Summary
holding that setoff is a claim against the bankruptcy estate that subjects a party to the bankruptcy court's jurisdiction, even if it is labeled as an affirmative defense
Summary of this case from DHP Holdings II Corp. v. Peter Skop Industries, Inc. (In re DHP Holdings II Corp.)Opinion
Case No. 00-40563 (PCB), Adv. Pro. No. 00-2276, 00 Civ. 4302 (SHS)
October 12, 2000
OPINION AND ORDER
Interstate Energy Resources, Inc. ("Interstate"), defendant in an adversary proceeding commenced in bankruptcy court by debtor-in-possession North American Energy Conservation, Inc. ("North American"), has moved pursuant to 28 U.S.C. § 157 (d) for an order withdrawing the reference of this adversary proceeding from the bankruptcy court. For the following reasons, Interstate's motion is denied.
I. BACKGROUND
North American filed a voluntary petition pursuant to Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq., in the United States Bankruptcy Court for the Southern District of New York on March 2, 2000. Prior to that filing, North American marketed natural gas and electricity on both the wholesale and retail level. The wholesale business, however, was discontinued just prior to the filing of the bankruptcy petition.
In the conduct of its wholesale business, North American entered into a contract in September 1997 with Interstate under which North American agreed to sell natural gas to Interstate. Pursuant to that contract, North American delivered certain agreed-to quantities of natural gas to interstate in January and February 2000. North American claims that Interstate owes it approximately $1.2 million for those gas deliveries.
On April 13, 2000, North American filed a complaint with the bankruptcy court seeking recovery of the money owed for the January and February 2000 deliveries. In an answer dated May 23, 2000, Interstate admitted that it had accepted delivery, but denied that it was indebted to North American in the amount claimed. In addition, Interstate claimed, in a portion of the answer entitled "Affirmative Defenses", several setoffs against North American for damages resulting from North American's rejection of the executory portions of the September 1997 contract. The setoffs claimed exceed $1.8 million.
Interstate subsequently filed this motion to withdraw the reference.
II. DISCUSSION
United States district courts have original jurisdiction of all civil proceedings "arising under Title 11 [of the United States Code] or arising in or related to cases under Title 11." 28 U.S.C. § 1334 (b). District courts may refer those proceedings to the bankruptcy court. See 28 U.S.C. § 157; In re 131 Liquidating Corp., 222 B.R. 209, 211 (S.D.N.Y. 1998). In this district, all such cases are automatically referred to the bankruptcy court pursuant to a standing order dated July 10 1984 See In re Times Circle East, Inc., No. 95 CIV. 2838, 1995 WL 489551, at *1 (S.D.N.Y. Aug. 15, 1995). That reference may be withdrawn, however, in whole or in part, "for cause shown." See 28 U.S.C. § 157(d); Securities and Exchange Comm'n v. Churchill Securities, Inc., 223 B.R. 415, 419 (S.D.N.Y. 1998). "There is no statutory definition of what constitutes `cause' to withdraw the bankruptcy reference." Times Circle, 1995 WL 489551, at *1.
In In re Orion Pictures Corp.,4 F.3d 1095 (2d Cir. 1993), the United States Court of Appeals for the Second Circuit set forth the analytical framework for determining whether there is "cause" to withdraw a reference from the bankruptcy court. First, the court must determine whether the dispute is core or non-core. Second, the court should consider additional factors, such as: (1) whether the claim is legal or equitable, (2) judicial efficiency, (3) prevention of forum shopping, and (4) uniformity in the administration of bankruptcy law. See Orion Pictures, 4 F.3d at 1101. Whether the dispute is core or non core should be determined first, because "it is upon this issue that questions of efficiency and uniformity will turn." Id. For example, hearing a core matter in a district court "could be an inefficient allocation of judicial resources given that the bankruptcy court generally will be more familiar with the facts and issues." Id.
A. Core or Non-Core
Whether a matter is "core" depends on the nature of the proceeding.See In re Best Products Co., Inc., 68 F.3d 26, 31 (2d Cir. 1995). "A proceeding that involves rights created by bankruptcy law, or that could arise only in a bankruptcy case, is a core proceeding." In re Green, 200 B.R. 296, 298 (S.D.N.Y. 1996); see also 28 U.S.C. § 157 (b)(2). A "non-core" proceeding is one that does not depend on bankruptcy laws for its existence and that could proceed in a court that lacks federal bankruptcy jurisdiction. See Green, 200 B.R. at 298.
