Froedge et al v. Fifth Third Bank

Filing 21

MEMORANDUM OPINION AND ORDER granting 8 Motion to Remand to Metcalfe Circuit Court. Signed by Chief Judge Joseph H. McKinley, Jr. on 5/23/2012. cc: Counsel, Metcalfe Circuit Court (cert.) (CDF)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
BOWLING GREEN DIVISION
CIVIL ACTION NO. 1:11-CV-00181-JHM
SANDY FROEDGE, et al.

PLAINTIFFS

V.
FIFTH THIRD BANK, INC.,
d/b/a FIFTH THIRD BANK

DEFENDANT

MEMORANDUM OPINION AND ORDER
This matter is before the Court on Plaintiffs’ Motion to Remand [DN 8]. Fully briefed, this
matter is ripe for decision. For the following reasons, the Court GRANTS the Plaintiffs’ motion
to remand.
I. BACKGROUND
In 2004, Eastern Livestock Co., LLC, a livestock brokerage company with branches in
eleven states, refinanced the bulk of its indebtedness through Defendant Fifth Third Bank, Inc. A
credit agreement and a security agreement were executed between Defendant and Eastern Livestock
that granted Defendant a first lien on all livestock, livestock in transit and receivables of Eastern
Livestock. From 2004 to 2010, Eastern Livestock regularly engaged in the purchase of livestock
from the Edmonton, Kentucky Buying Station on each Tuesday of each week. Eastern Livestock
would purchase cattle from the buying station using checks drawn from its account with Defendant.
In the fall of 2010, Defendant became aware that Eastern Livestock was “kiting” checks in
violation of the credit agreement. On Monday, November 1, 2010, Defendant froze the accounts
of Eastern Livestock, but did not notify the company of its actions. On the following day, Tuesday,
November 2, Eastern Livestock conducted its regular purchase of cattle at the Edmonton Buying
Station, using checks drawn from its Fifth Third account. Plaintiffs all sold cattle to Eastern

Livestock on November 2, 2010, at the Edmonton Buying Station and were issued checks drawn on
Eastern Livestock’s Fifth Third account. However, Defendant refused to honor these checks due
to the freeze initiated on November 1, 2010.
Defendant finally notified Eastern Livestock on November 5, 2010, that it had frozen Eastern
Livestock’s accounts. Shortly thereafter, on November 9, 2010, Defendant filed a complaint against
Eastern Livestock in the Hamilton County Court of Common Pleas, alleging claims of conversion,
unjust enrichment and fraud. Defendant also moved for the appointment of a Receiver. On
November 10, 2010, Elizabeth M. Lynch was appointed as the Receiver for Eastern Livestock, and
on December 6, 2010, an involuntary bankruptcy petition placed Eastern livestock in bankruptcy
in the Southern District of Indiana.
All cattle that were part of the assets of the Debtor Eastern Livestock, including those sold
by Plaintiffs, became a part of the Debtor’s bankruptcy estate. The proceeds from the sale of those
cattle still remain in the estate. Each Plaintiff is listed as a creditor in the Debtor’s bankruptcy,
where they seek to recover the value of the cattle sold to the Debtor on November 2, 2010.
Plaintiffs’ claims in the bankruptcy proceeding have not yet been settled and are listed as disputed.
Defendant is likewise a creditor of the Debtor in the bankruptcy proceeding. Defendant has filed
a proof of claim in the amount of $35,833,415.02, which has been allowed, but not yet paid.
On September 20, 2011, Plaintiffs filed the instant action against Defendant in the Metcalfe
Circuit Court alleging claims of conversion, unjust enrichment, and theft by failure to make required
disposition. Five identical lawsuits have been filed on behalf of similar plaintiffs in the Metcalfe

