Stoe v. Flaherty ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
1-23-2006
Stoe v. Flaherty
Precedential or Non-Precedential: Precedential
Docket No. 04-3947
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PRECEDENTIAL
IN THE UNITED STATES COURT
OF APPEALS
FOR THE THIRD CIRCUIT
NO. 04-3947
GEORGE P. STOE,
Appellant
v.
WILLIAM E. FLAHERTY; DAVID CARPENTER;
JAMES CARPENTER; WILLIAM SMELAS;
ROBERT SUNDERMAN; RONALD STATILE
On Appeal From the United States
District Court
For the Western District of Pennsylvania
(D.C. Civil Action No. 04-cv-00489)
District Judge: Hon. Donetta W. Ambrose
Argued October 18, 2005
BEFORE: SMITH, STAPLETON and NYGAARD,
Circuit Judges
(Opinion Filed January 23, 2006)
Erik Sobkiewicz (Argued)
Douglas A. Campbell
Campbell & Levine, LLC
1700 Grant Building
Pittsburgh, PA 15219
Attorneys for Appellant
Steven S. Santoro (Argued)
Santoro & Gonzalez
407 Station Street
Pittsburgh, PA 15017
Attorney for Appellee
William E. Flaherty
Laura B. Hoguet
Edna Sussman (Argued)
Houget Newman & Regal
10 East 40th Street
New York, NY 10016
and
Thomas H. May
Dickie, McCamey & Chilcote
Two PPG Place - Suite 400
Pittsburgh, PA 15222
Attorneys for Appellees
David O. Carpenter and D. James Carpenter
2
Eric B. Wolff (Argued)
David B. Florenzo
Benjamin M. Gipson
Kirkland & Ellis
655 Fifteenth Street, N.W.
Washington, D.C. 20005
Attorneys for Appellees
William Smelas, Robert Sunderman
and Ronald Statile
OPINION OF THE COURT
STAPLETON, Circuit Judge.
Plaintiff-appellant George Stoe (“Stoe”) brought a state-
law action in state court to recover unpaid severance benefits
from current and former officers of his previous employer,
which is now bankrupt. The defendants removed the case to
federal court pursuant to 28 U.S.C. § 1452, which provides for
the removal of claims related to a bankruptcy case. In the
District Court, the defendants successfully opposed Stoe’s
motion for mandatory abstention and ultimately won dismissal
on the merits. Because we conclude that the District Court
committed errors of law in ruling that the Bankruptcy Code’s
mandatory abstention provision was inapplicable to a case of
this kind, we will remand for further consideration of whether
3
the District Court must abstain from hearing Stoe’s case.
I.
Stoe was formerly the president of Zinc Corporation of
America (“Zinc”), a division of Horsehead Industries, Inc.
(“Horsehead”). In April 2002, Stoe entered into a severance
agreement with Zinc that provided for Stoe to receive a
severance of $648,000, payable in biweekly installments of
$13,500, for services he had rendered to the company prior to
his departure. Zinc and Horsehead made all payments required
by the severance agreement until Horsehead filed for Chapter 11
bankruptcy in the United States District Court for the Southern
District of New York in August 2002. The Bankruptcy Code
prohibited Horsehead from making further payments to Stoe
after the filing of the petition. See Belcufine v. Aloe, 112 F.3d
633, 634 (3d Cir. 1997) (noting that filing of a Chapter 11
petition bars the payment of pre-petition claims by the
company).
Stoe brought an action to recover the unpaid severance
payments under Pennsylvania’s Wage Payment and Collection
Law, 43 Pa. Cons. Stat. § 260.1 et seq. (“WPCL”), against
David Carpenter, Executive Chairman and CEO of Horsehead,
James Carpenter, President of Horsehead, William Smelas and
Robert Sunderman, both former Executive Vice Presidents of
Zinc, Ronald Statile, former Chief Financial Officer of Zinc,
and William Flaherty, former Chairman and CEO of Zinc.
