Telluride Asset Resolution, LLC v. Telluride Global Development, LLC (In Re Telluride Income Growth LP)

364 B.R. 390, 2007 Bankr. LEXIS 625, 47 Bankr. Ct. Dec. (CRR) 257, 2007 WL 646123

• Court: Bankruptcy Appellate Panel of the Tenth Circuit
• Decided: March 5, 2007
• Docket: BAP No. CO-06-006, Bankruptcy No. 03-31600-ABC, Adversary No. 04-1830-ABC
• Status: Published

Opinions

OPINION

McFEELEY, Chief Judge.

Plaintiff/Appellant Telluride Asset Resolution, LLC (“TAR”) and Defendant/Appellant Telluride Global Development, LLC (“TGD”) (hereinafter, when referred to jointly, “Appellants”) appeal two orders of the bankruptcy court for the District of Colorado. The first order dismissed part of an adversary proceeding and abstained from lifting a preliminary injunction. The second order remanded certain equitable breach of contract claims to the Colorado state court. The Appellants argue that the bankruptcy court erred in entering these orders because a previously entered sale order provided that the debtor’s assets were to be sold free and clear of all liens; therefore, there were no remaining issues to be decided by the state court. Finding no error, we affirm the appeal of the first order and we dismiss the appeal of the second order.

I. Background

The Debtor, Telluride Income Growth LP (“Debtor”), was formed to acquire, develop, and sell real property in Telluride, Colorado in 1991. Several limited partners invested approximately $1.6 million in the purchase of real property and the initial development of two residential condominium units known jointly as the Ballard House. Ultimately, due to lack of funding, TGD acquired title to the unsold units in the Ballard House project.

In October 2002, twenty-five of the Debtor’s limited partners (the “Limited Partners”) commenced litigation in Colorado state court (“State Court Litigation”) against, among others, the Debtor and TGD. They listed several derivative causes of action and an action for foreclosure of an equitable lien against the Ballard House project which the Limited Partners claimed they held personally. During the state court proceedings, the state court imposed a preliminary injunction.

In October 2003, an involuntary Chapter 7 case was filed by several of the Debtor’s creditors. Despite the Limited Partners’ resistance, an order for relief was entered and a Chapter 7 Trustee (“Trustee”) appointed. On September 1, 2004, the Trustee removed the State Court Litigation to bankruptcy court.

Subsequently, the Trustee entered into an agreement to sell all of the Debtor’s assets including the Debtor’s interest in the State Court Litigation to TAR. The Trustee moved for an order approving the sale. Following an evidentiary hearing and briefing, the court approved the sale. The sale order states:

Pursuant to 11 U.S.C. [] § 363(b) and (f), the Assets shall be transferred to Purchaser, provided however, that the Trustee is empowered to transfer only property of the Debtor’s estate, as defined in section 541 of the Bankruptcy Code. As of the Closing Date, the Assets shall be transferred to Purchaser, pursuant to section 36 g(f) of the Bankruptcy Code, free and clear of all interests ... and liens....

See Order Under 11 U.S.C. § 363, And Fed. R. Bankr.P.2002, 6004, 9014 And 9019(a), (A) Approving Agreement To Acquire Assets And Release Claims; And (B) Authorizing (I) Transfer Of Certain Of Debtor’s Assets Free And Clear Of Liens, Claims, Interests And Encumbrances, And (II) Mutual Release Of Claims (“Sale Order”) at 4, ¶ 6, in Appellants’ Appendix, Yol. 5, at 1691 (second emphasis added). The Sale Order does not address nor does it purport to convey to TAR the Limited Partners’ personal action to foreclose their alleged equitable lien on the Ballard House project.

In October 2005, TAR, as successor to the Trustee in the adversary proceeding, moved to vacate the preliminary injunction that had been issued in the state court prepetition, release to the Limited Partners the bond that had been required as a condition of the preliminary injunction, and dismiss the adversary proceeding. In opposition, the Limited Partners moved to remand the adversary proceeding to the state court, specifically their remaining non-derivative claim, stating that after TAR’s purchase of the Debtor’s assets, the adversary proceeding was now non-core and unrelated to the bankruptcy.

The bankruptcy court found that while it may not have had subject matter jurisdiction to adjudicate any remaining disputes that did not belong to the bankruptcy estate, it had core jurisdiction to determine how the adversary proceeding would be removed from its docket. The bankruptcy court orally ruled as follows: all TAR claims including claims originally asserted by the Limited Partners as derivative claims were dismissed without prejudice; all Limited Partners’ direct claims and any counterclaims against the Limited Partners were remanded to state court; the court abstained from ruling on the preliminary injunction and return of the bond and left that to be determined by the state court on remand. The bankruptcy court’s oral rulings were memorialized in written orders entered January 17, 2006, entitled: Order on Motion to Dissolve Preliminary Injunction, Release Bond and Dismiss without Prejudice, and Order Granting Motion to Remand Proceeding to Colorado State Court.

This appeal timely followed. We observe for the purpose of clarity that TGD was a defendant in both the state court case and in the original adversary proceeding based on its ownership interest in the Ballard House. In this appeal, TGD joins TAR as an Appellant. The parties have consented to this Court’s jurisdiction because they did not elect to have the appeal heard by the United States District Court for the District of Colorado. 28 U.S.C. § 158(c)(1); Fed. R. Bankr.P. 8001; 10th Cir. BAP L.R. 8001-1.

II. Discussion

Before us are two orders: (1) Order on Motion to Dissolve Preliminary Injunction, Release Bond and Dismiss Without Prejudice (“Abstention Order”); (2) Order Granting Motion to Remand Proceeding to Colorado State Court (“Remand Order”). In the Abstention Order, the bankruptcy court dismissed without prejudice all claims held by TAR and abstained from dissolving the state court injunction or releasing the bond; in the Remand Order, the bankruptcy court remanded all claims that were not claims or derivative claims of the estate to the state court. We will address each Order in turn.

As an initial matter, the Appel-lees argue that the Abstention Order is not ripe for review because it is not a final order and does not meet the criteria of the collateral order doctrine. This Court, with the consent of the parties, has jurisdiction to hear appeals “from final judgments, orders, and decrees,” and “with leave of the court, from other interlocutory orders and decrees” of bankruptcy judges within this circuit. 28 U.S.C. § 158(a), (b)(1).² A court order is a “final judgment” if it “ ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.’ ” Cunningham v. Hamilton County, 527 U.S. 198, 203-04, 119 S.Ct. 1915, 144 L.Ed.2d 184 (1999) (quoting Van Cauwenberghe v. Biard, 486 U.S. 517, 521, 108 S.Ct. 1945, 100 L.Ed.2d 517 (1988)). The Appellees argue that the Abstention Order is not such a final order because it does not end the litigation but leaves the matter to be concluded in state court.

In Quackenbush v. Allstate Insurance Co., 517 U.S. 706, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996), the Supreme Court delineated two tests for determining whether an abstention or remand order is immediately appealable.³ An abstention order will be immediately appealable if it effectively puts the litigants out of court by surrendering “jurisdiction of a federal suit to a state court.” Id. at 714, 116 S.Ct. 1712 (citation omitted). Alternatively, an abstention order will be immediately ap-pealable if it fits within the criteria of the collateral order doctrine.

The collateral order doctrine is judicial recognition of a small class of decisions “which finally determine claims of right separable from, and collateral to, rights asserted in the action, too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated.” Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949). For an order to come under this doctrine, the order in question “must conclusively determine the disputed question, resolve an important issue completely separate from the merits of the action, and be effectively unreviewable on appeal from a final judgment.” Coopers & Lybrand v. Livesay, 437 U.S. 463, 468, 98 S.Ct. 2454, 57 L.Ed.2d 351 (1978). If the order does not meet all of these requirements, it is not an appealable order under the collateral order doctrine. See Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 276, 108 S.Ct. 1133, 99 L.Ed.2d 296 (1988).

