United States District Court, S.D. New York
July 8, 2005.
JACK BUECHNER, et al., Plaintiffs,
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.,
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). 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
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
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
(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.
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,
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
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
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
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
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
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.
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
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
"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
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.
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.