EURO-AMERICAN STEEL COMPANY INC et al v. UNITED STATES FIDELITY & GUARANTY COMPANY 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
___________________________________:
:
Euro-American Steel 	:
Company, Inc., 	:
:
Plaintiff 	:
:
v. 	: 	ADV. NO. 06-00060
:
United Insurance Agency, 	:
USF&G, 	:
:
Defendants 	:
___________________________________:
DECISION AND ORDER
I. Background
The 	controversy 	pending 	before 	this 	Court 	is 	the 	removal 	of
civil action number DKCD2005-1071 from the Superior Court of Puerto
Rico, San Juan Section to this Court (Docket #1) by United States
Fidelity & Guaranty Co. (“USF&G”) and a motion to remand by Euro-
American Steel Company Inc. (“Euro”)(Docket #15).
On 	March 	14, 	2006, 	USF&G 	filed 	a 	notice 	of 	removal 	(Docket
#1), removing civil action number DKCD2005-1071 from the Superior
Court 	of 	Puerto 	Rico, 	San 	Juan 	Section 	to 	this 	Court. 	It 	is 	an
action commenced by Euro against USF&G and United Insurance Agency.
In the civil action, Euro seeks to recover $65,000 for the payment
of monies allegedly owed by C&A, under a subcontract Euro entered
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into with C&A prior to the bankruptcy filing, for the construction
and sale of a 200,000 gallon steel tank, which was to be installed
at 	the 	construction 	site 	of 	a 	Compost 	Plant 	in 	Toa 	Baja, 	Puerto
Rico.
On April 27, 2006, Euro filed a motion to remand pursuant to
Fed. 	R. 	Bankr. 	P. 	9027(a)(3) 	(Docket 	#15), 	contending 	that 	USF&G
filed 	a 	belated 	removal. 	Euro 	asserts 	that 	pursuant 	to 	Fed. 	R.
Bankr. P. 9027(a)(3), USF&G had thirty days from the notice of the
complaint 	to 	file 	the 	notice 	of 	removal. 	Euro 	asserts 	that 	USF&G
filed 	the 	notice 	of 	removal 	on 	March 	14, 	2006, 	and 	that 	because
USF&G was summoned on January 23, 2006, it had until February 23,
2006 	to 	file 	it. 	Thus, 	Euro 	asserts 	that 	USF&G 	filed 	a 	belated
notice of removal.
Euro 	also 	argues 	that 	this 	case 	is 	a 	non-core 	proceeding
because the debtor is not a party to the local court proceeding. It
contends 	that 	USF&G 	is 	a 	third 	party 	that, 	through 	a 	surety
contract 	for 	payment 	and 	performance 	bond, 	assumed 	the 	legal
responsibility to guarantee C&A’s payment. Moreover, Euro asserts
that 	its 	claim, 	filed 	in 	the 	local 	court, 	is 	based 	on 	the 	Civil
Code 	of 	Puerto 	Rico 	and 	that 	the 	action 	would 	exist 	in 	the 	local
court outside of the bankruptcy court. Euro requests that the Court
remand 	the 	present 	adversary 	proceeding 	with 	the 	imposition 	of
attorney’s fees and expenses.
On 	May 	19, 	2006, 	USF&G 	filed 	a 	reply 	to 	Euro’s 	motion 	to
remand (Docket #18), arguing that although it filed the notice of
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1 Adversary Case No. 05-00149 was remanded to the local court by Decision and
Order of June 29, 2006 and is now pending appeal before the District Court of
Puerto Rico.
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removal nineteen days after the February 23, 2006 deadline, it was
the 	result 	of 	excusable 	neglect. 	USF&G 	argues 	that 	it 	had 	to
examine the subcontract, which allegedly it did not have, in order
to know what defenses it could raise or in the alternative, explore
the 	possibility 	of 	a 	settlement. 	It 	argues 	that 	if 	Euro 	had
provided 	it 	with 	the 	contract 	in 	a 	timely 	fashion, 	it 	would 	have
filed a timely notice of removal. USF&G also asserts that pursuant
to 	Paragraph 	14.3.3 	of 	the 	subcontract, 	C&A 	has 	no 	obligation 	to
pay 	Euro 	any 	money 	until 	it 	has 	received 	final 	payment 	from 	the
owner of the project, which is ADS, and until Euro provides USF&G
with a release from the State Insurance Fund.
