Tultex Corp. v. Freeze Kids, LLC, 00 Civ. 1473 SAS.
| Citation | 252 BR 32 |
| Decision Date | 30 June 2000 |
| Docket Number | No. 00 Civ. 1473 SAS.,00 Civ. 1473 SAS. |
| Parties | TULTEX CORPORATION, Plaintiff, v. FREEZE KIDS, L.L.C., Defendant. |
| Court | U.S. District Court — Southern District of New York |
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Allen S. Gage, Jones, Day, Reavis & Pogue, New York City, for Plaintiff.
Michele D'Avolio, Wachtel & Masyr, L.L.P., New York City, for Defendant.
On May 27, 1999, plaintiff Tultex Corporation ("Tultex") filed a breach of contract action against defendant Freeze Kids, L.L.C. ("Freeze Kids") in New York State Supreme Court. Nine months later, on February 25, 2000, plaintiff removed its state court action to this Court. Plaintiff now seeks to transfer its action to the United States District Court for the Western District of Virginia. For the reasons that follow, plaintiff's motion to transfer venue is denied.
Plaintiff Tultex is a Virginia corporation with its principal place of business in Martinsville, Virginia. Complaint ¶ 1.1 Tultex manufacturers and distributes fleeced sportswear and screen-printed goods. Id. ¶ 3.
Defendant Freeze Kids is a New York company with its principal place of business in Manhattan. Id. ¶ 2. Freeze Kids is a children's apparel wholesaler. Certification of Joseph Esses, Manager of Freeze Kids, in Opposition to Motion to Transfer Venue ("Esses Cert.") ¶ 2.2 The Company has never conducted business in Virginia. Id.
In 1996, Phil Leff, Tultex's New York sales representative, contacted Freeze Kids to discuss a potential sales transaction between the two companies. Id. ¶ 3. Following Leff's initial contact, representatives from both companies met in New Jersey to discuss and negotiate financing for the purchase of Tultex merchandise by Freeze Kids. Id. ¶ 4.
As a result of these discussions, Freeze Kids purchased, on credit, approximately $1.5 million of fleeced sportswear and screen-printed goods from Tultex. Complaint ¶ 5; Memorandum of Law of Tultex in Support of its Motion to Transfer Venue ("Pl.Mem.") at 8. Freeze Kids purchased the merchandise by placing orders with Tultex's New York representatives. Esses Cert. ¶ 5. Freeze Kids did not place any orders with Tultex's representatives in Virginia. Id. ¶ 7. Nor did representatives of Freeze Kids ever travel to Tultex's offices in Virginia for any purpose. Id.
The Tultex merchandise was delivered to Freeze Kids's warehouse in New Jersey. Id. ¶ 6. After receiving the merchandise, Freeze Kids notified Tultex's New York representatives that the merchandise was defective. Id. ¶ 8. Tultex's New York representatives contacted Tultex's Virginia office, and the Virginia office sent quality control representatives to New York to address Freeze Kids's complaints. Id. The Virginia representatives traveled to Freeze Kids's New Jersey warehouse to inspect the allegedly defective merchandise. Id. Subsequent to the on-site inspection, Tultex's Virginia representatives and Freeze Kids exchanged facsimiles regarding the disputed merchandise. Id.
At some point prior to the commencement of this litigation, Freeze Kids tendered a payment of approximately $500,000 to Tultex. Pl. Mem. at 8. Freeze Kids sent the payment directly to Tultex's credit manager in Virginia. Id. However, Tultex claims that Freeze Kids still owes $934,055.46 on its purchase of Tultex merchandise. Esses Cert. ¶ 11; Complaint ¶ 5.
On May 27, 1999, Tultex filed an action against Freeze Kids in New York State Supreme Court alleging breach of contract and unjust enrichment. Complaint, Ex. A to D'Avolio Cert. By its action, Tultex seeks repayment of the $934,055.46 allegedly due and owing from Freeze Kids. Id. On July 6, 1999, Freeze Kids answered the Complaint and asserted counterclaims. Answer with Counterclaims, Ex. B to D'Avolio Cert. The counterclaims charge Tultex with breach of contract for delivering defective merchandise. Id.
On December 3, 1999, Tultex (together with nine subsidiaries and affiliates) filed a petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Western District of Virginia. Motion of Tultex Corporation to Transfer Venue ("Pl. Tr. Mot.") at 2. Three months later, on February 25, 2000, Tultex removed its state court action to this Court pursuant to 28 U.S.C. § 1452 which provides that "a party may remove any claim or cause of action in a civil action . . . to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title." 28 U.S.C. § 1452(a); see also Tultex Notice of Removal of State Court Civil Action ("Removal Notice"), Ex. D to D'Avolio Cert. Under 28 U.S.C. § 1334, district courts possess "original but not exclusive jurisdiction of all civil proceedings under title 11 or arising in related cases under title 11." Tultex also invoked this Court's diversity jurisdiction, see 28 U.S.C. § 1332, as an alternative ground for removal. Removal Notice, Ex. D to D'Avolio Cert., ¶ 6.
