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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1 JS-6 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 In re FANTASEA ENTERPRISES, INC., Debtor, 12 13 14 15 FANTASEA ENTERPRISES, INC. dba PACIFIC AVALON YACHT CHARTERS; and JOHN GUEOLA, an individual, 18 19 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, 16 17 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. 20 21 22 Before the Court are two appeals filed by Coverlaw, PC and James Cover 23 (collectively “Cover”) challenging decisions by the United States Bankruptcy Court for the 24 Central District of California. 25 I. 26 Factual and Procedural Background According to the parties, Cover was employed by Fantasea Enterprises, Inc., doing 27 business as Pacific Avalon Charters (“Fantasea”), as its bankruptcy counsel when Fantasea 28 filed a Chapter 11 bankruptcy petition on December 23, 2014. Following the filing of the 1 petition, Fantasea had 120 days, through April 22, 2015, to protect a dock lease for 2 Fantasea’s boat chartering business. Fantasea and its president, John Gueola, contend that 3 Cover failed to protect the dock lease despite knowing of its importance to Fantasea. 4 Fantasea replaced Cover as its bankruptcy counsel on July 31, 2015. 5 After being replaced as bankruptcy counsel, Cover filed, on January 13, 2016, an 6 Application for Compensation and Reimbursement of Costs in the Bankruptcy Court seeking 7 compensation for $81,525.74 in fees for services performed from December 2014 through 8 July 2015 on behalf of Fantasea. Fantasea filed an Opposition to Cover’s fee application, in 9 which it contended, among other arguments, that Cover acted imprudently in failing to 10 assume the dock lease and billed an unreasonably excessive amount of time. The 11 Bankruptcy Court eventually granted Cover’s Application and awarded $60,000 in fees in a 12 February 8, 2016 order. 13 Fantasea and Gueola commenced a legal malpractice again against Cover in Orange 14 County Superior Court on April 18, 2016. Cover, alleging that the malpractice action “arises 15 under Title 11,” filed a Notice of Removal with the Bankruptcy Court removing the 16 malpractice action based on 28 U.S.C. §§ 1334 and 1452. The removed malpractice action 17 became adversary proceeding number 8:16-ap-01143-TA. 18 Following removal, Cover filed a Motion to Dismiss the malpractice action. Relying 19 on In re Iannochino, 242 F.3d 36 (1st Cir. 2001), Cover argued in the Motion to Dismiss that 20 principles of res judicata and judicial estoppel bar the malpractice action because the 21 Bankruptcy Court’s order granting Cover’s fee application impliedly determined that 22 Cover’s fees were reasonably and necessarily incurred in the bankruptcy proceeding and 23 Fantasea did not timely disclose the malpractice claim as an asset of the bankruptcy estate. 24 After briefing by the parties and a hearing, the Bankruptcy Court eventually denied Cover’s 25 Motion to Dismiss on October 4, 2016. (Excerpts of Record (“ER”) Tab 30:1430-43.) 26 Cover’s appeal in Case No. SACV 16-1931 PA seeks leave to challenge that interlocutory 27 ruling. 28 -2- 1 While Cover’s Motion to Dismiss was pending, Fantasea and Gueola filed a Motion 2 for Permissive Abstention and Remand. The parties briefed that Motion and the Bankruptcy 3 Court conducted a hearing. The Bankruptcy Court issued an order granting the Motion for 4 Permissive Abstention and Remand and remanded the action to Orange County Superior 5 Court on October 7, 2016. (ER Tab 32:1464-74.) Cover’s appeal in Case No. SACV 16- 6 1932 PA, seeks appellate review of the Bankruptcy Court’s order granting the Motion for 7 Permissive Abstention and Remand. 8 II. 9 Standard of Review As Cover’s Motion to Certify Orders for Interlocutory Appeal in Case No. SACV 16- 10 1931 PA indicates, that appeal seeks review of the Bankruptcy Court’s interlocutory order 11 denying the Motion to Dismiss. Under 28 U.S.C. § 158(a)(3), district courts have discretion 12 to review a bankruptcy court’s interlocutory orders. Oliner v. Kontrabecki, 305 B.R. 510, 13 527 (N.D. Cal. 2004). Granting leave to consider an interlocutory appeal “is appropriate if 14 the order involves a controlling question of law where there is substantial ground for 15 difference of opinion and when the appeal is in the interest of judicial economy because an 16 immediate appeal may materially advance the ultimate termination of the litigation.” In re 17 Kashani, 190 B.R. 875, 882 (B.A.P. 9th Cir. 1995) (citing 28 U.S.C. § 1292(b)). “Although 18 district courts have discretion to hear interlocutory appeals from bankruptcy courts, § 158(d) 19 does not grant courts of appeal similar discretion to review interlocutory decisions. ‘The 20 courts of appeals do not have jurisdiction to hear interlocutory appeals in bankruptcy 21 cases.’” In re Rains, 428 F.3d 893, 900-01 (9th Cir. 2005) (quoting Silver Sage Partners, 22 Ltd. v. City of Desert Hot Springs, 339 F.3d 782, 787 (9th Cir. 2003). “‘Under 28 U.S.C. § 23 158(d), [a court of appeal’s] appellate jurisdiction exists when the bankruptcy court order 24 and the decision of the district court acting in its bankruptcy appellate capacity are both final 25 orders.’” Id. at 901 (quoting In re Bonham, 229 F.3d 750, 761 (9th Cir. 2000); see also In re 26 Four Seas Center, Ltd., 754 F.2d 1416, 1418 (9th Cir. 1985); Matter of King City Transit 27 Mix, Inc., 738 F.2d 1065, 1067 (9th Cir. 1984). 28 -3- 1 “The statutory standard for remand under 28 U.S.C. § 1452(b) is ‘any equitable 2 ground.’” In re McCarthy, 230 B.R. 414, 417 (B.A.P. 9th Cir. 1999) (quoting 28 U.S.C. § 3 1452(b)). A bankruptcy court’s “decision to remand under that provision can be reviewed 4 by a district court or a bankruptcy appellate panel, and not by a court of appeals or by the 5 Supreme Court.” Id. (citing 28 U.S.C. § 1452(b) and Things Remembered, Inc. v. Petrarca, 6 516 U.S. 124, 116 S. Ct. 494 (1995)). The “‘any equitable ground’ remand standard is an 7 unusually broad grant of authority. It subsumes and reaches beyond all of the reasons for 8 remand under nonbankruptcy removal statutes.” Id. “At bottom, the question is committed 9 to the sound discretion of the bankruptcy judge. It follows that the standard of review is 10 abuse of discretion.” Id. Discretionary rulings should not be disturbed without a definite 11 and firm conviction that the bankruptcy court committed a clear error of judgment. See In re 12 Lowenschuss, 67 F.3d 1394, 1399 (9th Cir. 1995). 13 III. 14 Discussion In exercising their discretion to remand actions under section 1452(b)’s “any 15 equitable ground” standard, courts have borrowed the standards for permissive or 16 discretionary abstention under 28 U.S.C. § 1334(c)(1). See Fed. Home Loan Bank v. Banc 17 of America Securities LLC, 448 B.R. 517, 525 (C.D. Cal. 2011). The factors a court should 18 consider when deciding if permissive abstention and remand are appropriate are: 19 (1) the effect or lack thereof on the efficient administration of 20 the estate if the Court recommends [remand or] abstention; (2) 21 extent to which state law issues predominate over bankruptcy 22 issues; (3) difficult or unsettled nature of applicable law; (4) 23 presence of related proceeding commenced in state court or 24 other nonbankruptcy proceeding; (5) jurisdictional basis, if any, 25 other than § 1334; (6) degree of relatedness or remoteness of 26 proceeding to main bankruptcy case; (7) the substance rather 27 than the form of an asserted core proceeding; (8) the feasibility 28 of severing state law claims from core bankruptcy matters to -4- 1 allow judgments to be entered in state court with enforcement 2 left to the bankruptcy court; (9) the burden on the bankruptcy 3 court’s docket; (10) the likelihood that the commencement of the 4 proceeding in bankruptcy court involves forum shopping by one 5 of the parties; (11) the existence of a right to a jury trial; (12) the 6 presence in the proceeding of nondebtor parties; (13) comity; 7 and (14) the possibility of prejudice to other parties in the action. 