In re Colleen, Inc.

• Decision Date: 22 May 2009
• Docket Number: Bankruptcy No. 06-13748-NVA.,Adversary No. 08-0700.
• Citation: 406 B.R. 674
• Parties: In re COLLEEN, INC., Debtor. Global Express Money Orders, Inc., Plaintiff v. Farmers & Merchants Bank, et al., Defendants.
• Court: U.S. Bankruptcy Court — District of Maryland

406 B.R. 674

In re COLLEEN, INC., Debtor.

Global Express Money Orders, Inc., Plaintiff v. Farmers & Merchants Bank, et al., Defendants.

Bankruptcy No. 06-13748-NVA.

Adversary No. 08-0700.

United States Bankruptcy Court, D. Maryland, Baltimore Division.

May 22, 2009.

COPYRIGHT MATERIAL OMITTED

Robert James Parsons, II, Esquire, Rogers, Moore & Rogers, LLP, Baltimore, MD, Martin B. Ellis, Esquire, Shumaker Williams, P.C., Towson, MD, for Carrollton Bank.

Andrew L. Cole, Esquire, Franklin & Prokopik, Baltimore, MD, for Farmers & Merchants Bank.

James T. Heidelbach, Esquire, Jason W. Hardman, Esquire, Gebhardt & Smith LLP, Baltimore, MD, for Baltimore County Savings Bank.

David S. Musgrave, Esquire, Ober, Kaler, Grimes & Shriver, P.C., Baltimore, MD, for the Plaintiff.

Zvi Guttman, Esquire, The Law Offices of Zvi Guttman, P.A., Baltimore, MD, for the Trustee.

MEMORANDUM OPINION IN SUPPORT OF ORDER GRANTING MOTION [DOC. 19] FOR ABSTENTION AND REMAND

NANCY V. ALQUIST, Bankruptcy Judge.

The Debtor in this bankruptcy case operated a now-defunct check cashing and money order sale business. The Debtor was engaged in the practice of check kiting and moved money among the three banks named as the defendants in the adversary proceeding now before this Court. The issuer of the money orders sold by the Debtor claims that the banks improperly utilized trust funds of the money order company to satisfy the banks' own claims against the Debtor. After the Debtor filed a chapter 11 petition in this Court, the money order company brought suit against the banks (but not the Debtor) in Maryland state court. The banks removed the action to this Court and the money order company asks this Court to abstain and remand the action back to state court.

The Court has for its consideration the Motion [doc. 19] of Global Express Money Orders, Inc. ("Global") For Abstention and Remand (the "Motion to Remand"), as well as an oppositions to the Motion to Remand filed by three banks at the following docket numbers: Baltimore County Savings Bank ("BCSB") [doc. 25], Carrollton Bank ("Carrollton") [doc. 26], and Farmers and Merchants Bank ("F & M") [doc. 27.]

On March 4 and March 24, 2009, the Court held an evidentiary hearing on the Motion to Remand and the oppositions. Based on the record in this case as well as the evidence and arguments presented at the two-day hearing on this matter, the Court has determined that it is mandatory for this Court to abstain from adjudicating this adversary proceeding, and that it is also appropriate for it to exercise its discretionary power to abstain. The Court will also remand this case to the Circuit Court for Baltimore City for the reasons set forth below.

On August 6, 2008, Global, a creditor of the instant Debtor, filed a three-count complaint against Carrollton, F & M and BCSB in the Circuit Court for Baltimore City (the "Civil Action"). Carrollton, F & M and BCSB are also creditors of the Debtor. The Civil Action alleges one-count of conversion under Maryland state law against each defendant and seeks compensatory damages against all three defendants and punitive damages against F & M and BCSB. On its face, the complaint seeks to recover damages based on actions by the banks that took place during June, 2006. Colleen, Inc., the debtor herein (the "Debtor" or "Colleen") filed a voluntary petition under chapter 11 of the Bankruptcy Code on June 28, 2006.

After Colleen's chapter 11 case was commenced, this Court appointed Zvi Guttman as chapter 11 Trustee and he later became the Plan Agent (the "Plan Agent" or "Mr. Guttman") under Colleen's confirmed Liquidation Plan. Because the Debtor conducted pre-petition banking operations at each of the three banks herein, Mr. Guttman looked into the conduct of the banks and the Debtor and ultimately entered into a settlement agreement with BCSB and F & M and a settlement agreement with Carrollton. Mr. Guttman also entered into a settlement agreement with Global.

On September 17, 2008, Carrollton, F & M and BCSB (collectively, the "Banks") filed a Notice [doc. 1] of Removal of the Civil Action to this Court pursuant to 28 U.S.C. §§ 1452 and 1334. Global filed the Motion [doc. 19] to Remand and the Banks filed their respective oppositions [doc. 25, 26, 27].

Against this backdrop, Global seeks to have this Court order the remand of its Civil Action against the Banks back to the Maryland state court where it was instituted. In support of its Motion to Remand, Global acknowledges that the Civil Action relates to the Debtor in this bankruptcy case, but argues that the subject matter of the Civil Action does not relate to the bankruptcy itself. In this regard, Global points out that the Civil Action seeks damages from non-debtor third parties and does not involve assets of the estate. Global also argues that the Civil Action does not affect assets that will be distributed to creditors and that the Plan Agent under the Liquidation Plan has no interest in the funds that are the subject of the Civil Action or the potential proceeds of the Civil Action. Global points out that the time period covered by the Civil Action is extremely limited — the complaint only implicates bank deposits that were made by the Debtor over a ten-day period in June 2008. Global argues that this Court does not have subject matter jurisdiction over the Civil Action, that the Civil Action is not a core proceeding that it is appropriately subject to mandatory and discretionary abstention and should be remanded back to the Circuit Court for Baltimore City. The Banks, on the other hand, argue that they are the majority of the bankruptcy estate's creditors, and, therefore that what is in their best interest is in the estate's best interest. Further, the Banks point out that even if the Civil Action proceeds in state court, if the Banks are called to pay money to Global, they may in turn assert an indemnification claim back against the bankruptcy estate. Accordingly, they argue, the Civil Action is sufficiently intertwined with the bankruptcy case, is a core proceeding, and this Court should not abstain from hearing it.

A. The Civil Action is a Non-Core Proceeding

As an initial matter, this Court does not believe that the Civil Action is a core proceeding.¹ The Court derives its subject matter jurisdiction pursuant to 28 U.S.C. § 1334² and may hear and determine all core proceedings arising under title 11 (the Bankruptcy Code) or arising in a case under title 11. 28 U.S.C. § 157(b).³

The Civil Action does not arise under or arise in a case under the Bankruptcy Code; it is a case between non-debtor third parties and involves non-property of the estate. See In re Porter-Hayden Co., 304 B.R. 725, 730 n. 3 (Bankr. D.Md.2004). The cause of action set forth in the Civil Action was not created by the Bankruptcy Code nor will it be determined under the provisions of the Bankruptcy Code. See In re Wood, 825 F.2d 90, 96 (5th Cir.1987) (for jurisdictional purposes, a proceeding arises under title 11 if it is created or determined by a provision of the Bankruptcy Code). On the face of the complaint initiating the civil action, Global asserts causes of action under Maryland conversion law based on the Banks' pre-petition actions. Nor does the Civil Action arise in a case under chapter 11. The Civil Action exists independently of the Colleen bankruptcy case — the causes of action asserted in that case are not dependent on Colleen ever having filed for bankruptcy protection. Thus, because the claims alleged in the Civil Action have independent existence apart from the bankruptcy case, the Civil Action does not arise under or arise in this bankruptcy case. See Valley Historic L.P. v. Bank of New York, 486 F.3d 831 (4th Cir.2007).

B. This Court Must Abstain From Hearing the Civil Action

The mandatory abstention statute governing this Court is found at 28 U.S.C. § 1334(c)(2) and provides:

Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.

Thus, a court must abstain when: (i) the case is based on state law causes of action, (ii) the case relates to a bankruptcy case but is not a core proceeding, and (iii) the case could not have been commenced in federal court in the absence of the bankruptcy filing and the case can be timely adjudicated in state court See In re Railworks, 345 B.R. 529 (Bankr.D.Md.2006).

Here, all of these factors are present. First, the Civil Action is based on state law. The complaint alleges three counts of common-law conversion, one against each of the Banks. Second, the Civil Action relates to Colleen because it appears that it was Colleen's pre-petition actions (check-kiting) that set off chain of events that resulted in various parties making claims to the same funds. Colleen made deposits in the Banks. The Banks acted against the deposits to satisfy their own claims, while Global claimed that the funds that the Banks "took" were its trust funds and therefore that the Banks engaged in common law conversion. As discussed, supra, however, the Civil Action is not a core proceeding. Third, the Civil Action could not have been commenced in federal court absent the bankruptcy filing and there is no allegation by the Banks that it could have been. Finally, appears the Civil Action can be timely adjudicated in state court. At the hearing on the Remand Motion, Global called as a witness Ms. Marilyn Bentley who is the scheduling coordinator for the Circuit Court for Baltimore City, the jurisdiction from which the Civil Action was removed....