Opinion ID: 3035192
Heading Depth: 2
Heading Rank: 3

Heading: Proofs of Claim and Core Proceedings

Text: Although we hold that the Bankruptcy Court erred and should consider anew the meaning of the Coordinating Agreement, we must also address the second, alternate and potentially dispositive ground upon which the Bankruptcy Court and District Court relied–namely, that the PDH Foreign Entities’ filing proofs of claims in Exide’s bankruptcy case rendered their claims against the Exide Foreign Entities core proceedings. Section 157(b)(2)(B) provides that “core” proceedings include “allowance or disallowance of claims against the estate.” Both courts reasoned that, by filing a proof of claim in the debtor’s bankruptcy case, the PDH Foreign Entities invoked the allowance process and their claims became core. We could accept this reasoning if it were premised upon the Coordinating Agreement’s designation of Exide as the only proper party to the PDH Foreign Entities’ claims so that the subject matter of the proofs of claim is the same as that of the state law action. However, the Bankruptcy Court suggested that, whenever a proof of claim is filed by a claimant in the debtor’s bankruptcy case, whatever claims are referenced therein become core proceedings under 28 U.S.C. § 157(b)(2)(B). Even before considering the “sole indemnitor” argument, the Bankruptcy Court stated, “it’s clear to me that by virtue of the filing of the Proofs of Claim that in large measure the matters before me are core . . . .” App. 49. On appeal, the District Court similarly expressed a belief that by filing proofs of claim against the 41 debtor, the PDH Foreign Entities were precluded from proceeding against the non-debtor defendants. It stated, “it seems to me that . . . if they hadn’t filed cont[ingent] proofs of claim in bankruptcy, that, truly, the Bankruptcy Court would not have had necessarily jurisdiction over this dispute so long as there wasn’t any recourse to the debtor.” App. 150. It then concluded that, “when the PDH Foreign Entities filed their [four] proofs of claim against the Exide bankruptcy estate, they irrevocably consented to have their claims heard and decided by the bankruptcy court.” App. 20. It is this proposition that we must now examine. On appeal, the PDH Foreign Entities argue that their filing of contingent proofs of claim in the debtor’s bankruptcy case does not establish that claims against non-debtors constitute “core” proceedings. The proofs of claim were for contribution or indemnification from Exide, contingent on securing a judgment against the Exide Foreign Entities and their not being able to pay it, and, while they might have submitted the PDH Foreign Entities to the jurisdiction of the Bankruptcy Court, they did not render the claims against the non-debtor Exide defendants “core.” 10 10 We note that it is undisputed that, should the PDH Foreign Entities secure a judgment against the Exide Foreign Entities and these entities prove unable to pay, their contingent proofs of claim against the debtor should be determined or estimated by (continued...) 42 In response, the Exide Foreign Entities urge us to affirm the Bankruptcy Court’s decision, contending that the filing of proofs of claims against the debtor rendered the PDH Foreign Entities’ claims textbook “core” proceedings. The contingent language within the proofs of claims, they say, has no bearing on the Bankruptcy Court’s jurisdiction. To address these arguments properly, we must first clarify the effect the filing of a proof of claim in a debtor’s bankruptcy has on the jurisdiction of the bankruptcy court over claims against non-debtors. As the following explains, we believe the case law is clear that the filing of a proof of claim may cause claims against non-debtors to be deemed “related to” 10 (...continued) the Bankruptcy Court. See also Langenkamp v. Culp, 498 U.S. 42, 44 (1990) (holding that when a party submits a proof of claim, it “trigger[s] the process of ‘allowance and disallowance of claims,’” and thereby is consenting to jurisdiction of the bankruptcy court to make a final decision as to its claim) (citing Granfinanciera v. Nordberg, 492 U.S. 33 (1989)). The PDH Foreign Entities acknowledge that the Bankruptcy Court has core jurisdiction over its proofs of claim against Exide itself. Appellant’s Br. 41; Reply Br. 17. The consent to jurisdiction, however, is limited to claims against the debtor itself, not claims against non-debtors. See 3 Collier on Bankruptcy ¶ 362.03[3][4] (15th ed. 2005) (noting that when one defendant files a bankruptcy petition, the suit may proceed against non-debtor codefendants). 