Opinion
Civil Action No. 3:03-CV-1658-N
March 22, 2004
MEMORANDUM OPINION AND ORDER
Before the Court is Appellants' appeal from two orders of the Bankruptcy Court of the Northern District of Texas, by which the Bankruptcy Court permissively abstained from Appellants' claims against Appellees and refused to allow Appellants to amend their pleadings to assert jurisdiction based on diversity. Because the Court believes that both orders of the Bankruptcy Court are well-supported by Fifth Circuit law and are not abuses of discretion, the Bankruptcy Court's orders are affirmed.
I. BACKGROUND
On October 5, 1998, an involuntary bankruptcy petition was filed against East Texas Healthcare, Inc. ("East Texas") in the United States Bankruptcy Court for the Northern District of Texas. On June 24, 2002, the Chapter 7 Trustee, Diane Reed, filed a First Amended Complaint in Interpleader against State Bank and Trust and Appellants, invoking the Bankruptcy Court's jurisdiction to determine the validity of competing claims to certain funds interpleaded into the registry of the Bankruptcy Court. On November 25, 2002, an Agreed Judgment was entered by the Bankruptcy Court, whereby Appellants were declared to have "first, valid, prior and perfected security interests in and liens on the accounts receivable of . . . Colonial Nursing Center, Inc., including all proceeds and cash collateral derived therefrom." On November 27, 2002, Appellants amended their answer and cross-claim to include claims for turnover against Appellees, who had not previously been parties to any proceeding in the East Texas bankruptcy. The Bankruptcy Court granted Appellees' Motion to Dismiss on March 10, 2003, applying permissive abstention under 28 U.S.C. § 1334(c)(1) because: (1) absent the East Texas bankruptcy case, there would be no federal jurisdiction; (2) the matters raised were wholly dependent on state law; (3) litigation concerning the accounts receivable of Colonial Nursing Center, Inc. had been pending in state court; and (4) comity and respect for state law weighed in favor of abstention. The Bankruptcy Court subsequently denied Appellants' motion to amend, holding that the motion was not timely made and would not have provided a basis to determine that permissive abstention was inappropriate.
II. ANALYSIS A. Permissive Abstention
Appellants claim that the Bankruptcy Court's March 10, 2003 Order must be reversed, because permissive abstention is a narrow doctrine and there are insufficient reasons to decline jurisdiction. The Court disagrees. Permissive abstention is reviewed under an abuse of discretion standard. Clark v. Fitzgibbons, 105 F.3d 1049, 1051 (5th Cir. 1997). On appeal, reversal is not justified if the ruling of the court can be supported on any ground. Bickford v. Int'l Speedway Corp., 654 F.2d 1028, 1031 (5th Cir. 1981). Contrary to Appellants' contention, "[u]nder the `permissive absention' doctrine, 28 U.S.C. § 1334(c)(1), courts have broad discretion to abstain from hearing state law claims whenever appropriate `in the interest of justice, or in the interest of comity with State courts or respect for State law.'" Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195, 1206 (5th Cir. 1996) (citations omitted); see also Wood v. Wood (In re Wood), 825 F.2d 90, 93 (5th Cir. 1987) (interpreting Bankruptcy Act to provide district courts "broad power to abstain whenever appropriate `in the interest of justice, or in the interest of comity with State courts or respect for State law.'").
Appellants cite no authority for their argument that a bankruptcy court is without power to exercise permissive abstention, and such contention is not supported by Fifth Circuit law. See In Re Gober, 100 F.3d at 1207 (affirming bankruptcy court's use of permissive abstention and district court's subsequent affirmation).
Bankruptcy and district courts are free to consider a number of factors when determining whether permissive abstention is appropriate under Section 1334; for example, the much-cited case of In re Republic Reader's Service discusses five factors relevant to discretionary abstention: "(1) the existence of two closely related proceedings based upon state law or a state law cause of action, (2) the absence of any basis for jurisdiction other than section 1334, (3) the likelihood that the proceeding can be timely adjudicated in a state forum[,] (4) the extent to which state law issues predominate, and (5) the degree of relatedness the proceeding has to the bankruptcy case." Republic Reader's Serv., Inc. v. Magazine Serv. Bureau, Inc. ( In re Republic Reader's Serv., Inc.), 81 B.R. 422, 428 (Bankr. S.D. Tex. 1987). Twelve considerations are considered by the district court in In re Richmond Tank Car. Richmond Tank Car Co. v. CTC Investments ( In re Richmond Tank Car Co.), 119 B.R. 124, 126 (S.D. Tex. 1989). The bankruptcy court is not required to address each factor discussed in Richmond Tank Car, indeed, in Gober, the bankruptcy court's grant of permissive abstention and the district court's order affirming such grant were affirmed by the Fifth Circuit despite the fact that "neither the bankruptcy court nor the district court offered any rationale for abstention in its [written] judgment." In re Gober, 100 F.3d at 1207. Furthermore, permissive abstention may be warranted even though some of the Richmond Tank Car and Republic Reader's Service factors are absent. See Flores v. Baldwin, No. 3:01-CV-2873-P, 2002 WL 1118504, at *6-7 (N.D. Tex. May 28, 2002) (applying permissive abstention despite fact that not all Republic Reader's Service factors were present).
