Opinion
1:03-CV-0476 SEB-VSS.
July 25, 2003
Order Granting Plaintiff's Motion to Withdraw the Reference and Granting Plaintiff's Motion to Remand and/or to Abstain.
This case involves parties to an ongoing bankruptcy proceeding. Plaintiff Margaret Good ("Good"), the liquidation agent of the liquidation trust for Heartland Steel, Inc. ("Heartland"), moves this court to withdraw the reference and also to remand the case to state court and/or to abstain from deciding the matter, arguing that Defendant Voest-Alpine Industries, Inc. ("Voest") removed the case to bankruptcy court improperly because: (1) the action is non-core, (2) the Court does not have subject matter jurisdiction over this dispute, and (3) Good is entitled to a jury trial, which the bankruptcy court may not conduct. For the reasons set forth below, we GRANT Plaintiff's Motion to Withdraw the Reference and GRANT Plaintiff's Motion to Remand and/or to Abstain.
Procedural History
On June 15, 1998, Kvaerner U.S., Inc. ("Kvaerner") allegedly contracted in writing to provide equipment for developing a software system to the debtor, Heartland. Around March of 2000, Voest became the successor-in-interest to Kvaerner and assumed control of Kvaerner's obligations to Heartland. In early 2001, Heartland filed a voluntary petition for Chapter 11 bankruptcy in the Southern District of Indiana and, subsequently, Voest filed a Proof of Claim for more than $20,000,000 stemming from Heartland's written contract with Kvaerner. The bankruptcy court confirmed a liquidating plan on November 20, 2001, and thereafter Good assumed the role of agent of the liquidation trust. Pursuant to the confirmed plan, all of Heartland's assets were to be transferred to the liquidation trust and the bankruptcy court was to retain jurisdiction over adversary proceedings pending as of the date of plan confirmation.
On January 17, 2003, Good filed an action in Indiana Superior Court of Vigo County against Kvaerner and Voest (collectively "Defendants") for breach of contract and constructive fraud, and also filed a demand for a jury trial. Good's state law action alleges that Voest breached a contract to design a software system and made fraudulent claims to Heartland about the system's capabilities. On February 20, 2003, Voest removed the matter to the United States Bankruptcy Court for the Southern District of Indiana and two days later served Good with copies of the removal papers. On March 13, 2003, Good filed the Motion to Withdraw the Reference and the Motion to Remand and/or to Abstain.
The Court requested and obtained from the Plaintiff the date of Plaintiff's demand for a jury trial because this information was not filed with the district court by either party.
Good and Voest dispute whether the agreement on which Good bases her contract claim was written or oral. For purposes of the motions presently before the Court, we need not determine the variety of contract at the heart of the dispute.
Legal Analysis A. Motion to Withdraw the Reference
The bankruptcy courts are a unit of the district courts, 28 U.S.C. § 151 (2003), and the district court has original jurisdiction over bankruptcy proceedings. Diamond Mortgage Corp. of Illinois v. Sugar, 913 F.2d 1233, 1238 (7th Cir. 1990). At its discretion, the district court may withdraw any proceeding from a bankruptcy court upon timely motion of any party for cause shown. 28 U.S.C. § 157(d) (2003). The motion must be filed "as soon as possible, or at the first reasonable opportunity after the moving party has notice of the grounds for withdrawal." Consol. Indus. Corp. v. Welbilt Holding Co., 254 B.R. 237, 241 (N.D. Ind. 2000) (quoting In re Sevko, Inc., 143 B.R. 114, 116 (N.D.Ill. 1992)). Cause may exist, for example, where there exists a need to conserve the parties' resources, Met-Al, Inc. v. Hansen Storage Co., 157 B.R. 993, 1002 (E.D. Wis. 1993) (citing In re Sevko, 143 B.R. 114, 117 (N.D.Ill. 1992)), or where the bankruptcy court lacks jurisdiction over the proceeding. See In re Memorial Estates, Inc., 90 B.R. 886, 892 (N.D. Ill. 1988). However, cause is not easy to establish, In re Alpern, 191 B.R. 107, 110 (N.D. Ill. 1995), and the moving party bears the burden of showing sufficient cause. In re E S Facilities, Inc., 181 B.R. 369, 373 (S.D. Ind. 1995) (citing Vista Metals Corp. v. Metal Brokers Int'l Inc., 161 B.R. 454, 456 (E.D. Wis. 1993)).
The Court recognizes that § 157(d) contains a mandatory withdrawal provision, as well as the discretionary withdrawal provision already mentioned. To justify mandatory withdrawal, a court must find that consideration of non-Title 11 federal law is necessary for resolution of the dispute. Matter of Vicars Ins. Agency, Inc., 96 F.3d 949, 952 (7th Cir. 1996). In this case, the mandatory withdrawal provision is not met by Good's proceeding because issues of federal law need not be considered to resolve the claims.
