1

Revised August 2, 2002

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT 

No. 02-50185

In the Matter of: SARMA GANDY, Debtor. 

JAMES GANDY, KARTAR GANDY, HARY GANDY LIMITED PARTNERSHIP,

SIGNTECH USA, LTD., KARTAR GANDY LIMITED PARTNERSHIP, and HARY

GANDY, Appellants, 

VERSUS 

SARMA GANDY, Appellee.

Appeal from the United States District Court 

For the Western District of Texas

 

July 22, 2002

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
2

debtor in possession (“Debtor”) under Chapter 11 of the

Bankruptcy Code. 11 U.S.C. §§ 1101 et seq. (2002). The United

States Bankruptcy Court for the Western District of Texas,

holding that it had discretion to refuse to order arbitration of

core bankruptcy matters, denied the Gandys’ motion to compel

arbitration and to stay the adversary proceeding pending

arbitration. The District Court affirmed. The Gandys now appeal

to this court. We affirm.

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 Gandy, Debtor’s father-in-law, and by James

Gandy, Debtor’s brother-in-law. On October 10, 1997, Debtor
3

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
4

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 accounts

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
5

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 filed 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 compel 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 obtained a

temporary restraining order against the Gandys, except for Hary

Gandy and HGLP, prohibiting them from further use of the funds.4
6

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. 

Discussion

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”), 9 U.S.C. §§ 1 et seq. (2002).5

Referring to this subsection, this court in In re National

Gypsum, 118 F.3d 1056, 1061 (5th Cir. 1997), stated that “[a]

bankruptcy court’s refusal to stay an adversary proceeding

pending arbitration, though interlocutory in nature, is

nevertheless appealable because of section 16 of the Federal

Arbitration Act.” See also Hays & Co. v. Merrill Lynch , Pierce,

Fenner & Smith, Inc., 885 F.2d 1149, 1151-52 (3d Cir. 1989)

(holding that 9 U.S.C. § 16(a) establishes rule of immediate

appealability with respect to orders denying motions to compel

and to stay arbitration). Thus, under 9 U.S.C. § 16(a)(1)(A) and

National Gypsum, this court has jurisdiction to hear the appeal

from the order of the bankruptcy court refusing to stay Debtor’s

adversary proceeding pending arbitration.

On appeal, the Gandys argue that the district court erred in

refusing to compel Debtor to arbitrate this case under the
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arbitration clauses of the partnership agreements for Signtech

and HGLP. Whether a 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 28 U.S.C. § 157(b). Id. at 1062. If we find that the

bankruptcy court had discretion to assess whether arbitration

would be consistent with the Bankruptcy Code, the exercise of

that discretion is reviewable only for abuse. See In re United

States Lines, Inc., 197 F.3d 631, 640-41 (2d Cir. 1999).

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
8

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.” 9 U.S.C. §

2. The FAA directs courts rigorously to enforce agreements to

arbitrate, even if a party opposing arbitration is asserting a

statutory claim. Shearson/American Express, Inc. v. McMahon, 482

U.S. 220, 226-27, 107 S.Ct. 2332, 96 L.Ed 2d 185 (1987). A court

must stay its proceedings if it is satisfied that an issue before

it is arbitrable under the agreement. 9 U.S.C. § 3; id. at 226,

107 S.Ct. at 2337. This statutory directive, however, may be

overridden by a contrary congressional command. McMahon, 482

U.S. at 226, 107 S.Ct. at 2337. A party wishing to defeat

application of the FAA bears the burden of demonstrating “that

Congress intended to preclude a waiver of judicial remedies for

the statutory rights at issue.” Id. at 227, 107 S.Ct. at 2237.

While it is generally accepted that a bankruptcy court has

no discretion to refuse to compel the arbitration of matters not

involving “core” bankruptcy proceedings under 28 U.S.C. § 157(b),
9

this court has held that a bankruptcy court may decline to stay a

proceeding whose underlying nature derives exclusively from the

provisions of the Bankruptcy Code. National Gypsum, 118 F.3d at

1067. In National Gypsum, this court cited with approval the

Third Circuit’s conclusion in Hays that bankruptcy courts

generally do not have discretion to decline to stay proceedings

involving non-core matters. Id. at 1066 (stating that Hays makes

“eminent sense” and is “universally accepted” with respect to

debtor-derivative, non-core matters).6 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 1067 (noting McMahon, 482

U.S. at 226-27, 107 S.Ct. at 2337-38). 

