JOHN E. HOFFMAN, JR., Bankruptcy Judge.
In this adversary proceeding, the Court is serving as a stopover on the road to litigation elsewhere because the parties agree that the merits of their dispute should be adjudicated by a court other than this one. They disagree, however, on which tribunal should decide those merits.
Meritage Homes Corporation and Meritage Homes of Nevada, Inc.
JPMorgan then filed a motion ("Transfer Motion") (Doc. 2) requesting that the State Court Action be transferred to the United States District Court for the District of Nevada ("Nevada Federal District Court") on several grounds: (1) the South Edge Bankruptcy Case is pending in the Nevada Bankruptcy Court; (2) Meritage's appeal of the order ("Confirmation Order")
In response, Meritage filed a motion for remand ("Remand Motion") (Doc. 12), arguing that no basis for removal exists because the State Court Action could not conceivably have had any effect on the bankruptcy estate of South Edge ("Estate") on the Removal Date and, therefore, the State Court Action was not related to the South Edge Bankruptcy Case on that date. Meritage further argues that, even if the State Court Action was related to the South Edge Bankruptcy Case on the Removal Date, it must be remanded for lack of jurisdiction because it was not removed to the United States District Court for the Southern District of Ohio ("Ohio Federal District Court"). Finally, Meritage contends that, as a result of the confirmation of the Plan and other events that occurred subsequent to the Removal Date, the State Court Action is no longer related to the South Edge Bankruptcy Case. As a result, Meritage argues, no federal court has jurisdiction over the State Court Action, meaning that equitable remand of the State Court Action pursuant to 28 U.S.C. § 1452(b) and permissive abstention under 28 U.S.C. § 1334(c)(1) are both warranted.
For the reasons set forth below, the Court concludes that: (1) removal was appropriate because the State Court Action was related to the South Edge Bankruptcy Case on the Removal Date; (2) a transfer to the Nevada Federal District Court is warranted based on, among other reasons, the continued relatedness of the State Court Action to the South Edge Bankruptcy Case as of the present time; and (3) although neither equitable remand nor permissive abstention appears to be appropriate, the ultimate decision on the propriety
Meritage argues that the Court lacks jurisdiction to do anything other than remand the State Court Action because JPMorgan removed it here rather than to the Ohio Federal District Court. The parties have spent much time addressing the split of authority and debating the various arguments concerning the issue of whether state court actions should be removed to district courts rather than directly to bankruptcy courts. There are good arguments on both sides of the debate. Compare Indus. Clearinghouse, Inc. v. Mims (In re Coastal Plains, Inc.), 338 B.R. 703, 710 (N.D.Tex.2006) (holding that the notice of removal was properly filed with the bankruptcy court) with Searcy v. Knostman, 155 B.R. 699, 704 (S.D.Miss.1993) (holding that the notice of removal should have been filed with the district court). But the Court need not choose a side in this debate. Because even if the State Court Action should have been removed to the Ohio Federal District Court, the Court clearly has the jurisdiction to at least hear the Transfer Motion and Remand Motion.
Although the United States Court of Appeals for the Sixth Circuit has not addressed the issue, decisions of several other federal courts of appeals support the proposition that the removal of a state court action directly to a bankruptcy court does not require remand and does not result in the bankruptcy court lacking jurisdiction to at least hear the matter. See Townsquare Media, Inc. v. Brill, 652 F.3d 767, 770 (7th Cir.2011) (holding that a state court action "was properly removed" even though it was removed to the bankruptcy court, and stating: "Although section 1452(a) provides for removal to the district court rather than to the bankruptcy court, Bankruptcy Rule 9027, buttressed by standing orders in the district courts (including the district court for the Southern District of Indiana), transfers removed suits from district court to bankruptcy court."); Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.), 505 F.3d 237, 246-47 & n. 8 (3d Cir.2007) ("[W]e do not categorize this filing issue [arising from removal of an action directly to the bankruptcy court] as relating to the bankruptcy court's subject matter jurisdiction.... In any event.... Federal Rule of Bankruptcy Procedure 9027(a)(1) permits the filing of a notice of removal with the `clerk,' a term that Rule 9001(3) defines as `bankruptcy clerk,' and 28 U.S.C. § 1452(a) permits removal to the `district court,' an entity of which the bankruptcy court is a unit. 28 U.S.C. § 151.... We also point out that the Western District of Pennsylvania has a general order referring all bankruptcy cases and proceedings filed in the district to the bankruptcy judges...."); Specialty Mills, Inc. v. Citizens State Bank, 51 F.3d 770, 773 n. 4 (8th Cir.1995) ("The fact that the state court action was removed directly to the bankruptcy court rather than the district court did not deprive the bankruptcy court of jurisdiction."); Creasy v. Coleman Furniture Corp., 763 F.2d 656, 661 n. 5 (4th Cir.1985) ("We believe ... that the [Bankruptcy Amendments and Federal Judgeship Act of 1984], which vests the bankruptcy
In light of the foregoing, the Court concludes that a remand based on the removal of the State Court Action to this Court rather than to the District Court would be unwarranted. And, given the relatedness of the State Court Action to the South Edge Bankruptcy (an issue discussed in detail below), the Court concludes that it has the jurisdiction to hear the Transfer Motion and the Remand Motion pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in the Ohio Federal District Court ("General Order").
The more difficult question is whether the Court has the authority to enter a final order remanding or transferring the State Court Action absent the consent of the parties, or whether the Court instead must, as the bankruptcy court did in the Calvary Baptist Temple case, submit a report and recommendation to the Ohio Federal District Court. The question matters here because JPMorgan stated in the Notice of Removal that "the claims asserted against it [in the State Court Action] are non-core within the meaning of 28 U.S.C. § 157(b)" and that it "does not consent to the entry of final orders or judgment by the bankruptcy court." Notice of Removal at 8-9.
Under 28 U.S.C. § 157(c), "[a] bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11," the caveat being that "[i]n such [a] proceeding, the bankruptcy judge['s] [role is limited to] submit[ting] proposed findings of fact and conclusions of law to the district court...."
But what is the "proceeding" in the context of a motion to transfer and a motion to remand? There are two ways to look at the question. Under one view, the "proceeding" is the motion to remand or the motion to transfer itself. When viewed that way, several courts-including this one — have held that bankruptcy courts have the authority to decide such motions on a final basis. See Bavelis v. Doukas (In re Bavelis), 453 B.R. 832,
Under the alternative view, however, the "proceeding" referenced in 28 U.S.C. § 157(c) is not the motion to remand or transfer itself, but rather is the underlying lawsuit — here, the State Court Action. Applying that approach, it could be argued, as a party has done in another case in which the court did not decide the issue, that a motion to remand or transfer a proceeding that is merely related to a bankruptcy case is itself a related-to matter. See BancBoston Real Estate Capital Corp. v. JBI Assocs. Ltd. P'ship (In re Jackson Brook Inst., Inc.), 227 B.R. 569, 585 (D.Me.1998) ("Associates also raises several procedural issues on appeal. It argues that a remand motion concerning a noncore proceeding is itself a noncore matter and, thus, the bankruptcy court was limited to submitting proposed findings of fact and conclusions of law to this Court pursuant to section 157(c)(1), rather than issuing a final order."). If that approach is correct, then the Court would, by entering an order granting the Transfer Motion or the Remand Motion, be issuing a final order in a proceeding that is merely related to a bankruptcy case.
While it concludes that the first approach discussed above is the better one, the Court will follow the second approach in this adversary proceeding in light of the positions taken by the parties. JPMorgan has not directly addressed whether it considers the Remand Motion itself to be a core proceeding in which the Court could enter a final order, but has withheld its consent to this Court's entry of final orders; thus, if the Court were to remand the State Court Action to the Ohio State Court, JPMorgan might argue that the Court lacked the authority to do so because it had not consented. Meritage has declined to consent to the Court's entry of final orders in this adversary proceeding and has argued that only the Ohio Federal District Court has the authority to decide the Transfer Motion. So if the Court were to transfer the State Court Action to the Nevada Federal District Court, Meritage clearly would argue that this Court did not have the authority to take that action. Thus, because neither party has consented to this Court's entry of final orders, in this adversary proceeding the Court will follow
The question then becomes whether an order granting a motion to remand or a motion to transfer — and here the Court will do one or the other — is a final order. In the bankruptcy context, a final order is one that "finally dispose[s] of discrete disputes within the larger case...." Lindsey v. O'Brien, Tanski, Tanzer & Young Health Care Providers of Conn. (In re Dow Corning Corp.), 86 F.3d 482, 488 (6th Cir.1996). In Dow Corning, the Sixth Circuit held that a district court erred when it concluded that certain claims for relief could have no conceivable effect on the debtor's bankruptcy estate and therefore could not be transferred to another federal district court; in so holding, the Sixth Circuit also held that the district court's order denying a request to transfer those claims to another federal district court was a final order. See Dow Corning, 86 F.3d at 488. If an order denying a request to transfer a proceeding can be a final order, then an order transferring a case arguably is all the more so. The Sixth Circuit, however, has not addressed the precise issue, and the Court therefore will analyze it more fully below.
The analysis begins with motions to remand. Under the law of the Sixth Circuit, an order remanding a proceeding to a state court — even outside of bankruptcy — is a dispositive order. See Vogel v. U.S. Office Prods. Co., 258 F.3d 509, 517 (6th Cir.2001) ("[R]emand [orders] are dispositive and ... can only be entered by district courts.... [W]e apply a functional equivalency test to see if a particular motion has the same practical effect as a recognized dispositive motion. Applying that test ... we ... find that a remand order is the functional equivalent of an order to dismiss. The practical effect of remand orders and orders to dismiss can be the same; in both, cases are permitted to proceed in state rather than federal court. Because he was not authorized to enter a dispositive remand order, the magistrate judge's ... remand order ... was not a valid order."). There is no reason the rule should be any different in the bankruptcy context. An order remanding the State Court Action to the Ohio State Court, therefore, clearly would be a final order.
The concept of symmetry would seem to suggest that this should hold true for an order transferring the State Court Action; if remanding a lawsuit back to the state court from which it came has a dispositive effect as to the party who does not want it decided in that court, then transferring the lawsuit away from the state court should have a dispositive effect as to the party who wants the matter heard there. But part of the Sixth Circuit's rationale in Vogel for holding that a remand order is the functional equivalent of an order to dismiss was that "in both, cases are permitted to proceed in state rather than federal court." Vogel, 258 F.3d at 517. That rationale arguably is inapplicable in the context of an order transferring an action from one federal court to another.
Some courts have so held, while others have found this to be a distinction without a difference and have extended the reasoning of courts such as the Sixth Circuit in Vogel to the transfer context. In fact, there is a split of authority on the issue of whether an order transferring a lawsuit to another federal court is a final order. Several courts have held that such orders are not dispositive. See Williams Advanced
By contrast, other courts have held that an order transferring a matter from one federal court to another is dispositive. See Payton v. Saginaw Cnty. Jail, 743 F.Supp.2d 691, 693 (E.D.Mich.2010) ("The Court believes that the most accurate measure of whether an order on a motion is `dispositive' is not whether the merits of the dispute are adjudicated, but whether activity in the case in that forum is terminated.... An order transferring venue has a similar effect on the litigation [as an order remanding the lawsuit]. Although the parties may proceed in a different forum, the plaintiff is deprived of his chosen forum and is forced to litigate elsewhere. The order is the functional equivalent of a dismissal of the case — albeit without prejudice — in that forum.... Decisions with consequences of that character ought to be made in final form by Article III judges, even when the able assistance of a magistrate judge is sought."); Bennett v. CSX Transp., Inc., 2010 WL 4646248, at * 1 n. 1 (D.S.C. Nov. 8, 2010) ("The instant motion to transfer venue was individually referred to the Magistrate Judge for disposition. While a motion to transfer venue does not explicitly fall within any of the dispositive motions set forth in 28 U.S.C. § 636(b)(1)(A) and there is a split of opinion in this district as to whether a Magistrate Judge has the authority to order a transfer of venue, Magistrate Judge Hodges has prepared a [report and recommendation], which is subject to de novo review pursuant to 28 U.S.C. § 636(b)(1), rather than a final order on the motion.").
If an order transferring the State Court Action to the Nevada Federal District Court is dispositive, and if the Court were to issue such an order, then the Court would (under the approach it is following for purposes of this adversary proceeding) be issuing a final order in a matter that is merely related to a bankruptcy case, which the Court is prohibited from doing under 28 U.S.C. § 157(c). In circumstances where their authority to enter orders transferring cases was open to debate, other courts have issued reports and recommendations to district courts rather than purporting to enter final orders. See F.T.C. v. Consumer Health Benefits Ass'n, 2011 WL 2341097, at *1 n. 4 (E.D.N.Y. June 8, 2011) (stating, in a case where "[t]his Circuit's case law leaves some question as to whether a United States Magistrate Judge has the authority to" enter an order on a final basis that "[o]ut of an abundance of caution, this Court has fashioned its conclusions ... as a Report and Recommendation"); Beavers v. Express Jet Holdings, Inc., 421 F.Supp.2d 994, 995-96 (E.D.Tex.2005) ("There is a split of authority as to whether a motion to transfer venue is one that — absent consent of the parties — magistrate judges may (a) hear and determine, or (b) only recommend an appropriate disposition via a written
After the parties filed responses to, and replies in support of, the Transfer Motion and the Remand Motion,
Meritage's counsel advised the Court during the Hearing that Meritage intended to file with the Nevada Federal District Court an amended notice of issues on appeal of the Confirmation Order. See Tr. at 34:18-23. In response, JPMorgan's counsel requested that his client be provided an opportunity to file a post-hearing brief addressing the impact of the revised notice of appeal. See Tr. at 100:8-102:3. At the conclusion of the Hearing, the Court directed Meritage to submit to the Court any revised notice of appeal that it would be filing with the Nevada Federal District Court. The Court also provided the parties an opportunity to file post-hearing briefs analyzing the manner in which the revised notice of appeal would affect the issue of whether the State Court Action is related to the South Edge Bankruptcy Case.
During the Hearing, Meritage, in an effort to support its position that the State Court Action was not related to the South Edge Bankruptcy Case, utilized a chart that purported to depict the structure and implementation of the Plan as of its effective date, see Tr. at 28-34, which was November 18, 2011 ("Effective Date").
Shortly after the Hearing, Meritage filed a notice (Doc. 44) of its amended statement of issues on appeal of the Confirmation Order ("Amended Statement"), which will be discussed in more detail in
Meritage and JPMorgan filed a stipulated chart ("Stipulated Chart") (Doc. 50) depicting the implementation of the Plan as of the Effective Date. The Stipulated Chart, a copy of which is attached as an exhibit to this opinion, sets forth certain information that was not contained in the chart discussed during the Hearing ("Additional Information"), including Additional Information contained in the boxes entitled "Meritage Potential Offset" and "Meritage Asserted Indemnity Claim if Meritage pays under Guaranty (POC #41)." The information set forth in the Stipulated Chart is discussed in more detail below in Section III.J and in Section IV.A in connection with the Court's analysis of the issue of whether the State Court Action is related to the South Edge Bankruptcy Case.
The parties also filed post-hearing briefs (JPMorgan's is docketed at Doc. 51 and Meritage's at Doc. 53) addressing the issue of whether the State Court Action is related to the South Edge Bankruptcy Case. JPMorgan relied in part on the Additional Information in support of its argument that the State Court Action could conceivably have an effect on the Estate and therefore is related to the South Edge Bankruptcy Case. The Court concluded that JPMorgan's arguments regarding the effect of the Additional Information on the issue of whether the State Court Action is related to the South Edge Bankruptcy Case required clarification. And Meritage failed to address this issue or any other issue raised by the Additional Information in its brief. Thus, after reviewing the Stipulated Chart and the initial post-hearing briefs, the Court determined that responses by the parties to those briefs would materially assist it in disposing of the Transfer Motion and the Remand Motion, and the Court therefore entered an order (Doc. 55) directing the parties to file responses addressing any legal and factual issues raised by the other party's post-hearing brief, including, without limitation, certain issues raised by the Court. On March 16, 2012, JPMorgan filed a supplemental post-hearing brief ("JPMorgan Supplemental Post-Hearing Brief") (Doc. 57), as did Meritage ("Meritage Supplemental Post-Hearing Brief.") (Doc. 59).
In the JPMorgan Supplemental Post-Hearing Brief, JPMorgan stated that an action might be brought against Meritage on behalf of the Estate. Consistent with that statement, on March 19, 2012, JPMorgan filed a notice (Doc. 60) of a motion to compel arbitration that had recently been filed in the Nevada Bankruptcy Court by the representative of the Estate regarding its arbitration demand for approximately $23 million from Meritage. This arbitration proceeding is discussed in Section III.L below.
Turning to the events that gave rise to this adversary proceeding, the Court begins at the beginning, in 2004, when Meritage and seven other entities involved in
In November 2004, South Edge acquired from the Bureau of Land Management approximately 1,940 acres of real property at a cost of approximately $557 million.