Good moved for withdrawal within 19 days of first receiving notice of the need to withdraw the proceeding. Therefore, the motion was timely.
The Southern District of Indiana does not have a counterpart to Local Rule 200.1 of the Northern District of Indiana as the rule is expressed in Consolidated Industries Corporation, 254 B.R. at 240, which stipulates that the motion to withdraw the reference must occur at the same time as the request for a jury trial.
A bankruptcy court has jurisdiction to hear an adversary proceeding under two circumstances: (1) the proceeding is a core matter pursuant to 28 U.S.C. § 157, or (2) the proceeding lies within the specific bankruptcy jurisdiction set out in 28 U.S.C. § 1334(b). Barnett v. Stern, 909 F.2d 973, 979 (7th Cir. 1990); Diamond Mortgage Corp. of Illinois, 913 F.2d at 1238-39; In re Markos Gurnee P'ship, 182 B.R. 211, 220 (Bankr. N.D. Ill. 1995). The bankruptcy jurisdiction of § 1334(b) includes all proceedings "arising under" Title 11, all proceedings "arising in" a case under Title 11, and all proceedings "related to" a case under Title 11. 28 U.S.C. § 1334(b) (2003).
We do not address whether this proceeding is core or non-core, because such an analysis is unnecessary to our ruling.
Sections 157(b)(1), (c)(1) include the same jurisdictional language for "arising under," "arising in," and "related to" jurisdiction as is found in § 1334(b).
"Arising under" jurisdiction refers to proceedings that are created or determined by Title 11 substantive law. Kalamazoo Realty Venture Ltd. P'ship v. Blockbuster Entm't Corp., 249 B.R. 879, 885 (N.D. Ill. 2000) (quoting River Oaks Ltd. P'ship v. Things Remembered, Inc., 1993 WL 147409, at * 1 (N.D. Ill. May 3, 1993)). "Arising in" jurisdiction refers to questions that arise in bankruptcy proceedings and concern the administration of the estate, such as the decision to discharge a debtor. Id. at 886. Here, the most directly applicable type of § 1334(b) jurisdiction is "related to" jurisdiction.
Here, the case does not fall within "arising under" jurisdiction, because Good's breach of contract and fraud claims are created and determined by state law, not by Title 11 substantive law.
Here, the case does not fall within "arising in" jurisdiction, because Good's cause of action did not arise in a bankruptcy proceeding. The facts underlying this cause of action occurred before the bankruptcy proceeding began, even though the action was not filed until afterwards.
1. "Related To" Jurisdiction
For a proceeding that is "related to" a case under Title 11, a bankruptcy court has jurisdiction to hear the proceeding and make proposals on findings of fact and conclusions of law to the district court. § 1334(b). "Related to" jurisdiction is narrowly interpreted, because at some point everything is related to everything else. Matter of FedPak Systems, Inc., 80 F.3d 207, 214 (7th Cir. 1996). "A case is `related to' a bankruptcy when the dispute `affects the amount of property for distribution [i.e., the debtor's estate] or the allocation of property among creditors.'" In re Memorial Estates, Inc., 950 F.2d 1364, 1368 (7th Cir. 1991), cert. denied, 504 U.S. 986 (1992) (quoting In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir. 1987)). In re Markos Gurnee P'ship, 182 B.R. at 220 (citing Diamond Mortgage Corp. of Illinois, 913 F.2d at 1239).
The bankruptcy court's jurisdiction is further limited once the liquidation plan has been confirmed. Cytomedix, Inc. v. Perfusion Partners Associates, Inc., 243 F. Supp.2d 786, 789 (N.D. Ill. 2003); see Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th Cir. 1991). In the case at bar the plan was confirmed prior to the filing of Good's current proceeding.
"Related to" jurisdiction encompasses contract and tort claims by and against the debtor, and through § 1334(b) these claims are taken from an ordinary stand-alone context and are brought to the bankruptcy court for the primary purpose of determining all claims in the same forum. Matter of FedPak Systems, Inc., 80 F.3d at 214. As a secondary purpose, "related to" jurisdiction brings to the bankruptcy court all actions that may affect the amount of property of the estate, even if the debtor is not a party to those actions. Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 162 (7th Cir. 1994). Property of the estate is defined broadly by 11 U.S.C. § 541(a)(1), Patterson v. Shumate, 504 U.S. 753, 757 (1992), such that it includes every conceivable future interest of the debtor, In re Barnes, 276 F.3d 927, 928 (7th Cir. 2002). Causes of action, such as breach of contract and constructive fraud, have been consistently interpreted to be within, "all legal or equitable interests of the debtor in property as of the commencement of the case." In re Polis, 217 F.3d 899, 900 (7th Cir. 2000) (quoting 11 U.S.C. § 541(a)(1)); Matter of Yonikus, 996 F.2d 866, 869 (7th Cir. 1993).
