Schuster v. Mims

• Court: Court of Appeals for the Fifth Circuit
• Decided: April 8, 1997
• Docket: 96-11271
• Status: Published

Opinion

United States Court of Appeals,

Fifth Circuit.

No. 96-11271

Summary Calendar.

In the Matter of the RUPP & BOWMAN CO., Debtor.

Eugene SCHUSTER, et al., Appellants,

v.

Jeffrey H. MIMS, Trustee, Appellee.

April 8, 1997.

Appeal from the United States District Court for the Northern District of Texas.

Before SMITH, DUHÉ and BARKSDALE, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Quest Biotechnology, Inc., Eugene Schuster, and Venture

Funding, Ltd. (collectively, the "Schuster Parties"), appeal the

district court's denial of motions for mandatory abstention and a

stay with respect to a bankruptcy court proceeding involving the

Rupp & Bowman Co. (the "Debtor"). We dismiss the appeal for want

of jurisdiction.

I.

This action stems from a 1986 transaction between the Schuster

Parties and the Debtor in connection with a Chapter 11 proceeding

involving AM Diagnostics ("AMD"). The Schuster Parties and the

Debtor were involved in bringing AMD out of bankruptcy and

subsequently in 1990 entered into a series of related agreements

pertaining to the AMD plan of reorganization. The agreements were

designed to inject funds into AMD to permit its reorganization and

1 required that each of the individual Schuster Parties and the

Debtor guarantee a portion of the AMD debt. One such agreement,

referred to as the Forbearance Agreement, was a promissory note for

$500,000 executed in favor of the Debtor as security for a line of

credit obtained by certain members of the Schuster Parties.

AMD failed in December 1991, and its primary creditor,

Foothill Capital Corporation ("Foothill"), foreclosed on most of

AMD's assets. According to the Schuster Parties, the Debtor and

Bert Williams, Jr., Debtor's CEO and controlling shareholder, had

agreed orally with the Schuster Parties prior to the foreclosure

that, in the event AMD failed, the parties would purchase the

assets from Foothill and form a new company for their collective

benefit. The Schuster Parties contend that the Debtor and Williams

breached this oral agreement by taking control of AMD's assets and

business for their exclusive benefit.

In April 1994, the Debtor filed suit in Michigan state court

against the Schuster Parties, alleging that the latter had

defaulted on their obligations under the Forbearance Agreement and

seeking to accelerate the entire outstanding balance under the

Agreement. In July 1994, the Debtor filed a voluntary chapter 11

petition in bankruptcy court in the Northern District of Texas and

sought refund from the Schuster Parties of various preferential

transfers, pursuant to 11 U.S.C. § 547(b). The bankruptcy

proceeding was converted in February 1995 to a chapter 7 filing;

Jeffery Mims was appointed trustee.

Mims amended the Debtor's complaint in October 1995 to include

2 a claim with respect to the Forbearance Agreement—the identical

claim alleged in the still-outstanding Michigan case—and a second

claim with respect to various other outstanding guarantees executed

in connection with the AMD plan of reorganization. The Schuster

Parties asserted in bankruptcy court various affirmative defenses

and counterclaims to the Forbearance Agreement claim that had been

incorporated by the Mims Amendment. These counterclaims are

virtually identical to claims the Schuster Parties had filed

against the Debtor and others in November 1991 in California

federal district court.

In November 1995, the Schuster Parties moved in bankruptcy

court for a mandatory abstention of the Forbearance Agreement claim

pursuant to 28 U.S.C. § 1334(c)(2). The Schuster Parties argued

that abstention was required because the forbearance claim was the

subject matter of a pending Michigan case that had been filed

previously. The Schuster Parties also requested a stay of

proceedings under the "first filed" rule, arguing that the

forbearance and guarantee claims were identical to certain claims

pending in the California federal court that had been filed

previously and had been the subject of extensive discovery and

motions.

The bankruptcy court denied both motions in January 1996, the

first based upon representations by the Debtor's counsel that he

would seek a nonsuit of the Michigan action and the latter because

the California federal court had not set a trial date. Upon

opposing summary judgment motions with respect to the various

3 bankruptcy claims, the court in June 1996 granted summary judgment

in favor of the Schuster Parties on the guarantee count and a

partial summary judgment in favor of the Debtor on the Forbearance

Agreement count, subject to a trial of the Schuster Parties'

affirmative defenses and counterclaims.

