UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 94-1766
CONGRESS CREDIT CORPORATION,
Plaintiff, Appellant,
v.
AJC INTERNATIONAL, INC., ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Hector M. Laffitte, U.S. District Judge]
Before
Campbell, Senior Circuit Judge,
Boyle* and Fust ,** District Judges.
Ronald L. Rosenbaum, with whom Woods, Rosenbaum, Luckeroth &
Perez Gonzalez was on brief for appellant.
Brian K. Tester, with whom Richard A. Lee Law Office was on brief
for appellees.
December 15, 1994
*Of the District of Rhode Island, sitting by designation.
**Of the District of Puerto Rico, sitting by designation.
CAMPBELL, Senior Circuit Judge. Congress Credit
Corporation ("Congress Credit") appeals from the district
court's dismissal without prejudice of its diversity action
to collect certain proceeds in the hands of the appellees,
AJC International, Inc. ("AJC") and Fronex Commodities, Inc.
(Fronex") under a perfected factor's lien. The lien was
allegedly granted to Congress Credit by United Western of
Puerto Rico, Inc. ("United Western"), which later filed for
bankruptcy. The district court has dismissed the lien action
without prejudice, apparently believing that Congress Credit
should not presently proceed with its lien action due to the
pendency of several adversary proceedings brought in the
bankruptcy court by the trustee of United Western to recover
the same sums as preferences from these same defendants.
This court initially affirmed, but upon considering Congress
Credit's petition for rehearing, and after giving the matter
further thought, has vacated its opinion and judgment of
affirmance. We now hold that the district court was without
authority to dismiss Congress Credit's diversity action to
enforce its lien, and we vacate and remand for further
proceedings in the district court.
FACTUAL AND PROCEDURAL BACKGROUND
FACTUAL AND PROCEDURAL BACKGROUND
Congress Credit is a commercial finance company.
It financed the accounts receivable and inventory of United
Western and claims to hold a recorded Factor's Lien and
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Assignment of Accounts Receivable given by United Western
pursuant to the Puerto Rico Factors Lien and Assignment of
Accounts Receivable Acts.1 On March 2, 1990, United Western
filed a petition in bankruptcy under Chapter 11 of the
Bankruptcy Code, which was converted to Chapter 7 on
September 7, 1990.
Appellees were suppliers of United Western, who
allegedly, within the ninety days prior to the bankruptcy
filing, received bulk transfers of inventory from United
Western in payment of its outstanding indebtedness to them
$376,610.79 in the case of AJC and $81,178.60 in the case of
Fronex.2 On May 11, 1990, United Western commenced
adversary proceedings in the bankruptcy court against the
appellees, alleging that the inventory sales constituted
preferential transfers. After the conversion to Chapter 7
the trustee was substituted for the debtor as plaintiff.
Congress Credit commenced this action in the district court
under diversity jurisdiction to recover essentially the same
1. P.R. Laws Ann. tit. 10, 551-60, 581-88 (1976). The
status and validity of this lien is not presently before us,
although it plays a central role in the controversy.
2. Two other suppliers of United Western also allegedly
received bulk transfers within the ninety day preference
period, in the amounts of $180,504.84 in the case of Agro
International ("Agro") (originally a named defendant in this
suit) and $23,000.00 in the case of Top Flight, Inc. ("Top
Flight"). Congress Credit represents that both of these
entities have been liquidated while this litigation has been
pending.
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assets, or their proceeds, on June 1, 1990, alleging that the
merchandise thus transferred had been subject to its factor's
lien.
On June 7, 1990 (some six days after filing its
lien action in the district court) Congress Credit filed an
adversary proceeding in the bankruptcy court, asserting a
claim to any recovery the estate might obtain in the
preference actions. The trustee did not contest this
proceeding; accordingly, judgment was entered on February 11,
1992 in favor of Congress Credit, securing Congress Credit's
right to any such recovery.
The appellees having successfully obtained a stay
of the lien action on August 31, 1990, pending resolution of
the adversary proceedings in the bankruptcy court, Congress
Credit next moved the district court to lift that stay on
August 27, 1992. The appellees opposed that motion and moved
to dismiss on September 28, 1992. The district court denied
the motion to vacate the stay and granted the motion to
dismiss in an opinion and order dated April 16, 1993.
Congress Credit's unsuccessful motion for reconsideration was
denied in a second opinion and order dated June 8, 1994,
which reiterated the grounds stated in the first opinion.
Congress Credit then appealed.
Congress Credit represents that there are no funds
in United Western's estate and that the bankrupt's business
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has long since been liquidated.3 The record also shows that
the bankruptcy judge has rejected a proposed agreement for
Congress Credit to finance the trustee's preference actions
and has ordered the trustee to show cause why the preference
actions should not be dismissed, as none of the proceeds
would benefit the estate (i.e. they would presumably all go
to Congress Credit under the bankruptcy court's order of
February 11, 1992).
The district court, nonetheless, reasoned that
Congress Credit's interests were fully protected by and could
await the results of the trustee's preference actions. The
court seemed to base the dismissal of the lien action on its
understanding that it was merely duplicative of the pending
preference actions:
The trustee's adversary proceeding and
this case involve the same transactions,
property and parties. The only
difference between the cases lies in the
legal bases for challenging the validity
of the transfers. A judgment in the
civil action would most certainly have an
effect on the debtor's estate. . . .
[M]aintenance of two proceedings
3. Not having the record in the bankruptcy case before us,
we cannot know for certain that this is correct. If it is,
and if, as may be the case, infra, the preference action
cannot benefit the estate, there may be no point in having
the trustee seek to recover property all of which must be
turned over to Congress Credit, with the inflation of legal
fees that this might entail. On the other hand, there may be
legitimate reasons justifying continuance of the preference
actions. Sorting out and making the best provision for these
realities is something we leave to the district court on
remand.
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adjudicating the same issues consumes
scarce judicial resources.
ANALYSIS
ANALYSIS
Shortly after hearing this appeal, we summarily
affirmed the district court's judgment of dismissal as, at
first blush, it seemed sensible to permit matters to be
pursued and, if possible, concluded in the bankruptcy court.
Like the district court, we were unhappy at the prospect of
the two cases the preference actions and the lien action
wasting scarce resources by proceeding on separate tracks
in different courts, with the risk of multiple judgments. We
are now persuaded, however, that the district court's
proposed solution to this dilemma was legally insupportable.
The correct, as well as most efficient solution, is for both
proceedings to be consolidated for disposition in the
district court, which is the only court with clear
jurisdiction over both.
While the lien action and the preference actions
apparently involve the identical property, they are not one
and the same action, permitting dismissal of one as surplus
to the other. They do not involve the same parties nor the
same causes of action. The law suit from which this appeal
is taken the lien action is a diversity action to
enforce a lien created under Puerto Rico law. P.R. Laws Ann.
tit. 10, 551-60, 581-88 (1976). Congress Credit must
prove the existence and validity of the lien, and, in
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addition, that the lien attached to the inventory transferred
to the appellees and followed to any claimed proceeds now in
their hands. The trustee, on the other hand, must show,
inter alia, that the inventory was property of the estate
when transferred to appellees so that its transfer to them
was a preference. 11 U.S.C. 547(b) (1988) ("the trustee
may avoid any transfer of an interest of the debtor in
property") (emphasis added); see generally 4 Collier on
Bankruptcy, 547.01 (Lawrence P. King, ed. 1994) (discussing
elements of a preference claim). This may require
consideration of the extent to which Congress Credit's
asserted lien removed the inventory from the debtor's
property and made it instead the property of Congress Credit
prior to the filing of United Western's bankruptcy
petition.4 Thus, the legal operation and validity of the
lien is an issue of some importance to both cases. However,
the plaintiffs and the legal theories for recovery in each
case are different.
The district court apparently viewed the two cases
as based on identical, parallel theories, giving the earlier
4. The operation of the lien is a question of Puerto Rico
law. See 4 Collier on Bankruptcy, 541.02[1] (Lawrence P.
