Halper v. Halper

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
1-6-1999
Halper v. Halper
Precedential or Non-Precedential:
Docket 98-5093
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Filed January 6, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 98-5093
IRWIN HALPER,
Appellant
v.
BARRY HALPER
On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civil Action No. 97-cv-02616)
District Judge: Honorable Garrett E. Brown, Jr.
Argued October 26, 1998
BEFORE: STAPLETON, LEWIS and MAGILL,*
Circuit Judges
(Opinion Filed January 6, 1999)
Colin M. Danzis
Dennis J. Drasco (Argued)
Donald B. Frazer, Jr.
Lum, Danzis, Drasco, Positan &
Kleinberg, LLC
103 Eisenhower Parkway
Roseland, NJ 07068-1049
Attorneys for Appellant
_________________________________________________________________
*Honorable Frank J. Magill, Senior United States Circuit Judge for the
Eighth Circuit, sitting by designation.
William S. Katchen (Argued)
Tina Niehold Moss
Amy R. Bitterman
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, NJ 07068
Attorneys for Appellee
OPINION OF THE COURT
STAPLETON, Circuit Judge:
Irwin Halper appeals the District Court's order affirming
the Bankruptcy Court's order determining that a Guaranty
in favor of Irwin was void as against public policy because
it was part of an illegal stock redemption and a fraudulent
conveyance under New Jersey and federal bankruptcy law.
We conclude that the District Court erroneously applied
New Jersey's contract principles in the course offinding
this to be a stock redemption. We further conclude that the
Bankruptcy Court lacked core proceeding jurisdiction to
enter a final judgment regarding the Guaranty's
enforceability.
I. FACTUAL AND PROCEDURAL BACKGROUND
Irwin Halper and his three cousins, Barry, Jeffrey and
Robert, were the sole owners of Halper Bros. Inc. ("HBI"), a
New Jersey corporation that distributed wholesale paper
and janitorial supplies. Each cousin owned 25% of HBI's
stock and participated in HBI's management and operation.
In the spring of 1990, each shareholder contributed
$300,000 to HBI's Employee Stock Ownership Plan
("ESOP"). In 1989 and into 1990, HBI began to suffer
financial difficulty. Barry, interested in restructuring to
continue running HBI on his own, began negotiating a
buyout of his cousins' stock. On February 13, 1991, the
cousins entered an agreement ("February Agreement")
whereby Barry agreed to purchase personally each of his
cousins' 25% HBI stock holdings for $300,000 apiece with
$25,000 down. Barry paid Irwin's $25,000 down payment
2
by personal check. The February Agreement was not
consummated, however, because Citibank, a creditor of
HBI's, refused to approve the buyout.
Further buyout negotiations ensued in which Barry
suggested that the transaction be structured as a stock
redemption by HBI. The three selling cousins, however,
rejected the redemption format because they were
concerned that HBI's insolvency would render it an illegal
redemption and a fraudulent transfer under New Jersey
law. Instead, Irwin and the other selling cousins insisted
that the buyout take place either (i) through a personal
purchase by Barry, or (ii) by an entity formed by Barry.1
Barry's accountants and lawyers, on the other hand,
advised Barry that if the transaction included an
employment agreement for each of the cousins giving up
his stock, the compensation provided for his services would
provide HBI with a significant tax deduction. This raised
further concerns for the selling cousins who feared that
HBI's financial condition might prevent it from honoring an
employment arrangement.
The parties reached a compromise, which they
memorialized in four agreements on September 5, 1991
("September Transaction"): (i) Letter Agreement, (ii)
Employment Agreement, (iii) Guaranty and Indemnity
Agreement, and (iv) Voting Trust Agreement. (Pa. 527-89).
There were three parties to each set of documents: (i) the
selling cousin involved, (ii) Barry Halper, and (iii) HBI
represented by Barry Halper as President. This appeal
involves only the rights of the parties to the agreements
executed by Irwin Halper.
_________________________________________________________________
1. An August 2, 1991 letter from the law firm representing Irwin, Robert
and Jeffrey illustrates their position:
The possibility of insolvency involved litigation as to the
redemption
of our client's stock by [HBI] strongly argues in favor of a direct
purchase by Barry or an entity created and funded by him for such
purpose. . . . [A]ll [HBI] stock owned by [Irwin, Jeffrey and
Robert]
must be purchased and all of the purchase price paid either by
Barry Halper or an entity controlled by him, and not[HBI].
(Pa. 524).
3
The Agreements are integrated. This is evident from (i)
the Letter Agreement's summary of the transaction and
description of the other three documents' significance, and
(ii) the other three documents' numerous cross references
to one another. The Employment Agreement provides, inter
alia, that HBI would pay Irwin a $300,000 signing bonus
less the $25,000 he received in connection with the failed
February Agreement, with the remaining $275,000 to be
paid in 12 equal monthly installments commencing
January 31, 1992.2 The Guaranty and Indemnity
Agreement ("Guaranty") provided that Barry personally
guaranteed HBI's payment of Irwin's signing bonus; Barry
and Irwin signed it in their individual capacities. The
Guaranty accommodated the selling cousins' concerns that
HBI's financial troubles might prevent it from honoring its
signing bonus obligation. The Voting Trust Agreement
provided that Irwin's HBI shares would be immediately
transferred to a voting trust with Barry as trustee, giving
Barry the irrevocable right to vote Irwin's shares. Finally,
Paragraph 9 of the Letter Agreement provided that Irwin
granted a three year irrevocable option to purchase his HBI
stock for $1.00 consideration to (i) Barry personally, (ii) an
entity created by Barry for the purchase, or (iii) HBI.
The parties agree that the September Transaction's
objective was to vest Barry with total ownership and control
of HBI. Indeed, the September Transaction gave Barry
absolute control over HBI on September 5, 1991, as trustee
under the Voting Trust. The only thing left to complete the
buyout was for Barry to decide how to exercise the option
to transfer beneficial ownership of the shares.
