Enalasys Corporation v. Taylor

• Court: District Court, S.D. California
• Decided: March 13, 2020
• Docket: 3:19-cv-01153
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 ENALASYS CORPORATION, Case No.: 19cv1153-LAB (JLB) 12 Plaintiff, ORDER DENYING MOTION FOR 13 v. REMAND OR ABSTENTION; AND 14 JAMES ERIC TAYLOR, et al., 15 Defendants. ORDER GRANTING MOTION TO TRANSFER VENUE 16 17 [Docket numbers 4, 6.] 18 19 Plaintiff Enalasys Corporation removed this case1 from California state court, 20 citing 28 U.S.C. §§ 1334 and 1452. 21 According to the operative complaint, Enalasys’ shareholders fired and 22 replaced the board of directors around December 6, 2018. The new board in turn 23 fired all the corporation’s officers, including its president, Eric Taylor. Enalasys 24 alleges that after Taylor found out he had been removed, he unauthorizedly 25 26 27 1 This case includes only three of the five claims from Enalasys’ operative complaint. Eric Taylor’s cross-complaint was not removed, and remains pending 28 1 withdrew over $200 from the corporate bank account, refused to cooperate with 2 the transfer of power, and withheld over $6 million worth of corporate assets. 3 Enalasys brought action in Imperial County Superior Court, obtaining a temporary 4 restraining order and preliminary injunction. On May 17, it filed its third amended 5 complaint. Enalasys says it is in possession of less than $50,000 worth of the $6 6 million in assets. The $6 million figure is based on an earlier representation by 7 Taylor, so it is unclear whether the allegedly missing assets are still worth that 8 much. Nevertheless, according to the complaint and injunction, Enalasys is 9 seeking both money and important company assets from Taylor, including real 10 property, software, technology, access to accounts, and records, many of which 11 are identified as necessary to keep running the company. (See Docket no. 6, Ex. 12 B (order granting preliminary injunction).) 13 On May 23, 2019, Defendants filed a demurrer. That same day, Enalaysis 14 filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the Central 15 District of California, Santa Ana division, which bears case number 19bk11987- 16 MW. Enalasys seeks to have this action transferred to the Central District. 17 Defendants have moved to remand or abstain. 18 Motion to Remand or Abstain 19 Defendants do not dispute that this case is related to the Chapter 11 20 bankruptcy proceeding, and the Court therefore has original jurisdiction over it 21 under 28 U.S.C. § 1334(b). Instead, they argue the Court is required to abstain 22 under § 1334(c)(2). Alternatively, they argue the Court should exercise its 23 discretion to abstain under § 1334(c)(1). 24 Defendants Taylor and Greennet IOT, LLC ask the Court to take judicial 25 notice of Enalasys’ web page, which includes its address in El Centro in Imperial 26 County, along with a map, taken from the website www.enalasys.net. It appears 27 they intend this to support the argument that Santa Ana is an inconvenient venue 28 and that El Centro is convenient for Enalasys. Enalasys disputes the address, 1 however, and it is not clear the address as given on the web page is current. 2 Defendants are not sure of the date, but believe it appeared online in either 3 December, 2018 or January, 2019. Enalasys disputes that this is its current 4 address. The address on Enalasys’ website (at the address given in the requires 5 for notice) is in Newport Beach. The Court can, and does, take judicial notice of 6 the location of El Centro, but as to other facts, the request is denied. 7 Mandatory Abstention 8 The Court must abstain under § 1334(c)(2) if five conditions are met: (1) the 9 motion is timely; (b) the claim is based on state law; (c) the claim is not based on 10 bankruptcy law and did not arise in a bankruptcy case; (d) the claim could not have 11 been filed in federal court absent bankruptcy jurisdiction; and (e) the claim must 12 be capable of being timely adjudicated in state court. See Bally Fitness Corp. v. 13 Contra Costa Retail Ctr., 384 B.R. 566, 569 (Bkrtcy. N.D. Cal., 2008). The absence 14 of even one element means abstention is not mandatory. Id. at 572. Although 15 describing it as “mandatory” might suggest it is not jurisdictional, and can be 16 waived. In re Brumfiel, 2015 WL 5895213 at *6 (BAP 10th Cir. Oct. 8, 2015). 17 Three of the five requirements for mandatory abstention are arguably met 18 here. For reasons discussed below, (c) does not appear to be met. But most 19 notably, Defendants have not met their burden of showing that the case can be 20 timely adjudicated in state court. See In re First Alliance Mortg. Co., 269 B.R. 449, 21 455 (C.D. Cal., 2001) (“[T]he party moving for abstention will bear the burden of 22 demonstrating that a state court action can be timely adjudicated.”); In re 23 Nationwide Roofing & Sheet Metal, Inc., 130 B.R. 768, 779 (Bkrtcy. S.D. Oh. 1991) 24 (rejecting unsubstantiated assertion that state court action could be timely 25 adjudicated). 