In Quackenbush, the Supreme Court found that a decision to abstain and remand fit within the parameters of the collateral order doctrine because “it conclusively determines an issue that is separate from the merits, namely, the question whether the federal court should decline to exercise its jurisdiction in the interest of comity and federalism” and the issue would be otherwise effectively unreviewable on appeal from a final judgment on the merits. Quackenbush, 517 U.S. at 714, 116 S.Ct. 1712; see also Personette v. Kennedy (In re Midgard Corp.), 204 B.R. 764, 768-69 (10th Cir. BAP 1997) (holding that a bankruptcy court’s orders refusing to abstain were reviewable under the collateral order doctrine because they conclusively determined the disputed issue of bankruptcy court jurisdiction, resolved an important issue separate from the merits of the underlying litigation, and would be effectively unreviewable on appeal).

In the appeal before us, in support for its decision to abstain, the bankruptcy court stated, “[t]he Court concludes that these matters are best left to the state court[.]” Transcript of Motions Hearing on December 14, 2005 (“Transcript”), at 26, ll. 14-15, in Appellants’ Appendix, Vol. 5, at 1645. The basis for this decision appears to be comity. The decision to abstain from deciding any of the other issues in the adversary proceeding conclusively determines an issue separate from the merits of the underlying proceeding. This case is analogous to Quackenbush; it is an appeal of a decision to abstain that will be effectively otherwise unreviewable on appeal. The Abstention Order thereby fits within the parameters of the second Quackenbush test, and is ripe for our review.

Next, Appellants argue that the bankruptcy court erred in entering the Abstention Order because the bankruptcy court abstained from hearing a core matter. Abstention is addressed in 28 U.S.C. § 1334(c)(1), (2). Abstention, like many bankruptcy provisions, begins with a distinction between core and non-core proceedings. Under 28 U.S.C. § 157(b)(1) bankruptcy courts “may hear and determine all cases under [T]itle 11 and all core proceedings arising under [T]itle 11 or arising in a case under [T]itle 11 ... and may enter appropriate orders and judgments .... ” Core proceedings are proceedings that involve rights created by bankruptcy law or which only arise in a bankruptcy proceeding. Gardner v. United States (In re Gardner), 913 F.2d 1515, 1518 (10th Cir.1990). Basically, bankruptcy courts have core jurisdiction over all cases that satisfy one of the following three criteria: (1) cases under Title 11; (2) proceedings arising under Title 11; (3) proceedings arising in a case under Title 11. In re Resorts Int'l Inc., 372 F.3d 154, 162 (3d Cir.2004) (citation omitted). The term “ ‘arising in’ refers to administrative matters that are not based on any right expressly created by [T]itle 11 but would nevertheless have no existence outside of the bankruptcy case.” In re ACI-HDT Supply Co., 205 B.R. 231, 234-35 (9th Cir. BAP 1997). Bankruptcy courts have full adjudicative power over core proceedings. Resorts Int’l, 372 F.3d at 162.

Non-core proceedings can exist independent from the bankruptcy proceeding, as they do not invoke substantive rights created by the bankruptcy. Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir.1987). “The bankruptcy court has jurisdiction over non-core proceedings when they are related to the bankruptcy in that they could conceivably have an effect on the bankruptcy estate.” Gregory Ranch v. Lyman (In re Gregory Rock House Ranch, LLC), 339 B.R. 249, 253 (Bankr.D.N.M.2006). In a non-core proceeding, unless the parties consent to entry of a final order of judgment by the bankruptcy judge, the bankruptcy court “shall submit proposed findings of fact and conclusions of law to the district court.” 28 U.S.C. § 157(c)(1).

