JTS Communities v. ZB, N.A. (In re International Manufacturing Group, Inc.)

Citation: 574 B.R. 717Docket: Case No. 14-25820-D-11; Adv. Pro. No. 17-2109-D

Court: United States Bankruptcy Court, E.D. California; August 3, 2017; Us Bankruptcy; United States Bankruptcy Court

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The plaintiffs in this adversary proceeding have filed a motion to remand their case back to the Sacramento County Superior Court after it was removed by the defendants under 28 U.S.C. 1452. The defendants oppose the motion, asserting federal jurisdiction, but the court finds that the defendants have not met their burden of establishing such jurisdiction. The removal statute is interpreted strictly against removal, and any doubt regarding the right of removal necessitates remand.

The underlying bankruptcy case is a Chapter 11 case where a liquidation plan was filed and confirmed in 2016, with a plan administrator appointed thereafter. This administrator was not involved in the state court action prior to its removal and is also not part of the current adversary proceeding. Both plaintiffs and defendants in this case are defendants in separate adversary proceedings initiated by the former Chapter 11 trustee and now maintained by the plan administrator. 

The defendants' arguments for federal jurisdiction include the ongoing bankruptcy case, a related case involving Deepal Wannakuwatte, claims filed by the plaintiffs in the bankruptcy case, and a recent class action against one of the defendants. However, the court finds these connections insufficient to establish related jurisdiction over the state court action, which involves only state law claims and lacks bankruptcy law issues. 

The claims in the state court do not overlap with those in the adversary proceedings initiated by the plan administrator, which focus on different parties and allegations. Specifically, the plan administrator's claims against the plaintiffs relate to a Ponzi scheme involving the debtor, while the allegations in the state court action address distinct wrongful acts by the defendants. Consequently, the court concludes that the plaintiffs' claims will not be adjudicated in the pending adversary proceedings. The motion to remand is granted.

The outcome of the state court action will not influence the interpretation or administration of the confirmed liquidating plan, which is necessary for federal jurisdiction in this post-confirmation action. The state court claims could have been initiated prior to confirmation or even pre-petition if the plaintiffs had knowledge of them. Despite a shared factual basis related to the debtor's Ponzi scheme, the existence of common issues does not establish jurisdiction under section 1471(b), as judicial economy alone cannot justify federal jurisdiction. A favorable state court judgment for the plaintiffs might reduce their claims against the bankruptcy estate, potentially increasing dividends to other creditors, but this possibility does not create post-confirmation related jurisdiction, as supported by the Ninth Circuit's precedent. Moreover, courts in the Ninth Circuit have consistently held that the prospect of impacting creditor dividends is insufficient for establishing jurisdiction. In contrast, cases like Pegasus Gold and Wilshire Courtyard demonstrate scenarios where a close nexus to the bankruptcy plan justified federal jurisdiction, highlighting that mere potential effects on creditor distributions do not warrant similar conclusions in this instance.

The case does not necessitate interpretation of the confirmed bankruptcy plan or its execution. It parallels the case of Battle Ground Plaza, LLC v. Ray, where a post-confirmation claim was made regarding a right of first refusal in state court against a reorganized debtor and others. The Ninth Circuit ruled that the bankruptcy court lacked jurisdiction over the breach of contract claim, which could exist independently of the bankruptcy proceedings. The defendants incorrectly applied the Pacor test for jurisdiction, as it has been modified post-confirmation to a narrower close nexus test, as seen in Wilshire Courtyard v. Cal. Franchise Tax Bd. The defendants also misinterpret the application of the Pacor test in cases involving liquidating plans, as those cases involved claims that were property of the estate pre-confirmation, unlike the current case where the claims are solely between non-debtor parties and do not affect the bankruptcy estate. The court also distinguishes this case from other cited cases, noting that no claims were pursued by a liquidating trustee or directly impacting creditors. Furthermore, the court lacks subject matter jurisdiction over the state court action, as it is not related to the bankruptcy case or plan. The court finds no basis for abstention since there is no parallel state court action, and therefore, the issue shifts to whether remand is appropriate.

If the state court action had not been removed and this court had determined it had related jurisdiction, abstention would have been mandatory under 28 U.S.C. 1334(c)(2). The action could not be initiated in this court without bankruptcy jurisdiction and was timely commenced in an appropriate state court. Even with related jurisdiction, the court would remand the case on equitable grounds, as permitted by 28 U.S.C. 1452(b). Key equitable factors favoring remand include the presence of only state law issues, non-debtor parties, minimal impact on the bankruptcy estate, and a weak connection between the state action and the bankruptcy plan. The defendants' concern about potential inconsistent outcomes does not outweigh these factors. The motion to remand is granted, and the plaintiffs' request for attorney's fees is denied; the court finds no merit in the defendants' argument that the inclusion of individual defendants was intended to destroy federal diversity jurisdiction. The court differentiates this case from others cited by the defendants, noting that those cases do not apply due to differing contexts regarding related jurisdiction after confirmation of a bankruptcy plan.

In Boston Reg., the court affirmed that a debtor or its trustee can pursue litigation to consolidate the debtor's assets for creditor benefit even after plan confirmation, maintaining related to jurisdiction. Similarly, Mortgs. Ltd. ruled that the scope of related to bankruptcy jurisdiction remains unchanged when a liquidating trust takes action related to the debtor. The defendants argued that the plaintiffs’ filing in state court post-confirmation was a manipulation akin to amendments made in a previous case. However, the plaintiffs did not amend their original claims and any delays in filing should be addressed by the state court. The factors for permissive abstention under 28 U.S.C. 1334(c)(1) align with those for remand on equitable grounds under 28 U.S.C. 1452(b). While avoiding inconsistent outcomes across jurisdictions is important, courts must adhere to jurisdictional limitations to prevent unauthorized expansions of jurisdiction under 1334(b).