Menu   4 ABR 474
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA


In re: Case No. A95-00757-DMD)
 ) 
EDGAR JAMES MUHLHAUSER,) 
 ) 
Debtor.       )
___________________________________) 
 ) 
 ) 
JOSEPH J. STUDNEK,) Adv. No. A95-00757-001-DMD
 )Bancap No. 96-3011
Plaintiff,      ) 
 )Chapter 7
     v.) 
 ) 
EDGAR J. MUHLHAUSER, individually) 
and as trustee of The Muhlhauser) 
Family Irrevocable Trust; THE) 
MUHLHAUSER FAMILY IRREVOCABLE TRUST,) 
a/k/a Edgar J. Muhlhauser Irrevocable) 
Trust, a/k/a Muhlhauser Children's) 
Irrevocable Trust; KAREN READ; ACTIVE) 
REALTY, INC.; and KAREN MUHLHAUSER,) 
 ) 
Defendants.     ) 
___________________________________) 
 ) 
EDGAR J. MUHLHAUSER,) 
 ) 
Counterclaim-Plaintiff      ) 
And Third Party Plaintiff,     ) 
 ) 
     v.) 
 ) 
JOSEPH J. STUDNEK,) 
 ) 
Counterclaim-Defendant,     ) 
 ) 
     and) 
 ) 
ROBERT L. MARTIN,) 
 ) 
Third-party Defendant.       ) 
___________________________________) 


ORDER GRANTING MOTION TO REMAND
AND DENYING JOINT MOTION FOR SETTLEMENT CONFERENCE


  TOP    4 ABR 475
     On January 29, 1996, the chapter 7 trustee, Larry Compton, filed a notice of removal of the above-referenced state court action. On February 9, 1996, the plaintiff and counterclaim defendant in the state court action, Joseph J. Studnek, filed a motion to remand to state court. The trustee and a third party, Steven Geczy, oppose remand. They have also filed a joint motion for a settlement conference. Both matters were heard by the court on August 5, 1996. J.L. McCarrey III appeared for Joseph Studnek. Michael Mills appeared on behalf of the trustee and Mitchel Schapira appeared on behalf of Geczy. Having reviewed the state court file in its entirety, as well as bankruptcy main case file no. A95-00757-DMD, In re Edgar J. Muhlhauser, IT IS ORDERED:

1. The motion to remand is granted. This matter is remanded to the state court for determination;
2. Joseph Studnek's request for sanctions is denied; and,
3. The joint motion for settlement conference is denied.

Background

     In 1994 Joseph Studnek initiated a civil action against the debtor, Edgar J. Muhlhauser, in Alaska Superior Court. Studnek v. Muhlhauser, et al., Case No. 3AN-94-2249 CI. Muhlhauser filed a massive 11-count counterclaim against Studnek, as well as a third-party complaint against Robert Martin. Geczy and Studnek also had claims pending against each other in state court. Those proceedings were consolidated with the Muhlhauser action. The trustee has removed the consolidated state civil action to this court.

     The notice of removal states that this action involves "a dispute over the proper apportionment of various partnership earnings." The trustee alleges that Studnek is holding assets which are property of the bankruptcy estate. The trustee also contends this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A),(B), (E) and (O).

     Studnek disputes the trustee's characterization of this case. He contends the primary issue to be determined is whether a partnership existed in the first place. Studnek denies that he, Geczy, and Muhlhauser formed a partnership. The issue of whether a partnership existed has yet to be determined by the state court. Judge Michalski denied Muhlhauser's motion for summary judgment on this issue in June   TOP   4 ABR 476 1995. Studnek contends the consolidated cases are not core proceedings and that this court either lacks jurisdiction or should abstain from determining the issues.

Analysis

     Any analysis of modern bankruptcy court jurisdiction must begin with a review of the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982)(Marathon). The Bankruptcy Reform Act of 1978 contained a provision that provided broad jurisdiction to bankruptcy courts over "civil proceedings arising in or related to cases under Title 11." Marathon filed for relief under Chapter 11 and sued Northern for breach of contract and warranty, misrepresentation, coercion and duress in bankruptcy court. The Supreme Court found that the exercise of jurisdiction over the case by the bankruptcy court was unconstitutional. Only district courts, with their Article III status, had the right and the power to adjudicate state law controversies related to cases under title 11. The court's determination was to apply retroactively and the judgment was stayed for three months to allow Congress the opportunity to address the problem.

     After prolonged delay, Congress adopted the "Bankruptcy Amendments and Federal Judgeship Act of 1984" (1984 Act). The 1984 Act amended 28 U.S.C. § 1334 in an attempt to deal with the jurisdictional issues raised by the Marathon decision. The provisions for voluntary and mandatory abstention, 28 U.S.C. § 1334(c)(1) and (c)(2), as amended, provide:
     (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.