We reasoned in National Gypsum that, “at least where the

cause of action at issue is not derivative from the debtor’s prepetition 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. 118 F.3d 

at 1069. Such discretion permits the bankruptcy court to assess

whether arbitration would be consistent with the purpose of the

Code, “including the goal of centralized resolution of purely
10

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. 11 U.S.C. § 544(b). Debtor also seeks relief under

section 548 to avoid any fraudulent transfer of an interest of

the debtor that was made within one year of the filing of her

bankruptcy petition. 11 U.S.C. § 548. Accordingly, she also

claims the remedies available under section 550 to recover such

transferred property or interest, or the value thereof, from the

transferees or their successors. 11 U.S.C. § 550(a). All of

these claims to avoid or recover pre-bankruptcy transfers are

“core proceedings” arising under Title 11, pursuant to 28 U.S.C.

§ 157. These claims are created by the Bankruptcy Code and are

not—outside of bankruptcy—available to Debtor. See In re Wood,

825 F.2d 90, 97 (5th Cir. 1987) (stating that “a proceeding is

core under section 157 if it invokes a substantive right provided
11

by title 11 or if it is a proceeding that, by its nature, could

arise only in the context of a bankruptcy case”); see, e.g.,

Hays, 885 F.2d at 1155 (“Claims asserted by the trustee under

section 544(b) are not derivative of the bankrupt. They are

creditor claims that the Code authorizes the trustee to assert on

their behalf.”); see, e.g., In re Hamilton Taft & Co., 176 B.R.

895, 902 n. 4 (Bankr. N.D. Cal. 1995) (noting that section 548 of

the Bankruptcy Code creates a federal cause of action for

recovery of a fraudulent conveyance).

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 11 U.S.C. § 542,
12

nor properly plead a fraudulent transfer claim under 11 U.S.C. §

548. Id. at 320, 322. The district court reversed the

bankruptcy court’s order denying the clearing broker’s request

for a stay pending arbitration. 

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. 

In this case, conversely, Debtor is seeking to avoid

transfers of her own ownership interests in Signtech or HGLP that

she made beginning in October 10, 1997. Assuming the facts to be

well pleaded and without evaluating the merits of any claim, we

note that the potential avoidance of such transfers is governed

by section 544(b), subject to the four-year limitations period

for Texas fraudulent transfer actions,7 and by section 550. 

Debtor also seeks to avoid transfers made upon the liquidation of

Signtech, a transaction made within one year before the

commencement of Debtor’s bankruptcy case,8 for which section 548

is also available.9 Through these causes of action provided by
13

the Bankruptcy Code, Debtor, as a debtor in possession in Chapter

11, is exercising the trustee’s “strong arm” powers pursuant to

11 U.S.C. § 1107(a).10 Unlike the situation in Trefny, the

transactions alleged to be fraudulent in this case are not

subject to the same kind of attack by Debtor outside of

bankruptcy. Therefore, assuming the facts to be well pleaded,

Debtor asserts bankruptcy causes of actions under sections 544,

548 and 550 that are in essence created by the Bankruptcy Code

for the benefit of creditors of the estate. See National Gypsum,

118 F.3d at 1068 (citing with approval In re Statewide Realty

Co., 159 B.R. 719, 722 (Bankr. D.N.J. 1993) (interpreting Hays

and distinguishing between actions derived from the debtor and

actions created by the Bankruptcy Code)). In this circumstance,

“the importance of the federal bankruptcy forum provided by the

Code is at its zenith.” Id.

While some of Debtor’s remaining claims do involve her prepetition 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]
14

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).

Appellants’ own arguments reinforce the primacy of Debtor’s

bankruptcy causes of action. Appellants contend that, even if

Debtor got far less than her fair share from Singtech and HLGP,

she is without remedy because she was represented by counsel and

either knew or should have known how to protect her interests. 

