Studebaker-Worthington v. Michael Rachlin & Co.

• Decision Date: 22 February 2004
• Docket Number: No. 04-CV-4459 (ILG).,04-CV-4459 (ILG).
• Citation: 357 F.Supp.2d 529
• Parties: STUDEBAKER-WORTHINGTON LEASING CORP., Plaintiff, v. MICHAEL RACHLIN & CO., LLC, Defendant.
• Court: U.S. District Court — Eastern District of New York

357 F.Supp.2d 529

STUDEBAKER-WORTHINGTON LEASING CORP., Plaintiff, v. MICHAEL RACHLIN & CO., LLC, Defendant.

No. 04-CV-4459 (ILG).

United States District Court, E.D. New York.

February 22, 2004.

Joseph Capobianco, Reisman, Peirez & Reisman, L.L.P., Garden City, NY, for Plaintiff.

Richard L. Zucker, Lasser Hochman, L.L.C., Roseland, NJ, for Defendant.

MEMORANDUM AND ORDER

GLASSER, District Judge.

INTRODUCTION

Studebaker-Worthington Leasing Corp. ("Plaintiff" or "SWLC") filed a lawsuit in New York State court against Defendant Michael Rachlin & Co., L.L.C. ("Defendant" or "Rachlin") for breach of contract. Defendant removed the case pursuant to 28 U.S.C. §§ 1441(a) and 1452, alleging that this Court has original jurisdiction over the state court action. Defendant asserts that the case "relates to" the Chapter 7 bankruptcy case of NorVergence, Inc. ("NorVergence") pending in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"), because the subject contract was assigned to Plaintiff by NorVergence. Presently before the Court is Defendant's motion to transfer the action from this Court to the Bankruptcy Court pursuant to 28 U.S.C. § 1412. Plaintiff opposes the motion and moves to remand the case to the state court pursuant to 28 U.S.C. § 1447(c), claiming that this Court lacks federal subject matter jurisdiction over it. In the alternative, Plaintiff requests that the Court abstain from hearing this matter pursuant to 28 U.S.C. § 1334(c).

For the reasons set forth below, Defendant's motion to transfer venue is denied and Plaintiff's motion to remand the case to the state court is granted.

BACKGROUND

SWLC is a financing company for office equipment and systems. (Affidavit of Kenneth P. Paston ("Paston Aff.") ¶ 6). It is a Delaware corporation with its principal place of business in Jericho, New York. (Id. Exh. 1). As part of its regular business practices, it acquires leases by assignment from third parties. (Id.) NorVergence was in the business of renting and reselling telecommunications services purchased from common carriers, and related hardware and equipment, to small businesses. (Not. of Removal ¶ 4a). Rachlin is a New Jersey corporation with its principal place of business in Newark, New Jersey. (Paston Aff. Exh. 1).

On or about September 12, 2003, Plaintiff and NorVergence entered into a master program agreement (the "Master Program Agreement"), pursuant to which NorVergence assigned certain rental agreements of specified equipment and agreed to assign future rental agreements to Plaintiff. (Paston Aff. ¶ 7 & Exh. 3). Under the terms of the Master Program Agreement, NorVergence assigned to SWLC all of "its rights, title and interest in and to the Rental Agreement and Equipment including all monies due and to become due under the Rental Agreement, but none of its obligations under the Rental Agreement." (Id. Exh. 3).

Three months later, Rachlin and NorVergence entered into an equipment rental agreement, dated December 4, 2003 (the "Rental Agreement" or the "Agreement"), pursuant to which Defendant rented certain telecommunications equipment from NorVergence. (Certification of Gail E. Alba signed on December 3, 2004 ("Alba Cert.") ¶ 2). The Rental Agreement specified the equipment that Rachlin agreed to rent. (Paston Aff. Exh. 4). The front of the Agreement encouraged Defendant to "read this Rental carefully and feel free to ask us any questions you may have about it." (Id.). The Agreement was signed by Rachlin's Vice President, Gail E. Alba ("Alba").¹ (Id.)

The Agreement required Defendant to pay the full amount due under the contract regardless of any fraud or deception perpetrated by NorVergence in making the original sale or in failing to provide the promised equipment and services. The contract language, in fine print, stated as follows:

YOUR DUTY TO MAKE THE RENTAL PAYMENTS IS UNCONDITIONAL DESPITE EQUIPMENT FAILURE, DAMAGE, LOSS OR ANY OTHER PROBLEM. RENTER IS RENTING THE EQUIPMENT "AS IS," WITHOUT ANY WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE IN CONNECTION WITH THIS AGREEMENT. If the equipment does not work as represented by the manufacturer or supplier, or if the manufacturer or supplier or any other person fails to provide service or maintenance, or if the Equipment is unsatisfactory for any reason, you will make any such claim solely against the manufacturer or supplier or other persons and will make no claim against us.

