TERRY L. MYERS, Bankruptcy Judge.
On April 16, 2015, Timothy Resler ("Resler") and Kimberly Resler (collectively, "Debtors") filed a petition under chapter 7.
On May 30, 2018, Resler filed in the District Court of the Fourth Judicial District of the State of Idaho, Ada County, a complaint against Ben Helton ("Helton") and Mineral King, LLC d/b/a Total Maintenance Solutions ("Mineral King"), that was assigned Case No. CV01-18-10080 (the "State Court Action"). See Adv. Doc. No. 1-1 ("Complaint"). On July 5, 2018, Helton and Mineral King filed a notice of removal of the State Court Action to this Court. Adv. Doc. No. 1. ("Removal Notice"). On August 8, 2018, Resler filed a motion to remand the State Court Action. Adv. Doc. No. 3 ("Remand Motion"). Helton and Mineral King (together the "Defendants") objected to the Remand Motion, as did the Trustee. Adv. Doc. Nos. 4, 5 (the "Objections").
The Remand Motion and Objections were heard on September 10, 2018, and taken under advisement. The Court resolves the matter by this Decision.
Rule 9027(a) requires a notice of removal under 28 U.S.C. § 1452 to "contain a short and plain statement of the facts which entitle the party filing the notice" to removal, and it also requires that party to state whether it "does or does not consent to entry of final orders or judgment by the bankruptcy court[.]" The Removal Notice here asserts that removal is made "[p]ursuant to 28 U.S.C. §§ 1452, 1478, and Bankruptcy Rule 9027[.]" It also alleges this Court has jurisdiction under 28 U.S.C. § 1334.
Removal under 28 U.S.C. § 1452(a) requires the district court to have jurisdiction under 28 U.S.C. § 1334.
980 F.2d at 566. Additionally:
Id. Gaus further notes that "the defendant bears the burden of actually proving the facts to support jurisdiction[.]" Id. at 567 (addressing issue of proving jurisdictional amount in controversy in a diversity case).
Id. (quoting McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178 (1936)).
Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 109 (1941), held that, in the context of removal, federal courts are required to "scrupulously confine their own jurisdiction to the precise limits which the statute has defined." Thus, even without a party raising the issue, the Court must independently evaluate its jurisdiction. See Henderson v. Shinseki, 562 U.S. 428, 434 (2011) ("[F]ederal courts have an independent obligation to ensure that they do not exceed the scope of their jurisdiction, and therefore they must raise and decide jurisdictional questions that the parties either overlook or elect not to press.").
The state court Complaint, for obvious reasons, makes no allegations regarding federal jurisdiction. This requires the Court to evaluate whether Defendants have, by reference to the "well-pleaded" allegations of the Complaint, carried the burden of establishing the causes alleged fall within this Court's jurisdiction.
Under 28 U.S.C. § 1334(b), the district court (and this Court by reference) has "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." A proceeding "arises under" Title 11 when the cause of action is created or decided by a provision of Title 11. In re Harris Pine Mills, 44 F.3d 1431, 1435 (9th Cir. 1995). The term "arising in" refers to those matters that arise only in a bankruptcy case, i.e., matters that are not based on any right created by Title 11 but which, nevertheless, would have no existence outside bankruptcy. Id. (citing In re Wood, 825 F.2d 90, 96-97 (5th Cir. 1987).
A civil proceeding is "related to" a case under Title 11 if "the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy," including those proceedings where "the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankruptcy estate." Fietz v. Great W. Savings (In re Fietz), 852 F.2d 455, 457 (9th Cir. 1988) (adopting the definition from Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)).
Assuming the removal is shown to be proper, a removed action may be remanded "on any equitable ground." 28 U.S.C. § 1452(b). The "any equitable ground" standard "is an unusually broad grant of authority. It subsumes and reaches beyond all the reasons for remand under nonbankruptcy removal statutes." Lake Country Invs., LLC v. Stewart (In re Lake Country Invs., LLC), 2000 WL 33712216, *3 (Bankr. D. Idaho July 10, 2000) (quoting McCarthy v. Prince (In re McCarthy), 230 B.R. 414, 417 (9th Cir. BAP 1999) (citation omitted)).
