Petition for Writ of Certiorari — Barbee v. Colonial Healthcare Center, Inc., 125 S. Ct. 919 (2005) (No. 04-683)
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Supreme Court, U.S.
/ FILED
No. 04-683 NOV 1 - 2004
In The
Supreme Court of the Anited States
es
vy
OFFICE OF THE CLERK
BILL H. BARBEE, ET AL.,
Petitioners,
v.
COLONIAL HEALTHCARE CENTER, INC.
AND MORRIS ESFORMES,
Respondents.
¢
On Petition For A Writ Of Certiorari
To The United States Court Of Appeals
For The Fifth Circuit
7
PETITiUN FOR A WRIT OF CERTIORARI
¢
RONALD D. HInpDs, Esq.
Counsel of Record
JEANNE CRANDALL, Esq.
REYNA HINDS & CRANDALL
“ 1201 Elm, Suite 3850
Dallas, Texas 75270
Telephone: (214) 760-8100
Telecopy: (214) 760-8109
Counsel for Petitioners
COCKLE LAW BRIEF PRINTING CO. (800) 225-6964
OR CALL COLLECT (402) 342-2831
QUESTIONS PRESENTED
Does a Bankruptcy Court have discretion to abstain
from the exercise of exclusive §1334(e) bankruptcy jurisdic-
tion under 28 U.S.C. §1334(c)(1)?
Does a Bankruptcy Court have discretion under 28
U.S.C. §1334(c)(1) to abstain from the exercise of diversity
jurisdiction under 28 U.S.C. §1332?
Did Congress intend to codify this Court’s judicial
doctrine of abstention when it enacted 28 U.S.C.
§1334(c)(1)? ’
The Second Circuit and the Fifth Circuit conflict in
the test applied to permissive abstention under 28 U.S.C.
§1334(c)(1). Which test is correct?
ii
PARTIES TO THE PROCEEDINGS
Petitioners state that the following parties appeared
in the U.S. Court of Appeals for the Fifth Circuit:
Plaintiffs: Defendants:
Bill H. Barbee i. Colonial Healthcare Center, Inc.
Helen C. Barbee 2. Morris Esformes
B. Hull Barbee
F.E. Brown
Clark Collier Orren 1993 Trust
Clark Collier Orren GP Trust
Bobby F. Collier
Curtis Collier
Michael J. Collier
10. Michael J. Collier, Jr.
11. Pat Collier
12. Joyce Davenport
13. Tyrone Davenport
14. Davenport Enterprises, Inc.
15. Jay T. Gordon
16. Joost Gosschalk
17. Lottie Guttry
18. William H. Hudspeth
19. Joel Patrick Collier, Jr. 1993 Trust
20. Joel Patrick Collier GP Trust
21. Marjorie Kimbrough, Executrix for the Estate of
O. L. Kimbrough
22. Ester Knox
23. Tom Landers
24. Earle E. Little
25. Edward Mack
26. H.A. Orgain
27. Heather Webber f/k/a Heather Ruffin
28. Vicki M. Thomas
i GP pe Ee
ili
TABLE OF CONTENTS
Page
te tg |, yy: | aE i
PARTIES TO THE PROCEEDING .................:ccccceeeeees ii
EE EEE ignsedeniatanitctsnnsisesnaiassinsnuideieniahan ili
ARERR FAAS BOE EINE ccccccccscccscccccsceccconssnesnsnsseaeses iv
i naan a sdlccaibheiaetetlpioneadiesie 1
RSE ERR TRCN 2
PE EEE BIT WGRIT BEEP ncencnceccccnqnestoncencasecnensecssnscoccsuann 2
PERSONS FROM WHOM RELIEF IS SOUGHT AND
REASONS WHY RELIEF IS NOT AVAILABLE
PT MATE GPE MEMES GRIER cccsescsccseneccntcnsneescncascesss 3
STATEMENT OF THE CASL...............scccccsccccesssessscesese 4
SITE niiisdisiehainbiicpniiisdahtacteiiiidabineniidenaminineaanianacbanie 8
A. Congress Never Intended for 28 U.S.C.
§1334(d) to Limit Review of Abstention Deci-
sions in Cases Not Dependent on §1334 (b) for
I aI in ccciccisaceesicoaanoaitintusenionnsens 8
B. There is a Split in the Circuits Concerning
the Scope of Permissive Abstention Under
28 U.S.C. §1334(c). This Case Presents an Im-
portant and Recurring Question of Whether
the Judicial Abstention Doctrine Applies to
Courts Exercising Abstention Under 28 U.S.C
§1334(c).......... Si iacaeicalanmsaieeabdletisalelaininiaibiteaaehtainaied 10
C. Mandamus Relief is Appropriate in this Case.... 13
ala i cncndemstenpmpataiecnaisailimininnil App. A, B,C & D
iv
TABLE OF AUTHORITIES
Page
CASES
Bank One, N.A. v. Boyd, 288 F.3d 181 (5th Cir.
SU ascites hastesaubiebdasdeanieammiieceheasas cic ctai ai a i asa 11
Burford v. Sun Oil Co., 319 U.S. 315 (1948).......0..0..... 9,13
Christ the King Reg’l High School v. Culvert, 815
F.2d 219 (2d Cir. 1987), cert. denied, 484 U.S. 830
(1987)......... etc albeit asia ieceagdelicei cosh abeaia dad dallidaoig guiaiaashedal 14
Cohens v. Virginia, 6 Wheat (19 U.S.) 264 (1821) ...... 12,15
Colorado River Water Conservation Dist. v. United
NE, Grey Wess SIE TED GaichcncsincaSoniceaeundnananhaghidpebaneobas 14
In re All American of Ashburn, Inc., 49 B.R. 926
CE Gee Ss acct aiitiacicnrccancsceenctitetioamlananiene 11
In re DeLorean Motor Co., 49 B.R. 900 (Bankr. E.D.
BI, Se isaicdicsateissinkenceccahsseliniipaladindtioenaiblaticabaincandeuatinssagsans 11
In re Dow Corning Corp., 113 F.3d 565 (6th Cir.
1997), cert. denied, 522 U.S. 977 (1997)............cccceeceeeeeee 7
In re Gober, 100 F.3d 1195 (5th Cir. 1996) .................. 11, 13
In re Hamilton, 35 F.3d 567 (6th Cir. 1994)....................002 7
In re Hillsborough Holdings Corp., 123 B.R. 1004
(Bankr. M.D. Fla. 1990), aff’d, 123 B.R. 1018
GCA STIs SUI Dissncdsccsecanieapanbelisatnasecatecnmnadeiieuadenadibecdudamansen 11
In re Pan American World Airways, Inc., 950 F.2d
ST IN TED erikckccnstnissicdekinhadnaaninarsainaanmibbaniicien 10, 11, 13
In re Republic Reader’s Service, Inc., 81 B.R. 422
IS Se i, I OI Dincic dik chet ethcctehinasedlclstctuaindiciat esiaiaiuae 11
In re Rupp & Bowman Co., 109 F.3d 237 (5th Cir.
SED sis nistecicdashiciatieanuensneehuaetieedauetdsainanedbecis a eels ae 7
TABLE OF AUTHORITIES - Continued
Page
Moses H. Cone Memorial Hospital v.- Mercury
Construction Corp., 460 U.S. 1 (1983)............cccceeeeeeeeeees 7
Quackenbush v. Allstate Insurance Co., 517 U.S.
PI I sininnisaindsnndansansiliiaanmpiceiniahasasuieimaiiecicncercalaaes 7
Stone & Webster Eng. Corp. v. Ilsley, 690 F.2d 323
(2d Cir. 1982), a/f’d sub nom Arcudi v. Stone &
Pema, Ge CFT, GE CR esntintenctnntanssnsanitacanaseiinnas 14
Thermtron Products, Inc. v. Hermansdorfer, 423
U.S. 336 (1976), abrogated on other grounds, 517
CB Pe CIID senisssistitcansssisntaiapiicancelbnitiedatitetatidineaia cen cenalas 7,14
Webb v. B.C. Rogers Poultry, Inc., 174 F.3d 697 (5th
Cir. 1999), cert. denied, 528 U.S. 964 (1999)....7, 9, 11, 13
Whitmire v. Victus Limited, 212 F.3d 885 (5th Cir.
