Opinion
Case No. 02-48396-DML-11, Adversary No. 03-4128.
February 4, 2004
CORRECTED REPORT AND RECOMMENDATION
TO THE HONORABLE JOHN McBRYDE, UNITED STATES DISTRICT JUDGE.
Comes now Dennis Michael Lynn, bankruptcy judge and makes this, his corrected report and recommendation regarding the motion of Phillip Shepherd, Defendant, seeking withdrawal of the reference of the above styled adversary proceedings pursuant to 28 U.S.C. § 157(d) (the "Motion").
Your bankruptcy judge held status conferences on the Motion and related matters on August 4 and December 19, 2003. Your bankruptcy judge previously held that this adversary proceeding is subject to the core jurisdiction of this Court in a memorandum opinion ("Lorax I"), a copy of which is attached hereto as Appendix A. Leave to appeal the bankruptcy court's decision in Lorax I was denied by order of the District Court dated December 22, 2003.
Your bankruptcy judge therefore concluded that disposition of the Motion turned on whether Defendant is entitled to a jury trial. For the reasons stated in that corrected memorandum opinion attached hereto as Appendix B ("Lorax II"), your bankruptcy judge believes Defendant is not entitled to a jury trial of this adversary proceeding.
Accordingly, based on the reasoning set fort in Lorax I and Lorax II, your bankruptcy judge recommends the Motion be denied.
Appendix "A"
IN RE: CASE NO. 02-48396-DML-11 LORAX CORPORATION Debtor.
SHAWN K. BROWN, AS TRUSTEE ADVERSARY NO. 03-4128 FOR THE LORAX CORPORATION Plaintiff, v. PHILLIP SHEPHERD, AS TRUSTEE OF THE GREENWALL LIQUIDATION TRUST, Defendant.
REVISED MEMORANDUM OPINION AND ORDER
This revised Memorandum Opinion and Order is in substitution for the original filed on June 25, 2003. It does not affect the outcome of the case.
Before this court is Defendant's motion to abstain and dismiss (the "Motion"). The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(3).
I. BACKGROUND
Debtor is the purported lessee of real property and improvements located in Athens, Texas (the "Property") pursuant to a lease agreement between E. Herbert Gatlin ("Gatlin"), Defendant's predecessor as trustee of the Greenwall Liquidating Trust (the "Greenwall Trust"), and Debtor (as amended, the "Lease Agreement"). The Greenwall Trust was created to hold title to the Property as part a settlement between the Texas Natural Resource Conservation Commission (the "TNRCC"), a predecessor of the Texas Commission on Environmental Quality, and Curtis Mathes Manufacturing Company ("Curtis Mathes") and Harvey Industries, Inc. ("Harvey"). Curtis Mathes and Harvey, both chapter 11 debtors themselves, attempted to abandon the Property during the course of their respective cases. The TNRCC objected to the abandonment because of environmental issues concerning the Property. As part of the resulting settlement, title to the Property was placed in the Greenwall Trust, with the State of Texas as the beneficiary.
The Greenwall Trust entered into an environmental agreement (as amended, the "Environmental Agreement") and the Lease Agreement with Debtor (f/k/a/ Greenwall Insulation Company). Through that transaction, Debtor obtained a fully funded thirty-year ground lease on the Property and an option to purchase the Property for additional consideration in the amount of $200,000. From the testimony and evidence presented by the parties, the court understands Debtor's estate is comprised virtually entirely of whatever interest Debtor has in the Property, Lease Agreement and Environmental Agreement.
In the complaint (the "Complaint") instituting the above-captioned adversary proceeding (the "Fort Worth Suit"), Plaintiff Trustee avers that Debtor paid $10,000 in full satisfaction of all lease payments due for the thirty-year term of the Lease Agreement. Complaint, ¶ 16.
Neither Plaintiff nor Debtor has exercised the option to purchase the Property.
After entering into the Lease Agreement and the Environmental Agreement, Debtor entered into a loan agreement with Enterprise National Bank of Palm Beach ("Enterprise"), and, purportedly, granted Enterprise a security interest in Debtor's current and future rights under the Lease Agreement. Debtor then subleased part of the Property to a number of parties, including Dallas Manufacturing, Inc. ("DMC"), Texas Ragtime, Inc. ("TRI") and ATCO Products, Inc. ("API").
Complaint, ¶ 19.
Henderson County Property Corporation ("HCPC") claims that, at some point after Debtor entered into the Environmental Agreement and the Lease Agreement, it acquired the State of Texas' beneficial interest in the Greenwall Trust. HCPC further claims to have removed Gatlin as trustee of the Greenwall Trust and to have replaced him with Defendant. Finally, HCPC claims to have acquired Enterprise's position with respect to Debtor's interests in the Lease Agreement and the Environmental Agreement.
Complaint, ¶ 20.
Complaint, ¶ 20.
Complaint, ¶ 22. The court, however, will hereafter refer to Enterprise when discussing the claim secured by Debtor's leasehold.
On September 17, 2002, Defendant filed a petition for declaratory judgment in the 353rd District Court, Travis County, Texas (the "Austin Suit"). Through the Austin Suit, Defendant sought declaratory judgment on three issues. First, he sought a declaration that Debtor defaulted under the Environmental Agreement. Second, Defendant sought a declaration that HCPC succeeded to all of the Texas Commission on Environmental Quality's rights, title and interests in the Environmental Agreement. Finally, Defendant sought a declaration that HCPC informed Debtor of its default under the Environmental Agreement and declared the Environmental Agreement terminated and all conveyances made pursuant thereto null and void.
On October 31, 2002, several creditors of Debtor filed an involuntary petition against Debtor, thereby instituting the above-captioned reorganization case in this court. The court entered an order for relief under chapter 11 of title 11 on December 2, 2002. On December 6, 2002, the court directed the United States Trustee to appoint a trustee to oversee the conduct of Debtor's chapter 11 case. On December 16, 2002, the United States Trustee appointed Plaintiff to serve in that capacity.
See 11 U.S.C. §§ 101, et seq. (the "Code").
Debtor is not represented by counsel and, as a corporation, cannot participate on its own behalf. Thus, Plaintiff is the sole spokesperson of Debtor in this case.
On February 28, 2003, Plaintiff caused the Austin Suit to be removed to the United States Bankruptcy Court for the Western District of Texas, Austin Division (the "Austin Bankruptcy Court"). Defendant opposed that removal and (acting in concert with HCPC) filed his motion for remand or abstention in that case on March 24, 2003 (the "Austin Motion"). On March 12, 2003, Plaintiff filed a motion to transfer venue of the Austin Suit to this court. On May 13, 2003 the Austin Bankruptcy Court transferred the Austin Suit to this court and on May 28, 2003 closed out the adversary proceeding on its docket.
On March 25, 2003, Plaintiff initiated the Fort Worth Suit. The parties agree that the Fort Worth Suit is the "mirror image" of the Austin Suit, and that both raise substantially the same issues. More specifically, the Fort Worth Suit seeks a declaration that (i) Debtor paid all lease payments related to the Lease Agreement; (ii) there are no existing defaults under the Lease Agreement, or, if there are such defaults, they may be cured; (iii) the Lease Agreement and Environmental Agreement have not been terminated; and (iv) Plaintiff may, if he chooses, cure the defaults, if any, and assume either the Lease Agreement or the Environmental Agreement (or both).
