Opinion
No. C-OO-3218 VRW
January 3, 2001
ORDER
Before the court is a motion by defendants Craig D Crisman, et al, to transfer venue to the Central District of California and a counter motion by plaintiff Kennilworth Partners for remand or abstention to return the matter to state court.
Defendants are current and former officers of Applied Magnetics Corporation, a company that has been undergoing Chapter 11 bankruptcy proceedings in the Central District of California since its petition on January 7, 2000. In July 1999, plaintiff entered into an agreement with Applied Magnetics to exchange convertible subordinated debentures for common stock and to purchase a new convertible note from Applied Magnetics. These transactions are now at issue in the bankruptcy proceedings.
Plaintiff initiated the case at bar on July 10, 2000, in the Superior Court of California for the County of San Francisco alleging that defendants as individuals committed fraud, deceit, negligent misrepresentation and violated the California Corporations Code during the aforementioned transactions. On September 6, 2000, defendants removed the matter to this court pursuant to 28 U.S.C. § 1452 (a) and Federal Rules of Bankruptcy Procedure 9027, which allow removal for bankruptcy and related matters for which the federal courts have jurisdiction under 28 U.S.C. § 1334. The essential question for the court to decide is whether the state court in San Francisco or the bankruptcy court in the Central District is the proper forum for adjudication of these state law claims.
Defendants argue that the bankruptcy court handling the Applied Magnetics proceedings is the proper forum. If the matter is transferred to the Central District, it will automatically be referenced to the bankruptcy court there. Although defendants were entitled to remove the action to federal court under section 1452(a), plaintiff is likewise entitled to request that the case be remanded to state court under section 1452(b) or by abstention under section 1334(c). See In re Harris Pine Mills, 44 F.3d 1431, 1434-35 (9th Cir 1995). Plaintiff thus asserts three independent bases in support of remanding this action: (1) equitable remand pursuant to 28 U.S.C. § 1452 (b); (2) mandatory abstention under 28 U.S.C. § 1334 (c)(2); and (3) discretionary abstention under 28 U.S.C. § 1334 (c)(1).
The court first addresses plaintiff's mandatory abstention argument. Section 1334(c)(2) establishes explicit provisions in which federal courts must refuse to hear claims in favor of state court adjudication. See Williams v Shell Oil Co, 169 B.R. 684, 692 (SD Cal 1994). As both parties note, the court must abstain when the following six elements are met: (1) a party files a timely motion; (2) the proceeding is based on a state law claim or cause of action; (3) the matter is merely "related to" a bankruptcy case (i e, it is not a "core" proceeding "arising under" the bankruptcy laws or "arising in" a bankruptcy case); (4) the matter otherwise could not have been brought in federal court absent jurisdiction under section 1334 as a bankruptcy related matter; (5) a state court action has commenced and (6) the state court action can be timely adjudicated. See 28 U.S.C. § 1334 (c)(2); see also Williams, 169 BR at 692; Schwarzer § 2:846.3. "Where federal courts must abstain under [section] 1334(c)(2), there is no removal jurisdiction." William W Schwarzer, A Wallace Tashima and James H Wagstaffe, Federal Civil Procedure Before Trial § 2:846.1 (Rutter Group Practice Guide 2000) (hereinafter, Schwarzer) (emphasis in original). On `timely motion' of any party to the state court action, a case removed to federal court must be remanded." Id (emphasis in original).
Plaintiff argues that each of these six elements is met in the case at bar. Defendants contend, however, that plaintiff has failed to establish the third and sixth elements. The remaining elements for mandatory abstention are satisfied because plaintiff commenced a state court action based entirely on state law claims and then timely filed a motion for abstention with this court after it was removed by defendants based solely on section 1334 jurisdiction.
The third element provides that the court must only abstain when the proceedings are noncore proceedings. Oddly, defendants first assert that in the Ninth Circuit, only the bankruptcy court can determine whether the matter is a core or noncore proceeding. See Def Reply Br at 4. In this regard, defendants cite In re International Nutronics, 28 F.3d 965 (9th Cir 1994), in which the court states in passing that "[w]e need not decide whether [the plaintiff's] claim would have qualified as a core proceeding, a determination to be made in the first instance by the bankruptcy court." Id at 969 (citing 28 U.S.C. § 157 (b)(3)). Defendants have mischaracterized the law.
Although section 157(b)(3) provides that the bankruptcy judge shall determine whether a proceeding is core or noncore, that provision relates to the scope of authority for bankruptcy courts under section 157 once federal jurisdiction is found to exist under section 1334. See In re Gruntz, 202 F.3d 1074, 1080 (9th Cir 2000). Specifically, bankruptcy courts may issue final judgments and orders in core proceedings, but in noncore proceedings bankruptcy courts may only submit proposed findings of fact and conclusions of law to district courts for their final judgment. Id at 1081; 28 U.S.C. § 157 (b)(1) and (c)(1). Before reaching that stage, however, section 1334(c)(2) mandates abstention by district courts under certain circumstances, but only for noncore proceedings. In order to determine whether abstention is required, therefore, clearly the district court must evaluate whether the proceeding is core or noncore. Indeed, district courts routinely engage in such analysis. See, e g, Williams, 169 BR at 692; In re Kold Kist Brands, Inc, 158 B.R. 175, 178 (CD Cal 1993). The court thus has the authority and obligation to determine whether the proceeding is core or noncore for section 1334(c)(2) purposes.
