In re Olympic Mills Corp., 05-9012.

CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)
Writing for the CourtSmith
Citation477 F.3d 1
PartiesIn re OLYMPIC MILLS CORPORATION, d/b/a/ Olympic Group, and Coachman Incorporated, Debtors. DCC Operating, Inc., Plaintiff, Appellee. v. Luis Rivera Siaca, Enery Ortiz-Rivera, and Conjugal Partnership, Defendants, Appellants, v. Wayne S. Foren, Third-Party Defendant. Olympic Mills Corporation, d/b/a/ Olympic Mills Group, and Coachman Incorporated, Intervenors.
Docket NumberNo. 05-9012.,05-9012.
Decision Date17 January 2007
477 F.3d 1
In re OLYMPIC MILLS CORPORATION, d/b/a/ Olympic Group, and Coachman Incorporated, Debtors.
DCC Operating, Inc., Plaintiff, Appellee.
Luis Rivera Siaca, Enery Ortiz-Rivera, and Conjugal Partnership, Defendants, Appellants,
Wayne S. Foren, Third-Party Defendant.
Olympic Mills Corporation, d/b/a/ Olympic Mills Group, and Coachman Incorporated, Intervenors.
No. 05-9012.
United States Court of Appeals, First Circuit.
Decided January 17, 2007.
Heard October 5, 2006.

[477 F.3d 2]

Daniel E. Rosenfeld, with whom Kirkpatrick & Lockhart LLP was on brief, for appellants.

W. Steven Paleos, with whom Carmen D. Conde, Sarit Zeevi, and C. Conde & Assoc. were on brief, for appellee.

Before SELYA and HOWARD, Circuit Judges, and SMITH,* District Judge.

SMITH, District Judge.

Defendant-appellant Luis Rivera Siaca ("Rivera") appeals a decision of the Bankruptcy Appellate Panel ("BAP") subjecting him to over $3 million in liability for retaining payments in breach of trust. The

477 F.3d 3

progenitor of this procedural gem, plaintiff-appellee DCC Operating, Inc. ("DCC"), originally brought suit in diversity in the United States District Court for the District of Puerto Rico. After obtaining a favorable summary judgment ruling, nondiverse debtors-in-possession Coachman, Inc. ("Coachman"), and its wholly-owned subsidiary Olympic Mills Corp. ("Olympic Mills"), intervened, requesting that the case be referred to the United States Bankruptcy Court for the District of Puerto Rico. Digesting the issue for several months, the district court eventually referred the case to the bankruptcy court, which, over a year later, awarded damages and entered final judgment. Rivera appealed the unfavorable ruling to the BAP; unsuccessful there as well, he appealed to us.

Before we reach the merits of this appeal, we must cut through a factual and procedural knot of Gordian complexity. This task calls upon us to examine at the outset whether we have subject-matter jurisdiction or if it was destroyed by the intervention of nondiverse intervenors; in turn, whether the intervenors are indispensable; and ultimately, whether remand would be appropriate to sort all this out. We cut the knot by stepping forward to address these issues without remand. Once the procedural issues are resolved we move to the merits, which by comparison present a fairly straightforward issue for resolution. After careful review, we affirm.


A. The Hampshire Venture.

This contract dispute began with a $2 million bridge loan essentially to finance the acquisition of sweaters.1 The lender, Development Capital Ventures, LP ("DCV"), is an investment company that provides venture capital to small businesses. The borrower, now-defunct Coachman, was a small business operating in Puerto Rico. In connection with the bridge loan, which was to be made in two $1 million installments (one on February 25, 2000, the other on March 10, 2000), Coachman delivered to DCV a "CONVERTIBLE SUBORDINATED DEMAND NOTE" (the "Note") on February 24, 2000. The Note had a maturity date of June 30, 2000,2 and provided for the conversion of the principal amount into company stock at DCV's option at any time before the balance was paid in full, or automatically upon the satisfaction of certain conditions.

The Note identified, described, and attached as annexes four documents that bore upon the bridge loan. Annex A was a term sheet detailing the conversion of stock; it, along with a guaranty embodied in annex C, is not involved in this dispute. Annex B was a document entitled "ASSET PURCHASE AGREEMENT," which the Note identified as the "Hampshire Agreement" and defined in ¶ 1.(viii) as follows:

"Hampshire Agreement" shall mean the agreement between the Company [Coachman] and Hampshire Corporation ("Hampshire") whereby the Company establishes a subsidiary to acquire inventory and equipment from Hampshire and Hampshire guarantees to acquire a minimum of 12 million sweaters from such subsidiary over the next five (5) years, or an average annual purchase of

477 F.3d 4

2.4 million sweater units. See draft agreement under Annex B.,

The draft version of the Hampshire Agreement identified the "subsidiary" referenced above as Glamourette/OM, Inc. ("Glamourette").3 The last document attached to the Note (as annex D) was a "SUBORDINATION AND STANDBY AGREEMENT" (the "Subordination Agreement"). According to the terms of the Note, Rivera, Coachman's affluent chairman and sometimes lender, was required to execute the Subordination Agreement as a condition precedent to the bridge loan.

