In re ACI-HDT Supply Co.

• Decision Date: 24 January 1997
• Docket Number: Bankruptcy No. 95-08253-A11,Adv. No. 95-90809-A11.,BAP No. SC-96-1318-AsJO
• Citation: 205 BR 231
• Parties: In re ACI-HDT SUPPLY COMPANY, Debtor. Nogah BETHLAHMY, IRA; Bethlahmy Family Trust; Judith E. Bernier, IRA; Kenneth C. Schmunk; Samuel B. Lewis; IRA; Jordan Day Lewis, IRA; Gershon S. Greenblatt; Deena S. Greenblatt; Howard Mark; and Edythe Mark, Appellants, v. Randy S. KUHLMAN, et al., Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

205 B.R. 231 (1997)

In re ACI-HDT SUPPLY COMPANY, DebtorNogah BETHLAHMY, IRA; Bethlahmy Family Trust; Judith E. Bernier, IRA; Kenneth C. Schmunk; Samuel B. Lewis; IRA; Jordan Day Lewis, IRA; Gershon S. Greenblatt; Deena S. Greenblatt; Howard Mark; and Edythe Mark, Appellants, v.Randy S. KUHLMAN, et al., Appellees.

BAP No. SC-96-1318-AsJO, Bankruptcy No. 95-08253-A11, Adv. No. 95-90809-A11.

United States Bankruptcy Appellate Panel, of the Ninth Circuit.

Argued and Submitted September 20, 1996.

Decided January 24, 1997.

John E. Grasberger, Milberg, Weiss, Bershad, Hynes & Lerach, San Francisco, CA, for Nogah Bethlahmy.

Charles F. Vihon, Much, Shelist, Freed, Denenberg, Ament, Bell & Rubenstein, P.C., Chicago, IL, for Jordan and Samuel Lewis.

Kevin Stack, Knapp, Petersen & Clarke, Glendale, CA, for Protel, Inc.

Before: ASHLAND, JONES, and OLLASON, Bankruptcy Judges.

OPINION

ASHLAND, Bankruptcy Judge:

STATEMENT OF FACTS

The Appellants herein are plaintiffs in a class action lawsuit filed in the Superior Court of San Diego County on November 21, 1995.In their First Amended Complaint, plaintiffs alleged that they were defrauded of more than $60 million as a result of their investments in Amtel Communication, Inc.'s private pay telephone "sale-lease-back program."The complaint alleges causes of action based upon violations of California statutes and common law.The appellants contend that the bankruptcy court erred in denying their motion to remand the proceeding to the state court after it was removed to the bankruptcy court by one of the named defendants, Texas Coinphone, Inc.

The debtor, Amtel Communications, Inc.("Amtel"), is not a named defendant in the state court action, neither are any of its affiliated entities: ACI-HDT Supply Company, Amtel Communications Services, Inc., Amtel Communications Correctional Facilities, Inc., or Amtel Communications Payphones, Inc. Collectively, these companies filed Chapter 11 on August 3, 1995, and their cases were administratively consolidated.Because of the filing, the appellants' complaint does not name Amtel as a defendant and recites that it does not "presently seek monetary damages or other relief" against it.However, a number of the class action plaintiffs have filed proofs of claim in Amtel's bankruptcy case, including Nogah Bethlahmy, Kenneth C. Schmunk, Gershon D. Greenblatt, and Howard Mark.

Instead, the plaintiffs sued a number of individual and corporate defendants.Among these were Randy S. Kuhlman, Amtel's CEO and sole shareholder, and David Darling, the company's executive vice president.Also named were Amtel's former corporate attorneys Scott Wellman and C. Samuel Blick.The manufacturers of the payphones sold to the plaintiffs were also named and include Elcotel, Inc., Protel, Inc., and Texas Coinphone, Inc.Finally, the plaintiffs named Bank of Commerce as a defendant for lending its prestige to the sale-leaseback program and soliciting persons to invest in the scheme.

The plaintiffs characterize the investment deal offered to them as a Ponzi scheme, facilitated by the named defendants.Under its sale-leaseback program, Amtel sold preassembled, freestanding private pay telephones to investors throughout the United States.Amtel did not manufacture the telephones but instead purchased the component parts from three principal manufacturers.

The sale-leaseback program was structured by way of three simultaneous agreements between Amtel and each investor.Under the first agreement, the investor purchased a pay telephone, manufactured by either Elcotel, Protel or Texas Coinphone, and rights to a site location designated by Amtel.The $3,300 purchase price covered the cost of the phone, a "location leasehold" interest, installation expenses, and shipping and handling charges.In the second agreement, the investor leased the pay telephone and site location back to Amtel.This agreement provided that Amtel would lease the unit for sixty months in exchange for a $51 per month payment during the term of the lease.During that time, Amtel promised to install, service, maintain, operate and insure the telephone unit for the investor.

The third agreement was an option to sell whereby Amtel guaranteed, at the investor's option, to repurchase the investor's pay telephone unit for the original investment amount at the end of the lease term.The monthly rent paid to the investor equated to a 17% to 19% annual return on each telephone for a total return on investment ranging from 85% to 92.59% over the five year lease period.The agreements, prepared by Wellman and Blick, were uniform for all investors.

