In Re Debtors: Fantasea Enterprises, Inc.

Filing 24

OPINION ON APPEAL FROM BANKRUPTCY COURT by Judge Percy Anderson. (See document for specifics) (Made JS-6. Case Terminated.) (mrgo)

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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In re FANTASEA ENTERPRISES, INC.,
Debtor,

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FANTASEA ENTERPRISES, INC. dba
PACIFIC AVALON YACHT
CHARTERS; and JOHN GUEOLA, an
individual,

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OPINION ON APPEAL FROM
BANKRUPTCY COURT
Bankruptcy Case No. 8:14-bk-17376-TA
Adversary Case No. 8-16-ap-01143-TA

Plaintiffs and Appellees,

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Nos. SACV 16-1931 PA
SACV 16-1932 PA

v.
COVERLAW, PC, a Wyoming
Corporation; JAMES COVER, an
individual; and DOES 1 through 25
inclusive,
Defendants and Appellants.

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Before the Court are two appeals filed by Coverlaw, PC and James Cover

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(collectively “Cover”) challenging decisions by the United States Bankruptcy Court for the

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Central District of California.

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I.

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Factual and Procedural Background
According to the parties, Cover was employed by Fantasea Enterprises, Inc., doing

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business as Pacific Avalon Charters (“Fantasea”), as its bankruptcy counsel when Fantasea

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filed a Chapter 11 bankruptcy petition on December 23, 2014. Following the filing of the

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petition, Fantasea had 120 days, through April 22, 2015, to protect a dock lease for

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Fantasea’s boat chartering business. Fantasea and its president, John Gueola, contend that

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Cover failed to protect the dock lease despite knowing of its importance to Fantasea.

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Fantasea replaced Cover as its bankruptcy counsel on July 31, 2015.

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After being replaced as bankruptcy counsel, Cover filed, on January 13, 2016, an

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Application for Compensation and Reimbursement of Costs in the Bankruptcy Court seeking

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compensation for $81,525.74 in fees for services performed from December 2014 through

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July 2015 on behalf of Fantasea. Fantasea filed an Opposition to Cover’s fee application, in

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which it contended, among other arguments, that Cover acted imprudently in failing to

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assume the dock lease and billed an unreasonably excessive amount of time. The

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Bankruptcy Court eventually granted Cover’s Application and awarded $60,000 in fees in a

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February 8, 2016 order.

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Fantasea and Gueola commenced a legal malpractice again against Cover in Orange

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County Superior Court on April 18, 2016. Cover, alleging that the malpractice action “arises

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under Title 11,” filed a Notice of Removal with the Bankruptcy Court removing the

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malpractice action based on 28 U.S.C. §§ 1334 and 1452. The removed malpractice action

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became adversary proceeding number 8:16-ap-01143-TA.

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Following removal, Cover filed a Motion to Dismiss the malpractice action. Relying

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on In re Iannochino, 242 F.3d 36 (1st Cir. 2001), Cover argued in the Motion to Dismiss that

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principles of res judicata and judicial estoppel bar the malpractice action because the

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Bankruptcy Court’s order granting Cover’s fee application impliedly determined that

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Cover’s fees were reasonably and necessarily incurred in the bankruptcy proceeding and

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Fantasea did not timely disclose the malpractice claim as an asset of the bankruptcy estate.

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After briefing by the parties and a hearing, the Bankruptcy Court eventually denied Cover’s

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Motion to Dismiss on October 4, 2016. (Excerpts of Record (“ER”) Tab 30:1430-43.)

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Cover’s appeal in Case No. SACV 16-1931 PA seeks leave to challenge that interlocutory

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ruling.

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While Cover’s Motion to Dismiss was pending, Fantasea and Gueola filed a Motion

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for Permissive Abstention and Remand. The parties briefed that Motion and the Bankruptcy

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Court conducted a hearing. The Bankruptcy Court issued an order granting the Motion for

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Permissive Abstention and Remand and remanded the action to Orange County Superior

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Court on October 7, 2016. (ER Tab 32:1464-74.) Cover’s appeal in Case No. SACV 16-

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1932 PA, seeks appellate review of the Bankruptcy Court’s order granting the Motion for

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Permissive Abstention and Remand.

