REDONDO CONSTRUCTION CORPORATION v. MORP DEVELOPMENT CORPORATION et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE: 	:
:
REDONDO CONSTRUCTION 	: 	CASE NO. 02-02887 (GAC)
CORPORATION, 	:
:
Debtor 	: 	CHAPTER 11
___________________________________:
:
REDONDO CONSTRUCTION 	:
CORPORATION, 	:
:
Plaintiff 	:
:
v. 	: 	ADV. NO. 04-0016
:
MORP DEVELOPMENT CORP., 	:
FRANCISCO RAMIREZ and 	:
DORAL BANK, 	:
:
Defendants 	:
___________________________________:
DECISION AND ORDER
I. Background
The controversy pending before this Court is a Motion by Doral
Bank 	(“Doral”) 	for 	determination 	of 	whether 	this 	proceeding 	is 	a
core 	proceeding 	(Docket 	#136). 	The 	debtor, 	Redondo 	Construction
Corporation (“Redondo”) filed this adversary proceeding on February
9, 	2004, 	to 	determine 	whether 	Morp 	Development 	Corp.
(“Morp”)(Docket #1), had unlawfully withheld $2,125,511.00, which
Redondo 	alleges 	is 	due 	under 	a 	March 	31, 	2000, 	construction
contract 	between 	Redondo 	and 	Morp. 	Redondo 	then 	filed 	an 	amended
complaint to include Francisco Ramirez and Doral as co-defendants
(Docket #77). On May 4, 2005, Doral filed a motion for withdrawal
of reference in the United States District Court for the District
Case:04-00016-ESL Doc#:142 Filed:07/19/06 Entered:07/19/06 15:59:18 Desc: Main
Document Page 1 of 8

2
of 	Puerto 	Rico. 	On 	June 	13, 	2005, 	this 	Court 	entered 	an 	order
finding that said motion was properly filed in the District Court
(Docket #96).
On March 15, 2006, Doral filed a Motion for Determination of
Core/Non-Core Matters (Docket #136). Doral argues that although the
present adversary proceeding arose because of an alleged violation
of 	the 	automatic 	stay, 	clearly 	a 	core 	proceeding, 	Redondo’s
allegations 	of 	lender 	control 	and 	liability 	are 	non-core
proceedings. 	It 	further 	argues 	that 	because 	this 	matter 	is 	non-
core, 	the 	Court 	needs 	the 	consent 	of 	the 	parties 	to 	enter 	final
judgment. 	Doral 	does 	not 	consent. 	Thus, 	it 	maintains 	that 	this
Court 	has 	to 	make 	a 	determination 	as 	to 	whether 	the 	present
adversary proceeding is a non-core matter. Doral asserts that after
the 	Court 	makes 	such 	a 	determination, 	the 	District 	Court 	can
proceed 	with 	the 	withdrawal 	of 	such 	action. 	Therefore, 	Doral
requests 	that 	the 	Court 	determine 	that 	this 	cause 	of 	action, 	for
lender control and liability, are non-core matters.
On 	May 	31, 	2006, 	Doral 	filed 	a 	Motion 	requesting 	that 	the
Court 	consider 	Docket 	#136 	unopposed 	(Docket 	#138), 	arguing 	that
the Court granted the parties ten days to file their responses to
Doral’s Motion for Determination of Core/Non-Core Matters (Docket
#136) 	and 	no 	opposition 	or 	responses 	were 	filed 	in 	two 	months.
Thus, Doral requests that the Court deem the motion unopposed and
rule accordingly.
On 	June 	30, 	2006, 	Redondo 	filed 	a 	belated 	answer 	to 	Doral’s
Case:04-00016-ESL Doc#:142 Filed:07/19/06 Entered:07/19/06 15:59:18 Desc: Main
Document Page 2 of 8

