1999 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

1-6-1999

Halper v. Halper

Precedential or Non-Precedential:

Docket 98-5093

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Recommended Citation

"Halper v. Halper" (1999). 1999 Decisions. Paper 2.

http://digitalcommons.law.villanova.edu/thirdcircuit_1999/2
Filed January 6, 1999 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

NO. 98-5093 

IRWIN HALPER, 

 Appellant 

v. 

BARRY HALPER 

On Appeal From the United States District Court 

For the District of New Jersey 

(D.C. Civil Action No. 97-cv-02616) 

District Judge: Honorable Garrett E. Brown, Jr. 

Argued October 26, 1998 

BEFORE: STAPLETON, LEWIS and MAGILL,* 

Circuit Judges 

(Opinion Filed January 6, 1999) 

 Colin M. Danzis 

 Dennis J. Drasco (Argued) 

 Donald B. Frazer, Jr. 

 Lum, Danzis, Drasco, Positan & 

 Kleinberg, LLC 

 103 Eisenhower Parkway 

 Roseland, NJ 07068-1049 

 Attorneys for Appellant 

_________________________________________________________________ 

*Honorable Frank J. Magill, Senior United States Circuit Judge for the 

Eighth Circuit, sitting by designation. 
 William S. Katchen (Argued) 

 Tina Niehold Moss 

 Amy R. Bitterman 

 Lowenstein Sandler PC 

 65 Livingston Avenue 

 Roseland, NJ 07068 

 Attorneys for Appellee 

OPINION OF THE COURT 

STAPLETON, Circuit Judge: 

Irwin Halper appeals the District Court's order affirming 

the Bankruptcy Court's order determining that a Guaranty 

in favor of Irwin was void as against public policy because 

it was part of an illegal stock redemption and a fraudulent 

conveyance under New Jersey and federal bankruptcy law. 

We conclude that the District Court erroneously applied 

New Jersey's contract principles in the course offinding 

this to be a stock redemption. We further conclude that the 

Bankruptcy Court lacked core proceeding jurisdiction to 

enter a final judgment regarding the Guaranty's 

enforceability. 

I. FACTUAL AND PROCEDURAL BACKGROUND 

Irwin Halper and his three cousins, Barry, Jeffrey and 

Robert, were the sole owners of Halper Bros. Inc. ("HBI"), a 

New Jersey corporation that distributed wholesale paper 

and janitorial supplies. Each cousin owned 25% of HBI's 

stock and participated in HBI's management and operation. 

In the spring of 1990, each shareholder contributed

$300,000 to HBI's Employee Stock Ownership Plan 

("ESOP"). In 1989 and into 1990, HBI began to suffer 

financial difficulty. Barry, interested in restructuring to 

continue running HBI on his own, began negotiating a 

buyout of his cousins' stock. On February 13, 1991, the 

cousins entered an agreement ("February Agreement")

whereby Barry agreed to purchase personally each of his 

cousins' 25% HBI stock holdings for $300,000 apiece with 

$25,000 down. Barry paid Irwin's $25,000 down payment 

 2 
by personal check. The February Agreement was not 

consummated, however, because Citibank, a creditor of 

HBI's, refused to approve the buyout. 

Further buyout negotiations ensued in which Barry 

suggested that the transaction be structured as a stock 

redemption by HBI. The three selling cousins, however, 

rejected the redemption format because they were 

concerned that HBI's insolvency would render it an illegal 

redemption and a fraudulent transfer under New Jersey 

law. Instead, Irwin and the other selling cousins insisted 

that the buyout take place either (i) through a personal 

purchase by Barry, or (ii) by an entity formed by Barry.1 

Barry's accountants and lawyers, on the other hand,

advised Barry that if the transaction included an 

employment agreement for each of the cousins giving up 

his stock, the compensation provided for his services would 

provide HBI with a significant tax deduction. This raised 

further concerns for the selling cousins who feared that 

HBI's financial condition might prevent it from honoring an 

employment arrangement. 

The parties reached a compromise, which they 

memorialized in four agreements on September 5, 1991 

("September Transaction"): (i) Letter Agreement, (ii) 

Employment Agreement, (iii) Guaranty and Indemnity 

Agreement, and (iv) Voting Trust Agreement. (Pa. 527-89). 

There were three parties to each set of documents: (i) the 

selling cousin involved, (ii) Barry Halper, and (iii) HBI 

represented by Barry Halper as President. This appeal 

involves only the rights of the parties to the agreements 

executed by Irwin Halper. 

_________________________________________________________________ 

1. An August 2, 1991 letter from the law firm representing Irwin, Robert 

and Jeffrey illustrates their position: 

 The possibility of insolvency involved litigation as to the 

redemption 

 of our client's stock by [HBI] strongly argues in favor of a direct 

 purchase by Barry or an entity created and funded by him for such 

 purpose. . . . [A]ll [HBI] stock owned by [Irwin, Jeffrey and 

Robert] 

 must be purchased and all of the purchase price paid either by 

 Barry Halper or an entity controlled by him, and not[HBI]. 

(Pa. 524). 

 3 
The Agreements are integrated. This is evident from (i) 

the Letter Agreement's summary of the transaction and 

description of the other three documents' significance, and 

(ii) the other three documents' numerous cross references 

to one another. The Employment Agreement provides, inter 

alia, that HBI would pay Irwin a $300,000 signing bonus 

less the $25,000 he received in connection with the failed 

February Agreement, with the remaining $275,000 to be 

paid in 12 equal monthly installments commencing 

January 31, 1992.2 The Guaranty and Indemnity 

Agreement ("Guaranty") provided that Barry personally 

guaranteed HBI's payment of Irwin's signing bonus; Barry 

and Irwin signed it in their individual capacities. The 

Guaranty accommodated the selling cousins' concerns that 

HBI's financial troubles might prevent it from honoring its 

signing bonus obligation. The Voting Trust Agreement 

provided that Irwin's HBI shares would be immediately 

transferred to a voting trust with Barry as trustee, giving 

Barry the irrevocable right to vote Irwin's shares. Finally, 

Paragraph 9 of the Letter Agreement provided that Irwin 

granted a three year irrevocable option to purchase his HBI 

stock for $1.00 consideration to (i) Barry personally, (ii) an 

entity created by Barry for the purchase, or (iii) HBI. 

