In re World Financial Services Center, Inc.

• Decision Date: 29 September 1986
• Docket Number: Bankruptcy No. 84-04452-H7,Adv. No. C86-0116-H7.
• Citation: 64 BR 980
• Court: U.S. Bankruptcy Court — Southern District of California
• Parties: In re WORLD FINANCIAL SERVICES CENTER, INC., a California corporation, dba World Financial Systems, Bargain Furniture, and Bargain Furnishings, Appliances & Electronics, Debtor. Harold S. TAXEL, Trustee in Bankruptcy, Plaintiff, v. COMMERCEBANK, a California corporation, Defendant.

64 B.R. 980 (1986)

In re WORLD FINANCIAL SERVICES CENTER, INC., a California corporation, dba World Financial Systems, Bargain Furniture, and Bargain Furnishings, Appliances & Electronics, Debtor Harold S. TAXEL, Trustee in Bankruptcy, Plaintiff, v. COMMERCEBANK, a California corporation, Defendant.

Bankruptcy No. 84-04452-H7, Adv. No. C86-0116-H7.

United States Bankruptcy Court, S.D. California.

September 29, 1986.

Edward A. Mendoza, Gendel, Raskoff, Shapiro & Quittner, Los Angeles, Cal., for plaintiff (trustee).

Michael Gerard Fletcher, Sharon R. Biederman, Members of Frandzel & Share, Irvine, Cal., for defendant.

MEMORANDUM DECISION

JOHN J. HARGROVE, Bankruptcy Judge.

I. INTRODUCTION

Defendant Commercebank moves this court to abstain from hearing this adversary proceeding pursuant to 28 U.S.C. § 1334(c)(2), or to order a change of venue, and for a determination of whether this adversary proceeding is a core proceeding. A hearing was held on June 3, 1986 wherein this court tentatively denied Commercebank's motion for mandatory abstention and tentatively found that venue was proper. After argument, this court requested additional briefs by the parties on the issue of discretionary abstention under 28 U.S.C. § 1334(c)(1) in view of the recent Ninth Circuit Court of Appeals' decision in Piombo Corporation v. Castlerock Properties, 781 F.2d 159 (9th Cir.1986).

II. SUMMARY OF FACTS

Briefly, the facts underlying this adversary proceeding are as follows:

On or about June 12, 1985, Margaret Arguelles ("Arguelles"), an employee operating under court authority and shareholder of the debtor, opened a checking account in the name of "World Financing Center" at the South Coast Regional Office of Commercebank. Between June 12, 1985 and October 23, 1985 Arguelles diverted from the debtor's estate approximately $72,000.00 in customer checks made payable to World Financial. Specifically, Arguelles endorsed the checks with a rubber stamp bearing the inscription "Pay to the Order of Commercebank, South Coast Regional Office, Costa Mesa, California, For Deposit Only, World Financing Center, 002 606623" and deposited these checks into the World Financing Center account at Commercebank. Arguelles was not authorized to endorse checks on behalf of World Financial. The trustee alleges that Commercebank converted the checks and the funds payable pursuant to said checks for its own use and that it was negligent in honoring such checks. The trustee has demanded that Commercebank return these funds to the estate and alleges Commercebank has refused. Commercebank responds that it is unable to turnover any property and that a previous Order for Preliminary Injunction entered November 13, 1985 requiring turnover has been fully complied with.¹

The issue before this court is whether this court a) has jurisdiction to hear this proceeding; b) whether this proceeding is a core matter pursuant to 28 U.S.C. § 157; c) whether this court will abstain; and d) whether venue is proper.

III. DISCUSSION

28 U.S.C. § 1334 and 28 U.S.C. § 157 define the limits of the subject matter jurisdiction of the bankruptcy court. 28 U.S.C. § 1334(a) provides that ". . . the district courts shall have original and exclusive jurisdiction of all cases under Title 11." 28 U.S.C. § 1334(b) 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." This jurisdictional scheme provides for four categories of cases and proceedings:

a) A case under Title 11;

b) A civil proceeding arising under Title 11;

c) A civil proceeding arising in a case under Title 11; and

d) A civil proceeding related to a case under Title 11.

28 U.S.C. § 157(a) provides that "each district court may provide that any or all cases under Title 11 and any or all proceedings arising under Title 11 or arising in or related to a case under Title 11 shall be referred to the bankruptcy judges for the district." The United States District Court for the Southern District of California has referred these cases to the bankruptcy judges for this district by General Order 312-c dated October 2, 1984 as amended by General Order 312-d dated May 15, 1985. 28 U.S.C. § 157(b) provides that a bankruptcy judge may hear and determine all cases under Title 11 and all core proceedings arising under Title 11, or arising in a case under Title 11 subject to review by the district court.²

28 U.S.C. § 157(c) provides that a bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under Title 11, but in such proceeding, the bankruptcy judge may not enter a final order or judgment without the consent of the parties, but shall submit proposed findings of fact and conclusions of law to the district court subject to de novo review.

A. Determination of Core Status:

Pursuant to 28 U.S.C. § 157(b)(3), this court must determine whether a proceeding is a core proceeding under this subsection or is a non-core proceeding which is defined as a proceeding that is otherwise related to a case under Title 11.³

28 U.S.C. § 157(b)(2)(A)-(O) provides a non-exhaustive list of core proceedings. 28 U.S.C. § 157(b)(2)(A) and (O) are "catch-all" categories concerning administration of the estate and "other proceedings affecting the liquidation of assets of the estate or the adjustment of the debtor/creditor or equity security holder relationship."

Recently, the United States Court of Appeals for the Ninth Circuit held that ". . . state law contract claims that do not specifically fall within the categories of core proceedings enumerated in 28 U.S.C. § 157(b)(2)(B)-(N) are related proceedings under § 157(c) even if they arguably fit within the literal wording of the two catchall provisions, sections 157(b)(2)(A) and (O). To hold otherwise would allow the bankruptcy court to enter final judgments that this court has held unconstitutional." Piombo Corporation v. Castlerock Properties, 781 F.2d 159, 162 (9th Cir.1986). The court held further that ". . . we are persuaded that a court should avoid characterizing a proceeding as `core' if to do so would raise constitutional problems. (Citations omitted). The apparent broad reading that can be given to § 157(b)(2) should be tempered by the Marathon decision." (Citation omitted). Id.

In Castlerock, the debtor filed a Chapter 11 proceeding, thereby automatically staying a state court contract action involving Castlerock and Piombo. Piombo filed for relief from the automatic stay and Castlerock filed an answer incorporating state law contract counterclaims against Piombo. The bankruptcy judge elected to try the counterclaims but did not enter an order denying the relief from stay. Piombo conceded subject matter jurisdiction but objected to the propriety of trying the counterclaims in the relief from stay proceeding. Piombo's objections were denied and Piombo brought a motion to be allowed to bring its own counterclaim, but the motion was denied.

Thereafter, at the pretrial conference, Piombo objected to the bankruptcy court's jurisdiction relying on Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). On stipulation of the parties the district court vacated the bankruptcy court's judgment which had been entered for Castlerock in order to determine whether the bankruptcy court could properly enter judgment. The district court held that the bankruptcy court did not have jurisdiction to determine the substantive issues and vacated the automatic stay. The Ninth Circuit Court of Appeals affirmed the district court's Order.

In light of Piombo Corporation v. Castlerock Properties, supra, this court would be forced to find, at the very least, that were this adversary proceeding based upon a state law contract claim, that the proceeding therefore, would not be core. However, both parties agree that the trustee is not proceeding on state law contract claims. While the holding of Castlerock applies only to state law contract claims and whether said claims are governed by § 157(b)(2)(A) and (O), this court is not prevented from examining the underlying complaint in this adversary proceeding in light of the principals enunciated in Castlerock.

On its face, this proceeding appears to be a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E) in that the trustee in his First Amended Complaint prays for turnover of property. However, a closer examination by this court reveals that the trustee has characterized a cause of action for turnover, when in fact the cause of action for turnover of property should not lie. The court notes that on February 21, 1986, the trustee filed his Complaint for conversion, negligence, and money had and received based solely upon state law. On April 10, 1986, Commercebank filed its motion for abstention or to change venue. Subsequently, prior to the hearing on Commercebank's motion, the trustee retained new counsel and on April 23, 1986 new counsel was duly substituted. Thereafter, on May 8, 1986, the trustee filed his First Amended Complaint alleging two additional causes of action, to wit, turnover of property pursuant to 11 U.S.C. § 542(a) and failure to use ordinary care in presentment pursuant to California Commercial Code § 4202(1)(a).⁴

An examination of the trustee's turnover cause of action reveals that the trustee seeks a turnover order requiring Commercebank to pay the trustee the proceeds of the checks which were deposited at Commercebank, as the collecting bank, and paid to Commercebank by the various drawee banks. Specifically, the trustee alleges that "Commercebank accepted for deposit to the account of `World Financial Center' at Commercebank checks made payable to World Financial and endorsed by `World Financing Center', and presented the same for collection to the banks upon which said checks had been drawn,...