Each Member and its respective parent executed guaranties in favor of JPMorgan as agent under the Credit Agreement, including: (1) a completion guaranty, which guaranteed the completion of certain improvements and the payment of certain development costs; (2) a limited guaranty, which guaranteed the payment of damages related to certain fraudulent and/or unlawful acts; and (3) a repayment guaranty. Like the repayment guaranties executed by the other Members, the repayment guaranty executed by Meritage ("Repayment Guaranty")
The term Bankruptcy Event was defined to include an involuntary bankruptcy in which an order for relief was entered,
Although the purpose of South Edge's formation was to develop Inspirada, for a time starting in the year 2008, the company created more activity for workout, litigation and bankruptcy professionals than it did for the construction industry. The troubles at Inspirada arose, at least in part, from economic conditions affecting the real estate market in the United States generally — conditions that were felt more acutely in some areas of the country than in others. According to the Disclosure Statement, "[b]y early 2008, the real estate market had begun a dramatic decline that ultimately resulted in what has come to be known as the `Great Recession' [with] [t]he Las Vegas area in particular [including Henderson] ... hit hard by the real estate decline [and] certain Members ... experiencing financial problems," resulting in two of the Members, Kimball Hill and Alameda, commencing their own bankruptcy proceedings. Disclosure Statement at 24-25.
An attempt to restructure the Loan consensually began when the parties entered into a forbearance agreement ("Forbearance Agreement") in May 2008, but those efforts soon ended without a restructuring agreement.
In December 2008, JPMorgan also commenced several lawsuits against the non-bankrupt Members and their parents, including two lawsuits against Meritage. One of those lawsuits, which was commenced in the Nevada Federal District Court, sought to enforce the Lenders' interest in the collateral pledged pursuant to the Credit Agreement and requested damages for alleged breaches by Meritage of the Acquisition Agreement and the Assignment Agreement ("UCC Action"). The other lawsuit, originally filed in the United States District Court for the Southern District of New York but later transferred to the Nevada Federal District Court at the request of the defendants, was based on the completion guaranty executed by Meritage ("Completion Guaranty Action"). The Members, including Meritage, moved for leave to amend their answer in one of those lawsuits to include a counterclaim asserting that JPMorgan had violated its covenant of good faith and fair dealing by commencing the South Edge Bankruptcy Case. The Nevada Federal District Court held that the members had "waived any and all counterclaims whatsoever under the plain language of the Guarantees" and that "[a]mendment as to the breach of the covenant of good faith and fair dealing claim therefore is futile, as Defendants have waived it." JPMorgan Chase Bank, N.A. v. KB Home, 740 F.Supp.2d 1192, 1202, 1203 (D.Nev.2010) (relying on the provisions of the Repayment Guaranty and other guarantees providing that (1) "[t]he liability of the Guarantor under this Guaranty is absolute, irrevocable and unconditional irrespective of: ... (e) any other setoff, defense or counterclaim whatsoever (in any case, whether based on contract, tort or any other theory) with respect to the [Credit] Facility Documents or the transactions contemplated thereby which might constitute a legal or equitable defense available to, or discharge of, the Borrower or a guarantor" and that (2) the
The UCC Action and the Completion Guaranty Action, along with similar actions against other Members, were consolidated for discovery purposes in a single proceeding, Case No. 08-1711, before the Nevada Federal District Court. In both the UCC Action and the Completion Guaranty Action, Meritage asserted counterclaims against JPMorgan. See Notice of Removal, Ex. 2. JPMorgan moved for summary judgment on those counterclaims, arguing that, pursuant to the Forbearance Agreement, the Members and their parents provided full releases of all claims against JPMorgan. The Nevada Federal District Court ruled in favor of JPMorgan on the release issue and granted its motion for summary judgment. See Notice of Removal, Ex. 2, at 9 (holding that "[t]he Release provision therefore bars Meritage from asserting counterclaims arising from the Credit Agreement that were available at the time Meritage voluntarily signed the Forbearance Agreement"). The Nevada Federal District Court also stated that "JPMorgan has not argued in this motion that the Release applies to affirmative defenses" and that "[t]he Court expresses no opinion on the Release's applicability to defenses." See id. at 9 n. 6.
As of the date of the Hearing, the UCC Action and the Completion Guaranty Action were pending before the Nevada Federal District Court, see Docs. 420 & 421 in Case No. 08-1711, but they were later dismissed against Meritage without prejudice because, under the Plan, only the Lenders or the representative of the Estate would have the right to pursue those actions. See Tr. at 89.
In June 2009, Focus requested that it be permitted to compel an arbitration against Meritage and the other non-bankrupt Members of South Edge on behalf of itself and purportedly on behalf of South Edge ("Focus Arbitration"). The Nevada Federal District Court granted the request to compel arbitration. In the Focus Arbitration, Focus alleged that the Members had delayed takedown schedules, failed to make interest payments and ceased construction on Inspirada, all in violation of the parties' agreements. The arbitration panel ultimately determined that certain of the Members, including Meritage, breached certain of their obligations under the Operating Agreement. See Declaration of Cynthia Nelson, Chapter 11 Trustee, in Support of Confirmation of the Plan of Reorganization ("Nelson Declaration") at 9.
Meritage requested that the Nevada Federal District Court vacate the arbitration award, but that court denied the motion to vacate and entered an order confirming the award. The Ninth Circuit affirmed. See JPMorgan Chase Bank, N.A. v. KB Home Nevada Inc., 2012 WL 639247 (9th Cir. Feb. 29, 2012).
Approximately two years after the disputes between the Lenders and the Members began, on December 9, 2010, JPMorgan (in its individual capacity as a lender under the Credit Agreement) joined two of the other Lenders in filing an involuntary Chapter 11 petition against South Edge in the Nevada Bankruptcy Court. In its capacity as agent for the Lenders, JPMorgan also filed a motion seeking appointment of a Chapter 11 trustee for the Estate. After a contested hearing — South Edge had filed a motion to dismiss the petition and an objection to the motion for appoint of a trustee — the Nevada Bankruptcy Court entered an order for relief against South Edge and an order directing the appointment of a Chapter 11 trustee. The United States Trustee appointed Cynthia Nelson ("Nelson") to serve as Chapter 11 trustee of the Estate, and the Nevada Bankruptcy Court entered an order approving the appointment.
In May 2011, Nelson commenced an adversary proceeding against JPMorgan and Focus and certain of its affiliates with respect to certain "MI Funds" that Focus had caused to be paid into a JPMorgan account in October 2007 to cover major infrastructure costs ("MI Adversary Proceeding"). In the MI Adversary Proceeding, Nelson alleged, among other things, that the deposit in the name of Focus was property of the Estate, subject to JPMorgan's lien. Focus denied that the MI Funds it placed into the account at JPMorgan were property of the Estate.
In June 2011, JPMorgan made a demand on Meritage for payment under the Repayment Guaranty. On behalf of the Lenders, in June 2011, JPMorgan also entered into a letter agreement with KB Home Nevada, Inc.; Coleman-Toll Limited Partnership; Pardee Homes of Nevada, Inc.; and Beazer Homes Holdings Corp. and their respective Parent Guarantors (collectively, the "Settling Builders") regarding a term sheet ("Term Sheet") for a consensual Chapter 11 plan of South Edge ("Plan Support Agreement"). See Nelson Decl. at 8.
Nelson consented to the Plan Support Agreement subject to certain clarifications, limitations and qualifications (none of which is relevant here). She also filed a motion for an order approving a settlement of the MI Adversary Proceeding. The motion requested that the MI Adversary Proceeding be resolved by a final judgment providing that, among other things, a portion of the MI Funds be deemed property of the Estate, subject to the valid, nonavoidable liens of JPMorgan on behalf of the Lenders, and free and clear of liens, claims or interests of Focus, and that the remaining balance be considered property of Focus, free and clear of liens, claims or interests of the South Edge, the Estate and the Lenders. The motion also noted that, if the settlement were approved by the Nevada Bankruptcy Court, the disputes and litigation among the major constituencies in the South Edge Bankruptcy Case, including Focus and all of the Members other than Meritage, would be resolved.
The Nevada Bankruptcy Court entered an order approving the settlement agreement ("Settlement Agreement") among Nelson, the Settling Builders, Focus and related entities, JPMorgan (in its capacity as administrative agent for the Lenders) and Inspirada Builders, LLC ("Inspirada Builders"). As described in more detail below, Inspirada Builders became the acquirer of South Edge's real property and certain other assets under the Plan, as well as the representative of the Estate ("Estate Representative").
JPMorgan and the Settling Builders filed a proposed Chapter 11 plan on August 1, 2011. See Doc. 844 in the South Edge Bankruptcy Case. Nelson described the Plan in broad strokes as follows:
See Nelson Decl. at 8, 14. The Plan, which was amended as of October 21, 2011, provided that the Settling Builders "shall ... contribute sufficient cash ... to the account of the Estate Representative to fund payments required under this Plan to (a) Holders of Allowed Claims (to the extent such payments are not provided to be paid from other funds, such as the MI Funds...) and (b) Holders of Allowed Administrative Expenses, Gap Claims, Priority Tax Claims, and TIP Loan Claims."
