RAFAEL J. NIDO, INC. et al v. COBIAN AGUSTIN & RAMOS, S.E. et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE: 	:
:
C & A, S.E., 	: 	CASE NO. 05-05297 (GAC)
:
Debtor 	: 	CHAPTER 11
___________________________________:
:
Rafael J. Nido, Inc., 	:
:
Plaintiff 	:
:
v. 	: 	ADV. NO. 05-0200
:
C & A, S.E., Jose Cobian, 	:
United Insurance Agency, 	:
USF&G, Solid Waste Authority, :
:
Defendants 	:
___________________________________:
DECISION AND ORDER
I. Procedural Background
The 	controversy 	pending 	before 	this 	Court 	is 	C&A, 	S.E.’s
(“C&A”) 	removal 	of 	civil 	action 	number 	K1CD2004-0623 	from 	the
Superior 	Court 	of 	Puerto 	Rico, 	San 	Juan 	Section 	to 	this 	Court
(Docket #1), Puerto Rico Solid Waste Management’s (“ADS”) Motion to
Remand 	(Docket 	#6) 	and 	Rafael 	J. 	Nido, 	Inc.’s 	(“Nido”) 	Motion 	to
Remand (Docket #18).
On 	September 	7, 	2005, 	C&A 	filed 	a 	notice 	of 	removal 	(Docket
#1), removing civil action number K1CD2004-0623 from the Superior
Court 	of 	Puerto 	Rico, 	San 	Juan 	Section 	to 	this 	Court. 	It 	is 	an
action commenced by Nido against C&A, Jose Cobian, United Insurance
Agency, 	United 	States 	Fidelity 	& 	Guaranty 	Co. 	and 	ADS. 	The 	civil
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action is seeking to recover from C&A $40,201.10, which allegedly
represents 	the 	value 	of 	the 	materials 	and/or 	labor 	furnished 	by
Nido 	for 	the 	construction 	of 	the 	chain-link 	fences 	and 	sliding
gates at a project in Toa Baja, Puerto Rico.
On September 22, 2005, United States Fidelity & Guaranty Co.
(“USF&G”), 	filed 	a 	motion 	in 	support 	of 	C&A’s 	notice 	of 	removal
(Docket #3). On the same day, ADS filed a motion to remand (Docket
#4) and a motion for leave to file a statement pursuant to Fed. R.
Bankr. P. 9027(e)(3) (Docket #5). On September 28, 2005, C&A filed
an 	opposition 	to 	ADS’s 	statement 	(Docket 	#7) 	and 	filed 	an
opposition to ADS’s motion to remand (Docket #8). On November 15,
2005, 	Nido 	filed 	a 	motion 	to 	remand 	(Docket 	#18). 	Finally, 	on
November 	23, 	2005, 	C&A 	filed 	an 	opposition 	to 	Nido’s 	motion 	to
remand 	(Docket 	#22). 	At 	a 	hearing 	held 	on 	February 	28, 	2006, 	the
Court took the matter under advisement (Docket #38).
II. Argument of the Parties
A. C&A
C&A filed the instant adversary proceeding seeking to remove
civil action number K1CD2004-0623 (“Nido action”), filed by Nido in
the 	Superior 	Court 	of 	Puerto 	Rico, 	San 	Juan 	Section. 	C&A 	asserts
that this Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and
§ 1334, and also pursuant to 11 U.S.C. § 105, § 502 and § 362. C&A
maintains that removal is proper because at least two of the three
bases 	of 	federal 	bankruptcy 	jurisdiction 	are 	present. 	Thus, 	C&A
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maintains 	that 	the 	Nido 	action 	and 	the 	amended 	cross-claim
contained 	therein 	are 	properly 	removable 	pursuant 	to 	28 	U.S.C. 	§
1452.
C&A invokes the “related to” jurisdiction and “arising under”
jurisdiction 	provided 	by 	28 	U.S.C. 	§ 	1334(b), 	relating 	to 	the
claims articulated by ADS’s cross claim. C&A asserts that the Nido
action is a core proceeding because it is a matter concerning the
administration 	of 	the 	estate 	pursuant 	to 	§ 	157(b)(2)(A) 	and
because it involves a claim whose allowance or disallowance is in
dispute 	before 	the 	bankruptcy 	court 	pursuant 	to 	§ 	157(b)(2)(B).
