Lewiston v. APTCAM, LLC (In re Lewiston)

Citations: 521 B.R. 811; 2014 Bankr. LEXIS 4972Docket: Bankruptcy No. 12-58599; Adversary No. 14-04828-PJS

Court: United States Bankruptcy Court, E.D. Michigan; December 10, 2014; Us Bankruptcy; United States Bankruptcy Court

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Leslie Etterbeek, a member of a limited liability company, initiated a state court lawsuit against five other members and two individuals associated with them. The defendants removed the case to bankruptcy court, prompting Etterbeek to file a motion seeking remand to state court or for the court to abstain from hearing the case. The bankruptcy court, under the jurisdiction of the District Court for the Eastern District of Michigan as outlined by 28 U.S.C. 157(a), 1334(a) and (b), and 1452(b), granted the motion to remand. 

The bankruptcy case involves Richard Lewiston, the Debtor, who filed for Chapter 7 on August 13, 2012, with significant interests in several limited liability companies, including Apartments at Cambridge Company, LLC (AAC), which is involved in real estate development in Michigan. The Debtor listed a receivable of over $4.8 million from AAC. AAC and its members initiated four adversary proceedings against the Debtor, seeking non-dischargeable judgments and contesting the Debtor's discharge. Additionally, Gene R. Kohut, the Chapter 7 trustee, filed a separate lawsuit against AAC for fraudulent transfers, which was referred to the bankruptcy court. The trustee intervened in the four adversary proceedings due to overlapping legal and factual issues. All five adversary proceedings have been heavily litigated, leading to multiple hearings on various motions. Following a joint request from the parties involved, the court consolidated these proceedings for trial, which involves substantial financial claims on both sides.

The Trustee negotiated a settlement to resolve most disputes in the bankruptcy case and related Adversary Proceedings. On April 3, 2014, the Trustee filed a motion (9019 Motion) for approval of this settlement under Fed. R. Bankr. P. 9019, accompanied by a Term Sheet signed by the Trustee, AAC, and all parties involved in the Adversary Proceedings except for the Debtor. A total of 19 signatories endorsed the Term Sheet, which outlined significant transfers from AAC, including over $558,000 in cash and property to the bankruptcy estate. The Trustee would market and sell AAC's properties, retaining 65.5% of the net sale proceeds while distributing 34.5% to the signatory members of AAC.

In return for these advantages, the Trustee agreed to drop all claims against AAC and its members in the Adversary Proceedings, relinquishing any claims to remaining cash and the 34.5% of sale proceeds. He also withdrew objections to proofs of claims from signatories. Notably, while the Debtor was not a signatory to the Term Sheet, he stood to gain significantly, as AAC and its members agreed to dismiss their claims for nondischargeable judgments against him under 11 U.S.C. § 523. The Debtor would still need to defend against the 727 objection to his discharge, but he did not face any obligations in return for the settlement. 

The Term Sheet effectively provided the bankruptcy estate with valuable assets and resolved extensive litigation, with all claims in the Adversary Proceedings settled except for the discharge objection. At the time of filing the 9019 Motion, creditors had filed claims totaling over $82 million, with no objections raised against the motion, and significant support from creditors, including Today’s Bank of Northwest Arkansas, which holds an $11 million judgment against the Debtor.

Two objections to the 9019 Motion were filed by family members of the Debtor, Michael Lewiston and Etterbeek, neither of whom were parties to the Adversary Proceedings, nor had they filed claims in the bankruptcy case or been listed as creditors. Their objections did not challenge the settlement's benefit to the bankruptcy estate but argued that the Term Sheet was unfavorable to them due to their minority interests in AAC, specifically 8.5% for Lewiston and 2% for Etterbeek. They contended that AAC lacked authority under Michigan law to enter into the Term Sheet based on their interpretation of AAC’s operating agreement and related laws. While the Trustee and the estate might not suffer from this alleged lack of authority, Lewiston and Etterbeek claimed they would.

