In re Brooks Mays Music Co.

• Decision Date: 08 March 2007
• Docket Number: Bankruptcy No. 06-32816-SGJ-11.,Adversary No. 06-3508.
• Citation: 363 B.R. 801
• Parties: In re BROOK MAYS MUSIC COMPANY, Debtor. Principal Life Insurance Company and Petula Associates, Ltd., Plaintiffs, v. JPMorgan Chase Bank, N.A. and The Recovery Group, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Texas

363 B.R. 801

In re BROOK MAYS MUSIC COMPANY, Debtor Principal Life Insurance Company and Petula Associates, Ltd., Plaintiffs, v. JPMorgan Chase Bank, N.A. and The Recovery Group, Inc., Defendants.

Bankruptcy No. 06-32816-SGJ-11.

Adversary No. 06-3508.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

March 8, 2007.

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Anthony J. Barbieri, Gary Samuel Kessler, Howard earl Rubin, Kessler & Collins, P.C., Dallas, TX, for Plaintiffs.

Holly J. Warrington, John E. Mitchell, William Louis Wallander, Vinson & Elkins, L.L.P., Dallas, TX, for Defendant, JPMorgan Chase Bank, N.A.

Phil C. Appenzeller, Jr., Ross Howard Parker, Munsch, Hardt, Kopf & Harr, P.C., Dallas, TX, for Defendant, The Recovery Group, Inc.

MEMORANDUM OPINION AND ORDER DENYING MOTION OF PLAINTIFFS TO REMAND AND ABSTAIN

STACEY G.C. JERNIGAN, Bankruptcy Judge.

I. INTRODUCTION

Principal Life' Insurance Company and Petula Associates, Ltd., the Plaintiffs, move to remand this adversary proceeding to the 116th Judicial District Court of Dallas County, Texas (hereinafter, the "State Court"). The Defendants oppose the motion. The court conducted a hearing on this matter on December 13, 2006.

II. RELEVANT FACTS

1. Brook Mays Music Company (the "Debtor" or "Brook Mays") filed a voluntary petition under chapter 11 of the United States Code (the "Bankruptcy Code") on July 11, 2006 (the "Petition Date"), initiating Case No. 06-32816-SGJ-11. Brook Mays' chapter 11 case is still pending in this court.

2. Thereafter, on October 4, 2006, the Plaintiffs filed an action in the State Court styled Principal Life Insurance Company and Petula Associates, Ltd., Plaintiffs, v. JPMorgan Chase Bank, N.A. and The Recovery Group, Inc., Defendants, Civil Action No. 06-10316 (hereinafter, "State Court Action").

3. The facts in the State Court Action involve prepetition conduct relating to Brook Mays, but Brook Mays is not a named party in the State Court Action.

4. The only Defendants named in the State Court Action are JPMorgan Chase Bank, N.A. ("Chase") and The Recovery Group, Inc. ("TRG"). Chase is named in connection with alleged acts in which it engaged in its capacity as a lender to Brook Mays and as agent for the additional lenders GE Commercial Distribution Finance Corporation ("GE CC") and Siemens Financial Services, Inc. ("Siemens," and collectively with Chase and GECC, the "Secured Lenders"). TRG is named in connection with alleged acts in which it engaged in its capacity as financial advisor to Brook Mays.

5. Chase loaned Brook Mays millions of dollars on a secured basis prepetition, pursuant to that certain Credit Agreement dated December 22, 2004, as amended by the First Amendment to Credit Agreement dated March 31, 2006, and as supplemented by a Forbearance Agreement dated March 31, 2006 (as amended and supplemented from time to time, the "Credit Agreement"). Additionally, pursuant to a Final Agreed Order Authorizing Limited Use of Cash Collateral, Obtaining Credit Secured by Senior Liens, and Granting Adequate Protection to Existing Lienholders (as amended from time, the "DIP Order"), entered July 31, 2006, Chase extended further significant credit to Brook Mays postpetition, with bankruptcy court approval after notice to creditors.

6. In the State Court Action, the Plaintiffs assert that, on December 15, 2006, less than one year before Brook Mays filed bankruptcy, Petula Associates, Ltd. ("Petula"), as landlord, entered into a ninety-one month lease ("Lease") with Brook Mays, as tenant, for certain real property consisting of 121,766 square fee of warehouse space in Dallas, Texas. Petula asserts that it improved the warehouse space to suit Brook Mays' needs prior to Brook Mays moving into the premises, expending over $600,000. Petula further asserts that Brook Mays was contractually required to obtain an irrevocable letter of credit ("L/ C") in the initial amount of $406,000 as security for Brook Mays' obligations under the Lease. Petula designated Principal Life Insurance Company ("Principal") to be the beneficiary of the L/C, since Principal performed treasury functions for Petula.