Under the WPCL, when a corporation fails to pay wages and
benefits that it owes its employees, the corporation’s top officers
can be held personally liable for the non-payments. Belcufine,
4
117 F.3d at 634. Stoe did not name Horesehead as a defendant
in the suit, but if Stoe is successful, the defendants will be
entitled to indemnification from Horsehead, pursuant to
Horsehead’s by-laws.
After removing Stoe’s state court action to federal court,
the defendants moved to dismiss Stoe’s action under Fed. R.
Civ. P. 12(b)(6), or, in the alternative, to transfer the action to
the Bankruptcy Court. Stoe moved to remand the action to state
court, or, in the alternative, for both permissive and mandatory
abstention.
The District Court denied Stoe’s motion to remand or to
abstain. With respect to mandatory abstention, the court made
two rulings. First, it ruled that “abstention cannot apply to
removed cases.” App. at 9. Second, the District Court
concluded that even if mandatory abstention applied as a general
matter to removed cases, it would not apply to Stoe’s case
because mandatory abstention requires that the state law claim
be only “related to” the bankruptcy proceeding, and not “arise
under” the Bankruptcy Code or “arise in” a bankruptcy case. In
the District Court’s view, Stoe’s claim was “inextricably
intertwined with the Bankruptcy Code and would not exist, but
for, the bankruptcy filing.” As a result, the District Court held
that Stoe’s claim “‘arises in’ the bankruptcy proceeding.” Id. at
10.
After Stoe responded to the defendants’ motions to
dismiss, the District Court ruled, following our decision in
Belcufine v. Aloe, 112 F.3d 633 (3d Cir. 1997), that Stoe did not
state a valid claim under the WPCL. Stoe does not challenge the
5
merits of that ruling before us, but rather argues that the District
Court was required to abstain from hearing his case and
consequently lacked jurisdiction to enter the order of dismissal.
II.
We have jurisdiction to review the District Court’s order
dismissing Stoe’s action pursuant to 28 U.S.C. § 1291. In
addition, the District Court’s prior order denying Stoe’s motion
for mandatory abstention is reviewable under 28 U.S.C. §
1334(d). We are cognizant that decisions not to remand are “not
reviewable by appeal or otherwise by the court of appeals under
section 158(d), 1291, or 1292 of [title 28].” 28 U.S.C. §
1452(b). By contrast, appeals of decisions not to exercise
mandatory abstention pursuant to § 1334(c)(2) are explicitly
permitted under § 1334(d). Stoe appeals the District Court’s
decision not to abstain and we accordingly consider only the
propriety of that decision, not the District Court’s decision
regarding remand. As the Second Circuit noted recently, “If we
determine. . . the district court erred by not abstaining, the
district court properly could both abstain and remand when this
lawsuit is returned to it. However, that reality would not alter
the fact that we would have reviewed only the decision not to
abstain.” Mt. McKinley Ins. Co. v. Corning Inc., 399 F.3d 436,
445 (2nd Cir. 2005). The District Court’s determination that the
mandatory abstention provision of § 1334(c)(2) does not apply
to removed cases is a question of statutory interpretation that we
review de novo. Tavarez v. Klingensmith, 372 F.3d 188, 189
n.1 (3d Cir. 2004). We similarly exercise plenary review over
the legal question of whether Stoe’s claim is a “core”
proceeding. See Mt. McKinley, 399 F.3d at 447.
6
III.
Section 1334 of title 28 provides, in pertinent part:
(a) Except as provided in subsection (b) of this
section, the district courts 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). . . (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.
28 U.S.C. § 1334.
Thus, upon a timely motion under § 1334(c)(2), a district
court must abstain if the following five requirements are met:
7
(1) the proceeding is based on a state law claim or cause of
action; (2) the claim or cause of action is “related to” a case
under title 11, but does not “arise under” title 11 and does not
“arise in” a case under title 11, (3) federal courts would not have
jurisdiction over the claim but for its relation to a bankruptcy
case; (4) an action “is commenced” in a state forum of
appropriate jurisdiction; and (5) the action can be “timely
adjudicated” in a state forum of appropriate jurisdiction.
