REDONDO CONSTRUCTION CORPORATION et al v. PUERTO RICO HIGHWAY AUTHORITY

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: :
:
REDONDO CONSTRUCTION CORPORATION, : Case No. 02-02887 (GAC)
:
Debtor : Chapter 11
___________________________________:
:
REDONDO CONSTRUCTION CORPORATION, :
:
Plaintiff, :
:
v. : Adv. No. 02-0113
:
PUERTO RICO HIGHWAY AND :
TRANSPORTATION AUTHORITY, :
:
Defendant :
___________________________________:
DECISION AND ORDER
The debtor filed this adversary complaint on September 6,
2002, alleging that the Puerto Rico Highway and Transportation
Authority (“PRHTA”) breached six construction contracts, pertaining
to projects that were completed over nine years prior to the filing
of the complaint, by primarily failing to pay for delays, changes
and inefficiencies allegedly caused by PRHTA. The debtor sought
the sum of $14,588,375.36 in incidental and contract damages. The
debtor alleged that the matter was core and requested trial by
jury.
PRHTA initially claimed sovereign immunity to suit, which was
denied by the Court. On June 21, 2004, PRHTA filed an answer to
the eighty-six count complaint, denying all substantive allegations
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“due to insufficient knowledge to form a belief.” PRHTA denied
that the proceeding was a core proceeding “in the event that this
Honorable Court would require an answer to these allegations.”
PRHTA affirmatively alleged that “[a]ny damages claimed, if any,
were caused by Debtor’s own actions, for which the Authority is not
responsible.” PRHTA also alleged that “[e]ven if the Authority
owed any monies to the Debtor, a fact which is denied by the
Authority, the claimed amount by Debtor is incorrect, exaggerated
and speculative.”
In the legal case, PRHTA filed two proofs of claim, seeking
the sum of $10,481,800.00 for construction defects, tort and breach
of contract. The claims were disallowed by the Court because PRHTA
did not file a response to an omnibus motion filed by the debtor
objecting to numerous claims. In the objection to claim, the
debtor merely stated that the sum claimed by PRHTA was not owed.
PRHTA has recently filed a motion for reconsideration, claiming
lack of notice of the objection, to which the debtor has not yet
responded. This matter is not ripe for decision and the
determination of the allowance of PRHTA’s claim is a core
proceeding and will be determined in the legal case.
This adversary proceeding is scheduled for trial commencing on
March 28, 2006. On February 28, 2006, PRHTA filed a motion seeking
a determination that this adversary proceeding is a non-core
proceeding and indicating that it does not consent to a jury trial
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in the bankruptcy court (dkt. #103). PRHTA also filed a motion for
leave to amend its answer to add the affirmative defense of set-off
(dkt. #104). In this motion, PRHTA refers to its proofs of claim,
which it seeks to set-off against any amount claimed by the debtor.
The debtor opposed the motion for a determination that this matter
is non-core and opposed the request to amend the answer, but
acquiesced to a non-jury trial (dkts. #115 and #118, respectively).
The two issues before the Court in this adversary proceeding
are whether this complaint is a core proceeding and whether PRHTA
may amend its answer to the complaint. For the reasons set forth
below, the Court concludes that this adversary proceeding is non-
core and that PRHTA may not amend its answer.
DISCUSSION
Core v. Non-core Proceeding
The debtor’s complaint is for collection of monies related to
six construction contracts, which were completed many years prior
to the filing of the debtor’s bankruptcy petition. The debtor
alleges that the matter is core because the feasibility of its plan
of reorganization depends upon the funds that it seeks to recover
from PRHTA.
The Judicial Code differentiates between core proceedings and
non-core proceedings and includes a non-exhaustive list of core
proceedings, including “matters concerning the administration of
the estate” and “orders to turn over property of the estate.” See
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28 U.S.C. § 157(b)(2). Core proceedings involve rights created by
the Bankruptcy Code, and depend on it for their existence. 28
U.S.C. § 157(b)(2); In re G.S.F. Corp., 938 F.2d 1467, 1475 (1st
Cir. 1991). On the other hand, non-core proceedings are “claims
‘concerned only with State law issues that did not arise in the
core bankruptcy function of adjusting debtor-creditor rights.’”
Arnold Print Works, Inc. v. Apkin (In re Arnold Print Works, Inc.),
815 F.2d 165, 167 (1 Cir. 1987)(quoting 130 Cong.Rec. H1848 (daily	st
ed. March 21, 1984)(statement of Representative Kindness)). Stated
another way, matters which do not involve rights created by federal
bankruptcy law are non-core matters. Mec Steel Bldgs., Inc. v. San
Lorenzo Construction (In re Mec Steel Bldgs., Inc.), 136 B.R. 606,
609 (Bankr. D.P.R. 1992). “If an action would survive outside of
bankruptcy, and in the absence of bankruptcy would have been
initiated in a state or district court, then it clearly involves a
non-core matter.” Id. (citations omitted).
Mec Steel Bldgs. 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
property of the estate, both core proceedings under 28 U.S.C. §
157(b)(2). The court in Mec Steel Bldgs. concluded that “actions
initiated in the bankruptcy court to collect prepetition account
receivables are clearly non-core matters and should not be
considered as matters affecting the administration of the estate or
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actions for the turnover of property of the estate in order to
categorize them as core.” Mec Steel Bldgs. 136 B.R. at 609
(citations omitted). Likewise, actions based on a prepetition
breach of contract are also non-core. See Matter of Candelero Sand
& Gravel, Inc., 66 B.R. 903, 906 (D.P.R. 1986); Ralls v. Docktor
Pet Ctrs., Inc., 177 B.R. 420, 427 (D.Mass.1995)(holding more
expansively that action involving pre-petition contracts, allegedly
breached both before and after the filing of the petition, is
entirely a non-core matter related to a case arising under Title
11).
In the present case, the debtor’s action is based on a
prepetition breach of contract and seeks to recover monies
allegedly owed. Based on Mec Steel Bldgs., Candelero Sand & Gravel
and Ralls, this Court concludes that this adversary proceeding is
a non-core matter.
Nonetheless, the debtor’s action is certainly related to the
bankruptcy case. In order for the bankruptcy court to have
jurisdiction over a related proceeding, the action must
“‘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 bankruptcy estate.’” In re G.S.F. Corp., 938
F.2d at 1475 (quoting In re Smith, 866 F.2d. 576, 580 (3 Cir.	rd
1989)). The debtor’s claims against PRHTA impact the
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administration of the bankruptcy estate, as PRHTA recognizes, and
thus this adversary is a related proceeding, over which this Court
has jurisdiction.
PRHTA 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. While PRHTA has argued that this is potentially
a huge waste of judicial and financial resources, PRHTA could have
invoked the district court long ago to withdraw the reference of
this proceeding pursuant to Fed. R. Bankr. P. 5011. As it stands,
this Court has jurisdiction over the proceeding and the trial will
proceed.
Amendment of Affirmative Defenses
One month before trial, PRHTA seeks to amend its answer to
assert an affirmative defense of setoff. PRHTA refers to its
proofs of claim, which it seeks to setoff against any amount
claimed by the debtor. In the first instance, PRHTA’s claims
against the estate are presently disallowed. Moreover, PRHTA has
already alleged in its affirmative defenses to the debtor’s
complaint that “[a]ny damages claimed, if any, were caused by
Debtor’s own actions, for which the Authority is not responsible.”
PRHTA also alleged that “[e]ven if the Authority owed any monies to
the Debtor, a fact which is denied by the Authority, the claimed
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amount by Debtor is incorrect, exaggerated and speculative.” These
allegations are sufficiently broad to allow PRHTA to introduce
evidence as to alleged construction defects or the debtor’s alleged
breach of contract.
Furthermore, setoff is not an affirmative defense but a
counter-claim which a defendant holds against a plaintiff, arising
out of transactions which are extrinsic to the plaintiff’s cause of
action. See United Structures of America, Inc. v. G.R.G.
Engineering, S.E., 9 F.3d 996, 998 (1st Cir. 1993). Setoff
involves mutual debts arising from unrelated transactions. PRHTA
has not stated that it seeks to include a counter claim against the
debtor one month before trial and clearly PRHTA’s claims do not
arise out of transactions which are extrinsic to the debtor’s
causes of action.
PRHTA is in effect seeking recoupment. This doctrine
“‘allows a defendant to “defend” against a claim by asserting–up to
the amount of the claim–the defendant’s own claim against the
plaintiff growing out of the same transaction.’” F.D.I.C. v.
Kooyomjian, 220 F.3d 10, 14 (1 Cir. 2000)(quoting Bolduc v. Beal	st
Bank, SSB, 167 F.3d 667, 672 (1 Cir. 1999)). To qualify for	st
recoupment, both the primary claim and the claim in recoupment must
involve the same parties and arise out of the same transaction.
Kooyomjian, 220 F.3d at 14 (citations omitted). “Recoupment is not
expressly regulated by the Bankruptcy Code; some courts even find
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recoupment unaffected by the automatic stay.” United Structures of
America, Inc., 9 F.3d at 998 (citations omitted).
Should PRHTA’s claims be allowed in the legal case and should
the debtor ultimately obtain a recovery against PRTHA in this
adversary proceeding, PRHTA may assert its defense of recoupment.
Accordingly, PRHTA’s request to amend its answer will be denied.
ORDER
WHEREFORE IT IS ORDERED that this is a non-core proceeding.
IT IS FURTHER ORDERED that PRHTA’s motion for leave to amend
its answer to add an affirmative defense of setoff (dkt. #104) is
DENIED.
SO ORDERED.
San Juan, Puerto Rico, this 20th day of March, 2006.
BY THE COURT:
/s/ Gerardo A. Carlo
_______________________
GERARDO A. CARLO
U.S. Bankruptcy Judge
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