JANICE MILLER KARLIN, Chief Bankruptcy Judge.
Four years ago, Debtors traded one encumbered tractor for another, and apparently went on their merry way. Although this commonplace exchange of collateral occurs routinely in large farming operations, Plaintiff CNH Industrial Capital America, LLC now alleges that someone, somewhere, dropped the ball and did not ensure that all "i"s were dotted and "t"s were crossed. As a result, it alleges its first priority security interest in the collateral was not recognized and the tractor proceeds were sent elsewhere. The dispute now before this Court is CNH's state court conversion claim against the two other creditors involved in the transaction.
The Court finds that it does not have jurisdiction over this removed matter because the removing party—Defendant Community National Bank & Trust-Chanute, has not satisfied its burden to show that the state court petition is related to Debtors' Chapter 11 bankruptcy. The Court further finds that even if the Court did have jurisdiction, it would exercise its discretion to remand the matter under either 28 U.S.C. § 1334(c)(1) (permissive abstention) or 28 U.S.C. § 1452(b) (equitable remand). As a result, the motions to remand
Debtors James and Jodi Watkins, who own both a large farming and cattle operation and a feed store, filed a voluntary Chapter 11 petition in April 2017.
One such claimant, CNH, recently filed a petition in state court against PrairieLand and Community National Bank, alleging that it is a creditor of Debtor James Watkins and that it holds eleven cross-collateralized notes and security agreements. One of those contracts is a November 2011 sales contract for the purchase of a John Deere 9630t jd Tractor. CNH contends it has a purchase money security interest in that tractor as a result of timely filing and renewing a UCC financing statement with the Kansas Secretary of State.
CNH further alleged in its state court petition that in March 2013, PrairieLand accepted from Mr. Watkins a trade of this tractor as part of a transaction in which Mr. Watkins purchased from PrairieLand a new John Deere 9560RT Tractor. At the time of this transaction, PrairieLand attributed a value of $265,000 to the traded-in tractor. About a week later, PrairieLand paid $265,000 to Community National Bank. The bank then applied those funds.
CNH alleges that it first learned over four years later—in April 2017 and as a result of Mr. Watkins' bankruptcy—that he may have traded the original tractor for another. CNH claims neither PrairieLand nor Community National Bank informed CNH of the transaction, obtained CNH's permission to accept CNH's collateral as trade, or obtained CNH's permission to issue or accept funds related to CNH's collateral.
CNH's petition states a claim for conversion, and seeks a joint and several judgment against both PrairieLand and Community National Bank in the amount of $265,000—again, the purported value of the tractor when traded. CNH also asks for all costs and fees, and both pre and post judgment interest.
PrairieLand answered the state court petition by admitting the basic events that occurred in March of 2013, including that Community National Bank's interest in the tractor was junior and inferior to CNH's interest. PrairieLand asserted the affirmative defense of statute of limitations, and also filed a crossclaim against Community National Bank. That crossclaim alleged a mistake in fact, and asserted that any recovery PrairieLand was required to pay to CNH should be indemnified by Community National Bank if a court determines that CNH had a superior security interest in the tractor and payment should not have been made to Community National Bank.
Community National Bank admits in its answer that it received the funds, but denies it was aware that those funds were for the sale of the tractor in which CNH claims a superior lien. The bank also asserts various affirmative defenses, including the statute of limitations, and asserts PrairieLand is comparatively at fault and/or contributorily negligent "as it was their failure to run a UCC search that created the claims in this suit."
The same day it answered the state court petition, Community National Bank filed its notice of removal, removing the Reno County petition to this Court. In its notice of removal, Community National Bank asserted related-to jurisdiction, and claimed the facts of this case are `identical" to those being stated in an adversary currently pending against Mr. Watkins by CNH—Adversary 17-7009. In that proceeding, CNH seeks a determination that a portion of the debt Mr. Watkins owes it is nondischargeable.
The notice of removal alleges that 1) there is a risk of CNH obtaining two identical recoveries for the same injury if judgment is granted in its favor in both actions; 2) the parties in the state court might be prevented from protecting their rights in Debtors' bankruptcy given that they were not made a party to CNH's adversary proceeding in the bankruptcy court; and 3) Debtors' rights could be impacted due to CNH's claims in the simultaneous actions, because "any judgment obtained against [PrairieLand and Community National Bank] in the state court action could impact [Debtors'] Chapter 11 bankruptcy plan without [Debtors] having any right[] to participate in the state court action."
Both CNH and PrairieLand have filed motions to remand. And while Community National Bank has consented to entry of final judgment by the bankruptcy court, PrairieLand has expressly declined to consent to the entry of final judgment by this Court.