The first requirement is not disputed in this appeal. Stoe’s
claim is plainly based on Pennsylvania’s WPCL and he does not
assert a federal cause of action. The District Court’s blanket
assertion that mandatory abstention does not apply to removed
cases relates to the requirement that an action “is commenced”
in a state forum. Accordingly, we address that requirement first.
A.
In support of the proposition that mandatory abstention
cannot apply to removed cases, the defendants insist that “the
fundamental premise” of the concept of abstention is the
existence of a parallel proceeding in whose favor the court can
abstain, and, that in the context of removed cases, there is no
such ongoing proceeding. This is confirmed, in the defendants’
view, by the use of the present tense in § 1334(c)(2)’s
requirement that “an action is commenced, and can be timely
adjudicated, in a State forum.” 28 U.S.C. § 1334(c)(2)
(emphasis supplied). The defendants add that applying §
1334(c)(2) in a situation involving no parallel proceeding turns
it into a remand provision which would either be inconsistent
with or obviate the need for the separate bankruptcy removal
8
and remand provisions in 28 U.S.C. § 1452. We are not
persuaded.
First, the existence of an ongoing state proceeding is not
inherent in the nature of abstention. Burford, Pullman, and
Thibodaux abstention, as well as other forms of abstention,
apply without regard to the existence of an ongoing proceeding.
Louisiana Power & Light Co. v. City of Thibodaux, 360 U.S. 25
(1959) (upholding abstention in eminent domain proceeding
removed from state court); Burford v. Sun Oil Co., 319 U.S. 315
(1943) (requiring abstention and dismissal of case raising
uncertain questions of state law in favor of resolution through
centralized state administrative procedures); R.R. Comm’n of
Texas v. Pullman Co., 312 U.S. 496 (1941) (requiring abstention
when state law is uncertain and clarification of state law in
subsequent state court proceeding might obviate need for federal
constitutional ruling); see generally Erwin Chemerinsky, Federal
Jurisdiction § 12.2 (4th ed. 2003) (discussing various federal
abstention doctrines).
Nor does the text of § 1334(c)(2) favor the defendants’
position. On its face, that text mandates abstention in removed
cases as well as those filed initially in federal court. A removed
case “is commenced” in the state court and satisfies that
requirement. “Is commenced” simply cannot reasonably be read
to require both commencement and ongoing pendency in state
court. In that regard, § 1334(c)(2) stands in sharp contrast to §
1334(e), which refers to the “district court in which a case under
title 11 is commenced or is pending. . . .” 28 U.S.C. § 1334(e)
(emphasis added). Congress could have likewise required that
there exist a “pending” case in state court as a prerequisite to
9
mandatory abstention, but it opted not to do so.
Significantly, the defendants have suggested no
persuasive reason why Congress might have been motivated to
make a distinction in § 1334(c)(2) between removed cases and
others. Section 1334(c)(2) is based on comity and, on its face,
reflects a congressional judgment that a party who wishes to
litigate a state claim in a state court, but finds himself in a
federal court solely because the controversy is related to a
bankruptcy, should be able to insist upon a state adjudication if
that will not adversely affect the bankruptcy proceedings.1
1
The legislative history of § 1334(c)(2) consists primarily of
the statements of individual legislators. It tends to confirm,
however, that, out of deference to state courts and concern over
the constitutional validity of the broad statutory reach of
bankruptcy jurisdiction, Congress sought to give effect to the
preferences of litigants who prefer a state forum, when state
court adjudication would not unduly interfere with the
administration of the bankruptcy estate. See, e.g., 130 Cong.
