FILED AUG 25 2016 1 SUSAN M. SPRAUL, CLERK ORDERED PUBLISHED U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-15-1424-KuFKi ) 6 GACN, INC., ) Bk. No. 14-13695 ) 7 Debtor. ) Adv. No. 15-01135 _______________________________) 8 ) CERTAIN UNDERWRITERS AT LLOYDS,) 9 SYNDICATES 2623/623, ) ) 10 Appellant, ) ) 11 v. ) OPINION ) 12 GACN, INC., ) ) 13 Appellee. ) _______________________________) 14 15 Argued and Submitted on June 23, 2016 at Pasadena, California 16 Filed – August 25, 2016 17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding 20 21 Appearances: Ross Smith of Troutman Sanders LLP argued for appellant Certain Underwriters at Lloyds, 22 Syndicates 2623/623; Simon Aron of Wolf, Rifkin, Shapiro, Schulman & Rabkin, LLP argued for 23 appellee GACN, Inc. 24 25 Before: KURTZ, FARIS and KIRSCHER, Bankruptcy Judges. 26 27 28 1 KURTZ, Bankruptcy Judge: 2 3 INTRODUCTION 4 This appeal originates from an adversary proceeding filed by 5 chapter 111 debtor GACN, Inc. against its insurer. The adversary 6 proceeding seeks declaratory relief determining the parties’ 7 rights and liabilities under state law arising from an insurance 8 contract the insurer and GACN entered into prepetition. The 9 insurer appeals from the bankruptcy court’s order denying the 10 insurer’s motion for mandatory or permissive abstention. 11 Our decision in this appeal largely turns on the answer to 12 the following question: for purposes of determining whether 13 GACN’s declaratory relief action is a “core” bankruptcy 14 proceeding, is the action so “inextricably connected” to the 15 debtor-in-possession’s efforts to administer its bankruptcy 16 estate that the action can be said to “arise in” a case under 17 title 11 and also can be said to fall within the scope of one or 18 both “catchall” provisions identifying core bankruptcy 19 proceedings set forth in 28 U.S.C. § 157(b)(2)(A) and (O)? 20 Pursuant to controlling Ninth Circuit authority, the answer 21 to this question is no. The declaratory relief action is not a 22 core bankruptcy proceeding. The bankruptcy court’s decision to 23 the contrary is erroneous. The bankruptcy court also erred when 24 it determined – for mandatory abstention purposes – that the 25 26 1 Unless specified otherwise, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal Rules of Bankruptcy 28 Procedure, Rules 1001-9037.
2 1 declaratory relief action presented questions of both state law 2 and federal law. For purposes of mandatory abstention, the 3 action only presented questions of state law. Therefore, we 4 REVERSE the bankruptcy court’s determinations that the 5 declaratory relief action was a core proceeding and that it 6 raised both questions of state law and federal law. As a result, 7 we must VACATE the bankruptcy court’s denial of the insurer’s 8 request for mandatory abstention, and we REMAND the matter for 9 further proceedings. 10 The bankruptcy court’s discretionary abstention ruling also 11 was based on the same error regarding the core versus noncore 12 nature of the declaratory relief action. Additionally, the 13 bankruptcy court erroneously concluded that bankruptcy law issues 14 predominated over state law issues. Consequently, we also must 15 VACATE and REMAND the bankruptcy court’s discretionary abstention 16 ruling. 17 FACTS 18 The insurer has conceded that most of the relevant facts are 19 undisputed, so we rely heavily on the facts as stated by the 20 bankruptcy court in its thorough and carefully-reasoned decision. 21 GACN owns and operates a family restaurant in the San 22 Fernando Valley. Before GACN filed bankruptcy, certain of its 23 former employees successfully sued GACN in the Los Angeles County 24 Superior Court for wrongful termination, resulting in a judgment 25 in favor of its former employees. The judgment included a $1.6 26 million compensatory damages award and $4 million punitive 27 damages award. 28 The wrongful termination judgment spurred further court
3 1 activity. In August 2014, GACN commenced its chapter 11 2 bankruptcy case, and in February 2015, GACN filed a complaint 3 (postpetition) in the Los Angeles County Superior Court against 4 the insurer and against the legal counsel the insurer had hired 5 and paid to defend GACN in the wrongful termination lawsuit. In 6 the complaint, GACN alleged that the insurer and the defense 7 counsel had wrongfully and unreasonably failed to settle with the 8 wrongful termination plaintiffs even though the insurer and 9 defense counsel knew that the wrongful termination plaintiffs had 10 offered to settle for the $1 million policy limit and also knew 11 that there was a likelihood that the wrongful termination lawsuit 12 ultimately would cost far more than the policy limit. 13 Meanwhile, in GACN’s bankruptcy case, the wrongful 14 termination plaintiffs filed proofs of claim in an aggregate 15 amount exceeding $11 million. GACN (acting as debtor in 16 possession) negotiated a settlement with the wrongful termination 17 plaintiffs, subject to bankruptcy court approval and also subject 18 to the insurer’s approval. The portion of the settlement 19 agreement dealing with insurer approval provided: 20 3. This Agreement is further conditioned upon its approval by Lloyd’s, or upon a court order which 21 provides that Lloyd’s approval is not required (the “Lloyds Determination”). Alternatively, the Lloyds 22 Determination may, upon consent of the Parties to this Agreement, be satisfied by entry of the Confirmation 23 Order. 24 Settlement Agreement (April 17, 2015) at p. 4. 25 As for its substantive terms, the settlement agreement 26 provided in relevant part for three installment payments of 27 $150,000 each to be paid by GACN principal George Metsos. The 28 settlement agreement further provided for the assignment of a