The parties agree that the September Transaction's 

objective was to vest Barry with total ownership and control 

of HBI. Indeed, the September Transaction gave Barry 

absolute control over HBI on September 5, 1991, as trustee 

under the Voting Trust. The only thing left to complete the 

buyout was for Barry to decide how to exercise the option 

to transfer beneficial ownership of the shares. 

That decision was made in January, 1992, when Barry's 

attorney, Mr. Gladstone, advised him that he should

exercise the Paragraph 9 option. On January 15, 1992, 

Gladstone's firm drafted a letter which Barry signed 

("Purchase Letter") stating: 

 Pursuant to paragraph 9 of the Letter Agreement you 

 are hereby notified that I elect to exercise my option to 

 acquire all of the shares of stock in [HBI] which are 

_________________________________________________________________ 

2. The Employment Agreement also provided that Irwin would continue 

as a HBI salesman and granted him a car, insurance and other benefits. 

 4 
 held by the Voting Trustee pursuant to the Voting 

 Trust Agreement. 

 I hereby request that the Voting Trustee take 

 immediate steps in order to effectuate the transfer of 

 said shares of stock to me. 

(Pa. 526). Barry signed the letter in his personal capacity, 

not as HBI's President. 

On January 17, 1992, two days after Barry exercised the 

option, HBI's creditors filed an involuntary bankruptcy 

petition. Not surprisingly, HBI did not honor its signing 

bonus obligations under the Employment Agreement, and 

Irwin resorted to his rights under the Guaranty. After 

several unsuccessful demands for payment from Barry, 

Irwin instituted an action in New Jersey Superior Court to 

enforce the Guaranty on January 24, 1993. Two days 

earlier, on January 22, 1993, Barry had filed a complaint 

in Bankruptcy Court. Barry's complaint provides in 

pertinent part: 

 Barry seeks a declaration from this Court (1) that the 

 underlying obligation from HBI to Irwin is void as a 

 redemption by a corporation while insolvent, and a 

 further declaration that Barry's personal guaranty does 

 not extend to this void agreement and (2) that the 

 obligation arising out of the "signing bonus" is void as 

 a fraudulent transfer. 

 * * * 

 WHEREFORE, plaintiff Barry Halper demands 

 judgment against Irwin Halper as follows: 

 (a) declaring that the signing bonus to be paid by 

 [HBI] to Irwin Halper is void as (1) a redemption made 

 by an insolvent corporation; and (2) that the obligation 

 is a fraudulent transfer under Bankruptcy Code 

 S 548(a)(2) 

 (b) declaring that Barry Halper's obligation to Irwin 

 Halper does not include the void redemption or 

 fraudulent transfer by [HBI] . . . . 

(Pa. 1243-44). Alternatively, Barry sought a declaratory 

judgment that (i) if the signing bonus is a valid obligation 

 5 
of HBI, then HBI's obligation thereunder is limited to 

$75,000 under Bankruptcy Code S 502(b)(7); and (ii) that 

Barry's liability under the Guaranty should similarly be 

limited to $75,000.3 

Barry successfully removed Irwin's state court action to 

the Bankruptcy Court, and the actions were consolidated 

for trial over Irwin's objection that the Bankruptcy Court 

lacked jurisdiction over his suit. Four years later, on 

February 21, 1997, the Bankruptcy Court rendered 

judgment in favor of Barry declaring the Guaranty 

unenforceable as against New Jersey's public policy

because it was part of an illegal stock redemption under 

New Jersey law and constituted a fraudulent transfer under 

New Jersey and federal bankruptcy law. Irwin appealed the 

Bankruptcy Court's order to the District Court, which 

affirmed.4 Irwin now appeals the District Court's order 

affirming the Bankruptcy Court's judgment. 

We exercise plenary review over the decision of a District 

Court sitting as an appellate court in a bankruptcy

proceeding. See In re Swedeland Dev. Group, Inc., 16 F.3d 

552, 559 (3d Cir. 1994). In turn, this court reviews the 

Bankruptcy Court's findings of fact under the clearly 

erroneous standard and conclusions of law under a de novo 

standard. See In re Sharon Steel Corp., 871 F.2d 1217, 

1222-23 (3d Cir. 1989). 

_________________________________________________________________ 

3. Bankruptcy Code S 502(b)(7) limits employee claims for damages 

arising from the debtor's termination of an employment contract. 

4. The Bankruptcy Court's judgment order grants Barry's request for 

declaratory judgment stating: 

 1) The transaction memorialized in the series of agreements entered 

 into by and between the parties on September 5, 1991 constitutes 

 an (i) illegal stock redemption by the Debtor while insolvent and 

(ii) 

 a fraudulent conveyance pursuant to 11 U.S.C. S 548 and N.J.S.A. 

 25:2-20, et seq.; and 

 2) The Guaranty is void and unenforceable; and 

 3) Judgment is hereby entered in favor of Barry Halper, and against 

 Irwin Halper, in the above captioned matters. 

(Pa. 35). The District Court's order simply states that it affirms. (Pa. 

21). 

 6 
II. JURISDICTION 

The Bankruptcy and District Courts determined that the 

Bankruptcy Court had core proceeding jurisdiction under 

28 U.S.C. S 157(b) giving it the power to issue final 

judgment on all claims in this action. Irwin challenges this 

determination, claiming that the Bankruptcy Court entirely 

lacked jurisdiction to entertain the claims between Barry 

and himself. He objects on the grounds that HBI was not a 

party and that, in his view, the adjudication of their 

disputes could not affect HBI's creditors. He concludes that 

this entire proceeding is therefore not "related to" the 

bankruptcy as required to support non-core jurisdiction 

under 28 U.S.C. S 157(c). 

We conclude that the Bankruptcy Court had jurisdiction 

over all claims asserted in the Bankruptcy Court, but that 

the character of its jurisdiction varied among the claims. 

We find that the Bankruptcy Court had only non-core

jurisdiction over the Guaranty claims and that, as a result, 

it lacked the power to issue a final judgment on that 

matter. Accordingly, we will reverse the District Court's 

judgment affirming the exercise of core jurisdiction over the 

Guaranty claims. 

Bankruptcy Court jurisdiction has been the subject of 

heated controversy in recent decades. See In re Guild & 

Gallery Plus, Inc., 72 F.3d 1171, 1176-79 (3d Cir. 

1996)(discussing Bankruptcy Courts' history); Phar-Mor, 

Inc. v. Coopers & Lybrand, 22 F.3d 1228, 1234-35 (3d Cir. 

1994)(same). In 1978, Congress attempted to centralize 

bankruptcy jurisdiction by granting District and 

Bankruptcy Courts expanded jurisdiction over cases arising 

under title 11. In re Guild, 72 F.3d at 1177 (quoting 

Thomas S. Marion, Core Proceedings and "New" Bankruptcy 

Jurisdiction, 35 DePaul L. Rev. 675, 678 (1986)). Under this 

scheme, Article I bankruptcy judges possessed full power to 

adjudicate not only cases arising directly under title 11, but 

also a wide range of other claims merely "related to" the 

title 11 proceedings. Id. In Northern Pipeline Const. Co. v. 

Marathon Pipeline Co., 458 U.S. 50 (1982), however, the 

Supreme Court held the 1978 jurisdictional reform 

unconstitutional because its grant of judicial power to 

Article I Bankruptcy Courts violated the separation of 

 7 
powers doctrine by undermining Article III's establishment 

of an independent judiciary. Id. at 84-85. 

In Marathon, the debtor had filed a chapter 11 petition in 

Bankruptcy Court and subsequently initiated an adversary 

proceeding against Marathon for various pre-petition 

violations of state law including breach of contract. The 

parties to the adversary proceeding were not diverse, and 

the dispute involved pure questions of state law presenting 

no federal question. The only basis for federal jurisdiction 

was the fact that one party was a chapter 11 debtor in 

bankruptcy. Id. at 90. Distinguishing "the restructuring of 

debtor-creditor relations, which is at the core of the federal 

bankruptcy power . . . from the adjudication of statecreated private rights, such as the right to recover damages 

that is at issue in this case," Justice Brennan concluded 

that the statute violated Article III because it 

unconstitutionally vested "all `essential attributes' of the 

judicial power of the United States in the `adjunct' [Article 

I] bankruptcy courts." Id. at 71, 84-85 (emphasis added). 

In 1984, Congress responded to Marathon and 

established the current bankruptcy jurisdiction regime 

codified at 28 U.S.C. S 1334 and 28 U.S.C. S 157. Section 

1334 vests broad primary jurisdiction over bankruptcy 

proceedings in the District Courts.5 District Courts may, 

however, refer bankruptcy matters falling within their 

jurisdiction to the Bankruptcy Courts under 28 U.S.C. 

S 157(a). District Courts have exercised this power by 

"routinely refer[ing] most bankruptcy cases to the 

bankruptcy court[s]." In re Guild, 72 F.3d at 1175.

Upon referral, "[s]ection 157 provides the bankruptcy 

_________________________________________________________________ 

5. Section 1334 of title 28 states in pertinent part: 

 (a) Except as provided in subsection (b) of this section, the 

district 

 court shall have original and exclusive jurisdiction of all cases 

under 

 title 11. 

 (b) Notwithstanding any Act of Congress that confers exclusive 

 jurisdiction on a court or courts other than the district courts, 

the 

 district courts shall have original but not exclusive jurisdiction 

of all 

 civil proceedings arising under title 11, or arising in or related 

to 

 cases under title 11. 
 8 
court with two levels of judicial power, depending upon the 

type of proceeding before it." In re Marcus Hook, 943 F.2d 

261, 266 (3d Cir. 1991). First, in "core" proceedings, the 

Bankruptcy Court assumes the role of a court of first 

instance with comprehensive power to hear, decide and 

enter final orders and judgments. See 28 U.S.C. S 157(b)(1). 

Appellate review of the Bankruptcy Court's judgment is 

available initially in the District Court and then in the 

Court of Appeals. See 28 U.S.C. S 158. Second, in "noncore" proceedings, the Bankruptcy Court's adjudicatory 

power is limited to hearing the dispute and submitting 

"proposed findings of facts and conclusions of law to the 

district court." Id. S 157(c)(1). 6 The District Court, after 

considering the Bankruptcy Court's proposed findings and 

conducting a de novo review of any matter objected to 

therein, enters final orders and judgments in "non-core" 

proceedings. See id. at S 157(c)(1). Section 157's distinction 

between "core" and "non-core" proceedings mirrors Justice 

Brennan's distinction in Marathon, and the jurisdictional 

variance between the two types of proceedings was intended 

"to satisfy the concerns of Marathon." Phar-Mor, 22 F.3d at 

1234; see In re Wood, 825 F.2d 90, 96 (5th Cir. 

1987)(discussing congruence between Marathon and S 157's 

jurisdictional regime). 

Thus, a proceeding's core or non-core nature is crucial in 

bankruptcy cases because it defines both the extent of the 

Bankruptcy Court's jurisdiction, and the standard by which 

the District Court reviews its factual findings. To determine 

whether a proceeding is a "core" proceeding, courts of this 

Circuit must consult two sources. First, a court must 

consult S 157(b). Although S 157(b) does not precisely define 

"core" proceedings, it nonetheless provides an illustrative 

list of proceedings that may be considered "core." See id. 

S 157(b)(2)(A)-(O). Second, the court must apply this court's 

test for a "core" proceeding. Under that test, " `a proceeding 

is core [1] if it invokes a substantive right provided by title 

11 or [2] if it is a proceeding, that by its nature, could arise 

_________________________________________________________________ 

6. The District Court may, upon consent of the parties, expand the 

Bankruptcy Court's power to adjudicate "non-core" proceedings to 

include the power to issue final orders and judgments. 28 U.S.C. 

S 157(c)(2). 

 9 
only in the context of a bankruptcy case.' " In re Guild & 

Gallery Plus, Inc., 72 F.3d 1171, 1178 (3d Cir. 

1996)(quoting Marcus Hook, 943 F.2d at 267); see In re: 

Continental Airlines, 125 F.3d 120, 131 (3d Cir. 1997); cf. 

Beard v. Braunstein, 914 F.2d 434, 444 (3d Cir. 1990). This 

Court and other courts of appeals have relied on this test 

to ensure that S 157(b) "core" proceeding jurisdiction is 

exercised in a manner consistent with Marathon.7 

Non-core proceedings include the broader universe of all 

proceedings that are not core proceedings but are 

nevertheless "related to" a bankruptcy case. See 28 U.S.C. 

S 157(c)(1). "[T]he test for determining whether a civil 

proceeding is related to bankruptcy is whether the outcome 

of that proceeding could conceivably have any effect on the 

estate being administered in bankruptcy." Pacor v. Higgins, 

743 F.2d 984, 994 (3d Cir. 1984) (emphasis omitted); see In 

re Guild, 72 F.3d at 1180-81.8 "[T]he proceeding need not 

_________________________________________________________________ 

7. See, e.g., Sanders Confectionary Prod's v. Heller Fin., 973 F.2d 474, 

483 (6th Cir. 1992)("A core proceeding either invokes a substantive right 

created by federal bankruptcy law or [is] one which could not exist 

outside of the bankruptcy."); In re United States Brass Corp., 110 F.3d 

1261, 1268 (7th Cir. 1997)("Core proceedings are actions by or against 

the debtor that arise under the Bankruptcy Code in the strong sense 

that the Code itself is the source of the claimant's right or remedy . . . 

"); 

Specialty Mills, Inc. v. Citizens State Bank, 51 F.3d 770, 773 (8th Cir. 

1995)("Core proceedings under 28 U.S.C. S 157 are those which arise 

only in bankruptcy or involve a right created by federal bankruptcy 

law."); Security Farms v. International Brh'd of Teamsters, Chauffeurs, 

Wharehouseman & Helpers, 124 F.3d 999, 1008 (9th Cir. 1997) ("Actions 

that do not depend on bankruptcy laws for their existence and that 

could proceed in another court are considered `non-core.' "); In re 

Gardner, 913 F.2d 1515, 1518 (10th Cir. 1990)("Actions which do not 

depend on the bankruptcy laws for their existence and which could 

proceed in another court are not core proceedings."). 

8. The Supreme Court has effectively overruled Pacor with respect to its 

holding that the prohibition against review of a remand order in 28 

U.S.C. S1447(d) does not apply to a bankruptcy case. See Things 

Remembered Inc. v. Petrarca, 116 S.Ct. 494 (1995). The Supreme Court's 

ruling, however, did not disturb Pacor's holding regarding what 

constitutes a non-core proceeding. See Donaldson v. Bernstein, 104 F.3d 

547, 554 n.1 (3d Cir. 1997). In fact, the Pacor non-core test has been 

widely followed by our sister circuits. 

 10 
necessarily be against the debtor or against the debtor's 

property." In re Guild, 72 F.3d at 1180-81. " `A key word in 

[this test] is conceivable. Certainty, or even likelihood, is 

not a requirement. Bankruptcy jurisdiction will exist so 

long as it is possible that a proceeding may impact on the 

debtor's rights, liabilities, options, or freedom of action or 

the handling and administration of the bankrupt estate.' " 

Id. at 1181 (quoting In re Marcus Hook, 943 F.2d at 264) 

(emphasis omitted). 

Barry and Irwin's consolidated action presented the

Bankruptcy Court with five claims: 

 1. Barry sought a declaratory judgment that HBI's 

 signing bonus is unenforceable because it was (a) part 

 of an illegal stock redemption under N.J.S.A. 14A:7- 

 14.1; (b) a fraudulent transfer under N.J.S.A. 25:2-20 

 et seq.; and (c) a fraudulent transfer under 11 U.S.C. 

 S 548. 

 2. Barry sought a declaratory judgment that his 

 personal Guaranty of the signing bonus is 

 unenforceable because HBI's underlying obligation was 

 void. 

 3. Conversely, Irwin sought a coercive judgment 

 enforcing Barry's personal Guaranty. 

 4. Barry sought a declaratory judgment that, if th e 

 signing bonus is enforceable, then HBI's obligation is 

 limited to $75,000 under 11 U.S.C. S 502(b)(7). 

 5. Barry sought a declaratory judgment that his 

 liability under the Guaranty should be coextensive with 

 HBI's underlying signing bonus obligation as limited by 

 S 502(b)(7). 

To determine the extent of the Bankruptcy Court's 

jurisdiction in this case we must examine each of the five 

claims presented to ascertain if it is core, non-core, or 

wholly unrelated to a bankruptcy case. Barry's first claim, 

that HBI's signing bonus obligation is void as part of an 

illegal stock redemption or fraudulent conveyance, is a core 

matter that the Bankruptcy Court was empowered to 

resolve by a final judgment. This claim appears tofit within 

two of S 157(b)'s illustrative examples. Section 157(b)(2)(B) 

 11 
states that core proceeding jurisdiction exists to determine 

the "allowance or disallowance of claims against the estate 

or exemptions from property of the estate . . ." 28 U.S.C. 

S 157(b)(2)(B). The claim seeks a declaration that any claim 

by Irwin against HBI under the Employment Agreement is 

unenforceable. Section 157(b)(2)(H) states that "proceedings 

to determine, avoid, or recover fraudulent conveyances" are 

core. Id. S 157(b)(2)(H). Barry specifically alleges that HBI's 

granting of Irwin's signing bonus was a fraudulent transfer 

under New Jersey and federal bankruptcy law. More 

importantly, Barry's claim to declare HBI's signing bonus 

obligation unenforceable satisfies this court's core 

proceeding test because it invoked the trustee's power to 

avoid fraudulent conveyances under S 548, a substantive 

provision of the bankruptcy code. Thus, we conclude that 

Barry's first claim "arises in a bankruptcy" and is a core 

claim. 

The same cannot be said, however, for Barry's and 

Irwin's "reciprocal claims" concerning the Guaranty's 

enforceability. Irwin's claim is a state law claim for breach 

of a pre-bankruptcy contract to which the debtor was not 

a party. Similarly, Barry's claim for a declaratory judgment 

that he is not personally liable for a breach of that contract 

is predicated upon state law. Neither claim satisfies this 

Court's core proceeding test because neither invokes a 

substantive provision of the bankruptcy code and neither is 

the type of claim that can only be entertained in 

bankruptcy. Rather, these claims involve a dispute between 

two parties, neither of whom is the debtor, over a prepetition contract between them. They must be resolved 

under New Jersey guaranty and contract law and could 

have been brought in state court. While Barry asserts that 

New Jersey would not enforce the Guaranty if HBI's 

underlying obligation is void under federal bankruptcy law, 

this does not render these claim core proceedings. 