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Circuit Court.1 Plaintiffs allege that Defendant intentionally froze Debtor Eastern Livestock’s
accounts without informing the company, with the knowledge that Eastern Livestock would
purchase a large sum of cattle the following day. Plaintiffs allege that this was an attempt by
Defendant to minimize and reduce the loss incurred by Defendant, in that the cattle would increase
the potential assets against which Defendant could assert its first priority lien.
On November 21, 2011, Defendant removed the instant case, and its five companion cases,
pursuant to 28 U.S.C. 1441(a), asserting the existence of bankruptcy jurisdiction under 28 U.S.C.
§ 1334 and supplemental jurisdiction under 28 U.S.C. § 1367. Plaintiffs have filed a motion to
remand contesting the existence of any jurisdiction. In the event the Court finds that bankruptcy
jurisdiction exists, Plaintiffs have requested that the Court abstain from exercising such jurisdiction.
II. DISCUSSION
A. Bankruptcy Jurisdiction
Defendant contends that removal was proper because the Court has bankruptcy jurisdiction
pursuant to 28 U.S.C. § 1334. Section 1334(b) states in pertinent part that “the district courts shall
have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising
in or related to cases under title 11.” 28 U.S.C. § 1334(b). Defendant argues that the Court has
jurisdiction because the Plaintiffs’ claims “arise under” the Bankruptcy Code, or in the alternative,
that the Court has jurisdiction because the claims are “related to” the Eastern Livestock bankruptcy
case.

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The five companion cases are Marcia Cloyd, et al. v. Fifth Third Bank, Case No. 1:11cv-00160; Jimmy Hendrick, et al. v. Fifth Third Bank, Case No. 1:11-cv-00161; Donna Johnson,
et al. v. Fifth Third Bank, Case No. 1:11-cv-00179; WK, a minor, et al. v. Fifth Third Bank, Case
No. 1:11-cv-00180; and Phillip Martin v. Fifth Third Bank, Case No. 1:11-cv-00182.
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“Section 1334 lists four types of matters over which the district court has jurisdiction: (1)
‘cases under title 11,’ (2) ‘proceedings arising under title 11,’ (3) proceedings ‘arising in’ a case
under title 11, and (4) proceedings ‘related to’ a case under title 11.” Mich. Emp’t Sec. Comm’n
v. Wolverine Radio Co., Inc. (In re Wolverine Radio Co.), 930 F.2d 1132, 1141 (6th Cir. 1991).
“The first category refers merely to the bankruptcy petition itself, filed pursuant to 11 U.S.C. §§ 301,
302, or 303.” Id. As this is obviously not the bankruptcy petition, there is not jurisdiction under the
first category. The Sixth Circuit has held that
For the purpose of determining whether a particular matter falls within bankruptcy
jurisdiction, it is not necessary to distinguish between the second, third, and fourth
categories (proceedings “arising under,” “arising in,” and “related to” a case under
title 11). These references operate conjunctively to define the scope of jurisdiction.
See In re Wood, 825 F.2d at 93. Therefore, for purposes of determining section
1334(b) jurisdiction, it is necessary only to determine whether a matter is at least
“related to” the bankruptcy. Id.
In re Wolverine, 930 F.2d at 1141.
The Sixth Circuit has adopted the expansive definition of a “related to” proceeding first
articulated by the Third Circuit in Pacor, Inc. v. Higgins (In re Pacor), 743 F.2d 984 (3d Cir. 1984).
See id. at 1142. Under this definition, a proceeding is “related to” a bankruptcy if “the outcome of
that proceeding could conceivably have any effect on the estate being administered in bankruptcy.”
In re Pacor, Inc., 743 F.2d at 994 (emphasis omitted). However, the Sixth Circuit has created an
exception to this rule, acknowledging that under such an expansive definition, a “situation may arise
where an extremely tenuous connection to the estate would not satisfy the jurisdictional
requirement.” Robinson v. Mich. Consol. Gas Co., 918 F.2d 579, 583 (6th Cir. 1990).
The Court finds that the instant case is “related to” the Eastern Livestock bankruptcy because
the outcome of the instant case could conceivably have an effect on the bankruptcy estate. Plaintiffs

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are listed as creditors in the Eastern Livestock bankruptcy, where they seek to recover the value of
the cattle sold to Eastern Livestock. (See Pls.’ Resp. to Notice of Removal, at ¶ 13.) In the instant
case against Defendant Fifth Third, Plaintiffs likewise seek to recover the value of the cattle sold
to Eastern Livestock. To the extent that Plaintiffs are successful in the instant case, their claims in
the bankruptcy estate will be reduced and/or extinguished, lest they experience an impermissible
double recovery. See Black v. Ryder/P.I.F. Nationwide, Inc., 15 F.3d 573, 581 (6th Cir. 1994)
(finding double recovery impermissible because it is “common wisdom that an injured party may
recover damages only for the actual loss he suffered and no more; he is to be made whole, but not
entitled to be put in a better condition than he would be in had the wrong not been committed.”)
(internal quotation marks omitted).
In similar cases, courts have found such a conceivable effect satisfies the “related to”
threshold for jurisdiction. See Omega Tool Corp. v. Alix Partners, LLP, 416 B.R. 315, 320 (E.D.
Mich. 2009) (finding “related to” jurisdiction where a plaintiff’s claim against the debtor’s
bankruptcy estate would be reduced by any amount recovered against a third-party defendant for the
same injuries); Randall & Blake, Inc. v. Evans (In re Canion), 196 F.3d 579, 586-87 (5th Cir. 1999)
(collecting cases for the proposition that “a claim between two non-debtors that will potentially
reduce the bankruptcy estate’s liabilities produces an effect on the estate sufficient to confer ‘related
to’ jurisdiction.”). The Court agrees that the potential reduction in Eastern Livestock’s bankruptcy
estate due to the satisfaction of these Plaintiffs’ claims by Defendant Fifth Third is a sufficient
conceivable effect to confer the Court with “related to” jurisdiction. Therefore, the Court finds that
it has jurisdiction under 28 U.S.C. § 1334(b).

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B. Mandatory Abstention
Notwithstanding the Court’s finding that bankruptcy jurisdiction exists, Plaintiffs contend
that this action should be remanded because mandatory abstention should apply. Plaintiffs argue
that under 28 U.S.C. § 1334(c)(2) the Court has no choice but to mandatorily abstain from hearing
this case. Section 1334(c)(2) states in pertinent part that
Upon timely motion of a party in a proceeding based upon a State law claim or State
law cause of action, related to a case under title 11 but not arising under title 11 or
arising in a case under title 11, with respect to which an action could not have been
commenced in a court of the United States absent jurisdiction under this section, the
district court shall abstain from hearing such proceeding if an action is commenced,
and can be timely adjudicated, in a State forum of appropriate jurisdiction.
For mandatory abstention to apply under § 1334, a proceeding must: (1) be based on a state law
claim or cause of action; (2) lack a federal jurisdictional basis absent the bankruptcy; (3) be
commenced in a state forum of appropriate jurisdiction; (4) be capable of timely adjudication; and
(5) be a non-core proceeding. Lindsey v. O’Brien, Tanksi, Tanzer and Young Health Care Providers
of Conn. (In re Dow Corning Corp.), 86 F.3d 482, 497 (6th Cir. 1996).
The first element in the analysis is satisfied because the only claims alleged in the Plaintiffs’
Complaint are state law claims for conversion, unjust enrichment, and theft by failure to make
required disposition pursuant to K.R.S. § 446.070. The second element is also satisfied because the
Parties agree that there is no diversity jurisdiction, and thus there is no basis for federal jurisdiction
absent the bankruptcy. The third element is likewise satisfied because the current action was
commenced in a state forum of appropriate jurisdiction, the Metcalfe Circuit Court, prior to its
removal to this Court. Defendant contends that in order to satisfy the “be commenced” element, that
the action must have been filed prior to the bankruptcy action itself. However, recent case law
indicates that such an interpretation is incorrect. See, e.g., XL Sports, Ltd. v. Lawler, 49 F. App’x
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13, 17, 20 (6th Cir. 2002) (finding a state law action filed after the bankruptcy petition satisfied the
“be commenced” element).
The Court must now determine whether the action can be timely adjudicated and whether
the action is a “core” or “non-core” proceeding under the bankruptcy code. Plaintiffs contend that
this action can be timely adjudicated, and in support of that contention have submitted the affidavit
of the Metcalfe Circuit Court Clerk stating that there are multiple three week blocks available for
the trial of this matter between June and December of 2012. (See Pls.’ Mot. to Remand, Ex.
Metcalfe Circuit Ct. Clerk Aff.) Defendant contends that this matter cannot be timely adjudicated
because Defendant has a contractual right to indemnification from Debtor, making the Debtor the
real party in interest. Therefore, Defendant argues the automatic stay would apply to this action in
state court, preventing it from timely adjudication. In support of this argument, Defendant cites
Dunkirk Limited Partnership v. TJC Companies Inc., 139 B.R. 643 (N.D. Ohio 1992), which relied
upon A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir. 1986). The court in Dunkirk, found that
where “suit is brought ‘against a third party who is entitled to absolute indemnity[,]’ . . . the real
party in interest is the debtor[,]” and thus refusal to apply the bankruptcy stay to a state court action
would defeat the purpose of the statute. Dunkirk, 139 B.R. at 646.
The Sixth Circuit has recognized that “[s]ome courts have held that the debtor’s stay may
be extended to non-bankrupt parties in ‘unusual circumstances.’” Patton v. Bearden, 8 F.3d 343, 349
(6th Cir. 1993) (citing A.H. Robins, 788 F.2d at 994.) One such “unusual circumstance” is when
a non-debtor defendant has a contractual right to absolute indemnity from the debtor. A.H. Robins,
788 F.2d at 999. However, where the non-debtor defendant’s liability rests upon its own breach of
duty, “unusual circumstances” are not present. Id. Several courts have found that the presence of

