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finding that when core and non-core issues are inextricably intertwined, the core proceedings may predominate
Summary of this case from Rodriguez v. Countrywide Home Loans, Inc.Opinion
Civil Action No. 00-3071, Section "R", Bankruptcy Case No. 99-13370 "A"
December 20, 2000
ORDER AND REASONS
Before the Court is the motion by plaintiff Mapco Petroleum, Inc. to withdraw the reference of certain adversary proceedings pursuant to 28 U.S.C. § 157 (d). For the following reasons, the motion is DENIED.
I. BACKGROUND
Before filing for bankruptcy relief, Efficient Solutions, doing business at the time as Entergy Integrated Solutions, Inc. ("EIS"), contracted with Mapco Petroleum to provide energy saving devices. Conflicts arose between the parties regarding the quality of service. As a result, EIS filed suit against Mapco in Louisiana state court for breach of contract. Mapco thereafter filed suit against EIS in Tennessee state court for breach of contract, negligent and intentional misrepresentation, and Tennessee Consumer Protection Act violations. In this complaint, Mapco also sued Entergy Corporation, the ultimate parent corporation of EIS, alleging that Entergy Corporation allowed EIS to hold itself out as acting on behalf of Entergy Corporation in the marketing of its products and to represent that it had the financial resources of Entergy Corporation to support its commitments. Mapco also filed both an answer and a counterclaim in the Louisiana action. In the counterclaim, Mapco sued Entergy Corporation on the same grounds that it sued on in the Tennessee action.
In September 1998, Entergy Enterprises, Inc. ("Entergy Enterprises"), the immediate parent corporation of EIS, sold the stock of its subsidiary to a third party, and EIS was renamed Efficient Solutions. Under the terms of the sale, Entergy Enterprises retained the potential liability resulting from the Mapco litigation. The parties also assigned Entergy Enterprises complete authority to settle Mapco's claims against its former subsidiary. Efficient Solutions retained the right to receive any net proceeds of the Mapco litigation after deduction of Entergy Enterprises' litigation costs.
In June 1999, Efficient Solutions filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Louisiana. In November 1999, Mapco filed a proof of claim in the bankruptcy proceedings, attaching its Tennessee complaint to the claim. Mapco thereafter amended its complaint in the Tennessee action to name Entergy Enterprises as the successor to the liabilities of its subsidiary and to dismiss Efficient Solutions from the claim without prejudice.
In March 2000, Entergy Enterprises and Efficient Solutions filed a motion to stay the Tennessee action and to challenge the addition of Entergy Enterprises. The parties asserted that the Tennessee action should be stayed entirely to allow the previously filed Louisiana action to proceed. The Tennessee Court denied the motion to stay and held that Efficient Solutions was entitled to receive only the net proceeds of any settlement or judgment in favor of Entergy Enterprises against Mapco. Since Entergy Enterprises had not intervened in the Louisiana action, the court found that there was no need to stay the proceeding because the two lawsuits did not involve identical parties.
On March 30, 2000, Entergy Enterprises and Efficient Solutions settled various claims and disputes they had against each other in the bankruptcy court. The parties then presented the proposed settlement to the bankruptcy "court for approval. In the settlement, the parties agreed to rescind the provision of the stock purchase agreement by which Entergy Enterprises retained liability for the Mapco lawsuits. Mapco responded by objecting to the settlement in the bankruptcy court, claiming that Mapco was a third-party beneficiary of the agreement and that the settlement was intended to insulate the solvent Entergy Enterprises from the claims it had assumed under the agreement. Mapco attached to its objection a copy of the amended Tennessee complaint in which it sued both Entergy Enterprises and Entergy Corporation. The bankruptcy court approved the settlement.
On May 5, 2000, Efficient Solutions filed an objection to Mapco's proof of claim and a counterclaim incorporating the allegations of breach of contract that it alleged against Mapco in the Louisiana proceeding. The matter was converted into an adversary proceeding pursuant to the Federal Rules of Bankruptcy 9014 and 7001, et seq. On June 12, 2000, Mapco filed a motion to withdraw its claim against the debtor. Mapco asked the bankruptcy court either to dismiss the adversary proceedings or to abstain from proceeding.