The parties agree that North American's claims against Interstate are non-core. According to North American, however, Interstate's assertion of setoffs are actually counterclaims against North American's bankruptcy estate and, as such, subject Interstate to the core jurisdiction of the bankruptcy court to "allow or disallow claims against the estate."See 28 U.S.C. § 157 (b)(2)(B).
When a party files a claim against a bankruptcy estate, that party "triggers the process of `allowance and disallowance of claims,' thereby subjecting [itself] to the bankruptcy court's equitable power."Langenkamp v. Culp, 498 U.S. 42, 44 (1990) (per curiam) (quotingGranfinanciera, S.A. v. Nordberg, 492 U.S. 53, 58-59 (1989)). Thus, if the setoffs pled by Interstate as "affirmative defenses" are actually claims against the estate, this dispute is a core proceeding pursuant to 28 U.S.C. § 157 (b)(2)(B).
Courts in similar circumstances have held that regardless of whether a setoff is labeled an "affirmative defense" or a "counterclaim", a setoff is a claim against the bankruptcy estate. See In re Commercial Financial Servs., Inc., 251 B.R. 397, 405 (Bankr. N.D. Okla. 2000); In re Americana Expressways, Inc., 161 B.R. 707, 712-13 (D. Utah 1993). Indeed, a setoff claim takes on particular importance in the context of bankruptcy, as it, in effect, "elevates an unsecured claim to secured status to the extent that the debtor has a mutual, pre-petition claim" against the party asserting setoff, as is the case here. Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984); see also Commercial Financial Servs., 251 B.R. at 405-06.
Accordingly, this Court finds that by pleading setoffs in the form of "affirmative defenses", Interstate has in fact asserted a claim against North American's bankruptcy estate. Thus, this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), which squints in the direction of leaving this matter in the bankruptcy court. See In re Seatrain Lines, Inc., 198 B.R. 45. 53 (S.D.N.Y. 1996).
B. Other Factors
Other Orion Pictures factors support that conclusion.
1. The Nature of the Action
A claim for breach of contract that seeks only money damages is a legal, rather than an equitable, claim. See, e.g., Dairy Queen, Inc. v. Wood, 369 U.S. 469, 477 (1962); Merex A.G. v. Fairchild Weston Sys., Inc., 29 F.3d 821, 825 (2nd Cir. 1994). When, however, as here, a party asserts a claim against a bankruptcy estate, it "subject[s itself] to the bankruptcy court's equitable power," Langenkamp, 498 U.S. at 44, and "the legal issue [is] converted to an issue of equity." Germain v. Connecticut Nat'l Bank, 988 F.2d 1323, 1329 (2d Cir. 1993). Thus, the nature of the action favors keeping this matter in the bankruptcy court.
2. Judicial Efficiency
Pertinent factors to consider in determining the most efficient deployment of judicial resources are whether the matter is likely to reach trial, whether protracted discovery will be required, and whether the bankruptcy court has familiarity with the issues presented. See Times Circle, 1995 WL 489551, at *3. North American had numerous pre-petition contracts with gas wholesalers other than Interstate, and at least some of those contracts have led to other claims against the estate. Issues surrounding those claims are likely to be similar to issues in this adversary proceeding. In addition, this proceeding is only at its preliminary stages, and North American maintains that Interstate's setoff claims will require "intensive" discovery — an issue on which interstate is silent. Accordingly, judicial efficiency favors adjudication by the bankruptcy court. See id.
3. Risk of Inconsistent Administration of the Bankruptcy Law
Leaving this proceeding in the bankruptcy court would also reduce the risk of inconsistent administration of the bankruptcy law. A setoff is a particular type of claim specifically addressed in the bankruptcy code.See 11 U.S.C. § 506(a), 511; see also Coplay Cement Co. v. Wills Paul Group, 983 F.2d 1435, 1441 (7th Cir. 1993). Accordingly, the bankruptcy court is best equipped to adjudicate this matter in the first instance:
4. Forum Shopping
There has been no claim and no showing that Interstate is engaging in forum shopping. Accordingly, this factor weighs neither in favor nor against withdrawal of the reference in this case.
III. CONCLUSION
After consideration of each of the factors articulated in Orion Pictures this Court concludes that withdrawal of the reference to the bankruptcy court is not warranted. Accordingly, Interstate's motion to withdraw the reference is denied.