Richard G. Andrews, United States District Judge.
Pending before the Court is the Motion for Leave to file interlocutory appeal from a Bankruptcy Court decision, Maxus Liquidating Trust v. YPF S.A., et al. (In re Maxus Energy Corp.), 597 B.R. 235 (Bankr. D. Del. 2019)
The Motion for Abstention is directed at the Trust's complaint (Adv. D.I. 1) concerning environmental liabilities of the bankrupt energy firm Maxus Energy Corporation ("Maxus" or "Debtor"). The background facts are set forth in the Opinion and only briefly summarized herein. Maxus, 597 B.R. at 239-43.
In the mid-1980s, Debtors sold their chemicals business to Occidental Chemical Corporation through a stock sale. The business was sold amidst health concerns about Debtors' plant in northern New Jersey. Just a few years earlier, the EPA declared that plant — and three other related locations — a superfund site and placed the site on its National Priorities List. Dioxin, a byproduct of the Agent Orange the plant manufactured, had been contaminating the area. Occidental sought indemnification through the stock sale. The clean-up effort was ongoing when, in 2005, the State of New Jersey sued Maxus, its parents, and Occidental in New Jersey Superior Court ("New Jersey Court") for their role in polluting the site ("New Jersey Action"). Occidental cross-claimed against Maxus for indemnification under the stock sale. Occidental also alleged that Maxus, its affiliate Tierra Solutions, Inc., YPF S.A. (parent of Maxus) and Repsol S.A. (grandparent of Maxus) were alter egos of each other. Maxus asserted various causes of action based on: (1) alter ego (declaratory relief), (2) breach of contract and contractual indemnification, (3) fraudulent transfers, (4) unjust enrichment, (5) tortious interference with contract, (6) civil conspiracy, (7) statutory contribution for environmental liabilities, and (8) fiduciary duty-based claims (collectively, the "New Jersey Claims"). Maxus, arguing that it was being scapegoated, impleaded hundreds of entities for polluting the site and contributing to its degradation. After nearly ten years, New Jersey settled with the parties, and Occidental agreed to pay $190 million. Other litigation continued.
On June 17, 2016, Maxus filed for bankruptcy, with Occidental as its largest creditor. The New Jersey Claims were removed to the United States Bankruptcy Court for the District of New Jersey and transferred to the Delaware Bankruptcy Court. Repsol moved the Bankruptcy Court to abstain from hearing the New Jersey Claims and remand those proceedings to the New Jersey Court. The Bankruptcy Court granted Repsol's abstention and remand motion under both mandatory and permissive abstention. In re Maxus Energy Corp., 560 B.R. 111, 121 (Bankr. D. Del. 2016). For mandatory abstention to apply under 28 U.S.C. § 1334(c)(2), six separate factors must be met, including that the matter is non-core, such that it is related to a bankruptcy proceeding but neither arises under title 11 nor in a case under title 11. With respect this factor, the Bankruptcy Court determined that the alter ego-based claims were non-core, as they "do not invoke a substantive right provided by title 11, nor are they part of a proceeding — even when analyzed separately from the NJ Environmental Claims — that could only arise in
On May 22, 2017, the Bankruptcy Court confirmed Maxus' Chapter 11 Plan, which created the Trust and vested it with the authority to pursue the Debtors' causes of action. (B.D.I. 1231). On November 1, 2017, the Trust moved to intervene in the New Jersey Action as of right. On November 17, 2017, the New Jersey Court granted the motion, ordering that the Trust "shall be treated as a party in this matter for all purposes." From then on, the Trust would bear the burden of litigation and of distributing to creditors any recovery, which would have otherwise inured to Occidental alone. Immediately thereafter, on November 22, 2017, the New Jersey Court entered final judgment on all of the New Jersey Claims in favor of Repsol, dismissing OCC's claims, including those for unjust enrichment, alter ego, fraudulent transfer, and civil conspiracy. On January 8, 2018, the Trust appealed the final judgment, and the appeal is pending. That appeal has divested the trial court of jurisdiction over the matter. Thus, the Trust is blocked from litigating in the New Jersey Court unless the appellate court remands and revives jurisdiction.
On June 14, 2018, the Trust filed the Complaint, which asserts twenty-three counts based on the same transactions, occurrences, and allegations that Occidental had asserted and lost in the New Jersey Action. The claims are against Repsol as well as YPF. As Occidental had previously asserted, the crux of the Trust's Complaint is that, for twenty years, Maxus' parents acted together to rob Maxus of its assets and leave third parties and taxpayers on the hook for its environmental liabilities. The Trust asserts fraudulent transfer claims ("544 Claims") under the Uniform Fraudulent Transfer Act of several states and under §§ 544 and 550 of the Bankruptcy Code. The Trust further asserts claims of unjust enrichment, alter ego, and civil conspiracy ("Non-544 Claims") only under state law.