These claims are nonetheless "non-core" and therefore 

fall within the Bankruptcy Court's jurisdiction because 

their resolution could "conceivably affect" HBI's estate in 

bankruptcy. For instance, finding the Guaranty to be 

enforceable would provide Irwin, a creditor of HBI under 

the Employment Agreement, with an alternative source of 

 12 
recovery effectively diverting his claims from the bankrupt 

estate. Because these claims are non-core, however, the 

Bankruptcy Court lacked the power to issue final judgment, 

but rather was limited to submitting proposed findings of 

fact and conclusions of law to the District Court. 

Barry's alternative claim seeking to limit HBI's liability to 

$75,000 if HBI's signing bonus obligation is not found to be 

an illegal stock redemption or a fraudulent transfer is also 

a core proceeding. This claim appears to fall within 

S 157(b)(2)(B)'s example of "core" matters relating to the 

allowance and estimation of claims against the estate. 28 

U.S.C. S 157(b)(2)(B). Moreover, this claim is brought by 

Barry as HBI's trustee in bankruptcy and invokes 11 U.S.C. 

S 502(b)(7), a substantive provision of the bankruptcy code. 

If the Court on remand finds the signing bonus to be an 

enforceable obligation of HBI, then the Bankruptcy Court 

would have core jurisdiction to entertain Barry's claim to 

limit HBI's liability under S 502(b)(7) and issue final 

judgment thereon. 

Barry's related claim, that his personal liability under the 

Guaranty should similarly be limited to $75,000 to be coextensive with HBI's underlying obligation, however, is a 

non-core matter. This claim does not appear to fit within 

any of S 157(b)(2)'s examples and it does not invoke a 

substantive provision of the bankruptcy code; nor is it the 

type of proceeding that can only arise in bankruptcy. 

Rather, this claim, like Barry's claim that the Guaranty is 

entirely unenforceable, depends upon New Jersey's 

guaranty and contract law, not the bankruptcy code, and 

could be resolved in state court. This claim does, however, 

fall within the Bankruptcy Court's non-core jurisdiction 

because it could conceivably affect HBI's bankruptcy estate. 

As our discussion illustrates, this case presented the 

Bankruptcy Court with a mixture of core and non-core 

claims. This court has not yet addressed how to determine 

a Bankruptcy Court's jurisdiction where it is presented with 

mixed claims. Several courts have employed a claim by 

claim analysis to determine the extent of a Bankruptcy 

Court's jurisdiction. See, e.g., In re N. Parent, Inc., 221 B.R. 

609, 626 (Bankr.D.Mass. 1998)("[E]ach of Debtor's fourteen 

causes of action will have to be separately analyzed to 

 13 
determine whether it falls within the bankruptcy court's 

core jurisdiction."); In re Best Reception Systems, Inc., 220 

B.R. 932, 946 (Bankr. E.D. Tenn. 1998)("[T]he court must 

examine each cause of action separately to determine if it 

is core or non-core."); In re 610 W. 142 Owners Corp., 219 

B.R. 363, 367 (Bankr. S.D.N.Y. 1998)(employing claim by 

claim analysis); Ralls v. Docktor Pet Ctr's Inc., 177 B.R. 420, 

425 n.6 (D. Mass. 1995)("A district court must scrutinize 

each count and each asserted right for relief to determine 

which ones were [core and] properly before the bankruptcy 

judge for final resolution and which ones [were non-core 

and] must receive de novo review."). 

The Bankruptcy and the District Courts determined that 

the entire proceeding could be characterized as a core 

proceeding under S 157(b)(2)(B) and (O).9 The District Court 

reasoned: 

 On November 29, 1993, the Bankruptcy Court entered 

 an Order providing Barry with standing to bring an 

 action to avoid or reduce claims against the debtor's 

 estate under the trustee powers of 11 U.S.C. S 548. The 

 adversary proceeding filed by Barry requested, inter 

 alia, a declaratory judgment that HBI's obligations 

 created by the September 5, 1991 agreements were 

 void as an illegal stock redemption of an insolvent 

 corporation, and constituted a fraudulent conveyance 

 under the Bankruptcy Code and New Jersey state law. 

 Resolution of these proceedings thus required that the 

_________________________________________________________________ 

9. These subsections provide: 

 (b)(2) Core proceedings include, but are not limited to- . . . 

 (B) allowance or disallowance of claims against the estate or 

 exemptions from property of the estate, and estimation of claims or 

 interests for the purposes of confirming a plan under chapter 11, 

 12, or 13 of title 11 but not the liquidation or estimation of 

 contingent or unliquidated personal injury tort or wrongful death 

 claims against the estate for purposes of distribution in a case 

 under title 11; 

 (O) other proceedings affecting the liquidation of the assets of 

the 

 estate or the adjustment of the debtor-creditor or the equity 

security 

 holder relationship, except personal injury tort or wrongful death 

 claims. 

 14 
 Bankruptcy Court adjudicate not only a claim against 

 a guarantor of the debtor's obligation, but also an 

 analysis of the extent of the debtor's obligation from 

 which the guarantor's obligation arose. 

(Pa. 9-10). We believe the District Court's analysis reflects 

an alternative approach to determining the extent of a 

Bankruptcy Court's jurisdiction in mixed claims 

proceedings. It resembles the view of those courts which 

hold that "when a proceeding is in part a core proceeding 

and in part non-core, the courts may determine that the 

entire proceeding is core if the core aspect heavily 

predominates and the non-core aspect is insignificant." In 

re Blackman, 55 B.R. 437, 443 (Bankr. D.C. 1985); see In 

re Hughes-Bechtol Inc., 141 B.R. 946, 949 (Bankr. S.D. 

Ohio 1992); In re Cinematronics Inc., 111 B.R. 892, 901 

(Bankr. S.D.Cal. 1990); In re Sibarium, 107 B.R. 108, 115 

(N.D. Tex. 1989); In re GWF Investment, Ltd., 85 B.R. 771, 

778 (Bankr.S.D.Ohio 1988). Other courts have expressly 

rejected or declined to follow the "predominantly core" 

approach. See, e.g., In re Best, 220 B.R. at 950; 610 W. 142 

Owners Corp., 219 B.R. at 370; Glinka, 1994 WL 905714, 

at *10 & n.14. 