ROD incissnininicisininpiaiiiiseeisiaialcimtaaiaade alameda teas 6
STATUTES
TD CR Ie teicciistntsnanaenissscriian leanne 5
ae Is BE ee iaiecctntiisinvnninsnectediactedetemenen 5
Se Ee. Fe i iikinreshitteensianeignudane 5
SD EE. SAD sisasiinicepussensicanhinitanciietiehiaateliineaa 3, 5, 8
BD CLIRG., GREG okitiiciinstttiinneieniedaanmene 2
BE TET, GED vniciiniinssninncritanicdscnvipicstanadidelblaaeisemadacaan 2
Se RR, Bp itiiintnntinaiicedaceumre eres 7,9
Be SF A se itssccdninicninsscnekciiemdgcecictinliaaadeaadiiuaiaiglian 6, 10, 15
BD TE: Fe sie nednrneanscicnenscniasaliebncatecgtamoan passim
See CA acs BIN siencasstnsainissaniccanaatbctaniemaaume 9, 10, 13, 15
vi
TABLE OF AUTHORITIES — Continued
Page
BD UFR, SEG II a Pesscnscnsncncsessnscsistusitiiniecsmmbentaiaea passim
Be Ui ie Be tnscrsssnsennmeiastatennsitionbaaaiasamaanie 8,9
BD Cade te eee ncssscccosccscnsuiicsunsiesvasiemstaansaiasaianana 1,14
Be Cre SD cesantéiscometistanimsninane 3, 5, 6,9, 15
SD Cras. pT eli casceschistuscsevusssshebsensannenienesseieaasanaaaiae 14
BD Uh eete Be Bi insssrssceesceshastendetttssiammneenenaes 10
Be Cie Se centscenisventemmesniantesticdenainieianaee a
BS CAS. Be ticcceesieristenisensiaeiaiaaee 6
4 Tex. Bus. & Com. Code (UCC), art. 9.302(a)(5)
COIIIIIIOE) cccinsscncsssstnicunententoneenseeeoelenaane aaa 4
4 Tex. Bus. & Com. Code (Rev. UCC), art. 9.309(2)........... 4 |
OTHER AUTHORITIES
H.R. Rep. No. 595, 95th Cong., 1st Sess. 446 (1977),
reprinted in 1978 U.S. Code Cong. & Admin.
POD Fa i cciaceetisctinncinaniieentans 10, 13
H.R. Rep. No. 103-835, 103rd Cong., 2d Sess,
reprinted in 1994 U.S. Code Cong. & Admin.
POO GND cachissninstactinneintncbiasacsaidiadiamncnaee 8
SGD Commies: BRNO, FH, Fe nnticcnsncsvntsictiuaieieees 8
1 Collier on Bankruptcy §3.05[1)] (15th Ed.)......0................ 8
aS
1
PETITION FOR A WRIT OF
MANDAMUS AND/OR CERTIORARI
Petitioners, the 28 individuals listed above, respect-
fully pray that a writ of mandamus, or in the alternative,
a writ of certiorari, issue to review the judgment of the
United States Court of Appeals for the Fifth Circuit
entered in this proceeding on August 3, 2004, dismissing
Petitioners’ appeal and denying their application for writ
of mandamus to the United States District Court for the
Northern District of Texas, Dallas Division, to compel it to
exercise its jurisdiction to determine the validity and
extent of liens on the Debtor’s property, and its obligation
to hear disputes involving citizens of different states.
+
OPINIONS BELOW
The opinion and order of the United States Bank-
ruptcy Court for the Northern District of Texas (unre-
ported), dated March 10, 2003, which abstained from the
exercise of federal jurisdiction over Plaintiff’s claims is
reproduced in Appendix C. The unreported opinion and
order of the United States Bankruptcy Court denying
Plaintiff’s Motion for Reconsideration is reproduced in
Appendix D. The unreported opinion of the United States
District Court for the Northern District of Texas affirming
the Bankruptcy Court’s abstention order is reproduced in
Appendix B. The per curiam order of the United States
Court of Appeals for the Fifth Circuit, dismissing Plain-
tiffs’ appeal under 28 U.S.C. §1334(d), is reproduced in
Appendix A.
+
2
JURISDICTION
The judgment of the Court of Appeals was entered on
August 3, 2004. This petition is filed within ninety days of
entry of that order. This Court’s jurisdiction is invoked
pursuant to 28 U.S.C. §1651 and §1254(1). Plaintiffs
disagree with the Fifth Circuit’s view concerning the
applicability of 28 U.S.C. §1334(d). That argument is
presented at pages 9-11 below.
,
vy
STATUTES INVOLVED
1. 28 U.S.C. §1334(c)(1):
Nothing in this section prevents a district court
in the interest of justice, or in the interest of
comity with State courts or respect for state law
from abstaining from hearing a particular pro-
ceeding arising under title 11 or arising in or re-
lated to a case under title 11.
2. 28 U.S.C. §1334(d):
Any decision to abstain or not to abstain made
under this subsection (other than a decision not
to abstain in a proceeding described in subsec-
tion (c)(2)) is not reviewable by appeal or other-
wise by the court of appeals under section 158(d),
1291, or 1292 of this title or by the Supreme
Court of the United States under section 1254 of
this title. This subsection shall not be construed
to limit the applicability of the stay provided for
by section 362 of title 11, United States Code, as
such section applies to an action affecting the
property of the estate in bankruptcy.
3. 28 U.S.C. §1334(e):
The district court in which a case under title 11
is commenced or is pending shall have exclusive
jurisdiction of all of the property, wherever lo-
cated, of the debtor as of the commencement of
such case, and of property of the estate.
4. 28 U.S.C. §157(b)(2)(K):
Core proceedings include, but are not limited
ee
(K) determinations cf the validity, extent, or
priority of liens;
2
Vv
PERSONS FROM WHOM RELIEF IS SOUGHT
AND REASONS WHY RELIEF IS NOT
AVAILABLE FROM ANY OTHER COURT.
Petitioners seek this Court’s mandate directing the
United States District Court for the Northern District of
Texas to exercise its original jurisdiction over Petitioners’
claims for enforcement of their liens and turn over of the
Debtor’s property. The District Court refused to exercise
original jurisdiction when Petitioners filed an original
proceeding to withdraw reference from the Bankruptcy
Court, relying upon and affirming the Bankruptcy Court’s
abstention order. Subsequently, while this appeal was
pending, the Missouri state court terminated the state
court receivership proceedings, and refused to allow
Petitioners to participate in the proceedings. Unless this
Court issues its mandate to require the District Court to
exercise jurisdiction in this case, the effect will be that the
Missouri state court’s ruling will constitute a binding res
judicata judgment on the Debtor’s interests in property —
4
an issue Congress deemed to be within the exclusive
jurisdiction of the federal district courts. It will also
deprive Petitioners of their interests in property without a
hearing.
4
-
STATEMENT OF THE CASE
The Petitioners are part of a larger group of approxi-
mately 140 individuals who funded $14 million over a five
year period of time to a nursing home company, Chartwell
Healthcare, Inc., operating nursing homes in Florida,
Missouri, and Texas. The company issued promissory
notes payable monthly over a ten-year term in return for
the funds. The notes were secured by the accounts receiv-
able of the nursing homes. :
Because of the high number of individuals who pur-
chased the notes, each security interest conveyed was a
very small amount of the total receivables and therefore
qualified as an automatically-perfected security interest ©
under the filing exemption set forth in UCC article
9.302(a)(5), 4 Tex. Bus. & Com. Code §9.302(a)(5) (re-
pealed, now Revised UCC, art. 9.309(2)). When proceed-
ings in bankruptcy were initiated against Chartwell
Healthcare, Inc. and its subsidiaries in 1998, several
disputes for priority were presented by competing secured
creditors. These disputes were resolved largely through
stipulated orders entered in the bankruptcy proceedings.