A hearing on the 9019 Motion was held on May 7, 2014, but was continued to May 14, 2014, due to the need for further legal briefing on the issues raised. By the continued hearing date, Lewiston had reached an agreement with the Trustee to withdraw his objection, leaving Etterbeek as the sole objector. Despite being a minority owner, she maintained that AAC acted beyond its authority in entering the Term Sheet and breached obligations under Michigan law, treating her unfairly regarding her ownership interest.

During the hearing, the Court reviewed the standard for approving a trustee's settlement under Fed. R. Bankr. P. 9019 and relevant case law, considering factors such as litigation complexity, probability of success, collection difficulties, and the interests of creditors. The Court concluded that the Adversary Proceedings were complex and costly, with uncertain outcomes for the Trustee. Additionally, the Court noted the significant creditor claims totaling over $82 million, with no opposition to the 9019 Motion from any creditor, and most being signatories to the Term Sheet. Ultimately, the Court found strong support for the Trustee's negotiated settlement among the creditors, emphasizing that the only objector, Etterbeek, was not a creditor in the bankruptcy case.

The Court ruled in favor of granting the 9019 Motion, indicating that all relevant factors supported this decision. It noted that Etterbeek's objection was focused on the conduct of AAC and its non-debtor members regarding a Term Sheet with the Trustee, rather than the motion itself. The Court overruled Etterbeek's objection, clarifying that its ruling pertained solely to the 9019 Motion and the Trustee's request to enter into the Term Sheet. It highlighted that AAC did not require the Court’s permission to proceed with the Term Sheet, and it did not adjudicate any claims from Etterbeek regarding the treatment she received from non-debtor AAC members.

The Court emphasized its lack of jurisdiction to resolve disputes between Etterbeek and the non-debtor AAC members in the context of the 9019 Motion. While the Court conducted a limited inquiry into the authority of AAC's managing members to enter the Term Sheet, it did this solely to assess the potential for further litigation affecting the bankruptcy estate. The Court was satisfied that the Trustee had adequately considered the implications of Etterbeek's state law claims on the settlement. 

Ultimately, the Court granted the 9019 Motion without prejudice to Etterbeek's rights to pursue claims under Michigan law against AAC or its non-debtor members. An order was entered on May 16, 2014, authorizing the Trustee to proceed with the Term Sheet, which became final as no appeals were filed. Following this, the Trustee, AAC, and other signatories dismissed most adversary proceedings, except for one related to discharge objections, and implemented the transactions outlined in the Term Sheet. AAC transferred assets to the Trustee, who is now managing them as part of the bankruptcy estate. Subsequently, on July 14, 2014, Etterbeek filed a six-count complaint in Michigan's Circuit Court against several entities and individuals, including five AAC members, without naming the Trustee, the Debtor, or AAC as defendants.

Count I asserts a breach of contract by the Defendants against Etterbeek under AAC's operating agreement. Count II alleges a breach of fiduciary duty owed to Etterbeek under Michigan law. Count III claims member oppression, stating that the Defendants interfered with Etterbeek's rights as a member of AAC. Count IV accuses certain Defendants of civil conspiracy to deprive Etterbeek of her statutory rights. Count V addresses conversion, alleging that the Defendants wrongfully took Etterbeek’s property. Count VI concerns fraudulent conveyance, claiming that the transfer of AAC's assets to the Trustee without compensation to Etterbeek constitutes a fraudulent act.

The complaint notifies all Defendants of Etterbeek's lis pendens against AAC's real property. On August 8, 2014, the Defendants removed the State Court Lawsuit to bankruptcy court, arguing that the claims fall within the court's jurisdiction as core proceedings or are related to the Debtor's bankruptcy case. On September 10, Etterbeek filed a Motion to Remand, seeking either remand to the Wayne County Circuit Court or abstention from the case. The Defendants responded on September 29, and Etterbeek replied on October 9. A hearing on the Motion to Remand was conducted on October 15, with the court taking it under advisement.

Etterbeek's Motion to Remand presents three key arguments: first, the Defendants' removal was improper under 28 U.S.C. 1452(a) since the claims do not arise under or relate to title 11, thus falling outside the jurisdiction of 28 U.S.C. 1334(b). Second, she contends that even if the claims could affect the Debtor's bankruptcy, they would be considered non-core, necessitating mandatory abstention under 1334(c)(2). Lastly, even if deemed a core proceeding, she argues for permissive abstention under 1334(c)(1) and remand under 1452(b).

