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holding that while a cause of action regarding a bankruptcy court's order approving sale of assets "could have a `conceivable effect' on the bankruptcy proceeding" and although "[b]ankruptcy courts have inherent or ancillary jurisdiction to interpret and enforce their own orders," mandatory and discretionary abstention both indicated that state law issues predominated the action and the case was remanded to state court for adjudication
Summary of this case from In re Arrow Dynamics Inc.Opinion
02-CV-6433 CJS(F)
January 23, 2003
Christopher P. Schueller, Esq., BUCHANAN INGERSOLL, PC, for the Plaintiff/Counter-Defendant.
James C. Burling, Esq. and Stephen B. Hudak, III, Esq., HALE DORR; Kevin J. English, Esq., PHILLIPS LYTLE HITCHCOCK BLAINE HUBER, for the Defendant/Counter-Claimant.
DECISION AND ORDER
INTRODUCTION
This case is before the Court on plaintiff's motion to remand or abstain, and defendant's cross-motion to transfer venue to the Southern District of New York. For the reasons stated below, the Court remands this case to New York State Supreme Court, Monroe County.
BACKGROUND
From approximately 1992 to January of 2001, ENI Technology, Inc. ("ENI") and Automatic System Developers, Inc. ("ASD") had a business relationship. On or about June 5, 2001, ASD filed for Chapter 11 bankruptcy relief in the United States Bankruptcy Court for the Southern District of New York. On September 28, 2001, the bankruptcy court issued an order approving the sale of ASD's assets, other than real property, which assets were obtained by plaintiff, Technology Outsource Solutions, LLC. ("TOS").
On July 11, 2002, TOS filed a summons and complaint in New York State Supreme Court, Monroe County, alleging nine causes of action against ENI based primarily on allegations of breach of contract. In its complaint, TOS alleged that, through the bankruptcy court, it purchased all of ASD's surviving claims and causes of action.
On August 15, 2002, ENI removed the action to this Court, asserting in its removal papers that jurisdiction was based on 28 U.S.C. § 1334 (bankruptcy cases and proceedings), 1446 (procedure for removal) and 1452 (removal of claims related to bankruptcy cases). In response to removal, plaintiff filed a motion on September 13, 2002, requesting this Court to remand, or abstain (document #2). Subsequently, on November 22, 2002, defendant filed a motion, requesting that this Court transfer the case to District Court in the Southern District of New York (document #13).
DISCUSSION
Subject Matter Jurisdiction
The alleged jurisdictional basis for this case is 28 U.S.C. § 1334(b), which grants the Court "original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11." In regard to the jurisdictional issue, it is not necessary to distinguish between proceedings "arising in," "arising under," or "related to" bankruptcy cases under § 1334(b). Legislative history indicates that the phrases were not used to refer to different matters, but to "operate conjunctively to define the scope of jurisdiction." In re Wood, 825 F.2d 90, 93 (5th Cir. 1987), citing S.Rep. No. 989, 95th Cong., 2d Sess., 153-54 (1987). Nevertheless, TOS argues that this case does not "arise under" title 11 or "arise in" a title 11 case in that the relief sought is not governed by bankruptcy law, since the sale of ASD's assets, including the causes of action asserted in the underlying suit, was made
While it is not necessary to distinguish among "arising under," "arising in," and "related to," for purposes of § 1334(b), it is necessary to do so for purposes of § 1334(c)(2), as will be discussed later.
free and clear of all mortgages, security interests, conditional sale or other title retention agreements, pledges, hypothecations, liens, judgments, encumbrances or claims of any kind or nature (including without limitation) any and all "claims" as defined in § 105(5) of the Bankruptcy Code, whether arising by agreement, by statute or otherwise and whether arising before, on or after the date on which these Chapter 11 cases were commenced. . . .
Order pursuant to 11 U.S.C. § 105, 363 and 365 and Fed.Bankr.R. 6004 and 6006 Approving the Sale of Assets of the Debtor Other Then [sic.] Real Property Free and Clear of Liens and Encumbrances and Authorizing the Debtor to Assume and Assign Certain Executory Equipment Leases, In re Automatic Systems Developers, Inc., No. 01-36475 (Bankr.S.D.N.Y. Sep. 24, 2001) ("Order Approving Sale").
