Opinion
Case No. 17-31030 Adv. No. 19-3054
02-19-2020
In re: GYPC, INC., Debtor DONALD F. HARKER, III, CHAPTER 7 TRUSTEE, Plaintiff v. EASTPORT HOLDINGS, LLC, Defendant
Copies to: Denis E. Blasius (Counsel for the Plaintiff) Nick V. Cavalieri (Counsel for the Defendant) Matthew T. Schaeffer (Counsel for the Defendant)
Chapter 7 Decision Denying Defendant Eastport Holdings, LLC's Motion for Abstention (doc. 13)
This matter is before the court on Defendant Eastport Holdings, LLC's Motion for Abstention (doc. 13) (the "Motion"). The court has considered the Motion, Plaintiff GYPC's Objection to the Motion (doc. 23), and Eastport's Reply (doc. 26). For the reasons stated in this decision, the court will enter an order denying the Motion. I. Statement of Facts, Procedural Background, and Positions of the Parties
GYPC, Inc. ("GYPC") filed its petition initiating the underlying bankruptcy case under Chapter 11 of the Bankruptcy Code on March 30, 2017. The case was converted to Chapter 7 on August 16, 2019. On its schedules, GYPC lists a Preferred Membership Interest ("PMI") in Eastport Holdings, LLC ("Eastport") with an unknown value on Schedule A/B. (Estate doc. 19).
The PMI arises out of a July 12, 2016 Asset Purchase and Sale Agreement (the "APA"). The parties to the APA are General Yellow Pages Consultants, Inc. ("GYPC"), as seller; Christopher Cummings and Eric Webb, as principals; Mindstream Media, LLC ("Mindstream"), as the buyer; and Eastport as the parent company of Mindstream. Through the APA, GYPC sold substantially all of its assets to Mindstream. The APA provides in section 6.1(c) that Webb and Cummings are required to indemnify Eastport and Mindstream from, among other things, any Excluded Liabilities which Eastport or Mindstream pays. The APA and the PMI are at the heart of this adversary proceeding and the Motion.
The APA is filed under seal for this adversary proceeding and adversary proceeding 19-3032, captioned GYPC, Inc. v. Mindstream Media, LLC.
"Excluded Liabilities" is defined in Article XI of the APA.
On February 16, 2018 Eastport filed a complaint in the Circuit Court of Shelby County, Tennessee against Webb and Cummings alleging that they breached the APA by not indemnifying Eastport for Excluded Liabilities it paid (the "Tennessee Action"). Eastport further alleges that the principals were "self-dealing" in their management of GYPC's bankruptcy case. Eastport did not name GYPC as a party to the Tennessee Action.
On July 5, 2018, prior to the conversion of this case to Chapter 7, GYPC filed an application seeking to employ Valuation Research Corporation to appraise the value of the PMI in Eastport. GYPC Estate, doc. 119. The court granted that application on August 10, 2o18. Estate doc. 126.
On April 30, 2019 GYPC filed its complaint initiating this adversary proceeding, alleging that Eastport violated the automatic stay by attempting to exercise control over estate property through the sending of correspondence to GYPC as well as through its filing of the Tennessee Action. GYPC is requesting damages for Eastport's alleged stay violations and, in addition, a determination of the value of GYPC's PMI in Eastport (doc. 1).
In response to GYPC's complaint, Eastport filed the Motion asking this court to abstain from hearing this proceeding and instead allow for completion of the Tennessee Action involving contract issues and the PMI. GYPC objected with a Memorandum in Opposition arguing that this court is the appropriate forum to determine the alleged stay violations as well as the PMI's value.
Eastport asserts that the Tennessee Action "involves legal and factual issues which are identical to the issues raised by [GYPC's] Complaint, and the state court of Tennessee is perfectly capable of applying Tennessee law to determine the rights of the parties under the APA. However, Messrs. Cummings and Webb have filed this Adversary Proceeding in an apparent attempt to grab estate resources to pay for their defense." Doc. 13 at 2. GYPC argues that the PMI is property of its bankruptcy estate and that if its stay violation allegations are established, Eastport's right to a setoff against the PMI may be extinguished. In sum, GYPC argues that the stay violation issues are threshold issues which this court should address before the value of the PMI can be determined.
II. Legal Standard and Analysis
A. Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334 and the standing order of reference in the Southern District of Ohio, Amended General Order 05-02. The court may determine the abstention motion as a contested matter under Federal Rule of Bankruptcy Procedure 9014.