We adopt the claim-by-claim approach as the only one 

consistent with the teachings of Marathon. This case well 

illustrates the point. In Marathon, as we have noted, a 

debtor in bankruptcy sued for breach of a pre-petition 

contract. The Court held that it would violate Article III for 

an Article I Bankruptcy Judge to adjudicate finally the 

tendered state law claim even though the plaintiff was a 

debtor in bankruptcy. Here, if we followed the approach of 

the Bankruptcy and District Courts, we would be required 

to sanction the entry of judgment by an Article I Judge on 

a pre-petition state law contract claim where neither party 

is in bankruptcy. 

In sum, we conclude that the only core matters before 

the Bankruptcy Court were Barry's claims (i) that HBI's 

signing bonus obligation was unenforceable as an illegal 

stock redemption or fraudulent conveyance, and (ii) that, if 

HBI's signing bonus obligation was enforceable, HBI's 

obligation should be limited to $75,000 under S 502(b)(7). 

We agree with the District Court's conclusion that the 

 15 
Bankruptcy Court had jurisdiction to enter a final order or 

judgment on these claims. However, the remaining claims 

regarding the Guaranty's enforceability and the extent of 

Barry's liability thereunder are non-core proceedings. The 

Bankruptcy Court did not have the power to issuefinal 

judgment on these claims, but rather was limited to

submitting proposed findings of fact and conclusions of law 

to the District Court under S 157(c). Thus, the District 

Court erred in affirming the Bankruptcy Court's exercise of 

core proceeding jurisdiction to declare the Guaranty 

unenforceable as a violation of public policy. 

III. ERRONEOUS APPLICATION OF CONTRACT 

 PRINCIPLES 

Having affirmed the District Court's determination that 

the Bankruptcy Court had core proceeding jurisdiction to 

enter a final judgment on Barry's claim that HBI's signing 

bonus obligation was unenforceable as part of an illegal 

stock redemption or a fraudulent conveyance, we now

consider the District Court's decision on the merits of that 

claim. 

The Bankruptcy Court and District Courts employed 

substantially similar modes of analysis. The initial task was 

to determine the parties' intent utilizing traditional 

principles of contract law. After finding the text of the 

September Transaction documents ambiguous, the 

Bankruptcy Court considered the extrinsic evidence 

tendered at trial and made a factual finding that the 

parties' minds met on a redemption of Irwin's stock by HBI, 

and that the Purchase Letter effectuated this intended 

redemption.10 Next, it considered whether the redemption 

_________________________________________________________________ 

10. We read the Bankruptcy Court's conclusion that a stock redemption 

was intended on September 5, 1991, and effectuated on April 15, 1992, 

to rest exclusively on its factual finding that this was what the parties 

intended. This is thus not a case where a court acknowledges that the 

parties intended one form of transaction, but treats the transaction in a 

different manner for reasons unrelated to the parties' intent. Compare 

Sedbrook v. Zimmerman Group, Ltd., 526 N.W.2d 758 (Wis. Ct. App. 

1994)("de facto" merger); Fenderson v. Athey Prod's Corp. Kolman Div., 

581 N.E.2d 288 (Ill. App. Ct. 1991)(same). 

 16 
thus accomplished was consistent with New Jersey law. 

Based on its finding that HBI was insolvent at the time of 

the redemption, it held that the transaction violated 

N.J.S.A. 14A:7-14.1. The Bankruptcy Court then turned to 

consider whether the September Transaction constituted a 

fraudulent conveyance under 11 U.S.C. S 548 and N.J.S.A. 

25.2-20, et seq. It was undisputed that the Agreement for 

redemption of Irwin's stock was entered within a year of the 

Bankruptcy Court's order of relief and at a time when the 

HBI was insolvent. The Bankruptcy Court focused upon the 

only remaining fraudulent transfer element: whether HBI 

"received less than reasonably equivalent value when it 

entered into the redemption agreement." Slip. 36. Because 

it was undisputed that the stock had a value of $1.00 or 

less, the Court concluded that HBI's obligation to pay Irwin 

$300,000 was a fraudulent conveyance. Finally, the 

Bankruptcy Court held that Barry's personal guaranty was 

unenforceable because it was a part of an integrated 

transaction involving an illegal stock redemption. 

Tracing the steps of the Bankruptcy Court's analysis 

demonstrates that the foundation of its ultimate legal 

conclusions was its finding that the parties contracted for 

a stock redemption. We must respectfully disagree with this 

foundational premise. We find no ambiguity in the text of 

the documents and all of the extrinsic evidence relevant 

under New Jersey law is entirely consistent with the 

express and unambiguous intent reflected in those terms. 

While the parties intended that Irwin would grant an option 

to HBI that could result in a redemption, they did not 

intend for that option to be exercised at a time when HBI 

was insolvent. Moreover, all of the relevant evidence 

indicates that no redemption occurred. 

We begin with basic principles of New Jersey contract 

law: 

 Evidence of the circumstances is always admissible in 

 aid of the interpretation of an integrated agreement. 

 This is so even when the contract on its face is free 

 from ambiguity. The polestar of construction is the 

 intention of the parties to the contract as revealed by 

 the language used, taken as an entirety; and, in the 

 quest for the intention, the situation of the parties, the 

 17 
 attendant circumstances, and the objects they were 

 thereby striving to attain are necessarily to be 

 regarded. The admission of evidence of extrinsic facts 

 is not for the purpose of changing the writing, but to 

 secure light by which to measure its actual 

 significance. Such evidence is adducible only for the 

 purpose of interpreting the writing -- not for the 

 purpose of modifying or enlarging or curtailing its 

 terms, but to aid in determining the meaning of what 

 has been said. So far as the evidence tends to show, 

 not the meaning of the writing, but an intention wholly 

 unexpressed in the writing, it is irrelevant. The judicial 

 interpretive function is to consider what was written in 

 the context of the circumstances under which it was 

 written, and accord to the language a rational meaning 

 in keeping with the expressed general purpose. 

Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293, 

301 (N.J. 1953). 