Section 1334(c)(1) permits abstention from core matters and non-core matters when it is in the “interest of justice,” judicial economy, or respect for state law (“permissive abstention”). Section 1334(c)(2) pertains only to non-core matters and provides guidelines for when a bankruptcy court must abstain (“mandatory abstention”). Mandatory abstention applies when all of the following elements are present: (1) the motion to abstain was timely; (2) the action is based on state law; (3) an action has been commenced in state court; (4) the action can be timely adjudicated in state court; (5) there is no independent basis for federal jurisdiction other than bankruptcy; (6) the matter is non-core. Midgard, 204 B.R. at 779. Abstention applies to proceedings removed to bankruptcy courts. Id. at 774. Under Midgard, we review a bankruptcy court’s decision on whether to abstain de novo. Id. at 770.⁴

The Appellants argue that the bankruptcy court incorrectly abstained because the issues were part of a core proceeding that should have remained in the bankruptcy court because the bankruptcy court was in the best position to enforce its orders. Alternatively, they argue that if it was a non-core proceeding, all of the elements of mandatory abstention were not met.

The bankruptcy court did not cite under which section it abstained in the Abstention Order. However, it did state that it was abstaining because “[t]he Court concludes that these matters are best left to the state court[J” Transcript at 26, ll. 14-15, in Appellants’ Appendix, Vol. 5, at 1645. Because the basis for this decision is comity, the bankruptcy court abstained under § 1334(c)(1), permissive abstention. Under this section a bankruptcy court may abstain from both core and non-core matters.⁵ The Appellants do not identify and we do not find any reasons as a matter of law why the bankruptcy court erred when it concluded that the state court was in a better position to determine whether to dismiss the preliminary injunction imposed by the state court and release the bond that the state court had put in place.

Alternatively, the Appellants argue that the bankruptcy court erred in abstaining because the Limited Partners’ rights had already been adjudicated in the sale order under § 363(f); therefore, the bankruptcy court had the subject matter jurisdiction to enforce its orders, or alternatively, the motion to remand was not timely made and the state court could not timely adjudicate the issue. In this argument the Appellants conflate the appeal of the Abstention Order with that of the Remand Order. The Abstention Order does not remand the Limited Partners’ third party claims; it dismisses part of the adversary proceeding and abstains and remands to the state court for a ruling on lifting the preliminary injunction or releasing the bond.

In addressing the Remand Order, we must make an initial determination as to whether we have jurisdiction. Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541, 106 S.Ct. 1326, 89 L.Ed.2d 501 (1986) (a federal appellate court must determine whether it has jurisdiction over an appeal); City of Chanute v. Williams Natural Gas Co., 31 F.3d 1041, 1045 n. 8 (10th Cir.1994) (same); Midgard, 204 B.R. at 767-68 (same). In the Remand Order the bankruptcy court remands “all direct claims by the Moving Limited Partners, if any, and any counterclaims thereto, if any ... provided, however, that claims against the Debtor, if any, shall be resolved in this Court.” Order Granting Motion To Remand Proceeding To Colorado Supreme Court at 1-2, in Appellants’ Appendix at 1607-08. The Remand Order remands only those claims held by the moving Limited Partners against third parties who no longer have any claims or interests within the bankruptcy.

Bankruptcy courts may remand previously removed cases to a state court under 28 U.S.C. § 1452. 28 U.S.C. § 1452(b); see also Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 129, 116 S.Ct. 494, 133 L.Ed.2d 461 (1995). Under § 1452(b), a court may remand a case that has been removed from state court on “any equitable ground.” While a “court of appeals” may not review a decision to remand under this section, there is no prohibition of review by a district court or a bankruptcy appellate panel. However, § 1452 is not the exclusive provision governing appellate review of remands in bankruptcy. Another provision governing appellate review of remands in previously removed cases is found in 28 U.S.C. § 1447(d).