     (2) 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. . . .
     These provisions must be read along with 28 U.S.C. § 157 and the   TOP   4 ABR 477 district court's reference of "core proceedings" to the bankruptcy courts. Together they represent Congress's response to the Marathon jurisdictional problems.

     Under 28 U.S.C. § 157, district court reference of core proceedings to bankruptcy courts is allowed. The trustee characterizes this case as a core proceeding, in part, on the "catch-all provisions" of 28 U.S.C. § 157(b)(2)(A) and (b)(2)(O). Section 157 provides, in part:
     (a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.

     (b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject review under section 158 of this title.

     (2) Core proceedings include, but are not limited to--

          (A) matters concerning the administration of the estate;
          . . . .

          (O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or equity security holder relationship, except personal injury tort or wrongful death claims.

Paragraphs (A) and (O) create the very problem the 1984 Act was designed to avoid. Thus, a court must avoid characterizing a case as a core proceeding simply because it may fall within these general provisions. In re Castlerock Properties, 781 F.2d 159, 162 (9th Cir. 1986). There must be something more to the controversy before a court asserts jurisdiction.

     The trustee asserts that this proceeding is a core proceeding court because Steven Geczy has filed a claim in the Muhlhauser bankruptcy and the lawsuit will determine the amount of his claim. Thus the proceeding becomes a part of the claims allowance process under 11 U.S.C. § 157(b)(2)(B). I disagree. Geczy has not asserted any claim against Muhlhauser in the current litigation. Secondly, the Ninth Circuit has recognized the distinction between state court litigation and the claims allowance process:   TOP   4 ABR 478
While there can be no serious dispute that claims filed in bankruptcy are within the bankruptcy court's core jurisdiction, the filing of a claim does not consolidate it with the pending state law case (into the claim) even though they are based on the same transaction. Both continue to exist, and must be considered, separately.

In re Conejo Enterprises, Inc., ___ F.3d ___, 1996 WL 476868, *1 (9th Cir. 1996). The state court action is not part of the claims allowance process.

     The trustee also contends this is a core proceeding pursuant to § 157(b)(2)(E), which pertains to "orders to turn over property of the estate." The action was initiated nearly 18 months prior to Muhlhauser's chapter 7 petition. It contains no basis for turnover under 11 U.S.C. § 542 or § 543, the bankruptcy turnover statutes. Under the trustee's expansive definition of turnover, any action to obtain damages from a third party is an action for "turnover." Such a position is totally inconsistent with both Marathon and Castlerock. Moreover, it is premature to characterize the state court action as one for turnover when it has not yet been determined that Muhlhauser has any interest in assets held by Studnek.

     Aside from Muhlhauser's bankruptcy, there is no independent basis for federal jurisdiction. The state court action is not a core proceeding. I conclude the action is simply a related proceeding, as it is not "a cause of action created by title 11 or one that only arises in title 11 cases." In re Eastport Associates, 935 F.2d 1071, 1077 (9th Cir. 1991).

     The current action is virtually indistinguishable from Marathon. Indeed, the trustee's state-law claims for breach of contract, misrepresentation, and duress are identical to the claims asserted by Marathon against Northern Pipe Line Co. Under such circumstances the provisions of mandatory abstention apply. Mandatory abstention is applicable when the following six criteria are present:
(1) the motion to abstain is timely; (2) the proceeding is based on a state law cause of action; (3) the proceeding is related to a case under Title 11 but does not arise under Title 11; (4) the action could not have been commenced in federal court absent jurisdiction under 28 U.S.C. § 1334; (5) the state court action has commenced; and (6) the state court action can be timely adjudicated.



  TOP   4 ABR 479
In re Unanue-Casal, 164 B.R. 216, 221 (D. Puerto Rico 1993), aff'd 32 F.3d 561 (1st Cir. 1994); cert. denied 115 S. Ct. 1098, 130 L.Ed.2d 1066 (1995).

     Here, the abstention motion was filed promptly, just 11 days after removal. The removed action is based purely on state law. The proceeding is related to the Muhlhauser chapter 7 case, but does not arise under Title 11. The proceeding could not have been brought in federal court absent the Muhlhauser bankruptcy. The action was pending in state court when removed.

     The state court can adjudicate this case in a timely manner. While the action was pending in state court for approximately 21 months prior to removal, it took an additional 6 months to get the current motion to hearing before this court after removal, and 2 months for this court to render its decision. With the addition of Los Angeles cases and the Martech preference litigation, this court's adversary caseload has never been higher. Moreover, the demands for a jury trial would result in greater delays in bankruptcy court than in state court, even if all parties consented to jury trials. Bankruptcy courts are ill-equipped to deal with jury trials. State courts have regular civil jury trials and extensive jury experience.

     Mandatory abstention applies. Studnek's motion will be granted and the case will be remanded to state court for adjudication. Studnek's request for sanctions will be denied. The joint motion for settlement conference will also be denied.

     DATED: October 7, 1996.
BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge