LIFE FLIGHT OF PUERTO RICO INC v. TRIPLE S INC et al

IN THE UNITED STATES BANKRUPTCY COURT FOR
THE DISTRICT OF PUERTO RICO
IN RE:
LIFE FLIGHT OF PUERTO RICO INC 	CASE NO. 08-08870 BKT
CHAPTER 11
Debtor(s) 	ADVERSARY NO. 09-00057
LIFE FLIGHT OF PUERTO RICO INC
Plaintiff
TRIPLE-S, INC. (SSS); MEDICAL CARD
SYSTEM INC. (MCS); INTERNATIONAL
MEDICAL CARD (IMC); PMC
MEDICARE 	CHOICE (PMC); MMM
HEALTHCARE; COOPERATIVA DE
SEGUROS DE VIDA DE PUERTO RICO
(COSVI); ADMINISTRACION DE
COMPENSACIONES POR ACCIDENTES
DE AUTOMOVILES (ACAA); HUMANA
HEALTH PLAN PUERTO RICO, INC.;
MCA MEDICARE;ABC COMPANY;
INSURANCE; and JOHN DOE
FILED & ENTERED ON 08/18/2009
Defendant(s)
OPINION AND ORDER
Before this Court is Defendant Medical Card Systems, Inc.'s ("MCS") Motion to Dismiss filed on
4/6/2009 [Dkt. No. 34], and Plaintiff/Debtor Life Flight of Puerto Rico Inc.'s ("Plaintiff") Reply filed
on 8/7/09 [Dkt. No. 91]. 	In their motion, MCS argues that this Court lacks the subject matter
jurisdiction to adjudicate Plaintiff's requested equitable and injunctive relief, as this action is a non-
core proceeding not “related to” U.S.C. Title 11, or in the alternative, the Court must abstain from
deciding this controversy for reasons of comity because of the compelling state interests and statute
involved under the established doctrines of Burford v. Sun Oil Company, 319 U.S. 315 (1943) and
Railroad Commission of Texas v. Pullman Company, 312 U.S. 496 (1941). Given the fact that these
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are state law claims that existed prior to, and independent of the filing of the bankruptcy petition, the
court lacks jurisdiction over the issue. Even if the court were to find “related to” or supplemental
jurisdiction, MCS points out that the basis for Plaintiff’s claim, which involves no significant
question of federal law, is pursuant to Article 8(c) of the Bill of Rights and Responsibilities of the
Patient, Act. No. 194 of August 25, 2000. Such matters MCS states, are clearly better suited for
determination by the Commonwealth Courts and the Legislature. Although MCS cites the doctrines
of Pullman and Burford, this Court considers this request as a motion for abstention pursuant to 28
U.S.C.A. § 1334(c), and will not discuss these doctrines as they are inapplicable in the face of this
statute.
In their reply, Plaintiff counters that the Court does have subject matter jurisdiction over this
controversy as a core matter as defined in 28 U.S.C §157, 28 U.S.C. §151 and 28 U.S.C. §1334, and
even it were to find only “related to” jurisdiction, the criteria necessary for abstention under 28
U.S.C. 1334 are not met. Therefore, abstention is not warranted as the outcome of this proceeding
directly concerns the present and future administration of the estate.
On December 24, 2008, Plaintiff Life Flight of Puerto Rico, Inc. filed a petition under Chapter 11 of
the Bankruptcy Code, and as of that date has been managing its affairs and operating its business as a
debtor-in-possession. Plaintiff specializes in providing emergency medical transportation by
specially equipped helicopter to patients in critical condition. The instant adversary proceeding was
filed on March 23, 2009, seeking temporary and permanent injunctive relief against nine (9)
defendants to prevent the unilateral determination of payments by the Defendants which are
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considerably below the fair market value for air medical ambulance services. Although it appears
from the record that Plaintiff filed several actions in state court in 2008, against all or some of the
named Defendants, by the time this adversary was commenced there were no pending state cases.