Rec. 13063, 13066-67 (1984) (statement of Sen. Hatch)
(supporting Senate bill’s broader abstention provision and
noting that “for reasons dictated by sound constitutional policy
as well as judicial economy and procedural fairness to claimants,
this bill contains a requirement that a Federal district court
involved in a bankruptcy matter honor the request of a party to
that proceeding to have wholly State law issues resolved in State
courts”); 130 Cong. Rec. 17152 (statement of Sen. Heflin)
(supporting broad abstention to give effect to right of litigant to
state forum); 130 Cong. Rec. 17154 (statement of Sen.
DeConcini) (arguing that proposed narrower abstention
10
Given that judgment, we can perceive no reason why Congress
could have decided to deny mandatory abstention to a party who
filed his state claim in a state court, only to have it removed to
a federal court.
Finally, mandatory abstention is not in conflict with 28
U.S.C. § 1452, which governs removal and remand in
provision “reflect[s] a balance between the need for an effective
and efficient bankruptcy court system. . . and the concerns of
those who find themselves involuntarily involved in a
bankruptcy proceeding”); 130 Cong. Rec. 17157 (statement of
Sen. Dole) (“[C]omity between Federal and State courts depends
upon the mutual respect that each of those divisions of the
national judiciary has for the jurisdiction of the other. At the
same time, however, I believe that it is equally essential that a
bankruptcy court–or district court hearing a bankruptcy
proceeding–have the ability to expeditiously dispose of all
claims that may be pressed by or against a debtor.”); see also
Susan Block-Lieb, Permissive Bankruptcy Abstention, 76 Wash.
U. L.Q. 781, 809-13 (1998) (reviewing legislative history); 2
Thomas D. Crandall, et al., The Law of Debtors and Creditors
§ 11.9 at 11-26 (rev. ed. 2005) (“Section 1334(c)(2) also
represents a broader ‘state’s rights’ concern for deference to and
respect for state courts (as well as opposition to ‘encroaching
federalism’), to the extent that such deference can be made
consistent with orderly and timely bankruptcy administration.”).
This legislative intent affords no basis for distinguishing
between removed cases and those cases brought originally in
federal court.
11
bankruptcy cases. That section provides:
(a) A party may remove any claim or cause of
action in a civil action . . . to the district court for
the district where such civil action is pending, if
such district court has jurisdiction of such claim
or cause of action under section 1334 of this title.
(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. . . .
28 U.S.C. § 1452. The defendants argue that § 1452(b)
provides the exclusive means by which a federal court can
remand a removed bankruptcy-related case. But section
1334(c)(2) does not purport to interfere with a court’s authority
to remand under § 1452(b). Rather, § 1334(c)(2) governs only
whether a district court must abstain from hearing a case. Once
a district court determines that it either must abstain from
hearing a removed case pursuant to 1334(c)(2) or should abstain
pursuant to 1334(c)(1)’s permissive abstention provisions, it can
consider whether there is reason for the suit to proceed in state
court. If so, there will be an “equitable ground” justifying
remand under § 1452(b). See Parrett v. Bank One, N.A. (In re
Nat’l Century Fin. Enters. Inv. Litig.), 323 F. Supp. 2d 861, 878
(S.D. Oh. 2004) (noting that mandatory abstention provides
equitable ground supporting remand under § 1452(b));
Personette v. Kennedy (In re Midgard Corp.), 204 B.R. 764,
775 & 775-76 n.13 (B.A.P. 10th Cir. 1997) (same); Murray v.
On-Line Bus. Sys., Inc. (In re Revco D.S., Inc.), 99 B.R. 768,
776 (N.D. Oh. 1989) (same); Chiodo v. NBC Bank-Brooks
12
Field (In re Chiodo), 88 B.R. 780, 785 (W.D. Tex. 1988)
(same); see also Joseph C. Cavender, Comment, On the Need
to Conduct Abstention Analysis in Bankruptcy-Related Cases
Removed to Federal Court, 71 U. Chi. L. Rev. 289, 290 (2004)
(arguing that abstention provisions, if met, should provide
“equitable ground” justifying remand). There is nothing
inconsistent about one statutory provision governing abstention
and a second provision governing remand.
