H. CHRISTOPHER MOTT, UNITED STATES BANKRUPTCY JUDGE.
Here, the Court tackles whether, at the behest of Plaintiff, this removed suit should be returned to the state court from whence it came. Ultimately, the Court finds that it must (and should) abstain, and the suit will be remanded to the state court in Brazoria County, Texas.
On March 8, 2015, Dune Energy, Inc., as debtor ("
Shortly after the bankruptcy filing, the Debtors sought Court approval of bid procedures for the sale of their assets under § 363 of the Bankruptcy Code. After several hearings, the Court approved the sale procedures and ultimately approved the sale of substantially all of the Debtors' oil and gas assets in July 2015. Following the sale, the Debtors filed a Chapter 11 Plan ("
The Plan created a liquidating trust ("
On March 6, 2017, the Plan Trustee ("
On March 24, 2017, Defendants removed the Suit from the State Court to the U.S. District Court for the Southern District of Texas ("
On May 5, 2017, the removed Suit was docketed in this Court as adversary proceeding no. 17-01052. On May 11, 2017, the Court entered an Order setting an initial status hearing. One day later, Defendants filed a lengthy motion to dismiss Plaintiff's Amended Petition under Rule 12(b)(6) of the Federal Rules of Civil Procedure ("
On June 9, 2017, as required by the Court, Plaintiff repled its Amended Petition by filing a Second Amended Complaint
Plaintiff filed the Complaint with this Court subject to Plaintiff's right to seek remand of the Suit to State Court and stated that Plaintiff would be filing a motion to remand. See Complaint (dkt# 25).
Soon thereafter, on June 19, 2017, Plaintiff filed a Motion to Remand or Abstain and Brief in Support ("
On July 14, 2017, Defendants filed a Response to the Motion ("
On August 4, 2017, the Court conducted a hearing on the Motion. Counsel for Plaintiff and counsel for Defendants appeared at the hearing. The parties presented oral arguments and evidence (in the form of testimony and exhibits) to the Court. The Court has considered the Motion, the Response, the Reply, the pleadings, the evidence, the record, and the statements and arguments of counsel.
For the reasons set forth in this Opinion, the Court finds that the Motion should be granted and the Suit remanded to State Court.
First, Plaintiff seeks remand of the Suit to State Court based on lack of subject matter jurisdiction over the Suit by this Court. The primary thrust of Plaintiff's argument is that since the Debtors' Plan has already been confirmed by the Court, "post-confirmation" bankruptcy jurisdiction in this Court is now limited and does not extend to the Suit filed against Defendants.
Bankruptcy subject matter jurisdiction is created and granted to federal district courts by 28 U.S.C. § 1334. In turn, by statute, federal district courts are authorized to refer bankruptcy cases and proceedings to bankruptcy courts. 28 U.S.C. § 157(a). As is typical in federal districts throughout the country, the U.S. District Court for the Western District of Texas
To begin, § 1334(a) provides that federal district courts shall have original and exclusive jurisdiction of "all cases under title 11." 28 U.S.C. § 1334(a). Title 11 is the U.S. Bankruptcy Code. "Cases under title 11" refers to the bankruptcy petition itself filed by or against a debtor. See U.S. Brass Corp. v. Travelers Ins. Grp., Inc. (In re U.S. Brass Corp.), 301 F.3d 296, 306 (5th Cir. 2002). So, the federal district courts (and bankruptcy courts by reference from the district courts) have exclusive jurisdiction over bankruptcy petitions filed under the Bankruptcy Code. The Suit filed by Plaintiff is not a bankruptcy petition or a bankruptcy case, so exclusive subject matter jurisdiction over the Suit is not vested in this Court under § 1334(a).
Instead, the Suit is a civil proceeding filed by Plaintiff against Defendants. Section 1334(b) provides that federal district courts (and bankruptcy courts by reference from the district courts) shall have original, but not exclusive, jurisdiction over three categories of civil proceedings. In sum, the three categories are: (1) civil proceedings "arising under" the Bankruptcy Code; (2) civil proceedings "arising in" a bankruptcy case; and (3) civil proceedings "related to" a bankruptcy case. 28 U.S.C. § 1334(b). It is within at least one of these three categories that the Suit filed by Plaintiff must fall — "arising under," "arising in," or "related to" bankruptcy jurisdiction — for this Court to have subject matter jurisdiction over the Suit.
