USCA1 Opinion

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 br

________________
_________________________
for appellees.
____________________

December 15, 1994

____________________

____________________

*Of the District of Rhode Island, sitting by designation.

**Of the District of Puerto Rico, sitting by designation.

CAMPBELL,

Corporation

court's

Senior Circuit Judge.

_____________________

("Congress Credit")

appeals

dismissal without prejudice

Congress Credit

from the

district

of its diversity action

to collect

AJC

certain proceeds in

the hands of

the appellees,

International, Inc. ("AJC") and Fronex Commodities, Inc.

(Fronex")

under a

perfected factor's

lien.

allegedly granted

to Congress

Puerto Rico, Inc.

("United Western"), which later

bankruptcy.

Credit by

The

of

several adversary

bankruptcy court by the trustee

same sums

as preferences

This court initially affirmed,

Credit's

further

of

filed for

believing that Congress Credit

should not presently proceed with

the

United Western

The district court has dismissed the lien action

without prejudice, apparently

pendency

lien was

its lien action due to the

proceedings

brought in

the

of United Western to recover

from

these same

defendants.

but upon considering Congress

petition for rehearing, and after giving the matter

thought, has

vacated its

opinion

and judgment

of

affirmance.

authority

enforce

We now hold

to dismiss

its

that the district court was without

Congress Credit's diversity

lien, and

we

vacate

and remand

for

action to

further

proceedings in the district court.

FACTUAL AND PROCEDURAL BACKGROUND

FACTUAL AND PROCEDURAL BACKGROUND

Congress Credit

It financed the

Western and

is a

commercial finance

accounts receivable and inventory

claims

to hold

-2-

recorded Factor's

company.

of United

Lien

and

Assignment

of Accounts

pursuant to

Receivable given

the Puerto Rico

Accounts Receivable Acts.1

filed

Bankruptcy

Factors Lien and

bankruptcy

Code,

was

under

converted

Chapter 11

to

Western

Assignment of

On March 2, 1990, United

petition in

which

by United

Western

of

Chapter

the

on

September 7, 1990.

Appellees

were suppliers

allegedly, within

the ninety

filing,

bulk transfers

received

of

United Western,

days prior

of

to the

inventory

who

bankruptcy

from United

Western in payment of its outstanding indebtedness to them

$376,610.79 in the case of AJC and

Fronex.2

On

adversary

May

1990,

proceedings in

appellees, alleging

preferential

the

11,

that

transfers.

trustee was

United

Western

commenced

the bankruptcy

court

against the

the

sales

constituted

inventory

After

substituted for

Congress Credit commenced

$81,178.60 in the case of

the conversion to

the

debtor as

this action in the

Chapter 7

plaintiff.

district court

under diversity jurisdiction to recover essentially the

same

____________________

1.

P.R. Laws

Ann. tit. 10,

status and validity of this

551-60, 581-88 (1976).

The

lien is not presently before us,

although it plays a central role in the controversy.

2.

Two

other suppliers

received
period, in

bulk transfers
the amounts

of

United

within

Western also

the ninety

of $180,504.84 in

day

allegedly
preference

the case

of Agro

International
suit) and
Flight").
entities

("Agro") (originally a named defendant in this

$23,000.00 in the
Congress

case of Top Flight,

Credit represents

that

Inc. ("Top

both of

these

have been liquidated while this litigation has been

pending.

-3-

assets, or their proceeds, on June 1, 1990, alleging that the

merchandise thus transferred had been subject to its factor's

lien.

On June

lien

7, 1990

(some six

action in the district court)

days after

Congress Credit filed an

adversary

proceeding in

the bankruptcy

claim

any

the

to

preference

recovery

actions.

The

estate

trustee

filing its

court,

might

did

not

asserting a

obtain

in

contest

the

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

of the lien action on

the adversary

Credit next

successfully obtained a

August 31, 1990, pending resolution of

proceedings in the bankruptcy

moved the

August 27, 1992.

stay

district court to

court, Congress

lift that

stay on

The appellees opposed that motion and moved

to dismiss on September 28,

1992.