Since Debtor failed so badly in looking out for herself,

Appellants seem to argue, she is now without redress. This might

well be a correct analysis of Debtor’s prospects for recovery on

the causes of action she pled in state court: breach of fiduciary

duty, negligence, fraud, constructive trust and breach of

contract. But Debtor’s mistakes, misjudgments, or failings—or

those of her counsel—matter little if at all in causes of action

brought under 11 U.S.C. §§ 544, 548 or 550. Because claims made

pursuant to these sections are creditor-based, the misconduct of

the debtor is hardly a complete defense. Indeed, the Bankruptcy

Code’s creditor-based causes of action, including those

incorporated from state law, are often grounded in serious

allegations of misconduct by the debtor. See, e.g., In re

Pancake, 106 F.3d 1242 (5th Cir. 1997); In re Haber Oil Co.,

Inc., 12 F.3d 426 (5th Cir. 1994); In re Hayden, 248 B.R. 519

(Bankr. N.D. Tex. 2000). Thus, the adjudication of Debtor’s
15

bankruptcy rights is separate and unrelated to Debtor’s prepetition legal or equitable rights. See National Gypsum, 118

F.3d at 1068.

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. National

Gypsum, 118 F.3d 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 implicate 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
16

purpose of the Bankruptcy Code: the expeditious and equitable

distribution of the assets of Debtor’s estate. According to

Debtor’s pleadings and uncontroverted 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 11 U.S.C. § 304, seem decidedly

preferable to that of even the most experienced arbitrator. The

bankruptcy court and the district court acting as one unit have

exclusive jurisdiction over all of the property, “wherever

located,” of the Debtor, and of property of her estate. 28

U.S.C. § 1334(e).

Third, one party, Hary Gandy, already has filed a proof of

claim as a lien holder on the Debtor’s interest in Signtech. 
17

This court has held that filing a proof of claim under bankruptcy

law “invokes the special rules of bankruptcy concerning

objections to the claim, estimation of the claim for allowance

purposes, and the rights of the claimant to vote on the proposed

distribution.” Wood, 825 F.2d at 97. In this sense, “a claim

filed against the estate is a core proceeding because it could

arise only in the context of bankruptcy.” Id. Although only one

of the appellants has filed a proof of claim, the peculiar powers

of the bankruptcy court have been invoked. The “nature of the

state proceeding [becomes] different from the nature of the

proceeding following the filing of a proof of claim.” Id.

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 some claims be sent to arbitration, see, e.g.,

Hays, 885 F.3d 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
18

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

considerations 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 override 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). 

Moreover, as already noted, Appellants’ proffered defenses to

Debtor’s causes of action suggest strongly that the nonbankruptcy 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
19

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 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. 118 F.3d at 1069. 

In this Debtor’s case, each of these concerns is tangible and

justifies the federal bankruptcy forum provided by the Code.13 

Accordingly, we find that the bankruptcy court possessed

discretion to refuse enforcement of the arbitration provision in

the Signtech and HGLP partnership agreements, and that the

bankruptcy court did not abuse its discretion in denying, and the

district did not err in affirming the denial of, the motions to

compel arbitration and for stay pending arbitration. 

AFFIRMED.
20

1. Debtor alleges that a later rescission agreement, executed by

Debtor and Hary Gandy, reconveyed to her all of her 33% interest in

Signtech. Debtor claims that she, not HGLP, was the owner of 33%

of Signtech when it liquidated in March of 2000. The Gandys

dispute any such rescission and maintain that HGLP owned 33% of

Signtech at its liquidation. Irrespective of whether Debtor or

HGLP owned 33% of Signtech, Debtor’s pleadings allege sufficient

facts, for instance, those related to the 1997 transfer or, in the

alternative, the transfer of Debtor’s ownership interest in HGLP,

to raise avoidance causes of action in the bankruptcy proceeding.

2. Eventually, KGLP took Signtech’s building in exchange for

increasing James Gandy’s ownership in the other assets to 49%.

3. The partnership agreements for Signtech and HGLP contain this

identical broad arbitration clause: 

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 section 14.16.

4. This restraining order is continued through and until conclusion

of an on-going preliminary injunction hearing. 

