Remco Energy Solutions v. Weinstock, Esq. et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at Baltimore
In re: 	:
MGR Distribution Corp. 	: 	CASE NO. 94-50161-DK
MGRR, Inc. 	CHAPTER 7
Merry-Go-Round Enterprises, Inc. 	:
Debtors. 	:
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Remco Energy Solutions 	:
Plaintiff, 	:
ADVERSARY NO.
v. 	: 	06-1644
Melvyn J. Weinstock, Esq., et al., 	:
Defendants. 	:
_____________________________________________________________________
MEMORANDUM OF DECISION
Before the court is the Plaintiff’s Motion for Remand or Abstention and the
opposition thereto filed by Defendants. In addition, both the Plaintiff and Defendants submitted
briefs on the issue of removal in response to the court’s earlier request. The court finds that the
arguments and facts are sufficiently set forth in the pleadings and that a hearing would not aid
the decisional process.
Date signed September 04, 2007
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The proceedings in this adversary proceeding were removed from the Maryland
Circuit Court for Baltimore City (the “State Court”). When removed, the Defendants alleged
that federal bankruptcy jurisdiction existed because the State Court litigation was related to the
bankruptcy case captioned above, MGR Distribution Corp., MGRR, Inc. and Merry-Go-Round
Enterprises, Inc. (together, the “Merry-Go-Round Cases”), pursuant to 28 U.S.C. § 1331 and
28 U.S.C. § 1441.
In the Complaint, the Plaintiff pleads legal malpractice by Defendants and seeks
damages in the amount of $1,420,768.00. 	The allegations arise out of the Defendants’
representation of Plaintiff as a creditor in the Merry-Go-Round Cases. 	Plaintiff avers that
Defendants mishandled the prosecution and settlement of their proof of claim against the
bankruptcy estates resulting in a substantially lower recovery for Plaintiff.
Section 1452 of title 28 of the United States Code, as exercised in connection with
Federal Rule of Bankruptcy Procedure 9027, authorizes the removal of state court actions
related to bankruptcy cases. The statute provides that except as provided therein,
A party may remove any claim or cause of action in a civil action . . . 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)(emphasis added).
In turn, Section 1334(b) of title 28 of the United States Code confers upon the United
States District Court original jurisdiction over “all civil Proceedings arising under title 11, or
related to cases under title 11." Bankruptcy courts, by referral from the United States District
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1 The United States District Court for the District of Maryland has referred all
bankruptcy cases and adversary proceedings to the United States Bankruptcy Court for the District
of Maryland. Local District Rule 402.
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Courts1, exercise that jurisdiction within the confines of 28 U.S.C. § 157. The “related to”
jurisdiction is extremely broad, yet it is not without limits. Pacor, Inc. v. Higgins, 743 F.2d
984, 994 (3d Cir. 1984). The “mere fact that there may be common issues of fact between a
civil proceeding and a controversy involving the bankruptcy estate does not bring the matter
within the scope of [1334(b)].” Id. at 994.
The determining test whether a civil proceeding is “related to” the bankruptcy case,
that was first articulated in Pacor, was “whether the outcome of that proceeding could
conceivably have any effect on the estate being administered in bankruptcy.” Id. at 994. See
also Celotex Corp. v. Edwards, 514 U.S. 300, 307-08, 115 S. Ct. 1493 (1995); 1 Collier on
Bankruptcy ¶ 3.01[4][c][ii][B] at 3-24 (15th Ed. Revised 2001). The Pacor court further held
that the proceeding does not have to be against the debtor or the debtor’s property, but will be
found “related to the bankruptcy if the outcome could alter the debtor’s rights, liabilities,
options or freedom of action (either positively or negatively) and which in any way impacts
upon the handling and administration of the bankruptcy estate.” Pacor, 743 F.2d at 994. The
court also held that the bankruptcy proceedings of one party could not include a lawsuit
between two other parties, when “there would be no automatic creation of liability against the
[bankruptcy party] on account of a judgment against [the defendant].” Id. at 995.
