Fried et al v. Lehman Brothers Real Estate Associates III, L.P. et al
Filing
74
ORDER AND OPINION re: 60 MOTION to Remand (Corrected) Notice of Motion to Abstain., 55 MOTION to Remand to State Court and Abstain under 28 USC 1334(c)(1) and (2). Following District Judge Barbara Joness dismissal of a related matter (Fried I), Plaintiffs filed this action in the Supreme Court of the State of New York, pleading various federal and state law claims against Defendants arising from failed investments with Defendant Lehman Brothers Real Estate Associates III. On June 17, 2011, Defendants removed the lawsuit to this Court, and on June 24, 2011, moved to stay this action pending the outcome of Plaintiffs appeal of Fried I. On July 15, 2011, Plaintiffs moved the Court to remand for lack of subject matter jurisdiction. On Janu ary 25, 2012, Judge Jones denied the motion to remand, and entered a stay pending the Second Circuits decision in Fried I. (Dkt. No. 27). On December 20, 2012, theSecond Circuit summarily affirmed the dismissal of Fried I. Fried v. Lehman Bros. Real Estate Assocs. III, L.P., 2012 WL 6621300 (2d Cir. Dec. 20, 2012). Plaintiffs now renew their motion to remand, or in the alternative, move the Court to abstain from hearing the case. Plaintiffs argue that two intervening changes have divested this C ourt of subject matter jurisdiction: (1) the Chapter 11 bankruptcy proceedings of Lehman Brothers Holdings, Inc. (LHI) is now in the post-confirmation stage, allegedly removing related to jurisdiction over this case, and (2) Plaintiffs amended their Complaint on February 28, 2013, removing any federal statutory claims and references to federal statutes that might give this Court federal question jurisdiction. For the reasons set forth above, Plaintiffs motion to dismiss for lack of subject matte r jurisdiction is DENIED, and Plaintiffs motion that the court abstain from exercising jurisdiction is GRANTED. The Clerk of the Court is directed to terminate the motions at docket numbers 55 and 60 and mark the case closed. SO ORDERED. (Signed by Judge Lorna G. Schofield on 5/30/2013) (rsh)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
BARBARA J. FRIED et al,
:
Plaintiffs,
:
:
-against:
:
LEHMAN BROTHERS REAL ESTATE
:
ASSOCIATES III, L.P. et al,
:
Defendants. :
:
------------------------------------------------------------- X
5/30/13
11 Civ. 04141 (LGS)
ORDER AND OPINION
LORNA G. SCHOFIELD, District Judge:
Following District Judge Barbara Jones’s dismissal of a related matter (“Fried I”),
Plaintiffs filed this action in the Supreme Court of the State of New York, pleading various
federal and state law claims against Defendants arising from failed investments with Defendant
Lehman Brothers Real Estate Associates III. 1 On June 17, 2011, Defendants removed the
lawsuit to this Court, and on June 24, 2011, moved to stay this action pending the outcome of
Plaintiffs’ appeal of Fried I. On July 15, 2011, Plaintiffs moved the Court to remand for lack of
subject matter jurisdiction.
On January 25, 2012, Judge Jones denied the motion to remand, and entered a stay
pending the Second Circuit’s decision in Fried I. (Dkt. No. 27). On December 20, 2012, the
Second Circuit summarily affirmed the dismissal of Fried I. Fried v. Lehman Bros. Real Estate
Assocs. III, L.P., 2012 WL 6621300 (2d Cir. Dec. 20, 2012). Plaintiffs now renew their motion
to remand, or in the alternative, move the Court to abstain from hearing the case. Plaintiffs argue
that two intervening changes have divested this Court of subject matter jurisdiction: (1) the
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The related case is Fried v. Lehman Brothers Real Estate Associates III, L.P., 09–cv–9100, which features
identical defendants (with the exception of two individual defendants that appear in this case). On March 9, 2011,
this Court dismissed all of the federal claims in that action and declined to exercise supplemental jurisdiction over
the remaining state law claims. Fried I Op. 32.
