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Fried v. Lehman Brothers Real Estate Associates Iii, L.P.

United States District Court, Second Circuit

May 30, 2013

BARBARA J. FRIED et al, Plaintiffs,
v.
LEHMAN BROTHERS REAL ESTATE ASSOCIATES III, L.P. et al, Defendants.

ORDER AND OPINION

LORNA G. SCHOFIELD, District Judge.

Following District Judge Barbara Jones's dismissal of a related matter (" Fried I "), Plaintiffs filed this action in the Supreme Court of the State of New York, pleading various federal and state law claims against Defendants arising from failed investments with Defendant Lehman Brothers Real Estate Associates III.[1] On June 17, 2011, Defendants removed the lawsuit to this Court, and on June 24, 2011, moved to stay this action pending the outcome of Plaintiffs' appeal of Fried I. On July 15, 2011, Plaintiffs moved the Court to remand for lack of subject matter jurisdiction.

On January 25, 2012, Judge Jones denied the motion to remand, and entered a stay pending the Second Circuit's decision in Fried I. (Dkt. No. 27). On December 20, 2012, the Second Circuit summarily affirmed the dismissal of Fried I. Fried v. Lehman Bros. Real Estate Assocs. III, L.P., 2012 WL 6621300 (2d Cir. Dec. 20, 2012). Plaintiffs now renew their motion to remand, or in the alternative, move the Court to abstain from hearing the case. Plaintiffs argue that two intervening changes have divested this Court of subject matter jurisdiction: (1) the Chapter 11 bankruptcy proceedings of Lehman Brothers Holdings, Inc. ("LHI") is now in the post-confirmation stage, allegedly removing "related to" jurisdiction over this case, and (2) Plaintiffs amended their Complaint on February 28, 2013, removing any federal statutory claims and references to federal statutes that might give this Court federal question jurisdiction.

For the reasons stated below, Plaintiffs' motion to remand for lack of subject matter jurisdiction is DENIED, and Plaintiffs' motion that the Court abstain from exercising its jurisdiction is GRANTED.

I. Factual Background

The factual background of this case, little of which has changed, is described in greater detail in Judge Jones's previous decision denying remand and staying this action. Fried v. Lehman Bros. Real Estate Associates III, L.P., No. 11 Civ. 4141, 2012 WL 252139, at *4 (S.D.N.Y. Jan. 25, 2012). The only significant change is the confirmation of LHI's bankruptcy plan of reorganization (the "Lehman Plan") on December 6, 2011, with an effective date of March 6, 2012. (Ex. B. to Colangelo Decl., Dkt. No. 69.) As a liquidating Chapter 11 estate, LHI is distributing assets to creditors pursuant to the confirmed Lehman Plan. The liquidation process is being guided by a seven-member board and will continue for several more years. (Ex. A to Parker Decl., Dkt. No. 49.)

II. Discussion

A. Subject Matter Jurisdiction

In what was clearly an effort to deny this Court jurisdiction, Plaintiffs have amended the Complaint to remove all federal law claims and references, so that the Amended Complaint contains only state law claims. There is great debate among the federal courts as to whether or not amendments can be employed post-removal to defeat federal jurisdiction. See Payne v. Parkchester N. Condos., 134 F.Supp.2d 582, 583 (S.D.N.Y. 2001) (discussing opposing viewpoints). Courts consider "the values of judicial economy, convenience, fairness, and comity" in deciding whether to allow pleading amendments to affect the forum in which the case is heard. Id. at 584 (citing Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 (1988)). Here, where there has been no discovery on either the original or the Amended Complaint, the Court does not find any prejudice against the Defendants in considering Plaintiffs' Amended Complaint for purposes of this motion. Indeed, the Defendants do not appear to assert any federal question jurisdiction, and the Court does not find any.

With regard to this Court's alternate basis for federal jurisdiction, Plaintiffs contend that the end of bankruptcy protection for the LHI estate on March 6, 2012, divests this court of jurisdiction as a matter "related to" the LHI bankruptcy proceeding. This is incorrect. 28 U.S.C. § 1334(b) provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b) (emphasis added). A court has jurisdiction over a removed case if "the action's outcome might have any conceivable effect on the bankruptcy estate." Parmalat Capital Fin. Ltd. v. Bank of Am. Corp., 639 F.3d 572, 579 (2d Cir. 2011) (internal quotation omitted). Judge Jones found that this case could have a conceivable effect on the Lehman bankruptcy estate in three ways that conferred "related to" jurisdiction. Fried II, 2012 WL 252139 at *4. First, Defendants can draw, and some currently draw, on LHI-owned insurance policies to cover defense costs, and may be able to draw on those policies to cover certain money damages. Second, LHI is obligated to indemnify certain individual Defendants for litigation costs and liabilities, and most of these Defendants have filed contingent proofs of claim in the bankruptcy proceedings. Id. Third, since LHI owns, directly or indirectly, all or a significant part of three of the entity defendants, any damages paid by them will draw directly from LHI assets. Each of these facts is still true post-confirmation, and each has the potential to affect the execution and administration of the Lehman Plan in that they could all affect amounts available to be paid to LHI's creditors. (Rao Decl., Dkt. No. 70.)

That LHI has emerged from bankruptcy protection, and the Lehman Plan is in the implementation stage under the continued jurisdiction of the Bankruptcy Court, does not change the analysis. When a plan provides for liquidating assets, rather than reorganizing the company as a going concern, "related to" jurisdiction remains broad because two of the justifications for narrower jurisdiction at the post-confirmation stage do not apply. In a liquidation setting, the reorganized debtor does not require "emancipation" from the constraints of bankruptcy protection to proceed with its business; nor is a liquidating debtor unfairly advantaged in the marketplace by the continued protections of bankruptcy court. See generally In re Refco, Inc. Sec. Litig., 628 F.Supp.2d 432, 441-42 (S.D.N.Y. 2008), citing In re Boston Reg'l Med. Ctr., Inc., 410 F.3d 100, 106 (1st Cir. 2005).

Even if Plaintiffs were correct that this action, were it filed today, would not be subject to "related to" jurisdiction under 28 U.S.C. § 1334, Plaintiffs are incorrect that this Court is divested of jurisdiction by events that occurred after removal. Judge Cote addressed this precise question in In re Worldcom, holding:

Although the Second Circuit standard for related to' jurisdiction requires a court to determine whether an action will have any conceivable effect' on the bankruptcy estate, ... it does not require federal district courts constantly to revisit jurisdictional findings to determine whether the effect of the litigation on the bankruptcy estate remains conceivable.' Instead, federal jurisdiction arising under Section 1334 is determined, like federal jurisdiction generally, on the basis [of the facts] at the time of removal.

In re WorldCom, Inc. Sec. Litig., 294 B.R. 553, 556 (S.D.N.Y. 2003) aff'd sub nom. Cal. Pub. Employees' Ret. Sys. v. WorldCom, Inc., 368 F.3d 86 (2d Cir. 2004) (internal citations omitted). A contrary rule "would create perverse incentives for ...


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