Under § 1447(d), any appellate review of orders to remand is precluded if the order is based on a procedural defect or lack of subject matter jurisdiction.⁶ See In re Richardson, 319 B.R. 724, 729 (S.D.Fla.2005). This section does not use the term “court of appeals” but prohibits any review on appeal.⁷ At least one dis-triet court has found that this section prohibits any review, including review by a district court of a bankruptcy court order entered on that basis. Id. This prohibition applies even if the appellate court believes that the lower court was in error. See Kennedy v. Lubar, 273 F.3d 1293, 1297 (10th Cir.2001).

The provisions of § 1447(d) are applicable in bankruptcy. “Section 1447(d) applies ‘not only to remand orders made in suits removed under [the general removal statute], but to orders of remand made in cases removed under any other statutes, as well.’ ” Things Remembered, 516 U.S. at 128,116 S.Ct. 494 (alteration in original) (emphasis omitted) (citing United States v. Rice, 327 U.S. 742, 752, 66 S.Ct. 835, 90 L.Ed. 982 (1946)). An order remanding a case under § 1452(b) based on lack of subject matter jurisdiction is subject to the provisions barring review of such decisions under § 1447(d). Things Remembered at 129, 116 S.Ct. 494.

In its oral findings regarding the Remand Order, the bankruptcy court found that the bankruptcy estate was no longer a party to the remaining claims in the adversary proceeding and the remaining claims did not involve the bankruptcy estate. Transcript at 23, II. 8-15, in Appellants’ Appendix at 1642. This was, in effect, a determination that it did not have subject matter jurisdiction over these claims. That being the case, § 1447(d) precludes our review of the Remand Order.

Courts have applied one exception to the general prohibition found in § 1447: the “substantive law exception.” The substantive law exception permits review of an order that dismisses a claim that precedes the order of remand. City of Waco v. U.S. Fid. & Guar. Co., 293 U.S. 140, 143, 55 S.Ct. 6, 79 L.Ed. 244 (1934). In Waco, the district court dismissed a third party, thereby eliminating diversity, and then remanded the case based on lack of jurisdiction. Id. at 142, 55 S.Ct. 6. The Supreme Court held that while no appeal could lie from the remand order, the decree of dismissal preceded that of remand and was appealable. Id. at 143, 55 S.Ct. 6. Pursuant to Waco, the substantive issue must be separable from the decision to remand. Cf. In re Richardson, 319 B.R. at 728 (concluding that the bankruptcy court’s finding that the parties had no standing to pursue an action in bankruptcy court was not separable from the decision to remand). “If the court looks to an issue for the purpose of determining subject matter jurisdiction, the issue is not separable because it cannot be said to have preceded the remand decision ‘in logic and in fact.’ ” Carr v. Am. Red Cross, 17 F.3d 671, 675 (3d Cir.1994) (emphasis omitted). In contrast, if the issue has relevance in determining the rights of the parties, independent from the issue of federal subject matter jurisdiction, the decision is separable and may be reviewed under the substantive law exception. Generally, the exception is employed only when the lower court dismisses a party or claim from a case before remanding it. Medisys Health Network, Inc. v. Local 348-S United Food & Commercial Workers, AFL-CIO & CLC, 337 F.3d 119, 123 (2d Cir.2003). The substantive law exception is interpreted narrowly. Id.

Although the Appellants do not invoke the substantive law exception, essentially, they claim this exception in their argument that the remand ignores the fact that the sale was free and clear of all liens or claims. The Appellants argue that after the sale there were no claims for the bankruptcy court to remand because the Sale Order sold the litigation rights free and clear of all liens and claims and thus, eliminated all liens and claims of the Limited Partners, both derivative and non derivative. While we express no opinion as to the validity of the Limited Partners’ non-derivative claims, we disagree with the Appellants’ premise. In the Sale Order the bankruptcy court stated:

“Nothing in this Order or in the Agreement shall affect the claims of any entity who is not a signatory to the Agreement against any other entity, provided however, the Agreement and transactions authorized by this Order expressly dispose of all claims of this bankruptcy estate that have previously been, or could have been, asserted derivatively on behalf of the Debtor.”

