- Case Type:
- Case Status:
- 18-5674 (6th Circuit, Jan 24,2019) Not Published
- The Sixth Circuit affirmed the rulings of the Bankruptcy Court and 6th Cir. BAP, (i) finding that jurisdiction existed for removal of the case from state court to the District Court (and referral to the Bankruptcy Court) because the matter was related to a prior bankruptcy case; (ii) holding that mandatory abstention did not apply; and (iii) dismissing the case on the merits.
- Procedural context:
- On appeal from the 6th Circuit Bankruptcy Appellate Panel. The Plaintiff filed a complaint in state court asserting claims relating to funds held in an account scheduled as an asset in the bankruptcy case of Leslie Resources, Inc. The Defendants removed the complaint from state court to federal District Court asserting jurisdiction under 28 U.S.C. § 1334. Plaintiff sought to remand, asserting that the District Court lacked mandatory jurisdiction and, if there was jurisdiction, abstention was mandatory under 28 U.S..C. § 1334(c)(2). The District Court found that it had at least "related to" bankruptcy jurisdiction and that mandatory abstention did not apply, and referred the case to the Bankruptcy Court. The Bankruptcy Court subsequently dismissed the Plaintiff's claims based on res judicata - the claims were or should have been litigated in the prior bankruptcy case.
- In 2002, Leslie Resources, Inc. (debtor) and a large number of affiliates filed Chapter 11 bankruptcy petitions. Debtor scheduled as an asset a certain account held at Community Trust Bank (bank) further identified as "restricted cash" and identified with "E. Begley Escrow." The account was, in fact, an account used to hold royalty payments on behalf of the heirs of Emmit Begley. However, the heirs of Emmit Begley filed no proofs of claim and no objections in the bankruptcy case. The debtor's assets were ultimately purchased at auction in 2004 by International Coal Group, Inc. ("ICG") and Lexington Coal Company ("LCC"). The sale order stated that it was binding on all creditors and enjoined actions against the purchasers with respect to any encumbrance or successor liability. In 2006, the bank filed an interpleader as an adversary proceeding in the bankruptcy case, naming the debtor, the liquidating trustee, ICG, LCC and "Mr. Begley - an unknown claimant referred to on the Business Account Agreements." Because the bank could not locate Mr. Begley, the bank requested and received authorization to serve Mr. Begley by publication. The interpleader was ultimately resolved by distribution of the funds in the account to ICG (67%) and LCC (33%). In 2014, the Plaintiff, as a successor in interest to some of Mr. Begley's heirs, brought his complaint in state court against the bank, ICG and LCC, alleging seven counts asserting various quiet title, contract, and tort claims. The case was removed to the federal District Court. The District Court determined that it had jurisdiction under 28 U.S.C. § 1334(b) because the matter was related to debtor's bankruptcy case, despite the fact that the debtor's bankruptcy case had long since closed and all property had long since been disposed of. The Sixth Circuit affirmed holding that the legal issues concerning the interpretation, validity, and enforcement of the bankruptcy court's orders created a sufficient nexus to create "related to" bankruptcy jurisdiction. If Plaintiff were successful, it could undo the confirmed sale, which could have an effect on the debtor's bankruptcy estate. The Sixth Circuit also affirmed the District Court's determination that mandatory abstention did not apply. The critical issue in the analysis was whether the proceedings were "core" or "non-core." The decision with respect to five the of seven counts (the tort claims) was directly controlled by the Sixth Circuit's prior decision in Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 314 (6th Cir. 2006). However, the Plaintiff argued that Lowenbraun was wrongly decided in light of Stern v. Marshall, 564 U.S. 462 (2011). The Sixth Circuit rejected this argument, holding that Stern is not inconsistent with Lowenbraun. Because the tort claims were based on actions that took place as part of the bankruptcy case (the sale and interpleader action), they were core claims under the Lowenbraun test. With respect to the quiet title and contract-based counts, the Bankruptcy Court and BAP held that whether they were core or non-core was immaterial because the core or non-core "proceeding" related to the entire proceeding and not to individual counts or claims. The Sixth Circuit neither affirmed nor rejected this reasoning, but found instead that one of the contract counts was core, and the other had been settled and was therefore moot. With respect to the quiet title count, the substance of the count required a determination of whether the account was property of the bankruptcy estate and was, therefore, core. The Sixth Circuit stated that whether or not the contract claim was core was "not so obvious" but ruled it was a moot issue because the Plaintiff had settled that claim. Finally, the Sixth Circuit affirmed the dismissal of the complaint for failure to state a claim based on res judicata. The Plaintiff's predecessors in interest, as creditors, are considered parties to the proceedings for res judicata purposes. Because "notice to the world was reasonably calculated to apprise interested parties of the sale and confirmation process" claims to the account should have been litigated in the bankruptcy sale / confirmation process. Further, even the tort claims shared identity with claims available before the bankruptcy case because they were all underpinned by the allegations regarding ownership of the account.
- MERRITT, GUY, and MOORE
John Finstad v. James Gord
Summarizing by Bradley Pearce
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