Opinion
CIVIL ACTION NO. SA-98-CA-0926 OG
September 8, 1999.
MEMORANDUM AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
TO: Honorable Orlando Garcia, United States District Judge
Before the court is plaintiffs' motion to dismiss certain claims, filed in response to this court's show cause order issued on August 10, 1999, plaintiffs' supplemental motion to remand, and defendants' motion for referral to the bankruptcy court. I have jurisdiction to enter this Memorandum and Recommendation under 28 U.S.C. § 636(b) and the District Court's Order referring all pretrial matters in this proceeding to me for disposition by order or to aid in their disposition by recommendation where my authority as a Magistrate Judge is statutorily constrained. Factual and Procedural Background
Docket Entry No. 98.
Docket Entry No. 93.
Docket Entry No. 99. See also Docket Entry No. 29, plaintiffs' motion for remand to the state district court.
Docket Entry No. 33.
This lawsuit alleges that Plaintiffs suffered damages due to the defendants' delay of the plaintiffs' attempts to procure financing for an apartment complex. Plaintiffs filed suit in state court in Bexar County, Texas on August 27, 1998 alleging breach of contract, negligence, fraud, breach of fiduciary duty, unlawful retaliation, conflict of interest, breach of the covenant of good faith and fair dealing, gross negligence, tortious interference with contract, and conspiracy. Alternatively, plaintiffs pleaded causes of action for unlawful discrimination under 42 U.S.C. § 1983 and 28 U.S.C. § 2201, 2202 alleging civil rights violations. The defendants timely removed the action to federal court on October 2, 1998. Defendants removed the action pursuant to § 1441(b) based upon federal question jurisdiction.
Docket Entry No. 1, Exhibit A, Plaintiffs' Original Petition, ¶ VI-XV.
Docket Entry No. 1, Exhibit A, Plaintiffs' Original Petition, ¶¶ XVI-XVII.
Docket Entry No. 1.
One of the plaintiffs in this action, W.W. San Antonio Investments, L.P., previously filed for protection under Chapter 11 after becoming insolvent. The final decree of the bankruptcy proceedings was entered December 4, 1997 and the case was closed the following day. The confirmed reorganization plan provided that 100% of the creditors' claims would be repaid. W.W. San Antonio Investments, L.P. was the only plaintiff in the instant action involved in those bankruptcy proceedings. Additionally, the City of San Antonio was the only defendant in the present lawsuit who was a creditor in those same proceedings.
Docket Entry No. 33, ¶ 2.
Docket Entry No. 33, ¶ 4.
Docket Entry No. 41, § I, ¶ 2.
Plaintiffs moved to remand this action to the state court where the suit was initially filed. The defendants filed a joint motion to refer the entire case to the bankruptcy court. While these motions were pending, plaintiffs filed a motion for leave to amend their complaint subject to their pending motion to remand. In the motion to amend, plaintiffs attempted to add several new causes of action and dropped the federal causes of action upon which the removal from state court had been premised. I denied the motion to amend as untimely. However, because plaintiffs apparently did not wish to proceed with their federal claims, I ordered the parties to show cause why I should not recommend to Judge Garcia that this case, consisting entirely of state law claims, be remanded to state court.
Docket Entry No. 29.
Docket Entry No. 33.
Docket Entry No. 68.
See Docket Entry No. 93.
Plaintiffs responded to the show cause order by filing a motion to dismiss their federal claims and a supplemental motion to remand. In their response to the show cause order, defendants argue that this case should not be remanded to state court, but should be referred to the bankruptcy court and that this court should exercise its discretion and retain jurisdiction over the pendent state law claims.
Docket Entry Nos. 98 and 99.
I do not believe that supplemental jurisdiction should be exercised over these state law claims since plaintiffs have abandoned their federal causes of action. Additionally, I do not believe that referral to the bankruptcy court is appropriate. Accordingly, I recommend that the case be remanded to state court.
Discussion
Defendants oppose remand and argue that the court should refer this case to the bankruptcy court and exercise its discretion and retain jurisdiction over the remaining state law claims.
