Gandy v. Gandy ( 2002 )

Revised August 2, 2002
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 02-50185
In the Matter of: SARMA GANDY, Debtor.
JAMES GANDY, KARTAR GANDY, HARY GANDY LIMITED PARTNERSHIP,
SIGNTECH USA, LTD., KARTAR GANDY LIMITED PARTNERSHIP, and HARY
GANDY, Appellants,
VERSUS
SARMA GANDY, Appellee.
Appeal from the United States District Court
For the Western District of Texas
July 22, 2002
Before KING, Chief Judge, PARKER, Circuit Judge, and ELLISON *,
District Judge
ELLISON *, District Judge:
This is an appeal from an order denying Appellants’ motion
to compel arbitration. Specifically, Appellants, James Gandy,
Kartar Gandy, Kartar Gandy Limited Partnership, Hary Gandy, and
Hary Gandy Limited Partnership (“Gandys”), seek arbitration of
claims asserted against them by Sarma Gandy, who is currently a
1
debtor in possession (“Debtor”) under Chapter 11 of the
Bankruptcy Code. 11 U.S.C. §§ 1101 et seq. (2002). The United
States Bankruptcy Court for the Western District of Texas,
holding that it had discretion to refuse to order arbitration of
core bankruptcy matters, denied the Gandys’ motion to compel
arbitration and to stay the adversary proceeding pending
arbitration. The District Court affirmed. The Gandys now appeal
to this court. We affirm.
Factual and Procedural History
This case evolved from a state court suit brought by the
Debtor, prior to her bankruptcy, challenging the specifics of
asset liquidation of Signtech USA, Limited (“Signtech”).
Signtech was a Texas limited partnership, formed in 1993, that
was in the business of making sign components and materials,
printing sign faces and other large advertisements, and
manufacturing and selling wide-format digital printers used in
printing large advertising copy. When Signtech was formed,
Debtor acquired a 33% ownership in Signtech as her sole and
separate property. The remaining interest in Signtech was owned
by Kartar Gandy Limited Partnership (“KGLP”), as owned and
controlled by Kartar Gandy, Debtor’s father-in-law, and by James
Gandy, Debtor’s brother-in-law. On October 10, 1997, Debtor
2
entered into a post-marital agreement whereby Debtor transferred
her 33% interest in Signtech to a new limited partnership, Hary
Gandy Limited Partnership (“HGLP”). Hary Gandy, Debtor’s
husband, was HGLP’s general partner and 20% owner, and Debtor was
a limited partner and 80% owner. After the 1997 transfer,
Signtech’s ownership interests were distributed among HGLP, James
Gandy, KGLP, and Gandy Group, Inc. HGLP, James Gandy, and KGLP
were the limited partners and 33% owners, while Gandy Group, Inc.
was the general partner and 1% owner.
Debtor’s claims center on a series of transactions
surrounding and following the 1997 transfer. Debtor alleges that
Hary Gandy, motivated by the possibility of an impending divorce
from Debtor, procured the transfer of Debtor’s 33% ownership
interest in Signtech to HGLP in order to secure his control over
Signtech. Debtor argues that this enabled Hary Gandy to continue
to conceal from Debtor the real value of her ownership interest.1
After the transfer to HGLP, Hary Gandy also obtained from Debtor
an increase from 20% to 20.35% of his ownership interest in HGLP.
According to Debtor, Hary Gandy obtained the additional interest
to forestall the invocation of a partnership clause permitting
replacement of the general partner, with or without cause, upon a
vote of 80% of the ownership interests in the partnership.
