Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almb-1_04-ap-01015/USCOURTS-almb-1_04-ap-01015-0/pdf.json

Parties Involved:
Saturn Transportation Systems, Inc.
Defendant
Culverhouse, Inc.
Plaintiff
Tracy W. Cary
Other Prof.

Document Text:

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF ALABAMA

In re Case No. 03-12288-WRS

 Chapter 11

CULVERHOUSE INC.,

 Debtor

CULVERHOUSE INC., 

 Plaintiff Adv. Pro. No. 04-1015-WRS

 v.

SATURN TRANSPORTATION SYSTEMS INC.,

 Defendant

MEMORANDUM DECISION

This Adversary Proceeding is before the Court upon the motion of Defendant Saturn

Transportation Systems, Inc., to compel arbitration. (Doc. 5). First, the Court will review the 

history of this proceeding. Second, the Court will consider the nature of the Culverhouse’s 

claim against Saturn Transportation and Saturn’s claim against the Debtor. Third, the Court will

consider whether enforcement of the arbitration clauses in the contracts would conflict with any

Bankruptcy Code policies. Finding that arbitration would conflict with Bankruptcy Code

policies, Saturn Transportation’s motion to compel arbitration is DENIED. 

I. PROCEDURAL HISTORY

On October 1, 2003, Plaintiff Culverhouse, Inc., filed a petition in bankruptcy pursuant to

Chapter 11 of the Bankruptcy Code. On February 9, 2004, Culverhouse filed a complaint

seeking damages and injunctive relief, alleging that Saturn had breached the terms of one or both 

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 The reader should bear in mind that bankruptcy courts create separate files with

separate docket sheets for adversary proceedings. When a bankruptcy case is filed, a bankruptcy

case file is created. When an adversary proceeding is filed, a separate case file is created. See,

Rule 7001, Fed. R. Bankr. P. As this Memorandum Decision is filed in the Adversary

Proceeding file, all references to documents filed in the bankruptcy case file will be preceded by

a case number reference. References to documents filed in this Adversary Proceeding will be

made solely to the docket number without a proceeding reference to the Adversary Proceeding

number. 

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of the contracts the parties had entered into. Saturn Transportation promptly moved this Court to

compel arbitration, citing provisions in the contracts. (Doc. 5). On April 21, 2004, the Court,

with the agreement of the parties, referred this matter to mediation. (Doc. 15). Mediation was

not successful and the Court will now consider Saturn Transportation’s motion to compel

arbitration. On July 7, 2004, Saturn Transportation filed an application for administrative

expenses in the Culverhouse bankruptcy case. (Case No. 03-12288, Doc. 252).1

 On July 16,

2004, Culverhouse moved to amend its complaint. (Doc. 22, 23). The parties have briefed the

motion. (Docs. 5, 21, 26). 

II. CULVERHOUSE’S CLAIM AGAINST SATURN AND

SATURN’S CLAIMS AGAINST CULVERHOUSE

On March 17, 2003, Saturn Transportation and Culverhouse entered into two contracts

which they styled: (1) “Independent Sales Representative Agreement,” and (2) “Master

Independent Contractor Operating Agreement Percentage Based Compensation.” In general

terms, the contracts call for Culverhouse to use its trucks and drivers to haul freight and to

provide other transportation related services for Saturn Transportation in return for

compensation. Both contracts contain arbitration clauses. (Doc. 5). 

In its complaint, Culverhouse alleges that Saturn took action in December 2003 and

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 The procedural posture of this Adversary Proceeding has become somewhat convoluted

in recent weeks. On July 16, 2004, Culverhouse moved to amend its complaint. (Doc. 22). This

Court has not yet ruled upon that motion, nevertheless Saturn has filed an answer to the amended

complaint and added a counterclaim to boot. (Doc. 27). The Counterclaim appears to

encompass the issues raised in the administrative claim and adds a claim for “interference with

business relations.” Therefore, it appears the counterclaim includes all of the items in the

administrative period claim and adds at least one substantive claim which was not a part of the

administrative period claim.

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January 2004, which culminated in the termination of these contracts. (Doc. 1). For example, a

letter dated January 12, 2004, from Saturn to Culverhouse appears to be an attempt to alter the

terms and conditions of the contract. The January 12 letter indicates that these changes were

needed to “make economic and operational sense for Saturn.” Culverhouse apparently failed to

accede to Saturn’s demands for concessions and as a result, by letter dated January 16, 2004,

Saturn gave notice that it was terminating their contractual relationship, citing “numerous safety

issues.” At a minimum, Culverhouse has raised an inference that safety issues were a pretext for

termination of the agreement and that the true motivation was Culverhouse’s refusal to meet

Saturn’s demands for contract concessions.

