TO:    The United States District Court.

I.    Introduction.


       This report and recommendation is prepared in accoraance with Bankruptcy Rule 5011. Rule 5011 requires that a bankruptcy judge submit a report and recommendation to the district judge when a motion for abstention has been filed. A copy of Rule 5011 is annexed to this report. A motion for permissive abstention has been filed by Kenneth L. Wallack and Tom E. Dewhirst in this case.

       This report and recommendation shall consist of the following: (1) a discussion of the procedural history of the motion, the Norman L. Mark bankruptcy, and related state court proceeding; (2) an analysis of 11 U.S.C. § 1334(c) (1) and the law of abstention; and (3) a recommendation regarding abstention.

II.    Procedural History.


       Norman L. Mark, a certified public accountant, filed a petition for relief under chapter 7 of Title 11, United States Code on February 16, 1988. Included among Mark's named creditors was

        1 ABR 232 

       Tom E. Dewhirst. Dewhirst, also a C.P.A., was listed as a secured creditor on the petition. The secured obligation arose from an agreement of sale which also provided a covenant not to compete upon default as a remedy. Mark did not reaffirm his obligation to Dewhirst, which arose from Mark's unsuccessful purchase of Dewhirst's accounting practice. Mark worked for Dewhirst before and after filing his bankruptcy petition. Mark received a discharge in bankruptcy on June 8, 1988. Mark's case was a no-asset liquidation and a final decree closing the case was entered on October 3, 1988.

       On November 30, 1988 Dewhirst sued Mark in a multi-faceted ten count complaint in state district court. allegations in the complaint include the following:


Count		Allegation
(Facts common to all counts)		Breach of contract, breach of covenant not to compete, failure to account, fraud, conversion of files
One		New post-petition agreement
Two		Declaratory judgment re: original non-competition agreement
Three		Injunctive relief from competition
Four		Conversion of business assets
Five		Conversion of client files
Six		Misapplication of funds
Seven		Accounting of cash and receivables
1 ABR 233
Count		Allegation
Eight		Breach of employment agreement
Nine		Fraud
Ten		Unfair trade practices


        Dewhirst prayed for declaratory relief entitling him to enforcement of a covenant not to compete, for compensatory and punitive damages for breach of alleged employment agreements, for turnover of property, for an accounting and other relief. A preliminary injunction was entered in state district court on December 22, 1988 prohibiting Mark from engaging in private practice as a C.P.A. Later, on March 14, 1989, the court entered findings and conclusions in support of its preliminary injunction nunc pro tunc to December 22, 1988.

        On March 7, 1989, Mark moved to reopen his bankruptcy case. The case was reopened by order of Judge Ross on March 20, 1989. Mark moved the court for the issuance of an order to show cause why Dewhirst and his attorney Kenneth L. Wallack should not be held in contempt for violations of Mark's discharge. Dewhirst and Wallack moved for permissive abstention by this court on April 13, 1989. A hearing upon the motion was held on April 14, 1989. No further proceedings have occurred in either state court or bankruptcy court since the hearing of April 14, 1989.

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III.    Abstention.

11 U.S.C. § 1334 provides:

        (a) Except as provided in subsection (b) of this section, the district court shall have original and exclusive jurisdiction of all cases under title 11.

        (b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, 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.

        (c) (1) Nothing is 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 proceedings if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction. Any decision to abstain made under this subsection is not reviewable by appeal or otherwise. This subsection shall not be construed to limit the applicability of the stay provided for by section 362 of title 11, United States Code, as such section applies to an action affecting the property of the estate in bankruptcy.

        (d) The district court in which a case under title 11 is commenced or is pending         1 ABR 235  shall have exclusive jurisdiction of all of the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.


        In this instance, Dewhirst and Wallack have moved for permissive abstention in accordance with 11 U.S.C. § 1334(c)(1). This section was adopted after the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pime Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). As printed out by Norton:


        [W]hile earlier bankruptcy jurisdictional provisions authorized abstention in the interest of justice, the 1984 provision's authorization for abstention based upon comity with state courts or respect for state law is a new statutory notion that goes hand in hand with the concept found in the Supreme Court's 1982 decision in Northern Pipeline to the effect that non-Article III bankruptcy judges could not constitutionally determine state-law contract causes of action asserted by a debtor against a third party. Northern Pipeline and the 1984 abstention provisions thus both operate to restrict the subject matter jurisdiction of non-Article III bankruptcy judges.

        The congressional history of the 1984 Amendments, moreover, indicates that a number of Senators and members of the House continue to be of the view that the independent Bankruptcy Court created under the 1978 Reform Act unwisely vested pervasive jurisdiction in the bankruptcy courts, and that the 1978 structure improperly impinged on the principle that the District Court should remain as the only trial court of general jurisdiction within the federal system. The necessity for the creation of a new jurisdictional system after Northern Pipeline was decided in 1982         1 ABR 236  thus served as an occasion for the advocates of limited jurisdiction for bankruptcy courts, to seek to cut back the subject matter jurisdiction of the bankruptcy courts, to bring them back within the control of the district courts, and to temper the power of bankruptcy judges by providing a greater role for state courts and a higher level of deference to state law.


1 Norton Bankruptcy Law and Practice, § 5.39, p. 196.

        The purpose behind the abstention statute was also noted in Macon Prestressed Concrete Co. v. Duke, 46 B.R. 727, 731 (Bankr. D.C.M.D. Ga. 1985):

        Voluntary abstention should be considered where the debtor's estate acquires the right to prosecute an unliquidated claim based upon a transaction totally unrelated to the debtor's financial affairs, such as a claim arising from personal injury, wrongful death, or a division of marital property upon divorce. Such claims ordinarily would be tried in a state court, but, because of the fortuitous circumstance of a pending bankruptcy action, are swept into the jurisdiction of an article I bankruptcy court because of the expansive definition of "property of the estate" as set forth in 11 U.S.C.A. § 541 (West 1979). It was these types of claims which obviously contributed to the Supreme Court's concern in Northern Pipeline Construction CO. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982).

        The Ninth Circuit has had occasion to recently review this revised abstention concept in a bankruptcy case. In In re Tucson Estates, Inc., 912 F.2d 1162 (9th Cir. 1990), the court reversed a bankruptcy court's decision not to abstain from hearing         1 ABR 237  a portion of a state court action. The bankruptcy judge reasoned that his stay of an entry of a state court judgment would permit him to "review" the state court decision after it was rendered but prior to entry of the judgment. He characterized the state court proceeding as a core proceeding because it involved allowance of claims and estate property. The Ninth Circuit disagreed and found the action to be precisely the type of action in which abstention should apply.

        The circumstances of this case viewed as a whole and evaluated in light of the factors well enunciated in Republic Reader's lead us to conclude that the bankruptcy court abused its discretion by not abstaining and entirely lifting the stay. The following factors all support abstention: the beneficial impact that resolution of the class claims in state court will have on efficient administrationof the estate, the extent to which state law issues predominate over bankruptcy issues, the existence of prior litigation of those issues which had already begun in state court, the difficult and unsettled nature of state law as applied to implied restrictive covenants, the lack of a federal jurisdictional basis other than bankruptcy jurisdiction for the state claims, the case's status as a related rather than core proceeding, the ease of permitting completion of the state Court litigation while reserving the judgment's enforcement to the bankruptcy court, the likelihood that the company's and officers' instigation of the proceeding in bankruptcy court is forum shopping to avoid imminent defeat in state court, the right to a jury trial in state court, and the nondebtor status of the homeowner plaintiffs. Although the decision on the homeowners' claims will affect significantly the bankruptcy estate's value, and the value of the claims asserted against         1 ABR 238  it, the issues reserved by the bankruptcy court--the restrictive covenant's reach and the amount of the misappropriation claim damages--are distinct from the administration of the bankruptcy estate. They involve determining whether the homeowners have a liquidated claim to file in the bankruptcy, not how that claim should be administered. The bankruptcy court abused its discretion in imposing the stay except as to the execution of any judgment.

In re Tucson Estates, Inc., 912 F.2d at 1169-1170 (footnotes omitted).

        The Republic Reader's abstention factors endorsed by the Ninth Circuit are as follows:

(1)    [T]he 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 the 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 my docket, (10) the likelihood that the commencement of the proceeding in 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 nondebtor parties.

In re Republic Reader's Service, Inc., 81 B.R. 422, 429 (Bankr. S.D. Tex. 1987) .