Chapter 11 bankruptcy proceedings of Lehman Brothers Holdings, Inc. (“LHI”) is now in the
post-confirmation stage, allegedly removing “related to” jurisdiction over this case, and (2)
Plaintiffs amended their Complaint on February 28, 2013, removing any federal statutory claims
and references to federal statutes that might give this Court federal question jurisdiction.
For the reasons stated below, Plaintiffs’ motion to remand for lack of subject matter
jurisdiction is DENIED, and Plaintiffs’ motion that the Court abstain from exercising its
jurisdiction is GRANTED.
I. Factual Background
The factual background of this case, little of which has changed, is described in greater
detail in Judge Jones’s previous decision denying remand and staying this action. Fried v.
Lehman Bros. Real Estate Associates III, L.P., No. 11 Civ. 4141, 2012 WL 252139, at *4
(S.D.N.Y. Jan. 25, 2012). The only significant change is the confirmation of LHI’s bankruptcy
plan of reorganization (the “Lehman Plan”) on December 6, 2011, with an effective date of
March 6, 2012. (Ex. B. to Colangelo Decl., Dkt. No. 69.) As a liquidating Chapter 11 estate,
LHI is distributing assets to creditors pursuant to the confirmed Lehman Plan. The liquidation
process is being guided by a seven-member board and will continue for several more years. (Ex.
A to Parker Decl., Dkt. No. 49.)
II. Discussion
A. Subject Matter Jurisdiction
In what was clearly an effort to deny this Court jurisdiction, Plaintiffs have amended the
Complaint to remove all federal law claims and references, so that the Amended Complaint
contains only state law claims. There is great debate among the federal courts as to whether or
not amendments can be employed post-removal to defeat federal jurisdiction. See Payne v.
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Parkchester N. Condos., 134 F. Supp. 2d 582, 583 (S.D.N.Y. 2001) (discussing opposing
viewpoints). Courts consider “the values of judicial economy, convenience, fairness, and
comity” in deciding whether to allow pleading amendments to affect the forum in which the case
is heard. Id. at 584 (citing Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 (1988)). Here,
where there has been no discovery on either the original or the Amended Complaint, the Court
does not find any prejudice against the Defendants in considering Plaintiffs’ Amended
Complaint for purposes of this motion. Indeed, the Defendants do not appear to assert any
federal question jurisdiction, and the Court does not find any.
With regard to this Court’s alternate basis for federal jurisdiction, Plaintiffs contend that
the end of bankruptcy protection for the LHI estate on March 6, 2012, divests this court of
jurisdiction as a matter “related to” the LHI bankruptcy proceeding. This is incorrect. 28 U.S.C.
§1334(b) provides 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) (emphasis added). A court has jurisdiction over a removed case if “the action’s
outcome might have any conceivable effect on the bankruptcy estate.” Parmalat Capital Fin.
Ltd. v. Bank of Am. Corp., 639 F.3d 572, 579 (2d Cir. 2011) (internal quotation omitted). Judge
Jones found that this case could have a conceivable effect on the Lehman bankruptcy estate in
three ways that conferred “related to” jurisdiction. Fried II, 2012 WL 252139 at *4. First,
Defendants can draw, and some currently draw, on LHI-owned insurance policies to cover
defense costs, and may be able to draw on those policies to cover certain money damages.
Second, LHI is obligated to indemnify certain individual Defendants for litigation costs and
liabilities, and most of these Defendants have filed contingent proofs of claim in the bankruptcy
proceedings. Id. Third, since LHI owns, directly or indirectly, all or a significant part of three of
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the entity defendants, any damages paid by them will draw directly from LHI assets. Each of
these facts is still true post-confirmation, and each has the potential to affect the execution and
administration of the Lehman Plan in that they could all affect amounts available to be paid to
LHI’s creditors. (Rao Decl., Dkt. No. 70.)