3
motion 	for 	determination 	of 	core/non-core 	matters 	(Docket 	#141).
Redondo contends that this is a core proceeding because the Amended
Complaint seeks relief against Doral premised on Title 11. Redondo
asserts 	that 	this 	adversary 	proceeding 	falls 	within 	the 	literal
wording 	of 	section 	28 	U.S.C. 	§ 	157(b)(2)(E), 	alleging 	that 	the
proceeds from the sale of the residence are property of the estate
and 	thus 	are 	subject 	to 	turnover 	pursuant 	to 	11 	U.S.C. 	§ 	542(a).
Moreover, 	Redondo 	seeks 	to 	have 	Doral 	held 	in 	contempt 	for
withholding the monies owed to Redondo in violation of 11 U.S.C. §
362(a)(3). 	Redondo 	also 	contends 	that 	it 	is 	seeking 	punitive
damages and sanctions pursuant to 11 U.S.C. § 105.
Likewise, Redondo maintains that Doral ignores the fact that
the Court has already used § 105 as a basis for its order requiring
Doral 	to 	deposit 	15% 	of 	the 	proceeds 	from 	the 	sale 	of 	the
residential units of the projects with the Court. Finally, Redondo
maintains 	that 	the 	present 	adversary 	case 	is 	a 	core 	proceeding
pursuant 	to 	28 	U.S.C. 	§ 	157(b)(2)(A), 	which 	indicates 	that 	core
proceedings 	include 	matters 	concerning 	the 	administration 	of 	the
estate, 	and 	§ 	157(b)(2)(O), 	which 	includes 	as 	core, 	other
proceedings affecting the liquidation of the assets of the estate
or 	the 	adjustment 	of 	the 	debtor-creditor 	or 	the 	equity 	security
holder relationship.
Redondo 	requests 	that 	the 	Court 	determine 	that 	the 	claim
against 	Doral 	is 	a 	core 	proceeding 	and 	that 	the 	Court 	retain
jurisdiction to try the same as part of this adversary proceeding.
Case:04-00016-ESL Doc#:142 Filed:07/19/06 Entered:07/19/06 15:59:18 Desc: Main
Document Page 3 of 8

4
In 	the 	alternative, 	Redondo 	contends 	that 	if 	this 	is 	a 	non-core
proceeding, 	it 	is 	inextricably 	intertwined 	with 	the 	core 	claims
arising from the same operative facts. Therefore, Redondo maintains
that the entire case should be adjudicated in this Court.
II. Discussion
The United States Code provides that “the district court 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.” 28 U.S.C. § 1334(b).
The 	“arising 	under” 	and 	“related 	to” 	concepts 	have 	been
extensively 	discussed 	by 	the 	courts. 	“Arising 	under” 	proceedings
are “those cases in which the cause of action is created by title
11.” In re Middlesex Power Equipment & Marine Inc., 292 F.3d 61, 68
(1st 	Cir. 	2002). 	As 	opposed 	to 	“related 	to,” 	which 	the 	First
Circuit Court of Appeals defines as:
‘potentially 	have 	some 	effect 	on 	the
bankruptcy 	estate, 	such 	as 	altering
debtor's rights, liabilities, options, or
freedom 	of 	action, 	or 	otherwise 	have 	an
impact 	upon 	the 	handling 	and
administration of the bankrupt estate.’
Id.(quoting 	In 	re 	G.S.F. 	Corp., 	938 	F.2d 	1467, 	1475 	(1st 	Cir.
1991)).
The 	Judicial 	Code 	then 	differentiates 	between 	core 	and 	non-
core proceedings. The Judicial Code includes a non-exhaustive list
of 	core 	proceedings. 	See 	28 	U.S.C. 	§ 	157(b)(2). 	Actions 	“arising
under” 	Title 	11 	are 	referred 	to 	as 	“core” 	proceedings 	and 	are
Case:04-00016-ESL Doc#:142 Filed:07/19/06 Entered:07/19/06 15:59:18 Desc: Main
Document Page 4 of 8