On April 17, 2000, plaintiff filed the instant motion to transfer this action to the United States District Court for the Western District of Virginia pursuant to 28 U.S.C. §§ 1334, 1404 and 1412.3
Plaintiff first seeks to transfer venue pursuant to 28 U.S.C. § 1412 which states: "A district court may transfer a case or proceeding under Title 11 to a district court for another district, in the interest of justice or for the convenience of the parties." However, as the plain language of the statute suggests, § 1412 applies only to "core" bankruptcy proceedings. See Gulf States Exploration Corp. v. Manville Forest Prods. Corp. (In re Manville), 896 F.2d 1384, 1388 (2d Cir.1990). Accordingly, transfer under this statute is appropriate only if Tultex's breach of contract action constitutes a core proceeding.
A nonexclusive list of actions which constitute core bankruptcy proceedings is set forth in 28 U.S.C. § 157(b)(2). Tultex argues that its contract action falls within three of the listed categories: (i) "matters concerning the administration of the bankruptcy estate", § 157(b)(2)(A); (ii) "allowance or disallowance of claims against the bankruptcy estate", § 157(b)(2)(B); and (iii) "other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship", § 157(b)(2)(O). Tultex's allegations of "core proceeding" are discussed in turn below.4
As set forth above, § 157(b)(2)(A) identifies "matters concerning the administration of the estate" as core proceedings. According to Tultex, collection of the $934,055.46 it claims is due and owing from Freeze Kids will impact its reorganization under Chapter 11. Thus, Tultex contends, its breach of contract action is a "matter concerning the administration of the estate." Before addressing Tultex's specific argument, I briefly review Northern Pipeline Construction, Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the seminal case discussing jurisdictional limits on the power of the federal bankruptcy courts.
In Marathon, a Chapter 11 debtor filed a breach of contract action in the bankruptcy court against the defendant, Marathon Pipeline, pursuant to the Bankruptcy Act of 1978, 28 U.S.C. § 1471. See id. at 56, 102 S.Ct. 2858. The 1978 Act granted federal bankruptcy courts jurisdiction over "all `civil proceedings arising under title 11 . . . or arising in or related to cases under title 11.'" Id. at 54, 102 S.Ct. 2858 (quoting 28 U.S.C. § 1471). Marathon Pipeline had not filed a proof of claim in connection with the debtor's bankruptcy; nor did it have any other connection to the bankruptcy proceedings. See id. at 56, 102 S.Ct. 2858. Accordingly, Marathon moved to dismiss the debtor's contract action arguing that the 1978 Act unconstitutionally conferred Article III judicial power upon non-Article III bankruptcy judges. See id.
The bankruptcy court denied Marathon's motion but, on appeal, the district court reversed finding the 1978 Act unconstitutional. See id. at 57, 102 S.Ct. 2858. The Supreme Court affirmed the district court, holding that state-created private rights such as contract claims must be adjudicated by an Article III judge. See id. at 69-70, 102 S.Ct. 2858.5 Thus, following Marathon, it is well-settled that Article III prohibits bankruptcy courts from adjudicating pre-petition contract claims — that is, claims arising prior to the commencement of the debtor's bankruptcy6 — against a nonparty to the bankruptcy. See, e.g., S.G. Phillips Constructors, Inc. v. City of Burlington, 45 F.3d 702, 705 (2d Cir.1995).
Tultex effectively argues that the clear rule of Marathon does not apply here because Tultex's contract claim is a "matter concerning the administration of its estate." That is, even though Tultex's contract claim against Freeze Kids arose and was commenced prior to its Chapter 11 filing, that claim may be decided by a bankruptcy judge rather than an Article III judge because it involves the "prompt collection of accounts receivable". Pl. Mem. at 3 (quoting Franklin Computer Corp. v. Harry Strauss & Sons, Inc., 50 B.R. 620, 625 (Bankr.E.D.Pa.1985)).
Tultex's reasoning is flawed, however, because "it creates an exception to Marathon that would swallow the rule." Orion Pictures Corp. v. Showtime Networks, Inc., 4 F.3d 1095, 1102 (2d Cir.1993). "Any contract that the debtor would pursue against a defendant presumably would be expected to inure to the benefit of the debtor estate and thus `concerns' its `administration.'" Id. To follow Tultex's argument to its logical conclusion, all pre-petition contract actions would constitute matters concerning the administration of the bankruptcy estate and, as a result,...
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