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BUECHNER v. AVERY

United States District Court, S.D. New York


July 8, 2005.

JACK BUECHNER, et al., Plaintiffs,
v.
ALLAN R. AVERY, NORMAN ROTHSTEIN, ELLEN WILLIN, MICHAEL McNULTY, LYNN MARTIN, AB MEDIA CORPORATION AND FUEL CELL COMPONENTS AND INTEGRATORS, INC., Defendants.

The opinion of the court was delivered by: P. KEVIN CASTEL, District Judge

MEMORANDUM AND ORDER

This action was removed from state court under 28 U.S.C. § 1452. The plaintiffs include the Trustee in bankruptcy for The AdBrite Corporation ("AdBrite") which is in Chapter 7 proceedings and who brought the state court action with the approval of the Bankruptcy Court. Also named as plaintiffs are fifteen shareholders of AdBrite. The Trustee and the shareholders bring claims against Allan R. Avery, the former Chief Executive of AdBrite, and others.

In urging remand, plaintiffs argue that the action was improperly removed by Avery and that this Court lacks subject matter jurisdiction. Plaintiffs assert that if this Court were to conclude that the action was properly removed and that there is subject matter jurisdiction, then the action is subject to mandatory abstention or, alternatively, permissive abstention. They urge equitable remand to state court pursuant to 28 U.S.C. § 1452(b). For the reasons set forth below, I conclude that the action was properly removed, that the Court has subject matter jurisdiction and that the action includes "core" proceedings to recover assets of the bankrupt in the hands of third-parties, which are not subject to mandatory abstention. I further conclude that the relevant factors strongly support permissive abstention. Also, as to the non-core state law money damage claims, mandatory abstention is required.

  Pursuant to 28 U.S.C. § 1452(b), the action is remanded to Supreme Court of the State of New York, New York County.

  The Proceedings in Bankruptcy Court

  On October 15, 2002, AdBrite filed a voluntary Chapter 11 petition in this District, 02-30225-CGM. On March 6, 2003, the Chapter 11 proceeding was converted into a Chapter 7 proceeding.

  On February 17, 2004, the Trustee for the debtor applied to the Bankruptcy Court for an order approving the retention of special counsel to bring an action on behalf of the bankrupt estate and certain of its shareholders against four persons and two entities. As described in the submissions to the Bankruptcy Court, the action would allege fraud, breach of fiduciary duty and conspiracy to deprive AdBrite of certain intellectual property rights. The factual basis for the claims arises out of the alleged actions of Allan Avery, as President of AdBrite, commencing in January 2002. Avery and Norman Rothstein allegedly formed a separate entity, A.B. Media Corporation, for the purpose of taking over the assets of AdBrite. The proposed lawsuit would allege that Avery caused AdBrite to enter into a short-term loan agreement with Rothstein with AdBrite's intellectual property as collateral and that Avery knew that AdBrite could not repay the loan according to its terms.

  Bankruptcy Judge Cecelia G. Morris held a hearing on the application on April 13, 2004, at which prospective defendants Avery, McNulty, Rothstein, Willen and Fuel Cell Components were represented by counsel. The Bankruptcy Court approved the retention of special counsel to pursue the action in New York state court.

  The State Court Action

  The summons in the action is dated December 22, 2004, the same date it and the complaint were filed with the New York County Clerk. Buechner, et al. v. Avery, et al., Index No 04/604319, Supreme Court, New York County. In addition to money damages, the action sought, among other things, an order "declaring the Rothstein Loan transaction and the conveyance of Adbrite's intellectual property cancelled and deemed void" and the "imposition of a constructive trust over the assets of" AdBrite in the hands of defendants. (Complaint, p. 27, ¶¶ 2 and 3)

  On February 14, 2005, defendant Avery filed a "Notice of Removal" in this District. Defendant alleged that removal was proper because the Court has "related to" jurisdiction. 28 U.S.C. § 1334(b).

  The Timeliness of Removal

  Plaintiffs assert that the removal petition was untimely because one or more defendants (other than Avery) were served with process more than thirty days prior to removal and failed to remove within that time period. Plaintiffs also assert that defendant Avery was served more than thirty days prior to removal, a point he strongly contests.