(Paston Aff. ¶ 20, Exh. 4 at 1). The word "us" referred to the renter, which is NorVergence, a designated finance company, or an assignee not designated at the time of execution.²

Plaintiff subsequently notified Defendant of the assignment and directed that payments under the Agreement be made to it. (Not. of Removal ¶ 4y). Plaintiff received only two monthly rental payments from Defendant and none after May 15, 2004. (Paston Aff. Exh. 1). As a result of Defendant's alleged breach of the Agreement, Plaintiff filed an action in New York Supreme Court, Nassau County, on September 8, 2004, to recover the remaining amounts due. (Id.) The complaint alleges a cause of action for breach of contract seeking to collect the unpaid rental payments and a separate "claim" for attorney's fees specifically provided for in the Rental Agreement. (Id.) Plaintiff has not asserted any federal causes of action in the complaint, including any arising under the Bankruptcy Code, and it has not asserted any claims against NorVergence.

On June 30, 2004, certain of NorVergence's creditors filed an involuntary Chapter 11 bankruptcy petition against it in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). (Not. of Removal ¶ 4ee). That court entered an order for relief and converted the bankruptcy from a Chapter 11 to a Chapter 7 case on July 14, 2004. (Id. ¶ 4ff).

In its removal papers, Defendant indicates that it will assert a counterclaim against Plaintiff and will add NorVergence and its Chapter 7 trustee as counterclaim defendants. (Not. of Removal ¶ 4). The proposed counterclaim will allege, among other things, that NorVergence fraudulently induced Rachlin to enter into the Rental Agreement, and that Plaintiff had actual or constructive knowledge of the fraud. (Id. ¶¶ 4a-ff).

DISCUSSION

Before considering Defendant's motion to transfer venue, the Court must first decide the threshold question whether it has subject matter jurisdiction over this case. Pursuant to 28 U.S.C. § 1447(c), upon which Plaintiff relies to remand the case to state court, the Court is obligated to grant that motion if it "lacks subject matter jurisdiction."³ "The removing party bears the burden of proof in establishing its right to a federal forum." Property Clerk v. Fyfe, 197 F.Supp.2d 39, 41 (S.D.N.Y.2002) (citations omitted).

A state court action may only be removed to federal court if the action could originally have been filed there. See 28 U.S.C. § 1441(a) ("any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant"); see also 28 U.S.C. § 1452(a) ("A party may remove any claim or cause of action in a civil action ... if such district court has jurisdiction of such claim or cause of action" because it arises in or is related to a bankruptcy case); Property Clerk v. Smith, 2000 WL 1725017, at *2 (S.D.N.Y. Nov. 17, 2000) ("An irregularity in removal of a case to federal court is to be considered jurisdictional... if the case could not initially have been filed in federal court") (citation and internal quotation omitted).

"The presence or absence of federal-question jurisdiction is governed by the `well-pleaded complaint rule,' which provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987); see also Rivet v. Regions Bank of Louisiana, 522 U.S. 470, 475, 118 S.Ct. 921, 139 L.Ed.2d 912 (1998) ("the `well-pleaded complaint rule'... provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint"). Under that rule, "federal question jurisdiction exists only when the plaintiff's own cause of action is based on federal law, and only when the plaintiff's well-pleaded complaint raises issues of federal law."⁴ Marcus v. AT&T Corp., 138 F.3d 46, 52 (2d Cir.1998). It has long been held that the party bringing suit "is master to decide what law he will rely upon." The Fair v. Kohler Die & Specialty Co., 228 U.S. 22, 25, 33 S.Ct. 410, 57 L.Ed. 716 (1913). Courts have commented that because of significant federal concerns, "[r]emoval jurisdiction must be strictly construed." In re NASDAQ Market Makers Antitrust Litig., 929 F.Supp. 174, 178 (S.D.N.Y.1996).

Where, as here, neither party has alleged diversity jurisdiction, removal requires federal question jurisdiction.⁵ Defendant asserts two grounds for federal subject matter jurisdiction: 1) under 28 U.S.C. § 1334(b) "by reason of the fact that this civil proceeding arises under Title 11 ... or is related to a case under Title 11, namely the bankruptcy case involving NorVergence"; and 2) under 28 U.S.C. § 1334(e) "by reason of the fact that the rental payments due under" the Rental Agreement, "which is the subject of the complaint[,] and the counterclaim to be filed by [D]efendant ... involve property of NorVergence ... as of the commencement of its bankruptcy case and/or property of its bankruptcy estate." (Not. of Removal ¶ 2).

Rachlin's arguments that the Court has original jurisdiction over this case are not based on the allegations in the complaint. As noted above, the complaint sets forth a breach of contract claim based on Defendant's failure to make the rental payments under the...