As to the first category, a civil proceeding "arises under" the Bankruptcy Code if it involves a cause of action created or determined by a statutory provision of the Bankruptcy Code. As to the second category, a civil proceeding "arises in" a bankruptcy case when it involves a cause of action that is not expressly created by the Bankruptcy Code, but nonetheless would have no existence outside of bankruptcy. See Wood v. Wood (In re Wood), 825 F.2d 90, 96-97 (5th Cir. 1987); see also In re U.S. Brass Corp., 301 F.3d at 306. These two categories of civil proceedings ("arises under" the Bankruptcy Code and "arises in" a bankruptcy case) are statutorily defined as "core" proceedings under 28 U.S.C. § 157(b).
As to the third category, the broadest grant of bankruptcy jurisdiction is over a civil proceeding that is "related to" a bankruptcy case (often called a "non-core" proceeding). The Fifth Circuit has recognized that a civil proceeding is "related to" a bankruptcy case if "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." In re Wood, 825 F.2d at 93 (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)) (emphasis in original).
Whether a bankruptcy court has subject matter
To determine the fundamental issue of whether this Court has bankruptcy jurisdiction under § 1334(b) over the Suit, it is not necessary to decide which of the three jurisdictional categories that the Suit may fall under ("arises under," "arises in," or "related to" bankruptcy jurisdiction).
Bankruptcy jurisdiction becomes more limited after confirmation of a bankruptcy plan (often called "post-confirmation"). Here, the Debtors' Plan was confirmed in September 2015, and Plaintiff filed the Suit against Defendants in March 2017.
The bankruptcy subject matter jurisdiction statute (28 U.S.C. § 1334) does not expressly limit bankruptcy jurisdiction after confirmation of a bankruptcy plan. However, in a 2001 decision, the Fifth Circuit seemed to adopt a more exacting theory for post-confirmation jurisdiction, recognizing that the broad "related to" category of bankruptcy jurisdiction is reduced after confirmation of a bankruptcy plan. Simply put, this is because, after confirmation of a plan, a bankruptcy estate ceases to exist. See Bank of La. v. Craig's Stores of Tex., Inc. (In re Craig's Stores of Tex., Inc.), 266 F.3d 388, 390-91 (5th Cir. 2001).
Specifically, the Fifth Circuit stated that after plan confirmation, "related to" bankruptcy jurisdiction ceases to exist for matters other than those "pertaining to the implementation or execution of the plan." In re Craig's Stores, 266 F.3d at 390 (finding that bankruptcy jurisdiction did not exist over post-confirmation dispute between reorganized debtor and its lender); In re U.S. Brass Corp., 301 F.3d at 304 (finding that bankruptcy jurisdiction did exist post-confirmation over agreement by debtor to liquidate claims through binding arbitration).
However, a subsequent decision by the Fifth Circuit in 2008 narrowly interpreted the Craig's Stores decision and identified three factors that were critical to the determination in Craig's Stores that bankruptcy jurisdiction did not exist post-confirmation.
In re Enron Corp., 535 F.3d at 335.
As a result, lower courts in the Fifth Circuit have broadly construed the "pertains to the implementation or execution of a plan" jurisdictional test laid out in Craig's Stores and recognized that Craig's Stores was premised on narrow and specific facts. In determining if post-confirmation bankruptcy jurisdiction exists over a civil proceeding, courts have examined the three factors identified by the Fifth Circuit in the subsequent In re Enron Corp. decision, which are whether: (1) the claims primarily arise from pre-confirmation or post-confirmation relations between the parties; (2) any claims or antagonisms were pending between the parties on the date of plan confirmation; and (3) any facts or law deriving from the bankruptcy are necessary to the claims. In re Enron Corp., 535 F.3d at 335; see, e.g., Brickley v. Scantech Identification Beams Sys., LLC, 566 B.R. 815, 829-30 (W.D. Tex. 2017) (applying three factors and finding that post-confirmation "related to" bankruptcy jurisdiction existed); Schmidt v. Nordlicht, 2017 WL 526017, at *3 (S.D. Tex. Feb. 9, 2017) (same).