Defendants argue that the State Court Lawsuit is effectively a circumvention of the Court’s order related to the 9019 Motion, which authorized the Trustee to engage with the Term Sheet affecting property transferred by AAC to the bankruptcy estate. They claim that the lawsuit involves core proceedings under 28 U.S.C. 157(b)(2), specifically concerning the administration and turnover of estate property, thus providing the Court with jurisdiction under 28 U.S.C. 1334(b). They further assert that jurisdiction is established under 28 U.S.C. 1334(e)(1), which grants exclusive jurisdiction over the estate's property. 

In their second argument, Defendants contend that even if the lawsuit is not a core proceeding, it qualifies as a non-core, related proceeding with potential implications for the bankruptcy case's administration, affirming their position that removal under 28 U.S.C. 1452(a) was appropriate. The focus of their arguments is on the Court's jurisdiction over the State Court Lawsuit claims and the validity of the removal, without addressing the opposing arguments for remand or abstention.

The document outlines the principles governing removal under 28 U.S.C. 1452, stipulating that a claim can only be removed if within the district court's jurisdiction under section 1334. It emphasizes that section 1334(a) grants original and exclusive jurisdiction over bankruptcy cases, while section 1334(b) provides original, but not exclusive, jurisdiction over civil proceedings related to bankruptcy cases. It defines civil proceedings as those 'arising under,' 'arising in,' or 'related to' title 11, with specific examples for each category, underscoring the necessity of establishing jurisdiction for proper removal.

A civil proceeding is considered 'related to' a bankruptcy case if it does not invoke a substantive right from federal bankruptcy law and could exist independently of the bankruptcy. The outcome of such a proceeding must have a conceivable effect on the bankruptcy estate. In this case, the Defendants failed to demonstrate that Etterbeek’s state law claims arise under or in the Debtor’s bankruptcy, as they do not cite any applicable provisions of the Bankruptcy Code. The Sixth Circuit distinguishes between core proceedings, which involve substantive rights from bankruptcy law or cannot exist outside of bankruptcy, and non-core matters. The court concluded that Etterbeek’s claims, based solely on Michigan law, do not invoke any rights created by the Bankruptcy Code and exist outside the bankruptcy framework. The claims do not involve the Trustee or Debtor and do not seek any relief from the bankruptcy estate. As such, they do not qualify as core proceedings under various sections of the Bankruptcy Code. Although the court has exclusive jurisdiction over the Debtor’s property, this does not extend to Etterbeek’s claims against non-debtors. If any jurisdiction exists, it would be because the State Court Lawsuit might affect the Debtor’s bankruptcy case, categorizing it as a non-core, related proceeding. Etterbeek contends that her claims cannot affect the bankruptcy case due to their basis in state law, targeting non-debtor parties, and not involving the Debtor or the Trustee.

Etterbeek relies on statements from the Court regarding its lack of jurisdiction over her claims against non-debtor members of AAC in relation to the 9019 Motion. The Defendants argue that the State Court Lawsuit is non-core but related to the bankruptcy case, particularly citing count VI, which alleges that AAC's asset transfer to the bankruptcy estate constitutes a fraudulent conveyance under Mich. Comp. Laws Ann. 566.31 et seq. They assert that a successful outcome for Etterbeek could impede the Trustee's authority to sell the transferred property under the Term Sheet, thus challenging the finality of the 9019 Motion, which Etterbeek did not appeal.

Count VI seeks to set aside the asset transfer to ensure payment to Etterbeek, who did not name the Trustee or AAC as defendants. Despite this, a favorable ruling could lead Etterbeek to seek relief from the bankruptcy estate, potentially affecting the Trustee's control over the assets. Etterbeek's filing of a lis pendens on property transferred to the Trustee underlines her intent to reclaim those assets. While the Court finds counts I through V irrelevant to the bankruptcy case, count VI and the lis pendens are significant, suggesting that Etterbeek aims to regain the property transferred under the Term Sheet. This could warrant the State Court's involvement, thereby making it a core proceeding. The Court concludes it has jurisdiction over the State Court Lawsuit as a non-core, related proceeding under 1334(b), validating the Defendants' removal under 1452(a).