That LHI has emerged from bankruptcy protection, and the Lehman Plan is in the
implementation stage under the continued jurisdiction of the Bankruptcy Court, does not change
the analysis. When a plan provides for liquidating assets, rather than reorganizing the company
as a going concern, “related to” jurisdiction remains broad because two of the justifications for
narrower jurisdiction at the post-confirmation stage do not apply. In a liquidation setting, the
reorganized debtor does not require “emancipation” from the constraints of bankruptcy
protection to proceed with its business; nor is a liquidating debtor unfairly advantaged in the
marketplace by the continued protections of bankruptcy court. See generally In re Refco, Inc.
Sec. Litig., 628 F. Supp. 2d 432, 441-42 (S.D.N.Y. 2008), citing In re Boston Reg’l Med. Ctr.,
Inc., 410 F.3d 100, 106 (1st Cir. 2005).
Even if Plaintiffs were correct that this action, were it filed today, would not be subject to
“related to” jurisdiction under 28 U.S.C. § 1334, Plaintiffs are incorrect that this Court is
divested of jurisdiction by events that occurred after removal. Judge Cote addressed this precise
question in In re Worldcom, holding:
Although the Second Circuit standard for ‘related to’ jurisdiction requires a court
to determine whether an action will have ‘any conceivable effect’ on the
bankruptcy estate, . . . it does not require federal district courts constantly to
revisit jurisdictional findings to determine whether the effect of the litigation on
the bankruptcy estate remains ‘conceivable.’ Instead, federal jurisdiction arising
under Section 1334 is determined, like federal jurisdiction generally, on the basis
[of the facts] at the time of removal.
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In re WorldCom, Inc. Sec. Litig., 294 B.R. 553, 556 (S.D.N.Y. 2003) aff'd sub nom. Cal. Pub.
Employees' Ret. Sys. v. WorldCom, Inc., 368 F.3d 86 (2d Cir. 2004) (internal citations omitted).
A contrary rule “would create perverse incentives for the parties to engage in delay and
gamesmanship.” Id. at 557.
B. Abstention
i. Mandatory Abstention
Plaintiffs separately move this Court to remand based upon either mandatory abstention
under 28 U.S.C. § 1334(c)(2) or discretionary abstention under 28 U.S.C. § 1334(c)(1).
Abstention is warranted on both grounds.
There are six requirements for mandatory abstention: (1) the motion to abstain is timely;
(2) the action is based on a state law claim; (3) the action is “related to” but not “arising in” a
bankruptcy case or “arising under” the Bankruptcy Code; (4) Section 1334 provides the sole
basis for federal jurisdiction; (5) an action is commenced in state court; and (6) the action can be
timely adjudicated in state court. In re WorldCom, Inc. Sec. Litig., 293 B.R. 308, 331 (S.D.N.Y.
2003). Only the first and last requirements are in dispute.
Regarding the last requirement, that the action can be timely adjudicated in state court,
Judge Jones addressed and rejected Plaintiffs’ earlier request for mandatory abstention on this
ground: “Plaintiffs have not provided enough evidence to show that this action would be timely
adjudicated in state court. Rather, they have supplied several reasons for why the action would
suffer greater delay in state court.” Fried II, 2012 WL 252139 at *4.
The Second Circuit recently cautioned District Courts about applying the usual
presumption that the movant carries the burden in asking for relief when addressing mandatory
abstention. Parmalat, 639 F.3d at 582. “Typically, a party seeking relief bears the burden to
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show he is entitled to that relief. Placing the burden on the party seeking remand may
nevertheless be inconsistent with the mandatory nature of abstention under § 1334(c)(2) as well
as the principles of comity, which presume that a state court will operate efficiently and
effectively. Accordingly, when examining this issue, the district court should consider these
significant competing concerns.” Id. (internal citations omitted).
