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Gavilon Grain LLC v. Rice

United States District Court, E.D. Arkansas, Eastern Division

August 16, 2017



          D.P. Marshall Jr. United States District Judge.

         1. Should Turner's contract-based disputes with Gavilon be arbitrated, as those parties agreed, or handled by the bankruptcy court in a turnover action, as the trustee for Turner's bankruptcy estate strongly urges? Turner was a grain broker. Among other things, it bought corn, rice, and soybeans from farmers and re-sold the grain to Gavilon and others. Gavilon was among Turner's largest customers. When Turner's business started wobbling from liquidity problems, the company sought to reorganize under the bankruptcy protections of chapter 11. The case was, in due course, converted to a chapter 7 liquidation proceeding. The trustee for Turner's estate is vigorously pursuing his statutory duties to gather, liquidate, and distribute Turner's assets for the benefit of the company's many creditors.

         The trustee has filed almost fifty adversary proceedings, including this one against Gavilon, which has generated the current disagreement about where the Turner/Gavilon disputes will be resolved. The trustee pleaded six claims -two for breach of contract, three for unjust enrichment, and one for turnover of all the money Gavilon owes Turner based on the first five claims.

         The particulars of those underlying claims bear on the arbitration-versus-bankruptcy dispute. Count 1 alleges that Gavilon broke the parties' contracts by not paying for approximately $2.5 million of corn that Turner actually shipped and by not paying for extra freight charges incurred by Turner on other shipments when Gavilon changed delivery locations. The extra freight charges are, the trustee says, an approximately $6 million issue. Count 2 alleges another breach: leaving open older contracts with higher grain prices, while paying on newer ones at lower prices. Gavilon allegedly owes the bankruptcy estate $3.5 million on this score. Counts 3 and 4 make fallback claims for unjust enrichment, which echo the alleged breaches. Count 5 is a stand-alone claim for unjust enrichment that seeks approximately $2 million for Gavilon's cancellation of contracts. In Count 6, the trustee realleged all the facts and invoked 11 U.S.C. § 542, which, with immaterial exceptions, empowers the trustee to seek turnover from third parties of property of the bankrupt's estate, including certain debts. "At the time of the commencement of this Bankruptcy Case/' pleaded the trustee, "for its actions, Gavilon owed Turner Grain a mature debt of not less than $14 million." No 7-1 at83. The trustee notes that this is the estate's largest potential asset.

         Gavilon responded with a motion to dismiss and compel arbitration. It denied any liability. No 7-2 at ¶ 11. Each of the Turner/Gavilon contracts contained a provision requiring that all related disputes be arbitrated by the National Grain and Feed Association. Gavilon points out that this group has been resolving these kinds of disputes for more than a century. The parties stipulated that these arbitration provisions were enforceable. The parties also agreed that, though their terms varied a bit, [*] these provisions covered all Gavilon's claims against Turner. Relying on these undisputed prepetition agreements to arbitrate, and the strong federal policy favoring arbitration embodied in the Federal Arbitration Act, Gavilon pressed the arbitral forum. The trustee countered with turnover. It is, he emphasized, an essential tool for gathering the debtor's property; and the United States Code denominates "orders to turn over property of the estate[]" as "core proceedings arising under title 11, " which are within the bankruptcy court's exclusive jurisdiction. 28 U.S.C. § 157(b)(1) & (2)(E).

         The bankruptcy court received full briefing, heard oral argument, and gave a thorough bench ruling agreeing in general with the trustee's position. No 7-7. The court acknowledged the parties' common ground: the arbitration provisions apply and, but for the bankruptcy, they must be enforced. The court applied the Shear son/American Express, Inc. v. McMahon, 482 U.S. 220 (1987) framework to resolve the tension between the F AA and the Bankruptcy Code's turnover provision. The court recognized the deeply divided decisions on whether pre-petition accounts receivable are core or non-core matters under the Code. The court concluded that the trustee's complaint-in substance, if not form-presented a bona fide claim for turnover of a matured debt, a core proceeding. The court rejected Gavilon's argument (and supporting authorities) that, to qualify as estate property, Turner's claim had to be liquidated or undisputed. Because the trustee's turnover right springs from the Bankruptcy Code, the court saw an inherent conflict with the FAA. The court recognized that the trustee had the burden of showing that Congress intended in the Code to override the F AA's manDated: enforce arbitration agreements just like any other contract. If Congress intended to limit or prohibit waiver of the bankruptcy forum for the turnover claim, then that intention would appear in the Code's text or legislative history or in the "inherent conflict between arbitration and the statute's underlying purposes." No 7-7 at 37 (quoting McMahon, 482 U.S. at 227).