Indeed, for the past decade, courts within the Fifth Circuit have consistently held that bankruptcy jurisdiction continues to exist post-confirmation over suits based on pre-confirmation claims and activities brought by a plan trustee appointed under a bankruptcy plan. See, e.g., Brickley, 566 B.R. at 829-30 (finding "related to" bankruptcy jurisdiction in post-confirmation suit by plan trustee based on breach of fiduciary duty and RICO claims); Schmidt, 2017 WL 526017, at *3 (finding "related to" bankruptcy jurisdiction in post-confirmation director and officer liability suit filed by plan trustee); WRT Creditors Liquidation Tr. v. C.I.B.C. Oppenheimer Corp., 75 F.Supp.2d 596, 604-06 (S.D. Tex. 1999) (finding "related to" bankruptcy jurisdiction in post-confirmation suit by plan trustee based on breach of fiduciary duties and state law claims); Kaye v. Dupree, (In re Avado Brands, Inc.), 358 B.R. 868, 878-89 (Bankr. N.D. Tex. 2006) (same); Coho Oil & Gas, Inc. v. Finley Res., Inc. (In re Coho Energy, Inc.), 309 B.R. 217, 221 (Bankr. N.D. Tex. 2004) (same).
Here, the Court easily finds that it has bankruptcy subject matter jurisdiction over the Suit filed by Plaintiff against Defendants as a "related to" proceeding. Plaintiff is a Plan Trustee appointed under the confirmed bankruptcy Plan of the Debtors. As Plan Trustee, Plaintiff is empowered to pursue and collect on the Debtors' causes of actions (including claims against Defendants in the Suit) and to distribute any net recoveries to pay creditors of the Debtors under the Plan. The Plan is a "liquidation" plan, meaning that the Debtors have no ongoing business operations and execution of the Plan involves the Plan Trustee (Plaintiff) pursuing causes of action for the benefit of creditors.
The Court concludes that after applying the three factors recognized for post-confirmation jurisdiction by the courts, it has "related to" bankruptcy jurisdiction over the Suit. See, e.g., In re Enron Corp., 535 F.3d at 335; Brickley, 566 B.R. at 829-30; Schmidt, 2017 WL 526017, at *3. First, the claims in the Suit arise entirely from pre-confirmation actions allegedly taken (or not taken) by Defendants. Second, as correctly recognized by Defendants, antagonism existed with Defendants prior to confirmation of the Plan in September 2015. Months before Plan confirmation (in June 2015), the Official Committee of Unsecured Creditors sought and obtained Court approval to bring causes of action on behalf of the Debtors' estates against present and former officers and directors of the Debtors. See Emergency Motion and Order (DX-12 and DX-13). Third, while limited facts and law deriving from the bankruptcy may be examined with respect to some of the claims, any net recoveries made by Plaintiff on these claims will affect distributions to creditors under the confirmed Plan.
After considering these three factors, the Court finds that post-confirmation "related to" bankruptcy jurisdiction exists over the Suit.
For these reasons, this Court has bankruptcy subject matter jurisdiction over the Suit brought by Plaintiff against Defendants. As a consequence, the Court denies Plaintiff's Motion for remand based on lack of subject matter jurisdiction.
Second, Plaintiff seeks remand of the Suit based on mandatory abstention. The gravamen of Plaintiff's argument is that this Court is required to abstain from deciding the Suit under 28 U.S.C. § 1334(c)(2).
Mandatory abstention in a bankruptcy proceeding is governed by 28 U.S.C § 1334(c)(2). Section 1334(c)(2) states:
This statute requires a federal court to abstain from hearing a proceeding if the following five requirements are met: (1) a motion to abstain is "timely" made; (2) the proceeding is a "non-core" ("related to") proceeding based upon a state law claim or cause of action; (3) the proceeding has no independent basis for federal jurisdiction other than § 1334(b); (4) the action can be adjudicated timely in state court; and (5) an action has been commenced in state court. See Edge Petroleum Operating Co. v. GPR Holdings, L.L.C. (In re TXNB Internal Case), 483 F.3d 292, 300 (5th Cir. 2007). If the requirements for mandatory abstention are met, a federal court has no discretion — it must abstain. See, e.g., WRT Creditors Liquidation Tr., 75 F.Supp.2d at 613 (citations omitted).
As to the first requirement, there has been no suggestion that Plaintiff did
Mandatory abstention applies only to a "related to" bankruptcy proceeding (also known as a "non-core" proceeding) that is based on state law claims or causes of action. Mandatory abstention does not apply to a "core" proceeding (also known as an "arising under" or "arising in" proceeding). See 28 U.S.C. § 1334(c)(2); Cadle Co. v. Moore (In re Moore), 739 F.3d 724, 728 (5th Cir. 2014); Gober v. Terra + Corp., (In re Gober), 100 F.3d 1195, 1206 (5th Cir. 1996).
