In re Amanat

• Decision Date: 15 December 2005
• Docket Number: Adversary No. 05-01399 (ALG).,Bankruptcy No. 05-14349.,Bankruptcy No. 04-43361.
• Citation: 338 B.R. 574
• Parties: In re Omar Sharif AMANAT, Debtor. In re MarketXT, Inc., Debtor. IIG Capital LLC, Plaintiffs, v. Wollmuth Maher & Deutsch, LLP, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

338 B.R. 574

In re Omar Sharif AMANAT, Debtor In re MarketXT, Inc., Debtor IIG Capital LLC, Plaintiffs, v. Wollmuth Maher & Deutsch, LLP, Defendants.

Bankruptcy No. 04-43361.

Bankruptcy No. 05-14349.

Adversary No. 05-01399 (ALG).

United States Bankruptcy Court, S.D. New York.

December 15, 2005.

COPYRIGHT MATERIAL OMITTED

Reisman, Peirez & Reisman, L.L.P., By: Jerome Reisman, Joseph Capobianco, Justin M. Vogel, Garden City, New York, for IIG Capital LLC, Plaintiff.

Wollmuth Maher & Deutsch LLP, By: Paul R. DeFilippo, William A. Maher, William F. Dahill, New York, New York, Defendant pro se.

MEMORANDUM OF OPINION

Allan L. GROPPER, Bankruptcy Judge.

Before the Court is a motion by Plaintiff IIG Capital LLC ("IIG") for an order requiring the Court to abstain from hearing and remanding to the New York State Supreme Court, `New York County (the "State Court") the above-captioned adversary proceeding, removed to this Court by Defendant, Wollmuth Maher & Deutsch, LLP ("WMD"). WMD asserts that this Court has jurisdiction to hear the IIG action and that IIG has not proven the elements for mandatory abstention, discretionary abstention or equitable remand. For the reasons set forth below, the motion is granted.

FACTS

The following facts are relevant and are determined for purposes of this motion only. MarketXT, Inc. ("MarketXT"), whose principal was Omar Amanat, was an electronic communications network for securities trading on the NASDAQ Stock Exchange. Archipelago Securities LLC and its affiliates ("Archipelago") and REDIBook ECN L.L.C., now apparently merged with Archipelago ("REDIBook"), were among MarketXT's customers.

In 2002, MarketXT allegedly began factoring its accounts receivable and entered into a Factoring and Security Agreement dated July 16, 2002, with JIG, as amended by the First Amendment of Factoring and Security Agreement also dated July 16, 2002 (the "Factoring Agreement"). It is alleged that pursuant to the Factoring Agreement, IIG would purchase certain accounts from MarketXT. IIG also allegedly received and perfected a first priority security interest in certain MarketXT collateral to secure obligations owed to it by MarketXT. It is claimed that at or about the date of the Factoring Agreement, Archipelago and REDIBook, two MarketXT accounts, owed MarketXT $4,085,024.75 and $3,031,086.73, respectively. IIG alleges that it informed Archipelago and REDIBook that MarketXT had assigned its present and future accounts to IIG and sent to Archipelago and REDIBook invoices providing an IIG mailing address for their future payments on the MarketXT debt.

On April 25, 2002, three months prior to the execution of the Factoring Agreement, MarketXT had commenced an arbitration proceeding against Archipelago and REDIBook before the National Association of Securities Dealers ("NASD") entitled In the Matter of Market XT, Inc. v. Archipelago LLC and REDIBook ECN LLP, NASD DR No. 02-2459 (the "Arbitration Proceeding"). The proceeding was to recover approximately $6.4 million in receivables. MarketXT had retained WMD to prosecute its claims in the Arbitration Proceeding on a contingency fee basis. IIG contends that it informed WMD by letter dated December 18, 2002, that IIG held an assignment of MarketXT's present and future accounts and that all proceeds collected from accounts should be paid to IIG as MarketXT's assignee.

On February 10, 2003, MarketXT and Archipelago settled the Arbitration Proceeding by executing a settlement agreement (the "Settlement Agreement"). MarketXT, by and through Amanat, warranted and represented in the Settlement Agreement that it had provided a complete list of all accounts assigned to any factor, that the Archipelago and REDIBook claims had not been assigned to a third party, that the claims were property of MarketXT, Inc., that no third party claimed ownership thereto and that MarketXT had the authority to direct payment of the settlement proceeds. Archipelago represented and warranted that it could enter into the Settlement and Agreement and such action would not violate the rights of any third party. Archipelago paid a total of 83,101,866.39 in settlement proceeds, $640,144.25 of which was paid directly to WMD for its fees and $2,461,722.14 of which was paid to MarketXT.