USF&G argues that filing a belated notice of removal in no way
prejudices 	C&A 	or 	Euro. 	To 	the 	contrary, 	it 	asserts 	that 	both
parties 	benefit 	from 	having 	the 	civil 	action 	adjudicated 	by 	the
bankruptcy court because this Court also has before it the case of
Nido 	v. 	ADS, 	Adversary 	No. 	05-00149 1. 	USF&G 	argues 	that 	it 	is
directly 	related 	to 	the 	case 	at 	bar 	and 	that 	the 	outcome 	will
determine whether or not C&A, USF&G or ADS is responsible for the
payment 	of 	Euro’s 	claim. 	USF&G 	also 	asserts 	that 	maintaining 	the
present 	adversary 	proceeding 	in 	the 	bankruptcy 	court 	is 	also
consistent with the best interest of C&A’s bankruptcy estate.
Moreover, 	USF&G 	contends 	that 	the 	bankruptcy 	court 	has
jurisdiction 	over 	the 	action 	pursuant 	to 	28 	U.S.C. 	§§ 	157(a) 	and
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1334 	and 	11 	U.S.C. 	§§ 	105(a), 	502 	and 	362. 	It 	asserts 	that 	the
present 	adversary 	proceeding 	belongs 	in 	the 	bankruptcy 	court
because 	it 	might 	deal 	efficiently 	and 	expeditiously 	with 	all
matters connected to C&A’s bankruptcy estate. 	It contends that the
action 	falls 	within 	the 	scope 	of 	one 	of 	the 	three 	types 	of
jurisdiction “arising under,” “arising in” or “related to” pursuant
to 28 U.S.C. § 1334(b) and that because one of the three bases for
federal jurisdiction is present, the present adversary proceeding
has 	been 	properly 	removed. 	USF&G 	maintains 	that 	at 	a 	minimum,
Euro’s claim falls within the “related to” jurisdiction because the
outcome 	of 	the 	matter 	will 	have 	an 	effect 	on 	C&A’s 	bankruptcy
estate. USF&G argues that according to the subcontract any amount
that USF&G is adjudged to owe Euro, automatically becomes a debt of
C&A’s 	estate. 	Thus, 	USF&G 	asserts 	that 	any 	judgment 	obtained 	by
Euro 	against 	USF&G 	will 	increase 	USF&G’s 	claim 	against 	C&A’s
estate.
Finally, 	USF&G 	asserts 	that 	the 	Euro 	claim 	can 	also 	be
categorized 	as 	a 	core-proceeding 	for 	the 	same 	reasons 	stated
previously and because it affects the liquidation of the assets of
C&A’s estate and the adjustment of the debtor-creditor relationship
pursuant to 28 U.S.C. § 157(b)(2). Therefore, USF&G requests that
the Court enter an order denying Euro’s motion to remand pursuant
to Fed. R. Bankr. P. 9027(a)(3).
On June 28, 2006, Euro filed a motion to amend the lawsuit to
include 	the 	debtor 	as 	a 	defendant 	and 	to 	issue 	summons 	(Docket
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#23). 	Euro 	asserts 	that 	it 	filed 	a 	motion 	to 	lift 	the 	automatic
stay against C&A and that the Court entered an order granting the
lift 	of 	stay. 	Euro 	requests 	that 	the 	Court 	grant 	permission 	to
amend 	the 	present 	adversary 	proceeding 	to 	include 	C&A 	as 	a
defendant and to issue summons.
