Phoenix Energy Services, LLC et al v. Phoenix Enviornmental, LLC et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
PHOENIX ENVIRONMENTAL, LLC,
Debtor. No. 11-11-15031 SA
PHOENIX ENERGY SERVICES,
Plaintiff,
v. Adv. No. 11-1199 S
PHOENIX ENVIRONMENTAL, LLC,
a New Mexico limited liability company,
EVERETT A. HODGE, II and
JANA L. HODGE,
Defendants.
MEMORANDUM OPINION IN SUPPORT OF
ORDER GRANTING MOTION FOR ABSTENTION
Plaintiff Phoenix Energy Services, LLC’s (“Plaintiff’s”)
Motion for Remand or Abstention (doc 10) and the response thereto
by debtor in possession Phoenix Environmental, LLC (“Debtor”)
(doc 11) came before the Court for a duly scheduled preliminary
hearing on January 4, 2012. The Court took the matter under
advisement, ruling inter alia that it did not need to conduct an
evidentiary hearing in order to make a ruling. Doc 14. Having	1 2
read the papers and considered the arguments of counsel, the
See, for example, Hurley v. Kujawa (In re Kujawa), 224	1
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 by counsel.
The Court notes that in addition to misspelling	2
“Environmental” in the style of this adversary proceeding in the
previous order, the Court also misstated the name of the State
Court Judge. The name is the Honorable Jane Shuler-Gray, not
Jane Shuler Gray. The Court apologizes to Judge Shuler-Gray for
that mistake.
Case 11-01199-s Doc 17 Filed 01/31/12 Entered 01/31/12 15:53:10 Page 1 of 9

Court rules that pursuant to 28 U.S.C. §1334(c)(2), it is
required to abstain from adjudicating this adversary proceeding.3
Background
Plaintiff filed its complaint against Debtor and its
owners/managers Everett and Jana Hodge (“Hodges”) in the Fifth
Judicial District Court, Lea County, New Mexico as case no. CV-
2011-705 on July 12, 2011. Plaintiff sought to obtain possession
of virtually all of Debtor’s property, including rolling stock,
equipment, etc. Plaintiff filed a first amended complaint on
October 18, 2011, which Debtor answered and to which Debtor filed
counterclaims on October 26. Docs 10-2 and 10-3. On November
10, the State Court Judge set a pretrial conference for June 27,
2012 and a trial date of July 9, 2012. State Court Docket (doc
10-1.) Plaintiffs, having filed a motion for replevin with the
initial complaint, filed an amended motion for replevin on
November 14, doc 10-4, and a writ of replevin was issued the same
day. Doc 10-7. Immediately on the same day as well, Debtor	4
filed a motion to dissolve the writ, doc 10-8, and the State
Court Judge then promptly conducted a twelve-hour evidentiary
The Court has subject matter and personal jurisdiction	3
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.
No court file stamp appears on the copy of the writ of	4
replevin filed in this adversary proceeding, but the state court
docket shows the writ has having been issued November 14. Doc
10-1.
Page 2 of 9
Case 11-01199-s Doc 17 Filed 01/31/12 Entered 01/31/12 15:53:10 Page 2 of 9

hearing on the issue on November 18, 2011. At the end of the
hearing that night, Judge Shuler-Gray apparently stated that she
would issue a ruling over the weekend or on the following
Monday. Less than 48 hours later, on Sunday afternoon, November	5
20, Debtor filed its chapter 11 petition. Main case doc 1.
Debtor then immediately filed its Notice of Removal. Doc 1.
Analysis
Although Plaintiff has also argued for equitable remand
under 28 U.S.C. §1452(b) and permissive abstention under 28
U.S.C. §1334(c)(1) the Court need only consider mandatory
abstention under 28 U.S.C. §1334(c)(2) to decide this matter.
That 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 facts in this adversary proceeding fit neatly into the
statute.
The parties do not contest the imminence of a ruling, and	5
so the precise details of when the ruling was to be issued is not
important. Whether Judge Shuler-Gray had suggested that she
would uphold the writ, as Plaintiff asserts and Debtor contests,
is also irrelevant for purposes of this decision since the stay
has not been modified to permit Plaintiff to take possession of
property of the estate pursuant to the writ of replevin or on any
other basis.
Page 3 of 9
Case 11-01199-s Doc 17 Filed 01/31/12 Entered 01/31/12 15:53:10 Page 3 of 9

