BRUCE FOX, Bankruptcy Judge.
Before me is a motion filed by defendants Vincent Piazza Sr., Piazza Family L.P., Piazza Management Corporation, VMP Holdings Associates, L.P., and VMP Holdings, LLC (hereinafter the Piazza defendants) seeking to remand this proceeding back to state court pursuant to 28 U.S.C. § 1452(b) or, in the alternative, to abstain from determining this adversary proceeding under 28 U.S.C. § 1334(c). This motion was joined by defendants, Richard J. Meadows, W. Joseph Liberato, and Thomas F. Alloy, and also by defendant Sovereign Bank.
The plaintiff, Thomas G. Drauschak, Jr., opposes remand or abstention. He maintains that this adversary proceeding should be determined in this bankruptcy forum.
The parties submitted memoranda in support of their respective positions and presented oral argument. The following material undisputed facts are derived from their submissions, particularly the pleadings, state court orders, and state court docket entries.
On September 14, 2010, Mr. Drauschak, acting individually and as a shareholder,
In essence, Mr. Drauschak's second amended complaint (375 paragraphs and 68 pages long), filed in May 2011, alleged that he — acting individually and through existing or newly created limited partnerships or limited liability companies — and Vincent Piazza, Sr., acting through a Piazza-controlled entity, agreed to develop commercial and residential real estate projects in Montgomery and Chester County, Pennsylvania. Funding for these projects came primarily from Sovereign Bank and Susquehanna Bank. Messrs. Drauschak and Piazza provided personal guarantees for these loans.
Mr. Drauschak second amended complaint avers that the Piazza defendants and other defendants failed to tender promised compensation, and improperly attempted to eliminate his interests in those various developmental entities or to make his interests worthless, and in so doing breached contracts as well as their fiduciary duties, converted property, and tortiously interfered with existing and prospective contracts or improperly aided and abetted those who so acted.
Raising 14 separate causes of action under Pennsylvania law, Mr. Drauschak sought damages, injunctive and declaratory relief, an accounting, the appointment of a receiver, and the "imposition of a constructive trust."
The defendants filed answers to this complaint denying Mr. Drauschak's entitlement to any relief. They contended that Mr. Drauschak mismanaged the construction projects resulting in loan defaults, and Mr. Piazza acted appropriately under his guarantee agreement and state law. Moreover the Piazza defendants also asserted 10 state law counterclaims seeking damages for alleged conversion, breach of contract, and breach of fiduciary duties, as well as the imposition of a constructive trust. In addition, certain of the Piazza defendants asserted contribution cross-claims against certain other defendants. The parties agree that the Piazza defendants have demanded trial by jury. Mr. Drauschak contends that they have no state law jury trial rights.
Since its commencement, Judge Cody has issued numerous orders in connection with this litigation including: staying certain execution sales, overruling a defendant's preliminary objections, denying plaintiff's request to consolidate this litigation with other state court litigation, and addressing numerous discovery disputes. In May 2012, she approved a stipulation dismissing defendants Vincent Piazza, Jr., Daniel Piazza, and Richard Orlow. In addition, in September 2011, the state court directed Mr. Drauschak to return approximately $330,000 he withdrew from an account with Malvern Savings Bank. In November 2011, Mr. Drauschak was held in civil contempt and placed on six months probation, and ordered to pay $2,000 per month beginning in December 2011. In December 2011, certain defendants were awarded almost $30,000 in counsel fees against Mr. Drauschak.
By order dated May 14, 2012, Judge Cody issued a revised scheduling order setting deadlines for completing discovery by July 15, 2012, directing the exchange of expert reports to occur in August 2012, requiring any dispositive motions to be filed by September 1, 2012, and notifying the parties that "[t]his case shall be deemed trial ready as of October 15, 2012."
On or about July 23, 2012, the state court scheduled a hearing for August 16,
From my review of the transcript, it appears that the state court correctly stated at the August 16th hearing that the bankruptcy stay under 11 U.S.C. § 362(a) only applied to the claims asserted against Mr. Drauschak, not the claims asserted by him. N.T. at 12; see Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1204-05 (3d Cir.1991). Thus, Judge Cody stated that she would hold the contempt motion in abeyance, N.T. at 14-15, but added:
N.T. at 13.
On August 20, 2012, Mr. Drauschak filed a notice of removal of the state court litigation with this court. See 28 U.S.C. § 1452(a); Fed. R. Bankr.P. 9027; In re Seven Fields Development Corp., 505 F.3d 237, 247 n. 8 (3d Cir.2007). The removed matter was docketed by the court clerk as Adv. No. 12-12-0544. Thereafter, on September 4, 2012, the movants filed a joint motion for summary judgment, as did Sovereign Bank. Also on September 4, 2012, in accordance with Federal Rule of Bankruptcy Procedure 9027(e)(3), various defendants, including the defendants who are movants herein, filed statements asserting that all claims in this removed proceeding are non-core and that they do not consent to the entry of a final judgment in this bankruptcy court. See docket entries ## 9, 14-15, 17.