We also find unpersuasive defendants’ related argument
that if mandatory abstention applies to removed cases, the
abstention provision will swallow the removal provision.
Nearly every removed bankruptcy-related case, they argue, will
simply be returned to state court when the district court
determines that mandatory abstention applies. However, the
requirement of “timely adjudication” in a state forum can serve
to retain a significant number of cases in federal court.
Cavender, supra, at 305-07.2 Moreover, the removal provision
of § 1452(a) applies not only to “related to” cases, but also to
“arising in” and “arising under” cases, while the mandatory
abstention provision applies only to “related to” cases. Compare
28 U.S.C. § 1452 (governing removal and remand for all claims
for which there is jurisdiction under § 1334) with 28 U.S.C. §
2
By contrast, if mandatory abstention does not apply to
removed cases, then mandatory abstention will almost never
apply. Cavender, supra, at 300-02. Simultaneous declaratory
judgment actions and enforcement actions in the state and
federal court would apparently be the limit of § 1334(c)(2)’s
application.
13
1334(c)(2) (providing for mandatory abstention only in “related
to” cases). Therefore, the removal provision still clearly has
effect with respect to “arising in” and “arising under” cases.
The mandatory abstention provision would consequently not
swallow the removal provision.
Four of the five courts of appeals to have considered the
issue of whether § 1334(c)(2) can apply to removal actions agree
with the conclusion we here reach. See Mt. McKinley Ins. Co.
v. Corning Inc., 399 F.3d 436, 446-47 (2nd Cir. 2005) (rejecting
argument that mandatory abstention does not apply in removal
proceedings); Christo v. Padgett, 223 F.3d 1324, 1331 (10th Cir.
2000) (concluding that application of mandatory abstention to
removed cases “better comports with the plain language of §
1334(c)(2) as well as Congress’s intent that mandatory
abstention strike a balance between the competing interests of
bankruptcy and state courts”); Robinson v. Michigan
Consolidated Gas Co., 918 F.2d 579, 584 n.3 (6th Cir. 1990)
(“The abstention provisions of 28 U.S.C. § 1334(c)(2) apply
even though a case has been removed pursuant to 28 U.S.C. §
1452.”); Southmark Corp. v. Coopers & Lybrand (Matter of
Southmark Corp.), 163 F.3d 925, 929 (5th Cir. 1999) (“[W]e
note, only to reject out of hand, [the] assertion that statutory
abstention does not apply to cases removed to federal court on
the basis of bankruptcy jurisdiction.”); but see Schulman v.
California (In re Lazar), 237 F.3d 967, 981-82 (9th Cir. 2001)
(section 1334(c)(2) “simply inapplicable” because after removal
no other related state proceeding exists).
In conclusion, the mandatory abstention provision of 28
U.S.C. § 1334(c)(2) applies, by its terms, to removed cases and
14
is not inconsistent with the removal and remand provisions of §
1452. Stoe meets the requirement that his action be
“commenced” in a state court of appropriate jurisdiction.
B.
Bankruptcy jurisdiction extends to four types of title 11
matters: (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. In re
Combustion Eng’g, Inc., 391 F.3d 190, 225 (3d Cir. 2005). The
category of cases “under” title 11 “refers merely to the
bankruptcy petition itself.” Id. at 225-26 n.38 (quotation and
citation omitted). A case “arises under” title 11 “if it invokes a
substantive right provided by title 11.” Torkelsen v. Maggio (In
re Guild & Gallery Plus, Inc.), 72 F.3d 1171, 1178 (3d Cir.
1996). Bankruptcy “arising under” jurisdiction is analogous to
28 U.S.C. § 1331, which provides for original jurisdiction in
district courts “of all civil actions arising under the Constitution,
laws, or treaties of the United States.” 1 Collier on Bankruptcy
§ 3.01[4][c][i] at 3-21-22 (15th ed. rev. 2005); see also Wood v.
Wood (Matter of Wood), 825 F.2d 90, 96-97 (5th Cir. 1987).
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.” 1 Collier on Bankruptcy §
3.01[4][c][iv] at 3-31 (quotations and footnotes omitted).
Proceedings “arise in” a bankruptcy case, “if they have no
existence outside of the bankruptcy.” United States Trustee v.
Gryphon at the Stone Mansion, Inc., 166 F.3d 552, 556 (3d Cir.
1999). Finally, a proceeding is “related to” a bankruptcy case if
15
“the outcome of that proceeding could conceivably have any
effect on the estate being administered in bankruptcy.” In re
Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984); see
also In re Federal-Mogul Global, Inc., 300 F.3d 368, 381 (3d
Cir. 2002) (noting that Pacor “clearly remains good law in this
circuit” in this respect).3
The question presented here is whether Stoe’s claim
“arises under” title 11, “arises in” a bankruptcy case, or is
merely “related to” a bankruptcy case. This is equivalent to the
question whether Stoe’s claim is a “core” proceeding or a “non-
core” proceeding within the meaning of 28 U.S.C. § 157. In re
Combustion Eng’g, Inc., 391 F.3d at 225 (“Cases under title 11,
proceedings arising under title 11, and proceedings arising in a
case under title 11 are referred to as ‘core’ proceedings; whereas
proceedings ‘related to’ a case under title 11 are referred to as
‘non-core’ proceedings.”).
The defendants insist that Stoe’s claim both “arises
under” the Bankruptcy Code and “arises in” a bankruptcy case.
Third Circuit precedent mandates that it does neither.
Whether a proceeding is a “core” proceeding that “arises
under” title 11 depends upon whether the Bankruptcy Code
3
For “related to” jurisdiction to exist at the post-confirmation
stage, “the claim must affect an integral aspect of the bankruptcy
process – there must be a close nexus to the bankruptcy plan or
proceeding.” Binder v. Price Waterhouse & Co. (In re Resorts
Int’l, Inc.), 372 F.3d 154, 167 (3d Cir. 2004).
16
creates the cause of action or provides the substantive right
invoked. Halper v. Halper, 164 F.3d 830, 836, 836-37 n.7 (3d
Cir. 1999). As the District Court here acknowledged, Stoe’s
“sole claim is based upon Pennsylvania’s Wage Payment and
Collection Law.” App. at 10. Thus, it “arises under” the WPCL
and not under the Bankruptcy Code. The defendants’ principal
argument to the contrary is based on our decision in Belcufine
v. Aloe, 112 F.3d 633 (3d Cir. 1997). Nothing in that case,
however, suggests that a claim like Stoe’s arises under the
Bankruptcy Code.
In Belcufine, we construed the WPCL, as a matter of
Pennsylvania law, to preclude liability for corporate managers
when the corporation’s non-payment of wages is required by the
operation of federal bankruptcy law. We reasoned that
[t]he liability of corporate managers under the
WPCL is a ‘contingent’ liability, i.e., it is
contingent on the corporation’s failure to pay
debts that it owes. Once a corporation files a
Chapter 11 petition, however, it is obligated to
pay wages and benefits only to the extent required
by the bankruptcy workout. Hence, when a
corporation under Chapter 11 fails to make
payments that the Bankruptcy Code does not
permit, the contingency needed to trigger the
liability of corporate managers under the
Pennsylvania WPCL never occurs.
Id. at 639 (citations omitted). While federal bankruptcy law
certainly informed our analysis, our decision in Belcufine was
17
clearly based on a construction of Pennsylvania law. Id. at 640
n.9 (“Our decision here. . . is predicated solely on an
interpretation of Pennsylvania law on the WPCL.”).