B. Discretionary Abstention
Even when a bankruptcy court has subject matter jurisdiction over a proceeding, the court may determine it is inappropriate to hear the proceeding and abstain from hearing the proceeding "in the interest of justice, or in the interest of comity with State courts or respect for State law[.]" 28 U.S.C. § 1334(c)(1). Additionally, a bankruptcy court may abstain in both core and non-core proceedings if the court deems it appropriate. Underwood v. United Student Aid Funds, Inc. (In re Underwood), 299 B.R. 471, 476 (Bankr. S.D. Ohio 2003). However, "[a]bstention from the exercise of federal jurisdiction is the exception, not the rule." Nationwide Roofing & Sheet Metal, Inc. v. Cincinnati Ins. Co. (In re Nationwide Roofing and Sheet Metal, Inc.), 130 B.R. 768, 778 (Bankr. S.D. Ohio 1991) (citations omitted). The doctrine of abstention is an "extraordinary and narrow" exception to the duty of a bankruptcy court to adjudicate a controversy that is properly before it. Id. Abdication of the obligation to decide cases can be justified under the permissive abstention doctrine only in the "exceptional circumstances where the order to the parties to repair to the State Court would clearly serve an important countervailing interest." McDaniel v. ABN Amro Mortgage Group, 364 B.R. 644, 649 (Bankr. S.D. Ohio 2007) (quoting In re Tremaine, 188 B.R. 380, 384 (Bankr. S.D. Ohio 1995)).
In order to determine whether it is appropriate to abstain, courts consider a number of nonexclusive factors. These factors include: (1) the effect or lack of effect on the efficient administration of the estate if a court abstains; (2) the extent to which state law issues predominate over bankruptcy issues; (3) the difficulty or unsettled nature of the applicable state law; (4) the presence of a related proceeding commenced in state court or other non-bankruptcy court; (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334; (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case; (7) the substance rather than form of an asserted core proceeding; (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court; (9) the burden of this 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; and (13) any unusual or other significant factors.Antioch Co. Litig. Tr. v. Hardman, 438 B.R. 598, 609-10 (Bankr. S.D. Ohio 2010); Nationwide, 130 B.R. at 780 (similar); Tremaine, 188 B.R. at 385 (similar). "This is a multi-factor balancing test, not a rule in which every element must be satisfied" and "not all factors need to weigh in favor of permissive abstention in order for it to be appropriate." MD Acquisition LLC v. Myers (In re Martin Designs, Inc.), Adv. No. 09-6037, 2009 WL 2707215, at *7 (Bankr. N.D. Ohio Aug. 26, 2009). Further, "[t]he relevance and importance of each of these factors will vary with the particular circumstances of each case and no one factor is necessarily determinative." McDaniel, 364 B.R. at 650 (quoting In re Chicago, Milwaukee, St. Paul & Pacific R.R., 6 F.3d 1184, 1189 (7th Cir. 1993)).
To make this determination, the court will analyze the relevant factors.
1. Effect or Lack of Effect on the Efficient Administration of the Estate
With regard to the efficient administration of the estate, based on the facts and circumstances, it is likely that abstention would have a negative effect on the administration of the estate by delaying administration and placing an unnecessary burden on the Chapter 7 trustee. All of the parties in this litigation are subject to the jurisdiction of this court. Further, all of the parties in this litigation are also involved in other adversary proceedings pending in this court. For instance, this court just determined Webb and Cummings' motion to dismiss a third-party complaint filed against them by Mindstream in the adversary proceeding captioned GYPC, Inc. v. Mindstream Media, LLC, which involved interpretation of the APA and many of the same facts as is involved in this proceeding. Adv. No. 19-3032, docs. 34 and 35. The court is familiar with the issues between these parties and the terms of the APA and it would not benefit the efficient administration of the bankruptcy estate if the court were to abstain from this litigation. See In re Bavelis, 453 B.R. 832, 870 (Bankr. S.D. Ohio 2011). In Bavelis, the court factored into its decision not to transfer the case that it was quite familiar with the issues and parties involved and transferring would not provide for the efficient administration of the estate. Id.
Further, if the court were to abstain, the creditors would be negatively affected as well. In Johnston, the court determined that the administration of the estate would not be affected in part because the main estate case had no assets available for distribution and there was no possibility that if the court did not abstain that assets would become available. Johnston v. City of Middletown (In re Johnston), 484 B.R. 698, 715 (Bankr. S.D. Ohio 2012). In this case, assets are available and abstaining would only inefficiently lengthen the time that assets will be able to be distributed to creditors.
