Opinion
CIVIL ACTION NO: 04-0036, SECTION: "R" (2).
June 15, 2004
ORDER AND REASONS
Plaintiffs Michael G. Syracuse d/b/a Interstate Supply Co. and Texas ICO, Inc. move the Court to remand this matter to the 29th Judicial District Court for the Parish of St. Charles under 28 U.S.C. § 1452 for lack of subject matter jurisdiction. In the alternative, if the Court finds that subject matter jurisdiction exists, plaintiffs move the Court to abstain under 28 U.S.C. § 1334. For the following reasons, the Court grants plaintiffs' motion to remand
I. Background
This dispute arises out of an alleged breach of contract for the sale of certain surplus material and equipment located at a refinery in Norco, Louisiana. In 2001, Orion Refining Corporation, owner of the Norco refinery, entered into a contract with plaintiffs Michael G. Syracuse d/b/a Interstate Supply Company for the sale and purchase of certain refinery material and equipment on an "as is, where is" basis for the sum of $100,000. Syracuse then assigned the contract to Texas ICO, Inc., a closely held corporation owned by Syracuse and his wife. The contract required Orion to decontaminate the surplus equipment before Texas ICO supervised its removal.
This dispute arose when Orion allegedly failed to perform its duty to decontaminate the equipment. In addition, plaintiffs allege that Orion removed certain vessel certification plates, which decreased the value of the vessels. Before Orion's alleged failure to perform its duties under the contract, Texas ICO appraised the equipment at $1,500,000.
In April 2002, Orion informed plaintiffs that the contract had expired and that it would not allow plaintiffs to enter the refinery grounds to remove the equipment. That same month, one of plaintiffs' subcontractors filed a petition for damages against plaintiffs in state court in Louisiana, alleging that plaintiffs failed to pay for certain work the subcontractor performed in connection with the equipment removal. Plaintiffs filed a third-party complaint against Orion, alleging conversion and breach of contract.
On May 13, 2003, Orion filed a voluntary petition for bankruptcy relief in the United States District Court for the District of Delaware. The next day, Orion filed a "Debtor's Expedited Motion" to sell the entire refinery and its contents to defendants Valero Energy Corporation and Valero Refining — New Orleans, L.L.C. Plaintiffs then filed an adversary proceeding against Orion in the bankruptcy court, alleging that they owned the surplus equipment and that Orion had refused to deliver it to them.
Over plaintiffs' objections, the bankruptcy court approved the sale to Valero in June 2003. The order of sale contained a provision that required Orion to deposit $1,500,000 from the sale proceeds into an escrow account to satisfy any claims of plaintiffs with regard to the equipment. ( See Def.'s Ex. A, at 40-42). The order also required Valero and Orion to give Texas ICO the opportunity to inspect the surplus material and equipment at the refinery. ( See id. at 41). The order further transferred the property to Valero free and clear of any liens, claims, and interests of creditors of Orion pursuant to 11 U.S.C. § 363. ( See id.). Finally, the order transferred any claimed lien or ownership interest in the equipment to the escrow account. ( See id.).
Section 363 provides, in pertinent part,
. . .
(b)(1) The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.
. . .
(f) The trustee may use, sell, or lease property under subsection (b) or (c) of this section free and clear of any interest in such property other than the estate, only if —
(1) applicable nonbankruptcy law permits the sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute;
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.11 U.S.C. § 363(b)(1) (f)(1)-(5).
In July 2003, plaintiffs inspected the equipment. Plaintiffs allege that the representatives of Orion and Valero denied them access to seventeen areas at the refinery where equipment was located. After the inspection, plaintiffs allegedly learned that Orion and Valero were offering the surplus equipment for sale to other buyers before completion of the inspection and in violation of the bankruptcy court order of sale. In October 2003, plaintiffs' counsel asked Orion and Valero to allow the inspection to resume.
In November 2003, after plaintiffs received no answer to their October request, plaintiffs sought injunctive relief against Orion and Valero in the adversary proceeding in the bankruptcy court. Plaintiffs asked the court to compel another inspection of the refinery. They also filed a motion for civil contempt, seeking to hold defendants in contempt for violations of the order of sale. Valero informed the bankruptcy court that plaintiffs had never served Valero with any of their pleadings and that Valero was not a party to the adversary proceeding in the bankruptcy court between plaintiffs and Orion. Valero also filed substantive responses to the two motions.
Two days before the hearing on the motions for injunctive relief and civil contempt, plaintiffs sued defendants in state court for injunctive relief to force Valero to allow the resumption of the inspection. Additionally, plaintiffs alleged a Louisiana state law claim for tortious spoliation of evidence. The application for injunctive relief was eventually dismissed in December 2003 because Valero allowed plaintiffs to resume their inspection of the refinery.
