Opinion
Case No. 02-40665-DML-11, (Jointly Administered), Adversary No. 02-4135
April 8, 2003
REPORT AND RECOMMENDATION REGARDING MOTION TO WITHDRAW REFERENCE
TO THE HON. TERRY R. MEANS, UNITED STATES DISTRICT JUDGE:
On March 14, 2003, the defendant in the captioned adversary proceeding ("Defendant" or "Eldorado") filed its Motion to Withdraw Reference (the "Motion"). On March 28, 2003, the plaintiff ("Plaintiff" or "CoServ") filed a response to the Motion (the "Response") and on March 31, 2003 Eldorado filed a reply (the "Reply") to the Response. On April 1, 2003, the undersigned bankruptcy judge held a status conference to consider the Motion. Plaintiff and Defendant appeared through counsel at that time by telephone and argued their respective positions. The undersigned has carefully reviewed the Motion, Response and Reply, considered the arguments of counsel and considered prior proceedings in and in connections with this adversary proceeding. For the reasons set out below, the undersigned recommends that the reference not be withdrawn.
I. Background
CoServ is the debtor in a chapter 11 case pending in the bankruptcy court. CoServ's plan of reorganization (the "Plan") was confirmed on September 11, 2002. Pursuant to the Plan all claims, including those dischargeable under 11 U.S.C. § 1141 (d) and 524, are to paid in full.
The captioned adversary proceeding has been the subject of the bankruptcy court's consideration for almost a year. The procedural history and relevant facts are fully set forth in an unpublished memorandum opinion entered on February 13, 2003, a copy of which is attached hereto for the District Court's convenience, and an earlier memorandum opinion, In re Denton County Elec. Co-op., Inc., 281 B.R. 876 (Bankr. N.D. Tex. 2002).
As reflected in these memorandum opinions, the bankruptcy court has studied numerous relevant exhibits, affidavits and legal authorities to familiarize itself with the facts and law pertinent to this adversary proceeding.
II. Discussion
The reasons for the undersigned's conclusion that this adversary proceeding is within the bankruptcy court's core jurisdiction are explained in detail in sections III and IV.B of the attached opinion, to which the District Court is respectfully referred. In addition, there is need to address several issues raised by or in connection with the Motion. These issues are (1) the bankruptcy court's possible institutional bias; (2) whether the claims of Eldorado are subject to disposition pursuant to CoServ's Plan; (3) and whether Defendant has forfeited any right it may have to a jury trial.
A. Institutional Bias
In the Motion Defendant argues that statements made by the bankruptcy court in its memorandum opinions reflect an institutional bias that operates in favor of Plaintiff. While the undersigned questions whether this purported bias would constitute a valid reason for withdrawal of the reference, the quoted portions of the memorandum opinions were motivated not by any inclination toward Plaintiff but rather by Defendant's failure, over the course of almost a year, to provide evidence of — indeed, in most instances, to do more than conclusively allege — harm to Defendant caused by the wrongful conduct of Plaintiff. See section IV.B of the attached memorandum opinion. In fact, the bankruptcy court has repeatedly offered Defendant the opportunity to demonstrate it has a valid cause of action. Even with respect to the summary judgment proceedings dealt with in the attached memorandum opinion, the court denied summary judgment as to several causes of action (sections IV.C.4 and 7 and V) to permit discovery by Defendant (see attached memorandum opinion, section IV.A) and offered Defendant ample opportunity to amend or modify its pleadings. In sum, the undersigned submits there is no reason to doubt that the bankruptcy court would decide this adversary proceeding objectively.
B. Eldorado's Claims are Subject to the Plan.
Eldorado contends that, because the Plan provides for payment in full of unsecured claims, these claims are not discharged. This is simply wrong. The Plan specifically provides that claims are discharged. Plan, § 12.1.1. The bankruptcy court's order confirming the Plan also provides for the discharge of claims. Confirmation Order (as defined in the Response), page 11, ¶ 6. Finally, 11 U.S.C. § 1141 (d)(1)(A) specifically states that confirmation of the plan:
(A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title, whether or not —
(i) a proof of the claim based on such debt is filed or deemed filed under section 501 of this title;
(ii) such claim is allowed under section 502 of this title; or
(iii) the holder of such claim has accepted the plan. . . .
There is no exception to the discharge provisions of chapter 11 for claims which, if allowed, will be paid in full. As suggested by section 1141(d)(1)(A) (see also 11 U.S.C. § 502 (b)), to be paid, a claim must be first allowed. In the case of Eldorado, before it is entitled to payment under the Plan, its claim is subject to disposition through the claims allowance process. That process is subject to the core jurisdiction of the bankruptcy court. 28 U.S.C § 157(b)(2)(B). As stated in the attached memorandum opinion (p. 9), Eldorado may only recover on its claims in the bankruptcy court.
C. Defendant has no Right to Jury Trial.
Defendant argues that its filing of counterclaims cannot have waived its "right" to a jury trial because the counterclaims were compulsory and so had to be asserted in response to Plaintiff's complaint for declaratory relief or be lost. Even if Defendant were compelled to file its counterclaims or lose them, that would not insulate it from a waiver argument.