Additionally, the Chapter 7 trustee should not have to litigate these issues in a Tennessee state court. Undoubtedly any determination of the rights of the parties under the APA will impact GYPC and its bankruptcy estate. From this court's perspective, GYPC and its trustee would be necessary or required parties to the Tennessee Action if it proceeded. It would be an inefficient and costly use of estate resources if the trustee had to defend the Tennessee Action. The administration of the estate would be negatively affected if the trustee was required to litigate in Tennessee when this court is familiar with the issues and capable of determining the value of the PMI as well as issues such as the setoff involving the APA.
2. The Extent to which Bankruptcy Issues Predominate and the Jurisdictional Basis
A bankruptcy court has exclusive jurisdiction over all property owned by the debtor "as of the commencement of the case, as well as any property of the estate[.]" 28 U.S.C. § 1334(e)(1); Hardman, 438 B.R. at 608. In this case, the PMI has always been represented to the court as being the most significant asset of the bankruptcy estate. The court approved the retention of a consultant to value the PMI. Preservation and administration of this asset of the bankruptcy estate therefore appears to be crucial. Because of these interests, it is most appropriate for this court to determine issues affecting the PMI and its value to the bankruptcy estate. Additionally, this adversary proceeding was brought to, among other things, determine whether Eastport violated the automatic stay which is in this court's core authority to determine. Hughes-Bechtol, Inc. v. Ohio (In re Hughes-Bechtol, Inc.), 141 B.R. 946, 953 (Bankr. S.D. Ohio 1992); In re Laskaratos, 605 B.R. 282, 286-87 (Bankr. E.D.N.Y. 2019). In addition, there are setoff issues involving the PMI and the claims of the various parties to the APA which are well within this court's wheelhouse. See Hughes-Bechtol, Inc. v. Air Enters., Inc. (In re Hughes-Bechtol, Inc.), 107 B.R. 552, 560 (Bankr. S.D. Ohio 1989) ("Although this court recognizes it has no greater expertise than the state court in determining the underlying contract issues in dispute among the parties, this court recognizes it does have greater experience than the State Court in applying various provisions of the Bankruptcy Code, including 11 U.S.C. §§ 506, 509 & 553, all of which are presented as part of these removed actions."). The setoff issues also appear to be related to the effect of the automatic stay arising out of the filing of GYPC's bankruptcy case. See GYPC, Inc. v. Mindstream Media, LLC, Adv. Pro. No.19-3032, doc. 34. Therefore, the issues before the court in this adversary proceeding are in this court's authority and jurisdiction to determine and involve issues which the court routinely addresses.
The court recognizes that the parties differ on the characterization of the PMI - whether it is an "interest in property of the Debtor's estate" (GYPC's Memorandum Contra, doc. 23 at 6) or a "a seller note with a fixed face value subject to certain adjustments" (Eastport's Motion, doc. 13 at 4). Regardless of its characterization, this interest of the bankruptcy estate must be preserved and administered in a manner to maximize its value for the estate. --------
3. The Difficulty or Unsettled Nature of the Applicable State Law
Both of the parties in this action seem to agree that there are no difficult or unsettled state law issues and that this court is perfectly capable of interpreting the state law in this litigation. This court routinely determines issues of state law and, particularly, issues as to interpretation of contracts. Therefore, this factor weighs against abstention.
4. The Presence of a Related Proceeding Commenced in State Court
The Tennessee Action is a related case in a Tennessee state trial court, with the primary objective being the determination of the parties' rights and obligations under the APA. Those determinations could likely have an effect on the value of the PMI. Eastport did not name GYPC as a party to the Tennessee Action. The state court proceeding appears to be on hold. Eastport argues that the trustee could join the state court action to protect the bankruptcy estate's interests and that the stay violations at play in this adversary proceeding could be handled with a motion. However, due to the issues involving the interpretation of the APA and the bankruptcy stay and setoff issues involved with the several adversary proceedings between the parties to the APA, this court believes it would in essence be abdicating its responsibilities in the GYPC case to abstain from this proceeding in favor of the Tennessee Action.
5. Degree of Relatedness of the Proceeding to the Main Bankruptcy Case
This adversary proceeding is substantially related to the main bankruptcy case. "An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action. . . and which in any way impacts upon the handling and administration of the bankrupt estate." Nationwide Roofing, 130 B.R. at 773 (quoting In re Pacor, Inc., 743 F.2d 984, 994 (3d Cir. 1984)). This adversary proceeding was filed to determine potential stay violations and the value of the PMI. The PMI is a significant asset of the bankruptcy estate and therefore its value is significantly related to GYPC's bankruptcy estate. The outcome of this adversary proceeding could have a significant effect on the bankruptcy estate and therefore this factor weighs against abstention.