7. Apparently, Brook Mays submitted to Chase an application for the L/C on December 15, 2005, and Petula proceeded to make lease improvements. Then, in May 2006, the Plaintiffs were informed by Brook Mays that the application for L/C had been withdrawn and the. L/C would not be issued. The Plaintiffs allege that Chase and TRG, the latter of which had become the financial advisor to Brook Mays in January 2006, singularly or in concert, delayed the issuance of the L/C, eventually advising Brook Mays that it should withdraw the L/C application. The Plaintiffs assert that they have been damaged because Brook Mays took possession of the leased premises in June 2006, defaulted under the Lease shortly thereafter, and the Plaintiffs should have had an L/C to look to for security but did not — allegedly due to wrongful actions of Chase and TRG. Chase allegedly directly represented to Plaintiffs that it intended to issue an L/C in the amount of $406,000.

8. Plaintiffs assert the following causes of action against Chase in the State Court Action: promissory estoppel, negligence (i.e., breach of a duty of reasonable care to Plaintiffs), fraudulent failure to disclose (the financial condition of Brook Mays), and negligent misrepresentation.

9. Plaintiffs assert the following causes of action against both Chase and TRG in the State Court Action: tortious interference with contract and prospective relations (i.e., the warehouse lease and the intended L/C agreement), gross negligence, malice, and fraud.

10. Plaintiffs seek actual damages of $406,000, plus attorney's fees and exemplary damages. Plaintiffs seek a jury trial.

11. The Defendants jointly and timely filed a Notice of Removal of all claims asserted in the State Court Action on November 3, 2006, pursuant to 28 U.S.C §§ 1334 and 1452 and Federal Rule of Bankruptcy Procedure 9027.¹

12. The questions now before the court are whether: (a) removal was proper in the first instance (i.e., whether this court can properly exercise subject matter jurisdiction over the claims); and, if so (b) should the court exercise subject matter over the claims or remand them to the State Court.

III. CONCLUSIONS OF LAW

A. Bankruptcy Subject Matter Jurisdiction — Does it Exist Here?

Bankruptcy subject matter exists (but, of course, is not exclusive) with regard to civil proceedings that are "arising under" the Bankruptcy Code, or "arising in" bankruptcy cases, or are "related to" bankruptcy cases. 28 U.S.C. § 1334(b). And removal of claims, pursuant to 28 U.S.C. § 1452(a) (hereinafter, the "Bankruptcy Removal Statute"), is only, in the first instance, proper if the district court (and by referral the bankruptcy court) would have bankruptcy subject matter jurisdiction over the claims pursuant to 28 U.S.C. § 1334(b).

Thus, the first matter this court must address is whether, bankruptcy subject matter jurisdiction indeed exists with regard to the claims asserted in the State Court Action — in other words, do the claims "arise under" the Bankruptcy Code, "arise in" the Brook Mays case, or are they "related to" the Brook Mays case? "Arising under" matters (i.e., those that "invoke a substantive right provided by title 11")² and "arising in" matters (i.e., matters that, by their nature, could only arise in the context of a bankruptcy case and concern the administration of the estate)³ and have been construed in bankruptcy jurisprudence to be bankruptcy "core" matters. E.g., EOP-Colannade of Dallas L.P. v. Faulkner (In re Stonebridge Technologies, Inc.), 430 F.3d 260 (5th Cir. 2005); U.S. Brass Corp. v. Travelers Ins. Group, Inc. (In re U.S. Brass Corp.), 301 F.3d 296, 304 (5th Cir.2002) (and authority cited therein).⁴ "Related to" matters (i.e., those, the outcome of which could "conceivably have an effect on the estate being administered in bankruptcy") have been construed in bankruptcy jurisprudence to be bankruptcy "non-core" matters. E.g., Wood, 825 F.2d at 93. The significance of "core"/"non-core". is that this court may both preside over and enter final, binding orders in "core" matters. However, in "non-core" matters, this court may only preside over the matters and make findings and conclusions as a recommendation to the district court, and the district court must enter the final order (with the district court having the power to review the findings and conclusions de novo) — unless all parties consent to the bankruptcy court issuing a final, binding order. 28 U.S.C. § 157(c). Thus, in the case of both "core" and "non-core" matters, there is bankruptcy subject matter jurisdiction. However, there are limitations on the authority of the bankruptcy court (i.e., the unit of the district court to which bankruptcy matters are referred)⁵ in the context of "non-core" matters.

The Defendants, who argue that the claims in the State Court Action present "arising in"/"core" claims or, alternatively, are at least "related to"/"non-core" claims, allege that there are several reasons that removal to (and subject matter jurisdiction in) the bankruptcy court is proper. Their reasons mentioned are as follows:

(a) DIP Order Release. The Plaintiffs are asserting damages that arise out of or are related to the prepetition Credit Agreement — that is, the alleged failure of Chase to issue the L/C. The DIP Order contained language barring or otherwise releasing claims relating to the Credit Agreement. Paragraphs 84-86 of the DIP Order. This court retained jurisdiction to enforce the terms of the DIP Order. Thus this dispute with the Plaintiffs "arises in" a bankruptcy case.

(b) Indemnification. The Defendants allege that any liability imposed on them in connection with the State Court Action will give rise to indemnification claims back against the Debtor/the estate....