National City Bank v. Coopers and Lybrand

• Decision Date: 01 June 1998
• Citation: 802 F.2d 990
• Parties: NATIONAL CITY BANK, as Indenture Trustee for Holders of Gambles Credit Corporation, ten percent (10%) Subordinated Notes due
• Court: U.S. Court of Appeals — Eighth Circuit

Page 990

802 F.2d 990

NATIONAL CITY BANK, as Indenture Trustee for Holders of Gambles Credit Corporation, ten percent (10%) Subordinated Notes due June 1, 1998; and nine and one half percent (9 1/2%) Subordinated Notes Series A due December 1, 1989 and Series B due December 1, 1997, Appellee, v. COOPERS AND LYBRAND, Appellant.

No. 85-5411.

United States Court of Appeals Eighth Circuit.

Submitted May 13, 1986.

Decided Sept. 23, 1986.

Peter M. Kreindler, Washington, D.C., for appellant.

James C. Diracles, Minneapolis, Minn., for appellee.

Before McMILLIAN, Circuit Judge, BRIGHT, Senior Circuit Judge and BOWMAN, Circuit Judge.

McMILLIAN, Circuit Judge.

Coopers and Lybrand (C & L), a nationwide partnership of certified public accountants, appeals from a final order entered in the District Court ¹ for the District of Minnesota remanding to the Minnesota state court a professional malpractice action brought against C & L by National City Bank (NCB). NCB initially filed the case in the state court, and C & L then removed the case to the federal court. C & L argues that the removal to the federal court was proper because federal jurisdiction based on federal question and bankruptcy jurisdiction existed. For the reasons discussed below, we affirm.

NCB, a Minnesota corporation, is the indenture trustee for various notes issued by Gamble's Credit Corp. (GCC). GCC, a Nevada corporation, was a subsidiary of Gamble-Skogmo, Inc. (GSK). GCC's only corporate activity was to finance GSK's accounts receivable, and GCC's only significant assets were GSK's accounts receivable. GCC's auditing and accounting were performed by C & L.

In August 1980 the Wickes Corp. (Wickes), a Delaware corporation with its headquarters in San Diego, California, acquired GSK and its subsidiaries, including GCC. In 1981 and 1982 C & L's San Diego office audited the financial statements of Wickes and its subsidiaries, including GCC. In April 1982, Wickes and most of its subsidiaries, including GSK and GCC, filed bankruptcy petitions under Chapter 11 of the Bankruptcy Reform Act. The bankruptcy proceedings took place in the Central District of California.

One issue in the bankruptcy proceedings was whether GCC had perfected its security interests in GSK's accounts receivable. This was a critical issue because GSK, as debtor in possession, could avoid GCC's security interests which were not properly perfected prior to GSK's filing for bankruptcy. 11 U.S.C. Secs. 544(a), 1107(a). Another related issue was whether GSK's obligations to GCC should be subordinated to GSK's other obligations because GCC was an "alter ego" of GSK.

In order to resolve these issues and to establish that GCC had perfected security interests in GSK's accounts receivable, the GCC Creditors Committee commenced an adversarial proceeding in the bankruptcy court in the Central District of California. The parties eventually reached a settlement, which was incorporated into the GCC plan of reorganization. Pursuant to the settlement, the noteholders received, in full satisfaction of their claims, an unsecured "senior claim over" against GSK in the amount of approximately $66,760,000. In exchange the noteholders released their claims against Wickes, GSK and their subsidiaries, including GCC, and their respective officers and directors. The noteholders expressly reserved their rights against "outside professionals" retained by GCC prior to 1982. C & L was one of these outside professionals.

The GCC reorganization plan was confirmed by the bankruptcy court and became effective in November 1983. In 1984 Wickes proposed a plan of reorganization for Wickes and its subsidiaries, including GSK. The bankruptcy court confirmed the Wickes reorganization plan in September 1984. Pursuant to the reorganization plan, the indenture noteholders received about 95 percent of their "senior claim over."

