Summary
concluding that the court had at least “related to” jurisdiction over debtor's state law claims because “the outcome of this case would have an effect on [debtor's] estate since any recovery of monetary damages would necessarily accrue to the estate”
Summary of this case from In re Legal Xtranet, Inc.Opinion
Civil Action No. 3:04-CV-1033-G.
December 9, 2004
MEMORANDUM ORDER
Before the court is the motion of the plaintiffs Regal Row Fina, Inc., Shiraz Poonawala, and Yasmin Poonawala (collectively, the "plaintiffs") to remand this case to the state district court from which it was previously removed and to impose sanctions on the defendant in this case. For the reasons discussed below, the motion is denied.
I. BACKGROUND
Regal Row Fina, Inc. ("Regal Row") is a debtor in a chapter 11 bankruptcy case, No. 04-33857-SAF-11, In re Regal Row, Inc., pending before United States Chief Bankruptcy Judge Steven A. Felsenthal in the United States Bankruptcy Court for the Northern District of Texas (the "bankruptcy case"). Notice of Removal and Request for Referral to Bankruptcy Court ("Washington Mutual's Notice of Removal") ¶ 3. Shiraz Poonawala and Yasmin Poonawala (collectively, the "Poonawalas") are the owners of Regal Row and served as the primary guarantors on the company's debt. Brief in Support of Washington Mutual Bank F.A.'s Response to Plaintiffs' Motion to Remand ("Washington Mutual's Response Brief") at 3. Together, Regal Row and the Poonawalas commenced this suit. See generally Plaintiffs' Original Petition ("Petition"), attached to Washington Mutual's Notice of Removal as Exhibit A-4. Washington Mutual, F.A. ("Washington Mutual"), successor by merger to Bank United, is a secured creditor of Regal Row and a party in interest with respect to the bankruptcy case. Washington Mutual's Notice of Removal ¶ 4.
In 1999, the plaintiffs entered into negotiations with Atlantic Oil Gas, Inc., p/k/a North Atlantic Oil Gas, Ltd. ("Atlantic Oil Gas"), to purchase real property, construct improvements thereon, and to operate a gas station, C-Store, and Grandy's fast food restaurant. Petition ¶ 12. In July 1999, plaintiff Yasmin Poonawala purchased the real property which is the subject of this dispute; Washington Mutual served as the lender for this purchase. Id. Following this initial transaction, Washington Mutual provided additional financing to Regal Row in October 1999, in the amount of $1,537,000.00, which was guaranteed by the Poonawalas. Id. Pursuant to the Deed of Trust, the Security Agreement, and the Financing Statements, Washington Mutual holds a first priority security interest in and against substantially all of Regal Row's real property and personal property — including, but not limited to, all of Regal Row's furniture, fixtures, equipment, and inventory (collectively, the "collateral"). Washington Mutual's Response Brief at 2-3; Claims Register for In re Regal Row Fina, Inc., attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand as Exhibit G ("Exhibit G") at 56; Washington Mutual's Proof of Claim in In re Regal Row Fina, Inc., attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand as Exhibit H ("Exhibit H") at 59; Cash Collateral Order, attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand as Exhibit O ("Exhibit O") at 209. Regal Row uses the collateral to operate a Fina-branded convenience store and gas station, as well as a Grandy's restaurant franchise. Washington Mutual's Response Brief at 3; Debtor's Schedules and Statement of Financial Affairs for In re Regal Row Fina, Inc., attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand as Exhibit B ("Exhibit B") at 9.
On April 2, 2004, the plaintiffs commenced this lawsuit, Cause No. 04-02755, Regal Row Fina, Inc., Shiraz Poonawala and Yasmin Poonawala, Plaintiffs v. Washington Mutual Bank, F.A. Successor by Merger to Bank United, Kimela L. Jacobs and North Atlantic Oil Gas, Ltd., f/k/a Atlantic Oil Gas, Inc., Defendants, in the 162d Judicial District Court in and for Dallas County, Texas. Brief in Support of Plaintiffs' Motion to Remand ("Plaintiffs' Motion to Remand") ¶ 2. The plaintiffs alleged counts of fraud, constructive fraud, fraud in a real estate transaction, breach of contract, negligent misrepresentation, and breach of fiduciary duty. Petition ¶¶ 16-44. The petition sought money damages and an award of costs and attorney's fees against Washington Mutual. See generally id. Specifically, the plaintiffs claim that prior to the July 1999 purchase and the October 1999 financing, there were several meetings and conversations between the parties to this suit during which time Washington Mutual made certain representations. Id. ¶ 13. As a result of these representations, the plaintiffs claimed that they believed they had acquired real estate, improvements, and personal property to operate the business at a cost they understood to be the cost of construction. Id. ¶ 14. However, the plaintiffs stated that the value of their acquisition was less than the amount the plaintiffs paid to Washington Mutual, thereby allowing Washington Mutual to receive a financial benefit by reason of the excess charges. Id.