In any event, defendants ask the court to determine whether the case is a core proceeding. Defendants argue that the case at bar is a core proceeding because it is "inextricably intertwined" with the underlying bankruptcy case. See Def Reply Br at 4-8. The court disagrees. Core proceedings are defined in the Ninth Circuit as follows:
Congress used the phrase "arising under title 11" to describe those proceedings that involve a cause of action created or determined by a statutory provision of title 11. The meaning of "arising in" proceedings is less clear, but seems to be a reference to those "administrative" matters that arise only in bankruptcy cases. In other words, "arising in" proceedings are those that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy.Harris Pine Mills, 44 F.3d at 1435 (quoting In Matter of Wood, 825 F.2d 90, 96- 97 (5th Cir 1987) (emphasis in original). Plaintiff has not alleged causes of action that are created or determined by a statutory provision of the bankruptcy laws. Likewise, plaintiff does not allege causes of action that would have no existence outside of bankruptcy. Each of plaintiff's claims are based entirely on state laws. For these reasons, the case at bar is not a core proceeding.
Alhough the case is not a core proceeding, the court finds it to be related to the Applied Magnetics bankruptcy matter. In Harris Pine Mills, the Ninth Circuit noted that "state law contract claims that do not specifically fall within the categories of core proceedings enumerated in 28 U.S.C. § 157 (b)(2)(B)-(N) are related proceedings under § 157(c) even if they arguably fit within the literal wording of the two catch-all provisions, sections 157(b)(2)(A) and (O)." Harris Pine Mills, 44 F.3d at 1436-37. Similarly, plaintiff's fraud, deceit, negligent misrepresentation and California Corporations Code claims do not fit into section 157(b)'s enumerated categories of core proceedings. Moreover, "[a] matter is related to the bankruptcy when `the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.'" Wood, 825 F.2d at 93 (citation omitted). "`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 which in any way impacts upon the handling and administration of the bankrupt estate.'" Matter of Walker, 51 F.3d 562, 569 (5th Cir 1995) (citation omitted). As defendants point out, any recovery by plaintiff would be subject to defendants' indemnification claims under Applied Magnetics' bylaws and claims for coverage under the company's directors and officers insurance policy. These amounts to be paid as a result of this action certainly would have an effect on the estate of Applied Magnetics. Accordingly, plaintiff's claims are related to that matter and the proceeding is noncore. The court finds, therefore, that the third element for mandatory abstention is satisfied.
Under the sixth element, the court must likewise only abstain if the state court action can be timely adjudicated. Plaintiff argues that there is no evidence that this action cannot be timely adjudicated in state court. See Pl Opp Br at 9. Defendants assert that plaintiff has failed to establish that the action can be timely adjudicated because plaintiff merely makes the allegation without presenting evidence to demonstrate it. Defendants point to In re Nationwide Roofing Sheet Metal, Inc, 130 B.R. 768, 779 (1991), for the proposition that plaintiff must present evidence to establish this element. Defendants' reliance on Nationwide, however, is misplaced. The decision was by a bankruptcy court in the Southern District of Ohio; it thus carries no authoritative weight in the Ninth Circuit. In a more recent opinion from the Northern District of California, the court stated to the contrary that "[w]hile an affirmative showing of the possibility of timely adjudication in state court may be necessary where a movant seeks abstention from a proceeding originating in federal court, such a showing is not necessary where the movant is contesting the removal of his own state action." Abadie v Poppin, 154 B.R. 86, 90 (ND Cal 1993).
As in Abadie, plaintiff is seeking to have its state law claims originally filed in state court returned to that forum. Despite defendants' urging, therefore, plaintiff need not make an affirmative showing of the potential for timely adjudication in state court. Id. Because each of plaintiff's claims is based on state law, the court finds that the state court will likely be a more efficient forum for adjudication of the claims. Indeed, there is no reason why the case cannot be placed on a well-planned discovery and motion schedule that allows for timely adjudication of the case. Accordingly, the court finds that the sixth element for mandatory abstention is satisfied.
For these reasons, the court finds that all the elements for section 1334(c)(2) are satisfied and mandatory abstention is warranted. In light of this conclusion, the court need not reach plaintiff's remaining two arguments regarding equitable remand and discretionary abstention. The court, therefore, GRANTS plaintiff's counter motion for remand or abstention. Defendants' motion to transfer venue is DENIED as moot. The clerk is directed to close the file and transfer a copy of this order to the clerk for the Superior Court of California for the County of San Francisco.
IT IS ORDERED.