That decision was made in January, 1992, when Barry's
attorney, Mr. Gladstone, advised him that he should
exercise the Paragraph 9 option. On January 15, 1992,
Gladstone's firm drafted a letter which Barry signed
("Purchase Letter") stating:
Pursuant to paragraph 9 of the Letter Agreement you
are hereby notified that I elect to exercise my option to
acquire all of the shares of stock in [HBI] which are
_________________________________________________________________
2. The Employment Agreement also provided that Irwin would continue
as a HBI salesman and granted him a car, insurance and other benefits.
4
held by the Voting Trustee pursuant to the Voting
Trust Agreement.
I hereby request that the Voting Trustee take
immediate steps in order to effectuate the transfer of
said shares of stock to me.
(Pa. 526). Barry signed the letter in his personal capacity,
not as HBI's President.
On January 17, 1992, two days after Barry exercised the
option, HBI's creditors filed an involuntary bankruptcy
petition. Not surprisingly, HBI did not honor its signing
bonus obligations under the Employment Agreement, and
Irwin resorted to his rights under the Guaranty. After
several unsuccessful demands for payment from Barry,
Irwin instituted an action in New Jersey Superior Court to
enforce the Guaranty on January 24, 1993. Two days
earlier, on January 22, 1993, Barry had filed a complaint
in Bankruptcy Court. Barry's complaint provides in
pertinent part:
Barry seeks a declaration from this Court (1) that the
underlying obligation from HBI to Irwin is void as a
redemption by a corporation while insolvent, and a
further declaration that Barry's personal guaranty does
not extend to this void agreement and (2) that the
obligation arising out of the "signing bonus" is void as
a fraudulent transfer.
* * *
WHEREFORE, plaintiff Barry Halper demands
judgment against Irwin Halper as follows:
(a) declaring that the signing bonus to be paid by
[HBI] to Irwin Halper is void as (1) a redemption made
by an insolvent corporation; and (2) that the obligation
is a fraudulent transfer under Bankruptcy Code
S 548(a)(2)
(b) declaring that Barry Halper's obligation to Irwin
Halper does not include the void redemption or
fraudulent transfer by [HBI] . . . .
(Pa. 1243-44). Alternatively, Barry sought a declaratory
judgment that (i) if the signing bonus is a valid obligation
5
of HBI, then HBI's obligation thereunder is limited to
$75,000 under Bankruptcy Code S 502(b)(7); and (ii) that
Barry's liability under the Guaranty should similarly be
limited to $75,000.3
Barry successfully removed Irwin's state court action to
the Bankruptcy Court, and the actions were consolidated
for trial over Irwin's objection that the Bankruptcy Court
lacked jurisdiction over his suit. Four years later, on
February 21, 1997, the Bankruptcy Court rendered
judgment in favor of Barry declaring the Guaranty
unenforceable as against New Jersey's public policy
because it was part of an illegal stock redemption under
New Jersey law and constituted a fraudulent transfer under
New Jersey and federal bankruptcy law. Irwin appealed the
Bankruptcy Court's order to the District Court, which
affirmed.4 Irwin now appeals the District Court's order
affirming the Bankruptcy Court's judgment.
We exercise plenary review over the decision of a District
Court sitting as an appellate court in a bankruptcy
proceeding. See In re Swedeland Dev. Group, Inc., 16 F.3d
552, 559 (3d Cir. 1994). In turn, this court reviews the
Bankruptcy Court's findings of fact under the clearly
erroneous standard and conclusions of law under a de novo
standard. See In re Sharon Steel Corp., 871 F.2d 1217,
1222-23 (3d Cir. 1989).
_________________________________________________________________
3. Bankruptcy Code S 502(b)(7) limits employee claims for damages
arising from the debtor's termination of an employment contract.
4. The Bankruptcy Court's judgment order grants Barry's request for
declaratory judgment stating:
1) The transaction memorialized in the series of agreements entered
into by and between the parties on September 5, 1991 constitutes
an (i) illegal stock redemption by the Debtor while insolvent and
(ii)
a fraudulent conveyance pursuant to 11 U.S.C. S 548 and N.J.S.A.
25:2-20, et seq.; and
2) The Guaranty is void and unenforceable; and
3) Judgment is hereby entered in favor of Barry Halper, and against
Irwin Halper, in the above captioned matters.
(Pa. 35). The District Court's order simply states that it affirms. (Pa.
21).
6
II. JURISDICTION
The Bankruptcy and District Courts determined that the
Bankruptcy Court had core proceeding jurisdiction under
28 U.S.C. S 157(b) giving it the power to issue final
judgment on all claims in this action. Irwin challenges this
determination, claiming that the Bankruptcy Court entirely
lacked jurisdiction to entertain the claims between Barry
and himself. He objects on the grounds that HBI was not a
party and that, in his view, the adjudication of their
disputes could not affect HBI's creditors. He concludes that
this entire proceeding is therefore not "related to" the
bankruptcy as required to support non-core jurisdiction
under 28 U.S.C. S 157(c).
We conclude that the Bankruptcy Court had jurisdiction
over all claims asserted in the Bankruptcy Court, but that
the character of its jurisdiction varied among the claims.
We find that the Bankruptcy Court had only non-core
jurisdiction over the Guaranty claims and that, as a result,
it lacked the power to issue a final judgment on that
matter. Accordingly, we will reverse the District Court's
judgment affirming the exercise of core jurisdiction over the
Guaranty claims.
Bankruptcy Court jurisdiction has been the subject of
heated controversy in recent decades. See In re Guild &
Gallery Plus, Inc., 72 F.3d 1171, 1176-79 (3d Cir.
1996)(discussing Bankruptcy Courts' history); Phar-Mor,
Inc. v. Coopers & Lybrand, 22 F.3d 1228, 1234-35 (3d Cir.
1994)(same). In 1978, Congress attempted to centralize
bankruptcy jurisdiction by granting District and
Bankruptcy Courts expanded jurisdiction over cases arising
under title 11. In re Guild, 72 F.3d at 1177 (quoting
Thomas S. Marion, Core Proceedings and "New" Bankruptcy
Jurisdiction, 35 DePaul L. Rev. 675, 678 (1986)). Under this
scheme, Article I bankruptcy judges possessed full power to
adjudicate not only cases arising directly under title 11, but
also a wide range of other claims merely "related to" the
title 11 proceedings. Id. In Northern Pipeline Const. Co. v.
Marathon Pipeline Co., 458 U.S. 50 (1982), however, the
Supreme Court held the 1978 jurisdictional reform
unconstitutional because its grant of judicial power to
Article I Bankruptcy Courts violated the separation of
7
powers doctrine by undermining Article III's establishment
of an independent judiciary. Id. at 84-85.
In Marathon, the debtor had filed a chapter 11 petition in
Bankruptcy Court and subsequently initiated an adversary
proceeding against Marathon for various pre-petition
violations of state law including breach of contract. The
parties to the adversary proceeding were not diverse, and
the dispute involved pure questions of state law presenting
no federal question. The only basis for federal jurisdiction
was the fact that one party was a chapter 11 debtor in
bankruptcy. Id. at 90. Distinguishing "the restructuring of
debtor-creditor relations, which is at the core of the federal
bankruptcy power . . . from the adjudication of state-
created private rights, such as the right to recover damages
that is at issue in this case," Justice Brennan concluded
that the statute violated Article III because it
unconstitutionally vested "all ``essential attributes' of the
judicial power of the United States in the ``adjunct' [Article
I] bankruptcy courts." Id. at 71, 84-85 (emphasis added).
In 1984, Congress responded to Marathon and
established the current bankruptcy jurisdiction regime
codified at 28 U.S.C. S 1334 and 28 U.S.C. S 157. Section
1334 vests broad primary jurisdiction over bankruptcy
proceedings in the District Courts.5 District Courts may,
however, refer bankruptcy matters falling within their
jurisdiction to the Bankruptcy Courts under 28 U.S.C.
S 157(a). District Courts have exercised this power by
"routinely refer[ing] most bankruptcy cases to the
bankruptcy court[s]." In re Guild, 72 F.3d at 1175.
Upon referral, "[s]ection 157 provides the bankruptcy
_________________________________________________________________
5. Section 1334 of title 28 states in pertinent part:
(a) Except as provided in subsection (b) of this section, the
district
court shall have original and exclusive jurisdiction of all cases
under
title 11.
(b) Notwithstanding any Act of Congress that confers exclusive
jurisdiction on a court or courts other than the district courts,
the
district courts shall have original but not exclusive jurisdiction
of all
civil proceedings arising under title 11, or arising in or related
to
cases under title 11.
8
court with two levels of judicial power, depending upon the
type of proceeding before it." In re Marcus Hook, 943 F.2d
261, 266 (3d Cir. 1991). First, in "core" proceedings, the
Bankruptcy Court assumes the role of a court of first
instance with comprehensive power to hear, decide and
enter final orders and judgments. See 28 U.S.C. S 157(b)(1).
Appellate review of the Bankruptcy Court's judgment is
available initially in the District Court and then in the
Court of Appeals. See 28 U.S.C. S 158. Second, in "non-
core" proceedings, the Bankruptcy Court's adjudicatory
power is limited to hearing the dispute and submitting
"proposed findings of facts and conclusions of law to the
district court." Id. S 157(c)(1). 6 The District Court, after
considering the Bankruptcy Court's proposed findings and
conducting a de novo review of any matter objected to
therein, enters final orders and judgments in "non-core"
proceedings. See id. at S 157(c)(1). Section 157's distinction
between "core" and "non-core" proceedings mirrors Justice
Brennan's distinction in Marathon, and the jurisdictional
variance between the two types of proceedings was intended
"to satisfy the concerns of Marathon." Phar-Mor, 22 F.3d at
1234; see In re Wood, 825 F.2d 90, 96 (5th Cir.
1987)(discussing congruence between Marathon and S 157's
jurisdictional regime).
Thus, a proceeding's core or non-core nature is crucial in
bankruptcy cases because it defines both the extent of the
Bankruptcy Court's jurisdiction, and the standard by which
the District Court reviews its factual findings. To determine
whether a proceeding is a "core" proceeding, courts of this
Circuit must consult two sources. First, a court must
consult S 157(b). Although S 157(b) does not precisely define
"core" proceedings, it nonetheless provides an illustrative
list of proceedings that may be considered "core." See id.
S 157(b)(2)(A)-(O). Second, the court must apply this court's
test for a "core" proceeding. Under that test, " ``a proceeding
is core [1] if it invokes a substantive right provided by title
11 or [2] if it is a proceeding, that by its nature, could arise
_________________________________________________________________
6. The District Court may, upon consent of the parties, expand the
Bankruptcy Court's power to adjudicate "non-core" proceedings to
include the power to issue final orders and judgments. 28 U.S.C.
S 157(c)(2).
9
only in the context of a bankruptcy case.' " In re Guild &
Gallery Plus, Inc., 72 F.3d 1171, 1178 (3d Cir.
1996)(quoting Marcus Hook, 943 F.2d at 267); see In re:
Continental Airlines, 125 F.3d 120, 131 (3d Cir. 1997); cf.
Beard v. Braunstein, 914 F.2d 434, 444 (3d Cir. 1990). This
Court and other courts of appeals have relied on this test
to ensure that S 157(b) "core" proceeding jurisdiction is
exercised in a manner consistent with Marathon.7
Non-core proceedings include the broader universe of all
proceedings that are not core proceedings but are
nevertheless "related to" a bankruptcy case. See 28 U.S.C.