On April 5, 2004, Regal Row filed a chapter 11 proceeding in the bankruptcy court in this district. Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand ("Washington Mutual's Response") at 1-2. Washington Mutual filed its answer to the state court suit on May 7, 2004. See generally Defendant Washington Mutual's, FA's Original Answer ("Washington Mutual's Answer"), attached to Index of Exhibits to Notice of Removal and Request for Referral to Bankruptcy Court as Exhibit A-10. Then, Washington Mutual removed the lawsuit by filing a notice of removal and request for referral to bankruptcy court on May 12, 2004. See generally Washington Mutual's Notice of Removal.
On May 5, 2004, plaintiffs Shiraz and Yasmin Poonawala commenced an individual chapter 11 proceeding, Case No. 04-35147-BJH-11, which is pending before United States Bankruptcy Judge Barbara J. Houser in the United States Bankruptcy Court for the Northern District of Texas. Washington Mutual's Response Brief at 2 n. 4. The plaintiffs have requested that this proceeding be transferred to United States Chief Bankruptcy Judge Felsenthal's court where the Regal Row bankruptcy proceeding is currently pending. See Bankruptcy Docket, In re Shiraz M. and Yasmin Poonawala, attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand as Exhibit C ("Exhibit C") at 39. Additionally, before filing their individual chapter 11 proceeding, the Poonawalas filed a second lawsuit against Washington Mutual. Washington Mutual's Response Brief at 2 n. 4. The second lawsuit, Cause No. C-200400187, Shiraz R. Poonawala, Individually and d/b/a Alvarado Texaco Travel and Truck Plaza, SYP Enterprises, Inc. and Yasmin Poonawala, Plaintiffs v. Washington Mutual Bank, FA Successor by Merger to Bank United, Kimela L. Jacobs and Alvarado Joint Venture, a Partnership, Defendants, in the 18th Judicial District Court in and for Johnson County, Texas (the "second lawsuit"), contains allegations against Washington Mutual that are similar to the claims made in the instant case. Id. On June 8, 2004, Washington Mutual removed the second lawsuit to the United States District Court for the Northern District of Texas and it was assigned to United States District Court Judge Solis. See id. On September 9, 2004, the court referred the second lawsuit to the bankruptcy court because it was "related" to the bankruptcy proceeding pending before United States Bankruptcy Judge Houser. Id.
Washington Mutual filed a separate motion requesting the court to refer the removed lawsuit to the bankruptcy court on May 24, 2004. See generally Motion for Referral of Removed Proceeding to Bankruptcy Court ("Washington Mutual's Motion for Referral"). On June 11, 2004, the plaintiffs filed their motion to remand this case to the state court from which it was previously removed. See generally Plaintiffs' Motion to Remand.
Washington Mutual's motion for referral was unopposed, and an order granting the referral pursuant to the standing order of reference was entered by the court on June 30, 2004. The order for referral, however, was subsequently vacated by another order on July 1, 2004.
In their reply brief, the plaintiffs argue that this court should not consider Washington Mutual's response brief because it was untimely filed. Reply Brief of Plaintiffs in Response to Defendant Washington Mutual's Response to Plaintiffs' Motion to Remand ("Plaintiffs' Reply Brief") ¶¶ A1-A5. Although Local Rule 7.1(e) does allow for this court to strike this brief, the court will consider the response brief on its merits.
II. ANALYSIS A. "Related To" Jurisdiction
Removal of a case from state to federal court is permissible if the federal court would have had jurisdiction over the case at the time of the removal. See 28 U.S.C. § 1441. Section 1441 provides that "any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending."
Washington Mutual removed this case pursuant to 28 U.S.C. § 1452, which allows the removal of claims related to bankruptcy cases. According to § 1452, a party can remove a case to federal court if the district court has jurisdiction over the cause of action under 28 U.S.C. § 1334. 28 U.S.C. § 1452(a). The bankruptcy jurisdiction of district courts and bankruptcy 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). The statute also confers on the district courts original, but not exclusive, jurisdiction "of all civil proceedings arising under title 11, or arising in or related to cases under title 11." Id. § 1334(b). The Fifth Circuit has stated that in determining whether jurisdiction under this statute exists, it is necessary to decide 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."Matter of Wood, 825 F.2d 90, 93 (5th Cir. 1987) (emphasis in original) (citations omitted). Since this case does not arise under title 11, removal of the case to this court is proper only if it is a civil proceeding arising in or related to a case under title 11. See 28 U.S.C. § 1334(b).
Washington Mutual argues that this civil proceeding is related to the title 11 bankruptcy cases filed by the plaintiffs. Civil proceedings which are "related to" a bankruptcy for removal purposes include the following: "(1) causes of action owned by the debtor which become property of the estate pursuant to 11 U.S.C. § 541, and (2) suits between third parties which have an effect on the bankruptcy estate." Celotex Corporation v. Edwards, 514 U.S. 300, 308 n. 5 (1995); accord Arnold v. Garlock, Inc., 278 F.3d 426, 434 (5th Cir. 2001). Washington Mutual claims that since it is the largest creditor of Regal Row and the Poonawalas are the guarantors on the Regal Row debt, any damages won by the plaintiffs in this case would affect the amount Regal Row is required to pay Washington Mutual in reorganization. Washington Mutual's Response ¶ 6. Therefore, this action would fall into the first type of "related to" proceeding set out by the Supreme Court.
In the Fifth Circuit, the test for whether a proceeding properly invokes federal bankruptcy "related to" jurisdiction is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. Arnold, 278 F.3d at 434 (citing In re Canion, 196 F.3d 579, 585 (5th Cir. 1999)). The test is simply whether an effect is possible; certainty of an effect is not a requirement. Id. Therefore, "an 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 . . . in any way impacts upon the handling and administration of the bankrupt estate." Matter of Zale Corporation, 62 F.3d 746, 752 (5th Cir. 1995) (quoting In re Walker, 51 F.3d 562, 569 (5th Cir. 1995)). At a minimum, the outcome of this case would have an effect on Regal Row's estate since any recovery of monetary damages would necessarily accrue to the estate. Therefore, the court finds that it has subject matter jurisdiction over this case under 28 U.S.C. § 1334. Removal under these circumstances was proper.
B. Timeliness of Removal
The plaintiffs argue that Washington Mutual's removal was improper because it was untimely. Plaintiffs' Motion to Remand ¶¶ B1-B7. The timeliness of the removal of an action that is related to a bankruptcy proceeding is governed by Federal Rule of Bankruptcy Procedure 9027. Rule 9027 provides that if the civil action is initiated after the commencement of the bankruptcy case, the notice of removal must be filed within 30 days of receiving either the complaint, or the summons if the complaint did not accompany the summons. FED. R. BANKR. P. 9027(a)(3). Alternatively, if the civil action was filed before the initiation of a bankruptcy case, the notice of removal must be filed within the longest of 90 days of the order for relief, 30 days of an order terminating a stay, or 30 days after the qualification of a chapter 11 trustee, but not later than 180 days after the order for relief. See FED. R. BANKR. P. 9027(a)(2). The plaintiffs filed this case on April 2, 2004, and Regal Row filed its bankruptcy petition three days later on April 5, 2004. Given the filing date of the bankruptcy case, it appears that removal would have been timely at any time until July 4, 2004. Thus, Washington Mutual's notice of removal, filed May 12, 2004, was timely.
The plaintiffs contend that because the current action is not "related to" the bankruptcy proceeding, it is irrelevant that Washington Mutual filed its notice of removal within 90 days of the order of relief in that case. Plaintiffs' Motion to Remand ¶ B-7. Specifically, the plaintiffs claim that the value of the property they acquired from Washington Mutual was far less than the amount the plaintiffs paid to Washington Mutual. As a result, the plaintiffs believe, Washington Mutual received a monetary benefit in excess of what it was entitled to receive. Since any monetary judgment to redress this allegedly tortious conduct would belong to the debtor's estate, a determination of whether Washington Mutual is liable to the plaintiffs could conceivably affect Regal Row's bankruptcy estate, either positively or negatively. Therefore, the court concludes that this action is sufficiently "related to" Regal Row's bankruptcy case that Rule 9027(a)(2) was satisfied and that, under the provisions of that rule, removal of this case was timely.
C. Abstention
The plaintiffs contend that even if this action is related to a bankruptcy proceeding and was timely removed, this court should abstain from exercising jurisdiction and should remand the case to the state court pursuant to § 1334(c). Plaintiffs' Motion to Remand ¶ C-5. There are two types of abstention that are potentially applicable: (1) section 1334(c)(1) provides fordiscretionary abstention in cases that are related to bankruptcy actions; (2) section 1334(c)(2), on the other hand, provides for mandatory abstention in particular cases that are related to bankruptcy actions. Specifically, 28 U.S.C. § 1334(c) provides that:
(1) 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.
(2) 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.28 U.S.C. § 1334(c). Thus, the court must consider the different standards used in applying discretionary or mandatory abstention doctrines created by this statute and determine, under those standards, the nature of its authority over the causes of action in this case.