Plan § 6.2. As discussed below, the Settling Builders ultimately made the election to leave certain assets, including claims against Meritage under the Operating Agreement, in the Estate.
During the hearing on confirmation of the Plan, counsel for the Settling Builders explained the reason for the continued existence of the Estate and its retention of the Retained Actions as follows:
See Doc. 58, Ex. 1 at 123:6-21.
Under the Plan, if Meritage did not become a Settling Builder, then Meritage's alleged liabilities under the Repayment Guaranty and the other guarantees would not be released, and the Settling Builders would pay into an escrow account an amount equal to the portion of the Settling Builders' consideration to be paid under the Plan that was equal to the amount of the alleged liability of Meritage on the Repayment Guaranty, which was estimated to be between $12.4 million and $12.8 million. The Plan also provided the Lenders the option of electing to sell to the Settling Builders a participation in the selling Lender's pro rata interest in the claim against Meritage under the Repayment Guaranty. See Plan at 20-21.
While the negotiation and formulation of the Plan was proceeding, in July 2011, Meritage Nevada filed a proof of claim ("Meritage Proof of Claim") asserting an unliquidated proof of claim in the South Edge Bankruptcy Case.
JPMorgan served a demand upon Meritage for payment under the Repayment Guaranty, but Meritage did not respond by making any payment. Rather, on August 19, 2011 (after the initial version of the Plan was filed but prior to confirmation of the Plan), Meritage commenced the State Court Action. Meritage asserts four causes of action in the State Court Complaint.
In the counterclaim it filed in this Court, JPMorgan contends that "a Bankruptcy Event has occurred, thereby triggering... Meritage's liability under the Repayment
In August 2011, after Meritage filed the State Court Complaint but before the Removal Date, JPMorgan commenced an action against Meritage in the Nevada District Court captioned JPMorgan Chase Bank, N.A. v. Meritage Homes Corp., Case No. 11-1364 ("Nevada Repayment Guaranty Action"). The complaint in the Nevada Repayment Guaranty Action, which is substantially identical to the counterclaim that JPMorgan asserted in the State Court Action after it was removed to this Court, alleges that Meritage breached the Repayment Guaranty when it refused JPMorgan's demand for payment in response to the triggering events of South Edge's bankruptcy case. The Nevada Repayment Guaranty Action remains pending.
In October 2011, Meritage filed an objection to confirmation of the Plan.
The provision of the Plan that Meritage contended would prevent it from exercising its right of setoff, § 8.3, provides as follows:
Plan § 8.3.
Section 8.3 of the Plan bars claims against the Estate "except as otherwise provided in this Plan or the Confirmation Order." Plan § 8.3. The Plan defines "Secured Claims" to include claims for setoff under § 553 of the Bankruptcy Code. See Plan § 1.1 ("`Secured Claims' means any Claims secured by valid, perfected, and nonavoidable Liens on Collateral to the extent of the value of such Collateral (a) as set forth in this Plan, (b) as agreed to by the Holder of such Claim and the Plan Proponents, or (c) as determined by a Final Order of the Bankruptcy Court in
In fact, during the hearing on confirmation of the Plan, the Nevada Bankruptcy Court inquired of counsel for the Settling Builders regarding the concern that the Plan would prohibit Meritage from asserting setoff rights, and the following colloquy occurred on the record:
See Supplemental Hough Decl. Ex. 1, at 125:8-22.
On October 27, 2011, the Nevada Bankruptcy Court overruled Meritage's objections to the Plan and entered the Confirmation Order.
As stated above, the parties have filed the Stipulated Chart, which depicts the implementation of the Plan as of the Effective Date. The Stipulated Chart requires some textual explanation here. Keeping in mind that the purpose of the Stipulated Chart is to assist the Court in determining whether the State Court Action could conceivably have any effect on the Estate, the Court begins at the top center of the Stipulated Chart, in the box labeled "South Edge, LLC Estate." Three arrows radiate from that box — one of those arrows is attached to a box reflecting that $21 million in MI Funds were transferred to JPMorgan in its capacity as administrative agent for the Lenders (pursuant to the settlement of the MI Adversary Proceeding described above);
Confirmation Order § III.C.10 (emphasis added).
As set forth in the Stipulated Chart, on the Effective Date, the Estate (1) transferred to Inspirada Builders "virtually all assets including real property but not litigation claims [against] Meritage" and (2) "continue[d] to exist[,]" retaining certain assets, including litigation claims against Meritage under the Operating Agreement. According to a box labeled "Estate" at the center left of the Stipulated Chart and a footnote to that box, the Estate "[o]wns assets not assigned to [Inspirada Builders]" (including the litigation claims against Meritage under the Operating Agreement) and, with respect to those assets retained by the Estate, Inspirada Builders is the representative of the Estate ("Estate Representative"). In short, Inspirada Builders obtained the ownership of land and other assets, which it apparently intends to develop into a planned community in Henderson, while the Estate (1) continues to exist after the Effective Date and (2) retains certain assets (including claims against Meritage under the Operating Agreement but not claims under the Repayment Guaranty).
The box at the very center of the Stipulated Chart reflects that the Settling Builders received ownership of Inspirada Builders in exchange for the compromises set forth in the Plan and their funding of the Plan. Three boxes labeled "Funded by Settling Builders" radiate from the "Settling Builders" box — one extending to the right of the Stipulated Chart into the area at the top of which appears a box labeled "Lender Group JPMorgan — Administrative Agent," and two extending into the Estate.
The right side of the Stipulated Chart summarizes the Settling Builders' payment of funds to JPMorgan in the aggregate amount of $335 million. This amount includes $21 million in MI Funds, plus $313.5 million on the Lenders' secured claims and $500,000 on their unsecured claims.
Two boxes labeled "Funded by Settling Builders" appear in the area to the center left of the Stipulated Chart. As described in the lower of these boxes, the Settling Builders agreed to provide $1 million to fund payments to the holders of general unsecured claims. That amount has been funded. Under the funding commitment summarized in the upper box labeled "Funded by Settling Builders," the Settling Builders agreed to make payments to the holders of allowed "[Gap] Claims, Administrative Claims, Priority Claims & TIP Loan Claims." A footnote to the Stipulated Chart states: "Per the Plan, allowed Administrative, [Gap Claims], assumption/rejection and Priority claims entitled to payment under the Plan are funded by the Settling Builders[,]" with the "[a]dministration and payment of such claims [being] made by the Estate by the Estate Representative." The footnote also states that "[a]ny funds remaining in the Estate after such distributions and including the net recoveries on all Retained Actions (including litigation claims against Meritage) and other assets, if any, will flow to the benefit of the Acquirer, which is 100% owned by the Settling Builders."
The Stipulated Chart also addresses the Meritage Proof of Claim and the potential treatment of a setoff claim by Meritage. The Meritage Potential Offset box states: "Lenders and Settling Builders contend Meritage has a duty to pay under the Repayment Guaranty. Meritage denies such duty. Lenders and Settling Builders contend Meritage's Indemnity Claim (which is premised on the possibility Meritage may pay under the Repayment Guaranty) may have setoff value against the Estate Representative's potential claims against Meritage." Similarly, the Meritage Asserted Indemnity Claim box states: "Any allowed indemnity claim will not receive [a] distribution under Plan. To the extent the indemnity claim is allowed, it may have setoff value per the Plan treatment of Class S1 claims, against recovery on Litigation Claims."
In November 2011, Meritage appealed the Confirmation Order. That appeal is pending before the Nevada Federal District Court, Case No. 11-1963. As one of the proponents of the Plan, JPMorgan is a party to the appeal.
Meritage's original statement of issues on appeal identified certain issues that called into question confirmation of the Plan in its entirety, such as whether the Nevada Bankruptcy Court's finding that the Plan was proposed in good faith was clearly erroneous. The Amended Statement was filed, according to Meritage, because that issue and certain other issues were mooted by its failure to obtain an appeal bond and therefore a stay pending appeal. In the Amended Statement, Meritage states that it "does not intend to challenge on appeal any finding of fact or conclusion of law that, if reversed, would require that the [Confirmation] Order be vacated in its entirety or preclude transfers
In March 2012, the Estate Representative filed with the Nevada Bankruptcy Court a motion for an order compelling arbitration of: (1) the Estate's claims against Meritage under the Operating Agreement; and (2) the Meritage Proof of Claim ("Arbitration Motion"). See Notice of Related Filing ("Notice of Related Filing") (Doc. 60), Ex. 2. The Arbitration Motion states that the panel deciding the arbitration proceeding commenced by Focus did not award South Edge damages only because it found that Focus lacked standing to assert claims on behalf of South Edge, while the Estate Representative "has the standing Focus lacked, because it is the Estate Representative of
Attached to the Arbitration Motion is an arbitration demand in which the Estate Representative alleges that Meritage Nevada breached the Operating Agreement by inadequately funding South Edge and by failing to build out Inspirada ("Arbitration Demand"). See Notice of Related Filing, Ex. 1. The Estate Representative requests damages on behalf of the Estate in an amount not less than $23,298,000. See Arbitration Demand at 16.
