CIT Group Inc. (Del) v. Tyco International Ltd.

UNITED STATES BANKRUPTCY COURT 	NOT FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
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In re:
Chapter 11
CIT GROUP INC.,
Case No. 09-16565 (ALG)
Reorganized Debtor.
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CIT GROUP INC.,
Plaintiff,
-against- 	Adv. Pro. No. 11-2267 (ALG)
TYCO INTERNATIONAL LTD.,
Defendant.
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MEMORANDUM OF DECISION
A P P E A R A N C E S:
SIDLEY AUSTIN LLP
Attorneys for CIT Group Inc.
By: 	Lee S. Attanasio, Esq.
John G. Hutchinson, Esq.
John J. Kuster, Esq.
Nicholas K. Lagemann, Esq.
787 Seventh Avenue
New York, New York 10019
GIBSON, DUNN & CRUTCHER LLP
Attorneys for Tyco International Ltd.
By: 	Marshall R. King, Esq.
Janet M. Weiss, Esq.
Lisa D. Keith, Esq.
200 Park Avenue
New York, New York 10166
ALLAN L. GROPPER
UNITED STATES BANKRUPTCY JUDGE
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Background
Before the Court are two related motions filed as a consequence of this Court’s recent
opinion in CIT Group Inc. v. Tyco Int’l Ltd. (In re CIT Group Inc.), 460 B.R. 633 (Bankr.
S.D.N.Y. 2011), now on appeal. The background can be briefly summarized. Reorganized
Debtor CIT Group, Inc. (“CIT”) and its former indirect parent company, Tyco International Ltd.
(“Tyco”), are parties to a tax agreement (the “Tax Agreement”) that was rejected in CIT’s
prepackaged plan of reorganization (the “Plan”), confirmed on December 8, 2009. After the
rejection, Tyco filed a proof of claim asserting damages in an unliquidated amount, and, after a
standstill period of approximately eighteen months, demanded arbitration proceedings to
liquidate its claim, relying on an arbitration clause in the Tax Agreement. CIT thereupon
commenced the instant adversary proceeding, seeking to subordinate any Tyco claim under §
510(b) of the Bankruptcy Code and to stay arbitration pending a decision on subordination, there
being no dispute that, if Tyco’s claim is subordinated, it would receive no distribution under
CIT’s Plan.
On January 20, 2012, after the Court had issued the above opinion granting summary
judgment to Tyco on the subordination issue and an order had been entered, CIT filed a notice of
appeal and the instant motion to enjoin arbitration proceedings pending a decision on the appeal
[Adv. Pro. No. 11-2267, ECF Nos. 47 & 48]. Tyco responded with a motion to compel
arbitration of its claim [Case No. 09-16565, ECF No. 294]. Following a hearing on the motions
on February 14, 2012, CIT also moved to certify the order appealed from for direct appeal to the
Second Circuit pursuant to 28 U.S.C. § 158(d)(2)(A)(i) and (iii) [Adv. Pro. No. 11-2267, ECF
No. 64]. Tyco filed a response stating that it had no objection to certification pursuant to 28
U.S.C. § 158(d)(2)(A)(iii), which authorizes a direct appeal when doing so “may materially
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advance the progress of the case or proceeding in which the appeal is taken.” [Adv. Pro. No. 11-
2267, ECF No. 65]. The Court is herewith certifying the matter for direct appeal, and it decides
the pending motions as follows.
Discussion
A. 	Arbitrability of Tyco’s Claim
The Court will first address Tyco’s motion to compel arbitration of its rejection damages
claim. Tyco relies on a clause in the Tax Agreement that provides:
Any dispute, controversy or claim arising out of or in connection with this
Agreement [subject to exceptions not relevant here] shall be finally determined
and settled by arbitration in accordance with the CPR Institute 	for Dispute
Resolution 	Rules 	for 	non-Administered 	Arbitration 	(the 	“Rules”) 	by 	three
arbitrators in the County of New York, State of New York. . . . Any decision in
such arbitration shall be final, conclusive and binding upon the parties to the
arbitration . . . .