5
specifically referenced in 28 U.S.C. § 157(b)(2) and “related to”
actions are “non-core” proceedings. Mec Steel Bldgs., Inc. v. San
Lorenzo Construction, 136 B.R. 606 at 609 (Bankr. D.P.R. 1992). See
also In re Evarts, 2006 WL 696136 (Bankr. D.N.H. 2006).
The Supreme Court of the United States decided upon the power
of 	bankruptcy 	judges 	to 	decide 	core 	and 	non-core 	proceedings 	in
the 	seminal 	case 	of 	Northern 	Pipeline 	Const. 	Co. 	v. 	Marathon
Pipeline Co., 458 U.S. 50 (1982). This case involved an adversary
proceeding brought by a debtor-in-possession seeking damages for an
alleged 	pre-petition 	breach 	of 	contract. 	The 	Supreme 	Court 	held
that 	the 	proceeding 	could 	not 	be 	finally 	adjudicated 	by 	the
bankruptcy court. The Court explained that while the restructuring
of 	debtor-creditor 	relationships 	is 	at 	the 	core 	of 	the 	federal
bankruptcy power, the adjudication of state-created private rights
is not. Id. at 71.
The 	First 	Circuit 	defined 	non-core 	proceedings 	as 	“claims
‘concerned 	only 	with 	state 	law 	issues 	that 	did 	not 	arise 	in 	the
core bankruptcy function of adjudicating debtor-creditor rights,’”
referring to them as “Marathon-type suits.” 	Arnold Print Works v.
Apkin 	(In 	re 	Arnold 	Print 	Works), 	815 	F.2d 	165, 	167 	(1st 	Cir.
1987)(quoting 	130 	Cong. 	Rec. 	H1848 	(daily 	ed. 	March 	21,
1984)(statement of Representative Kindness)). 	The court ruled that
bankruptcy courts were empowered to finally determine suits filed
by 	an 	estate 	representative 	to 	collect 	debts 	arising 	after 	the
commencement of the bankruptcy case, but not empowered to finally
Case:04-00016-ESL Doc#:142 Filed:07/19/06 Entered:07/19/06 15:59:18 Desc: Main
Document Page 5 of 8

6
determine 	suits 	relating 	to 	debts 	arising 	before 	commencement 	of
the case. Arnold Print Works v. Apkin, 815 F.2d at 168. While the
former was deemed to be core, the latter was deemed non-core. Id.
The court based its decision on Marathon stating that: “[n]on-core
proceedings, those that the statute calls ‘related to’ bankruptcy
cases, concern aspects of the bankruptcy case that Marathon barred
non-Article III judges from determining on their own.” Id. at 167.
In 	another 	case, 	in 	which 	the 	bankruptcy 	court 	had 	to
determine 	if 	a 	pre-petition 	action 	was 	deemed 	a 	core 	or 	non-core
proceeding, the court held that: “[i]f an action survive[s] outside
of 	bankruptcy, 	and 	in 	the 	absence 	of 	bankruptcy 	would 	have 	been
initiated 	in 	a 	state 	or 	district 	court, 	then 	it 	clearly 	involves
non-core 	matter.” 	Mec 	Steel 	Bldgs., 	Inc. 	v. 	San 	Lorenzo
Construction, 136 B.R. at 609.
Mec Steel involved a claim by the debtor for the collection of
accounts 	receivable. 	The 	debtor 	argued 	that 	this 	involved
administration of the estate and the turning over of the property
of 	the 	estate, 	both 	core 	proceedings 	under 	28 	U.S.C 	§ 	157(b)(2).
The court in Mec Steel concluded that:
[a]ctions initiated in the bankruptcy court to
collect 	pre-petition 	account 	receivables 	are
clearly 	non-core 	matters 	and 	should 	not 	be
considered 	as 	matters 	affecting 	the
administration 	of 	the 	estate 	or 	actions 	for
the 	turnover 	of 	property 	of 	the 	estate 	in
order to categorize them as core.
Mec Steel Bldgs., 136 B.R. at 609.
Likewise, in Goya Foods v. Unanue-Casal, the court stated:
Case:04-00016-ESL Doc#:142 Filed:07/19/06 Entered:07/19/06 15:59:18 Desc: Main
Document Page 6 of 8

