In re Masterwear Corp.

• Decision Date: 05 November 1999
• Docket Number: No. 97 B 47084(SMB) to 97 B 47088(SMB). Adversary No. 98-8724A.,97 B 47084(SMB) to 97 B 47088(SMB). Adversary No. 98-8724A.
• Citation: 241 BR 511
• Parties: In re MASTERWEAR CORP., et al., Debtors. Masterwear Corp., et al., Plaintiffs, v. Rubin Baum Levin Constant & Friedman, Defendant and Third Party Plaintiff, v. Albert Mushkin, Norman Bernard and Brad Bernard, Third Party Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

241 B.R. 511 (1999)

In re MASTERWEAR CORP., et al., Debtors.

Masterwear Corp., et al., Plaintiffs, v. Rubin Baum Levin Constant & Friedman, Defendant and Third Party Plaintiff, v. Albert Mushkin, Norman Bernard and Brad Bernard, Third Party Defendants.

No. 97 B 47084(SMB) to 97 B 47088(SMB). Adversary No. 98-8724A.

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

November 5, 1999.

COPYRIGHT MATERIAL OMITTED

Rubin Baum Levin Constant & Friedman, New York, Paul H. Aloe, Of Counsel, Pro Se.

Gordon, Gordon & Schnapp, P.C., New York, Elliot Schnapp, Of Counsel, for Norman Bernard and Brad Bernard.

Albert Mushkin, New York, Pro Se.

MEMORANDUM DECISION DENYING MOTION FOR SUMMARY JUDGMENT AND DISMISSING THIRD PARTY ACTION

STUART M. BERNSTEIN, Bankruptcy Judge.

The debtors (collectively "Masterwear") commenced this adversary proceeding to recover a prepetition payment made to the defendant Rubin Baum Levin Constant & Friedman ("Rubin Baum"). Rubin Baum impleaded the Third Party Defendants for indemnity. After Rubin Baum settled the primary action, it moved for summary judgment on its indemnity claims. For the reasons that follow, its motion is denied, and the third party action is dismissed without prejudice.

BACKGROUND

The present dispute grows out of Rubin Baum's earlier representation of the Third Party Defendants who controlled the debtors (collectively "Masterwear") until they were ousted by Signal Capital Corporation ("Signal"). A fuller discussion of these events is set forth in Masterwear Corp. v. Angel & Frankel, P.C. (In re Masterwear Corp.), 233 B.R. 266 (Bankr.S.D.N.Y.1999), familiarity with which is assumed. Briefly, Signal, a Masterwear shareholder, brought a derivative suit against the Third Party Defendants. The Third Party Defendants retained Rubin Baum, signing a letter retainer agreement, dated February 27, 1997, in which they agreed to pay the law firm's fees and expenses. Between February 1, 1997 and June 30, 1998, Rubin Baum billed $485,485.48 in fees and expenses but "wrote off" $137,411.50, leaving a balance of $348,073.98. Rubin Baum received $70,000.00 in payment from the Third Party Defendants and Mrs. Bernard, and an additional $78,784.43 from Masterwear.

After new management caused Masterwear to file the chapter 11 cases on October 27, 1997, Masterwear sued Rubin Baum to recover the $78,784.43. The complaint alleged four fraudulent transfer claims, a conversion claim and a claim that the payment exceeded the reasonable value of the services. Rubin Baum answered, denying the material allegations in the complaint, and asserting an affirmative defense that it had also represented the debtor in other matters, and that the transfers at issue were fair consideration for those services. (See Affidavit of Paul H. Aloe in Support of Motion for Default Judgment or, in the Alternative, for Summary Judgment, sworn to July 8, 1999 ("Aloe Affidavit"), Ex. G, ¶¶ 39-40.) The answer also demanded a jury trial. (Id. at p. 7.)

One week later, Rubin Baum served and filed a third party complaint, impleading the Third Party Defendants for indemnity. The third party complaint alleged two counts, one based upon the common law, (Aloe Affidavit, Ex. H, ¶¶ 1-6), and the other based upon the retainer agreement. (Id., ¶¶ 7-9.) Each count alleged that if Rubin Baum was "ultimately determined" to be liable to Masterwear, then the Third Party Defendants would be liable, jointly and severally, to Rubin Baum. (Id., ¶¶ 6, 9.) The Third Party Complaint did not request a jury trial. It did, however, attach the Answer and Jury Demand. (See id., ¶ 2.)

Rubin Baum subsequently agreed to pay Masterwear $60,000.00 in full settlement of the primary claim.¹ Brad Bernard, acting pro se, served written objections.² In addition, the Bernards objected through their lawyer, and Mushkin objected pro se, at the hearing on the settlement. The Bernards expressed concern that the settlement would prejudice their defense of the third party action. (See Transcript of hearing, held July 22, 1999, at 11-12.) Rubin Baum agreed. It argued that the settlement foreclosed subsequent litigation because the Third Party Defendants had done nothing to defend against the primary action, and in fact, had defaulted in the third party action. (See id. at 20-22.) Distinguishing between the effect of the settlement and the effect of the alleged default in pleading, (see id. at 22-23), I approved the settlement and directed a hearing on the pending motions to enter a default judgment against the Third Party Defendants, or in the alternative, to award summary judgment to Rubin Baum. (See id., 24, 29.) Rubin Baum subsequently withdrew its default motion against the Bernards,³ and I denied the default motion directed at Mushkin.⁴ Thus, the only remaining motion is the one by Rubin Baum seeking summary judgment.

