[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________ FILED
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 06-13733 February 23, 2007
Non-Argument Calendar THOMAS K. KAHN
________________________ CLERK
D. C. Docket Nos.
06-00114-CV-T-17MSS
BK:03-11047-8
In Re: ELECTRIC MACHINERY ENTERPRISES, INC.,
Debtor.
__________________________________________________________________
THE WHITING-TURNER CONTRACTING COMPANY,
UNITED STATES FIDELITY AND GUARANTY COMPANY,
Plaintiffs-Appellants,
versus
ELECTRIC MACHINERY ENTERPRISES, INC.,
Defendant-Appellee.
________________________
Appeal from the United States District Court
for the Middle District of Florida
_________________________
(February 23, 2007)
Before TJOFLAT, HULL and WILSON, Circuit Judges.
WILSON, Circuit Judge:
This is an interlocutory appeal in a bankruptcy case. We find that the district
court erred when it upheld a bankruptcy court’s denial of a motion to compel
arbitration.
BACKGROUND
The Whiting-Turner Contracting Company (“Whiting-Turner”) was the
general contractor on the construction of certain improvements at Universal City
Development Partners’ (“UCDP”) theme park known as “Seuss Landing.”1
Electric Machinery Enterprises, Inc. (“EME”) entered into a subcontract with
Whiting-Turner and agreed to provide electrical work on the project. During the
course of the work, Whiting-Turner suffered scheduling delays that impacted the
completion of the work. UCDP refused to grant Whiting-Turner any contract time
extensions for excusable delays; therefore, both Whiting-Turner and EME were
forced to expend additional costs to accelerate the work. Whiting-Turner
submitted an amended claim to UCDP for these additional costs. As part of the
amended claim, Whiting-Turner included (as a “pass-through” claim) the claimed
1
United States Fidelity and Guaranty Company (“USF&G”), as the surety, issued the
performance bond for the Seuss Landing project. USF&G and Whiting-Turner are the appellants
in this case. For simplicity, we refer to appellants jointly throughout as “Whiting-Turner.”
2
additional costs submitted by EME in the amount of $5,001,644. Whiting-Turner
also sought payment for additional change work that UCDP had directed Whiting-
Turner and thereby EME to perform. The total amount that Whiting-Turner
allocated to EME in its claim to UCDP was $6,116,467.
While Whiting-Turner was pursing these claims against UCDP, Whiting-
Turner and EME entered into a Tolling Agreement, which tolled the applicable
statute of limitations with respect to an action by EME against Whiting-Turner.
The Tolling Agreement also acknowledged that during the course of the project,
EME had incurred additional costs for change work and acceleration of contract
performance. The Tolling Agreement stated that Whiting-Turner had submitted
EME*s claimed costs as part of Whiting-Turner*s claims to UCDP, and Whiting-
Turner was continuing to exhaust both Whiting-Turner*s and EME*s claims with
UCDP.In the Tolling Agreement, Whiting-Turner and EME agreed “that any
issues, claims or defenses between them shall be resolved by binding arbitration
under the Construction Industry Rules of the American Arbitration Association
and judgment shall be entered upon any award in such proceedings.”
In June 2004, Whiting-Turner entered into a settlement agreement with
UCDP in which UCDP paid Whiting-Turner $9,600,000. Following the
settlement, Whiting-Turner informed EME that based on the prior payments made
3
to EME, Whiting-Turner considered its subcontract with EME paid in full. Both
before and during the Tolling Agreement, Whiting-Turner had previously paid
EME $1,845,451.
In May 2003, EME had filed for Chapter 11 bankruptcy in the United States
Bankruptcy Court for the Middle District of Florida. After Whiting-Turner settled
with UCDP, EME filed an adversary proceeding in bankruptcy court against
Whiting-Turner alleging that Whiting-Turner owes EME $5,081,286 in principal
and $2,328,423 in accrued interest pursuant to a subcontract agreement between
the parties. In its complaint, EME claims that the suit is for “turnover” property of
the estate. Furthermore, EME claims that Whiting-Turner breached their contract
and owed payment to EME based on a payment bond issued by Whiting-Turner.
EME moved for summary judgment, asserting that Whiting-Turner has a
duty to “turn over” the undisputed amount of money that it owes EME.
Specifically, EME claimed that it is owed a percentage of the settlement proceeds
that UCDP paid to Whiting-Turner. Whiting-Turner*s initial cumulative claim
against UCDP was for approximately $21 million, which included EME*s claim of
approximately $6.2 million. EME stated that this $6.2 million represented 29% of
Whiting-Turner*s cumulative claim. Therefore, EME claimed that it should
receive 29% of the $9,600,000 Whiting-Turner received as a settlement, which is
4
approximately $2,815,400. Whiting-Turner responded that during the course of
the UCDP litigation, it learned that EME*s cost claim was substantially overstated
and unsupported by EME*s own job cost records, and therefore, it had paid EME
in full. Also in response to EME*s claim, Whiting-Turner filed a motion to
compel arbitration. The bankruptcy court held a hearing on both motions.