On September 4, 2012, the Piazza defendants (and Sovereign Bank) filed motions for summary judgment. These motions, opposed by the debtor, are still pending. On September 6, 2012, the Piazza defendants filed the instant motion for remand/abstention. Other defendants almost immediately joined their request to return this proceeding to state court. And on September 7, 2012, the Piazza defendants filed a motion for the appointment of a chapter 11 trustee or, in the alternative, conversion of this case to chapter 7. The September 7th motion was voluntarily withdrawn on October 12, 2012, prior to any response having been filed by the debtor.
Section 1452(a) of title 28 of the United States Code provides for the removal of claims related to pending bankruptcy cases. "[A] proceeding is `related to' a Chapter 11 proceeding if the `outcome of [the] proceeding could conceivably have any effect on the estate being administered in bankruptcy.'" Nuveen Mun. Trust ex rel. Nuveen High Yield Mun. Bond Fund v. WithumSmith Brown, P.C., 692 F.3d 283, 293-94 (3d Cir.2012) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)). The movants in this contested matter do not dispute that the instant state court lawsuit was properly removed
Although the plaintiff may have properly removed the state court litigation to this forum, section 1452(b) states that "[t]he court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground." This subsection grants "broad discretion" to the bankruptcy court to remand a removed proceeding back to the state court from which it has been removed, or to deny the remand request. See, e.g., In re Micro Design, Inc., 120 B.R. 363, 366 (E.D.Pa.1990); 1 Collier on Bankruptcy ¶ 3.07[6], at 3-82 (16th ed. 2012). The Piazza defendants, joined by other defendants, contend that remand is warranted. The debtor disagrees.
In general, among the factors to be considered by a court in determining whether equitable grounds to remand exist are:
Kurz v. EMAK Worldwide, Inc., 464 B.R. 635, 645-46 (D.Del.2011) (quoting Gorse v. Long Neck, Ltd., 107 B.R. 479, 482 (D.Del. 1989)); see, e.g., see also 1 Collier on Bankruptcy, ¶ 3.07[6], at 3-83 (16th ed. 2012), identifying the relevant factors as including:
(footnotes omitted).
In applying these general considerations, courts have noted that principles of abstention found in 28 U.S.C. § 1334(c) should be included in the matrix of equitable factors that are relevant to a determination of a motion to remand under section 1452(b). See, e.g., Christo v. Padgett, 223 F.3d 1324, 1331 (11th Cir.2000); Shipley Garcia Enterprises, LLC v. Cureton, 2012 WL 3249544, at *13 (S.D.Tex. Aug. 7, 2012); In re Warren, 125 B.R. 128, 130-31 (E.D.Pa.1991); In re Asousa, 264 B.R. 376, 381 (Bankr.E.D.Pa.2001). Indeed, the Third Circuit Court of Appeals has instructed that the factors involving abstention should be considered prior to application of the more general principles of equitable remand:
Stoe v. Flaherty, 436 F.3d 209, 215 (3d Cir.2006).
Mandatory abstention is provided by 28 U.S.C. § 1334(c)(2), which states:
Under the terms of this provision, a bankruptcy court "must abstain if the following five requirements are met: (1) the proceeding is based on a state law claim or cause of action; (2) the claim or cause of action is `related to' a case under title 11, but does not `arise under' title 11 and does not `arise in' a case under title 11, (3) federal courts would not have jurisdiction over the claim but for its relation to a bankruptcy case; (4) an action `is commenced' in a state forum of appropriate jurisdiction; and (5) the action can be `timely adjudicated' in a state forum of appropriate jurisdiction." Stoe v. Flaherty, 436 F.3d at 213.
Discretionary abstention under 28 U.S.C. § 1334(c)(1) considers factors such as:
Gilbert v. Ben Franklin Hotel Associates, 1995 WL 598997, at *1 (E.D.Pa. Oct. 10, 1995); see e.g., Matter of Chicago, Milwaukee, St. Paul & Pacific R. Co., 6 F.3d 1184, 1189 (7th Cir.1993); Allen v. J.K. Harris & Co., LLC, 331 B.R. 634, 645 (E.D.Pa.2005); In re Asousa Partnership, 276 B.R. 55, 74-75 (Bankr.E.D.Pa.2002); see generally Shared Network Users Group, Inc. v. WorldCom Technologies, Inc., 309 B.R. 446, 451 (E.D.Pa.2004). The application of section 1334(c)(1) is also within the discretion of the bankruptcy court. See, e.g., In re Colarusso, 382 F.3d 51, 57 (1st Cir.2004); In re Greene, 1999 WL 689711, at *3 (E.D.Pa. Sept. 7, 1999).