II. ISSUE
Before the court today is the narrow issue of whether abstention (either mandatory or permissive) applies with respect to the Fort Worth Suit.
III. DISCUSSION
A. "Core" vs. "Related To" Proceedings
Section 1334 grants the federal district courts jurisdiction over four types of bankruptcy matters: (1) cases under title 11, (2) proceedings arising under title 11, (3) proceedings "arising in" a case under title 11, and (4) proceedings "related to" a case under title 11. A proceeding is "related to" a bankruptcy if "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy."
Section 1334 uses the term "proceeding" in its broadest sense. See United States Brass Corp. v. Travelers Ins. Group, Inc. ( In re United States Brass Corp.), 301 F.3d 296, 303-04 (5th Cir. 2002). See also 1 COLLIER ON BANKRUPTCY ¶ 3.01[4][b] (15th ed. rev. 2001) ("Anything that occurs within a case is a proceeding.") (quoting H.R. REP. NO. 95-595, at 445 (1977)).
See In re United States Brass Corp., 301 F.3d at 304; In re Wood, 825 F.2d 90, 93 (5th Cir. 1987); Moto Photo v. K.J. Broadhurst Enters., 2003 U.S. Dist. LEXIS 1955, *7 n. 2 (N.D. Tex. 2003).
If the district court of which it is a unit so chooses, a bankruptcy court may "hear and determine" certain matters falling within the jurisdictional grant of 28 U.S.C. § 1334. Specifically, 28 U.S.C. § 157(b)(1) gives bankruptcy courts full judicial power over "all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under . . . this section. . . ." Non-core proceedings that are "otherwise related to a case under title 11" may be heard by a bankruptcy judge, but, absent consent of the parties, any final order or judgment must be entered by the district court. Thus, if a matter within the broad scope of section 1334(b) satisfies the narrower test for a core proceeding, section 157 authorizes the bankruptcy court (at least in most cases) to decide the matter and enter a final judgment. While title 28 does not define core proceedings, section 157(b)(2) does provide a nonexclusive list of examples. Moreover, the Fifth Circuit has held that under 28 U.S.C. § 157 proceedings that fall within the categories of "arising under" and "arising in" are core proceedings; therefore, a "proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case."
See 28 U.S.C. § 157(a). The District Court for the Northern District of Texas has entered a general order of reference granting such authority to this court. See Miscellaneous Rule No. 33, dated August 3, 1984 (http://www.txnb.uscourts.gov/orders/misc33.pdf).
See In re United States Brass Corp., 301 F.3d at 304 (quoting 28 U.S.C. § 157(b)(1)).
Accord Milbank v. Tomlin ( In re Tomlin), 2002 Bankr. LEXIS 1370, *7 (Bankr. N.D. Tex. 2002). The determination of whether a matter is core is to be made by the bankruptcy judge. 28 U.S.C. § 157(b)(3).
See 28 U.S.C. § 157(b)(2)(A)-(O). The indefinite parameters of the concept of "core" proceedings suggests a recognition that what is core may vary to some extent based on the facts in a given case.
In re Wood, 825 F.2d at 97. The Fifth Circuit's discussion could be read to mean that, for example, a claim against property of the estate (section 102(2) of the Code) could not be adjudicated as a "core" proceeding, arguably being neither "a substantive right provided by title 11 [n]or . . . a proceeding that . . . could arise only in a bankruptcy case." Cf. 28 U.S.C. § 157(b)(2)(N) (as distinct from § 157(b)(2)(B), discussed in Wood, 825 F.2d at 97-8). The court, however, reads Wood to deem "related to" matters as being those which do not involve steps essential to the bankruptcy process (i.e. to the assertion of the "public rights" involved in estate administration) and do not require assertion of a bankruptcy created right. In the example given, that the "claim" may arise under state law does not prevent the bankruptcy court from determining its validity under state law as a prerequisite to dealing with it in administration of the bankruptcy estate. Wood, 825 F.2d at 97; 28 U.S.C. § 157(b)(3).
In summation, any matter that is a core proceeding is a "related to" proceeding as that concept has been defined. This is so because core proceedings, by their very nature, affect the estate being administered in bankruptcy. The converse, however, is not true. Not all "related to" proceedings rise to the level of being "core proceedings". The court, therefore, views matters "arising in" or "arising under" the Code and core proceedings to be subsets of the broader category of matters "related to" bankruptcy cases. Thus, there could never be a core proceeding that was not related to a bankruptcy, but it is possible to have a proceeding related to a bankruptcy that is not core.
B. Overview of Doctrine of Abstention
Section 1334(c) of title 28 provides for both permissive abstention under section 1334(c)(1), and mandatory abstention under section 1334(c)(2). In the Motion, Defendant asserts that under section 1334(c)(2) mandatory abstention applies to the Fort Worth Suit. In the alternative, he argues that this court should permissively abstain under section 1334(c)(1).
Section 1334(c)(2) of title 28, which governs whether mandatory abstention applies, states that:
[u]pon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
Section 1334(c)(1) of title 28 allows the court to abstain from hearing a matter that arises under title 11 or in a case under title 11, or that is related to a case under title 11. It states that
[n]othing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
The word "abstain" is not defined by the statute. When a court abstains from hearing a case, it "declines to exercise its jurisdiction" over a particular matter. The usual procedural device employed to "abstain" is to dismiss the matter pending before the federal tribunal, so that a parallel matter can proceed in an alternate forum. With the foregoing in mind, the court now considers whether abstention (either mandatory or permissive) is called for in this case.
Lozano v. Swift Energy Co. (In re Wright), 231 B.R. 597, 602 (Bankr. W.D. Tex. 1999).
See id. (quoting C. WRIGHT, A. MILLER, E. COOPER, FEDERAL PRACTICE AND PROCEDURE, Jurisdiction 2d, § 4245, at 102 (2d ed. 1988) and cases cited and discussed therein).
C. Mandatory Abstention
Based on the language of section 1334(c)(2), if the following six requirements are satisfied, the court must abstain:
1) A party to the proceeding filed a timely motion to abstain;
2) The proceeding is based on a state law claim;
3) There is no basis for federal court jurisdiction other than section 1334;
4) The proceeding is a "related to", non-core proceeding;
5) An action is pending in state court; and
6) The state court action can be timely adjudicated.
See P.O'B Apollo Tacoms, L.P. v. TIX Cos. ( In re House 2 Homes, Inc.), 2002 Bankr. Lexis 962 (Bankr. N.D. Tex. Sept. 9, 2002); Anderson v. Hoechst Celanese Corp. ( In re U.S. Brass Corp.), 173 B.R. 1000, 1004 (Bankr. E.D. Tex. 1994); Gabel v. Engra, Inc. ( In re Engra, Inc.), 86 B.R. 890, 894 (S.D. Tex. 1988).
