In re New 118TH LLC

• Decision Date: 13 November 2008
• Docket Number: Adversary No. 07-3064.,Bankruptcy No. 07-12333.
• Citation: 396 B.R. 885
• Parties: In re NEW 118TH LLC, et al., Debtors. Joremi Enterprises, Inc., Zev Cohen & Associates, Inc., Qualified Retirement Plan, Cohen Properties of Central Florida, Ltd., Zev Cohen & Gail Cohen, Tenants by the Entirety, Individually and on Behalf of All Those Investors in Mortgages Originated by the Kingsland Group, Inc., On 16 Properties in Manhattan, Plaintiffs, v. Michael Hershkowitz, Ivy Turk a/k/a Ivy Woolf-Turk, and Robert Lobel, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

396 B.R. 885

In re NEW 118TH LLC, et al., Debtors Joremi Enterprises, Inc., Zev Cohen & Associates, Inc., Qualified Retirement Plan, Cohen Properties of Central Florida, Ltd., Zev Cohen & Gail Cohen, Tenants by the Entirety, Individually and on Behalf of All Those Investors in Mortgages Originated by the Kingsland Group, Inc., On 16 Properties in Manhattan, Plaintiffs, v. Michael Hershkowitz, Ivy Turk a/k/a Ivy Woolf-Turk, and Robert Lobel, Defendants.

Bankruptcy No. 07-12333.

Adversary No. 07-3064.

United States Bankruptcy Court, S.D. New York.

November 13, 2008.

COPYRIGHT MATERIAL OMITTED

Lederman Abrahams & Lederman, LLP, Massapequa, NY (Bruce H. Lederman, of Counsel), for Special Real Estate Counsel and Special Litigation Counsel to the Official Committee of Unsecured Creditors.

Pelosi Wolf Effron & Spates LLP, New York, NY (Alan Effron, of Counsel), for Defendant Robert Lobel.

MEMORANDUM DECISION GRANTING REMAND

STUART M. BERNSTEIN, Chief Judge.

The plaintiffs instituted an action in the Supreme Court of the State of New York, New York County (the "State Court Action") against New 118th LLC, a number of its affiliates, several financial institutions, the City and State of New York and three individuals, Michael Hershkowitz ("Hershkowitz"), Ivy Woolf-Turk ("Turk") and Robert Lobel ("Lobel") (collectively the "Individual Defendants"). After the Court entered an order for relief against the affiliated debtors, the plaintiffs removed the State Court Action to the District Court pursuant to 28 U.S.C. § 1452(a), which referred it to this Court, and the State Court Action morphed into this Adversary Proceeding. The plaintiffs thereafter assigned the proceeds of their claims to the debtors' estates, and filed their Amended Complaint, dated Mar. 5, 2008. (ECF Doc. # 12.) The Amended Complaint dropped all of the defendants other than the Individual Defendants.

Lobel has moved to remand the Adversary Proceeding. For the reasons that follow, the Court grants the part of Lobel's motion for remand based upon principles of mandatory abstention.

BACKGROUND¹

At all relevant times, and except for The Kingsland Group, Inc. ("Kingsland"), the debtor defendants in the State Court Action (collectively, the "Property Owner Debtors")² owned 16 parcels of real property located in metropolitan New York. (¶ 14.)³ The Individual Defendants were shareholders or managing members and equity owners of each of the Property Owner Debtors. (¶¶ 18, 19, 24, 25, 30, 31.) In addition, the Individual Defendants were shareholders, officers and directors of Kingsland. (¶¶ 20-22, 26-28, 32-34.)

Beginning in 2003, Hershkowitz and Turk advised certain plaintiffs (collectively, "Joremi") that the Individual Defendants were planning to develop large, multi-family properties on the parcels owned by the Property Owner Debtors. (¶ 37.) The Individual Defendants offered to sell percentage interests in "bona fide recorded first mortgages" on the new multi-family developments, and Joremi eventually purchased $78 million worth of mortgages on the 16 properties. (¶¶ 1, 38.) The Individual Defendants personally guaranteed each mortgage note, agreeing to pay 15% of the outstanding principal amounts. (¶¶ 39, 59.)

The sale of the mortgages was part of a fraudulent scheme. Contrary to the Individual Defendants' representations, the mortgages were unrecorded, and were never intended to be recorded. (¶ 40.) In fact, the Individual Defendants were contemporaneously granting first mortgages to institutional lenders who duly recorded them. (Id.) To advance the scheme, the Individual Defendants sent Joremi investment binders that contained fraudulent, falsified and misleading documents indicating that the mortgages that Joremi was buying had been recorded. (¶¶ 41-43, 66.)

A. The State Court Action

On May 21, 2007, Joremi commenced the State Court Action against the Property Owner Debtors, Kingsland, the Individual Defendants, North Fork Bank, Washington Mutual Bank, Dominion Financial Corporation, Israel Discount Bank, Intervest Mortgage Corporation, Intervest National Bank and the City and State of New York. Joremi proposed to certify a class of between 40 and 50 similarly situated lenders. (¶ 44.) The Complaint asserted causes of action, inter alia, to foreclose the unrecorded Joremi mortgages on the properties still owned by the Property Owner Debtors, to recover damages based on RICO, and to recover the approximate aggregate amount of $17.5 million from the Individual Defendants based on their personal guarantees (the "Guarantee Claims").

