Opinion
CASE NO. 09-32467 ADVERSARY NO. 22-03168
2023-07-10
IN RE: ROYCE HOMES, LP, Debtor. John H. Speer and Magueyitos Land and Minerals, L.P., Plaintiffs, v. Rodney Tow, Trustee for the Estate of Royce Homes, LP, and Ron Niehaus, Trustee, Defendants.
Edgar Ahron Goldberg, Attorney at Law, Houston, TX, Leonard H. Simon, Pendergraft Simon, LLP, Houston, TX, for Plaintiffs. Richard Brent Cooper, Eric W. Hines, Cooper Scully PC, Dallas, TX, Erin Elizabeth Jones, Jones Murray, LLP, Houston, TX, Julie Mitchell Koenig, Cooper & Scully, PC, Houston, TX, for Defendants Rodney Tow, Trustee, Ronald R. Niehaus. Rodney D. Tow, Rodney Tow, PLLC, Texas City, TX, Defendant, Pro Se.
Edgar Ahron Goldberg, Attorney at Law, Houston, TX, Leonard H. Simon, Pendergraft Simon, LLP, Houston, TX, for Plaintiffs. Richard Brent Cooper, Eric W. Hines, Cooper Scully PC, Dallas, TX, Erin Elizabeth Jones, Jones Murray, LLP, Houston, TX, Julie Mitchell Koenig, Cooper & Scully, PC, Houston, TX, for Defendants Rodney Tow, Trustee, Ronald R. Niehaus. Rodney D. Tow, Rodney Tow, PLLC, Texas City, TX, Defendant, Pro Se. AMENDED ORDER DENYING PLAINTIFFS' MOTION FOR REMAND OR IN THE ALTERNATIVE FOR ABSTENTION
(RE: Docket No. 8)
Christopher Lopez, United States Bankruptcy Judge
Despite a trial over 10 years ago and a court-approved mediated settlement agreement, these parties keep litigating against each other. This dispute involves another fight about a promissory note Speer executed as part of the settlement agreement that is secured by property owned by Magueyitos.
A few years ago, Tow tried to remove language from the promissory note that he claimed he never approved. The District Court issued a decision rejecting that claim. But even under the terms of the note he executed, it appears Speer never satisfied his payment obligation. So Tow tried to foreclose on the Magueyitos property. Plaintiffs responded by filing a state court lawsuit seeking to void the promissory note and a related deed of trust entirely. Tow removed the lawsuit to this Court. Plaintiffs want the lawsuit back in state court and ask this Court to remand or abstain. After carefully considering the facts and applicable law, that request is denied.
BACKGROUND
Speer is a former principal of the Debtor and owns Magueyitos. Tow is the Chapter 7 Trustee in the Debtor's bankruptcy case. In 2011, Tow started an adversary proceeding against multiple defendants (including Speer), alleging fraudulent transfers, breach of fiduciary duty, and several other claims. That action was removed to the United States District Court for the Southern District of Texas. Tow and Speer eventually signed a mediated settlement agreement. As part of the settlement, Speer had to execute a $1 million promissory note payable to Tow in 2020. Speer's payment obligation was secured by a deed of trust concerning a 318.51-acre property owned by Magueyitos (the "Deed of Trust"). In 2015, the District Court entered an order approving the settlement agreement and a related addendum as "fair and equitable and in the best interest of the [bankruptcy] estate."
Tow Ex. 10, Docket No. 16.
Id., at 9-10; see also Tow Ex. 7.
Tow Ex. 10, at 9-10; see also Tow Ex. 6. Niehaus serves as the trustee on the Deed of Trust.
Order, at 1, Civ. Action. No. 4:11-cv-03700 (S.D. Tex.), Docket No. 480.
Speer executed the promissory note (the "Executed Note") and the Deed of Trust in 2016 but didn't pay the full amount due on the maturity date. In 2021, Tow filed a motion with the District Court alleging that Speer improperly added two paragraphs to the Executed Note without his express approval. This started a dispute about whether the controversial two paragraphs in the Executed Note should be removed or declared void. The District Court rejected Tow's claim and held that no deletions were required:
Tow Exs. 6, 7.
Pls. Ex. 2, at 2, Docket No. 17.
There is no basis for this court to find that Speer failed to comply with the agreements that the parties signed. There is no basis to find that the parties signed agreements that they did not have the opportunity to read and review. There is no basis to find that Speer lured or deceived Tow into signing a version of the Deed that Tow did not intend to sign or know he was signing. There is no basis to ignore limitations or ignore the fact that in the years since the documents were signed, properties have been sold and payments have been received
. . .
When the parties and counsel gathered to review and sign the closing documents, no issue was raised at about whether an improper version of any document was presented for signature. There is, in short, no record basis to compel further or different action on the part of Speer.
Id., at 2-3.
Speer subsequently sought an order requiring Tow to pay fees and expenses incurred responding to Tow's motion. The District Court denied this request, but again recognized the existence of the Executed Note and Speer's obligation to pay Tow under it:
Tow Ex. 1, at 1.
The terms of the Non-Recourse Promissory Note required Speer to pay his $1,000,000 debt obligation by November 30, 2020. By November 18, 2020, Speer had not paid. Tow's counsel demanded payment "[p]ursuant to the Compromise Order and Settlement Agreement." Speer did not comply.
Id., at 3.
Tow then filed another motion before the District Court seeking to reinstate the case on its active docket to carry out a judicial foreclosure on the Magueyitos property. The District Court permissively abstained from the matter under 28 U.S.C. § 1334(c)(1) because the Executed Note was governed by Texas law and there was no showing a Texas state court couldn't timely adjudicate Tow's claims based on the Executed Note. The District Court then referred the case back to this Court and ordered that nothing further be filed in District Court.
Tow Ex. 11, at 1-2.
Tow Ex. 2, at 4-5.
Pls. Ex. 4.
In 2022, Speer apparently still had not satisfied his obligation under the Executed Note. So Tow started a nonjudicial foreclosure on the Magueyitos property. In response, Plaintiffs petitioned a Texas state court for a temporary restraining order and injunction against Tow. They also sought a declaratory judgment that "there is a mistake between the parties, either unilateral or mutual that is outside the statute of limitations, that invalidates acceptance and therefore the validity and enforceability of the [Executed] Note and Deed of Trust." Plaintiffs' theory is that, by filing a motion alleging the two paragraphs in the Executed Note should be removed or declared void, Tow admitted he never approved or had the authority to accept the Executed Note. And Tow is now judicially and collaterally estopped from enforcing the Executed Note. Plaintiffs deny that Tow is the owner and holder of a valid and enforceable promissory note that is the debt subject to the Deed of Trust. So, at best, Tow holds a claim for breach of the settlement agreement. Alternatively, Plaintiffs seek an accounting from Tow disclosing all information about any credits Speer may apply under the Executed Note.
Tow Ex. 13.
Tow Ex. 14.
Pls. Ex. 5 ¶¶ 50-57.
Id. ¶ 39.
Id. ¶ 26.
Id. ¶ 39.
Id.
Id. ¶ 42.
Id. ¶¶ 45-46.
Thus, Plaintiffs seek a declaration that Speer is not—and never was—legally bound by the Executed Note and Deed of Trust he signed. And that Tow can't enforce those documents against him. Plaintiffs want the state court to transform the $1 million secured debt the Debtor's estate acquired under the Executed Note and Deed of Trust into an unsecured obligation for breach of the settlement agreement. And it is all Tow's fault because—even though he accepts the Executed Note as the legally enforceable version based on the District Court's ruling—he once challenged two paragraphs in it.
Tow confirmed he accepted the validity of the Executed Note at a recent hearing before this Court about Plaintiffs' motion. See Hr'g, May 4, 2023, Docket No. 20.
Tow responded by removing the state court lawsuit to this Court. The scheduled nonjudicial foreclosure has long passed and there is no pending foreclosure scheduled. So the main unresolved issue is a determination about the validity of the Executed Note.
See Notice of Removal, Docket No. 1.
JURISDICTION
This Court has jurisdiction under 28 U.S.C. §§ 157(b) and 1334(b). The parties' express and implied consent also provides this Court constitutional authority to enter a final judgment under Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 678-83, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) and Kingdom Fresh Produce, Inc. v. Stokes Law Off., L.L.P. (In re Delta Produce, L.P.), 845 F.3d 609, 617 (5th Cir. 2016).
ANALYSIS
Plaintiffs don't reference any statutes in their motion but argue this Court should remand or abstain from hearing this matter. So the Court will consider the motion as a petition for mandatory abstention under 28 U.S.C. § 1334(c)(2), permissive abstention under 28 U.S.C. § 1334(c)(1), and equitable remand under 28 U.S.C. § 1452(b).
Mandatory Abstention
28 U.S.C. § 1334(c)(2) provides that:
Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
The Fifth Circuit construes the statute to mandate abstention when these four requirements are satisfied:
(1) the claim has no independent basis for federal jurisdiction, other than § 1334(b); (2) the claim is a non-core proceeding; (3) an action has been started in state court; and (4) the action could be adjudicated timely in state court.Cadle Co. v. Moore (In re Moore), 739 F.3d 724, 728-29 (5th Cir. 2014) (internal citation omitted).