Remand to the State District Court
Defendants bear the burden of establishing a basis for federal jurisdiction of a removed case. Principles of federalism demand strict construction of the removal statutes and a defendant's right to remove is strictly construed against removal. A civil action filed in a state court may be removed to federal court if the district court would have had original jurisdiction over the plaintiffs claim and the cause of action arises under federal law. Absent jurisdiction based upon diversity of citizenship, an action is removable to federal court if it arises "under the Constitution, laws or treaties of the United States." However, a mere reference to a federal statute will not establish federal jurisdiction. A "substantial, disputed question of federal law is a necessary element of one of the [plaintiffs] well-pleaded state claims."
Jernigan v. Ashland Oil. Inc., 989 F.2d 812, 815 (5th Cir. 1993), cert. denied, 510 U.S. 868 (1993); Dodson v. Spiliada Maritime Corp ., 951 F.2d 40, 42 (5th Cir. 1992) (removing party bears the burden of demonstrating that the court has jurisdiction to hear the claim); B., Inc. v. Miller Brewing Co ., 663 F.2d 545, 549 (5th Cir. 1981).
Shamrock Oil Gas Corp. v. Sheets , 313 U.S. 100, 108-09 (1941).
Merrell Dow Pharmaceuticals. Inc. v. Thompson , 478 U.S. 804, 813 (1986).
Franchise Tax Bd. of Cal. v. Constr. Laborers Vacation Trust for S. Cal ., 463 U.S. 1, 13 (1983).
The presence or absence of federal question jurisdiction is controlled by the "well-pleaded complaint rule." Federal jurisdiction exists only when a federal question is presented on the face of the plaintiffs properly pleaded complaint. Plaintiffs as masters of their claim may avoid federal jurisdiction by relying exclusively on state law. A case may not be removed to federal court premised on a federal defense, including the defense of preemption. The sole exception to the rule of non-removability based on a defendant's claim of a federal defense is when an area of state law has been so completely invaded by federal law that Congress has manifested its intent to completely preempt the particular field of law.
Caterpillar Inc. v. Williams , 482 U.S. 386, 392 (1987) (citing Gully v. First National Bank , 299 U.S. 109, 112-13 (1936)).
Id .
Caterpillar, Inc. v. Williams , 482 U.S. 386, 392 (1987).
Franchise Tax Bd. of Cal. v. Constr. Laborers Vacation Trust for S. Cal ., 463 U.S. 1, 10-11(1983).
See Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 64 (1987).
The court has supplemental jurisdiction over all state claims in an action that are so related to the federal claims that "they form part of the same case or controversy." However, the district court may decline to exercise supplemental jurisdiction over state law claims in the event that all federal claims are dismissed or otherwise eliminated from a case. Several factors for the court to consider in determining whether it should exercise its discretion and dismiss or retain the remaining state law claims are listed in 28 U.S.C. § 1367(c). Additionally, the court should consider the factors of economy, convenience, fairness, and comity. The general rule in the Fifth Circuit is to decline to exercise jurisdiction over pendent state law claims when all federal claims have either been dismissed or otherwise eliminated from a case prior to trial. However, this rule is not absolute nor mandatory. The district court must consider all factors, and "no single factor is dispositive in this analysis.
The district court may decline to exercise supplemental jurisdiction over a claim under subsection (a) if —
(1) the claim raises a novel or complex issue of State law,
(2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction, or
(3) the district court has dismissed all claims over which it has original jurisdiction, or
(4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.28 U.S.C. § 1367(c).
Dowdy v. Oxy USA. Inc ., 101 F.3d 448, 456 (5th Cir. 1996) (citing Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 357 (1988)).
Batiste v. Island Records, Inc., 179 F.3d 217, 227 (5th Cir. 1999). See also Carnegie-Mellon Univ. v. Cohill , 484 U.S. at 350 n. 7; United Mine Worker v. Gibbs , 383 U.S. 715, 726 (1966) ("decisions of state law should be avoided both as a matter of comity and to promote justice between the parties, by procuring for them a surer-footed reading of applicable law").
