Schuster v. Mims ( 1997 )

United States Court of Appeals,
Fifth Circuit.
No. 96-11271
Summary Calendar.
In the Matter of the RUPP & BOWMAN CO., Debtor.
Eugene SCHUSTER, et al., Appellants,
v.
Jeffrey H. MIMS, Trustee, Appellee.
April 8, 1997.
Appeal from the United States District Court for the Northern
District of Texas.
Before SMITH, DUHÉ and BARKSDALE, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Quest Biotechnology, Inc., Eugene Schuster, and Venture
Funding, Ltd. (collectively, the "Schuster Parties"), appeal the
district court's denial of motions for mandatory abstention and a
stay with respect to a bankruptcy court proceeding involving the
Rupp & Bowman Co. (the "Debtor"). We dismiss the appeal for want
of jurisdiction.
I.
This action stems from a 1986 transaction between the Schuster
Parties and the Debtor in connection with a Chapter 11 proceeding
involving AM Diagnostics ("AMD"). The Schuster Parties and the
Debtor were involved in bringing AMD out of bankruptcy and
subsequently in 1990 entered into a series of related agreements
pertaining to the AMD plan of reorganization. The agreements were
designed to inject funds into AMD to permit its reorganization and
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required that each of the individual Schuster Parties and the
Debtor guarantee a portion of the AMD debt. One such agreement,
referred to as the Forbearance Agreement, was a promissory note for
$500,000 executed in favor of the Debtor as security for a line of
credit obtained by certain members of the Schuster Parties.
AMD failed in December 1991, and its primary creditor,
Foothill Capital Corporation ("Foothill"), foreclosed on most of
AMD's assets. According to the Schuster Parties, the Debtor and
Bert Williams, Jr., Debtor's CEO and controlling shareholder, had
agreed orally with the Schuster Parties prior to the foreclosure
that, in the event AMD failed, the parties would purchase the
assets from Foothill and form a new company for their collective
benefit. The Schuster Parties contend that the Debtor and Williams
breached this oral agreement by taking control of AMD's assets and
business for their exclusive benefit.
In April 1994, the Debtor filed suit in Michigan state court
against the Schuster Parties, alleging that the latter had
defaulted on their obligations under the Forbearance Agreement and
seeking to accelerate the entire outstanding balance under the
Agreement. In July 1994, the Debtor filed a voluntary chapter 11
petition in bankruptcy court in the Northern District of Texas and
sought refund from the Schuster Parties of various preferential
transfers, pursuant to 11 U.S.C. § 547(b). The bankruptcy
proceeding was converted in February 1995 to a chapter 7 filing;
Jeffery Mims was appointed trustee.
Mims amended the Debtor's complaint in October 1995 to include
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a claim with respect to the Forbearance Agreement—the identical
claim alleged in the still-outstanding Michigan case—and a second
claim with respect to various other outstanding guarantees executed
in connection with the AMD plan of reorganization. The Schuster
Parties asserted in bankruptcy court various affirmative defenses
and counterclaims to the Forbearance Agreement claim that had been
incorporated by the Mims Amendment. These counterclaims are
virtually identical to claims the Schuster Parties had filed
against the Debtor and others in November 1991 in California
federal district court.
In November 1995, the Schuster Parties moved in bankruptcy
court for a mandatory abstention of the Forbearance Agreement claim
pursuant to 28 U.S.C. § 1334(c)(2). The Schuster Parties argued
that abstention was required because the forbearance claim was the
subject matter of a pending Michigan case that had been filed
previously. The Schuster Parties also requested a stay of
proceedings under the "first filed" rule, arguing that the
forbearance and guarantee claims were identical to certain claims
pending in the California federal court that had been filed
previously and had been the subject of extensive discovery and
motions.
The bankruptcy court denied both motions in January 1996, the
first based upon representations by the Debtor's counsel that he
would seek a nonsuit of the Michigan action and the latter because
the California federal court had not set a trial date. Upon
opposing summary judgment motions with respect to the various
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bankruptcy claims, the court in June 1996 granted summary judgment
in favor of the Schuster Parties on the guarantee count and a
partial summary judgment in favor of the Debtor on the Forbearance
Agreement count, subject to a trial of the Schuster Parties'
affirmative defenses and counterclaims.
In the meantime, the Schuster Parties obtained a September
1996 trial date in the California action and then re-urged their
petition in the bankruptcy court for a transfer to California of
the entirety of the Forbearance Agreement defenses and related
counterclaims. The Schuster Parties at this time also renewed
their mandatory abstention motion pertaining to the Michigan
action, noting that Mims had been unable to obtain a non-suit of
that action.
In August 1996, the bankruptcy court ordered a transfer to
California of all of the Forbearance Agreement defenses and
counterclaims, except for those pertaining to Mims. Without ruling
explicitly on the mandatory abstention motion, the court denied it
implicitly by retaining the action and setting an October 1996
trial date in bankruptcy court. The trial date was set after the
Schuster Parties filed a notice of appeal to the district court,
asking for an emergency stay and review of the bankruptcy court's
decisions.
II.
The Schuster Parties contend that, pursuant to 28 U.S.C. §
1334(c)(2), the bankruptcy court erred in failing to abstain from
hearing their Forbearance Guarantee claims that had been pending in
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Michigan state court since April 1994. The district court,
concluding that the bankruptcy court's abstention order was
interlocutory, dismissed the appeal because the Schuster Parties
had failed to comply with rule 8003(a) and (c).1
Before reaching the merits, we must determine whether we have
jurisdiction to review the district court's decision. Section
1334(d), as amended, provides that "[a]ny decision to abstain or
not to abstain made under this subsection (other than a decision
not to abstain in a proceeding described in subsection (c)(2)) is
not reviewable by appeal or otherwise by the court of appeals under
section 158(d), 1291, or 1292 of this title...." 28 U.S.C. §
1334(d) (West Supp.1996) (emphasis added).
In contrast, the former section 1334(c)(2), applicable to
cases commenced before October 22, 1994, provided that "[a]ny
decision to abstain or not to abstain made under this subsection is
not reviewable by appeal or otherwise by the court of appeals under
section 158(d), 1291, or 1292 of this title...." 28 U.S.C. §
1334(c)(2) (West 1993), amended by 28 U.S.C. § 1334(c)(2), (d)
(Supp.1996). Because the instant case commenced in October 1995,
it is uncontested that the amended version of § 1334(d) governs.
The amended § 1334(c)(2) provides,
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
1
The rule requires a party filing an interlocutory appeal to
accompany its notice of appeal with a motion for leave to appeal.
Because the Schuster Parties failed to file the required motion,
the district court denied leave to appeal and struck the notice of
appeal.
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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(c)(2) (West Supp.1996) (emphasis added).
Accordingly, under this statute, courts must abstain from hearing
a state law claim if the following requirements are met: (1) The
claim has no independent basis for federal jurisdiction, other than
§ 1334(b); (2) the claim is a non-core proceeding, i.e., it is
related to a case under title 11 but does not arise under or in a
case under title 11; (3) an action has been commenced in state
court; and (4) the action could be adjudicated timely in state
court. See Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195,
1206 (5th Cir.1996); 28 U.S.C. §§ 1334(c)(2), 157(b)(1).
Because the Schuster Parties brought their motion for
mandatory abstention under the amended version of § 1334(c)(2), our
jurisdiction, if any, stems from § 1334(d) and must be consistent
with §§ 158(d), 1291, and 1292. We agree with the Debtor, however,
that § 1334(d) does not provide, on its own, a definitive basis for
appellate review. Rather, § 1334(d) confers jurisdiction on this
court to review decisions to deny or grant motions for mandatory
abstention only if such review is permissible under one or more of
§ 158(d), 1291, or 1292; it does not address whether an abstention
decision is in fact final or interlocutory. To determine whether
§ 1334(d) permits us to review the bankruptcy court's decision not
to abstain, we must enquire, therefore, whether the decision is
final or interlocutory.
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Not only has no court determined whether, under the amended §§
1334(c)(2) and (d), a bankruptcy court's decision not to abstain is
an interlocutory or final order, but the courts that have addressed
the issue with regard to the pre-amendment § 1334(c)(2) have
reached differing conclusions, with little or no discussion of
reasons.2 None of these courts has discussed the nature of the
mandatory abstention decision within the context of § 1291, either
directly or within the judicially-engrafted collateral order
doctrine of Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541,
545-47, 69 S. Ct. 1221, 1225, 93 L. Ed. 1528 (1949).
In general, a district court order is appealable under § 1291
if it "ends the litigation on the merits and leaves nothing for the
court to do but execute the judgment." Catlin v. United States,
324 U.S. 229, 233, 65 S. Ct. 631, 633, 89 L. Ed. 911 (1945). Certain
collateral orders are reviewable immediately under § 1291 where
they (1) determine conclusively the disputed issue; (2) resolve an
issue that is separable completely from the merits of the action;
2
See, e.g., 150 N. Street Assocs. Ltd. Partnership v. City of
Pittsfield (In re 150 N. Street Assocs. Ltd. Partnership), 184 B.R.
1, 6 (Bankr.D.Mass.1995) (noting that the decision under §
1334(c)(1) (permissive abstention) declining to abstain was an
interlocutory order and "not technically binding"); Eastport
Assocs. v. City of Los Angeles (In re Eastport Assocs.), 114 B.R.
686, 693 (C.D.Cal.1990) (assuming, without deciding, that it lacked
jurisdiction to reconsider a decision not to abstain under §
1292(b)), aff'd, 935 F.2d 1071 (9th Cir.1991); Earle Indus. v.
Circuit Eng'g (In re Earle Indus.), 72 B.R. 131, 135 n. 7
(Bankr.E.D.Pa.1987) ("Clearly, a decision under 28 U.S.C. §
1334(c)(2) to abstain is not reviewable."). But cf. Holtzclaw v.
State Farm Fire & Casualty Co. (In re Holtzclaw), 131 B.R. 162, 163
(E.D.Cal.1991) (" "A decision by the bankruptcy court on a question
of mandatory abstention is now a final order reviewable on appeal
by the district court.' ") (quoting All Am. Laundry Serv. v. Ascher
(In re Ascher), 128 B.R. 639, 645 (Bankr.N.D.Ill.1991)).
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(3) effectively would be unreviewable on appeal from a final
judgment; and (4) are too important to be denied review. See
Quackenbush v. Allstate Ins. Co., --- U.S. ----, ---- - ----, 116
S. Ct. 1712, 1718-19, 135 L. Ed. 2d 1 (1996) (citing Cohen, 337 U.S.
at 545-47, 69 S.Ct. at 1225-26).
We do not agree with the Schuster Parties that the decision
not to abstain from hearing the Forbearance Agreement claim that
has been pending in Michigan state court since April 1994 satisfies
the Quackenbush criteria for review under the collateral order
doctrine. Although the order arguably satisfies the first two
Quackenbush criteria—it determines conclusively the disputed issue,
and the abstention issue is separable completely from the merits of
the action—the order fails to satisfy the third prong.
We see no reason why the decision would be effectively
unreviewable on appeal. Unlike the reverse situation in which the
bankruptcy court abstains and is then bound as a matter of res
judicata to honor the judgment of the Michigan state court, thus
rendering the abstention decision effectively unreviewable on
appeal, see, e.g., Moses H. Cone Memorial Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 12, 103 S. Ct. 927, 935, 74 L. Ed. 2d 765 (1983),
the instant case poses no such concerns. Rather, once the
bankruptcy court renders a final judgment with respect to the
Forbearance Agreement claim, the Schuster Parties will be free to
appeal that decision and to challenge the appropriateness of the
decision not to abstain. Although we acknowledge that delaying
review of the abstention decision until such time may cause the
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Schuster Parties and the Debtor additional litigation-related
expenses, we do not view such delays as sufficient to convey
jurisdiction under the collateral order doctrine.3
Therefore, we lack jurisdiction to entertain the Schuster
Parties' appeal of the bankruptcy court's decision not to abstain,
and thus we do not reach the merits. Furthermore, because any
jurisdiction to consider the bankruptcy court's decision to
transfer part of the pending claims to California district court is
ancillary to our jurisdiction with respect to the abstention order
only, our lack of jurisdiction to hear the abstention appeal
necessarily deprives us of jurisdiction to hear the transfer
appeal.
The appeal is DISMISSED for want of jurisdiction.
3
See, e.g., Kershaw v. Shalala, 9 F.3d 11, 14 (5th Cir.1993).
But cf. A.H. Robins Co., v. Piccinin, 788 F.2d 994, 1009 (4th
Cir.) (noting that "[w]eighty considerations of fairness and
efficient judicial administration" counsel in favor of a "relaxed
standard of finality" for bankruptcy appeals), cert. denied, 479
U.S. 876, 107 S. Ct. 251, 93 L. Ed. 2d 177 (1986).
9