In Re: ELECTRIC MACHINERY ENTERPRISES, INC., Debtor. THE WHITING-TURNER CONTRACTING COMPANY, UNITED STATES FIDELITY AND GUARANTY COMPANY, Plaintiffs-Appellants, versus ELECTRIC MACHINERY ENTERPRISES, INC., Defendant-Appellee.
No. 06-13733
IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
February 23, 2007
D. C. Docket Nos. 06-00114-CV-T-17MSS, BK:03-11047-8. Non-Argument Calendar. [PUBLISH]
WILSON, Circuit Judge:
This is an interlocutory appeal in a bankruptcy case. We find that the district court erred when it upheld a bankruptcy court‘s denial of a motion to compel arbitration.
BACKGROUND
The Whiting-Turner Contracting Company (“Whiting-Turner“) was the general contractor on the construction of certain improvements at Universal City Development Partners’ (“UCDP“) theme park known as “Seuss Landing.”1 Electric Machinery Enterprises, Inc. (“EME“) entered into a subcontract with Whiting-Turner and agreed to provide electrical work on the project. During the course of the work, Whiting-Turner suffered scheduling delays that impacted the completion of the work. UCDP refused to grant Whiting-Turner any contract time extensions for excusable delays; therefore, both Whiting-Turner and EME were forced to expend additional costs to accelerate the work. Whiting-Turner submitted an amended claim to UCDP for these additional costs. As part of the amended claim, Whiting-Turner included (as a “pass-through” claim) the claimed
While Whiting-Turner was pursing these claims against UCDP, Whiting Turner and EME entered into a Tolling Agreement, which tolled the applicable statute of limitations with respect to an action by EME against Whiting-Turner. The Tolling Agreement also acknowledged that during the course of the project, EME had incurred additional costs for change work and acceleration of contract performance. The Tolling Agreement stated that Whiting-Turner had submitted EMEs claimed costs as part of Whiting-Turners claims to UCDP, and Whiting Turner was continuing to exhaust both Whiting-Turners and EMEs claims with UCDP.In the Tolling Agreement, Whiting-Turner and EME agreed “that any issues, claims or defenses between them shall be resolved by binding arbitration under the Construction Industry Rules of the American Arbitration Association and judgment shall be entered upon any award in such proceedings.”
In June 2004, Whiting-Turner entered into a settlement agreement with UCDP in which UCDP paid Whiting-Turner $9,600,000. Following the settlement, Whiting-Turner informed EME that based on the prior payments made
In May 2003, EME had filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Middle District of Florida. After Whiting-Turner settled with UCDP, EME filed an adversary proceeding in bankruptcy court against Whiting-Turner alleging that Whiting-Turner owes EME $5,081,286 in principal and $2,328,423 in accrued interest pursuant to a subcontract agreement between the parties. In its complaint, EME claims that the suit is for “turnover” property of the estate. Furthermore, EME claims that Whiting-Turner breached their contract and owed payment to EME based on a payment bond issued by Whiting-Turner.
EME moved for summary judgment, asserting that Whiting-Turner has a duty to “turn over” the undisputed amount of money that it owes EME. Specifically, EME claimed that it is owed a percentage of the settlement proceeds that UCDP paid to Whiting-Turner. Whiting-Turners initial cumulative claim against UCDP was for approximately $21 million, which included EME‘s claim of approximately $6.2 million. EME stated that this $6.2 million represented 29% of Whiting-Turners cumulative claim. Therefore, EME claimed that it should receive 29% of the $9,600,000 Whiting-Turner received as a settlement, which is
The bankruptcy court denied EMEs motion for summary judgment and found that this case is not a “turnover” action because it involves a disputed and unliquidated claim. The bankruptcy court also found that this case presents a constructive trust situation, because Whiting-Turner collected money in settlement for itself and for EME, and if Whiting-Turner does not distribute the proportion of the settlement owed to EME, Whiting-Turner will be unjustly enriched. However, the bankruptcy court acknowledged that the amount of money that Whiting-Turner owes to EME is a “hotly disputed” factual issue. Having determined that a constructive trust existed, the bankruptcy court determined that it had jurisdiction over the res of the constructive trust, and that the determination of the amount of res in the constructive trust was a “core” bankruptcy proceeding. Therefore, the bankruptcy court found that arbitration under these circumstances was not appropriate and denied Whiting-Turners motion to compel arbitration. The district court affirmed, and Whiting-Turner appealed.