The Notice of Removal (doc 1), initiating this adversary
proceeding, was filed 36 minutes after the chapter 11 petition
was filed. The causes of action – breach of contract, breach of
lease agreement, injunctive relief, declaratory judgment,
conversion, replevin, tortious interference with business
relations, unjust enrichment and state-court receivership (First
Amended Complaint – doc 10-2) – and the counterclaims –
conversion and theft, tortious interference [with business
opportunities], breach of contract and/or bad faith,
misappropriation/unfair competition, negligent
misrepresentation/actual and constructive fraud/duress, unjust
enrichment/restitution/promissory estoppel, declaratory judgment,
and exemplary damages [sic] (Answer to First Amended Complaint
and Counterclaim – doc 10-3) – are all clearly state law causes
of action, and while they are related to the chapter 11 case, in
that the answer to who is entitled to the equipment will
potentially make or break this chapter 11 case, 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). This action
could not have been commenced in the United States District Court
since there is a lack of diversity: both entities are New Mexico
limited liability companies. (First Amended Complaint, ¶¶1and 3
- doc 10-2, and Answer to First Amended Complaint and
Counterclaim, ¶1 – doc 10-3.) And as the recitation of the facts
Page 4 of 9
Case 11-01199-s Doc 17 Filed 01/31/12 Entered 01/31/12 15:53:10 Page 4 of 9

above makes clear, the action has been commenced, and can be
timely adjudicated, in a state forum of appropriate
jurisdiction. The State Court Judge has already committed	6
significant resources to deciding the merits of these issues,7
and has allocated additional time to complete that adjudication.
Thus the action must be remanded. Oakwood Acceptance Corporation
While it is not strictly relevant to a decision on	6
mandatory abstention, Delphi Automotive Systems, LLC v. Segway,
Inc., 519 F.Supp.2nd 662, 669 n.9 (E.D. Mich. 2007) (relevant
inquiry is status of state court’s docket), it is worth noting
that this Court’s current caseload is such that there are very
few trial days available until June, 2012, and none that clump
three or four days together during that time. (It seems
apparent, given that the State Court Judge has already in effect
conducted a day and a half of an evidentiary hearing and has
scheduled more time in July, and based on the pleadings and other
papers filed by the parties, that a full evidentiary hearing on
the merits of the disputes between the parties will require
several days of trial.) Typically the Court conducts an initial
pretrial conference in an adversary such as this, at which it
sets a discovery period and schedules a final pretrial
conference. Only after discovery is closed and during the final
pretrial conference does the Court set the trial date. Assuming
even a minimum discovery period of ninety days for the complex
factual issues raised in the pleadings, it is likely that there
would be no trial days left before this Court’s appointed term
ends in mid August 2012. Transferring the matter at that point
to another bankruptcy judge would consume more judicial resources
than if the litigation went back to the State Court Judge for
resolution.
Although the twelve-hour replevin hearing apparently	7
focused narrowly on the requirements of the replevin statute, the
State Court Judge had to have heard a significant amount of
evidence about the alleged contract and the issues raised in the
pleadings. Thus, although the replevin aspect of the litigation
is by itself no longer relevant – as already pointed out, the
stay has not been modified to allow Plaintiff to repossess any
property in Debtor’s possession – the evidence taken by the State
Court Judge on November 18 will undoubtedly be useful for making
a decision on the merits of the causes of action asserted by the
parties.
Page 5 of 9
Case 11-01199-s Doc 17 Filed 01/31/12 Entered 01/31/12 15:53:10 Page 5 of 9

v. Tsinigini (In re Oakwood Acceptance Corportion), 308 B.R. 81,
86-88 (Bankr. D.N.M. 2004) (even assuming bankruptcy court had
core jurisdiction to determine whether mobile home was property
of the estate, court may remand; state and tribal law issues
clearly predominated, the action had been tried and was on appeal
in the tribal courts, and removal at that late date would waste
judicial resources).
Debtor argues that this Court has exclusive jurisdiction
over the property of the estate, and therefore the Court must
retain this adversary proceeding. The factual predicate is
correct, the conclusion is not.
Unquestionably the Court has exclusive jurisdiction over
property of the estate, wherever located. §1334(e)(1). But that
fact alone does not mean that the Court must itself conduct all
the proceedings that might bear on the disposition of property of
the estate. See, for example, Oakwood Acceptance Corporation,
308 B.R. at 87 (even assuming bankruptcy court had core
jurisdiction to determine whether mobile home was property of the
estate, court may remand; “whether the mobile home is property of
the estate is dependent on the outcome of the appeal in the
Navajo Supreme Court”.). See also Delphi Automotive Systems, 519
F.Supp.2nd at 668-670 (state law breach of contract action not
core; mandatory abstention applied); In re the Roman Catholic
Bishop of San Diego, 374 B.R. 756, 763-64 (Bankr. S.D. Cal. 2007)
(court exercised jurisdiction to remand punitive damages claims
Page 6 of 9
Case 11-01199-s Doc 17 Filed 01/31/12 Entered 01/31/12 15:53:10 Page 6 of 9

