Court Opinion

ID: 195737
Source: CourtListenerOpinion
Date Created: 2011-02-07 02:46:20+00
Date Added: 2024-06-11T09:42:49.916937
License: Public Domain

UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                                     

No. 94-1766

                 CONGRESS CREDIT CORPORATION,

                    Plaintiff, Appellant,

                              v.

               AJC INTERNATIONAL, INC., ET AL.,

                    Defendants, Appellees.

                                         

         APPEAL FROM THE UNITED STATES DISTRICT COURT

               FOR THE DISTRICT OF PUERTO RICO

        [Hon. Hector M. Laffitte, U.S. District Judge]
                                                                 

                                         

                            Before

                Campbell, Senior Circuit Judge,
                                                          

             Boyle* and Fust ,** District Judges.
                                                            

                                          

Ronald  L.  Rosenbaum, with  whom  Woods, Rosenbaum,  Luckeroth  &
                                                                              
Perez Gonzalez was on brief for appellant.
                      
Brian  K. Tester, with whom Richard A. Lee Law Office was on brief
                                                                 
for appellees.
                                         

                      December 15, 1994
                                         

                
                            

*Of the District of Rhode Island, sitting by designation.

**Of the District of Puerto Rico, sitting by designation.

          CAMPBELL,  Senior Circuit  Judge.   Congress Credit
                                                      

Corporation  ("Congress Credit")  appeals  from the  district

court's  dismissal without prejudice  of its diversity action

to collect  certain proceeds in  the hands of  the appellees,

AJC  International, Inc. ("AJC") and Fronex Commodities, Inc.

(Fronex")  under a  perfected factor's  lien.   The  lien was

allegedly granted  to Congress  Credit by  United Western  of

Puerto Rico, Inc.  ("United Western"), which later  filed for

bankruptcy.  The district court has dismissed the lien action

without prejudice, apparently  believing that Congress Credit

should not presently proceed with  its lien action due to the

pendency  of  several adversary  proceedings  brought in  the

bankruptcy court by the trustee  of United Western to recover

the  same sums  as preferences  from  these same  defendants.

This court initially affirmed,  but upon considering Congress

Credit's  petition for rehearing, and after giving the matter

further  thought, has  vacated its  opinion  and judgment  of

affirmance.  We now hold  that the district court was without

authority  to dismiss  Congress Credit's diversity  action to

enforce  its  lien, and  we  vacate  and remand  for  further

proceedings in the district court.

              FACTUAL AND PROCEDURAL BACKGROUND
                          FACTUAL AND PROCEDURAL BACKGROUND

          Congress Credit  is a  commercial finance  company.

It financed the  accounts receivable and inventory  of United

Western and  claims  to hold  a  recorded Factor's  Lien  and

                             -2-

Assignment  of Accounts  Receivable given  by United  Western

pursuant to  the Puerto Rico  Factors Lien and  Assignment of

Accounts Receivable Acts.1  On March 2, 1990, United  Western

filed  a  petition in  bankruptcy  under  Chapter 11  of  the

Bankruptcy   Code,  which  was  converted  to  Chapter  7  on

September 7, 1990.

          Appellees  were suppliers  of  United Western,  who

allegedly, within  the ninety  days prior  to the  bankruptcy

filing,  received  bulk transfers  of  inventory  from United

Western in payment of its outstanding indebtedness to them   

$376,610.79 in the case of AJC and  $81,178.60 in the case of

Fronex.2    On   May  11,  1990,  United   Western  commenced

adversary  proceedings in  the bankruptcy  court  against the

appellees, alleging  that  the  inventory  sales  constituted

preferential  transfers.  After  the conversion to  Chapter 7

the  trustee was  substituted for  the  debtor as  plaintiff.

Congress Credit commenced  this action in the  district court

under diversity jurisdiction to recover essentially the  same

                    
                                

1.  P.R. Laws  Ann. tit. 10,     551-60, 581-88 (1976).   The
status and validity of this  lien is not presently before us,
although it plays a central role in the controversy.