4 1 portion of any litigation proceeds recovered on account of GACN’s 2 state court complaint against the insurer and defense counsel. 3 GACN then asked the insurer for its consent to the 4 settlement, but the insurer rejected that request. In essence, 5 the insurer asserted that the insurance contract required the 6 insurer’s prior consent before GACN could negotiate or enter into 7 any settlement and that GACN’s postpetition conduct in 8 negotiating and settling with the wrongful termination plaintiffs 9 violated the insurance contract. 10 The insurer thereafter filed an answer to GACN’s state court 11 complaint. The answer included an affirmative defense in which 12 the insurer asserted that GACN’s postpetition interactions with 13 the wrongful termination plaintiffs barred GACN from any recovery 14 on its state court complaint. The sixth affirmative defense 15 specifically provided as follows: 16 Plaintiff’s Complaint and each purported cause of action alleged therein against [insurer] is limited or 17 barred by operation of Policy Section X.B., which provides that “No Insured will, except at their own 18 cost, voluntarily make a payment, assume any obligation, or incur any expenses without our consent. 19 Subsequent payments which are deemed by us as having been prejudiced by any such voluntary payment will also 20 be the sole responsibility of the Insured.” Plaintiff has revealed that, despite Policy Section X.B., it 21 unilaterally negotiated a fully executed settlement agreement with the underlying claimants, and Plaintiff 22 did not seek or obtain [insurer’s] prior consent. 23 Answer (July 22, 2015) at pp. 3-4. 24 In turn, GACN filed the underlying adversary proceeding in 25 the bankruptcy court naming the insurer as the defendant and 26 seeking declaratory relief. In summary, GACN sought a judicial 27 determination of the parties’ rights and liabilities arising 28 from: (1) its postpetition negotiation of the conditional
5 1 settlement; (2) the insurer’s rejection of GACN’s request for its 2 approval of the settlement; and (3) Section X.B. of the insurance 3 contract. GACN’s adversary complaint described the dispute in 4 the following manner: 5 22. There now exists an actual controversy with respect to the rights and obligations of the parties under the 6 Policy. Specifically, the Policy provides Underwriters with certain rights and obligations concerning its 7 prior consent to any proposed settlement, the nature and extent of which are in controversy. GACN has 8 requested Underwriters’ consent to proceed with the proposed settlement with GACN’s Judgment Creditors, as 9 doing so is in GACN’s best interests and will prevent further avoidable damages to GACN. But Underwriters 10 have unreasonably and in bad faith failed and refused to provide such consent. By its actions and inactions, 11 Underwriters contends that proceeding with the settlement will adversely affect GACN’s rights under 12 the Policy. GACN contends that proceeding with the settlement should not result in any adverse effect on 13 the Policy or GACN’s rights under the Policy, and that Underwriters in good faith should consent to the 14 proposed settlement. 15 Complaint for Declaratory Relief (Aug. 20, 2015) at p. 6. 16 The insurer moved the bankruptcy court to abstain from 17 hearing GACN’s declaratory relief action based on either 18 mandatory abstention or discretionary abstention. After full 19 briefing and a hearing, the bankruptcy court issued its ruling. 20 The bankruptcy court held that four of the seven requirements for 21 mandatory abstention were met. The bankruptcy court recognized 22 that, by way of the insurer’s sixth affirmative defense in GACN’s 23 pending state court action, that action included the same subject 24 matter as GACN’s declaratory relief adversary proceeding. Also, 25 there was no non-bankruptcy basis for federal court jurisdiction, 26 the state court presiding over the action had jurisdiction, and 27 the insurer’s abstention motion was timely. 28 On the other hand, the bankruptcy court held that mandatory
6 1 abstention did not apply because three of the prerequisites were 2 not met. According to the bankruptcy court, the state court 3 could not timely adjudicate the issues raised by the declaratory 4 relief action, those issues were not purely state law issues, and 5 the declaratory relief action was a core proceeding. 6 The bankruptcy court also denied the insurer’s request for 7 discretionary abstention. After reciting all twelve of the 8 factors bankruptcy courts typically consider in deciding a 9 discretionary abstention request, the bankruptcy court 10 specifically discussed many of these factors, and its position on 11 the remaining factors is not in doubt. The entirety of the 12 decision makes clear what the court thought about all of the 13 discretionary abstention factors. On the whole, the bankruptcy 14 court explained, the adversary proceeding would require the court 15 to determine whether GACN’s postpetition efforts to administer 16 its own bankruptcy case (by attempting to fix, compose and extend 17 the prepetition debt it owed to the wrongful termination 18 plaintiffs) somehow ran afoul of its prepetition contract with 19 the insurer. Because the critical and essential reorganization 20 task of formulating a viable plan of reorganization was being 21 impeded by the unresolved adversary proceeding issues and because 22 GACN’s ability to successfully reorganize was threatened by this 23 impediment, the bankruptcy court concluded that exercising its 24 discretion to abstain in this instance “would conflict with 25 fundamental bankruptcy policy.” 26 On December 1, 2015, the bankruptcy entered is order denying 27 the insurer’s abstention motion, and the insurer timely appealed. 28
7 1 JURISDICTION 2 The bankruptcy court’s jurisdiction is discussed below. 3 With respect to our jurisdiction, a motions panel of this court 4 previously determined that an order denying abstention is a final 5 order for appeal purposes, citing Krasnoff v. Marshack (In re 6 General Carriers Corp.), 258 B.R. 181, 186-87 (9th Cir. BAP 7 2001).2 However, on further reflection, we disagree with this 8 conclusion of the motions panel. We are not bound by its 9 decision. See Couch v. Telescope Inc., 611 F.3d 629, 632 (9th 10 Cir. 2010); Stagecoach Utils., Inc. v. Cty. of Lyon (In re 11 Stagecoach Utils., Inc.), 86 B.R. 229, 230 (9th Cir. BAP 1988). 12 We have taken a closer look at In re General Carriers Corp.. 13 We held there that the order denying abstention at issue therein 14 should be treated as final and immediately appealable under the 15 collateral order doctrine. Id. at 187. Under that doctrine, 16 certain orders that do not end the litigation are nonetheless 17 treated as immediately appealable if they: “(1) determine 18 conclusively the disputed issue that is completely separable from 19 the merits of the action; (2) effectively would be unreviewable 20 on appeal from a final judgment; and (3) are too important to be 21 denied review.” Id. at 186-87. The General Carriers court held 22 that the abstention order on appeal satisfied all three criteria. 23 2 24 The motions panel also relied on In re Bankruptcy Petition Preparers Who Are Not Certified Pursuant to Requirements 25 of Arizona Supreme Court, 307 B.R. 134, 140 (9th Cir. BAP 2004). 26 But that decision is inapposite. It did not involve an appeal from an order denying abstention. Rather, the Panel there 27 construed the order on appeal as an order granting abstention, the finality of which is not at issue in the appeal currently 28 before us. See id.