  Section 1441 of title 28 of the United States Code authorizes removal of actions from state to federal court in certain circumstances. It provides that "any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court . . . where such action is pending." In the face of a motion to remand, the party removing the case bears the burden of establishing that removal was proper. See United Food & Commercial Workers Union, Local 919, AFL-CIO v. CenterMark Properties Meriden Square, Inc., 30 F.3d 298, 301 (2d Cir. 1994). The removal statute is to be strictly construed. See Syngenta Crop Protection, Inc. v. Henson, 537 U.S. 28, 32 (2002) (citing Healy v. Ratta, 292 U.S. 263, 270 (1934) ("Due regard for the rightful independence of state governments . . . requires that [federal courts] scrupulously confine their own jurisdiction to the precise limits which the statute has defined.")); see also Pupo v. Chadwick's of Boston, Inc., 2004 WL 2480399 at *1 (S.D.N.Y. Nov. 4, 2004). In all cases seeking remand to state court, the defendant bears the burden of demonstrating that removal is appropriate. California Public Employees' Retirement System v. Worldcom, Inc., 368 F.3d 86, 100-01 (2d Cir. 2004) (citing Grimo v. Blue Cross/Blue Shield of Vermont, 34 F.3d 148, 151 (2d Cir. 1994)); White v. Wellington, 627 F.2d 582, 590 (2d Cir. 1980) (Meskill, J., dissenting).

  Here, there are claims in the state court action that seek the turn over of assets of the debtor — certain identified intellectual property — or seek to recover on fraudulent conveyances. 28 U.S.C. § 157(b)(2) (E) and (H). These claims are deemed "core" in nature and necessarily "arise in" the bankruptcy proceeding. See Enron Power Marketing, Inc. v. Nevada Power Company, 2004 WL 3015256 at *5 (S.D.N.Y. Dec. 28, 2004) ("Congress has defined `core' proceedings as those that arise in cases under Title 11 of the U.S. Code, as well as a host of claims related to those cases."). Hence, there is subject matter jurisdiction under 28 U.S.C. § 1334(b).

  Defendant Avery also alleges that there is "related to" jurisdiction under 28 U.S.C. § 1334(b). "Proceedings `related to' the bankruptcy include (1) causes of action owned by the debtor which become property of the estate pursuant to 11 U.S.C. § 541, and (2) suits between third parties which have an effect on the bankruptcy estate." Celotex Corp. v. Edwards, 514 U.S. 300, 308 n. 5 (1995) (citing 1 Collier on Bankruptcy ¶ 3.01[1]). In the state court complaint, all of the causes of action, except for the seventh, are brought on behalf of "the Company" and the relief requested includes damages to be awarded to "the Company." Any recovery in favor of "the Company" would become property of the estate. See 11 U.S.C § 541(a)(7).

  Thus, this Court has subject matter jurisdiction over the claims of the Trustee against the defendants if the removal was procedurally proper. Plaintiffs argue that removal was improper because it was not accomplished within thirty days of receipt of the complaint through service of process. See 28 U.S.C. § 1446(b)(1); Murphy Brothers, Inc. v. Michetti Pipe Stringing, Inc., 526 U.S. 344, 354 (1999).

  Plaintiffs assert that service was properly effectuated on Avery on January 12, 2005, and that the case was not removed until February 14, 2005, more than thirty days after service upon him. Defendant Avery has submitted an affidavit swearing that he is separated from his wife and has not lived at the location of service in Houston, Texas, for the last year. Thus, he asserts service was improper. I need not decide the issue of whether there was proper service of process on Avery because removal on February 14 was timely, measured from January 12. The thirtieth day measured from the date plaintiffs contend they were served was Friday, February 11, 2005, which was the date, designated by the state of New York for observance of Lincoln's Birthday.*fn1 In this District, February 11, 2005, was also a Court-observed holiday.*fn2 Under Rule 6(a), Fed.R. Civ. P., because the last day for performing the act was a state holiday, performance was extended to the next business day, Monday, February 14, 2005. Thus, removal by Avery on February 14 meets the thirty-day requirement of section 1446(b).

  Alternatively, plaintiffs argue that the thirty-day period should not be measured from when Avery was served but when the first of the defendants was served. Section 1446(b) provides in relevant part that:

The notice of removal of a civil action or proceeding shall be filed within thirty days after the receipt by the defendant, through service or otherwise, of a copy of the initial pleading setting forth the claim for relief upon which such action or proceeding is based, or within thirty days after the service of summons upon the defendant if such initial pleading has then been filed in court and is not required to be served on the defendant, whichever period is shorter.
  The statute is silent as to whether, in a multi-defendant case, the fact that one defendant's time to remove has expired precludes a later served defendant from removing. In a recent opinion, Judge Marrero of this Court surveyed precedent and concluded that there was no controlling authority on the issue but that a majority of district courts in the Circuit had adopted the last defendant served rule. See Fernandez v. Hale Trailer Brake & Wheel, 332 F.Supp.2d 621, 623 (S.D.N.Y. 2004); see also Barnhart v. Federated Dept. Stores, Inc., 2005 WL 549712, at *6 (S.D.N.Y. Mar. 8, 2005). While the right to remove is strictly construed, I see no basis to read a limitation into the statute that is not otherwise present. See Piacente v. State University of New York at Buffalo, 362 F.Supp.2d 383, 386 (W.D.N.Y. 2004). I will follow those district courts that have followed the last-filed rule. But see Quinones v. Minority Bus Line Corp., 1999 WL 225540, at *2 (S.D.N.Y. Apr. 19, 1999). Although it does not form part of my reasoning, I note that any other rule would give the party seeking to avoid removal the strategic opportunity to sequence service of process so as to minimize the possibility of removal; for example, the plaintiff may choose to first serve a defendant with fewer resources and less motive to aggressively defend and, then, after the expiration of thirty days (but within the time provided for in Rule 4(m), Fed.R.Civ.P.), serve defendants with greater resources and a greater stake in the case, arguing that it is too late for them to remove.

  Unanimity of Removing Parties

  As a separate ground for remand, plaintiffs argue that removal was improper because all defendants did not manifest their consent to removal in a timely or proper way. Predecessor removal statutes have long been construed as requiring the consent of all defendants in order to remove an action to federal court on the basis of diversity of citizenship. See Fletcher v. Hamlet, 116 U.S. 408, 410 (1886), (construing Act of March 3, 1875, 18 Stat. 470); see also Chicago Rock Isl. & Pac. Ry. Co. v. Martin, 178 U.S. 245, 248 (1900).

  A majority of courts have interpreted the present-day general removal statutes, 28 U.S.C. § 1441 and 1446, as requiring all defendants who have been served to consent to removal. See, e.g., Smith v. Kinkead, 2004 WL 728542, at *2 (S.D.N.Y. Apr. 5, 2004); Franck v. Sullivan (In re WorldCom, Inc. Sec. Litig.), 2003 WL 22383090, at *1 (S.D.N.Y. Oct. 20, 2003); Payne v. Overhead Door Corp., 172 F.Supp.2d 475, 477 (S.D.N.Y. 2001); Berrios v. Our Lady of Mercy Medical Center, 1999 WL 92269, at *2 (S.D.N.Y. Feb. 19, 1999); Schepis v. Local Union No. 17, 989 F.Supp. 511, 513 n. 1 (S.D.N.Y. 1998); Still v. Debuono, 927 F.Supp. 125, 129 (S.D.N.Y. 1996); see also Wright & Miller, 14B Fed. Prac. & Proc. Juris.3d § 3723 ("[A] cardinal rule is that only defendants may remove and all defendants must join in the notice of removal."). Although unanimity is required under general removal statutes, 28 U.S.C. § 1452 is construed differently. Under section 1452, the filing of consent by the non-removing parties is not required. See California Public Employees' Retirement System v. Worldcom, Inc., 368 F.3d 86, 103 (2d Cir. 2004) ("because any one `party' can remove under Section 1452(a), removal under that provision, unlike removal under Section 1441(a), does not require unanimous consent of the defendants"). Here, the Notice of Removal clearly states that the action is being removed to this Court based on 1452(a). (Notice of Removal, p. 2, ¶ 4) Thus, I conclude that the unanimity rule is inapplicable and the removal petition satisfies all of the requirements of section 1452.

  Abstention

  Plaintiffs argue that abstention, pursuant to 28 U.S.C. § 1334(c)(2), is mandatory in this case. The Second Circuit has held that mandatory abstention does not apply to core claims. See In re Petrie Retail, Inc. 304 F.3d 223, 232 (2d Cir. 2002); In re S.G. Phillips Constrs., Inc., 45 F.3d 702, 708 (2d Cir. 1995). Alternatively, plaintiffs urge the Court to permissively abstain or equitably remand.

  Among proceedings deemed to be "core" are those seeking "orders to turn over property of the estate" and those "to determine, avoid, or recover fraudulent conveyances." 28 U.S.C. § 157(b)(2) (E) and (H). The state court complaint alleges claims for fraudulent conveyance under New York Debtor Creditor Law §§ 275 and 276. (Complaint, p. 22-24, ¶¶ 141-154) On its face, the Complaint seeks to "declar[e] the Rothstein Loan transaction and the conveyance of Adbrite's intellectual property cancelled and deemed void." (Complaint, p. 27 at ¶ 2) It also seeks to impose a constructive trust over the assets of AdBrite held by a corporate defendant, the appointment of a temporary receiver for that corporate defendant in order "to preserve the assets of Adbrite . . ." and an order prohibiting the sale or transfer of assets of AdBrite. (Id., p. 27-28 at ¶¶ 3, 4 and 5) It is clear that these claims are "core" proceedings that do not "arise under" title 11 but "arise in" a case under title 11. See In re Casual Male Corp., 317 B.R. 472, 476 n. 11 (S.D.N.Y. 2004) (citing In re Poplar Run Five Ltd. P'ship, 192 B.R. 848, 857 (Bankr.E.D.VA. 1995) ("A proceeding that involves state-law questions may still fall within the `core' jurisdiction of this Court if it `arises in' a case under title 11.").

  Permissive abstention in a core proceeding is left to the bankruptcy court's discretion. 28 U.S.C. § 1334(c)(1). See In re Petrie Retail, Inc., 304 F.3d at 232; In re S.G. Phillips Constrs., Inc., 45 F.3d at 708. "Permissive abstention can be warranted `in the interest of justice, or in the interest of comity with State courts or respect for State law.'" In re Petrie Retail, Inc. 304 F.3d at 232, quoting 28 U.S.C. § 1334(c)(1). In deciding whether to exercise discretion to abstain, among the factors considered are: (1) the effect on the efficient administration of the bankruptcy estate; (2) the extent to which issues of state law predominate; (3) the difficulty or unsettled nature of the applicable state law; (4) comity with state courts; (5) the degree of relatedness or remoteness of the proceeding with the main bankruptcy case; (6) the existence of a right to trial by jury; (7) prejudice to the involuntarily removed parties; and (8) the potential for duplicative and uneconomical use of judicial resources. See Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. P'ship, 2004 WL 1048239, at *3-9 (S.D.N.Y. May 7, 2004); NEMSA Establishment, S.A. v. Viral Testing Systems Corp., 1995 WL 489711, at *7 (S.D.N.Y. Aug. 15, 1995).

  Because the "core" claims predominate in the state court complaint, this action should be analyzed under principles of permissive abstention. Applying those principles, I conclude that abstention is appropriate. Recognizing that some claims for money damages are non-core in nature, I will thereafter analyze the state law claims under mandatory abstention principles. I begin with a discussion of the factors that relate to permissive abstention.

  A. The Effect on the Efficient Administration of the Bankruptcy

  There is no Chapter 11 proceeding pending. AdBrite is in a Chapter 7 liquidation. According to the Trustee, he had initially submitted a "no asset report" to the Bankruptcy Court on or about December 1, 2003. When he learned that certain shareholders intended to bring the state court action on their own behalf, he sought to reopen the Chapter 7 proceeding to permit the estate to assert claims on its own behalf. The Bankruptcy Court, in approving the retention of counsel to bring the action in state court, has tacitly concluded that the pursuit of the action in state court will promote the efficient conclusion of the Chapter 7 proceeding.

  B. The Predominance of State Law Issues

  Only state law claims are asserted, all purportedly arising under New York law, including provisions of New York's Debtor Creditor statute. This factor weighs in favor of remand.

  C. Difficulty or Unsettled Nature of State Law Issues

  I am not aware of any basis to conclude that the state law issues are novel, complex or unsettled, except that a claim seeking a party to turn over intellectual property is not commonly encountered. This factor does not tip decidedly in favor of remand.

  D. Comity The Bankruptcy Court was of the view that the courts of New York were the most appropriate forum to litigate these state law claims. I do not disagree. The interests of comity are promoted by allowing the claims to remain where the plaintiffs elected to bring them, i.e. state court.

  E. The Relatedness of the Proceedings to the Bankruptcy

  The state action does not turn on any issue that is now being litigated in Bankruptcy Court. True, as defendants point out, there may be issues arising out of Avery's claim of entitlement to indemnification as a former officer and director of AdBrite that may require the Bankruptcy Court's attention. The potential indemnification claim against the bankrupt estate of one defendant is a factor that weighs somewhat against abstention, but is not alone a ground for avoiding an equitable remand. See Digital Satellite Lenders, LLC v. Ferchill, 2004 WL 1794502, at *6 (S.D.N.Y. Aug. 10, 2004).