8 In re Cedar Funding, Inc., 419 B.R. 807, 820 n.18 (B.A.P. 9th Cir. 2009); see also In re 9 Tucson Estates, Inc., 912 F.2d 1162, 1167 (9th Cir. 1990). 10 In granting the Motion for Permissive Abstention and Remand filed by Fantasea and 11 Gueola, the Bankruptcy Court cited to and analyzed each of these fourteen factors. (See ER 12 Tab 32:1467-73.) The Bankruptcy Court did not commit a clear error of judgment when it 13 concluded that the equities favored abstention and remand. See In re Lowenschuss, 67 F.3d 14 at 1399; see also Ross v. Yaspan, No. CV 12-7048 DDP (FFMx), 2013 WL 3448725, at *4 15 (C.D. Cal. July 9, 2013) (“Here, the court finds it appropriate to abstain . . . . [E]ven if the 16 malpractice claim is considered to arise in the bankruptcy action, legal malpractice claims 17 are state law causes of action, and state courts are familiar with adjudicating such actions.”); 18 Fed. Home Loan Bank, 448 B.R. at 525 (“Because section 1452(b) affords ‘an unusually 19 broad grant of authority,’ any one or the relevant factors may provide a sufficient basis for 20 equitable remand.”) (quoting In re Roman Catholic Bishop of San Diego, 374 B.R. 756, 761 21 (Bankr. S.D. Cal. 2007)). This Court therefore affirms the Bankruptcy Court’s order 22 granting the Motion for Permissive Abstention and Remand. 23 In light of this Court’s affirmance of the Bankruptcy Court’s order remanding the 24 malpractice action to the Orange County Superior Court, and the fact that the action is now 25 pending in that court, this Court need not consider Cover’s Motion to Certify Orders for 26 Interlocutory Appeal. As a result, the Court denies that Motion, and the appeal in Case No. 27 SACV 16-1931 PA, as moot. Moreover, even if the Court were to reach the merits of the 28 Motion to Certify Orders for Interlocutory Appeal, the Court would, in the exercise of its -5- 1 discretion, deny the Motion. Specifically, the appellate record reveals that the parties 2 submitted voluminous requests for judicial notice, supplemental declarations, and facts 3 outside the pleadings in support of and in opposition to Cover’s Motion to Dismiss. (See ER 4 Tabs 8, 9, 12, 17, 19, 20, 21, 22, & 23.) As the briefing and argument submitted to the 5 Bankruptcy Court establishes, the issues raised by Cover’s Motion to Dismiss required 6 analysis of a substantial factual record that was inappropriate for resolution through a 7 Motion to Dismiss. This Court therefore concludes that were it to reach the issue, the Court 8 would find that allowing interlocutory review of the denial of Cover’s Motion to Dismiss 9 would not materially advance the ultimate termination of the litigation, further the interests 10 of judicial economy, or resolve a controlling question of law. In re Kashani, 190 B.R. at 11 882. Indeed, the Court finds it instructive that In re Iannochino, 242 F.3d 36, the case upon 12 which Cover principally relies, was resolved on a summary judgment motion rather than a 13 12(b)(6) motion. 14 IV. 15 Conclusion For all of the foregoing reasons, the Court affirms the Bankruptcy Court’s order 16 remanding the malpractice action to the Orange County Superior Court. The Court denies 17 the Motion to Certify Order for Interlocutory Appeal as moot. 18 19 20 21 IT IS SO ORDERED. DATED: February 17, 2016 ___________________________________ Percy Anderson UNITED STATES DISTRICT JUDGE 22 23 24 25 26 27 28 -6-

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