Contra Costa Retail Center LLC et al v. Bally Total Fitness Corporation

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
BALLY TOTAL FITNESS
CORPORATION, 	A.P. No. 07-4190 AT
Plaintiff,
vs.
CONTRA COSTA RETAIL CENTER,
et al.,
Defendants.
______________________________/
CONTRA COSTA RETAIL CENTER,
LLC, et al., 	A.P. No. 07-4191 AT
Plaintiffs,
vs.
BALLY TOTAL FITNESS
CORPORATION,
Defendant.
______________________________/
MEMORANDUM OF DECISION
Plaintiff Contra Costa Retail Center, LLC (“Landlord”) moves to
remand the above-captioned adversary proceeding against Bally Total
Fitness Corporation (“Bally”) to the Superior Court of Contra Costa
Signed: February 20, 2008
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
February 20, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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County, 	State 	of 	California 	(the 	“State 	Court”). 	For 	the 	reasons
stated below, the motion will be granted.
BACKGROUND
Bally 	filed 	a 	chapter 	11 	petition 	in 	the 	United 	States
Bankruptcy 	Court 	for 	the 	Southern 	District 	of 	New 	York 	on 	July 	31,
2007 	(the 	“Bankruptcy 	Case”). 	An 	order 	confirming 	Bally’s
reorganization 	plan 	(the 	“Plan”) 	was 	entered 	on 	September 	17, 	2007
(the “Confirmation Order”).
Prior 	to 	the 	bankruptcy 	filing, 	Bally 	operated 	a 	fitness
facility located on real property in Contra Costa County (the “Real
Property”) pursuant to a written lease (the “Lease”) with Landlord,
the 	owner 	of 	the 	Real 	Property. 	In 	or 	about 	May 	2007, 	Landlord
asserted 	that 	Bally 	was 	in 	default 	of 	the 	Lease 	and 	gave 	Bally 	a
twenty day notice to quit the Real Property. 	In June 2007, Landlord
gave Bally a three day notice to quit.
Bally 	contended 	that 	it 	was 	not 	in 	default 	of 	the 	Lease 	and
refused to vacate the Real Property. 	Instead, it filed a complaint
in 	State 	Court 	against 	Landlord, 	seeking 	a 	temporary 	restraining
order 	and 	preliminary 	and 	permanent 	injunctions 	as 	well 	as 	damages
for breach of contract (the “Injunction Action”). 	The applications
for a temporary restraining order and a preliminary injunction were
both denied.
In the meantime, Landlord had filed an unlawful detainer action
in 	State 	Court 	(the 	“Unlawful 	Detainer 	Action”). 	The 	State 	Court
ordered the Injunction Action and the Unlawful Detainer Action to be
coordinated through a single department of the Superior Court. 	Bally
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filed 	a 	demurrer 	to 	the 	complaint 	in 	the 	Unlawful 	Detainer 	Action
(the “UD Complaint”). 	After Landlord had filed an opposition to the
demurrer 	and 	before 	the 	demurrer 	could 	be 	heard, 	Bally 	filed 	for
chapter 	11, 	thereby 	staying 	prosecution 	of 	the 	Unlawful 	Detainer
Action.
Bally filed a pre-packaged chapter 11 plan (the “Plan”) with the
bankruptcy 	petition 	or 	shortly 	thereafter. 	The 	Plan 	provided 	that
the 	Lease 	would 	be 	assumed 	pursuant 	to 	11 	U.S.C. 	§ 	365. 	Landlord
objected 	to 	the 	Plan 	and 	accompanying 	disclosure 	statement,
contending 	that 	the 	Lease 	could 	not 	be 	assumed 	because 	it 	had 	been
terminated before the bankruptcy petition was filed. 	Bally disputed
this contention. 	To permit a prompt confirmation of the Plan without
waiting 	for 	this 	dispute 	to 	be 	resolved, 	the 	parties 	agreed 	that
confirmation 	of 	the 	Plan 	would 	have 	no 	effect 	on 	the 	issues 	being
litigated in State Court.