Both the "form and substance" of the proceeding should be analyzed to determine if it is "core" or "non-core." Each cause of action should be "separately examined" in making this determination. See WRT Creditors Liquidation Tr., 75 F.Supp.2d at 608 (citations omitted); Legal Xtranet, Inc. v. AT & T Mgmt. Servs., L.P. (In re Legal Xtranet, Inc.), 453 B.R. 699, 708 (Bankr. W.D. Tex. 2011). Some courts state that the "core" versus "non-core" analysis is applied to the proceeding as a "whole"; other courts state that the proceeding is not examined as a "whole," but rather as to each of the causes of action in a suit. Cf. WRT Creditors Liquidation Tr., 75 F.Supp.2d at 608; In re Legal Xtranet, 453 B.R. at 708.
A "core" proceeding is one that "arises under" the Bankruptcy Code or "arises in" a bankruptcy case. 28 U.S.C. § 157(b). According to the Fifth Circuit, a cause of action created or determined by a statutory provision of the Bankruptcy Code "arises under" the Bankruptcy Code; a cause of action that would have no existence outside of bankruptcy "arises in" a bankruptcy case. See In re Wood, 825 F.2d at 96-97.
Most courts have found that state law causes of action based on pre-bankruptcy events that do not invoke a substantive right created by federal bankruptcy law fail to "arise under" the Bankruptcy Code. See WRT Creditors Liquidation Tr., 75 F.Supp.2d at 609-10 (collecting cases). If the causes of action asserted exist under state law and stand independent of the bankruptcy case, they do not "arise in" a bankruptcy case. See, e.g., Schmidt, 2017 WL 526017, at *5; WRT Creditors Liquidation Tr., 75 F.Supp.2d at 612. Just because a bankruptcy plan creates a liquidating trust empowered to pursue pre-bankruptcy state law causes of action does not mean that the causes of action "arise in" a bankruptcy case. See WRT Creditors Liquidation Tr., 75 F.Supp.2d at 612 ("The test is ... not merely whether a bankruptcy court allowed or authorized the prosecution of the claim."). Similarly, claims do not "arise in" a bankruptcy just because they would not exist "but for" the filing of bankruptcy. See Gupta v. Quincy Medical Ctr., 858 F.3d 657, 664-65 (1st Cir. 2017); Schmidt, 2017 WL 526017, at *5. Instead, "core" jurisdiction exists if the claims are of the type that can only exist in a bankruptcy case. See Gupta, 858 F.3d at 665.
All of the causes of action in the Complaint are premised on pre-bankruptcy actions allegedly taken (and not taken) by Defendants. Furthermore, all of the causes of action are based on state law. None of the causes of action in the Complaint are based on the Bankruptcy Code, and each would have an existence outside of bankruptcy. As a result, the Court concludes that, whether viewed separately or as a whole, the Suit is not within this Court's "core" bankruptcy jurisdiction.
At the hearing on the Motion, the Court closely questioned Plaintiff's counsel regarding whether Plaintiff was attempting to use § 544(b) of the Bankruptcy Code to assert the state law fraudulent transfer claims in the Complaint (Counts 16 and 17). Plaintiff's counsel stipulated that Plaintiff was not and will not use § 544(b) of the Bankruptcy Code to pursue such claims. Moreover, the face of the Complaint does not assert standing under § 544(b) of the Bankruptcy Code to bring these claims. Based on this stipulation by Plaintiff's counsel, the Court finds that the state law fraudulent transfer claims in the Complaint are not within the "core" jurisdiction of the Court.
