Luan Investment S.E. v. Franklin 145 Corp. (In re Petrie Retail, Inc.)

304 F.3d 223

• Court: Court of Appeals for the Second Circuit
• Decided: September 5, 2002
• Docket: Docket No. 01-5052
• Status: Published

Opinions

Judge JACOBS dissents in a separate opinion.

OAKES, Senior Circuit Judge.

Luan Investment, S.E. (“Luan”) appeals from a July 19, 2001, Memorandum and Order and a December 4, 2001, Stipulation and Order entered by the United States District Court for the Southern District of New York, William H. Pauley III, Judge. The district court affirmed three orders entered by the United States Bankruptcy Court for the Southern District of New York, Arthur J. Gonzalez, Judge, in the context of the Chapter 11 proceedings of Petrie Retail, Inc. (“Petrie”) and its subsidiaries. The bankruptcy court orders enjoined Luan from commencing or continuing any action contingent upon the interpretation of lease provisions that were at issue in the administration of the debtors’ estate, denied Luan’s request for an administrative claim against the estate, and struck from the record documents referencing extrinsic evidence the bankruptcy court found inadmissible. Because we find the bankruptcy court had subject matter

and personal jurisdiction to issue the injunction, had discretion to refuse to abstain, and properly excluded parol evidence from the proceedings, we affirm.

BACKGROUND

This appeal involves an ongoing attempt by Luan to recover from a bankrupt and its assigns amounts believed to be owing under a lease for commercial property in Puerto Rico. On August 6, 1990, Luan Investment Corp. entered into a lease with Atlantico-M.PA. (“Atlántico”), a former wholly-owned subsidiary of Petrie, for the operation of a Marianne/Marianne Plus store at the Aguadilla Mall in Aguadilla, Puerto Rico. Luan Investment Corp. subsequently assigned the lease to appellant Luan, to whom Atlántico attorned.

The lease provides for a fixed annual rent, to be paid in monthly installments. However, under Rider 2A to the lease, the obligation to pay the fixed rate of rent is contingent on the satisfaction of certain occupancy conditions at the Aguadilla Mall. Until the occupancy conditions are met, the tenant is obligated to pay a reduced rate of rate.

On November 10,1993, Atlántico opened a Marianne/Marianne Plus store in the Aguadilla Mall. Because the occupancy conditions had not been met, Atlántico paid the reduced rate for rent.

On October 12, 1995, Petrie and its subsidiaries, including Atlántico (collectively, the “debtors”), filed a petition for reorganization under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”).¹

Luan maintains, as it has throughout this case, that the occupancy conditions triggering the escalation in rent were satisfied on October 31, 1996. The debtors and their assigns argue that the occupancy conditions were not met in 1996 or at any time during these proceedings.

On or about April 28, 1998, Luan filed with the bankruptcy court a motion to compel Atlántico to pay post-petition rent amounts due under Luaris interpretation of the occupancy conditions of the lease and to compel the debtors to assume or reject the lease within thirty days (the “Luan motion”). Based on consensual requests of the parties, the bankruptcy court periodically adjourned the Luan motion until a hearing was held on December 16, 1999.

On November 12, 1998, in response to a bankruptcy court order setting a deadline for the filing of proofs of administrative expenses, Luan filed an administrative proof of claim for the additional rent. In addition, on November 20,1998, Luan filed an objection to the debtors’ motion seeking approval of the assumption and assignment of certain unexpired leases, asserting a cure objection and a cure claim objection to the debtors’ plan of reorganization. Luaris proof of claim and objections to the debtors’ reorganization plan sought the interpretation of the same lease provisions at issue in the Luan motion.

