Opinion
No. 04-1041 MMC. Bankruptcy No. 00-41584 N. Adversary No. 03-4240 AN.
June 29, 2004
DECISION VACATING BANKRUPTCY COURT'S ORDER GRANTING PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION; REMANDING FOR FURTHER PROCEEDINGS
Before the Court is the appeal, filed by defendants Fort James Corporation, Fort James Operating Company, Fort James Fiber Company, Fort James International Holdings Ltd. and McGuire Woods LLP, from the November 5, 2003 order of the bankruptcy court granting the motion for a preliminary injunction, filed by plaintiffs Jeffrey H. Beck ("Beck" or "Liquidating Trustee") and Crown Paper Liquidating Trust, by which order defendants herein are enjoined from prosecuting an action filed in Delaware state court, specifically, Fort James Corp., et al., v. Beck, et al., Civil Action No. 19972-NC (the "Delaware Action"). Having reviewed the briefs filed by the parties, the Court rules as follows.
Defendants' request for oral argument is DENIED.
1. The bankruptcy court did not err in finding plaintiffs have a reasonable likelihood of success in establishing that plaintiffs are entitled to seek relief from defendants' prosecution of the Delaware Action, by which action defendants seek to enjoin plaintiffs from prosecuting claims against defendants and others. See Leonard v. Vrooman, 383 F.2d 556, 560 (9th Cir. 1967) (holding trustee "not subject to suit without leave of the appointing court for acts done in his official capacity and within his authority as an officer of the [bankruptcy] [c]ourt"); Pls.' Mot. for Prelim. Inj. Ex. 1 at 7, Ex. A attached to Ex. 1 (bankruptcy court's Confirmation Order identifying Beck as person to be appointed "Liquidating Trustee" and to whom bankruptcy court granted authority to prosecute debtors' claims against defendants).
In the Confirmation Order, the bankruptcy court retained jurisdiction over "all issues relating to the recovery of Assets of the Debtors and property of the Estates, wherever located, including any Causes of Action." (See Pls.' Mot. for Prelim. Inj. Ex. 1 (Ex. C, attached to Ex. 1, at 71).)
2. The bankruptcy court did not err in finding plaintiffs have a reasonable likelihood of success in establishing that 28 U.S.C. § 959(a), which provides that trustees may be sued "without leave of court appointing them, with respect to any of their acts or transactions in carrying on business connected with [the debtors'] property," see 28 U.S.C. § 959(a), is inapplicable to the Delaware Action. See Read v. Duck (In re Jacksen), 105 B.R. 542, 545 (B.A.P. 9th Cir. 1989) (holding trustee's prosecution of debtors' claim not "carrying on business" within meaning of § 959(a)).
3. The bankruptcy court did not err in finding plaintiffs have a reasonable likelihood of success in establishing that defendants did not previously receive permission to file the Delaware Action. (See Defs.' Mot. to Dismiss Adversary Compl. Ex. 4 at 13-17, 29-30 (transcript of case management conference conducted by the Honorable William Alsup, who stated "if [defendants] are going to file [in Delaware], there is nothing [the district court] can do to stop that").)
In their opposition to plaintiffs' motion for a preliminary injunction, defendants have incorporated by reference the papers filed in support of their motion to dismiss. (See Defs.' Opp. to Pls.' Mot. for Prelim. Inj. at 2:7-8.)
4. The bankruptcy court did not err by finding plaintiffs have a reasonable likelihood of establishing that the instant Adversary Proceeding does not constitute an impermissible collateral attack on the Memorandum Order, filed February 12, 2004, in the United States District Court for the District of Delaware, as that order does not address whether the Delaware Action was properly filed in a Delaware state court. See Fort James Corp. v. Beck, 2003 WL 345350 (D. Del. 2001).
The "collateral attack" issue, although addressed by the parties in their respective papers, was not discussed at the hearing conducted by the bankruptcy court and was not specifically addressed by the bankruptcy court. Because the bankruptcy court found that plaintiffs had established a reasonable likelihood of success on the merits, the bankruptcy court necessarily accepted the written argument offered by plaintiffs on this issue.
5. The bankruptcy court did not address defendants' argument that plaintiffs have no likelihood of success on account of evidence that, in defendants' view, demonstrates plaintiffs waived their right to require defendants to obtain permission before suing the Liquidating Trustee. See Arcamuzi v. Continental Air Lines, Inc., 819 F.2d 935, 937 (9th Cir. 1987) (holding preliminary injunction should not issue where plaintiff "shows no chance of success on the merits"). Plaintiffs' argument that the issue of waiver is irrelevant because the requirement of obtaining consent to sue implicates subject matter jurisdiction is incorrect. See Securities and Exchange Comm'n v. United Fin. Group, Inc., 576 F.2d 217, 221 (9th Cir. 1978) ("Inasmuch as the requirement of consent to sue derives from principles of equity and comity and is subject to waiver, it is not to be treated as an issue of subject matter jurisdiction."). Accordingly, the Court will remand the matter for consideration of any evidence the parties may present on the issue of waiver.