1. Mandatory Abstention
The mandatory abstention provision requires that the proceeding be "related to a case under title 11 but not arising in a case under title 11 or arising in a case under title 11. . . ." 28 U.S.C. § 1334(c)(2). Essentially, all proceedings — whether they are described as "core" or only "otherwise related" to a bankruptcy case — are related proceedings. A "related" proceeding, but one that does not "arise under" or "arise in" title 11, is one that is "otherwise related" within the meaning of 28 U.S.C. § 157(c)(1). See Matter of Wood, 825 F.2d at 97. Section 1334(c)(2), however, does not apply to "core" proceedings set out in 28 U.S.C. § 157(b). Matter of Wood, 825 F.2d at 97 ("core" proceedings equate to proceedings "arising under" title 11). To determine if mandatory abstention applies to the instant case, the court must determine whether this case constitutes a core proceeding or an otherwise related proceeding within the meaning of 28 U.S.C. § 157. In re Chiodo, 88 B.R. 780, 782 (W.D. Tex. 1988).
Congress has unequivocally expressed its intent that bankruptcy matters are to be resolved exclusively in a federal forum. See 28 U.S.C. § 1334; MSR Exploration, Limited v. Meridian Oil, Inc., 74 F.3d 910, 913 (9th Cir. 1996). "Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate." Celotex Corporation, 514 U.S. at 308 (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)). Nevertheless, not all matters related to bankruptcies fall within the ambit of those subject to federal power. As a result, the distinctions made between "core" and "non-core" proceedings in the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333, are instructive.
The 1984 Act was passed in response to the decision rendered in Northern Pipeline Construction Company v. Marathon Pipe Line Company, 458 U.S. 50 (1982), which drew a distinction between the "restructuring of debtor creditor relations, which is at the core of the federal bankruptcy power," and "the adjudication of state-created private rights." Id. at 71. Specifically, in regards to the latter, the Supreme Court held that Congress did not have the power to grant jurisdiction to Article I bankruptcy courts over proceedings related to a bankruptcy case involving rights "created by state law" and "independent of and antecedent to the reorganization petition that conferred jurisdiction upon the Bankruptcy Court." Id. at 84. Nevertheless, as to the first function, the Court noted that "[o]f course, bankruptcy adjudications themselves, as well as the manner in which the rights of debtors and creditors are adjusted, are matters of federal law." Id. at 84 n. 36.
In general, a "core proceeding" in bankruptcy is one that "invokes a substantive right provided by title 11 or . . . a proceeding that, by its nature, could arise only the context of a bankruptcy case." Matter of Wood, 825 F.2d at 97. On the other hand, "non-core proceedings" are those not integral to the restructuring of debtor-creditor relations and not involving a cause of action arising under title 11. See Windsor Communications Group, Inc. v. Grant, 75 B.R. 713, 721 (E.D. Pa. 1985). In other words, they are proceedings in which the outcome "could conceivably have any effect on the estate being administered in bankruptcy." Matter of Wood, 825 F.2d at 93 (quoting Pacor, 743 F.2d at 994) (emphasis in original).
The nature of the proceeding and whether it is coined "core" or "non-core" determines the court's authority. In "core" proceedings, bankruptcy courts have the authority to "hear and determine all [matters] . . . and may enter appropriate orders and judgments." 28 U.S.C. § 157(b)(1). In "non-core" proceedings, unless the parties consent, bankruptcy courts may only make recommended findings of fact and conclusions of law which are subject to de novo review in the district court. 28 U.S.C. § 157(c)(1)-(2).
The non-exhaustive list of "core" bankruptcy proceedings set forth in 28 U.S.C. § 157(b) includes:
(A) matters concerning the administration of the estate;
(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11;
(C) counterclaims by the estate against persons filing claims against the estate;
(D) orders in respect to obtaining credit;
(E) orders to turn over property of the estate;
(F) proceedings to determine, avoid, or recover preferences;
(G) motions to terminate, annul, or modify the automatic stay;
(H) proceedings to determine, avoid, or recover fraudulent conveyances;
(I) determinations as to the dischargeability of particular debts;
(J) objections to discharges;
(K) determinations of the validity, extent, or priority of liens;
(L) confirmations of plans;
(M) orders approving the use or lease of property, including the use of cash collateral;
(N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate; and
(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims.28 U.S.C. § 157(b)(2).