43 proceedings, but will not result in their being considered “core” proceedings. We agree, as Exide observes, that “it is axiomatic that filing a proof of claim triggers the claims allowance process under 11 U.S.C. § 501 et seq., which, by its very nature, is a “core” proceeding that can arise only in a title 11 case.” Appellee’s Br. 21; see also In re Argus Group 1700, Inc., 206 B.R. 737, 747-48 (Bankr. E.D. Pa. 1996) (“Debtors’ proposition that the filing of a proof of claim in bankruptcy transforms a pre-petition state law claim which was filed in state court before the bankruptcy into a core proceeding is sound.”). Indeed, it has long been black letter law that The filing of the proof 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. Understood in this sense, a claim filed against the estate is a core proceeding because it could arise only in the context of bankruptcy. Of course, the state-law right underlying the claim could be enforced in a state court proceeding absent the bankruptcy, but the nature of the state proceeding would be different from the nature of the proceeding following the filing of a proof of claim. 44 Matter of Wood, 825 F.2d 90, 97 (5th Cir. 1987); see also In re Continental Airlines, 125 F.3d 120, 131(3d Cir. 1999) (citing and following Wood). Nonetheless, the case law belies the assertion that, when a plaintiff files a proof of claim in a debtor’s bankruptcy case, it creates core bankruptcy jurisdiction over claims against nondebtor defendants as well. For example, in Holiday RV Superstores, Inc., plaintiffs brought state law claims of fraud, breach of fiduciary duty and successor liability against the debtor’s principal and successor, but did not name the debtor. 362 B.R. 126 (D. Del. 2007). Although one of the plaintiffs filed a proof of claim, which included a copy of the complaint, the court held that it established only that the plaintiffs “may have a claim against someone other than the estate for the same claim” and did “not transform a non-core proceeding into a core proceeding.” Id. at 129. Similarly, in CIT Communications Financial Corp. v. Level 3 Communications, LLC, plaintiff’s state court action against non-debtors, asserting breach of contract, unjust enrichment, and conversion arising from an equipment lease the defendants had purchased from the debtor, was found to be “unrelated” to the bankruptcy case. 483 F. Supp.2d 380 (D. Del. 2007). Despite the defendants’ assertions that the debtor was the responsible party whom they would need to implead and the plaintiff’s filing a proof of claim that concerned the same lease, the court rejected the defendants’ jurisdictional argument because “plaintiffs are alleging two separate contractual breaches, one attributable to the Debtors 45 (before they sold their assets), and the other for defendants’ subsequent, independent failure to make the Monthly Payments to plaintiff after purchasing those assets.” Id. at 388. Exide, however, claims our decision in Travellers Int’l AG. v. Robinson, 982 F.2d 96 (3d Cir. 1992), dictates that because the PDH Foreign Entities filed proofs of claim, their claims are “core” proceedings. We disagree. In Travellers, we held that “[w]here . . . a creditor has filed a claim, even though the claim is couched in protective language and is contingent, that creditor has submitted to the bankruptcy court’s equitable jurisdiction and waived any Seventh Amendment right to a jury trial.” Id. at 100. Our decision, however, was limited to “[t]he sole legal question . . . [of] whether a contingent proof of claim filed against a bankrupt estate, arising from a judgment in favor of a creditor . . ., subjects the creditor corporation to the equitable jurisdiction of the bankruptcy court.” Id. at 97 (emphasis added). We did not purport to do away with our traditional analysis, nor did we indicate that filing a proof of claim renders claims between non-debtors “core.” We can find no authority to support Exide’s broad assertion as to the impact of filing proofs of claim. We agree with the appellants that, as a general rule, “actions asserted by those plaintiffs who filed actions against non-debtor parties exclusively, regardless of whether they filed a proof of claim,” are “presumptively non-core.” In re Best Reception Systems, 220 B.R. at 947; accord In re Harrah’s Entm’t, Inc. Sec. Litig., 46 Civ. A. No. 95-3925, 1996 WL 684463,  (E.D. La. Nov. 26, 1996) (“While . . . [Langenkamp] might stand for the proposition that plaintiffs have waived their jury trial right against ... [the debtor] by submitting a proof of claim in the . . . [debtor’s] bankruptcy proceedings, . . . [Langenkamp] do[es] not stand for the broader proposition that plaintiffs have waived their jury right in a non-core proceeding . . . against non-debtor defendants simply by filing