Rather than file a counterclaim in this Adversary Proceeding, Saturn Transportation filed

an application for administrative expenses in the main bankruptcy case on July 7, 2004, seeking

the allowance of an administrative expense claim in the amount of $59,260.75.2 (Case No. 03-

12288, Doc. 252). Examination of Saturn’s claim indicates that it consists of two components,

both of which flow from the termination of the contracts. The first component of the claim

consists of a charge in the amount of $25,284.00 for incidental on board equipment (that is

equipment on board trailers owned by Saturn which were in the possession of Culverhouse). The

second component consists of transportation costs for the failure of Culverhouse to return 19

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trailers to Minnesota, as called for by the contract. It goes without saying that if Culverhouse is

correct in its claim that Saturn unlawfully terminated the contracts, then the transportation

charges will not be owed. In other words, Saturn would not be entitled to impose a charge for

wrongfully repossessing the trailers. Therefore, a substantial portion of Saturn’s administrative

claim turns on the question of whether the contracts were lawfully terminated. 

Examination of the two contracts in question, the complaint filed by Culverhouse in this

Adversary Proceeding, and the administrative expense claim filed by Saturn in the main

bankruptcy case, reveals that these conflicting claims arise out of a common nucleus of facts. It

is not practical to consider Saturn’s administrative expense claim without considering

Culverhouse’s claim that the contracts were unlawfully terminated. 

III. ARBITRATION OF CULVERHOUSE’S CONTRACT

CLAIM AGAINST SATURN WOULD CONFLICT WITH

UNDERLYING BANKRUPTCY CODE POLICIES

We start with the proposition that by enacting the Federal Arbitration Act (FAA),

Congress established a Federal policy favoring arbitration agreements. MS Dealer Service Corp.

v. Franklin, 177 F.3d 942, 974 (11th Cir. 1999), citing, Gilmer v. Interstate/Johnson Lane Corp.,

500 U.S. 20, 25, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991); see generally, 9 U.S.C. § 1, et. seq. The

existence of an arbitration clause in a contract does not, in every instance, mandate that the

matter be referred to arbitration. Before such a clause is enforced, the Court must determine

whether there are conflicting Federal policies which might countervail the arbitration clause. 

While there is no authority which is binding upon this Court which sets forth the standard to be

applied by a bankruptcy court in a case such as the one at bar, the Fifth Circuit handed down a

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decision recently which this Court finds persuasive. See, Gandy v. Gandy (In re: Gandy), 299

F.3d 489, 494-95 (5th Cir. 2002). The Court in Gandy stated that “a bankruptcy court has no

discretion to refuse to compel the arbitration of matters not involving “core” bankruptcy

proceedings . . . a bankruptcy court does possess discretion, however, to refuse to enforce an

otherwise applicable arbitration agreement when the underlying nature of a proceeding derives

exclusively from the provisions of the Bankruptcy Code and the arbitration of the proceeding

conflicts with the purpose of the Code.” Id. at 495.

Culverhouse contends that its claim against Saturn Transportation is within this Court’s

core jurisdiction and for that reason, it should not be referred to arbitration. Saturn contends that

Culverhouse’s claim is non-core, and contends that it should be referred to arbitration, citing a

recent decision of the Fifth Circuit which holds that a bankruptcy court has no discretion to

refuse arbitration of a non-core proceeding. While there is no authority which is binding upon

this Court precisely on point, it would appear that the core versus non-core distinction is a

material distinction. A bankruptcy court may deny arbitration of a core proceeding, if it finds

that arbitration would conflict with the purpose of the Bankruptcy Code. See, In re: Gandy, 299

F.3d 489 (5th Cir. 2002)(affirming decision of Bankruptcy Court which found that arbitration of

core proceedings would conflict with the purpose of the Code); Insurance Company of North

America v. NGC Settlement Trust & Asbestos Claim Management Corporation, (In re: National

Gypsum), 118 F.3d 1056 (5th Cir. 1997)(holding that determination whether suit was barred by

bankruptcy discharge injunction was a core proceeding and that the Bankruptcy Court properly 

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 Administrative expenses are those which arise from the “actual, necessary costs and

expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A). These claims are afforded the

highest priority under the Bankruptcy Code. 11 U.S.C. § 507(a)(1).

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refused to send the matter to arbitration); Hays and Company v. Merrill Lynch Pierce Fenner &

Smith, Inc., 885 F.2d 1149 (3rd Cir. 1989)(arbitration ordered in noncore proceeding).

Culverhouse contends that this is a core proceeding citing the provisions of 28 U.S.C. §

157(b)(2)(B), (C). These two provisions provide that claims against the estate and counterclaims

by the estate against those who have filed claims are core proceedings. Even more compelling in

this Court’s view is the fact that Saturn claims an administrative period expense.3

 Administrative

period claims must be paid in cash and in full on the effective date of the plan. 11 U.S.C. §

1129(a)(9)(A). Thus, the allowance of an administrative period claim has a significant impact

upon the plan confirmation process. In some instances, the allowance of an administrative period

claim may be determinative on the question as to whether a plan may be confirmed. Moreover,

even if it is not determinative, the allowance of an administrative period claim has a dramatic

impact upon the distribution to creditors. The more that is given to administrative period claims,

the less which remains available for distribution to other creditors, who do not have priority. If

Saturn’s motion were granted, a significant portion of the plan confirmation process would be

farmed out for arbitration, clearly conflicting with underlying policies of the Bankruptcy Code.