The district court denied

the

motion to

dismiss in

vacate the

an

opinion

stay

and

and granted

order

dated

the motion

April

16,

to

1993.

Congress Credit's unsuccessful motion for reconsideration was

denied

in a

second opinion

dated June

8, 1994,

the first

opinion.

Congress Credit represents that there are

no funds

which reiterated

and order

the grounds

stated in

Congress Credit then appealed.

in United Western's

estate and that the

-4-

bankrupt's business

has long since been liquidated.3

the

bankruptcy judge has

Congress

The record also shows that

rejected a proposed

agreement for

Credit to finance

the trustee's preference actions

and has ordered the trustee

to show cause why the preference

actions

would

to

should not

be

dismissed, as

benefit the estate (i.e.

Congress Credit

under the

none of

the proceeds

they would presumably all go

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

this case involve

property

and

proceeding and

the same transactions,

parties.

The

difference between the cases

legal bases for
of

only

lies in the

challenging the validity

the transfers.

judgment in

the

civil action would most certainly have an

effect

on the

[M]aintenance

debtor's
of

estate.

two

. .

proceedings

____________________

3.

Not having the

we cannot
and

if, as

know for certain that this is

may be

cannot benefit
the trustee

record in the bankruptcy

the case,

infra, the
_____

the estate, there

seek to

correct.

If it is,

preference action

may be no point

recover property all

turned over to Congress

case before us,

of which

Credit, with the inflation

in having
must be
of legal

fees that this might entail.

legitimate reasons
actions.
realities

On the other hand, there may be

justifying continuance of

the preference

Sorting out and making the best provision for these

is something

we leave

to the

district court

issues

consumes

on

remand.

-5-

adjudicating

the

same

scarce judicial resources.

ANALYSIS
ANALYSIS

Shortly

after hearing

this

appeal, we

summarily

affirmed

the district court's

first blush,

pursued

it

judgment of dismissal

seemed sensible

to

as, at

permit matters

to

be

and, if possible, concluded in the bankruptcy court.

Like the district

the two cases

court, we were unhappy at

the prospect of

the preference actions and

the lien action

wasting scarce resources by proceeding on separate tracks

in different courts, with the risk of multiple judgments.

are

now

persuaded,

however,

that

proposed solution to this dilemma

The correct, as well as

proceedings

district

to

court,

be

jurisdiction over both.

district

court's

was legally insupportable.

most efficient solution, is for both

consolidated

which

the

We

is

the

for

only

disposition

court

in

with

the

clear

While the

lien action

apparently involve the

and

other.

same causes of

is

taken

the

the same parties nor the

The law suit from

lien action

is

which this appeal

a diversity

enforce a lien created under Puerto Rico law.

tit.

prove

10,

the

551-60, 581-88

existence

and

(1976).

validity

-6-

not one

dismissal of one as surplus

They do not involve

action.

preference actions

identical property, they are

the same action, permitting

to the

and the

action to

P.R. Laws Ann.

Congress Credit

of

the

lien,

must

and, in

addition, that the lien attached to the inventory transferred

to the appellees and followed

their

hands.

inter alia,
__________

The trustee,

that the

when transferred

was a

may

property")

Bankruptcy,
__________

on the

other hand,

must show,

inventory was

property of

the estate

to appellees so

preference.

avoid any

to any claimed proceeds now in

11

U.S.C.

transfer

(emphasis

of

added);

that its transfer

547(b) (1988)

to them

("the trustee

an interest of the debtor

___________________________

see generally
_____________

in

Collier on
___________

547.01 (Lawrence P. King, ed. 1994) (discussing

elements

of

consideration

asserted

preference

of

lien

the

extent

removed

the

property and made it instead

prior

to

the

petition.4

filing

Thus, the

lien is an issue of some

the plaintiffs

of

claim).

to

This

which

inventory

may

Congress

from

Credit's

the

debtor's

the property of Congress Credit

United

legal operation

Western's

bankruptcy

and validity of

importance to both cases.

and the legal

require

theories for recovery

the

However,

in each

case are different.