In other words, under section 1334(c)(2), in "non-core" proceedings, courts must abstain from hearing a state law claim for which there is no independent basis for federal jurisdiction other than § 1334(b) "if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction." In re Gober, 100 F.3d 1195, 1206 (5th Cir. 1996). The party requesting abstention must prove the existence of each element by a preponderance of the evidence. See Brizzolara v. Fisher Pen Co., 158 B.R. 761 (Bankr. N.D. Ill. 1993). See also York v. Bank of America, N.A. ( In re York), 291 B.R. 806, 816 (Bankr. E.D. Tenn. 2003); In re Taylor Agency, Inc., 281 B.R. 354 (Bankr. S.D. Ala. 2001) (considering abstention under section 305 of the Bankruptcy Code). A party is not entitled to mandatory abstention if it fails to prove any one of the statutory requirements. In re Worldcom Secs. Litig. v. Ebbers, 2003 U.S. Dist. LEXIS 2790, *65 (S.D.N.Y. 2003).
The court does not quarrel with Defendant's assertion that the Motion was timely filed. Indeed, Defendant filed the motion on April 24, 2003, less than a month after Plaintiff commenced the instant action. Accordingly, the first prong of the six-part mandatory abstention test has been met. Next, the court agrees that the disputes over whether the Lease Agreement and Environmental Agreement are still in force necessarily raise state law issues. The court, therefore, deems the second prong of the mandatory abstention test satisfied.
The next consideration is whether the court has any basis for jurisdiction over the issues raised in the Fort Worth suit other than that granted by 28 U.S.C. § 1334. For purposes of the Motion, the court will assume, arguendo, that it has no jurisdiction over the Fort Worth Suit other than that granted by 28 U.S.C. § 1334 and that the third prong of the mandatory abstention test is satisfied.
The court must now consider whether the Fort Worth Suit is merely a "related to" proceeding under 28 U.S.C. § 157, or whether it rises to the level of a core proceeding such that mandatory abstention would be inapplicable. Here, the existence (or nonexistence) of Debtor's interests in the Property, the Lease Agreement and the Environmental Agreement are of such import that Debtor's case simply cannot proceed until the instant disputes are resolved. Determination of the Fort Worth Suit equates to a determination of the nature and extent of the estate to be administered by Plaintiff for the benefit of creditors in this chapter 11 case. If Plaintiff is correct in his assertion that Debtor maintains an interest in the Property and related contracts, he may be able to formulate, present and confirm a plan of reorganization for Debtor. If, on the other hand, Defendant is correct and Debtor has no interest in the Property, Lease Agreement or Environmental Agreement, Debtor's case is a lost cause — with no assets to speak of, Debtor's chances of being successfully reorganized are infinitesimal.
The court is aware of a number of cases that advance the proposition that the determination of the existence or nonexistence of an executory contract is not a core proceeding. While this court might, in another case, agree with the foregoing premise, Debtor's posture in chapter 11 causes the court to question whether such a rule is applicable in all situations. As stated above, Debtor's case cannot proceed until issues presented by the Fort Worth Suit are resolved. If this court were to cede these issues to a state court, it would effectively be ceding control over Debtor's chapter 11 case. This simply cannot be the result contemplated by Congress in enacting the Code and related statutes. More specifically, 28 U.S.C. § 1334(a) grants to district courts (and, by reference, bankruptcy courts) "original and exclusive jurisdiction of all cases under [the Code]". Notably, section 1334(a) does not provide for an exception to the district court's original and exclusive jurisdiction over all bankruptcy cases where an issue integral to the case happens to be an issue that, arising under different circumstances, would be viewed as "non-core". With due deference to those courts that have found the determination of the existence or nonexistence of an executory contract to be merely "related to" a case under the Code, this court concludes that the issues raised in the Fort Worth Suit are "core" proceedings with respect to Debtor's chapter 11 case. Any issue so central to a case under the Code that to deprive the bankruptcy court of the power to adjudicate it would eviscerate the court's section 1334(a) jurisdiction must be, by its very nature, a core proceeding. Thus, the court concludes Defendant has failed to carry his burden on the fourth prong of the mandatory abstention test.
See Tasch, Inc. v. Sabine Offshore Serv., Inc. ( In re Tasch, Inc.), 1999 U.S. Dist. LEXIS 1631 (E.D. La. 1999); Hughes-Bechtol, Inc. v. Construction Management, Inc., 144 B.R. 755, 757 (S.D. Ohio 1992); In re Midwest Communications Management Corp., 144 B.R. 354, 355 (Bankr. E.D. Ky. 1992). But see In re Harco Energy, 270 B.R. 658, 663 (Bankr. N.D. Tex. 2001) ("[t]he determination of the existence of an executory contract is a core matter over which this court has jurisdiction to enter a final order.").
If the Property, Lease Agreement and Environmental Agreement were simply a few among many potential assets of Debtor's estate, the court would find it easier to accept the reasoning of Tasch and similar cases. The court also finds Harco persuasive. Determination of the existence of a contract after all, is a logical step in the process of assumption or rejection under section 365 of the Code. As suggested above, it makes little sense to carve out from bankruptcy court consideration the one, critical issue from which the executory contract analysis must begin. See, supra, note 17.
See e.g. 28 U.S.C. § 1334(c) (granting the district court exclusive jurisdiction over all property of the debtor and the estate). Jurisdiction to determine the existence or non-existence of property of a bankruptcy estate would seem to follow logically from the words of section 1334(c).
Taking section 1334(e) and section 1334(a) together, the Fort Worth Suit arguably falls within the court's power to "hear and determine all cases under title 11" ( 28 U.S.C. § 157(b)(1)) and is thus not subject to a "core" vs. "related" proceeding analysis.
If, for example, a state suit could be maintained seeking a declaration that a partnership — as opposed to a tenancy in common — did not exist between parties, and one party filed a petition under section 303(b)(3) of the Code against the "partnership," even the pendency of the state proceeding would not preclude the bankruptcy court from determining whether a partnership existed. Yet Defendant's reading of 28 U.S.C. § 1334 and Wood requires abstention. As recognized in Wood, 825 at 97-8, how an issue comes to the court may affect whether it is core. The context of the Fort Worth Suit is such that, unlike the litigation in Wood, it may be seen as a core matter presenting issues that necessarily arise in the chapter 11 case.
Determination of the viability of the Lease Agreement is not only central to the case and an integral part of any determination covering it under section 365 of the Code; it amounts to determination of the existence of an estate under section 541 of the Code. The issue is implicit in potential core proceedings such as turnover of property ( 28 U.S.C. § 157 (b)(2)(E)); matters respecting the automatic stay ( 28 U.S.C. § 157(b)(2)(G)); determinations regarding Enterprise's lien ( 28 U.S.C. § 157(b)(2)(K)); and the relationship between the Debtor and its potential creditors including Defendant, Enterprise, DMC, TRI and API ( 28 U.S.C. § 157(b)(2)(O)). Thus, as distinguished from Wood, 825 F. 2d at 98, the Fort Worth Suit will be dispositive of various matters "arising in" Debtor's case.