5. 9 U.S.C. § 16(a)(1)(A) provides: 

“(a) An appeal may be taken from —

(1) an order — 

* District Judge of the Southern District of Texas, sitting by

designation.
21

(A) refusing a stay of any action under section 3

of this title; . . ..

6. In Hays, the Third Circuit reasoned that claims derivative of

the debtor are not excused from the clear congressional and Supreme

Court mandate that parties to an arbitration agreement must be

bound by it unless the party opposing arbitration can show that

“the text, legislative history, or purpose of the Bankruptcy Code

conflicts with the enforcement of the arbitration clause.” 885

F.2d at 1156. See In re Crysen/Montenay Energy Co., 226 F.3d 160

(2nd Cir. 2000) (noting the general acceptance of Hays’s holding

that district courts must stay non-core proceedings in favor of

arbitration); see also In re Gurga, 176 B.R. 196, 197 (B.A.P. 9th

Cir. 1994) (holding that a bankruptcy court must enforce an

agreement to arbitrate a claim that is non-core).

7. Debtor filed for bankruptcy on February 28, 2001. Her earliest

avoidance claim relates back to October of 1997. She, therefore,

has brought her claims within the four-year statute of limitations

for Texas fraudulent transfer actions. See TEX. BUS. & COM. CODE ANN.

§ 24.005; TEX. CIV. PRAC. & REM. CODE ANN. § 16.004.

8. The Gandys signed the Signtech liquidation plan on April 7,

2000, but made it effective as of March 1, 2000. Signtech’s

liquidation occurred within one year prior to Debtor filing her

bankruptcy petition on February 28, 2001.

9. The Gandys argue that Debtor, as a minority partner of Signtech

and HGLP, cannot challenge the transfers made by Signtech upon its

liquidation. Regardless of whether Debtor directly or indirectly

through HGLP owned an interest in Signtech, the Gandys argue that

Debtor’s limited partner status means that she has no interest in

specific partnership property under section 7.01 of the Texas

Revised Limited Partnership Act. While the Gandys have correctly

quoted the nature of partnership interests involved, this section

does not prevent remedies for a distribution that a partner is

entitled to receive. Section 6.06 of the Revised Limited

Partnership Act provides that: 

Subject to Sections 6.07 [prohibition and liability for

excessive 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.
22

Section 6.06 makes Debtor, a partner, into a quasi-creditor of the

partnership for a distribution that she is entitled to receive.

See TEX. REV. LIMITED PARTNERSHIP ACT § 6.06, Source and Commentary

(2001). As such, Debtor’s estate is a creditor vested with the

same rights and remedies as any creditor. Debtor’s estate, then,

is a creditor for the purpose of raising a fraudulent transfer

cause of action under 11 U.S.C. § 548 with respect to the

distribution of Signtech’s assets upon its liquidation. Appellants

have, in a post-argument submission, contended that Signtech was in

the process of “winding up” and that the rights of limited partners

would be governed by section 8.05 rather than section 6.06. The

record does not contain sufficient evidence for this court to

conclude that Signtech was being wound up. Section 8.01 equates

winding up with dissolution. Signtech appears simply to have been

in the process of liquidating some of its assets. See Appellants’

Br. at 6 (“Prior to the liquidation of its assets in 2000 . . ..”).

Moreover, Appellants do not cite any authority for the proposition

that a limited partner could not become a creditor if she did not

receive what was due her in a winding up.

10. The right of the trustee to commence an avoidance action is

extended to a debtor in possession pursuant to 11 U.S.C. § 1107(a),

which gives the debtor in possession “all of the rights . . . and

powers” of a trustee. See 5 L. KING, COLLIER ON BANKRUPTCY ¶ 544.02 at

544-4 n. 1, ¶ 548.01[1] at 548-7 (15th ed. rev. 2002). 

11. Debtor filed her Fourth Amended Complaint subsequent to the

discovery of this conduct. 

12. See Eastgroup Properties v. Southern Motel Ass’n, Ltd., 935

F.2d 245, 248 (11th Cir. 1991) (stating that courts have noted that

substantial consolidation be “used sparingly”).

13. Additionally, we note that if, as happens with many multi-party

disputes involving a debtor in possession, a global settlement

agreement among the parties is reached, the matter would be before

the bankruptcy court anyway under Bankruptcy Rule 9019.