At the outset, I note that the movants contend that remand under section 1452(b) is justified because all of the elements of mandatory abstention found in section 1334(c)(2) are present. In so contending, they have the burden to establish the presence of those elements, including the requirement that the proceeding could be timely adjudicated in state court. See generally Stoe v. Flaherty, 436 F.3d at 219 n. 5; In re Midgard Corp., 204 B.R. 764, 778 (10th Cir. BAP 1997); J.D. Marshall Int'l, Inc. v. Redstart, Inc., 74 B.R. 651, 654 (N.D.Ill.1987). In response, Mr. Drauschak disputes that mandatory abstention applies because this adversary proceeding is a core matter, and also because it cannot be timely adjudicated in state court. Plaintiff's Brief in Opposition, at 6.
"Whether claims are considered core or non-core proceedings dictates not only the bankruptcy court's role and powers but also the availability of mandatory abstention...." In re Exide Technologies, 544 F.3d 196, 206 (3d Cir.2008). The Third Circuit Court of Appeals has often instructed that a proceeding is classified as "core" under 28 U.S.C. § 157 "if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case." In re Marcus Hook Development Park, Inc., 943 F.2d 261, 267 (3d Cir. 1991) (quoting Beard v. Braunstein, 914 F.2d 434, 444 (3d Cir.1990), which, in turn, quoted Matter of Wood, 825 F.2d 90, 97 (5th Cir.1987)); accord In re Winstar Communications, Inc., 554 F.3d 382, 405 (3d Cir.2009); In re Exide Technologies, 544 F.3d at 206; Stoe v. Flaherty, 436 F.3d at 216.
In general, when an adversary proceeding raises multiple claims, the various claims must be analyzed for bankruptcy jurisdictional purposes on a claim-by-claim basis. Halper v. Halper, 164 F.3d 830, 839 (3d Cir.1999); see In re Exide Technologies, 544 F.3d at 206; In re Mullarkey, 536 F.3d 215, 223 (3d Cir.2008).
As mentioned earlier, all of the claims, cross-claims and counterclaims asserted in this adversary proceeding were based upon Pennsylvania law. None invoked a substantive right provided by the Bankruptcy Code; indeed, no such provision could have been invoked as there was no bankruptcy case pending in 2010 when the civil action commenced, or in 2011 when the plaintiff amended his complaint and the defendants' responses thereto were filed. Similarly, all of the claims, counterclaims and cross-claims could and did exist outside the context of a bankruptcy case. Indeed, the civil action was pending in state court for two years before Mr. Drauschak sought bankruptcy protection, and the amended pleadings were filed more than one year before the debtor's bankruptcy petition. See In re Exide Technologies, 544 F.3d at 207. Nonetheless, Mr. Drauschak argues that his claim for the imposition of a constructive trust under Pennsylvania law, and the Piazza defendants' similar counterclaim, are core claims that preclude the application of mandatory abstention.
Under Pennsylvania law, a constructive trust is an equitable remedy primarily designed to prevent unjust enrichment. Williams Tp. Bd. of Supervisors v. Williams Tp. Emergency Co., Inc., 986 A.2d 914, 922 (Pa.Cmwlth.2009). "When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest equity converts him into a trustee." Id., at 922 (quoting Com. by Kane v. Hilton, 24 Pa.Cmwlth. 285, 288, 355 A.2d 841 (1976)); see also Ira G. Steffy & Son, Inc. v. Citizens Bank of Pennsylvania, 7 A.3d 278, 287 n. 11 (Pa.Super.2010). "Generally, however, an equitable duty to convey property to another arises only in the presence of fraud, duress, undue influence, mistake, or abuse of a confidential relationship." In re Joey's Steakhouse, LLC, 474 B.R. 167, 184 (Bankr.E.D.Pa.2012).
In Count XIII of this adversary proceeding, Mr. Drauschak alleged that "by buying all of the debt on the real properties [of various entities] and then foreclosing on such debt despite the existence of numerous other profitable opportunities available [to those entities]" the Piazza defendants were unjustly enriched, entitling Mr. Drauschak to the imposition of a constructive trust. Second Amended Complaint, ¶ 358.
The Piazza defendants disputed this contention in their state court answer, asserting
Before applying the definition of core matters, I note that the moving defendants orally argued in support of remand that neither Mr. Drauschak nor they themselves have asserted valid constructive trust claims under Pennsylvania law. To the extent both parties are, in essence, contending that actions complained of breached various contractual agreements, "[t]he proper remedy for breach of contract, however, is an award of damages at law, not the equitable remedy of constructive trust." Matter of Bevill, Bresler & Schulman Asset Management Corp., 896 F.2d 54, 58 (3d Cir.1990). Similarly, to the extent that the Piazza defendants have not yet executed upon any property interests of the plaintiff, and to the extent Mr. Drauschak no longer has the challenged funds, the imposition of the equitable remedy of constructive trust may be inappropriate. See Louis Dolente & Sons v. U.S. Fidelity and Guar. Corp., 252 F.Supp.2d 178, 184 (E.D.Pa.2003).
If I assume arguendo, however, that the parties' allegations, if proven, may lead to the imposition of a constructive trust under Pennsylvania law, Mr. Drauschak's contention — that any constructive trust claim made by him, even one asserted prepetition, is a core matter for purposes of bankruptcy subject matter jurisdiction — is unpersuasive. While some courts have concluded that a claim of constructive trust against the debtor is a core matter implicating 11 U.S.C. § 541(d), see, e.g., In re O'Brien, 414 B.R. 92, 100 (S.D.W.Va.2009), courts have recognized that a constructive trust claim made by a debtor or bankruptcy trustee, based upon the defendant's prepetition conduct, is a state law claim that falls outside the scope of a core proceeding. As observed by the Sixth Circuit Court of Appeals:
XL Sports, Ltd. v. Lawler, 49 Fed.Appx. 13, 20 (6th Cir.2002); see, e.g., Schafer v. Nextiraone Federal, LLC, 2012 WL 2281828 (M.D.N.C. June 18, 2012); In re Taub, 413 B.R. 81 (Bankr.E.D.N.Y.2009).
In other words, where, as in this proceeding, issues of ownership of property interests are subject to bona fide dispute, a prepetition, state law claim by a debtor or bankruptcy trustee that the disputed property should be impressed with a constructive trust is classified as a non-core matter, just like a turnover action involving disputed property. See In re Fairfield Sentry Ltd. Litigation, 458 B.R. 665, 672, 682-83 (S.D.N.Y.2011) (among the claims found to be non-core was a state law claim for constructive trust); see also, e.g., U.S. v. Inslaw, Inc., 932 F.2d 1467, 1472 (D.C.Cir. 1991) ("It is settled law that the debtor cannot use the turnover provisions to liquidate contract disputes or otherwise demand assets whose title is in dispute."); In re Charter Co., 913 F.2d 1575, 1579 (11th Cir.1990); In re Joey's Steakhouse, LLC, 474 B.R. at 188; In re DHP Holdings II Corp., 435 B.R. 264, 271 (Bankr.D.Del. 2010); see generally Beard v. Braunstein, 914 F.2d 434 (3d Cir.1990):
Id., at 444 (quoting Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 432-33, 44 S.Ct. 396, 68 L.Ed. 770 (1924)); Ohio v. Madeline Marie Nursing Homes No. 1 and No. 2, 694 F.2d 449, 454 (6th Cir.1982) (construing the former Bankruptcy Act of 1898 and concluding that a valid turnover lawsuit requires a determination that the defendant's claim to possession of property is pretextual).
Therefore, I conclude, for purposes of mandatory abstention under 28 U.S.C. § 1334(c)(2), that all of the claims asserted by Mr. Drauschak, including his claim of constructive trust, are non-core claims. Similarly, none of the counterclaims and cross-claims asserted by the Piazza defendants are core matters.
I further conclude that all of plaintiffs' claims, as well as the counterclaims and cross-claims raised by the defendants, could be timely adjudicated by
Parmalat Capital Finance Ltd. v. Bank of America Corp. 639 F.3d 572, 580 (2d Cir. 2011). In applying these factors, the issue is whether an adjudication in state court would be consistent with the "needs of the title 11 case and not solely by reference to the relative alacrity with which the state and federal court can be expected to proceed." Stoe v. Flaherty, 436 F.3d at 219. The relative speeds by which the state and bankruptcy courts would determine the claims asserted in an adversary proceeding depend upon a number of considerations, including:
In re Midgard Corp., 204 B.R. at 778-79 (footnotes omitted).
Insofar as factors ## 5 and 6 are concerned, when all parties do not consent to the entry of a final judgment by the bankruptcy court (as in this proceeding), then it must submit a recommendation to the district court that is subject to de novo review. 28 U.S.C. § 157(c)(1). Similarly, when there is a right to trial by jury and all parties do not expressly consent to the bankruptcy judge presiding over the trial, see 28 U.S.C. § 157(e), then withdrawal of the reference to the district court under 28 U.S.C. § 157(d) is required. See, e.g., In re Cinematronics, Inc., 916 F.2d 1444 (9th Cir. 1990) (reference must be withdrawn where non-debtor defendant had right to jury trial and bankruptcy court had no authority to conduct jury trial); Beard v. Braunstein, 914 F.2d 434 (3d Cir.1990) (same). The necessity of also involving the district court often will lengthen the final determination process of bankruptcy litigation, which may well support a finding that the state court would timely adjudicate the litigation. In re Midgard Corp., 204 B.R. at 778 n. 17, 779 n. 18.
