Matter of McRae Fire Protection, Inc.

Decision Date06 May 1985
Docket NumberAdv. No. 84-0510-G.,Bankruptcy No. 84-00875-G
Citation49 BR 773
PartiesIn the Matter of McRAE FIRE PROTECTION, INC., Debtor. McRAE FIRE PROTECTION, INC., a Michigan corporation, Plaintiff, v. JOSEPH DAVIS, INC., a New York corporation, Defendant. JOSEPH DAVIS, INC., a New York corporation, Third-Party Plaintiff, v. WALT DISNEY WORLD COMPANY, a California corporation, United States Fidelity and Guaranty Company, a Maryland corporation, R.E. Dailey and Company, a Michigan corporation, Third-Party Defendants.
CourtU.S. Bankruptcy Court — Eastern District of Michigan

Mark F. Makower & Associates, P.C., Detroit, Mich., for debtor/plaintiff.

William F. Savino, Magavern & Magavern, Buffalo, N.Y., Chris Nilson, Detroit, Mich., for defendant/third-party plaintiff.

Lita H. Popke, Harvey, Kruse, Westen & Milan, P.C., Detroit, Mich., for Disney World.

David M. Hayes and Michael Khoury, Detroit, Mich., for USF & G.


RAY REYNOLDS GRAVES, Bankruptcy Judge.

R.E. Dailey Company, (Dailey), a Michigan corporation, contracted with the Walt Disney World Company, a California corporation doing business in the State of Florida, to perform as the general contractor for the construction of the Communicore Pavillion at Epcot Center in the State of Florida. On July 16, 1981, Dailey, subcontracted part of the Communicore Pavillion contract to Joseph Davis, Inc., (JDI), a New York corporation. Dailey also entered into an agreement with the United States Fidelity & Guaranty Co. (USF & G), a Maryland corporation, to obtain a labor and material bond. The bond required USF & G to pay for material and labor used in the Epcot Project should Dailey default on its payment to its subcontractors.

JDI in turn signed three separate contracts with McRae Fire Protection Systems (McRae), a Michigan corporation, to perform work on the Communicore, Japan, and France Pavillions. Each agreement provided for final payment to be made by JDI to McRae six months after JDI had received final payment. The contract did not specify, however, from whom the payment to JDI was to come. JDI argues that the parties understood that final payment to McRae was contingent upon Dailey's payment to JDI.

To date, JDI has paid $677,613.63 to McRae; McRae now seeks the balance of $142,654.35, plus interest from March 31, 1983. The amount is substantially reduced by various back charges assessed by Dailey against JDI. Approximately $36,000 represents retainage, which has not been paid to McRae because it has not been received by JDI. $53,350 was back charged by Dailey against McRae for work performed by Dailey on McRae's behalf. The entire $53,350 has been held by JDI from McRae. Another $40,000 has been withheld due to damages and back charges over and beyond those assessed by Dailey. JDI maintains that the balance of $12,000 arises out of nonpayment to McRae for extra work.

At the completion of the Dailey/Disney contract Disney made payment to Dailey, less back charges, which Dailey in turn back charged against JDI, and is now the focus of those proceedings. Six months after McRae finished its work, JDI had not received final payment from Dailey. Ultimately, McRae did not receive its final payment and defaulted on its payment to material suppliers and a loan with Manufacturers Bank of Detroit. On March 9, 1984, McRae filed for protection under Chapter 11 of the Bankruptcy Code.

On the date of filing, the JDI/McRae contract constituted 63% of McRae's current assets, and were sufficient to pay off 74% of its then existing total assets. The receivables from the contract are the largest asset belonging to McRae. It is of little wonder that on June 18, 1984 this adversary proceeding was commenced against JDI.

In its response JDI moved pursuant to 28 U.S.C. § 1471(d) for the Court to abstain. JDI argued the adversary proceeding concerned matters unique to Florida law that were involved in three law suits in the Florida courts. In a lengthy brief opposing the motion, McRae argued the Florida cases had not moved past discovery, that it was not involved in any way with the Florida litigation, and that traditional considerations warranting abstention did not apply. The most telling argument made by McRae were on pages 18 and 20 of its brief:

"We submit that the equities involved on the part of McRae, combined with the strong federal interest in orderly and expeditious administration of bankruptcy proceedings as well as the case law authority dealing with the abstention doctrine, clearly dictate that this court retain jurisdiction over this adversary proceeding." (Emphasis Added)
Where the outcome of a proceeding has a substantial and direct effect upon the estate of a debtor in a bankruptcy proceeding, a particularly strong showing is necessary in order to dictate abstention . . . (Emphasis Added)

This Court agreed with McRae and on September 25, 1984 entered an order denying the motion to abstain; JDI then filed a third-party complaint against Disney, Dailey, and USF & G. Disney argues it lacks sufficient minimum contacts with the State of Michigan and moves to dismiss for lack of personal jurisdiction. Each of the third-party defendants argue the third-party claims are either unnecessary to resolve the main claim, or do not affect the claim, and now move pursuant to 28 U.S.C. § 1334(c)(1) for the Court to abstain. McRae, apparently reversing its earlier position, joins in support of the motion to abstain. For reasons set forth below, the motions for dismissal for lack of personal jurisdiction and abstention are DENIED.

