In re Raytech Corp.

• Decision Date: 09 September 1999
• Docket Number: Bankruptcy No. 89-00293. Adversary No. 99-5058.
• Citation: In re Raytech Corp., 238 B.R. 241 (Bankr. Conn. 1999)
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re RAYTECH CORPORATION, Debtor. Raytech Corporation, Raytech Composites, Inc., and Raytech Automotive Components Company f/k/a Advanced Friction Materials Company, Plaintiffs, v. Oscar E. Stefanutti, individually and as Trustee of the Oscar E. Stefanutti Family Trust I Dated May 27, 1988, Defendants.

238 B.R. 241 (1999)

In re RAYTECH CORPORATION, Debtor Raytech Corporation, Raytech Composites, Inc., and Raytech Automotive Components Company f/k/a Advanced Friction Materials Company, Plaintiffs, v. Oscar E. Stefanutti, individually and as Trustee of the Oscar E. Stefanutti Family Trust I Dated May 27, 1988, Defendants.

Bankruptcy No. 89-00293. Adversary No. 99-5058.

United States Bankruptcy Court, D. Connecticut, Bridgeport Division.

September 9, 1999.

Brian M. Cogan, Stroock & Stroock & Lavan LLP, New York City, Elizabeth J. Austin, Pullman & Comley, LLC, Bridgeport, CT, for Plaintiffs.

Jeffrey Heuer, Jaffe, Raitt, Heuer & Weiss, P.C., Detroit, MI, Leslie Plaskon, Paul, Hastings, Janofsky & Walker, LLP, Stamford, CT, for Defendants.

ORDER ON DEFENDANTS' MOTION FOR DISMISSAL, OR IN THE ALTERNATIVE, ABSTENTION

ALAN H.W. SHIFF, Chief Judge.

BACKGROUND

The parties have submitted a joint stipulation which in relevant part provides the factual predicate for this order. The full text of the stipulation is attached as an Appendix.

A December 8, 1995 order of this court authorized Raytech Composites ("Composites"), a non-debtor Raytech subsidiary, to acquire Advanced Friction Materials Company ("AFM"). Pursuant to that order, on January 16, 1996, Composites agreed to purchase 47% of the outstanding shares of AFM from Oscar Stefanutti, its president and sole shareholder. The 1996 agreement provided that Stefanutti could exercise a subsequent put option to sell his remaining 53% of AFM stock to Composites for the greater of (a) $1.5 million, or (b) AFM's current annual after tax net income multiplied by a factor of 4.24. Stefanutti exercised the put option in January, 1998.

Under a 1998 agreement to which neither Raytech nor Composites are parties, AFM agreed to pay Stefanutti the put price, subject to the "final audited financials of AFM," payable 50% in cash and the remainder by a promissory note in three equal installments of principal and interest. Stipulation at ¶¶ 11, 14. In an April 30, 1998 letter, Stefanutti certified to the auditors that there had been no "fraud involving management or employees who have significant roles in AFM's internal control" and no "fraud involving others that could have a material effect on the financial statements." Stipulation at ¶ 13; Exh. E at ¶¶ 5(a), (b). The letter was also signed by AFM's Comptroller, Richard Hartwick. The final audit fixed the put price at $6,043,793.00, and AFM paid Stefanutti $3,021,896.50 on April 24, 1998. Stefanutti assigned his rights to the remaining 50% under the note to a family trust.

Sometime in 1998, AFM discovered that its comptroller had embezzled more than $2 million over an eight year period. In December of that year, AFM commenced an action against Hartwick and his wife in the United States District Court for the Eastern District of Michigan.

In March, 1999, Stefanutti informed Raytech that he intended to enforce AFM's obligations under the note should it fail to pay the first installment due April 24. AFM did not make that payment. Instead, on April 26, Raytech, Composites, and AFM (collectively, the "plaintiffs") commenced the instant adversary proceeding against Stefanutti and his family trust (collectively, the "defendants"), alleging that Hartwick's embezzlement concealed the true financial performance of AFM and that Stefanutti negligently misrepresented AFM's actual income in breach of his fiduciary duties, thereby inflating the purchase price of the stock by more than $3 million. The plaintiffs, inter alia, seek a declaratory judgment that they owe nothing under the note and that they are entitled to up to $1.5 million plus interest from the defendants. The plaintiffs further seek recision of the note.

On May 24, 1999, defendants, seeking to enforce their rights under the same note, commenced an action in Macomb County Circuit Court in Michigan, Stefanutti v. Raytech Automotive Components Company f/k/a AFM, case no. 99-2114-CK. On May 26, 1999, the defendants filed the instant motion to dismiss this adversary proceeding for lack of subject matter jurisdiction and failure to state a claim, or in the alternative, for abstention.