TOS also argues that the causes of action in the complaint are not "related to" the bankruptcy proceedings. While "related to" has been interpreted to mean that the outcome of the removed proceeding could have a conceivable effect upon the bankruptcy estate, In re Riverside Nursing Home, 144 B.R. 951, 956 (Bankr.S.D.N.Y. 1992) (citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)), TOS maintains that the Second Circuit requires a test stricter than "conceivable effect." In support of its position, TOS cites In re Cuyahoga Equipment Corp., 980 F.2d 110, 114 (2d Cir. 1992). TOS asserts that in Cuyahoga, the Second Circuit set forth a requirement on the removing party to show the existence of a "significant connection" between the bankruptcy case and the removed action as a predicate for federal jurisdiction. See Pl.'s Mem. Supp't Mot. Remand or Abstention at 4. Cuyahoga, however, clearly states that in the Second Circuit, "related to" jurisdiction can be based either on "conceivable effect" or on "significant connection," as counsel for TOS reluctantly conceded at oral argument.
In support of its position that TOS acquired ASD's assets through defrauding the bankruptcy court and, therefore, the case should not be remanded, ENI relies on Dixon v. First Family Fin. Servs., 276 B.R. 173, 180-81 (Bankr.S.D.Miss. 2002) in which the court wrote that it "found no evidence that Plaintiffs' bankruptcy trustees or the Bankruptcy Court were apprised of their causes of action against Defendants and therefore questions whether Williams' plan would have been confirmed or whether Funchess' or Stanley's debts would have been discharged had they not concealed their causes of action from the Bankruptcy Court." Id. at 180-81. The Dixon holding is applicable to the case at bar, since a determination here that plaintiff concealed assets, as defendant alleges, could have a "conceivable effect" on the bankruptcy proceeding. Consequently, the Court determines that it does have subject matter jurisdiction under 28 U.S.C. § 1334(b), and declines to remand the case on that ground. Having made that decision, however, the Court must now address the issue of abstention.
Mandatory Abstention
As an alternative to remand for lack of subject matter jurisdiction, TOS argues that the case should, nonetheless, be remanded pursuant to the mandatory abstention provision of 28 U.S.C. § 1334(c)(2). That section provides that,
Upon 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.28 U.S.C. § 1334(c)(2). Though some courts have held that this provision is not applicable to removed cases, since there is no longer a state action pending that could be "timely adjudicated," "the majority of courts have held the opposite, noting that the commencement of the removed action in state court is sufficient for purposes of § 1334(c)(2) such that mandatory abstention can apply to removed actions." Universal Well Servs., Inc. v. Avoca Natural Gas Storage, 222 B.R. 26, 31 (W.D.N.Y. 1998) (Telesca, J.). On this issue, the Court finds Judge Telesca's decision in Universal well-reasoned and supported by the majority of U.S. Courts of Appeals that have considered the question. Moreover, this Court has not found any Second Circuit decision to the contrary.
On the issue of whether the mandatory abstention statue applies in a case removed from a state court, the federal courts have split. The majority view in the Southern District of New York is that since no action remains pending in the state court, mandatory abstention is not applicable. See, e.g., In re Adelphia Communications Corp., 285 B.R. 127, 40 Bankr. Ct. Dec. 112 (Bankr.S.D.N.Y. 2002) (and cases cited therein). Though in that case, the bankruptcy court acknowledged that the statute, 28 U.S.C. § 1334(c)(2) uses the word "commenced" and not the word "pending" in reference to the state court action, nevertheless, the court there found that the lack of a cross-reference in the removal statue, 28 U.S.C. § 1452(b), was "striking" and held that, therefore, mandatory abstention could not apply since there was no pending state action for the court to abstain in favor of. Id. 285 B.R. at 143 n. 46; see also In re Lazar, 237 F.3d 967, 981-82 (9th Cir. 2001) ("Accordingly, because there is no pending state proceeding, §§ 1334(c)(1) and 1334(c)(2) are simply inapplicable to this case").