The 	effective 	date 	of 	the 	Plan 	was 	October 	2, 	2007, 	at 	which
time 	the 	automatic 	stay 	expired. 	Thus, 	at 	this 	point, 	further
prosecution of the Unlawful Detainer Action was no longer barred. 	On
November 	26, 	2007, 	the 	State 	Court 	issued 	an 	order 	denying 	Bally’s
demurrer to the UD Complaint. 	Shortly thereafter, Landlord scheduled
a deposition of Bally’s most knowledgeable person with respect to the
Lease 	and 	related 	issues. 	In 	response, 	on 	or 	about 	November 	26,
2007, 	Bally 	filed 	and 	served 	a 	notice 	of 	removal 	of 	the 	Injunction
and 	Unlawful 	Detainer 	Actions 	(the 	“State 	Court 	Actions”) 	to 	the
United 	States 	Bankruptcy 	Court 	for 	the 	Northern 	District 	of
California.
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1Section 157(a) provides that a district court may provide
that this jurisdiction is referred to the bankruptcy court. 	28
U.S.C. § 157(a). 	The United States District Court for the Northern
District of California has provided that its bankruptcy
jurisdiction is referred to the United States Bankruptcy Court for
the Northern District of California. 	See Local Rules for the
United States Bankruptcy Court for the Northern District of
California, B.L.R. 5011-1(a).
4
On or about December 20, 2007, Landlord filed a motion to remand
the State Court Actions to the State Court and/or to abstain. 	Bally
opposed the motion. 	A hearing on the motion was conducted on January
17, 2008 at which time the motion was taken under submission.
DISCUSSION
A. 	APPLICABLE LAW
1. 	Removal and Remand
Section 1452(a) of Title 28 of the United States Code provides
as follows:
A party may remove any claim or cause of action
in a civil action other than a proceeding before
the United States Tax Court or a civil action by
a governmental unit to enforce such governmental
unit’s 	police 	or 	regulatory 	power, 	to 	the
district court for the district where such civil
action 	is 	pending, 	if 	such 	district 	court 	has
jurisdiction 	of 	such 	claim 	or 	cause 	of 	action
under section 1334 of this title.
28 	U.S.C. 	§ 	1452(a). 	Section 	1334(b) 	provides, 	in 	pertinent 	part,
the 	district 	court 	“shall 	have 	original 	but 	not 	exclusive
jurisdiction of all civil proceedings...related to cases under title
11.” 	28 	U.S.C. 	§ 	1334(b). 1 	Section 	1452(b) 	provides 	in 	pertinent
part 	that 	“[t]he 	court 	to 	which 	such 	claim 	or 	cause 	of 	action 	is
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removed 	may 	remand 	such 	claim 	or 	cause 	of 	action 	on 	any 	equitable
ground.” 	28 U.S.C. § 1452(b).
Rule 	9027(a)(2) 	of 	the 	Federal 	Rules 	of 	Bankruptcy 	Procedure
provides 	that, 	if 	a 	claim 	or 	cause 	of 	action 	is 	pending 	when 	a
bankruptcy 	petition 	is 	filed, 	the 	deadline 	for 	filing 	a 	notice 	of
removal is the later of: (1) 90 days after the order for relief, (2)
30 days after the entry of an order terminating the automatic stay if
prosecution of the proceeding was stayed pursuant to 11 U.S.C. § 362,
or (3) 30 days after a trustee qualifies in a chapter 11 case but not
later 	than 	180 	days 	after 	the 	order 	for 	relief. 	Fed.R.Bankr.Proc.
9027(a)(2).
2. 	Abstention
Section 1334(c)(2) provides that:
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 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). 	This is sometimes referred to as mandatory
abstention. 	Section 1334(c)(1) provides that:
Except 	with 	respect 	to 	a 	case 	under 	chapter 	15
of title 11, nothing in this section prevents a
district court in the interest of justice, or in
the interest of comity with the State courts or
respect 	for 	State 	law, 	from 	abstaining 	from
hearing 	a 	particular 	proceeding 	arising 	under
title 	11 	or 	arising 	in 	or 	related 	to 	a 	case
under title 11.
