In re South Canaan Cellular Investments, Inc., Bankruptcy No. 09-10473bf (Jointly Administered with 09-10474) (Bankr. E.D. Pa. 11/12/2009), Bankruptcy No. 09-10473bf (Jointly Administered with 09-10474).
| Decision Date | 12 November 2009 |
| Docket Number | Adversary No. 09-0218.,Bankruptcy No. 09-10473bf (Jointly Administered with 09-10474). |
| Parties | In re: SOUTH CANAAN CELLULAR INVESTMENTS, INC., and SOUTH CANAAN CELLULAR EQUITY, LLC, Chapter 11, Debtors. SOUTH CANAAN CELLULAR INVESTMENTS, INC., and SOUTH CANAAN CELLULAR EQUITY, LLC Plaintiffs, v. LACKAWAXEN TELECOM, INC. and FRANK M. COUGHLIN Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Defendants Lackawaxen Telecom, Inc. ("LTI") and Mr. Frank Coughlin have filed two motions in this adversary proceeding that are related. First, the defendants seek to sever the plaintiffs/debtors' objection to LTI's unsecured proofs of claim from the above-captioned adversary proceeding. In addition, they also seek to strike the jury trial request of the debtors. The debtors oppose both motions.
Upon consideration of the memoranda submitted and the oral arguments presented, for reasons that follow I shall grant the request to strike the jury demand but deny the defendants' request to sever.
In this adversary proceeding, the debtors allege that defendant Mr. Coughlin, who is a shareholder of LTI and member of both debtors, improperly obtained assignments of the debtors' obligations from CoBank, ACB in 2007. The debtors assert seven alternative and overlapping claims against Mr. Coughlin in connection with those loan assignments: breach of duty of loyalty; breach of duty of candor/disclosure; usurpation of business opportunity; breach of duty of good faith; breach of duty of care; breach of fiduciary duty; and breach of duty of good faith and fair dealing.
In addition, the debtors join a claim against defendant LTI in their complaint for allegedly aiding and abetting Mr. Coughlin in his breach of these various duties to the debtor. They also include an objection to the $13 million secured proofs of claim filed by LTI in the debtors' two chapter 11 bankruptcy cases. See Fed. R. Bankr. P. 3007(b) ().
In their objection to LTI's proofs of claim, the debtors seek to disallow LTI's claims because: the assignments of the loans from Co-Bank to LTI should be invalidated; a constructive trust should be imposed upon any gain or profit LTI received owing to these loan assignments; LTI should be precluded from receiving any accrued interest or attorney's fees arising from the Co-Bank loans; the prepetition interest component of LTI's proof of claim was improperly computed; and, the attorney's fees components of the proofs of claim are excessive. In addition, as to defendants LTI and Coughlin, the debtors demand damages, imposition of a constructive trust, invalidation of the CoBank assignment, injunctive relief, and attorneys fees and costs based upon their claims of breaches of duties and aiding and abetting such breaches.
As part of their complaint, the debtors demand trial by jury on all claims, except the objection to LTI's proofs of claim.
In response to this complaint, the defendants filed a joint motion to dismiss under Fed. R. Bankr. P. 7012 on July 29, 2009. In their memorandum accompanying this dismissal motion, the defendants stated:
Plaintiffs' Complaint contains a demand for a jury trial. (Complaint, ¶ 16.) 28 U.S.C. § 157(e) provides that a Bankruptcy Court may conduct such a jury trial only if specially designated to exercise such jurisdiction by the district court and with the express consent of all the parties. Neither Defendant Coughlin nor Defendant LTI consents to the exercise of such jurisdiction by this Bankruptcy Court.
For all these reasons, this case should be dismissed under F.R.Civ.P. 12(b)(1).
Defendants' Memorandum in Support of their Motion to Dismiss, at 8 (emphasis in original).
Contemporaneously with the filing of their motion to dismiss, the defendants filed a motion with the district court to withdraw the reference for this adversary proceeding under 28 U.S.C. § 157(d). They asserted to the district court that the debtors had raised non-core claims and had also demanded a jury trial. As the defendants did not consent to a bankruptcy judge presiding over such a trial, the defendants maintained that the jurisdictional reference to the bankruptcy court should be withdrawn and the adversary proceeding adjudicated in the district court.1
On August 12, 2009, the debtors filed their memorandum in opposition to defendants' motion to dismiss. In this memorandum, the debtors stated in part:
Debtors hereby voluntarily withdraw their demands for (1) a jury trial and (2) a rescission of the assignment of the loan from Co-Bank to LTI thus rendering moot those grounds in the Motion to Dismiss.
***
Plaintiffs/Debtors hereby withdraw their request for a jury trial respecting their adversary action against LTI and Coughlin. Accordingly, Defendants' objection to the jury demand is now moot.