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II.

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Standard of Review
As Cover’s Motion to Certify Orders for Interlocutory Appeal in Case No. SACV 16-

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1931 PA indicates, that appeal seeks review of the Bankruptcy Court’s interlocutory order

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denying the Motion to Dismiss. Under 28 U.S.C. § 158(a)(3), district courts have discretion

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to review a bankruptcy court’s interlocutory orders. Oliner v. Kontrabecki, 305 B.R. 510,

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527 (N.D. Cal. 2004). Granting leave to consider an interlocutory appeal “is appropriate if

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the order involves a controlling question of law where there is substantial ground for

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difference of opinion and when the appeal is in the interest of judicial economy because an

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immediate appeal may materially advance the ultimate termination of the litigation.” In re

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Kashani, 190 B.R. 875, 882 (B.A.P. 9th Cir. 1995) (citing 28 U.S.C. § 1292(b)). “Although

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district courts have discretion to hear interlocutory appeals from bankruptcy courts, § 158(d)

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does not grant courts of appeal similar discretion to review interlocutory decisions. ‘The

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courts of appeals do not have jurisdiction to hear interlocutory appeals in bankruptcy

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cases.’” In re Rains, 428 F.3d 893, 900-01 (9th Cir. 2005) (quoting Silver Sage Partners,

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Ltd. v. City of Desert Hot Springs, 339 F.3d 782, 787 (9th Cir. 2003). “‘Under 28 U.S.C. §

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158(d), [a court of appeal’s] appellate jurisdiction exists when the bankruptcy court order

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and the decision of the district court acting in its bankruptcy appellate capacity are both final

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orders.’” Id. at 901 (quoting In re Bonham, 229 F.3d 750, 761 (9th Cir. 2000); see also In re

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Four Seas Center, Ltd., 754 F.2d 1416, 1418 (9th Cir. 1985); Matter of King City Transit

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Mix, Inc., 738 F.2d 1065, 1067 (9th Cir. 1984).

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“The statutory standard for remand under 28 U.S.C. § 1452(b) is ‘any equitable

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ground.’” In re McCarthy, 230 B.R. 414, 417 (B.A.P. 9th Cir. 1999) (quoting 28 U.S.C. §

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1452(b)). A bankruptcy court’s “decision to remand under that provision can be reviewed

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by a district court or a bankruptcy appellate panel, and not by a court of appeals or by the

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Supreme Court.” Id. (citing 28 U.S.C. § 1452(b) and Things Remembered, Inc. v. Petrarca,

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516 U.S. 124, 116 S. Ct. 494 (1995)). The “‘any equitable ground’ remand standard is an

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unusually broad grant of authority. It subsumes and reaches beyond all of the reasons for

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remand under nonbankruptcy removal statutes.” Id. “At bottom, the question is committed

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to the sound discretion of the bankruptcy judge. It follows that the standard of review is

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abuse of discretion.” Id. Discretionary rulings should not be disturbed without a definite

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and firm conviction that the bankruptcy court committed a clear error of judgment. See In re

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Lowenschuss, 67 F.3d 1394, 1399 (9th Cir. 1995).

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III.

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Discussion
In exercising their discretion to remand actions under section 1452(b)’s “any

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equitable ground” standard, courts have borrowed the standards for permissive or

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discretionary abstention under 28 U.S.C. § 1334(c)(1). See Fed. Home Loan Bank v. Banc

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of America Securities LLC, 448 B.R. 517, 525 (C.D. Cal. 2011). The factors a court should

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consider when deciding if permissive abstention and remand are appropriate are:

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(1) the effect or lack thereof on the efficient administration of

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the estate if the Court recommends [remand or] abstention; (2)

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extent to which state law issues predominate over bankruptcy

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issues; (3) difficult or unsettled nature of applicable law; (4)

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presence of related proceeding commenced in state court or

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other nonbankruptcy proceeding; (5) jurisdictional basis, if any,

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other than § 1334; (6) degree of relatedness or remoteness of

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proceeding to main bankruptcy case; (7) the substance rather

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than the form of an asserted core proceeding; (8) the feasibility

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of severing state law claims from core bankruptcy matters to
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allow judgments to be entered in state court with enforcement

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left to the bankruptcy court; (9) the burden on the bankruptcy

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court’s docket; (10) the likelihood that the commencement of the

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proceeding in bankruptcy court involves forum shopping by one

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of the parties; (11) the existence of a right to a jury trial; (12) the

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presence in the proceeding of nondebtor parties; (13) comity;

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and (14) the possibility of prejudice to other parties in the action.

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In re Cedar Funding, Inc., 419 B.R. 807, 820 n.18 (B.A.P. 9th Cir. 2009); see also In re

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Tucson Estates, Inc., 912 F.2d 1162, 1167 (9th Cir. 1990).

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In granting the Motion for Permissive Abstention and Remand filed by Fantasea and

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Gueola, the Bankruptcy Court cited to and analyzed each of these fourteen factors. (See ER

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Tab 32:1467-73.) The Bankruptcy Court did not commit a clear error of judgment when it

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concluded that the equities favored abstention and remand. See In re Lowenschuss, 67 F.3d

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at 1399; see also Ross v. Yaspan, No. CV 12-7048 DDP (FFMx), 2013 WL 3448725, at *4

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(C.D. Cal. July 9, 2013) (“Here, the court finds it appropriate to abstain . . . . [E]ven if the

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malpractice claim is considered to arise in the bankruptcy action, legal malpractice claims

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are state law causes of action, and state courts are familiar with adjudicating such actions.”);

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Fed. Home Loan Bank, 448 B.R. at 525 (“Because section 1452(b) affords ‘an unusually

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broad grant of authority,’ any one or the relevant factors may provide a sufficient basis for

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equitable remand.”) (quoting In re Roman Catholic Bishop of San Diego, 374 B.R. 756, 761

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(Bankr. S.D. Cal. 2007)). This Court therefore affirms the Bankruptcy Court’s order

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granting the Motion for Permissive Abstention and Remand.

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In light of this Court’s affirmance of the Bankruptcy Court’s order remanding the

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malpractice action to the Orange County Superior Court, and the fact that the action is now

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pending in that court, this Court need not consider Cover’s Motion to Certify Orders for

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Interlocutory Appeal. As a result, the Court denies that Motion, and the appeal in Case No.

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SACV 16-1931 PA, as moot. Moreover, even if the Court were to reach the merits of the

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Motion to Certify Orders for Interlocutory Appeal, the Court would, in the exercise of its
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discretion, deny the Motion. Specifically, the appellate record reveals that the parties

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submitted voluminous requests for judicial notice, supplemental declarations, and facts

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outside the pleadings in support of and in opposition to Cover’s Motion to Dismiss. (See ER

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Tabs 8, 9, 12, 17, 19, 20, 21, 22, & 23.) As the briefing and argument submitted to the

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Bankruptcy Court establishes, the issues raised by Cover’s Motion to Dismiss required

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analysis of a substantial factual record that was inappropriate for resolution through a

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Motion to Dismiss. This Court therefore concludes that were it to reach the issue, the Court

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would find that allowing interlocutory review of the denial of Cover’s Motion to Dismiss

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would not materially advance the ultimate termination of the litigation, further the interests

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of judicial economy, or resolve a controlling question of law. In re Kashani, 190 B.R. at

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882. Indeed, the Court finds it instructive that In re Iannochino, 242 F.3d 36, the case upon

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which Cover principally relies, was resolved on a summary judgment motion rather than a

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12(b)(6) motion.

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IV.

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Conclusion
For all of the foregoing reasons, the Court affirms the Bankruptcy Court’s order

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remanding the malpractice action to the Orange County Superior Court. The Court denies

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the Motion to Certify Order for Interlocutory Appeal as moot.

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IT IS SO ORDERED.
DATED: February 17, 2016
___________________________________
Percy Anderson
UNITED STATES DISTRICT JUDGE

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