B. The Bankruptcy Proceedings

On July 30, 2007 and August 17, 2007, a group of petitioning creditors filed involuntary Chapter 11 cases against the Property Owner Debtors, Kingsland and 72 Kings Ave. Corp. The Court ordered relief, and Richard L. Wasserman was appointed the Chapter 11 Trustee (the "Trustee"). The United States Trustee also appointed an Official Committee of Unsecured Creditors (the "Committee").

The State Court Action was removed, as described earlier, on October 16, 2007. Following removal, the Committee, the Trustee and Joremi entered into a stipulation (the "Stipulation"). In relevant part, the Stipulation assigned all recoveries and proceeds of the Adversary Proceeding to the debtors' estates, and authorized the Committee to prosecute the Adversary Proceeding on behalf of Joremi. (See Stipulation and Order, dated March 5, 2008)(ECF Doc. # 11.) The Court approved the Stipulation over Lobel's objection. (Id.)

Joremi subsequently filed the Amended Complaint, which dropped the other defendants and was limited to the Guarantee Claims against the Individual Defendants. On July 9, 2008, Turk filed an answer to the Amended Complaint asserting her rights under the 5th and 14th Amendments to the United States Constitution and under the comparable provisions of the Constitution of the State of New York, and declined either to admit or to deny the allegations. (See Answer and Affirmative Defenses of Defendant Ivy Turk, dated July 9, 2008)(ECF Doc. # 22.) On September 15, 2008, Joremi obtained a default judgment against Hershkowitz. (See ECF Doc. # 45.)

Before and after the filing of the Amended Complaint, Joremi and Lobel engaged in "extensive settlement negotiations, with the knowledge and authorization of the Trustee." (Motion to Remand, dated June 30, 2008, at 3)(ECF Doc. # 19.) The parties apparently reached an agreement in principle, but the agreement fell thorough when, on June 24, 2008, the Trustee objected to the settlement. (Id.)

Six days later, Lobel moved to remand the Adversary Proceeding back to the state court. He contended that this Court lacked subject matter jurisdiction, and remand was therefore required under 28 U.S.C. 1447(c). In the alternative, Lobel argued that the Court should abstain from hearing the Adversary Proceeding pursuant to 28 U.S.C. § 1334(c)(1) or (c)(2), and remand the case to state court pursuant to 28 U.S.C. § 1452(b).

DISCUSSION

A. Subject Matter Jurisdiction

Section 1452(a) of title 28 authorizes any party to a state court civil action to remove a claim or cause of action to the local district court provided that the claim or cause of action meets the jurisdictional requirements of 28 U.S.C. § 1334. In addition, 28 U.S.C. § 1447, which deals with the procedure following the removal of "the case," requires the district court to remand a case if the district court lacks subject matter jurisdiction. 28 U.S.C. § 1447(c). "There is no express indication in § 1452 that Congress intended that statute to be the exclusive provision governing removals and remands in bankruptcy," Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 129, 116 S.Ct. 494, 133 L.Ed.2d 461 (1995), and the net effect of the two provisions is that the district court, and hence, the bankruptcy court, must remand any removed claim or cause of action over which it lacks subject matter jurisdiction.

Subject matter jurisdiction over a removed claim is determined by the facts existing at the time of removal. Certain Underwriters at Lloyd's, London v. ABB Lummus Global, Inc., 337 B.R. 22, 25 (S.D.N.Y.2005); In re WorldCom, Inc. Secs. Litig., 294 B.R. 553, 556 (S.D.N.Y. 2003). The post-removal Stipulation and Amended Complaint are, therefore, immaterial. The question comes down to whether the Guarantee Claim asserted by Joremi against Lobel in the State Court Action fell within § 1334. See Halper v. Halper, 164 F.3d 830, 837 (3d Cir. 1999)("To determine the extent of the Bankruptcy Court's jurisdiction in this case we must examine each of the five claims presented to ascertain if it is core, non-core, or wholly unrelated to a bankruptcy case."); Peterson v. 610 W. 142 Owners Corp. (In re 610 W. 142 Owners Corp.), 219 B.R. 363, 368 (Bankr.S.D.N.Y. 1998)("[T]he core/non-core determination may vary from claim to claim.").

1. Core Jurisdiction

Bankruptcy core jurisdiction extends to all civil proceedings arising under title 11 or arising in a case under title 11. See 28 U.S.C. § 157(b)(1)("Bankruptcy judges may hear and determine ... all core proceedings arising under title 11, or arising in a case under title 11...."); Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir.1987)("[S]ection 157 apparently equates core proceedings with the categories of `arising under' and `arising in' proceedings.") Generally, a core proceeding is one that invokes a substantive right under title 11, or could only arise in the context of a bankruptcy case. Binder v. Price Waterhouse Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 162-63 (3d Cir. 2004); Wood, 825 F.2d at 96-97.

The Court plainly lacks core jurisdiction over the Guarantee Claim against Lobel. The cause of action did not arise under title 11, and did not arise in this bankruptcy case. It is a garden-variety state law claim between non-debtor parties.

2. Non-Core Jurisdiction

A proceeding is "related to" a case under title 11, and falls within its...