Mandatory abstention requires the court to refrain from hearing Etterbeek's claims in the State Court Lawsuit if it has non-core, related jurisdiction. Under 28 U.S.C. 1334(c)(2), the court must adhere to six criteria for mandatory abstention: 1) a timely motion for abstention must be filed; 2) the proceeding must be based on state law; 3) there must be no federal jurisdiction absent the bankruptcy case; 4) the proceeding must be initiated in a state forum of appropriate jurisdiction; 5) it must be capable of timely adjudication in that forum; and 6) it must be a non-core proceeding. Etterbeek's timely Motion to Remand satisfies all these elements, as the claims are based on state law, lack federal jurisdiction, were filed in the Wayne County Circuit Court, and can be adjudicated timely. Therefore, the court is mandated to abstain.

Permissive abstention is also possible, even if the court were to accept that the State Court Lawsuit involves core proceedings. Under 28 U.S.C. 1334(c)(1), the court may abstain in the interest of justice or comity with state courts. Factors influencing this decision include the impact on estate administration, the predominance of state law issues, the complexity of state law, related proceedings in state court, other jurisdictional bases, the relationship to the main bankruptcy case, the feasibility of separating state and core claims, court docket burdens, potential forum shopping, the right to a jury trial, involvement of nondebtor parties, and any significant unusual factors.

In Kmart Creditor Trust v. Conaway, the court addresses the issue of whether abstention under 28 U.S.C. § 1334(c) applies to cases removed under 28 U.S.C. § 1452. The Sixth Circuit has affirmed that courts can consider abstention in such cases. Several relevant factors favor abstention in this instance: 

1. The administration of the bankruptcy estate will not be affected by whether the claims from the State Court Lawsuit are heard in federal or state court, as the litigation is still in its early stages with no answers filed or discovery conducted. The Trustee must manage the estate regardless of the court's jurisdiction over Etterbeek’s claims.

2. The claims in the State Court Lawsuit are entirely based on Michigan state law, with no reference to the Bankruptcy Code or federal law, indicating that the matter is not inherently federal.

3. All parties involved in the State Court Lawsuit are non-debtors, and Etterbeek’s claims do not seek any relief against the Debtor, the Trustee, or the bankruptcy estate.

4. There is no evidence of forum shopping by Etterbeek, as she previously attempted to present similar claims in federal court but was denied jurisdiction for those claims. Her decision to pursue these claims in state court does not constitute forum shopping.

Overall, the factors traditionally considered for permissive abstention strongly support the court abstaining from hearing the State Court Lawsuit. Additionally, the motion to remand under 28 U.S.C. § 1452(b) is also requested.

The court has the authority to remand a claim or cause of action removed under 28 U.S.C. § 1452(b) on equitable grounds, which include factors such as judicial resource duplication, prejudice to the removed parties, forum non conveniens, state law questions better suited for state courts, comity, risk of inconsistent results, and the expertise of the original court. In the case at hand, the court recognizes Etterbeek's claims in the State Court Lawsuit as non-core proceedings related to the Debtor's bankruptcy case, affirming its jurisdiction under 28 U.S.C. § 1334(b) and the propriety of the Defendants’ removal under § 1452(a). However, all elements for mandatory abstention under § 1334(c)(2) are met, leading the court to abstain from hearing the lawsuit. Furthermore, even if some claims were deemed core, the court finds that permissive abstention under § 1334(c)(1) and remand under § 1452(b) are also warranted. The court grants the Motion to Remand and will issue a corresponding order. The court does not express any opinion on Etterbeek’s entitlement to relief should she succeed in the State Court Lawsuit, noting that her jury trial demand will necessitate that the District Court, rather than the bankruptcy court, conducts the trial, as she did not consent to a jury trial in this court.