Opinion
06 Civ. 2414 (CM).
June 19, 2006
DECISION AND ORDER GRANTING MOTION TO WITHDRAW REFERENCE AND REMANDING CASE TO THE NEW YORK STATE SUPREME COURT
This is an action for breach of contract (goods sold and delivered), breach of guaranty, account stated and quantum meruit, filed in August 2002 by the supplier of fuel oil against its customer and the customer's president as guarantor. The claims arise exclusively under New York State law, and there being no diversity of citizenship, the suit was filed in Supreme Court, Westchester County.
So what is it doing in a federal court?
Twice since the filing of this action — shortly after the filing of the complaint and again in September 2005 — defendant Veronica Daniels (the President of Community Fuel Oil Company) has filed voluntary petitions with the United States Bankruptcy Court for the Southern District of New York. Those petitions have had the effect of staying prosecution of this action as against Daniels.
In both bankruptcy actions, plaintiff filed proofs of claim. In the first proceeding, plaintiff also filed a limited objection to the confirmation of Debtor's filed Chapter 13 plan. Debtor sought to reduce or expunge the first proof of claim, but before that matter could be adjudicated, Daniels filed motion to dismiss her petition, which was granted in July 2003. Subsequent to the dismissal of her bankruptcy proceeding, Daniels (and her corporation) filed counterclaims in the New York State Supreme Court, all of which also arise under state law (and some of which appear meritless as a matter of law, such as a claim for breach of contract that is pleaded in fraud or one for intentional infliction of emotional distress). It does not appear, however, that plaintiff pressed the state court action; indeed, it seems that no reply to the counterclaims was filed until September 2005. That filing, and a motion for summary judgment, appear to have triggered a second voluntary petition in bankruptcy by Daniels (a/k/a the corporation), which led to a stay of this action against Daniels and the filing of a second proof of claim against Daniels. She objected to the proof of claim, thereby initiating a contested matter under Fed.R.Bankr.P. Rule 9014. Daniels' objection to West Vernon's claim was no different than her answer and counterclaims as filed in the State Supreme Court. Indeed, she affirmatively alleged that West Vernon's breach of contract (which had allegedly taken place many years previously) was the reason why she filed for bankruptcy protection in 2005.
Plaintiff responded to the objection and sought a prompt adjudication on the merits of the allowability of its second proof of claim. The hearing on the motion to expunge the claim was held on March 28, 2006.
At the hearing, plaintiff told the Bankruptcy Court that it was concerned Daniels would try the same trick — discontinuing her bankruptcy case — prior to a determination of West Vernon's claim on the merits. Counsel indicated that he intended to remove the state court action to this court as a core proceeding (which it clearly is). Anticipating a voluntary dismissal, plaintiff asked the Bankruptcy Court to retain jurisdiction over the matter in the event the underlying bankruptcy was dismissed. Judge Hardin entered just such an order on that same day, and West Vernon promptly removed the action to federal court. This court referred the matter to the Bankruptcy Court on March 29, 2006. It was assigned Adversary Proceeding No. 06-8274 and was consolidated for all purposes with the pending contested matter.
In his scheduling order, Judge Hardin specifically provided that he would retain jurisdiction over the Adversary Proceeding if Daniels' bankruptcy case was dismissed.
On April 18, 2006, Daniels' second bankruptcy case was dismissed on her motion.
Daniels and her corporation now seek withdrawal of the reference of Adversary Proceeding No. 06-8274 and remand of the action to the New York State Supreme Court (where, presumably, the motion for summary judgment, already filed, would be adjudicated). It argues that, since there is no bankruptcy proceeding pending, the only basis for federal jurisdiction — "related to" jurisdiction under the Bankruptcy laws — has disappeared, so Judge Hardin lacks the power to retain the case.
West Vernon opposes the application. It urges that Judge Hardin specifically reserved jurisdiction in order to prevent further abuse of the bankruptcy system by Daniels — abuse designed to prevent adjudication of West Vernon's claims.
Discussion
There is absolutely no question that the State case was properly removed to this court. The proceeding concerning determination of West Vernon's proof of claim, Daniels' objection thereto and her counterclaims against West Vernon, are "core proceedings" under 28 U.S.C. § 157(b)(2)(B) and (C). The removed Adversary Proceeding was "related to" those "core proceedings" — indeed, it was identical to them in all respects — and it was properly brought to this Court, and sent on to Judge Hardin.See Cal Pub. Employees' Ret. Sys v. WorldCom, Inc., 368 F.3d 86, 90 (2d Cir. 2004); see also 28 U.S.C. § 1452. If, as the Second Circuit ruled in In re Porges, 44 F.3d 159 (2d Cir. 1995), a bankruptcy court has discretion to retain jurisdiction, then dismissal of the underlying bankruptcy does not divest the court of jurisdiction that attached solely by virtue of the bankruptcy filing. Perhaps it should — but as a matter of law it does not.And while two similar occurrences do not automatically make out a pattern, I have little doubt that Daniels is abusing the jurisdiction of the Bankruptcy Court in an effort to thwart litigation of West Vernon's lawsuit against her and her corporation. Indeed, on this record, the inference is inescapable. So I can well understand the learned Bankruptcy Judge's desire to frustrate Daniels' effort to frustrate West Vernon's absolute right to have its claims adjudicated.
However, the Second Circuit, like many of its sister circuits, has adopted "the general rule that related proceedings ordinarily should be dismissed following the termination of the underlying bankruptcy case." Id. at 162-63 (2d Cir. 1995). The Circuit adopted this rule "because a bankruptcy court's jurisdiction over such related proceedings depends on the proceedings' nexus to the underlying bankruptcy case." Id.
The Court of Appeals did, however, say that a bankruptcy court could, in its discretion, retain jurisdiction over an adversary proceeding after dismissal of the underlying bankruptcy, because, "Nothing in the Bankruptcy Code requires a bankruptcy court to dismiss related proceedings automatically following the termination of the underlying case. . . . Indeed, section 349 of the Bankruptcy Code authorizes bankruptcy courts to alter the normal effects of the dismissal of a bankruptcy case if cause is shown." Id., citing In re Querner, 7 F. 3d 1199, 1201-02 (5th Cir. 1993) [and other cases].
The question, then, is whether Judge Hardin abused his discretion by retaining the removed case after dismissal of the underlying bankruptcy, or whether he should have followed the general rule, and let the matter be adjudicated in state court.
If, as the Second Circuit ruled in Porges, a bankruptcy court has discretion to retain jurisdiction, then dismissal of the underlying bankruptcy does not divest the court of jurisdiction that attached solely by virtue of the bankruptcy filing. Perhaps it should — but as a matter of law it does not.
The issue is whether this court ought to exercise that jurisdiction when the factor that created jurisdiction — the underlying bankruptcy — no longer exists. In the circumstances here presented, it was an abuse of the Bankruptcy Court's discretion to retain the case.
We start from the proposition that, because federal jurisdiction is limited and cannot be manufactured, a bankruptcy court ought to exercise its discretion to retain an adversary proceeding after dismissal of a bankruptcy sparingly. InPorges, the Second Circuit identified four factors that should be considered in connection with such a decision: judicial economy, convenience to the parties, fairness and comity. 44 F. 3d at 163.
In this particular case, none of the four factors counsels retaining jurisdiction over the adversary proceeding.
Judicial economy — the basis for Porges, In re Roma Group, 137 B.R. 148 (Bankr. S.D.N.Y. 1992), and Morris, 950 F.2d 1531 (2d Cir. 1992) — is not implicated here. The Bankruptcy Court had the removed case on its docket for less than three weeks. In both the removed case and the contested claim matter, the court had done nothing more than issue a scheduling order. This is not likePorges, where the bankruptcy court had conducted a trial and the merits were sub judice when the bankruptcy was dismissed. Nor is it like Morris, where the parties had already been at trial for four days and were more than halfway done with the trial. And it is not like In re Gregory, 214 B.R. 570 (S.D. Tex. 1997), where the bankruptcy court retained jurisdiction over the net proceeds from the sale of the homestead that was sold prior to the dismissal of the bankruptcy case.
It is not that the state court has been heavily involved in this contract dispute since its inception almost four years ago. Indeed, between bankruptcy-related stays and the parties failure to press the case in state court (or to seek more active judicial supervision), it appears that almost nothing has happened in the court where the action was filed. But the fact that this dispute was at a preliminary stage of litigation in the Bankruptcy Court — as a practical matter, only the pleadings or their equivalent had been filed — means that the federal courts have nothing invested in the resolution of this dispute. So judicial economy does not augur for retention.