a proof of claim against a debtor in a related bankruptcy case); In re Argus Group, 206 B.R. at 748 (rejecting debtors’ argument that the plaintiff’s proofs of claims filed in their bankruptcy cases transformed his pre-petition state law causes of action against the debtor’s operating entity which was not in bankruptcy into a “core” proceeding). The proposition that a contingent proof of claim against a debtor for contribution or indemnification somehow changes the analysis, rendering state court claims against non-debtors “core,” similarly receives no support in the case law. See, e.g, Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. P’ship, No. 04 Civ 708(GEL), 2004 WL 1048239,  (S.D.N.Y. May 7, 2004) (“Even if the proofs of claim filed by the . . . plaintiffs in the Jones bankruptcy render their claims against Jones ‘core’ . . ., they have no effect on the claims against the other defendants [or] the many cross-claims among defendants other than Jones . . ., all of which are clearly non-core.”); Hickox v. Leeward Isles Resorts, Ltd., 224 B.R. 533, 538 (S.D.N.Y. 1998) (finding related to jurisdiction where “plaintiff’s suit against defendant over the promissory notes may ‘conceivably’ affect the 47 administration of the debtor’s estate” because debtor served as guarantor of the defendant’s loan and proofs of claim had been filed); I.G. Davis v. Merv Griffin Co., 128 B.R. 78 (Bankr. D.N.J. 1991) (finding related to jurisdiction where a proof of claim filed by non-debtor defendant claimed he was entited to indemnification by debtor). In Davis v. Life Investors Insurance Company of America, the court considered and rejected an argument like the one Exide now advances. 282 B.R. 186 (S.D. Miss. 2002). There, Life Investors, a non-debtor defendant in a state court action, attempted to establish “core” bankruptcy jurisdiction over the state court cause of action because it had an alleged contractual right to indemnity from debtor for any judgment the plaintiff might obtain against it and had filed a proof of claim in the debtor’s bankruptcy case. Id. at 189. The court was not persuaded and held that the case was “not a core proceeding merely because the outcome of this case, if adverse to Life Investors, will result in a claim (or support the existing contingent claim) by Life Investors against [the debtor’s] bankruptcy estate which in turn might affect the assets of the estate.” Id. at 193. In sum, “there is no authority that a party with a contingent claim for indemnification can bootstrap its claim onto the Bankruptcy Court’s core jurisdiction.” In re Amanat, 338 B.R. 574, 581 (Bankr. S.D.N.Y. 2005). Yet, the District Court stated that our decision in Pacor v. Higgins provides just such authority. In concluding that the PDH Foreign Entities’ claims were “core,” it stated – incorrectly – that Pacor stands for the proposition that “a debtor’s 48 agreement to indemnify a third party gives rise to jurisdiction over nonbankruptcy controversies with that third party, especially where [it] has filed a claim against the debtor.” App. 22 (citing Pacor, 743 F. 2d at 995). This is not accurate. Pacor clearly holds that in the event of such an indemnification obligation, “related to” jurisdiction might exist. To the extent that the filing of a proof of claim against a debtor who has an obligation to indemnify is relevant, it is so because it “transforms the improbable into the conceivable,” thereby rendering the underlying claims involving non-debtor indemnitees related to the bankruptcy case – not core. In re Salem Mills, Inc., 148 B.R. 505, 510 n.9 (N.D. Ill. 1992) (observing that “[a]bsent the filing of a proof of claim involving a third-party indemnification action, it is unknown whether the original indemnitor will assert a claim if prevailing”); I.G. Davis, 128 B.R. at 99 (“Without doubt, the filing of a proof of claim [asserting a right to indemnification] and consequently the demand to share in the pro rata share of distribution of the estate in connection with [plaintiff’s] action has some effect on debtor’s estate and its rights, liability and freedom of action.”). Accordingly, claims between non-debtors may be related to a bankruptcy case, but generally do not qualify as core proceedings under 28 U.S.C. § 157(b). See, e.g., Pacor, 743 F.2d at 994-95; In G-I Holdings, Inc., 278 B.R. 376 (Bankr. D.N.J. 2002); In re Federal-Mogul Global, supra; In re Athos Steel and Aluminum, Inc., 71 B.R. 525 (Bankr. E.D. Pa. 1987). 49 This case does not differ in any meaningful way from the cases referenced above in which there were state court claims against non-debtors, proofs of claim filed, and a duty of the debtor to indemnify, and the claims were found to be non-core proceedings.11 Here, the PDH Foreign Entities filed pre-petition state law causes of action exclusively against the Exide Foreign Entities, making the claims at issue strictly between non-debtors. The proofs of claim submitted against Exide are separate from the right to proceed against the non-debtor foreign entities and were filed in light of an imminent claim bar date. The proofs of claim do not assert the state law causes of action against Exide, 11 Although Exide argues that this case is not like the indemnity cases and cites other cases, its citations are unpersuasive: some involved state lawsuits and proofs of claim where the debtor was the only defendant, In re S.G. Phillips Constr., 45 F.3d 702 (2d Cir. 1995); others resulted in decisions that the claims fell within the bankruptcy court’s purview because they were “related” to a bankruptcy action, not because they were “core” proceedings, In re Argus Group, supra, and still others had a result that actually supports the PDH Foreign Entities’ position. For instance, Exide cites In re Best Reception Systems, as establishing that the PDH Foreign Entities’ became core when the proofs of claim were filed, when in fact the court in that case held that, although the claims against the debtor were core given the filing of proofs of claim, the actions “against non-debtor parties asserted by those plaintiffs who have filed a proof of claim and named the Debtor as a defendant” were non-core. 220 B.R. at 944. 50 but rather assert a right to collect from Exide, should the PDH Foreign Entities win a judgment that the Exide Foreign Entities are unable to satisfy. They are essentially contribution or indemnification claims where the claimants are looking to the non-debtors for payment in the first instance and are clearly different from the breach of contract, conversion, and unjust enrichment claims asserted against the Exide Foreign Entities in state court. The language of the proofs of claim filed make apparent the distinction, noting their position that each of the Exide Foreign Entities “is primarily liable for its breaches, and that the Debtor is secondarily liable to the extent that [the individual Exide Foreign Entity] is unable to satisfy” the judgment against it. See, e.g., App. 500-01. As the PDH entities note, only by erasing the distinction between the PDH Foreign Entities’ state court claims against the Exide Foreign Entities and their proofs of claim against the Exide estate, is Exide able to argue that the PDH Foreign Entities state law claims are core. To follow Exide’s argument to its logical conclusion, whenever a plaintiff sues multiple defendants and one files for bankruptcy, if that plaintiff files a proof of claim against the debtor, his or her claims against the remaining co-defendants would become “core” proceedings as well. We know this is not the case. In the context of mass tort or securities cases, involving large numbers of defendants and indemnity relationships, courts routinely find that the remaining 51 claims between non-debtors are non-core or even entirely unrelated to the bankruptcy case.12 Therefore, we now hold that, by filing proofs of claim in Exide’s bankruptcy proceeding, the PDH Foreign Entities have not transformed their state law claims against non-debtor defendants into core matters that the Bankruptcy Court must resolve. The claims asserted in the PDH Foreign Entities’ proofs of claim are not the same as the claims against the nondebtor defendants in the state court action. See In re Argus Group, 206 B.R. at 748. The PDH Foreign Entities’ filing of contingent proofs of claim does not render the dispute between non-debtor plaintiffs and defendants “core.” The proofs of 12 See In re Combustion Eng’g, 391 F.3d at 230-31 (finding no related to jurisdiction over claims against debtor’s codefendants in large asbestos litigation despite arguments that the bankruptcy estate could be affected by future contribution or indemnification claims); Transamerica Financial Life Ins. Co. v. Merril Lynch & Co., Inc., 302 B.R. 620 (N.D. Iowa 2003) (holding that, because Enron was not named as a defendant and no third party complaint for indemnification had been filed, claims against Enron bankers and underwriters were not related to the bankruptcy but simply between non-debtors, despite the plaintiffs’ filing proofs of claim); In re Federal-Mogul Global, supra (holding that there was not even “related to” jurisdiction over asbestos litigation between non-debtors, based upon possibility that some defendants might assert indemnity claim against debtors). 