C&A further asserts that pursuant to § 157 (b)(2)(O) this is a core
proceeding 	because 	it 	affects 	the 	debtor-creditor 	relationship
during the bankruptcy proceeding.
C&A 	opposes 	the 	remand 	of 	the 	case 	as 	requested 	by 	ADS 	and
Nido. 	First, 	C&A 	argues 	that 	the 	forum 	defendant 	rule 	does 	not
apply 	to 	the 	case 	at 	bar 	because 	the 	Court’s 	jurisdiction 	is
grounded on original jurisdiction and not diversity jurisdiction as
ADS contends. C&A contends that ADS’s assertion that the removal of
the 	action 	is 	barred 	by 	the 	forum 	defendant 	rule 	does 	not 	limit
this Court’s jurisdiction because such action is expressly grounded
in 28 U.S.C. § 157 and § 1134 and in 11 U.S.C. § 105, § 502 and §
362.
On the other hand, C&A contends that mandatory abstention is
not 	applicable 	because 	the 	Nido 	action 	is 	a 	core 	proceeding. 	C&A
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also contends that the presence of state law claims do not render
the 	proceeding 	automatically 	non-core. 	Thus, 	C&A 	argues 	that
although 	the 	Nido 	action 	raises 	local 	law 	issues, 	this 	does 	not
warrant 	remand 	on 	either 	statutory 	grounds 	or 	equitable 	grounds.
C&A 	maintains 	that 	the 	removal 	of 	this 	action 	avoids 	piecemeal
litigation and inconsistent decisions between different forums.
Finally, 	C&A 	contends 	that 	discretionary 	abstention 	is 	not
warranted. 	C&A 	argues 	that 	the 	outcome 	of 	the 	present 	adversary
case 	will 	affect 	the 	bankruptcy 	estate 	because 	it 	will 	decide
whether 	to 	force 	C&A 	or 	USF&G 	to 	pay 	the 	full 	amount 	of 	the
arbitration award.
The 	other 	contentions 	made 	by 	C&A 	regarding 	the 	arbitration
award will not be discussed herein because they were addressed in
adversary proceeding 05-00149 in the Decision and Order of June 29,
2006.
B. USF&G
USF&G supports the removal of the Nido action on the grounds
that 	the 	Court 	has 	“related 	to” 	and 	“arising 	under” 	jurisdiction
pursuant to 28 U.S.C. § 1334(b). USF&G contends that the outcome of
the 	Nido 	action 	could 	affect 	C&A’s 	bankruptcy 	estate 	and 	its
administration, 	thereby 	altering 	debtor-creditor 	rights 	and
liabilities. Finally, it incorporates by reference C&A’s arguments
in the notice of removal. USF&G requests that the Court grant the
removal 	of 	the 	Nido 	action 	and 	assume 	jurisdiction 	over 	this
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adversary 	proceeding 	pursuant 	to 	§ 	1334 	and 	§ 	1452(a).
C. ADS
ADS opposes the removal of the present adversary proceeding.
ADS 	contends 	that 	removal 	is 	barred 	by 	28 	U.S.C. 	§ 	1441, 	which
relates to the forum defendant rule, arguing that at least one of
the 	defendants 	is 	a 	citizen 	of 	Puerto 	Rico. 	ADS 	urges 	that 	the
clarity 	of 	the 	forum 	defendant 	rule 	provides 	substantial
opportunity for judicial economy and conservation of resources of
all 	parties 	and 	the 	estate 	by 	mandating 	immediate 	remand. 	It
further contends that the Court has no jurisdiction over the claims
between 	non-debtors 	herein, 	and 	thus 	pursuant 	to 	28 	U.S.C. 	§
1447(c), the case must be remanded.
In the alternative, ADS argues that the present adversary case
should 	be 	remanded 	for 	equitable 	reasons 	because 	it 	is 	a
predominant 	local 	law 	claim 	in 	a 	pending 	local 	court 	proceeding.