Though this arguably disposes of the mandatory abstention issue, the court will address the remaining elements required for mandatory abstention and turns now to the fifth prong of the test — that there be an action pending in state court (or some other nonbankruptcy tribunal) to carry forward should this court abstain from hearing the Fort Worth Suit. In a prior opinion, this court held that mandatory abstention requires the presence of a pendent nonbankruptcy action in favor of which the bankruptcy court must abstain. Intuitively, this makes sense. If the court abstained, and there was not another pendant proceeding to take the place of the Fort Worth Suit, the issues raised in the instant adversary proceeding could be relegated to some judicial netherworld, never to be resolved.
Denton County Elec. Coop. v. Eldorado Ranch (in Re Denton County Elec. Coop), 281 B.R. 876, 880-81 (Bankr. N.D. Tex. 2002). Accord Security Farms v. International Bhd. of Teamsters, 124 F.3d 999, 1009 (9th Cir. 1997) ("[a]bstention can exist only where there is a parallel proceeding in state court. That is, inherent in the concept of abstention is the presence of a pendent state action in favor of which the federal court must, or may, abstain."), citing In re S.G. Phillips Constrs., Inc., 45 F.3d 702, 708 (2nd Cir. 1995) (including as a requirement for mandatory abstention the presence of a previously commenced state action); In re Tucson Estates, 912 F.2d 1162, 1167 (9th Cir. 1990) (recognizing as a factor for permissive abstention the presence of a related proceeding commenced in state court or other nonbankruptcy court); Broyles v. US Gypsum, 266 B.R. 778, 783 (E.D. Tex. 2001); Thomas v. R.J. Reynolds, 259 B.R. 571, 576 (S.D. Miss. 2001).
The case at bar presents an interesting twist on this issue. The Austin Suit began life as an action in the Texas state court system. It was thereafter removed to the Austin Bankruptcy Court, and then, prior to this court's consideration of the Motion, the Austin Suit was transferred to this court's docket. As such, even if the court were to abstain from hearing the Fort Worth Suit, when the other pendant action proceeds (i.e. the Austin Suit proceeds before this court) the parties would be right back where they started and the court faced with substantially the same issues (and parties). Whether the court hears the Fort Worth Suit or the Austin Suit (and concomitantly, whether Plaintiff and Defendant trade roles with each other) seems to present a distinction without a difference. After considering the foregoing, the court concludes that Defendant has failed carry his burden with respect to the fifth prong of the mandatory abstention test.
From its review of the Austin Bankruptcy Court's docket, the court notes that Defendant (or the plaintiff in the Austin Suit) and HCPC filed the Austin Motion with the Austin Bankruptcy Court before the Austin Suit was transferred to the Northern District of Texas. Because the Austin Bankruptcy Court opted to address Plaintiff's motion to transfer the Austin Suit before addressing the request for remand, the Austin Motion, as a technical matter, is now open for this court's consideration. The court is not, however, convinced it has the power to grant the relief sought in the Austin Motion. As this court understands the doctrine of remand, the doctrine requires a court to send a case back from whence it came. Accord In re U.S. Refining Marketing Co., Inc., 2000 U.S. App. LEXIS 219 (9th Cir. 2000). In this case, the only court to which this court could remand the Austin Suit is the Austin Bankruptcy Court. As the Austin Motion speaks to remand of the Austin Suit from the Austin Bankruptcy Court to the state court from which it was removed (and, in fact, questions the propriety of the Austin Bankruptcy Court's exercise of jurisdiction over the Austin Suit), this court doubts if it could or should now construe the Austin Motion as a request to send the Austin Suit back to the Austin Bankruptcy Court for further consideration. In making this observation, the court is not prejudging the issue. Rather, the court is simply considering some of the practical ramifications of granting the Motion and the likely delays to be created thereby.
Finally, the court will consider whether the issues to be abstained from by this court can be timely adjudicated in an alternate forum. As with the other elements of mandatory abstention, the party seeking abstention bears the burden of establishing the element of timely adjudication in the context of remand, and a naked assertion that the matter can be timely adjudicated in the state court, without more, is insufficient to satisfy the requirement of mandatory abstention. Courts discussing the timely adjudication element of mandatory abstention pursuant to 28 U.S.C. § 1334(c)(2) have looked to the following factors: 1) backlog of the state court's calendar, 2) status of the bankruptcy proceeding; 3) complexity of issues; and 4) whether the state court proceeding would prolong the administration or liquidation of the estate. The court agrees the foregoing factors are instructive, but concludes special emphasis on the status (and needs) of the bankruptcy proceeding is the key to the timing issue, at least in this case. Otherwise, "timely adjudication" is a meaningless concept in the bankruptcy context.
Renaissance Cosmetics, Inc. v. Dev. Specialists Inc., 277 B.R. 5, 14 (S.D.N.Y. 2002); WRT Creditors Liquidation Trust v. C.J. B.C. Oppenheimer Corp., 75 F. Supp. 2d 596, 605-06 (S.D. Tex. 1999). But see McCormick v. Kochar, 1999 U.S. Dist. LEXIS 17833, *3 (E.D. Pa. 1999) (placing burden on party opposing abstention to demonstrate case cannot be timely adjudicated in the state court).
See e.g. Janazzo v. Fleetboston Fin. Corp., 2002 U.S. Dist. LEXIS 451, *12 (N.D. Ill. 2002); J.D. Marshall Int'l, Inc. v. Redstart, Inc., 74 B.R. 651, 654-55 (N.D. Ill. 1987); In re Georgou, 157 B.R. 847, 851 (Bankr. N.D. Ill. 1993).
As discussed above, there is currently no alternate forum in which the parties may resolve their dispute (other than in this court under a different case number). While, technically, the Austin Motion requests remand of the Austin Suit to the Texas state court system, this court is not in a position to grant the relief requested. Rather, for there to be a pendant nonbankruptcy action in favor of which this court must abstain, Defendant must file and serve out a motion to transfer the Austin Suit back to the Austin Bankruptcy Court, and then (assuming such a motion is granted) renotice and proceed with the remand portion of the Austin Suit. Assuming the remand portion of the Austin Motion is granted (and assuming the automatic stay of § 362(a) of the Code presents no obstacle to continuation of the Austin Suit), the parties would then find themselves subject to whatever time constraints were associated with the state court's docket.
See footnote 28, supra.
In the Motion, Defendant states that the Austin Suit is capable of timely adjudication in the Texas state court system, and that, prior to removal to Austin Bankruptcy Court, the case was proceeding to trial under the governing discovery control plan. Defendant does not, however, give any consideration to the procedural hurdles that must be cleared before the Austin Suit can be redelivered to the Texas state court system (i.e. transfer of the Austin Suit to the Austin Bankruptcy Court and then, following further proceedings, remand to the state court from which it was removed). Other than reciting prior progression in accordance with the governing discovery control plan, Defendant also fails to give any indication of how long it will take the state court to hear and resolve the Austin Suit. Although the court does not anticipate the Austin Suit (or the Fort Worth Suit for that matter) will present extraordinarily complex issues, resolution of whatever issues exist will be essential to the conduct of Debtor's chapter 11 case. Indeed, until the status of the Lease Agreement is determined, Debtor (and the creditors) will not know whether reorganization is a realistic possibility. Moreover, the court has twice had to act pursuant to § 365(d)(4) of the Code to extend Plaintiff's time to assume or reject the Lease Agreement. The timetable for dealing with the lease and the timing of Debtor's reorganization process are necessarily hostage to the dispute joined in the Fort Worth (and Austin) Suit. The rights of Enterprise, DMC, TRI and API all depend on its outcome — as does any decision to assume or reject the Environmental Agreement.
