In re Gandy
Shelby A. Jordan, Jordan, Hyden, Womble & Culbreth, Corpus Christi, TX, Stephen Mark Murray, San Antonio, TX, for Appellee.
Appeal from the United States District Court for the Western District of Texas.
Before KING, Chief Judge, PARKER, Circuit Judge, and ELLISON*, District Judge.
ELLISON, District Judge:
This is an appeal from an order denying Appellants’ motion to compel arbitration. Specifically, Appellants, James Gandy, Kartar Gandy, Kartar Gandy Limited Partnership, Hary Gandy, and Hary Gandy Limited Partnership (“Gandys“), seek arbitration of claims asserted against them by Sarma Gandy, who is currently a debtor in possession (“Debtor“) under Chapter 11 of the Bankruptcy Code.
Factual and Procedural History
This case evolved from a state court suit brought by the Debtor, prior to her bankruptcy, challenging the specifics of asset liquidation of Signtech USA, Limited (“Signtech“). Signtech was a Texas limited partnership, formed in 1993, that was in the business of making sign components and materials, printing sign faces and other large advertisements, and manufacturing and selling wide-format digital printers used in printing large advertising copy. When Signtech was formed, Debtor acquired a 33% ownership in Signtech as her sole and separate property. The remaining interest in Signtech was owned by Kartar Gandy Limited Partnership (“KGLP“), as owned and controlled by Kartar Gаndy, Debtor‘s father-in-law, and by James Gandy, Debtor‘s brother-in-law. On October 10, 1997, Debtor entered into a post-marital agreement whereby Debtor transferred her 33% interest in Signtech to a new limited partnership, Hary Gandy Limited Partnership (“HGLP“). Hary Gandy, Debtor‘s husband, was HGLP‘s general partner and 20% owner, and Debtor was a limited partner and 80% owner. After the 1997 transfer, Signtech‘s ownership interests were distributed among HGLP, James Gandy, KGLP, and Gandy Group, Inc. HGLP, James Gandy, and KGLP were the limited partners and 33% owners, while Gandy Group, Inc. was the general partner and 1% owner.
Debtor‘s claims center on a series of transactions surrounding and following the 1997 transfer. Debtor alleges that Hary Gandy, motivated by the possibility of an impending divorce from Debtor, procured the transfer of Debtor‘s 33% ownership interest in Signtech to HGLP in order to secure his control over Signtech. Debtor argues that this enabled Hary Gandy to continue to conceal from Debtor the real value of her ownership interest.1 After the transfer to HGLP, Hary Gandy also obtained from Debtor an increase from 20% to 20.35% of his ownership interest in HGLP. According to Debtor, Hary Gandy obtained the additional interest to forestall the invocation of a partnership clause permitting replacement of the general partner, with or without cause, upon a vote of 80% of the ownership interests in the partnership.
As Signtech increasingly lost business and fell in debt, it began to sell various of its business components. After these asset sales, Signtech‘s remaining assets were its building, its digital printer manufacturing business, and its accounts receivable. On April 7, 2000, James Gandy, Hary Gandy (on behalf of HGLP), and Kartar Gandy (on behalf of KGLP) signed a plan of liquidation for Signtech and a series of assignments of Signtech‘s partnership interests in exchange for Signtech‘s assets. Effective as of March 1, 2000, the plan of liquidation and the assignments transferred to HGLP ownership of aсcounts receivable, and to James Gandy and KGLP 33% and 62%, respectively, of the remaining assets of Signtech, except for Signtech‘s building.2 Debtor, in consultation with Hary Gandy, had agreed to receive Signtech‘s accounts receivable as HGLP‘s share of the distribution upon liquidation. Debtor alleges that, unbeknownst to her, the accounts receivable consisted primarily of uncollectable foreign debts. In contrast, on April 3, 2000, four days before the signing of Signtech‘s liquidation plan, James Gandy began negotiating with one of Signtech‘s competitors for the sale of Signtech‘s digital printer business. The competitor agreed to purchase the digital printer business for $30,000,000.00 on April 17, 2000.