Debtors have recently moved for a potentially lengthy extension of time to amend their Chapter 11 bankruptcy to incorporate settlements they have reached with numerous creditors since filing their Second Amended plan. The basis for the motion is to allow the underlying dispute between CNH, PrairieLand, and Community National Bank to be resolved. Apparently, Community National Bank has indicated an intent to vote against any plan until the CNH claim is resolved.
Under the federal statutes governing removal, a party "may remove any claim or cause of action in a civil action . . . to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of [title 28]."
In this district, pursuant to 28 U.S.C. § 157(a), which permits referral to bankruptcy judges, the bankruptcy court has been referred "all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11" by the district court.
No party argues that the state court petition by CNH is or could be a "core proceeding[] arising under title 11, or arising in a case under title 11."
Proceedings related to a bankruptcy case are those that "could have been commenced in federal or state court independently of the bankruptcy case, but the outcome of that proceeding could conceivably have an effect on the estate being administered in bankruptcy."
In support of their motions to remand, CNH and PrairieLand argue that Community National Bank's notice of removal did not satisfy its burden of showing related-to jurisdiction. Community National Bank counters as follows—essentially stating that if it is found liable on CNH's conversion claim, then Debtors would in turn be "responsible for any funds that [Community National Bank] pays to CNH:"
Community National Bank argues that Debtors' Chapter 11 plan cannot be confirmed until the amount of the Bank's claims is thus finalized.
A similar jurisdiction question arose in Gillespie Practical Tech, Inc. v. A-1 Plank & Scaffold Mfg, Inc. (In re A-1 Plank & Scaffold Mfg., Inc).
A strikingly similar situation is present here. The only alleged effect on Debtors' bankruptcy is a possible change to the amounts contained in creditors' proofs of claim. Even that result would require a court to find that the conversion claim between the three creditors could and should impact the contract claims those creditors have against Debtors and that the creditors' proofs of claims should be adjusted accordingly. And not only has Community National Bank failed to show this Court how that scenario could and would play out, it is hard to see the impact on the actual bankruptcy estate itself. No party disputes that the property that was traded (e.g., the tractor) is no longer a part of Debtors' bankruptcy estate. Community National Bank has simply failed to show how this conflict between creditors would impact the handling and administration of Debtors' Chapter 11 estate.
Community National Bank's argument that the recovery sought by CNH in its adversary against Debtor, and its conversion suit against two creditors, is "identical" is also unconvincing. One adversary is for the willful and malicious injury by Mr. Watkins under 11 U.S.C. § 523(a)(6) for his actions in trading its collateral. The other is CNH's claim for damages against PrairieLand and Community National Bank for conversion of the collateral. While the facts underlying the transaction overlap in the two cases, they are entirely separate causes of action and recoveries.
Community National Bank has the burden of proving the existence of this Court's subject matter jurisdiction over the state court petition it removed to this Court. The Bank makes general statements about its claims against Debtors' Chapter 11 case, but never demonstrates what specifically would change as a result of the outcome of that dispute (other than to say that if it is required to pay CNH on CNH's conversion claim, its proofs of claim against Debtors estate would be increased). But how? And which clams are impacted? And what authority is there for such an impact? The bottom line is that Community National Bank did not carry its burden to establish this Court's subject matter jurisdiction.
Even if the Court had jurisdiction over this matter, the Court would still grant the motions to remand of PrairieLand and CNH under 28 U.S.C. § 1334(c), which provides for both permissive abstention under subsection (c)(1) and mandatory abstention under subsection (c)(2). As do the parties, the Court first assesses the applicability of mandatory abstention under § 1334(c)(2), which states:
The test to determine whether mandatory abstention applies is multi-factor. "Mandatory abstention applies when all of the following elements are present: (1) the motion to abstain was timely; (2) the action is based on state law; (3) an action has been commenced in state court; (4) the action can be timely adjudicated in state court; (5) there is no independent basis for federal jurisdiction other than bankruptcy; (6) the matter is non-core."
Factors one through three (whether the motion to abstain was timely filed, whether the petition is based on state law, and whether the matter was already commenced in state court) and factor five (that there is no independent basis for federal jurisdiction other than bankruptcy) are easily established. The motions to remand were filed within two weeks of the removal of the state court petition to this Court, and that petition is based on the state common law of conversion. The Court has already determined herein that factor six (the matter is non-core) is applicable. The remaining factor is factor four: whether the action can be timely adjudicated in state court.
"The burden of proving timely adjudication is on the party seeking abstention."
Some of these factors require the party moving for abstention to present evidence.