In Allard v. Benjamin, 49 B.R. 900 (Bkrtcy.E.D.Mi.1985), this Court found issues of bankruptcy to be federal questions and unaffected by the minimum contacts test of International Shoe v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945) and Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283, Reh'g denied, 358 U.S. 858, 79 S.Ct. 10, 3 L.Ed.2d 92 (1958), and their progeny. "When a federal statute creating a substantive right contains no process provisions, service of process in a district court over a nonresident defendant who is not found in the forum state is governed by the applicable statute or rule of that state under Rule 4(e) Fed.R. Civ.P.," Handley v. Indiana & Michigan Electric Company, 732 F.2d 1265, 1268 (6th Cir.1984). Bankruptcy Rule 7004(d) alleviates this concern by providing a nationwide service of process, and is similar to other specialized statutes. See e.g. 28 U.S.C. § 2361 (interpleader); 15 U.S.C. §§ 5, 22, 25 (Federal Anti-Trust). Jurisdiction over a defendant in federal question cases is, therefore, founded on the contacts with "the United States as a whole" rather than the contacts with the forum state. Id. at 1268. Citing Chrysler Corp., v. Fedders Corp., 643 F.2d 1229 (6th Cir.1981), cert. denied, 454 U.S. 893, 102 S.Ct. 388, 70 L.Ed.2d 207 (1981).

The Court must determine whether personal jurisdiction over a third-party defendant exists in an adversary proceeding arising under Title 11. Rule 14(a) of the Fed.Rule of Civ.Pro. permits a defending party as a third-party plaintiff to serve a complaint upon a person, not a party to the action, who is or may be liable to him for all or part of the plaintiff's claim. Rule 14(a) applies in adversary proceedings through Bankruptcy Rule 7014. Complaints filed in an adversary proceeding may be served anywhere in the United States. Bankruptcy Rule 7004(d). The rule applied in Allard is also appropriate to third-party defendants in adversary proceeding arising under or in Title 11. Compare Handley, supra.; Terry v. Raymond International, Inc., 658 F.2d 398 (5th Cir. 1981) (State long-arm statute used to obtain personal jurisdiction in federal question cases). If the adversary proceeding can be independently sustained on the basis that it arises under the Constitution or laws of the United States, personal jurisdiction is determined by the defendant's contacts with the United States. Handley, supra; Terry, supra.

The arguments that the JDI/Dailey contract has no effect on the main claim, and that the third-party Defendants are unnecessary for the resolution of the claim are premised on the legal relationship of the parties. Dailey points to the language of the contract and argues that the omission of any specific reference to a final payment from Dailey to JDI as a condition precedent to payment of McRae, fails to establish a relationship between McRae and Dailey. JDI, however, maintains that review of the back charges and work orders during the course of the project reveal McRae not only performed at Dailey's direction, but also that the back charges against JDI by Dailey for work that was not performed by McRae indicates the extent and nature of the relationship between the parties.

The third-party complaint filed by JDI seeks to join the third-party Defendants pursuant to Fed.Rules Civ.Pro. 14(a). The allegations of the third-party complaint are to be liberally construed and need not show that recovery is a certainty; "the complaint should be allowed to stand, if under some construction of the facts which might be adduced at trial, recovery would be possible." 3 Moore's Fed.Prac. ¶ 14.10 (1985). It is unnecessary for the third-party plaintiff to assert all liability against the defendants, he may assert either all or part of the liability against the third-party defendants. Nonetheless, Defendants urge the Court to adopt an outcome determinative test, United States v. Joe Grasso & Sons, Inc., et al., 380 F.2d 749 (5th Cir. 1967), In re H & S Transportation Company, Inc., 35 B.R. 67 (Bkrtcy.M.D.Tenn. 1983), Matter of Joyanna Holitogs, Inc., 21 B.R. 323 (Bkrtcy.S.D.N.Y.1982), and dismiss the third-party complaints.

Section 1334(c)(1) permits the Court, in its discretion to abstain in the interest of justice, or in the interest of comity...

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