In January 2004, Valero removed the state court action to this Court under 28 U.S.C. § 1452. Valero argues that federal subject matter jurisdiction exists because plaintiffs' spoliation of evidence claim arises from alleged violations of the bankruptcy order of sale. Valero contends that jurisdiction exists because the factual and legal bases of plaintiffs' state-law spoliation of evidence claim arise from an interpretation and enforcement of a sale order issued by a federal bankruptcy court under 11 U.S.C. § 363. Valero also argues that federal subject matter jurisdiction attaches because the bankruptcy court retained exclusive jurisdiction to enforce and to implement the order of sale.
II. Discussion
A. Bankruptcy Jurisdiction
Pursuant to the bankruptcy removal statute, 28 U.S.C. § 1452,
[a] party may remove any claim or cause of action in a civil action . . . to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under Section 1334 of this Title.28 U.S.C. § 1452(a).
Section 1334 provides district courts and adjunct bankruptcy courts with jurisdiction of all cases under Title 11, and "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(a) (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). District courts have original and exclusive jurisdiction over cases under title 11. See 28 U.S.C. § 1334(a). By contrast, district courts have original, but not exclusive, jurisdiction over cases "arising under," "arising in," or "related to" a case under title 11. See id. § 1334(b).
A case under title 11 over which the district court has exclusive jurisdiction is the bankruptcy petition itself. See In re Middlesex Power Equipment Marine, Inc., 292 F.3d 61, 66 (1st Cir. 2002); In re Walker, 51 F.3d 562, 568 (5th Cir. 1995).
The Fifth Circuit has explained that to determine whether jurisdiction exists, the Court must ascertain only whether a matter is at least "related to" the bankruptcy action:
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 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 Court must therefore determine whether "related to" jurisdiction exists under section 1334(b). To exercise "related to" jurisdiction, the Court must find that the outcome of the state law spoliation of evidence proceeding could conceivably have an effect on Orion's estate. See Walker, 51 F.3d at 568. As the Fifth Circuit has explained, "[a]n action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively)" and when it "in any way impacts upon the handling and administration of the bankrupt estate." Id. (citing In re Majestic Energy Corp., 835 F.2d 87, 90 (5th Cir. 1988)). These two requirements operate conjunctively. See In re Bass, 171 F.3d 1016, 1022 (5th Cir. 1999). In other words, "the anticipated outcome of the action must both (1) alter the rights, obligations, and choices of action of the debtor, and (2) have an effect on the administration of the estate." Id. (emphasis added). The Seventh Circuit has characterized the purposes of "related to" jurisdiction as follows:
The reference to cases related to bankruptcy cases is primarily intended to encompass tort, contract, and other legal claims by and against the debtor, claims that, were it not for bankruptcy, would be ordinary stand-alone lawsuits between the debtor and others but that section 1334(b) allows to be forced into bankruptcy court so that all claims by and against the debtor can be determined in the same forum. A secondary purpose is to force into the bankruptcy court suits to which the debtor need not be a party but which may affect the amount of property in the bankrupt estate.Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 161 (7th Cir. 1994).
Although defendants advance five arguments in support of "related to" jurisdiction, their jurisdictional arguments boil down to two possibilities: (1) the express retention by the bankruptcy court of exclusive jurisdiction to enforce and to implement the order of sale; and (2) section 363 of the bankruptcy code, which governs the "free and clear" sale of property of the debtor's estate.
Defendants first argue that jurisdiction exists because the bankruptcy court retained exclusive jurisdiction to implement and to enforce its order of sale. This argument is without merit. A bankruptcy court's retention of jurisdiction in an order of sale cannot bestow jurisdiction on it absent an independent statutory grant. See In re Cary Metal Products, Inc., 158 B.R. 459, 462-62 (N.D. Ill. 1993) (citing In re Lawndale Steel Co., Inc., 1991 WL 242977 (Bankr. N.D. Ill. 1991)); see also In re Majestic Energy Corp., 835 F.2d 87, 89 (5th Cir. 1988) ("Bankruptcy courts are courts of limited jurisdiction, with their scope defined by statute."). It is well-established federal law that "[a] court cannot write its own jurisdictional ticket." Zerand-Bernal Group v. Cox, 23 F.3d 159, 164 (7th Cir. 1994). The Court must therefore ascertain whether a statute confers federal subject matter jurisdiction here.
Defendants advance Section 363 of the bankruptcy code in support of their argument that federal jurisdiction exists. Defendants note that plaintiffs are parties to an adversary proceeding in the bankruptcy court to determine ownership of the surplus material and equipment. Defendants argue that allowing this case to remain in state court could lead to inconsistent rulings on legal title to the equipment. In addition, defendants argue that the state court must interpret the meaning of Section 363's "free and clear" language in the bankruptcy court's order of sale in order to ascertain whether defendant owed a duty to plaintiffs to preserve the surplus material and equipment. For the following reasons, the Court finds that Section 363 does not confer bankruptcy jurisdiction over plaintiffs' state law claim for spoliation of evidence.
