Schmidt v. Klein Bank (In re Schmidt)
- Citation:
- BAP, Case No. 11-6028, Appeal from the United States Bankruptcy Court for the District of Minnesota, August 3, 2011
- Tag(s):
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- Ruling:
- The BAP reversed the bankruptcy court's order denying the secured lender's motion to remand replevin actions, which had been removed from state court to the bankruptcy court, because the matters involved in the replevin actions were not core proceedings under 28 U.S.C. 157(b), and remanded to the bankruptcy court for further findings on the question whether the court is required to abstain under 28 U.S.C. 1334(c)(2).
- Procedural context:
- Appeal from order of the United States Bankruptcy Court for the District of Minnesota denying a secured lender's motion to remand the lender's replevin actions, which had been removed to the bankruptcy court from the state court, concluding that the matters involved in the replevin actions were not core proceedings under 28 U.S.C. 157(b)(2), and remanding for further findings on the question whether the matters could be timely adjudicated in state court pursuant to 28 U.S.C. 1334(c)(2).
- Facts:
- Klein Bank (the "Bank") filed multiple lawsuits against a number of different companies and their respective shareholders, asserting claims for breach of promissory note, breach of personal guaranties, breach of security agreement and replevin. Subsequently, the Bank filed motions for replevin seeking to seize certain property of both the debtors and non-debtors which was collateral for the Bank's loan. Voluntary chapter 11 petitions were then filed by the shareholders and their spouses. Certain of the debtors and their related entities subsequently filed notices of removal under 28 U.S.C. 1452, asserting that (1) the respective debtors have a legal interest in the property and, therefore, these are core proceedings which cannot be resolved without affecting the debtors' bankruptcy estates; (2) the replevin actions are related to the debtors' respective bankruptcy cases and, therefore, it would be more efficient and expeditious to have them heard in bankruptcy court; and (3) the U.S. District Court has original jurisdiction under 28 U.S.C. 1334. The bankruptcy court had concluded that mandatory abstention under Sec. 1334(c)(2) did not apply because the replevin actions were core to the debtors' bankruptcy cases under Sec. 157(b)(2). Specifically, the court concluded that the replevin litigation fell within three of the sixteen types of core proceedings enumerated in Sec. 157(b)(2) since the debtors showed they would not likely be successful in their reorganization efforts if the Bank replevined the assets of their non-debtor corporations. The BAP rejected that analysis, noting the United States Supreme Court's recent decision in Stern v. Marshall, in which the Court rejected the notion that Sec. 157 embodies a category of matters that are core, but do not arise under or in a bankruptcy case. Even if a matter may fit one of the enumerated examples in Sec. 157, the Court noted that core proceedings are those that arise in a bankruptcy case or under title 11. The BAP held that since the replevin actions do not arise under or in the debtors' bankruptcy cases, they are not core. While that conclusion seems obvious as to the Bank's claim against the non-debtor corporations, the BAP explained that it also true as to the Bank's causes of action against the debtors on their guaranties because those causes of action existed under state law, regardless of the bankruptcy filing. The BAP further noted that while the filing of any proofs of claim by the Bank in the bankruptcy case makes the Bank's claims against the Debtors core, it dose not make its claims against the non-debtors core. The BAP's advice - if a principal wishes to use the Bankruptcy Code to protect the assets of its corporation, or wants the bankruptcy court to decide causes of action against the corporation, it needs to file a bankruptcy case on behalf of the corporation. Finally, as to whether the other elements for mandatory abstention under Sec. 1334(c)(2) were met, the BAP observed that because the bankruptcy court's conclusion rested primarily on its finding that the repelevin actions were core, it did not make an express finding on the question whether the claims could be timely adjudicated in state court. The BAP thus remanded for a finding on that question.
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