Phoenix Enviornmental, LLC v. Johnson et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
PHOENIX ENVIRONMENTAL, LLC,
Debtor. 	No. 11-11-15031 SA
PHOENIX ENVIRONMENTAL, LLC,
Plaintiff,
v. 	Adv. No. 12-1007 S
XERIC OIL AND GAS, INC.,
BAKER MO SERVICES, INC.,
and DAN JOHNSON and COLLEEN JOHNSON,
dba DC Energy,
Defendants.
AMENDED 1 MEMORANDUM OPINION IN SUPPORT OF ORDER
ABSTAINING FROM HEARING ADVERSARY PROCEEDING
AND REMANDING ADVERSARY PROCEEDING TO STATE COURT2
Debtor in possession Phoenix Environmental, LLC (“Debtor”)
has moved to have this Court abstain from adjudicating this
1 This amended memorandum opinion amends the memorandum
opinion entered on August 22, 2012 (doc 29), and is intended
solely to correct typographical errors in the original opinion.
2 Although this adversary proceeding has been transferred to
the Honorable Robert H. Jacobvitz, Order Transferring Adversary
Proceeding (doc 28), the undersigned judge continues in service
on recall duty with authority to enter orders in cases and
adversary proceedings. 	The Court is adjudicating this dispute
because it was a pending matter on this judge’s docket at the
time that his fourteen-year term expired, and judicial economy
suggested that the matter could more expeditiously be resolved by
this judge rather than the newly assigned judge who is not
familiar with the background of the adversary proceeding or the
chapter 11 case. 	Following the entry of this judgment, this
judge will presumably cease any further activity in this
adversary proceeding or in the underlying chapter 11 case, In re
Phoenix Environmental, LLC, case no. 11-15031.
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adversary proceeding (“Motion”). 	Doc 13. 	For the reasons set
out below, the Court grants the Motion. 3
Background
On or about September 14, 2009, Phoenix Environmental, LLC
filed a Verified Complaint for Debt and Money Due and to
Foreclose Oil and Gas Liens in the Fifth Judicial District, Lea
County, New Mexico (“State Lawsuit”). 	The named defendants were
Xeric Oil and Gas, Inc. (which incurred the debts and was the
owner of the oil and gas leases at the time the purported liens
attached), Baker Mo Services, Inc., also a lien claimant on some
of the properties 4, and Dan and Colleen Johnson dba DC Energy,
who had purchased the leases from Xeric prior to the filing of
the State Lawsuit. 	Debtor filed its voluntary chapter 11
petition on November 20, 2011 (main case, doc 1). 	Defendants Dan
Johnson and Colleen Johnson (“Defendants”) removed the State
Lawsuit to this Court by filing their Notice of Removal on
January 19, 2012. 	Debtor moved to remand on the basis of both
mandatory and discretionary abstention. 	Doc 13. 	Defendants
responded in opposition, doc 15, Debtor replied, doc 17, to which
3 	The Court has subject matter and personal jurisdiction
pursuant to 28 U.S.C. §§1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §157(b)(2)(A); and these are
findings of fact and conclusions of law as may be required by
Rule 7052 F.R.B.P.
4 Baker Mo has withdrawn any claims in this action, doc 8,
and therefore will not be considered further.
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Defendants sur-replied. 	Doc 21. 	The parties have not asked for
an evidentiary hearing, and so the Court has decided this matter
on the papers submitted. 5
Analysis
Debtor argues for both permissive abstention under 28
U.S.C. §1334(c)(1) and mandatory abstention under 28 U.S.C.
§1334(c)(2). 	That latter section provides as follows:
Upon timely motion of a party in a proceeding based
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.
The adversary proceeding initiating this removal action was
timely filed, F.R.B.P. 9027(a)(2), and following an initial
pretrial conference held on February 6, 2012 (minutes – doc 6)
and the entry of the order arising out the initial pretrial
conference on March 7 (doc 12), Debtor promptly filed the Motion
on March 12. 	The causes of action in the complaint and in the
proposed counterclaim and cross-claim – collection of a debt,
foreclosure of purported liens, deceptive trade practices,
5 See, for example, Hurley v. Kujawa (In re Kujawa), 224
B.R. 104, 107-08 (E.D. Mo. 1998), citing In re Mozzocone, 200
B.R. 568, 575-75 (E.D. Penn. 1996) (extent of evidentiary hearing
within discretion of trial court). 	In this instance, the Court
had the benefit of the state court filings and extensive factual
presentations and argument from the parties on paper.
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slander of title and quiet title (doc 1-5, at 7-9) – are all
eminently state law causes of action that at best are related
matters and not core. 	While they are related to the chapter 11
case, in that the resolution of the dispute might provide
substantial funds to (or generate additional obligations for) the
estate, they are not core proceedings because the causes of
action do not arise under or in the chapter 11 case. 	See
generally Personette v. Kennedy (In re Midgard Corp.), 204 B.R.
764 (10th Cir. BAP 1997).