Subsequent to the distribution of the settlement proceeds, a dispute broke out as to whether Amanat and MarketXT had any further liability to WMD. To induce WMD to accept payment of less than the full amount due to it, Amanat executed an Affidavit and Agreement on September 22, 2004 (the "Affidavit and Agreement"). In the Affidavit and Agreement, Amanat represented and warranted that (1) all the representations made in the Settlement Agreement were true, accurate and complete; (2) IIG had demanded proceeds from accounts to which it was not entitled under the Factoring Agreement; (3) no defaults or circumstances existed under the Factoring Agreement that would have prevented direct payment of the settlement proceeds to MarketXT; (4) MarketXT did not violate IIG's rights by directing distribution of the settlement proceeds in the manner directed by the Settlement Agreement; and (5) Amanat assured WMD personnel in writing of the above representations after reviewing the Factoring Agreement with the assistance of counsel.¹ Amanat also expressly agreed that WMD could assert a direct claim against him if any of the representations and warranties proved false.²

An involuntary case was thereafter commenced against Amanat under Chapter 7 of the Bankruptcy Code, and the Court entered an order for relief on January 28, 2005. On February 8, 2005, IIG commenced the State Court action and asserted six state law causes of action against WMD, alleging that WMD was responsible for breach of fiduciary duties, impairment of a security interest, violation of an equitable lien, tortious interference with contractual relations, concealment and intentional disregard of the assignment of the accounts to IIG. All of these claims are based on New York law and New York's Attorney Disciplinary Rules. On March 9, 2005, WMD filed a contingent, unliquidated proof of claim against the Amanat estate based on Amanat's alleged potential liability to WMD for indemnification based on the representations in the Affidavit and Agreement. WMD then, on March 10, 2005, removed the State Court action to this Court.³ On April 22, 2005, IIG moved to remand the action back to State Court.

MarketXT subsequently commenced a voluntary case under Chapter 11 of the Bankruptcy Code, and the Court entered an order for relief on June 15, 2005. WMD filed a supplemental removal petition on July 5, 2005 based on the MarketXT case, and IIG moved to remand the supplemental petition on August 5, 2005. WMD alleges that it will file a contingent, unliquidated proof of claim prior to MarketXT's bar date, based on MarketXT's alleged potential liability to WMD for indemnification as a result of the representations and warranties made by MarketXT in the Settlement Agreement.⁴

DISCUSSION

I. The Court Has "Related To" Jurisdiction over the IIG Action

Under 28 U.S.C. § 1334, district courts have original but not exclusive jurisdiction over all civil proceedings arising under, arising in or related to cases under title 11, which they have referred to the bankruptcy judges "for this district. Actions arising under title 11 involve claims "predicated on a right created by a provision of title 11." Drexel Burnham Lambert Group, Inc. v. Vigilant Ins. Co., 130 B.R. 405, 407 (S.D.N.Y.1991). Actions arising in title 11 involve claims that are not based "on any right expressly created by title 11, but nevertheless, would have no existence outside of bankruptcy." Id. at 407. Actions "related to" a case under title 11 involve claims whose outcomes "could conceivably have any effect on the estate being administered in bankruptcy." Id. The Second Circuit's test "for determining whether litigation has a significant connection with a pending bankruptcy proceeding is whether its outcome might have any `conceivable effect' on the bankrupt estate." Publicker Indus. Inc. v. United States (In re Cuyahoga Equip.), 980 F.2d 110, 114 (2d Cir.1992), citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984).

Many cases have held that a bankruptcy court has "related to" jurisdiction over non-debtor litigation if the estate is obligated to indemnify or contribute to the losing party. See, e.g., New York City Employees' Ret. Sys. v. Ebbers (In re WorldCom, Inc. Sec. Litig.), 293 B.R. 308, 324 (S.D.N.Y.2003) (court held that a contribution claim could conceivably affect the bankruptcy estate because it could alter the distribution of assets among creditors); Bond St. Assocs. v. Ames Dep't. Stores, Inc., 174 B.R. 28, 33 (S.D.N.Y.1994) (court found reasonable basis for jurisdiction absent an indemnification agreement where the third-party defendant would "normally have a claim" for indemnification against the debtor); In re Masterwear Corp., 241 B.R. 511, 516-17 (Bankr.S.D.N.Y.1999) (court held that third-party action involving indemnification claim could conceivably affect the Debtor). A court has "related to" jurisdiction over a contractual and absolute obligation to indemnify even if the debtor's liability is not definite. See Hunnicutt Co. v. TJX Cos. (In re Ames Dep't Stores, Inc.), 190 B.R. 157, 160-61 (S.D.N.Y.1995); In re Brentano's Inc., 27 B.R. 90, 92 (Bankr.S.D.N.Y.1983), rev'd and remanded on other grounds, 36 B.R. 90 (S.D.N.Y.1984); Kelley v. Nodine (In re Salem Mortgage Co.), 783 F.2d 626, 634 (6th Cir.1986). A court also has "related to" jurisdiction over a disputed or conditional obligation to indemnify that has a "reasonable legal basis." In re WorldCom, Inc. Sec. Litig., 293 B.R. at 317.

An express contract or an implied obligation can give rise to the right to indemnification. Luedke v. Delta Air Lines, Inc., 159 B.R. 385, 389 (S.D.N.Y. 1993), quoting Bellevue S....