Because of the importance to Debtor's chapter 11 case of the issues raised in the Fort Worth Suit, this court simply cannot abdicate its responsibility to Debtor (or Debtor's estate and creditors) by leaving these issues for resolution in a state court based on Defendants showing of the timing involved with such a course of action. As this court has not been presented with adequate proof that the Austin Suit is capable of adjudication in the Texas state court system within time frames consistent with the needs of the reorganization process, the court concludes that the sixth and final prong of the test for mandatory abstention has not been met.
In light of the foregoing, the court concludes that mandatory abstention is inapplicable in the instant case. The Motion is, therefore, DENIED insofar as it requests relief under 28 U.S.C. § 1334(c)(2).
D. Permissive Abstention
In determining whether to abstain under section 1334(c)(1), courts have developed a nonexclusive list of factors to be considered. These factors have been adopted in the Northern District of Texas. The factors are:
See, e.g., In re Chi, Milwaukee, St. Paul Pac. R.R. Co., 6 F.3d 1184, 1189 (7th Cir. 1993); In re Tucson Estates, 912 F.2d 1162, 1166-67 (9th Cir. 1990); In re Republic Reader's Service, Inc., 81 B.R. 422, 429 (Bankr. S.D. Tex. 1986). See also Crawford v. Primary Care Group, 2003 U.S. Dist. LEXIS 4485 (E.D. Tex. 2003) (adding "comity" and "possibility of prejudice to other parties" as additional factors to be considered).
See Olajuwon Interests, Inc. v. Olajuwon ( In re Olajuwon Interests, Inc.), 2003 U.S. Dist. LEXIS 365 (N.D. Tex. 2003); Flores v. Baldwin, 2002 U.S. Dist. LEXIS 9539, at *19-20 (N.D. Tex. 2002); Hester v. Coho Energy, Inc. ( In re Coho Energy, Inc.), 2002 U.S. Dist. LEXIS 5862, at *19-20 (N.D. Tex. 2002).
(1) The effect or lack thereof on the efficient administration of the estate if a court recommends abstention;
(2) The extent to which state law issues predominate over bankruptcy issues;
(3) The difficulty or unsettled nature of the applicable state law;
(4) The presence of a related proceeding commenced in state court or other nonbankruptcy 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 state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
(9) The burden on the bankruptcy court's docket;
(10) The likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties;
(11) The existence of a right to a jury trial;
(12) The presence in the proceeding of nondebtor parties;
(13) Comity; and
(14) The possibility of prejudice to other parties in the action.
In determining whether permissive abstention is appropriate, courts refer to "principles developed under the judicial abstention doctrines." Those doctrines establish that federal courts have a "virtually unflagging obligation . . . to exercise the jurisdiction given them." On the other hand, the text of section 1334(c)(1) "demonstrates the intent of Congress that concerns of comity and judicial convenience should be met, not by rigid limitations on the jurisdiction of federal courts, but by the discretionary exercise of abstention when appropriate in a particular case."
In re Pan American Corp., 950 F.2d 839, 846 (2d Cir. 1991).
Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 47 L.Ed. 2d 483, 96 S. Ct. 1236 (1976).
In re Gober, 100 F.3d 1195, 1206 (5th Cir. 1996) (quoting In re Wood, 825 F.2d 90, 93 (5th Cir. 1987)).
The court considers whether permissive abstention is appropriate with the foregoing in mind. As discussed above, there are unanswered questions with respect to how quickly the Austin Suit will be heard if this court abstains from hearing the Fort Worth Suit. Because resolution of the issues raised in the Fort Worth and Austin Suits is so central to Debtor's chapter 11 case, any delay could have a disastrous effect on Debtor's ability to reorganize. This court is prepared to hear these matters as soon as the parties can be ready for trial. While the court understands that Defendant (in his role as plaintiff in the Austin Suit) has demanded a jury with respect to the Austin Suit, no such demand has been made in the Fort Worth Suit. If such a demand is made in the Fort Worth Suit, the court will cross that bridge at the appropriate time (though the court's conclusions regarding the centrality to the reorganization process of the issues presented suggests that the chapter 11 case and the dispute between the parties would be best addressed in the same court). Since there is no state action in favor of which this court could abstain should it so wish, comity is not a factor. Finally, the court believes itself capable of providing a fair and impartial hearing on the Fort Worth Suit, and that none of the parties would be unduly prejudiced should these matters proceed in the Northern District of Texas. While not all of the permissive abstention factors are implicated in the court's consideration of the Motion, the court feels that those that are implicated, on balance, weigh in favor of retaining jurisdiction over the Fort Worth Suit. The Motion is, therefore, DENIED insofar as it requests relief under 28 U.S.C. § 1334(c)(1).
Although as a technical matter, the court is not faced with a motion for abstention in the Austin Suit, the analysis with respect to any such motion would presumably be the same.
IV. CONCLUSION
As set forth herein, the Motion is DENIED. The parties shall, as soon as practicable, schedule a status conference at which the court will consider consolidation of the Fort Worth and Austin Suits, the timing of the trial( s) on the foregoing and any other procedural matters the parties wish to have considered.
It is so ORDERED.
Appendix "B"
IN RE: LORAX CORPORATION, Debtor. CASE NO. 02-48396-DML-11
SHAWN K. BROWN, AS TRUSTEE FOR THE LORAX CORPORATION, Plaintiff, v. PHILLIP SHEPHERD, AS TRUSTEE OF THE GREENWALL LIQUIDATION TRUST, Defendant. ADVERSARY NO. 03-4128-DML
CORRECTED MEMORANDUM OPINION
Before the court is the Motion to Strike Jury Demand (the "Jury Motion") filed by Shawn K. Brown ("Plaintiff"), as trustee for the Lorax Corporation ("Debtor"), in the above-styled adversary proceeding (the "Adversary"), by which Plaintiff asks the court to strike the Jury Demand (the "Jury Demand") filed by Phillip Shepherd ("Defendant"), as trustee of the Greenwall Liquidation Trust, on July 8, 2003. The Jury Motion was filed on July 17, 2003, and Defendant filed his Response to Motion to Strike Jury Demand (the "Jury Response") on July 31, 2003. On August 25 Plaintiff filed a Reply Brief in Support of Motion to Strike Jury Demand (the "Jury Reply"). Also on August 25 Defendant filed a Supplemental Briefing (the "Supplement").
The Jury Motion first received consideration in connection with the court's status conference held regarding Defendant's Motion to Withdraw Reference (the "Reference Motion") as to the Adversary on August 4, 2003. Following that status conference, the parties asked the court to delay consideration of the Jury Motion and the Reference Motion so that the parties might consider other means for resolving their differences.