Batiste , 179 F.3d at 227.
Id. (quoting McClelland v. Gronwaldt , 155 F.3d 507, 519 (5th Cir. 1998)).
When defendants removed this case from state court, they asserted federal question jurisdiction as the sole basis for invoking this court's subject matter jurisdiction. Plaintiffs' complaint alleged a variety of causes of action arising under state law. However, plaintiffs also alternatively pleaded two federal claims under § 1983 alleging civil rights discrimination. But plaintiffs have now moved to dismiss their federal claims, thereby proceeding with their state law claims only. As masters of their claims, plaintiffs have the right to abandon their federal claims. Since only plaintiffs' state law claims remain, they have also now moved to remand this case to state court.
In the case at hand the factors weigh heavily in favor of remand. The state law claims are numerous and predominate over the two federal claims which plaintiffs no longer wish to pursue. Furthermore, while the trial date will be postponed, the waste of resources should not be great. The parties have spent a sizable sum of money and time preparing this case here in federal court, but much of the discovery and other work product prepared to date may be used in state court proceedings. And unlike the Batiste case cited by the defendants, this case has not yet consumed significant judicial resources. The court has yet to address any of the merits of the plaintiffs' claims.
Batiste v. Island Records, Inc., 179 F.3d at 227-28 (case had been pending over three years and the court was familiar with the merits of the case since it had already ruled on multiple motions to dismiss claims or for summary judgment).
This case has been pending for almost a year, and is scheduled for trial in a month, but the three motions for summary judgment which were filed on August 13, 1999 have not yet been addressed by the court. See Docket Entry Nos. 94-96.
In light of plaintiffs' choice to not pursue their federal claims, I recommend that remand of the remaining state law claims is appropriate.
Referral to the Bankruptcy Court 28 U.S.C. § 1334 confers subject matter jurisdiction of bankruptcy matters upon the district courts. The section provides that the district courts shall have original and exclusive jurisdiction of all cases "under" Title II of the U.S. Code. Furthermore, the district 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." If subject matter jurisdiction exists under § 1334, the district court may refer a case to the bankruptcy court for the district.
Bankruptcy courts have the power to adjudicate cases referred from the district court if the case arises under Title 11 or is a core proceeding. If the proceeding is found to be non-core, the bankruptcy court may hear the proceeding, but lacks the power to enter any final order or judgment and is required to submit proposed findings of fact and conclusions of law to the district court for a de novo review and entry of the order or judgment.
The defendants jointly moved for this court to refer the case to the bankruptcy court for complete adjudication. They renewed their arguments in response to the court's show cause order of August 10, 1999 and urge that plaintiffs' state law claims should properly be handled by the bankruptcy court. Defendants claim that this lawsuit is a core proceeding since it involves matters concerning the administration of the estate, confirmation of plans, and "other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship."
See 28 U.S.C. § 157(b)(2)(A), (L), (O).
It is clear that the instant case is "related to" a Title II case because the claims of W.W. San Antonio Investments, one of the plaintiffs in the instant action, may be pre-petition claims which were not previously administered by the bankruptcy court. Furthermore, the plan approved by the bankruptcy court involved a mutual release in which plaintiffs Sarah Geltman, Peter Geltman, and W.W. San Antonio Investments agreed to release defendant City of San Antonio from any liability arising from the underlying financial transaction. These two facts relate the present case to the Title 11 proceeding because, as the Fifth Circuit has stated, "[a]n 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."
Plaintiffs have argued that none of the claims matured prior to the filing of the bankruptcy petition because they were discovered post-petition and are, therefore, not pre-petition claims. See Docket Entry No. 41, ¶ 9. However, a cause of action in Texas accrues "when the wrongful act effects an injury, regardless of when the plaintiff learned of such injury." Moreno v. Sterling Drug. Inc., 787 S.W.2d 348, 351 (Tex. 1990). The application of the discovery rule simply tolls the running of the period of limitations. Id .
See Docket Entry No. 33, Exhibit A, Mutual Release and Settlement Agreement.