In this contested matter, I note that: this chapter 11 case was just commenced; the proceeding involves only non-core claims for which the defendants have not consented to any final adjudication in this court; the defendants assert a (contested) right of trial by jury and have not expressly consented to this court presiding over that trial; the litigation has been pending before the state court for approximately two years; the discovery deadline set by the state court has passed; the state court has resolved a number of interlocutory motions and is likely quite familiar with this litigation; the outcome of the defendants' state law contribution cross-claims raised by some defendants against other defendants, although within the jurisdiction of the state court to resolve, would likely have no conceivable effect upon Mr. Drauschak's bankruptcy case and, therefore, would be outside the subject jurisdiction of this bankruptcy court, see, e.g., Matter of Walker, 51 F.3d 562, 569-70 (5th
As part of his argument that the state court could not timely adjudicate this adversary proceeding, Mr. Drauschak argues that the movants have not sought relief from the automatic stay, and would not be able to obtain such relief had it been sought, so that their counterclaims cannot be adjudicated by the state court were this matter remanded. Implicitly, he suggests that if the Piazza defendants' counterclaims will be determined in this bankruptcy court as part of the claims resolution process, it is more efficient to have the entire matter resolved in this forum as the material facts of the counterclaims are in common with his claims.
The movants acknowledge that they have not sought relief from the bankruptcy stay but consider such a motion premature until this court rules on their motion for remand. They state:
Defendants' Reply Brief, at 5 n.2 (unpaginated).
The plaintiff is correct that the Piazza defendants' counterclaims are stayed by 11 U.S.C. § 362(a). He is also correct that one intended purpose of the automatic stay is to afford the debtor a respite from the time and expense of litigating with creditors. E.g., Association of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir.1982) ("The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan or simply to be relieved of the financial pressures that drove him into bankruptcy.") (quoting H.R.Rep. No. 95-595, at 340 (1977), 1978 U.S.C.C.A.N. 5963, 6297).
If the creditor holds an unsecured claim, and if there is a dispute over the amount or validity of the claim, that dispute generally can be resolved through the bankruptcy court proof of claim process. There is often no valid reason to have the claim determined in another forum. See, e.g., In re Stranahan Gear Co., Inc., 67 B.R. 834 (Bankr.E.D.Pa.1986). As one commentator has explained:
David Epstein, et al., Bankruptcy § 3-25, at 267 (1992).
Mr. Drauschak overlooks, however, an important exception to the general principle that unsecured creditors cannot demonstrate cause for relief from the automatic stay. "About the only halfway common reason to lift the stay for an unsecured creditor is to permit liquidation of the claim in a forum that is substantially more appropriate than the bankruptcy court, or because the debtor filed bankruptcy in bad faith." Id.; see, e.g., In re Telegroup, Inc., 237 B.R. 87, 91-92 (Bankr.D.N.J.1999); In re Cummings, 221 B.R. 814, 818-19 (Bankr.N.D.Ala.1998); In re Curtis, 40 B.R. 795, 799-800 (Bankr.D.Utah 1984).
For example, if there is a need to fix the amount of the allowed unsecured claim — because the administration of the bankruptcy case requires it — and if the claim would normally be determined by a specialized forum, it may be appropriate to allow that forum to fix the amount of the claim. See generally In re Murdock Machine and Engineering Co. of Utah, 990 F.2d 567, 571 (10th Cir.1993) ("Thus, when jurisdiction over disputed claims is placed by law in a specialized tribunal, we expect that the litigation over the trustee's claims to recovery will be conducted in that forum."); In re Lahman Manufacturing Co., Inc., 31 B.R. 195, 199 (Bankr.D.S.D. 1983).