As Signtech increasingly lost business and fell in debt, it
began to sell various of its business components. After these
asset sales, Signtech’s remaining assets were its building, its
3
digital printer manufacturing business, and its accounts
receivable. On April 7, 2000, James Gandy, Hary Gandy (on behalf
of HGLP), and Kartar Gandy (on behalf of KGLP) signed a plan of
liquidation for Signtech and a series of assignments of
Signtech’s partnership interests in exchange for Signtech’s
assets. Effective as of March 1, 2000, the plan of liquidation
and the assignments transferred to HGLP ownership of accounts
receivable, and to James Gandy and KGLP 33% and 62%,
respectively, of the remaining assets of Signtech, except for
Signtech’s building.2 Debtor, in consultation with Hary Gandy,
had agreed to receive Signtech’s accounts receivable as HGLP’s
share of the distribution upon liquidation. Debtor alleges that,
unbeknownst to her, the accounts receivable consisted primarily
of uncollectable foreign debts. In contrast, on April 3, 2000,
four days before the signing of Signtech’s liquidation plan,
James Gandy began negotiating with one of Signtech’s competitors
for the sale of Signtech’s digital printer business. The
competitor agreed to purchase the digital printer business for
$30,000,000.00 on April 17, 2000.
Debtor then sued the individual members of the Gandy family
and the partnerships alleging causes of action for breach of
fiduciary duty, negligence, fraud, constructive trust, and breach
of contract. The Gandys filed a motion to compel arbitration
based on arbitration clauses in the parties’ partnership
agreements.3 On February 28, 2001, the state court granted the
4
motion and stayed the lawsuit. Debtor filed for bankruptcy that
afternoon. The state court suit was subsequently removed to the
bankruptcy court as an adversary proceeding. Debtor also filed a
new adversary action in bankruptcy court, and then moved to
consolidate the second adversary with the previously removed
state action. With the Gandys’ consent, the bankruptcy court
allowed the consolidation of Debtor’s claims in the two
adversaries into a single complaint—the Third Amended Complaint.
The Third Amended Complaint included causes of actions to avoid
transfers pursuant to sections 544, 550, and 548 of the
Bankruptcy Code, for civil RICO conspiracy, for insider fraud,
and to establish alter ego claims and require substantive
consolidation. The Gandys filed motions with the bankruptcy
court to compel arbitration and for stay of the adversary
proceeding pending arbitration. The bankruptcy court denied the
motions after finding that Debtor’s complaint essentially sought
avoidance of fraudulent transfers. The district court affirmed
the bankruptcy court’s exercise of discretion, holding that
Debtor had raised actual core proceedings in her capacity as
debtor in possession. Back in the bankruptcy court, Debtor,
based on allegations that the Gandys had transferred funds
belonging to Debtor’s estate to foreign “off-shore” trusts after
she sought Chapter 11 protection, successfully obtained a
temporary restraining order against the Gandys, except for Hary
Gandy and HGLP, prohibiting them from further use of the funds.4
5
The Gandys now timely appeal to this court the denial of the
motion to compel arbitration and for stay of the adversary
proceeding pending arbitration.
Discussion
This court’s appellate jurisdiction to review the bankruptcy
court’s refusal to stay an adversary proceeding pending
arbitration is founded upon section 16(a)(1)(A) of the Federal
Arbitration Act (the “FAA”), 9 U.S.C. §§ 1 et seq. (2002).5
Referring to this subsection, this court in In re National
Gypsum, 118 F.3d 1056, 1061 (5th Cir. 1997), stated that “[a]
bankruptcy court’s refusal to stay an adversary proceeding
pending arbitration, though interlocutory in nature, is
nevertheless appealable because of section 16 of the Federal
Arbitration Act.” See also Hays & Co. v. Merrill Lynch , Pierce,
Fenner & Smith, Inc., 885 F.2d 1149, 1151-52 (3d Cir. 1989)
(holding that 9 U.S.C. § 16(a) establishes rule of immediate
appealability with respect to orders denying motions to compel
and to stay arbitration). Thus, under 9 U.S.C. § 16(a)(1)(A) and
National Gypsum, this court has jurisdiction to hear the appeal
from the order of the bankruptcy court refusing to stay Debtor’s
adversary proceeding pending arbitration.
