Commonwealth Of Massachusetts v. Sohmer et al

OCR transcription for search; preserved printed pages are authoritative

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page1of14

UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS

OR ed a a Ot Rd Pt Pd Md Pat a Pd i Pet Pd ne) Pa! Pat Ped Pd Pe Pal Pt

In re
ALEC G. SOHMER, Chapter 7
Debtor Case No. 06-14073-JNF

RR Rt el Pat i ed Me! Pe i Pe! Pl Pd Pt Pt Pd Pl a Pd id nd Pd

COMMONWEALTH OF MASSACHUSETTS,

Plaintiff
Vv. Adv. P. No. 06-1433
ALEC G. SOHMER, Individually and as
Trustee of Certain Named Nominee Trusts;
JENNIFER SOHMER, Individually and as
Trustee of Certain Named Nominee Trusts;
TIMELESS FUNDING, INC.; ANDREW P.
PALMER, Individually and as a Member of
ANDREW P. PALMER AND ASSOCIATES;
SHAUN M. ELLIS, Individually and as a
Member of SHAUN M. ELLIS, LLC;
CARTERET MORTGAGE CORPORATION;
and EDWARD DE LA FLOR,

Defendants

el Rd Pe ld Pe! Pd Pd Pl

MEMORANDUM
I. INTRODUCTION
The matters before the Court are 1) the Motion to Dismiss Adversary Complaint for

Lack of Subject Matter Jurisdiction filed by Andrew P. Palmer (“Palmer”); 2) the Motion

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION
GPO

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main

Document Page 2 of 14

to Dismiss for Lack of Subject Matter Jurisdiction, or in the Alternative, for Mandatory
Abstention filed by Carteret Mortgage Corporation (“Carteret”), which Motion was joined,
with Court authority, by Edward de la Flor (“de la Flor”) who was an employee of Carteret
Mortgage Corporation (collectively, “Carteret”). The Commonwealth of Massachusetts,
by and through its Attorney General, Martha Coakley (the “Commonwealth” ), opposed
both motions. The Court conducted a hearing on March 26, 2008 at which time the issue
of the propriety of the Commonwealth’s Notice of Removal was raised. The Court ordered
the submission of supplemental briefs and took the Motions to Dismiss under advisement.
All parties have submitted briefs on this Court’s “related to” jurisdiction under 28 U.S.C.
§ 1334, as well as issues involving removal and remand under 28 U.S.C. §§ 1441, 1446, 1447
and 1452.

Upon consideration of the Amended Complaint filed by the Commonwealth and
the applicable statutes referenced below, as well as the memoranda submitted by the
parties, the Court hereby remands Counts I through V of the Commonwealth’s First
Amended Complaint to the Suffolk Superior Court, Department of the Massachusetts Trial
Court, retains jurisdiction over Count VI, through which the Commonwealth seeks denial
of the Debtor’s discharge under 11 U.S.C. § 727(a)(2), (3), (4), (5), and (7), and Count VII,
through which the Commonwealth seeks, in the alternative, an exception to the Debtor’s
discharge under 11 U.S.C. § 523(a)(2), (4), (6), and (7).

The Commonwealth removed the above-captioned adversary proceeding from the

Suffolk Superior Court on December 12, 2006 by filing a “Notice of Removal” with respect

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page 3of 14

to a pending five-count Complaint which it had filed on August 30, 2006 against the
Debtor, his non-debtor spouse, Jennifer Sohmer, both individually and as trustees of
several nominee trusts, and Timeless Funding, Inc. In its Notice of Removal, the

Commonwealth stated:

[T]he Commonwealth’s state court action is subject to removal under 28
U.S.C. § 1441(b), which provides: “Any civil action of which the district
courts have original jurisdiction founded on a claim or right arising under
the .. . laws of the United States shall be removable without regard to the
citizenship or residence of the parties.”

Citing Pacor, Inc. v. Higgins, 743 U.S. 984, 994 (1984), it added that “under 28 U.S.C. §

1334(b), its action is related to Alec Sohmer’s bankruptcy proceeding, and, therefore, the
district court has original but not exclusive jurisdiction over the state court action.” The
Commonwealth recognized, however, that “[{uJnder 11 U.S.C. § 362(b)(4), the
Commonwealth’s state court action is not subject to the automatic stay, and, accordingly,
the Commonwealth is entitled to prosecute its claim against Sohmer in the Superior

Court.” In support of that position, it cited, inter alia, In the Matter of Commonwealth Oil

Refining Co., Inc., 803 F.2d 1175, 1182 (Sth Cir. 1986), cert. denied, 483 U.S. 1005 (1987), and

In re First Alliance Mortgage Co., 263 B.R. 99 (B.A.P. 9th Cir. 2001). In a footnote, it also

observed the following: “Because the state court action is one by a governmental unit to
enforce its police or regulatory power, removal is appropriate under Section 1441(b)
instead of 28 U.S.C. § 1452(a) (excepting regulatory enforcement actions from bankruptcy-
specific removal)... .”

The Commonwealth's original Complaint contained five counts as follows: Count

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main

Document Page 4 of 14

I: Unfair and Deceptive Acts and Practices in Violation of G.L. c. 93A, § 2; Count II:
Violation of c. 93A through Violations of the Massachusetts Consumer Credit Cost
Disclosure Act, G.L. c. 140D and Federal Truth-in-Lending Laws, 15 U.S.C. §§ 1635, 1638;
Count III: Violation of c. 938A through Violations of Massachusetts and Federal Law
Applicable to High Cost Mortgage Loans, G.L. c. 183, § 28C, 209 C_MLR. §§ 32.2 & 32.34,
and 15 U.S.C. § 1639; Count IV: Usury; and Count V: Fraud. The Commonwealth sought
permanent injunctive relief against the defendants, as well as restitution to consumers, civil
penalties, attorneys’ fees, costs and other remedial relief.

Approximately nine months after it filed its Notice of Removal, the Commonwealth
moved to amend its Complaint. In the absence of objection, the Court granted the
Commonwealth’s Motion, and the Commonwealth filed its Amended Complaint on
October 10, 2007. In its Amended Complaint, the Commonwealth added additional
defendants, including Palmer, Carteret, and de la Flor. Having obtained extensions of time
within which to respond to the Commonwealth’s Amended Complaint, Palmer moved in
late December 2007, and Carteret moved in late January 2008, to dismiss the Amended
Complaint for lack of subject matter jurisdiction. Palmer also raised the issue of the
propriety of the Commonwealth’s removal and in his supplemental memoranda
emphasized that removal was improper in view of the provisions of 28 U.S.C. § 1452

reproduced below. Relying upon City and County of San Francisco v. PG & E Corp., 433

F.3d 1115 (9th Cir. 2006), he stated that section 1452 “sets forth a substantive limit on

subject matter jurisdiction of federal bankruptcy courts” for state police or regulatory

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page 5of14

actions, that is not subject to waiver. He also argued that the defect in the
Commonwealth’s removal was not merely procedural and rejected its reliance upon 28
US.C. § 1447(c).
Il. ANALYSIS
The issues presented in this case are complex, and there are few cases procedurally
or factually similar to those present here. The Commonwealth removed its civil action
under 28 U.S.C. § 1441(b), which must be read in the context of the preceding subsection.
Section 1441(a) provides:
Except as otherwise expressly provided by Act of Congress, any civil action
brought in a State court of which the district courts of the United States have
original jurisdiction, may be removed by the defendant or the defendants, to the
district court of the United States for the district and division embracing the place

where such action is pending. For purposes of removal under this chapter, the
citizenship of defendants sued under fictitious names shall be disregarded.

28 U.S.C. § 1441(a) (emphasis added). Section 1441(b), in turn, provides:

Any civil action of which the district courts have original jurisdiction
founded on a claim or right arising under the Constitution, treaties or laws
of the United States shall be removable without regard to the citizenship or
residence of the parties. Any other such action shall be removable only if
none of the parties in interest properly joined and served as defendants is a
citizen of the State in which such action is brought.

28 U.S.C. § 1441(b). The procedure governing the removal of claims from state to federal
courts under section 1441 is governed by 28 U.S.C. § 1446. Timing is critical. Section 1446
provides:

The notice of removal of a civil action or proceeding shall be filed within

thirty days after the receipt by the defendant, through service or otherwise, of

a copy of the initial pleading setting forth the claim for relief upon which
such action or proceeding is based, or within thirty days after the service of

5

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page 6 of 14

summons upon the defendant if such initial pleading has then been filed in
court and is not required to be served on the defendant, whichever period is
shorter.

28 U.S.C. § 1446(b) (emphasis added).

Section 1452 of title 28 contains removal and remand provisions pertinent to the
jurisdiction of bankruptcy cases and civil proceedings arising under title 11, or arising in
or related to cases under title 11. See 28 U.S.C. § 1334. Unlike section 1441, it does not limit
removal to the defendant or defendants. It provides:

(a) 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.

(b) The court to which such claim or cause of action is removed may remand

such claim or cause of action on any equitable ground. An order entered

under this subsection remanding a claim or cause of action, or a decision to

not remand, is not reviewable by appeal or otherwise by the court of appeals

under section 158(d), 1291, or 1292 of this title or by the Supreme Court of the

United States under section 1254 of this title.

28 U.S.C. § 1452(emphasis added).

The statutes set forth above unequivocally demonstrate that the Commonwealth

improperly removed its state court action against the Debtor and the other defendants to

this Court. As the plaintiff in the Suffolk Superior Court action, the general removal

statute, 28 U.S.C. § 1441, was unavailable to it. As the court in First Guaranty Bank & Trust

Co. v. Reeves, 86 F. Supp. 2d. 1147 (M.D. Fl. 2000), recognized:

Because the subject matter jurisdiction of a federal court is constitutional and
statutory in nature, it cannot be waived or otherwise conferred upon the

6

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page 7 of 14

court by the parties. University of South Ala., 168 F.3d at 410. See also Hurt
v. Dow Chemical Co., 963 F.2d 1142, 1146 (8th Cir.1992) (“subject-matter
jurisdiction is not a mere procedural irregularity capable of being waived”).
Even if neither of the parties objects to a court’s subject matter jurisdiction,
the court may - indeed should - inquire into its jurisdiction sua sponte
whenever it maybe lacking. 168 F.3d at 410. “[RJemoval jurisdiction is no
exception to a federal court's obligation to inquire into its own jurisdiction.” Id, If
at any time before final judgment it appears that the district court lacks
subject matter jurisdiction, the case shall be remanded” to the state court. 28
U.S.C. § 1447(c). This is true regardless of the existence of other motions
pending before the court. 168 F.3d at 411.

Reeves, 86 F. Supp. 2d at 1150 (emphasis added).

The United States Supreme Court in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S.

100 (1941), determined the issue of “whether the suit in which the counterclaim is filed, is
one removable by the plaintiff to the federal district court on grounds of diversity of
citizenship under § 28 of the Judicial Code, 28 U.S.C. § 71,” the precursor of 28 U.S.C. §
1441. 313 U.S. at 103 (emphasis added). In Shamrock Oil, the plaintiff in a state court case
removed a cause of action to the district court which denied the defendant’s motion to
remand. The United States Court of Appeals for the Fifth Circuit reversed and ordered the
matter to be remanded to the state court “on the ground that the plaintiff in the state court
was not a ‘defendant’ within the meaning of § 28 of the Judicial Code, and so was not
entitled to remove the cause under that section, which in terms authorizes the removal of
a suit subject to its provisions only ‘by the defendant or defendants therein.’” Id. The

Supreme Court, in affirming the decision of the Fifth Circuit, reviewed prior versions of

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page 8 of 14

section 28,’ and stated the following:

Not only does the language of the Act of 1887 [the precursor to § 1441]
evidence the Congressional purpose to restrict the jurisdiction of the federal
courts on removal, but the policy of the successive acts of Congress
regulating the jurisdiction of federal courts is one calling for the strict
construction of such legislation. The power reserved to the states under the
Constitution to provide for the determination of controversies in their courts,

' The Supreme Court stated:

We cannot assume that Congress, in thus revising the statute, was
unaware of the history which we have just detailed, or certainly that it
regarded as without significance the omission from the earlier act of the
phrase ‘either party’, and the substitution for it of the phrase authorizing
removal by the ‘defendant or defendants’ in the suit, or the like omission
of the provision for removal at any time before the trial, and the
substitution for it of the requirement that the removal petition be filed by
the ‘defendant’ at or before the time he is required to plead in the state
court.

We think these alterations in the statute are of controlling significance as
indicating the Congressional purpose to narrow the federal jurisdiction on
removal by reviving in substance the provisions of § 12 of the Judiciary
Act of 1789 as construed in West v. Aurora City, supra. See H. Rept. No.
1078, 49th Cong., 1st Sess., p. 1. If, in reenacting in substance the pertinent
provisions of § 12 of the Judiciary Act, Congress intended to restrict the
operation of those provisions or to reject the construction which this Court
had placed upon them, by saving the right of a plaintiff, in any case or to
any extent, to remove the cause upon the filing of a counterclaim praying
an affirmative judgment against him, we can hardly suppose that it would
have failed to use some appropriate language to express that intention.
That its omission of the reference in the earlier statute to removal by
‘either party’ was deliberate is indicated by the committee reports which
recommended the retention of the provisions of the Act of 1867 for
removal by either plaintiff or defendant when an additional ground of
removal is prejudice and local influence. See H. Rept., op. cit., supra, p. 2.

313 U.S. 107-08 (footnote omitted).

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page 9 of 14

may be restricted only by the action of Congress in conformity to the
Judiciary Articles of the Constitution. “Due regard for the rightful
independence of state governments, which should actuate federal courts,
requires that they scrupulously confine their own jurisdiction to the precise
limits which the statute has defined.”

Shamrock Oil, 313 U.S. at 108-09 (citations omitted).

In La Chemise Lacoste v. Alligator Co., Inc., 506 F.2d 339, 344 3d Cir. 1974), the

court observed that “the current statute [28 U.S.C. § 1441] has been given a similar

construction” to that set forth inShamrock Oil. See First Nat’! Bank of Pulaski v. Curry, 301

F.3d 456, 462 (6th Cir. 2002) (holding that third-party defendants are not “defendants” for
purposes of § 1441(a)). Thus, this Court finds that it lacks jurisdiction under 28 U.S.C. §
1441 to adjudicate the Commonwealth’s Amended Complaint.

The Commonwealth relies upon 28 U.S.C. § 1447(c) to overcome the anomaly
engendered by the removal of its Complaint as plaintiff. It argues that any defect in the
removal procedure was waived by Palmer and Carteret. Section 1447(c) provides:

A motion to remand the case on the basis of any defect other than lack of

subject matter jurisdiction must be made within 30 days after the filing of the

notice of removal under section 1446(a). If at any time before final judgment it

appears that the district court lacks subject matter jurisdiction, the case shall

be remanded.

28 U.S.C. § 1447(c) (emphasis added). The Commonwealth's argument raises the issue of
whether removal by a party precluded by statute from effectuating removal is a procedural
defect. As determined above, this Court does not believe that failure to comply with a

fundamental prerequisite of section 1441(b) is a procedural defect, and the Commonwealth

has cited no case supporting its position that removal of its Complaint from the state court

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main

Document Page 10 of 14

to this Court constitutes a procedural defect capable of being waived. Moreover, given the
plain language of the statute, namely that a motion to remand must be filed “within 30
days after the filing of the notice of removal under section 1446(a),” this Court cannot find
that either Carteret or Palmer waived the right to file a motion to remand because the 30
day period expired long before they were even added as named defendants. To rule
otherwise would be an egregious violation of due process.