The reasoning in the two cases cited above is unpersuasive. The mandatory abstention statute, § 1334(c)(2), clearly states, "if an action is commended" and not, "if an action is pending." The Court is persuaded by the reasoning in the majority of U.S. Courts of Appeals that have held that § 1334(c)(2) mandatory abstention is applicable in cases removed from state court. See Christo v. Padgett, 223 F.3d 1324 (11th Cir. 2000); Southmark Corp. v. Coopers Lybrand (In re Southmark Corp.), 163 F.3d 925, 929 (5th Cir. 1999) ("we note, only to reject out of hand, Coopers' assertion that statutory abstention does not apply to cases removed to federal court on the basis of bankruptcy jurisdiction. 28 U.S.C. § 1452. There is no textual support in the statute for this position, only a handful of bankruptcy court opinions support it, and the vast majority of courts hold otherwise"); Robinson v. Michigan Consol. Gas Co., 918 F.2d 579, 584 n. 3 (6th Cir. 1990); see also Baxter Healthcare Corp. v. Hemex Liquidation Trust, 132 B.R. 863, 869 n. 7 (N.D.Ill. 1991) ("Hemex contends that subsection (c)(2) does not apply to removed actions. This contention is contrary to established precedent"). The Court declines ENI's invitation to adopt the position of the Southern District and will, instead, adhere to the majority view, and the view adopted by Judge Telesca in 1998, that mandatory abstention does apply to cases removed from state court.
The abstention provisions of 28 U.S.C. § 1334(c)(2) apply even though a case has been removed pursuant to 28 U.S.C. § 1452. . . . The purpose of the abstention provisions is discussed in King, Jurisdiction and Procedure Under the Bankruptcy Amendments of 1984, 38 Vand. L. Rev. 675, 702 (1985) ("A probable purpose of this subsection is to preserve `state's rights' on the theory that not every case should be tried in the bankruptcy court, particularly if purely state law issues are involved.")
Robinson, 918 F.2d at 584 n. 3 (citations omitted).
All of ENI's arguments against returning this case to state court amount to attacks on the judicial sale of ASD's assets to TOS. ENI argues that TOS has no standing because of the alleged non-disclosure to the bankruptcy court, implying that the sale should, therefore, be undone. As a result, ENI maintains that the subject contract action should be transferred to the District Court for the Southern District of New York, because it was the bankruptcy court in that venue that approved the sale. Def.'s Mem. Supp't Cross-Mot. Transfer Venue Opp'n to Pl.'s Mot for Remand or Abstention at 7. This Court agrees that the bankruptcy court in the Southern District is in the best position to determine whether the sale was fraudulently induced; however, regardless of who the rightful plaintiff turns out to be, the lawsuit before the Court is a state contract case, nothing more. Neither the Western District, nor the Southern District Court is in any better position to resolve the contract case, in which principles of New York law must be applied, than the New York State Supreme Court in Monroe County. As to ENI's arguments that only the federal courts can correctly rule on the application of res judicata and judicial estoppel, a state court is just as well versed as are the federal courts in the application of those common law principles.
Regarding the doctrine of mandatory abstention, a case must meet six criteria to support invocation of the doctrine. They are:
(1) plaintiffs must "timely" have brought their motions for abstention; (2) the action must be based on a state law claim; (3) the action must be "related to" a bankruptcy proceeding, as opposed to "arising under" the Bankruptcy Code or "arising in" a case under the Bankruptcy Code; (4) the sole federal jurisdictional basis for the action must be § 1334; (5) there must be an action "commenced" in state court; and (6) the action must be capable of being "timely adjudicated" in the state court.
