In re VideOcart, Inc.
| Decision Date | 11 April 1994 |
| Docket Number | Bankruptcy No. 93-25767. Adv. No. 94-1051. |
| Citation | 165 BR 740 |
| Parties | In re VIDEOCART, INC., Debtor. CENITH PARTNERS, L.P., by Stephen G. RABINOVITZ, Plaintiff, v. HAMBRECHT & QUIST, INC., George G. Montgomery, John Malec, and Ronald E. Spears, Defendants. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Max D. Stern, Stern, Shapiro, Weissberg & Garin, Boston, MA (M. Ellen Carpenter, Law firm of Kern, Hagerty, Roach & Carpenter, of counsel), for plaintiff Cenith Partners, L.P.
Mitchell S. Ross, Law firm of Kaye, Fialkow, Richmond & Rothstein, Boston, MA, and Michael F. Perlis, Stroock & Stroock & Lavan, Los Angeles, CA, for defendants Hambrecht & Quist, Inc. and George G. Montgomery.
The matter before the Court for determination is the Motion of the plaintiff, Cenith Partners, L.P. ("Cenith" or the "plaintiff") to remand the above-referenced civil action (the "action") which was removed by the defendants, Hambrecht & Quist, Inc. ("H & Q") and George Montgomery ("Montgomery") (collectively the "defendants") to this Court from the Trial Court of the Commonwealth of Massachusetts, Superior Court Department, Suffolk County Division (the "state court"). The action was commenced in the state court on December 23, 1993. On January 21, 1994, before answering the complaint, the defendants filed a notice of removal of the action to the United States District Court for the District of Massachusetts pursuant to 28 U.S.C. §§ 1452(a) and 1334 and Fed. R.Bankr.P. 9027. The action was referred to this Court pursuant to 28 U.S.C. § 157(a) and the order of reference. The plaintiff now seeks to remand the action to the state court. The defendants oppose the motion. The Court conducted a hearing on March 23, 1994, and the parties presented arguments based upon undisputed facts. Both parties have submitted memoranda.
The action arises out of the alleged fraudulent sale of worthless securities (certain convertible notes in the amount of $250,000) of VideOcart, Inc. ("VideOcart" or the "Debtor"). VideOcart filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Northern District of Illinois on December 8, 1993. H & Q, an investment banker, was the underwriter for the sale of the securities offered by the Debtor. Montgomery was H & Q's managing director. The other defendants named in the action, John Malec and Ronald Spears were officers of the Debtor. VideOcart, however, is not a defendant in the action.
In its state court complaint, Cenith seeks rescission of the purchase and monetary damages. In its five count complaint, it also alleges violations of section 12 of the Securities Act of 1933, 15 U.S.C.A. §§ 77a-77bbb (West 1981 & Supp.1994), section 410(a)(2) of the Massachusetts Uniform Securities Act, Mass.Gen.Laws Ann. ch. 110A, §§ 101-417 (West 1990 & Supp.1994), as well as unfair and deceptive trade practices, see Mass.Gen. Laws Ann. ch. 93A, §§ 2, 11 (West 1984 & Supp.1994), deceit, and negligent misrepresentation by the defendants in the sale of the Debtor's securities.
In VideOcart's bankruptcy petition, Cenith is listed as one of the Debtor's twenty largest unsecured creditors with a claim in the sum of $250,000. The Debtor did not list the liability as disputed, unliquidated, or contingent. Cenith filed a proof of claim in the Chapter 11 case, which it later withdrew. However, Cenith has represented that it does not waive any distribution that might be forthcoming from the VideOcart estate.
The parties did not provide any further information about the status of the VideOcart case.
Cenith argues that remand of this action to the state court is required because this Court lacks jurisdiction over the subject matter of the dispute pursuant to 28 U.S.C. § 13341 as this action is not "related to" the VideOcart bankruptcy case. Cenith also asserts that removal of the action is expressly barred by 15 U.S.C. § 77v(a)2, which prohibits removal of state court actions under the Securities Act of 1933 to federal court. Finally, Cenith argues that even if remand were not mandatory for the first two reasons, equitable grounds support remand under 28 U.S.C. § 1452(b)3.