On appeal, the Gandys argue that the district court erred in
refusing to compel Debtor to arbitrate this case under the
6
arbitration clauses of the partnership agreements for Signtech
and HGLP. Whether a bankruptcy court has discretion to deny a
motion to stay a bankruptcy proceeding pending arbitration is a
question of law that we review de novo. National Gypsum, 118
F.3d at 1064. We also review de novo legal determinations of
whether an adversary proceeding in bankruptcy court is “core”
under 28 U.S.C. § 157(b). Id. at 1062. If we find that the
bankruptcy court had discretion to assess whether arbitration
would be consistent with the Bankruptcy Code, the exercise of
that discretion is reviewable only for abuse. See In re United
States Lines, Inc., 197 F.3d 631, 640-41 (2d Cir. 1999).
The Gandys contend that Debtor, as a party to the Signtech
and HGLP partnership agreements, had agreed to be bound by the
arbitration clauses that appear in identical form in the two
agreements. The Gandys contend that the FAA embodies a strong
federal policy in favor of arbitration and, therefore, compels
the arbitration of this case. The Gandys argue that Debtor, in
an effort to avoid arbitration, has “window-dressed” her state
law claims and artfully repled them as bankruptcy claims. The
Gandys further argue that, even if Debtor could bring her
“Bankruptcy Code-based” claims, they lack merit. The bankruptcy
and district courts considered and rejected these arguments. The
bankruptcy court found, and the district court affirmed, that
Debtor’s adversary proceeding raised actual core bankruptcy
7
issues including, inter alia, issues of avoidance of fraudulent
transfers.
The Gandys’ argument that the decision of the bankruptcy
court contravenes the FAA and the terms of the partnership
agreements requires this court to reconcile two important federal
statutes: the Federal Arbitration Act and the Bankruptcy Code.
The FAA provides that arbitration agreements “shall be valid,
irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for the revocation of any contract.” 9 U.S.C. §
2. The FAA directs courts rigorously to enforce agreements to
arbitrate, even if a party opposing arbitration is asserting a
statutory claim. Shearson/American Express, Inc. v. McMahon, 482
U.S. 220, 226-27, 107 S. Ct. 2332, 96 L.Ed 2d 185 (1987). A court
must stay its proceedings if it is satisfied that an issue before
it is arbitrable under the agreement. 9 U.S.C. § 3; id. at 226,
107 S.Ct. at 2337. This statutory directive, however, may be
overridden by a contrary congressional command. McMahon, 482
U.S. at 226, 107 S. Ct. at 2337. A party wishing to defeat
application of the FAA bears the burden of demonstrating “that
Congress intended to preclude a waiver of judicial remedies for
the statutory rights at issue.” Id. at 227, 107 S.Ct. at 2237.
While it is generally accepted that a bankruptcy court has
no discretion to refuse to compel the arbitration of matters not
involving “core” bankruptcy proceedings under 28 U.S.C. § 157(b),
8
this court has held that a bankruptcy court may decline to stay a
proceeding whose underlying nature derives exclusively from the
provisions of the Bankruptcy Code. National Gypsum, 118 F.3d at
1067. In National Gypsum, this court cited with approval the
Third Circuit’s conclusion in Hays that bankruptcy courts
generally do not have discretion to decline to stay proceedings
involving non-core matters. Id. at 1066 (stating that Hays makes
“eminent sense” and is “universally accepted” with respect to
debtor-derivative, non-core matters).6 A bankruptcy court does
possess discretion, however, to refuse to enforce an otherwise
applicable arbitration agreement when the underlying nature of a
proceeding derives exclusively from the provisions of the
Bankruptcy Code and the arbitration of the proceeding conflicts
with the purpose of the Code. Id. at 1067 (noting McMahon, 482
U.S. at 226-27, 107 S.Ct. at 2337-38).
