Chief Judge Cynthia A. Norton
Reorganized Debtor, Pursell Holdings, LLC ("Pursell Holdings"), moved to reopen this closed chapter 11 bankruptcy case so that it could file a motion to enforce the discharge injunction against respondents, North River Holdings, LLC; Southern Platte Holdings, LLC; David Barth, and John Barth (collectively, the "Southern Platte Parties") (ECF No. 287). The court reopened the case, and Pursell Holdings thereafter filed its Motion to Enforce Discharge Injunction (ECF No. 291), along with suggestions in support (ECF No. 292). The Southern Platte Parties oppose the motion, arguing that the underlying issues can and should be decided by the judge presiding over the state court litigation that has been pending for more than three years and is ready for trial. For the reasons that follow, this court will abstain and authorize the state court to decide any tangentially-related bankruptcy issues, including an alleged discharge injunction violation.
At this court's status hearing held on August 27, 2019, counsel for Pursell Holdings requested an additional hearing to put on evidence and to present oral argument, due to the "complexity" of the case. Counsel also stated on the record, however, that he agreed to the authenticity of all the state court pleadings attached to the filings in this case and did not specify any particular additional evidence he wished to present. Likewise, neither side contested the court's authority to take judicial notice of the pertinent state court filings. Holding another hearing would not materially assist the court because (1) there is no requirement there be evidence on a motion to abstain; (2) the state court pleadings sufficiently set out the issues; and (3) the matter is simply not that complex. For those reasons, the court denied Pursell Holdings' request for an opportunity to present evidence and oral argument.
North River Holdings, LLC ("North River") is a residential real estate development limited liability company created in 2005. It had two members: Pursell Holdings (the debtor in this bankruptcy case) and Southern Platte Holdings, LLC ("Southern"), each holding a fifty percent interest in the company. Southern is owned by David and John Barth.
Pursell Holdings filed this chapter 11 bankruptcy case on March 10, 2011. At the time of the bankruptcy filing, whatever interest Pursell Holdings held in North River became an asset of the bankruptcy estate pursuant to 11 U.S.C. § 541.
In January 2012, the Honorable Jerry W. Venters of this court, now retired, entered an Order Approving Debtor's First Amended Disclosure Statement and Confirming Debtor's First Amended Plan of Reorganization (ECF No. 263). As relevant here, the plan provided for a revesting of the estate assets, including the debtor's interest in North River, in Pursell Holdings as the reorganized debtor. About
According to Pursell Holdings, in 2014, after the bankruptcy case was fully administered and closed, the Southern Platte Parties unilaterally terminated Pursell Holdings' membership in North River and adopted a resolution to liquidate North River. Sometime in 2015, according to Pursell Holdings, the Southern Platte Parties then caused North River to transfer its assets to an entity owned by the Barths, Elmcreek Development, Inc., for less than fair value. Pursell Holdings alleges that, to justify these actions, the Southern Platte Parties took the position that Pursell Holdings was dissociated from North River as a result of the bankruptcy filing.
On March 10, 2016, Pursell Holdings filed a lawsuit against the Southern Platte Parties (and others, including Elmcreek Development) in the Circuit Court of Clay County, Missouri.
In very simple terms, as relevant here, the Southern Platte Parties have offered two primary justifications to the state court for their actions in connection with North River: (1) that Pursell Holdings' membership interest in North River was diluted when Pursell Holdings failed to make capital contribution calls and, since Southern now holds the majority of the membership interest in North River, it is properly in control of the company; and (2) that Pursell Holdings' bankruptcy filing caused its dissociation from North River under the terms of North River's operating agreement and state law and, and that Pursell Holdings lost its ownership interest and voting rights in the company as a result.