Defendants attempt to create "core" jurisdiction in this Court by asserting that most of the causes of action in the Complaint are precluded by a "correct" interpretation of the confirmed Plan, which they call a critical "gating" issue. See Response, pp. 9-13. But as often recognized by courts, the assertion of a defense based on an interpretation of the confirmed plan or order of a bankruptcy court is not sufficient to invoke "core" bankruptcy jurisdiction. See, e.g., Nancy Sue Davis Tr. v. Davis, 2009 WL 1066996, at *2 (S.D. Tex. Apr. 21, 2009) (concluding that defenses based on an interpretation of the confirmation order or plan will not create core bankruptcy jurisdiction); Malesovas v. Sanders, 2005 WL 1155073 at *3 (S.D. Tex. May 16, 2005) (stating defenses based on confirmed bankruptcy plan do not create bankruptcy jurisdiction over a removed suit; state courts are qualified to and routinely interpret bankruptcy plans); Principal Life Ins. Co. v. JPMorgan Chase
Defendants also argue the claims are "core" because, but for the Plan, Plaintiff would not have standing to pursue the causes of action asserted against Defendants, and because the Complaint expressly mentions the Plan. See Response, pp. 13-14. This type of argument has likewise been rejected by the courts. See Gupta, 858 F.3d at 664-65. A bankruptcy court's order or confirmed plan authorizing the prosecution of a cause of action does not make the cause of action a "core" proceeding. See WRT Creditors Liquidation Tr., 75 F.Supp.2d at 612; see also Malesovas, 2005 WL 1155073, at *3 (remanding suit to state court even though state court may have to interpret confirmed bankruptcy plan).
In sum, the Court concludes that the causes of action asserted in the Complaint are not "core" proceedings in form or substance. Instead, the causes of action in the Complaint are only "related to" (non-core) proceedings based on state law. Courts within the Fifth Circuit have consistently found that post-confirmation suits by plan trustees based on state law claims are only within the "related to" (and not "core") bankruptcy jurisdiction of a federal court. See, e.g., Brickley, 566 B.R. at 829-30 (stating post-confirmation claims for breach of fiduciary duty and state law claims are "related to" claims); Schmidt, 2017 WL 526017, at *3 (same); WRT Creditors Liquidation Tr., 75 F.Supp.2d at 613 (same); In re Avado Brands, 358 B.R. at 878-89 (same).
As a result, the Court finds that this requirement for mandatory abstention (the Suit is a "related to," "non-core" proceeding based on state law) has been satisfied.
Mandatory abstention applies only when the proceeding has no independent basis for federal jurisdiction, other than 28 U.S.C. § 1334(b) (the bankruptcy jurisdiction statute).
Here, the Court is satisfied that the Suit has no independent basis for federal jurisdiction other than § 1334(b). There is no diversity jurisdiction in the Suit and none has been suggested. See 28 U.S.C. § 1332. Further, Plaintiffs' Complaint alleges only state law causes of action.
Defendants' suggestion that independent federal jurisdiction may exist because the Complaint relies on §§ 544 and 548 of the Bankruptcy Code is misplaced for two reasons. First, the Complaint on its face does not state a cause of action under either § 544 or § 548, and Plaintiff's counsel stipulated that it is not using § 544 to assert state law fraudulent transfer claims. Second, federal jurisdiction over any claims under §§ 544 and 548 would be based on 28 U.S.C. § 1334(b) (the bankruptcy jurisdiction statute). So, there would be no "independent" basis for federal jurisdiction in any event.
Consequently, the Court finds that this requirement for mandatory abstention (that the Suit has no independent basis for federal jurisdiction) has been satisfied.
Mandatory abstention is required only if the proceeding can be "timely adjudicated" in state court. While a naked assertion that a proceeding can be timely heard in state court will not satisfy the requirement, courts have recognized that the requirement is a relatively low hurdle to clear. See, e.g., WRT Creditors Liquidation Tr., 75 F.Supp.2d at 605-06;
Here, Plaintiff easily satisfied its burden to show that the Suit can be timely adjudicated in the State Court. At the hearing on the Motion, Plaintiff provided credible testimony and introduced exhibits regarding the typical practices in and caseload of the 149th District Court of Brazoria County. See PX-12 and PX-13. The evidence clearly showed that the State Court can timely adjudicate the Suit.
As a result, the Court finds that this requirement for mandatory abstention (that the Suit can be timely adjudicated in State Court) has been satisfied.
Finally, mandatory abstention applies only if an action is commenced in state court. This requirement is satisfied if the state court action was filed, removed to federal court, and then the federal court is requested to abstain. See, e.g., Schmidt, 2017 WL 526017, at *1, *4; WRT Creditors Liquidation Tr., 75 F.Supp.2d at 602, 613; see also In re Simmons, 205 B.R. 834, 847 (Bankr. W.D. Tex. 1997) (denying request for mandatory abstention because movant had not yet commenced a proceeding in state court at the time of filing the motion for abstention in bankruptcy court).
