The Scoular Company v. 7-H Cattle Feeders, Inc. et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	JOSEPH PODZEMNY, 	No. 11-09-14226 JL
and
7-H CATTLE FEEDERS, INC.,
Debtors.
THE SCOULAR COMPANY,
Plaintiff,
v. 	Adversary No. 10-1010 J
DALHART CONSUMERS FUEL
ASSOCIATION, INC. and
7-H CATTLE FEEDERS, INC.,
Defendants.
MEMORANDUM OPINION
THIS MATTER is before the Court on Dalhart Consumers Fuel Association, Inc.’s
Motion to Dismiss for Lack of Subject Matter Jurisdiction or, Alternatively, for Abstention
(“Motion to Dismiss”) filed by Dalhart Consumers Fuel Association, Inc. (“Dalhart”), by and
through its attorneys of record Arland & Associates, LLC (William J. Arland III and Karla K.
Poe). Dalhart filed a brief in support of the Motion to Dismiss (Docket No. 14). Plaintiff, The
Scoular Company (“Scoular”), opposes the Motion to Dismiss. See Opposition of The Scoular
Company to Dalhart Consumers Fuel Association, Inc.’s Motion to Dismiss (“Opposition Brief”)
(Docket No. 16). Dalhart filed a reply to Scoular’s Opposition Brief. (Docket No. 18).
Dalhart asserts that this Court lacks subject matter jurisdiction over the claims raised in
this adversary proceeding and requests dismissal; alternatively, Dalhart asserts that this adversary
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proceeding is a non-core proceeding and that mandatory abstention is required in accordance
with 28 U.S.C. § 1334(c)(2). Scoular characterizes this adversary proceeding as a core
proceeding because its Complaint for Declaratory Judgment (“Complaint”) includes a claim for
recoupment based on pre-petition claims of Scoular against the Debtor, 7-H Cattle Feeders (“7-
H”), and pre-petition debts of Scoular owing to 7-H, and because the Complaint requests the
Court to determine that the sum of $530,000.00 which is the subject of an ongoing state court
action filed by Dalhart against Scoular and Union County Feedlot, Inc. represents an account
receivable that constitutes property of 7-H’s bankruptcy estate. 	Dalhart counters that because
the Complaint seeks a declaratory judgment determining that Scoular is not liable to Dalhart
based on the same state law claim that is the subject of the pending state court action, this
adversary proceeding is not a core proceeding and does not fall within the Court’s non-core
jurisdiction over matters related to 7-H’s bankruptcy case. Dalhart argues, alternatively, that if
the Court determines that it has non-core jurisdiction over this adversary proceeding, mandatory
abstention applies.
After consideration of the Motion to Dismiss, Scoular’s opposition thereto, and Dalhart’s
reply, and being otherwise sufficiently informed, the Court finds that it has subject matter
jurisdiction over this adversary proceeding, and that mandatory abstention does not apply.
However, because the dispute between Scoular and Dalhart involves non-debtor third parties and
concerns the same transaction that forms the basis of the claims raised in the pending state court
action, the Court will exercise its discretion in accordance with 28 U.S.C. § 1334(c)(1) to
permissively abstain from hearing that portion of this adversary proceeding that requests the
Court adjudicate the dispute between Scoular and Dalhart.
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BACKGROUND
7-H filed a voluntary petition under Chapter 11 of the Bankruptcy Code on September
19, 2009. 	Pre-petition, Scoular and 7-H bought and sold grain from each other. 	By a letter
dated September 13, 2009 (“Instruction Letter”), 7-H and Union County Feedlot, Inc. (“Union”)
instructed Scoular to pay Dalhart $530,000 representing amounts Scoular owed to 7-H for grain
purchased by Scoular from 7-H. 1 The Instruction Letter recites that “7-H and/or its affiliate
Union County Feedlot, Inc. . . . purchased the grain it sold to Scoular from Dalhart Consumers
Fuel Association, Inc.”2 Scoular issued a check in the amount of $530,000.00 made payable to
Dalhart dated September 15, 2009 (“Dalhart Check”), but later stopped payment on the Dalhart
Check.3 Neither Dalhart nor Scoular were parties to the Instruction Letter. Scoular asserts that
at no time was it indebted to Union. 	Dalhart asserts that it sold corn to Union, that at least
$530,000.00 remains due from Union for corn it purchased from Dalhart, that Dalhart did not sell
corn to 7-H and had no agreement with 7-H for the purchase of corn, and that Dalhart did not sell
corn to Scoular.4
Scoular owes 7-H approximately the sum of $723,323.21. 5 Scoular claims a right of
recoupment in the amount of approximately $470,999.27 regardless of the outcome of the
dispute between Scoular and Dalhart. If Scoular is required to pay $530,000.00 to Dalhart,
Scholar asserts a right of recoupment, in an amount, that if allowed would make Scoular a net
creditor of the estate instead of a net debtor of the estate in the amount of approximately
