In re Luis Elec. Contracting Corp.

• Decision Date: 29 October 1992
• Docket Number: Bankruptcy No. 888-80242-20. Adv. No. 890-8162-20.
• Citation: 165 BR 358
• Parties: In re LUIS ELECTRICAL CONTRACTING CORP., Debtor. C. Steven HACKELING, Trustee of the Estate of Luis Electrical Contracting Corp., Plaintiff, v. RAEL AUTOMATIC SPRINKLER CO., INC., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

165 B.R. 358 (1992)

In re LUIS ELECTRICAL CONTRACTING CORP., DebtorC. Steven HACKELING, Trustee of the Estate of Luis Electrical Contracting Corp., Plaintiff, v.RAEL AUTOMATIC SPRINKLER CO., INC., Defendant.

Bankruptcy No. 888-80242-20. Adv. No. 890-8162-20.

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

October 29, 1992.

COPYRIGHT MATERIAL OMITTED

Levine, Weinberg, Kaley & Pergament, P.C., Garden City, NY, for trustee.

Turnstead, Schechter & Torre, New York City, for defendant.

DECISION AND ORDER ON MOTION FOR NONCORE DECLARATION AND ABSTENTION

ROBERT JOHN HALL, Bankruptcy Judge.

PRELIMINARY STATEMENT

This matter comes before the Court upon a motion ("Motion") by Rael Automatic Sprinkler Co., Inc., the defendant("Defendant") in the above-captioned adversary proceeding ("Adversary Proceeding") for an order of the Court declaring the Adversary Proceeding non-core and abstaining from determining the matter.Luis Electrical Contracting Corp., the above-referenced debtor ("Debtor"), filed a petition for bankruptcy relief under chapter 7 of title 11, United States Code("title 11" and sometimes, the "Bankruptcy Code") on or about March 10, 1988.The Adversary Proceeding was commenced on or about May 15, 1990, by C. Steven Hackeling, chapter 7trustee("Trustee") of the Debtor's estate.Pursuant to the Adversary Proceeding, the Trustee seeks to recover from the Defendant $906,000 plus interest, costs, fees and disbursements, for breach of contract and nonpayment of matured promissory notes.

The Court has jurisdiction over this Motion pursuant to section 157(a), (b)(3)and1334(a), (c) of title 28, United States Code("title 28") and the order or referral of matters to the bankruptcy judges by the Eastern District of New York(Weinstein, C.J.)(1986).The Motion is made (i) pursuant to section 157(b)(3) of title 28, which provides that the bankruptcy judge shall determine, on timely motion of a party, whether a proceeding is a core proceeding under section 157(b)(2) of title 28 or is a proceeding that is otherwise related to a case under title 11; and (ii) pursuant to section 1334(c) which provides for both discretionary and mandatory abstention of certain matters.

For the reasons set forth below, the Motion is GRANTED, and the Court concludes that it will ABSTAIN from hearing and determining the Adversary Proceeding.

FACTS

From the Court's files and the papers submitted in support and in opposition to the Motion, the Court makes the following findings of fact.

The Trustee commenced the Adversary Proceeding by filing a complaint ("Complaint") which contains three causes of action.The Complaint alleges an agreement ("Agreement") between the Debtor and the Defendant whereby the Debtor was to furnish and render electrical contracting services, labor, and materials in return for payment from the Defendant.

The Trustee's first cause of action alleges that the agreed price and reasonable value of the labor and materials the Debtor satisfactorily provided was $1,350,000, but that as of March 1, 1988, notwithstanding the Debtor's demands, the Defendant refused to pay at least $350,000 of this sum, and as a result the Debtor has suffered damages of at least that amount plus interest.

The Trustee's second cause of action alleges that the Defendant breached its contract with the Debtor by refusing to pay for the services and materials provided by the Debtor, damaging the Debtor in the amount of at least $350,000, plus interest.

The Trustee's third cause of action alleges that the Defendant acknowledged its obligation to the Debtor by executing a series of promissory notes which have matured and, despite the Debtor's due demand, the Defendant has failed to pay, damaging the Debtor in the amount of at least $206,000, plus interest.

The Defendant's first responsive paper is the within Motion for an order of the Court declaring the Adversary Proceeding a noncore matter and abstaining from deciding it.

DISCUSSION

Characteristics of Core and Noncore Proceedings

Title 28 provides the bankruptcy judge with the jurisdictional authority to hear and determine those proceedings which have been termed "core proceedings" and which arise under the Bankruptcy Code or in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1).Core proceedings include, but are not limited to, those proceedings set forth in section 157(b)(2)¹ of title 28.Core proceedings include matters which were traditionally deemed inherently within the bankruptcy courts' jurisdiction.Walsh v. Abrams(In re HBG Servicenter, Inc.), 45 B.R. 668, 671(Bankr.E.D.N.Y.1985).