Sale Order at 4, ¶ 10, in Appellants’ Appendix, Volume 5, at 1691 (emphasis added). Additionally, in its oral findings in the Remand Order, the bankruptcy court stated: “I am not ruling today nor have I previously addressed the viability of any [LJimited [P]artnership nonderivative claims. This Court has not addressed direct claims of [Limited [P]artners in the [removed action] or otherwise.” Transcript at 24, ll. 19-22, in Appellants’ Appendix, Vol. 5, at 1643. The bankruptcy court clearly did not rule on the viability of the Limited Partners’ asserted third party beneficiary status. Those asserted claims remained for remand.

Alternatively, the Appellants argue that the motion to remand was not timely made and the state court cannot timely adjudicate the issue. This argument is grounded on case law surrounding a bankruptcy court’s decision to abstain from determining certain issues, and is irrelevant to a decision to remand based on a lack of subject matter jurisdiction. In sum, the Appellants have not established an exception to the prohibition stated in § 1447.

III. Conclusion

For the reasons set forth above, we affirm the bankruptcy court’s Order on Motion to Dissolve Preliminary Injunction, Release Bond and Dismiss Without Prejudice. Because we lack the jurisdiction to review the Order Granting Motion to Remand Proceeding to Colorado State Court we dismiss the appeal of that Order.

2 . 28 U.S.C. § 158(a) provides:

The district courts of the United States shall have jurisdiction to hear appeals (1) from final judgments, orders, and decrees; [and]

(3) with leave of the court, from other interlocutory orders and decrees[.]

28 U.S.C. § 158(c)(1) grants a Bankruptcy Appellate Panel the jurisdiction to hear appeals under subsection (a).

3 . Quackenbush examined whether such orders could be appealed under 28 U.S.C. § 1291, which provides the criteria for appeals of district court decisions. Bankruptcy court decisions are reviewable under an analogous provision found in 28 U.S.C. § 158(a).

4 . But see Coker v. Pan Am. World Airways, Inc. (In re Pan Am. Corp.), 950 F.2d 839, 844 (2d Cir.1991) (stating in a case decided prior to the amendment to the Bankruptcy Code which precludes appellate review of decisions to abstain under § 1334(c)(1), that review under this section should be under the abuse of discretion standard); accord In re Delta Towers, Ltd., 924 F.2d 74, 79 (5th Cir.1991); In re Colarusso, 295 B.R. 166, 178 (1st Cir. BAP 2003), aff'd, 382 F.3d 51 (1st Cir.2004).

5 . We note that the Appellants misunderstand the provisions of mandatory abstention. The mandatory abstention provision, § 1334(c)(2), delineates the requirements when a bankruptcy court must abstain from hearing non-core matters. However, the provisions of § 1334(c)(2) do not prohibit a bankruptcy court from abstaining from hearing a non-core matter under § 1334(c)(1).

6 . Pursuant to § 1447(c), previously removed cases must be remanded "[i]f at any time before final judgment it appears that the district court lacks subject matter jurisdiction.” The party removing the action bears the burden of establishing federal jurisdiction. Section 1447(c) must be read in pari materia with § 1447(d). See Thermtron Prods., Inc. v. Hermansdorfer, 423 U.S. 336, 345-46, 96 S.Ct. 584, 46 L.Ed.2d 542 (1976). Section 1447(d) provides ”(a)n order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise!.]”

7 . The restrictions on appellate review set forth in 28 U.S.C. § 1447(d) are subject to the three following statutory exceptions: civil rights cases; cases involving the Resolution Trust Corporation; cases involving the Federal Deposit Insurance Corporation. The first exception is referenced in § 1447(d). The latter two exceptions are found in the statutes empowering the corporations. None of these exceptions are applicable here.