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an indemnification agreement alone does not represent sufficient “unusual circumstances” to enforce
the bankruptcy stay. See e.g. Al-Shara v. Wal-Mart Stores, Inc., 2012 WL 1119339, at *4-5 (E.D.
Mich. Apr. 3, 2012) (finding no “unusual circumstances” where defendant merely presented a
standard-fare indemnity agreement); DeSouza v. PlusFunds Grp., Inc., 2006 WL 2168478, at *3
(S.D.N.Y. Aug. 1, 2006) (finding no “unusual circumstances” where non-debtor defendants
presented agreement to be indemnified by debtor corporation but defendants’ liability could rest
upon their own breaches of duty rather than their status as directors); Straney v. General Motors
Corp., 2006 WL 2911452, at *4 (E.D. Mich. Oct. 6, 2006) (finding no “unusual circumstances” due
to presence of indemnity agreement because “plaintiff presumably had nothing to do with that
indemnification agreement and it is inconceivable that his claims against GM may be thwarted
merely because GM has attempted to ‘contract away’ this responsibility to another party that has
now filed a bankruptcy petition.”).
The indemnification agreement at issue in the instant case states:
[Eastern Livestock] shall indemnify, defend, save and hold [Fifth-Third] . . .
harmless of, from and against all claims, demands, liabilities, judgments, losses,
damages, costs and expenses, joint or several . . . that [Fifth-Third] or any such
indemnified party may incur arising out of this Agreement, any of the other Loan
Documents or any act taken by [Fifth-Third] hereunder except to the extent of the
willful misconduct or gross negligence of such indemnified party, as determined
by a court of competent jurisdiction in a final non-appealable judgment or order.
(Pls.’ Mot. to Remand, Ex. Credit Agreement ¶ 9.11 (emphasis added).) Plaintiffs contend that the
claims alleged in the Complaint are “based upon the secret and independent tortious acts” of
Defendant, and that they do not qualify for indemnification under the Credit Agreement. The Court
agrees with Plaintiffs and finds that the instant claims and the language of the indemnity provision
demonstrate that this is not an “absolute” indemnity provision. A jury could find that the allegations

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contained within the Complaint, if proven true, demonstrate willful misconduct on the part of the
Defendant, making indemnification inappropriate. Therefore, the existence of this indemnification
provision does not provide the “unusual circumstances” necessary to justify the application of the
bankruptcy stay to the instant action. Accordingly, the Court finds that this matter is capable of
timely adjudication.
The final issue is the determination of whether the instant matter is a “core” or “non-core”
proceeding. Whether a proceeding is one that is “core” or “non-core” depends upon whether that
proceeding is one that “arises under” title 11, “arises in” a title 11 case, or is simply “related to” a
title 11 case. Proceedings that “arise under” title 11 or “arise in” a title 11 case are “core”
proceedings, where as proceedings that are merely “related to” a title 11 case are “non-core”
proceedings. In re Nat. Century Fin. Enter., Inc., 423 F.3d 567, 574 (6th Cir. 2005) (citing In re
Combustion Eng’g, Inc., 391 F.3d 190, 225-26 (3d Cir. 2004)). The distinction between the
different types of proceedings was outlined by the Sixth Circuit in In re Wolverine Radio Co.:
The phrase “arising under title 11” describes those proceedings that involve
a cause of action created or determined by a statutory provision of title 11, 1 Collier
on Bankruptcy ¶ 3.01[1][c][iii], and “arising in” proceedings are those that, by their
very nature, could arise only in bankruptcy cases. Id. at ¶ 3.01[1][c][v]. Conversely,
if the proceeding does not invoke a substantive right created by federal bankruptcy
law and is one that could exist outside of the bankruptcy, then it is not a core
proceeding. In re Wood, 825 F.2d at 97.
In re Wolverine, 930 F.2d at 1144. While neither “core” nor “non-core” proceedings are defined
by statute, Congress has enumerated a nonexclusive list of fifteen proceedings that qualify as “core”
proceedings under 28 U.S.C. § 157(b)(2) to aid in the determination.
Looking to the instant case, it clearly does not invoke a substantive right created by federal
bankruptcy law, and therefore, is not a claim that “arises under” title 11. Defendant contends that