2.  Two  other suppliers  of  United  Western also  allegedly
received  bulk transfers  within  the ninety  day  preference
period, in  the amounts  of $180,504.84 in  the case  of Agro
International  ("Agro") (originally a named defendant in this
suit) and  $23,000.00 in the  case of Top Flight,  Inc. ("Top
Flight").   Congress  Credit represents  that  both of  these
entities  have been liquidated while this litigation has been
pending.

                             -3-

assets, or their proceeds, on June 1, 1990, alleging that the

merchandise thus transferred had been subject to its factor's

lien.

          On June  7, 1990  (some six  days after  filing its

lien  action in the district court)  Congress Credit filed an

adversary  proceeding in  the bankruptcy  court,  asserting a

claim  to  any  recovery  the  estate  might  obtain  in  the

preference  actions.    The  trustee  did  not  contest  this

proceeding; accordingly, judgment was entered on February 11,

1992  in favor of Congress Credit, securing Congress Credit's

right to any such recovery.

          The appellees having  successfully obtained a  stay

of the lien action on  August 31, 1990, pending resolution of

the adversary  proceedings in the bankruptcy  court, Congress

Credit next  moved the  district court to  lift that  stay on

August 27, 1992.  The appellees opposed that motion and moved

to dismiss on September 28,  1992.  The district court denied

the  motion to  vacate the  stay  and granted  the motion  to

dismiss in  an  opinion  and  order  dated  April  16,  1993.

Congress Credit's unsuccessful motion for reconsideration was

denied  in a  second opinion  and order  dated June  8, 1994,

which reiterated  the grounds  stated in  the first  opinion.

Congress Credit then appealed.

          Congress Credit represents that there are  no funds

in United Western's  estate and that the  bankrupt's business

                             -4-

has long since been liquidated.3   The record also shows that

the  bankruptcy judge has  rejected a proposed  agreement for

Congress  Credit to finance  the trustee's preference actions

and has ordered the trustee  to show cause why the preference

actions  should not  be  dismissed, as  none of  the proceeds

would  benefit the estate (i.e.  they would presumably all go

to  Congress Credit  under the  bankruptcy  court's order  of

February 11, 1992).

          The  district  court,  nonetheless,  reasoned  that

Congress Credit's interests were fully protected by and could

await the results  of the trustee's preference  actions.  The

court seemed to base the dismissal of the lien action on  its

understanding that it  was merely duplicative of  the pending

preference actions:

          The  trustee's  adversary  proceeding and
          this case involve  the same transactions,
          property   and   parties.      The   only
          difference between the cases  lies in the
          legal bases for  challenging the validity
          of  the transfers.    A  judgment in  the
          civil action would most certainly have an
          effect  on the  debtor's  estate.  . .  .
          [M]aintenance    of    two    proceedings

                    
                                

3.  Not having the  record in the bankruptcy  case before us,
we cannot  know for certain that this is  correct.  If it is,
and  if, as  may be  the case,  infra, the  preference action
                                                 
cannot benefit  the estate, there  may be no point  in having
the trustee  seek to  recover property all  of which  must be
turned over to Congress  Credit, with the inflation  of legal
fees that this might entail.  On the other hand, there may be
legitimate reasons  justifying continuance of  the preference
actions.  Sorting out and making the best provision for these
realities  is something  we leave  to the  district court  on
remand.

                             -5-

          adjudicating  the  same  issues  consumes
          scarce judicial resources.

                           ANALYSIS
                                       ANALYSIS

          Shortly  after hearing  this  appeal, we  summarily

affirmed  the district court's  judgment of dismissal  as, at

first blush,  it  seemed sensible  to  permit matters  to  be

pursued  and, if possible, concluded in the bankruptcy court.