We independently examine the factual and legal determinations of the bankruptcy court under the same standards as the district court. Barnett Dodge Chrysler Plymouth Inc. v. Cranshaw (In re Issac Leaseco, Inc.), 389 F.3d 1205, 1209 (11th Cir. 2004). We review legal determinations de novo. Securities Groups v. Barnett (In re Monetary Group), 2 F.3d 1098, 1103 (11th Cir. 1993). We review the factual findings of the bankruptcy court for clear error. Id.
DISCUSSION
A. Legal Standard for the Enforcement of a Valid Arbitration Agreement
The parties do not dispute that they entered into a valid arbitration agreement to resolve any and all claims or issues between them. The Federal Arbitration Act (“FAA“) provides, in pertinent part, that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or in equity for the revocation of any contract.”
In McMahon, the United States Supreme Court promulgated a three factor test in order to determine Congress intent: “(1) the text of the statute; (2) its legislative history; and (3) whether ‘an inherent conflict between arbitration and the underlying purposes [of the statute]’ exists.” Davis, 305 F.3d at 1273 (alteration in original) (quoting McMahon, 482 U.S. at 227, 107 S. Ct. at 2338). In applying the McMahon factors, “‘questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration.‘” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26, 111 S. Ct. 1647, 1652, 114 L. Ed. 2d 26 (1991). Applying the McMahon factors to the Bankruptcy Code, we find no evidence within the text or in the legislative history that Congress intended to create an exception to the FAA in the Bankruptcy Code. See Mintze v. Am. Gen. Fin. Servs., Inc. (In re Mintze), 434 F.3d 222, 231 (3d Cir. 2006) (finding no evidence of such an intent in the statutory text or legislative history of the bankruptcy code). Therefore, we look to the third factor of the McMahon test and
B. Analysis
The bankruptcy court found that the determination of the res of the constructive trust was a core proceeding over which the bankruptcy court had exclusive jurisdiction. The bankruptcy court relied on the United States Supreme Courts decision in Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 124 S. Ct. 1905, 158 L. Ed. 2d 764 (2004), for the proposition that “[a] bankruptcy courts in rem jurisdiction permits it to ‘determin[e] all claims that anyone, whether named in the action or not, has to the property or thing in question.‘” Id. at 448, 124 S. Ct. at 1911 (second alteration in original). However, whether or not the bankruptcy court has jurisdiction, even exclusive jurisdiction, over a matter is a separate question from whether enforcing a valid arbitration agreement would pose an inherent conflict with the underlying purposes of the Bankruptcy Code. See McMahon, 482 U.S. at 227-28, 107 S. Ct. at 2338-39 (finding that the plaintiffs’ claim that the defendant violated § 10(b) of the Securities Exchange Act of 1934 was subject to arbitration even though district courts have exclusive jurisdiction over such violations). Therefore, the bankruptcy court‘s finding that it had jurisdiction over the matter does not end our inquiry, for a finding of jurisdiction
Courts addressing the issue of whether arbitration inherently conflicts with the Bankruptcy Code distinguish between core and non-core proceedings. See Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1156-57 (3d Cir. 1989). In general, bankruptcy courts do not have the discretion to decline to enforce an arbitration agreement relating to a non-core proceeding. See Crysen/Montenay Energy Co. v. Shell Oil Co. (In re Crysen/Montenay Energy Co.), 226 F.3d 160, 166 (2d Cir. 2000). However, even if a proceeding is determined to be a core proceeding, the bankruptcy court must still analyze whether enforcing a valid arbitration agreement would inherently conflict with the underlying purposes of the Bankruptcy Code. See Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re National Gypsum), 118 F.3d 1056, 1067 (5th Cir. 1997). As explained below, we find that the proceeding in this case is not a core proceeding. Moreover, and even if it is a core proceeding, there is no evidence that arbitrating EMEs claim against Whiting Turner would inherently conflict with the underlying purposes of the Bankruptcy Code. Therefore, the dispute between EME and Whiting-Turner is subject to arbitration under the terms of the arbitration agreement.
