New Bankruptcy Opinion: IN THE MATTER OF BLX GROUP, INC. – Court of Appeals, 9th Circuit, 2014

In the Matter of: BLX GROUP, INC., Debtor,

TIMOTHY L. BLIXSETH, Appellant,

v.

CARL A. EKLUND, Esquire, Chapter 11 Trustee of BLX Group, Inc., Appellee.

No. 13-35122.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted August 5, 2014 — Pasadena, California.
Filed August 26, 2014.

Before: KOZINSKI, Chief Judge, and PAEZ and BERZON, Circuit Judges.

NOT FOR PUBLICATION

MEMORANDUM [*]

Appellant Timothy L. Blixseth appeals the district court’s order dismissing his appeal of the bankruptcy court’s order confirming the Modified Third Amended Plan of Liquidation (“the Plan”) for the BLX Group, Inc. Bankruptcy Estate (“the Estate”). We affirm the dismissal of the appeal.

(1) An appellant must notice an appeal of a final bankruptcy court order within fourteen days of the order’s entry. Fed. R. Bankr. P. 8002(a). A bankruptcy court order is final where it “(1) `finally determines the discrete issue to which it is addressed,’ and (2) `resolves and seriously affects substantive rights.’” Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 780 (9th Cir. 1999) (quoting Elliott v. Four Seasons Props. (In re Frontier Props., Inc.), 979 F.2d 1358, 1363 (9th Cir. 1992) ). Applying this two-prong test, P.R.T.C. held that an order assigning a debtor’s legal claims against a third party to its largest creditor was “final.” See id. at 776-77, 780.

The August 30, 2011 Assignment Order transferring the Estate’s legal claims against Blixseth to the Yellowstone Club Liquidating Trust (“YCLT”) was likewise “final.” See id. at 780. That order expressly declared the assignment “in full force and effect notwithstanding confirmation of any plan of reorganization or liquidation, or any dismissal or conversion of this proceeding to a proceeding under Chapter 7 of the Bankruptcy Code.” Under the first P.R.T.C. prong, that language “finally assigned the assets,” i.e. the claims, to YCLT, because, even though the bankruptcy court retained jurisdiction over the Estate’s assets, it “lack[ed] discretion . . . to alter the scope of the assignment.” See id.

Additionally, under the second P.R.T.C. prong, the Assignment Order “seriously affected the rights of all creditors . . . to receive payment for their claims.” See id. The claims were a significant Estate asset. If YCLT is not able to recover on these claims, the Estate’s creditors may never receive meaningful distributions. See id.

Blixseth did not appeal the August 30, 2011 Assignment Order; he appealed only the March 12, 2012 Confirmation Order. Because the August 30, 2011 Assignment Order was final under P.R.T.C. and no appeal of that order was noticed, Blixseth’s assignments of error to that order are not reviewable here. See In re P.R.T.C., 177 F.3d at 780 .

(2) The district court properly concluded that Blixseth does not have appellate standing with regard to the order he did appeal, the Confirmation Order, because he was not a “person aggrieved” by that order. See Motor Vehicle Casualty Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 677 F.3d 869, 884 (9th Cir. 2012) . The March 12, 2012 Confirmation Order did not assign the claims to YCLT; it only approved the Plan, which incorporated the final

Assignment Order by reference. Blixseth repeatedly disclaimed being a creditor of the Estate. He is thus at most a defendant in an adversary proceeding, and lacks appellate standing to challenge the Plan in that capacity. See Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 443 (9th Cir. 1983) .

Moreover, contrary to what Blixseth asserted at oral argument before this Court, in the adversary proceeding, Blixseth could and did defend against YCLT’s claims on the grounds that BLX had not validly assigned them to YCLT, and obtained a ruling on the merits of that argument, albeit an adverse one.

(3) Finally, Blixseth lacks appellate standing with regard to the exculpation clause in the Plan. Unlike in Blixseth v. Yellowstone Mountain Club, LLC, et al., No. 13-35190, the clause in the BLX Plan is narrow both in its temporal scope and the persons it covers. Blixseth has not shown that he is “directly and adversely affected” by it in any way, as he has not pointed to any action he has or might affirmatively bring that would be barred by the clause. See Thorpe, 677 F.3d at 884 . Any contractual claims for attorney’s fees Blixseth might bring would plainly be outside the scope of the exculpation clause. The district court therefore properly held Blixseth lacked appellate standing with regard to the exculpation clause in the Plan.

AFFIRMED.

[*] This disposition is not appropriate for publication and is not precedent except as provided by 9th Cir. R. 36-3.

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New Bankruptcy Opinion: IN RE SHOTWELL LANDFILL, INC. – Dist. Court, North Carolina, 2014

IN RE: SHOTWELL LANDFILL, INC., et al., Debtors.

LSCG FUND 18, LLC, Appellant,

v.

SHOTWELL LANDFILL, INC., et al., Appellees.

No. 5:14-CV-427-BR.

United States District Court, E.D. North Carolina, Western Division.

August 22, 2014.

ORDER

W. EARL BRITT, Senior District Judge.

This matter is before the court on appellee/debtors’ motion to dismiss LSCG Fund 18, LLC’s (“LSCG”) appeal from U.S. Bankruptcy Judge Stephani W. Humrickhouse’s 13 June 2014 Order. (DE # 1.) LSCG filed a response in opposition to the motion. (DE # 2.)

In the order from which LSCG appeals, Judge Humrickhouse denied the motion of David A. Cook and LSCG to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a). (DE # 1-1.) Appellees contend that this order is interlocutory in nature and therefore not appealable now. (Mot., DE # 1, ¶ 3.) Under 28 U.S.C. § 158, this court has jurisdiction to hear appeals from final orders of the bankruptcy court as well as appeals from interlocutory orders where the appellant’s motion for leave to appeal has been granted. In considering whether it had jurisdiction over the district court’s order denying a motion for the appointment of a trustee pursuant to § 1104(a), the Fourth Circuit explained:

For purposes of this appeal, we will deem the order immediately reviewable as a final decision under 28 U.S.C. § 1291. While the court’s order is perhaps not “final” in the technical sense, considerations unique to bankruptcy appeals require that courts consider “finality in a more pragmatic and less technical way in bankruptcy cases than in other situations.” In re Amatex Corp., 755 F.2d 1034, 1039 (3d Cir.1985) . Such considerations include the protracted nature of bankruptcy proceedings and the large number of parties interested in the proceedings. “To avoid the waste of time and resources that might result from reviewing discrete portions of the action only after a plan of reorganization is approved, courts have permitted appellate review of orders that in other contexts might be considered interlocutory.” Id.; see also In re Paolino, 60 B.R. 828 (Bankr.E.D.Pa.1986) (district court, using the analysis in Amatex, treated as a final order for purposes of appeal pursuant to 28 U.S.C. § 158, the bankruptcy court’s order appointing a trustee). Accordingly, we will address the appeal on the merits.

Comm. of Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2d 239, 241 (4th Cir. 1987) . Cf. Modanlo v. Ahan (In re Modanlo), 342 B.R. 238, 241 n.8 (D. Md. 2006) (relying on Dalkon Shield and Harford v. Potomac Valley Farm Credit, ACA (In re Harford), No. 89-1844, 1990 WL 116729, at *1 (4th Cir. July 27, 1990) (unpublished), to conclude that the district court has jurisdiction to hear appeal from order appointing a trustee). Accord Ritchie Special Credit Invs., Ltd. v. U.S. Tr., 620 F.3d 847, 852 (8th Cir. 2010) (collecting cases).

Based on the foregoing, the court concludes that the bankruptcy court’s 13 June 2014 order is final for purposes of § 158, and therefore, the court has jurisdiction over the appeal. Appellees’ motion to dismiss is DENIED.

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New Bankruptcy Opinion: IN RE RHYNE’S ANTIQUES, CO., LLC – Bankr. Court, MD North Carolina, 2014

IN RE: Rhyne’s Antiques, Co., LLC, Debtor.

Case No. 14-10546C-11G.

United States Bankruptcy Court, M.D. North Carolina, Greensboro Division.

July 18, 2014.

OPINION AND ORDER

WILLIAM L. STOCKS, Bankruptcy Judge.

This case came before the court on July 16, 2014, for hearing on a Motion to Dismiss filed by Bank of North Carolina. Christopher C. Finan appeared on behalf of the Bank of North Carolina (the “Bank”), Sarah D. Bruce appeared on behalf of the United States Bankruptcy Administrator and Erik M. Harvey appeared on behalf of the Debtor. Having considered the Motion to Dismiss, the response filed by the Debtor, the matters of record in this case, the evidence offered at the hearing and the arguments of counsel, the court makes the following findings and conclusions pursuant to Rules 9014 and 7052 of the Federal Rules of Bankruptcy Procedure.

1. This case was commenced on May 16, 2014, when the Debtor filed a petition seeking relief under chapter 11 of the United States Bankruptcy Code.

2. The Motion to Dismiss seeks the dismissal of this chapter 11 case based upon a lack of good faith in the filing of the petition. The Bankruptcy Administrator has joined in the Motion to Dismiss and likewise seeks dismissal based upon a lack of good faith on the part of the Debtor.

3. A voluntary chapter 11 petition may be dismissed at the very outset of the case if there was a lack of good faith in the filing of the petition. Carolin Corp. v. Miller, 886 F.2d 693, 700 (4th Cir. 1989) . In Carolin the Court of Appeals adopted a standard requiring that both objective futility and subjective bad faith be shown in order to warrant dismissals for want of good faith in filing. Id. at 700-01. The principle guidelines to be followed in making the two-pronged inquiry required by the Carolin case are: the court should consider the totality of the circumstances; there is no exhaustive list of factors which should be considered; there is no single factor that will necessarily lead to a finding of bad faith; and the overall aim of the two-pronged inquiry is to determine whether the purposes of the Bankruptcy Code would be furthered or advanced by permitting the chapter 11 petition to proceed past filing. Id. at 701.

4. The objective futility inquiry is designed to insure that there is embodied in the petition “some relation to the statutory objective of resuscitating a financially troubled [debtor].” In re Coastal Cable TV, Inc., 709 F.2d 762, 765 (1st Cir. 1983) . The criteria for making this determination where the debtor has an ongoing business is whether there is any going concern value to preserve on the part of the debtor and any realistic possibility of an effective reorganization. Carolin, 886 F.2d at 701-02 . In a liquidation context, the objective futility inquiry is whether the petition represents an objectively futile attempt to achieve the more general goal of resuscitating a financially troubled debtor. In re Coleman, 426 F.3d 719, 728 (4th Cir. 2005) . After applying the foregoing criteria in the present case, the court is satisfied that objective futility exists in this case.

5. The Debtor’s only assets consist of commercial real estate located at 603 South Elm Street and 503 and 506 East Washington Street in Greensboro, North Carolina (the “Property”) and a $52,710.72 receivable from a related company, Rhyne’s Corner Cupboard Antiques, LLC (“Rhyne’s Corner Cupboard”).

6. The Property is subject to a deed of trust which secures a promissory note held by the Bank. The promissory note and the deed of trust are dated July 25, 2013. The promissory note is in the original amount of $774,000, is payable by monthly payments of $5,688.29 and had an unpaid balance of $812,337.50 as of the end of May, 2014.

7. The Debtor’s only source for income is rents from the Property. The only tenants in the Property during 2013 and 2014 have been Rhyne’s Corner Cupboard and the Debtor’s sole member, Richard W. Rhyne, who resides in an apartment located in the Property. According to the Debtor’s schedules, the Debtor has a month to month business lease with Rhyne’s Corner Cupboard and a residential rental agreement with Mr. Rhyne. The Debtor has no employees and no business or source of income other than rents from Rhyne’s Corner Cupboard and Mr. Rhyne.

8. The evidence established that there is no realistic possibility of an effective reorganization in this case. According to Debtor’s Statement of Financial Affairs, the Debtor has had no revenue during 2014 and had only $10,000 of income for all of 2013. This dearth of income is consistent with the $52,710.72 receivable from Debtor’s tenant, Rhyne’s Corner Cupboard. These circumstances reflect a continuing inability of Debtor’s tenants to make regular rental payments to the Debtor. The Debtor’s ability to propose and fund a confirmable plan of reorganization is dependent upon the Debtor receiving future rents from Rhyne’s Corner Cupboard and Mr. Rhyne sufficient to fund a plan. The evidence at the hearing establishes that the current tenants have been unable to make their rental payments for at least the last eighteen months. The Debtor’s evidence regarding improved business prospects for Rhyne’s Corner Cupboard and a new found ability to make future rental payments was vague, speculative and unconvincing. The bottom line is that there is neither going concern value to preserve nor a realistic chance of an effective reorganization or resuscitation in this case and that it would be futile for this Debtor to continue in chapter 11.

9. Under the Carolin decision the subjective bad faith inquiry is designed to insure that the petitioner actually intends to use the provisions of chapter 11 to reorganize or rehabilitate an existing enterprise or preserve going concern value of a viable or existing business. Stated obversely, the aim of this inquiry is to determine whether the petitioner’s real motivation is to abuse the reorganization process and to delay creditors without an intent or ability to reorganize the debtor’s financial affairs. Carolin, 886 F.2d at 702 . As discussed below, the court is satisfied that the Debtor filed this case to delay and frustrate the pending foreclosure proceeding and at a time when the Debtor was without an ability to reorganize.

10. This case is essentially a one creditor case involving a two-party dispute between the Bank and the Debtor that has landed in two bankruptcy cases. The Property formerly was owned by Rhyne’s Antiques, LLC, another company owned by Richard W. Rhyne. Rhyne’s Antiques, LLC was a debtor in an earlier chapter 11 case (Case No. 10-11164). After a plan was confirmed in that case, Rhyne’s Antiques, LLC was unable to make the payments to the Debtor called for in the plan. The Property was thereafter conveyed to the Debtor. The Debtor was successful in obtaining a refinancing from the Bank on July 25, 2013, pursuant to the promissory note and deed of trust now held by the Bank. Again, the Rhyne entity was unable to make the loan payments and, in fact, did not make a single payment to the Bank following the July 25 refinancing. This continuing default by the Debtor prompted the commencement of a foreclosure proceeding by the Bank and when this case was commenced, the Bank was in the process of prosecuting the foreclosure proceeding. The foreclosure process had proceeded through the hearing before the clerk, advertising of the sale date, the public auction on the courthouse steps and, in fact, the petition in this case was filed on the last day before the auction sale would have become final. This case was filed to impede and delay the foreclosure proceeding by a debtor who was without a viable or existing business and without the ability or intent to use the provisions of chapter 11 to reorganize or preserve any existing equity or going concern value. As such, it was an abuse or the reorganization process which reflects bad faith on the part of the Debtor.

11. Based upon the totality of the circumstances shown by the evidence both objective futility and subjective bad faith on the part of the Debtor have been established.

12. The purposes of the Bankruptcy Code would not be furthered or advanced by permitting the Debtor to continue in Chapter 11.

13. Cause exists for the dismissal of this case within the meaning of section 1112(b).

It is, therefore, ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss filed by Bank of North Carolina is granted and this case shall be and hereby is dismissed.

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New Bankruptcy Opinion: IN RE RESIDENTIAL CAPITAL, LLC – Bankr. Court, SD New York, 2014

In re: RESIDENTIAL CAPITAL, LLC, et al., Debtors.

RESIDENTIAL FUNDING COMPANY, LLC, Plaintiff,

v.

UBS REAL ESTATE SECURITIES, INC., Defendant.

Case No. 12-12020 (MG) Jointly Administered, Adv. Pro. Case No. 14-01926 (MG).

United States Bankruptcy Court, S.D. New York.

August 25, 2014.

SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, By: Alexander C. Drylewski, Esq., Four Times Square, New York, New York 10036, Attorneys for Defendant UBS Real Estate Securities, Inc.

QUINN EMANUEL URQUHART & SULLIVAN, LLP, By: Isaac Nesser, Esq., 51 Madison Avenue, 22nd Floor, New York, New York 10010, Attorneys for Plaintiff Residential Funding Company, LLC.

MEMORANDUM OPINION AND ORDER DENYING MOTION TO REMAND

MARTIN GLENN, Bankruptcy Judge.