Presumably the clerk's office did not transmit the Reference Motion to the District Court as a result of the requested delay, although Defendants' companion motion asking leave to appeal this court's decision in Lorax I (as hereafter defined) was processed and has been ruled upon. Thus, the Reference Motion has only recently been forwarded to the District Court. The timing of consideration of the Reference Motion has not, as a practical matter, been affected by the deferral of its transmission, because the court would have deferred its consideration to facilitate the parties' efforts to settle in any case.
When recently advised that the parties were unsuccessful in reaching an accommodation, the court set a second status conference on the Reference Motion, together with a hearing on the Jury Motion, for December 19, 2003. Prior to that hearing, Henderson County Property Corporation, the beneficiary of the Greenwall Liquidating Trust (hereafter "HCPC" or "Intervenor"), filed a motion to intervene in the adversary and a brief in support of Defendant's Jury Demand (the "HCPC Brief"). At the December 19 hearing, the court orally granted HCPC's motion to intervene and HCPC participated in the hearing.
At the December 19 hearing the court heard argument on the Jury Motion and took it and the Reference Motion under advisement. This matter is subject to this court's jurisdiction under 28 U.S.C. §§ 1334 and 157. This memorandum constitutes the court's findings and conclusions. FED. R. BANKR. F. 7052.
On December 19 the court announced that it considered resolution of the Jury Motion dispositive of the Reference Motion. The court, therefore, by separate filing, is submitting its recommendation on the Reference Motion to the District Court based on this memorandum opinion.
In Brown v. Shepherd (In re Lorax Corp.), 295 B.R. 83, 88 (Bankr. N.D. Tex. 2003), leave to appeal den., No. 4:03-CV-820-Y (N.D. Tex. Dec. 22, 2003) (hereafter "Lorax I"), the court determined the Adversary was subject to its core jurisdiction. The issue of whether the bankruptcy court, as opposed to the District Court, may exercise that jurisdiction is dependent on the resolution of the Jury Motion, because the fact that the Adversary is core does not alone deprive Defendant of any right it may have to a jury trial. See, e.g., Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 61 (1989) (holding that petitioners were entitled to jury trial notwithstanding designation of fraudulent conveyance suit as core proceeding triable by bankruptcy judge).
I. Background
The facts underlying the Adversary are discussed at length in the court's prior Lorax I opinion. See Lorax I, 295 B.R. at 86-88. The essence of the dispute between the parties is whether a lease of land to Debtor was validly terminated by Defendant prior to the commencement of Debtor's chapter 11 case. The parties agree that Plaintiff, as Debtor's chapter 11 trustee, remains in actual possession of the leased property (Supplement, p. 4, ¶ 8). Defendant and Intervenor, prepetition, had sought in state court to oust Debtor from possession of the leased property (the "State Suit"). The Adversary is the mirror image of the State Suit (HCPC Brief, p. 2, citing Lorax I, 295 B.R. at 88). In order to determine whether Plaintiff should retain possession of the leased property, the agreements between Debtor and Defendant's predecessor trustee must be construed and a fact finder must determine whether, under those agreements, Defendant terminated Debtor's interests. By the Jury Demand and the Reference Motion, Defendant seeks to present these issues to the District Court sitting with a jury.
II. Issue
The sole issue the court must address is whether Defendant is entitled to a jury trial in a dispute over rights to property in the possession of Plaintiff, the chapter 11 trustee.
III. Discussion
As suggested by the court's statement of the issue presented, resolution of the Jury Motion turns on Plaintiff's possession of the leased property. The parties have focused their attention on whether an action of the sort presented by the Adversary, and by extension the State Suit, would fall within the Seventh Amendment's guaranty of trial by jury of actions entitled to a jury trial under the common law at the time the Seventh Amendment was added to the Constitution. In doing so they have looked to authorities which do not address the significance of a trustee's possession of the property at issue. Upon review of the cases, in particular the Supreme Court's decision in Granfinanciera, however, the court concludes that the Jury Motion should be considered in light of the bankruptcy court's traditional power to summarily adjudicate rights to property in its possession. Were the property in Defendants' possession — if Plaintiff were attempting to gain possession of the property for the estate — the court would likely decide the Jury Motion differently.
"The jurisdiction which could properly be exercised by referees under the Bankruptcy Act was defined by notions of possession of property. . . . If property were in the possession of the court . . . the bankruptcy court had the jurisdiction to determine the rights and interests in and to that property." 1 COLLIER ON BANKRUPTCY ¶ 3.01[1][b][iv] (15th ed. 1994) (footnotes omitted). See also Katchen v. Landy, 382 U.S. 323, 336 (1966) (explaining that "bankruptcy courts have summary jurisdiction to adjudicate controversies relating to property over which they have actual or constructive possession").
Under the former bankruptcy act, the jurisdiction of the referee (the functional equivalent of today's bankruptcy judge) over nonbankrupts was limited to two categories: (1) cases in which the third party actually or constructively consented to trial before the referee; and (2) cases involving disputes over property which was in the actual or constructive possession of the court. See 2 COLLIER ON BANKRUPTCY ¶ 23.02[1] (14th ed. 1976). If, on the one hand, either of these circumstances existed with respect to a dispute, the referee in bankruptcy could dispose of it summarily. If, on the other hand, a dispute involved a nonbankrupt who did not consent to the referee's jurisdiction and did not involve property in the actual or constructive possession of the bankruptcy court, whatever federal jurisdiction was available by reason of the bankrupt's involvement had to be exercised by the District Court in a plenary proceeding.
The dispositive significance of possession in establishing summary jurisdiction is clear. Compare Katchen, 382 U.S. at 336 (affirming that controversies relating to property over which the bankrupt has actual or constructive possession may be adjudicated by bankruptcy courts in summary proceedings) and 2 COLLIER ON BANKRUPTCY ¶ 23.03 (14th ed. 1976) (emphasizing the power of a bankruptcy court to act summarily regarding controversies over property in its actual or constructive possession) with 2 COLLIER ON BANKRUPTCY ¶ 23.06[1] (14th ed. 1976) (setting forth well settled principle that a court of bankruptcy has no jurisdiction to hear and adjudicate in a summary proceeding a controversy regarding property held adversely to the bankrupt estate without the consent of the adverse claimant).
Possession of property by the court's officer — here Plaintiff — is equivalent to possession by the court. See 2 COLLIER ON BANKRUPTCY ¶ 23.05[2] (14th ed. 1976) ("Property is in the actual possession of the bankruptcy court when and [sic] officer of the court is in actual, physical possession of it, whether such officer be a trustee, receiver or other juridical representative.") (emphasis in original).
See generally 2 COLLIER ON BANKRUPTCY ¶ 23.02[1] (14th ed. 1976).