This case qualifies as a core proceeding under several of the § 157(b)(2) criteria, for it directly affects the administration of the estate. As stated above, Washington Mutual is the largest creditor of Regal Row; it was Washington Mutual's collection activity that eventually brought on the filing of the bankruptcy case. Washington Mutual's Response Brief at 10. Washington Mutual has filed a proof of claim in the bankruptcy case and has actively participated in hearings in which Regal Row sought authority from the bankruptcy court to use Washington Mutual's cash collateral. Id. at 10, 14; Exhibit G, attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand at 56; Exhibit H, attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand at 59; Claims Register for In re Shiraz M. and Yasmin Poonawala, attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand as Exhibit J ("Exhibit J") at 111; Washington Mutual's Proof of Claim in In re Shiraz M. and Yasmin Poonawala — Regal Row guarantees, attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand as Exhibit K ("Exhibit K") at 118; Washington Mutual's Proof of Claim in In re Shiraz M. and Yasmin Poonawala — Alvarado Truck Stop, attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand as Exhibit L ("Exhibit L") at 140; Exhibit O, attached to Appendix in Support of Defendant Washington Mutual Bank, F.A.'s Response to Plaintiffs' Motion to Remand at 209. As a result, any recovery that Regal Row receives from this case would naturally be applied against the indebtedness evidenced by the promissory note executed by Regal Row in favor of Washington Mutual. Washington Mutual's Response Brief at 11.
"A claim against the estate is instituted by filing a proof of claim as provided by the bankruptcy rules. The filing of the proof invokes the special rules of bankruptcy concerning objections to the claim, estimation of the claim for allowance purposes, and the rights of the claimant to vote on the proposed distribution." Matter of Wood, 825 F.2d at 97.
Another significant factor is that this case is a proceeding involving the allowance or disallowance of claims or counterclaims or exemptions from property of Regal Row's estate. 28 U.S.C. § 157(b)(2)(B). Washington Mutual contends — and the court agrees — that because Washington Mutual has filed a proof of claim in Regal Row's bankruptcy case and because this case is intertwined with its proof of claim, the case necessarily affects the allowance or disallowance of claims against Regal Row's bankruptcy estate. Washington Mutual's Response Brief at 12. Thus, before Regal Row can confirm a reorganization plan in the bankruptcy court, the extent of Regal Row's net obligation to Washington Mutual must be established. Washington Mutual's Response Brief at 12.
Additionally, the court concludes that this proceeding, if not originally a core proceeding, has been converted into one by Washington Mutual's filing of a proof of claim. See 28 U.S.C. § 157(b)(2)(C). Even though Washington Mutual's proof of claim was filed after the plaintiffs filed their state court petition, Washington Mutual — by filing its proof of claim — converted the plaintiffs' adversary proceeding involving state tort law claims "related to" Regal Row's bankruptcy to a proceeding to adjudicate a counterclaim "arising under" title 11. Numerous courts have found claims asserted by the debtor against a person who has filed proof of claims against the estate to be counterclaims within the meaning of § 157(b)(2)(C), and therefore core proceedings, notwithstanding the fact that the claims were asserted by procedures other than counterclaiming against the proof of claim itself. See, e.g., In re Performance Nutrition, Inc., 239 B.R. 93, 99 (Bankr. N.D. Tex. 1999) (holding that claims in a bankruptcy trustee's adversary complaint against two persons who had filed proofs of claims against the estate were counterclaims); Allen v. City Finance Company, 224 B.R. 347, 352 (S.D. Miss. 1998) (holding that claims asserted in a complaint filed by a debtor against a creditor who had filed proofs of claims were essentially counterclaims against the creditor); Pan American World Airways, Inc. v. Evergreen International Airlines, Inc., 132 B.R. 4, 7 (S.D.N.Y. 1991) (holding that claims in a complaint initiated by the debtor against an entity that had not yet filed a proof of claim in the bankruptcy proceeding, but intended to do so, were counterclaims within the meaning of § 157(b)(2)(C)). Furthermore, because any judgment entered in the determination of this case has the potential to eliminate Washington Mutual's liens, the lawsuit clearly falls within the definition of a proceeding to determine the validity, extent, or priority of Washington Mutual's liens. See 28 U.S.C. § 157(b)(2)(K).