26 Enalasys represents that the entire case in state court is stayed, pursuant to 27 the mandatory stay under 11 U.S.C. § 362(a)(1), and that to have the case heard 28 in state court, it would have to initiate a new adversary proceeding in the Central 1 District’s bankruptcy court. (Docket no. 8-1 at 12:23–28.) Because the automatic 2 stay does not forbid claims by a debtor in possession, see In re White, 186 B.R. 3 700, 704 (BAP 9th Cir., 1995), this apparently means the state court has entered a 4 stay.2 In any event, all activity in the state court docket seems to have stopped at 5 the time of the bankruptcy filing, and nothing in the record suggests it might restart 6 before the bankruptcy proceedings conclude. 7 Defendants have not disputed that the state case is subject to the automatic 8 stay, and have not adequately responded to Enalasys’ argument that the claims 9 could not be timely adjudicated if remanded. Rather, in a separate section they 10 argue that the case “can be at issue and set for trial within 6 month[s] after the stay 11 is lifted and a trial set within 1 year after that if [ ] normal procedures are followed.” 12 (Docket no. 6 at 5:24–25 (emphasis added).) In a separate section of their reply 13 brief (following the discussion of discretionary abstention), Defendants offered to 14 stipulate to the stay’s being lifted, but only “if Debtor also agrees the case can 15 proceed as suggested by moving parties.” (Docket no. 9 at 5:16–21.) Apparently 16 Defendants have a bargain in mind which the brief does not disclose. They do not 17 show why the proffered stipulation would be effective at persuading either the 18 bankruptcy court to grant relief from the automatic stay or the state court to lift the 19 stay as to all claims. And it appears likely creditors would object, particularly if the 20 conditions Defendants wish to impose include permitting the counterclaim against 21 Enalasys to go forward. 22 Enalasys also argues that abstention under § 1334(c)(2) does not apply 23 because the removed claims are core proceedings, over which the Court has 24 25 26 2 Neither party provided the state court docket, which is not readily available to the 27 Court. But allowing only those claims not automatically stayed to go forward is likely to be awkward, and in the interests of efficiency and fairness it is likely a court 28 1 original jurisdiction. The Court agrees the claims are predominantly core claims 2 under 11 U.S.C. § 157(b)(2)(E) and (O), because the action attempts to compel 3 Taylor to turn over nearly $6 million in Enalasys’ (and thus the estate’s) assets it 4 alleges he is wrongfully withholding. See In re Nat’l Equipment & Mold Corp., 64 5 B.R. 239 (N.D. Oh., 1986) (holding that state law action for conversion to recover 6 assets wrongly taken from the debtor shortly before filing Chapter 11 should be 7 treated as core). See also In re Kincaid, 917 F.2d 1162, 1165 (9th Cir. 1990) 8 (distinguishing between claims seeking to obtain property of the debtor from claims 9 seeking to obtain property owed to the debtor). The action also sought injunctive 10 relief intended to prevent the dissipation of Enalasys’ assets, and a preliminary 11 injunction granting such relief was already granted. Enalasys has consented to 12 entry of final judgment by the bankruptcy judge for any claims found to be non- 13 core. 14 Because all five elements are not established, mandatory abstention does 15 not apply here. 16 Discretionary Abstention 17 A seven-factor test has been established for discretionary abstention: 18 (a) the effect of the action on the administration of the bankruptcy estate; (b) the extent to which issues of state law predominate; (c) the 19 difficulty of applicable state law; (d) comity; (e) the relatedness or 20 remoteness of the action to the bankruptcy case; (f) the existence of a right to a jury trial; and (g) prejudice to the party involuntarily removed 21 from state court. 22 23 Bally, 384 B.R. at 572 (citing Williams v. Shell Oil, 169 B.R. 684, 690–93 (S.D. Cal. 24 1994).) 25 The opening brief does not mention this test or discuss most of these factors, 26 instead focusing on the inconvenience of litigating in Santa Ana, which pertains to 27 factor (g). Most of Defendants’ argument is focused on venue which the reply brief 28 concedes is not at issue. The test is mentioned and the remaining factors are 1 discussed for the first time in the reply brief. See Sundby v. Marquee Funding 2 Group, Inc., 2020 WL 434487, slip op. at *7 (S.D. Cal., Jan. 28, 2020). Enalasys 3 had no reason to discuss these factors, and did not do so. But even if they had 4 been adequately raised in the opening brief, however, the result would be the 5 same. 6 The first factor generally weighs against abstention, because the action is 7 intended both to protect the state’s assets, and to recover lost assets which can 8 be added to the estate. Moreover, the cause of action itself belongs to the estate. 