In April 1985 NCB filed this action in state court to recover from C & L the remainder of the principal and accrued interest from the date of the bankruptcy filing by GCC to the date of distribution under the Wickes reorganization plan. NCB sued C & L under state law alleging negligence, fraud and breach of contract (NCB asserts that it was a third party beneficiary of the auditing contract between GCC and C & L). NCB alleges that C & L's audits of GCC should have disclosed that GCC's 1981 financial statements had incorrectly characterized GCC's primary assets as accounts receivable purchased from GSK rather than as loans to GSK and should have detected that there were "serious documentation and perfection" problems with the accounts receivable. NCB alleges that it could have taken action to correct the defects, particularly the perfection defects, if C & L had discovered and disclosed those problems.

C & L removed the action from state court to federal court in May 1985. C & L alleged the existence of federal question jurisdiction based on 28 U.S.C. Sec. 1331 and 28 U.S.C. Sec. 1334(b). NCB then filed a motion to remand the action to the state court and C & L filed a motion to transfer the action to the bankruptcy court for the Central District of California which had retained jurisdiction over the Wickes bankruptcy proceeding. The district court remanded the action to the state court and did not consider C & L's motion for a transfer. National City Bank v. Coopers & Lybrand, No. 4-85-715, slip op. at 2 (D.Minn. Nov. 1, 1985) (National City Bank).

The sole issue on appeal is whether the district court erred in remanding the action to state court. ² The district court held that federal questions appeared only in C & L's answer, not in the complaint, and therefore were not cognizable for purposes of determining federal jurisdiction under the "well pleaded complaint" rule. National City Bank, slip op. at 5-7. The district court further held that resolution of NCB's state law claims did not involve substantial questions of federal law because the perfection of security interests is a question of state law and the issues of causation and damages would not require resolution of "new bankruptcy law issues." Id. at 9-10. The district court further held that bankruptcy jurisdiction did not exist under 28 U.S.C. Sec. 1334(b) because (1) the action did not "arise under" or "arise in" Title 11 because a bankruptcy debtor is not a party to the action and no relief under Title 11 is sought, and (2) the action is not "related to" a bankruptcy proceeding because the action cannot affect the bankruptcy estate. Id. at 12-13. The district court concluded that "the present action, .., is at most a precursor to [C & L's] potential indemnification action against Wickes." Id. at 13.

C & L argues that this action arises under 28 U.S.C. Sec. 1331 and 28 U.S.C. Sec. 1334(b) because the NCB's claims turn in part on a construction of federal bankruptcy law. C & L asserts that NCB's ability to prove liability, causation and damages depends on an interpretation of federal bankruptcy law, e.g., whether GCC's security interests in GSK's accounts receivable are avoidable under federal bankruptcy law.

NCB initially argues that the issue of federal jurisdiction under Sec. 1331 as a basis for removal jurisdiction is not properly before this court. NCB asserts that C & L is attempting to accomplish indirectly what it is prohibited from doing by 28 U.S.C. Sec. 1447. We agree. Section 1447(d) states that "[a]n order remanding a case to the State Court from which it was removed is not reviewable on appeal or otherwise." "[I]n order to prevent delay in the trial of remanded cases by protracted litigation of jurisdictional issues ..., Congress immunized from all forms of appellate review any remand order issued on the grounds specified in Sec. 1447(c), whether or not that order might be deemed erroneous by an appellate court." Thermtron Products, Inc. v. Hermansdorfer, 423 U.S. 336, 351-52, 96 S.Ct. 584, 593, 46 L.Ed.2d 542 (1976); see Gravitt v. Southwestern Bell Telephone Co., 430 U.S. 723, 97 S.Ct. 1439, 52 L.Ed.2d 1 (1977) (per curiam) (district court's remand order plainly within the bounds of Sec. 1447(c) was unreviewable by the courts of appeals by mandamus or otherwise). We therefore cannot review the district court's remand order to the extent that it is based on a lack of federal question jurisdiction under Sec. 1331.

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