Gavilon Grain LLC v. Rice
ORDER: The bankruptcy court's order denying Gavilon's motion to compel arbitration, No. 31 in No. 2:16-ap-1149, is reversed and the matter is remanded with instructions: The bankruptcy court must stay the trustee's adversary proceeding against Gavilon and compel arbitration of the five state law claims. Thereafter, the trustee can pursue turnover in the bankruptcy court if need be. Signed by Judge D. P. Marshall Jr. on 8/16/2017. (jak)
IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF ARKANSAS
GAVILON GRAIN LLC
M. RANDY RICE, as Chapter 7 Trustee
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 emichment, 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-versusbankruptcy 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 emichment, which echo the alleged breaches. Count 5 is a
stand-alone claim for unjust enrichment that seeks a pproxima tel y $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." Ng 7-1 at ii 83. 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. Ng 7-2 at
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.
·Here is an example: "Controversies and/ or other disagreements between
Buyer and Seller arising under this Contract shall be settled by arbitration which
shall be a condition precedent to any right of legal action that either Buyer or
Seller may have against the other party. Any arbitration shall be in accordance
with the rules of the National Grain and Feed Association [NGFA]. At the time
notice of arbitration is served by either Buyer or Seller upon the other, (i) if either
is a member of the NGFA, the NGFA Arbitration Committee shall serve as the
arbitrator; (ii) if neither is a member of the NGF A, the American Arbitration
Association shall serve as the arbitrator." NQ 7-2 at 7.
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.
Ng 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 Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987)
framework to resolve the tension between the FAA 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
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 FAA' s mandate: 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." Ng 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 nova, 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 11U.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
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. Concepcion, 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
Xis my property does not make it so. The turnover statute says, with the key
(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.
11U.S.C.§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
words. The statute doesn't speak of alleged debts.
The companion statutory provision about the bankruptcy court's power
in this area makes the same point from another direction. That court is
authorized to enter final orders to turnover property of the estate[.]" 28 U.S.C.
§ 157(b)(2)(E). Compare other parts of this section, which speak (variously) of
proceedings to determine, avoid, or recover" preferences and
fraudulent conveyances, as well as determinations of the validity, extent, or
priority of liens[.]" 28 U.S.C. § 157(b)(2)(F), (H) & (K) (emphasis added) . Of
course some court activity comes before every order. But the law discerns a
provision's meaning partly through the surrounding provisions. United Savings
Association of Texas v. Timbers ofInwood Forest Associates, 484 U.S. 365, 371 (1988) .
And these companion parts of the text indicate plenary bankruptcy court
power in some areas, and limited power in others, such as turnover.
Third, the legislative history of § 542 does not suggest an intention to
eliminate arbitration in any dispute where the trustee seeks recovery of
property or money that supposedly belongs to the estate. The bankruptcy
court recognized this point in passing, but didn't explore it. Turnover came
into the Bankruptcy Code in the 1978 Act, which encouraged reorganization.
United States v . Whiting Pools, Inc., 674 F.2d 144, 150-52 & n .13 (2d Cir. 1982),
affirmed, 462 U.S. 198 (1983). As Judge Friendly's summary of the legislative
history shows, the trustee's turnover power was designed in part to help keep
the reorganizing business going and its cash flowing. Whiting Pools, 674 F.2d
at 152-55. The Supreme Court specifically noted that the reorganization
context" in Whiting Pools informed its analysis of § 542(a), while reserving
judgment on whether that provision has the same broad reach in liquidation
proceedings. 462 U.S. at 208 n.17. The genesis of§ 542 isn't determinative, of
course. It's informative, though, in construing the statute's reach in general
and the reach of§ 542(b) in particular. Turner isn't reorganizing; it is being
liquidated. That context suggests a narrower reading of§ 542(b).
Fourth, the trustee's § 542 right to seek turnover, and the bankruptcy
court's§ 157 power to order it, must be read to avoid constitutional difficulties.
This Court must avoid an interpretation of a federal statute that engenders
constitutional issues if a reasonable alternative interpretation poses no
constitutional question." Gomez v. United States, 490 U.S. 858, 864 (1989).
Drawing the core/ non-core line is famously difficult. Stern v. Marshall, 564 U.S.
462 (2011); Northern Pipeline Construction Company v. Marathon Pipe Line
Company, 458 U.S. 50 (1982).
Notwithstanding the difficulty, or perhaps partly because of it, Article III
requires courts to use great care in drawing this line. The bankruptcy court's
conclusion that the trustee's claims against Gavilon are a core matter means
that the bankruptcy court would have the last word in deciding those disputed
contract claims. That court would give the final answer to these state law
There would be no recommendation to this Court with the
opportunity for de nova review. Wellness International Network, Ltd. v. Sharif 135
S. Ct. 1932, 1940 (2015). And that interpretation of§ 542 needlessly raises a
does the Constitution allow Congress to give the
bankruptcy court this authority? Compare Stern, 564 U.S. at 503, and Northern
Pipeline, 458 U.S. at 87. While Northern Pipeline arose in the context of the 1978
Act, the case's holding was about Article III.
That narrow but important
holding was common ground in Stern: "Congress may not vest in a non-Article
III court the power to adjudicate, render final judgment, and issue binding
orders in a traditional contract action arising under state law, without consent
of the litigants, and subject only to ordinary appellate review." Stern, 564 U.S.
at 494 (opinion of Roberts, C.J.) & 510 (Breyer,
Neither the parties nor the bankruptcy court addressed the
constitutional issue created by holding that the Turner/Gavilon dispute is a
proper turnover action.
If a trustee is pursuing property where the estate's right is undisputed,
and the proceeding is about putting a number on that debt and getting the
money, that's surely a core matter under§ 542. No one disputed, for example,
that the McCarty Ranch Trust's notes to the Cassidy Land and Cattle Company
were in default, and were fully matured by acceleration, so the bankruptcy
court had authority to foreclose the mortgage and order proceeds turned over
to pay these debts. In re Cassidy Land and Cattle Company, Inc., 836 F.2d 1130,
1131 (8th Cir. 1988). At the other pole is the unjust enrichment claim arising
from the cattle operation in the Falzerano case. The parties' disputes were about
bills for taking care of the cattle, rent for some pasture, and net pre-petition
profits from the operation. Sorting out that alleged debt, on the quasi-contract
claim for unjust enrichment, was not within the reach of § 542(a). In re
Falzerano, 686 F.3d 885, 886 (8th Cir. 2012). The estate's property interest was
too unsettled to qualify. As the Court of Appeals pointedly noted, in general,
are not to be used to liquidate disputed contract
claims" - and [a]dhering to this limitation seems essential after the Supreme
Court's recent decision in Stern v. Marshall, [564 U.S. 462] (2011)."
Falzerano, 686 F.3d at 887 & n.2.
Fifth, the trustee's complaint against Gavilon makes claims that are too
indefinite and uncertain to qualify as a bona fide turnover action. Recall Count
6, which seeks the turnover of $14 million. It is a tent for the five substantive
claims. The trustee pleaded that this total is the mature debt Gavilon owes the
estate. This is a conclusion, not facts showing a solid property right that would
support a solid turnover claim.
Turning from form to substance, the answer is the same. By their nature,
unjust enrichment claims are fuzzy and flexible.
United States v. Applied
Pharmacy Consultants, Inc., 182 F.3d 603, 606-09 (8th Cir. 1999); RESTATEMENT
(THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 1, comment a (2011). On
these matters of quasi-contract, there's almost always a dispute on liability, and
there's no certainty until some adjudicator decides that the law implies a
contract to prevent unjustified enrichment. QHG of Springdale, Inc. v. Archer,
2009 Ark. App. 692, 9-11, 373 S.W.3d 318, 324-25 (2009) (en bane). Gavilon's
three unjust enrichment claims partake of this uncertainty. If the parties'
contracts about destination-change freight charges, corn delivered but not paid
for, priority of contracts to be filled, and cancellation can't be enforced for some
reason, then the nice questions that appeal to the law's conscience will arise.
Falzerano' s teaching is that those questions are generally not for answering in
a turnover case. 686 F.3d at 887-88.
The trustee's contract claims are similarly disputed. They exclude the
cancellation issues, but raise all the other matters just described. The unpaid
bills for grain shipped and the unpaid delivery charges are essentially
receivables on Gavilon' s account. Whether there was some breach in leaving
some contracts open and closing others is a state law matter, too. Gavilon has
not agreed that it owes anything on various claims asserted. If it had, and if the
dispute were merely about how much, then the trustee would have a stronger
case for turnover. Compare In re Cassidy, 836 F.2d at 1131, with In re Charter
Company, 913 F.2d 1575, 1579 (11th Cir. 1990). The trustee and Gavilon are not
in that middling situation, though.
Section 542(b) speaks of the estate's property in a "matured" debt. The
Department of Health and Human Services v. Smith, 807 F.2d 122, 124 (8th Cir.
1986). Gavilon' s obligations to the estate, the trustee alleged and argues, are
mature because Turner fully performed by shipping the grain. Unlike the
buyers in the Total Transportation case, however, Gavilon has not agreed that
Turner fully performed. Compare In re Total Transportation, Inc., 87 B.R. 568,
574-75 (D. Minn. 1988). On the freight charges, for example, the trustee
acknowledges that the parties dispute why Turner changed delivery locations.
Was it for Turner's convenience, or atGavilon's direction? Ng 8 at 21-22. And
Gavilon doesn't agree that it failed to pay for corn delivered; Gavilon argues
instead that it paid all the money it owed. Ng 8 at 31-32.
The neighboring words in§ 542(b) that describe what debts are subject
to turnover are sidelights on what Congress meant by "matured." Utility
Electric Supply Inc. v. ABB Power T & D Co., Inc., 36 F.3d 737, 740 (8th Cir. 1994).
Turnover of debts
payable on demand" and
payable on order" covers
situations where the obligations are strong and clear, not uncertain. In Cassidy,
the entire debt on the note was payable because of the undisputed default. 836
F.2d at 1132-33. That obligation was clear; and so the turnover action was
But the debt need not be liquidated. Gavilon is mistaken in arguing to the
contrary. As the bankruptcy court pointed out, that word appears in other
Code provisions, but not in§ 542(b). The reasonable inference is that Congress
made choices in using this qualifying word or not. Requiring the amount of
debt to be liquidated - what the word book describes as settled or determined,
especially by agreement" - moves too far from the statute's text. BLACK'S LAW
(10th ed. 2014). If a third party's liability on a debt is clear,
then turnover is a proper vehicle for the trustee, even if the bankruptcy court
must determine the exact amount owed. In re Cassidy, 836 F.2d at 1132-33.
On the record presented, the turnover statute does not require the reading
adopted by the bankruptcy court. If these alleged debts are mature enough to
be property of the estate, then almost every receivable will be, notwithstanding
disputes about whether the debt exists. Granting the many efficiencies that
could be gained by finally adjudicating all these kinds of matters in the
bankruptcy court, this reading of§ 542(b) raises constitutional difficulties that
can be avoided. As the leading commentator notes, construing § 542(b) so
broadly would obliterate Northern Pipeline's holding about Article III' s
mandate. 1-3 COLLIER ON BANKRUPTCY
i-i 3.02 (16th ed. 2017).
Sixth, the Court is unpersuaded by the trustee's alternative arguments.
Gavilon didn't waive its right to seek arbitration by filing a claim early in the
case. The bankruptcy court has authority to finally adjudicate that claim,
including to decide any intertwined issues, even if they involve (for example)
destination-change charges, cancellation, or the like. 28 U.S.C. § 157(b)(2)(B).
The bankruptcy court's general authority under§ 157(b)(2)(A) and (0) does not
salvage this adversary proceeding either. The Court of Appeals has cautioned
that these two" catchall" provisions must be read narrowly. In re Cassidy, 838
F.2d at1132. To deny arbitration here because the trustee's claims are "matters ·
concerning the administration of the estate" or "proceedings affecting the
liquidation of the assets of the estate" would effectively erase the core/ non-core
line, as well as break faith with the Supreme Court's pro-arbitration decisions.
The trustee's substantive claims againstGavilonmust be arbitrated by the
National Grain and Feed Association. Adjudicating whether Gavilon owes any
debts that are property of Turner's chapter 7 estate is non-core. As the
bankruptcy court noted, the weight of authority favors enforcing arbitration
agreements that cover non-core matters. The bankruptcy court, therefore, is not
the only place where the debt question can be answered.
undisputed pre-petition arbitration agreements cover the trustee's contract and
unjust enrichment claims. There is no irreconcilable conflict between the
trustee's statutory right to turnover (eventually) of a matured debt that is the
property of Turner's estate and having an arbitration to resolve the
Gavilon/ trustee dispute about whether any such debt exists. If one does, and
Gavilon doesn't pay it, then the trustee can seek turnover and the bankruptcy
court can order it. The bankruptcy court's concerns about limited discovery
and cost will be present to some extent in every arbitration. They are not
weighty enough here to tilt the balance against the alternative forum. While
this Court has no doubt that the bankruptcy court could ably unravel the
Turner/ Gavilon knot, those parties agreed to another forum, and the
substantive claims asserted by the trustee are insufficiently definite in terms of
liability to be within the turnover statute's reach at this point.
The bankruptcy court's order denying Gavilon' s motion to compel
arbitration, N2 31 in No. 2:16-ap-1149, is reversed and the matter is remanded
with instructions: The bankruptcy court must stay the trustee's adversary
proceeding against Gavilon and compel arbitration of the five state law claims.
Thereafter, the trustee can pursue turnover in the bankruptcy court if need be.
D .P. Marshall Jr.
United States District Judge
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