We next turn to the documents. The four simultaneously 

executed documents spell out carefully, and in great detail, 

the terms of an integrated transaction, the primary

objectives of which were (1) to vest Barry with immediate 

control of HBI, (2) to provide Barry with the opportunity of 

becoming the sole stockholder of HBI and (3) to terminate 

any relationship between HBI and Irwin other than his 

employment relationship. To accomplish these objectives, 

the documents unambiguously provide, inter alia, for (a) the 

immediate transfer of Irwin's stock to Barry as voting 

trustee, (b) the granting of an irrevocable three year option 

to purchase Irwin's HBI stock exercisable by Barry, HBI, or 

an entity to be organized by Barry, (c) the employment of 

Irwin by HBI in a sales capacity, (d) the payment by HBI of 

a $300,000 signing bonus to Irwin, (e) Irwin's agreement to 

a restrictive covenant of non-disclosure and noncompetition, (f) Irwin's resignation as an officer and director 

of HBI, and his release of all his rights under HBI's 

stockholder agreement and executive compensation plan, 

(g) the exchange of releases between Irwin on the one hand 

and Barry and HBI on the other, and (h) Barry's guaranty 

of HBI's signing bonus obligation. The Letter Agreement 

provided that Irwin's rights under the Employment 

 18 
Agreement (including the signing bonus) were being given 

to him in consideration for his agreement to enter the 

overall transaction (e.g., his commitments to transfer his 

stock to the voting trust, to grant the irrevocable option, to 

provide services, to release his rights, etc.). 

Barry signed the Letter Agreement, both individually and 

as HBI's president. (Pa. 533) On January 15, 1992, Barry 

exercised the stock buyout option by sending a letter signed 

in his individual capacity, to himself, as voting trustee, and 

to Irwin stating: "[Y]ou are hereby notified that I elect to 

exercise my option to acquire all of the shares of stock in 

Halper Bros., Inc., which are held by the Voting Trustee 

pursuant to the Voting Trust Agreement." (Pa. 

526)(emphasis added). 

Discussing the preamble of the Letter Agreement, the 

Bankruptcy Court noted: 

 The plain language of [statement (i)] fails to delineate 

 whether the transaction is a sale of stock by an 

 individual shareholder or a redemption of the Debtor's 

 stock by the Company. The text also fails to stipulate 

 who is the purchaser of the stock, the Debtor, or Barry 

 or an entity controlled by Barry. The signature portion 

 of the Letter Agreement also offers no assistance to the 

 Court as it was executed by Barry, individually, and 

 Barry in his capacity as president of the Debtor. 

(Pa. 51) 

While the above statements are true, these facts do not 

make the Letter Agreement ambiguous or inconsistent. 

Rather, the precise language of the Letter Agreement 

creates the unambiguous possibility of either a sale or a 

redemption of the stock to any one of the three potential 

purchasers. Because Barry assumed sole control of HBI 

immediately upon the agreements' execution, this meant 

that Barry had a choice: he could purchase the stock 

individually, acquire the stock through an entity controlled 

by him, or cause HBI to redeem the shares. Any of the 

three methods would accomplish the undisputed primary 

objective of making Barry HBI's sole shareholder. The fact 

that a choice of method existed does not create an 

ambiguity by itself. If Barry or an entity controlled by Barry 

 19 
exercised the option to purchase Irwin's shares, the 

transaction would constitute a personal purchase and sale 

of stock between shareholders. However, if, and only if, HBI 

exercised this option, the transaction would constitute a 

redemption. Because Barry signed the Purchase Letter in 

his individual capacity and stated that he elected to 

exercise his option, this transaction constituted a personal 

purchase of the stock, not a redemption by HBI. 

Moreover, an examination of all of the extrinsic evidence 

confirms, rather than conflicts with, the intent evidenced in 

the documents. The cousins had previously declined to 

enter a transaction in which the benefit to them came 

solely through a redemption of their stock because they 

were aware that such an agreement would be 

unenforceable during any period of insolvency. This

rejection as well as Barry's desire to secure a tax deduction 

for HBI resulted in a compromise. To appease the selling 

cousins, their stock could be purchased by Barry or a new 

Barry-created entity. These potential purchasers--unlike 

HBI--could exercise their options while HBI was insolvent. 

To accommodate Barry's tax concern, payment for this 

option would come through HBI as a deductible signing 

bonus. Finally, the selling cousins' concerns regarding 

HBI's ability to pay the signing bonus were allayed by 

Barry's personal guaranty thereof. 

In short, based on the September Transaction 

documents, the extrinsic evidence, and the unambiguous 

terms of the Purchase Letter, we conclude that (1) Irwin 

granted an option to HBI that could be exercised if Barry 

infused capital and turned the business around, but which 

all recognized could not be exercised during insolvency, (2) 

Irwin granted Barry an option to purchase his shares which 

Barry exercised, and (3) there was no stock redemption. 

In reaching this conclusion we are not unmindful of the 

fact that the Bankruptcy Court credited the testimony of 

Barry and his lawyer that they intended the Purchase 

Letter to be an exercise of HBI's option to buy Irwin's stock. 

We accept that factual finding for present purposes. Under 

New Jersey law, however, Barry's subjective intent is not 

legally relevant. The undisclosed subjective intent of a 

participant in a transaction cannot be used to alter the 

 20 
intent clearly manifested in the documents to which he 

subscribed. See Atlantic Northern, 12 N.J. at 301. The 

Bankruptcy Court's reliance on that evidence was therefore 

error. 

As we have earlier noted, the Bankruptcy Court's 

erroneous determination that the transaction constituted a 

stock redemption was the basis for its judgment that the 

stock transfer was illegal and that the Guaranty was 

unenforceable. It follows that we must reverse the District 

Court's judgment and remand with instructions that there 

be further proceedings. 

IV. THE REMAND 

Our conclusion does not, of course, resolve this 

controversy. A number of issues remain to be resolved on 

remand. The first of these is Barry's claim that the signing 

bonus was a fraudulent conveyance under 11 U.S.C. S 548. 

We have held only that the $300,000 signing bonus was 

not a fraudulent transfer as consideration paid by HBI to 

Irwin for stock found by the Bankruptcy Court to be worth 

$1.00 per share or less in a stock redemption. The 

Bankruptcy Court's focus was upon the value of Irwin's 

stock. On remand, it must focus on the value of the

consideration to be given by Irwin under the terms of the 

September Transaction as we have interpreted them and on 

the extent to which HBI, rather than Barry, was to receive 

that consideration. As we have heretofore also held, this 

fraudulent transfer claim is a core proceeding because 

Barry as trustee invokes 11 U.S.C. S 548. Thus, it may be 

entertained by the District Court or it may be referred to 

the Bankruptcy Court for adjudication under 28 U.S.C. 

S 157(a). 

Second, the Guaranty's enforceability must be considered 

on remand to resolve Barry's claim for a declaratory 

judgment of unenforceability and Irwin's reciprocal claim 

for a coercive judgment enforcing the Guaranty. Further 

consideration is required for two reasons. First, we have 

determined that the Bankruptcy Court was without 

jurisdiction to enter judgment and further proceedings are 

required before the District Court to resolve this "non-core" 

 21 
matter. Second, it may be necessary on remand to 

reevaluate the circumstances in which the transaction was 

entered in the light of our reading of the relevant

documents. As we have indicated, the Bankruptcy Court 

viewed the September Transaction as intended to syphon 

off $300,000 in corporate funds in return for virtually 

worthless stock while HBI was insolvent. It would seem 

permissible to us, however, for a fact finder to determine on 

this record that the September Transaction was not entered 

for the purpose of defrauding creditors. The transaction 

gave Barry a variety of options, each of which, depending 

on the circumstances that unfolded, could be executed in a 

manner consistent with public policy. The parties knew 

that if Barry chose to infuse capital these arrangements 

would be wholly consistent with the rights of HBI's

creditors. They may also have intended that if Barry 

decided not to make the necessary capital infusion, the 

signing bonus would not be paid by HBI, but rather the 

consideration for Irwin's various commitments would come 

personally from Barry's pocket under the Guaranty without 

prejudice to creditors. 

We do not here decide that the intention of the parties in 

September of 1991 is relevant to the enforceability of the 

Guaranty under New Jersey law. We leave it to the District 

Court (with the assistance of the Bankruptcy Court if it so 

chooses) to determine the applicable New Jersey law

including the significance, if any, of the parties' intent at 

the time the Guaranty was made. We note, however, that 

there is some New Jersey case law supporting the 

proposition that unconditional guarantees that extend a 

guarantor's responsibility beyond that of the primary 

obligor are enforceable. The Superior Court in National 

Westminster Bank NJ v. Lomker, 649 A.2d 1328 (N.J. 

Super. Ct. App. Div. 1994), for example, held that a 

guarantor's liability may exceed that of the principal under 

New Jersey law. See id. at 1332 ("The liability of a 

guarantor is measured by that of the principal, unless the 

agreement explicitly provides otherwise."). In dicta, the 

court even entertained the possibility that a guarantor 

could explicitly waive the defenses of bad faith, fraud or 

conspiracy. See id.; see also Nation Wide, Inc. v. Scullin, 

256 F. Supp. 929, 932 (D.N.J. 1966)("However harsh a 

 22 
bargain it may seem in retrospect, the defendants' 

obligation was voluntarily assumed and made absolute by 

its terms."); Midatlantic Bank, N.A. v. Strong, 1996 WL 

697940, *5 (E.D.N.Y. 1966)("[E]ven absolute, unconditional 

guarantees are upheld and enforced by New Jersey 

courts."); Lenape State Bank v. Winslow Corp., 523 A.2d 

223, 231 (N.J. Super. Ct. App. Div. 1987)(upholding

unconditional guaranty under New Jersey law); cf. 

Interchange State Bank v. Rinaldi, 696 A.2d 744, 748 (N.J. 

Super. Ct. App. Div. 1997)(finding guaranty unconditional 

even in absence of term "unconditional"). Here, Barry's 

Guaranty explicitly provided that Barry waived: 

 any and all defenses of HBI and [Barry], including, 

 without limitation, any and all defenses now or 

 hereafter arising or asserted by reason of (a) any lack 

 of power, capacity or authority of HBI with respect to 

 the Employment Agreement, the Letter Agreement or 

 the Obligations or any part thereof; (b) the

 unenforceability of the Employment Agreement, the 

 Letter Agreement or the Obligations against HBI 

 * * * * * 

 Notwithstanding anything else contained in this 

 [Guaranty] Agreement, [Irwin]'s rights and [Barry]'s 

 obligations under this Agreement shall be reinstated 

 and revived, and the enforceability of this Agreement 

 shall continue, with respect to any amount at any time 

 prior to or after the date of this Agreement paid on 

 account of the Obligations which thereafter shall be 

 required to be restored or returned by [Irwin] under 

 any bankruptcy, fraudulent conveyance, insolvency or 

 reorganization laws or for any other reason all as 

 though such amount had not been paid. 

(Pa. 535-36). The court on remand should consider whether 

this express language is enforceable under New Jersey law 

under the circumstances of this case.11 

_________________________________________________________________ 

11. The Bankruptcy Court, in the course of holding that the Guaranty 

was unenforceable against public policy, concluded that the Guaranty 

was not "severable" from the September Transaction's other documents. 

Irwin did not challenge this conclusion on his appeal to the District 

 23 
Finally, if the court determines that HBI's signing bonus 

obligation was not a fraudulent conveyance, the court must 

then consider Barry's alternative claim that 11 U.S.C. 

S 502(b)(7) limits HBI and Barry's liability under the 

Guaranty to $75,000. The claim that HBI's obligation is 

limited to this amount is a core proceeding because it 

invokes a substantive provision of the bankruptcy code and 

may be decided in the first instance by the District Court or 

the Bankruptcy Court. Barry's derivative claim that his 

Guaranty liability should be similarly limited, however, is a 

non-core claim upon which only the District Court can 

issue final judgment. Nonetheless, the District Court may 

refer the claim to the Bankruptcy Court for proposed 

findings of fact and conclusions of law. 

V. CONCLUSION 

The judgment of the District Court will be reversed and 

this matter will be remanded to it for further proceedings 

consistent with this opinion. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

_________________________________________________________________ 

Court and Barry insists that he thereby waived any claim that the 

Guaranty was enforceable even if HBI's commitment to pay the signing 

bonus was unenforceable. We are unpersuaded. Irwin consistently 

maintained before the District Court, and before us, that the Guaranty, 

including the above-quoted portions, should be enforced in accordance 

with its literal terms. 

 24