It is true that adjudicating the competing claims will
presumably liquidate the claims of the parties against each
other, thereby affecting the administration of the estate,
resulting in the allowance or disallowance of claims by and
against the estate, determining the validity, extent and priority
of liens, and otherwise adjusting the debtor-creditor
relationship. 	See 28 U.S.C. §157(b)(2). 	But it is not
sufficient to argue the removed action must stay in the
bankruptcy court because there might be core matters to be
decided. 	Delphi Automotive Systems, LLC v. Segway, Inc., 519
F.Supp.2nd 662, 671 (E.D. Mich. 2007)(“The state law claims
asserted in Plaintiff’s complaint predominate over any bankruptcy
issue that may arise due to Plaintiff’s chapter 11 proceeding.”);
Schmidt v. Klein Bank (In re Schmidt), 453 B.R. 346 (8 th Cir. BAP
2011) 	(pending state court causes of action were not core
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proceedings notwithstanding that it was possible to place them
within one or more types of “core” proceedings identified in
§157(b)(2)). 	In any event, nothing in §1334(c)(2) allows for
such an exception; that is, if the requirements of §1334(c)(2)
are met, the Court must abstain, even if what is at issue appears
to include core matters.
This action could not have been commenced in the United
States District Court absent the bankruptcy filing since there is
a lack of diversity: two opposing parties are both New Mexico
limited liability companies.
There is some confusion about the status of the defendants.
See Motion for Remand, at 2: “... Dan Johnson and Colleen Johnson
d/b/a DC Energy LLC, a New Mexico limited liability company
....”, doc 13; and also signature line for Johnsons’/DC Energy’s
counsel in Answer to Verified Complaint at 3: “Attorney for Dan
and Colleen Johnson, DBA DC Energy, aka DC Energy, LLC”. 	Doc 1-
4. 	All parties seem to have treated DC Energy in this action as
if it were a sole proprietorship of the Johnsons. 6 	See, e.g.,
Notice of Removal (doc 1). 	It also appears that the Johnsons
control DC Energy but that the Johnsons themselves are Georgia
citizens. 	Compare Verified Complaint, ¶4 (Johnsons d/b/a DC
6 Curiously the parties do not address the issue directly in
this court, nor do they make clear who exactly is the formal
owner of the liened properties. 	The issue is probably of little
moment in the state district court; the statute makes it quite
important in this Court.
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Energy of Dallas, Georgia) (doc 1-2) with 	Answer to Verified
Complaint, ¶2 (“This Defendant [sic] denies the allegations of
Paragraph Four and affirmatively states that DC Energy, LLC is a
New Mexico Limited Liability Company.”) (doc 1-4). 	So while it
is true that the Johnsons are probably not New Mexico citizens,
in fact, “DC Energy” apparently is “DC Energy, LLC” – Answer to
Verified Complaint, ¶2 (doc 1-4) – so that DC Energy is legally a
separate entity from the Johnsons.
Thus, the alignment of the parties is a New Mexico limited
liability company as plaintiff and a New Mexico limited liability
company and two Georgia residents as defendants. 	Whether the
liened properties are owned by the Johnsons individually or, as
more likely appears, DC Energy, LLC, the fact is that federal
diversity jurisdiction requires complete diversity of the
parties. 	28 U.S.C. § 1332(a); McPhail v. Deere & Co., 529 F.3d
947, 951 (10 th Cir. 2008)(“[T]he citizenship of all defendants
must be different from the citizenship of all plaintiffs.”);
Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806)(Same.) 	See
also 13E Wright, Miller, Cooper, Freer, Steinman, Struve and
Amar, Federal Practice & Procedure § 3605 (3d ed.). 	Obviously
that does not exist here and so there is no federal jurisdiction
outside the bankruptcy filing.
Finally, as the record of the proceedings in the State
Lawsuit filed by Defendants makes clear, the action was commenced
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September 14, 2009, more than two years before the filing of the
chapter 11 petition. 	The State Court Judge, the Honorable
William G. W. Shoobridge, has presided over the case during the
entire time, including presiding over some discovery and even
apparently having set a bench trial on the merits for May 2,
2011. 	See State Lawsuit docket (doc 1-9, at 3 of 14) (April 27,
2011 docket entry showing vacation of trial setting). 	It is
apparent that the State Court can try this matter in a timely
fashion. 7
Conclusion
For the reasons stated, it is clear that this Court must
abstain from adjudicating this state court action which must be
remanded to the State Court Judge for further proceedings. 	An
order will enter. 	The order will provide among other things that
the hearing currently scheduled before the Honorable Robert H.
Jacobvitz for Monday, August 27, 2012 at 10.00 am (Mountain Time)
is cancelled.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	September 27, 2012
7 Given the foregoing analysis, the Court need not consider
whether discretionary abstention under 28 U.S.C. §1334(c)(1) is
applicable. 	The Court also need not address the parties’
arguments in connection with Stern v. Marshall, ___ U.S. ___, 131
S. Ct. 2594 (2011), since the Bankruptcy Court will not be
adjudicating the matter.
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Copies to:
Louis Puccini, Jr
Puccini Law, P.A.
PO Box 50700
Albuquerque, NM 87181-0700
Casey S Stevenson
Scotthulse, PC
201 E. Main Drive
El Paso, TX 79901
Robert R Feuille
PO Box 99123
El Paso, TX 79999-9123
Page 8 of 	8
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