More generally, the bankruptcy stay may be modified when there is an administrative need in the bankruptcy case to fix the amount of the claim and the claim dispute has been pending for considerable time in a non-bankruptcy forum. Issues of comity and economy may dictate that the non-bankruptcy forum conclude the resolution of that dispute and the bankruptcy stay should be modified for such purpose. See, e.g., S.Rep. No. 95-989, at 50 (1978), 1978 U.S.C.C.A.N. 5787, 5836 ("[I]t will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from many duties that may be handled elsewhere."); In re Wilson, 116 F.3d 87, 91 (3d Cir.1997) (quoting S.Rep. No. 95-989, 95th Cong., 2d Sess., at 50 (1978), 1978 U.S.C.C.A.N. 5787); In re Brown, 951 F.2d 564, 570-71 (3d Cir.1991) (owing to the state court's familiarity with the litigation, judicial economy supports the bankruptcy court's lifting of the automatic stay to allow the state court to fix the creditor's claim); see also, e.g., In re Castlerock Properties, 781 F.2d 159 (9th Cir.1986); Matter of Holtkamp, 669 F.2d 505, 508 (7th Cir.1982) In re Olmstead, 608 F.2d 1365 (10th Cir.1979); In re Marvin Johnson's Auto Service, Inc., 192 B.R. 1008 (Bankr.N.D.Ala.1996); In re Hoffman, 33 B.R. 937 (Bankr. W.D.Okla.1983); In re Philadelphia Athletic Club, Inc., 9 B.R. 280 (Bankr.E.D.Pa. 1981); see generally In re Curtis, 40 B.R. at 800 (the automatic stay may be lifted in the "interest of judicial economy and the expeditious and economical determination of litigation for the parties."); 3 Collier on Bankruptcy, ¶ 362.07[3][a], at 362-106 (16th ed. 2012) ("And relief also may be granted when necessary to permit litigation to be concluded in another forum, particularly if the nonbankruptcy suit involves multiple parties or is ready for trial.") (footnote omitted). This conclusion is expressly noted in the legislative history surrounding the enactment of section 362(d)(1):
H.R.Rep. No. 95-595, at 343-44 (1977), 1978 U.S.C.C.A.N. 5963, at 6300.
The factors supporting mandatory abstention, mentioned above, including judicial economy, would also justify applying the aforementioned exception to modify the automatic stay to permit the state court to adjudicate the entire dispute, including the unsecured counterclaims raised by the Piazza defendants. See Pursifull v. Eakin, 814 F.2d 1501, 1505-06 (10th Cir. 1987) (a decision to abstain constitutes cause for relief from the automatic stay); In re Mid-Atlantic Handling Systems, LLC, 304 B.R. 111, 130-31 (Bankr.D.N.J. 2003). Resolution of the claims and counterclaims are necessary for reorganization to occur in this court. Moreover, the cost of litigation to the debtor would be no greater (and possibly less, given the state court's greater familiarity with the litigation, the need for a recommendation process in this forum, and the likely inability of this court to resolve the cross-claims) if trial took place in state court rather than in this court. The evidence, burdens of proof, and witnesses would be identical.
I appreciate that, by virtue of 11 U.S.C. § 105(a), a bankruptcy court has the power to modify the automatic stay sua sponte. See, e.g., In re McDowell, 2009 WL 536452, at *1 (Bankr.S.D.Fla. Feb. 23, 2009); In re Sanchez, 1997 WL 861753, at *2 n. 6 (Bankr.E.D.Va. Nov. 7, 1997); In re Johnson, 210 B.R. 1004, 1006-07 (Bankr.W.D.Tenn.1997); In re Missouri Properties, Ltd., 211 B.R. 914, 928-29 (Bankr.W.D.Mo.1996); In re Elder-Beerman Stores Corp., 195 B.R. 1019, 1023 (Bankr.S.D.Ohio 1996) (and cases cited); see generally In re Wardrobe, 559 F.3d 932, 936 (9th Cir.2009). In light, however, of the Piazza defendants' intention to promptly seek an order modifying the bankruptcy stay, and so as to afford all parties the opportunity to address the precise terms of the modification of the stay, I shall not exercise my sua sponte powers. Rather, I shall simply conclude that the bankruptcy stay will not preclude the state court from a timely adjudication of all claims posed by the present adversary proceeding, were this proceeding remanded, as relief from the stay to adjudicate the counterclaims is highly likely to be granted.
Therefore, the state court can timely adjudicate all of the claims, counterclaims and cross-claims raised in this adversary proceeding. See, e.g., J.T. Thorpe Co. v. American Motorists, 2003 WL 23323005, at *3-4 (S.D.Tex. June 9, 2003) (state court issuance of "scheduling orders and a discovery control plan" along with an order "preferentially" setting a trial date demonstrated that there would be a timely adjudication in state court); Bevilacqua v. Bevilacqua, 208 B.R. 11, 16 (E.D.N.Y.1997) (where a debtor removed a state court action against her the court found that all of the alleged claims were non-core, had already been commenced in state court, and had reached the stage of summary judgment and trial, thus could be adjudicated in a timely fashion).
Furthermore, as all of the other elements of mandatory abstention are present in this contested matter, it is appropriate to remand this adversary proceeding back to state court for its prompt determination
Alternatively, even if the Piazza defendants had not demonstrated that mandatory abstention was proven under 28 U.S.C. § 1334(c)(2), the undisputed facts in this contested matter demonstrate that the better exercise of discretion justifies permissive abstention under section 1334(c)(1) and/or equitable remand to the state court under 28 U.S.C. § 1452(b). See generally Barge v. Western Southern Life Ins. Co., 307 B.R. 541, 548 (S.D.W.Va. 2004) ("[I]t has been noted that virtually the same factors supporting abstention under § 1334(c) support equitable remand under § 1452(b)."); In re Trans-Service Logistics, Inc., 304 B.R. 809, 813 (Bankr. S.D.Ohio 2004) (equitable remand under section 1452(b) "involves many of the considerations relevant to discretionary abstention" under section 1334(c)(1)).