We reasoned in National Gypsum that, “at least where the
cause of action at issue is not derivative from the debtor’s pre-
petition legal or equitable rights but rather is derived entirely
from federal rights conferred by the Bankruptcy Code,” a
bankruptcy court retains “significant discretion” to refuse to
stay the adversary proceeding and compel arbitration. 118 F.3d
at 1069. Such discretion permits the bankruptcy court to assess
whether arbitration would be consistent with the purpose of the
Code, “including the goal of centralized resolution of purely
9
bankruptcy issues, the need to protect creditors and reorganizing
debtors from piecemeal litigation, and the undisputed power of a
bankruptcy court to enforce its own orders.” Id. We are
persuaded that this reasoning governs the disputed issues in this
case, and that bankruptcy court rather than arbitration is the
appropriate forum.
Debtor advances three causes of action that derive entirely
from the federal rights conferred by the Bankruptcy Code. As a
debtor in possession, she seeks to exercise a trustee’s “strong
arm” powers under section 544 of Title 11 to avoid any transfer
that an unsecured creditor could have avoided under applicable
state law. 11 U.S.C. § 544(b). Debtor also seeks relief under
section 548 to avoid any fraudulent transfer of an interest of
the debtor that was made within one year of the filing of her
bankruptcy petition. 11 U.S.C. § 548. Accordingly, she also
claims the remedies available under section 550 to recover such
transferred property or interest, or the value thereof, from the
transferees or their successors. 11 U.S.C. § 550(a). All of
these claims to avoid or recover pre-bankruptcy transfers are
“core proceedings” arising under Title 11, pursuant to 28 U.S.C.
§ 157. These claims are created by the Bankruptcy Code and are
not—outside of bankruptcy—available to Debtor. See In re Wood,
825 F.2d 90, 97 (5th Cir. 1987) (stating that “a proceeding is
core under section 157 if it invokes a substantive right provided
10
by title 11 or if it is a proceeding that, by its nature, could
arise only in the context of a bankruptcy case”); see, e.g.,
Hays, 885 F.2d at 1155 (“Claims asserted by the trustee under
section 544(b) are not derivative of the bankrupt. They are
creditor claims that the Code authorizes the trustee to assert on
their behalf.”); see, e.g., In re Hamilton Taft & Co., 176 B.R.
895, 902 n. 4 (Bankr. N.D. Cal. 1995) (noting that section 548 of
the Bankruptcy Code creates a federal cause of action for
recovery of a fraudulent conveyance).
The Gandys’ arguments to the contrary rely on Trefny v. Bear
Stearns Securities Corp., 243 B.R. 300 (Bankr. S.D. Tex. 1999).
In Trefny, a trustee appointed to oversee the liquidation of a
debtor-brokerage firm brought an adversary proceeding against a
securities firm that served as the debtor’s clearing broker. The
trustee alleged causes of action under Texas state law, federal
civil causes of action based on violations of criminal statutes,
and the Bankruptcy Code. Id. at 306. The district court found
that the trustee was bound by the arbitration agreement between
the debtor and the clearing broker and between the debtor’s
customers and the clearing broker to arbitrate the state-law
claims and the claims based on federal criminal statutes. Id. at
320. With respect to the bankruptcy claims, the district court
found that the trustee did not assert a turnover claim of the
debtor’s liquidated or undisputed funds under 11 U.S.C. § 542,
11
nor properly plead a fraudulent transfer claim under 11 U.S.C. §
548. Id. at 320, 322. The district court reversed the
bankruptcy court’s order denying the clearing broker’s request
for a stay pending arbitration.
The reliance by the Gandys on Trefny’s analysis of the
general avoiding powers of a trustee is misplaced. In Trefny,
the trustee had not pleaded a proper section 548 claim because he
did not allege a transfer of “an interest of the debtor in
property” when he sought to avoid transfers of property of the
debtor’s customers. 243 B.R. at 322. The district court
concluded that the trustee was essentially pursuing tort claims
of fraud and seeking to recover money or securities lost because
of the alleged fraud. Id.