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28 U.S.C. § 1334(c)(1). 	T h i s 	i s 	s o m e t i m e s 	r e f e r r e d 	t o 	a s
discretionary abstention.
B. 	DECISION
Landlord 	contends 	that 	the 	State 	Court 	Actions 	should 	be
remanded 	based 	on 	principles 	of 	mandatory 	and 	discretionary
abstention. 	See 	28 	U.S.C. 	§ 	1334(c)(1)&(2). 	Strictly 	speaking,
these 	statutes 	do 	not 	apply 	to 	remand 	of 	a 	removed 	proceeding.
Remand 	is 	based 	on 	general 	equitable 	principles. 	See 	28 	U.S.C. 	§
1452. 	However, arguably, failure to remand where all of the elements
of mandatory abstention are present would be an abuse of the Court’s
discretion. 	As 	a 	result, 	the 	Court 	will 	address 	each 	of 	these 	two
grounds.
1. 	Mandatory Abstention as Ground for Remand
There 	are 	five 	elements 	required 	for 	mandatory 	abstention 	to
apply. 	They are that: (a) the motion must be made on a timely basis,
(b) 	the 	claim 	must 	be 	based 	on 	state 	law, 	(c) 	the 	claim 	cannot 	be
either based on bankruptcy law or have arisen in a bankruptcy case,
(d) the claim must not have been capable of being filed in a federal
court 	absent 	bankruptcy 	jurisdiction, 	and 	(e) 	the 	claim 	must 	be
capable of being timely adjudicated in state court. 	See 28 U.S.C. §
1334(c)(2). 	Landlord contends that each of these elements is present
here. 	Bally disagrees.
a. 	Timeliness of Motion
As recited above, Bally removed the State Court Actions to the
bankruptcy court on or about November 26, 2007. 	The motion to remand
or abstain was filed on December 20, 2007, less than a month later.
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Bally does not appear to contend that the motion was untimely. 	The
Court concludes that it was timely.
b. 	Claim or Cause of Action Based on State Law
Clearly, the claims asserted in the State Court Actions are all
based on state law. 	Bally does not appear to contend otherwise.
c. 	Claim or Cause of Action Does Not Arise Under Title 11 and
Did Not Arise in a Case Under Title 11
The 	State 	Court 	Actions 	do 	not 	assert 	any 	claim 	or 	cause 	of
action 	under 	Title 	11: 	i.e., 	the 	Bankruptcy 	Code. 	Since 	the 	State
Court 	Actions 	were 	filed 	prior 	to 	the 	commencement 	of 	Bally’s
bankruptcy case, clearly the claims or causes did not arise in a case
under Title 11: i.e., Bally’s case.
d. 	No Other Basis for Federal Court Jurisdiction
In 	its 	motion, 	Landlord 	notes 	that 	the 	claims 	asserted 	in 	the
State 	Court 	Actions 	are 	based 	solely 	on 	California 	law. 	It 	then
contends that there is no independent basis for federal jurisdiction
for 	the 	State 	Court 	Actions. 	In 	its 	opposition, 	Bally 	takes 	issue
with 	the 	second 	assertion. 	It 	contends 	that 	Landlord 	and 	“all
related parties” are California entities whereas Bally is a Delaware
corporation. 	Therefore, 	the 	State 	Court 	Actions 	could 	have 	been
filed 	in 	federal 	court 	based 	on 	diversity 	jurisdiction. 	Bally
asserts 	that 	the 	State 	Court 	Actions 	also 	meet 	the 	minimum 	dollar
amount required by diversity jurisdiction based on the value of the
Lease. 	See 28 U.S.C. § 1332(a).