Debtor then sued the individual members of the Gandy family and the partnerships alleging causes of action for breach of fiduciary duty, negligence, fraud, constructive trust, and breach of contract. The Gandys filed a motion to compel arbitration based on arbitration clauses in the parties’ partnership agreements.3 On February 28, 2001, the state court granted the motion and stayed the lawsuit. Debtor filed for bankruptcy that afternoon. The state court suit was subsequently removed to the bankruptcy court as an adversary proceeding. Debtor also filеd a new adversary action in bankruptcy court, and then moved to consolidate the second adversary with the previously removed state action. With the Gandys’ consent, the bankruptcy court allowed the consolidation of Debtor‘s claims in the two adversaries into a single complaint — the Third Amended Complaint. The Third Amended Complaint included causes of actions to avoid transfers pursuant to sections 544, 550, and 548 of the Bankruptcy Code, for civil RICO conspiracy, for insider fraud, and to establish alter ego claims and require substantive consolidation. The Gandys filed motions with the bankruptcy court to сompel arbitration and for stay of the adversary proceeding pending arbitration. The bankruptcy court denied the motions after finding that Debtor‘s complaint essentially sought avoidance of fraudulent transfers. The district court affirmed the bankruptcy court‘s exercise of discretion, holding that Debtor had raised actual core proceedings in her capacity as debtor in possession. Back in the bankruptcy court, Debtor, based on allegations that the Gandys had transferred funds belonging to Debtor‘s estate to foreign “off-shore” trusts after she sought Chapter 11 protection, successfully оbtained a temporary restraining order against the Gandys, except for Hary Gandy and HGLP, prohibiting them from further use of the funds.4 The Gandys now timely appeal to this court the denial of the motion to compel arbitration and for stay of the adversary proceeding pending arbitration.
This court‘s appellate jurisdiction to review the bankruptcy court‘s refusal to stay an adversary proceeding pending arbitration is founded upon section 16(a)(1)(A) of the Federal Arbitration Act (the “FAA“),
On appeal, the Gandys argue that the district court erred in refusing to compel Debtor to arbitrate this case under the arbitration clauses of the partnership agreements for Signtech and HGLP. Whether а bankruptcy court has discretion to deny a motion to stay a bankruptcy proceeding pending arbitration is a question of law that we review de novo. National Gypsum, 118 F.3d at 1064. We also review de novo legal determinations of whether an adversary proceeding in bankruptcy court is “core” under
The Gandys contend that Debtor, as a party to the Signtech and HGLP partnership agreements, had agreed to be bound by the arbitration clauses that appear in identical form in the two agreements. The Gandys contend that the FAA embodies a strong federal policy in favor of arbitration and, therefore, compels the arbitration of this case. The Gandys argue that Debtor, in an effort to avoid arbitration, has “window-dressed” her state law claims and artfully repled them as bankruptcy claims. The Gandys further argue that, even if Debtor could bring her “Bankruptcy Code-based” claims, they lack merit. The bankruptcy and district courts considered and rejected these arguments. The bankruptcy court found, and the district court affirmed, that Debtor‘s adversary proceeding raised actual core bankruptcy issues including, inter alia, issues of avoidance of fraudulent transfers.
The Gandys’ argument that the decision of the bankruptcy court contravenes the FAA and the terms of the partnership agreements requires this court to reconcile two important federal statutes: the Federal Arbitration Act and the Bankruptcy Code. The FAA provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
We reasoned in National Gypsum that, “at least where the cause of action at issue is not derivative from the debtor‘s pre-petition legal or equitable rights but rather is derived entirely from federal rights conferred by the Bankruptcy Code,” a bankruptcy court retains “significant discretion” to refuse to stay the adversary proceeding and compel arbitration. Id. at 1069. Such discretion permits the bankruptcy court to assess whether arbitration would be consistеnt with the purpose of the Code, “including the goal of centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders.” Id. We are persuaded that this reasoning governs the disputed issues in this case, and that bankruptcy court rather than arbitration is the appropriate forum.