Like the district  court, we were unhappy at  the prospect of

the two cases     the preference actions and  the lien action

    wasting scarce resources by proceeding on separate tracks

in different courts, with the risk of multiple judgments.  We

are  now  persuaded,  however,   that  the  district  court's

proposed solution to this dilemma  was legally insupportable.

The correct, as well as  most efficient solution, is for both

proceedings  to  be  consolidated  for  disposition  in   the

district   court,  which  is   the  only  court   with  clear

jurisdiction over both.

          While the  lien action  and the  preference actions

apparently involve the  identical property, they are  not one

and  the same action, permitting  dismissal of one as surplus

to the  other.  They do not involve  the same parties nor the

same causes of  action.  The law suit from  which this appeal

is  taken     the  lien action     is  a diversity  action to

enforce a lien created under Puerto Rico law.  P.R. Laws Ann.

tit.  10,     551-60, 581-88  (1976).   Congress Credit  must

prove  the  existence  and  validity  of  the  lien,  and, in

                             -6-

addition, that the lien attached to the inventory transferred

to the appellees and followed  to any claimed proceeds now in

their  hands.   The trustee,  on the  other hand,  must show,

inter alia,  that the  inventory was  property of  the estate
                      

when transferred  to appellees so  that its transfer  to them

was a  preference.  11  U.S.C.   547(b) (1988)  ("the trustee

may  avoid any  transfer  of  an interest  of  the debtor  in
                                                                     

property")  (emphasis  added);  see generally  4  Collier  on
                                                                         

Bankruptcy,   547.01 (Lawrence P. King, ed. 1994) (discussing
                      

elements   of  a  preference   claim).    This   may  require

consideration  of  the  extent  to  which  Congress  Credit's

asserted   lien  removed  the  inventory  from  the  debtor's

property and made it instead  the property of Congress Credit

prior   to  the   filing  of   United  Western's   bankruptcy

petition.4   Thus, the  legal operation  and validity of  the

lien is an issue of some  importance to both cases.  However,

the plaintiffs  and the legal  theories for recovery  in each

case are different.

          The  district court apparently viewed the two cases

as  based on identical, parallel theories, giving the earlier

                    
                                

4.  The operation  of the lien  is a question of  Puerto Rico
law.  See  4 Collier on Bankruptcy,    541.02[1] (Lawrence P.
                                              
King,  ed. 1994) ("Section 541 provides that the commencement
of a case creates an estate  consisting, most importantly, of
all legal or equitable interests of the debtor in property at
the  time  of the  commencement  of  the  case.   Under  this
provision it will still be necessary to look to nonbankruptcy
law, usually  to state law,  to determine whether  the debtor
has any legal or equitable interest in any particular item.")

                             -7-

preference   cases  a  right  to  proceed  exclusive  of  the

subsequent lien action.  This analysis  overlooked the  major

differences  between the  two causes of  action.   A district

court  may  certainly  dismiss  an  action  which  is  merely

"duplicative"  of another  action pending in  another federal

court.  See Colorado River Water Conservation Dist. v. United
                                                                         

States,  424 U.S.  800, 817,  96 S.Ct.  1236, 47  L.Ed.2d 483
                  

(1976); Small v. Wageman, 291  F.2d 734, 735 (1st Cir. 1961);
                                    

17A   Charles  Alan  Wright  et  al.,  Federal  Practice  and

Procedure    4247  nn. 7-8  and  accompanying text  (2nd  ed.

1988).  But for an action to  be "duplicative" of another, so

as to  warrant its dismissal  for that reason alone,  the one

must be materially on  all fours with the other.  The present

lien action is not at all in that category.  The plaintiff in

the  lien action  is different  from that  in  the preference

actions,  and the theory of recovery is altogether different.

See, e.g., Thermal Dynamics Corp. v. Union Carbide Corp., 214
                                                                    

F.  Supp.  773, 774  (S.D.N.Y.  1963) (in  order  to properly

enjoin suit in  another court, the issues "must  have such an

identity that a determination in  one action leaves little or

nothing  to  be determined  in  the other");  Radio  Corp. of
                                                                         

America v. Rauland Corp., 16 F.R.D. 160, 163 (N.D. Ill. 1954)
                                    

(federal  court  should  not  stay  proceedings  in  its  own

jurisdiction  unless it appears  that parties and  issues are

the  same), mandamus denied,  217 F.2d  218 (7th  Cir. 1954),
                                       

                             -8-

cert.  denied, 348  U.S.  973,  75 S.Ct.  533,  99 L.Ed.  758
                         

(1955), mandamus denied, 348 U.S. 968, 75 S.Ct. 543, 99 L.Ed.
                                   

754 (1955).

          We  think it  clear, therefore,  that  there is  no

justification for dismissing  the present lien action  on the

basis of a  supposed identity between  it and the  preference

actions.   Nor  can  we  see  any  bankruptcy-related  theory

allowing  the  district  court to  force  Congress  Credit to

depend  upon  the preference  proceedings  in  the bankruptcy

court for the  collection of its lien.   We are  advised that

the automatic stay as to  Congress Credit has long since been

vacated.   See 11  U.S.C.    362(a)  (1988) (staying  actions
                          

against the  debtor, property of  the debtor, or  property of

the  estate).  Direct  enforcement of Congress  Credit's lien

must be  accomplished by  a state law  action brought  in the

Puerto Rico courts or a  federal court sitting in  diversity.

It is doubtful whether a bankruptcy court has jurisdiction at

all over  such a  lien action,  which is clearly  not a  core

bankruptcy   matter,   see  28   U.S.C.      157(b)   (1988).
                                      

Conceivably, in  proper  circumstances,  a  bankruptcy  court

might handle  a lien  enforcement  action as  a non-core  but

"related" proceeding  under the  eye of  the district  court,

which would have final say over its disposition.  28 U.S.C.  

157(c)   (1988)  (bankruptcy  court   may  hear   a  non-core

proceeding, but  final  disposition of  such must  be by  the

                             -9-

district court).   Most probably, although we do  not rule on

the  question,  the  lien  action is  not  even  a  "related"

proceeding.   The  lien  holder  here  claims, and  has  been

awarded by  order of the  bankruptcy court, the right  to all

recovery  in the preference actions.   This suggests that, by

now, the  result in  the lien proceeding  can have  no impact

whatever upon the bankruptcy estate.   See, e.g., In re North
                                                                         

Star  Contracting Corp., 146  B.R. 514, 519  (Bankr. S.D.N.Y.
                                   

1992) (action is "related  to" a bankruptcy if  outcome could

alter  the debtor's rights,  liabilities, options, or freedom

of  action, or  in  any  way impacts  upon  the handling  and

administration of the bankruptcy estate); In re Chambers, 125
                                                                    

B.R. 788, 793 (Bankr. W.D. Mo. 1991) (matter not "related to"

Title  11  where  neither amount  of  property  available for

distribution, not the allocation of property among creditors,

is affected by the dispute).   If the lien enforcement action

is not  a "related"  proceeding, the  bankruptcy court  would

lack any  jurisdiction whatever over it.  In any event, it is

difficult   to   justify   ousting  Congress   Credit,   even

temporarily, from  the district  court     which clearly  has

diversity  jurisdiction over its  lien action     leaving its

rights under the lien  to be secured in the more  round about

preference   proceeding,   requiring  proof   of   additional

elements, in  a court  probably lacking  any jurisdiction  to

enforce the lien claim directly.

                             -10-

          In these  circumstances, we think it  was erroneous

to defer to the trustee's  and the bankruptcy court's lead in

the preference  proceedings     proceedings  which, at  best,

seem  poorly tailored to Congress Credit's present needs, and

which in  any case seem to have  lost steam.  To  be sure, it

makes no sense for the  two actions to proceed along separate

tracks,  inviting a defense  strategy of divide  and conquer.

But there  is a better  solution to this problem,  namely, to

consolidate  both  proceedings  in the  one  court,  here the

district court, where jurisdiction over both  actions plainly

exists.  This  will enable attention to be  directed where it

should  have been  directed all  along     to  the merits  or

demerits of  the claims  against the  appellees, without  the

distraction of  conceivable double or  conflicting recoveries

in different courts.

          We, therefore, vacate  and remand  to the  district

court with instructions that it provide appropriate notice to

the trustee in bankruptcy, directing him to show cause in the

district  court why  the  preference  claims  should  not  be

brought up  to the district  court from the  bankruptcy court

and  either abandoned  or  dismissed  or  else  continued  in

consolidation with the  lien claim.5  The  district court can

                    
                                

5.  The  bankruptcy court has already instituted inquiry into
whether the preference claims should be continued now that it
is  clear that the sole  beneficiary will be Congress Credit.
The district court  may, but need not, allow  that inquiry to
be resolved by the bankruptcy judge  if it thinks this is the

                             -11-

either  dismiss the preference  claims if it  determines that

they  lack viability (assuming  the bankruptcy court  has not

done so, see  n.5) or allow the  trustee to pursue them  in a
                        

consolidated proceeding  in the district  court together with

the lien diversity action.

          The  power of the district court to consolidate the

preference actions now  pending in the bankruptcy  court with

the  instant diversity  lien  action rests  on  its power  to

withdraw a case from the bankruptcy  court "for cause shown."

28  U.S.C.    157(d) (1988).    Courts have  done this  where

necessary in  analogous instances.   See, e.g., In  re Sevko,
                                                                         

Inc., 143  B.R. 114, 117 (N.D. Ill.  1992) (considerations of
                

judicial economy adequate to meet "cause shown" requirement);

Enviro-Scope Corp. v. Westinghouse Elec. Corp. (In re Enviro-
                                                                         

Scope  Corp.), 57 B.R. 1005,  1008-09 (E.D. Pa. 1985) (same).
                         

We  direct use of    157(d) not  because of any  fault on the

part  of the  bankruptcy  court,  but  because  bringing  the

preference  claims into  the district  court  will allow  all

facets of these controversies affecting the same property and

                    
                                

most efficient way  to proceed.  Alternatively,  the district
court may  take charge  of and  resolve that  inquiry itself.
Given the nearly four  years of wheelspinning, we  direct the
district  court to  do  whatever  is  necessary  to  speedily
resolve,  or  have  resolved, the  status  of  the preference
proceedings so that  appellant's lien claim, either  alone or
in  tandem, can  move ahead  and be  decided without  further
delay.

                             -12-

the same defendants to be  disposed of by one tribunal having

undoubted jurisdiction and authority.

          We  emphasize that the question of whether there is

any  reason to  continue  the  preference  claims  should  be

speedily  resolved at  the outset.    To pursue  them at  the

expense  of the estate  and, potentially, of  the appellant's

recovery, may  be inadvisable and a  waste of money.   On the

other hand, we  do not want to  prejudge the matter.   If the

preference claims still serve a proper  purpose and should be

pursued, they  should be pursued  in the district court  in a

consolidated proceeding together with the lien claim.  We are

confident that the district court, having both matters before

it,  will give  expedited attention  to  ending the  existing

gridlock.  Congress Credit is  entitled to have the merits of

its claims determined without further delay.

          The district court's  judgment of  April 19,  1993,

and  its opinion and order of  June 8, 1994, are vacated, and

this case is remanded  to the district court  for proceedings

consistent with this opinion.6

                    
                                

6.  We treat the  district court's opinion and order  of June
8, 1994 as  an appealable final judgment.   See Bankers Trust
                                                                         
Co. v. Mallis,  435 U.S. 381, 98  S.Ct. 1117, 55  L.Ed.2d 357
                         
(1978).

                             -13-