On July 24, 2000 the bankruptcy court denied Mapco's motion after hearing oral argument. On interlocutory appeal, this Court affirmed the bankruptcy court's decision. On August 25, 2000, Entergy Enterprises and Entergy Corporation filed a motion to intervene in the adversary proceeding, to which Mapco did not object. The bankruptcy court granted this motion. On September 5, 2000, Entergy Enterprises filed an intervening complaint for declaratory judgment in the adversary proceeding, asking the bankruptcy court to find that Mapco is not a third-party beneficiary of the agreement by which it sold its stock in Efficient Solutions. On the same day, Entergy Corporation filed an intervening answer to the complaint that Mapco attached to Mapco's proof of claim in the bankruptcy proceeding. On October 6, 2000, Mapco filed an answer and counterclaim to the adversary proceeding by the debtor, an answer and counterclaim to the intervening complaint of Entergy Enterprises, and a counterclaim against Entergy Corporation. Mapco now moves to withdraw the reference of the adversary proceedings from the bankruptcy court under 28 U.S.C. § 157 (d).
II. DISCUSSION
A. Bankruptcy Jurisdiction
Bankruptcy jurisdiction of district courts is conferred by 28 U.S.C. § 1334. Section 1334(a) provides for exclusive jurisdiction "of all cases under title 11." 28 U.S.C. § 1334 (a). Under Section 1334(b), the district courts have original, but not exclusive, jurisdiction "of all proceedings arising under title 11, or arising in or related to cases under title 11." Id. § 1334(b). Bankruptcy jurisdiction thus extends to four classes of cases: cases under title 11, proceedings arising under title 11, proceedings arising in title 11 cases, and proceedings related to cases under title 11. See In re Wood, 825 F.2d 90, 92 (5th Cir. 1987). The Fifth Circuit has explained that in determining whether jurisdiction exists, it is necessary to determine only whether a matter is at least "related to" the bankruptcy:
For the purpose of determining whether a particular matter falls within bankruptcy jurisdiction, it is not necessary to distinguish between proceedings "arising under", "arising in a case under", or "related to a case under", title 11. These references operate conjunctively to define the scope of jurisdiction. Therefore, it is necessary only to determine whether a matter is at least "related to" the bankruptcy. The Act does not define "related" matters. Courts have articulated various definitions of "related", but the definition of the Court of Appeals for the Third Circuit appears to have the most support: "whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy."Id. at 93.
The controversies at issue here are at a minimum related to a case under title 11. Mapco filed a proof of claim, which asserted that the debtor was liable to it for breach of contract. Clearly such a claim will affect the debtor's estate. The same applies to the debtor's counterclaim against Mapco. The determination of the claims by and against Entergy Enterprises will determine the extent to which the debtor or Entergy Enterprises retains liability for the contract claims. This determination will undoubtedly affect the debtor's estate. See Id. at 93-94 (explaining that to fall within bankruptcy jurisdiction a claim must have a "conceivable effect" on the debtor's estate). Further, Mapco's contract and tort claims against Entergy Corporation are interrelated with the claims against the debtor and will also affect the debtor's estate. Mapco is asserting that Entergy Corporation is liable with the debtor on the contract and tort claims. This could affect the extent of the debtor's liability for any judgment or provoke contribution or indemnity claims by Entergy Corporation against the debtor. Therefore, the Court finds that jurisdiction exists over the claims in this matter.
Bankruptcy courts do not enjoy full judicial power over all matters over which the district courts have jurisdiction under Section 1334. See Id. at 95. Bankruptcy judges have the power to determine "all core proceedings arising under title 11, or arising in a case under title 11" and to enter appropriate orders and judgments. 28 U.S.C. § 157 (b) (1); In re Wood, 825 F.2d at 95. Under 28 U.S.C. § 157 (c)(1), bankruptcy judges also have the power to hear "a proceeding that is not a core proceeding but that is otherwise related to a case under title 11" and to submit proposed findings of fact and conclusions of law to the district court, subject to de novo review. See In re Wood, 825 F.2d at 95.
B. Withdrawal of the Reference
Not all cases referred to bankruptcy judges must remain in bankruptcy court, however. Under certain circumstances, the district court may withdraw the reference of a proceeding. The standard for when a district court may withdraw a reference from a bankruptcy court is outlined in Title 28, United States Code, Section 157(d) . Section 157(d) provides for both mandatory and permissive withdrawal, as follows:
The district court may withdraw, in whole or in part, any case or proceeding referred [to the bankruptcy court], on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both Tile 11 and other laws of the United States regulating organizations or other activities affecting interstate commerce.28 U.S.C. § 157 (d).