9 See In re White, 186 B.R. 700, 703 (BAP 9th Cir. 1995). Defendants’ reply brief 10 treat the first factor as the effect of the transfer on the case. The second factor, 11 predominance of state law, is mixed. The claims are based on state law, which 12 weighs in favor of abstention. Yet the majority are core claims, because they seek 13 an order requiring the turnover of estate property. The third factor, difficulty of 14 applicable state law, is neutral. The fourth factory, comity, arguably weighs against 15 transfer. See Bally, 384 B.R. at 573. That being said, the state court has apparently 16 stayed the action, while waiting for the bankruptcy court to act. The fifth factor 17 favors transfer, because the case seeks to recover Enalasys’ substantial corporate 18 assets. Factor six, the right to a jury trial, is mixed. With regard to “turnover” claims 19 and other claims for injunctive relief, Defendants have no right to a jury trial. 20 Enalasys has consented to allow the bankruptcy judge to enter final judgment as 21 to any non-core claims. Defendants likely will not consent, although their brief does 22 not explicitly say so. Rather, they merely argue that the state court is “better 23 equipped to handle a jury trial than the bankruptcy court . . . .” (Docket no. 9 at 24 5:1–3.) 25 Defendants focus on the seventh factor, prejudice to them. This focuses 26 entirely on the inconvenience and increased expense of litigating in Santa Ana. 27 The briefing points out that most of the Defendants, Defendants’ counsel, and 28 many of the likely witnesses reside in Imperial County. They argue that Enalasys 1 has its offices in El Centro although that does not appear to be the case. Trying 2 the case in the Central District may present some challenges, if witnesses must be 3 subpoenaed for trial or hearings. 4 Defendants have also raised other arguments in declarations attached to the 5 motion. While the Court ordinarily expects arguments to be raised in the body of 6 the motion, it will consider these for purposes of making an informed and equitable 7 ruling. These declarations (Docket no. 6, Exh. B–D) argue that Enalasys’ creditors 8 are mostly located in Imperial County. This does not advance their argument, 9 because creditors are not parties to the removed claims. And to the extent any 10 creditors want to appear in the bankruptcy action, they would have to go to Santa 11 Ana regardless of how the Court rules on this motion. Other cross-plaintiffs in the 12 state court action do not need to go to Santa Ana or hire counsel there, because 13 their claims were not removed. Furthermore, there is little reason to think that most 14 creditors would seek involvement in this case. 15 The declarations also show that litigating in Santa Ana will be less convenient 16 for counsel, and probably more expensive. Hiring or associating local counsel 17 could solve this problem, and there is no reason to think it would be difficult to do 18 this in Orange County. It would likely be more expensive, and Defendants’ choice 19 of counsel may be affected. One Defendant, Joseph Werner, says he cannot 20 afford to hire counsel in Orange County or to defend himself there, although it is 21 not clear what he bases this on. Taylor’s declaration says he has run out of cash 22 and cannot hire counsel in Santa Ana, though he does not know whether he can 23 raise more money. The only reason this would weigh in favor of abstention is if he 24 raises enough money to pay counsel and litigate in El Centro, but not enough to 25 litigate in Santa Ana, and whether that will happen (or has happened) is unknown. 26 It may be that he will raise enough money to pay for counsel in either Santa Ana 27 or El Centro, or that he cannot pay for counsel either place. 28 / / / 1 Defendants also argue that Enalasys is engaging in forum shopping, and 2 removed the case to avoid dismissal. Two earlier complaints were dismissed 3 following demurrers, but it is unknown whether the third would have been. The fact 4 that federal pleading standards are stricter somewhat weakens this argument. And 5 the fact that Enalasys obtained both a temporary restraining order and a 6 preliminary injunction weakens it even more. 7 Even if the issue had been properly raised, and Enalasys had been afforded 8 a fair opportunity to oppose it, the Court having weighed all the factors would deny 9 discretionary abstention. 