On September 10, 2018, Repsol filed the Motion for Abstention, arguing that the Non-544 Claims were subject to mandatory abstention under 28 U.S.C. § 1334(c)(2),
Following briefing and oral argument (Adv. D.I. 100), the Bankruptcy Court denied the Motion for Abstention in its entirety. With respect to mandatory abstention, the Bankruptcy Court determined that it was not applicable because the Non-544 Claims were core and because the required state court action had not been commenced. Maxus, 597 B.R. at 242-46. In reaching this conclusion, the Bankruptcy Court held, "The New Jersey suit does not
This Court has jurisdiction to hear appeals "with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title." 28 U.S.C. § 158(a)(3). The parties do not dispute that the Order is interlocutory. Appeals of decisions not to exercise mandatory abstention pursuant to 28 U.S.C. § 1334(c)(2) are permitted under 28 U.S.C. § 1334(d). In re Seven Fields Development Corp., 505 F.3d 237, 249 (3d Cir. 2007).
Section 158(a) does not identify the standard district courts should use in deciding whether to grant such an interlocutory appeal. See id. "Typically, however, district courts follow the standards set forth under 28 U.S.C. § 1292(b), which govern interlocutory appeals from a district court to a court of appeals." In re AE Liquidation, Inc., 451 B.R. 343, 346 (D. Del. 2011).
28 U.S.C. § 1334 governs federal courts' jurisdiction over claims and mandates that the federal court abstain from hearing non-core bankruptcy matters concerning state-law issues under certain circumstances. Referred to as the mandatory abstention provision, section 1334(c)(2) provides:
Mandatory abstention requires that all six of the following elements are met: (1) the motion to abstain was timely brought; (2) the underlying action or proceeding pending in federal court is based upon a state law claim or cause of action; (3) the matter is non-core, such that it is related to a bankruptcy proceeding, but neither arises under title 11 nor in a case under title 11; (4) section 1334 is the sole basis for federal jurisdiction; (5) an action is commenced in state court; and (6) the action can be timely adjudicated in state court. See In re Longview Power, LLC, 516 B.R. 282, 293-94 (Bankr. D. Del. 2014). Section 1334(c) reflects a congressional judgment that parties wishing to litigate a state claim in state court but finding themselves in bankruptcy court purely "because the controversy is related to a bankruptcy, should be able to insist upon a state adjudication if that will not adversely affect the bankruptcy proceedings." Stoe v. Flaherty, 436 F.3d 209, 214 (3d Cir. 2006).
By the Motion for Leave, Repsol requests that this Court consider its appeal of the Order on an interlocutory basis. The Bankruptcy Court denied abstention both on a discretionary and mandatory basis as to all claims asserted by the Trust against Repsol. Repsol does not seek leave to appeal the discretionary portion of the Opinion denying abstention. With respect to mandatory abstention of the Non-544 Claims — the Trust's claims for unjust enrichment, alter ego, and conspiracy — Repsol does not dispute that the Bankruptcy Court properly identified each of the statutory elements that must be satisfied for mandatory abstention to be appropriate. Repsol challenges two specific aspects of the Opinion. First, Repsol claims that the Bankruptcy Court improperly determined that the Non-544 Claims alleged in the Complaint were "core," having previously determined that those claims, asserted by Occidental in the New Jersey Action, were non-core. Second, according to Repsol, the Bankruptcy Court improperly determined that there was no pending state court action in which the Trust's claims could be timely adjudicated.
A controlling question of law is one that (1) "would be reversible error on final appeal" or (2) is "serious to the conduct of the litigation, either practically or
Repsol claims that the Bankruptcy Court improperly determined that the Non-544 Claims alleged in the Complaint were "core." The Bankruptcy Court held, as a matter of law, that the Non-544 Claims were "core" bankruptcy claims — not subject to mandatory abstention — because: (i) the "alter ego claims of the Debtors' creditors are property of the estate and may only be pursued by the Trust," and (ii) the Non-544 Claims arose under the same events and are intimately connected with the core 544 Claims. See Maxus, 597 B.R. at 243-44. The Bankruptcy Court also held, as a matter of law, that the "appropriate action in state court ha[d] not been commenced" — and therefore could not be timely adjudicated — because the New Jersey Action was one in which Occidental (now the Trust) was seeking monetary relief only for itself and its own damages, while the Trust is now seeking to recover for all creditors. See id. at 245-46. The Court agrees these rulings are controlling questions of law, satisfying the first element.
The "controlling question of law" also must be one as to which there is "substantial ground for difference of opinion." 28 U.S.C. § 1292(b). This calls for more than mere disagreement with the ruling of the bankruptcy court. To satisfy this standard, "the difference of opinion must arise out of genuine doubt as to the correct legal standard." Hulmes v. Honda Motor Co., 936 F.Supp. 195, 208 (D.N.J. 1996), aff'd, 141 F.3d 1154 (3d Cir. 1998); see also In re Physiotherapy Holdings, Inc., 2017 WL 6524524, at *6 (D. Del. Dec. 21, 2017) (same). Conflicting and contradictory opinions can provide substantial grounds for a difference of opinion. White v. Nix, 43 F.3d 374, 378 (8
In the Opinion, the Bankruptcy Court found that the third requirement for mandatory abstention — that the claims to be abstained from are non-core — was not met. Repsol concedes that the Bankruptcy Court properly determined that the Trust's fraudulent conveyance claims (the "544 Claims") are core, but disputes the Bankruptcy Court's finding that the "Non-544 Claims" are also core. "Whether claims are considered core or non-core proceedings dictates not only the bankruptcy court's role and powers but also the availability
According to Repsol, the Bankruptcy Court's analysis is contrary to well established law. (See D.I. 1 at 10-11). Recognizing that the Bankruptcy Court would need to evaluate each claim individually, Repsol argues that it sought mandatory abstention over the Non-544 Claims only based on established case law holding that state-law alter ego, unjust enrichment, and civil conspiracy claims are non-core. (See D.I. 1 at 9-10 (citing In re LTC Holdings, Inc., 587 B.R. 25, 39 (Bankr. D. Del. 2018) (alter ego claims)); DeGirolamo v. Devonshire Fund, LLC (In re Myers), 2013 WL 6080270, at *7 (Bankr. N.D. Ohio Nov. 18, 2013) (civil conspiracy claims)). However, Repsol argues, the Bankruptcy Court's analysis did not proceed claim by claim. The Court agrees. The Bankruptcy Court's analysis included two main points, neither of which clearly supports a core finding under prevailing Third Circuit law.
After detailing why the 544 Claims (fraudulent transfers) are core (undisputed by Repsol), the Bankruptcy Court noted that even though state law provides the substance of the 544 Claims, "the power to bring the claim in the first place arises under federal law. Similarly, the alter, ego, unjust enrichment, and conspiracy counts are core." Maxus, 597 B.R. at 243-44. The Bankruptcy Court noted that when coupled with allegations of another wrong, alter ego can constitute an independent claim, and under the Third Circuit's decision in Emoral, the alter ego claims of the Debtor's creditors are property of the estate and may only be pursued by the Trust. (Id. at 244 (citing In re Emoral, Inc., 740 F.3d 875 (3d Cir. 2014))). This is one aspect of the Bankruptcy Court's decision that the Non-544 Claims are core.
As noted in the Clarification Opinion, "The Third Circuit has long recognized that alter ego actions are often considered non-core, `related to' proceedings." Maxus, 571 B.R. at 661. The Bankruptcy Court previously relied on the Third Circuit's decision in Phar-Mor, Inc. v. Coopers & Lybrand, 22 F.3d 1228, 1239-40 (3d Cir. 1994), holding that proceedings by debtor corporations to pierce their own veils are non-core. See id. Although the Bankruptcy Court had previously abstained from the same Non-544 Claims asserted by Occidental,
However, the Third Circuit rejects the proposition that a claim is core merely by virtue of the fact that the Trustee advances those claims on behalf of the Debtor or for the purpose of bringing property into the estate. See Phar-Mor, 22 F.3d at 1239 n.19 (observing such a notion "[s]urely [] sweeps too broadly" given that even a "debtor corporation's state law breach of contract action against a third party, if successful, will bring property into the estate of the debtor. But such a proceeding is precisely the type of proceeding that is non-core and outside the power of the bankruptcy court to adjudicate."). The cases cited by Trustee do not support the argument that a claim is core merely by virtue of the fact that a Trustee asserts those claims in his official capacity on behalf of the estate. See In re Sys. Eng'g & Energy Mgmt. Assocs., Inc., 252 B.R. 635, 643-44 (Bankr. E.D. Va. 2000) (rejecting Trustee's contention that "claims asserted in this adversary proceeding are core proceedings, in part, because they represent claims that the Trustee advances in his official capacity pursuant to 11 U.S.C. § 544"). Outside the Third Circuit, there is a split among courts considering the issue of whether veil piercing or alter ego claims are subject to the core jurisdiction of the bankruptcy court See id. at 649 & n.17. Repsol cites various decisions finding such claims non-core.
As the Bankruptcy Court noted in the Clarification Opinion, Emoral "provides the current Third Circuit framework for determining whether claims predicated upon successor or alter ego liability against a third-party non-debtor constitute property of the bankruptcy estate." Maxus, 571 B.R. at 656. "Specifically, Emoral confronted the issue of whether personal injury claims arising from the alleged wrongful conduct of the debtor could be asserted on a `mere continuation' theory of successor liability against a third-party non-debtor corporation who was the prepetition purchaser of the debtor's assets." Id. As a threshold matter, "[a]fter a company files for bankruptcy, creditors lack standing to assert claims that are property of the estate." Id. (citing Emoral, 740 F.3d at 879). The Bankruptcy Code defines the "estate" as including "all legal or equitable interests of the debtor in property as of the commencement of the case." Emoral
Emoral, 740 F.3d at 879. The Third Circuit instructed that, to determine whether the claims at issue constituted property of the estate, the nature of the cause of action itself must be examined. Id. In Emoral, the Third Circuit ruled that the plaintiff's claims were "general" instead of "individualized," and, therefore, property of the bankruptcy estate.
Although the Bankruptcy Court previously determined the Non-544 Claims to be "non-core" in the Abstention and Clarification Opinions,
A second aspect of the Bankruptcy Court's determination — that the Non-544 Claims "arise under the same events as the 544 Claims and are intimately connected to them," as "part of the same story as the core fraudulent transfer claims" — appears insufficient to establish that the Non-544 Claims are core under prevailing Third Circuit law. See Maxus, 597 B.R. at 244. Repsol correctly argues that such a "predominantly core" analysis has been rejected by the Third Circuit, which requires that an action must be analyzed on a claim-by-claim basis. See In re Exide, 544 F.3d at 206; Halper, 164 F.3d at 839 ("the claim-by-claim approach [i]s the only one consistent with the teachings of Marathon
The Court agrees with Repsol that the cases cited by Trustee are non-controlling and factually dissimilar,
According to Repsol, the Bankruptcy Court improperly determined that there was no pending state court action in which the Trust's claims could be timely adjudicated. In finding that mandatory abstention did not apply, as an appropriate action in state court has not been commenced, the Bankruptcy Court observed that:
Maxus, 597 B.R. at 245. Recognizing that the Trust intervened in the New Jersey Action as a party "for all purposes," and could conceivably "further amend[] to mirror the federal proceeding," the Bankruptcy Court observed that "this enlargement is hypothetical and has not happened yet." Id. While the Trust has replaced Occidental as the party to bring the state appeal, the Bankruptcy Court reasoned that, as the litigation currently stands, its scope is still limited to Occidental's remedies, and if the Trust prevails in New Jersey, at most it could recover the damages for harm Occidental suffered — it could not recover the damages for any other creditor's harm. Id. "[T]o the extent that other creditors could recover at all from the New Jersey Litigation, they would be confined to whatever share of Occidental-related damages Trustee distributes to them. Other than [Occidental], no creditor could recover for its own damages in the New Jersey Litigation. This is precisely what the Trust is trying to do here: allow creditors to recover for all their relevant damages, not just share in OCC's." Id. at 245-46. "The Trust's late-stage intervention and appeal do not render the New Jersey Litigation capable of providing relief from the harm of all creditors, not just [Occidental]. Because the New Jersey Litigation is confined to remedying [Occidental] for its harm and cannot offer the more expansive remedy sought here, it does not support mandatory abstention." Id.
Repsol argues that this determination misapprehends the significance of damages to the analysis and the Trust's role in the New Jersey Action. According to Repsol, the amount of damages sought is irrelevant and does not change the fact that the Trust is pursuing the substantively identical claims in the adversary proceeding as those that were asserted in New Jersey. (See D.I. 1 at 13-16; D.I. 6 at 2, 6-9). Repsol asserts, "By ignoring the identical nature of the actions pursued by the Trust in New Jersey and the Bankruptcy Court in terms of the legal theories advanced, transactions and occurrences alleged, and the causes of action pursued," and "instead focusing on the number of creditors or amount of damages sought to be recovered," the Bankruptcy Court will unfairly expose Repsol to multiple rounds of litigation on the same causes of action. (See D.I. 6 at 7).