Debtor Residential Funding Company, LLC (“RFC”) filed this lawsuit against UBS Real Estate Securities, Inc. (“UBS”) in the New York State Supreme Court, seeking breach of contract damages and indemnification related to loans UBS sold to RFC. RFC then removed the action to this Court, and UBS now seeks to remand the case to state court. [1] UBS also filed a motion to withdraw the reference of the action to this Court. Judge Daniels of the District Court denied that motion without prejudice, in part to await this Court’s decision on this Remand Motion. [2]

The complaint filed in this action is substantially similar to complaints in 83 other lawsuits (the “RMBS Actions”) initiated by RFC or its successor in interest, the ResCap Liquidating Trust (the “Trust”). The majority of the RMBS Actions are currently pending in the U.S. District Court for the District of Minnesota. Thirteen adversary proceedings substantially similar to this action are currently pending before this Court, under the central docket In re ResCap Liquidating Trust Mortgage Purchase Litigation, Adv. No. 14-07900 (Bankr. S.D.N.Y.). At least ten defendants in those adversary proceedings have pending motions to withdraw the bankruptcy reference and/or transfer venue, each in front of a different district judge. [3]

The RMBS Actions involve similar state law claims for breach of contract and indemnification related to the packaging and sale of residential mortgage backed securities (“RMBS”). What sets the UBS action apart is the fact that UBS filed a proof of claim against RFC in the bankruptcy case. That distinction is determinative of the outcome of this Motion. UBS’s proof of claim seeks contract breach damages and indemnification under a separate but similar contract governing the sale of loans from RFC to UBS. As explained below, RFC’s claims against UBS are counterclaims to UBS’s proof of claim. As such, the counterclaims are statutorily “core” under 28 U.S.C. § 157(b)(2)(C) as “counterclaims by the estate against persons filing claims against the estate.” It follows that the counterclaims fall within Congress’ grant of federal subject matter jurisdiction under 28 U.S.C. § 1334(b) over “civil proceedings arising under title 11, or arising in or related to cases under title 11.” Whether this Court has the constitutional authority (absent consent) to enter final judgment on the counterclaims is a separate issue, not necessary for a ruling on the Remand Motion. [4] Further, because RFC’s claims are “core,” they are not subject to mandatory abstention under 28 U.S.C. § 1334(c)(2), and the Court will not abstain from hearing this action under the permissive abstention principles of 28 U.S.C. § 1334(c)(1). Accordingly, the Remand Motion is DENIED for the reasons set forth below.

I. BACKGROUND

A. The Complaint

RFC asserts common law causes of action for breach of contract and contractual indemnification arising out of RFC’s purchase of loans from UBS (the “Loans”). (See Second Amended Complaint (“SAC”), ECF Doc. # 33 ¶¶ 81-91). According to RFC, it purchased over 2,200 mortgage loans from UBS, with an original principal balance in excess of half a billion dollars. (Id. ¶¶ 18, 20.) In connection with that sale, the parties entered into a Master Seller’s Purchase and Warranties Agreement dated May 12, 2005 (the “MSPA,” SAC Ex. A), under which UBS represented and warranted that the Loans would meet certain criteria and satisfy certain characteristics (the “Warranties”). (See SAC ¶ 25.) UBS also agreed to indemnify RFC against any liabilities and losses that RFC might incur if UBS’s Warranties were false. (See, e.g., MSPA § 3.03; SAC ¶ 28.)

After purchasing the Loans, RFC either securitized them by creating so-called “RMBS Trusts,” or sold them into whole loan pools. (SAC ¶¶ 22-24.) In doing so, RFC made certain representations to the RMBS or whole-loan purchasers concerning the characteristics of the Loans, relying on information provided by UBS and other mortgage originators. (Id. ¶¶ 26, 32.)

RFC alleges that the performance of the Loans revealed that the Loans contained a massive number of defects, in violation of the Warranties that UBS had made to RFC. (Opp. at 3; SAC ¶¶ 33-42.) The Loans began to default in large numbers, triggering losses in RMBS Trusts. (See SAC ¶ 43.) RMBS investors and others filed claims against RFC seeking compensation for these losses. (Id. ¶ 9.) These claims, relating to the Loans RFC bought from UBS as well as loans purchased from other mortgage originators, alleged staggering liability, involving more than 100 RMBS Trusts and a combined original principal balance of over $100 billion. (Id. ¶¶ 62-72.) Among the allegations common to these claims were that the loans backing RFC’s RMBS Trusts breached RFC’s representations and warranties concerning loan quality and underwriting guidelines—representations and warranties that, by extension, RFC had received from UBS and the other mortgage originators when buying the loans. (Id.)

On May 14, 2012, RFC, Residential Capital, LLC, and numerous affiliates (the “Debtors”) filed for chapter 11 bankruptcy protection, due in part to their enormous potential exposure from these RMBS-related lawsuits. (Id. ¶ 74.) RMBS investors, monoline insurers, whole-loan purchasers, indenture trustees, and others filed hundreds of proofs of claim in these bankruptcy proceedings, many of which mirrored pre-petition litigation, and all of which stemmed from allegedly defective mortgage loans. (Id. ¶ 75.) After protracted and contested proceedings, and through a lengthy mediation process, a global settlement was reached that provided for the resolution of all of the Debtors’ RMBS-related liabilities—including liability arising from the Loans purchased from UBS—in exchange for over $10 billion in allowed claims, allocated by various means to the RMBS Trusts, monoline insurers, FHFA, securities law claimants, and others (the “Global Settlement”). (Id. ¶ 78.)

On December 11, 2013, the Court entered an order (the “Confirmation Order,” Ch. 11 ECF Doc. # 6065) [5] confirming the Second Amended Joint Chapter 11 Plan Proposed by Residential Capital, LLC et al. and the Official Committee of Unsecured Creditors (the “Plan,” Ch. 11 ECF Doc. # 6065-1). The Plan, which is a liquidation plan, became effective on December 17, 2013 (the “Effective Date”). (Ch. 11 ECF Doc. # 6137.) As part of the confirmed Plan, the Court approved the Global Settlement, finding it to be fair, reasonable, and in the best interests of each of the Debtors. (See Findings of Fact ¶¶ 98-176, Ch. 11 ECF Doc. # 6066.)

RFC filed this action on December 17, 2013, after its RMBS-related liabilities became fixed through confirmation of the Plan. RFC asserts that

[p]ursuant to its express contractual obligations, UBS is obligated to compensate RFC for the portion of [the] Global Settlement associated with UBS’s breaches [of] its representations and warranties, as well as for the portion of RFC’s other liabilities and losses (including the tens of millions of dollars that RFC has paid in attorneys’ fees to defend against, negotiate, and ultimately settle claims relating to allegedly defective loans) associated with those same breaches.

(SAC ¶ 80.)

B. UBS’s Proof of Claim

On November 9, 2012—before RFC filed this action—UBS timely filed proof of claim number 4200 (the “UBS Claim”) in RFC’s bankruptcy proceeding. The UBS Claim relates to mortgage loans that UBS bought from RFC that were subsequently included in UBS-sponsored RMBS offerings. (See Proof of Claim, Fumerton Decl. Ex. F.) Like RFC, UBS bought mortgage loans—including loans from RFC—to be repackaged and sold. UBS’s purchase of loans from RFC was governed by a set of contracts (the “POC Contracts”) [6] that contained representations and warranties, as well as indemnification provisions, some of which were identical or similar in form to those in the MSPA governing RFC’s purchase of Loans from UBS. [7] In its proof of claim, UBS asserts that it has been named as a defendant in third-party lawsuits related to RMBS offerings and that, under the terms of the POC Contracts, RFC is obligated to indemnify UBS for any claims, causes of action, losses, damages, judgment, costs, and fees related to or arising from the lawsuits. (Id.) The proof of claim explicitly states that it is not intended to waive any rights of UBS to contest the jurisdiction of this Court. On December 12, 2013, the Debtors objected to UBS’s proof of claim solely on the ground of “Insufficient Documentation.” (See Debtors’ Fifty-Second Omnibus Objection to Claims (Insufficient Documentation), Ch.11 ECF Doc. # 6075.) The Debtors’ objection and the UBS Claim remain pending—a hearing on the objection has been adjourned several times, most recently to a date to be determined. (See Ch. 11 ECF Doc. ## 6210, 6328, 6490, 6641.)

C. Procedural History and the Remand Motion

RFC filed this action against UBS in the New York State Supreme Court, New York County, on December 17, 2013. (See Compl., ECF Doc. # 1-2.) In its state court Complaint, RFC alleged that jurisdiction was proper in New York state court under CPLR sections 301 and 302, and that venue was proper under CPLR sections 501 and 503. (Compl. ¶¶ 13-14.)

On March 27, 2014, RFC removed this action under 28 U.S.C. § 1452(a) to the District Court for the Southern District of New York, invoking 28 U.S.C. § 1334 as its sole ground for federal jurisdiction and asserting that the action is a “core” bankruptcy proceeding. (See Notice of Removal, ECF Doc. # 1-2 at 3-5; ¶ 13 (“The Removed Case is a core proceeding because it: concerns issues and claims similar and in some respects identical to those Defendant is asserting in its proof of claim in RFC’s bankruptcy case; is in substance and effect a counterclaim by the bankruptcy estate; relates to the administration of the estate and the Trust’s obligation to liquidate RFC’s assets; and may affect the allowance or disallowance of claims against the estate.”).) On April 1, 2014, the action was referred to this Court under 28 U.S.C. § 157(a) and the S.D.N.Y. Amended Standing Order of Reference. See Amended Standing Order of Reference (M-431), Case No. 12 Misc. 00032 (S.D.N.Y. Jan. 31, 2012).

In its Second Amended Complaint, RFC alleges that jurisdiction is proper in this Court since this action is a core proceeding under 28 U.S.C. § 157(b)(2)(C) as a counterclaim to UBS’s proof of claim, and also under § 157(b)(2)(A), (L), and (O) in that it affects the administration of the Debtors’ bankruptcy cases, requires enforcement of the Plan, and impacts the liquidation of the assets of the estate. (SAC ¶ 16). RFC also alleges that this Court has jurisdiction under 28 U.S.C. § 1367 because this matter is part of the same case or controversy as UBS’s proof of claim. [8]

UBS’s Remand Motion seeks to remand this action to the New York State Supreme Court. UBS argues that (1) this Court has neither core nor “related to” jurisdiction over this proceeding, and (2) even if the Court does have jurisdiction, the Court should abstain from hearing the case. UBS also does not consent to the entry of final orders or judgment by this Court if it is determined that a bankruptcy judge, absent consent of the parties, cannot enter final orders or judgment consistent with Article III of the Constitution.

II. DISCUSSION

A. This Court Has Subject Matter Jurisdiction Over This Action Under 28 U.S.C. § 1334(b); It Is As a Core Proceeding Under 28 U.S.C. § 157(b)(2)(C)

The party seeking removal of an action from state to federal court bears the burden of proving federal jurisdiction. Kirschner v. Grant Thornton LLP (In re Refco, Inc. Sec. Litig.), 628 F. Supp. 2d 432, 437 (S.D.N.Y. 2008). RFC asserts that federal jurisdiction exists over this action under 28 U.S.C. § 1334, which provides federal district courts with jurisdiction over “all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). Title 28 further provides that district courts may refer “any or all cases under title 11 and any or all proceedings arising under title 11 or arising or related to a case under title 11 . . . to the bankruptcy judges for the district.” 28 U.S.C. § 157(a). Under the statute, matters that may be referred to the bankruptcy courts are divided into two categories: “core” and “non-core” proceedings. See generally 28 U.S.C. § 157; see also Arkison, 134 S. Ct. at 2171 .

RFC asserts that this Court has jurisdiction over this action as a “core” proceeding since it is a counterclaim against UBS’s proof of claim. See 28 U.S.C. § 157(b)(2)(C) (stating that core proceedings include “counterclaims by the estate against persons filing claims against the estate”). UBS disagrees, arguing that counterclaims must relate to a proof of claim to be considered “core.” The Court rejects UBS’s argument; the connection between a counterclaim and a proof claim is irrelevant for establishing federal subject matter jurisdiction over the counterclaim. The relationship between the claim and counterclaim—and specifically, whether both will necessarily be resolved as part of the claims allowance process—is determinative only of whether a bankruptcy court may finally adjudicate the counterclaim in question. See Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011) . Thus, this proceeding is statutorily core as a “counterclaim[] by the estate against persons filing claims against the estate.” [9] 28 U.S.C. § 157(b)(2)(C). It follows, therefore, that the Court has jurisdiction over the proceeding under 28 U.S.C. § 1334(b) as one “arising in” a title 11 case. See Stern, 131 S. Ct. at 2604 (holding that all core proceedings necessarily arise under title 11 or arise in a title 11 case). Further, any proceeding that arises under the Bankruptcy Code or arises in a bankruptcy case is necessarily “bankruptcy-related,” as that term was used in Arkison. [10] Arkison, 134 S. Ct. at 2168 . The Court’s reasoning is best explained with a brief history of the current statute and relevant case law.

Courts have grappled with constitutional and statutory limits on bankruptcy jurisdiction since before the current bankruptcy court system was created in the Bankruptcy Act of 1978 (the “1978 Act”). The inquiry commonly focused on whether a bankruptcy estate’s affirmative claim against a third party involved the claims allowance process. For example, in Katchen v. Landy, 382 U.S. 323 (1966), the Supreme Court held that a bankruptcy judge had authority to enter judgment on a bankruptcy estate’s preference action against a creditor that filed a proof of claim in the bankruptcy case, and to enter judgment against the creditor for an amount in excess of its proof of claim. The Court held that the preference action in question was, like any other claims objection, “part and parcel” of the claims allowance process, and therefore subject to adjudication by a bankruptcy court. Id. at 330. The Court explained: “he who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide the consequences of that procedure.” Id. at 333 n.9. “[O]ne of those consequences was resolution of the preference issue as part of the process of allowing or disallowing claims . . . .” Stern, 131 S. Ct. at 2616 (explaining Katchen).

The contours of bankruptcy jurisdiction remained unclear after enactment of the 1978 Act. In a landmark decision, the Supreme Court struck down as unconstitutional the provisions of the 1978 Act that granted bankruptcy courts final adjudicative authority over certain state law claims brought against third parties who were not otherwise part of the bankruptcy proceeding. Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) . The Court explained that Article III of the Constitution required those matters to be adjudicated by an Article III court, not an Article I bankruptcy court. Id. at 71-72; see also In re New York Skyline, Inc., 512 B.R. 159, 171 (Bankr. S.D.N.Y. 2014) (discussing Marathon). Notably, the defendant in Marathon had not filed a proof of claim in the bankruptcy case—an important distinction from Katchen. See Stern, 131 S. Ct. at 2615-18 (discussing Katchen and Marathon).

To address the constitutional issues raised in Marathon, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 (the “1984 Act”). See Pied Piper Casuals, Inc. v. Ins. Co. of State of Pa., 72 B.R. 156, 158 (S.D.N.Y. 1987) . The 1984 Act divided matters that may be referred to the bankruptcy courts into two categories: “core” and “non-core” proceedings. See generally 28 U.S.C. § 157; see also Arkison, 134 S. Ct. at 2171 . “[C]ore proceedings are those that arise in a bankruptcy case or under Title 11.” [11] Stern, 131 S. Ct. at 2605 . Congress provided a non-exhaustive list of core proceedings in section 157(b)(2) of the 1984 Act. Non-core proceedings are those that are not core “but that [are] otherwise related to a case under title 11.” 28 U.S.C. § 157(c)(1). Bankruptcy judges were given statutory authority to enter final judgments in core proceedings, id. § 157(b)(1), but were limited in non-core proceedings to submitting proposed findings of fact and conclusions of law to the district court for de novo review. Id. § 157(c)(1).

Proceedings involving the “allowance or disallowance of claims” are listed as core proceedings under 28 U.S.C. § 157(b)(2)(B). Even after Marathon, it remained clear—as it had been since Katchen—that bankruptcy courts could constitutionally determine matters that were part of the claims allowance process. See, e.g., Langenkamp v. Culp, 498 U.S. 42, 44 (1990) (“[B]y filing a claim against a bankruptcy estate the creditor triggers the process of `allowance and disallowance of claims,’ thereby subjecting himself to the bankruptcy court’s equitable power.”) (citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 58-59 (1989) ). This authority is codified in 28 U.S.C. § 157(b)(2)(B). But it was unclear whether Congress, by listing counterclaims as core in section 157(b)(2)(C), had provided that the filing of a proof of claim subjected a creditor to final adjudication by the bankruptcy court of all counterclaims by the estate (regardless of connection to the proof of claim), and, if so, whether that act was constitutional. See 1 COLLIER ON BANKRUPTCY ¶ 3.02[d][i] (16th ed. rev. 2014).

The Supreme Court addressed this issue in Stern v. Marshall . In Stern, a creditor filed a proof of claim for defamation in the debtor’s bankruptcy case, and the debtor defended the complaint and filed a counterclaim for tortious interference. See Stern, 131 S. Ct. at 2601 . The bankruptcy court treated the counterclaim as core, and entered judgment in favor of the debtor. See id. at 2601-02. The district court disagreed that the counterclaim was core, and conducted a de novo review of the record as if the claim was non-core. See id. at 2602. On further appeal, the Ninth Circuit held that the debtor’s counterclaim, although compulsory, was not a core proceeding under section 157(b)(2)(C). Marshall v. Stern (In re Marshall), 600 F.3d 1037, 1057-58 (9th Cir. 2010) . Specifically, the court stated that

a counterclaim under § 157(b)(2)(C) is properly a core proceeding arising in a case under the Code only if the counterclaim is so closely related to the proof of claim that the resolution of the counterclaim is necessary to resolve the allowance or disallowance of the claim itself. Such a construction of § 157(b)(2)(C) takes into account the whole of the statute, avoids rendering any terms superfluous, follows Katchen, and comports with the principles of Marathon and Congress’ desire to revise the Bankruptcy Code in a manner consistent with the Constitution.

Id. at 1058 (internal quotation marks omitted).