As mentioned above, all of the claims, counterclaims and cross-claims in this adversary proceeding arise under Pennsylvania law, claims which the state court has greater expertise than this court in resolving. See Shubert v. Roche Holding Ag, 157 F.Supp.2d 542, 547 (E.D.Pa.2001) (remand under section 1452(b) is warranted in part to "heed to the maxim that state courts are better suited to handle state claims."). Moreover, the litigation had been pending in state court for approximately two years before its removal, and so that forum is more familiar with the numerous legal and factual disputes implicated in the litigation than is this bankruptcy forum. For example, the state court is also better able to decide whether, under Pennsylvania law, Mr. Drauschak is entitled to relief from his stipulation to dismiss Mr. Orlow as a defendant. The plaintiff also challenges the defendants' demand for a trial by jury under state law, an issue which the state court is most capable of resolving. The state court, moreover, is in the best position to decide if further discovery should be permitted despite the passage of its discovery deadline.
In addition, the presence of cross-claims that fall outside this court's subject matter jurisdiction, the inability of this court to render a final decision under 28 U.S.C. § 157(c)(1), and the fact that Mr. Drauschak initially chose the state court as his forum are factors favoring discretionary abstention/remand. Also a factor is that the plaintiff's bankruptcy filing occurred just before a scheduled civil contempt hearing was to take place, and his notice of removal was filed four days after the state court had explained that his bankruptcy filing would not delay the prompt resolution of the claims he had asserted. Thus, the possibility of forum shopping is present.
Finally, this chapter 11 case has only recently commenced. Abstention/remand in favor of the state court would have limited effect upon the administration of this case. A determination of the plaintiff's ability to reorganize in bankruptcy
Indeed, whether or not a jury trial is necessary, defendants' lack of consent to the entry of a final judgment in this forum also necessitates the involvement of the district court in the final adjudication of this adversary proceeding. In contrast, the state trial court has the power to enter final judgment. Therefore, final judgment in this proceeding may occur sooner in the state court system than in the federal bankruptcy system. See Seale v. Owens, 134 B.R. 181, 185 (E.D.La.1991) (need for recommendation and trial de novo makes equitable remand appropriate).
These factors, taken together, support permissive abstention and/or equitable remand. See, e.g., Shiboleth v. Yerushalmi, 412 B.R. 113 (S.D.N.Y.2009); Stahl v. Stahl, 2003 WL 22595288, at *4 (S.D.N.Y. November 7, 2003) (remand under § 1452 warranted because the litigation "involves exclusively matters of state law, and is one of several related actions over which a single State court judge has been presiding for many years. The State of New York has a strong interest in enforcing its laws, and there are no persuasive reasons not to allow it to do so."); In re Wolf, 2011 WL 4915841, at *2 (Bankr.D.Colo. Oct. 17, 2011); In re Almonacy, 2011 WL 13659 (Bankr.D.N.J. Jan. 4, 2011); see also In re Morris, 55 B.R. 615 (Bankr.N.D.Tex.1985) (although litigation removed by the chapter 11 debtors included a constructive trust claim against them, which the court determined to be a core matter, remand was warranted where "substantial discovery" had been undertaken in state court and that court "had familiarized itself with the legal and factual issues to be determined.").
The last issue posed by Mr. Drauschak is whether the movants waived their right to seek abstention or remand. Mr. Drauschak contends that the Piazza defendants' filing of a summary judgment motion in this court before moving for remand/abstention, and their filing a motion for the appointment of a chapter 11 trustee or conversion to chapter 7 after seeking remand/abstention, waived their right to seek a return of this litigation to state court, citing Koehnen v. Herald Fire Ins. Co., 89 F.3d 525 (8th Cir.1996) and Lanier v. American Bd. of Endodontics, 843 F.2d 901 (6th Cir.1988).
The appellate court in Lanier observed that "when a party undertakes affirmative action in the federal district court, she has acquiesced in the federal court's jurisdiction and waived objection to the removal." Id., at 904. The Lanier court affirmed the trial court's conclusion that waiver had occurred because "before filing her motion to remand to the state court, plaintiff entered into stipulations, filed requests for discovery, sought to amend her complaint, filed a new lawsuit against the defendant in the federal court, demanded trial by jury, and proceeded with discovery." Id., at 905.