Plaintiffs argue that state adjudication would be timely given recent experience with the
New York courts. (Russell Decl., Dkt. No. 63 at ¶ 7.) Defendants have offered no evidence to
the contrary, relying on Judge Jones’s opinion. While Judge Jones’s holding may be law of the
case, it is not binding on this Court. Aramony v. United Way of Am., 254 F.3d 403, 410 (2d Cir.
2001) (“Application of the law of the case doctrine is discretionary and does not limit a court's
power to reconsider its own decisions prior to final judgment.”)
Whether a case can be timely adjudicated for the purposes of mandatory abstention
analysis requires more than an analysis of the relative speed of the state and federal forums.
“Four factors come into play in evaluating 1334(c)(2) timeliness: (1) the backlog of the state
court's calendar relative to the federal court's calendar; (2) the complexity of the issues presented
and the respective expertise of each forum; (3) the status of the title 11 bankruptcy proceeding to
which the state law claims are related; and (4) whether the state court proceeding would prolong
the administration or liquidation of the estate.” Parmalat, 639 F.3d at 580. While the state court
may not be, as Judge Jones found, faster than this Court, the status of the Lehman Plan weighs in
favor of remand when applied to factors three and four. It is doubtful that this matter will have
any significant effect on the timely administration and liquidation of the LHI estate.
The only remaining issue in dispute is whether the instant motion was timely.
Defendants argue that, after 30 days following the notice of removal, 28 U.S.C. § 1447(c)
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prohibits motions for remand for any reason other than lack of subject matter jurisdiction. They
argue that Plaintiffs’ abstention argument therefore is untimely, citing In re Methyl Tertiary
Butyl Ether ("MTBE'') Prods. Liab. Litig., 522 F. Supp. 2d 557, 561 (S.D.N.Y. 2007), aff’d sub
nom. Orange Cnty. Water Dist. v. Unocal Corp., 584 F.3d 43, 50 (2d Cir. 2009) (“we have found
challenges to removal defects under § 1441(a) and (b) to be waivable”) (emphasis added).
While motions to remand based upon defects in removal procedure other than subject
matter jurisdiction are considered waivable and subject to the 30-day limit of § 1447(c), motions
to abstain pursuant to 28 U.S.C. § 1334 and § 1452(b) are not governed by § 1447(c).
Abstention motions do not concern removal procedure, but instead whether a court will exercise
the jurisdiction it has. See Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 127 (1995)
(holding that the grounds for remand under § 1447(c) are for defects in removal procedure or for
lack of subject-matter jurisdiction); accord In re New 118th LLC, 396 B.R. 885, 894 n.7 (Bankr.
S.D.N.Y. 2008); In re Exeter Holding, Ltd., 2013 WL 1084548 (Bankr. E.D.N.Y. Mar. 14, 2013)
(“However, this thirty-day deadline to seek remand under § 1447(c) is inapplicable to a request
for remand from the bankruptcy court ‘on any equitable ground’ under § 1452(b).”).
“Section 1334(c)(2) does not define ‘timely’ and courts apply a case-by-case approach.
The relevant considerations include…whether the movant moves as soon as possible after he or
she should have learned the grounds for such a motion.” In re New 118th LLC, 396 B.R. 885,
893 (Bankr. S.D.N.Y. 2008) (internal citations omitted). Here the one-year stay of this action
expired on January 10, 2013. On February 28, 2013, Plaintiffs filed their Amended Complaint,
eliminating any basis for federal question jurisdiction. On March 6, 2013, Plaintiffs filed their
second motion to remand based on lack of subject matter jurisdiction. On April 5, 2013, 37 days
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after the filing of the Amended Complaint, Plaintiffs filed a motion asking the court to abstain
from exercising jurisdiction. The motion to abstain was therefore timely.