On appeal to the Supreme Court, one of the questions presented was “[w]hether the Ninth Circuit opinion, which render[ed] § 157(b)(2)(C) surplusage in light of § 157(b)(2)(B), contravene[d] Congress’ intent in enacting § 157(b)(2)(C).” Petition for Writ of Certiorari at ii, Stern, 131 S. Ct. 2594 (No. 05-1631), 2010 WL 3068082 . The Supreme Court answered this question in the affirmative, rejecting the Ninth Circuit’s reasoning. The Court held that the counterclaim at issue was indeed statutorily core under section 157(b)(2)(C) as a “counterclaim by the estate against persons filing claims against the estate.” Stern, 131 S. Ct. at 2604 . See also 1 COLLIER ON BANKRUPTCY ¶ 3.02[d][i]. But even though the counterclaim was statutorily core, the Court concluded that Congress could not constitutionally authorize bankruptcy courts to finally determine the counterclaim, since the bankruptcy court “lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.” Stern, 131 S. Ct. at 2620 . Thus, “Stern made clear that some claims labeled by Congress as `core’ may not be adjudicated by a bankruptcy court in the manner designated by § 157(b).” Arkison, 134 S. Ct. at 2172 . It is important to note, though, that Stern explicitly held that the debtor’s counterclaim was “core” under section 157(b)(2)(C). See Stern, 131 S. Ct. at 2605 (“[W]e agree with [the creditor] that designating all counterclaims as `core’ proceedings raises serious constitutional concerns. . . . We would have to `rewrit[e]‘ the statute, not interpret it, to bypass the constitutional issue § 157(b)(2)(C) presents. That we may not do.”) (alteration in original) (quoting Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 841(1986) ). Nor did Stern alter the subject matter jurisdiction of the bankruptcy courts. See, e.g., Geron v. Peebler (In re Pali Holdings, Inc.), 488 B.R. 841, 848 n.26 (Bankr. S.D.N.Y. 2013) (“Stern, which affects the constitutional power of a bankruptcy judge to issue a final judgment in a matter as to which the bankruptcy court already has subject matter jurisdiction, does not in any way deprive bankruptcy courts of subject matter jurisdiction.”). As the Supreme Court stated, “[s]ection 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. That allocation does not implicate questions of subject matter jurisdiction.” Stern, 131 S. Ct. at 2607 .

Against this backdrop, the Court turns to the issue presented in the Remand Motion— whether federal subject matter jurisdiction exists over the state law claims asserted in this action. As discussed above, the core/non-core distinction generally does not bear on the question of federal subject matter jurisdiction—federal courts have jurisdiction to hear both core matters and non-core matters. See 28 U.S.C. § 1334(b). But if the current proceeding qualifies as one of the core proceedings enumerated in section 157(b)(2), then it follows that the Court has subject matter jurisdiction over the action as one “arising in” a bankruptcy case, and the Court need not determine whether the claims are “related to” the bankruptcy proceeding. [12] Further, the core/noncore distinction becomes significant on a motion to remand, since mandatory abstention principles do not apply to core claims. [13] See 28 U.S.C. § 1334(c).

RFC asserts that this action is core as a “counterclaim[] by the estate against persons filing claims against the estate.” 28 U.S.C. § 157(b)(2)(C). Specifically, RFC contends that the claims it asserts against UBS in this action are the “mirror image” of the claims asserted against it in the UBS proof of claim. (Opp. at 8.) Even though the claims in this action and the UBS Claim are based on wholly distinct contracts, involving entirely different sets of loans, the Court agrees with RFC that the claims are counterclaims under Rule 13 of the Federal Rules of Civil Procedure, made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7013. See FED. R. CIV. P. 13(c) (“A counterclaim need not diminish or defeat the recovery sought by the opposing party. It may request relief that exceeds in amount or differs in kind from the relief sought by the opposing party.”).

UBS argues that the counterclaims asserted in this action are non-core, since they involve distinct issues and facts from its proof of claim and therefore do not qualify as counterclaims under section 157(b)(2)(C). (See Mem. at 11-12; Reply at 3-4.) UBS’s argument relies indirectly on a number of pre-Stern decisions by courts in this district that held that section 157(b)(2)(C) confers core bankruptcy jurisdiction over a state law counterclaim only when there is some connection between the counterclaim and the creditor’s proof of claim. See, e.g., Statutory Comm. of Unsecured Creditors v. Motorola, Inc. (In re Iridium Operating LLC), 285 B.R. 822, 832 (S.D.N.Y. 2002) (“Traditionally non-core claims against a creditor in an adversary proceeding will be considered core if: (1) the claim arises out of the same transaction as the creditor’s proofs of claim or setoff claim, or (2) the adjudication of the adversary proceeding claim would require consideration of issues raised by the proofs of claim or setoff claim such that the two claims are logically connected.”); In re Lombard-Wall Inc., 48 B.R. 986, 990-91 (S.D.N.Y. 1985) (“Although [section 157(b)(2)(C)] would appear to extend the bankruptcy court’s jurisdiction to all counterclaims, courts have traditionally permitted bankruptcy courts to assert jurisdiction over counterclaims by a trustee only when there exists some connection between the claims of the creditor and those of the trustee.”). [14]

UBS’s reliance on this line of reasoning is misplaced in light of the Supreme Court’s ruling in Stern. As the above discussion makes clear, before Stern, courts attempted to reconcile a bankruptcy court’s core jurisdiction with the Supreme Court’s earlier rulings that appeared to require a connection between a bankruptcy estate’s affirmative claim against a creditor and that creditor’s proof of claim. But engaging in this analysis conflated matters involving the “allowance or disallowance of claims,” which are core proceedings under section 157(b)(2)(B), with counterclaims against creditors of the estate, which are core proceedings under section 157(b)(2)(C). Stern made clear that a determination whether a counterclaim is “core” under section 157(b)(2)(C) does not turn on whether that claim is related to the proof of claim; that inquiry is relevant only to a determination whether the bankruptcy court may constitutionally finally adjudicate the issue under section 157(b)(1). See Stern, 131 S. Ct. at 2605 . Thus, the counterclaims asserted in this action are statutorily core as counterclaims under section 157(b)(2)(C), and the Court has “arising in” subject matter jurisdiction over the claims. [15] Whether this Court has constitutional authority to enter final judgment on the counterclaims is a separate issue, and one that is not currently before the Court.

The Court also rejects UBS’s argument that the Supreme Court’s recent decision in Arkison transforms counterclaims like the one asserted here into non-core claims. (See Reply at 4-5.) As explained above, “Stern made clear that some claims labeled by Congress as `core’ may not be adjudicated by a bankruptcy court in the manner designated by § 157(b). Stern did not, however, address how the bankruptcy court should proceed under those circumstances.” Arkison, 134 S. Ct. at 2168 . Thus, after Stern, courts were divided on how to proceed when faced with a “Stern claim”—i.e., “a claim designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way as a constitutional matter.” Id. at 2170. Bankruptcy judges lack constitutional authority to finally adjudicate Stern claims, but section 157(c)(1)—allowing for the submission of proposed findings of fact and conclusions of law—applies on its face only to non-core claims. See 28 U.S.C. § 157(c)(1). The Supreme Court addressed this apparent “statutory gap” in Arkison, holding that “[t]he statute permits Stern claims to proceed as non-core within the meaning of § 157(c).” Arkison, 134 S. Ct. at 2172-73 . The Court explained:

When a court identifies a claim as a Stern claim, it has necessarily “held invalid” the “application” of § 157(b)—i.e., the “core” label and its attendant procedures— to the litigant’s claim. Note following [28 U.S.C.] § 151. . . . With the “core” category no longer available for the Stern claim at issue, we look to § 157(c)(1) to determine whether the claim may be adjudicated as a non-core claim— specifically, whether it is “not a core proceeding” but is “otherwise related to a case under title 11.” If the claim satisfies the criteria of § 157(c)(1), the bankruptcy court simply treats the claims as non-core: The bankruptcy court should hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.

Id.

UBS argues that the above language from Arkison renders this action non-core. The Court disagrees. Writing for a unanimous court in Arkison, Justice Thomas did not specify which subsection of section 157(b) would be invalidly applied to a Stern claim. Under this Court’s reading of Stern and Arkison, a bankruptcy court is foreclosed from applying the procedures delineated in section 157(b)(1)—i.e., final adjudication of core claims—to certain claims labeled as core by Congress in section 157(b)(2). Instead, adjudication of Stern claims is channeled to section 157(c), permitting the bankruptcy court to submit proposed findings of fact and conclusions of law, as if the claim was non-core. [16] The Court does not read Arkison to re-write the statute such that Stern claims are no longer statutorily core under 157(b)(2)— something the Stern court itself explicitly did not do. See Stern, 131 S. Ct. at 2605 .

For these reasons, the Court holds that this action is core as a counterclaim against the UBS proof of claim, and the Court therefore has core jurisdiction over the action as a matter “arising in” the bankruptcy proceeding. Accordingly, the Court need not address any of RFC’s alternative bases for establishing core jurisdiction. Further, because the action is core, mandatory abstention principles do not apply. See 28 U.S.C. 1334(c); see also Shipley Garcia Enters., LLC v. Cureton, No. 12-cv-0089, 2012 WL 3249544, at *10 (S.D. Tex. Aug. 7, 2012) (holding that mandatory abstention does not apply to Stern claims because “although Stern determined that a bankruptcy court may not constitutionally enter final judgment on certain counterclaims under § 157(b)(2)(C), it did not rewrite the statute and reclassify those claims as `related to’ proceedings under §§ 157(c)(1) or 1334(c).”). Therefore, the only remaining issue is whether the Court should abstain under permissive abstention principles. The Court concludes that it should not.

B. Abstention is Not Warranted Under Permissive Abstention Principles

UBS argues that even if the Court concludes that it has core jurisdiction over this proceeding (which it does), the Court should nonetheless remand the action by exercising its discretion to abstain from hearing the case. See 28 U.S.C. § 1334(c)(1) (“[N]othing 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.”). The Court disagrees. Courts in this district consider a number of factors when determining whether to permissively abstain from a case pursuant to section 1334(c)(1), including:

(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 [on] the court’s docket, (10) the likelihood 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 nondebtor parties.

In re WorldCom, Inc. Sec. Litig., 293 B.R. 308, 332 (S.D.N.Y. 2003) (quoting In re Masterwear Corp., 241 B.R. 511, 520 (Bankr. S.D.N.Y. 1999) ). See also Bayerische Landesbank v. Deutsche Bank AG (In re Residential Capital, LLC), 488 B.R. 565, 577 (Bankr. S.D.N.Y. 2013).

Section 1334(c)(1) must be interpreted according to the principle that “federal courts have a `virtually unflagging obligation . . . to exercise the jurisdiction given them,’ and may abstain only for a few `extraordinary and narrow exception[s].’” Id. (alterations in original) (quoting Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 813 )); see also Lothian, 487 B.R. at 165 (noting the “presumption against abstention”); Refco, 628 F. Supp. 2d at 447 (stating that “[f]ederal courts . . . must be sparing in their exercise of discretionary abstention” (internal quotation marks omitted)). The movant bears the burden of establishing that permissive abstention is warranted. Residential Capital, 488 B.R. 577 (citing In re Margulies, 476 B.R. 393, 402 (Bankr. S.D.N.Y. 2012) ). The Court finds that the relevant factors for permissive abstention weigh against abstaining from exercising the Court’s jurisdiction over this proceeding.

First, the court rejects UBS’s argument that “this action will have—at best—a contingent and remote effect on the [b]ankruptcy [p]roceedings.” (Mem. at 18.) As UBS acknowledges, any recovery in this action will go to RFC’s creditors under the terms of the confirmed Plan. (See id.) Thus, the bankruptcy estate will benefit from any judgment RFC obtains, and the cases cited by UBS are therefore distinguishable. For example, in Allstate Insurance Co. v. CitiMortgage, Inc ., the court applied permissive abstention in a proceeding between two non-debtors, where the defendant had filed an indemnification claim against the debtor. No. 11 Civ. 1927 (RJS), 2012 WL 967582, at *5-6 (S.D.N.Y. Mar. 13, 2012). The court found that the action between the two non-debtors would have no impact on the efficient administration of the bankruptcy proceeding, especially because the defendant’s indemnification claim against the debtor had already been fully liquidated. Id.; see also Residential Capital, 488 B.R. at 577 (recommending that the district court abstain from hearing a case between two non-debtors where the defendant had filed an indemnification claim against the bankruptcy estate). Here, any judgment in favor of RFC in this action will result in an affirmative recovery for the RFC bankruptcy estate, which is being administered by the Trust. The potential benefit to RFC’s creditors alone is sufficient to find an effect on the efficient administration of the estate. See, e.g., Refco, 628 F. Supp. 2d at 446 (holding that discretionary abstention was not warranted where the action “share[d] a close relationship with the . . . bankruptcy proceeding as the claims being prosecuted by the Trustee [were] the very causes of action that were assigned to it by the . . . Debtors pursuant to the confirmed Plan). Additionally, this particular RMBS Action was brought against a defendant with its own proof of claim in the bankruptcy proceedings (related to different loans than those at issue here). Since UBS’s recovery on its proof of claim may be offset by RFC’s recovery in this case (or vice versa), this case affects the bankruptcy estate in that regard as well. Therefore, the Court finds that this case will have an effect on the administration of the bankruptcy proceedings, which “is one of the more important factors to consider” for permissive abstention. Allstate, 2012 WL 967582, at *6 (citing In re Adelphia Commc’ns Corp., 285 B.R. 127, 144-45 (Bankr. S.D.N.Y. 2002) ).

Second, although this action involves only state law claims, none of the issues are particularly complex, so comity does not require abstention. See Refco, 628 F. Supp. 2d at 446 (holding that “the state law claims are straightforward common-law claims that do not involve arcane or idiosyncratic provisions of state law that would warrant abstention based on comity concerns” (internal quotation marks omitted)); WorldCom, 293 B.R. at 332 (“NYCERS has not identified any unique or unsettled issues of state law that warrant abstention based on comity concerns.”). The Court dealt extensively with similar claims asserted against RFC during the bankruptcy case; the claims were settled in the Global Settlement incorporated into the confirmed Plan. UBS argues that the law regarding the statute of limitations to apply in this case was recently thrown into doubt by ACE Securities Corp. v. DB Structured Products, Inc., 977 N.Y.S.2d 229 (App. Div. 2013), over which the New York Court of Appeals recently granted leave to appeal. See No. APL-2014-156, 2014 WL 2891678, 2014 N.Y. Slip Op. 76202 (June 26, 2014). Regardless of UBS’s contentions, this Court, like other federal courts in this district, is prepared to address the implications of ACE if those issues are raised by UBS in a dispositive motion. See, e.g., Deutsche Bank Nat. Trust Co. v. Quicken Loans Inc., No. 13 Civ. 6482 (PAC), 2014 WL 3819356, at *3-4 (discussing district court treatment of ACE and finding “no persuasive evidence that the New York Court of Appeals would abrogate the rule stated in [ACE] and the well-reasoned cases following it in this District”). In any event, the issue may be resolved by the New York Court of Appeals before this Court will have to address it.

Third, the Court rejects UBS’s argument that it “will suffer prejudice absent remand by being subjected to unnecessary delay and duplicative proceedings.” (Mem. at 19.) The Court will not opine whether this action can be timely adjudicated by a New York state court. Suffice it to say that this Court is ready now to proceed with this action in an expeditious manner, coordinated with the other RMBS Actions pending before the Court. The Court has already entered two case management and scheduling orders in these cases.

The Court need not address the other factors for permissive abstention, other than to say that it has considered all of UBS’s arguments and concludes that UBS has failed to carry its burden to persuade this Court that abstention is warranted. Therefore, the Court will not abstain from hearing this case under permissive abstention principles.

C. The Court Has Authority to Enter This Order, Which Is Not a Final Order

There is a split in authority whether a motion to remand is itself a “core” proceeding, or whether the “proceeding” referenced in 28 U.S.C. § 157 is the underlying lawsuit subject to a remand motion. See Residential Capital, 488 B.R. at 571-72 (discussing split in authority). In two prior cases, without resolving the issue, this Court submitted proposed findings of fact and conclusions of law to the district court, recommending remand of a state court action. See id.; Sealink Funding Ltd. v. Deutsche Bank AG (In re Residential Capital, LLC), 489 B.R. 26, 43-44 (Bankr. S.D.N.Y. 2013). In those cases, where motions to withdraw the reference were pending, this Court’s decision to grant the remand motions would have removed the cases from federal court on a final basis, rendering the withdrawal of the reference motions moot. See Residential Capital, 488 B.R. at 572; Residential Capital, 489 B.R. at 43-44. This Order denying the Remand Motion, however, is an interlocutory order, and not a final judgment, since the case will continue in front of this Court. See, e.g., O’Toole v. McTaggart (In re Trinsum Grp., Inc.), 467 B.R. 735, 740 (Bankr. S.D.N.Y. 2012) (“In adversary proceedings, orders dismissing fewer than all claims are considered to be interlocutory.”); see also LTV Steel Co., Inc. v. United Mine Workers of Am. (In re Chateaugay Corp.), 922 F.2d 86, 90 (2d Cir. 1990) (“Orders in bankruptcy cases may be immediately appealed if they resolve discrete disputes within the larger case. The disposition of a discrete dispute is generally considered to be the resolution of an adversary proceeding within the bankruptcy action.” (internal citations omitted)). Therefore, the Court has authority to enter this Order, and is not limited to submitting proposed findings of fact and conclusions of law to the district court. See Trinsum Grp., 467 B.R. at 740 (holding that, after Stern, bankruptcy judges have the authority to enter interlocutory orders in non-core proceedings and in core proceedings as to which the bankruptcy court may not enter final orders or judgment consistent with Article III absent consent). This Order is still subject to discretionary review by the district court under 28 U.S.C. § 158(a)(3). See id. at 741.

