In re Kmart Corp.

• Decision Date: 25 March 2004
• Docket Number: Adversary No. 03-5426.,Bankruptcy No. 02-B-02474.
• Citation: 307 B.R. 586
• Parties: In re KMART CORPORATION, et al., Debtors. Kmart Creditor Trust, Plaintiff, v. Charles Chetwynn Conaway; Mark Steven Schwartz; David P. Rots; David W. Montoya; John T. McDonald; Anthony B. D'Onofrio; and Pricewaterhousecoopers LLP, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

307 B.R. 586

In re KMART CORPORATION, et al., Debtors Kmart Creditor Trust, Plaintiff, v. Charles Chetwynn Conaway; Mark Steven Schwartz; David P. Rots; David W. Montoya; John T. McDonald; Anthony B. D'Onofrio; and Pricewaterhousecoopers LLP, Defendants.

Bankruptcy No. 02-B-02474.

Adversary No. 03-5426.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

March 25, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John D. Pirich, Lansing, MI, for Plaintiff.

Thomas J. Tallerico, Troy, MI, for Defendants.

OPINION GRANTING KMART CREDITOR TRUST'S MOTION FOR REMAND

MARCY BETH MCIVOR, Bankruptcy Judge.

For the reasons set forth below, this Court ABSTAINS from hearing this case pursuant to 28 U.S.C. § 1334(c)(2) (mandatory abstention) and, in the alternative, ABSTAINS from hearing this case pursuant to 28 U.S.C. § 1334(c)(1) (permissive abstention) and GRANTS the Kmart Creditor Trust's Motion for Remand pursuant to 28 U.S.C. § 1452.

I. FACTUAL BACKGROUND

The parties provided many pages of background and facts in their briefs. The Court has limited its findings of fact to those facts which are relevant to deciding the instant motion.

On January 22, 2002, the Kmart Corporation and certain of its affiliates (the "Debtors") filed voluntary petitions under Chapter 11 of the Bankruptcy Code in United States Bankruptcy Court for the Northern District of Illinois. The Debtors operated their businesses and managed their properties as debtors in possession.

As part of their first-day motions, the Debtors sought approval from the Bankruptcy Court to retain Price water house Coopers LLP ("PwC") as an ordinary course professional to provide audit, audit-related, and tax services and to retain PwC as the Debtors' financial advisor in their Chapter 11 cases. On February 13, 2002, the Bankruptcy Court appointed PwC as an ordinary course professional under §§ 105(a), 327(a), and 331 of the Bankruptcy Code. On February 15, 2002, the Bankruptcy Court appointed PwC as the Debtors' financial advisor under § 327(a) of the Bankruptcy Code and Fed. R. Bankr.P.2014(a).

On September 12, 2002, the Debtors filed a supplemental application under §§ 327(a) and 328(a) of the Bankruptcy Code to retain PwC to provide audit, audit-related, and tax services to the Debtors in connection with the 2002 fiscal year. Although the Debtors believed that the audit and tax services provided by PwC were part of the Debtors' ordinary course of business, the Debtors assert that they filed the supplemental application to "formally and more publicly disclose" the terms of PwC's engagement. The Bankruptcy Court granted the Debtors' supplemental application on September 30, 2002.

On February 27, 2003, the Debtors filed their First Amended Joint Plan of Reorganization of Kmart Corporation and Its Affiliated Debtors and Debtors in Possession ("the Plan"). The Plan created the Kmart Creditor Trust ("the Trust") which was vested with pursuing causes of action against certain entities regarding various conduct that occurred prior to the chapter 11 case. Plan, ¶¶ 1.160; 11.2(a); 1.159. The Plan did not require the Trust to file its causes of action in the Bankruptcy Court, specifically permitting the Trust to commence any causes of action "in any other court of competent jurisdiction." Plan, Art. XIV. The Bankruptcy Court entered an order confirming the Plan of Reorganization on April 23, 2003. The Debtors' bankruptcy cases are active and have not been closed.

On November 18, 2003, the Kmart Creditor Trust commenced a state court action in the Oakland County Circuit Court. In the complaint, the Trust seeks various forms of relief based on allegations that certain individual defendants, in their capacities as Kmart directors, breached their fiduciary duties to the Debtors, breached their employment agreements with the Debtors, and/or received improper loans from the Debtors. The Trust also seeks various forms of relief from PwC based on allegations that PwC negligently performed accounting and consulting services for the Debtors and, as a result, led the Debtors into a costly Chapter 11 reorganization, prolonged that reorganization, and cost the Debtors' estate hundreds of thousands of dollars in unnecessary fees. These counts are identified in the state court Complaint as Count IX — Common Law Accounting Negligence; CountX — Statutory Accounting Negligence; Count XI — Consulting Negligence; and Count XII — Consulting Breach of Contract. Complaint, ¶¶ 374-400.