The Respondents in this case acquired custody of
the Medicare and Medicaid proceeds of the healthcare
receivables of one of the Chartwell nursing homes,
Colonial Nursing Center, Inc., based on their status as
the original lessors of the nursing home operations and
their subsequent pre-petition application to a circuit
5
court in Jefferson City, Missouri, for their appointment as
receiver for the Colonial nursing home. When Colonial
Nursing Center, Inc. filed a voluntary Chapter 7 petition
in the United States Bankruptcy Court for the Northern
District of Texas, the state court stayed all proceedings in
the state court receivership case pending the administra-
tion of the estate by the bankruptcy court.
In this case, which was commenced originally as an
interpleader action by the Chartwell Chapter 7 Trustee,
the Bankruptcy Court entered an Agreed Judgment under
which the Petitioners were declared to have first priority
secured status on the proceeds of the receivables of Colo-
nial Nursing Center, Inc. which were still in the custody of
the Respondents. The Respondents had notice of the
motion for entry of the judgment and did not contest it.
Although the Bankruptcy Court acknowledged that it
had exclusive jurisdiction undex 28 U.S.C. §1334(e) to
consider Petitioners’ claims to enforce liens against prop-
erty of the Debtor’s estate (App. C-3 and C-4) and core
jurisdiction to finally dispose of those claims under 28
U.S.C. §157(b)(2)(B), (E), and (K) (App. C-3), it abstained
from the exercise of jurisdiction over the Plaintiffs’ third
party claims for declaratory relief and turn over of the
funds held by the Respondents. The Bankruptcy Court
identified no interests of comity that would justify abstain-
ing to a proceeding which itself was stayed under 11
U.S.C. §362 since 1999, saying only that the jurisdiction
conferred on the Bankruptcy Court was not intended to
benefit secured creditors seeking recovery on their liens.
After receipt of the Order, Petitioners moved for
reconsideration and, at the same time, moved to amend
|
: 6
their cross-claims to assert diversity jurisdiction.’ The
bankruptcy court denied both motions by opinion and
order dated May 6, 2003. (App. D). Significantly, this
Order clarified the earlier Order by stating that Petition-
ers’ claims had not been dismissed; the adversary proceed-
ing would be “administratively closed” pending Petitioners’
efforts to collect the proceeds in Missouri. (App. D-2).
Based upon this ruling, Petitioners not only appealed the
abstention order to the District Court, but also filed a
motion to withdraw reference requesting that the District
Court exercise original jurisdiction in diversity.
The District Court affirmed the abstention order and
wholly disregarded the motion to withdraw reference in its
unreported opinion and order dated March 22, 2004. (App.
B).
Petitioners filed a notice of appeal, or in the alterna-
tive, petition for writ of mandamus to the United States
Court of Appeals for the Fifth Circuit on April 15, 2004.
Defendants moved to dismiss that appeal based on 28
U.S.C. §1334(d). The appeal was dismissed and the appli-
cation for writ of mandamus was denied by the Court of
Appeals by per curiam order dated August 3, 2004. (App.
A).
Petitioners alleged complete diversity under 28 U.S.C.
§1332 and pre-emptive and exclusive jurisdiction under 28
U.S.C. §1334(e). Abstention decisions in cases of this type
are properly reviewed by the Court of Appeals as a “final
* Pursuant to 28 U.S.C. §1653 and Whitmire v. Victus Ltd., 212
F.3d 885, 887-88 (5th Cir. 2000), Petitioners were entitled to amend
defective allegations of jurisdiction at any time, either in the trial court
or on appeal.
decision” that “effectively put the litigants out of court”
under 28 U.S.C. §1291, and as a collateral order separate
from the merits but requiring an immediate appeal.
Quackenbush v. Allstate Insurance Co., 517 U.S. 706
(1996); Thermtron Products, Inc. v. Hermansdorfer, 423
U.S. 336, 345-50 (1976); Webb v. B.C. Rogers Poultry, Inc.,
174 F.3d 697, 699 (5th Cir. 1999), cert. denied, 528 US.
964 (1999); In re Rupp & Bowman Co., 109 F.3d 237, 240
(5th Cir. 1997).* Contrary to the view of the courts below,
28 U.S.C. §1334(d) does not restrict appellate jurisdiction
over abstention decisions where federal court jurisdiction
does not depend upon “related to” jurisdiction under 28
U.S.C. §1334(b).
In the alternative, appellate jurisdiction existed under
the All Writs Act, 28 U.S.C. §1651(a) to compel a federal
court to exercise exclusive and pre-emptive jurisdiction
and “decide a pending case.” Thermtron Products, Inc. v.
Hermansdorfer, 423 U.S. at 352-53; In re Dow Corning
Corp., 113 F.3d 565, 569 (6th Cir. 1997), cert. denied, 522
U.S. 977 (1997).
The state court continued to suspend all proceedings
in the receivership case pending Plaintiffs’ appeal of the
abstention order to the District Court and to the United
States Court of Appeals. Immediately prior to the filing of
this petition, however, the state court terminated the
receivership and discharged the Receiver from any claims
? Thermtron was overruled by the Quackenbush decision only
insofar as it held that remand orders were not a “final decision”
appealable under 28 U.S.C. §1291.
* See also Moses H. Cone Memorial Hospital v. Mercury Construc-
tion Corp., 460 U.S. 1, 12 (1983); In re Hamilton, 35 F.3d 567 (6th Cir.
1994).
8
for turn over of the accounts receivable proceeds. The
effect of the abstention order, therefore, was to deprive
Plaintiffs of their right to enforce the Bankruptcy Court’s
judgment for recovery of the secured property. The Bank-
ruptcy Court’s Order had the effect of delegating to a state
court tlie core determination of the validity and priority of
liens in a Debtor’s property under 28 U.S.C. §157(b)(2)(K).
r
v
ARGUMENT
A. Congress Never Intended for 28 U.S.C. §1334(d)
to Limit Review of Abstention Decisions in
Cases Not Dependent on §1334(b) for Federal
Jurisdiction
Section 1334(d) of Title 28, the full text of which is set
forth above at page 2, is derived from a virtually identical
provision previously included within 28 U.S.C. section
1334(c)(2) prior to the 1994 Bankruptcy Reform Act. Prior
to 1994, the reference to “under this subsection” clearly
referred to mandatory abstention under section 1334(c)(2),
and not permissive abstention “in the interest of comity.”
The legislative history accompanying the 1994 amend-
ments makes no reference to any intent to expand the
limitation of appellate review to include abstention deci-
sions beyond the mandatory abstention provision set forth
in 1334(c)(2). H.R. Rep. No. 103-835, 103rd Cong., 2d Sess,
reprinted in 1994 U.S. Code Cong. & Admin. News at
3340; 140 Cong. Rec. H10,764. One authoritative commen-
tator, 1 Collier’s on Bankruptcy §3.05[1] (15th Ed.), states
“the new configuration of the materials contained in
subsection 1334(d) continues the rights to appeal that
previously existed, but adds one new right... .” Prior to
1994, many courts held that appellate jurisdiction existed
9
to review permissive abstention orders under section
1334(c)(1), notwithstanding the limitation of appellate
review where abstention was mandatory under section
1334(c)(2).
‘Petititioners contend that the Bankruptcy Court’s
abstention order is outside the scope of 28 U.S.C.
§1334(c)(1), and therefore subject to review notwithstand-
ing 28 U.S.C. §1334(d) because: (1) section 1334(e) pre-
empts state court jurisdiction over the Plaintiffs’ claims,
and therefore, a bankruptcy court cannot abstain from a
matter over which it exercises exclusive jurisdiction; and (2)
section 1334(c)(1) cannot apply where an independent basis
for jurisdiction under 28 U.S.C. section 1332 exists over
the case.
In Webb v. B.C. Rogers Poultry Inc., 174 F.3d 697, 699
(5th Cir. 1999), cert. denied, 528 U.S. 964 (1999), the Fifth
Circuit applied a test similar to the test Petitioners now
urge this Court to adopt. Where federal jurisdiction is
premised on section 1334(b) (jurisdiction broadly conferred
for cases “arising under” or “related to” a case under title
11), a district court’s decision to abstain under section
1334(c) is not subject to review by the Court of Appeals. Id.
at 699-700. Where, however, an independent basis of
jurisdiction exists under 28 U.S.C. §1332 (diversity juris-
diction), the abstention order is a “final order” over which
the Court of Appeals must exercise jurisdiction under 28
U.S.C. §1291. Id. at 699.