The bankruptcy court denied EME*s motion for summary judgment and
found that this case is not a “turnover” action because it involves a disputed and
unliquidated claim. The bankruptcy court also found that this case presents a
constructive trust situation, because Whiting-Turner collected money in settlement
for itself and for EME, and if Whiting-Turner does not distribute the proportion of
the settlement owed to EME, Whiting-Turner will be unjustly enriched. However,
the bankruptcy court acknowledged that the amount of money that Whiting-Turner
owes to EME is a “hotly disputed” factual issue. Having determined that a
constructive trust existed, the bankruptcy court determined that it had jurisdiction
over the res of the constructive trust, and that the determination of the amount of
res in the constructive trust was a “core” bankruptcy proceeding. Therefore, the
bankruptcy court found that arbitration under these circumstances was not
appropriate and denied Whiting-Turner*s motion to compel arbitration. The district
court affirmed, and Whiting-Turner appealed.
5
STANDARD OF REVIEW
We independently examine the factual and legal determinations of the
bankruptcy court under the same standards as the district court. Barnett Dodge
Chrysler Plymouth Inc. v. Cranshaw (In re Issac Leaseco, Inc.), 389 F.3d 1205,
1209 (11th Cir. 2004). We review legal determinations de novo. Securities
Groups v. Barnett (In re Monetary Group), 2 F.3d 1098, 1103 (11th Cir. 1993).
We review the factual findings of the bankruptcy court for clear error. Id.
DISCUSSION
A. Legal Standard for the Enforcement of a Valid Arbitration Agreement
The parties do not dispute that they entered into a valid arbitration
agreement to resolve any and all claims or issues between them. The Federal
Arbitration Act (“FAA”) provides, in pertinent part, that arbitration agreements
“shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or
in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA establishes a
federal policy favoring arbitration. See Shearson/American Express, Inc. v.
McMahon, 482 U.S. 220, 226, 107 S. Ct. 2332, 2337, 96 L. Ed. 2d 185 (1987).
However, “[l]ike any statutory directive the Arbitration Act*s mandate may be
overridden by a contrary congressional command.” Id. “Thus, unless Congress
has clearly expressed an intention to preclude arbitration of the statutory claim, a
6
party is bound by its agreement to arbitrate.” Davis v. Southern Energy Homes,
Inc., 305 F.3d 1268, 1273 (11th Cir. 2002). The party opposing arbitration has the
burden of proving “that Congress intended to preclude a waiver of a judicial
remedies for [the particular claim] at issue.” McMahon, 482 U.S. at 227, 107 S.
Ct. at 2337.
In McMahon, the United States Supreme Court promulgated a three factor
test in order to determine Congress* intent: “(1) the text of the statute; (2) its
legislative history; and (3) whether ‘an inherent conflict between arbitration and
the underlying purposes [of the statute]* exists.” Davis, 305 F.3d at 1273
(alteration in original) (quoting McMahon, 482 U.S. at 227, 107 S. Ct. at 2338).
In applying the McMahon factors, “‘questions of arbitrability must be addressed
with a healthy regard for the federal policy favoring arbitration.’” Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 26, 111 S. Ct. 1647, 1652, 114 L. Ed.
2d 26 (1991). Applying the McMahon factors to the Bankruptcy Code, we find no
evidence within the text or in the legislative history that Congress intended to
create an exception to the FAA in the Bankruptcy Code. See Mintze v. Am. Gen.
Fin. Servs., Inc. (In re Mintze), 434 F.3d 222, 231 (3d Cir. 2006) (finding no
evidence of such an intent in the statutory text or legislative history of the
bankruptcy code). Therefore, we look to the third factor of the McMahon test and
7
examine whether an inherent conflict exists between arbitration and the underlying
purposes of the Bankruptcy Code.
B. Analysis
The bankruptcy court found that the determination of the res of the
constructive trust was a core proceeding over which the bankruptcy court had
exclusive jurisdiction. The bankruptcy court relied on the United States Supreme
Court*s decision in Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 124
S. Ct. 1905, 158 L. Ed. 2d 764 (2004), for the proposition that “[a] bankruptcy
court*s in rem jurisdiction permits it to ‘determin[e] all claims that anyone,
whether named in the action or not, has to the property or thing in question.’” Id.
at 448, 124 S. Ct. at 1911 (second alteration in original). However, whether or not
the bankruptcy court has jurisdiction, even exclusive jurisdiction, over a matter is a
separate question from whether enforcing a valid arbitration agreement would pose
an inherent conflict with the underlying purposes of the Bankruptcy Code. See
McMahon, 482 U.S. at 227-28, 107 S. Ct. at 2338-39 (finding that the plaintiffs*
claim that the defendant violated § 10(b) of the Securities Exchange Act of 1934
was subject to arbitration even though district courts have exclusive jurisdiction
over such violations). Therefore, the bankruptcy court*s finding that it had
jurisdiction over the matter does not end our inquiry, for a finding of jurisdiction
8
does not in itself demonstrate that the FAA inherently conflicts with the
Bankruptcy Code.