52 claim for indemnification against the debtor merely demonstrate that the claims against the non-debtor Exide entities are “related to” Exide’s bankruptcy case as they “could conceivably” have an effect on the bankruptcy estate. Pacor, 743 F.2d at 994; Halper, 164 F.3d at 837 (noting that “[c]ertainty or likelihood is not a requirement”).13 13 Courts often have concluded that claims between nondebtors were “related to” proceedings where there was a contractual duty to indemnify and a claim for indemnification or proof of claim for indemnification. See In re Resource Technology Corp., No. 03 C 5785, 2004 WL 419918,  (N.D. Ill. Feb. 13, 2004) (holding that a claim between non-debtors was related to by virtue of the defendant’s having filed a proof of claim expressing his intention to seek indemnification from the debtor, which “ultimately may affect the allocation of property among [the] creditors”); Life Investors Ins. Co., 282 B.R. at 190 (holding that in light of non-debtor defendant's contractual right to indemnity from debtor for any judgment the plaintiff might obtain and its filing of a proof of claim, the claims between non-debtors were “related to” the bankruptcy); In re Harrah’s Entm’t, 1996 WL 684463 at  (in a suit between non-debtors, “the presence of an indemnification agreement between several of the . . . defendants and debtor . . . means that any adverse outcome in this suit against the . . . defendants could conceivably have an effect on the administration of the bankruptcy estate.”); Merv Griffin Co., 128 B.R. at 99 (finding that contractual right to indemnification from debtor establishes (continued...) 53 Accordingly, if, after remand, the Bankruptcy Court decides that, based on the Coordinating Agreement, Exide is the only proper party against whom the PDH Foreign Entities may seek a remedy, then the claims would be “core” proceedings. If, however, the Court decides that the Coordinating Agreement permits the PDH Foreign Entities to pursue their claims against the non-debtor defendants, the claims will be not only non-core, but also subject to mandatory abstention 14 and enforcement of 13 (...continued) “related to” jurisdiction); Philippe v. Sharpe, 103 B.R. 355, 358 (D. Me. 1989) (deciding it had “related to” jurisdiction over claims between non-debtors where “apparently unconditional duty to indemnify” would result in automatic liability on the part of the debtor). 14 In “non-core” proceedings, courts must abstain from hearing a claim if (1) the proceeding is based upon state law causes of action; (2) the causes of action are “related to” a case under title 11, but do not “arise under” title 11 or “arise in” a case under title 11; (3) federal courts would not have jurisdiction absent its relation to a bankruptcy case; (4) an action is “commenced” in a state forum of appropriate jurisdiction; and (5) the action can be timely adjudicated in the state forum. Stoe, 436 F.3d at 213 (summarizing requirements under 28 U.S.C. § 1334(c)(2)). Here, there is no dispute as to the first four factors. PDH Foreign Entities’ claims against the Exide Foreign Entities constitute a state law cause of action commenced in a state forum for which there is no independent basis for federal (continued...) 54 the agreement’s forum selection clause 15 and should accordingly 14 (...continued) jurisdiction other than § 1334(b). As to the fifth factor, the Exide defendants claim that the Illinois State Court will not timely adjudicate the claims. The question is “not whether the action would be more quickly adjudicated in [the bankruptcy court] than in state court, but rather, whether the action can be timely adjudicated in the state court.” In re Freehand H.J., Inc., 2007 WL 1775368,  (Bankr. E.D. Pa. June 19, 2007) (quoting In re Trans World Airlines, Inc., 278 B.R. 42, 51 (Bankr. D. Del. 2002) (emphasis in original)). Here, the state court action was moving along expeditiously; the judge had made clear his intent to move the case forward; and the action had been placed in the docket of the Cook County Circuit Court, designed to facilitate the adjudication of commercial disputes. Accordingly, we believe that this action can be timely adjudicated in the state court. 15 A forum-selection clause is presumptively valid and will be enforced unless the party objecting to its enforcement demonstrates that enforcement of the clause would violate a strong public policy of the forum. Coastal Steel Corp. v. Tilghman Wheelabrator Ltd., 709 F.2d 190, 202 (3d Cir. 1983); M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972). Where the claims at issue are not “core” bankruptcy matters, this rule applies equally to Chapter 11 debtors. See Diaz Contracting, 817 F.2d at 1051-53; In re Kamine/Besicorp Allegany, L.P., 214 B.R. 953, 972-74 (Bankr. D.N.J. 1997). (continued...) 55 be returned to the Illinois state court for trial.