Appellants indicate that these investments were made in violation of orders by state securities regulators who had prohibited sales of the investments within their states.Further, that they were sold based on fraudulent misrepresentations as to Amtel's solvency while concealing the fact that the suppliers of the phones retained a secret security interest in the phones that was purportedly senior to the investors' ownership rights.In fact, the court appointed examiner in the bankruptcy proceedings concluded that there were not sufficient funds from the collection of coin revenue to operate the company and pay investors their monthly rental payments.Instead, Amtel relied on funds from sales to later investors to pay prior investors.

As appellants see it, the only "winners" in the scheme were the insiders, the telephone manufacturers who supplied the phones and profited from them, and the professionals and banks who benefitted from the large fees paid to them.Their complaint alleges a variety of state law causes of action.Among these are claims based upon The Consumers Legal Remedies Act,Cal.Civ.Code §§ 1750, et seq.;California Business and Professionals Code§§ 17200, et seq.;California Business and Professions Code §§ 17500 et seq.; state common law fraud and deceit; state common law negligence and negligent misrepresentation;Cal.Corp. Code § 25110;Cal.Corp. Code § 25400; and state common law professional negligence and legal malpractice.

On December 29, 1995, Texas Coinphone, Inc. removed the state action to the bankruptcy court pursuant to 28 U.S.C. § 1452andFederal Rule of Bankruptcy Procedure 9027.The purported basis for removal was that the state action involved claims that are core proceedings under 28 U.S.C. § 157(b)(2)(A), (B), (H), and (O).¹In addition, the notice of removal alleged that the plaintiffs' complaint asserted claims that were property of the estate, that it determined rights that are related to Amtel's rights, and that it sought to impose a constructive trust upon property of the estate.

The appellants filed a timely motion to remand alleging that the state causes of action did not "arise in" or "arise under"Title 11 and were not sufficiently "related to" Amtel's bankruptcy proceeding to confer jurisdiction upon the bankruptcy court.Both Protel, Inc. and Texas Coinphone, Inc. filed oppositions.At the conclusion of the hearing, the court ruled that the actions were core proceedings pursuant to § 157(b)(2).The court's order denying remand was entered on March 16, 1996 and the appellants filed a timely notice of appeal.

ISSUES PRESENTED

1.Whether the bankruptcy court erred in determining that the state law causes of action against non-debtor third parties were core proceedings and therefore within the jurisdiction of the bankruptcy court pursuant to 28 U.S.C. § 157(b)(2)and§ 1334(b).

2.Whether the state law causes of action were within the non-core but "related to" jurisdiction of the bankruptcy court.

3.Whether, if the matter was properly within its jurisdiction, the bankruptcy court failed to remand the action based upon either the discretionary or mandatory abstention provisions of 28 U.S.C. § 1334(c)(1) and (2).

STANDARD OF REVIEW

We review de novo the bankruptcy court's acceptance of jurisdiction.In re Harris Pine Mills,44 F.3d 1431, 1434(9th Cir.1995);In re Castlerock Properties,781 F.2d 159, 161(9th Cir.1986).Findings of fact are reviewed under the clearly erroneous standard and questions of law are reviewed de novo.In re Britton,950 F.2d 602, 604(9th Cir.1991).

The issue of mandatory abstention turns upon the jurisdiction question and is therefore a question of law subject to de novo review.In re DeLorean Motor Co.,155 B.R. 521, 524(9th Cir. BAP1993).Discretionary abstention under § 1334(c)(1) and remand on an equitable basis are reviewed for an abuse of discretion.DeLorean,155 B.R. at 524;In re Eastport Associates,935 F.2d 1071, 1075(9th Cir.1991).

DISCUSSION

Appellants contend that the bankruptcy court erred in concluding that their state law causes of action constituted matters that fell within the court's core jurisdiction pursuant to 28 U.S.C. § 157(b)and§ 1334(b).Alternatively, they argue that the action does not fall within the court's non-core or "related to" jurisdiction under 28 U.S.C. § 157(c)(1)and§ 1334(b).Finally, they contend that if the court did properly exercise jurisdiction over the matter, it erred in failing to remand the action to state court pursuant to either the permissive or mandatory abstention provisions of § 1334(c)(1) or (2).

The jurisdiction of the bankruptcy court is based upon the distinction between core and non-core bankruptcy matters.Core matters are those "arising under title 11, or arising in a case under title 11."28 U.S.C. § 157(b)(1).The term "arising under" describes those proceedings involving a cause of action created or determined by a statutory provision of title 11.Whereas "arising in" refers to administrative matters that are not based on any right expressly created by title 11 but would nevertheless have no existence outside of the bankruptcy case.In re Eastport Associates,935 F.2d 1071, 1076(9th Cir.1991)(citingIn re Wood,825 F.2d 90, 96-97(5th Cir.1987)).

Section 157(b)(2) contains a list of...