S 157(c)(1). "[T]he test for determining whether a civil
proceeding is related to bankruptcy is whether the outcome
of that proceeding could conceivably have any effect on the
estate being administered in bankruptcy." Pacor v. Higgins,
743 F.2d 984, 994 (3d Cir. 1984) (emphasis omitted); see In
re Guild, 72 F.3d at 1180-81.8 "[T]he proceeding need not
_________________________________________________________________
7. See, e.g., Sanders Confectionary Prod's v. Heller Fin., 973 F.2d 474,
483 (6th Cir. 1992)("A core proceeding either invokes a substantive right
created by federal bankruptcy law or [is] one which could not exist
outside of the bankruptcy."); In re United States Brass Corp., 110 F.3d
1261, 1268 (7th Cir. 1997)("Core proceedings are actions by or against
the debtor that arise under the Bankruptcy Code in the strong sense
that the Code itself is the source of the claimant's right or remedy . . .
");
Specialty Mills, Inc. v. Citizens State Bank, 51 F.3d 770, 773 (8th Cir.
1995)("Core proceedings under 28 U.S.C. S 157 are those which arise
only in bankruptcy or involve a right created by federal bankruptcy
law."); Security Farms v. International Brh'd of Teamsters, Chauffeurs,
Wharehouseman & Helpers, 124 F.3d 999, 1008 (9th Cir. 1997) ("Actions
that do not depend on bankruptcy laws for their existence and that
could proceed in another court are considered ``non-core.' "); In re
Gardner, 913 F.2d 1515, 1518 (10th Cir. 1990)("Actions which do not
depend on the bankruptcy laws for their existence and which could
proceed in another court are not core proceedings.").
8. The Supreme Court has effectively overruled Pacor with respect to its
holding that the prohibition against review of a remand order in 28
U.S.C. S1447(d) does not apply to a bankruptcy case. See Things
Remembered Inc. v. Petrarca, 116 S. Ct. 494 (1995). The Supreme Court's
ruling, however, did not disturb Pacor's holding regarding what
constitutes a non-core proceeding. See Donaldson v. Bernstein, 104 F.3d
547, 554 n.1 (3d Cir. 1997). In fact, the Pacor non-core test has been
widely followed by our sister circuits.
10
necessarily be against the debtor or against the debtor's
property." In re Guild, 72 F.3d at 1180-81. " ``A key word in
[this test] is conceivable. Certainty, or even likelihood, is
not a requirement. Bankruptcy jurisdiction will exist so
long as it is possible that a proceeding may impact on the
debtor's rights, liabilities, options, or freedom of action or
the handling and administration of the bankrupt estate.' "
Id. at 1181 (quoting In re Marcus Hook, 943 F.2d at 264)
(emphasis omitted).
Barry and Irwin's consolidated action presented the
Bankruptcy Court with five claims:
1. Barry sought a declaratory judgment that HBI's
signing bonus is unenforceable because it was (a) part
of an illegal stock redemption under N.J.S.A. 14A:7-
14.1; (b) a fraudulent transfer under N.J.S.A. 25:2-20
et seq.; and (c) a fraudulent transfer under 11 U.S.C.
S 548.
2. Barry sought a declaratory judgment that his
personal Guaranty of the signing bonus is
unenforceable because HBI's underlying obligation was
void.
3. Conversely, Irwin sought a coercive judgment
enforcing Barry's personal Guaranty.
4. Barry sought a declaratory judgment that, if th e
signing bonus is enforceable, then HBI's obligation is
limited to $75,000 under 11 U.S.C. S 502(b)(7).
5. Barry sought a declaratory judgment that his
liability under the Guaranty should be coextensive with
HBI's underlying signing bonus obligation as limited by
S 502(b)(7).
To determine the extent of the Bankruptcy Court's
jurisdiction in this case we must examine each of the five
claims presented to ascertain if it is core, non-core, or
wholly unrelated to a bankruptcy case. Barry's first claim,
that HBI's signing bonus obligation is void as part of an
illegal stock redemption or fraudulent conveyance, is a core
matter that the Bankruptcy Court was empowered to
resolve by a final judgment. This claim appears tofit within
two of S 157(b)'s illustrative examples. Section 157(b)(2)(B)
11
states that core proceeding jurisdiction exists to determine
the "allowance or disallowance of claims against the estate
or exemptions from property of the estate . . ." 28 U.S.C.
S 157(b)(2)(B). The claim seeks a declaration that any claim
by Irwin against HBI under the Employment Agreement is
unenforceable. Section 157(b)(2)(H) states that "proceedings
to determine, avoid, or recover fraudulent conveyances" are
core. Id. S 157(b)(2)(H). Barry specifically alleges that HBI's
granting of Irwin's signing bonus was a fraudulent transfer
under New Jersey and federal bankruptcy law. More
importantly, Barry's claim to declare HBI's signing bonus
obligation unenforceable satisfies this court's core
proceeding test because it invoked the trustee's power to
avoid fraudulent conveyances under S 548, a substantive
provision of the bankruptcy code. Thus, we conclude that
Barry's first claim "arises in a bankruptcy" and is a core
claim.
The same cannot be said, however, for Barry's and
Irwin's "reciprocal claims" concerning the Guaranty's
enforceability. Irwin's claim is a state law claim for breach
of a pre-bankruptcy contract to which the debtor was not
a party. Similarly, Barry's claim for a declaratory judgment
that he is not personally liable for a breach of that contract
is predicated upon state law. Neither claim satisfies this
Court's core proceeding test because neither invokes a
substantive provision of the bankruptcy code and neither is
the type of claim that can only be entertained in
bankruptcy. Rather, these claims involve a dispute between
two parties, neither of whom is the debtor, over a pre-
petition contract between them. They must be resolved
under New Jersey guaranty and contract law and could
have been brought in state court. While Barry asserts that
New Jersey would not enforce the Guaranty if HBI's
underlying obligation is void under federal bankruptcy law,
this does not render these claim core proceedings.