Saturn Transportation would have Culverhouse’s claim sent to arbitration, yet it

interposes its administrative expense claim here. This violates a well-established policy against

piecemeal litigation. See, e.g., Ambrosia Coal and Construction Co. v. Pages Morales, 368 F.3d

1320 (11th Cir. 2004). If piecemeal litigation were ordered, the parties would have to try many of

the same factual issues twice, in two different fora. This would impose unnecessary costs on an

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already financially-stressed Debtor and would create a risk of inconsistent adjudications. Policy

considerations favoring arbitration pursuant to the terms of the contracts are outweighed by

Bankruptcy Code policy concerns effecting not only the parties here but the entire creditor

population. 

Administrative claims, such as that interposed by Saturn here, if allowed, must be paid in

cash, in full, on the effective date of the plan. 11 U.S.C. § 1129(a)(9)(A). Allowance of an

administrative period claim has an immediate and direct impact upon the plan confirmation

process. First, an administrative-period claim must be paid in full upon confirmation. 

Allowance of such a claim necessarily diminishes the amount available for distribution to other

creditors. To the extent that the plan confirmation process is a zero sum game, amounts paid to

administrative priority creditors necessarily diminishes the amount available to others. Second,

there are two separate aspects of the allowance of an administrative claim. The first aspect is

simply the determination of the amount, if any, of the liability on the claim. This is no different

than the determination of any civil contract claim in any court. However, the second aspect

entails a determination which is unique to bankruptcy proceedings. Once a determination of the

amount of liability is made, the Court must then determine whether the amount to be allowed

comprises “the actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. §

503(b)(1)(A). The determination of whether or not a given expense actually served to “preserve

the estate” is a determination which should not be ceded to a nonbankruptcy forum. Indeed, an

arbiter would have no reason to know whether a given expense served to preserve the estate or 

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 Black’s Law Dictionary defines counterclaim as “a claim for relief asserted against an

opposing party after an original claim has been made; esp., a defendant’s claim in opposition to

or as a setoff against the plaintiff’s claim.” 

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not. Saturn would, no doubt, submit the entire matter to arbitration and then argue its preclusive

effect in this Court. This determination is at the very core of a bankruptcy court’s jurisdiction. 

To cede this jurisdiction to arbitration would be to permit creditors to opt out of the bankruptcy

process by way of an artfully-drafted clause in a contract. As this squarely conflicts with the

purpose and the operation of the Bankruptcy Court, arbitration will not be ordered. Third,

allowance of an administrative period claim may be determinative of the question of whether a

given case is viable under Chapter 11 of the Bankruptcy Court. Such a crucial determination

should not be made by any tribunal other than a bankruptcy court.

Saturn argues that Culverhouse’s contract claim is not core because it is not denominated

a counterclaim, citing 11 U.S.C. § 157(b)(2)(c). (Doc. 26, pp. 5-6). To be sure, Culverhouse

filed its Adversary Proceeding before Culverhouse filed its administrative period claim and it is

not cast in the form of a counterclaim, however, to hold that the claim of Culverhouse is not a

counterclaim would be to exalt form over substance. One does not look merely at the form of

matter to determine what it is, rather one looks to its substance. It is clear that the contract claim

of Culverhouse and the administrative period claim of Saturn arise from the same occurrence, i.e.

the termination of the two contracts in issue. Conflicting claims arising out of the same

occurrence are counterclaims under any reasonable definition of the term counterclaim.4

 See,

Rule 13, Fed. R. Civ. P. 

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IV. CONCLUSION

The Court finds that Culverhouse’s claim against Saturn, which was the initial claim filed

in this Adversary Proceeding, and Saturn’s administrative claim against Culverhouse, which is

filed in the main bankruptcy proceeding (Case No. 03-12288, Doc. 252) arise from the same

occurrence. The central question here is whether Saturn properly terminated its contracts with

Culverhouse. If the answer to that question is yes, the next question becomes whether Saturn is

entitled to damages flowing from Culverhouse’s breach and the termination of the contract. If

there are damages, the Court must further find whether the liability is entitled to an

administrative priority pursuant to 11 U.S.C. §§ 503, 507(a)(1). On the other hand, if Saturn did

not lawfully terminate the contract, the Court must next consider whether an award of damages

in favor of Culverhouse is appropriate. As it is not practical to separate the conflicting claims

and as the allowance of an administrative claim has a dramatic impact upon the Chapter 11 Plan

confirmation process, the determination of this matter by way of arbitration would squarely

conflict with the purpose and operation of the Bankruptcy Code. For this reason, Saturn’s

motion to refer this matter to arbitration is denied. The Court will enter an order by way of a

separate document.

Done this 23rd day of September, 2004.

/s/ William R. Sawyer

United States Bankruptcy Judge

c: Tracy W. Cary, Attorney for Plaintiff

 Jayna Partain Lamar, Attorney for Defendant

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