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In its reply, Landlord does not dispute that citizenship of the
parties 	is 	diverse. 	However, 	it 	contends 	that, 	as 	the 	plaintiff,
Bally could not have removed the Injunction Action to federal court
based 	on 	diversity 	jurisdiction 	under 	the 	general 	federal 	removal
statute. 	Under 	28 	U.S.C. 	§ 	1441, 	the 	general 	federal 	removal
statute, 	the 	party 	that 	filed 	the 	action 	in 	state 	court 	cannot
thereafter 	remove 	it 	to 	federal 	court. 	This 	comment, 	while 	true,
disregards 	the 	precise 	language 	of 	28 	U.S.C. 	§ 	1334(c)(2). 	The
necessary element for mandatory abstention is that the action could
not have been commenced in a court of the United States, not whether
it could have been removed there absent jurisdiction under 28 U.S.C.
§ 1334.
Landlord 	also 	disputes 	Bally’s 	contention 	that 	the 	Unlawful
Detainer 	Action 	satisfies 	the 	minimum 	dollar 	amount 	for 	diversity
jurisdiction. 	At 	present, 	the 	minimum 	dollar 	amount 	for 	actions
prosecuted 	in 	federal 	court 	based 	on 	diversity 	jurisdiction 	is
$75,000. 	28 U.S.C. § 1332(a). 	Landlord notes that, under California
law, the damages sought in an unlawful detainer action are limited to
those directly related to the unlawful detention of the real property
in question. 	See Vasey v. California Dance Co., 70 Cal. App. 3d 742,
748 (1977). 	Landlord presumably contends that these are minimal.
Landlord’s argument reads the minimum dollar amount requirement
for 	jurisdiction 	too 	narrowly. 	For 	purposes 	of 	diversity
jurisdiction, the measure of the dollar amount in controversy is not
limited to the amount of recoverable damages. 	When the action seeks
recovery 	of 	a 	leasehold, 	the 	value 	of 	the 	leasehold 	must 	be 	taken
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into 	account. 	Several 	courts 	have 	found 	the 	appropriate 	dollar
amount 	in 	such 	actions 	to 	be 	at 	least 	one 	year’s 	rent. 	See 	Mutual
First, 	Inc. 	v. 	O’Charleys 	of 	Gulfport, 	Inc., 	721 	F. 	Supp. 	281, 	283
(S.D. 	Ala. 	1989). 	See 	also 	Swords 	to 	Plowshares 	v. 	Kemp, 	423 	F.
Supp. 2d 1031, 1037, fn.6 (N.D. Cal. 2005)(denying remand of unlawful
detainer 	action 	removed 	based 	on 	federal 	question 	jurisdiction 	and
citing Mutual First with approval).
The Lease called for payments of $25,687 per month. 	Thus, one
year’s rent was well in excess of the minimum dollar amount.
e. 	Timely Adjudication
Landlord contends that the State Court Actions could be timely
adjudicated in state court. 	It argues that the State Court Actions
were proceeding quickly until Bally filed for bankruptcy and, after
confirmation, removed them to bankruptcy court. 	Moreover, Landlord
notes 	that, 	under 	state 	law, 	an 	unlawful 	detainer 	complaint 	enjoys
statutory preference for trial setting purposes. 	See Cal. Civ. Proc.
Code § 1170.5(a). 	Bally does not address this element and therefore
presumably 	concedes 	it. 	In 	any 	event, 	the 	issue 	of 	timely
adjudication 	is 	less 	significant 	when 	a 	reorganization 	plan 	has
already been confirmed.
In sum, although most of the elements for mandatory abstention
are 	present. 	However, 	one 	of 	those 	elements 	is 	missing-–i.e., 	the
absence of an independent basis for federal jurisdiction. 	Since all
elements must be present for mandatory abstention to apply, the Court
will not order a remand on this ground.