8 1 In relevant part, General Carriers explained that the abstention 2 motion had been filed as a stand-alone motion. Id. at 185. In 3 other words, no adversary proceeding had been commenced or was 4 pending. Id. As a result, the order on appeal satisfied the 5 second collateral order doctrine requirement of being effectively 6 unreviewable on appeal from a final judgment or order, because 7 there was no pending adversary proceeding to finally resolve. 8 Id. at 187. 9 The matter currently before this Panel is distinguishable. 10 Here, there is a pending adversary proceeding, and the insurer 11 could seek review of the abstention order upon the final 12 resolution of that adversary proceeding. Thus, the collateral 13 order doctrine does not apply in this instance. 14 The General Carriers court alternately held that the order 15 on appeal satisfied the flexible finality standard generally 16 applicable in bankruptcy cases. The flexible finality standard 17 treats a covered bankruptcy court order as final if the order: 18 “‘1) resolves and seriously affects substantive rights and 2) 19 finally determines the discrete issue to which it is addressed.’” 20 Id. at 186 (quoting Elliott v. Four Seasons Props. (In re 21 Frontier Props.), 979 F.2d 1358, 1363 (9th Cir. 1992)). 22 This aspect of General Carriers also is distinguishable from 23 this case. In General Carriers, the Panel considered an order 24 entered in the main bankruptcy case; here, however, we are 25 dealing with an order entered in an adversary proceeding, and the 26 flexible finality standard does not apply in adversary 27 proceedings. Belli v. Temkin (In re Belli), 268 B.R. 851 (9th 28 Cir. BAP 2001). Instead, for purposes of determining the
9 1 finality of an adversary proceeding judgment or order, bankruptcy 2 courts rely upon the same finality standard that applies in all 3 other federal civil cases. That standard treats a judgment or 4 order as final for appeal purposes only if it “ends the 5 litigation on the merits and leaves nothing for the court to do 6 but execute the judgment.” Catlin v. United States, 324 U.S. 7 229, 233 (1945); see also Eastport Assocs. v. City of Los Angeles 8 (In re Eastport Assocs.), 935 F.2d 1071, 1075 (9th Cir. 1991) 9 (holding that finality defect of order denying motion to abstain 10 was “cured” by subsequent entry of final order disposing of the 11 merits of the entire adversary proceeding). The order denying 12 abstention at issue herein did not meet the general federal civil 13 finality standard, so it was interlocutory and not final. 14 Unless we grant leave to appeal, this interlocutory appeal 15 from the bankruptcy court’s order denying abstention is subject 16 to dismissal for lack of jurisdiction. Giesbrecht v. Fitzgerald 17 (In re Giesbrecht), 429 B.R. 682, 687 (9th Cir. BAP 2010). We 18 typically grant leave to appeal when “refusal would result in 19 wasted litigation and expense, the appeal involves a controlling 20 question of law as to which there is a substantial ground for 21 difference of opinion, and an immediate appeal would materially 22 advance the ultimate termination of the litigation.” Official 23 Comm. of Unsecured Creditors v. Credit Lyonnais Bank Nederland, 24 N.V. (In re NSB Film Corp.), 167 B.R. 176, 180 (9th Cir. BAP 25 1994). 26 We hold that this standard is met here. The appeal involves 27 a controlling question of law regarding what constitutes a core 28 proceeding, which still is a somewhat unsettled area of law. And
10 1 our resolution of this question now very well might prevent 2 wasted litigation and expense and also might materially expedite 3 the ultimate termination of this litigation. Accordingly, we 4 grant the insurer leave to pursue this interlocutory appeal, and 5 we will turn our attention to the merits. 6 ISSUES 7 1. Did the bankruptcy court err when it denied the insurer’s 8 mandatory abstention request? 9 2. Did the bankruptcy court err when it denied the insurer’s 10 discretionary abstention request? 11 STANDARDS OF REVIEW 12 We review de novo orders regarding mandatory abstention, and 13 we review for an abuse of discretion orders regarding permissive 14 abstention. Bethlahmy v. Kuhlman (In re ACI–HDT Supply Co.), 205 15 B.R. 231, 234 (9th Cir. BAP 1997). 16 The bankruptcy court abuses its discretion if it applies an 17 incorrect legal rule or its findings of fact are illogical, 18 implausible or without support in the record. United States v. 19 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). 20 DISCUSSION 21 1. Overview of Bankruptcy Court Jurisdiction 22 In large part, our resolution of this appeal hinges on our 23 review of the bankruptcy court’s determination that the 24 declaratory relief action was a “core” bankruptcy proceeding 25 rather than a “noncore” proceeding. To facilitate our discussion 26 of this issue, we first strive to place the core versus noncore 27 distinction in context. 28 Bankruptcy court jurisdiction is statutorily based. Under