Noncore proceedings involve disputes over rights that, in distinction, have little or no relation to the Bankruptcy Code, do not arise under the federal bankruptcy law and would exist in the absence of a bankruptcy case.E.g., Acolyte Elec. Corp. v. N.Y.(In re Acolyte Elec. Corp.), 69 B.R. 155, 162(Bankr. E.D.N.Y.1986), orderaff'd,1987 WL 47763(E.D.N.Y.1987);28 U.S.C. § 157(b)(3)(A noncore proceeding does not arise under title 11 but "is otherwise related to a case under title 11".).The clearest example of a noncore proceeding is a proceeding not inherently related to the bankruptcy field, and which could not have been brought in a federal court absent the bankruptcy case since the parties are not diverse and no federal question has been presented for adjudication.See, e.g., Northern Pipeline Constr. Co. v. Marathon Pipe Line Co.,458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598(1982)(plurality opinion)(breach of contract action).

The Court will determine whether the Trustee's Adversary proceeding is core or noncore using the guidance provided by the United States Court of Appeals for the Second Circuit:

The relevant inquiry is whether the nature of this adversary proceeding, rather than the state or federal basis for the claim, falls within the core of federal bankruptcy power.

Gulf States Explor. Co. v. Manville Forest Prods. Corp.(In re Manville Forest Prods. Corp.), 896 F.2d 1384, 1389(2d Cir.1990)(citingWood v. Wood(In re Wood), 825 F.2d 90, 97(5th Cir.1987);Arnold Print Works, Inc. v. Apkin(In re Arnold Print Works, Inc.), 815 F.2d 165, 169(1st Cir.1987)).

The Court will separately analyze and determine whether each of the Trustee's three causes of action is a core proceeding.

A.The Trustee's First Cause of Action

The Trustee's first cause of action alleges that the Debtor satisfactorily provided labor and materials to the Defendant pursuant to the Agreement between them.It is alleged that the price of the labor and materials was set forth in the Agreement as $1,350,000.The Trustee alleges that $350,000 remains due and owing from the Defendant.

The nature of the first cause of action in this Adversary Proceeding does not "fall within the core of federal bankruptcy power."Manville.The Trustee's first cause of action is either an action for breach of contract or an action for restitution.It is a breach of contract cause of action if the Debtor chooses to sue on (thereby enforcing) a contract that the Debtor alleges to be valid.Alternatively, it is an action for restitution based upon the Defendant's unjust enrichment if the Debtor chooses not to enforce the contract (or if no enforceable contract existed) and to sue in quasi-contract for the value of the benefits received (quantum meruit).Either theory upon which the first cause of action is based, however, is founded upon simple state law rights.Accordingly, this first cause of action requires the "adjudication of state-created private rights."Manville,896 F.2d at 1389(quotingMarathon,458 U.S. at 71, 102 S.Ct. at 2871(Brennan, J.)).

Because the federal bankruptcy power is in no way required for the adjudication of the Trustee's first cause of action, and the action clearly does not arise under title 11 nor falls within any of the listed core proceedings in section 157(b)(2), (quoted in full supra at note 1), the Court holds that it is a noncore proceeding.

B.The Trustee's Second Cause of Action

The Trustee's second cause of action states: "Defendant Rael has breached its contract with the Debtor by refusing to pay for services and materials provided by the Debtor."Trustee's Complaintat 3(emphasis added).

A breach of contract cause of action exclusively requires the adjudication of state-created rights.See Marathon.The federal bankruptcy power does not give rise to this action nor will it be employed.Therefore, the Court holds that the Trustee's second cause of action is a noncore proceeding.

C.The Trustee's Third Cause of Action

In the Trustee's third cause of action against the Defendant, it is alleged that the Defendant acknowledged its obligation(s) to the Debtor by executing a group of promissory notes ("Notes").The Notes came due on several dates between December 15, 1987 and June 14, 1988.The Trustee alleges that the Defendant has failed and refused to make payment on the Notes, despite the Debtor's demand, and as a result the Debtor has been damaged in the sum of at least $206,000, plus interest.

Only certain of the Notes matured and became payable pre-petition, others carried postpetition maturity dates.The Court will first address whether the Trustee's cause of action to collect the Notes which matured prepetition is a core proceeding.

The creation of a promissory note, as well as the liability of the maker in an action brought for its enforcement, is governed by state law.If the promissory note is negotiable, the New York Uniform Commercial Code applies.N.Y.U.C.C. § 3-805(Article 3"applies to any instrument whose terms do not preclude transfer and which is otherwise negotiable within Article 3 but which is not payable to order or to bearer. . . .").If the promissory note is nonnegotiable, its creation, validity and enforcement are governed by state contract law.O'Brien v. O'Brien,16 N.Y.S.2d 799, 802(Civ.Ct.1939)("Non-negotiable bills...