Channel Bell Assocs. v. W.R. Grace Co., 1992 WL 232085 at *5. Here, TOS has met all six criteria. As to the first requirement, TOS filed the motion for remand and abstention as its first response to defendant's notice of removal. The removal was filed on August 15, 2002 and TOS filed its motion to remand on September 13, 2002, within the statutory time period. 28 U.S.C. § 1447(c). As to the second requirement, the suit is based on state law claims, primarily sounding in breach of contract. Regarding the third requirement, the Court has already determined that this suit is "related to" a bankruptcy action, and the Court further finds that it does not "arise under" the Bankruptcy Code or "arise in" a bankruptcy action. On this point, the Court agrees with plaintiff that it obtained the assets of ASD, "free and clear of all mortgages, security interests, conditional sale or other title retention agreements, pledges, hypothecations, liens, judgments, encumbrances or claims of any kind or nature." Order Approving Sale, supra. As to the fourth requirement, the sole jurisdictional basis in this Court is 28 U.S.C. § 1334. As to the final two requirements, an action was commenced in state court, and that action is capable of being timely adjudicated in state court. As TOS's counsel pointed out during oral argument, New York State Supreme Court in Monroe County has a commercial division, established in 1995, and designed to be "a world-class forum for the resolution of business disputes." Chief Judge Judith Kaye, "The Commercial Division of the State of New York" (2002), at http://www.courts.state.ny.us/comdiv/. Therefore, in accordance with the provisions of § 1334(c)(2), the Court abstains and, pursuant to 28 U.S.C. § 1452(b), remands the action back to New York State Supreme Court, Monroe County.
Discretionary Remand
In addition to mandatory abstention, the Court also finds that it should abstain under 28 U.S.C. § 1334(c)(1), which allows for discretionary abstention. That section states, in pertinent part, "nothing 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 sale of ASD's assets was made free and clear of any lien from the bankruptcy. The only issues pending for adjudication by the state court in this action touch on state law contract issues. The parties are two companies doing business in New York, plaintiff in Poughkeepsie and defendant in Rochester. State law issues predominate in the action.
Additionally,
Bankruptcy courts have inherent or ancillary jurisdiction to interpret and enforce their own orders wholly independent of the statutory grant of jurisdiction under 28 U.S.C. § 1334. Local Loan Co. v. Hunt, 292 U.S. 234, 239 (1934); Paris Mfg. Corp. v. Ace Hardware Corp. (In re Paris Indus. Corp.), 132 B.R. 504, 508 (D.Me. 1991) ("Bankruptcy Courts must have the ability to enforce prior orders and `secure or preserve the fruits and advantages of a judgment or decree rendered therein' . . . The proceeding being ancillary and dependent, the jurisdiction of the Court follows that of the original cause . . .") (quoting Local Loan Co. [ 292 U.S. 234 (1934)]); Volvo White Truck Corp. v. Chambersburg Beverage (In re White Motor Credit Corp.), 75 B.R. 944, 947-48 (Bankr.N.D.Ohio 1987) (ancillary jurisdiction to interpret and enforce prior orders includes purchasers' action for declaratory and injunctive relief to enforce orders of sale and "may be exercised irrespective of an independent jurisdictional basis").
In re Chateaugay Corp., 201 B.R. 48, 62 (Bankr.S.D.N.Y. 1996). Thus, returning this case to state court will not prevent the bankruptcy court from addressing ENI's claims pertaining to the sale of assets to TOS. Therefore, in the interests of comity, the Court finds it appropriate to abstain pursuant to 28 U.S.C. § 1334(c)(1), and remand the case to the New York State Supreme Court, Monroe County, pursuant to 28 U.S.C. § 1452(b).
CONCLUSION
For the reasons stated above, TOS's motion (document #2) to abstain and remand is granted; further, ENI's motion (document #13) to transfer this case is denied. This case is remanded pursuant to 28 U.S.C. § 1452 to New York State Supreme Court, Monroe County, for adjudication.
The Clerk is directed to send a copy of this decision and order to the Honorable Cecelia G. Morris, U.S. Bankruptcy Court for the Southern District of New York (referring to bankruptcy petition #: 01-36475-cgm), and to Eric J. Small, Trustee, Office of the United States Trustee, 74 Chapel Street, Suite 200, Albany, N.Y. 12207, to inform each of defendant's allegations that the court-approved sale of ASD's assets to TOS was induced by fraud.
IT IS SO ORDERED.