In Polis, the debtor's causes of action, based on Illinois state consumer protection law and the Truth In Lending Act (TILA), were brought after the bankruptcy case began despite the fact that the actions existed before the bankruptcy case began. In re Polis, 217 F.3d at 900. Polis held that the proceeds from the actions were property of the estate. Id. at 902. Similarly in the case at bar, the cause of action for breach of contract and fraud existed before the bankruptcy case began and the action was not brought until after the bankruptcy case began. The potential proceeds of Good's cause of action constitute property of the estate, because they represent a future interest that would affect the amount of property for distribution. Thus, this dispute falls within the bankruptcy court's "related to" jurisdiction.
Even in a post-confirmation environment, "related to" jurisdiction exists pursuant to § 1334(b) where a substantial impact exists on the assets to be distributed to the creditors. In re S.N.A. Nut Co., 206 B.R. 495, 501 (Bankr. N.D. Ill. 1997). Clearly, the damages sought by Good through her cause of action would create such an impact.
2. Right to Jury Trial
Even when "related to" jurisdiction exists, a district court may still withdraw the reference from the bankruptcy court for other reasons. In the case at bar, Good's right to a jury trial dictates that the reference should be withdrawn.Congress cannot eliminate a party's Seventh Amendment right to a jury trial through legislation, because the Seventh Amendment guarantees the right to a jury trial for "suits at common law." Matter of Hallahan, 936 F.2d 1496, 1502, 1504 (7th Cir. 1991) (citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 61 (1989)). The Hallahan court held that if the breach of contract claim had "been filed in district court rather than in a bankruptcy proceeding, Hallahan would clearly have had the right to demand a jury." Id. at 1502. The court held that the right to request a jury trial is waived for any claim filed in a bankruptcy proceeding, if the requesting party voluntarily filed for bankruptcy under Chapter 11 and sought the protection of the bankruptcy court from the creditors. Id. at 1505.
A bankruptcy judge may conduct a jury trial when designated to do so by the district court and when all parties consent. 28 U.S.C. § 157(e) (2003). However, Seventh Circuit bankruptcy judges are not authorized to conduct jury trials at all, Matter of Grabill Corp., 967 F.2d 1152, 1158 (7th Cir. 1992), and therefore sufficient cause to withdraw the reference exists where the right to a jury trial exists. Consol. Indus. Corp., 254 B.R. at 238; See Met-Al, Inc., 157 B.R. at 1002 (quoting Bus. Communications, Inc. v. Freeman, 129 B.R. 165, 166 (N.D. Ill. 1991)). A right to a jury trial exists where: (1) the proceeding is triable before a jury, "based on the nature of the claim and the nature of the relief sought," and (2) the bankruptcy proceeding will not block a jury trial from occurring, for example when a defendant is seeking the jury trial and has filed a proof of claim. Consol. Indus. Corp., 254 B.R. at 239.
Voest argues based upon three Supreme Court cases that the filing of a proof of claim bars a trustee from having a right to a jury trial on a fraud claim. See Granfinanciera, 492 U.S. 33; Katchen, 382 U.S. 323; Schoenthal v. Irving Trust Co., 287 U.S. 92 (1932). None of these cases is directly applicable to the instant case. Each involves a jury trial request by a creditor for a claim made by the bankruptcy trustee, and the respective courts limit their holdings to those situations. Granfinanciera, 492 U.S. at 57-58 (interpreting the holdings of Schoenthal and Katchen). Here, the liquidating agent of the estate is the party requesting the jury trial and is not the party that filed the proof of claim.
Fraudulent conveyance, Id. (citing Granfinanciera, 492 U.S. 33), negligence, and all other legal actions that are not actions in equity are triable before a jury. Id. at 239-40. A party must file a motion to withdraw the reference in district court in order to be able to assert a Seventh Amendment right to a jury trial during a bankruptcy proceeding; otherwise, the bankruptcy proceeding blocks the jury trial right. In re Schwinn Bicycle Co., 184 B.R. 945, 949 (Bankr. N.D. 11. 1995).