The appellate court in Koehnen noted that "[a] party that engages in affirmative activity in federal court typically waives the right to seek a remand, ... particularly if the federal court has ruled unfavorably...." Id., at 528 (citations omitted). In so noting, the Eighth Circuit affirmed the trial court's determination that such a waiver had taken place, stating:
Id., at 528; see also In re AHT Corp., 265 B.R. 379, 384 (Bankr.S.D.N.Y.2001):
In Cook v. Wikler, 320 F.3d 431 (3d Cir.2003), the Third Circuit Court of Appeals reviewed decisions such as Lanier and concluded that the issue whether a party has waived its right to seek remand is within the discretion of the trial court, likening the question to one of laches:
Id., at 437-38 (citations and footnote omitted).
In maintaining that the Piazza defendants waived their right to remand or abstention, Mr. Drauschak overlooks that the conduct of the Piazza defendants in this forum is readily distinguishable from that supporting waiver in Lanier and Koehnen, and that the issue of waiver is subject to trial court discretion. In other words, the filing of a pleading in federal court does not always constitute a waiver of the right to seek abstention or remand by the party having filed the pleading.
For example, in Cook v. Wikler, 320 F.3d at 437, the district court concluded that a party obtaining entry of default against a cross-claimant under Rule 55 and then opposing relief from the entry of such default, did not waive the right to seek remand. Similarly, in Allen v. J.K. Harris & Co., LLC, 331 B.R. 634, 642-644 (E.D.Pa.2005), reconsideration denied, 2005 WL 2902497 (E.D.Pa. November 2, 2005), the district court held that a party did not waive her right to permissive abstention
In this contested matter, I also conclude that the Piazza defendants did not waive their right to seek abstention/remand by filing their motion for summary judgment and their motion for the appointment of a chapter 11 trustee or conversion to chapter 7.
As to the latter motion, the Piazza defendants voluntarily withdrew their request for the appointment of a trustee before the debtor ever filed a response to it. No hearing on the motion ever took place and there was no adverse ruling on the motion. Thus, this withdrawn pleading does not justify a finding of waiver.
As to the summary judgment motion, I note that Federal Rule of Bankruptcy Procedure 9027(i) provides:
(emphasis added).
This procedural rule is derived from 28 U.S.C. § 1450. See Advisory Committee Note (1983). As the Supreme Court explained in construing section 1450:
Granny Goose Foods, Inc. v. Brotherhood of Teamsters and Auto Truck Drivers Local No. 70 of Alameda County, 415 U.S. 423, 436, 94 S.Ct. 1113, 39 L.Ed.2d 435 (1974). Thus, unless modified by this court, as authorized by Rule 9027(i), all of the interlocutory orders issued by the state court remained in effect even after Mr. Drauschak removed the litigation to this court. Among those interlocutory orders was a deadline for filing dispositive motions, such as a motion for summary judgment. See Winstead v. Georgia Gulf Corp., 77 Fed.Appx. 267, 269-70 (5th Cir. 2003) (state court deadline for amending the complaint to add new parties "remained in full force and effect once the case was removed to federal court."); In re Ramirez, 2010 WL 1904270, at *5-6 (Bankr.S.D.Tex. May 11, 2010) (state court order compelling discovery was in effect upon removal of litigation to bankruptcy court).
On May 14, 2012, the state court entered a revised scheduling order fixing, inter alia, a deadline for filing dispositive motions. The deadlines in that scheduling order were not nullified by Mr. Drauschak's removal of the civil action to this forum. To the extent that the Piazza defendants sought to comply with that scheduling order by filing a motion for summary judgment, they were acting defensively,
Therefore, I conclude that the Piazza defendants did not waive their rights under sections 1334(c) and 1452(b) to have this adversary proceeding returned to the state court for a final adjudication of the merits of all claims, counterclaims and cross-claims.
In sum, the parties agree that one forum should hear and decide the numerous claims arising from the real estate development ventures undertaken by Mr. Drauschak and Mr. Piazza, Sr. The plaintiff argues that this bankruptcy court is the appropriate forum; the Piazza defendants contend that the state court is more appropriate.
For the reasons set forth above, I conclude that the defendants have the much stronger position under 28 U.S.C. §§ 1334(c) and 1452(b). Moreover, this conclusion is also consistent with congressional intent when, in 1978, Congress first enacted a statutory stay upon the commencement of a bankruptcy case, but recognized that judicial economy and comity may justify modification of this stay in order to permit a non-bankruptcy forum to complete prepetition litigation.
After pending for two years before the state court, this adversary proceeding should be remanded so that the state court can resolve promptly the merits of all of the Pennsylvania law claims, counterclaims and cross-claims. An appropriate order will be entered, which shall also address the procedure for resolving any issues concerning modification of the bankruptcy stay.
The plaintiff does maintain, however, that the movants' right to seek remand has been waived. See Plaintiff's Brief in Opposition, at 21-22. The waiver issue will be later addressed.