There is no discretion in such cases to abstain unless
the narrow strictures of the doctrine set forth in Burford v.
Sun Oil Co., 319 U.S. 315 (1943) apply, and “a court
necessarily abuses its discretion when it abstains outside
of the doctrine’s strictures.” Jd. at 700.
10
B. There is a Split in the Circuits Concerning the
Scope of Permissive Abstention Under 28 U.S.C.
§1334(c). This Case Presents an Important and
Recurring Question of Whether the Judicial Ab-
stention Doctrine Applies to Courts Exercising
Abstention Under 28 U.S.C. §1334(c)
By its own terms, 28 U.S.C. section 1334(c)(1) does not
authorize abstention where a ground other than “related
to” jurisdiction under 1334(b), such as diversity of citizen-
ship under section 1332, would apply to support federal
jurisdiction over the case or controversy.
The Second Circuit Court of Appeals analyzed the
legislative history and interpretation of 28 U.S.C.
§1334(c)(1) in considerable depth in Jn re Pan American
Corporation, 950 F.2d 839, 845 (2d Cir. 1991). The Court of
Appeals stated that the section is substantially the same
as former section 1471(d) of Title 28, and that the legisla-
tive history of the former section remained an important
reference in construing its successor. The House Report
accompanying the 1978 legislation stated that:
[I]n order to insure that the jurisdiction of the
bankruptcy court is exercised only when appro-
priate to the expeditious disposition of bank-
ruptcy cases, the bill codifies present case law
relating to the-power of abstention in particular
proceedings by the bankruptcy court.
Id. at 845-46, quoting, H.R. Rep. No. 595, 95th Cong., 1st
Sess, 446 (1977), reprinted in 1978 US. Code Cong. &
Admin. News 5963, 6401. The House Report specifically
adopted judicial standards applicable to the exercise of
discretionary abstention as follows:
11
The [discretionary abstention] subsection recog-
nizes the exigencies that arise in such cases as -
Thompson v. Magnolia Petroleum, 309 U.S. 478
(1940), in which it is more appropriate to have a
State court hear a particular matter of State law.
Id. at 846.
According to the Second Circuit:
Congress thus intended that section 1334(c)(1) be
informed by principles developed under the judi-
cial abstention doctrines, and courts have usually
looked to these well-developed notions of judicial
abstention when applying section 1334(c)(1).
Id. at 846. Even the Fifth Circuit has sometimes applied
this standard rather than the standard applied by the
District Court in this case. Compare Bank One, NA uv.
Boyd, 288 F.3d 181, 184 (5th Cir. 2000) and Webb v. B.C.
Rogers Poultry Inc., 174 F.3d 697, 699 (5th Cir. 1999), cert.
denied, 528 U.S. 964 (1999) with In re Gober, 100 F.3d 1195
(5th Cir. 1996) and In re Republic Reader’s Service, Inc., 81
B.R. 422, 428 (Bankr. S.D. Tex. 1987). See also In re
Hillsborough Holdings Corp., 123 B.R. 10904, 1013 (Bankr.
M.D. Fla 1990), aff’d, 123 B.R. 1018 (M.D. Fla 1991) (“this
abstention provision should only apply if the interests of
the entities seeking abstention will be promoted by ab-
stention and when they override the court’s presumptive
duty to hear and resolve matters which are properly before
it”); In re DeLorean Motor Co., 49 B.R. 900, 910 (Bankr.
E.D. Mich. 1985) (abstention “has been viewed as an
extraordinary and narrow exception to the duty of the
federal courts to adjudicate controversies which are
properly before it”); In re All American of Ashburn, Inc., 49
B.R. 926 (Bankr. N.D. Ga. 1985) (discretionary abstention
was not appropriate in adversary proceeding to collect
accounts receivable).
12
Second, section 1334(c)(1) does not authorize bank-
ruptcy courts to abstain from hearing cases within the
District Court’s diversity jurisdiction. It only authorizes a
district court to make that determination. If the bank-
ruptcy issues were considered insubstantial to the Bank-
ruptcy Court, the proper remedy should have been to refer
the matter to the District Court for determination under
its diversity jurisdiction, rather than abstaining to a state
court that had already expressly deferred these issues to
the Bankruptcy Court.* Administration of a bankruptcy
estate and the effect of a case on such administration is a
basis for “related to” jurisdiction; but the absence of such
an effect is not alone sufficient for abstention by a district
court sitting in diversity.
The abstention doctrine is a very narrow, judge-made
exception to the constitutional requirement that the
federal courts must exercise the jurisdiction authorized by
Congress. According to this Court:
We have no more right to decline the exercise of
jurisdiction which is given than to usurp that
which is not given. The one or the other would be
treason to the constitution.
Cohens v. Virginia, 6 Wheat (19 U.S.) 264 (1821), quoted in
New Orleans Public Services, Inc. v. City of New Orleans,
491 U.S. 350, 358-59 (1989); Colorado River Water Conser-
vation District v. United States, 424 U.S. 800, 817 (1976);
“ See Record at 1097 and 1149 (“The order and judgment specifi-
cally makes no determination as to the rights and priorities of any
party or non-party with respect to the Pre-Receivership Receivables or
the proceeds thereof, or any offsets asserted by James Lincoln, Jim
Lincoln & Associates, Health Systems, Inc., or the Successor Operators,
deferring the same to the Bankruptcy Court.”) (emphasis supplied).
|
enna racer anne arama a cara amas So, A RI e e a a A
13
Growe v. Emison, 507 U.S. 25, 32 (1993) (abstention
authorized in only two circumstances); Sayers v. Forsyth
Building Corp., 417 F.2d 65, 73-74 (5th Cir. 1969) (revers-
ing abstention by the District Court; “absent the most
compelling reason the plaintiffs have a right to have the
case adjudicated in the federal system”).
C. Mandamus Relief is Appropriate in this Case
_The Courts of Appeal have applied inconsistent
standards in reviewing the propriety of abstention under
28 U.S.C. §1334(c). Compare In re Pan American Corpora-
tion, 950 F.2d 839, 845 (2d Cir. 1991); Webb v. B.C. Rogers
Poultry Inc., 174 F.3d 697, 699 (5th Cir. 1999), cert. denied,
528 U.S. 964 (1999); with In re Gober, 100 F.3d 1195 (5th
Cir. 1996), and the District Court opinion in this case.
(App. B). There is no discretion in such cases to abstain
unless the narrow strictures of the doctrine set forth in
Burford v. Sun Oil Co., 319 U.S. 315 (1943) apply, and “a
court necessarily abuses its discretion when it abstains
outside of the doctrine’s strictures.” Webb, 174 F.3d at 700.
Section 1334(c)(1) was intended by Congress to apply
only to those cases where the bankruptcy court’s jurisdic-
tion is peripheral to the underlying bankruptcy case, and
covered by federal jurisdiction only because of the broad
test for “related to” jurisdiction under §1334(b).° It was not
® In re Pan American World Airways, Inc., 950 F.2d 839, 845 (2d
Cir. 1991), quoting H.R. Rep. No. 595, 95th Cong., 1st Sess. 446 (1977),
reprinted in 1978 U.S. Code Cong. & Admin. News 5963, 6401 (“The
[discretionary abstention] subsection recognizes the exigencies that
arise in such cases as Thompson v. Magnolia Petroleum, 309 U.S. 478
(1940) in which it is more appropriate to have a State court hear a
particular matter of State law.”).
14
intended to apply to claims which are pre-empted by
federal bankruptcy law.°
Mandamus relief is appropriate here. This Court made
clear in Thermtron Products, Inc. v. Hermansdorfer, 423
U.S. 336, 352-53 (1976)’ that “[a] traditional use of the writ
in aid of appellate jurisdiction both at common law and in
the federal courts has been to confine an inferior court to a
lawful exercise of its prescribed jurisdiction or to compel it
to exercise its authority when it is its duty to do so.” “Re-
peated decisions of the [Supreme Court], have established
the rule ... that the writ will lie in a proper case to direct a
subordinate Federal court to decide a ending cause.” Id.
In Thermtron, this Court determined that 28 U.S.C.