Debtor advances three causes of action that derive entirely from the federal rights conferred by the Bankruptcy Code. As a debtor in possession, she seeks to exercise a trustee‘s “strong arm” powers under section 544 of Title 11 to avoid any transfer that an unsecured creditor could have avoided under applicable state law.
The Gandys’ arguments to the contrary rely on Trefny v. Bear Stearns Securities Corp., 243 B.R. 300 (Bankr.S.D.Tex.1999). In Trefny, a trustee appointed to oversee the liquidation of a debtor-brokerage firm brought an adversary proceeding against a securities firm that served as the debtor‘s clearing broker. The trustee alleged causes of action under Texas state law, federal civil causes of action based on violations of criminal statutes, and the Bankruptcy Code. Id. at 306. The district court found that the trustee was bound by the arbitration agreement between the debtor and the clearing broker and between the debtor‘s customers and the clearing broker to arbitrate the state-law claims and the claims based on federal criminal statutes. Id. at 320. With respect to the bankruptcy claims, the district court found that the trustee did not assert a turnover claim of the debtor‘s liquidated or undisputed funds under
The reliance by the Gandys on Trefny‘s analysis of the general avoiding powers of a trustee is misplaced. In Trefny, the trustee had not pleaded a proper section 548 claim because he did not allege a transfer of “an interest of the debtor in property” when he sought to avoid transfers of property of the debtor‘s customers. 243 B.R. at 322. The district court concluded that the trustee was essentially pursuing tort claims of fraud and seeking to recover money or securities lost because of the alleged fraud. Id.
While some of Debtor‘s remaining claims do involve her pre-petition legal or equitable rights, the bankruptcy causes of action predominate. The heart of Debtor‘s complaint concerns the avoidance of fraudulent transfers and implicates non-bankruptcy contractual and tort issues “in only the most peripheral manner.” National Gypsum, 118 F.3d at 1067. Once Debtor sought the relief afforded by Chapter 11 of the Bankruptcy Code, she became a debtor in possession vested with certain statutory rights that empower her “by virtue of the Bankruptcy Code to deal with [her] contracts and property in a manner [she] could not have employed absent the bankruptcy filing.” N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 528, 104 S.Ct. 1188, 1197, 79 L.Ed.2d 482 (1984).
That Debtor‘s bankruptcy causes of action predominate does not, however, end the analysis. Even when a cause of action is derived entirely from the federal rights conferred by the Bankruptcy Code, the bankruptcy court has discretion to deny enforcement of the arbitration clause only when enforcement would conflict with the purpose or provisions of the Code. Id. at 1069. On this point, Trefny is also of no help to the Gandys. Since the trustee in Trefny had not asserted a turnover claim under section 542 that precluded arbitration, nor pleaded a fraudulent transfer claim under section 548, the district court concluded that the trustee‘s claims did not involve important bankruptcy policies. 243 B.R. at 325. Therefore, under the dictates of National Gypsum, the trustee had failed to show that arbitration of his claims would implicаte or conflict with the bankruptcy law or policies. Id. 324-25.
In this case, not only are Debtor‘s claims derived from the Bankruptcy Code, their resolution implicates matters central to the purposes and policies of the Bankruptcy Code. We note, first, that Debtor‘s claims against the Gandys appear to represent very nearly the entirety of Debtor‘s bankruptcy estate.