Here, the Court has no evidence of any kind from the parties. For example, this Court has no idea of the state court's current backlog, if any. Obviously, the state court petition had just been filed and answered, and the parties are now in the initial stages of discovery—a process that will have to be undertaken no matter where the litigation occurs.
All this stated, however, it is always difficult to predict the issues that will need resolved in any debtor's bankruptcy. But the fact remains that the parties have declined to unanimously consent to allow this Court to enter a final judgment in this Adversary Proceeding. That means that instead of issuing a binding final decision, this Court would instead be required to make a report and recommendation under 28 U.S.C. § 157(c)(1). The District Court would then be required to review that report and enter its final decision. Obviously, the necessity to involve a second federal judicial officer will further delay the ultimate entry of a final judgment. As a result, it is certainly possible that this more time-consuming two-tier review would result in the state court being able to enter final judgment sooner than the federal court.
All this considered, the question of mandatory abstention under 28 U.S.C. § 1334(c)(2) certainly leans to favoring abstention, but it is admittedly not clear. The Court, therefore, next assesses whether permissive abstention under § 1334(c)(1) is applicable. That section states:
Again, the Court will employ a multi-factor test, which includes:
As the parties moving for this Court's abstention under § 1334(c)(1), CNH and PrairieLand have the burden of establishing that permissive abstention is appropriate.
As the Court has noted throughout, the outcome of the state court petition will have little effect on the administration of Debtors' Chapter 11 case because it is, in the main, a conflict between three creditors about who was entitled to receive the proceeds from the trade-in of previous estate property. In addition, state law dominates throughout CNH's petition, the answers thereto, and the counterclaim thereon. There is no jurisdictional basis to bring the petition to this Court other than § 1334, and this Court has determined the state court petition is not closely intertwined with the bankruptcy, nor a core proceeding.
Turning to the remaining factors, the fact that all parties involved in the state court petition are non-Debtors, and the fact that this Court has significant concerns about its own jurisdiction, constitute the "unusual or significant factors" contemplated for this analysis. Again, because at most, the Court would have related-to jurisdiction over the state court petition, and because two parties do not consent to entry of a final order by this Court, the two-tier review process is implicated, thus resulting in delay the state court would not experience. The Court finds there is simply no good reason for resolution of this dispute to be delayed in such a manner.
Community National Bank does not address the permissive abstention argument, but only states that equity does not demand remand of this matter. To the contrary, weighing all the above factors, and in the interest of comity with the state court and efficient and expeditious justice for the parties, the Court concludes it should abstain from hearing this matter under § 1334(c)(1).
To complete the analysis, CNH also argues that the Court should remand this matter to the state court under 28 U.S.C. § 1452(b), which permits remand of removed cases "on any equitable ground." Some courts have looked at equitable factors when considering remand under § 1452(b), such as:
Other courts have determined that the "analysis of a request for equitable remand under § 1452(b) and permissive abstention under § 1334(c)(1) is substantively the same."
For the reasons stated above in support of discretionary abstention, the equities of this matter also require remand to state court. This Court wishes to allow state courts to decide state law matters involving same-state parties, especially when the matter does not have a direct impact on a debtor's bankruptcy case. In addition, the state court petition is at the earliest stages of litigation, and it will be a more efficient expenditure of judicial resources to determine this dispute amongst three Kansas companies in a Kansas state court instead of using the resources of two federal judicial officers. Finally, counsel for all parties have offices located much closer to the state court than this Court, resulting in the state court providing a bit more convenient location for a trial.
The Court finds that Community National Bank did not satisfy its burden of showing that this Court has subject matter jurisdiction over the removed state court petition. In addition, this case is based on a state law conversion claim that, in the interests of comity and justice, should be heard in the state court. The Court therefore exercises its discretion pursuant to 28 U.S.C. § 1334(c)(1) and abstains from hearing this proceeding. For the same reasons, the Court remands this matter to the state court under 28 U.S.C. § 1452(b).
Accordingly, the motions to remand of PrairieLand
No party has indicated which of these multiple claims, if any, would be impacted by the state court petition between the creditors.
The Court is unlikely to grant an open-ended extension for the filing of Debtors' third amended plan. The Court is presently unconvinced that it is in the best interest of the vast majority of creditors (or Debtors) to delay the filing of a third amended plan, and the scheduling of a confirmation trial if anyone objects. The litigation between these creditors, especially if a decision is appealed, could take easily more than a year or even two to conclude. Debtors' bankruptcy has been pending almost a year, and creditors deserve the opportunity to vote on a final plan—even if it contains contingencies dependent on the outcome of this state court litigation. Secured creditors not receiving adequate protection also deserve to begin receiving distributions if a plan is confirmed (or to begin to repossess collateral if confirmation is denied and the case ultimately converts to one under Chapter 7).
