In re Branded Products, Inc.
| Citation | 154 BR 936 |
| Decision Date | 09 April 1993 |
| Docket Number | Adv. No. 92-5189-LMC.,Bankruptcy No. 92-53548-LMC |
| Parties | In re BRANDED PRODUCTS, INC., Debtor. FEDDERS NORTH AMERICA, INC., Plaintiff, v. BRANDED PRODUCTS, INC., et al., Defendants. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas |
Mallory L. Miller, Jr., San Antonio, TX, for debtor and defendant.
Gerry Lozano and Norman L. Nevins, San Antonio, TX, for plaintiff.
Michael Flume, San Antonio, TX, for defendants John Wright & Mike Bonham.
William A. Jeffers, Jr., San Antonio, TX, for defendant Texas Bank, N.A.
DECISION ON PLAINTIFF'S MOTION FOR REMAND AND LIFT STAY, AND IN THE ALTERNATIVE, TO SEVER AND REMAND
CAME ON, for hearing, the motion of the Plaintiff, Fedders North America, Inc. ("Fedders"), to remand and lift stay, and in the alternative to sever and remand the above-styled adversary proceeding which Branded Products, Inc. ("Branded"), the debtor, had previously removed to this court from state court. In the context of its motion, Fedders argued that the court should abstain from hearing the matter. The court entertained argument from counsel. At the close of the hearing, the court took the matter under advisement and invited counsel to brief additional issues. This decision resolves those issues.
On December 14, 1987, Branded and Fedders executed a Fedders Products Distributor Agreement (the "Distributor Agreement"). Pursuant to the Distributorship Agreement, Branded ordered products from Fedders which were paid for by advances on a line of credit established by Branded with Bombardier Capital Corporation.
On September 28, 1989, Branded entered into a Loan Agreement with Texas Bank, N.A. ("Texas Bank"). The Loan Agreement set forth a formula for the advancement of monies to Branded in accordance with the level of Branded's eligible accounts receivable. Branded granted a security interest in its various assets, including its accounts receivable, to Texas Bank to secure the loan. Pursuant to the Loan Agreement, Branded supplied a monthly Accounts Receivable Report to Texas Bank, detailing Branded's eligible accounts receivable. Texas Bank's collateral also included any cause of action Branded may have against Fedders.
In June 1991, pursuant to the Distributor Agreement, Fedders sold numerous air conditioning units (the "Units") to Branded and invoiced Branded for the sale. Thereafter, Branded sold the Units to Builders Square. Branded invoiced Builders Square accordingly. The Builders Square account receivable was listed on the monthly Accounts Receivable Report issued by Branded to Texas Bank.
Subsequently, Builders Square paid Branded, and Branded deposited the proceeds in a bank other than Texas Bank. Texas Bank considered this a violation of the Loan Agreement. Texas Bank requested that Branded cure the alleged default. Branded then delivered a check to Texas Bank for the entire amount of the Builder's Square payment. Texas Bank accepted this payment and applied it to the Branded debt.
Branded, however, never paid the debt it owed to Fedders. Fedders filed suit in state court (the "State Court Action")1, naming as defendants Branded, Branded's President, Ron Seago, Texas Bank and two employees of Texas Bank, John Wright and Mike Bonham.2 Fedders alleged eleven claims against the various defendants, including tortious interference with contract, conversion, civil conspiracy, lender liability, constructive trust, unjust enrichment, fraudulent transfer, and breach of duty of good faith. Branded answered and filed a counter-claim, alleging a history of actions on the part of Fedders causing the financial demise of Branded and sounding in fraud, breach of contract, duress and coercion, tortious interference with contract, misrepresentation, deceptive trade practices, and breach of duty of good faith. The court has granted leave to Branded to amend its counter-claim petition, alleging numerous claims against Fedders, including claims for equitable subordination, a determination of secured status and priorities, voidable preference, and fraudulent transfers. Texas Bank, John Wright and Mike Bonham have filed a cross-claim against Branded seeking contribution and indemnification.
Discovery in the state court action has commenced, but has not been concluded. The only action heard in the State Court Action pertained to a discovery dispute. On July 10, 1992, Texas Bank, John Wright and Mike Bonham filed a Motion for Summary Judgment, seeking to dispose of all the issues between Fedders and the Nondebtor Defendants, as well as the claims for contribution and indemnity.