§1447(d), a statute similar to 28 U.S.C. §1334(d), did not
create a bar from the exercise of jurisdiction in mandamus,
where the District Court relied upon a ground not permitted
under the statute for remand orders (overcrowding of the
federal docket). Similarly, in this case, the Bankruptcy Court
had no discretion to abstain in a case outside the scope of
“related to” jurisdiction under 28 U.S.C. section 1334(b).
Accordingly, as in Thermtron, there is no impediment to
review the Bankruptcy Court’s abstention order, and the
* Colorado River Water Conservation Dist. v. United States, 424 U.S.
800, 815, n.21 (1976) (“the presence of a federal basis for jurisdiction may
raise the level of justification needed for abstention”); Christ the King
Regional High School v. Culvert, 815 F.2d 219, 223, n. 4 (2d Cir. 1987),
cert. denied, 484 U.S. 830 (1987) (“The underlying rationale for this
doctrine is that it would be futile to abstain in deference to a state
decisional body if it later should develop that it may not have jurisdiction
over a dispute due to the preemptive jurisdiction of a federal body.”);
Stone & Webster Eng Corp. v. Ilsley, 690 F.2d 323, 326 n. 2 (2d Cir. 1982),
aff'd sub nom Arcudi v. Stone & Webster, 463 U.S. 1220 (1983) (“Absten-
tion .. . is not appropriately invoked in a preemption case.”).
” See note 2, supra.
15
District Court’s failure to exercise its own jurisdiction in
diversity, because neither court had discretion to abstain
under 28 U.S.C. §1334(c) in a case governed by section
1332 and 1334(e).
By requiring individual and elderly plaintiffs to prose-
cute their claims in a distant forum, the District Court has
deprived the Plaintiffs of their right to choose a federal
forum for their dispute and completely abdicated its consti-
tutional duty to exercise the jurisdiction conferred upon it.
According to this Court:
We have no more right to decline the exercise of
jurisdiction which is given than to usurp that
which is not given. The one or the other would be
treason to the Constitution.
Cohens v. Virginia, 6 Wheat (19 U.S.) 264 (1821), quoted in
New Orleans Public Services, Inc. v. City of New Orleans,
491 U.S. 350, 358-59 (1989).
The case for mandamus relief is even clearer in this
case because: (1) the state court previously entered an
Order deferring the lien validity and priority claims to the
Bankruptcy Court, and (2) Plaintiffs are not parties to any ~
state court proceeding and the Bankruptcy Court itself
acknowledged that any motion to intervene which they
might file in the state court could be denied.
Respectfully submitted,
RONALD D. HINDS
JEANNE CRANDALL
REYNA HINDS & CRANDALL
1201 Elm, Suite 3850
Dallas, TX 75270
214-760-8100 Telephone
214-760-8109 Telecopy
Attorneys for Petitioners
A-1
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 04-10536
In the Matter Of: EAST TEXAS HEALTHCARE INC;
CHARTWELL HEALTHCARE SERVICES OF MISSOURI |
INC
Debtors
BILL H BARBEE; HELEN C BARBEE; B HULL
BARBEE; F E BROWN, JR; CLARK COLLIER ORREN
1993 TRUST; ET AL
Appellants
V.
MORRIS ESFORMES; COLONIAL HEALTHCARE
CENTER INC
ee ee ee ee ee ee
Appeal from the United States District Court for the
Northern District of Texas, Dallas
(Filed Aug. 3, 2004)
Before WIENER, BENAVIDES, and STEWART, Circuit
Judges.
PER CURIAM:
IT IS ORDERED that appellees’ motion to dismiss
appellants’ appeal for lack of jurisdiction is GRANTED.
A-2
IT IS FURTHER ORDERED that, construing appel-
lants’ notice of appeal as an application for writ of man-
damus, it is DENIED.
IT IS FURTHER ORDERED that appellees’ motion
for an award of attorneys fees and costs is denied.
/s/ Wiener /s/ Benavides /s/ Stewart
7/26/2004 7/28/2004 - 7/28/2004
B-1
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
BILL H. BARBEE, et al., §
Appellants, :
i : Civil Action No.
COLONIAL HEALTHCARE -3:03-CV-1658-N
CENTER, INC., and MOR- §
RIS ESFORMES, :
Appellees. a
MEMORANDUM OPINION AND ORDER
(Filed Mar. 22, 2004)
Before the Court is Appellants’ appeal from two orders
of the Bankruptcy Court of the Northern District of Texas,
by which the Bankruptcy Court permissively abstained
from Appellants’ claims against Appellees and refused to
allow Appellants to amend their pleadings to assert
jurisdiction based on diversity. Because the Court believes
that both orders of the Bankruptcy Court are well-
supported by Fifth Circuit law and are not abuses of
discretion, the Bankruptcy Court’s orders are affirmed.
I. BACKGROUND
On October 5, 1998, an involuntary bankruptcy
petition was filed against East Texas Healthcare, Inc.
(“East Texas”) in the United States Bankruptcy Court for
the Northern District of Texas. On June 24, 2002, the
Chapter 7 Trustee, Diane Reed, filed a First Amended
Complaint in Interpleader against State Bank and Trust
B-2
and Appellants, invoking the Bankruptcy Court’s jurisdic-
tion to determine the validity of competing claims to
certain funds interpleaded into the registry of the Bank-
ruptcy Court. On November 25, 2002, an Agreed Judgment
was entered by the Bankruptcy Court, whereby Appellants
were declared to have “first, valid, prior and perfected
security interests in and liens on the accounts receivable
of ... Colonial Nursing Center, Inc., including all proceeds
and cash collateral derived therefrom.” On November 27,
2002, Appellants amended their answer and cross-claim to
include claims for turnover against Appellees, who had not
previously been parties to any proceeding in the East
Texas bankruptcy. The Bankruptcy Court granted Appel-
lees’ Motion to Dismiss on March 10, 2003, applying
permissive abstention under 28 U.S.C. § 1334(c)(1) be-
cause: (1) absent the East Texas bankruptcy case, there
would be no federal jurisdiction; (2) the matters raised
were wholly dependent on state law; (3) litigation concern-
ing the accounts receivable of Colonial Nursing Center,
Inc. had been pending in state court; and (4) comity and
respect for state law weighed in favor of abstention. The
Bankruptcy Court subsequently denied Appellants’ motion
to amend, holding that the motion was not timely made
and would not have provided a basis to determine that
permissive abstention was inappropriate.
II. ANALYSIS
A. Permissive Abstention
Appellants claim that the Bankruptcy Court’s March
10, 2003 Order must be reversed, because permissive
abstention is a narrow doctrine and there are insufficient
reasons to decline jurisdiction. The Court disagrees.
Permissive abstention is reviewed under an abuse of
Se Reenter -
B-3
discretion standard. Clark v. Fitzgibbons, 105 F.3d 1049,
1051 (5th Cir. 1997). On appeal, reversal is not justified if
the ruling of the court can be supported on any ground.
Bickford v. Int'l Speedway Corp., 654 F.2d 1028, 1031 (5th
Cir. 1981). Contrary to Appellants’ contention, “[u]nder
the ‘permissive absention’ doctrine, 28 U.S.C. § 1334(c)(1),
courts have broad discretion to abstain from hearing state
law claims whenever appropriate ‘in the interest of justice,
or in the interest of comity with State courts or respect for
State law.’” Gober v. Terra + Corp. (In re Gober), 100 F.3d
1195, 1206 (5th Cir. 1996) (citations omitted); see also
Wood v. Wood (In re Wood), 825 F.2d 90, 93 (5th Cir. 1987)
(interpreting Bankruptcy Act to provide district courts
“broad power to abstain whenever appropriate ‘in the
interest of justice, or in the interest of comity with State
courts or respect for State law.’”).’
Bankruptcy and district courts are free to consider a
number of factors when determining whether permissive
abstention is appropriate under Section 1334; for example,
the much-cited case of In re Republic Reader’s Service
discusses five factors relevant to discretionary abstention:
“(1) the existence of two closely related proceedings based
upon state law or a state law cause of action, (2) the
absence of any basis for jurisdiction other than section
1334, (3) the likelihood that the proceeding can be timely
adjudicated in a state forum|[,] (4) the extent to which state
law issues predominate, and (5) the degree of relatedness
* Appellants cite no authority for their argument that a bank-
ruptcy court is without power to exercise permissive abstention, and
such contention is not supported by Fifth Circuit law. See In Re Gober,
100 F.3d at 1207 (affirming bankruptcy court’s use of permissive
abstention and district court’s subsequent affirmation).