11 1 28 U.S.C. § 1334(a), federal district courts have “original and 2 exclusive jurisdiction” over all title 11 cases (i.e., the 3 bankruptcy case itself). Under 28 U.S.C. § 1334(b), district 4 courts have “original but not exclusive jurisdiction” over “all 5 civil proceedings arising under title 11, or arising in or 6 related to cases under title 11.” (Emphasis added.) 7 In turn, 28 U.S.C. § 157 specifies how district courts can 8 share their bankruptcy jurisdiction with the bankruptcy courts. 9 In accordance with the referral process authorized in 28 U.S.C. 10 § 157(a), virtually all federal district courts have “referred” 11 to the bankruptcy courts all of those matters over which the 12 district courts hold bankruptcy jurisdiction pursuant to 28 13 U.S.C. § 1334. 14 The terms “arising under title 11” and “arising in a case 15 under title 11” are terms of art which the courts have defined. 16 Wilshire Courtyard v. Cal. Franchise Tax Bd. (In re Wilshire 17 Courtyard), 729 F.3d 1279, 1285 (9th Cir. 2013). A proceeding 18 “arises under” title 11 if it presents claims for relief created 19 or controlled by title 11. Id. In contrast, the claims for 20 relief in a proceeding “arising in” a title 11 case are not 21 explicitly created or controlled by title 11, but such claims 22 nonetheless would have no existence outside of a bankruptcy case. 23 Id. 24 The remaining category of bankruptcy jurisdiction, “related 25 to” jurisdiction, is an exceptionally broad category encompassing 26 virtually any matter either directly or indirectly related to the 27 bankruptcy case. Id. at 1287. 28
12 1 2. Core Versus Noncore Distinction - Generally 2 The above-referenced jurisdictional scheme is the product of 3 Congress’ 1984 amendments to the Bankruptcy Code. Congress 4 enacted this new jurisdictional scheme to address and resolve the 5 constitutional issues identified by the Supreme Court in Northern 6 Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 7 (1982). The 1984 revisions, in relevant part, created two broad 8 categories of proceedings potentially subject to bankruptcy court 9 jurisdiction: “core” bankruptcy proceedings and “noncore” 10 proceedings. Marshall v. Stern (In re Marshall), 600 F.3d 1037, 11 1052-54 (9th Cir. 2010), aff’d, 564 U.S. 462 (2011). 12 Core proceedings consist of all actions “arising under” 13 title 11 and also those “arising in” a case under title 11. Id. 14 at 1053. 28 U.S.C. § 157(b)(2) contains a non-exhaustive list of 15 core bankruptcy proceedings. Id. at 1053-54. Included in that 16 list are a number of provisions identifying specific types of 17 bankruptcy court proceedings that qualify as core and two 18 catchall provisions that bookend the more-specific provisions. 19 The first catchall provision, 28 U.S.C. § 157(b)(2)(A), 20 designates as core “matters concerning the administration of the 21 estate” and the second catchall provision, 28 U.S.C. 22 § 157(b)(2)(O), designates as core “other proceedings affecting 23 the liquidation of the assets of the estate or the adjustment of 24 the debtor-creditor or the equity security holder relationship, 25 except personal injury tort or wrongful death claims.” 26 Congress specified that bankruptcy judges could render 27 final, appealable rulings in core bankruptcy proceedings. 28 28 U.S.C. § 157(b)(1); In re Marshall, 600 F.3d at 1053-54.
13 1 Congress further specified that bankruptcy judges could render 2 final, appealable rulings in noncore proceedings, but only with 3 the parties’ consent (in order to avoid Marathon-like 4 constitutional problems). Id. (citing 28 U.S.C. § 157(c)). 5 3. Core Versus Noncore Distinction & Abstention Factors 6 The core versus noncore distinction affects other aspects of 7 bankruptcy court jurisprudence besides whether the bankruptcy 8 court can enter final, appealable rulings. In relevant part, the 9 distinction plays a significant role in the bankruptcy court’s 10 decision whether to grant or deny an abstention motion. Whether 11 an action is a core or a noncore proceeding is a factor to be 12 considered in making both mandatory and permissive abstention 13 rulings. See 28 U.S.C. § 1334(c)(1), (2); see also In re 14 Eastport Assocs., 935 F.2d at 1075-76 (identifying permissive 15 abstention factors). 16 The bankruptcy court correctly recited the applicable legal 17 standards for determining both mandatory and permissive 18 abstention requests. Neither party on appeal has challenged 19 those standards. Rather, the parties’ arguments on appeal focus 20 on whether the undisputed facts presented herein satisfy these 21 factors. As the bankruptcy court noted, mandatory abstention 22 requires: 23 (1) A timely motion; (2) a purely state law question; (3) a non-core proceeding § 157(c)(1); (4) a lack of 24 independent federal jurisdiction absent the petition under title 11; (5) that an action is commenced in a 25 state court; (6) the state court action may be timely adjudicated; (7) a state forum of appropriate 26 jurisdiction exists. 27 Order Denying Abstention (Dec. 1, 2015) at p. 9 (citing In re 28 General Carriers Corp., 258 B.R. at 189).