for jury determination, ruling that claims estimation process is
not the only way of determining claims; bankruptcy court reserved
for itself the issue of treatment of liquidated claims in the
bankruptcy case and “will be making its own determination of what
constitutes property of the Debtor’s bankruptcy estate.”).8
Debtor similarly argues that the issue of whether the
contested contract is executory and can be rejected must be
decided by this Court. It is correct that the assumption or
rejection of executory contracts is a core proceeding; it can
only exist in the context of a bankruptcy case. Midgard, 204
B.R. at 771; Gardner v. United States (In re Gardner), 913 F.2d
1515, 1518 (10 Cir. 1990) (core proceedings are those which	th
have no existence outside of bankruptcy). But the decision to
allow (and, for that matter, to require) the debtor to assume or
reject an executory contract is not the same as deciding whether
such a contract even exists. Although both issues can be
contested and decided in the same proceeding and in fact often
are, they do not need to be. Indeed, the heart of the dispute
between the parties has been from the outset the existence vel
non of an enforceable contract between the parties. More to the
point (and less circularly), it is not sufficient to argue the
An illustration of the principle that the bankruptcy court	8
need not conduct all the proceedings to determine a core issue is
provided by Brown v. Felsen, 442 U.S. 127, 135-36 (1979) (only
bankruptcy courts may make dischargeability adjudications) and
Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991) (collateral
estoppel principles apply in making those adjudications).
Page 7 of 9
Case 11-01199-s Doc 17 Filed 01/31/12 Entered 01/31/12 15:53:10 Page 7 of 9

removed action must stay in the bankruptcy court because there
might be core matters to be decided. Delphi Automotive Systems,
519 F.Supp.2nd at 671 (“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 Cir. BAP 2011)	th
(pending state court causes of action were not core 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.
Debtor also cites Murphy v. John Hoffman Co., 211 U.S. 562,
570 (1909) for the proposition that if the bankruptcy court has
possession of the property in issue, its jurisdiction is
exclusive, and the bankruptcy court has ancillary and exclusive
jurisdiction to decide all issues concerning the property.
Section 1334(e)(1) makes clear that the statement about exclusive
jurisdiction continues to be correct, but the accuracy of the
second statement is more questionable. Whatever the validity of
Murphy continues to be, Congress has legislated specifically on	9
The continuing validity of that language in Murphy is	9
somewhat questionable; see for example Oakwood Acceptance
Corporation, at 88: “Even with a possible question of whether the
mobile home is now property of the estate, the predominate issue
is whether the Plaintiff properly repossessed the mobile home, a
non-bankruptcy law issue.” The court ruled that the
determination of the prepetition status of the mobile home by the
Navajo Supreme Court would determine the status of the mobile
home as property of the estate. Id. at 87.
Page 8 of 9
Case 11-01199-s Doc 17 Filed 01/31/12 Entered 01/31/12 15:53:10 Page 8 of 9

the issue of abstention, including mandating abstention in
certain circumstances. So to the extent there may be a conflict
between Murphy and §1334(c)(2), the abstention provision must
take precedence.
Conclusion
For the reasons stated, it is clear that this Court must
abstain from adjudicating this state court action and it must be
remanded to the State Court Judge for further proceedings. An
order will enter.
James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: January 31, 2012
COPY TO:
Shay E Meagle
1903 Wyoming Blvd. NE Ste. B
Albuquerque, NM 87112-2860
Louis Puccini, Jr
Puccini Law, P.A.
PO Box 50700
Albuquerque, NM 87181-0700
Kenneth Dugan
PO Box 2168
Carlsbad, NM 88221
Page 9 of 9
Case 11-01199-s Doc 17 Filed 01/31/12 Entered 01/31/12 15:53:10 Page 9 of 9