Finally, this case is properly considered a core proceeding by virtue of the "catch-all" provision because the plaintiffs' claims against Washington Mutual would likely "affect the liquidation of the assets of the estate or the adjustment of the debtor-creditor . . . relationship." 28 U.S.C. § 157(b)(2)(O); see Matter of Baudoin, 981 F.2d 736, 741, 742 (5th Cir. 1993) (holding that the same lender liability claim would have been a "core proceeding" in the personal bankruptcy of the corporation's owners, by virtue of the "catch all" provision of § 157(b)(2)(O), where the bank, although listed in the debtors' chapter 7 petition, had filed no proof of claim). Therefore, the court concludes that any potential judgment from this case would be an asset of the bankruptcy estate, possibly resulting in additional funds available for distribution by the bankruptcy court. That this case is inextricably interwined with the bankruptcy proceeding cannot, in these circumstances, reasonably be disputed. See, e.g., Matter of Paso Del Norte Oil Company, 755 F.2d 421, 425 (5th Cir. 1985) (stating that a determination of core status relies on whether it is possible to administer the estate without resolving the controversy, or whether the controversy is tied to matters pertaining to bankruptcy); Holland America Insurance Company v. Succession of Roy, 777 F.2d 992, 998 (5th Cir. 1985) (stating that adversary proceedings that do not intimately involve the debtor-creditor relationship and that rest solely in state law are not properly brought before the federal bankruptcy court); In re Marr Broadcasting Company, Inc., 79 B.R. 673, 677 (Bankr. S.D. Tex. 1987) (concluding that it was possible to administer the estate without resolving the state law controversy when the suit involved a party who was not a creditor of the debtor).
The plaintiffs in this case are seeking to recover monetary damages from Washington Mutual based on its allegedly tortious conduct. Any damages that the plaintiffs would recover, would affect the amount that Regal Row is required to pay Washington Mutual, its largest secured creditor, through reorganization. Because this action is a core proceeding under 28 U.S.C. § 157(b), mandatory abstention does not apply.
2. Permissive Abstention Equitable Remand
Since this case is within the bankruptcy court's "core" jurisdiction, the decision whether to abstain from hearing it lies within the court's discretion. See Matter of Southmark Corporation, 163 F.3d 925, 932 (5th Cir.), cert. denied, 527 U.S. 1004 (1999). There are two statutory provisions a court must consider when determining whether to abstain or remand. First, § 1334(c)(1) authorizes abstention, as requested by the plaintiffs here, in the interest of justice. 28 U.S.C. § 1334(c)(1). Second, § 1452(b) provides that the "court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground." 28 U.S.C. § 1452(b). Together, § 1452(b) and § 1334(c) evince a congressional policy that the trial of state law created issues and rights should be allowed to proceed in state court, at least where there is no basis for federal jurisdiction independent of § 1334 and the litigation can be timely completed in state court. Lee v. Miller, 263 B.R. 757, 763 (S.D. Miss. 2001). Because the statutes are similar in purpose, the circumstances which weigh in favor of discretionary abstention or dictate mandatory abstention under § 1334(c), weigh in favor of or constrain remand under § 1452(b). Id. (citing Twyman v. Wedlo, Inc., 204 B.R. 1006, 1020 (Bankr. N.D. Ala. 1996)).
According to the Fifth Circuit, equitable considerations that are relevant to a decision to remand include:
(1) forum non conveniens;
(2) a holding that, if the civil action has been bifurcated by removal, the entire action should be tried in the same court;
(3) a holding that a state court is better able to respond to questions involving state law;
(4) expertise of the particular court;
(5) duplicative and uneconomic effort of judicial resources in two forums;
(6) prejudice to the involuntarily removed parties;
(7) comity considerations; and
(8) a lessened possibility of an inconsistent result.
Browning v. Navarro, 743 F.2d 1069, 1076 n. 21 (5th Cir. 1984) (citations omitted); see also In re Fairchild Aircraft Corporation, Bankruptcy No. 90-50257C, 1990 WL 119650, at *1, 4 (Bankr. W.D. Tex. June 18, 1990).
When determining whether to exercise discretionary abstention and equitable remand, there are fourteen factors that a court must consider and balance. These factors include:
(1) the effect or lack thereof on the efficient administration of the estate if the court decides to remand or abstain;
(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 judgments to be entered in state court with enforcement left to the bankruptcy court;
(9) the burden of the . . . court's docket;
(10) the likelihood that the commencement of the proceeding in the [district] 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) the possibility of prejudice to other parties in the action.Davis v. Life Investors Insurance Company of America, 282 B.R. 186, 194 n. 7 (S.D. Miss. 2002).
These factors, taken as a whole, do not weigh in favor of remand. The first factor weighs against remanding this action to state court. Washington Mutual alleges that one of the primary reasons it removed this action was so that the case could be coordinated with Regal Row's bankruptcy proceedings. Washington Mutual's Response Brief at 17. Specifically, Washington Mutual is concerned that the adjudication of this case would impact certain provisions in the proposed plan of reorganization. There are unanswered questions with respect to how quickly the state court lawsuit will be heard if this court abstains from hearing the case or refers it to the bankruptcy court. Because resolution of the issues raised in this case are central to Regal Row's chapter 11 bankruptcy, any delay could have a substantial effect on its ability to effectively reorganize. Moreover, although Regal Row filed its proposed plan on October 7, 2004, this plan is still awaiting confirmation by the bankruptcy court. Thus, there is still much to accomplish in the pending bankruptcy proceeding with which to coordinate this action.