III. CONCLUSION

For all of the foregoing reasons, the Motion is DENIED.

IT IS SO ORDERED.

[1] The motion pending before the Court is the Motion of Defendant UBS Real Estate Securities Inc. to Remand This Action to New York State Supreme Court (the “Remand Motion,” ECF Doc. # 5). The Remand Motion is supported by a Memorandum of Law (the “Mem.,” ECF Doc. # 6) and the Declaration of Robert A. Fumerton (the “Fumerton Decl.,” ECF Doc. # 7). RFC filed an opposition (the “Opp.,” ECF Doc. # 18), and UBS filed a reply (the “Reply,” ECF Doc. # 22). The Court heard oral argument on the Remand Motion on June 26, 2014. At the hearing, the Court requested supplemental briefing from the parties. On July 25, 2014, UBS filed a Supplemental Memorandum of Law in Support of its Motion to Remand (the “UBS Supp.,” ECF Doc. # 34) and the Supplemental Declaration of Robert A. Fumerton (the “Fummerton Supp.,” ECF Doc. # 35). RFC filed a Supplemental Memorandum of Law in Opposition to Defendant’s Motion to Remand (the “RFC Supp.,” ECF Doc. # 36) and the Declaration of Isaac Nesser (ECF Doc. # 37).

[2] See Case No. 14-cv-03039 (GBD), ECF Doc. # 12 (July 14, 2014) (Order Denying Motion to Withdraw Bankruptcy Reference); July 10, 2014 Hr’g Tr. 5:18-6:16.

[3] After Judge Daniels’ decision to await this Court’s decision on the instant Remand Motion, several other district judges with pending motions to withdraw the reference in RMBS Actions followed suit. See ResCap Liquidating Trust v. CMG Mortg., Inc., No. 14-cv-4950 (Pauley, J.); Rescap Liquidating Trust v. First Mariner Bank, No. 14-cv-5064 (Crotty, J.); Rescap Liquidating Trust v. Cadence Bank, N.A., No. 14-cv-5250 (Abrams, J.); Rescap Liquidating Trust v. PHH Mortg. Corp., No. 14-cv-5315 (Koetl, J.); Rescap Liquidating Trust v. Honor Bank, No. 14-cv-5415 (Schofield, J.); Residential Funding Co., LLC v. GreenPoint Mortg. Funding, Inc., No. 14-5452 (Castel, J.); Rescap Liquidating Trust v. Summit Fin. Mortg. LLC, No. 14-5453 (Gardephe, J.).

In one of the RMBS Actions, Judge Hellerstein granted a motion to withdraw the reference and transfer venue to the District of Minnesota, enforcing a contractual forum selection clause. See ResCap Liquidating Trust v. RBC Mortg. Co., No. 14-cv-04457 (AKH), ECF Doc. # 10 (S.D.N.Y. July 18, 2014). Judge Hellerstein’s decision was based, in part, on his holding that RFC’s claims in that action are non-core since a “breach-of-contract action by a debtor against a party to a prepetition contract, who has filed no claim with the bankruptcy court, is non-core.” Id. at 3 (quoting In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir. 1993) ). Judge Hellerstein later denied RFC’s request to stay his decision to withdraw the reference and transfer venue pending this Court’s disposition of this Remand Motion. See Case No. 14-cv-04457, ECF Doc. # 14 (S.D.N.Y. July 29, 2014).

[4] The Court will assume for purposes of this decision that it would not have authority to enter final orders or judgment on RFC’s counterclaims against UBS without the consent of the parties. The Court would still have authority to enter proposed findings of fact and conclusions of law whether the claims are core or non-core. See Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2168 (2014) (“We hold today that when, under Stern’s reasoning, the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, the relevant statute nevertheless permits a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court.”). Since RFC and UBS sold loans to each other under substantially similar contracts, there may be issues of fact and law common to the claims and counterclaims. To the extent that the bankruptcy court finally determines issues of fact and law in the claims allowance process, preclusion principles may apply in adjudicating the counterclaims even if the Court cannot enter final orders or judgment. See Frazin v. Haynes & Boon, L.L.P. (In re Frazin), 723 F.3d 313, 324 (5th Cir. 2013) (applying preclusion to facts determined in claims allowance process to counterclaim on which bankruptcy court could not enter final judgment). This is another reason the claims and counterclaims should be heard together.

[5] References to documents filed in the chapter 11 proceeding, Case No. 12-12020, will be notated as “Ch. 11 ECF Doc. # XX.”

[6] The POC Contracts are: (1) a Standard Terms and Provisions of Sale and Servicing Agreement dated May 30, 2006 (Fumerton Supp. Ex. 4); (2) a Reference Agreement, also dated May 30, 2006 (Fumerton Supp. Ex. 5); and (3) a Sale and Servicing Agreement (Fumerton Supp. Ex. 6).

[7] For a comparison of similar provisions in the POC Contracts and the MSPA, see RFC Supp. at 7-10.

[8] There is authority, including in the Second Circuit, that bankruptcy courts may exercise supplemental jurisdiction under 28 U.S.C. § 1367. See, e.g., In re Pegasus Gold Corp., 394 F.3d 1189, 1195 (9th Cir. 2005) ; Lionel Corp. v. Civale & Trovato, Inc. (In re Lionel Corp.), 29 F.3d 88, 92 (2d Cir.1994) ; Shafferman v. The Queens Borough Public Library (In re JMK Construction Group, Ltd.), 502 B.R. 396, 403 n.6 (Bankr. S.D.N.Y. 2013). Jurisdiction over the third-party claims, however, does not necessarily mean that the bankruptcy court may enter final orders or judgment with respect to the claims.

[9] Section 157(b)(2) includes a non-exclusive list of core proceedings. While there may be room to disagree whether some matters fall within certain subsections of section 157(b)(2), counterclaims by the estate against persons filing claims against the estate, as UBS did here, leaves no ambiguity.

[10] This truism was not important until the Supreme Court’s decisions in Stern and, in particular, Arkison, which, as discussed below, explains what a bankruptcy court may do in adjudicating Stern claims. Because the claims are bankruptcy-related, the Court may submit proposed findings of fact and conclusions of law to the district court under section 157(c)(1), even if the Court lacks constitutional authority to enter final judgment on the claims under section 157(b)(1). See Arkison, 134 S. Ct. at 2172-73 ; see also U.S. Bank Nat. Ass’n v. Verizon Commc’ns, Inc., No. 13-10752, 2014 WL 3746476, at *12 (5th Cir. July 30, 2014).

[11] Courts have articulated that “[c]laims `arise in’ bankruptcy when, although not based on any right expressly created by Title 11, they `would have no practical existence but for the bankruptcy.’” Lothian Cassidy, LLC v. Lothian Exploration & Dev. II, L.P., 487 B.R. 158, 162 (S.D.N.Y. 2013) (quoting In re Casual Male Corp., 317 B.R. 472, 476 (Bankr. S.D.N.Y. 2004) . Still, “[c]ommon-law claims closely connected with the administration of the bankruptcy can qualify as `arising in’ a bankruptcy even though they may, in a literal sense, be brought outside a bankruptcy action.” Id. A counterclaim to a bankruptcy proof of claim would have no practical existence but for the bankruptcy.

[12] In a different RMBS Action, Judge Abrams referred the action to this Court, finding that the action was “related to” RFC’s bankruptcy case. See Memorandum Opinion and Order, Residential Funding Co., LLC v. SunTrust Mortg., Inc., No. 13-cv-8938 (S.D.N.Y. July 3, 2014) (“J. Abrams Order”). The defendant, SunTrust, did not file a proof of claim. Generally, before a plan is confirmed, “a civil proceeding is related to a title 11 case if the action’s outcome might have any conceivable effect on the bankrupt estate.” Parmalat Capital Fin. Ltd. v. Bank of Am. Corp., 639 F.3d 572, 579 (2d Cir. 2011) (internal quotation marks omitted) (quoting In re Cuyahoga Equip. Corp., 980 F.2d 110, 114 (2d Cir.1992) ). Once a plan of reorganization is confirmed, however, it is unclear whether the “conceivable effect” test continues to apply. The answer may depend on whether the plan provides for the debtor to be reorganized or liquidated. Where the debtor has been reorganized, the “close nexus” test applies. See ACE Am. Ins. Co. v. DPH Holdings Corp. (In re DPH Holdings Corp.), 448 F. App’x 134, 137 (2d Cir. 2011) . That test has two requirements: “First the matter must have a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution or administration of the confirmed plan and second, the plan must provide for the retention of jurisdiction over the dispute.” Savoy Senior Hous. Corp. v. TRBC Ministries, LLC, 401 B.R. 589, 597 (S.D.N.Y. 2009) (quoting Krys v. Sugrue, No. 08 Civ. 7416 (GEL), 2008 WL 4700920, at *5-6 (S.D.N.Y. Oct. 23, 2008)). The “close nexus” test applies post-confirmation in reorganization cases because “it is assumed the reorganized debtor is becoming self-sufficient, and no longer needs umbrella protection from the bankruptcy court. Additionally, there is no estate, as property reverts to the reorganized debtor.” In re Park Ave. Radiologists, P.C., 450 B.R. 461, 468 (Bankr. S.D.N.Y. 2011) .

Some courts apply the “close nexus” test even when the debtor liquidates; other courts apply the “conceivable effect” test. See Allstate Ins. Co. v. CitiMortgage, Inc., No. 11 Civ. 1927 (RJS), 2012 WL 967582, at *5 (S.D.N.Y. Mar. 13, 2012) (summarizing the division within the circuit). This Court previously applied the conceivable effect test in a liquidation case. See In re Cross Media Mktg. Corp., 367 B.R. 435, 444 (Bankr. S.D.N.Y. 2007) (holding that a bankruptcy court’s jurisdiction does not diminish post confirmation if the debtor, pursuant to a liquidating plan, seeks to commence litigation to collect the debtor’s assets for the benefit of its creditors). The Court adopted the reasoning of the First Circuit that a bankruptcy court’s jurisdiction should not shrink post-confirmation in a liquidation proceeding because “a liquidating debtor exists for the singular purpose of executing an order of the bankruptcy court. Any litigation involving such a debtor thus relates much more directly to a proceeding under title 11.” In re Boston Reg’l Med. Ctr., Inc., 410 F.3d 100, 107 (1st Cir. 2005) .

Judge Abrams did not decide the applicable standard because she found that the action satisfied the “close nexus” test. See J. Abrams Order at 4 (“The Court need not decide which standard applies, however, because the present action meets even the more onerous `close nexus’ standard.” (citing Refco, 628 F. Supp. 2d at 441-43)). Specifically, Judge Abrams found that “[t]he claims RFC has asserted against SunTrust . . . directly affect the `implementation, consummation, execution or administration’ of the Plan, as the Plan expressly preserves such claims, transfers them from RFC to the Liquidating Trust, and provides for RFC’s creditors to receive a share of recovery from them.” Id. at 4-5 (citations omitted).

Since the Court finds it has core jurisdiction over this action as a counterclaim to the UBS Claim, the Court need not reach the question here. This issue may need to be addressed in the other similar RMBS Actions filed by RFC or the Trust where the defendant did not file a proof of claim against the Debtors. The Court will first have to determine whether the RMBS Actions are core (other than under section 157(b)(2)(C)), and, if not, whether the claims are “related to” the bankruptcy under the applicable test—either the conceivable effect or close nexus test.

[13] Additionally, “forum selection clauses,” such as those contained in some of the RMBS Actions, see supra n.3, are generally enforced in non-core cases but not in core cases. See Wachovia Bank N.A. v. Encap Golf Holdings, LLC, 690 F. Supp. 2d 311, 329-31 (S.D.N.Y. 2010) (Crotty, J.) ; Statutory Comm. of Unsecured Creditors v. Motorola, Inc. (In re Iridium Operating LLC), 285 B.R. 822, 835-37 (S.D.N.Y. 2002) (Pauley, J.) .

[14] See also Leslie Fay Cos. v. Falbaum (In re Leslie Fay Cos.), No. 97 Civ. 2244 (MGC), 1997 WL 555607, at *2 (S.D.N.Y. Sept. 4, 1997) (holding that adversary proceeding was core counterclaim where it arose out of the same transaction as the proofs of claim and concerned same agreements); Hirsch v. London S.S. Owners’ Mut. Life Ins. Ass’n Ltd. (In re Seatrain Lines, Inc.), 198 B.R. 45, 50 n.7 (S.D.N.Y. 1996) (“A debtor’s adversary proceeding against a creditor is a core matter only when it arises out of the same transaction as the proof of claim—functioning, in essence, as a counterclaim to it.”). In support of its argument, UBS cites to Durso Supermarkets, Inc. v. D’Urso (In re Durso Supermarkets, Inc.), 170 B.R. 211, 213-14 (S.D.N.Y. 1994), which held that a counterclaim was not “core” because it did not arise out of the same transaction as the creditor’s proof of claim, which was based on a state court judgment.

[15] Conferring core jurisdiction over the counterclaims asserted here also comports with the policy of efficiency behind permissive counterclaims under the federal rules. See 6 Charles A. Wright, et al., FEDERAL PRACTICE AND PROCEDURE § 1420 (3d ed. 2014) (“Rule 13(b) simply encourages the parties to assert their independent and unrelated counterclaims in order to dispose of all points of controversy between the litigants in one action, thereby avoiding the cost of multiple suits.”). This holding also promotes “the strong public policy interest in centralizing all core matters in the bankruptcy court.” Breeden v. The Aegis Consumer Funding Grp. Inc. (In re The Bennett Funding Grp., Inc.), 259 B.R. 243, 252 (N.D.N.Y. 2001) ; see also Kismet Acquisition, LLC v. Icenhower (In re Icenhower), No. 10-55933, 2014 WL 2978491, at *5 (9th Cir. July 3, 2014) (“One of the Bankruptcy Code’s primary objectives is centralization of disputes concerning a debtor’s legal obligations.” (internal quotation marks omitted)).

[16] The result in Arkison supports the approach adopted by the U.S. District Court for the Southern District of New York in Amended Standing Order of Reference, M-431 (dated Jan. 31, 2012) (“If a bankruptcy judge or district judge determines that entry of a final order or judgment by a bankruptcy judge would not be consistent with Article III of the United States Constitution in a particular proceeding referred under this order and determined to be a core matter, the bankruptcy judge shall, unless otherwise ordered by the district court, hear the proceeding and submit proposed findings of fact and conclusions of law to the district court. The district court may treat any order of the bankruptcy court as proposed findings of fact and conclusions of law in the event the district court concludes that the bankruptcy judge could not have entered a final order or judgment consistent with Article III of the United States Constitution.”).

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New Bankruptcy Opinion: IN RE NEW BERN RIVERFRONT DEVELOPMENT, LLC – Bankr. Court, ED North Carolina, 2014

IN RE: NEW BERN RIVERFRONT DEVELOPMENT, LLC, DEBTOR.

NEW BERN RIVERFRONT DEVELOPMENT, LLC, Plaintiff,

v.

WEAVER COOKE CONSTRUCTION, LLC; TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA; J. DAVIS ARCHITECTS, PLLC; FLUHRER REED PA; and NATIONAL ERECTORS REBAR, INC. f/k/a NATIONAL REINFORCING SYSTEMS, INC., Defendants, and

WEAVER COOKE CONSTRUCTION, LLC; and TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Defendants, Counterclaimants, Crossclaimants and Third-Party Plaintiffs,

v.

J. DAVIS ARCHITECTS, PLLC, FLUHRER REED PA, SKYSAIL OWNERS ASSOCIATION, INC.; NATIONAL REINFORCING SYSTEMS, INC., ROBERT P. ARMSTRONG, JR., ROBERT ARMSTRONG, JR., INC., SUMMIT DESIGN GROUP, INC., CAROLINA CUSTOM MOULDING, INC., CURENTON CONCRETE WORKS, INC., WILLIAM H. DAIL d/b/a DD COMPANY, EAST CAROLINA MASONRY, INC., GOURAS, INC., HAMLIN ROOFING COMPANY, INC.; HAMLIN ROOFING SERVICES, INC., HUMPHREY HEATING & AIR CONDITIONING, INC.; PERFORMANCE FIRE PROTECTION, LLC; RANDOLPH STAIR AND RAIL COMPANY; STOCK BUILDING SUPPLY, LLC; PLF OF SANFORD, INC. f/d/b/a LEE WINDOW & DOOR COMPANY; UNITED FORMING, INC. a/d/b/a UNITED CONCRETE, INC.; JOHNSON’S MODERN ELECTRIC COMPANY, INC.; and WATERPROOFING SPECIALITIES, INC., Crossclaimants, Counterclaimants and Third-Party Defendants. and

NATIONAL ERECTORS REBAR, INC. Defendant, Counterclaimant, Crossclaimant and Third-Party Plaintiff,

v.