1 See Instruction Letter, attached as Exhibit A to the Complaint.
2 Id.
3 See Brief in Support of Dalhart Consumers Fuel Association, Inc.’s Motion to Dismiss for Lack of Subject Matter
Jurisdiction or, Alternatively, for Abstention (“Dalhart Brief), Exhibit 1 and Exhibit 2 attached to Exhibit A,
Affidavit in Support of Dalhart Consumers Fuel Association, Inc.’s Motion to Dismiss for Lack of Subject Matter
Jurisdiction, or, Alternatively, for Abstention (“Turner Affidavit”); Opposition Brief, ¶¶ 7-8.
4 See Dalhart Brief, ¶¶ 1, 2, and 4; and Turner Affidavit.
5 See Complaint, ¶22 and J-H Answer ¶13 admitting the allegation.
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$252,323.31.6 Dalhart asserts no claim against the estate regardless of the outcome of the
dispute between Scoular and Dalhart.7
Prior to the filing of this adversary proceeding, Dalhart filed a complaint against Scoular
and Union County Feedlot, Inc. (“Union”) in the 69th Judicial District Court, Dallam County,
Texas, as Cause No. 11011 (“Texas Action”) alleging claims against Union for breach of
contract, to recover on unaccepted instruments, and to recover attorneys’ fees; and alleging
claims against Scoular to recover on an unaccepted instrument (the “Dalhart Check”), and to
recover attorneys’ fees. 	The complaint filed in the Texas Action includes an allegation that
Union transferred its rights in the grain purchased from Dalhart to 7-H without consideration,
and that 7-H then sold the grain to Scoular. See Exhibit B to Complaint. 7-H was not named as a
defendant in the Texas Action due to 7-H’s status as a Chapter 11 debtor. Id.
Scoular filed this adversary proceeding against Dalhart and 7-H on January 21, 2010.
The Complaint contains two counts: 	1) a request for declaratory judgment determining a) that
the $530,000.00 which 7-H had directed Scoular to pay Dalhart is an outstanding account
receivable that constitutes property of the debtor’s bankruptcy estate, b) that Scoular’s stop
payment on the check issued to Dalhart was legitimate in all respects, c) that Scoular’s
obligations evidenced by the $530,000.00 account receivable were at all times owing to 7-H and
that Scoular at no time undertook any independent obligation to Dalhart, and d) that Scoular has
no obligation to Dalhart with respect to the Dalhart Check or otherwise for payment of the grain;
and 2) a request for recoupment based on purchases and sales between Scoular and 7-H.
7-H filed an Answer to the Complaint (“Answer”). In its Answer, 7-H admitted, among
other things, that it sold grain to Scoular that it had acquired from Dalhart, that the Instruction
6 See Complaint, ¶¶21-24.
7 See Dalhart Brief, ¶ 3; Turner Affidavit, ¶ 5.
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Letter attached to the Complaint as Exhibit A is a true and accurate copy of a letter 7-H
authorized to be sent to Scoular, and that Scoular is indebted to 7-H. 	7-H denies that the
amounts claimed due to Scoular are subject to recoupment, and asserts that Scoular was not a
creditor of 7-H. 7-H supports Scoular’s contention that the receivable owing to 7-H constitutes
property of 7-H’s bankruptcy estate. At the preliminary hearing on the Motion to Dismiss,
counsel for 7-H represented to the Court that 7-H takes no position as to the Motion to Dismiss. 8
DISCUSSION
Whether the Court Has Subject Matter Jurisdiction Over this Adversary Proceeding
Dalhart requests the Court to dismiss this adversary proceeding for lack of subject matter
jurisdiction in accordance with Fed.R.Civ.P. 12(b)(1), made applicable to adversary proceedings
by Fed.R.Bankr.P. 7012(b). In considering a motion to dismiss under Fed.R.Civ.P. 12(b), the
Court may consider matters outside the pleadings, such as affidavits or other documents, without
converting the motion to dismiss into a motion for summary judgment under Fed.R.Civ.P. 56,
provided the motion challenges the facts upon which subject matter jurisdiction depends, and
provided further that those facts are not intertwined with the merits of the case. See Holt v.