DISCUSSION

Having settled the primary action, Masterwear has no further interest in this adversary proceeding, and the sole dispute lies between non-debtors. As a result, I raised the question of my jurisdiction with the remaining parties. Rubin Baum contends that I have "related to" and supplemental jurisdiction over the third party action, should exercise it and grant summary judgment. The Bernard Objections questioned my subject matter jurisdiction, (Objections, ¶ 2(a)), and maintained that if I have jurisdiction, I should abstain from exercising it. As explained below, I agree that I have jurisdiction, but in light of my denial of Rubin Baum's summary judgment motion, I decline to exercise further jurisdiction and leave the parties to their state court remedies.

A. Subject Matter Jurisdiction

1. "Related to" or Non-Core Jurisdiction

The bankruptcy court is, like other federal courts, one of limited jurisdiction. Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Congress has prescribed the scope of bankruptcy jurisdiction over civil proceedings (as opposed to cases) in 28 U.S.C. § 1334(b), limiting it to proceedings that arise in a bankruptcy case or arise under the bankruptcy law (i.e., core proceedings) and proceedings that relate to a bankruptcy case (i.e., non-core proceedings). The original complaint in this case contained a mix of core and non-core claims, but in either case, the Court had subject matter jurisdiction over all of the claims asserted by Masterwear.

The jurisdiction over the third party claims is a harder question. The bankruptcy court's non-core jurisdiction is broad (but not limitless), Celotex Corp. v. Edwards, 514 U.S. at 307-08, 115 S.Ct. 1493, and extends to a proceeding whose outcome may have any "conceivable effect" on the debtor's estate. In re Cuyahoga Equipment Corp., 980 F.2d 110, 114 (2d Cir.1992); Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984). Under this test,

an action is related to bankruptcy if the outcome could alter the debtor\'s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.

Id.; accord Back v. AM General Corp. (In re Chateaugay Corp.), 213 B.R. 633, 638 (S.D.N.Y.1997); Bond Street Assocs. v. Ames Dep't Stores, Inc., 174 B.R. 28, 32 (S.D.N.Y.1994).

In litigation involving non-debtors, "relatedness" often turns on the estate's obligation to indemnify the losing party. Where the obligation to indemnify is contractual and absolute, the third party litigation is "related to" the bankruptcy case. E.g., Hunnicutt Co. v. TJX Cos. (In re Ames Dep't Stores, Inc.), 190 B.R. 157, 160-61 (S.D.N.Y.1995); Apex Inv. Assoc., Inc. v. TJX Cos., 121 B.R. 522, 526 (N.D.Ill.1990); In re Brentano's, Inc., 27 B.R. 90, 92 (Bankr.S.D.N.Y.1983), rev'd & remanded on other grounds, 36 B.R. 90 (S.D.N.Y.1984); see Weisman v. Southeast Hotel Properties Ltd. Partnership, No. 91 Civ. 6232, 1992 WL 131080, at *3 (S.D.N.Y. June 1, 1992). The debtor's liability need not, however, be definite. Kelley v. Nodine (In re Salem Mortgage Co.), 783 F.2d 626, 634 (6th Cir.1986). "Related to" jurisdiction also exists if a disputed or conditional indemnity claim has a "reasonable legal basis." In re Chateaugay Corp., 213 B.R. at 640; compare Bond Street Assocs. v. Ames Dep't Stores, Inc., 174 B.R. at 28, 33 (lease dispute between landlord and debtor's assignor was "related to" debtor-assignee's bankruptcy because lease assignor "will normally have a claim against the debtor-assignee for losses caused by the assignee's breach") and Weisman v. Southeast Hotel Properties Ltd. Partnership, 1992 WL 131080, at *4 ("related to" jurisdiction existed over third party dispute where claims asserted against defendants came within provisions of debtor's limited indemnification agreement) with In re Chateaugay Corp., 213 B.R. at 639-40 (no jurisdiction where defendant might assert indemnity claim against reorganized debtor based upon a theory of alter ego liability) and Wall v. Merrill Lynch Pierce Fenner & Smith, Inc., No. 92 Civ. 0387, 1992 WL 77625, at *2 (S.D.N.Y. Mar. 26, 1992)(no jurisdiction over third party action where debtor's indemnification agreement specifically excepted the fraud and fiduciary duty breaches alleged in the complaint).

Here, the Third Party Defendants have articulated a "reasonable legal basis" to recover indemnification from Masterwear should they be forced to pay Rubin Baum. According to Rubin Baum, the legal fees and expenses at issue were incurred on behalf of the Third Party Defendants defending Signal's derivative action.⁵ In that action, Signal contended that the Third Party Defendants breached their fiduciary and contractual duties by unlawfully extending their employment contracts and taking excessive and unauthorized compensation and reimbursement for personal expenses. In re Masterwear Corp., 233 B.R. at 270 & n. 1. The Third Party Defendants defended the derivative action with great vigor given the amount of Rubin Baum's legal fees.

Under...