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2Clearly, the efficiency sought by Bally is not simply a
denial of the motion for remand but the granting of a motion (yet
to be filed) to transfer the State Court Actions to the bankruptcy
court in New York. In this context, Bally refers to the State Court
Actions as “core.” 	They are clearly not “core” proceedings
because, as discussed above, they are neither based on bankruptcy
law nor did they arise in a bankruptcy case. 	See 28 U.S.C. §
157(b)(2).
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2. 	Discretionary Abstention as Grounds for Remand
As Landlord notes, a seven factor test has been established for
determining 	whether 	a 	claim 	should 	be 	remanded 	to 	state 	court 	as 	a
discretionary matter. 	See Williams v. Shell Oil, 196 B.R. 684, 690-
93 (S.D. Cal. 1994). 	Those factors are: (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 	difficulty 	of
applicable state law; (e) comity; (f) the relatedness or remoteness
of the action to the bankruptcy case; (g) the existence of a right to
a 	jury 	trial; 	and 	(h) 	prejudice 	to 	the 	party 	involuntarily 	removed
from state court. 	Id. 	The Court will discuss each of these factors
as they appear in the factual context of this proceeding.
a. 	Effect on Administration of Bankruptcy Estate
Bally 	contends 	that 	remand 	will 	have 	a 	negative 	effect 	on 	the
administration of its bankruptcy case. 	It asserts that the facility
operated 	on 	the 	Real 	Property 	is 	one 	of 	its 	most 	profitable
operations 	and 	that 	disruption 	of 	its 	operations 	at 	this 	location
would be detrimental to Bally’s economic prospects. 	It argues that
an 	efficient 	resolution 	of 	the 	Lease 	dispute 	is 	essential 	to 	the
success of its bankruptcy case. 2
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Since the Plan has already been confirmed, Bally’s argument is
particularly unpersuasive. 	While the potential loss of a profitable
location 	may 	well 	have 	a 	negative 	economic 	effect 	on 	Bally’s
business, there is no evidence that it will impact the administration
of Bally’s bankruptcy estate. 	To the contrary, after confirmation,
strictly speaking, there is no further bankruptcy estate. 	Moreover,
the outcome of the litigation will presumably not be affected by the
forum in which the litigation is conducted. 	Thus, this factor favors
remand.
b. 	Extent To Which Issues of State Law Predominate
As discussed in the preceding section and above, the only issues
presented in the State Court Actions are issues of state law. 	Thus,
this factor also favors remand.
c. 	Difficulty of Applicable State Law
Bally 	argues 	that 	there 	are 	no 	difficult 	issues 	of 	state 	law.
Landlord does not take issue with this contention. 	Thus, this factor
is neutral. 	It does not support remand. 	However, likewise, it does
not support retention of the proceeding.
d. 	Comity
General principles of comity support permitting issues of state
law 	to 	be 	determined 	by 	the 	state 	court 	absent 	other 	factors
dictating 	otherwise. 	Thus, 	if 	the 	other 	factors 	discussed 	in 	this
section 	created 	an 	equal 	equitable 	balance 	between 	retention 	and
remand, principles of comity dictate remand.
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26 	3Landlord does not address its right to a jury trial in the
Injunction Action.
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e. Relatedness or Remoteness of Action to Bankruptcy Case
Landlord contends that the issues presented by the State Court
Actions 	are 	remote 	to 	the 	bankruptcy 	case. 	Bally 	disagrees. 	It
contends 	that 	the 	State 	Court 	Actions 	are 	directly 	related 	to 	the
bankruptcy case. 	It notes that the Plan provided for assumption of
320 leases by Bally and its affiliates, among which was the Lease.
For this reason, Bally contends that the bankruptcy court in New York
is the appropriate court to adjudicate this dispute.
The Court agrees with Landlord. 	The fact that the Plan could be
confirmed without resolving the dispute makes it clear that the issue
presented 	by 	this 	dispute 	is 	not 	closely 	related 	to 	Bally’s
bankruptcy case.
f. 	Right to a Jury Trial
Landlord notes that the California Constitution gives it a right
to 	a 	jury 	trial 	in 	the 	Unlawful 	Detainer 	Action. 	See 	Cal. 	Const.
