Veldekens v. Ge Hfs Holdings, Inc.

• Decision Date: 23 January 2007
• Docket Number: Adversary No. 05-3772.,Civ.A. No. H-06-3296.
• Parties: Charles R. VELDEKENS, et al., Plaintiffs, v. GE HFS HOLDINGS, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

Page 762

362 B.R. 762

Charles R. VELDEKENS, et al., Plaintiffs, v. GE HFS HOLDINGS, INC., et al., Defendants.

Civ.A. No. H-06-3296.

Adversary No. 05-3772.

United States District Court, S.D. Texas, Houston Division.

January 23, 2007.

John F. Higgins, IV, Porter & Hedges, LLP, Houston, TX, for Plaintiff.

R. Paul Yetter, Yetter & Warden, Houston, TX, for Defendant.

MEMORANDUM OPINION ON THE MOTION TO WITHDRAW THE REFERENCE

HOYT, District Judge.

After considering the applicable law and the parties' arguments before this Court and the Bankruptcy Court, and for the reasons stated below, this Court granted the plaintiffs' motion to withdraw the reference of Adversary Proceeding 05-3772 on December 28, 2006. See Dkt. No. 9 (Dec. 28, 2006). This memorandum opinion is submitted in support of that determination.

I. INTRODUCTION

A. Summary

This case has a long and complicated factual and procedural history. The dispute predated the main case below by many years, and it continues several months after the debtor's plan of reorganization was confirmed. This Court is in an ideal position to quickly adjudicate the true claims while minimizing the resources spent litigating unnecessary points of law. Though it is possible that a "final" judgment issued by the Bankruptcy Court would ultimately be upheld, the inevitable appeal to this Court and resulting duplication of effort would result in delay, confusion, and frustration. A number of difficult issues will be avoided if this Court adjudicates the case in the first instance.

B. Background

The plaintiffs, Charles and Ashraf Veldekens, were the owners of a hospital facility located at 510 West Tidwell Road in Houston (the "Tidwell Property"). In January of 1998, the Veldekens leased the Tidwell Property to the debtor in the main case below, Doctors Hospital 1997, L.P., a limited partnership formed to operate a hospital at the Tidwell Property. Subsidiaries of Healthplus Corporation ("Healthplus") owned all of the general and most of the limited partnership interests in the debtor.

Subsequent to that lease, the debtor entered into a number of loan transactions intended (at least in part) to finance renovations to the Tidwell Property. To help the debtor secure this financing, and to obtain the benefit of the proposed renovations, the Veldekens executed a personal guaranty, assigned their rights under the lease, and granted a security interest in the Tidwell Property to and for the debtor's lenders. The lenders, the guaranty, the assignment, and the security interest were all later acquired by the defendant, GE HFS Holdings, Inc. ("GE").

The Veldekens soon discovered that "[h]e who puts up security for another will surely suffer." Proverbs 11:15. The Veldekens were not satisfied with the Tidwell Property construction, and suspected that the debtor and Healthplus were diverting loan funds secured by the Tidwell Property to other construction projects. The dispute came to a head in 2005, when the Veldekens sued the debtor, Healthplus, and GE in state court. See Veldekens v. Doctors Hosp. 1997, L.P., No. 2005-16310 (164th Dist. Ct., Harris County, Tex., filed Mar. 9, 2005). The debtor then filed its voluntary Chapter 11 petition, initiating the main bankruptcy case. See In re Doctors Hosp. 1997 L.P., Case No. 05-35291-H4-11 (Bankr.S.D. Tex. filed Apr. 6, 2005). When the debtor filed its petition, the Veldekens nonsuited the debtor and GE in their state court suit, but attempted to maintain the case against Healthplus. See Compl. ¶ 55, Doctors Hospital 1997 L.P. v. Veldekens (In re Doctors Hosp. 1997, L.P.), Case No. 05-35291-H4-11, Adv. No. 05-3315 (May 6, 2005). However, the Bankruptcy Court stayed the state court proceedings against Healthplus, and that case was eventually docketed in the Bankruptcy Court as Adversary Proceeding No. 05-3513.

C. Adversary Proceeding No. 05-3772

In August of 2005, the Veldekens filed a second state court action asserting the same or similar claims against GE. On September 30, 2005, GE removed the suit to federal court based on complete diversity and on bankruptcy jurisdiction. See Veldekens v. GE HFS Holdings, Inc., No. 4:05-CV-3381 (S.D.Tex. Oct. 18, 2005) (Gilmore, J.). On October 14, 2006, the Veldekens and GE jointly filed a, motion to refer that action to the Bankruptcy Court:

Currently Pending before the U.S. Bankruptcy Court ... is a Chapter 11 bankruptcy, [the Main Case]. Doctors Hospital 1997, L.P. is the lessee of the real property which is the subject of this case. Further, already pending in Bankruptcy Court is [AP 3315], in.which [the Veldekens] assert claims similar to the ones [the Veldekens] brought in this matter. The parties agree that the Bankruptcy Court is the appropriate forum to resolve the parties' dispute....

