LEAD I JV, LP v. North Fork Bank

Citations: 401 B.R. 571; 2009 U.S. Dist. LEXIS 19777; 2009 WL 605423Docket: 1:08-mj-00843

Court: District Court, E.D. New York; March 11, 2009; Federal District Court

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In the case 401 B.R. 571 (2009), Plaintiffs Lead I JV, LP and Frio Lead I JVGP, LLC filed a motion to remand their claims against North Fork Bank and its Winchester Branch back to the New York State Supreme Court. The court granted the motion for the main action, remanding it to state court, while denying the motion concerning the third-party action, which was transferred to the United States District Court for the Western District of Texas for referral to its Bankruptcy Court.

The case originated on May 15, 2007, when Plaintiffs filed a complaint against North Fork Bank alleging violations of New York U.C.C. 3-404, breach of contract, and negligence due to unauthorized withdrawals from their account. Subsequently, North Fork Bank filed a Third-Party Complaint against Lothian Oil, Inc. and its CEO, Bruce Ransom, seeking claims for conversion, indemnification, and contribution. Prior to this, Lothian had filed for Chapter 11 bankruptcy on June 13, 2007, and North Fork filed a Proof of Claim in that bankruptcy, asserting a constructive trust on Lothian's assets.

North Fork sought permission from the Bankruptcy Court to pursue its third-party claims in New York, which was granted, with the stipulation that North Fork could not contest the removal or transfer of the New York action. Lothian subsequently removed the action to federal court on February 28, 2008, prompting the current remand motion from Plaintiffs, who argued the removal was untimely. The court ultimately sided with Plaintiffs regarding the remand of their claims but not for the third-party claims against Lothian, which were transferred to the Bankruptcy Court.

The Court rejects the Plaintiffs' arguments regarding the removal of the case to federal court. Under 28 U.S.C. § 1446, which outlines the procedures for removal, a defendant must adhere to these procedures and demonstrate federal jurisdiction. Section 1452 allows for the removal of claims related to bankruptcy cases, contingent on jurisdiction under 28 U.S.C. § 1334, which grants district courts original jurisdiction over bankruptcy matters. Lothian claims jurisdiction based on its bankruptcy status.

The Plaintiffs assert that Lothian's Notice of Removal was untimely, referencing both § 1446(b) and Bankruptcy Rule 9027(a)(2), which require that a notice of removal be filed within thirty days of receiving the initial pleading. They argue that this thirty-day period began on October 19, 2007, when North Fork filed a Proof of Claim and attached the Third-Party Complaint, making Lothian's February 28, 2008 filing untimely. However, the Court clarifies that the removal period does not commence until the initial pleading is properly served. Citing Murphy Bros. Inc. v. Michetti Pipe Stringing, Inc., the Court emphasizes that personal jurisdiction and the obligation to respond arise only upon proper service of a complaint.

Lothian was served with a third-party complaint on January 31, 2008, and filed a Notice of Removal on February 28, 2008, which is within the thirty-day timeframe stipulated by 28 U.S.C. § 1446(b) and presumably by Bankruptcy Rule 9027(a)(3). However, the Court must also consider Ransom, who was served on July 31 and December 12, 2007, prior to Lothian’s filing. The key issue is determining when the thirty-day removal period commences in cases involving multiple defendants. Lothian argues that this period starts upon service of the last defendant, a stance supported by a split among federal courts regarding the interpretation of § 1446(b). While the Supreme Court has not directly addressed this in a multi-defendant context, its ruling in Murphy Bros. implies support for the last-served defendant rule. The majority of post-Murphy Bros. decisions favor this rule over the first-served rule, particularly when the first-served defendant has not participated in the litigation. The court agrees with this reasoning and determines that Lothian’s Notice of Removal is timely as it was filed within thirty days after Lothian was served.

Additionally, the Plaintiffs contest the removal by arguing that third-party defendants cannot remove cases to federal court, citing cases related to 28 U.S.C. § 1441(a). However, these cases do not address the specific removal rights of third-party defendants under the relevant statutes.

Removal under 28 U.S.C. 1441(a) is limited to "the defendant or defendants," excluding third-party defendants. Courts have interpreted this to mean that only primary defendants can remove cases, contrasting with 28 U.S.C. 1452(a), which allows any "party" to remove claims related to bankruptcy cases. This broader interpretation includes third-party removal, as established in cases such as Palisades Collections, LLC v. Shorts. Congress has explicitly expanded removal statutes to encompass various defendant types in bankruptcy contexts. A debtor, regardless of their designation, can remove a case if it impacts their estate.

The Court acknowledges that Lothian, as a third-party defendant, appropriately removed the action to federal court under 1452(a). In addressing remand, Plaintiffs argue for abstention under 28 U.S.C. 1334(c)(2), but their arguments focus solely on the main action against North Fork, not the third-party claims. Despite their request for remand of the entire action, the Court decides to remand only the claims against North Fork. 

Jurisdiction over bankruptcy claims is established under 28 U.S.C. 1452(a), which allows removal to the district court where the case is pending if it falls under the jurisdiction outlined in section 1334. This section grants federal courts original jurisdiction over cases under title 11 and related civil proceedings. Jurisdiction is categorized into "core" and "non-core" proceedings, with core proceedings directly linked to bankruptcy functions, such as automatic stay motions and bankruptcy plan confirmations. North Fork's claims against Lothian and its CEO Ransom are presumed to be core, as they directly concern the bankruptcy estate.

The "related to" jurisdiction under Title 11 allows bankruptcy courts to hear actions that may have any conceivable effect on the bankruptcy estate or significant connections to it. Non-core proceedings grant bankruptcy judges the authority to submit proposed findings to district courts, which make final determinations. Mandatory abstention applies to non-core, related-to proceedings under 28 U.S.C. 1334(c)(2), requiring the district court to abstain from hearing such cases if certain conditions are met, including timely motion, state law basis, and the ability for timely adjudication in state court. Plaintiffs argue for mandatory abstention, asserting their claims against North Fork do not arise under Title 11 and can be quickly resolved in New York state court. However, North Fork counters that the claims are core and that diversity jurisdiction exists, thus negating the requirement for abstention. Lothian concedes the claims are non-core but disputes the applicability of mandatory abstention due to their connection to the bankruptcy. The court will first determine whether the claims against North Fork are core, as core claims do not qualify for mandatory abstention. The court preliminarily finds that the claims are indeed non-core, satisfying the conditions for mandatory abstention.

Plaintiff Lead LP, a limited partnership, and plaintiff Frio Lead, a limited liability company and general partner of Lead LP, allege that North Fork Bank improperly allowed significant withdrawals from their account without the required signatures. The account, opened on June 6, 2006, mandated signatures from both authorized agents, Ransom and Michael Raleigh. Despite this, $2,626,724.58 was withdrawn without Raleigh's authorization, including $126,724.58 transferred to Seismic Exchange Inc. on the same day the account was opened, and two subsequent unauthorized withdrawals of $700,000 and $1,800,000 on July 10 and July 14, 2006, respectively. Lead LP reported these unauthorized withdrawals to North Fork Bank and demanded repayment, which has not occurred. The Complaint asserts claims against North Fork Bank for violations of New York U.C.C. § 3-404, breach of contract, and negligence.

In a Third-Party Complaint filed on June 19, 2007, North Fork Bank alleges that Ransom, CEO of Lothian, directed transactions on behalf of Lead LP without proper authorization. North Fork claims it relied on Ransom's signature, leading to the completion of those transactions, and asserts claims for conversion, indemnification, contribution, payment by mistake, and unjust enrichment, contingent upon a finding of liability to the Plaintiffs.

The Plaintiffs' claims against North Fork are deemed non-core, as they are based on state law tort and contract claims unrelated to federal bankruptcy law. These claims were initiated prior to Lothian’s bankruptcy filing and do not invoke substantive rights under Title 11, although they may impact the bankruptcy estate.

Claims in question do not invoke substantive rights from federal bankruptcy law and could exist independently of the bankruptcy case. Jurisdiction for disputes between non-debtors falls under the bankruptcy court's 'related to' jurisdiction, not core jurisdiction. The claims do not arise under title 11 or within the bankruptcy case but are standard state law claims. Any potential liability for North Fork related to these claims may create an indemnification claim against debtor Lothian, but this does not transform the claims into core matters. North Fork contends that a significant portion of funds improperly withdrawn from the Lead LP account was used to buy the West Cowden Property, leading them to file a proof of claim asserting a lien under a constructive trust theory. Lothian has objected to this claim. North Fork argues that the core nature of its claims arises from the direct implications for the estate's claims allowance; however, the court has rejected this, stating that while North Fork's contingent indemnification claims could affect the Lothian estate, they do not elevate the plaintiffs' state law claims to core proceedings. Furthermore, North Fork claims that the plaintiffs involved the funds and property in the bankruptcy by filing a state action against Lothian before the bankruptcy. Evidence includes a state court action filed by Lead LP against Lothian and Ransom for wrongful conversion of funds, and a subsequent settlement agreement between Lead LP and Lothian before the bankruptcy filing, which was later approved by the Bankruptcy Court. An appeal regarding this approval has been filed by a third-party creditor.

On October 19, 2007, Lead LP submitted a Proof of Claim in the Lothian bankruptcy case, referencing funds involved in a New York lawsuit and claiming a constructive trust over the West Cowden Property. This Proof of Claim was contingent upon a potential reversal of the Settlement Agreement approval. The West Cowden Property was sold for approximately $23,300,000 with Bankruptcy Court approval shortly before the action's removal on February 28, 2008, attaching all claims, including those from North Fork, to the sale proceeds. On April 15, 2008, the appeal against the Bankruptcy Court's settlement approval was dismissed, rendering the Plaintiffs' Proof of Claim ineffective.

North Fork contended that the Plaintiffs' claims were core proceedings as they could affect the Lothian bankruptcy estate, entitled to half of the Plaintiffs' recovery from a settlement agreement. However, the Court disagreed, stating that while the claims might have a "conceivable effect" on the estate, they are ordinary state law claims arising independently of the bankruptcy. These claims involve alleged unauthorized withdrawals from the Plaintiffs' North Fork account and do not invoke substantive rights under the Bankruptcy Code. Consequently, the Court determined that the claims are non-core, which brings the Plaintiffs closer to fulfilling the requirements for mandatory abstention under 1334(c)(2).

Regarding jurisdiction, the Court noted that mandatory abstention requires that 1334 is the sole basis for federal jurisdiction. Although Lothian's Notice of Removal did not mention diversity jurisdiction, the parties contested its existence, complicating the application of mandatory abstention. The Court found Lothian failed to demonstrate that diversity jurisdiction was present in the main action, emphasizing that for diversity removal, citizenship must be established both at the time of the state court filing and at the time of removal. The Plaintiffs argued that there was no diversity of citizenship with North Fork, supporting the Court's conclusion.

North Fork argues that the Complaint in the New York action demonstrates complete diversity between the parties at the time of filing, as Lead LP (a Delaware limited partnership with its principal place of business in Texas) and Frio Lead (a Texas limited liability company) are diverse from North Fork (chartered in New York with its principal place of business in New York). North Fork contends that the inclusion of third-party defendants Ransom and Lothian, who are New York citizens, does not affect this diversity, citing relevant case law. 

In their reply, Plaintiffs assert for the first time that the citizenship of all limited partners of Lead LP must be considered for diversity jurisdiction. They claim that Lead LP's limited partners include Frio Energy Partners (a Texas limited partnership) and Lothian Oil Investments I, Inc. (a Delaware corporation with its principal place of business in New York), which would negate diversity because Lothian shares North Fork's state of business. The Court acknowledges that the citizenship of Lead LP's limited partners is relevant and agrees with Plaintiffs that diversity jurisdiction is lacking based on the evidence presented in their reply.

The Court clarifies that it can consider this new information, as it directly addresses issues raised by North Fork and Lothian, and neither party contested the accuracy of Plaintiffs' claims or sought to provide additional evidence. Defendants had the option to file a sur-reply but did not. The burden of establishing federal jurisdiction lies with Lothian, as the party seeking removal.

The Court will evaluate the Plaintiffs' reply papers to determine if Lothian has demonstrated that diversity jurisdiction exists. It concludes that Lothian has not met this burden. Regarding mandatory abstention under 28 U.S.C. § 1334(c)(2), the Plaintiffs fulfill all six statutory requirements: (1) the motion to abstain was timely; (2) the claims are based on state law; (3) the claims are related to, but do not arise in or under, a bankruptcy case; (4) § 1334 provides the only basis for federal jurisdiction; (5) the action was initiated in state court; and (6) the action can be timely adjudicated in state court. The parties agree on the first two requirements, and the third and fourth are satisfied as the claims are non-core. The fifth requirement is confirmed by recent Second Circuit clarification that an action commenced in state court remains valid for mandatory abstention after being removed to federal court. 

Lothian briefly contests the sixth requirement, arguing that the complexities of the bankruptcy and related actions make the intention of § 1334(c)(2) inapplicable. The excerpt references a case, In re Global Crossing, where the court found federal jurisdiction over related state claims but denied mandatory abstention, stating that the claims could not be timely adjudicated in state court due to the complexities and overlapping litigation. Ultimately, Plaintiffs' assertion that their cases could be quickly resolved in state court is noted but not elaborated upon.

There is a consensus that resolving the plaintiffs' fraud claims in this case will not be swift, similar to the WorldCom case, and the existence of various proceedings across jurisdictions will further delay the resolution of the Global Crossing claims. Section 1334(c)(2) mandates that federal courts defer to state courts for lawsuits related to a bankruptcy that can be resolved more quickly at the state level without disrupting federal proceedings. However, this does not apply here due to the intricate relationship between the federal bankruptcy process and complicated securities class actions. Remanding the case to state court would complicate and prolong the resolution of the claims and ongoing federal matters. Previous cases have similarly concluded that claims cannot be promptly adjudicated in state court when they are part of a larger complex litigation. 

In this case, the plaintiffs' six-page complaint against North Fork alleges unauthorized withdrawals from Lead LP's account, violating N.Y. U.C.C. 3-404, breaching contract, and acting negligently. Unlike the cited complex cases, these claims are straightforward and not intertwined with the Lothian bankruptcy. Thus, the rationale from Global Crossing does not apply. The court determines that the plaintiffs' state-law claims can be timely adjudicated in state court, meeting all six criteria for mandatory abstention under Section 1334(a). Consequently, the court will remand the main action to state court while transferring the third-party action to the United States District Court for the Western District of Texas, Midland Division.

The court has determined it has jurisdiction over the Plaintiffs' claims against North Fork related to the Lothian bankruptcy but must abstain from exercising that jurisdiction. The court is faced with the issue of whether to remand only the main action or the entire case, which includes the third-party action. Plaintiffs argue that if the entire case is not remanded, the court must abstain from hearing their claims against North Fork. Lothian supports the removal of the third-party action, asserting North Fork’s consent to such removal and the relevance of the claims to the Lothian bankruptcy proceeding.

The removal was conducted under 28 U.S.C. § 1452(a), which allows for partial removal of claims, providing flexibility not available in non-bankruptcy contexts. The court concludes that it is not required to remand the third-party action, even though it must abstain from the main action. Lothian requested to transfer the third-party action to the United States District Court for the Western District of Texas, which North Fork does not oppose. Given prior court orders allowing North Fork to proceed with third-party claims and prohibiting them from contesting removal, the court agrees to transfer the third-party action to the Texas district court.

In conclusion, the court grants the Plaintiffs' motion to remand the main action to the Supreme Court of New York, Suffolk County, but denies the motion regarding the remand of the third-party action.

The third-party action is transferred to the United States District Court for the Western District of Texas, Midland Division, for referral to the Bankruptcy Court of the same district. Following this transfer, the Clerk is instructed to close the case. The plaintiffs incorrectly cite Bankruptcy Rule 9027(a)(2), which is not applicable since the third-party action against Lothian was initiated after Lothian's bankruptcy filing. Instead, Bankruptcy Rule 9027(a)(3) applies, as it addresses actions initiated post-bankruptcy commencement. The advisory committee notes indicate this subdivision is derived from 28 U.S.C. 1446(b), and courts have differing views on whether this statute or Bankruptcy Rule 9027 governs removal timelines in bankruptcy-related cases. No party has contested the applicability of 9027(a)(3) in this context. Ransom has not participated in either the New York action or the federal proceedings. The "last-served defendant" rule refers to the last defendant that files for removal. The outcome would likely remain unchanged under 28 U.S.C. 1452 and Bankruptcy Rule 9027(a)(3), based on precedent indicating that as long as one defendant adheres to the thirty-day removal requirement, the petition is timely. The plaintiffs acknowledge that the third-party claims are core proceedings. Although the plaintiffs initially miscite the abstention provisions, they later clarify their intention to reference mandatory abstention, which does not apply to core claims. The New York action was initiated on May 15, 2007. The Court interprets the plaintiffs' motion to remand as a request for abstention, despite its title. The District Court for the Western District of Texas has a Standing Order of Reference for bankruptcy cases, allowing referral to bankruptcy judges for proceedings arising under Title 11.