The Summary Judgment Motion, however, has yet to be heard. The State Court Action has been stayed by Branded's filing of its petition for relief under chapter 11 of title 11 of the United States Code on October 1, 1992. On October 15, 1992, Branded removed the State Court Action to this court. On November 3, 1992, Fedders filed the motion currently before the court.
At hearing, the parties advanced several arguments on the interplay between the bankruptcy jurisdictional statute, 28 U.S.C. § 1334, and the bankruptcy removal and remand statute, 28 U.S.C. § 1452. Fedders, relying principally upon In re Chiodo, 88 B.R. 780 (W.D.Tex.1988) (recommendation adopted), argued that abstention under § 1334(c) applies in the case of a removed matter, and should be applied here. Branded and the Nondebtor Defendants countered, contending that the court may not remand a removed action under the authority of § 1334(c).
The interplay between the doctrines of abstention and remand in bankruptcy has been much discussed but little understood. The doctrines have been intermixed and confused in dozens of decisions,3 in no small part because Congress itself codified a judge-made rule of limited application (abstention), then placed it within the bankruptcy jurisdiction statute. In the process, Congress used language so loose that even its sponsors misunderstood the reach of the statute they had just enacted. See discussion infra. A closer examination of the respective remand and abstention statutes may help to clear up some of the confusion.
Section 1452(a) allows a party to remove any claim related to a bankruptcy case to the bankruptcy court if the court has jurisdiction under § 1334. The statute is generous in its authorization of removals, excepting from removal only those proceedings pending before a tax court or those proceedings in which a government agency is enforcing its regulatory or police powers. 28 U.S.C. § 1452(a). Once a cause of action is removed, it automatically comes under the province of the district court. If that court determines that it does not have subject matter jurisdiction over the matter, or is not otherwise properly before the court, it may dismiss the action.4 On motion of a party, the court may also decide to send the matter back to the tribunal from whence it came, on any equitable ground.
Section 1334, by contrast, defines the jurisdictional bounds of the district court, and, by extension, the bankruptcy court to whom the matter has been referred. Section 1334 is sectioned into four subparts. Subparagraph (a) grants original and exclusive jurisdiction of all cases under title 11 of the United States Code to the bankruptcy courts. Subparagraph (b) grants original, but not exclusive, jurisdiction over all civil proceedings arising under title 11, or arising in or related to cases under title 11. Subparagraph (d) gives the bankruptcy court exclusive jurisdiction over all property of the debtor. Subparagraph (c), enacted in two paragraphs, codifies the so-called discretionary and mandatory abstention provisions, discussed further below.
As a doctrine, abstention under § 1334(c), be it mandatory or discretionary, has no application in the context of a removed action. In re Fairchild Aircraft Corp., 4 Tex.Bankr.Ct.Rep. 308, 313, 1990 WL 119650 (Bankr.W.D.Tex.1990), recommendation adopted, slip op. (W.D.Tex. 1990) (citing In re 666 Associates, 57 B.R. 8, 12 (Bankr.S.D.N.Y.1985)). This view contrasts with that of my former colleague, Bankruptcy Judge R. Glen Ayers, Jr., who opined that the only occasion to ever invoke the doctrine of abstention is in the context of removal. See In re Chiodo, 88 B.R. at 785. With all due respect to Judge Ayers' decision, this court believes that premise to be faulty. For example, were a debtor to initiate a compulsory counterclaim via an independent adversary proceeding in the bankruptcy court instead of asserting the claim in a pending state court action, ". . . as the matter no doubt involves the same transaction, abstention (even mandatory abstention) could well apply even though the removal statute had not come into play." See Fairchild, 4 Tex.Bankr.Ct.Rep. at 313 n. 2. When a case is removed to federal court from state court, by contrast, the case file is literally transferred, and there is no case any longer pending in the state court. The federal court can then return the case file to state court by remanding the case.
But federal courts do not effectively respond to removed cases by abstaining from hearing the case, for that would not send the case back to state court. The usual procedural device employed to "abstain" is to dismiss the matter pending before the federal tribunal, so that the parallel matter can proceed in the alternate forum (e.g., state court, administrative board). See 17A C. WRIGHT, A. MILLER, E. COOPER, FEDERAL PRACTICE AND PROCEDURE, Jurisdiction 2d, § 4245,...
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