King, ed. 1994) ("Section 541 provides that the commencement
of a case creates an estate consisting, most importantly, of
all legal or equitable interests of the debtor in property at
the time of the commencement of the case. Under this
provision it will still be necessary to look to nonbankruptcy
law, usually to state law, to determine whether the debtor
has any legal or equitable interest in any particular item.")
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preference cases a right to proceed exclusive of the
subsequent lien action. This analysis overlooked the major
differences between the two causes of action. A district
court may certainly dismiss an action which is merely
"duplicative" of another action pending in another federal
court. See Colorado River Water Conservation Dist. v. United
States, 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483
(1976); Small v. Wageman, 291 F.2d 734, 735 (1st Cir. 1961);
17A Charles Alan Wright et al., Federal Practice and
Procedure 4247 nn. 7-8 and accompanying text (2nd ed.
1988). But for an action to be "duplicative" of another, so
as to warrant its dismissal for that reason alone, the one
must be materially on all fours with the other. The present
lien action is not at all in that category. The plaintiff in
the lien action is different from that in the preference
actions, and the theory of recovery is altogether different.
See, e.g., Thermal Dynamics Corp. v. Union Carbide Corp., 214
F. Supp. 773, 774 (S.D.N.Y. 1963) (in order to properly
enjoin suit in another court, the issues "must have such an
identity that a determination in one action leaves little or
nothing to be determined in the other"); Radio Corp. of
America v. Rauland Corp., 16 F.R.D. 160, 163 (N.D. Ill. 1954)
(federal court should not stay proceedings in its own
jurisdiction unless it appears that parties and issues are
the same), mandamus denied, 217 F.2d 218 (7th Cir. 1954),
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cert. denied, 348 U.S. 973, 75 S.Ct. 533, 99 L.Ed. 758
(1955), mandamus denied, 348 U.S. 968, 75 S.Ct. 543, 99 L.Ed.
754 (1955).
We think it clear, therefore, that there is no
justification for dismissing the present lien action on the
basis of a supposed identity between it and the preference
actions. Nor can we see any bankruptcy-related theory
allowing the district court to force Congress Credit to
depend upon the preference proceedings in the bankruptcy
court for the collection of its lien. We are advised that
the automatic stay as to Congress Credit has long since been
vacated. See 11 U.S.C. 362(a) (1988) (staying actions
against the debtor, property of the debtor, or property of
the estate). Direct enforcement of Congress Credit's lien
must be accomplished by a state law action brought in the
Puerto Rico courts or a federal court sitting in diversity.
It is doubtful whether a bankruptcy court has jurisdiction at
all over such a lien action, which is clearly not a core
bankruptcy matter, see 28 U.S.C. 157(b) (1988).
Conceivably, in proper circumstances, a bankruptcy court
might handle a lien enforcement action as a non-core but
"related" proceeding under the eye of the district court,
which would have final say over its disposition. 28 U.S.C.
157(c) (1988) (bankruptcy court may hear a non-core
proceeding, but final disposition of such must be by the
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district court). Most probably, although we do not rule on
the question, the lien action is not even a "related"
proceeding. The lien holder here claims, and has been
awarded by order of the bankruptcy court, the right to all
recovery in the preference actions. This suggests that, by
now, the result in the lien proceeding can have no impact
whatever upon the bankruptcy estate. See, e.g., In re North
Star Contracting Corp., 146 B.R. 514, 519 (Bankr. S.D.N.Y.
1992) (action is "related to" a bankruptcy if outcome could
alter the debtor's rights, liabilities, options, or freedom
of action, or in any way impacts upon the handling and
administration of the bankruptcy estate); In re Chambers, 125
B.R. 788, 793 (Bankr. W.D. Mo. 1991) (matter not "related to"
Title 11 where neither amount of property available for
distribution, not the allocation of property among creditors,
is affected by the dispute). If the lien enforcement action
is not a "related" proceeding, the bankruptcy court would
lack any jurisdiction whatever over it. In any event, it is
difficult to justify ousting Congress Credit, even
temporarily, from the district court which clearly has
diversity jurisdiction over its lien action leaving its
rights under the lien to be secured in the more round about
preference proceeding, requiring proof of additional
elements, in a court probably lacking any jurisdiction to
enforce the lien claim directly.