  F. Right to a Jury Trial

  Each party's right to trial by jury can be protected in state court. In contrast, the Bankruptcy Court is not empowered to conduct a jury trial absent the consent of all parties. 28 U.S.C. § 157(e). Some courts have concluded that this factor weighs in favor of remand. See Kerusa, 2004 WL 1048239, at *6; Drexel Burnham Lambert Group, Inc. v. Vigilant Insurance Company, 130 B.R. 405, 409 (S.D.N.Y. 1991). Of course, this Court is empowered to conduct a jury trial of the claims and, thus, the parties right to a jury trial would be protected whether or not the case is remanded.

  G. Prejudice to Removed Parties.

  The plaintiffs have elected to bring their claims in Supreme Court, New York County. If the case is litigated in this Court, then plaintiffs will be denied their choice of forum. H. Duplicative Litigation: Wasted Resources and Inconsistent Results

  The fifteen shareholders who have sued in state court have claims independent from the claims of the estate. For reasons of economy and efficiency, they are being litigated in a joint complaint with the claims of the bankrupt estate. There is no arguable basis for removal of these shareholder claims. Mindful that some coordination in pretrial proceedings is possible, it is less efficient to have factually and legally related claims proceeding in two different judicial systems. This factor favors remand.

  I. Timeliness

  Every indication is that this case can be adjudicated in state court in a reasonably prompt manner. See 22 NYCRR § 202.19(b) (Uniform Civil Rules for Supreme Court and County Court setting aspirational goals ranging from 8 months for completion of discovery in an "expedited" case to 15 months for the completion of discovery in a "complex" case). Defendants express concern that large dockets and the availability of interlocutory appeals in state court may slow the progress of the case. (D. Mem. at 19) Their fear can be alleviated by their own election to refrain from interlocutory appeals and to cooperate in designating the case for "expedited" treatment.

  J. Summary

  The non-exhaustive list of factors relating to permissive abstention favors remand in this case. The Bankruptcy Court had a keen appreciation of the needs of the Chapter 7 proceeding and concluded that state court was an appropriate forum in which to have these exclusively state law claims adjudicated. In the exercise of discretion, I conclude that equitable remand is appropriate. I reject defendants argument that this court ought not remand the action because until the Second Circuit decided Mt. McKinley Ins. Co. v. Corning Inc., 399 F.3d 436, 447 (2d Cir. 2005), it was not clear that statutory abstention applied in an action removed to federal court on "related to" jurisdiction. The Mt. McKinley opinion observed that every Circuit, other than the Ninth Circuit, that had considered the issue had reached the conclusion that mandatory and permissive abstention under section 1334 applied in a removed action. The Court further noted that there was a split in the district court authority in this Circuit. Ultimately, the Second Circuit rested its conclusion on its reading of section 1334 together with section 1452. I see no basis to conclude that Mt. McKinley ought not apply to cases pending before the Court handed down its decision. See Bennett v. U.S. Lines, Inc., 64 F.3d 62, 67 (2d Cir. 1995), citing James B. Beam Distilling Co. v. Georgia, 501 U.S. 529, 540 (1991). Because discretionary or permissive abstention is proper in this removed action, a proper remedy is equitable remand under 28 U.S.C. § 1452(b). Cf. Covanta Onondaga Ltd. v. Onondaga County Resource Recovery Agency, 318 F.3d 392, 399 (approving of equitable remand of a removed action as to which mandatory abstention applied).

  In addition to the claims that I have found to be core in nature, the Complaint also alleges state law claims for money damages, including fraud and breach of fiduciary duty, which are non-core in nature and subject to a mandatory abstention analysis. Having analyzed the case under permissive abstention, I can easily resolve whether a different result would attain in this case if the non-core claims were separately analyzed under principles of mandatory abstention. Section 1334(c)(2) provides as follows:

"Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced and can be timely adjudicated in a State forum of appropriate jurisdiction."*fn3
  Here, the motion seeking to invoke mandatory abstention was timely made in this Court. The action was removed on February 14, and on February 28, I set a schedule for the making of the motion to remand and plaintiffs timely filed pursuant to that schedule. The garden variety state law claims arguably invoking "related to" jurisdiction as their only basis for federal jurisdiction, arise under state law, were commenced in a proper state forum and, for the reasons discussed above, can be timely adjudicated in that forum. Thus, all of the requirements for mandatory abstention are also met in this case.

  Conclusion

  The action is REMANDED, pursuant to 28 U.S.C. § 1452(b), to Supreme Court of the State of New York, New York County, from which it was removed. Plaintiffs' application for attorney's fees is denied as the positions asserted by the defendants appear to have been asserted in good faith. All other relief sought by the parties is denied.

  SO ORDERED.


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