In this case, conversely, Debtor is seeking to avoid
transfers of her own ownership interests in Signtech or HGLP that
she made beginning in October 10, 1997. Assuming the facts to be
well pleaded and without evaluating the merits of any claim, we
note that the potential avoidance of such transfers is governed
by section 544(b), subject to the four-year limitations period
for Texas fraudulent transfer actions,7 and by section 550.
Debtor also seeks to avoid transfers made upon the liquidation of
Signtech, a transaction made within one year before the
commencement of Debtor’s bankruptcy case,8 for which section 548
is also available.9 Through these causes of action provided by
12
the Bankruptcy Code, Debtor, as a debtor in possession in Chapter
11, is exercising the trustee’s “strong arm” powers pursuant to
11 U.S.C. § 1107(a).10 Unlike the situation in Trefny, the
transactions alleged to be fraudulent in this case are not
subject to the same kind of attack by Debtor outside of
bankruptcy. Therefore, assuming the facts to be well pleaded,
Debtor asserts bankruptcy causes of actions under sections 544,
548 and 550 that are in essence created by the Bankruptcy Code
for the benefit of creditors of the estate. See National Gypsum,
118 F.3d at 1068 (citing with approval In re Statewide Realty
Co., 159 B.R. 719, 722 (Bankr. D.N.J. 1993) (interpreting Hays
and distinguishing between actions derived from the debtor and
actions created by the Bankruptcy Code)). In this circumstance,
“the importance of the federal bankruptcy forum provided by the
Code is at its zenith.” Id.
While some of Debtor’s remaining claims do involve her pre-
petition legal or equitable rights, the bankruptcy causes of
action predominate. The heart of Debtor’s complaint concerns the
avoidance of fraudulent transfers and implicates non-bankruptcy
contractual and tort issues “in only the most peripheral manner.”
National Gypsum, 118 F.3d at 1067. Once Debtor sought the relief
afforded by Chapter 11 of the Bankruptcy Code, she became a
debtor in possession vested with certain statutory rights that
empower her “by virtue of the Bankruptcy Code to deal with [her]
13
contracts and property in a manner [she] could not have employed
absent the bankruptcy filing.” N.L.R.B. v. Bildisco & Bildisco,
465 U.S. 513, 528, 104 S. Ct. 1188, 1197, 79 L.Ed 2d 482 (1984).
Appellants’ own arguments reinforce the primacy of Debtor’s
bankruptcy causes of action. Appellants contend that, even if
Debtor got far less than her fair share from Singtech and HLGP,
she is without remedy because she was represented by counsel and
either knew or should have known how to protect her interests.
Since Debtor failed so badly in looking out for herself,
Appellants seem to argue, she is now without redress. This might
well be a correct analysis of Debtor’s prospects for recovery on
the causes of action she pled in state court: breach of fiduciary
duty, negligence, fraud, constructive trust and breach of
contract. But Debtor’s mistakes, misjudgments, or failings—or
those of her counsel—matter little if at all in causes of action
brought under 11 U.S.C. §§ 544, 548 or 550. Because claims made
pursuant to these sections are creditor-based, the misconduct of
the debtor is hardly a complete defense. Indeed, the Bankruptcy
Code’s creditor-based causes of action, including those
incorporated from state law, are often grounded in serious
allegations of misconduct by the debtor. See, e.g., In re
Pancake, 106 F.3d 1242 (5th Cir. 1997); In re Haber Oil Co.,
Inc., 12 F.3d 426 (5th Cir. 1994); In re Hayden, 248 B.R. 519
(Bankr. N.D. Tex. 2000). Thus, the adjudication of Debtor’s
14
bankruptcy rights is separate and unrelated to Debtor’s pre-
petition legal or equitable rights. See National Gypsum, 118
F.3d at 1068.
