In re Inc.

• Decision Date: 24 May 2011
• Docket Number: Bankruptcy No. 11–51042.,Adversary No. 11–05042.
• Citation: 55 Bankr.Ct.Dec. 28,453 B.R. 699
• Court: U.S. Bankruptcy Court — Western District of Texas
• Parties: In re LEGAL XTRANET, INC., Debtor.Legal Xtranet, Inc. d/b/a/ Elumicor, Plaintiff,v.AT & T Management Services, L.P. f/k/a SBC Management Services, L.P., Defendant.

453 B.R. 699
55 Bankr.Ct.Dec. 28

In re LEGAL XTRANET, INC., Debtor.Legal Xtranet, Inc. d/b/a/ Elumicor, Plaintiff,
v.
AT & T Management Services, L.P. f/k/a SBC Management Services, L.P., Defendant.

Bankruptcy No. 11–51042.

Adversary No. 11–05042.

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

May 24, 2011.

[453 B.R. 702]

Randall A. Pulman, Pulman, Cappuccio & Pullern LLP, William R. Davis, Jr., Langley & Banack, Inc., San Antonio, TX, for Plaintiff.Michael M. Parker, Steve A. Peirce, Fulbright & Jaworski, LLP, Ricardo G. Cedillo, Troy A. Glander, Davis, Cedillo & Mendoza, Inc., San Antonio, TX, for Defendant.

DECISION AND ORDER ON DEFENDANT'S MOTION TO REMAND LEIF M. CLARK, Bankruptcy Judge.

This decision and order resolves a motion to remand a matter removed to this court the same day the bankruptcy petition was filed. Almost immediately, the Defendant (“AT & T”) requested remand, based upon the theories of mandatory abstention or, alternatively, permissive abstention/equitable remand. AT & T essentially argued that LXI's suit raised only state law claims and was at best “related to” LXI's bankruptcy case. AT & T further argued that mandatory abstention applied because this court only had jurisdiction, if at all, under the “related to” prong of 28 U.S.C. § 1334 and because AT & T's evidence showed that the case could be timely adjudicated in state court. Finally, AT & T argued that permissive abstention or equitable remand would also be appropriate.

LXI, the Plaintiff in the suit, and the Debtor in this bankruptcy case, naturally, objected to AT & T's motion to remand. First, LXI argued that mandatory abstention did not apply because LXI's claims against AT & T were core proceedings under various subsections of section 157(b)(2) of the Code. LXI asserted that its claims against AT & T were “in the nature of offsets against or attempts to limit the claims of what may well be one of Debtor's largest creditors” (Resp., p. 5.) and thus, as analogous to a response to a proof of claim, the claims against AT & T constituted core proceedings. LXI also argued that its suit fell within this court's core jurisdiction because it included a request for a determination that AT & T is responsible for all sales taxes assessed by the comptroller. LXI maintained that this claim arose under the Bankruptcy Code because it involved the determination of tax liability, liquidation of the assets of the estate and administration of the estate. Lastly, LXI argued that AT & T was also not entitled to equitable remand because consideration of the relevant factors actually favored keeping the case in the bankruptcy court.

Discussion

LXI's state court suit against AT & T seeks a declaratory judgment regarding a

[453 B.R. 703]

contract that had governed the parties' relationship for many years. In December 2010, AT & T gave notice of its intention to terminate that contract pursuant to a provision of that contract. The ensuing dispute arose over the extent (if any) to which LXI might be entitled to certain protections for its claims of proprietary interest in certain software, and for its claims to trade secret protection. The dispute also centered around the extent (if any) to which LXI might be entitled to compensation for work associated with data transfer back to AT & T and/or its new contracting entity, and if so, at what rate. The declaratory judgment action seeks a determination that: 1) LXI is not required to turn over to AT & T its documents in LXI's proprietary and trade secret software format; 2) the Fourth Rate Amendment whereby AT & T pays an annual [redacted] repository management fee and thereafter only [redacted] cents per page for all other services is an effective amendment of the Master Agreement and was the rate for Electronic Data Discovery in effect at the time of the termination of the Master Agreement; 3) the applicable rate for the export and migration of AT & T's documents is: (a) [redacted] cents per page in accordance with the fourth Amendment of the Master Agreement, plus (b) depending on the length of time of such an export, an equal and proportional share of the [redacted] repository management annual fee; and 4) AT & T is responsible for any and all sales taxes assessed by the Texas Comptroller of Public Accountants for the audit period from July 1, 2006, through December 31, 2009, and any other subsequent periods. In short, LXI's suit requires that the court interpret the parties' contract and determine whether AT & T is liable for sales taxes assessed in connection with LXI's provision of services to AT & T. AT & T filed counterclaims against LXI for conversion and breach of contract and sought injunctive relief. AT & T's counterclaims have since been withdrawn. Its request for injunctive relief was essentially resolved after the matter had been removed to this court. Thus, all that remains to be tried are the various declaratory matters described above. Whether that trial should remain in the federal system or should instead be remanded to the state court is the subject of this decision and order.