On December 18, 2003, relying on 28 U.S.C. § 1452, PwC removed the claims against it to this Court, leaving parallel claims against the officer defendants pending before Judge Nichols in the Oakland County Circuit Court. PwC removed the Trust's claims against it, alleging that those claims are core and, therefore, pursuant to 28 U.S.C. § 157(b)(2), should be heard by the Bankruptcy Court. Furthermore, PwC argues that because the Trust's claims against it are core, mandatory abstention is not appropriate. Specifically, PwC argues that the Trust's claims are core because: (1) the Trust's claims allege professional malpractice against a court-appointed official; and (2) the Trust's claims involve the interpretation of Kmart's Plan of Reorganization and orders entered by the bankruptcy court.

On January 6, 2003, the Trust filed a Motion to Remand, alleging that mandatory abstention under § 1334(c)(2) applies because the allegations in the Trust's Complaint are purely state law causes of action. In the alternative, the Trust alleges that this Court should remand this action under 28 U.S.C. § 1452(b), which authorizes remand based on "any equitable ground."

II. ANALYSIS

A. Jurisdiction and Burden of Proof

Federal courts are courts of limited jurisdiction; they are empowered to hear only those cases within the judicial power of the United States as defined by Article III of the Constitution. This principle reflects the need to respect state courts in matters arising under federal law. The party invoking jurisdiction bears the burden of proving that all prerequisites to jurisdiction are satisfied. Removal statutes are strictly construed, and any doubts about the propriety of removal are resolved in favor of state court jurisdiction and remand. When ruling on a motion for remand, courts construe all doubts in favor of remand. In re Transamerica Fin. Life Ins. Co., 302 B.R. 620, 624-5 (N.D.Iowa 2003).

B. Mandatory Abstention under 28 U.S.C. § 1334(c)(2)

In the Sixth Circuit, a bankruptcy court must abstain from exercising jurisdiction over a case removed pursuant to 28 U.S.C. § 1452(a), and remand that proceeding when the statutory prerequisites of 28 U.S.C. § 1334(c)(2) are satisfied. Robinson v. Michigan Consol. Gas Co., 918 F.2d 579, 584 n. 3 (6th Cir.1990) ("abstention provisions of 28 U.S.C. § 1334(c)(2) apply even though a case has been removed pursuant to 28 U.S.C. § 1452"). Section 1334(c)(2) provides:

(c)(2) 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.

28 U.S.C. § 1334(c)(2). More simply put, under 28 U.S.C. § 1334(c)(2), a bankruptcy court must abstain and thus remand when the following six requirements are satisfied: (1) the motion is timely filed; (2) the proceeding is "based upon a State law claim or State law cause of action;" (3) the claim or cause of action is related to a bankruptcy case, but did not arise in or under the bankruptcy case (in other words, the claim or cause of action is non-core); (4) the only basis for original jurisdiction in federal court is the bankruptcy filing; (5) the State law claim or cause of action is the subject of "an action [that] is commenced ... in a State forum of appropriate jurisdiction;" and (6) the State court action "can be timely adjudicated." 28 U.S.C. § 1334(c)(2). In re Transamerica Fin. Life Ins. Co., 302 B.R. 620, 627 (N.D.Iowa 2003); accord, Lindsey v. O'Brien, Tanski, Tanzer & Young Health Care Providers (In re Dow Corning Corp.), 86 F.3d 482, 497 (6th Cir.1996); Loomis Elec., Inc. v. Lucerne Prods., Inc., 225 B.R. 381, 387 (N.D.Ohio 1998).

The parties agree that only element three, supra, concerning whether the claim or cause of action is a core proceeding, is at issue in this case.

C. Determination of Whether the Claim or Cause of Action Is Core or Non-core

A proceeding is considered "core" only if it "invokes a substantive right created by federal bankruptcy law or one which could not exist outside of bankruptcy." Sanders Confectionery Prod., Inc. v. Heller Financial, Inc., 973 F.2d 474, 483 (6th Cir.1992). "Claims that arise under the Bankruptcy Code or arise in a bankruptcy case are core matters; claims that relate to a bankruptcy case, but do not arise in a bankruptcy case or under the Bankruptcy Code are non-core." WRT Creditors Liquidation Trust v. C.I.B.C. Oppenheimer Corp., 75 F.Supp.2d 596, 606 (S.D.Tex.1999) (internal quotations omitted). Mandatory abstention applies only to non-core proceedings, and applies only when all the other requirements of 28 U.S.C. § 1334(c)(2) are satisfied. Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195, 1206 (5th Cir.1996). Core proceedings may be heard by a bankruptcy court or may be remanded to state court pursuant to 28 U.S.C. § 1452.

D. Parties' Arguments Concerning Whether the Claims are Core or Non-Core

PwC argues that the Trust's claims against it are core and, therefore, mandatory abstention is not required, because: (1) the Trust's claims allege professional malpractice against a court-appointed...