On December 1, 1998, the bankruptcy court held a hearing concerning the sale of the debtors’ assets and related relief (the “sale hearing”). Luan was present at the sale hearing. On the same date, the bankruptcy court entered an order (the “sale order”), approving, inter alia, an Asset Purchase Agreement and the sale of the debtors’ assets. Pursuant to the sale order, Marianne, Ltd. (“Marianne”), formerly known as Urban Acquisition Corp., acquired the lease at issue.²

Under the sale order, Marianne did not assume certain liabilities (the “excluded liabilities”). The excluded liabilities included defaults under the assigned contracts that existed prior to the assignment and any other obligations arising prior to, and required to be performed prior to, the assignment unless Marianne specifically assumed the obligations. The sale order provided that those holding excluded liabilities were “enjoined from asserting or prosecuting any Claim or cause of action” against Marianne related to the excluded liabilities. The sale order further barred and enjoined parties to the leases that were assigned from asserting against Marianne any default or breach under the leases that was outstanding as of the date of the closing. The sale order also contained provisions for payment of cure amounts and included a clause in which the bankruptcy court retained “sole and exclusive jurisdiction over all matters arising from or related to the [lease], the [debtors’ motion seeking approval of the assumption and assignment of certain unexpired leases], the Transaction Documents, the implementation thereof and [the Sale] Order.”

On December 8, 1998, the bankruptcy court entered an order (the “confirmation order”) confirming the Debtors’ Second Amended Joint Plan of Reorganization (the “plan of reorganization”). The plan of reorganization and confirmation order incorporated the terms of the sale order. The plan designated appellee Franklin 145 Corp. as the debtors’ distribution company. The Plan’s effective date and thus the closing date for the sale of assets was December 18,1998.

On September 27, 1999, Luan sent a letter to Marianne declaring it in default and announcing its intention to terminate the lease for non-payment of rent. Invoking the rent-escalation provision in the lease, Luan demanded that Marianne pay additional rent of $411,030.05 plus $61,732.29 in interest, which amount the bankruptcy court found to include amounts defined as excluded liabilities under the sale order, the plan of reorganization, and the confirmation order.

On November 19, 1999, in response to Luan’s letter, Marianne filed a motion with the bankruptcy court pursuant to 11 U.S.C. §§ 1141(a) and 1142(b) for an order in aid of consummation of the Plan (the “plan consummation motion”). The plan consummation motion sought entry of an order enforcing the sale order’s injunction as to excluded liabilities and finding Luan in violation of the confirmation order for seeking to collect excluded liabilities.

On November 23, 1999, Luan filed a lawsuit against Marianne in Puerto Rico (the “Puerto Rico action”) seeking entry of an order declaring Marianne in default under Luan’s interpretation of the lease.

On December 16, 1999, the bankruptcy court held a hearing in connection with the plan consummation motion and the Luan motion. In opposition to the plan consummation motion, Luan argued that the bankruptcy court lacked subject matter jurisdiction over the dispute and personal jurisdiction over Luan, and that, regardless of the jurisdictional matters, the bankruptcy court should abstain from the action.

On December 21, 1999, the bankruptcy court entered an order granting the plan consummation motion and enjoining Luan from “commencing, continuing or prosecuting any action contingent upon the interpretation of the ... provisions of the leases at issue before this Court.” The bankruptcy court determined that it had jurisdiction to enforce the pre-existing injunction as stated in the sale order and to interpret the lease in the context of Luan’s administrative claim against the debtors and its claim against Marianne for excluded liabilities. In addition, the bankruptcy court found it had personal jurisdiction over Luan based on the fact that Luan put the interpretation of the lease before the court in its motion and submitted to the court’s jurisdiction in that regard.

On March 8, 2000, the bankruptcy court held a hearing with respect to the interpretation of the lease. Marianne filed a motion in limine to exclude parol evidence on the ground that the terms of the lease were clear and unambiguous. On March 29, 2000, the bankruptcy court granted the motion in limine finding that, under Puer-to Rico law, the terms of the lease related to the payment of rent were not ambiguous, and, therefore, parol evidence was not admissible to contravene the terms of the lease.