Here, there can be no dispute that the Suit was commenced by Plaintiff in State Court prior to removal and prior to abstention being sought in this Court. Plaintiff commenced the State Court action against Defendants on March 6, 2017. The action was removed to federal court on March 24, 2017 and transferred to this Court on May 3, 2017. Abstention was then requested in this Court by Plaintiff on June 19, 2017. See PX-12 (Register of Actions in State Court); DX-3 (Notice of Removal); Order (dkt# 1); Motion (dkt# 31). Indeed, in their pleadings, Defendants conceded that this requirement has been satisfied. See Response, p. 9 ("Here, the Defendants do not dispute that an action was commenced in state court.").
For these reasons, the Court finds that this requirement for mandatory abstention (that an action is commenced in state court) has been satisfied.
In conclusion, the Court finds that each of the requirements for mandatory abstention under 28 U.S.C. § 1334(c)(2) have been satisfied. Consequently, the Court has no discretion; it must remand the Suit to State Court.
Nevertheless, the Court will still address Plaintiff's alternative request for remand based on permissive abstention. This is because a bankruptcy court may still permissively
Alternatively, Plaintiff seeks remand of the Suit to State Court based on permissive abstention and/or equitable remand. The genesis of Plaintiff's argument is that this Court should exercise its discretion to abstain and remand under 28 U.S.C. § 1334(c)(1) (permissive abstention) and/or 28 U.S.C. § 1452(b)(equitable remand).
Permissive abstention in a bankruptcy proceeding is governed by 28 U.S.C. § 1334(c)(1). Section 1334(c)(1) states:
Equitable remand of a bankruptcy proceeding is provided for by 28 U.S.C. § 1452(b). Section 1452(b) states:
According to the Fifth Circuit, bankruptcy courts have broad discretion to permissively abstain and equitably remand a suit. See, e.g., In re Gober, 100 F.3d at 1206; Browning v. Navarro, 743 F.2d 1069, 1077 n.21 (5th Cir. 1984). Such discretion is not limited by the type of proceeding. Rather, the bankruptcy court may permissively abstain from both "core" and "non-core" bankruptcy proceedings. In re Gober, 100 F.3d at 1206.
Courts throughout the Fifth Circuit typically use a factors-based analysis to determine if permissive abstention and equitable remand of a bankruptcy civil proceeding is appropriate. Because the two statutes are similar in purpose, the same factors are usually weighed to determine if permissive abstention or equitable remand is warranted. See, e.g., Regal Row Fina, Inc. v. Wash. Mut. Bank, 2004 WL 2826817 at *8 (N.D. Tex. Dec. 9, 2004); Broyles v. U.S. Gypsum Co., 266 B.R. 778, 785 (E. D. Tex. 2001); Inter Nat'l Bank v. Rosales (In re Rosales), 2012 WL 4343701 at *4 (Bankr. W.D. Tex. Sept. 21, 2012); Special Value Continuation Partners, L.P. v. Jones (In re Special Value Continuation Partners, L.P.), 2011 WL 5593058 at *7-*8 (Bankr. S.D. Tex. Nov. 10, 2011).
The non-exclusive factors examined include:
See Regal Row, 2004 WL 2826817 at *8; Broyles, 266 B.R. at 785; In re Rosales, 2012 WL 4343701 at *4; Special Value, 2011 WL 5593058 at *7-8.
Here, on balance, the Court finds that the factors weigh in favor of permissive abstention and equitable remand of the Suit to State Court. The following is the Court's analysis of the factors.
In sum, nine factors weigh in favor of permissive abstention and equitable remand of the Suit under the circumstances.
Factor 1 (efficient administration of estate) weighs in favor of abstention and remand. As Plaintiff correctly points out, there is no longer a bankruptcy estate to administer in the Debtors' bankruptcy case. A liquidating Plan has been confirmed and the Debtors are no longer operating under bankruptcy supervision (or otherwise). The State Court is well positioned to promptly adjudicate the Suit and determine whether the claims asserted have merit and any recoverable value for creditors.