Those considerations are: (1) the administrative effect on the estate in the event of a bankruptcy court recommendation of abstention; (2) the extent to which state law issues predominate over bankruptcy issues; (3) the difficulty or unsettled nature of applicable state law; (4) the existence of any related proceedings; (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334; (6) the degree of relatedness of the proceeding to the main bankruptcy case; (7) the substance rather than the form of an asserted core proceeding; (8) the feasibility of state claim severance from core bankruptcy matters; (9) the present docket burden in the Bankruptcy Court; (10) the likelihood of forum shopping by one party; (11) the existence of the right to a jury trial by either party; and (12) the presence of nondebtor parties in the proceeding. In re Richmond Tank Car Co., 119 B.R. at 126.
In the instant matter, the Bankruptcy Court clearly considered a number of factors when applying discretionary abstention, and set forth a well-reasoned order which granted Appellees' motion to abstain. The Bankruptcy Court held, in part, that:
Absent a bankruptcy case, there would be no federal jurisdiction over the Noteholders' actions to pursue their alleged collateral from the defendants. Without the trustee asserting an action under § 542(a), there is no remedy established by the Bankruptcy Code. The amended cross-complaint raises matters determined by state law. The amended cross-complaint does not invoke a substantive right created by federal bankruptcy law. Litigation had been pending in state court, in which the Noteholders had sought to intervene. Presumably, with the resolution of the bankruptcy issues by settlement and the agreed judgment with State Bank, the Noteholders could renew their intervention efforts. The settlement agreement itself recognizes that the Noteholders may pursue their claims regarding the Missouri nursing homes in state court in Missouri.Reed v. State Bank Trust (In re East Texas Healthcare, Inc.), Adversary No. 02-3218, slip op. at 8 (Bankr. N.D. Tex. Mar. 10, 2003). In short, the Bankruptcy Court held that Appellants' cross-claim was a state law matter between two non-debtors, the resolution of which would not impact the bankruptcy estate and would be better accomplished in a Missouri proceeding. Although the Bankruptcy Court did not address each of the twelve Richmond Tank Car factors briefed and argued by the parties, the court was well within its discretion to grant permissive abstention. Accordingly, the March 10, 2003 Order is affirmed.
B. Motion to Amend
Appellants further allege that the Bankruptcy Court's May 6, 2003 Order Denying Motions to Reconsider and For Leave to Amend must be overruled as an abuse of discretion. The Court disagrees. It is well-settled that a decision to grant leave to amend is within the discretion of the trial court, and the court's denial of such motion is reviewed under an abuse of discretion standard. Southmark v. Schulte Roth Zabel ( In re Southmark), 88 F.3d 311, 314 (5th Cir. 1996). In deciding whether to grant such leave, "the court may consider such factors as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility of amendment." Id. at 314-15 (citing Foman v. Davis, 371 U.S. 178, 182 (1962)).
In the instant matter, the Bankruptcy Court held that Appellants' "effort to amend their pleadings to bolster their bankruptcy jurisdiction claims comes too late and is of no avail." Reed v. State Bank Trust ( In re East Texas Healthcare, Inc.) Adversary No. 02-3218, slip. op. at 3 (Bankr. N.D. Tex. May 6, 2003). The Bankruptcy Court explained that the motion to amend, interposed after entry of the March 10, 2003 Order, was untimely, stating the "motion to amend the pleadings after the entry of an order adjudicating a motion to dismiss with an alternative request to abstain is untimely and need not be considered by the court." Id. (citing In re Southmark, 88 F.3d at 314-15). At a bankruptcy court hearing on January 29, 2002, Appellants argued that diversity jurisdiction was a factor for the Bankruptcy Court to consider when determining abstention; however, Appellants' motion to amend was delayed until April 21, 2003 — twelve weeks after the hearing and six weeks after the Bankruptcy Court rejected their argument.
In addition, the Bankruptcy Court noted that diversity jurisdiction would not have affected its determination that permissive abstention was warranted. Unlike Whitmire v. Victus Ltd. T/A Master Design Furniture, 212 F.3d 885, 887 (5th Cir. 2000), the instant matter was not dismissed for lack of jurisdiction; instead, the Bankruptcy Court held that it had jurisdiction over the adversary proceeding but declined to hear the case out of comity and respect for state law. The Bankruptcy Court explained, "Congress has not chartered this court and the presiding judge of this court has not been vested with the constitutional authority to entertain litigation premised on diversity jurisdiction." In re East Texas Healthcare, Inc., Adversary No. 02-3218, slip. op. at 3. In short, an allegation of diversity jurisdiction would not have affected the Bankruptcy Court's determination on permissive abstention, nor required the Bankruptcy Court to exercise jurisdiction over the matter. Accordingly, the Bankruptcy Court's determination was not an abuse of discretion and is therefore affirmed.
CONCLUSION
Because the Bankruptcy Court's application of permissive abstention under 28 U.S.C. § 1334 (c)(1) and denial of Appellant's Motion to Amend are well-supported by Fifth Circuit law, and because the March 10, 2003 and May 6, 2003 Orders did not constitute abuses of discretion, the Bankruptcy Court's orders are affirmed.