Courts addressing the issue of whether arbitration inherently conflicts with
the Bankruptcy Code distinguish between core and non-core proceedings. See
Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1156-
57 (3d Cir. 1989). In general, bankruptcy courts do not have the discretion to
decline to enforce an arbitration agreement relating to a non-core proceeding. See
Crysen/Montenay Energy Co. v. Shell Oil Co. (In re Crysen/Montenay Energy
Co.), 226 F.3d 160, 166 (2d Cir. 2000). However, even if a proceeding is
determined to be a core proceeding, the bankruptcy court must still analyze
whether enforcing a valid arbitration agreement would inherently conflict with the
underlying purposes of the Bankruptcy Code. See Ins. Co. of N. Am. v. NGC
Settlement Trust & Asbestos Claims Mgmt. Corp. (In re National Gypsum), 118
F.3d 1056, 1067 (5th Cir. 1997). As explained below, we find that the proceeding
in this case is not a core proceeding. Moreover, and even if it is a core
proceeding, there is no evidence that arbitrating EME*s claim against Whiting-
Turner would inherently conflict with the underlying purposes of the Bankruptcy
Code. Therefore, the dispute between EME and Whiting-Turner is subject to
arbitration under the terms of the arbitration agreement.
9
The Bankruptcy Code provides a non-exclusive list of core proceedings.
See 28 U.S.C. § 157(b)(2)(A)-(P). The proceeding in this case does not fall within
any of the listed proceedings. However, since the list is non-exhaustive, we must
inquire as to the nature of a core verus a non-core proceeding. In In re Toledo, we
stated that “‘[i]f the proceeding involves a right created by the federal bankruptcy
law, it is a core proceeding.’” Cont’l Nat’l Bank v. Sanchez (In re Toledo),170
F.3d 1340, 1348 (11th Cir. 1999) (quoting Wood v. Wood (In re Wood), 825 F.2d
90, 97 (5th Cir. 1987)). A proceeding is also considered core “‘[i]f the proceeding
is one that would arise only in bankruptcy.’” Id. A proceeding is not core “‘[if]
the proceeding does not invoke a substantive right created by the federal
bankruptcy law and is one that could exist outside of bankruptcy.’” Id.
In this case, the bankruptcy court held that the determination of the res of a
constructive trust is a core proceeding. The district court, in affirming the
bankruptcy court, cited to Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396
(4th Cir. 1992), for the proposition that the finding of a constructive trust and the
proper distribution of the res of that trust are core proceedings. However, In re
Johnson is distinguishable.
In In re Johnson, the debtor filed bankruptcy following the collapse of an
illegal pyramid scheme that the debtor had perpetrated. 960 F.2d at 398. The
10
bankruptcy court permitted a class of plaintiffs to bring a declaratory suit seeking
judgment that the bulk of the debtor’s estate should be held in constructive trust.
The bankruptcy court determined that the bulk of the funds in the debtor*s estate
were to be held in constructive trust for the defrauded investors. The bankruptcy
court then determined the proper distribution of the funds in the trust to the class
of plaintiffs. The appellants, two of the class plaintiffs, objected. While they did
not object to the bankruptcy court*s determination that the funds were to be held in
a constructive trust, they argued that the bankruptcy court was without jurisdiction
to determine who was entitled to the distribution of the funds. In affirming the
district court*s affirmance of the bankruptcy court, the Fourth Circuit noted that “it
was necessary for the bankruptcy court to determine the proper beneficiaries [of
the trust] concurrent with its finding of a constructive trust.” Id.
at 402. The court stated that “the only proper forum for determining whether
assets held by a debtor are held in constructive trust is the bankruptcy court . . . .
[A] determination of the proper distribution of that trust [is] intimately tied to the
traditional bankruptcy functions and estate, and therefore, [it is a] core matter
within the clear jurisdiction of the bankruptcy court.” Id.
In contrast, in this case, the disputed assets are not held by the debtor.
Rather, they are held by a third party (Whiting-Turner), and the proceeding
11
between EME and Whiting-Turner does not involve a claim by a bankruptcy
creditor against funds held by the bankruptcy debtor*s estate. In re Johnson
involved creditors who made claims against the debtor’s estate in bankruptcy court
for liquidation of assets held by the debtor, a proceeding which the Fourth Circuit
found to be “core.” Our case does not present the same type of proceeding.