These claims are nonetheless "non-core" and therefore
fall within the Bankruptcy Court's jurisdiction because
their resolution could "conceivably affect" HBI's estate in
bankruptcy. For instance, finding the Guaranty to be
enforceable would provide Irwin, a creditor of HBI under
the Employment Agreement, with an alternative source of
12
recovery effectively diverting his claims from the bankrupt
estate. Because these claims are non-core, however, the
Bankruptcy Court lacked the power to issue final judgment,
but rather was limited to submitting proposed findings of
fact and conclusions of law to the District Court.
Barry's alternative claim seeking to limit HBI's liability to
$75,000 if HBI's signing bonus obligation is not found to be
an illegal stock redemption or a fraudulent transfer is also
a core proceeding. This claim appears to fall within
S 157(b)(2)(B)'s example of "core" matters relating to the
allowance and estimation of claims against the estate. 28
U.S.C. S 157(b)(2)(B). Moreover, this claim is brought by
Barry as HBI's trustee in bankruptcy and invokes 11 U.S.C.
S 502(b)(7), a substantive provision of the bankruptcy code.
If the Court on remand finds the signing bonus to be an
enforceable obligation of HBI, then the Bankruptcy Court
would have core jurisdiction to entertain Barry's claim to
limit HBI's liability under S 502(b)(7) and issue final
judgment thereon.
Barry's related claim, that his personal liability under the
Guaranty should similarly be limited to $75,000 to be co-
extensive with HBI's underlying obligation, however, is a
non-core matter. This claim does not appear to fit within
any of S 157(b)(2)'s examples and it does not invoke a
substantive provision of the bankruptcy code; nor is it the
type of proceeding that can only arise in bankruptcy.
Rather, this claim, like Barry's claim that the Guaranty is
entirely unenforceable, depends upon New Jersey's
guaranty and contract law, not the bankruptcy code, and
could be resolved in state court. This claim does, however,
fall within the Bankruptcy Court's non-core jurisdiction
because it could conceivably affect HBI's bankruptcy estate.
As our discussion illustrates, this case presented the
Bankruptcy Court with a mixture of core and non-core
claims. This court has not yet addressed how to determine
a Bankruptcy Court's jurisdiction where it is presented with
mixed claims. Several courts have employed a claim by
claim analysis to determine the extent of a Bankruptcy
Court's jurisdiction. See, e.g., In re N. Parent, Inc., 221 B.R.
609, 626 (Bankr.D.Mass. 1998)("[E]ach of Debtor's fourteen
causes of action will have to be separately analyzed to
13
determine whether it falls within the bankruptcy court's
core jurisdiction."); In re Best Reception Systems, Inc., 220
B.R. 932, 946 (Bankr. E.D. Tenn. 1998)("[T]he court must
examine each cause of action separately to determine if it
is core or non-core."); In re 610 W. 142 Owners Corp., 219
B.R. 363, 367 (Bankr. S.D.N.Y. 1998)(employing claim by
claim analysis); Ralls v. Docktor Pet Ctr's Inc., 177 B.R. 420,
425 n.6 (D. Mass. 1995)("A district court must scrutinize
each count and each asserted right for relief to determine
which ones were [core and] properly before the bankruptcy
judge for final resolution and which ones [were non-core
and] must receive de novo review.").
The Bankruptcy and the District Courts determined that
the entire proceeding could be characterized as a core
proceeding under S 157(b)(2)(B) and (O).9 The District Court
reasoned:
On November 29, 1993, the Bankruptcy Court entered
an Order providing Barry with standing to bring an
action to avoid or reduce claims against the debtor's
estate under the trustee powers of 11 U.S.C. S 548. The
adversary proceeding filed by Barry requested, inter
alia, a declaratory judgment that HBI's obligations
created by the September 5, 1991 agreements were
void as an illegal stock redemption of an insolvent
corporation, and constituted a fraudulent conveyance
under the Bankruptcy Code and New Jersey state law.
Resolution of these proceedings thus required that the
_________________________________________________________________
9. These subsections provide:
(b)(2) Core proceedings include, but are not limited to- . . .
(B) allowance or disallowance of claims against the estate or
exemptions from property of the estate, and estimation of claims or
interests for the purposes of confirming a plan under chapter 11,
12, or 13 of title 11 but not the liquidation or estimation of
contingent or unliquidated personal injury tort or wrongful death
claims against the estate for purposes of distribution in a case
under title 11;
(O) other proceedings affecting the liquidation of the assets of
the
estate or the adjustment of the debtor-creditor or the equity
security
holder relationship, except personal injury tort or wrongful death
claims.
14
Bankruptcy Court adjudicate not only a claim against
a guarantor of the debtor's obligation, but also an
analysis of the extent of the debtor's obligation from
which the guarantor's obligation arose.
(Pa. 9-10). We believe the District Court's analysis reflects
an alternative approach to determining the extent of a
Bankruptcy Court's jurisdiction in mixed claims
proceedings. It resembles the view of those courts which
hold that "when a proceeding is in part a core proceeding
and in part non-core, the courts may determine that the
entire proceeding is core if the core aspect heavily
predominates and the non-core aspect is insignificant." In
re Blackman, 55 B.R. 437, 443 (Bankr. D.C. 1985); see In
re Hughes-Bechtol Inc., 141 B.R. 946, 949 (Bankr. S.D.
Ohio 1992); In re Cinematronics Inc., 111 B.R. 892, 901
(Bankr. S.D.Cal. 1990); In re Sibarium, 107 B.R. 108, 115
(N.D. Tex. 1989); In re GWF Investment, Ltd., 85 B.R. 771,
778 (Bankr.S.D.Ohio 1988). Other courts have expressly
rejected or declined to follow the "predominantly core"
approach. See, e.g., In re Best, 220 B.R. at 950; 610 W. 142
Owners Corp., 219 B.R. at 370; Glinka, 1994 WL 905714,
at *10 & n.14.