28 U.S.C. § 1334(b) states that courts have "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11."
Mandatory abstention is not required here because there is an independent basis for federal jurisdiction beyond Section 1334(b) and Plaintiffs' claims constitute a core proceeding. This Court has independent, exclusive jurisdiction over this case. 28 U.S.C. § 1334(e)(1) states that the district court in which this bankruptcy case started has exclusive jurisdiction over property of the estate. The District Court referred this case back to the bankruptcy court. So this Court has exclusive jurisdiction over all property of the estate.
Pls. Ex. 4.
The Executed Note and Deed of Trust are property of the Debtor's estate. Section 541(a)(7) of the Bankruptcy Code states that property of the estate includes "[a]ny interest in property the estate acquires after the commencement of the case." 11 U.S.C. § 541(a)(7). The Bankruptcy Code does not define "interest," "property," or "acquire" so we look to their ordinary meaning. See Schindler Elevator Corp. v. United States ex rel. Kirk, 563 U.S. 401, 407, 131 S.Ct. 1885, 179 L.Ed.2d 825 (2011) (internal citation omitted). The definitions of these words have not changed. The relevant definition of "interest" means a "right, title, or legal share in something." Property means "something owned or possessed" and "something to which a person or business has legal title." And acquire means "to get as one's own; to come into possession or control of . . . ."
Interest, Merriam-Webster Online Dictionary (https://www.merriam-webster.com/dictionary/interest) (last visited May 22, 2023).
Property, Merriam-Webster Online Dictionary (https://www.merriam-webster.com/dictionary/property) (last visited May 22, 2023).
Acquire, Merriam-Webster Online Dictionary (https://www.merriam-webster.com/dictionary/acquire) (last visited May 22, 2023).
Under the Court-approved mediated settlement agreement, the estate obtained an interest in a $1 million promissory note, and that debt is secured by the Magueyitos property. The Executed Note and Deed of Trust are the documents Speer signed.
See, e.g., Pls. Ex. 2, at 2-3.
Plaintiffs want a Texas state court to declare the Executed Note and Deed of Trust invalid and unenforceable, and leave Tow with a breach of contract claim under the settlement agreement. That necessarily requires a determination of the nature and extent of the estate's interest in these documents from the time they were executed and thereafter. Any litigation about the nature and extent of the property of the estate acquired as part of the settlement agreement lies within this Court's exclusive jurisdiction under 28 U.S.C. § 1334(e). See, e.g., Manges v. Atlas (In re Duval Cty. Ranch Co.), 167 B.R. 848, 849 (Bankr. S.D. Tex. 1994) ("[w]henever there is a dispute regarding whether property is property of the bankruptcy estate, exclusive jurisdiction is in the bankruptcy court") (internal citations omitted); Brown v. Fox Broad. Co. (In re Cox), 433 B.R. 911, 920 (Bankr. N.D. Ga. 2010) (internal citations omitted); Schroeder v. New Century Holdings. Inc. (In re New Century Holdings, Inc.), 387 B.R. 95, 105 (Bankr. D. Del. 2008) ("[A] determination of what is property of the estate and concurrently, of what is available for distribution to creditors of that estate, is precisely the type of proceeding over which the bankruptcy court has exclusive jurisdiction") (internal citation omitted).
Pls. Ex. 5 ¶¶ 39, 42.
Mandatory abstention is also not required because this case constitutes a core proceeding under 28 U.S.C. § 157(b). Section 157(b)(1) states that "[b]ankruptcy judges may hear and determine . . . all core proceedings arising under title 11, or arising in a case under title 11." "Arising under" jurisdiction covers any "cause of action created or determined by a statutory provision of title 11." Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir. 1987) (internal citation omitted). "Arising in" jurisdiction is based on claims that "would have no existence outside of the bankruptcy." Id. at 97. Core proceedings resolve issues that arise exclusively in a bankruptcy case. See id. This is separate from non-core proceedings, which relate to cases under title 11 but do not arise exclusively under a bankruptcy case. See id.
28 U.S.C. § 157(b)(2) sets forth a non-exclusive list of core proceedings, which includes "(A) matters concerning the administration of the estate." Matters concerning the administration of the estate "pertain[ ] to matters that are integral, if not essential to the administration of the estate . . . ." LTV Steel Co., Inc. v. Union Carbide Corp. (In re Chateaugay Corp.), 193 B.R. 669, 677 (S.D.N.Y. 1996) (internal citation omitted).
Plaintiffs want to frame their lawsuit as a pure contract dispute for which this Court only has "related to" jurisdiction. And that the Court should abstain or remand like the District Court previously did in connection with Tow's attempt to start judicial foreclosure proceedings in federal court. But that is wrong. The material issues in their lawsuit involve matters that arise in and arise under title 11.