Therefore, 	ADS 	requests 	that 	the 	Court 	remand 	this 	adversary
proceeding to the local court.
D. Nido
Nido 	also 	opposes 	the 	removal 	of 	the 	present 	adversary
proceeding. 	Nido 	asserts 	that 	this 	action 	does 	not 	“arise 	under”
Title 11 nor does it “arise in” a case under Title 11 because it is
a claim based on local law. Nido also contends that the outcome of
this proceeding will have no effect on C&A’s bankruptcy estate. It
further contends that an adverse outcome in this action for USF&G,
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Jose Cobian or ADS would at most mean that the affected defendant
would 	take 	Nido’s 	place 	as 	creditor 	of 	C&A, 	but 	the 	total 	amount
owed 	by 	C&A’s 	estate 	will 	remain 	the 	same. 	Nido 	avers 	that 	C&A
should worry about the total amount it has to pay, not to whom.
In 	the 	alternative, 	Nido 	contends 	that 	the 	Court 	should
abstain from hearing this case because it is a local law claim, it
was commenced more than a year before C&A filed for bankruptcy and
it 	was 	being 	timely 	adjudicated 	by 	the 	local 	court. 	Nido 	also
contends that his action could not have been commenced in a court
of 	the 	United 	States 	absent 	jurisdiction 	under 	28 	U.S.C 	§ 	1334.
Nido 	maintains 	that 	this 	action 	does 	not 	concern 	a 	question 	of
federal law, all of the parties are citizens of Puerto Rico, hence
defeating the required diversity and finally, this claim does not
exceed 	the 	$75,000 	minimum 	amount 	required. 	Therefore, 	Nido
concludes 	that 	the 	district 	court 	would 	not 	have 	subject 	matter
jurisdiction over this action.
Furthermore, Nido contends that this adversary action is not
a 	core 	proceeding 	pursuant 	to 	28 	U.S.C. 	§ 	157(b)(2)(A), 	§
157(b)(2)(B) and § 157(b)(2)(O), as alleged by C&A. Nido maintains
that 	the 	only 	ground 	upon 	which 	the 	Court 	may 	exercise 	its
jurisdiction would be a “related to” jurisdiction under Title 11.
However, Nido contends that if it is a “related to” jurisdiction,
then 	the 	Court 	should 	abstain 	because 	it 	is 	non-core 	proceeding.
Moreover, 	Nido 	contends 	that 	this 	Court 	lacks 	subject 	matter
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jurisdiction and that should this Court find that it has “related
to” jurisdiction, then it would be a non-core proceeding and absent
consent 	of 	the 	parties, 	this 	Court 	is 	limited 	to 	submitting
proposed 	findings 	of 	fact 	and 	conclusions 	of 	law 	to 	the 	district
court.
Finally, Nido asserts that mandatory abstention is warranted
and 	discusses 	how 	the 	ten 	requirements 	for 	abstention 	are 	met.
Therefore, Nido requests that the Court remand the Nido action to
the local court.
III. Discussion
A. Jurisdiction
The United States Code provide that “the district court shall
have 	original 	but 	not 	exclusive 	jurisdiction 	of 	all 	civil
proceedings 	arising 	under 	title 	11, 	or 	arising 	in 	or 	related 	to
cases under title 11.” 28 U.S.C. § 1334(b). In deciding whether to
allow a removed action to proceed, the bankruptcy court must first
decide if it has subject matter jurisdiction over the proceeding.
In 	re 	Santa 	Clara 	County 	Child 	Care 	Consortium, 	223 	B.R. 	40, 	44
(B.A.P. 1st Cir. 1998). In doing so, the court must decide whether
the removed action is one arising under, arising in or related to
Title 11. Id. at 44.