We adopt the claim-by-claim approach as the only one
consistent with the teachings of Marathon. This case well
illustrates the point. In Marathon, as we have noted, a
debtor in bankruptcy sued for breach of a pre-petition
contract. The Court held that it would violate Article III for
an Article I Bankruptcy Judge to adjudicate finally the
tendered state law claim even though the plaintiff was a
debtor in bankruptcy. Here, if we followed the approach of
the Bankruptcy and District Courts, we would be required
to sanction the entry of judgment by an Article I Judge on
a pre-petition state law contract claim where neither party
is in bankruptcy.
In sum, we conclude that the only core matters before
the Bankruptcy Court were Barry's claims (i) that HBI's
signing bonus obligation was unenforceable as an illegal
stock redemption or fraudulent conveyance, and (ii) that, if
HBI's signing bonus obligation was enforceable, HBI's
obligation should be limited to $75,000 under S 502(b)(7).
We agree with the District Court's conclusion that the
15
Bankruptcy Court had jurisdiction to enter a final order or
judgment on these claims. However, the remaining claims
regarding the Guaranty's enforceability and the extent of
Barry's liability thereunder are non-core proceedings. The
Bankruptcy Court did not have the power to issuefinal
judgment on these claims, but rather was limited to
submitting proposed findings of fact and conclusions of law
to the District Court under S 157(c). Thus, the District
Court erred in affirming the Bankruptcy Court's exercise of
core proceeding jurisdiction to declare the Guaranty
unenforceable as a violation of public policy.
III. ERRONEOUS APPLICATION OF CONTRACT
PRINCIPLES
Having affirmed the District Court's determination that
the Bankruptcy Court had core proceeding jurisdiction to
enter a final judgment on Barry's claim that HBI's signing
bonus obligation was unenforceable as part of an illegal
stock redemption or a fraudulent conveyance, we now
consider the District Court's decision on the merits of that
claim.
The Bankruptcy Court and District Courts employed
substantially similar modes of analysis. The initial task was
to determine the parties' intent utilizing traditional
principles of contract law. After finding the text of the
September Transaction documents ambiguous, the
Bankruptcy Court considered the extrinsic evidence
tendered at trial and made a factual finding that the
parties' minds met on a redemption of Irwin's stock by HBI,
and that the Purchase Letter effectuated this intended
redemption.10 Next, it considered whether the redemption
_________________________________________________________________
10. We read the Bankruptcy Court's conclusion that a stock redemption
was intended on September 5, 1991, and effectuated on April 15, 1992,
to rest exclusively on its factual finding that this was what the parties
intended. This is thus not a case where a court acknowledges that the
parties intended one form of transaction, but treats the transaction in a
different manner for reasons unrelated to the parties' intent. Compare
Sedbrook v. Zimmerman Group, Ltd., 526 N.W.2d 758 (Wis. Ct. App.
1994)("de facto" merger); Fenderson v. Athey Prod's Corp. Kolman Div.,
581 N.E.2d 288 (Ill. App. Ct. 1991)(same).
16
thus accomplished was consistent with New Jersey law.
Based on its finding that HBI was insolvent at the time of
the redemption, it held that the transaction violated
N.J.S.A. 14A:7-14.1. The Bankruptcy Court then turned to
consider whether the September Transaction constituted a
fraudulent conveyance under 11 U.S.C. S 548 and N.J.S.A.
25.2-20, et seq. It was undisputed that the Agreement for
redemption of Irwin's stock was entered within a year of the
Bankruptcy Court's order of relief and at a time when the
HBI was insolvent. The Bankruptcy Court focused upon the
only remaining fraudulent transfer element: whether HBI
"received less than reasonably equivalent value when it
entered into the redemption agreement." Slip. 36. Because
it was undisputed that the stock had a value of $1.00 or
less, the Court concluded that HBI's obligation to pay Irwin
$300,000 was a fraudulent conveyance. Finally, the
Bankruptcy Court held that Barry's personal guaranty was
unenforceable because it was a part of an integrated
transaction involving an illegal stock redemption.
Tracing the steps of the Bankruptcy Court's analysis
demonstrates that the foundation of its ultimate legal
conclusions was its finding that the parties contracted for
a stock redemption. We must respectfully disagree with this
foundational premise. We find no ambiguity in the text of
the documents and all of the extrinsic evidence relevant
under New Jersey law is entirely consistent with the
express and unambiguous intent reflected in those terms.
While the parties intended that Irwin would grant an option
to HBI that could result in a redemption, they did not
intend for that option to be exercised at a time when HBI
was insolvent. Moreover, all of the relevant evidence
indicates that no redemption occurred.
We begin with basic principles of New Jersey contract
law:
Evidence of the circumstances is always admissible in
aid of the interpretation of an integrated agreement.
This is so even when the contract on its face is free
from ambiguity. The polestar of construction is the
intention of the parties to the contract as revealed by
the language used, taken as an entirety; and, in the
quest for the intention, the situation of the parties, the
17
attendant circumstances, and the objects they were
thereby striving to attain are necessarily to be
regarded. The admission of evidence of extrinsic facts
is not for the purpose of changing the writing, but to
secure light by which to measure its actual
significance. Such evidence is adducible only for the
purpose of interpreting the writing -- not for the
purpose of modifying or enlarging or curtailing its
terms, but to aid in determining the meaning of what
has been said. So far as the evidence tends to show,
not the meaning of the writing, but an intention wholly
unexpressed in the writing, it is irrelevant. The judicial
interpretive function is to consider what was written in
the context of the circumstances under which it was
written, and accord to the language a rational meaning
in keeping with the expressed general purpose.
Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293,
301 (N.J. 1953).
