In re Santa Clara County Child Care Consortium
| Citation | 223 BR 40 |
| Decision Date | 04 August 1998 |
| Docket Number | BAP No. MB 97-079. |
| Parties | In re SANTA CLARA COUNTY CHILD CARE CONSORTIUM, Debtor. WORK/FAMILY DIRECTIONS, INC., Plaintiff/Appellee, v. CHILDREN'S DISCOVERY CENTERS, INC., Defendant/Appellant. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, First Circuit |
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Andrea T. Porter, Nancy J. Geenen, David J. Richardson and Murphy, Weir & Butler, San Francisco, CA, for appellant.
J. Kenneth Felter, P.C., Steven E. Skwara, John G. Loughnane, Sheila K. Driscoll and Goodwin, Procter & Hoar, Boston, MA, for appellee.
Before VOTOLATO, Chief Judge, LAMOUTTE and CARLO, Bankruptcy Judges.
This is an appeal of the bankruptcy court's decision remanding the adversary proceeding to the state court and denying the petition to transfer venue to the United States Bankruptcy Court for the District of California, where debtor's bankruptcy case is pending. Generally, a bankruptcy court's conclusions of law are reviewed de novo, In re S.P.M. Mfg. Corp., 984 F.2d 1305 (1st Cir.1993), while findings of fact are reviewed for abuse of discretion. In re G.S.F. Corp., 938 F.2d 1467 (1st Cir.1991). Mixed questions of law and fact are reviewed "along a degree-of-deference continuum, ranging from plenary review for law-dominated questions to clear-error review for fact-dominated questions." Servicios Comerciales Andinos, S.A. v. General Electric Del Caribe, Inc., 145 F.3d 463 (1st Cir.1998) (citations omitted). The bankruptcy court's decision to remand the removed state court proceeding because it was not sufficiently related to the debtor's bankruptcy case, presents a mixed question of law and fact.
Debtor, Santa Clara County Child Care Consortium ("Santa Clara"), is a non-profit corporation organized under the laws of California. Children's Discovery Centers, Inc. (CDC) is a Delaware Corporation with its principal place of business in California, and is the successor in interest to Prodigy Consulting, Inc. and Prodigy Child Development Centers, Inc. ("Prodigy"). CDC is the operator and manager of two child care centers owned by Santa Clara. Work/Family Directions, Inc. ("Work/Family") is a Massachusetts corporation with its principal place of business in Boston, Massachusetts, and is the successor in interest to Work Family Directions Development Corporation (WFDD). WFDD financed the construction of the two child care centers constructed by Santa Clara and operated by CDC.
On April 29, 1993, Santa Clara and Prodigy entered into a Child Development Center Management Agreement, pursuant to which Santa Clara agreed to pay the cost of construction of two child care centers which Prodigy agreed to operate and manage. That agreement further provided that WFDD would finance the construction of the child care centers. WFDD lent $3,295,000 to Santa Clara pursuant to a Dependent Care Resources Development Agreement dated June 29, 1993, and evidenced by a promissory note executed by Santa Clara in favor of WFDD on June 17, 1993. Prodigy executed a guarantee of Santa Clara's debt to WFDD on June 17, 1993.
On May 19, 1997, prior to the filing of Santa Clara's bankruptcy petition, Work/Family commenced an action against CDC in the Superior Court Department of the Trial Court of the Commonwealth of Massachusetts, Suffolk County (Civil Action No. 97-2655). The complaint seeks a declaratory judgment that CDC is liable to Work/Family for $3,295,000.00 as guarantor of Santa Clara's debt and damages for CDC's alleged breach of guaranty.
Santa Clara filed a petition for relief under chapter 7 of the Bankruptcy Code on May 30, 1997 in the United States Bankruptcy Court for the Northern District of California, San Jose Division (case no. 97-54584-MM-7). CDC is the holder of an unsecured claim against Santa Clara in the amount of $960,922.00. Work/Family is the holder of a claim against Santa Clara, scheduled as secured in the amount of $3,272,589.75, based upon the debtor's liability under the promissory note.