As an initial matter, the court must address whether the remand request should be evaluated based on the pleadings as they stood as of the removal, or as they stood when they were later amended post-motion but prior to the hearing on the motion for remand. The issue arises because, shortly before the hearing, AT & T amended its answer and counterclaim by dropping its counterclaims (but asserting a defensive claim for recoupment). The case law offers a clear answer: the court must determine its jurisdiction based on the pleadings as of the time LXI filed its notice of removal. See Bissonnet Invs. LLC v. Quinlan (In Re Bissonnet Invs. LLC), 320 F.3d 520, 525 (5th Cir.2003) (“The existence of subject matter jurisdiction is determined at the time of removal.”) (citing Arnold v. Garlock, 278 F.3d 426, 434 (5th Cir.2001)); Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir.2002) (“[T]o determine whether jurisdiction is present for removal, we consider the claims in the state court petition as they existed at the time of removal.”); Enron Corp. Secs. v. Enron Corp. (In re Enron Corp. Secs.), 2005 WL 6220721, at *3–4, 2005 U.S. Dist. LEXIS 34029, at *15–16 (S.D.Tex. July 25, 2005) (“Jurisdiction is determined at the time of removal and the right to remove depends on the plaintiff's pleading at the time of petition for removal ... The same is true for removals under the much broader

[453 B.R. 704]

grant of ‘related to’ bankruptcy jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 1452(a).”) (internal citations omitted). We thus consider the pleadings as they stood as of the date of filing of the motion for remand.

Looking at the parties' pleadings as they existed at the time of removal, the first issue to be addressed is whether the court has jurisdiction over the parties' state court proceeding and, if so, whether each cause of action asserted within that proceeding is core or non-core. See CBI Eastchase, L.P., et. al. v. Farris, et. al. (In re e2 Communications, Inc.), 2005 Bankr.LEXIS 3250, at *8 (Bankr.N.D.Tex. Mar. 24, 2005) (noting that before addressing the issues of abstention and equitable remand, “the first question is whether this Court has jurisdiction over the claims asserted in the State Court Action under section 1334”). Additionally, “ ‘any doubts concerning removal must be resolved against removal and in favor of remanding the case back to state court ... [and, the removing party] bear[s] the burden of establishing federal jurisdiction under section 1334.’ ” Id. (citations omitted).

Section 1334 provides in relevant part:

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.

(b) Except as provided in subsection (e)(2), and notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.

28 U.S.C. § 1334(a)-(b). The term ‘cases under title 11’ refers to the bankruptcy petition itself, which is not applicable here. See In re e2 Communications, 2005 Bankr.LEXIS 3250, at *9 n. 5. Thus, only subsection (b) is relevant to this dispute. A matter falls within the court's subject matter jurisdiction if the matter arises under a provision of title 11, or if the matter arises in or is related to the bankruptcy case. See id. Civil proceedings that arise under title 11 or arise in cases under title 11 are deemed “core” matters; while civil proceedings that are related to a title 11 case are deemed “non-core” matters. See id.; see also Morrison v. Western Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473, 479 (5th Cir.2009). As succinctly explained by the bankruptcy court for the Northern District of Texas,

‘Arising under’ jurisdiction involves causes of action created or determined by a statutory provision of title 11. ‘Arising in’ jurisdiction is not based on a right expressly created by title 11, but is based on claims that have no existence outside of bankruptcy. Prior to confirmation of a plan of reorganization, ‘related to’ jurisdiction exists if ‘the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.

In re e2 Communications, 2005 Bankr. LEXIS 3250, at *9–10 n.5 (emphasis original) (citations omitted); see also In re Morrison, 555 F.3d at 479. A civil proceeding need not “necessarily be against the debtor or against the debtor's property. An action is related to bankruptcy if the outcome could alter the debtor's rights, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” In re...