We next turn to the documents. The four simultaneously
executed documents spell out carefully, and in great detail,
the terms of an integrated transaction, the primary
objectives of which were (1) to vest Barry with immediate
control of HBI, (2) to provide Barry with the opportunity of
becoming the sole stockholder of HBI and (3) to terminate
any relationship between HBI and Irwin other than his
employment relationship. To accomplish these objectives,
the documents unambiguously provide, inter alia, for (a) the
immediate transfer of Irwin's stock to Barry as voting
trustee, (b) the granting of an irrevocable three year option
to purchase Irwin's HBI stock exercisable by Barry, HBI, or
an entity to be organized by Barry, (c) the employment of
Irwin by HBI in a sales capacity, (d) the payment by HBI of
a $300,000 signing bonus to Irwin, (e) Irwin's agreement to
a restrictive covenant of non-disclosure and non-
competition, (f) Irwin's resignation as an officer and director
of HBI, and his release of all his rights under HBI's
stockholder agreement and executive compensation plan,
(g) the exchange of releases between Irwin on the one hand
and Barry and HBI on the other, and (h) Barry's guaranty
of HBI's signing bonus obligation. The Letter Agreement
provided that Irwin's rights under the Employment
18
Agreement (including the signing bonus) were being given
to him in consideration for his agreement to enter the
overall transaction (e.g., his commitments to transfer his
stock to the voting trust, to grant the irrevocable option, to
provide services, to release his rights, etc.).
Barry signed the Letter Agreement, both individually and
as HBI's president. (Pa. 533) On January 15, 1992, Barry
exercised the stock buyout option by sending a letter signed
in his individual capacity, to himself, as voting trustee, and
to Irwin stating: "[Y]ou are hereby notified that I elect to
exercise my option to acquire all of the shares of stock in
Halper Bros., Inc., which are held by the Voting Trustee
pursuant to the Voting Trust Agreement." (Pa.
526)(emphasis added).
Discussing the preamble of the Letter Agreement, the
Bankruptcy Court noted:
The plain language of [statement (i)] fails to delineate
whether the transaction is a sale of stock by an
individual shareholder or a redemption of the Debtor's
stock by the Company. The text also fails to stipulate
who is the purchaser of the stock, the Debtor, or Barry
or an entity controlled by Barry. The signature portion
of the Letter Agreement also offers no assistance to the
Court as it was executed by Barry, individually, and
Barry in his capacity as president of the Debtor.
(Pa. 51)
While the above statements are true, these facts do not
make the Letter Agreement ambiguous or inconsistent.
Rather, the precise language of the Letter Agreement
creates the unambiguous possibility of either a sale or a
redemption of the stock to any one of the three potential
purchasers. Because Barry assumed sole control of HBI
immediately upon the agreements' execution, this meant
that Barry had a choice: he could purchase the stock
individually, acquire the stock through an entity controlled
by him, or cause HBI to redeem the shares. Any of the
three methods would accomplish the undisputed primary
objective of making Barry HBI's sole shareholder. The fact
that a choice of method existed does not create an
ambiguity by itself. If Barry or an entity controlled by Barry
19
exercised the option to purchase Irwin's shares, the
transaction would constitute a personal purchase and sale
of stock between shareholders. However, if, and only if, HBI
exercised this option, the transaction would constitute a
redemption. Because Barry signed the Purchase Letter in
his individual capacity and stated that he elected to
exercise his option, this transaction constituted a personal
purchase of the stock, not a redemption by HBI.
Moreover, an examination of all of the extrinsic evidence
confirms, rather than conflicts with, the intent evidenced in
the documents. The cousins had previously declined to
enter a transaction in which the benefit to them came
solely through a redemption of their stock because they
were aware that such an agreement would be
unenforceable during any period of insolvency. This
rejection as well as Barry's desire to secure a tax deduction
for HBI resulted in a compromise. To appease the selling
cousins, their stock could be purchased by Barry or a new
Barry-created entity. These potential purchasers--unlike
HBI--could exercise their options while HBI was insolvent.
To accommodate Barry's tax concern, payment for this
option would come through HBI as a deductible signing
bonus. Finally, the selling cousins' concerns regarding
HBI's ability to pay the signing bonus were allayed by
Barry's personal guaranty thereof.
In short, based on the September Transaction
documents, the extrinsic evidence, and the unambiguous
terms of the Purchase Letter, we conclude that (1) Irwin
granted an option to HBI that could be exercised if Barry
infused capital and turned the business around, but which
all recognized could not be exercised during insolvency, (2)
Irwin granted Barry an option to purchase his shares which
Barry exercised, and (3) there was no stock redemption.
In reaching this conclusion we are not unmindful of the
fact that the Bankruptcy Court credited the testimony of
Barry and his lawyer that they intended the Purchase
Letter to be an exercise of HBI's option to buy Irwin's stock.
We accept that factual finding for present purposes. Under
New Jersey law, however, Barry's subjective intent is not
legally relevant. The undisclosed subjective intent of a
participant in a transaction cannot be used to alter the
20
intent clearly manifested in the documents to which he
subscribed. See Atlantic Northern, 12 N.J. at 301. The
Bankruptcy Court's reliance on that evidence was therefore
error.
As we have earlier noted, the Bankruptcy Court's
erroneous determination that the transaction constituted a
stock redemption was the basis for its judgment that the
stock transfer was illegal and that the Guaranty was
unenforceable. It follows that we must reverse the District
Court's judgment and remand with instructions that there
be further proceedings.
IV. THE REMAND
Our conclusion does not, of course, resolve this
controversy. A number of issues remain to be resolved on
remand. The first of these is Barry's claim that the signing
bonus was a fraudulent conveyance under 11 U.S.C. S 548.
We have held only that the $300,000 signing bonus was
not a fraudulent transfer as consideration paid by HBI to
Irwin for stock found by the Bankruptcy Court to be worth
$1.00 per share or less in a stock redemption. The
Bankruptcy Court's focus was upon the value of Irwin's
stock. On remand, it must focus on the value of the
consideration to be given by Irwin under the terms of the
September Transaction as we have interpreted them and on
the extent to which HBI, rather than Barry, was to receive
that consideration. As we have heretofore also held, this
fraudulent transfer claim is a core proceeding because
Barry as trustee invokes 11 U.S.C. S 548. Thus, it may be
entertained by the District Court or it may be referred to
the Bankruptcy Court for adjudication under 28 U.S.C.