On June 7, 2000, the bankruptcy court entered an order resolving the Luan motion by denying Luan’s request for an administrative claim, rejecting Luan’s interpretation of the lease, and setting the amount of Luan’s cure claim against the debtors’ estates at $10,185.62. The order also denied as moot Luan’s April 19, 2000, motion for summary judgment and denied Luan’s request to have parol evidence admitted into the record.

On September 5, 2000, the bankruptcy court granted Franklin 145 Corp.’s motion to strike from the record on appeal parol evidence the bankruptcy court previously ruled inadmissible.

Luan timely appealed the December 21, 1999, June 7, 2000, and September 5, 2000, bankruptcy court orders to the District Court for the Southern District of New York. The district court consolidated the appeals and, on July 19, 2001, issued a memorandum decision affirming the bankruptcy court’s orders with regard to jurisdiction, abstention, and application of the parol evidence rule. On December 4, 2001, the district court issued an order affirming the bankruptcy court’s orders in their entirety, finding that its July 19, 2001, Memorandum and Order resolved all issues raised on appeal.

DISCUSSION

Luan argues that the district court erred by affirming the bankruptcy court’s orders because: (1) the bankruptcy court did not have subject matter or personal jurisdiction to hear the plan consummation motion; (2) the bankruptcy court should have abstained from hearing the plan consummation motion where Luan had filed suit regarding the lease at issue in federal district court; and (3) the bankruptcy court erred by excluding parol evidence regarding the interpretation of the lease.³ We address each argument in turn but write primarily to address the first.

Our review of a district court decision affirming a bankruptcy court order is plenary. FCC v. NextWave Personal Communications, Inc. (In re NextWave Personal Communications, Inc.), 200 F.3d 43, 50 (2d Cir.1999). We therefore independently review the factual findings and legal conclusions of the bankruptcy court. Id. We must accept the bankruptcy court’s findings of fact unless clearly erroneous; conclusions of law are reviewed de novo. Id.

I. Bankruptcy Court Jurisdiction

Luan argues that the bankruptcy court did not have subject matter jurisdiction over the contract dispute raised in the plan consummation motion and did not have personal jurisdiction over Luan as to that motion.

A. Subject Matter Jurisdiction

Luan argues that the bankruptcy court did not have subject matter jurisdiction over the plan consummation motion because it was part of a post-sale contract dispute between two non-debtors.

The jurisdiction of the bankruptcy court is set forth in 28 U.S.C. § 157. Bankruptcy proceedings are divided into two principal categories: “core” and “non-core.” 28 U.S.C. § 157 (2001); United States Lines, Inc. v. Am. Steamship Owners Mut. Protection and Indem. Ass’n, Inc. (In re United States Lines, Inc.), 197 F.3d 631, 636 (2d Cir.1999). In core proceedings, the bankruptcy court has comprehensive power and may enter appropriate orders and judgments. 28 U.S.C. § 157(b)(1) (2001); see S.G. Phillips Constrs., Inc. v. City of Burlington (In re S.G. Phillips Constrs., Inc.), 45 F.3d 702, 704 (2d Cir.1995). In proceedings which are non-core, but which otherwise relate to a bankruptcy case under title 11, “the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court[J” 28 U.S.C. § 157(c)(1) (2001).

The core/non-core distinction was first articulated in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). In Marathon, the Court considered the constitutionality of bankruptcy court jurisdiction under Article III of the Constitution, noting that “the restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, must be distinguished from the adjudication of state-created private rights, such as the right to recover contract damages[.]” Id. at 71, 102 S.Ct. 2858. The Court held that “Congress may not vest in a non-Article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law[J” Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 584, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985) (discussing the Marathon holding). However, the Court “was unable to agree on the precise scope and nature of Article Ill’s limitations.” Id.