Tax Agreement § 7.13(a), attached as Exhibit A to Motion to Compel Arbitration [Case No. 09-
16565, ECF No. 294]. CIT has not challenged that the arbitration clause covers Tyco’s claim,
and it does not assert that rejection of a contract in a bankruptcy case also constitutes the
rejection of an agreement to arbitrate a dispute arising out of that contract.1 Instead, CIT’s
argument centers on a clause in Article XII of the Plan, which provides in pertinent part that this
Court
shall retain exclusive jurisdiction (except with respect to matters described under
clause (a) below, as to which jurisdiction shall not be exclusive) over all matters
arising out of or related to the Chapter 11 Cases and the Plan, to the fullest extent
permitted by law, including jurisdiction to:
(a) 	Determine any and all objections to the allowance of Claims;
. . . .
1 It is well established that “rejection of a contract, or even breach of it, will not void an arbitration clause.
. . . Any different conclusion would allow a party to avoid arbitration at will simply by breaching [or rejecting] the
contract.” Madison Foods, Inc. v. Fleming Cos., Inc. (In re Fleming Cos, Inc.), 325 B.R. 687, 693-94 (Bankr. D.
Del. 2005) (citation omitted).
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(d) 	Hear and determine all matters with respect to the assumption or rejection
of any executory contract or unexpired lease to which one or more of the Debtors
is a party or with respect to which the Debtors may be liable, including, if
necessary, the nature or amount of any required Cure or the liquidation of any
Claims arising therefrom.
CIT further contends that permitting an arbitral panel to resolve a claim that derives from a § 365
rejection would “necessarily jeopardize” the objectives of the Bankruptcy Code because such a
claim is “uniquely a creature of the Bankruptcy Code.” Response to Tyco’s Motion to Compel at
5 [Case No. 09-16565, ECF No. 296].
Tyco for its part relies on a separate Plan provision contemplating that claim disputes
remain subject to the same liquidation processes that would have applied absent CIT’s
bankruptcy filing. As CIT’s Plan was a fully prepackaged plan of reorganization, it principally
impaired the financial creditors, and very few creditors were required to file claims. Article VI.A
further provides:
Except as provided otherwise in the Plan or by the order of the Bankruptcy Court,
holders of Claims shall not be required to file proofs of Claim with the
Bankruptcy Court. The amount and validity of any disputed, contingent and/or
unliquidated Claim shall be determined, resolved or adjudicated, as the case may
be, in the manner in which such Claim would have been determined, resolved or
adjudicated if the Chapter 11 Cases had not been commenced; provided,
however, that the Debtors reserve the right to file with the Bankruptcy Court, on
or before the Claims Objection Deadline, an objection to any Claim. The Debtors
shall be authorized to, and shall, resolve all Disputed Claims by withdrawing or
settling such objections thereto, or by litigating to judgment in the Bankruptcy
Court or such other court having jurisdiction the validity, nature, and/or amount
thereof.2
(emphasis added). There are thus two contradictory Plan provisions: Article VI.A, authorizing
liquidation of Disputed Claims in a non-bankruptcy court, and Article XII(d), purporting to give
2 “Disputed Claim” is defined as “any Claim, or any portion thereof, that is not an Allowed Claim or a
Disallowed Claim.” Plan Art. I.B.1.59. Tyco’s claim is thus a Disputed Claim.
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this Court exclusive jurisdiction, “to the fullest extent permitted by law,” with respect to the
liquidation of Disputed Claims arising from the assumption or rejection of executory contracts.
The short resolution of this apparent conflict is that the reservation of exclusive
jurisdiction in this Court, “to the fullest extent permitted by law,” should not be construed in a
manner that is fundamentally at odds not only with another provision of the Plan but also with
the strong “federal policy favoring arbitration agreements.” Moses H. Cone Mem’l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 24 (1983). A bankruptcy court has discretion to refuse to
compel arbitration of core bankruptcy matters, which by their nature implicate interests central to
the bankruptcy process, but only if the bankruptcy court concludes that the Bankruptcy Code
provisions governing the proceeding “inherently conflict” with the text or objectives of the
Federal Arbitration Act (“FAA”), or that arbitration would “necessarily jeopardize” the goals of
the Bankruptcy Code. U.S. Lines, Inc. v. Am. S.S. Owners Mut. Prot. & Indem. Ass’n (In re U.S.
Lines, Inc.), 197 F.3d 631, 640 (2d Cir. 1999). It is the burden of the party opposing arbitration
to show that Congress intended to preclude arbitration of the claim at issue. MBNA Am. Bank,
N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006).3
In this case, CIT has not carried its burden of demonstrating that it should be able to
avoid arbitration as agreed in the Tax Agreement. Despite CIT’s contentions, liquidating the
Tyco claim through arbitration would not conflict with, much less “necessarily jeopardize,” the
goals of the Bankruptcy Code. There is no need in this two-party dispute for “centralized
proceedings,” such as where “complex factual scenario[s] involv[e] multiple claims.” In re U.S.
