difficult to justify keeping jurisdiction over a suit between non-debtor parties where the contract on which that suit is predicated . . . precludes the debtor from actually suing the defendant on it. . . . There is nothing to litigate in the suit between Leco and General Railroad sic. . . . You people have basically stipulated that nothing will happen in the lawsuit between General Railway and Leco until the third-party complaint is resolved. So it is impossible to justify this as somehow being an active first-party complaint that the third-party complaint appends to. . . . I am talking about . . . when and why should a bankruptcy court adjudicate a dispute between non-debtor parties. . . . The debtor clearly has a significant interest in the outcome of this lawsuit, but it is not a party to the lawsuit, and the debtor can have a significant interest in the outcome of the lawsuit but still not be a party to it, and that\'s just the quirks of the contracts here and I think that there is an appropriate limit to how far a bankruptcy court should stretch to pull cases into the bankruptcy forum even though the debtor has a vital interest in the outcome of the litigation.
Tr. at 12, 13, 22-23. Nevertheless, despite her initial doubt with respect to the propriety of exercising jurisdiction over the third-party adversary proceeding, Judge Abram denied the City's motions for mandatory and discretionary abstention under 28 U.S.C. § 1334(c)(1) and (2); stayed the first-party and third-party adversary proceedings; and ordered that discovery proceed in the state court action. See March 19 Order. This appeal followed.
To determine whether the City properly can be haled into bankruptcy court to adjudicate its dispute with General Railway, the Court first turns to 28 U.S.C. § 1334(b), which provides, in relevant part, that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." "Arising in" and "arising under" proceedings encompass the matters that are at the core of the jurisdiction of the bankruptcy courts, and "depend upon the application or construction of bankruptcy law as expressed in Title 11."...
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