In re Rubin Bros. Footwear, Inc.

• Decision Date: 10 April 1987
• Docket Number: No. 83 Civ. 6910 (SWK).,83 Civ. 6910 (SWK).
• Citation: 73 BR 346
• Parties: In re RUBIN BROS. FOOTWEAR, INC., a New York Corporation, Debtor. In re RUBIN BROS. FOOTWEAR, INC., a Georgia Corporation, Debtor. RUBIN BROS. FOOTWEAR, INC., a New York Corporation, Rubin Bros. Footwear, Inc., a Georgia Corporation, Elliot Rubin and Cyrus Rubin, Plaintiffs, v. CHEMICAL BANK, Louis A. "Buddy" Solomon and Sanford Astarita, Defendants.
• Court: U.S. District Court — Southern District of New York

73 B.R. 346 (1987)

In re RUBIN BROS. FOOTWEAR, INC., a New York Corporation, Debtor In re RUBIN BROS. FOOTWEAR, INC., a Georgia Corporation, Debtor RUBIN BROS. FOOTWEAR, INC., a New York Corporation, Rubin Bros. Footwear, Inc., a Georgia Corporation, Elliot Rubin and Cyrus Rubin, Plaintiffs, v. CHEMICAL BANK, Louis A. "Buddy" Solomon and Sanford Astarita, Defendants.

No. 83 Civ. 6910 (SWK).

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

April 10, 1987.

COPYRIGHT MATERIAL OMITTED

Contino, Ross & Benedict, Sp. Counsel by George R. Hirsch, New York City, Ravin & Kesselhat, Counsel by David N. Ravin, West Orange, N.J., for Rubin Bros. Footwear, Inc. (a New York Corp.), and Rubin Bros. Footwear, Inc. (a Georgia Corp.).

Robert S. Levy, P.C. by Larry N. Stopol, New York City, for Cyrus Rubin and Elliot Rubin.

Davis, Markel, Dwyer & Edwards by David Dunn, New York City, for Louis A. Solomon.

Cravath Swaine & Moore by Robert F. Mullen, Jeffrey S. Facter, Ottenburg, Steindler, Houston & Rosen by Glenn B. Rice, New York City, for Chemical Bank and Sandford Astarita.

KRAM, District Judge.

This case is currently before this Court on defendants' motion to remand the action to Bankruptcy Court and alternatively to dismiss the complaint pursuant to Rules 12(b)(6), 9(b), and 12(b)(1) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted, failure to plead fraud with particularity, and on the ground that the Court lacks jurisdiction over plaintiffs' state law claims.

The plaintiffs in this case, Rubin Bros., Inc. (a New York Corporation), Rubin Bros., Inc. (a Georgia Corporation) (collectively "Rubin Brothers"), and Elliot Rubin and Cyrus Rubin ("the Rubins") are a footwear manufacturing corporation, its wholly owned subsidiary, the corporate president and vice-president respectively. The defendants are Chemical Bank ("Chemical"), Sanford Astarita, an officer and employee of Chemical, and Louis A. Solomon, an individual employed by Rubin Brothers on a temporary basis for business consulting purposes. Rubin Brothers asserts Bankruptcy claims, pursuant to 11 U.S.C. §§ 544, 547 and 548 against Chemical, and RICO claims, pursuant to 18 U.S.C. § 1964(c) against each defendant. Invoking the pendant jurisdiction of this Court, Rubin Brothers also asserts certain claims under New York and Georgia state law.

BACKGROUND

Rubin Brothers and Chemical had a long-standing business relationship and by March 1982 Rubin Brothers was indebted to Chemical in the amount of approximately $700,000. At that time, Rubin Brothers was experiencing certain financial difficulties and was unable to meet its financial obligations as they became due.

At some point during the spring of 1982, Cyrus Rubin met with Astarita, who was the Rubin Brothers account officer at Chemical. At that meeting Cyrus Rubin informed Astarita of Rubin Brothers' financial difficulties and its intention to file for bankruptcy. Astarita recommended instead that Rubin Brothers hire Solomon as a consultant to help turn Rubin Brothers' business around and avoid bankruptcy. Astarita allegedly failed to disclose that Solomon, although working for Rubin Brothers, would act on behalf of Chemical, first to change Chemical's debt position in May of 1982 from largely unsecured to totally secured, and then to reduce the debt to Chemical over the course of the next year (finally paying it off in April of 1983), all allegedly to the detriment of unsecured creditors of Rubin Brothers.¹

RICO CLAIMS

Preference Claims

Plaintiffs allege that the activities related to these credit changes were "intentional false and fraudulent actions and representations" employed by Astarita and Solomon in pursuit of their alleged plan to secure and reduce Chemical's debt position with Rubin Brothers. Plaintiffs allege that those "fraudulent actions" were furthered by the use of the mails and the telephone on more than one occasion and were "acts of fraud in connection with a case under Title 11 of the United States Code", and that as a result, defendants are liable under Section 1964 of RICO, and the analogous Georgia RICO statute, for treble damages and attorneys' fees.

