In re Lombard-Wall Inc.
| Decision Date | 04 April 1985 |
| Docket Number | Bankruptcy No. 82 B 11556 (EJR),Adv. No. 83-6014A. |
| Citation | 48 BR 986 |
| Parties | In re LOMBARD-WALL INCORPORATED, Debtor. LOMBARD-WALL INCORPORATED, as Debtor-in-Possession, Plaintiff, v. NEW YORK CITY HOUSING DEVELOPMENT CORPORATION, Defendant. |
| Court | U.S. District Court — Southern District of New York |
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Cadwalader, Wickersham & Taft, New York City by Edwin David Robertson, W. Ian Laird, Amy A. Marasco, New York City, of counsel, for plaintiff.
Skadden, Arps, Slate, Meagher & Flom, New York City by Dennis J. Drebsky, Cara N. Nash, New York City, of counsel, for defendant.
The plaintiff, Lombard-Wall Incorporated ("Lombard"), moves pursuant to Local Rule 19(g) of the Civil Rules for the United States District Courts for the Southern and Eastern Districts of New York for an order confirming the Opinion and Report of the Honorable Edward J. Ryan, United States Bankruptcy Judge, acting as a Special Master. The defendant, the New York City Housing Development Corporation ("HDC"), objects to the Special Master's findings. For the reasons stated below, we confirm the Special Master's report in part but decline to adopt his recommendation concerning jury trial.
Plaintiff Lombard, an arbitrager, purchases and sells government obligations and other money market instruments. Defendant HDC, a corporate governmental agency, provides mortgage financing for residential construction with funds raised through the issuance of notes and bonds. Between February 1981, and April 1982, HDC invested the proceeds of some of its note and bond financings with Lombard. During that time, HDC entered into three "repurchase agreements" with Lombard. According to the terms of the agreements, HDC would deposit funds with its fiscal agent, J. Henry Schroder Bank & Trust Company ("Schroder"); Schroder would then purchase securities from Lombard with HDC's funds. Lombard would later repurchase the securities for an amount equal to the purchase price plus a predetermined rate of interest.
Lombard provided Schroder with three irrevocable letters of credit ("LCs") guaranteeing each of its obligations. Chase Manhattan Bank, N.A. issued the LCs on Lombard's behalf. Schroder could only draw on an LC if it could represent that a sum was "due and owing" pursuant to the terms of one of the repurchase agreements.
On August 12, 1982, Lombard filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 1101-1174 (1982). At that time, Lombard had allegedly defaulted on its obligations under the investment agreements. The bankruptcy petition operated as a stay, prohibiting HDC from reselling the securities. See 11 U.S.C. § 362 (1982). On August 16, HDC commenced an adversary proceeding in bankruptcy court seeking relief from the automatic stay and seeking an order under 11 U.S.C. § 365 (1982), compelling Lombard to assume or reject the investment agreements to the extent that they were deemed executory contracts. HDC also filed an emergency application for an order vacating the automatic stay pursuant to 11 U.S.C. § 363(f) (1982), and thereby permitting HDC to sell the securities held by Schroder.
On August 18, after extensive negotiations, HDC and Lombard stipulated to a settlement (the "stipulation" or "settlement") permitting HDC to sell the securities. HDC was to remit to Lombard any proceeds above the amount due at the time of the sale. Judge Ryan approved the settlement on August 18, following a thorough hearing.
Pursuant to the stipulation, Schroder sold the securities. The sale generated an excess of $7,389,980 after deducting the principal and interest due HDC. On August 19, HDC inexplicably caused draws to be made on the first two LCs in the amounts of $225,978 and $1,300,798 respectively.
On March 15, 1983, HDC filed a proof of claim with the bankruptcy court, alleging that Lombard was indebted to it in an undetermined amount. The claim was contingent on the bankruptcy court ruling that HDC had continuing obligations to Lombard. Lombard's reorganization plan was confirmed on July 14, 1983. On October 14, 1983, Lombard commenced the instant action (the "Lombard action") in the bankruptcy court. Lombard's complaint asserts sixteen claims for relief. Claims one through eight concern HDC's draws on the LCs (the "LC claims"). HDC has expressly consented to the bankruptcy court's jurisdiction over the remaining eight claims.
