In re Commercial Financial Services, Inc.
| Decision Date | 21 April 2000 |
| Docket Number | 98-05166-R. Adversary No. 99-0005-R.,Bankruptcy No. 98-05162-R |
| Citation | 251 BR 397 |
| Parties | In re COMMERCIAL FINANCIAL SERVICES, INC., and CF/SPC NGU, Inc., Debtors. Commercial Financial Services, Inc., Plaintiff, v. Jay L. Jones, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Oklahoma |
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Larry M. Wolfson, Jerry L. Switzer, Jr., Jenner & Block, Chicago, IL, Neal Tomlins, Ronald E. Goins, Tomlins & Goins, Tulsa, OK, Jay Geller, Law Office of Jay S. Geller, Portland, ME, for plaintiff.
Andrew Turner, Timothy Trump, Conner & Winters, P.C., Tulsa, OK, for defendant.
On December 11, 1998, Plaintiff Commercial Financial Services, Inc. ("CFS") filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. CFS is a debtor in possession pursuant to 11 U.S.C. § 1107. On January 11, 1999, CFS filed its Complaint For Turnover of Property of Debtor's Estate and Other Relief against Jay L. Jones ("Jones") alleging that he had executed a demand note, that CFS has made demand for payment of the note, that Jones has failed and refused to honor the demand for payment, that CFS is entitled to recover from Jones under 11 U.S.C. § 542 and under a breach of contract cause of action, and further that all claims made by Jones against the estate should be disallowed under 11 U.S.C. § 502(d) (the "Complaint"). Adversary Docket # 1 ("Doc. 1").
On February 24, 1999, Jones filed a Motion to Withdraw the Reference and Brief in Support Thereof (the "Motion to Withdraw Reference"). Doc. 6. In his Motion to Withdraw Reference, Jones argues that he is entitled to a jury trial, that he does not consent to this Court conducting a jury trial, and thus the reference of this matter to this Court must be withdrawn by the district court. CFS responded to the Motion to Withdraw Reference on March 16, 1999. Doc. 10. CFS contends that Jones may not ultimately be entitled to a jury trial and that withdrawal of the reference is therefore premature. On March 26, 1999, Jones filed a Reply to CFS' Response to Motion to Withdraw Reference ("Reply Brief"). Doc. 13.
Contemporaneously with the Reply Brief, Jones filed an Answer to the Complaint and demanded a jury trial ("Answer"). Doc. 16. In his Answer, Jones admits that he executed the note, denies that advances were made to him under the note, admits that CFS's records indicate that advances were made to him or for his benefit, admits that CFS has made demand for payment, and admits that he has refused to pay the indebtedness. In his Answer, Jones also states, as an affirmative defense, that "Jones may be owed money by CFS which may be set-off or recouped against any amount that he may owe to CFS." Answer at 3. Jones contends that his assertion of the affirmative defenses of setoff and recoupment has not resulted in a waiver of a right to jury trial. See Reply Brief at 3.
Also on March 26, 1999, Jones filed a Motion to Abstain Combined with Brief in Support Thereof ("Motion to Abstain") (Doc. 14) and a Motion to Dismiss Combined with Brief in Support Thereof (Doc. 15) ("Motion to Dismiss"). Except in connection with the relief sought, the legal argument underlying these motions is substantively identical.
In the Motion to Dismiss, Jones argues that CFS's claims under Section 542(b) and 502(d) of the Bankruptcy Code should be dismissed under Rule 12(b)(6) of the Federal Rules of Civil Procedure () for failure to state valid bankruptcy claims. Jones maintains that under the facts pleaded, CFS cannot obtain relief pursuant to Section 542(b) of the Bankruptcy Code because Section 542(b) may only be asserted by a debtor to obtain turnover of the payment of a debt when "there is no dispute or defense asserted by the obligor." Id. at 2. In this case, Jones contends that although he has not had an opportunity to review and conduct discovery on the allegations against him, Id. at 3. Further Jones states that he Id. Jones also contends that by asserting a turnover claim under Section 542, which Jones believes "mirrors" the breach of contract claim, CFS's Complaint is "a transparent attempt to maintain federal jurisdiction that is not supported by any real substance." Id. at 1-2.1 Thus, he argues, the Section 542(b) turnover claim is not a valid claim for relief (and arguably was not asserted in good faith).