JPMorgan contends that the relatedness of the State Court Action to the South Edge Bankruptcy Case provides a means of passage for the transfer of the parties' dispute with respect to the Repayment Guaranty to the Nevada Federal District Court, while Meritage argues that a lack of relatedness establishes a barrier between the Ohio State Court and the Nevada Federal District Court that JPMorgan should not have crossed. The Court addresses this gateway issue in the remainder of the opinion.
If the State Court Action was not related to the South Edge Bankruptcy Case on the Removal Date, then there was no basis for removal, no federal court has jurisdiction over the State Court Action, and the parties' arguments regarding the relative merits of transfer and equitable remand would be beside the point. See New England Wood Pellet, LLC v. New England Pellet, LLC, 419 B.R. 133, 136-37 (D.N.H. 2009) ("If subject matter jurisdiction is lacking, there is no power to do anything with the case except dismiss or remand it."); Rayonier Wood Prods., L.L.C. v. Scanware, Inc. (In re Scanware, Inc.), 411 B.R. 889, 893 (Bankr.S.D.Ga.) ("When presented with a motion to remand or a motion to transfer the venue of a proceeding which has been removed from the state court, the bankruptcy court must first evaluate whether the state court action was properly removed; that is, it must determine whether it has subject matter jurisdiction over the proceeding. If there is a jurisdiction defect and the parties and the action are not properly before the Court, any action taken by the Court would be void." (citations and internal quotation marks omitted), aff'd, 420 B.R. 915 (S.D.Ga.2009)).
The burden of demonstrating that the federal jurisdictional requirements for removal have been satisfied rests with the defendant. See Vill. of Oakwood v. State Bank & Trust Co., 539 F.3d 373, 377 (6th Cir.2008). JPMorgan, therefore, has the burden of proving relatedness.
Another issue raised by the parties is the date on which a matter needs to be related to the bankruptcy case in order for removal to be appropriate. JPMorgan contends that all that matters for purposes of removal is whether a matter was related to the bankruptcy case on the date of removal. Meritage, by contrast, argues that events occurring after the date of removal are relevant to the issue of whether removal was appropriate. By far, the majority view is that courts are not required to "constantly ... revisit jurisdictional findings to determine whether the effect of the litigation on the bankruptcy remains `conceivable'" because "federal jurisdiction arising under Section 1334 is determined ... on the basis [of] the facts at the time of removal." In re WorldCom, Inc. Sec. Litig., 294 B.R. 553, 556 (S.D.N.Y.2003) (citing Bissonnet Invs. LLC v. Quinlan (In re Bissonnet Invs. LLC), 320 F.3d 520, 525 (5th Cir.2003);
Even under the majority view, continued relatedness as of the present time is relevant to the issue of whether the State Court Action should be remanded to the Ohio State Court or transferred to the Nevada Federal District Court. Continued relatedness remains legally relevant because, as explained in more detail in § IV.B of this opinion, one of the most important considerations bearing on the transfer analysis is the strong presumption that a proceeding that could conceivably have an effect on a bankruptcy estate should be decided in the district where the bankruptcy case is pending. Although a proceeding could conceivably have had an effect on the estate on the date of removal, so that a federal court will have related-to jurisdiction to decide the matter, subsequent events, while not divesting the court of jurisdiction, might counsel against transfer if those events mean that the proceeding could no longer conceivably have an effect on the estate. The Court, therefore, will analyze relatedness both on the Removal Date and as of the present time.
Rhiel v. Cent. Mortg. Co. (In re Kebe), 444 B.R. 871, 876 (Bankr.S.D.Ohio 2011).
In a Chapter 11 case in which the bankruptcy estate ceases to exist after
Applying this standard, Meritage repeatedly argues that the State Court Action could not conceivably have any effect on the Estate because the Estate "is a legal fiction." Meritage Supplemental Post-Hearing Br. at 1, 4, 5, 6. This argument is unavailing for several reasons. First, the argument is inconsistent with the express provisions of the Plan and the Confirmation Order, which clearly provide for the continued existence of the Estate. Second, none of the six issues on appeal seeks to overturn those provisions of the Plan and the Confirmation Order. Third, the Stipulated Chart — to which Meritage agreed — states that the Plan provides that the Estate continues to exist after the Effective Date, and Meritage may not at this point disavow that stipulation. See Christian Legal Soc. v. Martinez, ___ U.S. ___, 130 S.Ct. 2971, 2983, 177 L.Ed.2d 838 (2010) ("This Court has ... refused to consider a party's argument that contradicted a joint stipulation [entered] at the outset of th[e] litigation.... [F]actual stipulations are formal concessions ... that have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact. Thus, a judicial admission ... is conclusive in the case." (internal quotation marks and citation omitted)). For all of these reasons, the Court must reject Meritage's arguments based on the alleged non-existence of the Estate.
Meritage also relies heavily on the fact that the "State Court Action is a
For the reasons explained below, the Court concludes that both on the Removal Date and as of the present time the outcome of the State Court Action could conceivably have an effect on the Estate. In analyzing why this is so, it is helpful to keep in mind the nature of a bankruptcy estate and the ways in which a proceeding may affect it. An "`estate' is created at the commencement of the bankruptcy case, and is `comprised' of, inter alia, `all legal and equitable interests of the debtor in property as of the commencement of the case[.]' 11 U.S.C. § 541(a), (a)(1)." Kellogg v. United States (In re W. Tex. Mktg. Corp.), 54 F.3d 1194, 1200 (5th Cir.1995). See also Reliance Ins. Co. of Ill. v. Weis, 148 B.R. 575, 581 (E.D.Mo.1992) ("The bankruptcy estate is created upon the filing of the petition for bankruptcy.... Section 541 of the Code establishes that the filing of the bankruptcy petition creates an estate and defines which property comprises the estate. Subsection 541(a)(1) defines property of the estate as `all legal or equitable interests of the debtor in property as of the commencement of the case.' This includes all choses in action and claims by the debtor against others." (citations omitted)). Whether a creditor will receive a recovery on its claim from a bankruptcy estate — and the extent of that recovery — will generally turn on two factors: the value of the assets comprising the estate and the amount of allowed claims asserted against it.
Given that a bankruptcy estate is comprised of property and that claims can be brought against the estate, a state court proceeding could conceivably have an effect on an estate in at least three ways that are relevant here. First, a proceeding could conceivably have an effect on an estate if it could potentially decrease the amount of claims against the estate. As explained below, this clearly was true of the State Court Action on the Removal Date. Second, a proceeding could conceivably have an effect on a bankruptcy estate if it could potentially decrease the value of property of the estate. That effect also was conceivable on the Removal Date — which is relevant to the issue of whether the State Court Action was properly removed — and also continues to be conceivable today, which is relevant to the issue of whether the State Court Action should be transferred or remanded. Also relevant to the transfer and remand issue is the fact that the outcome of the State Court Action could, as explained below, potentially increase the amount of claims against the Estate.
JP Morgan contends that the State Court Action was related to the South Edge Bankruptcy Case on the Removal
Meritage Reply at 4-5.
All that is true, but it ignores the fact that, as of the Removal Date, confirmation of the Plan was not a foregone conclusion. On the Removal Date, in fact, the Plan had not yet been confirmed, and Meritage was strenuously opposing confirmation on multiple grounds, including alleging a lack of good faith on the part of the proponents of the Plan. Although the Plan was later confirmed, as of the Removal Date it certainly was conceivable that it would not be. And if the Plan had not been confirmed, it is conceivable that the settlement under which the Lenders agreed to accept less than the full amount owed them in full satisfaction of their claims would have been in jeopardy. Under that scenario — which was certainly conceivable as of the Removal Date — a payment by Meritage under the Repayment Guaranty conceivably could have reduced the amount of the Lenders' claim against the Estate. And it is well established that an action that could result in a reduction of claims against the estate gives rise to the type of conceivable effect on the estate required to support a finding of related-to jurisdiction. See Mich. Tractor & Mach. Co. v. Red Top Rentals, Inc. (In re Red Top Rentals, Inc.), 2010 WL 2737182, at *3 (Bankr.E.D.Mich. Jan. 11, 2010) ("To the extent that MCAT recovers against Dowden, it will reduce MCAT's claim against the assets of the bankruptcy estate. Thus, an action by MCAT to enforce the guaranty `could conceivably' affect the Debtor's estate and `related to' jurisdiction exists."); Joremi Enters., Inc. v. Hershkowitz (In re New 118th LLC), 396 B.R. 885, 890-91 (Bankr.S.D.N.Y.2008) ("[G]uarantee claims are considered to be `related to' the bankruptcy case.... [I]f
And that could have been the effect on the Estate here as of the Removal Date. In the State Court Action, Meritage is seeking a declaratory judgment that it is not legally required to take the action — make payments on the Repayment Guaranty — that as of the Removal Date (before confirmation of the Plan) conceivably could have resulted in the reduction of the Lenders' claims against the Estate.