14 1 With respect to permissive abstention, the bankruptcy court 2 pointed out that courts consider the following twelve factors: 3 (1) the effect or lack thereof on the efficient administration of the estate if a Court recommends 4 abstention, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty 5 or unsettled nature of the applicable law, (4) the presence of a related proceeding commenced in state 6 court or other nonbankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. 7 § 1334, (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the 8 substance rather than form of an asserted “core” proceeding, (8) the feasibility of severing state law 9 claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to 10 the bankruptcy court, (9) the burden of [the bankruptcy court’s] docket, (10) the likelihood that the 11 commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties, (11) the 12 existence of a right to a jury trial, and (12) the presence in the proceeding of nondebtor parties. 13 14 Id. at 9-10 (citing Christensen v. Tucson Estates, Inc. (In re 15 Tucson Estates, Inc.), 912 F.2d 1162, 1167 (9th Cir. 1990)). 16 4. Review of Bankruptcy Court’s Determination of Core Status 17 While the parties and the bankruptcy court canvassed the law 18 from both the Ninth Circuit and other circuits, there is ample 19 Ninth Circuit law on point sufficient to answer the question of 20 whether GACN’s declaratory relief adversary proceeding qualifies 21 as a core proceeding. 22 Four Court of Appeals cases inform our analysis. Battle 23 Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124 (9th Cir. 24 2010); Harris v. Wittman (In re Harris), 590 F.3d 730 (9th Cir. 25 2009); Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 26 1431 (9th Cir. 1995); Piombo Corp. v. Castlerock Props. (In re 27 Castlerock Props.), 781 F.2d 159 (9th Cir. 1986). 28 In re Castlerock Props. (the earliest of these four
15 1 decisions) articulated the Ninth Circuit’s general rule 2 regarding whether state law contract claims qualify as core or 3 noncore proceedings: “state law contract claims that do not 4 specifically fall within the categories of core proceedings 5 enumerated in 28 U.S.C. § 157(b)(2)(B)–(N) are [noncore] 6 proceedings . . . even if they arguably fit within the literal 7 wording of the two catch-all provisions, sections § 157(b)(2)(A) 8 and (O).” In re Castlerock Props., 781 F.2d at 162. The Ninth 9 Circuit adopted this narrow interpretation of the catchall 10 provisions in deference to Marathon and in order to avoid a 11 reprise of the constitutional problems Marathon grappled with. 12 See In re Harris, 590 F.3d at 740 (identifying the impetus for In 13 re Castlerock Prop.’s holding). 14 Whereas In re Castlerock Props. involved a prepetition 15 contract claim, In re Harris Pine Mills (the second oldest of the 16 four decisions) involved postpetition tort claims allegedly 17 arising from the bankruptcy trustee’s exercise of his statutory 18 duty to administer bankruptcy estate assets: specifically, the 19 bankruptcy-court-approved sale of those assets. In re Harris 20 Pine Mills, 44 F.3d at 1434. In re Harris Pine Mills held that 21 the postpetition state law tort claims asserted against the 22 bankruptcy trustee and his agents were based on conduct 23 “inextricably intertwined” with the trustee’s sale of estate 24 property and, therefore, that those claims constituted core 25 proceedings that fell within the scope of 28 U.S.C. § 157(b)(2)’s 26 catchall provisions. Id. at 1438. 27 In re Harris (the third oldest of these four decisions) 28 effectively extended In re Harris Pine Mills’ holding to
16 1 postpetition contract claims. In re Harris analyzed at length 2 both In re Castlerock Props. and In re Harris Pine Mills. In the 3 process, In re Harris made some important statements about 4 “arising in” jurisdiction and about when 28 U.S.C. § 157(b)(2)’s 5 catchall provisions apply to contract actions. For instance, In 6 re Harris stated that, “[b]ecause the plaintiff sued the 7 bankruptcy trustee for the trustee’s conduct in administering the 8 bankruptcy estate, the state law claims arose in the bankruptcy 9 case and were subject to federal jurisdiction.” In re Harris, 10 590 F.3d at 738 (emphasis added). In so stating, In re Harris 11 further explained that “an action against a bankruptcy trustee 12 for the trustee’s administration of the bankruptcy estate could 13 not” exist independent of a bankruptcy case. Id. at 737. 14 Moreover, in deciding that In re Harris Pine Mills was 15 controlling, In re Harris noted that the causes of action in both 16 cases arose “from the trustee’s post-petition conduct pursuant to 17 the trustee’s duty to administer the bankruptcy estate.” Id. at 18 739. Therefore, In re Harris reasoned, the breach of contract 19 action before it, just like the tort action before In re Harris 20 Pine Mills, qualified as a core proceeding under 28 U.S.C. 21 § 157(b)(2)(A), because the action “was inextricably intertwined 22 with the sale of estate assets - the literal administration of 23 the bankruptcy estate.” Id. 24 In re Harris made some similarly expansive statements 25 regarding the basis for core jurisdiction in the process of 26 determining that In re Castlerock Props. did not control the 27 outcome of Harris’ appeal. First, as a preliminary matter, In re 28 Harris noted that In re Castlerock Props. did not entirely
17 1 eliminate the catchall provisions of 28 U.S.C. § 157(b)(2)(A) and 2 (O), but rather merely limited their application “under 3 principles of constitutional avoidance.” Id. at 740. And 4 second, In re Harris held that Harris’ action against the 5 bankruptcy trustee fell within the scope of In re Castlerock 6 Props.’s narrow construction of the catchall provisions. In so 7 holding, In re Harris explained as follows: 8 Harris’s claim does not just “relate” to the administration of the estate, his suit necessarily 9 involves how the bankruptcy estate was administered. This is not like the pre-petition contract suits in 10 Castlerock and Marathon that only arguably related to the administration of the estate because one of the 11 parties to the contract was in bankruptcy. Harris’s breach of contract claim arose from the administration 12 of his bankruptcy estate. Castlerock, like Marathon, involved breach of contract claims that arose before 13 and independent of the administration of bankruptcy assets. 14 15 Id. at 740 (citations omitted and emphasis added). 16 If our analysis of the above-referenced Ninth Circuit 17 decisions ended there, we likely could and would conclude under 18 In re Harris that GACN’s declaratory relief action “arose in” 19 GACN’s bankruptcy case and was a “core” proceeding under both 28 20 U.S.C. § 157(b)(2)(A) and (O). By way of its declaratory relief 21 action, GACN sought to determine whether, as contended by the 22 insurer, GACN had breached its obligations under the insurance 23 contract as a result of its postpetition efforts to administer 24 its bankruptcy estate and move toward a viable plan of 25 reorganization (by negotiating a settlement fixing, composing and 26 extending its indebtedness to the wrongful termination 27 plaintiffs). 28 Thus, GACN’s declaratory relief action, similar to the
18 1 lawsuit in In re Harris, arose from the debtor-in-possession’s 2 “post-petition conduct pursuant to [its] duty to administer the 3 bankruptcy estate,” was “inextricably intertwined with the . . . 4 the literal administration of the bankruptcy estate” and 5 “necessarily involve[d] how the bankruptcy estate was 6 administered.” Id. In addition, GACN’s declaratory relief 7 action was unlike the state law claims at issue in Castlerock and 8 Marathon, which “involved breach of contract claims that arose 9 before and independent of the administration of bankruptcy 10 assets.” Id. 11 But our analysis of the Ninth Circuit decisions does not end 12 there. In re Harris also expressed a concern indicating that 13 bankruptcy courts must take care not to include within the 14 definition of core proceedings “traditional” prepetition contract 15 actions like the one at issue in Marathon. Id. at 741. 16 According to In re Harris, the Marathon concern was not 17 implicated by Harris’ lawsuit because the underlying contract was 18 entered into postpetition, was approved by the bankruptcy court, 19 directly related only to estate administration and involved as 20 parties the trustee and the estate’s Special Representative. Id. 21 None of the types of facts that satisfied In re Harris’s 22 Marathon concern are present here. The insurance contract was 23 entered into prepetition between the insurer and GACN – before 24 GACN became a debtor in possession – and the insurance contract 25 never was the subject of bankruptcy court approval. It also is 26 relevant that, here, the debtor in possession – GACN – commenced 27 the adversary proceeding against the insurer, rather than the 28 other way around. This further distinguishes the matter
19 1 currently before us from In re Harris, in which Harris filed the 2 subject action against the bankruptcy trustee. Some of the 3 above-quoted language from In re Harris suggests that this 4 distinction is significant. See, e.g., id. at 737 (holding that 5 “an action against a bankruptcy trustee for the trustee’s 6 administration of the bankruptcy estate” is a core proceeding 7 arising in a title 11 case); see also Schultze v. Chandler, 765 8 F.3d 945, 948-50 (9th Cir. 2014) (explaining why actions against 9 estate professionals routinely are considered core proceedings 10 and further stating that “courts have been less concerned with 11 the identity of the party bringing the claim and more concerned 12 with the identity and function of the party against whom the 13 claim is brought”). 14 In short, In re Harris suggested that an adversary 15 proceeding by the trustee or debtor in possession on a 16 prepetition contract might not escape Marathon’s constitutional 17 concerns (and hence should not be determined to be within the 18 scope of 28 U.S.C. § 157(b)(2)(A) or (O)), even if that adversary 19 proceeding involved claims for relief based on the trustee’s – or 20 the debtor in possession’s – postpetition conduct undertaken to 21 administer the bankruptcy estate. 22 What In re Harris suggested, In re Ray largely confirms. In 23 In re Ray (the newest of the four Ninth Circuit decisions 24 referenced above), the reorganized debtor (Ray), in furtherance 25 of his confirmed chapter 11 plan, sought and obtained bankruptcy 26 court approval to sell an undeveloped half-acre parcel of real 27 property adjacent to the shopping mall the debtor co-owned with a 28 third party. In re Ray, 624 F.3d at 1128-29. The prospective
20 1 buyer of the shopping mall (Battle Ground Plaza, LLC) objected to 2 the sale of the half-acre parcel because, under the terms of the 3 parties’ prepetition contract for the sale of the shopping mall, 4 Battle Ground Plaza held a right of first refusal to purchase the 5 half-acre parcel. Id. The bankruptcy court approved the sale of 6 the half-acre parcel over Battle Ground Plaza’s objection. Id. 7 Later on, Battle Ground Plaza filed a state court lawsuit 8 against Ray and others alleging, among other things, that Ray had 9 breached his contractual duty to honor the right of first refusal 10 by selling the half-acre parcel to someone other than Battle 11 Ground Plaza. Id. The state court “remanded” the lawsuit to the 12 bankruptcy court, and the bankruptcy court ultimately entered a 13 final decision on the merits denying any relief on Battle Ground 14 Plaza’s prepetition contract claim. Id. 15 On appeal, the Ninth Circuit held that the bankruptcy court 16 lacked jurisdiction to hear and decide the merits of Battle 17 Ground Plaza’s lawsuit. Id. at 1131-35. According to In re Ray, 18 the lawsuit did not arise under title 11, did not arise in a case 19 under title 11, and was not even related to a case under title 20 11. Id. at 33. Nor did the bankruptcy court have ancillary 21 jurisdiction over the lawsuit. Id. at 1135-36. 22 The only aspects of In re Ray relevant here concern its 23 determination that the bankruptcy court lacked “arising in” 24 jurisdiction and its analysis of In re Harris. According to In 25 re Ray, following the reasoning of In re Harris, Battle Ground 26 Plaza’s lawsuit did not “arise in” a case under title 11 because 27 the lawsuit could exist independently of Ray’s bankruptcy case, 28 so the lawsuit was not a core proceeding. Id. at 1133.