B-4
the proceeding has to the bankruptcy case.” Republic
Reader’s Serv., Inc. v. Magazine Serv. Bureau, Inc. (In re
Republic Reader’s Serv., Inc.), 81 B.R. 422, 428 (Bankr.
S.D. Tex. 1987). Twelve considerations are considered by
the district court in In re Richmond Tank Car.’ Richmond
Tank Car Co. v. CTC Investments (In re Richmond Tank
Car Co.), 119 B.R. 124, 126 (S.D. Tex. 1989). The bank-
ruptcy court is not required to address each factor dis-
cussed in Richmond Tank Car; indeed, in Gober, the
bankruptcy court’s grant of permissive abstention and the
district court’s order affirming such grant were affirmed
by the Fifth Circuit despite the fact that “neither the
bankruptcy court nor the district court offered any ration-
ale for abstention in its [written] judgment.” In re Gober,
100 F.3d at 1207. Furthermore, permissive abstention may
be warranted eyen though some of the Richmond Tank
Car and Republic Reader’s Service factors are absent. See
Flores v. Baldwin, No. 3:01-CV-2873-P, 2002 WL 1118504,
at *6-7 (N.D. Tex. May 28, 2002) (applying permissive
abstention despite fact that not all Republic Reader’s
Service factors were present).
* Those considerations are: (1) the administrative effect on the
estate in the event of a bankruptcy court recommendation of absten-
tion; (2) the extent to which state law issues predominate over bank-
ruptcy issues; (3) the difficulty or unsettled nature of applicable state
law; (4) the existence of any related proceedings; (5) the jurisdictional
basis, if any, other than 28 U.S.C. § 1334; (6) the degree of relatedness
of the proceeding to the main bankruptcy case; (7) the substance rather
than the form of an asserted core proceeding; (8) the feasibility of state
claim severance from core bankruptcy matters; (9) the present docket
burden in the Bankruptcy Court; (10) the likelihood of forum shopping
by one party; (11) the existence of the right to a jury trial by either
party; and (12) the presence of nondebtor parties in the proceeding. In
re Richmond Tank Car Co., 119 B.R. at 126.
B-5
In the instant matter, the Bankruptcy Court clearly
considered a number of factors when applying discretion-
ary abstention, and set forth a well-reasoned order which
granted Appellees’ motion to abstain. The Bankruptcy
Court held, in part, that:
Absent a bankruptcy case, there would be no fed-
eral jurisdiction over the Noteholders’ actions to
pursue their alleged collateral from the defen-
dants. Without the trustee asserting an action
under § 542(a), there is no remedy established by
the Bankruptcy Code. The amended cross-
complaint raises matters determined by state
law. The amended cross-complaint does not in-
voke a substantive right created by federal bank-
ruptcy law. Litigation had been pending in state
court, in which the Noteholders had sought to in-
tervene. Presumably, with the resolution of the
bankruptcy issues by settlement and the agreed
judgment with State Bank, the Noteholders
could renew their intervention efforts. The set-
tlement agreement itself recognizes that the
Noteholders may pursue their claims regarding
the Missouri nursing homes in state court in
Missouri.
Reed v. State Bank & Trust (In re East Texas Healthcare,
Inc.), Adversary No. 02-3218, slip op. at 8 (Bankr. N.D.
Tex. Mar. 10, 2003). In short, the Bankruptcy Court held
that Appellants’ cross-claim was a state law matter be-
~ tween two non-debtors, the resolution of which would not
impact the bankruptcy estate and would be better accom-
plished in a Missouri proceeding. Although the Bank-
ruptcy Court did not address each of the twelve Richmond
Tank Car factors briefed and argued by the parties, the
court was well within its discretion to grant permissive
B-6
abstention. Accordingly, the March 10, 2003 Order is
affirmed.
B. Motion to Amend
Appellants further allege that the Bankruptcy Court’s
May 6, 2003 Order Denying Motions to Reconsider and For
Leave to Amend must be overruled as an abuse of discre-
tion. The Court disagrees. It is well-settled that a decision
to grant leave to amend is within the discretion of the trial
court, and the court’s denial of such motion is reviewed
under an abuse of discretion standard. Southmark uv.
Schulte Roth & Zabel (In re Southmark), 88 F.3d 311, 314
(5th Cir. 1996). In deciding whether to grant such leave,
“the court may consider such factors as undue delay, bad
faith or dilatory motive on the part of the movant, re-
peated failure to cure deficiencies by amendments previ-
ously allowed, undue prejudice to the opposing party, and
- futility of amendment.” Id. at 314-15 (citing Foman v.
Davis, 371 U.S. 178, 182 (1962)).
In the instant matter, the Bankruptcy Court held that
Appellants’ “effort [] to amend their pleadings to bolster
their bankruptcy jurisdiction claims comes too late and is
of no avail.” Reed v. State Bank & Trust (In re East Texas
Healthcare, Inc.), Adversary No. 02-3218, slip. op. at 3
(Bankr. N.D. Tex. May 6, 2003). The Bankruptcy Court
explained that the motion to amend, interposed after entry
of the March 10, 2003 Order, was untimely, stating the
“motion to amend the pleadings after the entry of an order
adjudicating a motion to dismiss with an alternative
request to abstain is untimely and need not be considered
by the court.” Jd. (citing In re Southmark, 88 F.3d at 314-
15). At a bankruptcy court hearing on January 29, 2002,
—
B-7
Appellants argued that diversity jurisdiction was a factor
for the Bankruptcy Court to consider when determining
abstention; however, Appellants’ motion to amend was
delayed until April 21, 2003 — twelve weeks after the
hearing and six weeks after the Bankruptcy Court rejected
their argument.
In addition, the Bankruptcy Court noted that diver-
sity jurisdiction would not have affected its determination
that permissive abstention was warranted. Unlike Whit-
mire v. Victus Ltd. T/A Master Design Furniture, 212 F.3d
885, 887 (5th Cir. 2000), the instant matter was not
dismissed for lack of jurisdiction; instead, the Bankruptcy
Court held that it had jurisdiction over the adversary
proceeding but declined to hear the case out of comity and
respect for state law. The Bankruptcy Court explained,
“Congress has not chartered this court and the presiding
judge of this court has not been vested with the constitu-
tional authority to entertain litigation premised on diver-
sity jurisdiction.” In re East Texas Healthcare, Inc.,
Adversary No. 02-3218, slip. op. at 3. In short, an allega-
tion of diversity jurisdiction would not have affected the
Bankruptcy Court’s determination on permissive absten-
tion, nor required the Bankruptcy Court to exercise
jurisdiction over the matter. Accordingly, the Bankruptcy
Court’s determination was not an abuse of discretion and
is therefore affirmed.
CONCLUSION
Because the Bankruptcy Court’s application of per-
missive abstention under 28 U.S.C. § 1334(c)(1) and denial
of Appellant’s Motion to Amend are well-supported by
Fifth Circuit law, and because the March 10, 2003 and
B-8
May 6, 2003 Orders did not constitute abuses of discretion,
the Bankruptcy Court’s orders are affirmed.
SIGNED this 22 day of March, 2004.
/s/ David C. Godbey
David C. Godbey
United States District
Judge
C-1
_ IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: §
EAST TEXAS HEALTH- ; CASE NO. 98-38547-SAF-7
CARE, INC., et al., § (Jointly Administered)
DEBTORS. §
§
DIANE G. REED, §
CHAPTER7 TRUSTEE, §
PLAINTIFF, §
VS. : ADVERSARY NO. 02-3218
STATE BANK & TRUST,
et al., §
DEFENDANTS. §
MEMORANDUM OPINION AND ORDER
Colonial Healthcare Center, Inc., and Morris Esformes
move to dismiss the amended cross-complaint filed by a
group of persons referred to as the East Texas Notehold-
ers. In the alternative, Colonial and Esformes move the
court to abstain. In a separate motion, Health Systems,
Inc., and James Lincoln move to dismiss the amended
cross-complaint. The East Texas Noteholders oppose both
motions. The court conducted a hearing on the motions on
January 29, 2003.