Lines, 197 F.3d at 641; see also Alan N. Resnick, The Enforceability of Arbitration Clauses in
3 A bankruptcy court generally has no discretion to refuse to compel arbitration of a non-core arbitrable
matter, since the strong presumption in favor of arbitration will generally trump a bankruptcy court’s more limited
interest in adjudicating such issues. Crysen/Montenay Energy Co. v. Shell Oil Co. (In re Crysen/Montenay Energy
Co.), 226 F.3d 160, 166 (2d Cir. 2000). There is no dispute that liquidation of Tyco’s rejection damages claim is a
core proceeding. See 28 U.S.C. § 157(b)(2)(B); Response to Tyco’s Motion to Compel at 7.
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Bankruptcy, 15 AM. B ANK. I NST . L. REV. 183 (2007). There are instances where the bankruptcy
court must reserve jurisdiction notwithstanding the parties’ agreement to arbitrate certain issues;
for example, in this case, there is no dispute that the issue of subordination of Tyco’s claim under
Bankruptcy Code § 510(b) is for the federal courts to decide. By contrast, the determination of
damages in connection with rejection of the Tax Agreement will not require consideration of any
bankruptcy law issues. Nor will the liquidation of Tyco’s claim, if any, delay consummation of
CIT’s Plan, which became effective several years ago. In short, CIT has not shown that there is
anything about arbitration of Tyco’s claim that would “inherently conflict” with or “necessarily
jeopardize” the Plan or the goals of CIT’s reorganization.4
CIT argues that Article XII(d) of the Plan nonetheless binds Tyco to arbitrate its rejection
damages claim. It contends that the Tax Agreement was the only contract rejected in connection
with its prepackaged Plan, and that Tyco was sufficiently aware of the Plan’s provisions to serve
and file a proof of claim. This does not, however, suffice to demonstrate that the Court or Tyco
understood the “exclusive jurisdiction” reservation in Article XII(d) to override the contradictory
provisions of Article VI.A, which generally preserved pre-petition remedies, or that Tyco
knowingly waived its arbitration rights. Under the circumstances, the record does not support
CIT’s claim of waiver. Compare Charter Behavioral Health Sys., LLC v. Managed Health
4 The Ninth Circuit’s recent decision in Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe
Insulation Co.), 2012 U.S. App. LEXIS 1691 (9th Cir. Jan. 30, 2012), offers an example where arbitration of a core
proceeding was not compelled. Thorpe, the debtor, was an asbestos dealer. Continental, one of the debtor’s insurers,
had settled a coverage dispute with the debtor prior to its bankruptcy filing, and the settlement agreement contained
an arbitration clause. Afterwards, contemplating bankruptcy, Thorpe began negotiating with its other insurers and
asbestos claimants to structure a plan of reorganization that included a channeling trust pursuant to § 524(g).
Continental, contending that such actions breached warranties in the settlement agreement, demanded arbitration.
The day before arbitration was to commence, Thorpe filed for bankruptcy. The Ninth Circuit affirmed the
bankruptcy court’s decision to refuse to send the matter to arbitration, holding that “[b]ecause Congress intended
that the bankruptcy court oversee all aspects of a § 524(g) reorganization, only the bankruptcy court should decide
whether the debtor’s conduct in the bankruptcy gives rise to a claim for breach of contract. Arbitration of this case
would conflict with congressional intent.” Id. at *27.
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Network, 277 B.R. 54 (Bankr. D. Del. 2002), with Ernst & Young, LLP v. Baker O’Neal
Holdings, Inc., 304 F.3d 753 (7th Cir. 2002).
Indeed, assuming arguendo that CIT’s interpretation of the Plan is correct and Tyco’s
rejection damages claim is subject to the exclusive jurisdiction of this Court, it is within the
Court’s discretion to abstain from exercising such jurisdiction. The Judicial Code authorizes
discretionary abstention by a bankruptcy court, inter alia, “in the interest of justice.” 28 U.S.C. §
1334(c)(1). The courts have relied on a number of factors when deciding if discretionary
abstention is “in the interest of justice,” including:
(1) the effect or lack thereof on the efficient administration of the estate if a
[bankruptcy] 	court 	recommends 	abstention, 	(2) 	the 	extent 	to 	which 	[non-
bankruptcy] law issues predominate over bankruptcy issues, (3) the difficulty or
unsettled nature of the applicable [non-bankruptcy] law, (4) the presence of a
related proceeding commenced in state court or other non-bankruptcy court, (5)
the jurisdictional basis, if any, other than 28 U.S.C. § 1334, (6) the degree of
relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the
substance rather than form of an asserted “core” proceeding, (8) the feasibility of
severing [non-bankruptcy] law claims from core bankruptcy matters to allow
judgments to be entered in [non-bankruptcy] court with 	enforcement left to the
bankruptcy court, (9) the burden of [the bankruptcy court’s] docket, (10) the
likelihood that the commencement of the proceeding in a bankruptcy court
involves forum shopping by one of the parties, (11) the existence of a right to a
jury trial, and (12) the presence in the proceeding of non-debtor parties.
In re Motors Liquidation Co., 457 B.R. 276, 289 (Bankr. S.D.N.Y. 2011), quoting In re Portrait
Corp. of Am., 406 B.R. 637, 641-42 (Bankr. S.D.N.Y. 2009) (citation omitted).
In this case, abstention would have no adverse effect on the administration of the estate,
as the Plan became effective years ago; non-bankruptcy issues not only predominate, but are
exclusively involved; the issues are wholly remote from the main bankruptcy case; and, most
significantly, the policy in favor of enforcing arbitration clauses counsels in favor of abstention.
Thus, even if the Plan preserved exclusive jurisdiction in this Court to resolve the dispute, and
recognizing that such action should not be taken lightly, the Court has discretion to remit the
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claim to arbitration and does so. See In re BFW Liquidation, LLC, 459 B.R. 757, 777 (Bankr.
N.D. Ala. 2011) (ordering arbitration of pension fund’s claim against debtor notwithstanding
debtor’s objection thereto, because “interests of justice plainly indicate that abstention in favor of
arbitration is warranted in this case pursuant to 28 U.S.C. § 1334(c)(1)”); Alderwoods Grp., Inc.
v. Charter Funerals, Inc. (In re Loewen Grp. Int’l, Inc.), 344 B.R. 727, 731 (Bankr. D. Del.
2006) (granting reorganized debtor’s motion to abstain, pursuant to 28 U.S.C. § 1334(c)(1), and
to refer dispute to arbitration, saying, “[T]he factors that favor abstention are the more
substantive ones: the actions involve only state law issues and their resolution will not have an
effect on the efficient administration of the estate. Further, there is a strong federal policy in
favor of arbitration.” (citations omitted)).
B. 	Stay Pending Appeal
In response to Tyco’s motion to compel arbitration, CIT also moved to enjoin arbitration
pending a final decision on its appeal of the Court’s order granting Tyco summary judgment on
the subordination question. CIT seeks a preliminary injunction under Fed. R. Civ. P. 65, made
applicable by Bankruptcy Rule 7065, instead of a stay pending appeal pursuant to Bankruptcy
Rule 8005, but the standards are substantially the same. Nken v. Holder, 129 S. Ct. 1749, 1761
(2009) (“There is substantial overlap between [the factors governing stay pending appeal] and
the factors governing preliminary injunctions.” (citation omitted)); Silverman v. Nat’l Union Fire
Ins. Co. (In re Suprema Specialties, Inc.), 330 B.R. 93, 94 (S.D.N.Y. 2005) (“In order to obtain a
stay from a Bankruptcy Court order the appellant must make the same showing normally
required for a preliminary injunction or stays of other kinds of orders.” (citation omitted)). A
preliminary injunction order, or a stay pending appeal, will be entered where the movant
demonstrates “(1) that irreparable harm is likely absent an injunction and (2) either (a) a
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likelihood of success on the merits or (b) sufficiently serious questions going to the merits of the
case to make it a fair ground for litigation plus a balance of hardships tipping decidedly in [its]
favor.” Citigroup Global Mkts, Inc. v. VCG Special Opportunities Master Fund Ltd., 598 F.3d
30, 35 (2d Cir. 2010).
In deciding the issue of a stay pending appeal, the following is relevant. The parties
agreed to stay further proceedings to liquidate the Tyco claim pending this Court’s decision on
the question of subordination, and the stay made eminent practical sense. A further stay would
also make sense, but Tyco has refused to consent thereto, asserting that the time it would take
before the appeals were decided would put it at a disadvantage, as witnesses’ memories become
more clouded by the passage of time. A direct appeal to the Court of Appeals would substantially
reduce the appeal period, and the Court is contemporaneously with the issuance of this decision
certifying the matter for direct appeal to the Circuit Court on the ground that a direct appeal
would “materially advance the progress of the case” within the meaning of 28 U.S.C. §
158(d)(2)(A)(iii).