In the meantime, the Schuster Parties obtained a September

1996 trial date in the California action and then re-urged their

petition in the bankruptcy court for a transfer to California of

the entirety of the Forbearance Agreement defenses and related

counterclaims. The Schuster Parties at this time also renewed

their mandatory abstention motion pertaining to the Michigan

action, noting that Mims had been unable to obtain a non-suit of

that action.

In August 1996, the bankruptcy court ordered a transfer to

California of all of the Forbearance Agreement defenses and

counterclaims, except for those pertaining to Mims. Without ruling

explicitly on the mandatory abstention motion, the court denied it

implicitly by retaining the action and setting an October 1996

trial date in bankruptcy court. The trial date was set after the

Schuster Parties filed a notice of appeal to the district court,

asking for an emergency stay and review of the bankruptcy court's

decisions.

II.

The Schuster Parties contend that, pursuant to 28 U.S.C. §

1334(c)(2), the bankruptcy court erred in failing to abstain from

hearing their Forbearance Guarantee claims that had been pending in

4 Michigan state court since April 1994. The district court,

concluding that the bankruptcy court's abstention order was

interlocutory, dismissed the appeal because the Schuster Parties

had failed to comply with rule 8003(a) and (c).1

Before reaching the merits, we must determine whether we have

jurisdiction to review the district court's decision. Section

1334(d), as amended, provides that "[a]ny decision to abstain or

not to abstain made under this subsection (other than a decision

not to abstain in a proceeding described in subsection (c)(2)) is

not reviewable by appeal or otherwise by the court of appeals under

section 158(d), 1291, or 1292 of this title...." 28 U.S.C. §

1334(d) (West Supp.1996) (emphasis added).

In contrast, the former section 1334(c)(2), applicable to

cases commenced before October 22, 1994, provided that "[a]ny

decision to abstain or not to abstain made under this subsection is

not reviewable by appeal or otherwise by the court of appeals under

1334(c)(2) (West 1993), amended by 28 U.S.C. § 1334(c)(2), (d)

(Supp.1996). Because the instant case commenced in October 1995,

it is uncontested that the amended version of § 1334(d) governs.

The amended § 1334(c)(2) provides,

Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising

1 The rule requires a party filing an interlocutory appeal to accompany its notice of appeal with a motion for leave to appeal. Because the Schuster Parties failed to file the required motion, the district court denied leave to appeal and struck the notice of appeal.

5 in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.

28 U.S.C. § 1334(c)(2) (West Supp.1996) (emphasis added).

Accordingly, under this statute, courts must abstain from hearing

a state law claim if the following requirements are met: (1) The

claim has no independent basis for federal jurisdiction, other than

§ 1334(b); (2) the claim is a non-core proceeding, i.e., it is

related to a case under title 11 but does not arise under or in a

case under title 11; (3) an action has been commenced in state

court; and (4) the action could be adjudicated timely in state

court. See Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195,

1206 (5th Cir.1996); 28 U.S.C. §§ 1334(c)(2), 157(b)(1).

Because the Schuster Parties brought their motion for

mandatory abstention under the amended version of § 1334(c)(2), our

jurisdiction, if any, stems from § 1334(d) and must be consistent

with §§ 158(d), 1291, and 1292. We agree with the Debtor, however,

that § 1334(d) does not provide, on its own, a definitive basis for

appellate review. Rather, § 1334(d) confers jurisdiction on this

court to review decisions to deny or grant motions for mandatory

abstention only if such review is permissible under one or more of

§ 158(d), 1291, or 1292; it does not address whether an abstention

decision is in fact final or interlocutory. To determine whether

§ 1334(d) permits us to review the bankruptcy court's decision not

to abstain, we must enquire, therefore, whether the decision is

final or interlocutory.

6 Not only has no court determined whether, under the amended §§

1334(c)(2) and (d), a bankruptcy court's decision not to abstain is

an interlocutory or final order, but the courts that have addressed

the issue with regard to the pre-amendment § 1334(c)(2) have

reached differing conclusions, with little or no discussion of

reasons.2 None of these courts has discussed the nature of the

mandatory abstention decision within the context of § 1291, either

directly or within the judicially-engrafted collateral order

doctrine of Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541,

545-47, 69 S.Ct. 1221, 1225, 93 L.Ed. 1528 (1949).