As noted above, the burden is on Defendants, as removing parties, to establish that the Court has jurisdiction over the removed action. The Removal Notice's contentions regarding jurisdictional facts, Adv. Doc. No. 1 at 2-4, were challenged by Resler. Adv. Doc. Nos. 3, 3-1. At hearing, Defendants presented no evidence, nor did they request judicial notice under Fed. R. Evid. 201. Defendants rely instead on Resler's assertions in the Complaint, and on their interpretations and characterizations of the factual and legal effect of those assertions in the Removal Notice and their Objection to remand.
Consistent with the above authorities, and given Defendants' approach to their burden, the Court will focus on the allegations made by Resler in the Complaint.
Resler contends that he, along with Helton, was an "owner" of an Idaho limited liability company called Total Maintenance Solutions, LLC ("TMS"), that performed landscaping services. Though there are unclear statements about TMS being "dissolved" at some unidentified point, Resler asserts that in 2014 he "sold" his TMS member interest to Helton. Helton, in turn, and as part of the negotiation regarding the purchase price for such interest, agreed to employ Resler as a full-time consultant to TMS. Resler and TMS entered into a July 2, 2014 consulting agreement that provided for an annual $175,000 fee to Resler, payable monthly. See Complaint at Ex. A, pp. 12-13 (the "Consulting Agreement").
Resler alleges Helton later wanted Mineral King to "formally purchase" Resler's member interest in TMS, and that this required a second purchase and sale agreement and another consulting agreement. Helton purportedly discussed dissolving TMS but ultimately determined Mineral King would take over use of the TMS name and assume TMS's liabilities. Resler asserts that he agreed, and entered into and signed a second consulting agreement with Mineral King. This subsequent agreement, unlike the Consulting Agreement, is not of record, and its date is not clear. It allegedly required full-time services from Resler and again provided a $175,000/year fee for those services.
The Complaint then alleges Helton "convinced Resler" to cancel this second consulting agreement on the basis that Resler, Helton and Bob Wheeler would form a new company in which Resler would be an owner. Resler contends he agreed and the second consulting agreement (i.e., with Mineral King) was "cancelled" in November 2014, but that he was still being paid under the earlier and "original" TMS Consulting Agreement.
After Debtors filed bankruptcy in April 2015, Resler and Helton discussed forming the new company, but that company was never created. Resler alleges Helton instead formed a separate company, Cutting Edge Landscape, with Wheeler, and that Mineral King ceased paying Resler's consulting fee in August 2015.
Resler retained counsel who made demands on Helton and Mineral King. Resler claims a settlement was subsequently reached on April 26, 2018, under which he would receive $160,000 from Helton and Mineral King, but that further disputes arose.
The resulting State Court Action filed by Resler seeks damages for breach of this 2018 settlement agreement (which Resler argues was confirmed in various emails, though never reduced to a single, signed writing). Resler alleges, alternatively (i.e., "[i]n the event the Court finds an enforceable settlement agreement was not reached"), that he should recover damages for breach of the July 2, 2014 Consulting Agreement that he contends Mineral King assumed and made payments under. Resler also asserts a count of fraud and intentional misrepresentation. Resler seeks a judgment of $160,000 under the alleged settlement agreement or, alternatively, compensatory damages for breach of the Consulting Agreement, or for fraud, in an amount to be proven at trial. He further seeks exemplary damages, attorneys' fees and costs, and pre- and post-judgment interest. The Complaint is verified by Resler.