In re Walker , 51 F.3d 562, 569 (5th Cir. 1995) (citations omitted). But see In re Transamerican Natural Gas Corp., 127 B.R. 800, 803 (S.D. Tex. 1991) ("The mere potential of a claim to increase or decrease the pool of funds available to a debtor, without more, is insufficient to create bankruptcy jurisdiction.").
While it is clear that the instant case is "related to" a Title 11 case, it is not clear that the entire case now before the court is a core proceeding. Defendants argue that the release and the prepetition claims establish that this lawsuit is a core proceeding. While it is true that the interpretation of the extent of the release lies within the power of the bankruptcy court, it does not follow that the bankruptcy court has the power to adjudicate the state law claims which arise outside of bankruptcy law. Judge Clark, who would handle this case if referred to the bankruptcy court, has recently held that "A matter is `core' if it involves a substantive right solely created by the federal bankruptcy law or could not exist outside of bankruptcy." Under this definition, the lawsuit now before this court is neither, and is, therefore, not a core proceeding.
Nielsen v. Specialty Equipment Cos., Inc., 3 F.3d 1043, 1045 (7th Cir. 1993) ("[A] bankruptcy court does have the power to determine the legality of provisions including releases incorporated into a reorganization plan.").
In re Wright, 231 B.R. 597, 599 (Bankr. W.D. Tex. 1999).
Even if this case is deemed a core proceeding, many factors weigh against this court's exercise of its discretion in referring this case to the bankruptcy court. First, many of the parties in the instant case had nothing to do with the previous bankruptcy proceedings. It is doubtful that the bankruptcy court would have supplemental jurisdiction to hear those claims which are in no way associated with the Title 11 proceeding. This would require the bankruptcy court to submit its findings of facts and conclusions of law on those claims back to the district court for a de novo review. Additionally, the state court is the more appropriate forum to conduct a trial on these claims, none of which substantively fall under bankruptcy or federal law.
The U.S. Code states that the district court may refer a case involving core or non-core proceedings to the bankruptcy court; the district court's referral is discretionary and not mandatory. Because I find the lawsuit before this court to be a non-core proceeding and the bankruptcy court not the most appropriate forum to adjudicate these state law matters, I recommend that the case be remanded to the state court.
See 28 U.S.C. § 157 (a).
Recommendation
Based upon the reasons listed above, I recommend that the district court exercise its discretion and:
1. GRANT plaintiffs' motion to dismiss certain claims;
2. GRANT plaintiffs' supplemental motion to remand; and
3. DENY defendants' motion for referral to the bankruptcy court.
Instructions For Service and Notice of Right To Appeal/Object
The United States District Clerk shall serve a copy of this Memorandum and Recommendation on all parties either (1) by certified mail, return receipt requested, or (2) by facsimile if authorization to do so is on file with the Clerk. Under 28 U.S.C. § 636 (b)(1), and Rule 4(b) of the Local Rules for the Assignment of Duties to United States Magistrates (Appendix C to the Local Court Rules for the Western District of Texas), any party who desires to object to this report must file written objections to the Memorandum and Recommendation with the Clerk of this Court, and serve the Magistrate Judge and all parties, within ten (10) days after being served with a copy of this Memorandum and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. A party's failure to file written objections to the proposed factual findings, legal conclusions, and recommendations contained in this report shall bar the party from a de novo determination by the District Court. Additionally, any failure to file written objections to the proposed findings, conclusions, and recommendations contained in this report within ten (10) days after being served, shall bar the aggrieved party from appealing the factual findings and legal conclusions that are accepted by the District Court, except on grounds of plain error.
United States v. Wilson, 864 F.2d 1219, 1221 (5th Cir. 1989),cert. denied, 492 U.S. 918 (1989).
Battle v. U.S. Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
Thomas v. Arn, 474 U.S. 140, 150-55 (1985); United States v. Raddatz, 447 U.S. 667, 673-76 (1980); 28 U.S.C. § 636(b)(1).
Douglass v. United Serv. Auto. Ass's , 79 F.3d 1415 (5th Cir. 1996).