DISCUSSION

Jurisdiction

The defendants challenge this court's subject matter jurisdiction, which is a prerequisite for a determination of whether abstention under 28 U.S.C. § 1334(c) is necessary or appropriate. Title 28 U.S.C. § 1334(b) provides that "notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or court other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings . . . related to a case under title 11." The bankruptcy court's authority to abstain under this section emanates from the district court's standing order of reference. See 28 U.S.C. §§ 157(a), (b)(1), and (c)(1). See also Standing Order (D.Conn. September 21, 1984); Daly v. Biafore (In re Carrozzella & Richardson), 237 B.R. 536 (Bankr. D.Conn.1999); Monaco v. United States Department of Education (In re County Schools, Inc.), 163 B.R. 424, 430 (Bankr. D.Conn.1994). Since, for the reasons that follow, this proceeding is at a minimum related to the underlying bankruptcy case, this court has jurisdiction to address the abstention issue.

The test for determining whether a civil proceeding is related to a bankruptcy case is whether the outcome of that proceeding "might have any conceivable effect" on the estate being administered in bankruptcy. Publicker Industries, Inc. v. United States (In re Cuyahoga Equipment Corporation), 980 F.2d 110, 114 (2nd Cir. 1992); In re Wood, 825 F.2d 90, 93 (5th Cir.1987). "An action is related if the outcome could alter the debtor's rights, liabilities, options, or freedom of action either positively or negatively which in any way impacts upon the handling and administration of the debtor's estate." In re Kolinsky, 100 B.R. 695, 702 (Bankr. S.D.N.Y.1989); In re Naugatuck Dairy Ice Cream, Co., Inc., 106 B.R. 24, 27 (Bankr. D.Conn.1989).

If this adversary proceeding is resolved in the plaintiffs' favor, the value of AFM will be increased by perhaps as much as $4.5 million. That increase will benefit the Raytech estate and its creditors. See, e.g., Kolinsky, supra, 100 B.R. at 703; In re Mego Int'l, Inc., 28 B.R. 324, 326 (Bankr.S.D.N.Y.1983). That conceivable outcome is sufficient to establish this court's jurisdiction. Kolinsky at 704-05.

Mandatory Abstention

Abstention is mandated when:

upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.

28 U.S.C. § 1334(c)(2) (1994).¹

The plaintiffs argue that the instant proceeding arises in a case under title 11 because the acquisition of AFM by Composites, a non-debtor subsidiary, was specifically authorized by the December 8, 1995 order of this court, at the request of the debtor, following an objection raised by the Committee of Unsecured Creditors. Plaintiff's Opposition to Defendant's Motion at 5. The defendants respond that the matter could not have been brought here but for Raytech's bankruptcy, i.e., that action involves only state law issues and non-debtor parties. Motion to Dismiss . . . or, Alteratively . . . to Abstain at 6, 17. That controversy need not be resolved here, however, because for the reasons that follow, the court can and will abstain under § 1334(c)(1).

Discretionary Abstention

Section 1334(c)(1) provides

Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State Courts or respect for State law, from abstaining from hearing a particular proceeding . . . related to cases under title 11.

The issue of whether a bankruptcy court should exercise its discretionary abstention turns on whether the administration of the bankruptcy case would be served best by that procedure. In re Texaco, 77 B.R. 433, 438 (Bankr.S.D.N.Y.1987) ("the primary concern should be whether the federal bankruptcy objectives are served by conceding the bankruptcy court's jurisdiction to a state court.") Cf. In re Naugatuck Dairy Ice Cream, Co., Inc., 106 B.R. 24, 29 (Bankr.D.Conn.1989); Marine Midland Bank v. Zurich Insurance Company, (In re Olympia & York Maiden Lane Finance Corporation, L.L.C.), 1999 WL 58581, *8 (Bankr.S.D.N.Y.1999) (citing Bevilacqua v. Bevilacqua, 208 B.R. 11, 15 (E.D.N.Y.1997) and In re Riverside Nursing Home, 144 B.R. 951, 956 (S.D.N.Y.1992)). That conclusion is warranted here.

Parenthetically, it is observed that the state court action can be timely adjudicated. See Stipulation at ¶ 20 and Exh. K (according to an internet website, http://www.libcoop.net/maccir/statisti.htm, Macomb County Circuit Court statistically disposes of 87.4% of its civil cases within a two year period). Moreover, "state courts afford the best forum for deciding issues whose resolution turns on the interpretation of state law . . .", Naugatuck, supra, and "where the parties have agreed to the application of the forum law, their consent concludes the choice of law inquiry." American Fuel Corp. v. Utah Energy Development Co., Inc., 122 F.3d 130, 133 (2nd Cir.1997). The stock purchase agreement provided that it "shall be governed by and constructed and enforced in accordance with the substantive laws of Michigan." Stipulation, Exh. A at § 7.8. Because this court would look to Michigan law in determining the enforcement of the note, the state court is the preferred forum. It is also observed that the resolution of the controversy is relatively insignificant. Unlik...