Following the passage of 28 U.S.C. §§ 1334 and 157 in the 1984 amendments to the Judicial Code, which were intended to resolve the Constitutional problems posed by an Article I federal court exercising general jurisdiction, some courts equated the scope of core proceedings with the former summary jurisdiction of the bankruptcy referee. This, of course, is not correct. The essential characteristic of the bankruptcy referee's summary jurisdiction under the prior law related to abbreviated procedures. 2 COLLIER ON BANKRUPTCY ¶ 23.02[2] (14th ed. 1976). Those procedures certainly did not contemplate the use of a jury to find facts. Id. at ¶ 23.03. But, as Granfinanciera made clear, the mere inclusion by Congress of a type of action in the list of core proceedings could not alone deprive a party of its Seventh Amendment right to a jury. Thus there is no equivalence — though there is definitely overlap — between core jurisdiction under present law and the summary jurisdiction exercised by a bankruptcy referee.
See Northern Pipeline Constr. Co. v. Marathon Pipeline Co., 458 U.S. 50, passim (1982). See also CONG. REC. STATEMENTS, Bankruptcy Amendments Act of 1984, Pub.L. 101-650 (1984) (amending the bankruptcy statute "to set forth the jurisdiction of the Federal district courts with regard to bankruptcy cases and proceedings").
See generally 1 COLLIER ON BANKRUPTCY ¶ 3.01 (15th ed. 1996). See also Granfinanciera, 492 U.S. at 61.
In Granfinanciera the Court concluded that the fraudulent transfer action at issue was "not closely intertwined with [the] federal regulatory program" overseen by the bankruptcy court. Granfinananciera, 492 U.S. at 54, 64.
The 1984 enactments, and the provisions of the Judicial Code which they replaced, were not intended to strip the bankruptcy courts of their ability to deal with disputes which would have been subject to a referee's summary powers under the former bankruptcy act. The adjudication by a court of disputes concerning property in its possession as part of a trust is an exercise of the court's equitable jurisdiction. By extension, a matter which is both core under section 157(b)(2) and involves property in the possession of the bankruptcy court is not a matter of which comes within Granfinanciera's holding that a third party is entitled receive consideration of its case by a jury.
See 2 COLLIER ON BANKRUPTCY ¶ 23.03 (14th ed. 1976) (explaining that inherent in every court of equity is the incidental and indispensable power and authority to administer the property in its possession). It is no accident that present chapter 11 is the descendant of the "equity receiverships" used to invoke federal jurisdiction in connection with the restructuring of railroad debt in the last half of the 19th century. See David A. Skeel, Jr., Debt's Dominion: A History of Bankruptcy Law in America (2001), at 48, 105-06. The use of an equity receivership in federal court allowed the exercise of jurisdiction by that court in one proceeding over property held by a railroad in different states. Id. at 53. Administration of property in a court's custody through an equity receivership occurred through the exercise of the court's equitable jurisdiction — even if legal questions arose in connection with that administration. Just as it is well settled that administration of an equity receivership involves exercise of a court's equity jurisdiction, so, too, it is well established that a trust is a creature of equity. See Decker v. Mitchell (In re JTS Corp.), No. 9859752-MM, 2003 Bankr. LEXIS 1341, at 14 (N.D. Cal. Sept. 30, 2003) (agreeing that property of an insolvent corporation may be administered in equity as a trust for the benefit of creditors) and Bryan v. Welch, 74 F.2d 964, 970 (10th Cir. 1935) (finding that "[a] court of equity has exclusive jurisdiction over trusts"). That the "trust" is statutorily created (here by section 541 of the Bankruptcy Code) does not alter the fact that the trust and the property held by it are subject to the supervising court's equity jurisdiction. This was true under the prior bankruptcy act and was true at the time of passage of the Seventh Amendment. See generally Granfinanciera, 492 U.S. 33 (1989) (analyzing present-day Seventh Amendment right to jury trial vis-à-vis recognized right to jury trial in courts of law and equity in late-18th century England); In re United Button Co., 140 F. 495 (D.C.D. Del. 1906) (tracing history of early jury trial provisions).
A review of the pronouncements of the Supreme Court makes it clear that the exercise by the bankruptcy court of this in rem jurisdiction may not be thwarted by a demand for a jury. In Granfinanciera the court commented on Katchen:
Our holding [in Katchen] did not depend, however, on the fact that "[bankruptcy] courts are essentially courts of equity" because "they characteristically proceed in summary fashion to deal with the assets of the bankrupt they are administering." . . . Our decision turned, rather, on the bankruptcy court's having "actual or constructive possession" of the bankruptcy estate. . . . . (citations omitted; emphasis added).
Granfinanciera, 492 U.S. at 57. As the Court repeatedly noted in Granfinanciera, the question there before the court was whether a party from whom the trustee sought a recovery to augment the bankruptcy estate was entitled to a jury trial. Id. 43, 46, 48-49. In the case at bar, Plaintiff does not seek to recover anything from Defendant. Plaintiff, as trustee, has possession of the leased property; the leased property is held by him as part of the estate. Defendant wishes to take possession of the leased property from the estate.
The distinction between the right to a jury trial of one defending against a bankruptcy trustee's claim to recover property as compared to one seeking property from the estate is clear. See, e.g., Schoenthal v. Irving Trust Co., 287 U.S. 92, 94-95 (1932); Katchen, 382 U.S. at 337-38; Whitehead v. Shattuck, 138 U.S. 146, 151, 154-55 (1891). In Granfinanciera the court made clear the distinction: "There can be little doubt that fraudulent conveyance actions by bankruptcy trustees . . . are quintessentially suits at common law that more nearly resemble state-law contract claims . . . to augment the bankruptcy estate than they do creditors' hierarchically ordered claims to . . . the bankruptcy res." Granfinanciera, 492 U.S. at 56. Here, Defendant wants to prove his right to unfettered ownership and possession of what is virtually the entire res in this bankruptcy case.
Effectively Defendant is asserting a claim to property of Debtor's estate. Plaintiff also asserts a claim to the same property, which Defendant must (as it was attempting to do in the State Suit) extinguish. Plaintiff has possession of the property under color of right. If Plaintiff's claim is so lacking in merit that it does not suffice to bring the leased property within this court's traditional in rem jurisdiction, Plaintiff's claim will be disposed of in summary fashion and never reach the stage of being tested by a jury. This is consistent with exercise of the bankruptcy court's summary jurisdiction under the former bankruptcy act. 1 COLLIER ON BANKRUPTCY ¶ 3.01[1][b][iv] (15th ed. 1996). See also 2 COLLIER ON BANKRUPTCY ¶ 23.04[2] (14th ed. 1976) (explaining that a bankruptcy court may go into the merits of the controversy to determine whether or not the bankruptcy court has acquired legitimate actual or constructive possession, including the right to determine the validity of the right of possession of leased premises in the possession of the bankrupt). That Defendant has not filed a proof of claim, so submitting to bankruptcy court jurisdiction, eliminates only the possibility that this court could hear the Adversary by Defendant's "consent." It does not mean Defendant may escape the court's control over disposition of the estate, an alternative basis for the exercise of this court's equitable jurisdiction recognized in both Katchen and Granfinanciera.
This brings up yet another distinction drawn in Granfinanciera. The distribution of the bankruptcy estate-liquidation of assets of the estate or the reordering of the debtor-creditor relationship, see 28 U.S.C. § 157(b)(2)(0), is the "public right" exercised by the bankruptcy court through the equitable, Article I jurisdiction granted to it. "Those cases in which Congress may decline to provide jury trials are ones involving statutory rights that are integral parts of a public regulatory scheme and whose adjudication Congress has assigned to . . . [a] specialized court of equity." Granfinanciera, 492 U.S. at 55. In the case before the court, the "public regulatory scheme" would be frustrated were Defendant able to use a claimed right to a jury to divest the reorganization court of its in rem authority.