7
[t]he 	contract 	validity 	question 	is 	not 	core
to 	the 	bankruptcy 	proceeding. 	Even 	where 	the
action 	“will 	drastically 	affect 	both 	the
debtor-creditor relationship and the assets of
the 	[e]state” 	it 	cannot 	be 	deemed 	a 	core
proceeding 	if 	it 	arises 	prior 	to 	the
bankruptcy 	filing 	and 	involves 	a 	right
independent 	of 	and 	antecedent 	to 	the
bankruptcy filing.
Goya Foods v. Unanue-Casal (In re Unanue-Casal), 164 B.R. 216, 221
(Bankr. 	D.P.R. 	1993). 	See 	also 	Matter 	of 	Candelero 	San 	& 	Gravel,
Inc., 66 B.R. 903, 906 (D.P.R. 1986).
When 	the 	bankruptcy 	court 	makes 	a 	determination 	that 	a
proceeding 	is 	a 	“non-core” 	matter, 	it 	needs 	the 	consent 	of 	the
parties 	to 	enter 	a 	final 	judgment. 	The 	First 	Circuit 	Court 	of
Appeals held that:
[a]lthough 	the 	bankruptcy 	court 	may 	hear 	all
"related-to" 	proceedings 	which 	have 	been
referred 	to 	it, 	whether 	core 	or 	non-core, 	it
may enter a final appealable judgment only if
(i) 	the 	proceeding 	itself 	is 	core, 	viz.,
closely 	intertwined 	with 	and 	integral 	to 	the
bankruptcy 	court's 	mandate 	to 	administer 	a
bankruptcy 	case; 	or 	(ii) 	the 	case 	or
proceeding 	is 	non-core, 	but 	the 	litigants
nonetheless 	have 	consented 	to 	the 	entry 	of 	a
final 	disposition 	by 	the 	bankruptcy 	court,
rather than by the district court.
In 	re 	Sheridan, 	362 	F.3d 	at 	99-100 	(1st 	Cir. 	2004). 	See 	also
Northern Pipeline Const. Co. v. Marathon Pipeline Co., 458 U.S. at
86-87. 	If 	the 	parties 	do 	not 	consent, 	the 	bankruptcy 	court 	is
powerless 	to 	enter 	final 	judgement 	and 	instead 	must 	submit 	its
proposed 	findings 	of 	fact 	and 	conclusions 	of 	law 	to 	the 	district
court for consideration. In re Sheridan, 362 F.3d at 100.
Case:04-00016-ESL Doc#:142 Filed:07/19/06 Entered:07/19/06 15:59:18 Desc: Main
Document Page 7 of 8

8
The 	present 	adversary 	proceeding 	relates 	to 	a 	pre-petition
breach of contract. The actions for breach of contract and lender
liability do not arise in or under the Bankruptcy Code. The actions
survive 	outside 	of 	bankruptcy 	and 	in 	the 	absence 	of 	bankruptcy
would 	have 	been 	initiated 	in 	local 	court 	or 	district 	court.
Therefore, this Court concludes that this is a non-core proceeding.
Nonetheless, 	Redondo’s 	action 	is 	certainly 	related 	to 	the
bankruptcy case and the Court has jurisdiction over the proceeding
pursuant 	to 	28 	U.S.C. 	§ 	1334(b). 	Doral 	does 	not 	consent 	to 	the
entry of a final order or judgment by the Bankruptcy Court. Thus,
any proposed findings of fact and conclusions of law issued after
trial will be subject to de novo review by the district court. See
Fed. R. Bankr. P. 7012(b) and 9033.
ORDER
WHEREFORE IT IS ORDERED that Doral’s Motion for Determination
of 	Core/Non-Core 	Matters 	(Docket 	#136) 	is 	GRANTED. 	The 	Court
concludes that this is a non-core proceeding.
SO ORDERED.
San Juan, Puerto Rico, this 19th day of July, 2006.
S/Gerardo A. Carlo-Altieri
_____________________________
GERARDO A. CARLO-ALTIERI
Chief, U.S. Bankruptcy Judge
Case:04-00016-ESL Doc#:142 Filed:07/19/06 Entered:07/19/06 15:59:18 Desc: Main
Document Page 8 of 8