United States, 46 F.3d 1000, 1003 (10 th Cir. 1995).9 Scoular’s Complaint for Declaratory
Judgment (“Complaint”) asserts that this Court has jurisdiction over this adversary proceeding
based on 28 U.S.C. §§ 157, 2201, 2202, and further alleges that this adversary proceeding is a
core proceeding. See Complaint, ¶ 5 (Docket No. 1). Dalhart correctly states that the federal
8 Counsel for 7-H in this adversary proceeding also represents 7-H in the underlying bankruptcy case.
9 Dalhart contests the facts upon which subject matter depends, inasmuch as Dalhart appears to argue that its dispute
with Scoular does not involve 7-H. Further, Dalhart’s Motion to Dismiss does not require the Court to consider the
merits of the dispute between Dalhart and Scoular in order to solve the jurisdictional issue. It is, therefore, not
necessary to convert the Motion to Dismiss into a motion for summary judgment. In its Opposition Brief, Scoular
requested an opportunity to conduct discovery in order to present further evidence in accordance with Fed.R.Civ.P
56(f). Because the Court has not converted the Motion to Dismiss into a motion for summary judgment, Rule 56(f)
is inapplicable. The Court would have discretion to allow further evidence if it were necessary to resolve the
jurisdictional issue, but because the Court finds that jurisdiction exists, such additional evidence is unnecessary.
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Declaratory Judgment Act, 28 U.S.C. §§ 2201-2202,10 is insufficient to confer subject matter
jurisdiction on the bankruptcy court. See Cardtoons, L.C. v. Major League Baseball Players
Ass’n, 95 F.3d 959, 964 (10 th Cir. 1996)(“The Declaratory Judgment Act does not confer
jurisdiction upon federal courts.”)(citations omitted). See also, Winslow v. Romer, 123 B.R. 74,
(D.Colo. 1990)(stating that “[t]he statutes and rules authorizing the court to order injunctive and
declaratory relieve do not confer subject matter or personal jurisdiction on the court. . . . [t]hey
provide only additional remedies once the movant has otherwise established
jurisdiction.”)(citations omitted). Consequently, the Court must evaluate its subject matter
jurisdiction over this adversary proceeding in accordance with 28 U.S.C. § 1334.
That section provides, in relevant part:
[T]he district courts 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).
The congressional grant of jurisdiction to the bankruptcy court under 28 U.S.C. § 1334 is
limited. Gardner v. United States (In re Gardner), 913 F.2d 1515, 1517 (10 th Cir. 1990) (stating
that “[b]ankruptcy courts have only the jurisdiction and powers expressly or by necessary
implication granted by Congress.”)(citation omitted). 	Pursuant to 28 U.S.C. §157,
Bankruptcy judges may hear and determine all cases under title 11 and all core
proceedings arising under title 11, or arising in a case under title 11, . . . and may enter
appropriate orders and judgments. . . .
28 U.S.C. § 157(b)(1).
10 The federal Declaratory Judgment Act provides, in relevant part:
In a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of
an appropriate pleading, may declare the rights and other legal relations of any interested party seeking
such declaration . . . .
28 U.S.C. § 2201(a) (emphasis added).
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“Core” proceedings are proceedings which involve rights created by bankruptcy law, or which
would arise in a bankruptcy case. 	Gardner v. United States (In re Gardner), 913 F.2d 1515,
1518 (10 th Cir. 1990). See also 28 U.S.C. § 157(2)(A) - (O) (listing matters included within core
proceedings). 	Bankruptcy courts also have jurisdiction over proceedings that are not core
proceedings, but are otherwise “related to” a case under title 11. See Personnette v. Kennedy (In
re Midguard Corp.), 204 B.R. 764, 771 (10th Cir. BAP 1997). 	“Non core” proceedings do not
invoke substantive rights created by bankruptcy law, and can exist independently from the
bankruptcy case. In re Wood, 825 F.2d 90, 97 (5th Cir. 1987). 	Proceedings that fall within the
bankruptcy court’s non-core, “related to” jurisdiction include “suits between third parties which
have an effect on the bankruptcy estate.” Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.5, 115
S.Ct. 1493, 1499, 131 L.Ed.2d 403 (1995) (citation omitted).
Dalhart asserts that this adversary proceeding does not fall within this Court’s jurisdiction
because it does not “arise under” title 11 nor “arise in” a bankruptcy case; and does not fall
within the Court’s non-core, “related-to” jurisdiction because the claims are not related to 7-H’s
bankruptcy case. Dalhart focuses on that portion of the adversary proceeding that concerns
Dalhart’s dispute with Scoular. Dalhart characterizes its dispute with Scoular as a statutory
breach of contract case that involves two non-debtor entities. 	Dalhart reasons that the claim
concerning the Dalhart Check does not involve 7-H or the bankruptcy estate, and will not impair
this Court’s administration of the 7-H case, since the claim does not belong to 7-H and any
resulting recovery would be paid to Dalhart, not 7-H. Scoular characterizes this adversary
proceeding as a “core” proceeding inasmuch as it requests the Court to determine whether the
Dalhart Check represents an account receivable that would constitute property of 7-H’s
bankruptcy estate. Alternatively, Scoular asserts that the proceeding falls within this Court’s
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related-to jurisdiction because the outcome will affect the administration of the bankruptcy
estate.
“[T]he test for determining whether a civil proceeding is related in bankruptcy is whether
the outcome of that proceeding could conceivably have any effect on the estate being
administered in bankruptcy.” Pacor v. Higgins, 743 F.2d 874, 994 (3rd Cir. 1984). 	In Pacor v.
Higgins, the Third Circuit reasoned that because the controversy between Higgins and Pacor
would have no effect on the pending bankruptcy case filed by Manville, a party against whom
Pacor had a potential third-party indemnification claim, the action was not sufficiently “related
to” the bankruptcy to fall within the bankruptcy court’s limited jurisdiction. Pacor, 743 F.2d at
995. 	Dalhart relies on Pacor, arguing that its claim against Scoular is not property of 7-H’s
bankruptcy estate, exists independently of any dispute between Scoular and 7-H, and constitutes
what Pacor describes as a “mere precursor” to any impact on the bankruptcy estate since any
impact on the bankruptcy case is contingent upon the outcome of the dispute between Scoular
and Dalhart. Dalhart further argues that, similar to Pacor, 7-H will not be bound by principles of
res judicata or collateral estoppel because 7-H is not a party to the Texas Action. 	This Court
disagrees that this adversary proceeding, including the dispute between Dalhart and Scoular, falls
outside the scope of this Court’s “related-to” jurisdiction.
Pacor acknowledges that a proceeding “need not necessarily be against the debtor or
against the debtor’s property” in order to fall within the bankruptcy court’s “related to”
jurisdiction; it is sufficient “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 bankrupt estate.” Pacor, 994 F.2d at 743 (emphasis added).
See also, Owens-Illinois, Inc. v. Rapid American Corp., (In re Celotex Corp.), 124 F.3d 619, 626
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(stating that “the Pacor test does not require certain or likely alteration of the debtor’s rights,
liabilities, options or freedom of action, nor does it require certain or likely impact upon the
handling and administration of the bankruptcy estate.”); In re Titan Energy, Inc., 837 F.2d 325,
330 (8th Cir. 1988)(stating that “even a proceeding which portends a mere contingent or
tangential effect on a debtor’s estate meets the broad jurisdictional test articulated in Pacor.”).
This Adversary Proceeding, despite Scoular’s attempt to conflate its claims involving 7-H
with its dispute with Dalhart, consists of two claims: 1) Scoular’s claim for recoupment against
7-H which will determine the amount of its claim against or liability to the bankruptcy estate;
and 2) its dispute with Dalhart over the Dalhart Check.