There is certainly precedent that, in a matter involving mixed questions of law and equity, the mere preponderance of equitable issues does not affect a party's right under the Seventh Amendment to a jury trial. See, e.g., United States v. Williams, 441 F.2d 637, 644 (5th Cir. 1971). It is also true that there is authority for the proposition that a bankruptcy court should defer to the District Court to allow jury trial of those issues which, absent bankruptcy, might be heard by a jury; then the bankruptcy court may exercise its jurisdiction to deal with remaining questions properly within its equitable authority. 1 COLLIER ON BANKRUPTCY ¶ 3.01[4][c][iii] (15th ed. rev. 2003) (citing Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095 (2d Cir. 1993)).
In re Orion, if good law, is inapposite. In Orion the debtor sought to assume a contract by which Showtime Networks, Inc. ("Showtime") was obligated to license and distribute motion pictures. Simultaneously with the motion to assume, the debtor commenced an adversary proceeding seeking damages from Showtime for breach of the agreement. The bankruptcy court authorized assumption of the agreement and ruled that this disposed of the adversary as well. The result of the bankruptcy court's action was a potential recovery from Showtime of $77,000,000. Thus, Orion, like Granfinanciera, involved augmentation of the estate. This court questions whether the Second Circuit's determination that the bankruptcy court's authority to hear an assumption motion would not allow it "to decide a disputed legal contract issue," Orion, 4 F.3d at 1079 (emphasis in original), should be read broadly. Such a reading of Orion would, for example, preclude the bankruptcy court from determining, pursuant to section 365(b)(1)(A) of the Bankruptcy Code, the existence of a default by the debtor and requirements for cure.
The latter methodology may be effective where determination of a legal issue is a prerequisite to the bankruptcy court advancing the reorganization process. It would be at odds with the statutory scheme designed by Congress, however, to filter out from the bankruptcy process all legal issues regardless of how they may arise. In connection with confirmation of a plan, a bankruptcy court may be required to determine, for example, the validity and extent of a lien, see Code sections 506(a), 111(b), 1123(a)(5)(E), 1129(b)(2)(A), 1225(a)(5) and 1325(a)(5); amounts required or other actions necessary to cure and reinstate contracts, see Code sections 365, 1123(b)(2), 1129(a)(11); or the "legal, equitable or contractual rights" of a claimant, see Code sections 1124(2)(d), 1126, 1129(c)(7) and 1129(a)(8)(B). Yet each of these issues, and many others, could be the subject of a jury demand if Defendant is here entitled to a jury, although none involves seeking an affirmative recovery from a third party. If the bankruptcy court cannot decide these issues as part of its equitable power to oversee the reorganization of a debtor, the plan process could be diffused among a number of courts. Such a result is wholly inconsistent with the Supreme Court's command that reorganization proceed efficiently and expeditiously. See United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365, 376 (1988).
Nor is plan confirmation the only function performed by the bankruptcy court in which legal issues are determined. A decision under section 363(c)(2) of the Code to permit use of cash collateral or under section 364(d) to provide a senior lien for new debt will require a determination of the extent and, perhaps, validity of a lien. Credit bidding at a sale under section 363(k) is likely to raise the same issues. Claim objections regularly bring into the bankruptcy court issues of, inter alia, state law which, but for bankruptcy, would be subject to jury trial. While, if the creditor has filed a claim, the bankruptcy court will have jurisdiction by consent, in chapter 9 and chapter 11, a creditor need not file a proof of claim to be entitled to distributions. See Code sections 925 and 1111(a); FED. R. BANKR. P. 3003(b)(1).
The court is aware that in Wolfe v. First Fed. Sav. Loan Ass'n of Paragould (In re Wolfe), 68 B.R. 80 (1986), Judge McGuire held in case of such a determination there is, in fact, entitlement to a jury. The court cannot agree.
That a debtor lists a creditor's claim as liquidated, not disputed and not contingent does not mean it is exempt from objection. Even if the debtor thereby "waives" any objection (a doubtful proposition), other parties may object. See Code section 502.
The trustee, the debtor or a codebtor may file a claim entitling a nonfiling creditor to participate in the estate or under the plan in any chapter. See Code sections 501 and 901; FED. R. BANKR. P. 3004 and 3005. Surely none of these provisions substitutes for purposes of consent to bankruptcy jurisdiction for the filing by the creditor itself of a proof of claim; just as surely, the bankruptcy court nevertheless has jurisdiction to determine whether such claims are valid — against the estate or under a plan. Indeed, just as is true in the case at bar, determination of a claim not pressed by the creditor disposes only of the creditor's rights against the res. Because it is the res which is implicated, rather than property of the claimant, the bankruptcy court has jurisdiction to decide the claim.
A secured creditor, in fact, need not file a claim to maintain its rights as a lienholder. See FED. R. BANKR. P. 3002(a). See also Universal Am. Mortgage Co. v. Bateman (In re Bateman), 331 F.3d 821, 827 (11th Cir. 2003) (explaining that filing a proof of claim is not mandatory for secured creditors).
As the Supreme Court recognized in Granfinanciera, enactment of the Bankruptcy Code was "clearly intended to make the reorganization process more efficient." Id. at 62. Efficiency of the process would not be served, generally, by reducing the reorganization court's jurisdiction from that which referees could exercise under prior law. Specifically, in the instant case, transfer of the Adversary, the very essence of the chapter 11 case, to the District Court for trial by jury would make no sense in the chapter 11 context, where responsibility for fixing deadlines under sections 365(d)(4) and 1121 of the Bankruptcy Code and making determinations under provisions such as sections 363, 1105 and 1112 remains the responsibility of the bankruptcy court. The intention of Congress and the commands of the Supreme Court are better served not by expanding a nondebtor's jury right to include that entity's claim to property of the estate but rather by recognizing the traditional, equitable power of the bankruptcy court to adjudicate controversies over interests in property in that court's custody.
See also Katchen, 382 U.S. at 329 (recognizing that a primary purpose of the bankruptcy laws is to secure the prompt, efficient, and inexpensive administration and settlement of the estate).
Indeed, if the bankruptcy court can exercise jurisdiction over the property in its possession only by consent of other parties claiming interest in that property, not only will efficiency be forfeited, but forum shopping and interposition of jury demands to delay proceedings will be encouraged.
IV. Conclusion
In sum, the court concludes that disputes which are core to the case under 28 U.S.C. § 157(b)(2) and which could have been summarily disposed of under the former bankruptcy act are subject to its equity jurisdiction, and a party to such a dispute is not entitled to a jury trial. In the case at bar, the court has previously ruled the Adversary to be core. As the Adversary also clearly would have fallen within a referee's summary jurisdiction under the former bankruptcy act, Defendant is not entitled to a jury trial.
For the foregoing reasons, the Jury Motion is GRANTED.