The 	“arising 	under” 	and 	“related 	to” 	concepts 	have 	been
extensively 	discussed 	by 	the 	courts. 	“Arising 	under” 	proceedings
are “those cases in which the cause of action is created by title
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11.” In re Middlesex Power Equipment & Marine Inc., 292 F.3d 61, 68
(1st 	Cir. 	2002). 	As 	opposed 	to 	“related 	to,” 	which 	the 	First
Circuit Court of Appeals defines as those cases that:
“potentially 	have 	some 	effect 	on 	the
bankruptcy 	estate, 	such 	as 	altering
debtor's rights, liabilities, options, or
freedom 	of 	action, 	or 	otherwise 	have 	an
impact 	upon 	the 	handling 	and
administration of the bankrupt estate.”
Id. 	at 	68 	(quoting 	In 	re 	G.S.F. 	Corp., 	938 	F.2d 	1467, 	1475 	(1st
Cir. 1991)).
In the present case, the Court concludes that this adversary
proceeding affects the bankruptcy estate and thus has been properly
removed, granting this Court subject matter jurisdiction pursuant
to 	28 	U.S.C. 	§ 	1334(b), 	which 	grants 	the 	Court 	jurisdiction 	over
all 	civil 	proceedings 	arising 	under 	Title 	11, 	or 	arising 	in 	or
related to cases under Title 11.
B. Core and Non-core Proceedings
The 	Judicial 	Code 	differentiates 	between 	core 	and 	non-core
proceedings. 	The 	Judicial 	Code 	includes 	a 	non-exhaustive 	list 	of
core 	proceedings. 	See 	28 	U.S.C. 	§ 	157(b)(2). 	Actions 	“arising
under” 	Title 	11 	are 	referred 	to 	as 	“core” 	proceedings 	and 	are
specifically referenced in 28 U.S.C. § 157(b)(2) and “related to”
actions are “non-core” proceedings. Mec Steel Bldgs., Inc. v. San
Lorenzo Construction, 136 B.R. 606, 609 (Bankr. D.P.R. 1992). See
also 	In 	re 	Evarts, 	2006 	WL 	696136 	(Bankr. 	D.N.H. 	2006). 	With
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respect 	to 	non-core 	proceedings, 	the 	determination 	shall 	not 	be
made 	solely 	on 	the 	basis 	that 	its 	resolution 	may 	be 	affected 	by
local law. 28 U.S.C. § 157(b)(3).
The Supreme Court of the United States decided upon the power
of 	bankruptcy 	judges 	to 	decide 	core 	and 	non-core 	proceedings 	in
the 	seminal 	case 	of 	Northern 	Pipeline 	Constr. 	Co. 	v. 	Marathon
Pipeline Co., 458 U.S. 50 (1982). This case involved an adversary
proceeding brought by a debtor-in-possession seeking damages for an
alleged 	pre-petition 	breach 	of 	contract. 	The 	Supreme 	Court 	held
that 	the 	proceeding 	could 	not 	be 	finally 	adjudicated 	by 	the
bankruptcy court. The Court explained that while the restructuring
of 	debtor-creditor 	relationships 	is 	at 	the 	core 	of 	the 	federal
bankruptcy power, the adjudication of state-created private rights
is not. Id. at 71.
The 	First 	Circuit 	defines 	non-core 	proceedings 	as 	“claims
‘concerned 	only 	with 	state 	law 	issues 	that 	did 	not 	arise 	in 	the
core bankruptcy function of adjudicating debtor-creditor rights,’”
referring to them as “Marathon-type suits.” 	Arnold Print Works v.
Apkin 	(In 	re 	Arnold 	Print 	Works), 	815 	F.2d 	165, 	167 	(1st 	Cir.
1987)(quoting 	130 	Cong. 	Rec. 	H1848 	(daily 	ed. 	March 	21,
1984)(statement of Representative Kindness)). 	The court ruled that
bankruptcy courts were empowered to finally determine suits filed
by 	an 	estate 	representative 	to 	collect 	debts 	arising 	after 	the
commencement of the bankruptcy case, but not empowered to finally
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determine 	suits 	relating 	to 	debts 	arising 	before 	commencement 	of
the 	case. 	In 	re 	Arnold 	Print 	Works, 	815 	F.2d 	at 	168. 	While 	the
former was deemed to be core, the latter was deemed non-core. Id.