The

as

district court apparently viewed the two cases

based on identical, parallel theories, giving the earlier

____________________

4.
law.

The operation
See
___

of the lien

is a question of

4 Collier on Bankruptcy,
_____________________

Puerto Rico

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.")

-7-

preference

cases

subsequent lien action.

right

to

proceed

This analysis

exclusive

overlooked the

of

the

major

differences

court

may

between the

certainly

"duplicative"

court.

two causes of

dismiss

of another

an

action

which

action pending in

424 U.S.

800, 817,

96 S.Ct.

(1976); Small v. Wageman, 291

_____
_______

Charles

Procedure

Alan

4247

Wright

nn. 7-8

1988).

But for an action to

as to

warrant its dismissal

must be materially on

is

merely

another federal

1236, 47

lien action

L.Ed.2d 483

F.2d 734, 735 (1st Cir. 1961);

et

and

al.,

Federal

Practice

accompanying text

for that reason alone,

all fours with the other.

is different

(2nd

and

ed.

be "duplicative" of another, so

lien action is not at all in that category.

the

A district

See Colorado River Water Conservation Dist. v. United

___ _______________________________________
______

States,
______

17A

action.

from that

the one

The present

The plaintiff in

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

enjoin suit in

(S.D.N.Y.

1963) (in

another court, the issues "must

identity that a determination in

nothing

to

order

be determined

in

to properly

have such an

one action leaves little or

the other");

Radio Corp. of
_______________

America v. Rauland Corp., 16 F.R.D. 160, 163 (N.D. Ill. 1954)

_______
_____________

(federal

court

jurisdiction

the

should

not

stay

unless it appears

same), mandamus denied,

_______________

proceedings

that parties and

217 F.2d

-8-

218 (7th

in

its

own

issues are

Cir. 1954),

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,

justification for dismissing

basis of a

actions.

can

we

see

there is

the present lien action

supposed identity between

Nor

that

any

it and the

no

on the

preference

bankruptcy-related

theory

allowing

depend

the

upon

district

court to

the preference

court for the

See 11
___

against the

the

must be

U.S.C.

Direct

362(a)

the bankruptcy

We are

advised that

(1988) (staying

the debtor, or

enforcement of Congress

accomplished by

Puerto Rico courts or a

in

Credit to

Congress Credit has long since been

debtor, property of

estate).

Congress

proceedings

collection of its lien.

the automatic stay as to

vacated.

force

a state law

actions

property of

Credit's lien

action brought

federal court sitting in

in the

diversity.

It is doubtful whether a bankruptcy court has jurisdiction at

all over

bankruptcy

such a

lien action,

matter,

Conceivably, in

proper

see
___

28

which is clearly

U.S.C.

circumstances,

not a

157(b)

bankruptcy

core

(1988).

court

might handle

a lien

"related" proceeding

enforcement

under the

action as

eye of

a non-core

the district

but

court,

which would have final say over its disposition.

28 U.S.C.

157(c)

(1988)

proceeding, but

(bankruptcy

final

court

disposition of

-9-

may

hear

such must

non-core

be by

the

district court).

the

question,

proceeding.

awarded by

Most probably, although we do

the

The

lien

lien

order of the

action is

holder

here

in the preference actions.

now, the

result in

Star Contracting Corp., 146

_______________________

1992) (action is "related

in

any

"related"

has

been

to all

This suggests that, by

can have

no impact

See, e.g., In re North

_________ ___________

B.R. 514, 519

(Bankr. S.D.N.Y.

to" a bankruptcy if

the debtor's rights,

action, or

claims, and

the lien proceeding

whatever upon the bankruptcy estate.

of

even

bankruptcy court, the right

recovery

alter

not

not rule on

outcome could

liabilities, options, or freedom

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).

is not

a "related"

lack any

proceeding, the

bankruptcy court

jurisdiction whatever over it.