That Debtor’s bankruptcy causes of action predominate does
not, however, end the analysis. Even when a cause of action is
derived entirely from the federal rights conferred by the
Bankruptcy Code, the bankruptcy court has discretion to deny
enforcement of the arbitration clause only when enforcement would
conflict with the purpose or provisions of the Code. National
Gypsum, 118 F.3d at 1069. On this point, Trefny is also of no
help to the Gandys. Since the trustee in Trefny had not asserted
a turnover claim under section 542 that precluded arbitration,
nor pleaded a fraudulent transfer claim under section 548, the
district court concluded that the trustee’s claims did not
involve important bankruptcy policies. 243 B.R. at 325.
Therefore, under the dictates of National Gypsum, the trustee had
failed to show that arbitration of his claims would implicate or
conflict with the bankruptcy law or policies. Id. 324-25.
In this case, not only are Debtor’s claims derived from the
Bankruptcy Code, their resolution implicates matters central to
the purposes and policies of the Bankruptcy Code. We note,
first, that Debtor’s claims against the Gandys appear to
represent very nearly the entirety of Debtor’s bankruptcy estate.
Secondly, this dispute intimately implicates a central
15
purpose of the Bankruptcy Code: the expeditious and equitable
distribution of the assets of Debtor’s estate. According to
Debtor’s pleadings and uncontroverted arguments before this
court, Kartar Gandy and James Gandy have transferred funds that
are the proceeds of transfers that are the subject of Debtor’s
adversary proceeding to foreign “off-shore” grantor trusts.11
Letters from these foreign trustees claim that they will not
honor the jurisdiction of United States courts and will not
execute judicial orders requiring the return of the contested
funds to the bankruptcy court’s jurisdiction. The bankruptcy
court has entered a temporary restraining order prohibiting the
Gandys, except for Hary Gandy and HGLP, from further use of the
funds pending an on-going preliminary injunction hearing. In
view of this development, the expertise and power of a bankruptcy
court, including service of process, compulsory jurisdiction and
contempt, and ancillary jurisdiction with respect to possible
foreign proceedings, see 11 U.S.C. § 304, seem decidedly
preferable to that of even the most experienced arbitrator. The
bankruptcy court and the district court acting as one unit have
exclusive jurisdiction over all of the property, “wherever
located,” of the Debtor, and of property of her estate. 28
U.S.C. § 1334(e).
Third, one party, Hary Gandy, already has filed a proof of
claim as a lien holder on the Debtor’s interest in Signtech.
16
This court has held that filing a proof of claim under bankruptcy
law “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.” Wood, 825 F.2d at 97. In this sense, “a claim
filed against the estate is a core proceeding because it could
arise only in the context of bankruptcy.” Id. Although only one
of the appellants has filed a proof of claim, the peculiar powers
of the bankruptcy court have been invoked. The “nature of the
state proceeding [becomes] different from the nature of the
proceeding following the filing of a proof of claim.” Id.
Fourth, Debtor has also asserted claims for substantive
consolidation of the assets and liabilities of certain nominally
distinct entities. While we recognize that substantive
consolidation is an extreme and unusual remedy12 and intimate no
view on the merits of Debtor’s claims, we note that substantive
consolidation is a remedy available to a bankruptcy court that
may be out of reach in arbitration.