Art. 	I, 	§ 	16. 3 	In 	its 	opposition, 	Bally 	does 	not 	dispute 	this
assertion. 	However, Bally cites authority for the proposition that
the 	right 	to 	a 	jury 	trial 	does 	not 	necessarily 	require 	remand,
particularly 	since 	the 	proceeding 	may 	never 	go 	to 	trial.
Nevertheless, 	the 	Court 	views 	this 	as 	a 	factor 	in 	favor 	of 	remand.
The bankruptcy court could not itself conduct the jury trial unless
the parties consented to the proceeding being treated as if it were
“core” 	and 	to 	the 	bankruptcy 	court 	conducting 	the 	jury 	trial. 	See
Fed. R. Bankr. Proc. 9015(b). 	This is unlikely to occur.
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g. 	Prejudice of Retention to Party Seeking Remand
Landlord 	asserts 	that 	it 	will 	suffer 	prejudice 	if 	the 	State
Court 	Actions 	are 	not 	remanded. 	Bally 	has 	admitted 	that, 	if
Landlord’s motion to remand is denied, it will seek to transfer the
proceeding to the bankruptcy court for the Southern District of New
York. 	Landlord 	argues 	that 	it 	would 	be 	unfair 	and 	prejudicial 	to
force it to litigate the State Court Action in New York. 	It points
out that the issue is one of California law concerning a transaction
that took place entirely in California. 	Moreover, it notes that the
Lease 	expressly 	provides 	that 	any 	litigation 	between 	the 	parties
concerning the Lease must be initiated in Contra Costa County.
In response, Bally contends that the prejudice asserted is not
supported by the record. 	To the contrary, Bally contends, because it
has 	leased 	facilities 	all 	over 	the 	United 	States, 	it 	will 	suffer
prejudice 	if 	not 	permitted 	to 	consolidate 	all 	of 	its 	litigation 	in
the bankruptcy court in New York. 	Landlord responds that Bally did
not 	initially 	consider 	the 	state 	court 	forum 	prejudicial 	since 	it
filed 	the 	Injunction 	Action 	there. 	Landlord 	asserts 	that 	Bally 	is
simply forum shopping, after receiving an unfavorable ruling on its
demurrer.
The 	Court 	concludes 	that 	this 	factor 	favors 	Landlord. 	The
factor in question does not address prejudice to Bally. 	It asks only
about 	the 	prejudice 	caused 	by 	the 	retaining 	the 	proceeding 	to 	the
party seeking remand. 	Clearly, there would be prejudice to Landlord
if 	Landlord 	were 	forced 	to 	travel 	to 	New 	York 	to 	prosecute 	this
litigation. 	Given the forum selection clause and the fact that the
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dispute 	is 	governed 	solely 	by 	California 	law, 	the 	prejudice 	to
Landlord would be extremely unfair.
In 	sum, 	all 	of 	the 	factors 	to 	be 	considered 	in 	the 	context 	of
discretionary abstention either favor remand or at best are neutral
to it. 	Consequently, the Court concludes that the proceeding should
be remanded to State Court on a discretionary basis.
CONCLUSION
The 	factors 	governing 	mandatory 	abstention 	do 	not 	require
remand. 	There is an independent basis for federal jurisdiction other
than 	bankruptcy 	jurisdiction: 	i.e., 	diversity 	jurisdiction.
However, the factors governing discretionary abstention clearly favor
remand. 	Accordingly, Landlord’s motion for remand will be granted.
Counsel for Landlord is directed to submit a proposed form of order
in accordance with this proceeding.
END OF DOCUMENT
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COURT SERVICE LIST
Dustin P. Branch
Katten, Muchin, Rosenman LLP
2029 Century Park E #2600
Los Angeles, CA 90067
Adam L. Shiff
Kasowitz, Benson, Torres and Friedman
1633 Broadway
New York, NY 10019
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