Plaintiff Life Flight is requesting a jury trial.
JURISDICTION
The jurisdiction of the bankruptcy court, like that of any other federal court, is limited by statute.
Section 1334(b) of Title 28 provides that "the 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." The district courts may, in turn, refer "any or all proceedings arising under title 11 or arising in
or ‘related to’ a case under title 11…to the bankruptcy judges for the district." 	At its essence,
bankruptcy court jurisdiction exists in cases “under” the United States Bankruptcy Code, 11 U.S.C.
§§ 101 et seq., and those cases “arising under,” “arising in,” and “related to” title 11. 28 U.S.C. §
1334(b); 28 U.S.C. § 157(a). These types of proceedings are further delineated as “core” or “non-
core.” 	Because 	of 	the 	constitutional 	limits 	imposed 	upon 	bankruptcy 	court 	jurisdiction,
distinguishing between core and non-core proceedings is vital to the exercise of jurisdiction by a
bankruptcy court. A bankruptcy court may hear and finally determine all core bankruptcy
proceedings; the parties' agreement is not needed. 28 U.S.C. § 157(b). In non-core “related to”
proceedings, however, only the district court may enter final orders absent consent of the parties. 28
U.S.C. § 157(c).
A. “Related to”
Bankruptcy courts may exercise subject matter jurisdiction over core claims that "arise under" or
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"arise in" a bankruptcy case. A bankruptcy court will also have subject matter jurisdiction over those
non- core proceedings that "relate to" a bankruptcy case. In re Middlesex Power Equipment &
Marine Inc., 292 F.3d 61, 68 (1st Cir. 2002). A civil proceeding is "related to" a bankruptcy case, for
jurisdictional purposes, when the action between the parties affects how much property is available
for distribution to creditors of the bankruptcy estate or allocation of property among such creditors,
or if the outcome could alter the debtor’s rights or liabilities. Id. at 68 ( quoting In re G.S.F. Corp.,
938 F.2d 1467, 1475 (1st Cir.1991)). "Related to" jurisdiction is limited, and bankruptcy courts lack
jurisdiction over matters which will have no effect upon the debtor’s estate. By its very definition,
“related-to” jurisdiction only applies in non-core matters as an alternative basis of jurisdiction. It
assumes that the matter does not ‘arise in’ the case at hand and therefore it requires some other nexus
vis-a-vis the estate involved.
“Related to” jurisdiction is the most expansive component of bankruptcy jurisdiction, see 28 U.S.C.
§ 1334(b), but it is not boundless. See, e.g., Arnold Print Works v. Apkin, 815 F.2d at 165, 167 (1st
Cir.1987) (abstention from hearing non-core "related to" matters is permissive and sometimes
mandatory). Whether the claims are sufficiently “related to” a bankruptcy case is a question of
whether they are “sufficiently connected” to the debtor’s reorganization.
The Third Circuit has established a much-cited standard for determining whether a proceeding is
“related.” In Pacor, Inc. v. Higgins, 743 F.2d 984 (3rd Cir. 1984), the Court described the test as
whether “the outcome of that proceeding could conceivably have any effect on the estate being
administered in bankruptcy.” The First Circuit has recognized this standard. See In re G.S.F. Corp.,
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938 F.2d 1467, 1475 (1st Cir. 1991). In addition, numerous First Circuit district and bankruptcy
courts have accepted and applied this test. See, e.g., In re Santa Clara County Child Care
Consortium, 223 B.R. 40, 45 (B.A.P. 1st Cir. 1998) (providing a lengthy list of First Circuit district
and bankruptcy courts adopting the Pacor test); In re Remington Dev. Group, Inc., 180 B.R. 365, 368
(Bankr. D.R.I. 1995). “The usual articulation of the test for determining whether a civil proceeding is
‘related to’ bankruptcy is whether the outcome of that proceeding could conceivably have any effect
on the estate being administered in bankruptcy.” