U.S. Abatement Corp., Matter of

• Citation: 39 F.3d 556
• Decision Date: 23 November 1994
• Docket Number: No. 93-3581,93-3581
• Parties: , 32 Collier Bankr.Cas.2d 761, 26 Bankr.Ct.Dec. 360, Bankr. L. Rep. P 76,208 In the Matter of UNITED STATES ABATEMENT CORPORATION, a/k/a U.S.A. Corp., Debtor. UNITED STATES ABATEMENT CORP., a/k/a U.S.A. Corp., Appellant, v. MOBIL EXPLORATION & PRODUCING U.S., INC., as agent for Mobil Oil Exploration & Producing Southeast, Inc. and Mobil Exploration and Producing North America, Inc., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 556

39 F.3d 556

63 USLW 2399, 32 Collier Bankr.Cas.2d 761,

26 Bankr.Ct.Dec. 360,

Bankr. L. Rep. P 76,208

In the Matter of UNITED STATES ABATEMENT CORPORATION, a/k/a

U.S.A. Corp., Debtor.

UNITED STATES ABATEMENT CORP., a/k/a U.S.A. Corp., Appellant, v. MOBIL EXPLORATION & PRODUCING U.S., INC., as agent for Mobil

Oil Exploration & Producing Southeast, Inc. and

Mobil Exploration and Producing North

America, Inc., Appellee.

No. 93-3581.

United States Court of Appeals, Fifth Circuit.

Nov. 23, 1994.

Richard W. Martinez, Tranchina & Martinez, New Orleans, LA, for appellant.

Sherman G. Fendler, James D. McMichael, Liskow & Lewis, New Orleans, LA, for appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before KING, JOLLY and STEWART, Circuit Judges.

KING, Circuit Judge:

This appeal involves the question whether a bankruptcy court, upon motion of a Chapter 11 debtor, may equitably subordinate the claim of a creditor who exercised a contractual right to recoup from the debtor sums it became obligated to pay to other creditors who had filed liens against the recouping creditor's property. The debtor contended that the exercise of the right of recoupment constituted an inequitable exercise of control over the debtor, forcing the debtor into bankruptcy, all to the detriment of other creditors. The bankruptcy court held that the exercise of a contractual right of recoupment did not amount to a type of inequitable conduct that could form the basis for equitable subordination and dismissed the debtor's claim for equitable subordination under Rule 12(b)(6). The district court affirmed. We also affirm.

I. FACTUAL AND PROCEDURAL HISTORY

On March 13, 1992, United States Abatement Corporation ("USA") filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code. On April 20, 1992, Mobil Exploration and Producing U.S., Inc. ("Mobil") filed a timely unsecured nonpriority Proof of Claim in the amount of $365,000, asserting that Mobil had a contractual right to indemnification from USA for amounts expended to pay off the liens of subcontractors. ¹ These liens had attached to Mobil's property when USA failed to pay subcontractors who provided services pursuant to two contracts between USA and Mobil calling for USA to sandblast and paint certain structures belonging to Mobil located on the Outer Continental Shelf.

On June 15, 1992, USA filed a complaint seeking equitable subordination of Mobil's claim. Mobil responded by filing a motion pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure asserting that USA had failed to state a claim upon which relief could be granted. USA filed an amended complaint on November 6, 1992, in which it set forth additional facts in support of its equitable subordination claim. Specifically, USA contends that the facts set forth in its amended complaint establish that Mobil exercised control over the financial affairs of USA to such an extent that USA's other creditors were harmed thereby.

On November 13, 1993, the bankruptcy court granted Mobil's motion to dismiss USA's equitable subordination claim. On August 4, 1993, the district court entered judgment affirming the bankruptcy court's decision. In re U.S. Abatement Corp., 157 B.R. 590 (E.D.La.1993). USA filed a timely appeal to this court, asserting two points of error: (1) the bankruptcy court erred in addressing USA's equitable subordination action prior to determining whether Mobil held a valid claim against USA's estate; and (2) the bankruptcy and district courts erred in concluding that USA had failed to state a claim justifying equitable subordination.

II. STANDARD OF REVIEW

A dismissal for failure to state a claim is disfavored in the law and justified only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Carney v. Resolution Trust Corp., 19 F.3d 950, 954 (5th Cir.1994); Mahone v. Addicks Util. Dist. of Harris County, 836 F.2d 921, 926 (5th Cir.1988). In evaluating the propriety of a dismissal, we accept the plaintiff's well-pleaded facts as true. Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th Cir.1994); Shushany v. Allwaste, Inc., 992 F.2d 517, 520 (5th Cir.1993). Furthermore, the question of whether a creditor's conduct is so egregious as to require the remedy of equitable subordination is a question of law, over which an appellate court may exercise plenary review. Smith v. Associates Commercial Corp. (In re Clark Pipe & Supply Co.), 893 F.2d 693, 699-700 n. 5 (5th Cir.1990).

