Matter of Barney Schogel, Inc.

• Decision Date: 19 June 1981
• Docket Number: Bankruptcy No. 77 B 2454.
• Citation: 12 BR 697
• Parties: In the Matter of BARNEY SCHOGEL, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

12 B.R. 697 (1981)

In the Matter of BARNEY SCHOGEL, INC., Debtor.

Bankruptcy No. 77 B 2454.

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

June 19, 1981.

COPYRIGHT MATERIAL OMITTED

Tunstead, Schechter & Torre, New York City, Withington, Cross & Park, Boston, Mass., for claimant; John R. Maguire, New York City, Philip M. Cronin, Boston, Mass., of counsel.

Kaufman, Taylor & Kimmel, New York City, for debtor; Irwin M. Taylor, New York City, of counsel.

HOWARD SCHWARTZBERG, Bankruptcy Judge.

Barney Schogel, Inc., the debtor-in-possession in this Chapter XI proceeding,¹ seeks an order expunging a claim filed by the Coronis Construction Co., Inc. for $251,735.45. Coronis contends that its claim "is entitled to priority as it is a cost of administration incurred after the debtor petitioned to reorganize and was permitted to continue in possession of its property." The controversy arose after Schogel and Coronis entered into an agreement whereby Schogel was to manufacture windows according to specifications supplied by Coronis. Coronis contends that subsequent to the manufacture and installation of the windows it discovered that they did not satisfy the specifications. The windows were removed and replaced by Coronis approximately thirteen months after their installation. Coronis filed a claim charging Schogel for the cost of removing and replacing the windows, additional work done at the site due to the defective windows, general contractor overhead and profit, and hardship caused by delays. Schogel argues that the asserted grounds of liability are "fallacious and totally without merit" because Schogel submitted a procedure for nominal remedial work as to the windows which was approved by Coronis, but Coronis nevertheless refused to grant Schogel permission to repair them, notwithstanding that they could have been readily and inexpensively repaired. In addition Schogel contends that the portions of the claim for general contractor overhead and profit and hardship caused by delay should not be allowed because they are unliquidated and not provable.

This case presents the court with a morass of issues, both legal and factual, the majority of which were not addressed by either party. A preliminary issue to be determined involves choice of applicable laws. The debtor, Barney Schogel, Inc., is a corporation domiciled in New York and the claimant, Coronis Construction Co., Inc., is a corporation domiciled in Massachusetts. Following written correspondence between the parties Schogel supplied windows to Coronis for installation in a building in Boston, Massachusetts. Coronis installed the windows and paid approximately $31,000 of the $32,000 purchase price to Schogel. Notwithstanding the performance by both parties neither party signed a formal contract. The windows were supplied for a project in Boston called the Pine Street Inn. The building was to provide public housing for the indigent. The Boston Redevelopment Authority owned the land and the Boston Housing Authority rehabilitated the building. Coronis was the general contractor for the project.

A federal court sitting in a diversity case must apply the conflict of laws rules of the forum state. Klaxon v. Stentor Electrical Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); reaffirmed in Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3, 96 S.Ct. 167, 46 L.Ed.2d 3 (1975). However, this case presents an interesting twist which precludes the mechanical application of the Klaxon rule. This controversy, which could have been brought in the U.S. District Court, 28 U.S.C. ? 1332, but for the intervening Chapter XI proceeding, was brought in the Bankruptcy Court as an objection to the claim filed by Coronis. Hence, this court is not bound to apply the New York choice of laws rule if the facts indicate that a different rule should be applied.

The reported decisions on this issue do not involve objections to claims but rather involve the trustee's avoiding power under ? 70(c) of the Bankruptcy Act of 1898. In In re Holiday Airlines Corporation, 620 F.2d 731 (9th Cir. 1980), the trustee brought an action to determine the validity of a lien filed under the Federal Aviation Act by the creditor, a Washington corporation. The debtor was a California corporation. In discussing the underlying issue of application of State lien law, the court stated:

"We agree with the bankruptcy judge that the rule in diversity of citizenship cases, i.e. of mechanical application of the conflicts law of the form State, should not be required in bankruptcy proceedings, at least in Federal Aviation Act cases. The Bankruptcy Act is silent as to the appropriate choice of law when two States have competing interests."