Scoular’s claims vis a vis 7-H clearly fall within this Court’s subject matter jurisdiction
whether they are characterized as core or non-core.11 Scoular’s request for recoupment will
require the Court to determine the amount of Scoular’s claim against the bankruptcy estate, if
any. Claims objections fall within the bankruptcy court’s subject matter jurisdiction.12
Scoular’s claim involving its dispute with Dalhart falls within the Court’s related-to
jurisdiction because it will have a potential impact on the administration of 7-H’s bankruptcy
estate. Scoular is both a creditor, and an account-debtor to 7-H. Whether Scoular were to
prevail or lose its dispute with Dalhart in this adversary proceeding, there would be a change in
the assets or liabilities of the 7-H bankruptcy estate. If Scoular were to prevail in its dispute with
Dalhart, the $530,000 represented by the Dalhart Check would remain an outstanding account
11 See 28 U.S.C. § 157(b)(1)(B) (“allowance of claims against the estate” are core proceedings); In re Commercial
Financial Services, Inc., 251 B.R. 397 (Bankr.N.D.Okla. 2000)(noting that “setoff, whether as a defense or as a
counterclaim clearly invokes that claims allowance process.”); Syler v. Jean Bob, Inc., (In re Concept Clubs, Inc.),
154 B.R. 581, 588 (D.Utah 1993)(holding that a counterclaim for setoff “may constitute a claim against the
bankruptcy estate for jurisdictional purposes.” (emphasis in original)); In re Electric Machinery Enterprises,
Inc.,416 B.R. 801, 871 (Bankr.M.D.Fla. 2009)(finding that recoupment or setoff defense asserted against claims of
Chapter 11 debtor constituted a claim against the estate, invoking the equitable jurisdiction of the bankruptcy court
and “transforming this proceeding into a core proceeding . . .”).
12 See, 28 U.S.C. § 157(b)(1)(B) (“allowance or disallowance of claims against the estate” are core proceedings).
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receivable owing by Scoular to 7-H subject to the claimed right of recoupment. Scoular would
then owe approximately $252,325 to the estate if its recoupment claim were allowed, and more if
its recoupment claim were disallowed, thereby increasing the estate assets available for
distribution to creditors. If Dalhart were to prevail in this adversary proceeding in the dispute
between Scoular and Dalhart, 7-H’s liabilities would increase and its assets would decrease if
recoupment were permitted.13 Unlike Pacor, where the liability of the debtor was dependent
upon the outcome of the dispute between two non-debtor parties, the outcome of Scoular’s
dispute with Dalhart in this adversary proceeding necessarily would affect the administration of
7-H’s bankruptcy estate. The Court is persuaded that this adversary proceeding falls at least
within its non-core “related to” jurisdiction.
Whether the Court Must Abstain Under the Mandatory Abstention Statute
Mandatory abstention is governed by 28 U.S.C. § 1334(c)(2), which provides:
Upon timely motion of a party in a proceeding 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).
Mandatory abstention applies only to non-core proceedings. Bricker v. Martin, 348 B.R. 28, 33
(W.D.Pa. 2006). Once the Court has determined that a proceeding falls within the bankruptcy
court’s non-core, “related-to” jurisdiction, the Court must abstain provided the remaining
elements under 28 U.S.C. § 1334(c)(2) have been met. 	Those elements are: 1) the motion for
abstention must be timely filed; 2) the matter must be based on a state law claim or cause of
13 Based on the evidence before the Court, should Dalhart prevail in the dispute between Scoular and Dalhart,
Scoular would not simply be substituted for Dalhart as an unsecured creditor of the estate because 1) Dalhart has
admitted it has no claim against the 7-H estate, and 2) Scoular, but not Dalhart, asserts recoupment.
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action; 3) the action can be timely adjudicated in state court; and 4) there is no independent
source of federal jurisdiction that would have permitted the plaintiff to commence the action in
federal court in the absence of the bankruptcy. 	In re Mobile Tool Intern., 320 B.R. 552, 556
(Bankr.D.Del. 2005). All elements must be satisfied in order to grant a party’s request for
mandatory abstention. Id.