As plaintiffs point out, however, at least one court has referred to the requirement as necessary to the non-appointing court's "jurisdiction." See, e.g., Carter v. Rodgers, 220 F.3d 1249, 1253 (11th Cir. 2000).
6. Plaintiffs, in addressing defendants' argument that the parties contractually agreed to litigate the issues presented in the Delaware Action in a Delaware court, failed to offer any evidence to demonstrate a likelihood of success in establishing they are not bound by the forum selection clause set forth in their agreement with defendants. See Murphy v. Schneider National, Inc., 362 F.3d 1133, 1140 (9th Cir. 2004) (holding "[b]ecause forum selection clauses are presumptively valid, they should be honored absent some compelling and countervailing reason"; stating party challenging clause has "heavy burden of proof" to "clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching"). The bankruptcy court did not address, on its merits, defendants' argument that plaintiffs failed to offer evidence in support of their allegation that the forum selection clause is not enforceable. Plaintiffs cannot demonstrate a likelihood of success on this issue in the absence of any evidence. See, e.g., Pratt v. Rowland, 65 F.3d 802, 807, 810 (9th Cir. 1995) (holding plaintiff not entitled to preliminary injunction where plaintiff did not offer "probative evidence" to establish likelihood he could establish truth of allegations in complaint). Accordingly, the Court will remand the matter for further consideration of this issue.
The Court further notes that neither party has addressed whether it is the appointing court, i.e., the bankruptcy court, or the court designated in the parties' agreement, i.e., the selected forum, that decides whether the agreement in which the forum selection clause is contained is the product of fraud.See, e.g., Richards v. Lloyd's of London, 135 F.3d 1289, 1297 (9th Cir. 1998) (applying, in action not involving bankruptcy trustee, general rule that party opposing enforcement of forum selection clause on grounds of fraud "must show that theinclusion of that clause in the contract was the product of fraud or coercion") (emphasis in original) (internal quotation and citation omitted); see also Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 403-04) (1967) ("[I]f the claim is fraud in the inducement of the arbitration clause itself — an issue which goes to the `making' of the agreement to arbitrate — the federal court may proceed to adjudicate it. But the statutory language [of the Arbitration Act] does not permit the federal court to consider claims of fraud in the inducement of the contract generally[;]" rather, such issue is to be referred to the arbitrator for determination).
7. A preliminary injunction may not issue where a plaintiff does not "demonstrate a significant threat of irreparable injury, irrespective of the magnitude of the injury." See Big Country Foods, Inc. v. Board of Educ., 868 F.2d 1085, 1088 (9th Cir. 1989) (holding district court properly denied motion for preliminary injunction where plaintiff offered no evidence to demonstrate threat of irreparable injury). Here, plaintiffs, in the bankruptcy court, relied on the allegations of their complaint to demonstrate why, in the absence of a preliminary injunction, they would face a significant threat of irreparable injury. Although plaintiffs, for the first time on appeal, argue that the evidence proffered to the bankruptcy court by defendants, (see Defs.' Not. of Filing of Deposition Transcript), will support a finding that plaintiffs face a significant threat of irreparable injury, (see Appellees' Brief at 22:20-23:3), such argument should be considered in the first instance by the bankruptcy court.
Plaintiffs did offer a copy of the Delaware Action complaint, as well as copies of the complaints being prosecuted by the Liquidating Trustee in district court, and asserted in their memorandum of points and authorities that having to defend in the Delaware Action would force the Liquidating Trustee to "incur significant additional, unnecessary expenses and poses a very real threat of irreparable harm." (See Pls.' Mot. for Prelim. Inj. at 8:16-19.) A plaintiff, however, cannot demonstrate a significant threat of irreparable injury by relying on "conclusory declarations of counsel as to what the litigation costs would be if the multiple actions proceeded separately."See Federal Trade Comm'n v. First Alliance Mortgage Co. (In re First Alliance Mortgage Co.), 264 B.R. 634, 656-67 (C.D. Cal. 2001).
To the extent plaintiffs also rely on events occurring subsequent to the bankruptcy court's ruling at issue, such matters likewise may be addressed on remand
CONCLUSION
For the reasons stated above, the bankruptcy court's order is VACATED, and the matter is REMANDED to the bankruptcy court for further proceedings consistent with this decision.The Clerk of the Court shall close the file.