ROBERT P. ARMSTRONG, JR., ROBERT ARMSTRONG, JR., INC., SUMMIT DESIGN GROUP, INC., JMW CONCRETE CONTRACTORS, and JOHNSON’S MODERN ELECTRIC COMPANY, INC. Third-Party Defendants. and

J. DAVIS ARCHITECTS, PLLC, Third-Party Plaintiff,

v.

MCKIM & CREED, P.A., Third-Party Defendant. and

GOURAS, INC., Third Party Defendant and Fourth-Party Plaintiff,

v.

RAFAEL HERNANDEZ, JR., CARLOS CHAVEZ d/b/a CHAVEZ DRYWALL, 5 BOYS, INC. and ALEX GARCIA d/b/a/ JC 5, Fourth-Party Defendants. and

STOCK BUILDING SUPPLY, LLC, Third-Party Defendant and Fourth-Party Plaintiff,

v.

CARLOS O. GARCIA, d/b/a/ C.N.N.C., Fourth-Party Defendant.

Case No. 09-10340-8-SWH, Adversary Proceeding No. 10-00023-AP.

United States Bankruptcy Court, E.D. North Carolina, Raleigh Division.

August 25, 2014.

ORDER DENYING SUMMARY JUDGMENT REGARDING STATUTE OF LIMITATIONS DEFENSE ASSERTED BY GOURAS, INCORPORATED

STEPHANI W. HUMRICKHOUSE, Bankruptcy Judge.

This matter came on to be heard upon the motion for summary judgment filed by Gouras, Incorporated (“Gouras”) regarding the third party complaint of Weaver Cooke Construction, LLC (“Weaver Cooke”), in Raleigh, North Carolina, on March 5, 2014. Although summary judgment is sought on several bases, this order will deal with the issue of whether the statute of limitations bars the negligence and breach of express warranty claims asserted by Weaver Cooke against Gouras.

BACKGROUND

New Bern Riverfront Development, LLC (“New Bern”) is the owner and developer of the SkySail Luxury Condominiums (the “SkySail Project” or the “Project”) located in New Bern, North Carolina. On March 30, 2009, New Bern initiated an action in Wake County Superior Court against nine individual defendants related to their roles in the construction of the SkySail Condos (the “State Action”). The named defendants in the State Action included: New Bern’s general contractor, Weaver Cooke; Travelers Casualty and Surety Company of America (“Travelers”); National Erectors Rebar, Inc. f/k/a National Reinforcing Systems, Inc. (“NER”) and certain subcontractors of the general contractor.

On November 30, 2009, New Bern filed a petition for relief under chapter 11 of the Bankruptcy Code. The State Action was removed to the United States District Court for the Eastern District of North Carolina on December 16, 2009, and subsequently transferred to this court on February 3, 2010. After voluntarily dismissing its causes of action as to the subcontractors named as defendants in the State Action, New Bern filed its first amended complaint on May 6, 2010, asserting claims against Weaver Cooke; Travelers; NER, and the additional parties of J. Davis Architects, PLLC, and Fluhrer Reed, PA.

On May 27, 2010, Weaver Cooke filed an answer to New Bern’s first amended complaint and a third-party complaint against Wachovia Bank, National Association and Wells Fargo & Company f/d/b/a Wachovia Corporation. Absent as third-party defendants in Weaver Cooke’s original third-party complaint were any of the subcontractors hired by Weaver Cooke during the construction of the SkySail Project.

On June 14, 2012, Weaver Cooke filed its second, third-party complaint asserting claims of negligence, contractual indemnity and breach of express warranty against many of the subcontractors hired during the construction of the SkySail Project, including Gouras. Gouras filed an answer to Weaver Cooke’s second, third-party complaint on August 17, 2012, asserting numerous defenses, including the statute of limitations.

On December 20, 2013, Gouras filed an amended motion for summary judgment regarding all three causes of action alleged by Weaver Cooke. As grounds for summary judgment, Gouras argued: (1) the applicable statute of limitations bars Weaver Cooke’s claims of negligence and breach of express warranty; (2) the economic loss rule bars Weaver Cooke’s negligence claim; and (3) Weaver Cooke’s contractual indemnity claim is barred by N.C. Gen. Stat. § 22B-1. Inasmuch as the resolution of the statute of limitations affirmative defense may dramatically affect the complexion of the litigation, the court has chosen to deal first with that issue as to each third-party defendant.

Simply put, Gouras argues that Weaver Cooke’s negligence and breach of warranty claims accrued more than three years prior to the June 14, 2012, filing date of Weaver Cooke’s second, third-party complaint. Weaver Cooke’s claims against Gouras relate to damages caused by water intrusion at the SkySail Project. However, Gouras claims that Weaver Cooke had knowledge of water intrusion at the SkySail Project prior to June of 2009. In addition, Gouras claims that the defects Weaver Cooke complains of were open and obvious conditions that Weaver Cooke should have been aware of by, or prior to, February 2008, when Gouras completed its work at the SkySail Project. Accordingly, Gouras argues that Weaver Cooke’s negligence and breach of warranty claims are time-barred. In response, Weaver Cooke argues that a genuine dispute of material fact exists as to when Weaver Cooke should have discovered the defects giving rise to its causes of action alleged against Gouras; i.e., Weaver Cooke claims it discovered the defects attributable to Gouras within three years of its second, third-party complaint.

DISCUSSION

“[S]ummary judgment is proper `if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.’” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552 (1986) (quoting Fed. R. Civ. P. 56(c)). In making this determination, conflicts are resolved by viewing all facts and inferences to be drawn from the facts in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994 (1962) (per curiam) . Summary judgment is not a “disfavored procedural shortcut,” but an important mechanism for filtering out “claims and defenses [that] have no factual basis.” Celotex, 477 U.S. at 327, 106 S. Ct. at 2555 .

In this proceeding, the court turns to North Carolina state law, and as is typical in this context, the determination of “whether a cause of action is barred by the statute of limitations is a mixed question of law and fact. However, when the bar is properly pleaded and the facts are admitted or are not in conflict, the question of whether the action is barred becomes one of law.” Pembee Mfg. Corp. v. Cape Fear Constr. Co., 313 N.C. 488, 491, 329 S.E.2d 350, 353 (1985) . North Carolina General Statute § 1-52 provides a three year statute of limitations for actions sounding in tort or contract. N.C. Gen. Stat. § 1-52(1), (5) (2010). Additionally,

[f]or purposes of the three-year limitation prescribed by G.S. 1-52, a cause of action based upon or arising out of the defective or unsafe condition of an improvement to real property shall not accrue until the injury, loss, defect or damage becomes apparent or ought reasonably to have become apparent to the claimant.

N.C. Gen. Stat. § 1-50(a)(5)(f) (2009).

Actions based upon or arising out of the defective or unsafe condition of an improvement to real property include those which seek to “recover damages for breach of a contract to construct or repair an improvement to real property” and those based upon the “negligent construction or repair of an improvement to real property.” N.C. Gen. Stat. § 1-50(a)(5)(b) (2009). Gouras argues that, even with the benefit of a discovery rule, which would serve to delay accrual of Weaver Cooke’s causes of action against it until the defect became apparent or ought reasonably to have become apparent, Weaver Cooke knew, or reasonably should have known, of the defects it attributes to Gouras or its agents more than three years prior to the filing of the second, third-party complaint.

Weaver Cooke subcontracted the task of installing sheathing and building wrap on the Project’s exterior to Gouras. Gouras’ work was to be performed in conjunction with that of other subcontractors in order to tie the sheathing and building wrap into other parts of each building’s envelope. The sheathing installed by Gouras was “Dens-Glass” and the building wrap was “Tyvek.” Gouras completed its work at the SkySail Project in February of 2008. At some point in 2008, Weaver Cooke became aware of water intrusion problems at the SkySail Project. The water intrusion problems first identified by Weaver Cooke were manifesting at or around the exterior balcony doors and into certain units of the SkySail Project.

Weaver Cooke claims that Gouras’ work was defective in the following ways: Gouras failed to properly secure the Tyvek installation at windows and doors and instead “loose-laid” Tyvek over the jamb nailing flanges; Tyvek was butted to the shelf angles, when it should have been taped; and Tyvek was butted, not taped, to the balcony floor slabs. Weaver Cooke claims that these alleged defects relate to water intrusion. [1]

In support of its motion for summary judgment, Gouras first argues that any defects in the Tyvek installation would have been open and obvious during this construction phase and that the accrual of any cause of action related to the Tyvek installation should be no later than the date it completed its work on the project, February 2008. Second, Gouras notes that water intrusion at the Project was detected by Weaver Cooke no later than February 2009, and that the presence of water intrusion at this time should have alerted Weaver Cooke to the defects it now attributes to Gouras.

To support its argument that the defects Weaver Cooke complains of were open and obvious conditions, Gouras highlights the deposition testimony of several management-level employees for Weaver Cooke, including: Kevin Lloyd, Weaver Cooke’s project manager and vice president; Steve Tidey, Weaver Cooke’s project superintendent; and, David Cline, Weaver Cooke’s assistant project manager. Cline agreed that, if there were locations where Tyvek was not sealed, it would have been open and obvious. Additionally, Tidey agreed that he would have noticed if Tyvek was not installed correctly because it was an open and obvious condition and that the failure to seal the Tyvek would have been open and obvious. Lloyd testified that he would not disagree with Cline or Tidey on these issues. However, Tidey further testified that he does not recall ever seeing any defectively installed Tyvek or ever being informed of defectively installed Tyvek. Similarly, Cline testified that he was not aware of any instances where he saw Gouras “cutting corners” in its work. Accordingly, Gouras has not presented any evidence that Weaver Cooke was actually aware of any defectively installed Tyvek.

In response, Weaver Cooke claims that it could not possibly have been everywhere on the Project, simultaneously monitoring all the work being performed by dozens of subcontractors during the construction phases. Additionally, Weaver Cooke notes that essentially every aspect of a construction project is open and obvious during a given point in time and that once the Tyvek was installed, it was later concealed from view by the brick veneer. Weaver Cooke alleges that whether it should have been aware of the defects it attributes to Gouras is a disputed issue of material fact.

The court agrees with Weaver Cooke. A genuine issue of material fact exists as to whether, considering the nature of the defects alleged by Weaver Cooke as attributable to Gouras, these conditions were open and obvious and Weaver Cooke should have reasonably been aware of them. In order for Weaver Cooke to have discovered the defects it attributes to Gouras, i.e., the failure to integrate the Tyvek to the windows, doors and other components of the building envelope, Weaver Cooke would have perhaps been required to closely examine where the Tyvek met with each window on the project, or even each shelf angle, thus necessitating a more careful inspection of the building’s exterior. Whether the alleged defects attributable to Gouras should have been apparent to Weaver Cooke as it performed its supervisory tasks during the construction phase is in dispute. Accordingly, summary judgment is not appropriate in this instance.

Gouras additionally argues that Weaver Cooke was aware of water intrusion issues at the SkySail Project, and the resulting damage, by February 2009, and that this knowledge should have led Weaver Cooke to identify the defects it now attributes to Gouras. That being the case, Gouras argues that accrual of any cause of action against it, taking into consideration the discovery rule found in § 1-50(a)(5)(f), occurred at least by February 2009, and therefore the three year statute of limitations found in § 1-52 had expired at the time Weaver Cooke filed its second, third-party complaint.

Gouras again cites the deposition testimony of some of Weaver Cooke’s management-level employees to argue that Weaver Cooke was aware of water intrusion issues which should have ultimately led Weaver Cooke to identify Gouras as potentially responsible for the problem. [2] However, the testimony referred to by Gouras primarily relates to the presence of ponding water on the Project’s concrete balconies, and resulting water intrusion through the balcony doors, along with water intrusion through the Project’s roof. The defects Weaver Cooke complains of relate to Tyvek that was defectively installed to shelf angles along the Project’s exterior walls and the integration of Tyvek with the Project’s windows, doors, and balcony slabs. Water intrusion through the roof does not necessarily implicate the defects of which Weaver Cooke complains. Furthermore, even properly installed Tyvek (which is a water resistant, not waterproof material) may not have prevented water intrusion through the exterior balcony doors when it was caused by ponding water on the concrete balconies.

Gouras also refers to the North Carolina Supreme Court case of Pembee Mfg. Corp. v. Cape Fear Constr. Co., 313 N.C. 488, 329 S.E.2d 350 (N.C. 1985), to argue that the presentment of water intrusion problems in 2008 put Weaver Cooke on notice of potential defects in construction, and thus, initiated the running of the limitations period. However, that case is factually distinguishable. In Pembee, the plaintiff became aware of leaks in a roof within two months of installation, but did not file suit for nearly eight years. Id. at 489, 329 S.E.2d at 351. However, the plaintiff in Pembee was at all times aware of the party, or parties, responsible for constructing the roof; the only delay in the plaintiff’s filing of the suit was the plaintiff’s lack of knowledge as to the extent of damage caused by the defective roof. Id. at 493-94, 329 S.E. 2d at 354. The court in Pembee held that, “[a]lthough the plaintiff may not have realized the extent of the defect in the roof,” the plaintiff was aware of the defective roof more than three years prior to the initiation of its action and thus, its claims were time-barred. Id. at 394, 329 S.E. 2d at 355.

Unlike Pembee, where the plaintiff had knowledge of the defective roof and the identity of the parties responsible for the defect, Weaver Cooke’s knowledge of water intrusion through the roof and the sliding glass doors did not necessarily put them on notice of potential defects created by Gouras. Weaver Cooke maintains that it was not until it received the report prepared by the debtor’s expert, George Barbour, in March 2012 (the “Barbour Report”), that it knew to attribute the water intrusion to Gouras’ allegedly defective work.

Here, although Weaver Cooke was aware of certain water intrusion problems in late 2008 and early 2009, it is not evident that this knowledge would have put Weaver Cooke on notice that Gouras was potentially responsible for this defect and the resulting damages. Whether Weaver Cooke’s admitted knowledge of water intrusion in late 2008 and early 2009 would have led it to conclude that Gouras had potential liability for that problem is a genuine issue of material fact, and thus, summary judgment is not appropriate. Accordingly, since genuine issues of material fact exist as to whether Weaver Cooke knew, or should have known, about Gouras’ alleged defects more than three years prior to the June 14, 2012, filing date of its second, third-party complaint, summary judgment on the statute of limitations defense is DENIED.

SO ORDERED.

[1] Gouras notes that although Weaver Cooke’s expert Mr. Yarborough mentioned a location where DensGlass sheathing had not been sealed properly, Mr. Yarborough admitted that there was no evidence that the DensGlass seal allowed any water penetration into the building. Weaver Cooke does not dispute this statement and focuses its remarks regarding the statute of limitations solely to the installation of the Tyvek. Since there is no dispute that the DensGlass installation did not contribute to the water intrusion, the court does not reach that issue in this summary judgment ruling.

[2] See Gouras, Incorporated’s Memorandum of Law in Support of its Amended Motion for Summary Judgment (Docket Entry 714 at 15-17) (citing deposition testimony of certain management level employees of Weaver Cooke, who testified as to their knowledge of water intrusion problems at the SkySail Project).

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New Bankruptcy Opinion: IN RE NEW BERN RIVERFRONT DEVELOPMENT, LLC – Bankr. Court, ED North Carolina, 2014

IN RE: NEW BERN RIVERFRONT DEVELOPMENT, LLC, Debtor.

NEW BERN RIVERFRONT DEVELOPMENT, LLC, Plaintiff,

v.

WEAVER COOKE CONSTRUCTION, LLC; TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA; J. DAVIS ARCHITECTS, PLLC; FLUHRER REED PA; and NATIONAL ERECTORS REBAR, INC. f/k/a NATIONAL REINFORCING SYSTEMS, INC., Defendants, and

WEAVER COOKE CONSTRUCTION, LLC; and TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Defendants, Counterclaimants, Crossclaimants and Third-Party Plaintiffs,

v.

J. DAVIS ARCHITECTS, PLLC, FLUHRER REED PA, SKYSAIL OWNERS ASSOCIATION, INC.; NATIONAL REINFORCING SYSTEMS, INC., ROBERT P. ARMSTRONG, JR., ROBERT ARMSTRONG, JR., INC., SUMMIT DESIGN GROUP, INC., CAROLINA CUSTOM MOULDING, INC., CURENTON CONCRETE WORKS, INC., WILLIAM H. DAIL d/b/a DD COMPANY, EAST CAROLINA MASONRY, INC., GOURAS, INC., HAMLIN ROOFING COMPANY, INC.; HAMLIN ROOFING SERVICES, INC., HUMPHREY HEATING & AIR CONDITIONING, INC.; PERFORMANCE FIRE PROTECTION, LLC; RANDOLPH STAIR AND RAIL COMPANY; STOCK BUILDING SUPPLY, LLC; PLF OF SANFORD, INC. f/d/b/a LEE WINDOW & DOOR COMPANY; UNITED FORMING, INC. a/d/b/a UNITED CONCRETE, INC.; JOHNSON’S MODERN ELECTRIC COMPANY, INC.; and WATERPROOFING SPECIALITIES, INC., Crossclaimants, Counterclaimants and Third-Party Defendants. and

NATIONAL ERECTORS REBAR, INC. Defendant, Counterclaimant, Crossclaimant and Third-Party Plaintiff,

v.