"The parties agree that the Bankruptcy Court may hear and determine this case, and may enter appropriate final orders or judgment, pursuant to 28 U.S.C. § 157. To the extent necessary, the parties consent to the entry of final orders or judgment in this case by the Bankruptcy Court."

Agreed Mot. for Referral to Bankr.Ct. ¶¶ 2-3, Veldekens v. GE HFS Holdings, Inc., Case No. 4:05-CV-3381 (S.D. Tex. filed Oct. 14, 2005). Judge Gilmore granted the motion, and the case was docketed as Adversary Proceeding No. 05-3772. The present motion arises out of that proceeding.

The Bankruptcy Court presided over a number of preliminary matters, including the Veldekens' motion to join the nondiverse defendants Newbanks, Inc., and Thomason. On December 5, 2005, after a full-day hearing, the court denied the Veldekens' request for a preliminary injunction preventing GE from foreclosing on the Tidwell Property. Shortly thereafter, GE foreclosed its lien.

All of the defendants filed answers: GE on November 28, 2005, Newbanks on December 15, 2005, and Thomason on May 30, 2006. Each of the defendants also filed motions for summary judgment, and those motions have been fully briefed before the Bankruptcy Court. However, the Bankruptcy Court not addressed the summary judgment motions pending this Court's resolution of the motion to withdraw the reference.

D. Confirmation of the Plan and the Present Motion

Though the Veldekens had filed claims against the debtor and initially opposed the proposed plan of reorganization, they eventually withdrew all claims against the debtor and all objections to the plan. On May 8, 2006, the Bankruptcy Court entered an order confirming the debtor's second amended plan of reorganization. On May 16, the Veldekens filed the present motion. The Bankruptcy Court held two hearings related to jurisdiction, abstention, and withdrawal, and the parties extensively briefed the various issues. The Bankruptcy Court issued its order denying abstention on October 5, 2006. See Veldekens v. GE HFS Holdings Inc. (In re Doctors Hosp. 1997, L.P.), 351 B.R. 813 (Bankr.S.D.Tex.2006). On the same day, the court issued its report on the present motion recommending that this court deny withdrawal.

II. LEGAL STANDARD

"The district court may withdraw, in whole or in part, any case or proceeding referred [to the Bankruptcy Court], on its own motion or on timely motion of any party, for cause shown." 28 U.S.C. § 157(d) (2000). The decision to grant or deny this motion is committed to the discretion of the district court. See Bankr.R. 5011(a); see also Mirant Corp. v. Potomac Elec. Power Co., 197 Fed.Appx. 285, 294 (5th Cir.2006) ("Matters under Chapter 11 are within the district court's original jurisdiction, and reference to and withdrawal from the bankruptcy court of bankruptcy matters is left to the discretion of the district court."). The Fifth Circuit has provided only "general principles that should guide the district court in determining whether to refer or withdraw the reference." Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 998 (5th Cir. 1985); see also In re Lieb, 915 F.2d 180, 184 (5th Cir.1990). The district court's decision to grant or deny withdrawal is not itself appealable, but the Court of Appeals can review the decision on direct appeal from a subsequent final judgment. In re Lieb, 915 F.2d at 184; compare In re El Paso Elec. Co., 77 F.3d 793, 795 (5th Cir. 1996) (denial of motion to withdraw can be certified for appeal under § 1292(b)). The decision to withdraw a reference "must be based on a sound, articulated foundation," at least when the case adjudicates the relative rights of the debtor and its creditors. Holland Am., 777 F.2d at 998.

III. SUBJECT MATTER JURISDICTION

"Federal courts must be assured of their subject matter jurisdiction at all times." Blake v. Evans (In re Canion), 196 F.3d 579, 584 (5th Cir.1999). Because the Veldekens' combined motion challenged the jurisdiction of both the District Court and the Bankruptcy Court, the issues should be addressed separately. See Wood v. Wood (In re Wood), 825 F.2d 90, 91 (5th Cir.1987) ("In this case, we must decide two issues: first, whether bankruptcy jurisdiction exists; second, if jurisdiction does exist, whether the bankruptcy court may proceed over this matter as a `core' or a `non-core' proceeding.").

The Veldekens do not contend that this Court never had jurisdiction over the present case. Their current position as to jurisdiction as of the date of removal is unclear, though at the time they did not seek a remand. They even joined in the motion to refer the case to the Bankruptcy Court, which asserted bankruptcy jurisdiction. But they argue that post-removal developments destroyed any subject matter jurisdiction that might have existed, whether based on diversity or on bankruptcy. Alternatively, they argued below that post-removal developments created an obligation to abstain and remand this action to state court.

A. Diversity Jurisdiction

Recall that this case was originally removed based on both complete diversity and bankruptcy jurisdiction. Diversity jurisdiction is an independent basis for district court...