In response to Marathon, Congress codified the core/non-core distinction in the Bankruptcy Amendments and Federal Judgeship Act of 1984. In re S.G. Phillips Constrs., Inc., 45 F.3d at 705 (citing In re Arnold Print Works, Inc., 815 F.2d 165, 166-67 (1st Cir.1987) (Breyer, J.)). We have previously recognized that, in making the core/non-core distinction, “Congress realized that the bankruptcy court’s jurisdictional reach was essential to the efficient administration of bankruptcy proceedings and intended that the ‘core’ jurisdiction would be construed as broadly as possible subject to the constitutional limits established in Marathon.” Id. Therefore, we construe Marathon narrowly and give core proceedings “a broad interpretation that is ‘close to or congruent with constitutional limits[.]’ ” In re United States Lines, Inc., 197 F.3d at 637 (quoting Resolution Trust Corp. v. Best Prods. Co. (In re Best Prods. Co.), 68 F.3d 26, 31 (2d Cir.1995) (internal citation omitted)).

In this case, the plan consummation motion asked the bankruptcy court to enjoin Luan from proceeding with a contract action contingent upon the interpretation of the lease provisions at issue in the administration of Luan’s claims in bankruptcy court. “[Wjhether a contract proceeding is core depends on (1) whether the contract is antecedent to the reorganization petition; and (2) the degree to which the proceeding is independent of the reorganization.” In re United States Lines, Inc., 197 F.3d at 637. The second prong of the inquiry “hinges on ‘the nature of the proceeding.’ ” Id. (quoting In re S.G. Phillips Constrs., Inc., 45 F.3d at 707). “Proceedings can be core by virtue of their nature if either (1) the type of proceeding is unique to or uniquely affected by the bankruptcy proceedings, ... or (2) the proceedings directly affect a core bankruptcy function.” Id. (internal citations omitted).

The plan consummation motion in this case involves a post-petition dispute that arose over a pre-petition lease. The fact that the lease was executed pre-petition and that the dispute between Luan and Marianne could arise outside of bankruptcy proceedings weighs against its core status. See In re United States Lines, Inc., 197 F.3d at 637-38. However, due to a combination of factors, the contract dispute in this case was not independent of the reorganization. Accordingly, the impact of the plan consummation motion on other core bankruptcy functions renders it core. See id.

First, the dispute in this case was based on rights established in the sale order. “[Ojrders approving the sale of property” are core bankruptcy proceedings. 28 U.S.C. § 157(b)(2)(N) (2001). In this case, the sale order, plan of reorganization, and confirmation order set forth the rights Luan could assert vis-a-vis Marianne in connection with the sale of the lease, specifically prohibiting actions for excluded liabilities. Thus, although the original lease was a pre-petition contract, many of Marianne’s rights with regard to the lease were established as part of the core bankruptcy court function of approving the sale of the Petrie property.

Moreover, the bankruptcy court found that Luan’s demand of Marianne involved excluded liabilities as defined in the sale order. The bankruptcy court’s finding was not clearly erroneous, and is therefore adopted by this court. Because Luan sought excluded liabilities, the contract dispute between Luan and Marianne involved rights specifically established by the sale order. Accordingly, the dispute was uniquely affected by and “inextricably linked to the bankruptcy court’s Sale Order[.]” Comco Assocs. v. Faraldi Food Indus., Ltd., 170 B.R. 765, 772 (E.D.N.Y.1994).

Second, the plan consummation motion sought enforcement of a pre-existing injunction issued as part of the bankruptcy court’s sale order and confirmation order. A bankruptcy court retains post-confirmation jurisdiction to interpret and enforce its own orders, particularly when disputes arise over a bankruptcy plan of reorganization. See Back v. LTV Corp. (In re Chateaugay Corp.), 213 B.R. 633, 640 (S.D.N.Y.1997); In re Johns-Manville Corp., 97 B.R. 174, 179-80 (Bkrtcy.S.D.N.Y.1989). The plan consummation motion was filed in response to Luan’s demand for excluded liabilities and sought enforcement of the injunction provisions outlined in the sale order, plan of reorganization, and confirmation order. Therefore, the dispute between Luan and Marianne involved interpretation of the bankruptcy court’s orders. The bankruptcy court thus had jurisdiction over the plan consummation motion and, specifically, had jurisdiction to consider whether Luan was seeking excluded liabilities and, if so, to enforce the injunction provisions of its orders.