ROBERT P. ARMSTRONG, JR., ROBERT ARMSTRONG, JR., INC., SUMMIT DESIGN GROUP, INC., JMW CONCRETE CONTRACTORS, and JOHNSON’S MODERN ELECTRIC COMPANY, INC. Third-Party Defendants. and

J. DAVIS ARCHITECTS, PLLC, Third-Party Plaintiff,

v.

MCKIM & CREED, P.A., Third-Party Defendant. and

GOURAS, INC., Third Party Defendant and Fourth-Party Plaintiff,

v.

RAFAEL HERNANDEZ, JR., CARLOS CHAVEZ d/b/a CHAVEZ DRYWALL, 5 BOYS, INC. and ALEX GARCIA d/b/a/ JC 5, Fourth-Party Defendants. and

STOCK BUILDING SUPPLY, LLC, Third-Party Defendant and Fourth-Party Plaintiff,

v.

CARLOS O. GARCIA, d/b/a/ C.N.N.C., Fourth-Party Defendant.

Case No. 09-10340-8-SWH, Adversary Proceeding No. 10-00023-AP.

United States Bankruptcy Court, E.D. North Carolina, Raleigh Division.

August 25, 2014.

ORDER GRANTING SUMMARY JUDGMENT REGARDING STATUTE OF LIMITATIONS DEFENSE ASSERTED BY CURENTON CONCRETE WORKS, INC.

STEPHANI W. HUMRICKHOUSE, Bankruptcy Judge.

This matter came on to be heard upon the motion for summary judgment filed by Curenton Concrete Works, Inc. (“Curenton”) regarding the third party complaint of Weaver Cooke Construction, LLC (“Weaver Cooke”), in Raleigh, North Carolina, on March 5, 2014. Although summary judgment is sought on several bases, this order will deal with the issue of whether the statute of limitations bars the negligence and breach of express warranty claims asserted by Weaver Cooke against Curenton.

BACKGROUND

New Bern Riverfront Development, LLC (“New Bern”) is the owner and developer of the SkySail Luxury Condominiums located in New Bern, North Carolina (the “SkySail Project” or the “Project”). On March 30, 2009, New Bern initiated an action in Wake County Superior Court against nine individual defendants related to the alleged defective construction of the SkySail Condos (the “State Action”). The named defendants in the State Action included: New Bern’s general contractor, Weaver Cooke; Travelers Casualty and Surety Company of America (“Travelers”); National Erectors Rebar, Inc. f/k/a National Reinforcing Systems, Inc. (“NER”) and certain subcontractors of the general contractor.

On November 30, 2009, New Bern filed a petition for relief under chapter 11 of the Bankruptcy Code. The State Action was removed to the United States District Court for the Eastern District of North Carolina on December 16, 2009, and subsequently transferred to this court on February 3, 2010. After voluntarily dismissing its causes of action as to the subcontractors named as defendants in the State Action, New Bern filed its first amended complaint on May 6, 2010, asserting claims against Weaver Cooke; Travelers; National Erectors Rebar, Inc. f/k/a NRS, and the additional parties of J. Davis Architects, PLLC, and Fluhrer Reed, PA.

On May 27, 2010, Weaver Cooke filed an answer to New Bern’s first amended complaint and a third-party complaint against Wachovia Bank, National Association and Wells Fargo & Company f/d/b/a Wachovia Corporation. Absent as third-party defendants in Weaver Cooke’s original third-party complaint were any of the subcontractors hired by Weaver Cooke during the construction of the SkySail Project.

On June 14, 2012, Weaver Cooke filed its second, third-party complaint asserting claims of negligence, contractual indemnity and breach of express warranty against many of the subcontractors hired during the construction of the SkySail Project, including Curenton. Curenton filed an answer to Weaver Cooke’s second, third-party complaint on June 27, 2012, asserting numerous defenses, including the statute of limitations.

On December 20, 2013, Curenton filed a motion for summary judgment regarding all three causes of action alleged by Weaver Cooke. As grounds for summary judgment, Curenton argued: (1) the applicable statute of limitations bars Weaver Cooke’s claims of negligence and breach of express warranty; (2) the economic loss rule bars Weaver Cooke’s negligence claim; and (3) Weaver Cooke’s contractual indemnity claim is barred by N.C. Gen. Stat. § 22B-1. Inasmuch as the resolution of the statute of limitations affirmative defense may dramatically affect the complexion of the litigation, the court has chosen to deal first with that issue as to each third-party defendant.

Simply put, Curenton argues that Weaver Cooke’s negligence and breach of warranty claims accrued more than three years prior to the June 14, 2012, filing date of Weaver Cooke’s second, third-party complaint. Curenton claims that, due to Weaver Cooke’s knowledge of alleged defects attributable to it prior to June of 2009, Weaver Cooke’s negligence and breach of warranty claims are time-barred. In response, Weaver Cooke argues that a genuine issue of material fact exists as to when Weaver Cooke discovered the impact of the defects giving rise to its causes of action alleged against Curenton; i.e., Weaver Cooke claims it first discovered the extent of the damage caused by defects attributable to Curenton within three years of its second, third-party complaint.

DISCUSSION

“[S]ummary judgment is proper `if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.’” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552 (1986) (quoting Fed. R. Civ. P. 56(c)). In making this determination, conflicts are resolved by viewing all facts and inferences to be drawn from the facts in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994 (1962) (per curiam) . Summary judgment is not a “disfavored procedural shortcut,” but an important mechanism for filtering out “claims and defenses [that] have no factual basis.” Celotex, 477 U.S. at 327, 106 S. Ct. at 2555 .

With respect to the non-core matter now before the court, there is no dispute as to the relevant facts or applicable law. The court has jurisdiction to enter this order allowing summary judgment, in light of the right of de novo review by the district court. Ward v. United States Dept. of Educ., Case No. 5:13-CV-695-D (E.D.N.C. June 18, 2014), citing Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (2014) .

In this proceeding, the court turns to North Carolina state law, and as is typical in this context, the determination of “whether a cause of action is barred by the statute of limitations is a mixed question of law and fact. However, when the bar is properly pleaded and the facts are admitted or are not in conflict, the question of whether the action is barred becomes one of law.” Pembee Mfg. Corp. v. Cape Fear Constr. Co., 313 N.C. 488, 491, 329 S.E.2d 350, 353 (1985) . North Carolina General Statute § 1-52 provides a three year statute of limitations for actions sounding in tort or contract. N.C. Gen. Stat. § 1-52(1), (5) (2010). Additionally,

[f]or purposes of the three-year limitation prescribed by G.S. 1-52, a cause of action based upon or arising out of the defective or unsafe condition of an improvement to real property shall not accrue until the injury, loss, defect or damage becomes apparent or ought reasonably to have become apparent to the claimant.

N.C. Gen. Stat. § 1-50(a)(5)(f) (2009).

Actions based upon or arising out of the defective or unsafe condition of an improvement to real property include those which seek to “recover damages for breach of a contract to construct or repair an improvement to real property” and those based upon the “negligent construction or repair of an improvement to real property.” N.C. Gen. Stat. § 1-50(a)(5)(b) (2009). Curenton argues that, even with the benefit of a discovery rule, which would serve to delay accrual of Weaver Cooke’s causes of action against it until the defect became apparent or ought reasonably to have become apparent, Weaver Cooke knew, or reasonably should have known, of defects attributable to Curenton more than three years prior to the filing of the second, third-party complaint.

Specifically, Curenton was responsible for pouring the project’s elevated concrete slabs, which included the balcony slabs, the structural post-tension slab for the pool deck and the concrete slabs for the parking deck. The “forms” for Currenton’s concrete pours were constructed and removed by another subcontractor, United Forming Incorporated. Weaver Cooke’s claims against Currenton relate to the alleged defective construction of the concrete balcony slabs. [1] The concrete placement for the balconies was completed in February of 2008. Weaver Cooke asserts that Curenton is liable for construction defects relating to water intrusion occurring in or around the balcony doors at the SkySail Project, which Weaver Cooke further alleges caused damage to the interior of certain condo units. Weaver Cooke claims that the water intrusion through the doors was caused, in part, by the pooling of water on balconies due to improper balcony slopes, improper “step-downs,” and the lack of a smooth and even finish. Curenton maintains that the fact of water intrusion and its causes were known to Weaver Cooke by the end of 2008 and thus, claims based on these alleged defects are time-barred.

To support its argument, Curenton points to the deposition testimony of the management level employees of Weaver Cooke who oversaw and supervised the major construction activities at the SkySail Project. These included Kevin Lloyd, Weaver Cooke’s project manager and vice president; Steve Tidey, Weaver Cooke’s project superintendent; David Cline, Weaver Cooke’s assistant project manager; Raj Garud, Weaver Cooke’s project coordinator; and Dan Estes, Weaver Cooke’s president. From the record before the court, which includes the depositions of these individuals along with certain affidavits and the parties’ pleadings, the following facts may be determined. [2]

First, Weaver Cooke knew about water intrusion at windows and exterior doors, and related damage to condo unit interiors, no later than the spring of 2009. [3] Garud agreed that Weaver Cooke knew about leaks around sliding glass doors, with certainty, by September of 2008. [4] Cline testified that he had no reason to disagree with Garud on that issue. [5] Tidey agreed that Weaver Cooke knew of numerous water intrusion issues at the SkySail Project in February of 2009, including water intrusion issues at balcony doors and damage to the interior of the condo units. [6] Tidey further testified that Weaver Cooke was aware of standing water on the balconies at that time (February 2009) as well. [7] Lloyd testified that he would have no reason to disagree with Garud, Cline or Tidey on those issues. [8] Additionally, Weaver Cooke’s president, Estes, testified that he became aware of water intrusion issues around windows and doors at the project in the spring of 2009 and that he had no reason to disagree with Garud, Tidey and Cline as to when they became aware of water intrusion problems. [9]

Second, Weaver Cooke also specifically became aware of the improper balcony sloping and the failure to achieve proper step-downs on the balconies between 2008 and the spring of 2009. Proper balcony sloping and step-downs are intended to provide positive drainage away from the building and its doors; the failure to implement these designs may result in water pooling on balconies. Garud testified that he became aware of improper sloping and water not draining off of the balconies in August of 2008 and that “[e]verybody in Weaver Cooke was aware” of this problem at that time. [10] Garud additionally testified that Weaver Cooke was aware of the failure to achieve adequate step-downs on the balconies by at least September of 2008. [11] Tidey testified that Weaver Cooke knew of the improper balcony sloping by June of 2008. [12] Lloyd and Cline testified that they had no reason to disagree with Garud or Tidey on those issues. [13] Furthermore, Estes confirmed that he became aware of the failure to achieve proper step-downs and the related water intrusion problems in the spring of 2009. [14]

However, Weaver Cooke maintains that it was not until March of 2012, when it received the report of the debtor’s expert, George Barbour (the “Barbour Report”), that it became aware of the impact of the water intrusion from the balconies. Weaver Cooke argues that this is when the extent of the damages caused by defects attributable to Curenton were first discovered. In addition, Weaver Cooke appears to argue that it was not until it received the Barbour Report, in March of 2012, that it was aware that New Bern sought to hold it liable for work performed by Curenton, and thus, its causes of action against Curenton did not accrue until that time.

The fact that Weaver Cooke may have not known the extent of the damage caused by the water intrusion problem is not material to the legal question of when the statute of limitations with respect to any claim based upon that problem began to run. See Pembee Mfg. Corp. v. Cape Fear Constr. Co., 313 N.C. 488, 329 S.E.2d 350 (1985) . In Pembee, the plaintiff had contracted with two parties for the construction of a 30,000 square foot manufacturing plant in July of 1972. Id. at 489, 329 S.E.2d at 351. By January of 1973, the plant was substantially completed and the plaintiff occupied the building at that time. Within two months of occupying the facility, the plaintiff began to notice leaks in the roof, and made repairs. A few years later, during a five-month period in 1976 going into 1977, extensive leaking occurred. The plaintiff hired an engineer in April 1980, who discovered moisture entrapment in the roofing materials. The plaintiff failed to file suit against the potentially responsible contractors until November of 1981. Id. When the defendants moved to dismiss on grounds that the action was outside the statute of limitations, the North Carolina Supreme Court agreed, concluding that the “the fact that [the roof] was defective was apparent at least by April 1977,” when the intensified leaking occurred. Id. at 494, 329 S.E.2d at 355. At that point, the plaintiff, “although perhaps not aware of the extent of [the] damage, knew that its roof was defective” and therefore was “on inquiry as to the nature and extent of the problem.” Id. at 493, 329 S.E.2d at 354. The plaintiff was at all times aware of the party, or parties, who were potentially liable for the defective roof. Accordingly, the Pembee court held that the cause of action accrued no later than April of 1977, and the plaintiff’s suit was barred by the statute of limitation. Id. at 494, 329 S.E.2d at 355. See also Williams v. Houses of Distinction, Inc., 213 N.C. App. 1, 10-11, 714 S.E.2d 438, 444-45 (N.C. App. 2011) (discussing Pembee in context of determining point in time when a plaintiff “`clearly knew’ of the construction-related defects”).

Moreover, Weaver Cooke’s argument that it did not know until its receipt of the Barbour Report that it might potentially be held liable by New Bern for alleged defects attributable to Curenton also is not material. The dispositive issue is when Weaver Cooke’s own negligence and breach of warranty causes of actions accrued, and that occurred when “the injury, loss, defect or damage [became] apparent or ought reasonably to have [been] apparent.” N.C. Gen. Stat. § 1-50(a)(5)(f). Furthermore, New Bern’s First Amended Complaint, filed on May 6, 2010, included allegations which put Weaver Cooke on notice that New Bern intended to hold it liable for work performed by Curenton. In its First Amended Complaint, New Bern asserted a breach of contract claim against Weaver Cooke, in which it alleged that:

150. Defendant Weaver Cooke has materially and substantially breached the Construction Contract by, among other things and in addition to the specific items described above:

k. failing to properly construct the balconies of certain condominium units in the Project;

l. failing to properly construct the Project buildings in a manner preventing water intrusion, which is causing damage and the potential for significant mold problems in the residential units as well as the common areas[,]”

Plaintiff New Bern Riverfront Development, LLC’s First Amended Complaint (Docket Entry 15 at 24-25).

The defects which form the basis of Weaver Cooke’s negligence and breach of warranty claims against Curenton are not latent and were known to Weaver Cooke more than three years prior to the filing of its second, third party complaint. Weaver Cooke was aware of water intrusion problems by at least the spring of 2009. Additionally, even though the fact of ponding water on the concrete balconies and water intrusion through the balcony doors, alone, was likely sufficient to put Weaver Cooke on notice of defects attributable to Curenton, Weaver Cooke had actual knowledge of the causes of the water intrusion more than three years before it filed suit. In 2008 Weaver Cooke was aware of the improper balcony sloping and the failure to achieve balcony step downs. Upon identifying the water intrusion problem and its potential causes, Weaver Cooke should have quickly identified the prospective target, Curenton. There are no material facts in issue regarding when the discovery of the alleged defects occurred or that Curenton was potentially responsible for these defects. The causes of action for negligence and breach of warranty accrued no later than the spring of 2009 and therefore these claims are time barred and summary judgment in Curenton’s favor on those claims is GRANTED.

SO ORDERED.

[1] “Weaver Cooke’s primary assertion is that Curenton failed to accurately achieve and uniformly achieve the elevations established on isolated concrete balcony forms, and otherwise failed to finish the concrete slabs so as to provide a smooth, even and uniform surface, free from undulations which may trap or repel water on the balconies.” Weaver Cooke Construction, LLC’s Memorandum in Response to Motion for Summary Judgment of Curenton Concrete Works, Inc. (Docket Entry 749 at 6).

[2] Attached to the numerous motions for summary judgment filed by the various subcontractors in this adversary proceeding are excerpts of relevant deposition testimony which each subcontractor relies upon to support its motion. Likewise, Curenton provided the court with excerpts of the deposition transcripts of the above-identified Weaver Cooke employees to support its motion for summary judgment. However, in ruling upon the present motion, the court also finds useful other excerpts of the same deposition transcripts which were not provided by Curenton. Accordingly, the court has also relied upon additional excerpts of the same deposition transcripts, which were provided to the court by other parties to this action. Where necessary, the court shall cite the source of the deposition testimony.