Factor 2 (predominant issues) also weighs in favor of abstention and remand. State law (and not bankruptcy law) issues predominate in the Suit. The multiple causes of action in the Complaint are all based on state law. Defendants' argument, that critical "gating" bankruptcy Plan defenses are better decided by this Court, is unavailing for several reasons. Most of the suggested defenses — an exculpation clause, lack of standing, and statute of limitations — are also based on state law. In the event the Plan may impact any such defenses, the State Court is capable of reading and understanding the Plan. As the federal district court in Malesovas recognized: "bankruptcy plans of reorganization, no matter how complicated, are contracts which can be interpreted by other courts of competent jurisdiction.... Thus, state courts are qualified to interpret the language of bankruptcy plans and orders and routinely engage in such interpretation." 2005 WL 1155073 at *3.
Factors 4 (presence of related proceeding), 5 (jurisdictional basis), 6 (degree of remoteness), and 7 (substance of proceeding) all weigh heavily in favor of abstention and remand. There is a related proceeding present that was commenced in state court — the Suit that was originally filed by Plaintiff in Brazoria County, Texas. There is no federal jurisdiction over the Suit other than bankruptcy jurisdiction under 28 U.S.C. § 1334. The Suit is quite remote from the Debtors' bankruptcy case, where a liquidating Plan was confirmed almost two years ago. And the substance, as well as the form, of the Suit is not a "core" proceeding.
Even more importantly, Plaintiff has repeatedly demanded (and is entitled to) a jury trial in the Suit. This Court lacks authority to conduct a jury trial given the lack of party consent. See 28 U.S.C. § 157(e). So, the U.S. District Court (not this Court) would have to conduct a trial if the Suit stayed in federal court. The U.S. District Court for the Western District of Texas has among the heaviest caseloads in the entire country. These hard-working federal district judges handle massive criminal dockets as well as substantial civil dockets, while enduring several judicial vacancies. See U.S. District Court Judicial Caseload Profile (PX-14). Although this Court can and would make time to conduct as many pre-trial matters as possible, it would take at least two different federal judges in two federal courts to fully adjudicate the Suit. In stark contrast, the State Court (using one state court district judge) has the jurisdiction, authority, and docket availability to handle pre-trial matters, conduct the trial promptly, and render a final decision on the merits in the Suit.
Factor 13 (comity) likewise weighs in favor of abstention and remand. The Suit involves state law issues and deference should be given to the State Court to decide state law issues under these circumstances. Defendants' suggestion that limited deference should be given to a Texas state court because Delaware corporate fiduciary law (and not Texas state law) applies is not persuasive for several reasons. First, the Complaint alleges both Texas and Delaware state law causes of action. Second, although one of the Debtors is a Delaware corporation, the other two Debtors are Texas corporations; so there may be choice of law decisions to be made. State law (not federal law) will govern choice of law decisions, which are better made here by a state court rather than a federal court who might be making a so-called "Erie guess."
In sum, four factors are either neutral (do not weigh in favor of or against permissive abstention) or do not apply to the Suit.
Factor 3 (nature of applicable law) is neutral. Currently, it is unclear what the applicable state law or laws will be in the Suit. Plaintiff says that Texas law will
Factor 8 (severance of state law claims) appears inapplicable under the situation presented. This factor — the feasibility of severance of state law claims from core bankruptcy matters to permit the state court to enter a judgment with enforcement of the judgment left to the bankruptcy court — does not apply here. Any possible resulting judgment in the Suit would be against non-debtors (Defendants); there would be no judgment to enforce against the Debtors in this bankruptcy case. And there are no "core" causes of action to be severed.
Factor 10 (forum shopping) is a neutral factor where there has been "much ado about nothing" between the parties. Plaintiff accused Defendants of forum shopping because the Debtor (acting through Defendant James A. Watt, its President) chose to file the Debtors' bankruptcy case in the Western District of Texas (Austin Division). This novel forum shopping accusation by Plaintiff lacks merit on multiple levels. Forum shopping in the context of permissive abstention is not usually based on where the bankruptcy case was filed; it is based on where the civil proceeding (suit) was filed. Further, Mr. Watt (the decision-maker) is but one of eighteen Defendants in the Suit; the other seventeen Defendants cannot be blamed for any forum shopping. Finally, Mr. Watt adequately explained the decision-making process for the Debtors' bankruptcy filing at the hearing on the Motion; there was nothing untoward (or improper) with the Debtors choosing to file a bankruptcy case in this District.