6. The Substance Rather than the Form of an Asserted Core Proceeding
The underlying adversary proceeding is a core proceeding, both in substance and form. It does not appear to the court that either party is attempting to classify a proceeding as core when it is not. Eastport argues that there are no core proceedings and the "only arguably core issue is the stay violation issue." However, under 28 U.S.C. § 157(b)(1) and (2), issues involving the automatic stay as well as issues involving "estimations of claims or interests" and "matters concerning the administration of the estate" are core proceedings. The issues in this adversary proceeding squarely fall within the statute. Therefore, because no party is attempting to classify a proceeding as core when it is not, this factor tends to weigh against abstention.
7. The Feasibility of Severing State Law Claims from Core Bankruptcy Matters
Contrary to Eastport's assertions, it would be difficult to sever the state law issues from the core bankruptcy matters in this case. To disentangle the stay violation and setoff issues from the contractual issues relating to the interpretation and application of the APA would be unnecessarily burdensome for both the state court and this court and would result in judicial inefficiencies. This bankruptcy court has exclusive jurisdiction over the stay violation issues under 11 U.S.C. § 362 and while a state court may determine if the stay applies, only a bankruptcy court can award damages for a stay violation. See In re Bankers Healthcare Group, Inc. v. Bilfield (In re Bilfield), 494 B.R. 292, 302 (Bankr. N.D. Ohio 2013) ("Section 362(k) calls for an award of actual damages . . . ."). Therefore, this factor weighs against abstention.
8. The Burden on this Court's Docket
While this court has a substantial docket, it will not abstain from a proceeding within its jurisdiction to decrease any potential burden because "it is the responsibility of this court to adjudicate issues that are properly before it and not to abstain." Antioch Co. Litigation Trust v. Morgan (In re Antioch Co.), Adv. No. 09-3409, 2010 Bankr. LEXIS 1630, at *16 (Bankr. S.D. Ohio May 26, 2010) (citation omitted). This court should not abdicate its responsibility to determine issues before it absent "exceptional circumstances where the order to the parties to repair to the State Court would clearly serve an important countervailing interest." McDaniel, 364 B.R. at 649 (quoting Tremaine, 188 B.R. at 384). The court does not find those circumstances present with respect to this adversary proceeding. Further, because the issues involved in this proceeding are intertwined with issues involved in other proceedings before this court, the court does not perceive that the adjudication of this proceeding will be a significant burden on its docket.
9. The Likelihood of Forum Shopping
This factor does not weigh heavily in the court's decision on this abstention. However, the court would note that based on the timing of the filing of the Tennessee Action and the issues set forth in that action, forum shopping may have been involved in the decision to file the action in Tennessee against Webb and Cummings. The issues raised in the Tennessee Action were already being discussed and considered in the underlying bankruptcy case prior to the filing of the Tennessee Action. While this adversary proceeding was filed subsequent to the Tennessee Action, this does not discount the fact that the Tennessee Action was filed while the bankruptcy estate case was pending.
Eastport argues that a motivating reason for its filing of the Tennessee Action was that it believed that Webb and Cummings were using the GYPC bankruptcy case to their personal advantage. However, without evaluating the veracity of those allegations, the court notes that since the filing of the Tennessee Action and this adversary proceeding, the GYPC case has been converted to Chapter 7 with the appointment of the trustee. Accordingly, Webb and Cummings are no longer in a position to make decisions with respect to the GYPC bankruptcy case and the pending adversary proceedings, except to the extent that they are personally parties to any such adversary proceeding and then they may make determinations only relating to their personal interests. Thus, that perceived need to move the disputes relating to the APA to another forum has been eliminated.
Therefore, although the forum shopping factor does not weigh heavily in the court's decision, it does tend to weigh against abstention.
10. The Existence of a Right to a Jury Trial
Neither party has made a jury demand in the Tennessee Action, or in this adversary proceeding, as to the contractual dispute and therefore the court gives this factor little weight. Further, it appears there is no jury trial right for a willful violation of the stay. Calderon v. Bank of Am. Co. (In re Calderon), 497 B.R. 558, 567 (Bankr. E.D. Ark. 2013). Therefore, this factor is neutral and does not weigh in favor or against abstention.
The combination of the above factors weighs in favor of the court retaining this adversary proceeding. The court believes that denying this motion for abstention is in the best interest of both the parties and the bankruptcy estate.
III. Conclusion
For all these reasons, the motion for discretionary abstention is denied. The court will enter a separate order consistent with this decision.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Guy R. Humphrey
United States Bankruptcy Judge Dated: February 19, 2020 Copies to: Denis E. Blasius (Counsel for the Plaintiff) Nick V. Cavalieri (Counsel for the Defendant) Matthew T. Schaeffer (Counsel for the Defendant)