S 157(a).
Second, the Guaranty's enforceability must be considered
on remand to resolve Barry's claim for a declaratory
judgment of unenforceability and Irwin's reciprocal claim
for a coercive judgment enforcing the Guaranty. Further
consideration is required for two reasons. First, we have
determined that the Bankruptcy Court was without
jurisdiction to enter judgment and further proceedings are
required before the District Court to resolve this "non-core"
21
matter. Second, it may be necessary on remand to
reevaluate the circumstances in which the transaction was
entered in the light of our reading of the relevant
documents. As we have indicated, the Bankruptcy Court
viewed the September Transaction as intended to syphon
off $300,000 in corporate funds in return for virtually
worthless stock while HBI was insolvent. It would seem
permissible to us, however, for a fact finder to determine on
this record that the September Transaction was not entered
for the purpose of defrauding creditors. The transaction
gave Barry a variety of options, each of which, depending
on the circumstances that unfolded, could be executed in a
manner consistent with public policy. The parties knew
that if Barry chose to infuse capital these arrangements
would be wholly consistent with the rights of HBI's
creditors. They may also have intended that if Barry
decided not to make the necessary capital infusion, the
signing bonus would not be paid by HBI, but rather the
consideration for Irwin's various commitments would come
personally from Barry's pocket under the Guaranty without
prejudice to creditors.
We do not here decide that the intention of the parties in
September of 1991 is relevant to the enforceability of the
Guaranty under New Jersey law. We leave it to the District
Court (with the assistance of the Bankruptcy Court if it so
chooses) to determine the applicable New Jersey law
including the significance, if any, of the parties' intent at
the time the Guaranty was made. We note, however, that
there is some New Jersey case law supporting the
proposition that unconditional guarantees that extend a
guarantor's responsibility beyond that of the primary
obligor are enforceable. The Superior Court in National
Westminster Bank NJ v. Lomker, 649 A.2d 1328 (N.J.
Super. Ct. App. Div. 1994), for example, held that a
guarantor's liability may exceed that of the principal under
New Jersey law. See id. at 1332 ("The liability of a
guarantor is measured by that of the principal, unless the
agreement explicitly provides otherwise."). In dicta, the
court even entertained the possibility that a guarantor
could explicitly waive the defenses of bad faith, fraud or
conspiracy. See id.; see also Nation Wide, Inc. v. Scullin,
256 F. Supp. 929, 932 (D.N.J. 1966)("However harsh a
22
bargain it may seem in retrospect, the defendants'
obligation was voluntarily assumed and made absolute by
its terms."); Midatlantic Bank, N.A. v. Strong, 1996 WL
697940, *5 (E.D.N.Y. 1966)("[E]ven absolute, unconditional
guarantees are upheld and enforced by New Jersey
courts."); Lenape State Bank v. Winslow Corp., 523 A.2d
223, 231 (N.J. Super. Ct. App. Div. 1987)(upholding
unconditional guaranty under New Jersey law); cf.
Interchange State Bank v. Rinaldi, 696 A.2d 744, 748 (N.J.
Super. Ct. App. Div. 1997)(finding guaranty unconditional
even in absence of term "unconditional"). Here, Barry's
Guaranty explicitly provided that Barry waived:
any and all defenses of HBI and [Barry], including,
without limitation, any and all defenses now or
hereafter arising or asserted by reason of (a) any lack
of power, capacity or authority of HBI with respect to
the Employment Agreement, the Letter Agreement or
the Obligations or any part thereof; (b) the
unenforceability of the Employment Agreement, the
Letter Agreement or the Obligations against HBI
* * * * *
Notwithstanding anything else contained in this
[Guaranty] Agreement, [Irwin]'s rights and [Barry]'s
obligations under this Agreement shall be reinstated
and revived, and the enforceability of this Agreement
shall continue, with respect to any amount at any time
prior to or after the date of this Agreement paid on
account of the Obligations which thereafter shall be
required to be restored or returned by [Irwin] under
any bankruptcy, fraudulent conveyance, insolvency or
reorganization laws or for any other reason all as
though such amount had not been paid.
(Pa. 535-36). The court on remand should consider whether
this express language is enforceable under New Jersey law
under the circumstances of this case.11
_________________________________________________________________
11. The Bankruptcy Court, in the course of holding that the Guaranty
was unenforceable against public policy, concluded that the Guaranty
was not "severable" from the September Transaction's other documents.
Irwin did not challenge this conclusion on his appeal to the District
23
Finally, if the court determines that HBI's signing bonus
obligation was not a fraudulent conveyance, the court must
then consider Barry's alternative claim that 11 U.S.C.
S 502(b)(7) limits HBI and Barry's liability under the
Guaranty to $75,000. The claim that HBI's obligation is
limited to this amount is a core proceeding because it
invokes a substantive provision of the bankruptcy code and
may be decided in the first instance by the District Court or
the Bankruptcy Court. Barry's derivative claim that his
Guaranty liability should be similarly limited, however, is a
non-core claim upon which only the District Court can
issue final judgment. Nonetheless, the District Court may
refer the claim to the Bankruptcy Court for proposed
findings of fact and conclusions of law.
V. CONCLUSION
The judgment of the District Court will be reversed and
this matter will be remanded to it for further proceedings
consistent with this opinion.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
_________________________________________________________________
Court and Barry insists that he thereby waived any claim that the
Guaranty was enforceable even if HBI's commitment to pay the signing
bonus was unenforceable. We are unpersuaded. Irwin consistently
maintained before the District Court, and before us, that the Guaranty,
including the above-quoted portions, should be enforced in accordance
with its literal terms.
24