In turn, Defendants accused Plaintiff of forum shopping because the Suit was filed by Plaintiff in Brazoria County, Texas and not this Court (where Plaintiff has filed other suits against some of the Defendants). This forum shopping accusation by Defendants also lacks merit. For forum shopping to become a significant factor in an abstention analysis, "it must rise to a level demonstrating an attempt to abuse or manipulate the judicial process." Official Comm. of Unsecured Creditors of Schlotzsky's Inc. v. Grant Thornton, L.L.P. (In re Schlotzsky's, Inc.), 351 B.R. 430, 435-36 (Bankr. W.D. Tex. 2006) (citing AXA Re Prop. & Cas. Ins. Co. v. Day, 162 Fed. Appx. 316, 320 (5th Cir. 2006)). In choosing where to file a lawsuit, a plaintiff inevitably engages in some degree of forum shopping. Similarly, in invoking a particular remedy or process early in a suit (such as removal), defendants also attempt to select the forum perceived as most favorable to their case. See In re Schlotzsky's, Inc., 351 B.R. at 435-36. Unless such strategies approach an abuse of the judicial process (which it has not in the Court's view) this factor neither weighs in favor of, nor against, abstention.
Factor 12 (existence of non-debtor parties) is also neutral. Here, technically the Suit involves only non-debtor parties. But Plaintiff was appointed and the Plan Trust was created in the Debtors' bankruptcy case to pursue the Debtors' causes of action. On balance, this factor does not push the scales one way or the other with regard to permissive abstention.
The Court sees only one factor that weighs slightly against permissive abstention and remand of the Suit. Factor 14 examines the possibility of prejudice to other parties in the action. Here, Defendants suggest they would be harmed if the Suit was remanded to State Court because
The possibility of significant prejudice and harm to Defendants is mitigated, however, for several reasons. Initially, it must be noted that only eight of eighteen Defendants are also defendants in other adversary proceedings pending in this Court. So, ten of eighteen Defendants (a majority) will not be defending suits by Plaintiff in two forums. Second, at the request of the parties, the Court has abated the other adversary proceedings, and the Court will continue to do so if requested by the parties. Third, these other adversary proceedings filed by Plaintiff seek to recover alleged "preferential transfers" under the Bankruptcy Code from certain Defendants. The claims asserted by Plaintiff in the Suit (state law claims) are not related to and do not overlap with the preference claims (bankruptcy claims) asserted by Plaintiff in these other adversary proceedings. Fourth, it seems unlikely that the outcome in one of the proceedings would affect or prejudice the outcome in the other proceedings. On balance, the Court finds that Factor 14 (possibility of prejudice) weighs slightly against abstention and remand of the Suit.
At bottom, nine factors weigh in favor of permissive abstention and remand, four factors are neutral, and one factor weighs slightly against abstention and remand of the Suit. More significant than this raw numerical count, the Court finds that the factors favoring permissive abstention are of greater importance under the circumstances of this Suit.
The text of the permissive abstention statute (28 U.S.C. § 1334(c)(1)) speaks to the "interest of justice," "interests of comity for State courts," and "respect for state law" as each being a separate ground to abstain. Here, all three statutory grounds support the exercise of the Court's discretion to permissively abstain for the reasons set forth in the factors-based analysis above.
From a structural perspective, permissive abstention serves as a counter-balance to bankruptcy jurisdiction. As recognized by the Fifth Circuit, the broad grant of bankruptcy jurisdiction to federal courts under § 1334(b) is tempered by the discretionary power of a federal court under § 1334(c)(1) to abstain from exercising such federal jurisdiction due to the interests of justice, comity with state courts, or respect for state law in a particular case. See In re Wood, 825 F.2d at 93. These two statutory concepts must go hand-in-hand; the discretionary abstention statute helps the far-reaching bankruptcy jurisdiction statute from bringing suits into federal courts when they are better left for state courts to decide.
For all of these reasons, the Court concludes that it should exercise its discretion to permissively abstain and equitably remand the Suit to the State Court under 28 U.S.C. § 1334(c)(1) and/or 28 U.S.C. § 1452(b).
In conclusion, this Court has bankruptcy subject matter jurisdiction over the Suit under 28 U.S.C. § 1334(b). However, the Court is required to abstain from hearing
For the reasons set forth in this Opinion, the Court will grant Plaintiff's Motion and remand the Suit to the 149th District Court of Brazoria County, Texas, for adjudication and disposition. A separate Order will be entered by the Court granting the Motion and remanding the Suit consistent with this Opinion.