With respect to the Section 502(d) disallowance claim, Jones asserts that "as there is no legitimate turnover claim stated, . . . there is no basis to disallow any claims which may be made by Jones in the CFS bankruptcy case." Motion to Dismiss at 4. Jones contends that he has not filed any claims against the estate, and that if Jones files a claim, CFS may object. See id. at 4.
In the Motion to Abstain, Jones reiterates his analysis of the impropriety of the claims; he concludes that the federal claims should be dismissed because the Section 542(b) claim is unliquidated, disputed and subject to defenses, that the Section 502(d) claim is premature and dependent upon the survival of the Section 542(b) claim, and that the remaining claim is "non-core" and controlled by state law. Jones thus argues that this Court should abstain in the interest of justice and comity. Since there is no parallel state lawsuit pending between these parties, abstention would result in the dismissal of the entire proceeding.
On April 26, 1999, CFS filed a combined response to the Motion to Abstain and the Motion to Dismiss. Doc. 21. CFS maintains that it has stated three valid claims for relief and therefore dismissal is inappropriate; that discretionary abstention is not warranted under the multi-factor examination courts perform in considering abstention; and that its claims under Section 542(b) and 502(d) are core matters over which this Court has jurisdiction to render a final determination.
Jones's requests for dismissal, abstention and withdrawal of the reference are alternative requests for relief. The focus of Jones's motions is his argument that this Court cannot adjudicate CFS's claims against him because (1) the title 11 claims must be dismissed and the remaining claim — a non-core state law breach of contract claim — should properly be determined by a state court, and (2) he desires a jury trial, but does not consent to this Court conducting such trial, and thus the proceeding must be tried in another court. Determining the scope of this Court's jurisdiction over this adversary proceeding is fundamental to the resolution of all motions before the Court.
Federal court jurisdiction over bankruptcy cases and proceedings is established pursuant to Section 1334 of title 28 of the United States Code. District courts have original and exclusive jurisdiction of bankruptcy cases (cases that arise under title 11). See 28 U.S.C. § 1334(a). District courts have original but non-exclusive jurisdiction over all civil proceedings arising under title 11, or arising in or related to a title 11 case, notwithstanding any statute that otherwise confers exclusive jurisdiction on a court other than the district court. See 28 U.S.C. § 1334(b). Further, district courts have exclusive jurisdiction over property of the debtor and property of the estate. See 28 U.S.C. § 1334(e).
Jones contends that CFS's claims under 11 U.S.C. §§ 542 and 502(d) are not valid bankruptcy claims but are in reality state law contract claims. Pursuant to Section 1334(b) of title 28 of the United States Code, the district court clearly has jurisdiction over all CFS's claims, regardless of their characterization, in light of the undisputed fact that this proceeding is related to the bankruptcy case because its outcome may have an effect on the resources available for distribution to creditors of the estate. See 28 U.S.C. § 1334(b); Gardner v. United States (In re Gardner), 913 F.2d 1515, 1518 (10th Cir.1990) () (internal quotes and citation omitted). Jones admits that the district court has jurisdiction over this proceeding.
Section 157(a) of title 28 of the United States Code provides, however, that the district court may refer to bankruptcy courts any or all proceedings arising under title 11, or arising in or related to a case under title 11. See 28 U.S.C. § 157(a). On July 10, 1984, the District Court for the Northern District of Oklahoma did in fact refer to the bankruptcy judges in this district all title 11 cases and proceedings "in, under or related to" title 11 cases, including, without limitation, "state law claims or causes of action of the kind referred to at Title 28 U.S.C. § 1334(c)(2)."2 Rule B-5 of the District Court Rules for Bankruptcy Practice and Procedure, Misc. Order No. M-128, dated April 11, 1985. This Court therefore has jurisdiction of this proceeding pursuant to Section 157(a) and Rule B-5 because this is a proceeding in, under and/or related to CFS's bankruptcy case.
Because this is a "related to" proceeding, even if the claims under title 11 were dismissed, this Court would still have subject matter jurisdiction over the contract claim to the same extent as the district court has jurisdiction.3 And even though Jones believes that this Court should abstain from hearing this proceeding in deference to the ...
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