In general, a district court order is appealable under § 1291

if it "ends the litigation on the merits and leaves nothing for the

court to do but execute the judgment." Catlin v. United States,

324 U.S. 229, 233, 65 S.Ct. 631, 633, 89 L.Ed. 911 (1945). Certain

collateral orders are reviewable immediately under § 1291 where

they (1) determine conclusively the disputed issue; (2) resolve an

issue that is separable completely from the merits of the action;

2 See, e.g., 150 N. Street Assocs. Ltd. Partnership v. City of Pittsfield (In re 150 N. Street Assocs. Ltd. Partnership), 184 B.R. 1, 6 (Bankr.D.Mass.1995) (noting that the decision under § 1334(c)(1) (permissive abstention) declining to abstain was an interlocutory order and "not technically binding"); Eastport Assocs. v. City of Los Angeles (In re Eastport Assocs.), 114 B.R. 686, 693 (C.D.Cal.1990) (assuming, without deciding, that it lacked jurisdiction to reconsider a decision not to abstain under § 1292(b)), aff'd, 935 F.2d 1071 (9th Cir.1991); Earle Indus. v. Circuit Eng'g (In re Earle Indus.), 72 B.R. 131, 135 n. 7 (Bankr.E.D.Pa.1987) ("Clearly, a decision under 28 U.S.C. § 1334(c)(2) to abstain is not reviewable."). But cf. Holtzclaw v. State Farm Fire & Casualty Co. (In re Holtzclaw), 131 B.R. 162, 163 (E.D.Cal.1991) (" "A decision by the bankruptcy court on a question of mandatory abstention is now a final order reviewable on appeal by the district court.' ") (quoting All Am. Laundry Serv. v. Ascher (In re Ascher), 128 B.R. 639, 645 (Bankr.N.D.Ill.1991)).

7 (3) effectively would be unreviewable on appeal from a final

judgment; and (4) are too important to be denied review. See

Quackenbush v. Allstate Ins. Co., --- U.S. ----, ---- - ----, 116

S.Ct. 1712, 1718-19, 135 L.Ed.2d 1 (1996) (citing Cohen, 337 U.S.

at 545-47, 69 S.Ct. at 1225-26).

We do not agree with the Schuster Parties that the decision

not to abstain from hearing the Forbearance Agreement claim that

has been pending in Michigan state court since April 1994 satisfies

the Quackenbush criteria for review under the collateral order

doctrine. Although the order arguably satisfies the first two

Quackenbush criteria—it determines conclusively the disputed issue,

and the abstention issue is separable completely from the merits of

the action—the order fails to satisfy the third prong.

We see no reason why the decision would be effectively

unreviewable on appeal. Unlike the reverse situation in which the

bankruptcy court abstains and is then bound as a matter of res

judicata to honor the judgment of the Michigan state court, thus

rendering the abstention decision effectively unreviewable on

appeal, see, e.g., Moses H. Cone Memorial Hosp. v. Mercury Constr.

Corp., 460 U.S. 1, 12, 103 S.Ct. 927, 935, 74 L.Ed.2d 765 (1983),

the instant case poses no such concerns. Rather, once the

bankruptcy court renders a final judgment with respect to the

Forbearance Agreement claim, the Schuster Parties will be free to

appeal that decision and to challenge the appropriateness of the

decision not to abstain. Although we acknowledge that delaying

review of the abstention decision until such time may cause the

8 Schuster Parties and the Debtor additional litigation-related

expenses, we do not view such delays as sufficient to convey

jurisdiction under the collateral order doctrine.3

Therefore, we lack jurisdiction to entertain the Schuster

Parties' appeal of the bankruptcy court's decision not to abstain,

and thus we do not reach the merits. Furthermore, because any

jurisdiction to consider the bankruptcy court's decision to

transfer part of the pending claims to California district court is

ancillary to our jurisdiction with respect to the abstention order

only, our lack of jurisdiction to hear the abstention appeal

necessarily deprives us of jurisdiction to hear the transfer

appeal.

The appeal is DISMISSED for want of jurisdiction.

3 See, e.g., Kershaw v. Shalala, 9 F.3d 11, 14 (5th Cir.1993). But cf. A.H. Robins Co., v. Piccinin, 788 F.2d 994, 1009 (4th Cir.) (noting that "[w]eighty considerations of fairness and efficient judicial administration" counsel in favor of a "relaxed standard of finality" for bankruptcy appeals), cert. denied, 479 U.S. 876, 107 S.Ct. 251, 93 L.Ed.2d 177 (1986).