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In these circumstances, we think it was erroneous
to defer to the trustee's and the bankruptcy court's lead in
the preference proceedings proceedings which, at best,
seem poorly tailored to Congress Credit's present needs, and
which in any case seem to have lost steam. To be sure, it
makes no sense for the two actions to proceed along separate
tracks, inviting a defense strategy of divide and conquer.
But there is a better solution to this problem, namely, to
consolidate both proceedings in the one court, here the
district court, where jurisdiction over both actions plainly
exists. This will enable attention to be directed where it
should have been directed all along to the merits or
demerits of the claims against the appellees, without the
distraction of conceivable double or conflicting recoveries
in different courts.
We, therefore, vacate and remand to the district
court with instructions that it provide appropriate notice to
the trustee in bankruptcy, directing him to show cause in the
district court why the preference claims should not be
brought up to the district court from the bankruptcy court
and either abandoned or dismissed or else continued in
consolidation with the lien claim.5 The district court can
5. The bankruptcy court has already instituted inquiry into
whether the preference claims should be continued now that it
is clear that the sole beneficiary will be Congress Credit.
The district court may, but need not, allow that inquiry to
be resolved by the bankruptcy judge if it thinks this is the
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either dismiss the preference claims if it determines that
they lack viability (assuming the bankruptcy court has not
done so, see n.5) or allow the trustee to pursue them in a
consolidated proceeding in the district court together with
the lien diversity action.
The power of the district court to consolidate the
preference actions now pending in the bankruptcy court with
the instant diversity lien action rests on its power to
withdraw a case from the bankruptcy court "for cause shown."
28 U.S.C. 157(d) (1988). Courts have done this where
necessary in analogous instances. See, e.g., In re Sevko,
Inc., 143 B.R. 114, 117 (N.D. Ill. 1992) (considerations of
judicial economy adequate to meet "cause shown" requirement);
Enviro-Scope Corp. v. Westinghouse Elec. Corp. (In re Enviro-
Scope Corp.), 57 B.R. 1005, 1008-09 (E.D. Pa. 1985) (same).
We direct use of 157(d) not because of any fault on the
part of the bankruptcy court, but because bringing the
preference claims into the district court will allow all
facets of these controversies affecting the same property and
most efficient way to proceed. Alternatively, the district
court may take charge of and resolve that inquiry itself.
Given the nearly four years of wheelspinning, we direct the
district court to do whatever is necessary to speedily
resolve, or have resolved, the status of the preference
proceedings so that appellant's lien claim, either alone or
in tandem, can move ahead and be decided without further
delay.
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the same defendants to be disposed of by one tribunal having
undoubted jurisdiction and authority.
We emphasize that the question of whether there is
any reason to continue the preference claims should be
speedily resolved at the outset. To pursue them at the
expense of the estate and, potentially, of the appellant's
recovery, may be inadvisable and a waste of money. On the
other hand, we do not want to prejudge the matter. If the
preference claims still serve a proper purpose and should be
pursued, they should be pursued in the district court in a
consolidated proceeding together with the lien claim. We are
confident that the district court, having both matters before
it, will give expedited attention to ending the existing
gridlock. Congress Credit is entitled to have the merits of
its claims determined without further delay.
The district court's judgment of April 19, 1993,
and its opinion and order of June 8, 1994, are vacated, and
this case is remanded to the district court for proceedings
consistent with this opinion.6
6. We treat the district court's opinion and order of June
8, 1994 as an appealable final judgment. See Bankers Trust
Co. v. Mallis, 435 U.S. 381, 98 S.Ct. 1117, 55 L.Ed.2d 357
(1978).
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