Rivera executed the Subordination Agreement, along with the Note (on behalf of Coachman), on February 24, 2000. At that time, Coachman owed Rivera approximately $5.75 million on past loans, but neither the Note nor the Subordination Agreement identified the particular loans to be subordinated to DCV's bridge loan. Almost a year later, Coachman fell into default. DCV's corporate general partner, DCC, demanded that Coachman pay its balance. When Coachman took no action to satisfy its obligations under the Note, DCC demanded that Rivera pay all amounts due from payments he had received from Coachman or its affiliates over the previous year. (Between February 24, 2000, and October 18, 2001, Rivera made a series of loans to Coachman, Olympic Mills, and Glamourette totaling $16.6 million, and was repaid at least $5.6 million.) On November 7, 2001, DCC, alleging various state-law claims under the Subordination Agreement, sued Rivera in diversity in federal district court. Shortly thereafter, on November 26, 2001, Coachman, Olympic Mills, and Glamourette filed in bankruptcy court voluntary petitions for relief under Chapter 11.4

B. The Litigation.

Discovery proceeded in district court for almost a year before DCC and Rivera filed cross-motions for summary judgment. DCC argued that Rivera violated his trust obligations under the Subordination Agreement by retaining certain payments from Coachman or its affiliates. Specifically, DCC contended that, pursuant to ¶ 4 of the Subordination Agreement, Rivera was required to forward such payments to DCV for application against the bridge loan. Rivera responded that the Subordination Agreement covered only those loans made before January 24, 2000. The disbursements he had received, Rivera explained, were in payment of loans made after the execution of the Subordination Agreement. The district court disagreed and ruled that the Subordination Agreement unambiguously covered the repayment of all loans, whenever made, until Coachman satisfied its obligations under the Note. However, the district court reserved decision on the amount of damages hoping that, in light of its ruling, the parties would reach an agreement on their own. The district court entered partial summary judgment on December 16, 2002.

Nine days later, Rivera moved to dismiss the case for failure to join Coachman and Olympic Mills. Rivera argued, for the first time, that these parties were necessary, indispensable, and (importantly) nondiverse by virtue of their incorporation in Delaware. (DCC was a Delaware corporation

477 F.3d 5

as well.) The next day, Coachman and Olympic Mills filed in the district court through special counsel a motion to intervene as of right under Fed.R.Civ.P. 24(a)(2). Citing DCC's recent victory, Coachman and Olympic Mills argued, without actually asserting any claim, that the payments to Rivera "may be subject to the avoidance powers" granted to them as debtors-in-possession. Because their interest in these payments "may preempt" that of DCC, and because "DCC's attempt to collect the funds for its own benefit implicate[s] numerous core bankruptcy issues," Coachman and Olympic Mills requested that the case be referred to the bankruptcy court for further adjudication. In a text order entered on December 31, 2002, the district court granted the motion to intervene without discussion (and without addressing Rivera's motion or soliciting DCC's position on either motion), and ordered the parties to appear at a status conference on January 16, 2003, to address the intervenors' referral request. DCC filed a motion opposing dismissal, intervention, and referral on January 15.

At the status conference, DCC said that it would consent to referral only if Rivera would deposit over $5 million with the bankruptcy court. The district court gave Rivera until January 24 to respond, set a briefing schedule on the referral question if Rivera declined DCC's offer (which he did), and stated that the case would proceed to trial on May 27, 2003 if the case were not referred. Coachman and Olympic Mills submitted a memorandum on February 24 pursuant to the scheduling order, but, short-circuiting the process, initiated an adversarial proceeding (No. 03-0042) in bankruptcy court the very next day. The complaint, filed against Rivera, DCC, DCV, and others, alleged a variety of claims, including preferential payments and fraudulent conveyances.

The referral remained under advisement in the district court for the next two months. With a trial date approaching, the district court finally referred the parties' contract dispute to the bankruptcy court on May 1, 2003. (Taking care of old business, the district court also denied as moot Rivera's January request to file another indispensability memo.) The case proceeded in bankruptcy court as a separate adversary proceeding (No. 03-0090), despite Rivera's motion in adversary proceeding No. 03-0042 to consolidate them. DCC moved to dismiss Coachman and Olympic Mills as intervenors, but the bankruptcy court denied the motion without discussion in a text order on February 12, 2004. After some additional discovery, DCC and Rivera filed cross-motions for summary judgment. Ruling upon the motions in August 2004, the bankruptcy court, recognizing that the "sole remaining issue" was the amount of damages DCC should receive, rejected Rivera's call to vacate the...

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