Debtors' Memorandum of Law in Opposition to Defendant's Motion to Dismiss, at 7 n.l, and 20 n.4.
On August 17, 2009, at a hearing on the debtors' motion to approve a jointly proposed disclosure statement under 11 U.S.C. § 1125, counsel addressed the pendency of the defendants' motion to dismiss this adversary proceeding as well as LTI's motion to withdraw the reference. Counsel for LTI opined that he anticipated that the district court, rather than this bankruptcy court, would rule upon the pending motion to dismiss. N.T., at 12. Counsel for the debtors disagreed, implying that the motion to dismiss should be considered by this court. Id., at 12-13. Insofar as the issue of trial by jury was concerned, counsel for the debtors stated that they had "withdrawn the request for a jury trial." N.T., at 13. Counsel for LTI (who is also counsel for defendant Coughlin) then replied that such withdrawal would need defendants' consent. Id., at 13.
At that August 17, 2009 hearing, the defendants neither consented to nor opposed the withdrawal of plaintiff's jury demand. On August 26, 2009 the defendants filed two pleadings: a withdrawal of their motion filed with the district court to withdraw the reference of this adversary proceeding; and a "Notice of Consent to Non-Jury Trial." See docket # 14. This notice stated that the defendants "hereby consent to a non-jury trial of all issues triable by jury in the above adversary action." Id.
At a status hearing held thereafter in this proceeding, counsel reported the district court had noted on its docket that defendants' motion to withdraw the reference was marked withdrawn and so would not be considered by the district court. Moreover, defendants' counsel requested, in light of this disposition of their withdrawal motion, that this court adjudicate the pending motion to dismiss. The debtors opposed that request, arguing that they still desired a jury trial and that the district court should preside over this adversary proceeding, including adjudication of defendants' motion to dismiss.
Promptly thereafter, the defendants filed the instant motions to sever the debtors' objection to LTI's proofs of claim, and then filed a subsequent motion to strike the debtors' jury demand. See generally 8 Moore's Federal Practice-Civil, § 39.13[2][c] (3d ed. 2009) (). I note that both the debtors and LTI have proposed competing chapter 11 plans, and those plans, if approved, may involve the distribution of assets of a limited partnership in which the two debtors are among the limited partners. If either chapter 11 plan were confirmed, it could only be consummated after determining the allowed unsecured claim of LTI.
Federal Rule of Bankruptcy Procedure 7021 incorporates Federal Rule of Civil Procedure 21 in adversary proceedings such as this. Rule 21 states:
Misjoinder of parties is not a ground for dismissing an action. On motion or on its own, the court may at any time, on just terms, add or drop a party. The court may also sever any claim against a party.
If a claim is severed, it "proceeds as a discrete, independent suit." 4 Moore's Federal Practice, § 21.06 (2009); see United States ex rel. LaCorte v. Smithkline Beecham, 149 F.3d 227, 231 (3d Cir. 1998). Moreover, whether to sever a claim is within the discretion of the trial court. See, e.g., Walsh v. Miehle-Goss-Dexter, Inc., 378 F.2d 409, 412 (3d Cir. 1967); GriRsby v. Kane, 250 F. Supp.2d 453, 456 (M.D. Pa. 2003); 7 Federal Practice & Procedure Civ., § 1689 (3d ed. 2009).
While federal courts have invoked their discretion to sever claims against improperly joined parties, and when venue is improper as to some parties, see 7 Federal Practice & Procedure Civ., § 1689 (3d ed. 2009), application of Rule 21 is not restricted to those two circumstances. Moreover, whether to sever a claim under Rule 21 requires that a court consider the fairness to the parties and convenience and judicial economy, by analyzing factors such as the commonality of issues of law or fact and prejudice to the parties. See, e.g., German v. Federal Home Loan Mortgage Corp., 896 F. Supp. 1385, 1400 (S.D.N.Y. 1995); In re Montagne, 2009 WL 1065427, at *2 (Bankr. D. Vt. 2009).
Similarly, Federal Rule of Bankruptcy Procedure 7042 incorporates Federal Rule of Civil Procedure 42. Rule 42(b) provides a trial court with discretion to order separate trials of claims "[f]or convenience, to avoid prejudice, or to expedite and economize." The difference between severance under Rule 21 and separate trials under Rule 42 is that only the former results in two different civil actions. See, e.g., Official Committee of Unsecured Creditors v. Shapiro, 190 F.R.D. 352, 354 (E.D. Pa. 2000). Given the defendants' articulated intention that this bankruptcy court determine LTI's allowed claims against the debtors separately from any determination of the debtors' causes of action against Mr. Coughlin, which determination may be made in the district court, it appears...
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