The court based its decision on Marathon stating that: “[n]on-core
proceedings, those that the statute calls ‘related to’ bankruptcy
cases, concern aspects of the bankruptcy case that Marathon barred
non-Article III judges from determining on their own.” Id. at 167.
In another case, in which a bankruptcy court had to determine
if a pre-petition action was deemed a core or non-core proceeding,
the 	court 	held 	that: 	“[i]f 	an 	action 	survive[s] 	outside 	of
bankruptcy, 	and 	in 	the 	absence 	of 	bankruptcy 	would 	have 	been
initiated 	in 	a 	state 	or 	district 	court, 	then 	it 	clearly 	involves
non-core 	matter.” 	Mec 	Steel 	Bldgs., 	Inc. 	v. 	San 	Lorenzo
Construction, 136 B.R. at 609.
Mec Steel involved a claim by the debtor for the collection of
accounts 	receivable. 	The 	debtor 	argued 	that 	this 	involved
administration of the estate and the turning over of the property
of 	the 	estate, 	both 	core 	proceedings 	under 	28 	U.S.C 	§ 	157(b)(2).
The court in Mec Steel concluded that:
[a]ctions initiated in the bankruptcy court to
collect 	pre-petition 	account 	receivables 	are
clearly 	non-core 	matters 	and 	should 	not 	be
considered 	as 	matters 	affecting 	the
administration 	of 	the 	estate 	or 	actions 	for
the 	turnover 	of 	property 	of 	the 	estate 	in
order to categorize them as core.
Mec Steel Bldgs., 136 B.R. at 609.
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Likewise, actions based on pre-petition breach of contract are
also non-core. See Matter of Candelero San & Gravel, Inc., 66 B.R.
903, 906 (D.P.R. 1986)(holding that action involving pre-petition
contract, 	allegedly 	breached 	both 	before 	and 	after 	the 	filing 	of
the petition, is entirely non-core matter related to a case arising
under Title 11).
Finally, 	the 	District 	Court 	of 	Puerto 	Rico 	in 	Goya 	Foods 	v.
Unanue-Casal, stated:
[t]he 	contract 	validity 	question 	is 	not 	core
to 	the 	bankruptcy 	proceeding. 	Even 	where 	the
action 	“will 	drastically 	affect 	both 	the
debtor-creditor relationship and the assets of
the 	[e]state” 	it 	cannot 	be 	deemed 	a 	core
proceeding 	if 	it 	arises 	prior 	to 	the
bankruptcy 	filing 	and 	involves 	a 	right
independent 	of 	and 	antecedent 	to 	the
bankruptcy filing.
Goya Foods v. Unanue-Casal (In re Unanue-Casal), 164 B.R. 216, 221
(D.P.R. 1993). See also Matter of Candelero San & Gravel, Inc., 66
B.R. at 906.
The 	present 	adversary 	proceeding 	relates 	to 	a 	pre-petition
action for breach of contract that commenced outside the bankruptcy
court. 	Although 	this 	Court 	concludes 	that 	it 	has 	jurisdiction
pursuant 	to 	28 	U.S.C. 	§ 	1334(b), 	it 	is 	“related 	to” 	jurisdiction
because 	although 	this 	proceeding 	may 	have 	some 	effect 	on 	the
bankruptcy estate it clearly does not arise in or under Title 11.
The Nido action survives outside of bankruptcy and in the absence
of 	bankruptcy, 	would 	have 	been 	resolved 	in 	local 	court. 	The 	Nido
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action 	relates 	to 	a 	pre-petition 	claim 	arising 	under 	local 	law,
which 	is 	deemed 	non-core 	under 	cited 	case 	law 	and 	specifically
pursuant to the Supreme Court’s decision in Marathon, supra. Cases
where 	courts 	find 	that 	there 	is 	“related 	to” 	jurisdiction 	are
deemed 	non-core. 	Therefore, 	this 	Court 	concludes 	that 	this 	is 	a
non-core proceeding.
