Marotta Gund Budd & Dzera LLC v. Costa

• Decision Date: 31 March 2006
• Docket Number: Civ. No. 05-CV-452-JD.
• Citation: 340 B.R. 661
• Court: U.S. District Court — District of New Hampshire
• Parties: MAROTTA GUND BUDD & DZERA LLC and J. Richard Budd, III v. Pat V. COSTA and Robert H. Walker.

340 B.R. 661

MAROTTA GUND BUDD & DZERA LLC and J. Richard Budd, III v. Pat V. COSTA and Robert H. Walker.

Civ. No. 05-CV-452-JD.

United States District Court, D. New Hampshire.

March 31, 2006.

David M. Kohane, Jeffrey Milton Traurig, Michael D. Sirota, Cole Schotz Meisel Forman & Leonard PA (NJ), Hackensack, NJ, Peter G. Callaghan, Preti Flaherty Beliveau Pachios & Haley, Concord, NH, for Marotta Gund Budd & Dzera LLC and J. Richard Budd, III.

Charles A. Dale, III, David Himelfarb, Gadsby & Hannah, Boston, MA, Thomas J. Pappas, Wiggin & Nourie PA, Manchester, NH, for Pat V. Costa and Robert H. Walker.

ORDER

DiCLERICO, District Judge.

The plaintiffs, Marotta Gund Budd & Dzera LLC ("MBGD") and J. Richard Budd, III, brought this state law action in state court in New York, alleging that the defendants defamed them by republishing statements originally made in motions filed in a bankruptcy case pending in the United States Bankruptcy Court for the District of New Hampshire. The defendants, Pat V. Costa and Robert H. Walker, removed the defamation action to the United States District Court for the Eastern District of New York, invoking its original jurisdiction over "all civil proceedings ... arising in or related to cases under Title 11" of the United States Code. 28 U.S.C. § 1334(b).

The plaintiffs then moved to remand the action to state court for lack of subject-matter jurisdiction or, in the alternative, under either the "permissive" or "mandatory" abstention principles of 28 U.S.C. § 1334(c). See, e.g., Middlesex Power Equip. & Marine, Inc. v. Town of Tyngsborough, Mass. (In re Middlesex Power Equip. & Marine, Inc.), 292 F.3d 61, 67-68 & n. 6 (1st Cir.2002). In response, the defendants opposed the motion to remand and cross-moved to transfer the case to this court under 28 U.S.C. § 1404(a) which the plaintiffs opposed. The United States District Court for the Eastern District of New York (Ross, J.) granted the motion to transfer but took no action on the motion to remand, reasoning that the New Hampshire bankruptcy court, where this court could refer the motion, see 28 U.S.C. § 157, "is in the best position to determine whether this action is `arising in' or `related to' the pending bankruptcy case." Order (Dec. 15, 2005), at 1. Once the case arrived here, the plaintiffs renewed their motion for remand or abstention and the defendants filed an objection. The plaintiffs also filed a reply to the defendants' renewed objection.¹

At the outset, the court notes that, in accordance with Judge Ross's suggestion, the defendants have asked this court to refer the remand motion to the bankruptcy court; the plaintiffs have indicated that they do not object to that course. If this court lacks subject matter jurisdiction, however, it necessarily lacks the authority to refer the case to the bankruptcy court. See Muratore v. Darr, 375 F.3d 140, 147-48 (1st Cir.2004); accord Standing Order BK-1, In re Referral of Title 11 Proceedings (D.N.H. Jan. 18, 1994), available at http://www.nhd.uscourts.gov (referring cases which meet the standard for subject matter jurisdiction under section 1334(b)). This court must therefore decide for itself whether it has subject matter jurisdiction.²

Standard of Review

In sparring over the issues of subject matter jurisdiction and abstention, the parties have accepted the factual allegations set forth in the complaint as true. The court will therefore do the same. See, e.g., Gabriel v. Preble, 396 F.3d 10, 11-12 (1st Cir.2005); Muniz-Rivera v. United States, 326 F.3d 8, 11 (1st Cir.2003). Although counsel for each side has submitted affidavits recounting certain events and appending certain filings from the bankruptcy proceeding, the court can consider these materials in ruling on the motion without necessitating an evidentiary hearing.³ See McIntyre v. United States, 367 F.3d 38, 42 (1st Cir.2004); Valentin v. Hosp. Bella Vista, 254 F.3d 358, 363 (1st Cir.2001). When decided in this fashion, a motion to dismiss for lack of subject matter jurisdiction can be granted "only when the facts alleged in the complaint ... do not justify the exercise of subject matter jurisdiction." Muniz-Rivera, 326 F.3d at 11.