Secondly, this dispute intimately implicates a central purpose of the Bankruptcy Code: the expeditious and equitable distribution of the assets of Debtor‘s estate. According to Debtor‘s pleadings and uncontrovеrted arguments before this Court, Kartar Gandy and James Gandy have transferred funds that are the proceeds of transfers that are the subject of Debtor‘s adversary proceeding to foreign “off-shore” grantor trusts.11 Letters from these foreign trustees claim that they will not honor the jurisdiction of United States courts and will not execute judicial orders requiring the return of the contested funds to the bankruptcy court‘s jurisdiction. The bankruptcy court has entered a temporary restraining order prohibiting the Gandys, except for Hary Gandy and HGLP, from further use of the funds pending an on-going preliminary injunction hearing. In view of this development, the expertise and power of a bankruptcy court, including service of process, compulsory jurisdiction and contempt, and ancillary jurisdiction with respect to possible foreign proceedings, see
Fourth, Debtor has also asserted claims for substantive consolidation of the assets and liabilities of certain nominally distinct entities. While we recognize that substantive consolidation is an extreme and unusual remedy12 and intimate no view on the merits of Debtor‘s claims, we note that substantive consolidation is a remedy available to a bankruptcy court that may be out of reach in arbitration.
Although it is technically possible that the Debtor‘s case be divided and somе claims be sent to arbitration, see, e.g., Hays, 885 F.2d at 1154-55, this approach here would be of disservice to the parties and defeat the purposes of the Bankruptcy Code. See generally Mette H. Kurth, Comment, An Unstoppable Mandate and an Immovable Policy: The Arbitration Act and the Bankruptcy Code Collide, 43 U.C.L.A. L.REV. 999, 1034 (1996) (recommending that judicial discretion be exercised to bring about the most efficient resolution of a case). Parallel proceedings would be wasteful and inefficient, and potentially could yield different results and subject parties to dichotomous obligations. See National Gypsum, 118 F.3d at 1069 n. 21 (stating that efficiency concerns may be legitimate consideratiоns in the bankruptcy context, where efficient resolution of claims and conservation of the bankruptcy estate assets are integral purposes of the Bankruptcy Code). While consideration of bifurcated proceedings has been found not to be substantial enough to override the federal policy favoring arbitration with respect to derivative, non-core matters, see, e.g., Hays, 885 F.2d at 1158-59, this concern, in the context of causes of action derived from the Bankruptcy Code, could present the type of conflict with the purposes and provisions of the Bankruptcy Code that may overridе the FAA‘s statutory directive of enforcement of arbitration agreements. See National Gypsum, 118 F.3d at 1068 (alluding to McMahon, 482 U.S. at 226-27, 107 S.Ct. 2332). Moreover, as already noted, Appellants’ proffered defenses to Debtor‘s causes of action suggest strongly that the non-bankruptcy causes of action are inconsequential relative to the bankruptcy causes of action. See id. (stating that where a core proceeding involves adjudication of federal bankruptcy rights wholly divorced from inherited pre-petition state law claims, the importance of the federal bankruptcy forum is at its zenith).
Some of the purposes of the Code we mentioned in National Gypsum as potentially conflicting with the Arbitration Act include thе goal of centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders. Id. at 1069. In this Debtor‘s case, each of these concerns is tangible and justifies the federal bankruptcy forum provided by the Code.13
AFFIRMED.
Notes
The Parties agree that any controversy or claim arising out of or relating to this Agreement, or any dispute arising out of the interpretation or application of this Agreement, which the parties hereto are unable to resolve, shall be finally resolved and settled exclusively by arbitration in San Antonio, Texas[,] by a single arbitrator under the American Arbitration Association‘s Commercial Arbitration Rules then in effect and in accordance with the substantive laws of the State of Texas. The parties each recognize and consent to the jurisdiction over each of them by the courts of the State of Texas. The award of the arbitrator shall be final and binding upon the parties and non-appealable, and judgment may be entered upon such award by any court of competent jurisdiction.
See Signtech Partnership Agreement section 14.15; HGLP Partnership Agreement sеction 14.16.
“(a) An appeal may be taken from —
(1) an order —
(A) refusing a stay of any action under section 3 of this title; ....”
Subject to Sections 6.07 [prohibition and liability for excessivе distributions] and 8.05 [priorities in disposition of assets] of this Act, at the time that a partner becomes entitled to receive a distribution, with respect to the distribution, that partner has the status of and is entitled to all remedies available to a creditor of the limited partnership.
Section 6.06 makes Debtor, a partner, into a quasi-creditor of the partnership for a distribution that she is entitled to receive. See