C. Remand
Section 1452(b) of Title 28 permits the court to which a claim
or cause of action has been removed to remand the claim or cause of
action on any equitable ground. 28 U.S.C. § 1452(b). The following
equitable grounds for remand have been identified:
(1) 	the 	effect 	of 	the 	action 	on 	the
administration 	of 	the 	bankruptcy 	estate; 	(2)
the 	extent 	to 	which 	issues 	of 	state 	law
predominate; 	(3) 	the 	difficulty 	of 	applicable
state 	law; 	(4) 	comity; 	(5) 	the 	relatedness 	or
remoteness 	of 	the 	action 	to 	the 	bankruptcy
case; 	(6) 	the 	existence 	of 	a 	right 	to 	a 	jury
trial; 	and 	(7) 	prejudice 	to 	the 	party
involuntarily removed from state court.
In re Santa Clara County Child Care Consortium, 223 B.R. at 44. See
also In re Evarts, 2006 WL at 696136.
The 	present 	adversary 	proceeding 	involves 	a 	removed 	action
that arose from a breach of contract between C&A and Nido. C&A and
USF&G 	request 	that 	the 	Court 	remove 	the 	action 	to 	the 	bankruptcy
court. Nido and ADS request that the Court remand it to the local
court. 	As 	previously 	explained, 	this 	Court 	has 	“related 	to”
jurisdiction over this adversary proceeding pursuant to 28 U.S.C.
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§ 1334(b).
This Court finds that in the present case, there are numerous
equitable grounds for remand. First, the Nido pre-petition breach
of 	contract 	action 	does 	not 	affect 	the 	administration 	of 	the
bankruptcy 	estate. 	The 	breach 	of 	contract 	action 	is 	remotely
related to the bankruptcy case. Moreover, all of the issues involve
only 	local 	law. 	Finally 	for 	comity 	reasons, 	this 	Court 	concludes
that because this adversary case involves a pre-petition breach of
contract, the local court should finally determine the outcome of
the action under local law and enter judgment.
Furthermore, 	although 	the 	abstention 	provisions 	are 	not
directly 	applicable 	because 	there 	is 	no 	parallel 	local 	court
proceeding, courts consider them in deciding when to remand a case.
The bankruptcy court in In re Interamericas Turkey Development Co.,
Inc., 94 B.R. 9 (D.P.R. 1988), held that:
Pursuant to section 1334(c)(2), the ‘district
court must abstain from hearing a purely state
law 	claim 	where 	there 	is 	no 	other 	basis 	for
federal 	jurisdiction 	other 	than 	its
relatedness 	to 	a 	bankruptcy 	proceeding
(including 	one 	where 	the 	debtor 	is 	a 	party)
and where the claim can be timely adjudicated
in a state court.’
Id. at 13,(quoting Matter of Candelero San & Gravel, Inc., 66 B.R.
at 	906 	and 	Sate 	Bank 	of 	Lombard 	v. 	Chart 	House, 	46 	B.R. 	468, 	472
(N.D.Ill. 1985)).
This Court concludes that mandatory abstention would apply if
there were a parallel local court proceeding. The present adversary
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case is one based on breach of contract, which is purely a matter
of local law. It is a case “related to” Title 11, which is the only
basis 	for 	federal 	jurisdiction. 	The 	action 	was 	commenced 	outside
the 	bankruptcy 	court. 	Finally, 	this 	Court 	finds 	that 	the 	Nido
action can be timely adjudicated by the local court. Thus, remand
is warranted because the criteria for mandatory abstention are met.
ORDER
WHEREFORE IT IS ORDERED that ADS’ Motion to Remand (Docket #4)
and 	Nido’s 	Motion 	to 	Remand 	(Docket 	#18) 	pursuant 	to 	28 	U.S.C. 	§
1452(b) are GRANTED. This action is hereby remanded to the Superior
Court of Puerto Rico, San Juan Section.
SO ORDERED.
San Juan, Puerto Rico, this 14th day of August, 2006.
S/Gerardo A. Carlo-Altieri
_____________________________
GERARDO A. CARLO-ALTIERI
Chief, U.S. Bankruptcy Judge
Case:05-00200-BKT Doc#:42 Filed:08/14/06 Entered:08/14/06 12:09:11 Desc: Main
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