As discussed above, Defendants were required to present sufficient facts to support their jurisdictional allegations and arguments. They relied solely on the Complaint's allegations and their legal argument. Though they did not request judicial notice of this Court's files and records in Debtors' chapter 7 case, the Court may take such notice sua sponte. Fed. R. Evid. 201(c), (d) (providing that the Court may take such notice on its own and at any stage of the proceeding). At times, such judicial notice is "necessary to explain the history of [the] case, to address certain procedural aspects, and to place the evidence in appropriate context with events in the case and adversary proceedings." U.S. Trustee v. Resler (In re Resler), 583 B.R. 238, 242 (Bankr. D. Idaho 2018). While "taking notice of what was filed, and when, does not mean that the contents of the filings necessarily have evidentiary weight[,]" In re Frantz, 534 B.R. 378, 380 n.4 (Bankr. D. Idaho 2015) (citations omitted), entries on a debtor's verified bankruptcy schedules and statements, when offered against a debtor, may have evidentiary effect under Fed. R. Evid. 801(d). Id. (citing In re Vin Vinhnee, 336 B.R. 437, 449 (9th Cir. BAP 2005); Jordan v. Kroneberger (In re Jordan), 392 B.R. 428, 444 n.32 (Bankr. D. Idaho 2008)).
Debtors filed their petition for relief on April 16, 2015. Doc. No. 1. They did not disclose any causes of action or claims against Helton or Mineral King. Id. at 13.
Debtors did not identify or disclose any executory contracts. Id. at 45 (sched. G). There was never a disclosure, on schedule G, schedule I or otherwise, of the July 2, 2014 Consulting Agreement with its $175,000 "annual fee" paid monthly by TMS for Resler's consulting.
In removing the state court action, Helton and Mineral King contend Resler's Complaint seeks recovery on alleged "contractual rights" under the July 2014 Consulting Agreement and that "The contractual right and alleged right to recovery are property of the [bankruptcy] estate to which the Trustee only has the right to collect or enforce[.]" Adv. Doc. No. 1 at 2. However, Resler's brief supporting his Remand Motion asserts the causes of action for breach of the Consulting Agreement did not "accrue" until Mineral King ceased paying the consulting fee in August 2015, four months after the bankruptcy was filed. And he argues the creation of the 2018 settlement agreement, and its breach, occurred even later. Therefore, Resler contends, none of the claims are property of the estate. Adv. Doc. No. 3-1.
In objecting to the Remand Motion and in support of their removal of the Complaint, Helton and Mineral King argue the breaches of the Consulting Agreement and/or alleged settlement "relate to the larger ongoing transfers and transactions occurring pre-petition[.]" Adv. Doc. No. 5 at 4. They also argue removal was based on Resler's lawsuit being one that is "related to" the bankruptcy case. Id. Additionally, Helton and Mineral King argue that Resler should be barred, under judicial estoppel principles, from pursuing claims that arise under, in their view, an "undisclosed executory contract." Id. at 5.
The gravamen of the State Court Action is (a) Helton and Mineral King breached the July 2, 2014 Consulting Agreement by the failure, commencing in August 2015, to make payments to Resler; (b) Helton and Mineral King breached a settlement agreement that was allegedly reached in April 2018; and (c) fraud, misrepresentation and fraudulent inducement by Helton, predicated on Helton's representations from November 2014 to August 2015 that Resler would be an owner of and receive profits from a new company.
The Court has previously evaluated the question of when an action accrues in the context of determining whether such action is a prepetition asset of a bankruptcy estate subject to the trustee's administration or a postpetition claim assertable by a debtor. Avery v. Mikkelsen (In re Mikkelsen), 2018 WL 4182448 (Bankr. D. Idaho Aug. 30, 2018). It explained that property of the estate under § 541(a)(1) includes accrued causes of action even if the debtor was unaware of the claims at the time he filed the petition, but held that a cause of action that only accrues post-petition is not property of the estate under § 541(a)(1) or § 541(a)(7). Id. at *3 (citing Porrett v. Hillen (In re Porrett), 564 B.R. 57, 67-69 (D. Idaho 2016) (internal citations omitted)). See also Krohn v. Glaser (In re Glaser), 2019 WL 1075613, *2 (9th Cir. BAP Mar. 5, 2019) ("Pre-petition causes of action are part of the bankruptcy estate and post-petition causes of action are not.").