II. Discussion
Removal 	of 	state 	court 	actions 	to 	the 	bankruptcy 	court are
provided for in the Judicial Code, which states that:
[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). The time limits for filing a notice of removal
of 	a 	civil 	action 	initiated 	after 	the 	commencement 	of 	the 	case
under 	the 	Bankruptcy 	Code 	are 	governed 	by 	the 	Federal 	Rules 	of
Bankruptcy Procedure, which states that:
a 	notice 	of 	removal 	may 	be 	filed 	with 	the
clerk 	only 	within 	the 	shorter 	of 	(A) 	30 	days
after 	receipt, 	through 	service 	or 	otherwise,
of 	a 	copy 	of 	the 	initial 	pleading 	setting
forth 	the 	claim 	or 	cause 	of 	action 	sought 	to
be 	removed, 	or 	(B) 	30 	days 	after 	receipt 	of
the 	summons 	if 	the 	initial 	pleading 	has 	been
filed 	with 	the 	court 	but 	not 	served 	with 	the
summons.
Fed. R. Bankr. P. 9027(a)(3).
Because Euro’s action was filed after C&A’s bankruptcy filing,
pursuant 	to 	Rule 	9027(a)(3), 	USF&G 	had 	thirty 	days 	to 	file 	the
notice of removal after receiving the summons. USF&G was summoned
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on 	January 	23, 	2006. 	Thus, 	the 	deadline 	to 	file 	the 	notice 	of
removal 	was 	February 	23, 	2006. 	This 	Court 	concludes 	that 	because
USF&G filed the notice of removal on March 14, 2006, nineteen days
after the deadline, USF&G filed an untimely notice of removal.
Nonetheless, even if the removal were timely, section 1334 of
the United States Code provides 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). Thus, when presented with a motion
to 	remand, 	the 	bankruptcy 	court 	must 	first 	evaluate 	whether 	the
state court action has been properly removed and determine whether
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).
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
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:
“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.(quoting 	In 	re 	G.S.F. 	Corp., 	938 	F.2d 	1467, 	1475 	(1st 	Cir.
1991)).
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The 	present 	adversary 	proceeding 	relates 	to 	a 	pre-petition
action for breach of contract that commenced outside the bankruptcy
court. Euro’s action clearly does not arise in or under title 11.
At 	best, 	it 	would 	be 	a 	“related 	to” 	proceeding 	because 	it 	could
have some effect on the bankruptcy estate.
The Supreme Court in Celotex v. Edwards, included as related
to 	proceedings: 	“(1) 	causes 	of 	action 	owned 	by 	the 	debtor 	which
become property of the estate pursuant to 11 U.S.C. § 541, and (2)
suits between third parties which have an effect on the bankruptcy
estate.” 	Celotex 	v. 	Edwards, 	514 	U.S. 	300, 	308 	n.5 	(1995). 	The
Supreme Court recognized that the bankruptcy court’s “related to”
jurisdiction is not limitless and discussed in a foot note that the
widely used test to decide if a court has “related to” jurisdiction
is using the test in Pacor, Inc. v. Higgins, 743 F.2d 984 (3rd Cir.
1984). Celotex v. Edwards, 514 U.S. at 308.
The 	test 	used 	in 	Pacor 	is 	“whether 	the 	outcome 	of 	that
proceeding 	could 	conceivably 	have 	any 	effect 	on 	the 	estate 	being
administered in bankruptcy.” Celotex v. Edwards, 514 U.S. at 308 n.
6. 	Although 	the 	Supreme 	Court 	indicated 	that 	other 	circuits 	have
used 	different 	tests, 	it 	stated 	that 	whatever 	test 	is 	used, 	the
cases “make clear that bankruptcy courts have no jurisdiction over
proceedings that have no effect on the debtor.” Celotex v. Edwards,
514 U.S. at 308 n.6.
In 	In 	re 	Santa 	Clara 	County 	Child 	Care 	Consortium, 	223 	B.R.