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this case is actually one seeking a determination of the validity, extent, or priority of liens, and is
thus an enumerated “core” proceeding under 28 U.S.C. § 157(b)(2)(K). The Court disagrees.
Plaintiffs are not seeking a determination of the validity or priority of Defendant’s first priority lien
on the assets of the Debtor’s estate. To the contrary, Plaintiffs are conceding that the lien and its
priority is valid, and alleging that by obtaining the lien Defendant committed the torts of conversion,
unjust enrichment, and theft by failure to make required disposition. As the instant case does not
invoke a substantive right created by federal bankruptcy law, the Court finds that it is not one that
“arises under” title 11.
Nor is this a proceeding that “arises in” a case under title 11. In order for a proceeding to
be deemed one that “arises in” a case under title 11, it must be one that by its very nature could not
exist outside of the bankruptcy context. In re Wolverine, 930 F.2d at 1144. “The category of
proceedings ‘arising in’ bankruptcy cases ‘includes such things as administrative matters, orders to
turn over property of the estate and determinations of the validity, extent, or priority of liens.’” Stoe
v. Flaherty, 436 F.3d 209, 216 (3d Cir. 2006) (quoting 1 Collier on Bankruptcy § 3.01[4][c][iv] at
3-31). This is a limited category of proceedings. See In re Wood, 825 F.2d 90, 95 n.25 (5th Cir.
1987) (“Numerous courts have noted the necessity of defining core proceedings narrowly so as to
conform to the constitutional proscription of Marathon.”) (collecting cases).
Plaintiffs’ Complaint contains three state law claims that essentially allege that Defendant
intentionally froze Eastern Livestock’s account without proper notice thereby gaining possession
and control of the Plaintiffs’ livestock through the assertion of its first priority lien. As such, this
is a proceeding that could exist regardless of the presence of a bankruptcy action. “It is simply a
state [conversion] action that, had there been no bankruptcy, could have proceeded in state court.”

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Id. at 97. Therefore, this proceeding is not one that “arises in” a title 11 case. Furthermore, the
parties are each non-debtors, and the Sixth Circuit has found that “suits between third parties that
affect the administration of the title 11 case are typically considered to fall within the ‘related to’
category.” In re Wolverine, 930 F.2d at 1145. Accordingly, the Court finds that this proceeding
neither “arises under” title 11 nor “arises in” a case under title. Therefore, because it is only “related
to” the Debtor’s bankruptcy, it is a “non-core” proceeding.
Because Plaintiffs have demonstrated the presence of all five abstention elements, the Court
finds that mandatory abstention is appropriate and necessary and that jurisdiction under 28 U.S.C.
§ 1334 is lacking. Furthermore, having found that bankruptcy jurisdiction is not appropriate, there
is likewise no basis to support a finding of supplemental jurisdiction. See 28 U.S.C. § 1367.
Accordingly, the Court finds that Defendant has failed to demonstrate that this Court has
original jurisdiction over this matter. Therefore, this action is remanded back to the Metcalfe Circuit
Court.
III. CONCLUSION
For the reasons set forth above, IT IS HEREBY ORDERED that Plaintiffs’ Motion to
Remand [DN 8] is GRANTED.

May 23, 2012

cc: counsel of record

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