21 1 Undeniably, there were some potentially significant 2 similarities between In re Harris and In re Ray. Id. In both 3 cases, the breach of contract lawsuits directly arose from 4 postpetition conduct specifically undertaken to further either 5 estate administration or the consummation of a confirmed 6 reorganization plan. Id. Based on this similarity, In re Ray 7 arguably could have concluded (as In re Harris did) that the 8 subject lawsuit could not have existed outside of a title 11 9 case. But, importantly, In re Ray did not rely on this 10 similarity. 11 Instead, In re Ray focused on what it perceived to be the 12 key distinctions in the controlling facts of both cases: 13 • In re Harris involved a lawsuit against the bankruptcy 14 trustee and other estate representatives, who at all 15 relevant times were engaged in the performance of their 16 statutory duties as prescribed by the Bankruptcy Code, 17 whereas In re Ray involved a lawsuit against the reorganized 18 debtor and several non-debtor parties; and 19 • In re Harris involved a lawsuit for breach of a postpetition 20 settlement agreement the trustee entered into as part of his 21 administration of the bankruptcy estate’s assets, whereas In 22 re Ray involved a lawsuit for breach of a prepetition right 23 of first refusal created under state law rather than as part 24 of a bankruptcy case. Id. 25 Based on these distinctive facts, In re Ray concluded 26 that Battle Ground Plaza’s lawsuit did not arise in a title 11 27 case and was not a core proceeding. Id. 28 When we look at the four above-referenced Ninth Circuit
22 1 cases as a whole, we are persuaded that GACN’s declaratory relief 2 action against the insurer is not a core proceeding. The 3 underlying dispute solely concerns the parties’ rights and 4 liabilities under a prepetition insurance contract, which was 5 entered into pursuant to state law rather than as a part of a 6 bankruptcy case. Additionally, the insurer has not attempted to 7 assert against GACN any sort of affirmative claim for relief 8 challenging any aspect of GACN’s performance of its statutory 9 duties as a debtor in possession or otherwise implicating core 10 bankruptcy claims procedures. 11 We recognize and appreciate the major impact the 12 declaratory relief action is having and will continue to have on 13 GACN’s bankruptcy case. It is not an exaggeration to say that 14 GACN’s prospects of a successful consensual reorganization depend 15 upon it prevailing in that action. Nor are we disregarding the 16 fact that the insurer’s litigation position (that GACN forfeited 17 it rights under the insurance contract by negotiating a 18 postpetition settlement with the wrongful termination plaintiffs) 19 challenges GACN’s conduct as debtor in possession in 20 administering the bankruptcy estate and impedes GACN from making 21 further progress towards confirming a consensual chapter 11 plan. 22 The catch is that none of these facts translate into core 23 bankruptcy jurisdiction. The criteria for core jurisdiction, set 24 forth above, as established by Congress in response to Marathon, 25 have been strictly construed by the Ninth Circuit in order to 26 avoid a future Marathon-like constitutional problem. The facts 27 of this case simply do not satisfy the Ninth Circuit’s strict 28 standards for core jurisdiction.
23 1 Thus, the bankruptcy court erred when it held that GACN’s 2 declaratory relief action qualified as a core bankruptcy 3 proceeding. 4 5. Review of Bankruptcy Court’s Determination That Other 5 Mandatory Abstention Elements Were Not Satisfied 6 Even though we have decided that GACN’s declaratory relief 7 action was a noncore proceeding, this does not by itself 8 establish that the bankruptcy court incorrectly denied mandatory 9 abstention. To support its mandatory abstention denial, the 10 bankruptcy court also determined that two other mandatory 11 abstention prerequisites were not met. According to the 12 bankruptcy court, GACN’s adversary proceeding did not present 13 purely state law questions. Additionally, the bankruptcy court 14 found that the state court could not timely adjudicate the 15 dispute. We will address each of these determinations in order. 16 With respect to the questions raised by the declaratory 17 relief action, we disagree with the bankruptcy court’s 18 determination that the action raised both state law questions and 19 bankruptcy law questions. This abstention element requires 20 bankruptcy courts to look at the parties’ claims for relief in 21 order to ascertain whether state law or federal law governs those 22 claims. See, e.g., Bowen Corp. v. Sec. Pac. Bank Idaho, F.S.B., 23 150 B.R. 777, 782 (Bankr. D. Idaho 1993); World Solar Corp. v. 24 Steinbaum (In re World Solar Corp.), 81 B.R. 603, 607 (Bankr. 25 S.D. Cal. 1988). Bowen Corp.’s and In re World Solar Corp.’s 26 analyses of this mandatory abstention element are consistent with 27 the language of the statute, which focuses on whether the subject 28 proceeding involves “State law claim[s] or State law cause[s] of
24 1 action.” 28 U.S.C. § 1334(c)(2). 2 On its face, GACN’s complaint only asks for a determination 3 of the parties’ rights and liabilities under the insurance 4 contract, which is wholly governed by state law. The bankruptcy 5 court posited that bankruptcy law questions might arise because 6 the action will affect GACN’s rights and duties as a debtor in 7 possession and also might impair GACN’s ability to obtain 8 bankruptcy court approval under Rule 9019 of its settlement with 9 the wrongful termination plaintiffs. The bankruptcy court’s 10 reasoning conflates the potential impact of the action with the 11 law governing the action. We recognize that General Carriers 12 Corps.’s articulation of this element referenced state law 13 “questions” rather than state law “claims for relief.” 258 B.R. 14 at 189. But we do not read General Carriers Corp. as attempting 15 to depart from the statutory language or as attempting to change 16 the plain meaning of that language. For mandatory abstention 17 purposes, we hold that GACN’s adversary proceeding only presented 18 questions of state law. 19 As for the issue of whether the state court could timely 20 adjudicate the dispute, the bankruptcy court here answered a 21 slightly different question: who could resolve the dispute faster 22 – the bankruptcy court or the state court. While the bankruptcy 23 court’s question frequently is relevant to the timeliness 24 determination, it is not always controlling. The most important 25 considerations in making the timeliness determination are the 26 circumstances surrounding the bankruptcy case and the urgency of 27 resolving the dispute presented by those circumstances. In re 28 World Solar Corp., 81 B.R. at 612. As In re World Solar Corp.