40, 	44 	(B.A.P. 	1st 	Cir. 	1998) 	the 	guarantor 	of 	the 	debtor’s 	loan
removed 	a 	state 	court 	proceeding 	arguing 	that 	the 	court 	had
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“related 	to” 	jurisdiction. 	The 	court 	used 	the 	“Pacor 	test” 	to
determine whether litigation falls within the jurisdictional grant
of 	section 	1334(b). 	The 	Bankruptcy 	Appellate 	Panel 	for 	the 	First
Circuit 	declined 	to 	find 	that 	it 	had 	“related 	to” 	jurisdiction,
holding 	that 	the 	outcome 	of 	the 	removed 	case 	would 	not 	have 	a
substantially and direct financial impact upon the reorganization
proceeding, 	but, 	rather 	would 	merely 	determine 	the 	validity 	and
enforceability of a guaranty between two creditors of debtor.
The 	Bankruptcy 	Appellate 	Panel 	for 	the 	First 	Circuit
recognized in In re Santa Clara, that courts using the Pacor test
have reached different outcomes, with some finding that they have
“related 	to” 	jurisdiction 	in 	cases 	removed 	by 	third 	parties, 	see
e.g. In re Hughs-Bechtol, 107 B.R. 556 (Bankr. S.D.Ohio 1989), and
some 	declining 	to 	find 	“related 	to” 	jurisdiction, 	see 	e.g. 	In 	re
Dak 	Mfg. 	Corp., 	73 	B.R. 	921 	(Bankr. 	D.N.J. 	1987). 	However, 	in
reaching a decision, the court in Santa Clara stated that it:
[s]ides with courts that find an insufficient
nexus 	to 	confer 	“related 	to” 	subject 	matter
jurisdiction on the bankruptcy court, in state
court 	actions 	involving 	non-debtor 	parties,
which may result in contribution/substitution
of 	creditors 	without 	a 	change 	in 	the
classification of a claim as it relates to the
debtor.
In 	re 	Santa 	Clara 	County 	Child 	Care 	Consortium, 	223 	B.R. 	at 	49.
Accordingly, 	the 	panel 	affirmed 	the 	decision 	of 	the 	bankruptcy
court to remand the removed proceeding to the state court.
The 	present 	adversary 	proceeding 	relates 	to 	a 	pre-petition
breach of contract between C&A’s guarantor and a third party. ADS
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hired C&A to be the contractor of a project in Toa Baja, P.R., and
C&A 	entered 	into 	a 	contract 	with 	Euro 	for 	the 	sale 	of 	a 	200,000
steel 	gallon 	tank 	for 	the 	amount 	of 	$65,000. 	Euro 	is 	one 	of 	the
creditors listed in C&A’s bankruptcy case, filing Proof of Claim #1
for 	the 	amount 	of 	$65,000. 	Euro 	filed 	the 	present 	action 	against
USF&G 	in 	the 	local 	court 	to 	recover 	the 	amount 	allegedly 	owed 	by
C&A. 	Therefore, 	in 	the 	present 	adversary 	proceeding 	if 	Euro 	is
successful, then USF&G will be substituted as a creditor of ADS or
C&A’s 	estate. 	On 	the 	other 	hand, 	if 	Euro 	is 	not 	successful 	then
C&A’s estate will not be affected. Thus, in using the Pacor test,
this 	Court 	finds 	that 	the 	outcome 	of 	Euro’s 	action 	will 	not 	have
any effect on the estate being administered in bankruptcy, it will
only result in a substitution of creditors without a change in the
classification of the claim as it relates to the debtor. Therefore,
this 	Court 	concludes 	that 	it 	does 	not 	have 	“related 	to”
jurisdiction and the case should be remanded to the local court.
ORDER
WHEREFORE IT IS ORDERED that Euro’s motion to remand (Docket
#15) 	is 	GRANTED. 	This 	action 	is 	hereby 	remanded 	to 	the 	Superior
Court of Puerto Rico, San Juan Section.
SO ORDERED.
San Juan, Puerto Rico, this 18th day of August, 2006.
S/Gerardo A. Carlo-Altieri
_____________________________
GERARDO A. CARLO-ALTIERI
Chief, U.S. Bankruptcy Judge
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