The fourth element of mandatory abstention is not satisfied in this case. An action
premised on the claims asserted in this adversary proceeding could have been commenced in a
federal court absent commencement of the 7-H bankruptcy case based on diversity of citizenship
and an amount in controversy in excess of $75,000. See 28 U.S.C. § 1332. 14 Scoular is a
Nebraska corporation. Dalhart is a Texas corporation. 7-H is a New Mexico corporation. The
amount in controversy is more than $75,000.00.15 Thus, there is complete diversity among the
parties to this adversary proceeding and an amount in controversy in excess of the jurisdictional
minimum; Scoular could have commenced this proceeding in a federal court without invoking
this Court’s bankruptcy jurisdiction. Because there is an alternative basis for federal jurisdiction,
the requirements for mandatory abstention under 28 U.S.C. § 1334(c)(2) have not been
satisfied.16
14Cf. In re Warren Producers, Inc., 360 B.R. 249, 252-253 (Bankr.W.D.Ky. 2007)(holding that mandatory
abstention did not apply where there was an independent basis for federal jurisdiction based on diversity among the
parties and an alleged amount in controversy in excess of the jurisdictional minimum); Mobile Tool, 320 B.R. at 556
(requirements for mandatory abstention not met where there was complete diversity and sufficient amount in
controversy to meet federal jurisdiction requirements under 27 U.S.C. § 1332); In re Grubbs Const. Co., 305 B.R.
476, 481 (Bankr.W.D.Ark. 2003)(finding that mandatory abstention did not apply where there was diversity of
citizenship between the plaintiff and the defendants and the amount in controversy was sufficient to confer federal
jurisdiction).
15 See 28 U.S.C. § 1332(a) and (c)(providing that “[t]he district courts shall have original jurisdiction of all civil
actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is
between . . . citizens of different States[ ]” and providing further that “a corporation shall be deemed to be a citizen
of any State by which it has been incorporated and of the State where it has its principal place of business . . .”).
16 In addition, mandatory abstention does not apply to the extent the claims in this case are “core” claims.
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Whether the Court May Abstain Under the Permissive Abstention Statute
Even where mandatory abstention under 28 U.S.C. § 1334(c)(2) is inapplicable, the
bankruptcy court may abstain from both core and non-core matters when abstention best serves
the interest of justice, judicial economy, or in the interest of comity with the state courts. See In
re Best Reception Systems, Inc., 220 B.R. 932, 952 (Bankr.E.D.Tenn. 1998)(“[P]ermissive
abstention applies to both non-core related and core proceedings.”)(citing Gober v. Terra +
Corp. (In re Gober), 100 F.3d 1195, 1206 (5th Cir. 1996)(remaining citations omitted)). 	The
bankruptcy court can raise the issue of permissive abstention sua sponte. See Bricker v. Martin,
348 B.R. at 33 (noting that, unlike the mandatory abstention statute, the permissive abstention
statute does not require a motion, which, “by implication, [means that] a bankruptcy court may
permissively abstain sua sponte.”); In re Terracor, 86 B.R 671, n.15 (D.Utah 1988)(noting that
“[s]ection 1334(c)(1) allows the court to act in absence of a motion by a party in
interest.”)(citation omitted).
Permissive abstention is governed by 28 U.S.C. § 1334(c)(1), which provides, in relevant
part:
[N]othing in this section prevents a district court in the interest of justice, or in the
interest of comity with 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.
28 U.S.C. § 1334(c)(1).
In considering whether to exercise its discretion to abstain under 28 U.S.C. § 1334(c)(1), the
following factors are relevant:
(1) the effect that abstention would have on the efficient administration of bankruptcy estate;
(2) the extent to which state law issues predominate; (3) the difficulty or unsettled nature of
applicable state law; (4) the presence of a related proceeding commenced in state court or
other nonbankruptcy court; (5) the federal jurisdictional basis of the proceeding; (6) the
degree of relatedness of the proceeding to the main bankruptcy case; (7) the substance of
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asserted “core” proceeding; (8) the feasibility of severing the state law claims; (9) the burden
the proceeding places on the bankruptcy court's docket; (10) the likelihood that
commencement of the proceeding in bankruptcy court involves forum shopping by one of
parties; (11) the existence of a right to jury trial; and (12) the presence of nondebtor parties in
the proceeding.