Although it is technically possible that the Debtor’s case
be divided and some claims be sent to arbitration, see, e.g.,
Hays, 885 F.3d at 1154-55, this approach here would be of
disservice to the parties and defeat the purposes of the
Bankruptcy Code. See generally Mette H. Kurth, Comment, An
Unstoppable Mandate and an Immovable Policy: The Arbitration Act
17
and the Bankruptcy Code Collide, 43 U.C.L.A. L. REV. 999, 1034
(1996) (recommending that judicial discretion be exercised to
bring about the most efficient resolution of a case). Parallel
proceedings would be wasteful and inefficient, and potentially
could yield different results and subject parties to dichotomous
obligations. See National Gypsum, 118 F.3d at 1069 n. 21
(stating that efficiency concerns may be legitimate
considerations in the bankruptcy context, where efficient
resolution of claims and conservation of the bankruptcy estate
assets are integral purposes of the Bankruptcy Code). While
consideration of bifurcated proceedings has been found not to be
substantial enough to override the federal policy favoring
arbitration with respect to derivative, non-core matters, see,
e.g., Hays, 885 F.2d at 1158-59, this concern, in the context of
causes of action derived from the Bankruptcy Code, could present
the type of conflict with the purposes and provisions of the
Bankruptcy Code that may override the FAA’s statutory directive
of enforcement of arbitration agreements. See National Gypsum,
118 F.3d at 1068 (alluding to McMahon, 482 U.S. at 226-27).
Moreover, as already noted, Appellants’ proffered defenses to
Debtor’s causes of action suggest strongly that the non-
bankruptcy causes of action are inconsequential relative to the
bankruptcy causes of action. See id. (stating that where a core
proceeding involves adjudication of federal bankruptcy rights
18
wholly divorced from inherited pre-petition state law claims, the
importance of the federal bankruptcy forum is at its zenith).
Some of the purposes of the Code we mentioned in National
Gypsum as potentially conflicting with the Arbitration Act
include the goal of centralized resolution of purely bankruptcy
issues, the need to protect creditors and reorganizing debtors
from piecemeal litigation, and the undisputed power of a
bankruptcy court to enforce its own orders. 118 F.3d at 1069.
In this Debtor’s case, each of these concerns is tangible and
justifies the federal bankruptcy forum provided by the Code.13
Accordingly, we find that the bankruptcy court possessed
discretion to refuse enforcement of the arbitration provision in
the Signtech and HGLP partnership agreements, and that the
bankruptcy court did not abuse its discretion in denying, and the
district did not err in affirming the denial of, the motions to
compel arbitration and for stay pending arbitration.
AFFIRMED.
19
* District Judge of the Southern District of Texas, sitting by
designation.
1. Debtor alleges that a later rescission agreement, executed by
Debtor and Hary Gandy, reconveyed to her all of her 33% interest in
Signtech. Debtor claims that she, not HGLP, was the owner of 33%
of Signtech when it liquidated in March of 2000. The Gandys
dispute any such rescission and maintain that HGLP owned 33% of
Signtech at its liquidation. Irrespective of whether Debtor or
HGLP owned 33% of Signtech, Debtor’s pleadings allege sufficient
facts, for instance, those related to the 1997 transfer or, in the
alternative, the transfer of Debtor’s ownership interest in HGLP,
to raise avoidance causes of action in the bankruptcy proceeding.
2. Eventually, KGLP took Signtech’s building in exchange for
increasing James Gandy’s ownership in the other assets to 49%.
3. The partnership agreements for Signtech and HGLP contain this
identical broad arbitration clause:
The Parties agree that any controversy or claim arising
out of or relating to this Agreement, or any dispute
arising out of the interpretation or application of this
Agreement, which the parties hereto are unable to
resolve, shall be finally resolved and settled
exclusively by arbitration in San Antonio, Texas[,] by a
single arbitrator under the American Arbitration
Association’s Commercial Arbitration Rules then in effect
and in accordance with the substantive laws of the State
of Texas. The parties each recognize and consent to the
jurisdiction over each of them by the courts of the State
of Texas. The award of the arbitrator shall be final and
binding upon the parties and non-appealable, and judgment
may be entered upon such award by any court of competent
jurisdiction.
See Signtech Partnership Agreement section 14.15; HGLP
Partnership Agreement section 14.16.
4. This restraining order is continued through and until conclusion
of an on-going preliminary injunction hearing.
5. 9 U.S.C. § 16(a)(1)(A) provides:
“(a) An appeal may be taken from —
(1) an order —
20
(A) refusing a stay of any action under section 3
of this title; . . ..