The six requirements for mandatory abstention have been met. Accordingly, this Court
abstains based on Section 1334(c)(2).
ii. Permissive Abstention
Plaintiffs also ask the Court to abstain under the doctrine of permissive abstention. Even
if mandatory abstention did not apply, the Court would abstain based on permissive abstention.
A district court may abstain under its own discretion pursuant to Section 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
proceeding arising under title 11 or arising in or related to a case under title 11”), or a court may
remand on equitable grounds under Section 1452(b) (“The court to which such claim or cause of
action is removed may remand such claim or cause of action on any equitable ground.”). See
Certain Underwriters at Lloyd's, London v. ABB Lummus Global, Inc., No. 03 Civ. 724, 2004
WL 224505, *8 (S.D.N.Y. Feb. 5, 2004) (“the factors for equitable remand are virtually identical
to the factors for discretionary abstention”).
Courts in this district typically turn to a twelve-factor test to analyze permissive
abstention:
(1) the effect or lack thereof on the efficient administration of the estate if a Court
recommends abstention, (2) the extent to which state law issues predominate over
bankruptcy issues, (3) the difficulty or unsettled nature of the applicable state law,
(4) the presence of a related proceeding commenced in state court or other nonbankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334,
(6) the degree of relatedness or remoteness of the proceeding to the main
bankruptcy case, (7) the substance rather than form of an asserted ‘core’
proceeding, (8) the feasibility of severing state law claims from core bankruptcy
matters to allow judgments to be entered in state court with enforcement left to
the bankruptcy court, (9) the burden of [the court's] docket, (10) the likelihood
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that the commencement of the proceeding in a bankruptcy court involves forum
shopping by one of the parties, (11) the existence of a right to a jury trial, and (12)
the presence in the proceeding of non-debtor parties.
See, e.g., In re WorldCom, Inc. Sec. Litig., 293 B.R. 308, 332 (S.D.N.Y. 2003); Allstate Ins. Co.
v. CitiMortgage, Inc., 2012 WL 967582 (S.D.N.Y. Mar. 13, 2012); Langston Law Firm v.
Mississippi, 410 B.R. 150, 156 (S.D.N.Y. 2008); In re Gordon, 2011 WL 3878356 (Bankr.
S.D.N.Y. Aug. 30, 2011).
“In determining whether to exercise permissive abstention under § 1334(c) courts have
considered one or more (not necessarily all) of twelve factors.” In re Cody, Inc., 281 B.R. 182,
190 (S.D.N.Y. 2002) (emphasis in original). The factors largely ask the Court to balance the
federal interest in efficient bankruptcy administration against the interest of comity between the
state and federal courts.
In this case, most of the factors relevant to permissive abstention weigh in favor of the
state forum. The Amended Complaint is based entirely on state law, and there are no bankruptcy
or other federal issues (factors 2, 6, 7, 8); the Plaintiffs commenced this action in state court
(factor 4); the parties are entitled to a jury trial, which would be unavailable in the bankruptcy
court (factor 11); the sole basis for federal jurisdiction is “related to” jurisdiction under 28 U.S.C.
§ 1334 (factor 5); state adjudication will not impede the efficient administration of the
bankruptcy estate (factor 1); and neither LHI nor any of the other former debtors is a party to this
action.
If the state law claims here were difficult or unsettled (factor 3), that would weigh in
favor of state court adjudication, but the fact that the claims here are straightforward is not a
reason for the case to proceed in federal court. On the whole, the factors weigh in favor of
remand based on principles of comity between the federal and state courts.
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III. Conclusion
For the reasons set forth above, Plaintiffs’ motion to dismiss for lack of subject matter
jurisdiction is DENIED, and Plaintiffs’ motion that the court abstain from exercising jurisdiction
is GRANTED.
The Clerk of the Court is directed to terminate the motions at docket numbers 55 and 60
and mark the case closed.
SO ORDERED.
Dated: May 30, 2013
New York, New York
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