Court Opinion

ID: 2963008
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:04:50.541539+00
Date Added: 2024-06-11T11:42:37.308402
License: Public Domain

USCA1 Opinion

	

                            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-