EME argues that Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574 (2d Cir.
1983), supports the proposition that a bankruptcy court can exercise jurisdiction
over a constructive trust with assets held by a third party, and such a proceeding is
a core proceeding. However, we disagree with EME’s interpretation of In re
Kaiser. In that case, the bankruptcy court found that the debtor husband had made
a fraudulent transfer of property to his wife in order to hinder, delay, or defraud
his creditors. The bankruptcy court imposed a constructive trust upon the property
that the debtor had fraudulently transferred to his wife. The debtor argued that the
bankruptcy court did not have the authority to issue a final order imposing the
constructive trust, because it was only a “related proceeding.” Id. at 1581. While
the Second Circuit in In re Kaiser disagreed with the appellant-debtor, it explained
that “[i]t is certainly true that state courts commonly impose constructive trusts.
What appellant ignores, however is that this action was brought as a result of his
fraudulent transfers in light of the bankruptcy laws. . . . [therefore], federal law
12
provides the right upon which the remedy of the constructive trust sought here is
based.” As such, the proceeding was “core.” Id. at 1582. Further supporting the
Second Circuit’s holding is the fact that proceedings to determine, avoid, or
recover fraudulent conveyances are specifically listed as core proceedings under
28 U.S.C. § 157(b)(2)(H). Unlike In re Kaiser, this case does not involve a
debtor*s fraudulent conveyance of property to a third party in order to circumvent
the bankruptcy laws.
Accordingly, we hold that the bankruptcy court erred in finding that a
determination of how much money, if any, Whiting-Turner owes EME is a core
proceeding.2 A determination of whether Whiting-Turner owes EME money
under their contractual agreement does not involve a right created by federal
bankruptcy law, and it is not a proceeding that would arise only in bankruptcy.
See In re Toledo, 170 F.3d at 1348. EME could have bought this claim against
Whiting-Turner irrespective of whether EME had filed for bankruptcy. EME*s
claim against Whiting-Turner does not involve the traditional purpose of the
bankruptcy court – modifying the rights of creditors who make claims against the
bankruptcy debtor’s estate. See In re Semel & Co., 285 F. Supp. 536, 541 (D. N.J.
2
Since we find that the bankruptcy court erred in finding that this was a core proceeding,
and therefore should have directed the parties to arbitration, we make no finding as to whether
the bankruptcy court properly concluded that a constructive trust existed.
13
1968) (“[T]he purpose of bankruptcy legislation from its inception in the last
century down to the present day was and is the reasonably expeditious
rehabilitation of financially distressed debtors with a consequent distribution to
creditors who have acted diligently.”); In re Ionosphere Clubs, Inc., 101 B.R. 844,
851 (Bankr. S.D.N.Y. 1989) (same). While the determination of whether Whiting-
Tuner actually owes EME part of the settlement proceeds that Whiting-Turner
received from UCDP could affect EME*s estate, actions that are merely related to
a bankruptcy case are non-core proceedings. See 28 U.S.C. § 157(c)(1).
Therefore, because EME*s claim against Whiting-Turner is only related to EME’s
bankruptcy, it is non-core and subject to arbitration.
Furthermore, even if we were to find that EME*s claim against Whiting-
Turner constitutes a core proceeding, we find that EME did not sustain its burden
under McMahon to demonstrate that Congress intended to limit or prohibit
waiver of a judicial forum for the type of claim that EME brought against Whiting-
Turner. See McMahon, 482 U.S. at 227, 107 S. Ct. at 2338. The bankruptcy court
found that the determination of the res in a constructive trust was a core
proceeding and that arbitration under these circumstances was inappropriate.
However, the bankruptcy court did not assess whether enforcing the parties*
arbitration agreement would inherently conflict with the underlying purposes of
14
the Bankruptcy Code. Only if the bankruptcy court actually makes a sufficient
finding that enforcing an arbitration agreement would inherently conflict with the
Bankruptcy Code does it have the discretion to deny enforcement of the arbitration
agreement. See In re National Gypsum, 118 F.3d at 1067. We find no evidence in
the record to suggest that sending EME*s claim against Whiting-Turner to
arbitration, as the parties agreed to do, would inherently conflict with the
Bankruptcy Code, and EME has failed to demonstrate otherwise. Therefore, even
if this dispute is in fact core, it is still subject to arbitration.
CONCLUSION
The bankruptcy court erred in denying Whiting-Turner*s motion to compel
arbitration. Accordingly, we reverse the judgment of the district court, which
denied Whiting-Turner*s bankruptcy appeal, and remand this case to the district
court for remand to the bankruptcy court with instructions to compel the parties to
arbitrate in accordance with the terms of their arbitration agreement.
REVERSED and REMANDED.
15