
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 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                                         -2-            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.                                         -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  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                                         -4-            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.                                         -5-                      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                                         -6-            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.")                                         -7-            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),                        _______________                                         -8-            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                                         -9-            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.                                         -10-                      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                                         -11-            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.                                         -12-            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).                                         -13-