On June 12, 1997, CDC filed a notice of removal of the Massachusetts court proceeding to the United States Bankruptcy Court for the District of Massachusetts pursuant to 28 U.S.C. § 1334(b), (e) and 28 U.S.C. § 1452, asserting that said action is inextricably intertwined with the claims litigation in Santa Clara's bankruptcy proceeding. On June 16, 1997, CDC filed its answer to the Massachusetts complaint. On that same date, CDC filed it's "Objection to Allowance of Claim of Work Family Directions Development Corporation and Counterclaim for Determination of Nature, Extent and Validity of Lien" in Santa Clara's bankruptcy case, thereby commencing adversary proceeding no. 97-5306-MM.
On July 8, 1997, Work/Family filed a motion to remand the removed action back to the state court. CDC filed an opposition to the remand motion on July 15, 1997, and, on that same date, filed a motion to transfer venue of the removed proceeding to the bankruptcy court in California where Santa Clara's case is pending.
At a hearing held on August 12, 1997, the Massachusetts bankruptcy court granted Work/Family's motion to remand and denied CDC's motion to transfer venue.1 CDC filed a notice of appeal of the court's decision on August 22, 1997.
The removal of state court actions to the bankruptcy court is provided for in 28 U.S.C.A. § 1452(a), which states that "a party may remove any claim or cause of action in a civil action . . . to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title." Section 1334(b), which delineates jurisdiction over bankruptcy proceedings, provides that "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." The district court may refer bankruptcy jurisdiction to the bankruptcy court pursuant to 28 U.S.C.A. § 157(a). Thus, a party may remove a cause of action from state court to the bankruptcy court if it is an action arising under title 112, or arising in3 or "related to"4 a case under title 11. The procedure for removing a cause of action to the bankruptcy court is set forth in Bankruptcy Rule 9027.5
When presented with a motion to remand a proceeding which has been removed from the state court, the bankruptcy court must first evaluate whether the state court action was properly removed; that is, it must determine whether it has subject matter jurisdiction over the proceeding. In doing so, the bankruptcy court must decide whether the removed action is one arising under or arising in a case under title 11 or is an action "related to" a case under title 11. If it is, the bankruptcy court may entertain the removed proceeding. However, if the bankruptcy court does not have subject matter jurisdiction over the removed proceeding, then it may not hear the matter and the case should be remanded pursuant to 28 U.S.C. § 1447(c)6, which provides that if at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded.
Even if the court has jurisdiction, further basis for remanding a removed cause of action lies in 28 U.S.C. § 1452(b), which provides that the court to which a claim or cause of action is removed may remand the claim or cause of action on any equitable ground. The bankruptcy court must first determine whether the matter is even properly before it, prior to reaching considerations of equity. See Pacor, Inc. v. Higgins, 743 F.2d 984, 993 (3rd Cir.1984) ()7 See also, Seybolt v. Bio-Energy of Lincoln, Inc., 38 B.R. 123, 126 (Bankr.D.Mass.1984) ()
In the state court action which was removed to the bankruptcy court, Work/Family was seeking a declaratory judgment that CDC is liable to it, pursuant to the guaranty executed on June 17, 1993, wherein CDC's predecessor guaranteed Santa Clara's debt to Work/Family's predecessor. It is clearly not an action "arising under title 11", nor an action "arising in" a proceeding under title 11. Whether it is an action "related to" a proceeding under title 11 in light of Santa Clara's bankruptcy petition is not as clear. Appellees argue that the state court proceeding is merely a declaratory judgment action to determine the rights and obligations of two non-debtor parties and will have no conceivable substantive effect on the bankruptcy estate. On the other hand, appellants argue that the state court proceeding is an action between two creditors of the debtor who are also involved in claims litigation within Santa Clara's bankruptcy proceeding, and that since said litigation arises out of the same underlying transaction as the state proceeding, the two are inextricably intertwined.
The type of civil proceedings encompassed within § 1334(b) as "related to proceedings" are those whose outcome could conceivably have an effect on the bankruptcy estate, and which (1) involve causes of action owned by the debtor that became property of a title 11 estate under § 541, or (2) are suits between third parties which "in the absence of bankruptcy, could have been brought in a district court or a state court." 1 Lawrence P. King, et al., Collier on Bankruptcy ¶ 3.014cii (15th ed. rev.1998), citing In re Colorado Energy Supply, Inc., 728 F.2d 1283, 1286 (10th Cir.1984). Not all litigation between third parties falls within the court's "related to" jurisdiction. The test most widely used to determine whether litigation falls within the jurisdictional grant of § 1334(b) is whether "the outcome...
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