Nevertheless, although a further stay would make practical sense, considered on its merits
as a matter of law, CIT’s motion is insufficient to justify a stay that would extend throughout the
appellate process. As to the first prong of the preliminary injunction standard, CIT asserts that it
would suffer irreparable harm absent an injunction because it would be forced to expend time
and money arbitrating a claim for damages that would have no value if CIT wins on appeal and
Tyco’s claim is subordinated pursuant to § 510(b). However, as Tyco argues, the incurrence of
litigation costs does not ordinarily constitute irreparable harm. E.g., Katz v. I.A. Alliance Corp.,
301 B.R. 781, 781 (S.D.N.Y. 2003); Daniels v. City of New York, 138 F. Supp. 2d 562, 564
(S.D.N.Y. 2001); see also Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 217 (1985) (FAA
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“requires district courts to compel arbitration of pendent arbitrable claims . . . even where the
result would be the possibly inefficient maintenance of separate proceedings in different
forums.”).
CIT also relies on cases finding irreparable harm where a party is compelled to arbitrate a
non-arbitrable dispute. See Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 129 (2d
Cir. 2003) (granting injunction because movant “would be irreparably harmed by being forced to
expend time and resources arbitrating an issue that is not arbitrable, and for which any award
would not be enforceable.” (quotation marks and citation omitted)); ProShares Trust v. Schnall,
695 F. Supp. 2d 76, 80 (S.D.N.Y. 2010) (granting injunction where the parties had not agreed to
arbitrate and could not be compelled to do so under applicable FINRA rules). However, the issue
here is not whether the parties agreed to arbitration – there is no question there was such an
agreement – but whether the Plan requires the Court to exercise exclusive jurisdiction to decide
the dispute. As shown above, there are numerous bases leading to the conclusion that the Plan
creates no such straightjacket under the circumstances of this case.
Turning to the other preliminary injunction factors, the issues that CIT will raise on
appeal are certainly “fair ground for litigation,” as it claims. However, it is not clear that the
balance of hardships will have tilted decidedly in CIT’s favor if it prevails on appeal, as both
parties would incur unrecoverable expenses during an intervening arbitration. As the Court said
in Lawrence v. Wilder Richman Secs. Corp., 417 F. App’x 11, 14 (2d. Cir. 2010) (summary
order), “A party suffers no legally cognizable injury at all, let alone irreparable injury, by being
compelled to engage in arbitration to which he has contractually agreed.”
Nevertheless, under the circumstances, the Court will stay the matter for a sufficient
period to allow the appellate court to decide a motion for a preliminary injunction or a stay, if
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CIT decides to make one. As noted above, Tyco has pointed to no hardship from a stay pending
appeal other than the passage of time. CIT has moved for an order certifying the matter for
immediate appeal to the Second Circuit, Tyco did not object to certification in order to expedite
the appellate process, and this Court is herewith certifying that “an immediate appeal from the
[summary judgment order] may materially advance the progress of the case or proceeding.” 28
U.S.C. § 158(d)(2)(A)(iii); Bankruptcy Rule 8001(f). Since there is uncertainty whether the
Circuit will hear a direct appeal, a limited stay of the arbitration is warranted until such time as
the Circuit Court or the District Court, as the case may be, has an opportunity to rule on any
further motion for a stay. This temporary stay will terminate automatically if CIT does not make
such a motion within twenty days after (i) the appeal is docketed in the Circuit Court or (ii) the
appeal is assigned to a district judge, whichever is relevant after the Circuit Court rules on
certification.
Conclusion
For the reasons set forth above, Tyco’s motion to compel arbitration of claims relating to
the Tax Agreement is granted, and CIT’s motion to enjoin arbitration pending its appeal of the
order entered January 18, 2012 is denied, except that a stay is granted until the issue of
certification is decided and the appellate court has an opportunity to rule on any further stay
motion that CIT may timely file. Tyco’s counsel shall settle an order or orders on three days’
notice regarding the motions; the Court has entered a separate order certifying the direct appeal.
Dated: March 9, 2012
New York, New York
s/Allan L. Gropper
UNITED STATES BANKRUPTCY JUDGE
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