The fact that federal bankruptcy law is implicated as a
defense to Stoe’s claim, does not change the fact that Stoe’s
claim itself does not “arise under” title 11. The Bankruptcy
Code did not create Stoe’s cause of action. Constitutional
“arising under” federal question jurisdiction may, of course, be
implicated by a federal defense to a state law claim. See Osborn
v. Bank of the United States, 22 U.S. (9 Wheat) 738 (1824). But
bankruptcy “arising under” jurisdiction is analogous to the
narrower statutory “arising under” federal question jurisdiction
of 28 U.S.C. § 1331. Matter of Wood, 825 F.2d at 96-97; 1
Collier on Bankruptcy § 3.01[4][c][i] at 3-22. Certainly, nothing
in Belcufine suggests that Stoe could have filed his claim in a
federal district court, had Horsehead not been in bankruptcy.
Nor can we accept the District Court’s conclusion that
Stoe’s claim “arises in” a bankruptcy case. It reasoned that,
because Horsehead stopped making payments as a consequence
of its bankruptcy, Stoe’s claim for severance benefit “would not
exist, but for the bankruptcy filing.” App. at 10. But claims that
“arise in” a bankruptcy case are claims that by their nature, not
their particular factual circumstance, could only arise in the
context of a bankruptcy case. See Halper, 164 F.3d at 836
(proceeding is “core” “if it is a proceeding that, by its nature,
could arise only in the context of a bankruptcy case”) (quotation
omitted) (emphasis added); 1 Collier on Bankruptcy §
3.01[4][c][iv] at 3-31 (noting that “administrative matters” such
as allowance and disallowance of claims, orders in respect to
18
obtaining credit, determining the dischargeability of debts,
discharges, confirmation of plans, orders permitting the
assumption or rejection of contracts, are the principal
constituents of “arising in” jurisdiction, and that “[i]n none of
these instances is there a “cause of action” created by statute,
nor could any of the matters illustrated have been the subject of
a lawsuit absent the filing of a bankruptcy case”). Claims under
the WPCL can clearly exist outside the context of bankruptcy
cases. The only connection that Stoe’s claim has to the
Horsehead bankruptcy is that, in the event that Stoe is successful
in recovering damages for unpaid wages from the defendants
here, those defendants will likely seek indemnification from
Horsehead. In that sense it is “related to” the Horsehead
bankruptcy because it could “conceivably” have an effect on the
estate being administered.
We find the situation in Halper v. Halper, 164 F.3d 830
(3d Cir. 1999), indistinguishable from the one here presented.
Our decision there mandates a conclusion that Stoe’s claim is
not a “core” proceeding. In Halper, the plaintiff, Irwin Halper,
one of four prior owners of Halper Bros., Inc. (“HBI”), sued his
cousin, Barry Halper, also an owner of HBI. 164 F.3d at 833-
34. Irwin had entered into a contract with HBI which provided
for ongoing payments to Irwin. Id. Barry and Irwin entered into
a Guaranty and Indemnity Agreement by which Barry personally
guaranteed HBI’s payments to Irwin under the contract. Id.
HBI subsequently entered bankruptcy. Id. at 834. Irwin sued in
state court to enforce Barry’s personal guarantee, and Barry
removed to the Bankruptcy Court. We ruled that Irwin’s action
to enforce Barry’s personal guarantee–“a state law claim for
breach of a pre-bankruptcy contract to which the debtor was not
19
a party”–was not a “core” proceeding because it did not “invoke
a substantive provision of the bankruptcy code,” nor was it “the
type of claim that can only be entertained in bankruptcy.” Id. at
838. We explained:
[T]hese claims involve a dispute between two
parties, neither of whom is the debtor, over a
prepetition contract between them. They must be
resolved under New Jersey guaranty and contract
law and could have been brought in state court.