Third, the dispute between Luan and Marianne involved an issue already before the bankruptcy court as part of its consideration of Luan’s claim against the estate. As such, the dispute uniquely affected and was uniquely affected by the core bankruptcy functions as to “matters concerning the administration of the estate,” 28 U.S.C. § 157(b)(2)(A) (2001), and the “allowance or disallowance of claims against the estate.” 28 U.S.C. § 157(b)(2)(B) (2001). At the time the sale order was issued, Luan had filed an administrative proof of claim for additional rent from the estate, over which the bankruptcy court had core jurisdiction. See In re S.G. Phillips Constrs., Inc., 45 F.3d at 705; Gulf States Exploration Co. v. Manville Forest Prods. Corp. (In re Manville Forest Prods. Corp.), 896 F.2d 1384, 1390 (2d Cir.1990) (“[A] claim filed against the estate is a core proceeding because it could arise only in the context of bankruptcy.”) (citation omitted). The proof of claim, as well as the Luan motion and Luan’s objections to the plan of reorganization, required the bankruptcy court to interpret the lease in order to determine what assets of the debtors’ estate should be distributed to Luan. Thus, the interpretation of the lease was originally raised as part of the bankruptcy court’s core function of determining whether to allow Luan’s claim in the administration of the estate.

Luan’s allegation against Marianne was identical to Luan’s claim against the estate, namely, that the lessee was in default for failing to pay amounts due under the rent-escalation clause of the lease. In addition, Luan sought excluded liabilities from Marianne. The contract dispute between Luan and Marianne was thus a continued attempt by Luan to recover rent originally claimed from the estate. As such, it uniquely affected and was uniquely affected by the bankruptcy court’s core functions of determining Luan’s claim and administering the estate.

The combination of factors in this case leads us to conclude that the plan consummation motion was a core proceeding because it was not independent of the reorganization. Specifically, the plan consummation motion uniquely affected and was uniquely affected by core bankruptcy functions because the dispute between Luan and Marianne was based on rights established in the sale order, the plan consummation motion sought enforcement of a pre-existing injunction issued in the bankruptcy court’s sale order, and the dispute involved an issue already before the bankruptcy court as part of its consideration of Luan’s claim against the estate. We express no view as to whether any one of these facts alone would render a proceeding core. We further note, as the bankruptcy court did, that the bankruptcy court’s core jurisdiction over the dispute between Luan and Marianne is limited to the enforcement of the rights established by the orders of the bankruptcy court and the resolution of issues raised in the reorganization.

B. Personal Jurisdiction

Luan argues that the bankruptcy court lacked personal jurisdiction over it in connection with the plan consummation motion.

Creditors subject themselves to the bankruptcy court’s equity jurisdiction “by submitting a claim against the bankruptcy estate.” Granfinanciera, S.A v. Nordberg, 492 U.S. 33, 59 n. 14, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) (citing Katchen v. Landy, 382 U.S. 323, 335, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966)); see also First Fidelity Bank v. Hooker Invs., Inc. (In re Hooker Invs., Inc.), 937 F.2d 833, 838 (2d Cir.1991). In this case, Luan filed a proof of claim for additional rent thereby subjecting itself to the bankruptcy court’s “equitable power to [allow or] disallow [that] claim[].” Granfinanciera, 492 U.S. at 59, n. 14, 109 S.Ct. 2782.