         The court found no such intention in the words of the Code's turnover provision about debts. And it found none in the legislative history of that part of the Code. The court looked to the general legislative history of the Bankruptcy Code as glossed in the cases. The court noted four purposes that would be compromised if a turnover action had to be arbitrated: centralized resolution of purely bankruptcy issues; the need to protect creditors from piecemeal litigation; the court's undisputed power to enforce its own orders; and speedy resolution, either by rehabilitating debtors or liquidating their assets. Exercising its discretion, the court held that it should handle the Turner/Gavilon dispute for several reasons. It could probably do so more quickly than an arbitrator; no expertise beyond basic accounting was required; and arbitration would harm creditors - the lack of discovery would hobble the trustee, who is a stranger to the underlying transactions, and the cost would mean less for creditors (eventually) in this administratively insolvent estate.

         Gavilon has appealed. The trustee elected to have this Court decide the appeal. The legal questions are reviewed de novo, the judgment calls for abuse of discretion. In re AFY, Inc., 461 B.R. 541, 545-46 (8th Cir. BAP 2012); In re Canal Street Ltd. Partnership, 269 B.R. 375, 379 (8th Cir. BAP 2001). Of course a court that makes a legal error abuses its discretion. Kern v. TXO Production Corporation, 738 F.2d 968, 970 (8th Cir. 1984).

         2. Notwithstanding the care the bankruptcy court took in considering the tangled issues presented, a foundational legal error undermines the court's decision. The parties have several rather ordinary contract-related disputes. Liability isn't agreed or otherwise locked in. There's no mature debt at this point. So there's no work for the turnover power to do yet. The bankruptcy court's expansive reading of 11 U.S.C. § 542(b) creates an Article III issue that should be avoided, if possible, and can be avoided by reading the statute more narrowly. And the bankruptcy court's error about the nature of the trustee's claim led to an incorrect balancing of the material considerations about the forum.

         First, the FAA heralds the robust federal policy favoring arbitration agreements. The bankruptcy court noted this law but moved past it quickly. "A written provision in ... a contract . . . involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. In an unmistakably strong line of cases in the last three decades, the Supreme Court has implemented this pro-arbitration policy, turning back almost every effort to temper it. E.g., American Express Company v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013); CompuCredit Corp. v. Greenwood, 565 U.S. 95 (2012); AT&T Mobility LLC v. Conception, 563 U.S. 333 (2011); Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000); Gilmer v. Interstate/Johnson Lane Corporation, 500 U.S. 20 (1991). For example, the Gilmer Court found the ADEA and FAA harmonious: If the parties agreed to it, arbitration of ADEA claims can be compelled, despite the ADEA's statutory right to sue about violations "in any court of competent jurisdiction/' 500 U.S. at 26-29, 35. The FAA contemplates the possibility of non-enforcement, but only on grounds that would revoke any other contract. The sum of all this, the Court concludes, is that when an otherwise enforceable arbitration agreement-like those here - is in play, a tie goes to the runner.

         Second, the text of the turnover statute doesn't indicate that Congress intended to eliminate arbitration in every circumstance where the trustee is seeking to recover an alleged debt to the estate. If disputed, my contention that X is my property does not make it so. The turnover statute says, with the key words emphasized:

(a) Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
(b) Except as provided in subsection (c) or (d) of this section, an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee, except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor.

11 U.S.C. ยง 542(a)-(b). The trustee's turnover power is limited to "debt[s] that [are] property of the estate[.]" The obligation must be definite and certain: matured, payable on demand, or payable on order -these are the Code's ...

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