In considering whether an action has been commenced in state court, the Bankruptcy Court noted, "Though the Code itself does not articulate the kind of state court action that satisfies [28 U.S.C. § 1334(c)(2)], any action will not do." Maxus, 597 B.R. at 245. "[T]his Court has denied abstention when the state action does not "parallel ... the substance of the adversary proceeding." Id. (citing Matter of Total Tech. Servs. Inc., 142 B.R. 96, 100 (Bankr. D. Del. 1992)). "Other courts interpreting this provision consider whether the federal proceeding could afford relief that the state proceeding could not." Id. (citing In re Nationwide Roofing and Sheet Metal, Inc., 130 B.R. 768, 778-79 (Bankr. S.D. Ohio 1991)).
Trustee argues that the Bankruptcy Court was correct, as the Trust has never commenced any action in New Jersey to vindicate its claims, and given the procedural posture of the New Jersey Action —
To be appropriate for interlocutory appeal, a difference of opinion must arise out of genuine doubt as to the correct legal standard. The Court finds no genuine disagreement as to the correct legal standard here. Moreover, the Bankruptcy Court determination's was consistent with well established Third Circuit law that the New Jersey Action is not a "parallel proceeding" to which the Trust's Non-544 Claims can be appended. See, e.g., In re Samson Resources Corp., 559 B.R. 360, 371 (Bankr. D. Del. 2016) ("inherent in the concept of abstention is the presence of a pendent state action"); In re SemCrude, L.P., 428 B.R. 82, 101 (Bankr. D. Del. 2010) (holding that "a state action has not properly been commenced" because "the state court proceeding could not, if [plaintiff] prevailed, provide the relief which Nationwide could obtain in this adversary.")
Courts do not allow interlocutory appeals where a successful appeal "would only promote piecemeal determination of the questions raised in the adversary action and would likely create unnecessary delay." AE Liquidation, 451 B.R. at 347. See In re Advanced Marketing Services, Inc., 2008 WL 5680878 (D. Del. Apr. 3, 2008). Additionally, "interlocutory appeal is meant to be used sparingly and only in exceptional cases where the interests cutting in favor of immediate appeal overcome the presumption against piecemeal litigation." AE Liquidation, 451 B.R. at 349 (internal quotation marks omitted).
Repsol argues that an immediate appeal will materially advance the termination of the litigation because the correct opinion would limit the claims against Repsol to the 544 Claims, "eliminate significant discovery and briefing on the Non-544 Claims," and focus the Bankruptcy Court
According to the Trustee, Repsol's argument, that the "544 Claims lend themselves to tailored discovery and legal issues," must be rejected in the context of a motion for abstention, which is premised on the availability of a parallel proceeding in which the claims can actually be litigated. (D.I. 7 at 14). Additionally, the Trustee argues, the 544 Claims will in fact necessarily overlap with discovery on the Non-544 Claims: as the Bankruptcy Court determined, the alter-ego, conspiracy, and unjust enrichment claims "arise under the same events as the [core] 544 Claims and are intimately connected with them." Maxus, 597 B.R. at 244. Trustee argues the relief requested by Repsol could only promote piecemeal litigation, as YPF Defendants have not sought abstention; thus, Repsol's Motion for Leave contemplates no fewer than three separate sets of litigation, all centered on the same operative set of facts: "(1) the Trust and YPF will continue to litigate both the 544 Claims and the Non-544 Claims in the Bankruptcy Court; (2) Repsol will defend the 544 Claims in Delaware; and (3) Repsol will defend the Non-544 Claims in New Jersey both through the appeal and any subsequent remand." (D.I. 7 at 13).
Repsol's point is well-taken that abstention on the Non-544 Claims has the potential to significantly reduce discovery and briefing in the adversary proceeding, as those claims require narrow discovery regarding the value of the allegedly fraudulently transferred assets, as opposed to discovery regarding corporate behavior. However, even if the Court were to grant leave to appeal the Bankruptcy Court's core determination with respect to the Non-544 Claims, based on grounds for disagreement discussed above, the Court has already determined that leave to immediately appeal the other elements required for mandatory abstention — an existing state action in which the claims can be timely adjudicated — is not justified here. As all six elements of the statute must be met for mandatory abstention to apply under 28 U.S.C. § 1334(c)(2), granting immediate leave to appeal the core determination would not serve to eliminate claims or advance the litigation of the adversary proceeding.
For the reasons explained above, the Court will deny the Motion for Leave. A separate order shall be entered.