While Barry asserts that New Jersey law would
not enforce the Guaranty if HBI’s underlying
obligation is void under federal bankruptcy law,
this does not render these claims core
proceedings.
Id. at 838 (emphasis added). However, the claim nevertheless
fell within the Bankruptcy Court’s jurisdiction as a “related to”
proceeding because it could “conceivably affect” HBI’s estate
in bankruptcy. Id.
Stoe’s claim against the defendants is on all fours with
Irwin’s claim against Barry in Halper. Both claims involve
prepetition obligations between a nondebtor-plaintiff and a third
party whose obligation to the plaintiff was contingent upon the
debtor’s failure to meet its obligations to the plaintiff. Both are
state law claims where liability under state law may be affected
by the operation of the Bankruptcy Code. The sole difference
between the two cases is that Stoe’s guarantee claim is based
upon a state statute and Irwin’s guarantee claim is based on state
common law (i.e., contract law). In the context
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of a “core”/ “non-core” issue, this is a distinction without a
difference.
Stoe’s claim is “related to” a bankruptcy case, but it does
not “arise under” the Bankruptcy Code or “arise in” a
bankruptcy case.
C.
One set of defendants, for the first time on appeal,
proposes an alternative basis for federal court jurisdiction in 28
U.S.C. § 959(a). That statute provides:
Trustees, receivers or managers of any property,
including debtors in possession, may be sued,
without leave of the court appointing them, with
respect to any of their acts or transactions in
carrying on business connected with such
property. Such actions shall be subject to the
general equity power of such court so far as the
same may be necessary to the ends of justice, but
this shall not deprive a litigant of his right to trial
by jury.
28 U.S.C. § 959(a). But even were we to consider this
argument, it fails for the same reason that Stoe’s claim is not a
“core” claim, because the defendants are not being sued as
trustees or debtors in possession but in their capacity as officers
of Horsehead due to their contingent liability under the WPCL.
D.
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The District Court did not reach the question of whether
the proceeding on Stoe’s state claim “can be timely
adjudicated[] in a State forum of appropriate jurisdiction.” 28
U.S.C. § 1334(c)(2). We will remand for consideration of that
question in the first instance. See Mt. McKinley, 399 F.3d at
450 (remanding for consideration of “timely adjudication” when
district court had failed to reach the question due to erroneous
rulings regarding whether proceeding was “core” and whether
abstention applied to removed cases).4
The defendants urge that we can decide “timely
adjudication” on the record before us. The thrust of their
argument is that: (1) the question of timely adjudication involves
a comparison between the speed of resolution in state and
federal court; (2) the case is already resolved in federal court
4
In his motion for abstention before the District Court, Stoe
asserted, based on information secured from “Calendar Control
at the State Court,” that “the State Court does not have a
backlog” and can “hear Plaintiffs’ action in a timely manner.”
App. at 103. While Stoe did not file an affidavit in support of
that assertion, none of the defendants challenged the assertion
during proceedings in the District Court. Similarly, none of
them challenge this assertion here or argue that Stoe presented
no prima facie case on this issue. Accordingly, while Stoe had
the burden of proving his right to mandatory abstention, it is
appropriate for us to remand to the District Court for
consideration of the “timely adjudication” issue in the first
instance.
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because the merits of the case are clear under Belcufine and
Stoe has not seriously appealed this determination; (3) therefore,
relatively speaking, the case cannot be timely adjudicated in
state court. We conclude, however, that timeliness in this
context must be determined with respect to needs of the title 11
case and not solely by reference to the relative alacrity with
which the state and federal court can be expected to proceed. 1
Collier on Bankruptcy § 3.05[2] at 3-72 (“The few cases
considering the issue hold that timeliness must be referenced
against the needs of the title 11 case, rather than against an
absolute time guideline.”).
IV.
The District Court’s judgment will be reversed, and this
matter will be remanded to the District Court for further
proceedings consistent with this opinion.
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