More than three years after filing the state court lawsuit, and on the eve of a jury trial, Pursell Holdings moved this court to reopen its bankruptcy case. Pursell Holdings argues that its fifty percent interest in North River revested in it upon confirmation of the plan and that the Southern Platte Parties' position in state court that the bankruptcy filing operated as a dissociation of Pursell Holdings from North River violates the bankruptcy discharge injunction (ECF No. 287). Pursell Holdings further argues that North River is an asset which was expected to contribute to the payment of creditors under the plan. The Southern Platte Parties request that the bankruptcy court abstain and allow the state court litigation to proceed on all matters pending there. Although this court does not have the benefit of having all the state court filings,
28 U.S.C. § 1334(a) gives the federal courts "original and exclusive jurisdiction over cases under title 11"
Pursell Holdings has made it clear it is not asking this court to decide whether its membership interest was diluted due to contribution calls or any other state law issues involved in what it has described as a "a garden variety shareholders/members dispute,"
The bankruptcy discharge injunction is found in § 524(a) of the bankruptcy code, which provides, in its entirety:
In other words, a bankruptcy discharge: voids judgments to the extent they determine the personal liability of a debtor (§ 524(a)(1)); enjoins any action or act to collect a debt as a personal liability of a debtor (§ 524(a)(2)); and enjoins collection of community claims from the property of a debtor (§ 524(a)(3)). A bankruptcy court has jurisdiction to decide whether a creditor has violated the discharge injunction.
Despite having labeled the Southern Platte Parties' actions as a "discharge violation," Pursell Holdings is not arguing that the Southern Platte Parties have done any of the specific actions prohibited by § 524. As a result, this court questions whether the Southern Platte Parties' alleged actions fall within the discharge injunction.
When Congress enacted 28 U.S.C. § 1334(b) giving bankruptcy courts jurisdiction over bankruptcy-related matters, it "granted state courts concurrent jurisdiction
The Southern Platte Parties thus ask this court to abstain so that the matters can all be decided in the state court where they have been pending for more than three years. Section 1334 contains two provisions regarding a bankruptcy court's abstention from hearing state court-related matters. Subsection 1334(c)(2), referred to as the "mandatory abstention" provision, provides, in relevant part:
In other words, the bankruptcy court is required to abstain if "(1) a party to the proceeding files a timely motion to abstain; (2) the proceeding is based upon a state law claim or state law cause of action; (3) the proceeding is a related (non-core) proceeding; (4) absent § 1334(b), the cause of action ... could not have been commenced in a federal court; and (5) the proceeding is commenced and can be timely adjudicated in a state forum."
No one disputes that the Southern Platte Parties' motion to abstain is "timely," and the court finds that it is.
Subsection 1334(c)(1) provides a second basis for abstention, known as "permissive abstention." That section provides, in relevant part, that "nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11."
Factors courts consider in determining whether permissive abstention include:
"Courts should apply these factors flexibly, for their relevance and importance will vary with the particular circumstances of each case, and no one factor is necessarily determinative."
Addressing each factor in turn:
Simply put, since the plan has been confirmed and the case fully administered,
Although the state court litigation does have a bankruptcy component, state law issues predominate over the litigation as a whole. Indeed, that is undoubtedly why Pursell Holdings chose the state court as the forum in which to litigate. This factor weighs heavily in favor of abstention.
As to the third factor, counsel for Pursell Holdings suggests that the state court judge would prefer this court to decide the bankruptcy issues because she does not "speak bankruptcy." But the partial transcript of the hearing in which the judge made that remark shows that counsel for the Southern Platte Parties and another defendant in the state court action, Platte Valley Bank of Missouri, unnecessarily complicated matters by suggesting to the judge there was a bankruptcy trustee, there was a standing problem, and that a bankruptcy estate would be affected by the litigation.
In any event, the reopening of this case did not create a new estate; neither is a bankruptcy trustee involved nor will anything be sold in connection with this bankruptcy case. The only bankruptcy-related issues this court perceives here are (i) whether the bankruptcy code or confirmed plan override North River's operating agreement and state law providing for an automatic dissociation of Pursell Holding's interest in North River; and (ii) what ownership interest was "revested" in Pursell Holdings upon confirmation of the plan.
On the first point, the state court judge is more than capable of interpreting the law concerning such ipso facto clauses in operating agreements (clauses providing for some automatic action upon the filing of a bankruptcy or other insolvency related event) and the like. Moreover, given that both sides appear to have raised estoppel and other defenses for whether a disassociation did or did not occur, the state court is also in the best position to decide that issue.
On the second point, confirmation of a plan of reorganization merely creates a new contract between the debtor and its creditors,
There is indeed a state court proceeding — brought by Pursell Holdings — which: has been pending for more than three years, has been fully briefed for summary judgment (including the bankruptcy-related issues), and was on the eve of trial when this case was reopened. This factor weighs heavily in favor of abstention.
Pursell Holdings has not argued that there is another independent basis for federal court jurisdiction, such as diversity of citizenship and this court finds none. This factor weighs in favor of abstention.
This factor typically comes into play when a state court case has been removed to the bankruptcy court because the out-come could affect the administration of the underlying bankruptcy case. In this case, the bankruptcy case was fully administered and closed in 2014 such that there is no main bankruptcy case pending, but for the reopening. This factor weighs in favor of abstention.
Whether a creditor has violated the discharge injunction is undoubtedly a core proceeding, although, as noted previously, bankruptcy and state courts have concurrent jurisdiction to determine if the injunction was violated. As also noted previously, Pursell Holdings appears to concede that the issue here is not really whether Southern Platte violated the discharge injunction, but is whether Southern Platte violated the terms of the confirmed plan. This court did retain jurisdiction to interpret the order confirming the plan
Nonetheless, the issue is, in essence, which court in the interests of justice or comity with the state court, should decide the issue. Given, again, that interpretation of the plan and discharge injunction is inextricably intertwined with state law issues of the interpretation of the operating agreement and common law defenses such as estoppel, this factor also weighs in favor of abstention.
This factor is not particularly relevant here because there is no "enforcement" issue related to the bankruptcy case. Although the bankruptcy issues could conceivably be severed from the state court issues, doing so would only unnecessarily duplicate and complicate the state court litigation. This factor weighs in favor of abstention.
The bankruptcy court's docket is not overly burdened. This factor weighs against abstention.
As was the case in In re Stabler,
Pursell Holdings, which filed the case in state court, and placed the disassociation squarely at issue from the beginning in that case, does not convincingly explain to this court why it waited more than three years to assert to this court that its disassociation constituted a bankruptcy discharge violation. This court concludes that waiting nearly three years to bring the bankruptcy issues to this court and on the eve of trial is indeed forum shopping. This factor weighs very heavily in favor of abstention.
The Southern Platte Parties would not be entitled to a jury trial if the bankruptcy issues had been brought to this court earlier in the proceedings. But all these parties have a right to a jury trial on the underlying state law issues. And those issues are inextricably intertwined with the two bankruptcy issues. This factor likewise weighs in favor of abstention.
In addition to the Southern Platte Parties, the state court litigation has at least two nondebtor parties: Elmcreek Development Inc. and Platte Valley Bank of Missouri. Those parties should not be required to litigate in two different courts. This factor weighs heavily in favor of abstention.
Finally, although not listed as a factor above, the Eighth Circuit noted in Apex, in the context of a motion to reopen, that the length of time between the closing of the bankruptcy estate and the filing of a motion to reopen should be considered, and that "the longer the time between the closing of the estate and the motion to reopen ... the more compelling the reason for reopening the estate should be."
Based on the foregoing, the court concludes that the factors overwhelmingly favor this court's abstaining from this matter pursuant to 28 U.S.C. § 1334(c)(1).
ACCORDINGLY, the Motion for Bankruptcy Court to Abstain from Taking Jurisdiction
IT IS SO ORDERED.