Background

Budd is a principal of MGBD, a company "specializing in advising companies, creditors, investors, and other parties with interests in companies facing operational and financial difficulties." Compl. ¶ 2. In November, 2004, MGBD entered into a management agreement with Robotic Vision Systems, Inc. ("RVSI") and Auto Image ID, Inc. (collectively, "the debtors"), two corporations that had just voluntarily filed for bankruptcy under Chapter 11. The agreement appointed Budd as the debtors' "Chief Restructuring Officer" and obligated the debtors to reimburse MGBD for his services and expenses in that regard.⁴ The bankruptcy court subsequently issued an order that, inter alia, appointed Budd "as the person in control of" RVSI, or "the `Controlling Person.'" Bkrtcy. Ct. Order (Jan. 20, 2005), at 2.

Around this time, Costa, who remained RVSI's chairman, president, and chief executive officer, allegedly began making the statements about the plaintiffs which form the basis of their defamation action.⁵ The plaintiffs claim that, in an e-mail to one of RVSI's consultants, Costa "falsely and maliciously accused Plaintiffs of `improper actions' relating to the management of RVSI and engaging in `assassination attempts' against Costa." Compl. ¶ 8. Costa also allegedly sent a letter to the Lehman Group, L.L.C., whose relationship to these matters is unclear, accusing Budd of various acts of malfeasance in managing RVSI, including "run[ning] a sham ... auction process" for the sale of one of RVSI's divisions and "perpetrating a fraud in a Federal court." Id. ¶ 10.

Costa subsequently filed a motion in the bankruptcy court seeking to oust Budd as RVSI's controlling person and to appoint a Chapter 11 trustee in his stead. According to the complaint, this motion contained a number of false statements about Budd, accusing him of "deceiving RVSI's shareholders and ... filing a false affidavit with the [bankruptcy] court." Compl. ¶ 12. Costa later filed a motion to modify and clarify the scheduling order the bankruptcy court had entered in connection with his motion to appoint a trustee, which allegedly repeated many of the same false accusations about Budd set forth in Costa's earlier filing. Costa allegedly made similar statements in other papers he filed in the bankruptcy court in response to motions by both the debtors and their counsel, Sheehan Phinney Bass + Green ("Sheehan Phinney"), to quash discovery demands he had made on them, also in connection with his motion to appoint a trustee.

The plaintiffs have disavowed any claim that Costa defamed them through the statements contained in these bankruptcy court filings. Rather, they assert that the defamation occurred when Costa posted those filings to a publicly available website, effecting a "re-publication" of the allegedly false statements. Mot. Remand ¶ 5 (emphasis omitted); accord Compl. ¶ 34. The plaintiffs further assert that Costa defamed them in both (1) a letter he and Walker sent to Sheehan Phinney and (2) a letter Costa sent to Sheehan Phinney's co-counsel in representing the debtors, Drier LLP. These letters allegedly accused Budd of, inter alia, "`perpetrat[ing] a fraud on the RVSI Board of Directors, the company, and the [bankruptcy] court....'" and "`fil[ing] knowingly false affidavits....'" Compl. ¶ 23.

MGBD, "a limited liability company of the State of New York," Compl. ¶ 2, and Budd, who resides there, commenced this action against Costa, a Massachusetts resident, and Walker, a New York resident, in Nassau County Supreme Court in New York on July 15, 2005. In response, the defendants answered, asserting a counterclaim under the New York "anti-SLAPP" statute,⁶ then filed a timely notice of removal of the case to the District Court for the Eastern District of New York. The notice of removal invoked that court's "original jurisdiction over this action under 28 U.S.C. § 1334 in that this action is a civil proceeding arising in or related to a case under Title 11." Notice Remov. ¶ 3(d).

Meanwhile, on August 25, 2005, Costa and Walker moved the bankruptcy court for an order requiring RVSI to indemnify them against the defamation suit, to advance them their expenses in defending it, and to accord administrative priority to these claims under 11 U.S.C. § 503(b)(1)(A). Both the official committee of unsecured creditors and the debtors objected to this motion, arguing that the defendants' claims were not entitled to priority, and the defendants were not entitled to indemnification, because their actions giving rise to the defamation suit had conferred no benefit on the estate.

On October 11, 2005, the bankruptcy court converted the debtors' cases to Chapter 7 proceedings upon motion of the official committee of unsecured creditors. In light of this development, which necessitated the appointment of a Chapter 7 trustee, the bankruptcy court denied Costa's motion to appoint a Chapter 11 trustee as moot. The bankruptcy court also cancelled a scheduled hearing on the defendants' motion for indemnification and administrative priority.

Just after the appointment of a Chapter 7 trustee, MGBD relinquished its duties to the debtors and, on November 15, 2005, filed an application with the bankruptcy court for final approval of its fees and expenses.⁷ With Costa's assent, the Chapter 7 trustee then sought a continuance of the hearing on this and other final fee applications to permit additional investigation on whether to object to them, including discussions with Budd and Costa. The court granted the order, setting April 7, 2006, as the deadline to file any objections to the fee applications, and May 5, 2006, as the date of the hearing. So far, Costa has not filed any objection to MGBD's final fee application, though he represents...