To determine when a cause of action accrues, reference must be made to applicable state law. Mikkelson, 2018 WL 4182448 at *3 (citing Cusano v. Klein, 264 F.3d 936, 947 (9th Cir. 2001)). In Idaho, where all the relevant conduct and transactions here have occurred, a "cause of action generally accrues, and the statute of limitation begins to run, when a party may maintain a lawsuit against another." Western Corp. v. Vanek, 158 P.3d 313, 314 (Idaho App. 2006) (citing Galbraith v. Vangas, Inc., 655 P.2d 119, 122 (Idaho App. 1982)). A state court cause of action for breach of a written contract accrues upon breach even though no damages arise until later. Mason v. Tucker & Assocs., 871 P.2d 846, 853 (Idaho App. 1994).
Resler contends the breach (i.e., the failure to continue payments) occurred in August 2015, some four months post-petition. There is nothing in this record suggesting an earlier date. This is a post-petition cause of action.
The July 2, 2014 Consulting Agreement is attached to the Complaint. Determining whether Debtors' interest in this agreement constitutes property of the estate is within the Court's 28 U.S.C. § 1334 jurisdiction. Chiang v. Neilson (In re Death Row Records, Inc.), 2012 WL 952292, *14 (9th Cir. BAP March 21, 2012). That general grant of jurisdiction does not, however, conclude the analysis for purposes of removal or remand.
The Consulting Agreement requires Resler to provide services to TMS in the nature of business consulting and participation in daily operations and customer relations. Adv. Doc. No. 1-1 at 12. TMS is required to pay for those services. Id. There are other obligations imposed on Resler in regard to confidential information and non-competition. Id. at 13.
The Bankruptcy Code furnishes no express definition of an executory contract, but the legislative history to § 365(a) indicates "Congress intended the term to mean a contract `on which performance is due to some extent on both sides.'" In re Valley Club Homes, LLC., 2008 WL 2783258, *1 (Bankr. D. Idaho July 15, 2008) (citing N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 522 n.6 (1984) (quoting H.R. Rep. No. 95-595, p. 347 (1977)). Under the accepted "Countryman definition," a contract is executory if "the obligations of both parties are so far unperformed that the failure of either party to complete performance would constitute a material breach and thus excuse the performance of the other." Id. at *1-2 (citation omitted). The Consulting Agreement thus appears to qualify as an executory contract.
It is significant, however, that under the Consulting Agreement, Resler was required to personally perform certain services, and TMS was required to pay him for the same. This creates a "personal services contract." Section 365(c) provides:
11 U.S.C. § 365(c)(1)(A), (B). As explained in an authoritative treatise:
3 COLLIER ON BANKRUPTCY ¶ 365.07[1][b], p. 365-65. In Hopkins v. Saratoga Holdings, LLC (In re Colvin), 2007 WL 4553352 (Bankr. D. Idaho Dec. 20, 2007), a debtor (Colvin) sold his interest in a limited liability company formed to run a fitness franchise business. In return for his interest he was to receive a stream of payments. Colvin also agreed not to disparage the reputation of that business or its remaining owners. The Court stated:
Id. at *4 n.12.
Resler was a "self-employed business consultant," according to the schedules and statements filed in the case, and earned $19,000/month from such work, most of which apparently came from the Consulting Agreement.
The Court finds and concludes that claims under, or for breach of, the Consulting Agreement are not properly removable.
Resler's Complaint also sued Defendants on a theory of breach of an oral contract—the alleged settlement agreement reached orally and/or documented by emails—under which Defendants were to pay $160,000. According to the Complaint, the alleged settlement occurred after a March 2018 demand letter and subsequent negotiations. Complaint at 4-5 (¶¶ 19-24). Even assuming for the purposes of this Decision only that the various writings and/or other evidence establishes an enforceable settlement agreement, it would not have existed until 2018, well after the bankruptcy petition's filing on April 16, 2015. The cause of action for breach of such alleged settlement agreement is manifestly a post-petition claim. Removal as to this cause is not appropriate.
Resler asserts a claim for fraud or misrepresentation as an alternative theory, should it be concluded there is no enforceable settlement agreement. Complaint at 7. These claims are based on false promises regarding a new landscaping business, occurring between November 2014 and the cessation of payments under the Consulting Agreement in August 2015.
Idaho Code § 5-218(4), the statute of limitations for actions sounding in fraud, provides "[t]he cause of action in such case [is] not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake." Id. See also McCoy v. Lyons, 820 P.2d 360, 368 (Idaho 1991) ("The discovery rule applicable to fraud requires more than an awareness that something may be wrong but requires knowledge of the facts constituting fraud."); Michael v. Stephen F. Smith, Att'y at Law Chartered, 2010 WL 9589173, *6 (Idaho App. July 15, 2010) (citing Idaho Code § 5-218(4) and Nerco Minerals Co. v. Morrison Knudson Corp., 90 P.3d 894, 900 (Idaho 2004)).
As discussed above in connection with the alleged breach of the Consulting Agreement, the time of accrual of the cause of action is determinative. As to this fraud cause of action, the accrual is also postpetition. And, as with the other counts of the Complaint, any arguments of such cause being "sufficiently rooted" in the prebankruptcy past are, unavailing. This cause of action is postpetition in nature, and removal is inappropriate.
Defendants, as noted earlier, bear the burden of establishing that removal is proper. And in considering whatever showing might be made by the removing party, the Court is also required to independently evaluate and scrupulously confine its jurisdiction.
Defendants have failed to establish that the Court has jurisdiction over this action under 28 U.S.C. § 1334 as a proceeding arising under Title 11 or as one arising in the case. See Harris Pine Mills, supra (addressing tests for arising under and arising in jurisdiction).
As noted at the outset of this Decision, remand can be ordered "on any equitable ground" and this is an unusually broad grant of authority. See, e.g., McCarthy, 230 B.R. at 417-18. The Court may consider the same factors that apply to questions of permissive abstention. In re Diversified Contract Servs., Inc., 167 B.R. 591, 596 (Bankr. N.D. Cal. 1994). Those factors include:
Fed. Home Loan Bank of Chicago v. Banc of Am. Secs. LLC, 448 B.R. 517, 525 (C.D. Cal. 2011). However, "[b]ecause [28 U.S.C. §] 1452(b) affords `an unusually broad grant of authority,' any one of the relevant factors may provide a sufficient basis for equitable remand." Id.
It would belabor things unnecessarily to address each factor. Given the above findings and conclusions as to removal, the Court concludes there is here a lack of jurisdictional basis for retaining the matter; state law issues predominate; attempted removal could reflect possible forum shopping; there is a demand in the Complaint for jury trial; and there are issues of comity implicated. The Remand Motion will be granted.
The Court concludes that removal was not adequately justified, and the Remand Motion, Adv. Doc. No. 3, will be granted. The Court will enter an order accordingly.
In her arguments, Trustee asserts Resler's filing of the Complaint violated § 362(a)(3). Adv. Doc. No. 6 at 2. This is an issue not properly before the Court, as Trustee would have to file a motion under § 105(a) to seek relief for a stay violation. See Havelock v. Taxel (In re Pace), 67 F.3d 187, 192-93 (9th Cir. 1995) (trustee is not an "individual" entitled to seek damages under § 362(h) (now § 362(k)); In re Lake Country Inves. Ltd. Liab. Co., 1999 WL 33490220 *4-5 (Bankr. D. Idaho Sep. 22, 1999) (recognizing that, under Pace, while trustees who were natural persons could not use § 362(h), they were entitled to seek relief for stay violations under § 105(a)). The Court obviously does not speak here to the merit or lack of merit of such a contention.