25 1 indicated, the greater the urgency in resolving the dispute for 2 bankruptcy purposes, the less of a delay in the state court the 3 bankruptcy court should allow for before determining that the 4 state court cannot timely adjudicate the dispute. 5 Here, the record indicated that GACN’s need to resolve the 6 dispute underlying the declaratory relief action was relatively 7 urgent because the pendency of the dispute was impeding GACN’s 8 reorganization efforts. The record also suggested that a number 9 of months would elapse before the state court could address the 10 dispute either by trial or summary judgment. These factors tend 11 to support the bankruptcy court’s timeliness determination. 12 On the other hand, because the bankruptcy court erroneously 13 concluded that the dispute was a core proceeding, the bankruptcy 14 court’s timeliness calculation necessarily was off. When, as 15 here, the dispute is a noncore proceeding, and one of the parties 16 has not consented to the bankruptcy court entering a final 17 decision pursuant to 28 U.S.C. § 157(c)(2), the bankruptcy court 18 cannot itself enter a final decision, but rather must submit 19 proposed findings of fact and conclusions of law to the district 20 court, which only can enter a final decision after considering 21 the bankruptcy court’s proposed findings and conclusions and 22 after reviewing de novo any matter a party has timely and 23 specifically objected to. 28 U.S.C. § 157(c)(1). 24 When the 28 U.S.C. § 157(c)(1) district court review process 25 is factored into the timeliness equation, the bankruptcy court 26 might conclude that GACN could obtain a more timely resolution of 27 the issues underlying the declaratory relief action by seeking 28 from the state court summary adjudication of the insurer’s sixth
26 1 affirmative defense in the state court action. See generally 2 See’s Candy Shops, Inc. v. Sup. Ct., 210 Cal. App. 4th 889, 899- 3 900 (2012) (indicating that summary adjudication procedures are 4 available to dispose of individual affirmative defenses). 5 Our collective experience as bankruptcy judges indicates 6 that the length of time it takes district courts to complete the 7 review process under 28 U.S.C. § 157(c)(1) varies widely from 8 court to court and district to district. We have no personal 9 knowledge of how long this process might take in the Central 10 District of California on a matter requiring the interpretation 11 of an insurance contract provision. 12 Therefore, remand is necessary so that the bankruptcy court 13 can revisit the timeliness issue. 14 6. Decision re Bankruptcy Court’s Denial of Mandatory Abstention 15 In sum, we will VACATE and REMAND the bankruptcy court’s 16 denial of the insurer’s request for mandatory abstention, so that 17 the bankruptcy court can factor into its timeliness consideration 18 28 U.S.C. § 157(c)(1)’s district court review process for noncore 19 matters. On remand, the bankruptcy court also can consider the 20 other aspects of the timeliness issue we have alluded to, above, 21 and it may reopen the record on this issue if it deems it 22 necessary or desirable. 23 However, based on our analysis set forth above, we must 24 overturn the bankruptcy court’s ruling that GACN’s declaratory 25 relief action is a core proceeding and its ruling that the action 26 raises both questions of state law and questions of bankruptcy 27 law for mandatory abstention purposes. We REVERSE these rulings. 28 Consequently, the resolution on remand of the insurer’s mandatory
27 1 abstention request depends solely on the bankruptcy court’s 2 resolution of the timeliness issue. If the bankruptcy court, on 3 remand, decides the timeliness issue in favor of the insurer, it 4 should grant the mandatory abstention request, but if it decides 5 the timeliness issue in favor of GACN, it should deny the 6 mandatory abstention request. 7 7. Discretionary Abstention 8 Generally speaking, the bankruptcy court’s discretionary 9 abstention analysis is persuasive. The bankruptcy court cogently 10 reasoned that the huge impact the resolution of the declaratory 11 relief action would have on the administration of GACN’s 12 bankruptcy estate and on GACN’s prospects of proposing a viable 13 consensual plan of reorganization militated strongly against 14 discretionary abstention, citing Cont’l Ins. Co. v. Thorpe 15 Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011, 1021 16 (9th Cir. 2012). In essence, the bankruptcy court held that this 17 factor outweighed any factors that arguably might weigh in favor 18 of discretionary abstention. 19 That being said, the bankruptcy court’s errors regarding the 20 presence of a core proceeding and regarding the predominance of 21 bankruptcy law issues over state law issues infected the 22 bankruptcy court’s discretionary abstention analysis. Both the 23 noncore status of the declaratory relief action and the 24 predominance of state law issues therein are relevant to several 25 of the discretionary abstention factors. Because these factors 26 might be weighed differently if the noncore status of the action 27 and the predominance of state law issues are accounted for, we 28 conclude that the errors were not harmless to the bankruptcy
28 1 court’s denial of discretionary abstention and that the denial 2 under these circumstances constituted an abuse of discretion. 3 Accordingly, we will VACATE and REMAND the bankruptcy 4 court’s denial of the insurer’s request for discretionary 5 abstention so that the bankruptcy court can account for the 6 noncore status of the declaratory relief action and for the 7 predominance of state law issues therein. 8 CONCLUSION 9 In closing, we acknowledge that our decision, following 10 Ninth Circuit law, adheres to a formulaic standard for 11 determining core jurisdiction – a standard that can lead to 12 seemingly arbitrary results offering little or no relief from the 13 real-life litigation obstacles debtors encounter, and which can 14 seriously threaten the foundational Bankruptcy Code objectives to 15 provide debtors with a fresh start and creditors with a ratable 16 distribution from available assets. Then again, this formulaic 17 standard necessarily flows from the Supreme Court’s Marathon 18 decision and Congress’ post-Marathon amendments to the Bankruptcy 19 Code’s jurisdictional scheme. Neither the Ninth Circuit nor this 20 Panel are writing on a clean slate. We are bound by both 21 Marathon’s pronouncements and Congress’ jurisdictional scheme. 22 For the reasons set forth above, we REVERSE in part, and we 23 VACATE and REMAND in part. 24 25 26 27 28