In the case at bar, the bankruptcy judge may not conduct a jury trial pursuant to § 157(e) because the district court has not designated the bankruptcy judge to conduct a jury trial and Good has not given consent. Good's breach of contract and fraud claims do not seek equitable remedies and are thus generally triable before a jury. These claims were not filed in a bankruptcy proceeding; rather, they were filed in state court. Good also filed a request for a jury trial in state court on January 17, 2003, and later filed a timely motion in district court to withdraw the reference. The fact that the jury trial request occurred before the motion to withdraw the reference does not create a waiver of the ability to withdraw in the case at bar, because the jury trial request occurred at state court prior to removal. Therefore, Good has properly invoked her right to a jury trial, a right that the bankruptcy court is not empowered to provide under Seventh Circuit precedent, which constitutes sufficient cause to withdraw the reference. Therefore, Good's Motion to Withdraw the Reference is GRANTED.
B. Motion to Remand
Pursuant to the bankruptcy removal statute, a district court can remand any claim or cause of action to the state court from which it was removed on any equitable basis, 28 U.S.C. § 1452(b) (2003), where "equitable" is taken to mean "appropriate." Hernandez v. Brakegate, Ltd., 942 F.2d 1223, 1226 (7th Cir. 1991). The district court considers the following factors to decide if remand is appropriate: "(1) duplication of judicial resources, (2) uneconomical use of judicial resources; (3) effect of remand on the administration of the bankruptcy estate; (4) [involvement of] questions of state law better addressed by a state court; (5) comity considerations; (6) prejudice to the involuntarily removed parties; (7) lessened possibility of an inconsistent result; and (8) expertise of the court where action originated." Intra Muros Trust v. Truck Stop Scale Co., 163 B.R. 344, 346 (N.D. Ind. 1994); Baxter Healthcare Corp. v. Hemex Liquidation Trust, 132 B.R. 863, 867-68 (N.D. Ill. 1991). The moving party bears the burden of demonstrating that remand is proper. Brizzolara v. Fisher Pen Co., 158 B.R. 761, 769 (Bankr. N.D. Ill. 1993).In Baxter Healthcare, these eight criteria were interpreted as overwhelming proof of remand. Baxter Healthcare Corp., 132 B.R. at 868. There, the docket of the state court was less crowded than the district court, and the case had already traveled through two courts, meaning that duplication of judicial resources may have occurred without remand. Id. The Baxter Healthcare court determined that although the uneconomical use of judicial resources was neutral because there was an uncertain future to the bankruptcy case, remand may nonetheless have been appropriate because the state court could hear the case more expeditiously than the federal court, thus accelerating the bankruptcy case. Id. Since federal laws were not implicated and only "related to" jurisdiction existed, the court found the effect of remand on the administration of the bankruptcy estate to be minimal and that the state law claims were better addressed by a state court. Id. The court noted that even though the district court can handle the state law claims at bar, remand eased comity concerns and properly utilized the state court expertise with regard to state law claims. Id. Finally, the court found that greater consistency of outcomes would exist with similar contract and warranty cases filed in state court if remand was granted, and the consistency limited prejudice to the involuntarily removed party. Id.
Here, the eight factors considered in Baxter Healthcare also strongly weigh in favor of remand to the state court. Because the case at bar involves claims based entirely on state law, and because the claims fall within "related to" jurisdiction, remand will have minimal effects on the administration of the bankruptcy. The state court can adequately address the state law issues based on its expertise. As in Baxter Healthcare, comity and consistency of outcomes are supported by allowing state courts to decide issues that are wholly based on state law. Moreover, the only disadvantage Good will suffer is limited to the shifting forums in which the adjudication of the case has proceeded. Given the reasons detailed above and the weight of the factors favoring remand, Plaintiff's Motion to Remand and/or A Abstain is GRANTED.
The case at bar has only been moved once so far and Plaintiff has not presented any information on the comparative status of the state court's and district court's dockets. Thus, the interest of avoiding duplication of judicial resources supports maintaining the case in the district court. Moreover, although we predict that the bankruptcy case will progress according to a fairly predictable schedule, Plaintiff has not provided information concerning the state court's time line for adjudication. Thus the economical use of judicial resources is a neutral factor.
Because we have determined that remand is appropriate, we need not consider Plaintiff's abstention arguments.
Conclusion
Plaintiff Good filed a Motion to Withdraw the Reference and a Motion to Remand and/or to Abstain. For the reasons detailed above, we find that (1) the action is "related to" the Title 11 bankruptcy case because the proceeding may affect the amount of property for distribution, (2) Plaintiff is entitled to a jury trial, justifying withdrawal of the reference, and (3) based on the relevant factors, remand to state court of this action is appropriate. Accordingly, we GRANT Plaintiff's Motion to Withdraw the Reference, and GRANT Plaintiff's Motion to Remand and/or to Abstain.It is so ORDERED.