To the extent that the state law issues predominate, if a state law issue is not unsettled, or if there is no state authority directly on point, then this court is equally qualified to resolve those issues. Therefore, the second and third factors cut against abstention in favor of the Texas state court proceedings. See Matter of Chicago, Milwaukee, St. Paul Pacific Railroad Company, 6 F.3d 1184, 1189 n. 8 (7th Cir. 1993). Nevertheless, factors four and five weigh in favor of abstention since, if remand of the entire case were made, the parties would be able to litigate this case in a state court, and no basis for federal jurisdiction exists except the court's bankruptcy jurisdiction. Since the court has determined that this proceeding is a "core proceeding," factor six does not favor abstention.
Factors seven and eight do not weigh in favor of abstention simply because, as stated above, this action is a core proceeding. Although it appears, on the basis of the complaint, that the subject matter of this case fits squarely within the realm of the state court's plenary jurisdiction, the pendency of the bankruptcy proceeding transforms the nature of this case. Since the instant case will ultimately determine what Regal Row must pay to Washington Mutual in reorganization, it will directly affect the pending bankruptcy action.
As for factors nine and ten, it is likely that the bankruptcy court's docket would not be overburdened by this case and it does not appear that Washington Mutual initiated removal proceedings for the improper purpose of forum shopping. Factor eleven, the existence of a right to a jury trial, weighs in favor of abstention to the state court, but does not in itself counsel remand. The plaintiffs filed a jury demand in state court; however, they failed to file a statement under Rule 9027(e)(3) to contest the bankruptcy judge's role in deciding the case. Consequently, the plaintiffs have waived their right to a jury. Factor twelve strongly weighs in favor of removal because the parties to the lawsuit involve the plaintiffs, who are debtors in the related Chapter 11 bankruptcy proceedings, and Washington Mutual, the largest secured creditor of the plaintiffs.
Rule 9027(e)(3) provides that "[a]ny party who has filed a pleading in connection with the removed claim or cause of action, other than the party filing the notice of removal, shall file a statement admitting or denying any allegation in the notice of removal that upon removal of the claim or cause of action the proceeding is core or non-core. If the statement alleges that the proceeding is non-core, it shall state that the party does or does not consent to entry of final orders or judgment by the bankruptcy judge." FED. R. BANKR. P. 9027(e)(3).
Factor thirteen, comity, does not weigh in favor of abstention. Although the plaintiffs initially filed this case — containing exclusively state law claims — in a state court, the case will affect the bankruptcy proceedings. Moreover, given that the only activity that occurred in the state court was the filing of a petition by the plaintiffs and an answer by the defendant, there is no danger that a ruling issued by the bankruptcy court will impair any judgments of the state court. Finally, there has been no showing that any of the parties would be unduly prejudiced should this case proceed in the Northern District of Texas.
Since the permissive abstention factors weigh in favor of retaining jurisdiction over the lawsuit, neither abstention nor equitable remand is appropriate in this case.
C. Motion for Referral to the Bankruptcy Court
This case clearly involves factual determinations that can be most efficiently made by the bankruptcy judge presiding over Regal Row's bankruptcy action. Regal Row is already engaged in proceedings before the bankruptcy court in this district. The bankruptcy court is familiar with the facts underlying this dispute and United States Chief Bankruptcy Judge Felsenthal is in a better position than the undersigned to assess the issues involving the contracts and relationships between the parties. Consolidation of this action and the one before the bankruptcy court is a more prudent use of judicial resources by two courts presiding over different branches of the same litigation. Therefore, pursuant to 28 U.S.C. § 157(a), this court refers this case to the bankruptcy court where Regal Row's chapter 11 action is currently pending.D. Motion for Costs and Expenses
The plaintiffs rely on 28 U.S.C. § 1447(c) as well as Fifth Circuit case law as the basis for awarding the plaintiff costs and expenses incurred in removal proceedings. Plaintiffs' Motion to Remand ¶¶ 5, 7-8; see Avitts v. Amoco Production Company, 111 F.3d 30, 32 (5th Cir.), cert. denied, 522 U.S. 977 (1997). Specifically, the plaintiffs contend that because Washington Mutual's removal of this case was improper, an award of costs and expenses, including attorney's fees to the plaintiffs, is justified. Plaintiffs' Motion to Remand ¶¶ 9-10.