[3] To the extent the court references “spring of 2009,” that term is derived from the testimony of Weaver Cooke’s president, Dan Estes, who repeatedly cited this time period as the point by which he was aware of certain defects at the SkySail Project. That term is the most general and arguably the latest date given among Weaver Cooke’s management; however, Estes’ testimony, which followed that of the other Weaver Cooke employees, was corroborative in nature and was not at any point understood by the court or other litigants to refer to any time period other than a time period prior to June of 2009. In this order, the court’s use of “spring of 2009″ likewise refers to a period in time occurring prior to June of 2009.

[4] Deposition of Raj Garud, Vol. II at 174, lines 5-9 (as found in Stock Building Supply LLC’s and PLF of Sanford, Inc.’s Memorandum in Support of their Motion for Summary Judgment against Weaver Cooke Construction, LLC (Docket Entry 721 at 93)).

[5] Deposition of David Cline, Vol. I at 237, lines 5-10 (as found in Docket Entry 721 at 102).

[6] Deposition of Steve Tidey, Vol. I at 208, line 23 – 209, line 15 (as found in Docket Entry 721 at 119-20).

[7] Id.

[8] Deposition of J. Kevin Lloyd, Vol. II at 227, line 23 – 228, line 6 (as found in Docket Entry 721 at 132-33).

[9] Deposition of Daniel Estes at 167, line 2 – 168, line 13 (as found in Docket Entry 721 at 143-44).

[10] Garud Depo, Vol. II at 126, line 10 – 128, line 19; and at 174, line 10 – 175, line 5 (as found in Third Party Defendant Curenton Concrete Works, Inc.’s Memorandum of Law in Support of its Motion for Summary Judgment, Exhibit 12A, (Docket Entry 690-14 at 3-7)).

[11] Id. at 175, lines 6-23 (as found in Exhibit 12A, Docket Entry 690-14 at 7).

[12] Tidey Deposition, Vol. I at 180, lines 4-14 (as found in Docket Entry 721 at 115).

[13] Lloyd Deposition, Vol. II at 228, line 24 – 229, line 11; and at 229, line 23 – 230, line 3 (as found in Docket Entry 721 at 133-35). Cline Depo. Vol. I at 237, lines 16-21 (as found in Docket Entry 721 at 102).

[14] Estes Deposition, at 169, line 6 – 170, line 8 (as found in Docket Entry 721 at 145-46).

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New Bankruptcy Opinion: IN RE BUENA VISTA OCEANSIDE, LLC – Bankr. Court, WD Pennsylvania, 2014

In re: BUENA VISTA OCEANSIDE, LLC, Chapter 11, Debtor.

BUENA VISTA OCEANSIDE, LLC, Plaintiff,

v.

HOLISTIX 24, INC, HOLISTIX BY THE SEA, LLC, KEVIN SPARKS AND RYAN ZOFAY, Defendants.

Bankruptcy No. 11-24516-CMB, Adversary No. 14-02078-CMB.

United States Bankruptcy Court, W.D. Pennsylvania.

August 25, 2014.

Jeffrey A. Hulton, Esq. for Debtor-Plaintiff, Buena Vista Oceanside, LLC

Erica L. Koehl, Esq. & Norman E. Gilkey, Esq. for Defendants, Holistix 24, Inc., Holistix by the Sea, LLC, Kevin Sparks, and Ryan Zofay.

MEMORANDUM ORDER

CARLOTA M. BÖHM, Bankruptcy Judge.

The matter before the Court is the Defendants’ Motion to Dismiss Plaintiff’s Complaint Pursuant to F.R.Bankr.P. 7012(b)(1) (“Motion”) [1] wherein Defendants aver that the within Court lacks subject-matter jurisdiction to adjudicate the above-captioned adversary proceeding.

Federal Rule of Civil Procedure 12(b)(1), made applicable to bankruptcy proceedings by Fed.R.Bankr.P. 7012(b), provides for the defense against a claim for relief by the assertion of lack of subject-matter jurisdiction. “Federal courts are presumed not to have jurisdiction without affirmative evidence . . .” and thus, the burden of establishing jurisdiction falls on the party asserting its existence. Nuveen Mun. Trust ex rel. Nuveen Yield Mun. Bond Fund v. WithumSmith Brown, P.C., 692 F.3d 283, 293 (3d Cir. 2012) .

Congress has vested “limited authority” in bankruptcy courts. Bankruptcy courts fall outside of the constitutional authority of Article III and derive their authority from federal statutes. There are significant restrictions on what functions can be constitutionally delegated to these courts. “[T]he source of the bankruptcy court’s subject matter jurisdiction is neither the Bankruptcy Code nor the express terms of the Plan. The source of the bankruptcy court’s jurisdiction is 28 U.S.C. §§ 1334 and 157.”

Binder v. Price Waterhouse & Co., LLP (In re Resorts Int’l, Inc.), 372 F.3d 154, 161 (3d Cir. 2004) (citations omitted).

Pursuant to 28 U.S.C. §1334, the district court is granted original and exclusive jurisdiction over all cases under title 11, as well as original but not exclusive jurisdiction over all civil proceedings arising under title 11, or arising in or related to cases under title 11. See 28 U.S.C. §1334(a)-(b). Section 157 of United States Code permits each district to refer “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″ to the bankruptcy judges of their respective district. See 28 U.S.C. 157(a). District courts routinely refer most bankruptcy cases to bankruptcy courts. In re Resorts Int’l, Inc. 372 F.3d at 162 .

Pending referral from the district court, four types of title 11 matters potentially fall within a bankruptcy court’s jurisdiction: “`(1) cases under title 11, (2) proceeding[s] 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 Resorts Int’l, Inc., 372 F.3d at 162 (citations omitted). The first three of these types of matters are referred to as “core” proceedings; matters for which a bankruptcy court has full adjudicative powers, subject to review, under to 28 U.S.C. §157(b)(1). See In re Resorts Int’l, Inc., 372 F.3d at 162 . Conversely, the fourth type of title 11 matters, proceedings related to a case under title 11, are known as “non-core” proceedings and a bankruptcy court’s authority to adjudicate these matters is limited to submitting proposed findings of fact and conclusions of law to the district court for review de novo and entry of a final order/judgment. Id.; See also 28 U.S.C. § 157(c)(1). Despite the distinction, determination of whether a proceeding is “core” or “non-core” is unnecessary for the evaluation of subject matter jurisdiction. In re Resorts Int’l, Inc., 372 F.3d at 163 . Instead, the Court must only focus on whether a proceeding is “related to” the bankruptcy case; the broadest means of obtaining bankruptcy jurisdiction. Id.

The general test for whether an action is “related to” a bankruptcy proceeding was set forth in Pacor, Inc. v. Higgins, which held that a matter is “related to” a bankruptcy case if “`the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.’” Nuveen, 692 F.3d at 294 (citations omitted). However, the applicability of the Pacor test is complicated if the relevant action has been brought post-confirmation of a bankruptcy plan. See Nuveen, 692 F.3d at 294 .

As observed in Nuveen, the jurisdiction of the bankruptcy court decreases following confirmation of a case creating problems with respect to retention of bankruptcy jurisdiction. Id. “. . . At the most literal level, it is impossible for the bankruptcy debtor’s estate to be affected by a post-confirmation dispute because the debtor’s estate ceases to exist once confirmation has occurred.” Id. (quoting In re Resorts Int’l, Inc., 372 F.3d at 164-65 ). However, bankruptcy courts within the Third Circuit have been reluctant to apply the Pacor test so strictly as to completely eliminate post-confirmation jurisdiction. In re Resorts Int’l, Inc., 372 F.3d. at 165 . Instead, courts, including the United States Court of Appeals for the Third Circuit, have found that retention of jurisdiction by a bankruptcy court is appropriate “where there is a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement. . .” Id. at 168-169.

Therefore, upon consideration of the Adversary Complaint, the within Motion, Debtor’s Response in Opposition to Defendants’ Motion to Dismiss, the arguments set forth at the hearing held June 17, 2014, and the entire record of this case, the Court finds as follows:

1. Debtor, Buena Vista Oceanside, LLC, filed a Voluntary Petition under Chapter 7 of the Bankruptcy Code on July 20, 2011, which was subsequently converted to a case under Chapter 11 on August 9, 2011.

2. On July 15, 2012, Debtor entered into a post-petition Commercial Lease Agreement (“Lease”) with Defendants, Holistix 24, Inc. and Holistix By The Sea, LLC (collectively “Holistix”), for the lease of property identified as 4225 El Mar Drive, Lauderdale-by-the-Sea, Florida, for a period of five (5) years commencing November 1, 2012 and ending October 31, 2017.

3. Debtor avers that Holistix became delinquent in its monthly rental payments beginning in January 2013. However, Debtor opted to forgo immediate legal action based on the personal assurances of Defendant, Kevin Sparks.

4. Shortly thereafter, Debtor filed its Fifth Amended Plan of Reorganization (“Plan”) and Fifth Amended Disclosure Statement to Accompany Amended Plan Dated March 11, 2013 (“Disclosure Statement”) on March 11, 2013, which was confirmed by the Court on May 29, 2013.

5. Debtor avers that by October 2013, Holistix was delinquent in rent to Debtor in excess of $100,000.00.

6. On November 20, 2013, Debtor filed Debtor’s Motion for Final Decree in Accordance with 11 U.S.C. §1106(a)(7) and Report of Debtor.

7. Debtor commenced the within adversary proceeding post-confirmation on April 9, 2014 asserting post-petition claims for breach of contract, fraud, imposition of constructive trust, and piercing the corporate veil.

8. At the hearing held June 17, 2014, Debtor conceded that issues raised in the within adversary proceeding are “non-core.”

9. As the adversary was filed post-confirmation and the causes of action arose post-petition, in order to demonstrate “related to” jurisdiction, the Debtor must show that the claims for relief have a close nexus to the bankruptcy plan or proceeding. In re Resorts Int’l, Inc., 372 F.3d at 168-169 .

10. The Court is unpersuaded that the within adversary proceeding is “related to” the bankruptcy case.

a. Debtor avers that since the Lease was executed prior to the filing of the Plan, the Plan relied on the revenue expected to be generated by the Lease as a source of funding for Plan payments and that the loss of said revenue “substantially impairs” Debtor’s ability to meet Plan requirements. Thus, Debtor argues, the within adversary is sufficiently connected and “essential to the integrity of the Plan.” This Court disagrees.

b. Despite Debtor’s assertions of necessity of the Lease payments for Plan success, a review of the Plan and Disclosure Statement reveals that no reference to the Lease is made therein. In fact, in Debtor’s Disclosure Statement and Plan, Debtor avers that the Plan will be funded by the Transamerican Trust (“Trust”).

c. Nowhere in the Plan or Disclosure Statement does the Debtor assert that the Trust would be funded, fully or in part, by the Lease payments. [2] Nor does the Debtor identify any potential claims against Defendants when prompted to identify proposed or contemplated litigation and specify the effect(s) such litigation would have on plan payments under Section VIII, paragraph 3 of the Disclosure Statement.

d. Given that the Lease was executed nearly eight months prior to the Plan, and that Holistix had become delinquent in the latter two, signaling to Debtor that litigation may be necessary, the Court finds it questionable that Debtor would fail to identify the Lease payments in the Plan and Disclosure Statement as either a source of funding and/or essential to the success of the Plan.

e. At the hearing, Debtor averred that specific reference was not made to the Lease agreement because, at the time of the Plan, Debtor did not anticipate that Holistix would breach the Lease. However, as stated above, per the averments of the Debtor, Holistix had already been in breach of the Lease for approximately two months as of the date of the Plan.

f. Due to Debtor’s failure to identify the Lease agreement as essential to and/or a source of funding for the Plan, Debtor cannot show that the within adversary proceeding affects the “interpretation, implementation, consummation, execution, or administration” of Debtor’s confirmed plan. See In re Resorts Int’l, Inc., 372 F.3d at 168-169 . To hold otherwise would promote a bankruptcy court’s broad retention of jurisdiction over any action in which the plaintiff is a debtor currently operating under a reorganization plan in which creditors are paid from post-confirmation income. See H & L Developers, Inc. v. Arvida/JMB Partners (In re H & L Developers, Inc.), 178 B.R. 71, 76 (Bankr.E.D.Pa.1994) .

g. Accordingly, the Court finds that Debtor failed to show that the adversary proceeding possesses a “close nexus to the bankruptcy plan or proceeding” sufficient to warrant a finding of “related to” jurisdiction.

11. Absent a finding of “related to” jurisdiction, the Court lacks subject-matter jurisdiction to adjudicate the within adversary proceeding.

12. The Court notes, and Debtor conceded at the hearing, that Debtor’s claims for relief could be properly adjudicated by an alternate court of competent jurisdiction.

Based on the foregoing, it is hereby ORDERED, ADJUDGED, and DECREED, that the Defendants’ Motion to Dismiss Plaintiff’s Complaint Pursuant to F.R.Bankr.P. 7012(b)(1) is GRANTED.

[1] This Court has jurisdiction to assess whether or not it possesses subject matter jurisdiction to adjudicate the within adversary proceeding. See Post-Confirmation Trust v. Berry (In re Fleming Companies, Inc.), 444 B.R. 127, 132 (Bankr.D.Delaware 2011).

[2] Section IV, paragraph 11 of the Disclosure Statement provides, in part, as follows: “The Trust will fund the Plan. The Trust owns significant real estate holdings in multiple states including four commercial buildings in Pennsylvania approximating 60,000 square feet that are 100% leased. The Court has previously stated that the Trust is capable of meeting its financial obligations to fund the plan for the Debtor.” Although Debtor, in making this statement, alludes to the revenue generated through the leasing of property as a source of funding for the Trust, the Court notes that Debtor fails to specifically identify the Lease agreement as an essential source of funding. On the contrary, the statement impresses upon the reader that, not only are the collective real estate holdings of the Trust substantial enough to meet the demands of the Plan, but that the most important pieces of realty are the commercial buildings in Pennsylvania and not the property subject to the Lease.

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New Bankruptcy Opinion: Hartford Casualty Insurance Company v. FARLEY ASSOCIATES, INC. – Dist. Court, D. South Carolina, 2014

Hartford Casualty Insurance Company, Plaintiff,

v.

Farley Associates, Inc., JJF Company, LLC, James C. Farley, Jr., James C. Farley, III, Janis I. Farley, and Catherine G. Farley, Defendants.

C/A No. 0:13-547-CMC.

United States District Court, D. South Carolina, Rock Hill Division.

August 25, 2014.

ORDER AND OPINION DENYING MOTION TO AMEND JUDGMENT

CAMERON McGOWAN CURRIE, Senior District Judge.

This matter is before the court on motion of Plaintiff Hartford Casualty Insurance Company (“Hartford”) to amend the judgment entered May 29, 2014. ECF No. 64. Specifically, Hartford seeks to modify the judgment to state that its second through ninth causes of action are dismissed without prejudice. Four of the six Defendants (collectively “Remaining Defendants”) oppose the motion. The matter is stayed as to two other Defendants, based on their initiation of Chapter 7 bankruptcy proceedings (“Defendants in Bankruptcy”). See ECF No. 67 at 1 n.1 (stating in response to motion that Defendants Janis I. Farley and Catherine G. Farley have initiated Chapter 7 proceedings, automatically staying further proceedings as to them); ECF No. 68 at 1 n.1 (conceding in reply that action is stayed as to Defendants in Bankruptcy). [1] For the reasons set forth below, Hartford’s motion is denied.

BACKGROUND

Summary Judgment Order. On May 12, 2014, the court entered an Opinion and Order granting partial summary judgment to Hartford on its first cause of action (breach of contract) and denying summary judgment on Hartford’s second cause of action (common law indemnity). ECF No. 58. After noting that the “order determine[d] liability and partially determine[d] damages as to Hartford’s first cause of action” and left “open a relatively discrete damages issue as to” this cause of action “as well as all issues on Hartford’s remaining claims[,]” the court instructed the parties as follows:

Recognizing that Hartford’s other causes of action may seek the same damages (ultimately requiring an election of remedies) and the possibility that the open damages issue on the first cause of action may be subject to resolution by means other than trial, the court directs the parties to confer and file a status report no later than May 28, 2014, regarding what further proceedings are necessary and appropriate. To the extent trial is necessary, the pretrial deadlines remain as set in the Second Consent Amended Scheduling Order.

ECF No. 58 at 11 (emphasis added).

Status Reports. The parties responded separately, though similarly, to this order on May 28, 2014. Hartford’s response reads, in full, as follows:

Pursuant to the Court’s Order and Opinion on Motion for Partial Summary Judgment, ECF No. 58, the parties have conferred regarding whether further proceedings before the Court are necessary in the pending lawsuit. The undersigned reports that no further proceedings are necessary in the pending lawsuit and that final Judgment may be entered in this matter, pursuant to the Order and Opinion, awarding Plaintiff damages against the Defendants, jointly and severally, in the amount of $10,058,731.97. Plaintiff reserves all post-Judgment rights that may be available to it under applicable law.

ECF No. 60 (emphasis added). Defendants’ response was similar:

Pursuant to the Court’s Order and Opinion on Motion for Partial Summary Judgment, ECF No. 58, the parties have conferred regarding whether further proceedings before the Court are necessary in the pending lawsuit. The Defendants agree that no further proceedings are necessary in the pending lawsuit. The Defendants reserve all post-Judgment rights that may be available to them under applicable law.

ECF No. 61.

Order to Enter Judgment. The court entered the following docket text order the following day:

TEXT ORDER: In light of the parties’ status reports, the Clerk of Court is directed to enter judgment jointly and severally against all Defendants in the amount of $10,058,731.97. This amount is awarded pursuant to the court’s Order and Opinion on Plaintiff’s motion for summary judgment, which granted relief on Plaintiff’s claim for contractual indemnification. The court deems the status report an election of remedies and dismisses all other claims with prejudice. Judgment shall bear interest at the statutory rate.

ECF No. 62 (entered May 29, 2014) (emphasis added).

Judgment was also entered on May 29, 2014, and included the following relevant language: “[Hartford shall] take nothing of the [Defendants] as to the second through ninth causes of action, and this action is dismissed with prejudice as to those causes of action.” ECF No. 63.

ARGUMENTS

Rule 59(e) Motion. Hartford timely filed the present motion on June 25, 2014. The combined motion and memorandum lists the three grounds for alteration or amendment of a judgment pursuant to Fed. R. Civ. P. 59(e), but relies solely on the third: to prevent manifest injustice. ECF No. 64 at 2 (citing Bagley v. Reynolds, 5:11-CV-2664, 2012 WL 5207483 (D.S.C. Oct. 22, 2012)). Hartford asserts that “[t]o establish manifest injustice, courts generally require the moving party to prove that it acted with diligence and that it stands to suffer prejudice to a potentially meritorious claim.” Id. (citing, e.g., Robinson v. Wix Filtration Corp., LLC, 599 F.3d 403, 408-11 (4th Cir. 2010) ; see also id. at 3 (noting “the due diligence element focuses on whether the manifest injustice [the] motion aims to prevent could have been prevented by some prior action of the movant.”). [2] Hartford also notes that “[a] court may find manifest injustice when it makes a ruling on the basis of an `erroneous understanding of the relevance’ of the moving party’s request.’” Id. at 4 (citing E.E.O.C. v. Lockheed Martin Corp. Aero & Naval Sys., 116 F.3d 110, 112 (4th Cir. 1997) (finding district court did not abuse its discretion in amending judgment to enforce rather than deny enforcement of an EEOC subpoena where Fourth Circuit precedent “virtually mandate[d]” enforcement)).

Hartford summarizes the events leading to entry of judgment, noting that neither party’s status report “requested that the [second through ninth causes of action] be dismissed with prejudice.” Id. at 4. Hartford argues dismissal of these claims with prejudice was based on an erroneous understanding of the relevance of the parties’ status reports in light of two potentially adverse consequences of dismissal with prejudice. First, Hartford asserts that it might be precluded from pursuing the second through ninth causes of action in the event Defendants sought and obtained reversal of the judgment on appeal. Id. at 5-6. Second, Hartford asserts it might suffer prejudice in collecting the judgment if any Defendant seeks bankruptcy protection and argues that the dismissal with prejudice of the second through ninth causes of action precludes Hartford from arguing that the debt is non-dischargable under 11 U.S.C. § 523. Id. at 6. As to the second concern, Hartford argues as follows:

Under the Bankruptcy Code, liabilities for money or property obtained by false pretenses, [or] for willful and malicious injury, and debts for fraud or defalcation while acting in a fiduciary capacity, are non-dischargeable in bankruptcy. See 11 U.S.C. § 523; see also Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205 (1979) . While the Supreme Court in Brown held that res judicata would not apply and the bankruptcy court was not confined to a review of the judgment and record in prior proceedings when considering the dischargeability of a debt, [Defendants] could try to argue that the situation presented here is different from the case before the Supreme Court in Brown[, which] involved a prior state court proceeding where the parties agreed to a stipulated judgment as part of a settlement.

Id. at 6; see also id. at 7 (stating concern Defendants might argue the eight claims dismissed with prejudice had been fully litigated when they had not).

Finally, Hartford argues that a voluntary dismissal is normally without prejudice. Id. at 7. Hartford cites several cases in which courts held statements such as that the plaintiff did not intend to pursue a matter further did not equate to a request that the complaint (or remaining claims) be dismissed with prejudice. Id. at 7 (citing Youssef v. Tishman Const. Corp., 744 F.3d 821 (2d Cir. 2014) ; WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011) ; Smith v. Potter, 513 F.3d 781 (7th Cir. 2008) ).

Defendants’ Opposition. In response, Remaining Defendants argue that Hartford has failed to establish manifest injustice, the sole ground on which Hartford relies. ECF No. 67 at 2. They further assert that, to establish manifest injustice, Hartford must show an error by the court which is “direct, obvious, and observable,” rather than mere potential prejudice. Id. at 3 (citing Register v. Cameron & Barkley Co., 481 F. Supp. 2d 479, 480 (D.S.C. 2007) ). Remaining Defendants argue this standard may not be met under the circumstances in this case because the concerns Hartford raises are the “mere potential for prejudice to exist in the future.” Id. at 4 (citing Ciralsky v. CIA, 355 F.3d 661 (D.C. Cir. 2001) ).

As to Hartford’s specific concerns, Remaining Defendants note, first, “that relevant law indicates all nine claims would be revived should this Court’s grant of summary judgment be reversed upon appeal.” Id. at 4-5 (also noting all Defendants offered to waive their rights of appeal, although that offer was declined). Second, without disavowing any intent to distinguish Brown v. Felsen in any bankruptcy proceedings that might be initiated, Remaining Defendants assert that Hartford’s concerns are merely speculative. In contrast, these Defendants note that dismissing the claims without prejudice would leave Hartford the option of refiling the claims in this court. Remaining Defendants also argue that Hartford could have prevented any difficulties posed by the dismissal with prejudice by wording its status report differently.

Reply. In reply, Hartford notes that the potential for bankruptcy proceedings itself is not speculative, as two of the original six Defendants have, in fact, filed bankruptcy petitions. ECF No. 68 at 1. Hartford argues that its express reservation in the status report of all post-judgment rights is inconsistent with any argument that Hartford waived its right to seek correction of the judgment to specify that dismissal was without prejudice. Hartford denies any intent to “litigat[e] the remaining causes of action before this Court,” asserting that the purpose of its motion is to “prevent prejudice in the Bankruptcy Court in which two Indemnitors have now filed Chapter 7 petitions.” Id. at 2. It also distinguishes Ciralsky, noting that the appellate court there “remanded the case to the district court to allow it `to reconsider its Rule 59e decision in light of a clearer understanding of the consequences of denial.’” Id. at 3 (quoting Ciralsky, 555 F.3d at 673).

DISCUSSION

I. EFFECT OF BANKRUPTCY PETITIONS

As both parties note, two of the original six Defendants have filed bankruptcy petitions and are subject to an automatic stay. ECF Nos. 67 at 1 n.1, 68 at 1 n.1. This court may not, therefore, modify the judgment as to the two Defendants in Bankruptcy. [3]

II. EFFECT OF VOLUNTARY DISMISSAL

As noted above, Hartford argues that a voluntary dismissal is normally without prejudice, relying on several cases in which courts held statements such as that the plaintiff did not intend to pursue a matter further did not equate to a request that the complaint (or remaining claims) be dismissed with prejudice. ECF No. 64 at 7 (citing Youssef v. Tishman Const. Corp., 744 F.3d 821 (2d Cir. 2014) ; WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011) ; Smith v. Potter, 513 F.3d 781 (7th Cir. 2008) ). None of the cited cases, however, deal with circumstances similar to those here: where a judgment was entered on one claim based on a partial grant of summary judgment and the other claims were dismissed with prejudice based on a status report that the court construed as an election of remedies. See ECF No. 58 at 11 (order granting summary judgment on one claim and requesting status reports in light of probability an election of remedies would, ultimately, be required because the “other causes of action may seek the same damages”); ECF No. 60 (Hartford’s status report stating that “no further proceedings are necessary in the pending lawsuit and . . . final Judgment may be entered in this matter”); ECF No. 62 (docket text order deeming Hartford’s status report to be an election of remedies and directing entry of judgment). [4]

III. MANIFEST INJUSTICE BASED ON POTENTIAL APPEAL

As Defendants concede, reversal on appeal would void the judgment and would result in reinstatement of all causes of action. This is because dismissal of those claims was based on the parties’ stated positions in light of the summary judgment ruling and the court’s treatment of Hartford’s response as an election of remedies. The potential for reversal on appeal does not, therefore, present a risk of manifest injustice.

IV. MANIFEST INJUSTICE BASED ON POSSIBLE ARGUMENTS IN BANKRUPTCY PROCEEDINGS

To establish manifest injustice, Hartford must show that it acted with diligence and that it stands to suffer injury that is “direct, obvious, and observable,” rather than mere potential prejudice. Ciralsky v. CIA, 355 F.3d 661 (D.C. Cir. 2001) ; Register v. Cameron & Barkley Co., 481 F. Supp. 2d 479, 480 (D.S.C. 2007) ; see also Robinson v. Wix Filtration Corp., LLC, 599 F.3d 403, 408-11 (4th Cir. 2010) (discussed supra n.2) (declining to impose Rule 60(b)’s requirement that court consider whether Hartford has a meritorious claim on Rule 59(e)). [5]

For purposes of this order, the court assumes that it is not speculative that the four Remaining Defendants may yet seek bankruptcy protection. Given the wording of these Defendants’ arguments, which do not disavow such an intent, the court will assume they may seek to distinguish Brown in the event they also seek bankruptcy protection or are forced into bankruptcy proceedings. The court will further assume that the fact the judgment states dismissal of the second through ninth causes of action is with prejudice provides a basis on which Remaining Defendants might argue that Brown is distinguishable.

Based on the above, the court assumes for present purposes that dismissing the second through ninth causes of action with prejudice may, at the least, require Hartford to overcome additional legal arguments to protect its position in bankruptcy proceedings. Assuming those issues were decided against it, Hartford would suffer the further prejudice of being precluded from advancing the relevant bases for avoiding discharge of the debts.

The court does not, however, find that these possibilities warrant a finding of manifest injustice for several reasons. First, the dismissal with prejudice of the second through ninth causes of action was based on the court’s interpretation of Hartford’s response as an election of remedies. This potential basis for dismissing the claims was referenced in the portion of the Opinion and Order requesting the status report, giving Hartford notice that the court would deem its response an election of remedies. Had Hartford been concerned with that possibility, it should have made its position clear in its status report by requesting dismissal of the remaining claims without prejudice, rather than stating that “no further proceedings are necessary in the pending lawsuit and . . . final Judgment may be entered in this matter.” It was not a clear error of law for the court to deem Hartford’s response an election of remedies and to dismiss the second through ninth causes of action with prejudice under these circumstances. See Fed. R. Civ. P. 41(a)(2) (providing court with discretion as to the terms of dismissal by stating that dismissal under this subpart is “on terms that the court considers proper” and is without prejudice “[u]nless the order states otherwise”) (emphasis added).

Second, the court expressly relied on election of remedies as the basis for dismissal in the docket text order directing entry of judgment, making clear that it was not a resolution on the merits of the second through ninth claims. The rationale of Brown suggests that dismissal based on such an election would not preclude the defenses to discharge allowed in Brown. [6] Under these circumstances, it seems unlikely that Brown would be distinguished on the basis of the “with prejudice” designation. [7] Thus, Hartford has, at most, shown a possibility of prejudice, which is insufficient to establish manifest injustice. See Ciralsky, 355 F.3d at 673 (finding district court did not err in denying Rule 59(e) motion where movant had argued only that he might be unfairly prejudiced by dismissal because the statute of limitations might be deemed to have run, but remanding to allow court to consider motion based on a more complete understanding of the consequences of denial).

The alternative to dismissal of the second through ninth causes of action with prejudice is also problematic. If the judgment dismissed the claims without prejudice, the claims would be subject to reassertion in this or any other court (albeit subject to a possible res judicata defense). While Hartford may not intend to reassert the claims except for purposes of avoiding discharge in bankruptcy, the effect of its proposed alternative judgment would allow it to reassert claims in this or any other court. For this reason and given the late stage of the proceedings at the point judgment was entered, the court would not have ended the action with a judgment on one cause of action and dismissal of the remaining eight causes of action without prejudice absent Defendants’ express consent.

Finally, the court did not and does not read Hartford’s reservation of post-judgment rights to suggest agreement only to dismissal of the then-unresolved claims without prejudice. This is because the dismissal is part of the judgment itself, not something that happens thereafter. In contrast, the court reads this reservation as preserving any rights that may exist to collect the judgment, including by opposing discharge in bankruptcy on whatever legal theories are otherwise available. It also reserved Hartford’s right to appeal or oppose an appeal and to make the present motion, which is denied on the merits, not based on waiver of the right to file a Rule 59(e) motion.

CONCLUSION

For the reasons set forth above, Hartford’s motion to amend the judgment is denied.

IT IS SO ORDERED.

[1] Neither side indicates when the bankruptcy proceedings were initiated. It, nonetheless, appears that the proceedings either were initiated after the present motion was filed or Hartford was unaware of any bankruptcy proceedings when it filed the motion to amend.

[2] To the extent Hartford suggests Robinson requires courts addressing a motion under Rule 59(e) to “consider whether the movant has a meritorious defense” or claim, it is mistaken. See Robinson, 599 F.3d at 410 n.9 (explaining different standards applicable to motions under Rules 60(b) and 59(e) and stating that “[t]his requirement has never been extended to Rule 59(e) motions.”).

[3] Although the court does not rest its decision on this basis, it notes that granting the relief sought as to the Remaining Defendants would, at the least, result in complications given that there would be two versions of the judgment in effect. Both versions would impose joint and several liability against all six original Defendants as to the first cause of action. As to the remaining (second through ninth) causes of action, one version of the judgment would grant dismissal with prejudice (as to the Defendants in Bankruptcy), while the other would grant dismissal without prejudice (as to the Remaining Defendants).

[4] In contrast to the circumstances in this case, Youssef involved voluntary dismissal of an action prior to any defendant filing an answer or motion for summary judgment. The appellate court held that the district court erred in interpreting a letter stating that the plaintiff “has decided not to pursue this matter any further” as an agreement to dismissal with prejudice given that the matter was dismissed while the plaintiff still had a right to dismiss without prejudice under Fed. R. Civ. P. 41(a)(1). Youssef, 744 F.3d at 823-24 .

Smith v. Potter also involved a voluntary dismissal under Fed. R. Civ. P. 41(a)(1), prior to defendant filing an answer or motion for summary judgment. Smith v. Potter, 513 F.3d at 782 . The appellate court held that the district court erred in dismissing the action with prejudice because the motion to dismiss was, “[i]n substance . . . a Rule 41(a)(1) motion[.]” Id. at 783.

WPP Luxembourg involved a defense challenge to a district court’s dismissal of claims without prejudice under Fed. R. Civ. P. 12(b)(6). In affirming the dismissal without prejudice at this early stage in the proceedings, the court cited to cases under Fed. R. Civ. P. 41(a)(2), noting that “[w]here the request is to dismiss without prejudice, a District Court should grant a motion for voluntary dismissal under 41(a)(2) unless a defendant can show that it will suffer some plain legal prejudice as a result.” WPP Luxembourg, 655 F.3d at 1058 n.6 (internal citations and quotation marks omitted). Nothing in WPP Luxembourg (or either of the other cases discussed above) addresses dismissal of claims in the context of entry of judgment, much less entry of judgment under circumstances suggesting an election of remedies).

[5] The court, nonetheless, assumes for purposes of this order that loss of an opportunity to present a meritorious argument may have a bearing on the manifest injustice determination. Such a loss is not, however, sufficient unless it is “direct, obvious, and observable.” Here those requirements are not met for reasons addressed below.

[6] In Brown, the Court held that res judicata did not bar a bankruptcy court from going beyond the record and judgment in a state court proceeding in deciding whether guaranteed debt was nondischaragable as a result of fraud, deceit or malicious conversion. In reaching this conclusion, the Court noted that “neither the interests served by res judicata, the process of orderly adjudication in state courts, nor the policies of the Bankruptcy Act would be well served by foreclosing petitioner from submitting additional evidence to prove his case.” Brown, 442 U.S. at 132 . The Court emphasized the practical foundation for this rule, noting that petitioner’s failure to pursue a state-law fraud claim did “not conclusively show that petitioner thought respondent was innocent of fraud.” Id. at 138. It might, instead have been based on a view that “those remedies would not be advantageous to him.” Id. Footnoting this comment, the Court explained as follows:

So long as a debtor is solvent, the debtor and creditor alike may prefer a simple contract suit to complex tort litigation.. . . For the creditor, the prospect of increased attorney’s fees and the likelihood of driving the debtor into bankruptcy may offset the advantages of exemplary damages or other extraordinary remedies. Bankruptcy deprives the debtor of his creditworthiness and so impairs his ability to repay.

Id. at 138, n.8

[7] If Brown is distinguished on some other basis, for example, that the underlying decision is that of a federal rather than a state court, the distinction would not be the result of the judgment’s specification that the dismissal of the relevant claims is with prejudice. It follows that no other basis for a distinction is relevant to the present motion.

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