        1 ABR 239 
        These factors represent a method for addressing the Marathon issue. The primary message from Marathon is that traditional state common law actions are not subject to bankruptcy court adjudication simply because of a bankruptcy filing. Here the debtor is not seeking an adjudication of state law claims, however. Rather, he seeks to enforce the discharge injunction of 11 U.S.C. § 524 through contempt proceedings. There is no state contract claim to be adjudicated. The discharge injunction is being enforced. The fundamental purpose of the abstention statute is not violated by retention of jurisdiction.

        A review of the Republic Reader's factors supports this view. The efficient administration of the estate will not be affected should the court recommend abstention or not. Inasmuch as this is a no-asset case which has been otherwise fully administered, this factor is insignificant. State law issues do not predominate over bankruptcy issues. On the contrary, Dewhirst's state court complaint is inextricably linked to questions of reaffirmation and dischargeability. Bankruptcy issues predominate over state law issues because the sole determination to be made by this court is whether or not the creditor Tom Dewhirst and his counsel violated the discharge of Norman Mark. The law applicable to the situation in this instance is solely federal law. It is complex in that issues regarding dischargeability of noncompetition agreements have given rise to a great deal of controversy and inconsistent rulings among courts.

        1 ABR 240 
        Unquestionably, there is a related proceeding commenced in state court. However, the very presence of that related proceeding is the basis for the allegations of a violation of the discharge. There is certainly a possibility of inconsistent findings at the state and federal levels and this problem cannot be minimized. There is a jurisdictional basis other than 28 U.S.C. § 1334 for hearing the contempt matter. 28 U.S.C. § 1331 provides a jurisdictional basis for determination of federal questions when the amount in controversy exceeds $10,000.00. Here there are significant federal questions regarding interpretations of bankruptcy law. This proceeding is intimately related to the main bankruptcy case in that it involves the discharge of the major creditor of the debtor.

        The substance of the contempt allegations are that Tom Dewhirst violated the discharge of Norman L. Mark by seeking to enforce a discharged covenant not to compete. This is a substantial bankruptcy law issue in substance as well as form. There is no feasibility of severing state law claims from core bankruptcy matters in this case. There are no state law claims before the court. The issue is solely whether or not there was a violation of the discharge through the filing of the state law complaint and the issuance of a preliminary injunction. The court will review each aspect of the complaint, count by count to determine which aspects of the complaint may violate federal law.         1 ABR 241  This court is not hearing a state law complaint but rather reviewing such complaint and the actions of the creditor to determine if its order and discharge were violated. The burden of the bankruptcy court's docket is not so great as to preclude the prompt adjudication of this claim within the next sixty days. Although the debtor would certainly prefer the bankruptcy court as a forum for adjudication of his legal problems, it does not appear that there was "forum shopping" in the bringing of the contempt motion, but rather simply the utilization of that remedy to enforce this court's prior order of discharge. If anyone was forum shopping, it was Dewhirst. law before a state court of discharge. He brought complex issues of bankruptcy before a state court and ignored this court's bankruptcy jurisdiction. There is no right to jury trial in this case and the only nondebtor party present in the proceeding are the creditor and his attorney.

        It should also be noted that under 28 U.S.C. § 157(b) (2) core proceedings include determinations as to the dischargeability of particular debts and objections to discharges. Although the motion for contempt proceedings is not labeled as such, it is a dischargeability action in substance. The court is being called upon to determine whether or not certain debts are dischargeable. From that determination will flow a determination as to whether or not Tom Dewhirst and his attorney violated Mark's discharge by filing their state court action.

        1 ABR 242 
        Dewhirst argues in his brief that abstention should be embraced because the state court action involves possible post-petition contract claims. He misses the point entirely. The determination as to whether or not such post-petition claims constitute violations of this court's discharge involves application of federal bankruptcy law, not the state law of contracts. This court will not be reviewing the validity of any post-petition contracts other than as to determine if allegations of such post-petition contracts violate federal law.

IV.    Recommendation Regarding Abstention.

        Because this contempt proceeding does not involve a fundamental question of state law, and because of the significance of the discharge in the administration of a chapter 7 proceeding, I recommend that this court deny the motion to abstain submitted by Tom E. Dewhirst. A proposed order denying abstention is annexed hereto.




        Respectfully Submitted this 24th day of November, 1990.





DONALD MacDONALD IV
Bankruptcy Judge




Serve:	B. Guetschow, Esq.
	H. Gazaway, Esq.