In re Today's Destiny, Inc., Case No: 05-90080 (Bankr. S.D. Tex. 5/1/2009)
| Decision Date | 01 May 2009 |
| Docket Number | Case No: 05-90080.,No. 06-3285.,06-3285. |
| Parties | IN RE: TODAY'S DESTINY, INC. Chapter 7, Debtor(s) JOSEPH M. HILL, Plaintiff(s), v. MICHAEL DAY, et al, Defendant(s). |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
On October 13, 2005, Today's Destiny, Inc. ("Debtor") filed a chapter 7 bankruptcy petition. Debtor was in the business of selling "predictive dialing equipment" to dentists and chiropractors ("Customers"). Predictive dialing equipment is designed to increase the efficiency of telemarketers by connecting marketing agents only to "live" persons rather than unanswered phones, voice mail, or answering machines. Various financial institutions ("Lenders")1 financed the equipment sales and leases by entering into agreements with Customers.
Customers filed over 300 proofs of claim for damages arising from the sales and leases. Customers largely contend that Debtor sold them worthless equipment at prices of $18,000.00-80,000.00. As of October 29, 2008, Customers' proofs of claim totaled over $20,000,000.00.
On March 21, 2006, the chapter 7 Trustee filed an adversary proceeding against Debtor's principals ("Insiders")2 and Lenders. The Trustee contends that Debtor and Lenders defrauded Customers through the fraudulent sale and leasing of the predictive dialing equipment. Debtor's principals and Lenders deny the allegations.
During February through April of 2007, Insiders and Lenders ("Defendants") filed Motions to Dismiss, Motions for More Definite Statement, and Motions to Abstain with respect to the Trustee's complaint. The majority of Defendants' motions have been resolved by separate Memorandum Opinions on July 6, 2007, and April 11, 2008.
The July 6 Opinion determined whether certain Customers seeking to intervene in this adversary ("Intervenors") could intervene under the Federal Rules of Bankruptcy Procedure, which claims asserted by the Trustee were owned by the estate, and which claims were owned by putative Intervenors. In re Today's Destiny, Inc., 2007 WL 2028111 (Bankr. S.D. Tex. July 6, 2007). The Court found that Intervenors' claims shared a sufficient commonality with the Trustee's claims and therefore authorized intervention under Rule 7024. Id. The Court's Opinion also included a chart categorizing which claims were owned by the Today's Destiny's estate and which were owned by Intervenors. Id.
The April 11, 2008, Opinion resolved issues regarding in pari delicto, contribution under the Texas Civil Practice and Remedies Code, and abstention. In re Today's Destiny, Inc., 388 B.R. 737 (Bankr. S.D. Tex. 2008). An essential holding of the April 11 Opinion was that the Trustee's contribution claim could only be sustained if Today's Destiny's liability could become fixed. Accordingly, the Court issued deadlines for filing objections to Customers' proofs of claim. Lenders objected to nearly all of the more than 300 proofs of claim.
On November 26, 2008, the Court issued a Memorandum Opinion resolving most of the claim objections. Subsequently, the parties filed a joint motion to extend pending deadlines to afford the parties the opportunity to mediate. On December 11, 2008, the Court issued an Order that abated the bankruptcy case and the adversary proceeding until the conclusion of the parties' mediation. On March 9, 2009, the parties informed the Court that approximately half of the Lenders settled with the Trustee and Intervenors.3 On April 27, 2009, the Court issued an order approving the settlements.
Pursuant to the April 11 Opinion, the Court issued an Order authorizing Intervenors to file a complaint. Intervenors filed a Consolidated First Amended Complaint on May 12, 2008 (docket # 461). The April 11 Opinion gave Defendants the opportunity to re-urge their Rule 8, 9, and 12 arguments, and to re-urge abstention arguments that were not considered in the April 11 Opinion.4 Defendants filed over 20 motions to dismiss or for a more definite statement. This Memorandum Opinion resolves Defendants' motions. The Court will consider Lenders' and Insiders' motions separately below.