Courts generally interpret this provision restrictively, granting mandatory withdrawal of the reference when the claim and defense entail material and substantial consideration of non-Bankruptcy Code federal law. See, e.g., Lifemark Hosps. of La., Inc. v. Liljeberg Enters., Inc., 161 B.R. 21, 24 (E.D. La. 1993) (withdrawing reference when case necessarily involved a determination of antitrust claims); U.S. Gypsum Co. v. Nat'l Gypsum Co., 145 B.R. 539, 541 (N.D. Tex. 1992) (withdrawing reference when case necessarily involved a determination of patent claims); In re Johns-Manville Corp., 63 B.R. 600, 603 (S.D.N.Y. 1986) (withdrawing reference when case necessarily involved a determination of Comprehensive Environmental Response Compensation and Liability Act issues); In re White Motor Corp., 42 B.R. 693, 704 (N.D. Ohio 1984) (no withdrawal of reference based on speculation about issues under Employee Retirement Income Security Act and Internal Revenue Code which may or may not be germane to the core proceeding). Mapco does not seek mandatory withdrawal; rather it seeks permissive withdrawal under 28 U.S.C. § 157 (d) "for cause shown."
1. Permissive Withdrawal
The Fifth Circuit has held that in determining whether to withdraw the reference for cause shown, district courts should consider whether the matter at issue is a core or a non-core proceeding. See Holland America Ins. Co. v. Succession of Shepherd J. Roy, 777 F.2d 992, 999 (5th Cir. 1985). See also In re Babcock Wilcox Co., 2000 WL 422372, *3 (E.D. La. April 17, 2000). Additionally, courts should consider whether the proceedings involve a jury demand and whether withdrawal would further the goals of promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering the economical use of the debtor's and creditors' resources, and expediting the bankruptcy process. See id.
a. Nature of Proceeding
A non-exhaustive list of core proceedings is set forth in 28 U.S.C. § 157 (b)(2). The list includes allowance or disallowance of claims against the estate, estimation of claims, and counterclaims by the estate against persons filing claims against the estate. See 28 U.S.C. § 157 (b)(2)(B),(C). Other than by listing examples, the statute does not define "core proceedings." Courts consider matters that arise under the Bankruptcy Code to be core. See Liljeberg Enters. Inc. v. Lifemark Hosps. of La., 2000 WL 63307, at *3 (E.D. La. Jan. 21, 2000). Additionally, courts consider a proceeding to be core if it involves substantive rights provided by title 11 or if by its nature the proceeding could only arise in the context of a bankruptcy case. See In re Wood, 825 F.2d 90, 97 (5th Cir. 1987).
Here proceedings on Mapco's proof of claim against the debtor are core proceedings. Mapco's filing of a proof of claim is an example of a proceeding that could only arise in the context of a bankruptcy case. See id. The filing of a proof of claim invokes the special rules of bankruptcy concerning objections to the claim, claims allowance, estimation of the claim for allowance purposes, and the right of the claimant to vote on the proposed distribution. Thus, even though Mapco could enforce its state law contract rights against the debtor in state court absent the bankruptcy, the nature of the state proceeding would be different from the bankruptcy proceeding following the filing of a proof of claim. See id. Therefore, courts have found that when a party submits a proof of claim, it is consenting to jurisdiction of the bankruptcy court to make a final decision. See Langenkamp v. Culp, 498 U.S. 42, 44, 111 S. Ct. 330, 331 (1990) ( citing Granfinanciera v. Nordberg, 492 U.S. 33, 109 S. Ct 2782, 2799-2800 (1989)). See also In re Pierre A. Lapeyre, 1999 WL 486888 (E.D. La. July 8, 1999). Under these circumstances, the proceedings involving Mapco's proof of claim are core proceedings. See In re S.G. Phillips Constructors, Inc., 45 F.3d 702 (2d Cir. 1995) (core jurisdiction exists over creditor's proof of prepetition contract claim).
The debtor's counterclaim against Mapco involving the same subject matter as Mapco's proof of claim is likewise a core proceeding. See 28 U.S.C. § 157 (b)(2)(c); In re Baudoin, 981 F.2d 736 (5th Cir. 1993). See also 1 COLLIER ON BANKRUPTCY ¶ 3.02[3] [d] (15th Ed. 1992) [hereinafter "COLLIER"]. The claims by Mapco against nondebtor affiliates such as Entergy Enterprises and Entergy Corporation and their claims against Mapco are not core proceedings, however. These are state law claims between nondebtors, which do not involve substantive rights conferred by title 11 or proceedings that could only arise in a bankruptcy case. They all fall under 28 U.S.C. § 157 (c)(1), which authorizes bankruptcy courts to hear non-core "related" proceedings and to submit findings and conclusions to the district court for de novo review.