The Pacor test has been adopted with little or no variation by most circuits, including
the Fourth Circuit. See New Horizon of NY, LLC v. Jacobs, 231 F.3d 143, 151 (4th Cir. 2000).
More recently, the Court of Appeals has discussed “related to” jurisdiction in its opinion of
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Valley Historic L.P. v. Bank of New York, 486 F.3d 831 (4th Cir. 2007). In Valley Historic, the
Court followed the Third Circuit’s “close nexus” analysis (see Bergstrom Binder v. Price
Waterhouse Co. (In re Resorts Int’l, Inc.), 372 F.3d 154, 166 (3d Cir. 2004)), and found that the
proceeding in question “must serve[] a bankruptcy administration purpose on the date the
bankruptcy court exercises that jurisdiction.” Id. at 837. The Court explained that “without
such a purpose, ‘related to’ jurisdiction would extend beyond the limited jurisdiction conferred
upon bankruptcy courts in the post-confirmation context.” Id.
Therefore, in order for this court to have jurisdiction over the Complaint in this
removed case, the cause of action must affect or impact in some manner the rights and liabilities
of the bankruptcy estate or administration of the estate in the Merry-Go-Round Cases. The
court takes judicial notice of the fact that the final report and proposed distribution in the
Merry-Go-Round Cases has been approved and this removed proceeding is the last remaining
matter preventing the court’s Clerk from closing the cases.
The gravamen of Defendants’ argument that jurisdiction is properly in this court is
that the relationship between Plaintiff and Defendants would not have existed but for the Merry-
Go-Round Case because the legal malpractice stems from the Defendants’ representation of
Plaintiff in that case. Defendants go so far as to purport that the administration of the Merry-
Go-Round case will be affected because as part of proving the existence of malpractice, the
Plaintiff will have to demonstrate that the court-approved settlement of Plaintiff’s claim was
badly advised and should be vacated.
In this vain, Defendants cite to numerous cases each of which is distinguishable to
the point of being inapplicable. For example, Defendants urge the court to follow the Fourth
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2 The defendant, Englander, was co-counsel to the debtor-in-possession and both
Englander’s employment and compensation required the court’s approval.
3 As to Defendant’s argument that this malpractice action impinges on the order
entered in the Merry-Go-Round bankruptcy Case approving the settlement, to the extent
applicable (if any), defenses of collateral estoppel may be asserted in the state court and do not
require this court’s federal jurisdiction. No direct attack on the final order approving settlement
has been filed and the period for any appeal or rehearing of that order has long expired. See Fed.
R. Bankr. Proc. 8002 and 9023.
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Circuit opinion of Grausz v. Englander, 321 F.3d 467 (4th Cir. 2003) which found “related to”
jurisdiction existed over the debtor’s malpractice claim against its own attorneys. However, the
Court did not hold, as Defendants infer, that claims based on legal malpractice committed in
the course of the bankruptcy case are necessarily related to the bankruptcy case sufficient to
create jurisdiction. Rather, the Court found that the legal malpractice claim by the debtor was
an attack on the bankruptcy court’s approval of debtor’s counsel’s final fee application and was
therefore barred by res judicata.2 This is clearly distinguishable from the instant proceeding
where the employment and representation between Plaintiff and Defendants was not monitored
or approved by the bankruptcy court, nor required to be so. See 11 U.S.C. §§ 327, 330, 331.
This court cannot find a “close nexus” between the causes of action brought in State
Court by Plaintiff and the Merry-Go-Round Case and finds that the case must be remanded back
to State Court pursuant to 28 U.S.C. § 1452(b). 	Regardless of which party prevails in the
malpractice litigation, there is simply no conceivable effect on the bankruptcy estates or the
administration of such. Furthermore, and in the alternative, the court finds that even if there
were to be even a morsel of “related to” jurisdiction in existence, such relation is so remote as
to make the court’s exercise of jurisdiction an inefficient use of its scarce judicial resources and
would exercise its discretionary right to abstain arising in 28 U.S.C. § 1334(c)(1). 3
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For these reasons, the court finds that the Motion to Remand should be granted. An
Order in conformity with this decision will be entered herewith.
cc: 	all counsel
all parties
End of Decision
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