On January 6, 1984, HDC moved this Court, pursuant to Emergency Bankruptcy Rule I(a)(2), to withdraw the reference of the Lombard action from the bankruptcy court and to have it tried before a jury in this Court. HDC contended that Lombard's action involved primarily state common law claims that were only peripherally related to the Lombard bankruptcy proceeding. Citing Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), HDC argued that the bankruptcy court could not constitutionally exercise jurisdiction over those claims.
By order dated January 20, 1984, this Court referred HDC's motion to the Honorable Edward J. Ryan, United Bankruptcy Judge, as a Special Master to hear and report on the motion. On December 14, 1984, after hearing argument and sifting through extensive motion papers filed by the parties, Judge Ryan issued his recommendation. He found that HDC had consented to the bankruptcy court's jurisdiction because (1) it had filed a proof of claim with the bankruptcy court, (2) it had expressly agreed in the stipulation to the bankruptcy court's retention of jurisdiction, and (3) it had failed to object to the jurisdiction clause in Lombard's reorganization plan. He therefore recommended that the motion be denied and that the bankruptcy court retain jurisdiction over the Lombard action. See In re Lombard-Wall, Inc., 44 B.R. 928 (Bankr.S.D.N.Y.1984). Although he thought it unnecessary to determine the nature of the Lombard action, Judge Ryan stated, "the argument that HDC consented to jurisdiction by filing a proof of claim necessarily leads to the conclusion that this action is a core proceeding under 28 U.S.C. § 157(b)(2)(C), and as such arises under bankruptcy law." Id. at 932. Judge Ryan also recommended that HDC's motion for a jury trial be denied and rejected a constitutional challenge to the bankruptcy court's power to adjudicate the Lombard action.
Although we find fault with some of Judge Ryan's analysis, we cannot quibble with his ultimate conclusion that the bankruptcy court may adjudicate the Lombard action.1 In addition, we adopt his finding on the constitutional issue but reject his jury trial analysis.
When this motion was originally referred to Judge Ryan, Emergency Bankruptcy Rule I governed the exercise of jurisdiction by the bankruptcy courts. On July 10, 1984, the President signed into law the Bankruptcy Amendments and Federal Judgeship Act of 1984 (the "new Act"), Pub.L. No. 98-353, 98 Stat. 340 (1984). That legislation, which superseded the Emergency Rule, provides the appropriate standard for resolution of this dispute. Romeo J. Roy, Inc. v. Northern National Bank, 740 F.2d 111, 112 (1st Cir.1984).
Section 157 of the new Act regulates the jurisdiction of the bankruptcy courts. Section 157(b)(1) states that "bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section and may enter appropriate orders and judgments, subject to review under section 158. . . ." 28 U.S.C.A. § 157(b)(1) (West Supp. Sept. 1984).2 Section 157(b)(2) lists fifteen "core" proceedings. Section 157(c) then delineates the bankruptcy court's jurisdiction over noncore proceedings. This section reads as follows:
28 U.S.C.A. § 157(c)(1)-(2) (West Supp. Sept. 1984). Logic, together with the structure and layout of section 157, suggests that a party's consent can only vest the bankruptcy court with jurisdiction over non-core proceedings. Core proceedings are subject to the bankruptcy court's jurisdiction regardless of the parties' consent.3
Only after determining that a proceeding is not a core proceeding should a court consider whether the parties consented to the bankruptcy court's jurisdiction. Judge Ryan focused his analysis on the issue of consent. He should have first considered whether the Lombard action is a core proceeding. It is to this question that we now turn.
Lombard argued before Judge Ryan and before this Court that its action could be classified as a number of different section 157(b)(2) core proceedings. Although Judge Ryan bypassed many of Lombard's arguments, he found that 44 B.R. at 936. We agree with Judge Ryan's finding.
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