Section 1447(c) provides that "[a]n order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal." 28 U.S.C. § 1447(c). Thus, this provision grants courts the discretion to award costs and expenses incurred in opposing an improper removal action. See id.; Valdes v. Wal-Mart Stores, Inc., 199 F.3d 290, 292 (5th Cir. 2000). Even though the instant case was removed pursuant to § 1452, the specialized bankruptcy removal statute, a district court still retains authority to award attorney fees and costs pursuant to § 1447(c). See Coward v. AC and S, Inc., No. 02-51175, 2004 WL 75425, at *1, 2-3 (5th Cir. Jan. 14, 2004) (holding that a district court is not without power to award attorney fees and costs pursuant to § 1447(c) after a remand has been certified because if § 1447(c) were not applicable, the court would be left hearing cases for which it has no subject matter jurisdiction); see also Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 129 (1995) ("There is no express indication in § 1452 that Congress intended that statute to be the exclusive provision governing removals and remands in bankruptcy.").
Under the standard set forth in § 1447(c), it is apparent that the legal and factual elements present in this case do not support an award of costs and expenses. An award for costs and expenses is within the sound discretion of the court. Valdes, 199 F.3d at 292. The motive for removal should not be the sole concern, but instead, the court should determine whether the defendant had "objectively reasonable" grounds to believe that removal was legally proper. Id. at 293-94. To make such a determination, the court must objectively examine the removing party's actions in light of the legal and factual elements. Id. at 293. Washington Mutual had "objectively reasonable" grounds to believe that removal was a proper course of action. It was reasonable for Washington Mutual to view the state court lawsuit as one falling under the jurisdiction of the bankruptcy courts since it involved the debtor-creditor relationship. Therefore, based on the above facts, the court concludes that the plaintiffs' motion for costs and expenses should be denied.
D. Rule 11 Sanctions
The plaintiffs seek to have sanctions imposed upon Washington Mutual pursuant to Rule 11 of the Federal Rules of Civil Procedure. See Plaintiffs' Motion to Remand ¶¶ IV.11-IV.17. The plaintiffs maintain, as the basis for sanctions, that in an effort to make the removal action appear timely, Washington Mutual has attempted to mislead the court by making false representations and omitting certain facts. Id.
Federal Rule of Civil Procedure 11 provides in relevant part:
(b) Representations to Court. By presenting to the court (whether by signing, filing, submitting, or later advocating) a pleading, written motion, or other paper, an attorney . . . is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, —
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
* * *
(c) Sanctions. If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation.
(1) How Initiated.
(A) By Motion. A motion for sanctions under this rule shall be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision (b). It shall be served as provided in Rule 5, but shall not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected.
* * *
FED R. CIV. P. 11(b)-(c)(1)(a).
In this case, the plaintiffs did not properly follow the procedures set forth in Rule 11(c)(1)(A). The certificate of service attached to the motion indicates that it was served upon Washington Mutual's counsel on June 11, 2004. The motion for remand was then filed with the court that same day. Thus, the plaintiffs did not wait the required 21 days after serving the motion to allow Washington Mutual to withdraw or correct the alleged misrepresentations before filing the motion with the court. Although the plaintiffs transmitted a letter to Washington Mutual on June 9, 2004 to satisfy Local Rule 7.1, they never mentioned their intention to file a request for Rule 11 sanctions. Furthermore, the motion filed by the plaintiffs contained not only their arguments as to why the case should be remanded, but also their arguments for why sanctions are warranted. See generally Plaintiffs' Motion to Remand. The plaintiffs have not complied with Rule 11(c)(1)(A) with respect to the filing of a separate Rule 11 motion. Therefore, the court finds that the plaintiffs' request for the imposition of sanctions should be denied.
In response to the plaintiffs' request, Washington Mutual has moved for sanctions against the plaintiffs for their failure to address the appropriate standard for removal in their briefs. Washington Mutual's Response Brief at 23. Additionally, it argues that the plaintiffs' failure to contest core jurisdiction in a timely manner entitles it to sanctions. Id. Nevertheless, Washington Mutual's motion for sanctions is undercut by the very argument it presents in its response brief in opposition to the plaintiffs' motion for sanctions. See Washington Mutual's Response Brief at 23. Just as the plaintiffs failed to comply with Rule 11(c)(1)(A), Washington Mutual's motion suffers from the same deficiencies and its motion is denied for the same reasons.
III. CONCLUSION
For the reasons discussed above, the plaintiffs' motion to remand is DENIED. This case is REFERRED to the bankruptcy court, pursuant to 28 U.S.C. § 157(a), for consideration by that court in conjunction with the Chapter 11 case, In re Regal Row, Inc., No. 04-33857-SAF-11.
The plaintiffs' motions for attorneys fees and for Rule 11 sanctions are DENIED. Washington Mutual's motion for sanctions is also DENIED.
SO ORDERED.