Stoe v. Flaherty

Decision Date23 January 2006
Docket NumberNo. 04-3947.,04-3947.
Citation436 F.3d 209
PartiesGeorge P. STOE, Appellant v. William E. FLAHERTY; David Carpenter; James Carpenter; William Smelas; Robert Sunderman; Ronald Statile.
CourtU.S. Court of Appeals — Third Circuit

Erik Sobkiewicz (Argued), Douglas A. Campbell, Campbell & Levine, LLC, Pittsburgh, PA, for Appellant.

Steven S. Santoro (Argued), Santoro & Gonzalez, Pittsburgh, PA, for Appellee William E. Flaherty.

Laura B. Hoguet, Edna Sussman (Argued), Houget Newman & Regal, New York, N.Y. and Thomas H. May, Dickie, McCamey & Chilcote, Pittsburgh, PA, for Appellees David O. Carpenter and D. James Carpenter.

Eric B. Wolff (Argued), David B. Florenzo, Benjamin M. Gipson, Kirkland & Ellis, Washington, D.C., for Appellees William Smelas, Robert Sunderman and Ronald Statile.

Before SMITH, STAPLETON and NYGAARD, Circuit Judges.


STAPLETON, Circuit Judge.

Plaintiff-appellant George Stoe ("Stoe") brought a state-law action in state court to recover unpaid severance benefits from current and former officers of his previous employer, which is now bankrupt. The defendants removed the case to federal court pursuant to 28 U.S.C. § 1452, which provides for the removal of claims related to a bankruptcy case. In the District Court, the defendants successfully opposed Stoe's motion for mandatory abstention and ultimately won dismissal on the merits. Because we conclude that the District Court committed errors of law in ruling that the Bankruptcy Code's mandatory abstention provision was inapplicable to a case of this kind, we will remand for further consideration of whether the District Court must abstain from hearing Stoe's case.


Stoe was formerly the president of Zinc Corporation of America ("Zinc"), a division of Horsehead Industries, Inc. ("Horsehead"). In April 2002, Stoe entered into a severance agreement with Zinc that provided for Stoe to receive a severance of $648,000, payable in biweekly installments of $13,500, for services he had rendered to the company prior to his departure. Zinc and Horsehead made all payments required by the severance agreement until Horsehead filed for Chapter 11 bankruptcy in the United States District Court for the Southern District of New York in August 2002. The Bankruptcy Code prohibited Horsehead from making further payments to Stoe after the filing of the petition. See Belcufine v. Aloe, 112 F.3d 633, 634 (3d Cir.1997) (noting that filing of a Chapter 11 petition bars the payment of pre-petition claims by the company).

Stoe brought an action to recover the unpaid severance payments under Pennsylvania's Wage Payment and Collection Law, 43 Pa. Stat. § 260.1 et seq. ("WPCL"), against David Carpenter, Executive Chairman and CEO of Horsehead, James Carpenter, President of Horsehead, William Smelas and Robert Sunderman, both former Executive Vice Presidents of Zinc, Ronald Statile, former Chief Financial Officer of Zinc, and William Flaherty, former Chairman and CEO of Zinc. Under the WPCL, when a corporation fails to pay wages and benefits that it owes its employees, the corporation's top officers can be held personally liable for the non-payments. Belcufine, 112 F.3d at 634. Stoe did not name Horesehead as a defendant in the suit, but if Stoe is successful, the defendants will be entitled to indemnification from Horsehead, pursuant to Horsehead's by-laws.

After removing Stoe's state court action to federal court, the defendants moved to dismiss Stoe's action under Fed.R.Civ.P. 12(b)(6), or, in the alternative, to transfer the action to the Bankruptcy Court. Stoe moved to remand the action to state court, or, in the alternative, for both permissive and mandatory abstention.

The District Court denied Stoe's motion to remand or to abstain. With respect to mandatory abstention, the court made two rulings. First, it ruled that "abstention cannot apply to removed cases." App. at 9. Second, the District Court concluded that even if mandatory abstention applied as a general matter to removed cases, it would not apply to Stoe's case because mandatory abstention requires that the state law claim be only "related to" the bankruptcy proceeding, and not "arise under" the Bankruptcy Code or "arise in" a bankruptcy case. In the District Court's view, Stoe's claim was "inextricably intertwined with the Bankruptcy Code and would not exist, but for, the bankruptcy filing." As a result, the District Court held that Stoe's claim "'arises in' the bankruptcy proceeding." Id. at 10.

After Stoe responded to the defendants' motions to dismiss, the District Court ruled, following our decision in Belcufine v. Aloe, 112 F.3d 633 (3d Cir.1997), that Stoe did not state a valid claim under the WPCL. Stoe does not challenge the merits of that ruling before us, but rather argues that the District Court was required to abstain from hearing his case and consequently lacked jurisdiction to enter the order of dismissal.


We have jurisdiction to review the District Court's order dismissing Stoe's action pursuant to 28 U.S.C. § 1291. In addition, the District Court's prior order denying Stoe's motion for mandatory abstention is reviewable under 28 U.S.C. § 1334(d). We are cognizant that decisions not to remand are "not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of [title 28]." 28 U.S.C. § 1452(b). By contrast, appeals of decisions not to exercise mandatory abstention pursuant to § 1334(c)(2) are explicitly permitted under § 1334(d). Stoe appeals the District Court's decision not to abstain and we accordingly consider only the propriety of that decision, not the District Court's decision regarding remand. As the Second Circuit noted recently, "If we determine . . . the district court erred by not abstaining, the district court properly could both abstain and remand when this lawsuit is returned to it. However, that reality would not alter the fact that we would have reviewed only the decision not to abstain." Mt. McKinley Ins. Co. v. Corning Inc., 399 F.3d 436, 445 (2nd Cir.2005). The District Court's determination that the mandatory abstention provision of § 1334(c)(2) does not apply to removed cases is a question of statutory interpretation that we review de novo. Tavarez v. Klingensmith, 372 F.3d 188, 189 n. 1 (3d Cir.2004). We similarly exercise plenary review over the legal question of whether Stoe's claim is a "core" proceeding. See Mt. McKinley, 399 F.3d at 447.


Section 1334 of title 28 provides, in pertinent part:

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.

(b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, 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.

(c) . . . (2) 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.

Thus, upon a timely motion under § 1334(c)(2), a district court must abstain if the following five requirements are met: (1) the proceeding is based on a state law claim or cause of action; (2) the claim or cause of action is "related to" a case under title 11, but does not "arise under" title 11 and does not "arise in" a case under title 11, (3) federal courts would not have jurisdiction over the claim but for its relation to a bankruptcy case; (4) an action "is commenced" in a state forum of appropriate jurisdiction; and (5) the action can be "timely adjudicated" in a state forum of appropriate jurisdiction.

The first requirement is not disputed in this appeal. Stoe's claim is plainly based on Pennsylvania's WPCL and he does not assert a federal cause of action. The District Court's blanket assertion that mandatory abstention does not apply to removed cases relates to the requirement that an action "is commenced" in a state forum. Accordingly, we address that requirement first.


In support of the proposition that mandatory abstention cannot apply to removed cases, the defendants insist that "the fundamental premise" of the concept of abstention is the existence of a parallel proceeding in whose favor the court can abstain, and, that in the context of removed cases, there is no such ongoing proceeding. This is confirmed, in the defendants' view, by the use of the present tense in § 1334(c)(2)'s requirement that "an action is commenced, and can be timely adjudicated, in a State forum." 28 U.S.C. § 1334(c)(2) (emphasis supplied). The defendants add that applying § 1334(c)(2) in a situation involving no parallel proceeding turns it into a remand provision which would either be inconsistent with or obviate the need for the separate bankruptcy removal and remand provisions in 28 U.S.C. § 1452. We are not persuaded.

First, the existence of an ongoing state proceeding is not inherent in the nature of abstention. Burford, Pullman, and Thibodaux abstention, as well as other forms of abstention, apply without regard to the existence of an ongoing proceeding. Louisiana Power & Light Co. v. City of Thibodaux, 360 U.S. 25, 79 S.Ct. 1070, 3 L.Ed.2d 1058 (1959) (upholding abstention in eminent domain proceeding removed from state court); Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943) (requiring abstention and dismissal of case raising uncertain...

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