620 F.2d at 734. This reasoning is supported by Collier on Bankruptcy, which states, "Although some courts have appeared to think that a bankruptcy court is obliged to apply the conflict-of-laws rules of the state of the forum, the more supportable rule is that the bankruptcy court should be free to exercise for itself the choice of applicable state law." 4B Collier on Bankruptcy ? 70.49, at 605-06 (14th ed. 1976).

In this case the New York choice of laws rule should be applied. The determination of whether or not Coronis has a claim will be based solely on the interpretation of state law.² The matter is one which would have been within the diversity of citizenship jurisdiction of the district court had Schogel not filed its Chapter XI petition. The fact that the controversy arose as an objection to a claim in a bankruptcy proceeding does not alter the legal underpinnings of the cause of action. The claim is based upon an alleged breach of contract under state law and the objection is bottomed on state law. Therefore, in this case it is appropriate to apply the choice of laws rule of the forum, New York.

In the recent Second Circuit decision, Krauss v. Manhattan Life Insurance Co. of N.Y., 643 F.2d 98 (2d Cir., 1981), based upon the New York Court of Appeals decision in Dym v. Gordon, 16 N.Y.2d 120, 262 N.Y.S.2d 463, 209 N.E.2d 792 (1965), the court outlined the New York choice of law rule as a three step analysis:

1. The court must isolate the issue on which the laws conflict.

2. The court must identify the purposes of the conflicting state laws to determine whether a genuine conflict exists.

3. The court must examine the contracts of the interested jurisdictions to ascertain which has the closer connection with the facts of the case and thus has the superior interest in having its law applied.

In this case, the transaction between the parties involved the purchase of windows, which are goods within the meaning of ? 2-105(1) of the Uniform Commercial Code. The section states:

"`Goods\' means all things (including specially manufactured goods) which are moveable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action . . . ".

Therefore, Article 2 of the Uniform Commercial Code, which applies to transactions in goods, U.C.C. ? 2-102, will control the determination of the dispute between Coronis and Schogel. In light of the fact that both New York, Schogel's domicile, and Massachusetts, Coronis's domicile, have enacted identical versions of Article 2 there is no conflict of laws and the controversy will be decided under the law that is common to both states.

The Agreement

A June 17, 1977 letter from the sales manager of Schogel to Coronis stated:

"We propose to furnish . . . aluminum DHA2 HP50 double-hung windows . . . tempered where required in accordance with specifications Section 8C and Addendum # 1 and drawing A-31 and A-32 dated 1/18/77 and quantities as listed herein for the net sum of: THIRTY-TWO THOUSAND ($32,000.00) DOLLARS. emphasis added

In its reply, dated July 15, 1977, Coronis stated:

"We are sending under separate cover plans . . . for your use in shop drawing preparation. A formal P.O. Purchase Order in the amount of $32,000 per your quotation of June 17, 1977 will follow shortly. The only reservation of the architect is proof that the . . . glass is equal in strength and insulation qualities to the glass specified. Please forward this data to this office as soon as possible in order to obtain approval." emphasis added

Schogel's sales manager, in a letter dated July 19, 1977, stated:

"I want to acknowledge and thank you for your letter of July advising that we would receive a contract to furnish only aluminum windows for subject project. . . . "

Included in the July 19th correspondence was a test report from United States Testing Company, Inc. The report indicated that it was prepared for Deer Custom Products Corporation³ and that the subject of the test was a Series 250 I.G. Aluminum Double Hung Window. In its sample identification section the report stated that the sash were inside glazed using Dow Corning # 790 Building Sealant bedding, 3/16" tempered glass and vinyl snap-in glazing beads. The report concluded:

"The subject sample window . . . was found to comply with the performance requirements of the referenced ANSI standard for category DH-A2-HP(50) windows."

With respect to test results the report stated that there was no entry of water when the windows were tested at 2.86 pounds per square foot (psf) or 6.24 psf.

In a letter dated August 26, 1977 from Coronis to Schogel the Assistant Construction Manager of Coronis stated:

"Enclosed are three copies of your Contract. Please sign, seal and return all three copies. One executed copy will be returned for your files."

The articles of the contract relevant to this proceeding stated:

"THIS AGREEMENT is made between the Subcontractor and the Contractor for consideration hereinafter named.

                Date of Agreement                        August 23, 1977
                Subcontractor                            Barney Schogel Incorporated
                                                         85 Beechwood Avenue

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