Convenience of the parties is of no relevance. Whether the parties litigate this case at 300 Quarropas Street or in the Daronco Court House one block to the north will make not the slightest difference to their convenience.
Comity favors remand. It is the proper function of the state courts to adjudicate state law claims where diversity of citizenship is lacking. This is not a case where the federal court would, by retaining the case, deprive the state judge "of opportunities to develop and apply state law." Young v. New York City Transit Company, 903 F. 2d 146, 164 (2d Cir. 1990). No momentous or groundbreaking issue of state law is at issue here: the only issue for determination is whether West Vernon delivered fuel oil for which is was not paid or whether it failed to deliver fuel oil to Community Fuel Oil and Daniels. However, that is quintessentially a matter for the state courts — so much so that, but for Daniels' decision to file for bankruptcy, this court would not be permitted to adjudicate it.
This leaves but one factor to consider — fairness — and there is little question that it was a sense of fair play that underlay the Bankruptcy Court's order.
Judge Hardin's conclusion that Daniels was using the bankruptcy court as a litigation weapon can hardly be questioned. It is the conclusion I would have reached on the same record. What the learned Bankruptcy Judge did, however, was in effect to sanction Daniels for her misuse of the bankruptcy process, and the limited resources of the Bankruptcy Court, by forcing her to litigate the state law claims there. In the circumstances, it was an abuse of discretion to impose that particular sanction.
"Article III's limits on federal jurisdiction are designed not only to prevent federal courts from assessing the merits of certain disputes, but to prevent federal courts from interfering-through such assessments or otherwise — with the jurisdiction of state courts over certain cases . . . that do not implicate federal interests." Hernandez v. Conriv Realty Assocs., 182 F.3d 121, 123 (2d Cir. 1999). Retaining a case over which no independent jurisdiction could be asserted, when virtually no judicial resources have been expended on the matter and no one would be inconvenienced by sending the matter to state court, as a means of preventing abuse of the bankruptcy process, is inappropriate. The imposition of other sanctions — monetary penalties on Daniels and her lawyer, for example, — would send the same message without inserting a federal court into a lawsuit that, in the ordinary course, it has no power to decide.
Also, assuming she clears the summary judgment hurdle, Daniels has a constitutional right to a jury trial. I have reviewed the cases cited by West Vernon's counsel, which stand for the proposition that a party who files for bankruptcy and brings an adversary proceeding in bankruptcy court waives his right to have a jury try what would otherwise be a jury-triable issue. See Langenkamp v. Culp, 498 U.S. 42 (1990). Nothing in those cases suggests that depriving a party of her right to a jury trial is an appropriate way to punish her for abusing the jurisdiction of the bankruptcy court — even though she would have had no right to a jury trial if the issue had been adjudicated in the Bankruptcy Court.
Finally, there is little or no indication on this record that it would be fundamentally unfair to remand West Vernon's lawsuit back to the court where it was originally filed. Last September West Vernon made a motion for summary judgment. Assuming that Daniels would have sought an adjournment or two prior to responding to the motion (which would have been granted), and that West Vernon would have adjourned its reply date at least once, it is not likely that the motion would have been fully briefed until the end of the 2005 calendar year, and probably not adjudicate until sometime between March 1 of this year and today. While West Vernon has lost some time as a result of Daniels' second filing in bankruptcy, that loss can be measured in a matter of months. If West Vernon had any interest in pushing the case, it could have done so between July 2003 and September 2005, when no bankruptcy stay prevented it from moving the matter along. I see no indication in the record that West Vernon took any steps during that period to get the matter adjudicated during that 26 month window.
For these reasons, I grant the motion to withdraw the reference and, having done so, I remand this matter to the New York State Supreme Court.
While the present record argues for removal, I emphasize that neither Daniels nor any other business person should expect that the federal courts will permit endless abuse of the bankruptcy process. There comes a point when Porges discretion is appropriately exercised — even if the Bankruptcy Court has expended little time on a removed matter. Daniels would do well to take that into account before trying this maneuver again.
The Clerk of the Court is directed to return the file in this matter to the Clerk of the New York State Supreme Court in and for the County of Westchester, and to close this matter on the court's docket.