In re Commercial Financial Services, Inc., 251 B.R. 414, (Bankr.N.D.Okla. 2000)(noting
that this “well-worn list of factors . . . was originally established in Republic Reader’s Servic,
Inc. v. Magazine Service Bureau, Inc., (In re Republic Reader’s Service, Inc.), 81 B.R. 422,
428-29 (Bankr.S.D.Tex. 1987)).
Factors (2), (4), (5), (6), (10) and (12) weigh in favor of permissive abstention. The dispute
between Scoular and Dalhart concerns the application of state law, though the state law at issue
is not unsettled or particularly difficult. The Texas Action is already pending and was
commenced before the commencement of this adversary proceeding, and Scoular and Dalhart are
non-debtor parties. The dispute between Scoular and Dalhart is only “related-to” 7-H’s
bankruptcy case, and solely raises questions of state law. It also appears that Scoular filed this
adversary proceeding in an attempt to litigate its dispute with Dalhart in a forum it perceives to
be more neutral. No party has argued that the Texas Action cannot be timely adjudicated.
Factor (1), the effect on the efficient administration of the bankruptcy estate, weighs slightly in
favor of retaining this proceeding as a whole; however, because the Court will permissively
abstain only from the dispute between Dalhart and Scoular, a dispute that is also the subject of
the Texas Action, this factor does not outweigh the other factors.
Scoular argues that by not retaining jurisdiction over all the claims raised in this
adversary proceeding, it will risk inconsistent rulings and may be subjected to paying the same
obligation twice: once to Dalhart (assuming Dalhart prevails in the Texas Action) and once to 7-
H (as an outstanding account receivable if 7-H were to assert it was not bound by the result in the
Texas Action and could successfully assert that the Texas Court’s decision was wrong). This
Court is not persuaded that the risk is as great as Scoular would have the Court believe. Further,
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to bind 7-H to the outcome of the Texas Action, Scoular could move for relief from the
automatic stay to join 7-H as a defendant in the Texas Action. And in any event even if this
Court were to retain jurisdiction over the all claims raised in this adversary proceeding,
resolution of the dispute between Scoular and Dalhart would simply depend on which court
(either the state court or this Court) entered a judgment first, since the Texas Action has not been
stayed by the filing of 7-H’s bankruptcy case.
It is Feasible to Sever the Dispute between Scoular and Dalhart from this Adversary Proceeding
Factor (8), which concerns the “feasibility of severing state law claims” “implicitly
presupposes that partial abstention may be appropriate.” Bricker v. Martin, 348 B.R. at 38. Here,
given that the Texas Action was commenced before the filing of this adversary proceeding and
raises claims that are also raised as part of this adversary proceeding, the Court finds that
abstention only with respect to the claims in this adversary proceeding that would be resolved by
the outcome of the Texas Action is appropriate. The Court will not abstain as to the claims by
Scoular against 7-H, but will stay this adversary proceeding pending the outcome of the Texas
Action. Abstaining from that portion of this adversary proceeding that duplicates the claims
raised in the Texas Action will not hamper the orderly adjudication of 7-H’s bankruptcy case.
Once a determination is made in the Texas Action, the remaining claims in this adversary
proceeding can be adjudicated.
Based on the foregoing, the Court concludes that the Motion to Dismiss for lack of
subject matter jurisdiction will be denied. The Court will exercise its discretion under 28 U.S.C.
§ 1334(c)(1) to permissively abstain from that portion of this adversary proceeding concerning
the dispute between Scoular and Dalhart, and will stay this adversary proceeding pending the
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outcome of the Texas Action. 	An appropriate order consistent with this Memorandum Opinion
will be entered.
___________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Entered on Docket: May 3, 2010
Copies to:
Daniel J Behles
Cuddy & McCarthy, LLP
7770 Jefferson NE, Suite 305
Albuquerque, NM 87109
Attorneys for 7-H Cattle Feeders, Inc.
Steven Heim
Steven T Waterman
Dorsey & Whitney LLP
136 South Main Street, Suite 1000
PO Box 45925
Salt Lake City, UT 84145-0925
Attorneys for The Scoular Company
William J Arland, III
Karla K. Poe
Arland & Associates, LLC
PO Box 1089
Santa Fe, NM 87504-1357
Attorneys for Dalhart Consumers Fuel Association, Inc.
Case 10-01010-j Doc 19 Filed 05/03/10 Entered 05/03/10 16:58:49 Page 15 of 15