III. ANALYSIS

In order properly to assess USA's claim of equitable subordination, it is helpful to summarize the key provisions of the two contracts between Mobil and USA. Both contracts contained three relevant clauses: (1) a termination clause; (2) an indemnification clause; and (3) a retainage clause. The termination clause stated, "Company [Mobil] reserves the right to terminate this contract with or without cause at any time." The termination clause also contained a provision for calculating compensation due to USA should Mobil exercise its right to terminate the contracts. Thus, the termination clause on its face permitted Mobil to terminate the contracts for any reason, yet ensured that USA would be compensated for any work it had completed up until the time of termination. The bankruptcy court in this case concluded that the termination clause was valid under Louisiana law. See American Waste and Pollution Control Co. v. Jefferson Davis Parish Sanitary Landfill Comm'n, 578 So.2d 541 (La.Ct.App.1991) (enforcing termination clause on grounds that "[a] written contract between two parties is the law as to those parties and the courts are bound to enforce the contract as written."), cert. denied, 581 So.2d 694 (La.1991). USA does not contest the bankruptcy court's legal conclusion that the termination clause is fully enforceable as written.

The two contracts between Mobil and USA also contained an indemnification clause which read:

Contractor [USA] further agrees to pay Company [Mobil] for damages to its property and to indemnify and hold Company harmless against the payment of any and all taxes, penalties, interest, liens or indebtedness or claims against its property, or for work performed, or measured by the work performed, growing out of or incident to Contractor's operations hereunder.

(emphasis added).

The contracts also contained a retainage clause whereby Mobil was authorized to withhold thirty percent of money due to USA as leverage to ensure that USA paid off all subcontractors who might assert liens against Mobil's property. The bankruptcy court concluded that the indemnification clause was unambiguous and enforceable as written, rejecting USA's argument that the retainage clause superseded the indemnification clause by placing a "cap" of thirty percent on the amount to which Mobil was contractually entitled to recoup from USA to clear its property of subcontractors' liens. The bankruptcy court reasoned that while the retainage clause provided Mobil with prophylactic protection against the formation of liens, the indemnification clause provided additional protection by explicitly granting Mobil a right of full indemnification should any subcontractors' liens actually materialize. USA does not contest the bankruptcy court's interpretation of the relationship between the indemnification and retainage clauses.

The bankruptcy court concluded that under the terms of the two contracts between USA and Mobil, Mobil was entitled to recoup the full amount of all subcontractors' liens paid and owing on its property against the amounts due to USA under the contracts. Thus, of the $692,099 owed by Mobil to USA under the contracts, the bankruptcy court found that Mobil could subtract $607,052.82, the amount Mobil paid or owed subcontractors who had filed liens against Mobil's property. Mobil's total remaining obligation to USA on the contracts was therefore $85,046.18. ²

USA's first argument on appeal is that the bankruptcy court erred in deciding the request for equitable subordination prior to deciding whether Mobil had a valid claim against USA's estate. In other words, USA believes the bankruptcy court "put the cart before the horse" by deciding that there was no reason to invoke equitable subordination of Mobil's claim because the bankruptcy court never determined that Mobil had a valid claim against USA's estate in the first place. USA asserts that the bankruptcy court's order of addressing these issues deprived it of a full panoply of litigation choices. Specifically, USA contends that if the bankruptcy court first had addressed the issue of whether Mobil had a valid claim, USA would have been in a better position to evaluate the propriety of pursuing its equitable subordination claim. We find this contention to be without merit.

We initially note that the bankruptcy court's determination as to what order it should address motions before it is a matter best left to its sound discretion. Landis v. North Am. Co., 299 U.S. 248, 254, 57 S.Ct. 163, 165, 81 L.Ed. 153 (1936) (acknowledging "the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for the litigants. How this can best be done calls for the exercise of judgment...."). There is no requirement in the Bankruptcy Code, Bankruptcy Rules or case law that a bankruptcy court address the merits of a pending claim prior to disposing of a motion for equitable subordination. ³ Thus, an appellate court should be loathe to substitute its judgment for the bankruptcy court regarding such matters of docket management absent an abuse of discretion. In re Stone, 986 F.2d 898, 903 n. 3 (5th Cir.1993) (noting that decisions regarding docket management are subject to an abuse...