b. Forum Shopping
Both sides of this dispute accuse the other of forum shopping. On balance, Mapco is more at fault on this score. It chose to file an action in Tennessee even though there was an earlier action in Louisiana state court on the same subject matter. Further, it has engaged in a number of tactical maneuvers to extricate itself from the bankruptcy court even though it filed a proof of claim and three counterclaims there. For example, it sought to dismiss its claim against the debtor without prejudice, to dismiss the adversary proceeding, and to have the bankruptcy court abstain in favor of the Tennessee proceeding. It now seeks to escape to district court by filing this withdrawal motion. Absent some suggestion of bad faith filing, the Court does not see how the debtor can be charged with forum shopping by filing for bankruptcy relief. As to the nondebtor affiliates, their liability is contingent on the debtor's liability to Mapco, and it makes sense for them to be in the same proceeding with the debtor, rather than having to defend themselves separately in Tennessee.
c. Judicial Economy
Granting the motion to withdraw will not serve the interests of judicial economy. The core and non-core issues before the bankruptcy court are inextricably related. There can be no liability on the non-core claims unless the debtor breached the contract, which is the subject matter of the proof of claim. The bankruptcy court is intimately familiar with the case, having conducted a number of proceedings involving these issues. Indeed, Mapco asked the bankruptcy court to pass on its claims against Entergy Enterprises when it objected to the settlement agreement on the grounds that it is a third-party beneficiary of Entergy Enterprises' prior agreements. Withdrawing the reference would serve only to prolong the litigation and to expend valuable resources for both the parties and the judicial system. Therefore, the Court finds that withdrawing the reference would not promote judicial economy.
2. Demand for a Jury Trial
Mapco asserts that it is entitled to a jury trial on its claims against the debtor, Entergy Enterprises, and Entergy Corporation. Generally, the inability of a bankruptcy court to hold a jury trial in a related matter is a ground for a district court to withdraw the reference from a bankruptcy court. See COLLIER, § 3.04 [1] [b] . However, the Supreme Court has held that when a creditor files a proof of claim against a bankrupt estate, he triggers a process of "allowance and disallowance of claims" thereby subjecting himself to the bankruptcy court's equitable powers. See Granfinanciera v. Nordberg, 492 U.S. 33, 58-59, 109 S.Ct. 2782, 2799 (1989); Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 331 (1990). The creditor's claim is incorporated in the restructuring of the debtor's financial relationships through the jurisdiction of the bankruptcy court. See Granfinanciera, 492 U.S. at 57-58, 109 S.Ct. at 2799; Langenkarup, 498 U.S. at 44, 111 S.Ct. at 331. Upon submitting a claim, there is no Seventh Amendment right to a jury trial. See Langenkamp, 498 U.S. at 45, 111 S.Ct. at 331. Many courts have reasoned that the filing of a proof of claim transforms the complaint for damages into a written demand against the debtor's estate. See In re Lapeyre, 1999 WL 486888, *4 (E.D. La. July 8, 1999) ( citing In re Marshland Dev., Inc., 129 B.R. 626, 631 (N.D. Cal. 1991) (holding creditor's removal of state court complaint to bankruptcy court transmuted complaint into claims resolution proceeding, which is tantamount to filing of a proof of claim); In re Lang, 166 B.R. 964, 966-67 (D. Utah 1994) (reasoning that the complaint for damages arising from the state law claims was essentially a written demand against the debtor's estate). Mapco therefore lost its right to a jury trial on its claims against the debtor by filing its proof of claim in the bankruptcy court.
Mapco also has no right to a jury trial on the debtor's counterclaim, which is based on the same transaction as Mapco's claim. The counterclaim would have a direct effect on the allowance of Mapco's claim because it asserts that Mapco, not the debtor, breached the contract that is the subject of Mapco's proof of claim. Success on the counterclaim could result in disallowance of Mapco's claim. See Germain v. Connecticut Nat'l Bank, 988 F.2d 1323, 1329-30 (2d Cir. 1993); COLLIER, § 3.02 [3][d].
Mapco asserts that it has a right to a jury trial on its claims against Entergy Corporation and Entergy Enterprises. Even if this is true, it is not apparent that a jury trial of these claims will be required. Accordingly, the Court will not grant a motion to withdraw the reference until it is readily apparent that Mapco's jury trial rights are jeopardized. See In Matter of Lieb, 180, 185 (5th Cir. 1990); Hayes v. Royala, Inc., 180 B.R. 476 (E.D. Tex. 1995). Depending on how the bankruptcy court resolves the core issues, a need for a jury trial could be eliminated.
III. CONCLUSION
For the foregoing reasons, the Court DENIES Mapco's motion to withdraw the reference from the bankruptcy court.