To be clear, a recovery by a creditor against a nondebtor guarantor will not necessarily have a conceivable effect on the estate in all, or even most, bankruptcy cases. The Court need not and therefore does not address generally the question of when a lawsuit between a lender and a nondebtor guarantor that could result in the guarantor's payment on the guaranty will have a conceivable effect on a bankruptcy estate. Indeed, an argument could be made in many bankruptcy cases that a reduction or elimination of the lender's claim would have no effect on the estate because there would be a concomitant increase in the amount of claims against the estate based on the rights of subrogation, reimbursement and/or indemnification asserted by the guarantor, the result being a mere substitution of creditors. See Boyer v. Simon (In re Fort Wayne Telsat, Inc.), 403 B.R. 590, 596 (Bankr.N.D.Ind.2009) ("[A] guarantor's payment of a debtor's obligation to a creditor does not affect the total amount of claims against the estate. Instead, it simply substitutes one creditor, the guarantor, for another, the original claimant. The total debt to be paid by the estate remains the same and, therefore, so does the distribution to the debtor's other creditors.").
Here, however, it was conceivable on the Removal Date that Meritage would have been unsuccessful in asserting rights such as subrogation and indemnification. First, the Repayment Guaranty expressly restricts Meritage's right of subrogation. It states as follows:
Repayment Guaranty § 6. Second, given Meritage's alleged breaches of the Operating Agreement, it was conceivable as of the Removal Date that the Estate would have had defenses to Meritage's indemnification claim. Because the Estate would not have had those same defenses against the claims of the Lenders, the effect of Meritage's being found liable on the Repayment Guaranty would not have been a mere substitution of creditors, a finding that also supports related-to jurisdiction here. See New 118th LLC, 396 B.R. at 891 ("`[R]elated to' jurisdiction has ... been found where the guaranty action will not necessarily result in a mere substitution of creditors. The reimbursement claim may stand on a different footing because it is for a different amount, or the debtor can assert defenses against the guarantor that it cannot assert against the common creditor."); Burns v. First Citizens Bank & Trust Co. (In re Rainbow Sec. Inc.), 173 B.R. 508, 511-12 (Bankr.M.D.N.C.1994) (holding that creditor's actions against nondebtor third parties was related to the debtor's bankruptcy case where "the estate might very well have defenses against the third-party defendants, as officers, shareholders and insiders of the debtor corporation, which it would not have if First Citizens were the creditor"). Cf. Canion, 196 F.3d at 585-86 (holding that creditor's action against nondebtor third parties was related to the bankruptcy case because, if the creditor succeeded, "the total amounts due on claims against [the debtor's] bankruptcy estate would be decreased," and the debtor might have a defense of unclean hands to the third parties' reimbursement claims). Thus, a determination that Meritage had breached the Operating Agreement was a distinct possibility on the Removal Date — potentially blocking a recovery by Meritage on its claims for indemnification or reimbursement. Accordingly, a finding in the State Court Action that Meritage was liable on the Repayment Guaranty could conceivably have had the effect, as of the Removal Date, of decreasing the amount of claims against the Estate.
Meritage argues that the State Court Action could not conceivably have had an effect on the Estate on the Removal Date because JPMorgan did not file its counterclaim — which is the only claim asserted in the State Court Action that would result in a payment by Meritage on the Repayment Guaranty — until after the Removal Date. This argument is unavailing. JPMorgan commenced the Nevada Repayment Guaranty Action, which is substantially identical to JPMorgan's counterclaim, before the Removal Date, and on that date it therefore was conceivable, if not inevitable, that JPMorgan would file a counterclaim seeking to hold Meritage liable for its alleged breaches of the Repayment Guaranty. Consequently, the fact that JPMorgan did not file the counterclaim until after the Removal Date provides no basis for finding that the State Court Action could not conceivably have had an effect on the Estate based on facts existing on the Removal Date.
"Section 1141(b) allows a debtor or a court to prevent or postpone the transfer of property of the estate to the new post[]confirmation entity by providing that assets do not vest in the reorganized entity or they vest after a delay or with qualifications." In re WorldCom, Inc., 2009 WL 2959457, at *2 (Bankr.S.D.N.Y. May 19, 2009) (internal quotation marks omitted). "When that occurs, assets remain `property of the estate' subject to the jurisdiction of the bankruptcy court and the dictates of the Bankruptcy Code." Id. The Plan and Confirmation Order make it abundantly clear, that this was the approach taken in the South Edge Bankruptcy Case. The Estate's claims against Meritage under the Operating Agreement remained property of the Estate after confirmation.
Those claims have value. But any recovery that might be obtained by JPMorgan on the Repayment Guaranty on behalf of the Settling Builders in the State Court Action could conceivably reduce that value, which would constitute an effect on the Estate. See Willis v. Litzler (In re TIC United Corp.), 194 Fed.Appx. 187, 188 (5th Cir.2006) ("Willis argues that the bankruptcy court lacked subject matter jurisdiction. We disagree. Willis' state court lawsuit was related to the bankruptcy case because the outcome of that proceeding could conceivably have [an] effect on the estate being administered in bankruptcy. Willis' state law tort claims can affect the debtor's bankruptcy estate by decreasing the amount of ... assets ... [available to the estate]" (internal quotation marks omitted)). As the Stipulated Chart demonstrates, to the extent that (1) Meritage is determined to have liability on the Repayment Guaranty and (2) the Meritage Proof of Claim is allowed, Meritage could conceivably utilize its indemnification rights asserted in that proof of claim to effectuate a setoff against any liability that Meritage is determined to have to the Estate under the Operating Agreement. Because the outcome of the State Court Action could result in Meritage asserting a setoff that in turn might reduce the value of property of the Estate (i.e., the Estate's claims against Meritage under the Operating Agreement), the State Court Action could conceivably have an effect on the Estate. This potential effect on the Estate existed on the Removal Date because, as of that date, the Plan provided that the Settling Builders could elect to leave the Estate's claim against Meritage under the Operating Agreement in the Estate, and the potential effect continues as of the present time because the Settling Builders in fact made that very election.
Meritage argues that it is not quite that simple, but the complexity that Meritage
In the Meritage Supplemental Post-Hearing Brief, Meritage identifies nine contingencies that it argues "must be resolved before any impact upon [the] Estate [that its setoff rights might have] can be considered `conceivable[.]'" Meritage Supplemental Post-Hearing Br. at 9. In the Court's view, certain of those contingencies need not occur in order for Meritage's potential setoff rights to cause the State Court Action to conceivably have an effect on the Estate, and each of the other contingencies either has already occurred or conceivably could occur.
The Court will first address the two contingencies that need not occur in order for the State Court Action to conceivably have an effect on the Estate based on Meritage's potential setoff rights — (1) that "Meritage must win its pending appeal as to the Third Issue on Appeal"
As to the first of those contingencies, Meritage argues that, even if the State Court Action resulted in a ruling that it was liable to JPMorgan on the Repayment Guaranty, and even if Meritage then sought to assert its indemnification claim as a setoff against any liability it is determined to have to the Estate under the Operating Agreement, the Plan would prohibit Meritage from effectuating a setoff unless it first prevailed on the Third Issue on Appeal. This argument, however, is inconsistent with the language of the Plan. As set forth above, nothing in § 8.3 of the Plan would prohibit Meritage from defensively asserting claims that are allowed by another Plan provision or the Confirmation Order. And Meritage's indemnity claim may become an allowed claim under the terms of the Plan for setoff purposes because the Plan defines "Secured Claims" to include claims for setoff under § 553 of the Bankruptcy Code; and under the Plan allowed setoff claims are classified as "Class S1 — Other Secured Claims." As also discussed above, during the hearing on confirmation of the Plan, the Nevada Bankruptcy Court inquired of counsel for the Settling Builders regarding the concern that the Plan would prohibit Meritage from asserting setoff rights. The Nevada Bankruptcy Court, apparently satisfied with the explanation provided, overruled Meritage's objections to the Plan and entered the Confirmation Order. The Court thus concludes that Meritage's right to assert its indemnification claim as a setoff against any recovery by the Estate is not dependent on the disposition of the Third Issue on Appeal.
Next, there is the contingency that has already come to pass — "[T]he Estate Representative must identify a litigation claim against Meritage." Meritage Supplemental Post-Hearing Br. at 9. The Estate Representative did so in the Arbitration Motion and in the Arbitration Demand.
The Court turns to the contingencies posited by Meritage that indeed must occur in order for the State Court Action to have an effect on the Estate. As explained below, each of those contingencies could conceivably occur. Indeed, a close analysis of those contingencies provides a roadmap for demonstrating in even greater detail how the outcome of the State Court Action could conceivably have an effect on the Estate.
Meritage first contends that it "must lose at least its declaratory judgment claims [under the Repayment Guaranty] in the State Court Action[,]" and "JPMorgan must prevail on its counterclaim [under the Repayment Guaranty] in the State Court Action[,]" id., in order for the State Court Action to conceivably have an effect on the Estate. It is not this Court's role to adjudicate the merits of the State Court Action. Rather, the Court is tasked only with determining whether it is conceivable that JPMorgan could obtain a judgment against Meritage on the Repayment Guaranty. The Court finds that it is conceivable that JPMorgan could obtain such a judgment. JPMorgan contends that a "Bankruptcy Event" occurred, thereby triggering Meritage's liability under the Repayment Guaranty. Meritage requests a declaratory judgment that JPMorgan has no rights against Meritage under the Repayment Guaranty, alleging that (1) Meritage tendered full payment to JPMorgan in April 2008, (2) JPMorgan wrongfully refused to accept Meritage's payment and refused to issue a partial lien release and (3) a Bankruptcy Event as defined in the Repayment Guaranty was not intended to include an involuntary bankruptcy initiated by JPMorgan. As to the first two allegations, the rulings of the Nevada Federal District Court regarding the effect of the release set forth in the Forbearance Agreement persuade the Court to conclude that JPMorgan conceivably could prevail under the Repayment Guaranty. As to the third allegation, it bears noting that the term Bankruptcy Event was defined in the Repayment Guaranty to include an involuntary bankruptcy in which an order for relief was entered, which is what happened in the South Edge Bankruptcy
Continuing down this road, Meritage argues that it "must either lose its breach of contract claim for damages against JPMorgan, or any award on such claim must not serve to offset JPMorgan's prevailing counterclaim award...." Meritage Supplemental Post-Hearing Br. at 9. True, but it is conceivable that Meritage could lose on its breach of contract claim, which is largely predicated on the same allegations that form the basis of its declaratory judgment claims.
Meritage also argues that the Estate Representative must "successfully prosecute a litigation claim against Meritage" under the Operating Agreement, id., in order for there to be a conceivable effect on the Estate. As with the State Court Action, it is not this Court's role to adjudicate the Estate Representative's claims against Meritage under the Operating Agreement. But in light of the Focus Arbitration — in which the arbitration panel found Meritage liable for certain breaches of the Operating Agreement — it is certainly conceivable that the Estate Representative could obtain a judgment against Meritage based on the Operating Agreement. See also Nelson Decl. at 3 (stating that, "[w]hile [Nelson] believe[d] that the Estate has a strong case against the Settling Builders and Meritage.... [she understood] that the potential damage awards to the Estate based upon those claims could vary widely from a net zero in damages to in excess of $500 million in damages...."). Thus, once again, JPMorgan has carried its burden of demonstrating that the State Court Action could conceivably impact the Estate.
Finally, Meritage contends that, in order for the State Court Action to conceivably have an effect on the Estate, its indemnification claim (1) "must be valid and not subject to any successful objection" and (2) "must meet the test for a valid setoff...." Meritage Supplemental Post-Hearing Br. at 9. As discussed above in the context of the potential reduction of claims against the Estate that the State Court Action could cause, it is conceivable that Meritage's indemnification claim, even if asserted only as a setoff, will be subject to valid defenses, especially if Meritage is found to be liable to the Estate for breaches of the Operating Agreement. In fact, JPMorgan itself argued at one point in these proceedings that Meritage "provides no evidence that it could recover from South Edge for funds it might have to pay to JPMorgan under the Repayment Guaranty" and "[n]or can it because Meritage is one of the equity owners of South Edge, not a separate and unrelated entity." JPMorgan Opp'n at 11-12. And the Estate Representative presumably will challenge Meritage's asserted right to indemnification on that basis either by objecting to the Meritage Proof of Claim in the South Edge Bankruptcy Case or, if the Nevada Bankruptcy Court grants its request to compel
In the final analysis, both on the Removal Date and as of the present time, the outcome of the State Court Action could conceivably have an effect on the Estate by (1) increasing the amount of claims against the Estate and (2) decreasing the value of claims held by the Estate. The State Court Action, therefore, is related to the South Edge Bankruptcy Case.
The Court finds that the State Court Action continues to be related to the South Edge Bankruptcy Case as of the present time because the outcome of the State Court Action could conceivably increase the amount of claims against the Estate. If Meritage was determined to have liability on the Repayment Guaranty in the State Court Action it might — if it also prevailed on the Third Issue on Appeal — assert an affirmative indemnification claim against the Estate. And, as of the present time, the amount of the claims held by JPMorgan and the other Lenders has been fixed by the provisions of the Plan, which has been confirmed. In fact, as of the present time, a recovery by JPMorgan in the State Court Action would inure to the benefit of the Settling Builders and would not result in a reduction of the Lenders' claims against the Estate. Thus, if Meritage successfully asserted an indemnification claim against the Estate affirmatively rather than as a setoff, this would increase the amount of claims against the Estate. And the Sixth Circuit has held that related-to jurisdiction exists over litigation between third parties that might increase the claims against the estate by means of indemnification. See Dow Corning, 86 F.3d at 492-94; Wolverine Radio Co., 930 F.2d at 1143 (holding that an indemnification provision supported jurisdiction even though the debtor "would not be affected until and unless [the third party] invoked the indemnification" provision and that it would "not require a finding of definite liability of the
Unlike its ability to assert a setoff, Meritage would be able to assert an affirmative indemnification claim only if it prevailed on the Third Issue on Appeal. The only position the Court takes in this regard is that it is conceivable that Meritage could prevail on the Third Issue on Appeal. Even if the Court were to consider that eventuality unlikely — an issue it need not reach — that would be of no moment because "[c]ertainty, or even likelihood, is not a requirement" for a finding of relatedness. Halper, 164 F.3d at 837.
The Court turns next to the issue of whether the State Court Action should be transferred to the Nevada Federal District Court or remanded to the Ohio State Court. The party seeking transfer, here JPMorgan, has the burden of demonstrating that the proceeding should be transferred. See Levy v. Cain, Watters & Assoc., PLLC, 2010 WL 271300, at *9 (S.D.Ohio Jan. 15, 2010).
The section of the Judicial Code under which JPMorgan seeks a transfer of the State Court Action, 28 U.S.C. § 1412, provides that "[a] district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties." Similarly, under 28 U.S.C. § 1404, "[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented." 28 U.S.C. § 1404.
In analyzing the convenience prong courts have considered the (1) location of the plaintiff and defendant, (2) ease of access to the necessary proof, (3) convenience of the witnesses and the parties and their relative physical and financial condition, (4) availability of the subpoena power for unwilling witnesses and (5) expense of obtaining unwilling witnesses. See id. at 841.
The Court concludes that, on balance, the factors to be analyzed under the transfer statutes (both the interest of justice and the convenience prongs) weigh in favor of transferring the State Court Action to the Nevada Federal District Court.
As explained in detail below, the primary considerations leading to this conclusion are (1) the continued existence of the Estate, (2) the effect that the State Court Action could have on the Estate, (3) the pendency of the South Edge Bankruptcy Case (to which the State Court Action is related) in Nevada and (4) the participation of JPMorgan and Meritage in the appeal of the Confirmation Order, which is pending in the Nevada Federal District Court.
"In deciding whether the transfer of an adversary proceeding would be in the interest of justice, courts give the greatest weight to whether the proposed transfer would promote the economic and efficient administration of the bankruptcy estate." Bavelis, 453 B.R. at 874. See also Gunner v. Anthony (In re Heritage Fin. Network, Inc.), 286 B.R. 318, 320 (Bankr.S.D.Ohio 2002) ("As for the interests of justice, nearly every case that has considered transfer of a bankruptcy proceeding has construed this phrase in section 1412 to give primacy to administrative matters affecting the estate." (internal quotation marks omitted)). It should not be surprising, then, that there is a strong
The Court also concludes that a transfer would serve the interests of judicial economy because the Nevada Federal District Court, as well as the Nevada Bankruptcy Court, has "developed a substantial `learning curve'" with respect to the facts and circumstances that gave rise to the State Court Action. Manville Forest Prods. Corp., 896 F.2d at 1391. For example, as JPMorgan has argued, the UCC Action and the Completion Guaranty Action would — despite their dismissal (which was anticipated at the time of the Hearing) and their lack of preclusive effect — counsel in favor of transfer and against equitable remand:
Tr. at 89:6-91:15. As discussed above, in connection with these actions, the Nevada Federal District Court became familiar with the Repayment Guaranty and the other facts relevant to the merits of the State Court Action.
The other factors to be considered when determining whether the interest of justice warrants transfer are either neutral or weigh in favor of transfer. There is no reason to believe that the parties would be unable to receive a fair trial in either the Ohio State Court or the Nevada Federal District Court. Meritage contends that remand is appropriate because it has demanded a jury trial. Yet Meritage provides no reason why the Nevada Federal District Court could not conduct a jury trial if Meritage indeed is entitled to one, and "[j]ury duty is a burden that ought not to be imposed upon the people of a community which has no relation to the litigation." Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508-09, 67 S.Ct. 839, 91 L.Ed. 1055 (1947). In light of the fact that the South
As the United States District Court for the Southern District of New York found when transferring the Completion Guaranty Action to the Nevada Federal District Court, "it is undoubtedly inconvenient for Defendants [Meritage and the other Members] to litigate against the same adversary at the same time in separate-but related actions on opposite sides of the nation." See JP Morgan Chase Bank, 2009 WL 1457158, at *6. See also Capital Venture Int'l v. Network Commerce, Inc., 2002 WL 417246, at *2 (S.D.N.Y. Mar. 15, 2002) (holding that "[t]here is a strong policy favoring the litigation of related claims in the same tribunal" because, among other things, it avoids wasted "time and expense for both parties" (internal quotation omitted)). So too here. JPMorgan and Meritage are litigating Meritage's appeal of the Confirmation Order against one another in the Nevada Federal District Court. Thus, although JPMorgan's main office is in Ohio,
Meritage relies on Gulf Oil for the proposition that "unless the balance is strongly in favor of the defendant, the plaintiff's choice of forum should rarely be disturbed." Meritage Resp. at 7. True, the United States Supreme Court promulgated that rule in Gulf Oil, but it then held that the rule did not apply in that very case where, among other things:
Gulf Oil, 330 U.S. at 509-10, 67 S.Ct. 839.
All that is true here as well. Neither the facts relevant to the State Court Action
What is more, given that Meritage sought and obtained transfer of the Completion Guaranty Action to the Nevada Federal District Court, "the court can hardly conclude that [Ohio] is [Meritage's] chosen forum." Hartford Fire Ins. Co. v. Westinghouse Elec. Corp., 725 F.Supp. 317, 322 (S.D.Miss.1989) ("Normally in determining the propriety of transfer, a plaintiff's choice of forum is entitled to primary consideration.... But where the plaintiff has filed two actions in Minnesota, and another in Georgia and finally elected to file suit in Mississippi, the court can hardly conclude that Mississippi is plaintiff's chosen forum. And, in any event, it has been recognized that a plaintiff's choice of forum is entitled to little weight where he has sued in a district other than the district of his residence."). See also Gresser v. Wells Fargo Bank, 2012 WL 1094338, at *2 (N.D.Cal. Mar. 29, 2012) ("[I]f the operative facts have not occurred within the forum of original selection and that forum has no particular interest in the parties or the subject matter, the plaintiff's choice is entitled only to minimal consideration.... The degree to which courts defer to the plaintiff's chosen venue is substantially reduced where the plaintiff's venue choice is not its residence or where the forum chosen lacks a significant connection to the activities alleged in the complaint.... [W]hen the plaintiff chooses a forum which has no connection to himself or the subject matter of the suit, and is thus not his `home turf,' the burden on the defendant is reduced and it is easier for the defendant to show that the balance of convenience favors transfer. If the operative facts have not occurred within the forum of original selection and that forum has no particular interest in the parties or the subject matter, [a] plaintiff's choice is only entitled to minimal consideration.").
The section of the Judicial Code under which Meritage seeks a remand of the State Court Action provides that an action may be remanded "on any equitable ground." 28 U.S.C. § 1452(b). Permissive abstention, which Meritage also requests, is governed by 28 U.S.C. § 1334(c)(1), which states that:
28 U.S.C. § 1334(c)(1). Permissive abstention under § 1334(c)(1) is "an extraordinary and narrow exception to the duty of the federal courts to adjudicate controversies which are properly before it." Bavelis, 453 B.R. at 881 (internal quotation marks omitted).
The equitable-remand and permissive-abstention analyses are "essentially identical...." Parrett v. Bank One, N.A. (In re Nat'l Century Fin. Enters., Inc., Inv. Litig.), 323 F.Supp.2d 861, 885 (S.D.Ohio 2004) (internal quotation marks
On balance, the factors to be considered in making the determination to equitably remand or exercise permissive abstention, at least as things now stand, appear to weight against both. Because it would result in an entirely new court becoming involved in the disputes between Meritage and JPMorgan rather than having the Nevada Federal District Court continue to adjudicate them, abstention and remand would result in the duplicative and uneconomical use of judicial resources. And because the Estate continues to exist, abstention and remand could affect the efficient administration of the Estate. Moreover, there is no reason to believe that a transfer would prejudice Meritage; Meritage has been litigating matters related to Inspirada in the District of Nevada for several years and is currently appealing the Confirmation Order in that district.
The Ohio Federal District Court could deny the Remand Motion outright.
Under the circumstances, the best approach appears to deny the Remand Motion without prejudice. First, the party seeking transfer, JPMorgan, itself suggested that the transferee court decide the equitable remand issue, while the party opposing transfer, Meritage, presumably would not be prejudiced by having another bite at the equitable-remand apple. Second, certain of the factors to be considered in the permissive-abstention analysis — including the burden on the docket of the court that will be deciding the merits — are best addressed by the court that would actually be hearing the matter if it is not remanded. The Court, therefore, recommends that the Ohio Federal District Court follow the approach taken in MD Acquisition and deny the Remand Motion without prejudice to the renewal of the motion in the Nevada Federal District Court.
For the foregoing reasons, the Court concludes that: (1) the State Court Action was related to the South Edge Bankruptcy Case on the Removal Date and remains related as of the present time; (2) transfer of the State Court Action to the Nevada Federal District Court is in the interest of justice and would serve the interests of convenience; and (3) equitable remand of the State Court Action to the Ohio State Court would not be appropriate. Accordingly, the Court recommends that the Ohio Federal District Court grant the Transfer Motion. The Court also recommends that the Ohio Federal District Court deny the Remand Motion without prejudice to the renewal of the motion in the Nevada Federal District Court.
Pursuant to Bankruptcy Rule 9033(b), "[w]ithin 14 days after being served with a copy of the proposed findings of fact and conclusions of law a party may serve and file with the clerk [of the bankruptcy court] written objections which identify the specific proposed findings or conclusions objected to and state the grounds for such objection." Fed. R. Bankr.P. 9033(b). In addition, "[a] party may respond to another party's objections within 14 days after being served with a copy thereof." Id.
The Clerk of the Bankruptcy Court is hereby directed to transmit this opinion, which shall serve as the Court's report and recommendation, to the Clerk of the District Court for the Southern District of Ohio, Eastern Division, for assignment to a District Judge. The Clerk shall defer transmittal of this report and recommendation to the District Court until such time as it has been served upon all parties and the objection period prescribed by Bankruptcy Rule 9033(b), including any extension of that period approved by the Court, has expired.
JPMorgan is a citizen of Ohio because it is a federally chartered bank whose main office is located in Ohio. See Murphy v. JP Morgan Chase, 2011 WL 6122642, at *3 n. 2 (S.D.Ohio Dec. 8, 2011) ("The Supreme Court has held that federally chartered national banks, which are not incorporated in any state `shall ... be deemed citizens of the state in which they are respectively located' for diversity jurisdiction purposes. Wachovia Bank, N.A. v. Schmidt, 546 U.S. 303, 306 and 318, 126 S.Ct. 941, 163 L.Ed.2d 797 (2006). Moreover, a national bank is `located' in the state where its `main office' is located as [designated] in its organization certification and articles of association. Defendant JPMorgan Chase Bank is a citizen of Ohio. JP Morgan's Articles of Association state that [its] `main office ... shall be in the ... State of Ohio.')." See also 28 U.S.C. § 1348 ("The district courts shall have original jurisdiction of any civil action commenced by the United States, or by direction of any officer thereof, against any national banking association, any civil action to wind up the affairs of any such association, and any action by a banking association established in the district for which the court is held, under chapter 2 of Title 12, to enjoin the Comptroller of the Currency, or any receiver acting under his direction, as provided by such chapter. All national banking associations shall, for the purposes of all other actions by or against them, be deemed citizens of the States in which they are respectively located." (emphasis added)).
28 U.S.C. § 157(c).
Repayment Guaranty § 1(a).
Plan at 12-13.