6. In Hays, the Third Circuit reasoned that claims derivative of
the debtor are not excused from the clear congressional and Supreme
Court mandate that parties to an arbitration agreement must be
bound by it unless the party opposing arbitration can show that
“the text, legislative history, or purpose of the Bankruptcy Code
conflicts with the enforcement of the arbitration clause.” 885
F.2d at 1156. See In re Crysen/Montenay Energy Co., 226 F.3d 160
(2nd Cir. 2000) (noting the general acceptance of Hays’s holding
that district courts must stay non-core proceedings in favor of
arbitration); see also In re Gurga, 176 B.R. 196, 197 (B.A.P. 9th
Cir. 1994) (holding that a bankruptcy court must enforce an
agreement to arbitrate a claim that is non-core).
7. Debtor filed for bankruptcy on February 28, 2001. Her earliest
avoidance claim relates back to October of 1997. She, therefore,
has brought her claims within the four-year statute of limitations
for Texas fraudulent transfer actions. See TEX. BUS. & COM. CODE ANN.
§ 24.005; TEX. CIV. PRAC. & REM. CODE ANN. § 16.004.
8. The Gandys signed the Signtech liquidation plan on April 7,
2000, but made it effective as of March 1, 2000. Signtech’s
liquidation occurred within one year prior to Debtor filing her
bankruptcy petition on February 28, 2001.
9. The Gandys argue that Debtor, as a minority partner of Signtech
and HGLP, cannot challenge the transfers made by Signtech upon its
liquidation. Regardless of whether Debtor directly or indirectly
through HGLP owned an interest in Signtech, the Gandys argue that
Debtor’s limited partner status means that she has no interest in
specific partnership property under section 7.01 of the Texas
Revised Limited Partnership Act. While the Gandys have correctly
quoted the nature of partnership interests involved, this section
does not prevent remedies for a distribution that a partner is
entitled to receive. Section 6.06 of the Revised Limited
Partnership Act provides that:
Subject to Sections 6.07 [prohibition and liability for
excessive distributions] and 8.05 [priorities in
disposition of assets] of this Act, at the time that a
partner becomes entitled to receive a distribution, with
respect to the distribution, that partner has the status
of and is entitled to all remedies available to a
creditor of the limited partnership.
21
Section 6.06 makes Debtor, a partner, into a quasi-creditor of the
partnership for a distribution that she is entitled to receive.
See TEX. REV. LIMITED PARTNERSHIP ACT § 6.06, Source and Commentary
(2001). As such, Debtor’s estate is a creditor vested with the
same rights and remedies as any creditor. Debtor’s estate, then,
is a creditor for the purpose of raising a fraudulent transfer
cause of action under 11 U.S.C. § 548 with respect to the
distribution of Signtech’s assets upon its liquidation. Appellants
have, in a post-argument submission, contended that Signtech was in
the process of “winding up” and that the rights of limited partners
would be governed by section 8.05 rather than section 6.06. The
record does not contain sufficient evidence for this court to
conclude that Signtech was being wound up. Section 8.01 equates
winding up with dissolution. Signtech appears simply to have been
in the process of liquidating some of its assets. See Appellants’
Br. at 6 (“Prior to the liquidation of its assets in 2000 . . ..”).
Moreover, Appellants do not cite any authority for the proposition
that a limited partner could not become a creditor if she did not
receive what was due her in a winding up.
10. The right of the trustee to commence an avoidance action is
extended to a debtor in possession pursuant to 11 U.S.C. § 1107(a),
which gives the debtor in possession “all of the rights . . . and
powers” of a trustee. See 5 L. KING, COLLIER ON BANKRUPTCY ¶ 544.02 at
544-4 n. 1, ¶ 548.01[1] at 548-7 (15th ed. rev. 2002).
11. Debtor filed her Fourth Amended Complaint subsequent to the
discovery of this conduct.
12. See Eastgroup Properties v. Southern Motel Ass’n, Ltd., 935
F.2d 245, 248 (11th Cir. 1991) (stating that courts have noted that
substantial consolidation be “used sparingly”).
13. Additionally, we note that if, as happens with many multi-party
disputes involving a debtor in possession, a global settlement
agreement among the parties is reached, the matter would be before
the bankruptcy court anyway under Bankruptcy Rule 9019.
22