Diane G. Reed is the Chapter 7 trustee of the bank-
ruptcy estates of several subsidiaries of Chartwell Health-
care, Inc., including three Chartwell debtors who operated
nursing homes in Missouri. Those nursing homes gener-
ated account receivables pre-bankruptcy order for relief
~
ciaiiatieealaaie icra as
C-2
that arguably became property of the Chartwell subsidiar-
ies’ bankruptcy estates. 11 U.S.C. § 541. Receiverships for
the Missouri nursing homes had been instituted by the
State of Missouri. The receivers collected the accounts
receivable. One of the receivers transferred collected funds
to the trustee.
On June 28, 2002, Reed filed her first amended
complaint, interpleading funds the trustee received from
the Missouri receiver. The trustee alleged that State Bank
and Trust Company of Dallas, Texas, and the East Texas
Noteholders each claimed a first priority, secured claim in
the funds. The extent of their liens would exhaust the
funds, leaving the trustee with no remaining interest to
distribute to unsecured creditors. The trustee commenced
the interpleader action for the court to determine the
priority of the lien positions of State Bank and the East
Texas Noteholders.
On August 13, 2002, the Noteholders filed a third
party complaint against Health Systems and Linculn. On
November 27, 2002, the Noteholders filed an amended
cross-complaint against Colonial, Esformes, Health Sys-
tems and Lincoln. In the amended cross-complaint, the
Noteholders allege that the defendants collected receiv-
ables belonging to the Chartwell debtors in Missouri, but
did not turnover the funds to the trustee. The Noteholders
claim a first priority, perfected security interest in those
receivables. The Noteholders request the entry of a de-
claratory judgment establishing their position and the
entry of a turnover judgment for the funds.
Meanwhile, on November 27, 2002, the court entered
an agreed judgment resolving the competing claims of
State Bank and the Noteholders to the funds interplead by
C-3
the trustee. In her first amended complaint for inter-
pleader, the trustee reserved a claim to the interplead
funds “in the unlikely event” the court determined that
neither State Bank nor the Noteholders had an enforce-
able security interest in the funds. As a result of the
judgment entered November 27, 2002, the trustee’s reser-
vation of a claim is moot.
Colonial, Esformes, Health Systems and Lincoln move
to dismiss the amended cross-complaint for lack of subject
matter and personal jurisdiction. The court had subject
matter jurisdiction over the trustee’s first amended com-
plaint for interpleader. Reed held funds that were property
of the bankruptcy estates but subject to competing liens.
Reed concluded that the secured creditors’ competing lien
priorities would exhaust the funds, so she interplead the
funds for the court to determine the extent and priority of
the liens. 28 U.S.C. §5 157(b)(2)(If) and 1334(b) and (e).
In the amended cross-complaint, the Noteholders
allege in effect that the defendants hold additional funds
from accounts that are likewise property of the bankruptcy
estates, albeit subject to their lien claims. The court has
jurisdiction over property of the debtor as of the com-
mencement of a case and of property of the estate. 28
U.S.C. § 1334(e). The court has jurisdiction to determine if
property constitutes property of the estate and, if so, to
require that the property be turned over to the bankruptcy
estate. 28 U.S.C. §§ 157 (b)(2)(E) and 1334(b). Further-
more, the court would have jurisdiction to determine a
claim of a security interest by a creditor in the property of
the estate. 28 U.S.C. §§ 157(b)(2)(B) and (K) and 1334(b);
11 U.S.C. §§ 502 and 506.
C-4
Since the trustee named the Noteholders in an adver-
sary proceeding to determine the extent and priority of
their liens in funds from the Missouri nursing homes held
by the trustee, the Noteholders could commence third
party litigation against other persons who allegedly held
property of the estate subject to their lien claims. Recovery
of that property, if successful, would be applied to the
secured claims of the Noteholders, thereby affecting the
distributions to the creditor body of the bankruptcy es-
tates. 28 U.S.C. § 1334(b); Wood v. Wood (In re Wood), 825
F.2d 90, 93-94 (5th Cir. 1987). With subject matter juris-
diction, the court obtains personal jurisdiction over the
defendants by service pursuant to Bankruptcy Rule
7004(d).
However, the amended cross-complaint cannot be
reviewed in a vacuum from events in both this adversary
proceeding and the underlying bankruptcy cases. The
Noteholders have settled their claims against the bank-
ruptcy estates. In their settlement with the trustee, the
Noteholders dismiss with prejudice claims they assert
against the bankruptcy estates except for certain reserved
claims. For the reserved claims, the Noteholders and the
trustee agreed that the claims would not be dismissed if
necessary to preserve the Noteholders’ causes of action
against third persons, but, in that event, the Noteholders
entered a covenant not to sue the estates. Consequently, as
a result of the settlement, the Noteholders will obtain no
further recovery from the bankruptcy estates on account of
their claims. The trustee agreed that the Noteholders
could prosecute certain defined reserved claims without
interference by the bankruptcy estates and that the
Noteholders would own those claims free and clear of any
liens, contribution rights, or competing claims by other
C-5
parties to the settlement, including the trustee. The
reserved claims include the claims of a security interest in
the subject funds held by the defendants. By order entered
May 6, 2002, in Reed v. Heller Healthcare Finance, Inc., et
al., adversary proceeding no. 99-3273, the court approved
the settlement.
The defendants contend that the trustee has thereby
abandoned the estates’ interest in the funds. If property
has been abandoned by the trustee, it would no longer be
property of the estate. The Noteholders respond that the
trustee has not abandoned the estates’ interest in the
property. Indeed, the trustee has not filed a motion to
abandon the property pursuant to 11 U.S.C. § 554(a). The
court has not ordered the trustee to abandon the property
on request of a party in interest and after notice and a
hearing. 11 U.S.C. § 554(b). The bankruptcy estates have
not been closed. 11 U.S.C. § 554(c). The trustee may only
abandon property of the estate pursuant to this statutory
authority. In re Heil, 141 B.R. 112, 115 (Bankr. N_D. Tex.
1992). The property has therefore not been abandoned.
Nevertheless, by virtue of the settlement and the inter-
pleader, the trustee no longer claims an interest in the
funds. Pursuant to the settlement, the trustee may not
assert any competing claim to the funds from the Missouri
nursing homes. Having been approved by the court, the
settlement is binding on the trustee. Thus, even though
not technically abandoned at this time, the trustee is
precluded from asserting a claim to the funds. The settle-
ment deems the claim to the funds to be owned by the
Noteholders.
Notwithstanding the settlement, the Noteholders
argue that this court may nevertheless direct the turn
over of funds from the defendants. As discussed above, this
_
C-6
court does have jurisdiction to order the turn over of
property of the estate. 28 U.S.C. § 157(b)(2)(E). The
Bankruptcy Code provides for the turn over of property of
the estate “to the trustee.” 11 U.S.C. § 542(a). But the
trustee is not seeking that relief. Under the settlement,
the trustee may not seek that relief. The court may not use
the Code’s “turn over” provision to order the defendants to
pay the funds to the Noteholders, even if the Noteholders
establish that they have a security interest in the subject
funds.
Consequently, the court had jurisdiction at the com-
mencement of the litigation. Once acquired, jurisdiction is
not lost by developments concerning the litigation. But the
bankruptcy estates no longer claim an interest in the
subject funds. The Noteholders have either dismissed their
claims against the bankruptcy estates with prejudice or
entered a covenant not to sue the estates regarding the
claims. Consequently, any collection by the Noteholders
from the defendants based on their alleged security
interest will no longer have an effect on the distributions
to creditors of the bankruptcy estates.
Colonial and Esformes alternatively request that the
court abstain from adjudicating this dispute. At the
hearing, Health Systems and Lincoln did not oppose that
alternative request for relief. Colonial and Esformes argue
that abstention is either mandatory or should be granted
in the exercise of the court’s discretion. 28 U.S.C. § 1334(c)
(1) and (2).