As noted above, the outcome of this proceeding must conceivably have some effect on the estate of the debtor for "related to" jurisdiction to exist. See Walker, 51 F.3d at 568. The Court fails to see how the outcome of this proceeding could affect the estate of the debtor. Plaintiffs' claim is not by or against the debtor. Further, Orion relinquished any interest in the surplus material and equipment and the refinery when it sold the assets to Valero. When the bankruptcy court approved the sale, this property left the bankruptcy estate. See, e.g., In re Cary Metal Prods., Inc., 152 B.R. 927, 934 (Bankr. N.D. Ill. 1993). Moreover, plaintiffs are not suing Valero to recover the property transferred pursuant to the sale order or to establish title to or an interest in the property. Rather, plaintiffs sue Valero in tort for spoliation of evidence. Although the outcome of this proceeding may result in liability for damages by Valero to plaintiffs, defendants have not shown how the state court action will affect Orion's estate.
A Louisiana state court need not determine legal title to property that is the subject of a spoliation of evidence claim in order to determine whether a defendant spoliated the evidence. Under Louisiana law, plaintiffs must prove that Valero had a duty as a matter of law to preserve the evidence that is the subject of plaintiffs' claim and that defendants have breached that duty, intentionally or negligently. McCool v. Beauregard Mem'l Hosp., 814 So.2d 116 (La.Ct.App. 2002). Whether the bankruptcy order of sale transferred the surplus material and equipment to Valero free and clear of all liens is not dispositive of whether defendants owed plaintiffs a duty to preserve that property pending resolution of plaintiffs' claim to the funds in escrow.
Whether a duty exists in Louisiana is a question of law. See Guillory v. Dillard's Dep't Store, 777 So.2d 1, 4 (La.Ct.App. 2000). The Louisiana state court's "`inquiry is whether the plaintiff has any law — statutory, jurisprudential, or arising from general principles of fault — to support his claim.'" Id. (citing Hardy v. Bowie, 744 So.2d 606, 614 (La. 1993)). At least one Louisiana court has held that a duty to preserve evidence may arise under Louisiana Civil Code article 2315, the general delictual article. See Bethea v. Modern Biomedical Servs., 704 So.2d 1227, 1233 (La.Ct.App. 1997) ("Although there is no statutory duty imposed on the defendants in this case to preserve the evidence and avoid hindering plaintiffs' claim, we find a duty exists under La. Civ. Code art. 2315."). A determination of whether a duty exists must be made "on a case-by-case basis according to the facts particular to that claim." Guillory, 777 So.2d at 4. Although plaintiffs allege that defendants' duty arose from the order of sale, this does not create bankruptcy jurisdiction: "Bankruptcy is a system of entitlements (of both debtors and creditors) created by federal law, but a dispute over the meaning or validity of an agreement between the purchaser at a bankruptcy sale and some third party . . . arises under state rather than federal law." Zerand-Bernal, 23 F.3d at 162. As noted by the Seventh Circuit, if this were not so, "`anyone who could trace his title to a bankrupt could invoke federal jurisdiction to settle disputes affecting that property.'" Id. (citing In re Xonics, 813 F.2d 127, 131 (7th Cir. 1987)). This would expand bankruptcy jurisdiction too far.
The Court recognizes that the bankruptcy court approved the sale of assets to Valero free and clear of all liens, claims, and encumbrances. This is a valid power of the bankruptcy court. See id. at 163 (citing 11 U.S.C. § 363(f), 1141(c)). But, as the Court has already noted, plaintiffs do not seek to enforce a lien or encumbrance in the state court action. See id. Nor do plaintiffs attempt to state a claim to the property in the state court action. See id. Plaintiffs simply assert a state law tort claim for spoliation of evidence.
Defendant's reliance on Franchise Tax Board v. Construction Laborers Vacation Trust is misplaced. 463 U.S. 1 (1983). The Court recognizes that, pursuant to the well-pleaded complaint rule, a court may exercise federal subject matter jurisdiction over a case that involves the interpretation of a substantial question of federal law. See id. at 9-11. As noted above, however, that a Louisiana state court may have to refer to the bankruptcy order of sale does not confer jurisdiction on this Court. See Zerand-Bernal, 23 F.3d at 162.
III. Abstention
Because the Court finds federal subject matter jurisdiction lacking, the Court need not reach the issue of whether it should abstain from hearing this matter.
IV. Conclusion
For the reasons state above, the Court grants plaintiff's motion to remand for lack of subject matter jurisdiction.