In In re Hooker Investments, Inc., 122 B.R. 659 (S.D.N.Y. 1991) app. den., mandamus den., 937 F.2d 833 (2d Cir. 1991), the court declined to grant bank creditors an extension of time to file proofs of claim in order to preserve their rights to jury trial. Just as the creditors there had the choice of retaining their ability to participate in the debtor's chapter 11 estate or preserve the right to a jury trial, so too, Eldorado, if possessed of compulsory counterclaims, could forsake those claims or subject them to adjudication by the bankruptcy court.
Defendant (Motion, p. 6, n. 4) suggests hire Jensen, 946 F.2d (5th Cir. 1991) does not support this analysis. In fact, the Jensen court stated ( 946 F.2d at 374):
"We agree with the result in Hallahan [In re Hallahan, 936 F.2d 1496 [7th Cir. 1991)], but not its reasoning with regard to why the debtor had no right to a jury trial. . . . As we see it, the debtor had no right to a jury trial in Hallahan, not because the debtor had filed a petition in bankruptcy, but because the plaintiff had submitted his claim against the debtor to the equitable jurisdiction of the bankruptcy court. Filing a proof of claim denied both the plaintiff and the defendant, debtor, the right to jury trial. . .
Jensen's holding was simply that the filing by a debtor of a bankruptcy petition does not result in submission by the debtor for all purposes to bankruptcy court jurisdiction. The quoted portion of the opinion, however, indicates an opposite result in this adversary proceeding.
Moreover, it defies logic to suggest that a complaint seeking declaratory relief that the defendant does not have certain claims would force that defendant to plead mirror image claims as compulsory counterclaims. For precisely that reason, the Court of Appeals for the Fifth Circuit has ruled that disposition of a declaratory relief action does not preclude claims which might have been asserted the same case and would have been resolved under principles of res judicata if the underlying action were a suit seeking damages or injunctive relief. In Kaspar Wire Works, Inc. v. Leco Engineering and Machine, Inc., 575 F.2d 530, 536 (5th Cir. 1978) (dealing with pursuit of a patent infringement claim following disposition of a declaratory judgment action in which the infringer had raised the same claim) the Court said:
In a suit such as Leco's, the true remedial rights involved are those of the declaratory action defendant in his potential suit . . . against the party taking the role of plaintiff. The declaratory action plaintiff has engaged in no transaction giving rise to any substantive rights; his remedial entitlement, if any, emanates from the availability of declaratory relief. . . . He is asserting not a "claim," but an anticipatory defense to a potential claim.
However, if we view the claim presented in a declaratory suit like Leco's as Kaspar's potential claim . . . a startling result . . . might follow from the application of claim preclusion to the resulting judgment: because the "successful" defendant's claims would be merged in this "declaration" . . ., [a party] could extinguish a . . . claim [against it] by suing for declaratory relief and then voluntarily dismissing the suit with prejudice. Undoubtedly no court would sanction such a result, but its theoretical possibility demonstrates the inappropriateness of casting the issue . . . within the normal framework of claim preclusion. (emphasis in original).
In Kaspar, the Court of Appeals looked to a draft of the Restatement of the Law, Second, Judgments. The portion of the draft relied on by the Court was adopted in the final version of the Restatement. Restatement of the Law, Second, Judgments, § 33. Comment "c" to that section makes clear that a declaratory relief action will not bar counterclaims which are not pleaded in response. The declaratory relief action will dispose only of those matters actually litigated. Kaspar, 575 F.2d at 537; Restatement of the Law, Second, Judgments, § 33, Comment "c".
See, also, Martin v. Martin, Martin Richards, 989 S.W.2d 357, 359 (Tex. 1998); Stericycle, Inc., v. City of Delavan, 120 F.3d 657, 659 (7th Cir. 1997). Harborside Refrigerated Services, Inc. v. Vogel, 959 F.2d 368, 372 (2d Cir. 1992) (responding to the argument that a claim that could have been raised as a counterclaim in a previously adjudicated declaratory action: "[T]he preclusive effect of the declaratory judgment is limited to the subject matter of the declaratory relief sought. The plaintiff or defendant may continue to pursue further declaratory or coercive relief."; BGB Pet Supply, Inc. v. Nutro Products, Inc., 1997 U.S. App. Lexis 22451, * 12-*14 (6th Cir. 1997) (also refusing to hold that failure to plead in a prior declaratory relief suit barred a counterclaim); Minneapolis Auto Parts Company, Inc. v. The City of Minneapolis, 739 F.2d 408, 410 (8th Cir. 1984); Criste v. The City of Steamboat Springs, 122 F. Supp.2d 1183, 1189 (D. Colo. 2000); Perry Drugstores, Inc. v. CSKG, Inc., 83 F. Supp.2d 873, 879 (E.D. Mich. 2000); Lube 495, Inc. v. Jiffy Lube Int., Inc., 813 F. Supp. 100, 112 (D. Mass. 1993).
In sum, it is well settled that a defendant in a suit for declaratory relief need not assert its counterclaims. Thus the authorities cited by Defendant to demonstrate it has not waived its right to jury trial are inapposite. Indeed, Eldorado, by voluntarily filing counterclaims it might have held in reserve, has affirmatively chosen to submit itself to bankruptcy court jurisdiction.
III. Conclusion
For the reasons set forth herein and in the attached memorandum opinion, the undersigned recommends that the District Court deny the Motion.
Respectfully submitted,