Discretionary abstention is appropriate. The court
may abstain from hearing a particular proceeding “in the
interest of justice, or in the interest of comity with State
courts or respect for State law.” 28 U.S.C. § 1334(c)(1);
C-7
In re Gober, 100 F.3d 1195, 1206 (5th Cir. 1996). Absent a
bankruptcy case, there would be no federal jurisdiction
over the Noteholders’ actions to pursue their alleged
collateral from the defendants, Without the trustee assert-
ing an action under § 542(a), there is no remedy estab-
lished by the Bankruptcy Cocle. The amended cross-
complaint raises matters determined by state law. The
amended cross-complaint does not invoke a substantive
right created by federal bankruptcy law. Litigation had
been pending in state court, in which the Noteholders had
sought to intervene. Presumably, with the resolution of the
bankruptcy issues by settlement and the agreed judgment
with State Bank, the Noteholders could renew their
intervention efforts. The settlement agreement itself
recognizes that the Noteholders may pursue their claims
regarding the Missouri nursing homes in state court in
Missouri.
Counsel for the Noteholders asserts that her law firm
owns part of the Noteholders’ claims and that the firm has
taken an assignment of their claims. She argue. that the
law firm can assert the claims against the bankruptcy
estate. Counsel argues, therefore, that collection by the
Noteholders from the defendants could have a conceivable
effect on the handling of the law firm’s claims in the
bankruptcy cases. Presumably If the Noteholders recover
from these defendants, pari of their recovery will go to
their counsel, thereby reducing counsel’s claims against
this estate. By attempting to assert a claim against the
estate when the Noteholders have settled their claims,
counsel appears to be attempting to circumvent an order of
this court approving the settlement. Counsel also appears
to be attempting to undermine a portion of the settlement.
This court does not anticipate allowing a distribution to
C-8
counsel on account of the law firm’s alleged ownership of
part of the Noteholders’ claims or from an assignment of
part of the claims. And, certainly, counsel will not expect
the trustee to seek to recover from the defendants in order
to increase funds for distribution to creditors of the es-
tates, including counsel, when her clients are attempting
to collect directly from the defendants. Counsel’s assign-
ment and ownership claim appears to conflict with the
interests of her client. Counsel’s asserted claim does not
weigh against abstaining.
Counsel for the Noteholders also asserts that the
trustee is going to bring an action to collect the funds. The
settlement agreement precludes an action since that
would be a claim against matters reserved for the Note-
holders. Furthermore, the court does not base its decision
on speculation about what litigation may be commenced in
the future by the trustee.
Therefore, the court determines that while it had
subject matter jurisdiction as the litigation had been
initially commenced, subsequent events lead the court to
abstain from adjudicating the amended. cross-complaint.
The Noteholders may not invoke the turnover power of the
trustee to collect on their alleged collateral. The state law
claims for declaratory relief brought in that complaint
should be pursued in state court. As a result of the settle-
ment and. the agreed judgment in the inter-pleader action,
the trustee claims no interest in the subject funds and the
Noteholders will not pursue any claims against the estate,
regardless of the success of their collection efforts from the
defendants. As state law claims remain disputed among
non-debtors, comity and respect for state law weigh in
favor of abstention.
\
C-9
As the remain:ng matters in the adversary proceeding
have been finally resolved, with the abstention on the
amended cross-complaint, the adversary proceeding shall
be closed. As, a result, the court need not address the
motions to dismiss filed pursuant to Fed. R. Civ. P. 12(b)(6)
or the motion for mandatory abstention.
Based on the foregoing,
IT IS ORDERED that the alternative motion of
Colonial Healthcare Center, Inc., and Morris Esformes to
abstain is GRANTED. The court shall abstain from adju-
dicating the amended cross-complaint against Colonial
Healthcare Center, Inc., Morris Esformes, Health Systems,
Inc., and James Lincoln.
IT IS FURTHER ORDERED that, as a result, the
remaining issues raised by the pending motions need not
be decided.
IT IS FURTHER ORDERED that this adversary
proceeding is CLOSED.
Dated this 10th day of March, 2003.
/s/ Steven A. Felsenthal
Steven A. Felsenthal
United States Bankruptcy
Judge
p-1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: §
EAST TEXAS HEALTH- : CASE NO. 98-38547-SAF-7
CARE, INC., et al., g (Jointly Administered)
DEBTORS. §
§
DIANE G. REED, §
CHAPTER7 TRUSTEE, §
PLAINTIFF, §
§ ADVERSARY NO. 02-3218
VS. §
STATE BANK & TRUST, :
DEFENDANT. §
ORDER DENYING MOTIONS TO
RECONSIDER AND FOR LEAVE TO AMEND
On March 19, 2003, the East Texas Noteholders
filed a motion for reconsideration and modification of
this court’s order of abstention entered March 11, 2003.
By order entered April 1, 2003, the court directed that
the third party defendants file responses to the motion.
The court held that it would decide the motion on the
written pleadings. The third party defendants filed their
responses on April 14 and April 15, 2003. The Notehold-
ers filed a reply on April 21, 2003, together with a
motion for leave to amend the third party complaint.
The parties then submitted letters to the court on April
22, 2003, and April 28, 2003.
The court considers the Noteholders’ motion for
reconsideration as a motion under Bankruptcy Rule
ee eee eae
D-2
9023. The purpose of a Fed. R. Civ. P. 59 motion, made
applicable by Bankruptcy Rule 9023, is to correct mani-
fest errors of law or fact or to present newly discovered
evidence. The motion may not be used to introduce
evidence that was available at trial but was not prof-
fered, to relitigate old issues, to advance new theories,
or to secure a rehearing on the merits. See Lavespere uv.
Niagara Mach. & Tool Works, Inc., 910 F.2d 167 (5th
Cir. 1990); In the In re Caravan Refrigerated Cargo, Inc.,
864 F.2d 388, 393 (5th Cir. 1989); Fontenot v. Mesa
Petroleum Co., 791 F.2d 1207 (5th Cir. 1986).
In its order entered March 11, 2003, the court, in
the exercise of discretion, abstained from hearing the
third party complaint and thereupon administratively
closed the adversary proceeding. Contrary to the Note-
holders’ argument, the order does not dismiss the
adversary proceeding. To support its exercise of discre-
tion, the court articulated its reasons for abstaining.
The Noteholders have not established that the court —
made an manifest error of fact or law in its reasoning.
The exercise of discretion is vested in this court, to be
set aside only for an abuse of discretion. While the
Noteholders would have preferred a different result, the
motion does not establish any illogic in the court’s
reasoning that would support a finding of an abuse of
discretion. In essence, the Noteholders attempt to
reargue their case in the motion for reconsideration.
That is not the function of a motion under Rule 9023.
This court does not sit as a forum for the collection
of collateral of entities that will have no effect on the
administration of a bankruptcy case. Other courts of
competent jurisdiction may perform that function. The
Noteholders now contend that this court should allow them
D-3
the opportunity to amend their tthird party complaint to
assert diversity jurisdiction. A motiion to amend the plead-
ings after the entry of an order adjudicating a motion to
dismiss with an alternative requestt to abstain is untimely
and need not be considered by the: court. See In re South-
mark Corp., 88 F.3d 311, 314-15 (5ith Cir. 1996). Neverthe-
less, the court notes that Congress; has not chartered this
court and the presiding judge of tthis court has not been
vested with the constitutional authwrity to entertain litiga-
tion premised on diversity jurisdiction. The Noteholders’
efforts to amend their pleadings to tbolster their bankruptcy
jurisdiction claims comes too late aand is of no avail. In its
memorandum opinion and order enttered March 11, 2003, the
court found that it had jurisdictzion over the adversary
proceeding as originally filed by Dizane Reed, the Chapter 7
trustee of the bankruptcy estates off East Texas Healthcare,
Inc., et al. The court further found tthat developments in the
adversary proceeding and the undierlying bankruptcy case
supported the discretiorary decision: to abstain.
Based on the foregoing,
IT IS ORDERED that the Elast Texas Noteholders’
motion for reconsideration and modification of order of
abstention entered March 11, 2003, and the East Texas
Noteholders’ motion for leave tto amend third party
complaint are DENIED.
Signed this 6th day of May, 2(003. -
/s/ Steven A. Felsenthal
Steven A. Felsenthal
Umited States Bankruptcy
Judge
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.