difficult

to

justify

temporarily, from

diversity

If the lien enforcement action

ousting

the district

jurisdiction over its

rights under the lien

preference

elements, in

a court

In any event, it is

Congress

court

Credit,

which clearly

lien action

requiring

proof

probably lacking

enforce the lien claim directly.

even

has

leaving its

to be secured in the more

proceeding,

would

of

round about

additional

any jurisdiction

to

-10-

In these

circumstances, we think it

to defer to the trustee's

the preference

seem

was erroneous

and the bankruptcy court's lead in

proceedings

proceedings

which, at

best,

poorly tailored to Congress Credit's present needs, and

which in

any case seem to have

makes no sense for the

lost steam.

To

be sure, it

two actions to proceed along separate

tracks,

inviting a defense

But there

is a better

consolidate

both

strategy of divide

solution to this problem,

proceedings

in the

one

should

This

will enable attention to be

have been

demerits of

directed all

the claims

distraction of

along

against the

conceivable double or

namely, to

court,

district court, where jurisdiction over both

exists.

and conquer.

here the

actions plainly

directed where it

to

the merits

appellees, without

or

the

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

brought up

court why

the

preference

to the district

claims

court from the

should

not

be

bankruptcy court

and

either abandoned

consolidation with the

or

dismissed

lien claim.5

or

The

else

continued

in

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

The district court

beneficiary will be Congress Credit.

may, but need not, allow

be resolved by the bankruptcy judge

-11-

that inquiry to

if it thinks this is the

either

they

dismiss the preference

claims if it

lack viability (assuming

done so, see

___

the bankruptcy court

n.5) or allow the

consolidated proceeding

determines that

has not

trustee to pursue them

in the district

in a

court together with

the lien diversity action.

The

power of the district court to consolidate the

preference actions now

pending in the bankruptcy

the

lien

instant diversity

action rests

withdraw a case from the bankruptcy

28

U.S.C.

157(d) (1988).

necessary in

Inc., 143
____

B.R. 114, 117 (N.D. Ill.

its power

to

court "for cause shown."

Courts have

analogous instances.

on

court with

done this

where

See, e.g., In re Sevko,

_________ _____________

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,

_____________

We

part

direct use of

of the

preference

1008-09 (E.D. Pa. 1985) (same).

157(d) not

bankruptcy

claims into

because of any

court,

but

the district

because

court

fault on the

bringing

the

will allow

all

facets of these controversies affecting the same property and

____________________

most efficient way

court may

to proceed.

take charge

Given the nearly four

of and

Alternatively,
resolve that

court to

do

resolve,

or

resolved, the

proceedings so that

inquiry itself.

years of wheelspinning, we

district

have

the district

whatever

is

necessary

status

of

direct the
to

speedily

the preference

appellant's lien claim, either

alone or

in

tandem, can

move ahead

and be

decided without

further

delay.

-12-

the same defendants to be

disposed of by one tribunal having

undoubted jurisdiction and authority.

We

any

reason to

speedily

emphasize that the question of whether there is

continue

resolved at

the

preference

the outset.

claims

To pursue

should

them at

be

the

expense

of the estate

recovery, may

other hand, we

and, potentially, of

be inadvisable and a

do not want to

waste of money.

On the

prejudge the matter.

If the

preference claims still serve a proper

pursued, they

should be pursued

the appellant's

purpose and should be

in the district court

consolidated proceeding together with the lien claim.

in a

We are

confident that the district court, having both matters before

it,

will give

gridlock.

expedited attention

Congress Credit is

to

ending the

existing

entitled to have the merits of

its claims determined without further delay.

The district court's

and

its opinion and order of

this case is remanded

judgment of

April 19,

1993,

June 8, 1994, are vacated, and

to the district court

for proceedings

consistent with this opinion.6

____________________

6.

We treat the

8, 1994 as

district court's opinion and order

an appealable final judgment.

Co. v. Mallis,
___
______

435 U.S. 381, 98

(1978).

-13-

of June

See Bankers Trust

___ _____________

S.Ct. 1117, 55

L.Ed.2d 357