10 Motion to Transfer 11 Following removal, the party removing the case may file a motion to change 12 venue, which may be granted either for the convenience of the parties or in the 13 interest of justice. 28 U.S.C. §§ 1412, 1452. See Hightman v. FCA US LLC, 2009 14 WL 3780272, slip op. at *3 (S.D. Cal., Aug. 12, 2019) (holding that the two bases 15 for transfer under § 1412 are disjunctive, and either one warrants transfer). 16 Enalasys relies on the interest of justice rather than convenience of the parties. 17 With exceptions not applicable here, the general policy of the bankruptcy code is 18 that all proceedings in the bankruptcy case be conducted in the district where the 19 petition was filed. In re Burley, 738 F.2d 981, 988 (9th Cir. 1984). See also Reid- 20 Ashman Mfg., Inc. v. Swanson Semiconductor Serv., L.L.C., 2008 WL 425638, at 21 *1 (N.D. Cal., Feb. 14, 2008) (holding that transfer under 28 U.S.C. § 1412, unlike 22 transfer under § 1404, carries a presumption in favor of the court where the 23 bankruptcy case is pending). 24 In addition to this presumption, factors the Court may consider in determining 25 whether the interest of justice warrants transfer include the economics of estate 26 administration, judicial economy, whether the parties would receive a fair trial, 27 whether the judgment would be enforceable, whether either forum has an interest 28 in having the controversy resolved within its borders, and the plaintiff’s original 1 choice of forum. Hightman, 2019 WL 3780272 at *4; Reid-Ashman, 2008 WL 2 425638 at *2. The Court also considers the convenience of the parties. Id. (citing 3 In re Bruno, 227 B.R. 311, 325 (S.D. Ala., 1998)). The Court is also mindful of the 4 need to secure the speedy resolution of cases. See Fed. R. Civ. P. 1. 5 Most of the arguments in favor of or against transfer are subsumed within 6 addressed in the abstention analysis, supra. Neither party has suggested that the 7 case belongs anywhere other than in El Centro or Santa Ana. 8 Adding to the earlier analysis, the fact that the transfer would move 9 proceedings within Southern California is important. The fact that the transfer 10 would be between two courts in the same state ameliorates many of the concerns. 11 State borders play no role here, and federal judges in Santa Ana regularly and ably 12 interpret and apply California law. There is no concern that the bankruptcy court 13 will not competently and fairly adjudicate the claims. 14 Travel between the two venues is feasible, though daily commuting over a 15 long period of time is impractical. Santa Ana and El Centro are less than 200 miles 16 apart, and driving between them can take from 3 to 3½ hours, if conditions are 17 reasonably good. This is not ideal for Defendants and witnesses, but not terribly 18 onerous either. The bankruptcy court can make arrangements to minimize 19 inconvenience and expense to them. It is much more convenient for Enalasys than 20 El Centro would be. Enalasys represents that its headquarters are now in Orange 21 County. Even setting that aside, Enalasys is already litigating in Santa Ana. The 22 Court finds the convenience to the parties weighs somewhat against transfer, but 23 not strongly. 24 The Plaintiff’s choice of forum does not carry any great weight here, in part 25 because the Plaintiff itself is seeking transfer. Defendants likely had no choice 26 about where to file their cross-complaint. But even characterizing their filing it in El 27 Centro as a forum choice does not change the analysis, because the cross- 28 complaint was not removed and will not be transferred. 1 Administration of the estate, and judicial economy are important factors here, 2 ||and both weigh in favor of transfer. Enalasys’ claims seek the turnover of assets 3 are both important for its own continued operation and would become part of 4 ||the estate. The state court apparently is not prepared to adjudicate the case until 5 bankruptcy proceedings end. And waiting until the bankruptcy proceeding ends to 6 ||adjudicate those claims makes little sense. To the extent the claims are core 7 ||claims, federal policy favors transferring them to the court where the bankruptcy is 8 || pending. See In re Burley, 738 F.2d at 988. 9 Having considered and weighed these factors, the Court concludes that 10 || transfer would serve the interest of justice. 11 || Conclusion and Order 12 Having considered the arguments, and having weighed the relevant factors, 13 ||the Court DENIES the motion for abstention or remand, and GRANTS the motion 14 transfer. 15 This action is ORDERED transferred to the United States Bankruptcy Court 16 ||for the Central District of California. 17 18 IT IS SO ORDERED. 19 ||Dated: March 12, 2020 20 ( iM A. JB wy 21 Hon. Larry Alan Burns 29 Chief United States District Judge 23 24 25 26 27 28