The defendants argue that removal was proper and that remand of the action is not warranted on legal or equitable grounds. They maintain that the bankruptcy court has jurisdiction over the action because it is related to the VideOcart bankruptcy case as Cenith is a creditor of the Debtor and the defendants will have indemnification claims and/or contribution claims against VideOcart if Cenith prevails in the action. The defendants state that removal is not barred by 15 U.S.C. § 77v(a) because only one count of the complaint arises under the Securities Act of 1933. The defendants also argue that equitable considerations militate against remand because there are three other actions arising out of the sale of VideOcart securities pending in other federal courts, and, therefore, the interests of judicial economy are better served by application of the multi-district litigation rules of federal procedure.
Was removal of the state court action proper under 28 U.S.C. § 1452(a)?
Do equitable grounds exist for remand pursuant to 28 U.S.C. § 1452(b)?
Removal and remand of claims related to bankruptcy cases are governed by 28 U.S.C. § 1452. Jurisdiction of bankruptcy cases is governed by 28 U.S.C. § 1334. Procedures with respect to the referral of bankruptcy cases from the district court to the bankruptcy court are contained in 28 U.S.C. § 157 which provides in pertinent part:
28 U.S.C. § 157(a)-(c). In the absence of consent by all parties to the entry of a final order by the bankruptcy judge in a non-core, related proceeding, the bankruptcy judge may only recommend findings of fact and conclusions of law to the United States District Court for de novo review. Id. § 157(c)(1). Notably, Cenith does not consent to the entry of final orders by this Court. See Plaintiffs' Statement Pursuant to Bankruptcy Rule 9027(e)(3).
The parties agree that the removed action is a non-core proceeding. They disagree as to whether it is a related proceeding. Related proceedings include suits between non-debtor, third parties which affect the administration of the bankruptcy estate. In determining whether a non-core matter is sufficiently related to a bankruptcy case so as to confer jurisdiction on the bankruptcy court, courts' inquiries focus on whether "the outcome ... could conceivably have any effect on the estate being administered in bankruptcy." Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984); In re Wood, 825 F.2d 90, 93 (5th Cir.1987).
The court in DaSilva v. American Savings, 145 B.R. 9 (S.D.Tex.1992), which found that removal of a state court action was improper where the litigation involved claims of third-party home buyers against banks that had financed the debtor/builder, stated the following: "neither common issues, related parties, parallel claims nor bankruptcy law applications make a case related to a bankruptcy for the purpose of removal jurisdiction." 145 B.R. at 12. In DaSilva, the court determined that the potential of a claim for contribution by the defendants against the debtor did not have a sufficient effect on the administration of the case to make the action related to the bankruptcy case. 145 B.R. at 12. See also Foley Co. v. Aetna Casualty & Surety Co. (In re S & M Constructors, Inc.), 144 B.R. 855, 861-62 (Bankr. W.D.Mo.1992).
In the recent decision of In re Houghton, 164 B.R. 146, 25 B.C.D. 402 (Bankr. W.D.Wash.1994), the bankruptcy court ruled that its jurisdiction under 28 U.S.C. § 1334(b) did not extend to a claim by third-party investors against non-debtor investment advisors who were alleged to have fraudulently induced the investors to make loans to the debtor. Finding that the dispute had no financial impact on the debtor's estate, the court ruled that the proceeding was not "related to" the bankruptcy case, even though there was a nondischargeability complaint pending against the debtor arising out of the same facts.
Guided by the above decisions, the Court finds that the defendants have failed to establish based upon the undisputed facts that the action that they have removed to this Court has a sufficient nexus to or effect on the VideOcart bankruptcy estate to confer "related to" jurisdiction on this Court. The appearance of the plaintiff as a creditor in the Debtor's schedules is irrelevant. The present action is by a non-debtor against non-debtors. A recovery by the plaintiff against the defendants will not directly affect the Debtor's bankruptcy estate. The defendants might have contribution claims against the Debtor in the future if the plaintiff is successful. However, this is only a precursor to the potential contribution claim, see Pacor 743 F.2d at 995; DaSilva, 145 B.R. at 12, and is too tenuous and speculative an event at this point in time to confer ...
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