In this case, the bankruptcy court held that the determination of the res of a constructive trust is a core proceeding. The district court, in affirming the bankruptcy court, cited to Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396 (4th Cir. 1992), for the proposition that the finding of a constructive trust and the proper distribution of the res of that trust are core proceedings. However, In re Johnson is distinguishable.
In In re Johnson, the debtor filed bankruptcy following the collapse of an illegal pyramid scheme that the debtor had perpetrated. 960 F.2d at 398. The
In contrast, in this case, the disputed assets are not held by the debtor. Rather, they are held by a third party (Whiting-Turner), and the proceeding
EME argues that Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574 (2d Cir. 1983), supports the proposition that a bankruptcy court can exercise jurisdiction over a constructive trust with assets held by a third party, and such a proceeding is a core proceeding. However, we disagree with EME‘s interpretation of In re Kaiser. In that case, the bankruptcy court found that the debtor husband had made a fraudulent transfer of property to his wife in order to hinder, delay, or defraud his creditors. The bankruptcy court imposed a constructive trust upon the property that the debtor had fraudulently transferred to his wife. The debtor argued that the bankruptcy court did not have the authority to issue a final order imposing the constructive trust, because it was only a “related proceeding.” Id. at 1581. While the Second Circuit in In re Kaiser disagreed with the appellant-debtor, it explained that “[i]t is certainly true that state courts commonly impose constructive trusts. What appellant ignores, however is that this action was brought as a result of his fraudulent transfers in light of the bankruptcy laws. . . . [therefore], federal law
Accordingly, we hold that the bankruptcy court erred in finding that a determination of how much money, if any, Whiting-Turner owes EME is a core proceeding.2 A determination of whether Whiting-Turner owes EME money under their contractual agreement does not involve a right created by federal bankruptcy law, and it is not a proceeding that would arise only in bankruptcy. See In re Toledo, 170 F.3d at 1348. EME could have bought this claim against Whiting-Turner irrespective of whether EME had filed for bankruptcy. EMEs claim against Whiting-Turner does not involve the traditional purpose of the bankruptcy court – modifying the rights of creditors who make claims against the bankruptcy debtor‘s estate. See In re Semel & Co., 285 F. Supp. 536, 541 (D. N.J. 1968)
Furthermore, even if we were to find that EMEs claim against Whiting-Turner constitutes a core proceeding, we find that EME did not sustain its burden under McMahon to demonstrate that Congress intended to limit or prohibit waiver of a judicial forum for the type of claim that EME brought against Whiting-Turner. See McMahon, 482 U.S. at 227, 107 S. Ct. at 2338. The bankruptcy court found that the determination of the res in a constructive trust was a core proceeding and that arbitration under these circumstances was inappropriate. However, the bankruptcy court did not assess whether enforcing the parties arbitration agreement would inherently conflict with the underlying purposes of
CONCLUSION
The bankruptcy court erred in denying Whiting-Turners motion to compel arbitration. Accordingly, we reverse the judgment of the district court, which denied Whiting-Turners bankruptcy appeal, and remand this case to the district court for remand to the bankruptcy court with instructions to compel the parties to arbitrate in accordance with the terms of their arbitration agreement.
REVERSED and REMANDED.