The lawsuit questions the validity and enforceability of the Executed Note and the Deed of Trust; and whether it ever became part of the Debtor's estate. Proceedings to determine whether something is estate property or somehow stopped being estate property is a core proceeding under Section 157(b)(2)(A). See, e.g., Atlas, 167 B.R. at 849 ("a proceeding to determine what constitutes property of the estate pursuant to 11 U.S.C. § 541 is a core proceeding under 28 U.S.C. § 157(b)(2)(A)") (internal citation omitted); Nilhan Devs., LLC v. Glass (In re Nilhan Devs., LLC), 631 B.R. 507, 541 (Bankr. N.D. Ga. 2021). The issues involved here are central to the estate's right to have either a claim secured by a lien on property or an unsecured obligation based on a promise in the settlement agreement.
Moreover, as the "representative of the estate" with the "capacity to sue and be sued" on its behalf (see 11 U.S.C. § 323(a), (b)), Tow as Chapter 7 Trustee had authority to settle estate claims and causes of action against Speer individually through the mediated settlement agreement. Any dispute about Tow's authority arises in and under the Chapter 7 case, and is thus within the Court's exclusive jurisdiction. Therefore, for all these reasons, mandatory abstention is not warranted here.
Permissive Abstention and Equitable Remand
28 U.S.C. § 1334(c)(1) provides that:
Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
28 U.S.C. § 1452(b) also states that a court "may remand such claim or cause of action on any equitable ground." Courts consider many factors in deciding whether to abstain or remand. Special Value Continuation Partners, L.P. v. Jones, No. 11-3304, 2011 WL 5593058, at *7-8 (Bankr. S.D. Tex. Nov. 10, 2011). These factors include the
(1) effect or lack thereof on the efficient administration of the estate if the court recommends [remand or] abstention; (2) extent to which state law issues predominate over bankruptcy issues; (3) difficult or unsettled nature of applicable law; (4) presence of related proceeding commenced in state court or other non-bankruptcy proceeding; (5) jurisdictional basis, if any, other than § 1334; (6) degree of relatedness or remoteness of proceeding to main bankruptcy case; (7) the substance rather than the form of an asserted core proceeding; (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgment to be entered in state court with enforcement left to the bankruptcy court; (9) the burden of the bankruptcy court's docket; (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties; (11) the existence of a right to a jury trial; (12) the presence in the proceeding of non-debtor parties; (13) comity; and (14) possibility of prejudice to other parties in the action.Id. (internal citation omitted).
Based on the text of Sections 1334(c)(1) and 1452(b), as well as the above factors, the Court declines to exercise permissive abstention or remand this proceeding on equitable grounds. Given how central Plaintiffs' claims are to the administration of this bankruptcy estate as a potential material source of recovery for creditors, the Court believes it is the best and most efficient forum for adjudicating this matter. The bankruptcy issues here predominate over any potential state law issues. It is true that Plaintiffs' original state court petition includes requests for a temporary injunction and restraining order to stop a foreclosure. But the scheduled nonjudicial foreclosure has long passed and there is no foreclosure pending. So really, the only issue left is a determination of the validity of the Executed Note and Deed of Trust. And, as detailed above, this Court has exclusive jurisdiction over this dispute. It is also not possible to sever any state law claims from the bankruptcy matters to allow a judgment to be entered by the state court on these core issues. There is no burden on this Court's docket and no evidence of any possibility of prejudice to any party in the action. This Court will ensure that this dispute is adjudicated as soon as practicable. It will also ensure any accounting required to determine what credit or offset rights Speer may have under the Executed Note will be done expeditiously. Thus, factors 1, 2, 5, 6, 7, 8, 9, and 14 weigh against permissive abstention or remand.
Plaintiffs also claim Tow's notice of removal, given that it alleges subject matter bankruptcy jurisdiction, is a collateral attack on the District Court's abstention order on Tow's judicial foreclosure action. And that Tow is now estopped from relitigating the state court lawsuit in this Court. The Court disagrees. The District Court permissibly abstained from hearing Tow's foreclosure action and determined that a state court was instead the proper forum for that proceeding based on the choice of law provision in the Executed Note that Plaintiffs now claim was never valid. If their litigation was another dispute based on enforcement rights under the Executed Note, following the District Court's abstention decision may be appropriate. But this case is very different. It is a request for a declaratory judgment on the validity and enforceability of property of this bankruptcy estate. Plaintiffs also misconstrue the District Court's referral order stating that nothing else should be filed in District Court. The District Court wants parties to seek relief in this Court in the first instance. It does not foreclose the rights of any party to seek appropriate relief from the federal courts. Therefore, this Court will retain jurisdiction over this matter.
Pls. Ex. 1 ¶ 17.
Id. ¶ 18.
See Pls. Ex. 4.
The Court knows that Plaintiffs filed a jury demand in this adversary proceeding. See Pls. Jury Demand, Docket No. 10. The Court will address the merits of this request on a future date to be determined.
CONCLUSION
Thus, for the reasons stated above, the Motion for Remand or in the Alternative for Abstention is DENIED.