Global Express Money Orders, Inc. v. Farmers & Merchants Bank

Citations: 406 B.R. 674; 2009 Bankr. LEXIS 1767; 51 Bankr. Ct. Dec. (CRR) 230Docket: Bankruptcy No. 06-13748-NVA; Adversary No. 08-0700

Court: United States Bankruptcy Court, D. Maryland; May 22, 2009; Us Bankruptcy; United States Bankruptcy Court

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The Court granted the Motion for Abstention and Remand filed by Global Express Money Orders, Inc. in the bankruptcy case involving a debtor who operated a check cashing and money order business and engaged in check kiting. The money order company alleged that three banks improperly used trust funds to satisfy their claims against the debtor. Following the debtor's chapter 11 filing, the money order company sued the banks in Maryland state court, which the banks subsequently removed to federal court. After hearings, the Court determined that mandatory and discretionary abstention was required, remanding the case back to the Circuit Court for Baltimore City. 

Global's complaint against the banks included claims of conversion and sought compensatory and punitive damages, stemming from actions taken in June 2006, prior to the debtor's bankruptcy filing on June 28, 2006. The chapter 11 trustee, Zvi Guttman, had previously settled with the banks and the money order company. Global argued that the civil action, while related to the debtor, did not pertain to the bankruptcy itself, as it sought damages from non-debtor third parties and did not involve the estate's assets or affect creditor distributions.

Global asserts that the Civil Action involves only bank deposits made by the Debtor over a ten-day period in June 2006 and claims that the Court lacks subject matter jurisdiction, arguing that the action is neither a core proceeding nor appropriate for the Court's consideration, suggesting it be remanded to the Circuit Court for Baltimore City. Conversely, the Banks argue they represent a majority of the bankruptcy estate's creditors, positing that their interests align with the estate's interests. They contend that even if the Civil Action proceeds in state court, any payment they make to Global could lead to an indemnification claim against the bankruptcy estate, asserting that the Civil Action is sufficiently connected to the bankruptcy case to be deemed a core proceeding.

The Court concludes that the Civil Action is a non-core proceeding, as it does not arise under or in a case under the Bankruptcy Code. The claims in the Civil Action are based on Maryland conversion law and relate to pre-petition actions, existing independently of the bankruptcy case. The Court finds that the causes of action do not depend on the Debtor's bankruptcy filing, thus failing to meet the criteria for subject matter jurisdiction under 28 U.S.C. § 1334.

Furthermore, the Court determines that it must abstain from hearing the Civil Action under 28 U.S.C. § 1334(c)(2) due to the presence of state law claims that relate to the bankruptcy case but do not arise under it. All conditions for mandatory abstention are satisfied: the case is based on state law, related to a bankruptcy case but not a core proceeding, and could not have been initiated in federal court without the bankruptcy filing, with the potential for timely adjudication in state court.

The Civil Action is founded on state law, alleging three counts of common-law conversion against each of the Banks involved. Colleen's pre-petition actions, specifically check-kiting, triggered a series of claims to the same funds, leading the Banks to act against the deposits to satisfy their own claims. Global asserts that the funds taken by the Banks are its trust funds, constituting common-law conversion. The Civil Action is deemed a non-core proceeding and could not have been initiated in federal court without the bankruptcy filing. The action can be timely resolved in state court, with testimony from Marilyn Bentley indicating a trial date could be set within a year of remand. The court finds that all elements of 28 U.S.C. § 1334(c)(2) for mandatory abstention are satisfied, necessitating abstention from federal jurisdiction. Additionally, the court opts for discretionary abstention under 28 U.S.C. § 1334(c)(1), considering factors such as the efficiency of the bankruptcy estate administration, the predominance of state issues, and the tangential impact of the Civil Action on estate administration, which favors abstention.

State law issues significantly dominate the Civil Action, which is solely based on Maryland conversion law with no bankruptcy law involved, supporting abstention. The causes of action under Maryland common law are well within the expertise of Maryland state courts, favoring abstention. A related state court proceeding is no longer present, rendering this factor neutral. There is no federal jurisdictional basis for the Civil Action outside of the bankruptcy case, also favoring abstention. While the Civil Action is related to the debtor, its impact on the bankruptcy case is indirect and tenuous, as any claims arising would need to be brought back to the estate for allowance and distribution. Distributions from the bankruptcy estate to Global are currently frozen pending the Civil Action's outcome to prevent overpayment and protect other creditors, further indicating the tenuous connection. The Civil Action is not a core proceeding, supporting abstention. Since it consists entirely of state-law claims, there is nothing to sever from the bankruptcy matters, again favoring abstention. Both courts are believed to have significant case loads, making this factor neutral.

The likelihood of forum shopping is contested between Global and the Banks, with each accusing the other of manipulating jurisdiction for strategic advantages. Global claims that federal law's stringent tracing requirements favor the Banks, while the Banks assert that Global prefers state law's lenient commingling standards. BCSB contends that Global aims to utilize the state tracing statute, which does not mandate tracing, in contrast to the federal statute, which does. The Court finds no negative intent from either party, categorizing this factor as neutral.

The right to a jury trial exists in the Civil Action, favoring abstention since Global did not assert this right. Additionally, the case exclusively involves non-debtor third parties, further supporting abstention. Consequently, the Court concludes that discretionary abstention is justified.

BCSB's defense of the Motion to Remand presents a unique perspective, suggesting that the case is a continuation of loss allocation among creditors and advocating for federal law application. However, the Court finds BCSB's argument problematic as it relies on the assertion that the converted funds are property of the estate, which is unsupported by testimony from the Plan Trustee, indicating no estate interest in the funds. Thus, the dispute is deemed a matter of state law between creditors without estate involvement.

The Court decides to equitably remand the Civil Action to the Circuit Court for Baltimore City, noting that the factors for equitable remand align with those for permissive abstention. The Court establishes that remand is appropriate based on both mandatory and permissive abstention grounds. Lastly, it clarifies that while a bankruptcy court holds jurisdiction over core and non-core proceedings related to title 11, it cannot render final judgments in non-core matters without party consent.

Subject matter jurisdiction is not a primary concern at this stage; however, determining whether this case is a core proceeding is essential for the abstention analysis. According to 28 U.S.C. §§ 1334(a-b), district courts possess original and exclusive jurisdiction over cases under Title 11, with original but not exclusive jurisdiction over related civil proceedings. Furthermore, 28 U.S.C. § 157(b)(1) allows bankruptcy judges to hear and decide cases and core proceedings under Title 11, with their decisions subject to review under § 158. Additionally, 28 U.S.C. § 157(a) permits district courts to refer all Title 11 cases and related proceedings to bankruptcy judges. In the District of Maryland, all bankruptcy cases are automatically referred to the bankruptcy court as per District Rule 402.