Prime Rate Claims

In addition, plaintiffs allege that Chemical misrepresented what the rate of interest would be on loans made by Chemical to Rubin Brothers over a period beginning at least as early as 1980 and ending in May 1982. Plaintiffs allege that the interest rate stated in the promissory notes that Rubin Brothers gave Chemical was to be a "certain number of percentage points per annum above the rate of Chemical for prime commercial loans of 90-day maturities ("the prime rate"). The prime rate, according to plaintiffs, was understood to be the interest rate that Chemical gave its most creditworthy borrowers for 90-day unsecured loans.

Plaintiffs claim that in fact Chemical's most creditworthy borrowers received an interest rate that was below the rate upon which Chemical computed the interest rate for loans to Rubin Brothers. As a result, plaintiffs claim, Rubin Brothers paid a higher interest rate than that which plaintiffs understood had been specified in the notes. Plaintiffs allege that Chemical's conduct constituted an "overcharge" and a fraudulent misrepresentation. They also allege that Chemical used the mails on more than one occasion to transmit to Rubin Brothers its periodic statement of interest due, that those mailings constituted mail fraud in violation of 18 U.S.C. § 1341, and that because of that mail fraud, Chemical is liable under RICO for these actions as well.

BANKRUPTCY CLAIMS

Plaintiffs also claim that the granting of security interests to Chemical in May of 1982 was a fraudulent conveyance and voidable preference under Sections 548, 547 and 544 of the Bankruptcy Code and New York and Georgia common law, as were the subsequent payments on the outstanding debt to Chemical. Plaintiffs ask that the security interests be set aside and that the payments of the Rubin Brothers loan balance between May 1982 and April 1983 be returned.

STATE LAW CLAIMS

Plaintiffs contend that the defendants' actions also constituted common law fraud, intentional interference with business relations, prima facie tort, and a "fraudulent conspiracy", and seek punitive damages for those claims. Plaintiffs also allege that defendant Solomon has breached his fiduciary duty based on these facts and that Chemical is jointly and severally liable for the actions of Solomon and Astarita, respectively.

Finally, Elliot and Cyrus Rubin assert that they are entitled to rescission of personal guaranties of Rubin Brothers' debts that they had executed in favor of Chemical. They seek rescission on the grounds of estoppel and waiver, cancellation of expiration, misrepresentation of mutual mistake, and "upon general principles of equity".

Plaintiffs originally brought this action in federal district court in Connecticut, from which defendants removed the action to the United States Bankruptcy Court of the Southern District of New York. On February 9, 1984, Bankruptcy Judge Ryan held a hearing on plaintiffs' motion to remand the action to federal district court. The Bankruptcy Judge granted plaintiffs' motion to remand, and the action was then remanded to the district of Connecticut and subsequently transferred to this Court.

DISCUSSION

REMAND TO BANKRUPTCY COURT

This Court will first consider whether, as plaintiffs allege, 28 U.S.C. § 1478(b) bars it from reviewing Judge Ryan's determination. Section 1478(b) provides:

Removal to the bankruptcy courts

(a) A party may remove any claim or cause of action in a civil action, other than a proceeding before the United States Tax Court or a civil action by a Government unit to enforce such governmental unit\'s police or regulatory power, to the bankruptcy court for the district where the civil action is pending, if the bankruptcy courts have jurisdiction over such claim or cause of action.

(b) The court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground. An order under this subsection remanding a claim or cause of action, or decision not so remanding, is not reviewable by appeal or otherwise.

The bar on review, however, applies only to orders based on grounds of equity, and not to orders based on grounds of jurisdiction. Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir.1984); see, e.g., In re Bobroff, 43 B.R. 746 (E.D.Pa.1984), aff'd, 766 F.2d 797 (3d Cir.1985); In re Clifford Resources, Inc., 24 B.R. 778 (Bkrtcy.S.D.N.Y.1982).

The bankruptcy court clearly remanded this case to federal district court due to its concern over whether it had jurisdiction to hear the case and not for purely equitable reasons. At the hearing on the motion to remand, the court stated ". . . underlying the whole thing is the uncertainty of the jurisdiction of the bankruptcy court to hear this matter." The court then remanded the case "to the court which has indubitable jurisdiction over the various causes of action" in the case. As such this Court may review the bankruptcy court's decision.

Title 28 U.S.C. § 157(d) dictates when a district court may properly withdraw a reference to bankruptcy court and governs in this case where plaintiff seeks in essence to re-refer this case to bankruptcy court. Section 157(d) provides,

The district court may withdraw, in whole or in part, any case or proceeding refer red under this section, on its own motion or timely motion of any party, for cause shown. The district court shall, on timely motion of a party so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both Title 11 (11 U.S.C. §§ 101 et seq.) and other laws of the United States regulating organizations or activities affecting interstate commerce.

Plaintiffs' claims include substantial RICO allegations. Defendants contend that RICO is not a statute "regulating...