The time limitation set forth in section 1447(c) makes perfect sense. Under the
circumstances contemplated by the general removal statute, the defendant or defendants
would be the parties filing the Notice of Removal, and the plaintiff would be the party

seeking remand. See La Chemise Lacoste v. Alligator Co., 506 F.2d at 343 n4 (“it is

axiomatic that a plaintiff may not remove an action to federal court”). Many courts have
observed that “it is well-settled that ‘the plaintiff [is] the master of the claim; he or she may

mn

Rossello-Gonzalez v.

avoid federal jurisdiction by exclusive reliance on state law.

Calderon-Serra, 398 F.3d 1, 11 (1st Cir. 2004) (citing Caterpillar Inc. v. Williams, 482 U.S.

386, 392 (1987)). In Rossello-Gonzalez, the First Circuit, echoing the Supreme Court in

Shamrock Oil, added that “the burden to prove that a federal question has been pled lies

with the party seeking removal,” 398 F.2d at 11 (citing BIW Deceived v. Local S6, Indus.

Union of Marine & Shipbuilding Workers, 132 F.3d 824, 831 (1st Cir. 1997). It concluded

that “[iJn light of this burden, and of the important federalism concerns at play in

considering removal jurisdiction, see, e.g., Franchise Tax Bd., 463 U.S. at 8, 103 S. Ct. 2841,

we find that any ambiguity as to the source of law relied upon. . . ought to be resolved

10

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page 11 of 14

against removal. Id. (citing Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. at 108-09)).

Section 1447(c), which the Commonwealth emphasizes, does not provide any
deadlines for motions to remand for added defendants. Such deadlines would be illogical
in view of the provisions of section 1441(a) which contemplate the filing of motions to
remand by plaintiffs, not defendants. Thus, the defendants cannot be barred from moving
to remand or raising objections to this Court’s lack of jurisdiction based upon the plain
language of section 1447(c).? In view of the decision of the Supreme Court in Shamrock Oil

and Congress's goal of abridging the right of removal, see La Chemise Lacoste, 506 F.2d at

344, this Court finds that it lacks jurisdiction with respect to the Commonwealth’s
improperly removed action.

The defendants argue that the position of the Commonwealth effectuates an “end-
run” around the provisions of 28 U.S.C. § 1452(a), and this Court agrees. Section 1441(a)
begins with the phrase, “[e]xceptas otherwise expressly provided by Congress.” Congress
expressly provided for removal for bankruptcy matters in section 1452. That section
prohibits removal of actions “to enforce such governmental unit's police or regulatory power.”
The Commonwealth stated that it brought “this enforcement action in the public interest

under G. L. c. 93A, §§ 2 and 4 of the Massachusetts Consumer Protection Act concerning

° The problems associated with the Commonwealth’s removal under section
1441(b) have a cascading effect. Under section 1446(b), a defendant must file a notice of
removal within 30 days of the receipt of a copy of the initial pleading setting forth the
claim for relief or within 30 days after service of the summons, whichever is shorter.
The Commonwealth, as plaintiff in the state court action, filed its Complaint against the
Sohmers and Timeless Funding, Inc. in August of 2006 but did not purport to remove it
to this Court until December of that year.

11

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page 12 of 14

unfair and deceptive business conduct in connection with the foreclosure rescue scheme
described in the First Amended Complaint.” Thus, it cannot dispute that, if it had filed a
Notice of Removal under section 1452(a), this adversary proceeding would have been
remanded expeditiously to the state court for lack of jurisdiction.

The language of the police and regulatory power exceptions in the automatic
stay context and inthe removal context is virtually identical, and the purpose
behind each exception is the same. Koken v. Reliance Group Holdings, Inc.
(In re Reliance Group Holdings, Inc.), 273 B.R. 374, 385 (Bankr. E.D. Pa.
2002). “Section 1452 and 11 U.S.C. § 362(b)(4) were designed specifically to
work in tandem. Therefore, interpretation of these two provisions should be
consonant.” Id. (citation omitted); see also 1 Collier on Bankruptcy (15th ed.)
§ 3.07[3] (“It would seem, therefore, that the congressional intent was to
make those types of civil actions that are not subject to removal correspond
to civil actions that are excepted from the automatic stay.”).

See PG & E Corp,, 433 F.3d at 1123. The Commonwealth has admitted that its enforcement
action is excepted from the automatic stay due to the nature of the action as a police power
enforcement proceeding. Moreover, the United States Bankruptcy Appellate Panel for the

Ninth Circuit, construing Massachusetts law In re First Alliance Mortgage Co., 263 B.R. 99

(B.A.P. 9th Cir. 2001), specifically held that the Commonwealth's claim for restitution “fits
within the narrow exception of § 362(b)(4) for fixing damages for violations of consumer
laws.” 263 B.R. at 114. Thus, the Commonwealth cannot rely upon 28 U.S.C. § 1447(c) to

thwart the exception set forth in section 1452, which is jurisdictional. As the Ninth Circuit

observed in PG & E Corp.,

[t]he central issue in this case is whether removal of the actions filed by the
Attorney General and San Francisco was precluded because the claims were
part of ‘a civil action by a governmental unit to enforce such governmental
unit’s police or regulatory power,’ and not subject to removal under 28
U.S.C. section 1452(a). This is a question of subject matter jurisdiction that does

12

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main

Document Page 13 of 14

not implicate the jurisdictional limitations of section 1452(b).

433 F.3d at 1121 (emphasis added). The decision in Things Remembered, Inc. v. Petrarca,

516 U.S. 124 (1995), does not alter this conclusion as the Supreme Court in that case
determined that sections 1447(d) and 1452(b) both govern removals and remands in
bankruptcy cases, that there is nothing in section 1447(d) that should be read to imply that
it does not apply to bankruptcy, and that section 1452(b) should not be read to prevent
application of section 1447(d) to bankruptcy. Because both of those sections apply to
appellate review of orders to remand, they do not dictate the outcome of the pending
motions.
Il. CONCLUSION

In view of the foregoing, the Court remands Counts I through V to the Superior
Court. The Commonwealth’s Amended Complaint is primarily predicated upon violations
of state law and the effect on the administration of the Debtor’s bankruptcy case is remote.
Although the Commonwealth suggested that there would be delay if this case were
remanded to the state court, this Court disagrees. The adversary proceeding has been
pending for 15 months in this Court, and because it is at best a non-core, related to
proceeding, this Court would be required to submit proposed findings of fact and
conclusions of law to the District Court for de novo review. See 28 U.S.C. § 157(c).
Accordingly, there is little likelihood that the matter will be resolved any more quickly in
the bankruptcy court than in the state court, particularly if there were appeals from any

Court order ruling that removal was proper in the first instance. Accordingly, the Court

13

Case 06-01433 Doc145 Filed 05/15/08 Entered 05/16/08 10:55:23 Desc Main
Document Page 14 of 14

shall enter an order remanding Counts I through V of the Commonwealth’s Amended
Complaint to the Superior Court and retaining jurisdiction over Counts VI and VII.

By the Court,

GU. Barry —

Joan N. Feeney

United States Bankruptcy Judge
Dated: May 15, 2008
cc: Alec G. Shomer, Esq., Kara Thorvaldsen, Esq., Frank P. Spinella, Jr., Esq., Diane L.
Lawton, Esq., Jacqueline A. Welch, Esq., Christopher K. Barry Smith, Esq., Laurel E. Bretta,
Esq., Eugene Patrick McCann, Esq., Harold B. Murphy, Esq.,

14