The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334. The Intervenors' complaint is a related, rather than a core, proceeding under 28 U.S.C. § 157(b). Venue is proper in this District pursuant to 28 U.S.C. § 1409.
Lenders' financing agreements with Customers contained forum selection clauses providing that any disputes would be resolved in a non-Texas forum. The Court's April 11 Memorandum Opinion considered the effect of the forum selection clauses on the Trustee's complaint. Because the Trustee's complaint did not assert any claims owned by Customers, the April 11 Opinion held that the forum selection clauses did not preclude the Trustee from asserting claims in this Court. Intervenors, however, are asserting claims against Lenders arising out of their financing agreements with Lenders. Intervenors have not filed any responsive pleadings contesting the existence or enforceability of forum selection clauses or the effect of the clauses on this Court's jurisdiction.
Accordingly, the Court grants Lenders' motions to dismiss based on the forum selection clauses.
The Court additionally notes that dismissal of Lenders is warranted under § 1334(c)(1), the permissive abstention provision of the United States Code.
Title 28 U.S.C. § 1334(c)(2) provides for mandatory abstention when:
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).
The Fifth Circuit has interpreted this provision to mandate abstention where:
(1) [t]he claim has no independent basis for federal jurisdiction, other than § 1334(b); (2) the claim is a non-core proceeding, i.e., it is related or in a case under title 11; (3) an action has been commenced in state court; and (4) the action could be adjudicated timely in state court.
Edge Petroleum Operating Co., Inc. v. GRP Holdings (In re TXNB Internal Case), 483 F.3d 292, 300 (5th Cir. 2007) (quoting Schuster v. Mims (In re Rupp & Bowman), 109 F.3d 237, 239 (5th Cir. 1997)).
"The party requesting abstention must prove the existence of each element by a preponderance of the evidence." In re Lorax Corp., 295 B.R. 83, 90 (Bankr. N.D. Tex. 2003) .
Lenders have not met their burden with respect to mandatory abstention. Section 1333 provides for diversity jurisdiction within federal courts where the parties are citizens of different states and the amount in controversy exceeds $75,000.00. Intervenors seek economic and special damages that exceed $75,000.00. Lenders offer no evidence that Intervenors and Lenders lack the required diversity of citizenship.
Title 28 U.S.C. § 1334(c)(1) provides for permissive abstention. Section 1334(c)(1) provides:
[N]othing in this section prevents a district in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
28 U.S.C. § 1334(c)(1).
Bankruptcy courts have wide latitude in determining whether to remand a state law cause of action. The Fifth Circuit has held that under 28 U.S.C. § 1334(c)(1), the court has "broad discretion to abstain from hearing state law claims `whenever appropriate in the interest of justice, or in the interest of comity with State courts or respect for State law.'" In re Gober, 100 F.3d 1195, 1206 (5th Cir. 1996) (quoting 28 U.S.C. § 1334(c)(1)).
In determining whether discretionary abstention or equitable remand is appropriate, courts have developed a list of nonexclusive factors, including:
(1) the effect or lack thereof on the efficient administration of the estate;
(2) extent to which state law issues predominate over bankruptcy issues;
(3) difficult or unsettled nature of applicable law;
(4) presence of related proceeding commenced in state court or other non-bankruptcy proceeding;
(5) jurisdictional basis, if any, other than § 1334;
(6) degree of relatedness or remoteness of proceeding to main bankruptcy case;
(7) the substance rather than the form of an asserted core proceeding;
(8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
(9) the burden of the bankruptcy court's docket;
(10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties;
(11) the existence of a right to a jury trial;
(12) the presence in the proceeding of nondebtor parties;
(13) comity; and
(14) the possibility of prejudice to other parties in the action.
J.T. Thorpe Co. v. Am. Motorists, No. H-02-4598, 2003 WL 23323005 (S.D. Tex. June 6, 2003) (citing Beasley v. Pers. Fin. Corp., 279 B.R. 523, 533 (S.D. Miss. 2002)). See also In re Encompass Servs. Corp., 337 B.R. 864, 878 (Bankr. S.D. Tex. 2006). Many...
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