Luan argues that it did not consent to determination of its claim in bankruptcy court because it was forced either to file a proof of claim or risk losing its claim against the debtors. We note that we have held that a creditor subjects itself to the bankruptcy court’s jurisdiction even where filing a proof of claim is statutorily mandated. In re Best Prod. Co., 68 F.3d at 32. However, we need not decide whether filing the proof of claim was alone sufficient to invoke the bankruptcy court’s jurisdiction in this case. In addition to filing a proof of claim, Luan appeared in the debtors’ bankruptcy proceeding, filed a motion with the bankruptcy court seeking determination and payment of its administrative rent charge, and submitted objections to the debtors’ motion seeking approval of the assumption and assignment of unexpired leases as well as the debtors’ plan of reorganization. Moreover, Luan did not object to the personal jurisdiction of the bankruptcy court with regard to any proceedings related to its claim for additional rent. Therefore, Luan submitted to and invoked the bankruptcy court’s jurisdiction over its claim.

Luan argues that, even if the bankruptcy court had personal jurisdiction over it as to the administrative claim and the Luan motion, the bankruptcy court did not have personal jurisdiction over Luan with regard to the plan consummation motion. As discussed above, the plan consummation motion sought enforcement of the sale order’s existing injunction and sought relief based on the rights established in the sale order. The sale order specifically provided that the bankruptcy court would “retain sole and exclusive jurisdiction over all matters arising from or related to the [lease], the [debtors’ motion seeking approval of the assumption and assignment of certain unexpired leases], the Transaction Documents, the implementation thereof[,] and this Order.” Luan did not object or appeal from the sale order, confirmation order, or plan on the basis of personal jurisdiction. Accordingly, in addition to submitting to the bankruptcy court’s jurisdiction with regard to its claims against the estate, Luan submitted to jurisdiction of the bankruptcy court with regard to the sale order and its enforcement. Because the plan consummation motion sought enforcement of the sale order, the bankruptcy court had personal jurisdiction over Luan with regard to the motion.

II. Abstention

Luan argues that the bankruptcy court erred by failing to abstain from hearing the plan consummation motion and the district court erred by affirming the bankruptcy court’s decision.

Section 1334(c)(2) of Title 28 of the United States Code “requires the district court to abstain from hearing a non-core matter which can be timely adjudicated in state court in a previously commenced action.” In re S.G. Phillips Constrs., Inc., 45 F.3d at 708. Abstention is only mandated with respect to non-core matters. Id. Therefore, where a matter constitutes a core proceeding, the mandatory abstention provisions of section 1334(c)(2) are inapplicable. As discussed above, the resolution of the plan consummation motion was a core proceeding. Therefore, mandatory abstention pursuant to 28 U.S.C. § 1334(c)(2) does not apply. Id.; Ben Cooper, Inc. v. Ins. Co. of the State of Penn. (In re Ben Cooper, Inc.), 924 F.2d 36, 38 (2d Cir.1991).

Permissive abstention from core proceedings under 28 U.S.C. § 1334(c)(1) is left to the bankruptcy court’s discretion. In re S.G. Phillips Constrs., Inc., 45 F.3d at 708. Permissive abstention can be warranted “in the interest of justice, or in the interest of comity with State courts or respect for State law.” 28 U.S.C. § 1334(c)(1) (2001). In this case, the bankruptcy court did not abstain because the factors bearing on the interests of justice weighed heavily against abstention to avoid inconsistent interpretation of the lease and to prevent Luan from forum shopping. We find that the bankruptcy court’s decision not to abstain under such circumstances fell within its discretion.

III. Parol Evidence

Luan argues that the bankruptcy court erred by excluding parol evidence when it interpreted the lease and that the district court erred in affirming that decision. We have considered Luan’s arguments and, for the reasons stated in the thorough opinions of the bankruptcy and district courts, find them to be without merit.

CONCLUSION

For the foregoing reasons, we affirm the orders of the district court.

1 . On June 4, 1998, the bankruptcy court entered an order substantively consolidating the debtors' estates into a single Chapter 11 case.

2 . After acquiring the lease, Marianne designated its affiliate, Cruz-Ponce Corp. ("CPC”), as the tenant under the lease. For convenience, we will refer to these appellees collectively and individually as “Marianne.”

3 . In its brief, Luan raises additional arguments that were not raised before or addressed by the bankruptcy court. Because these issues are not properly before this court, we decline to address them.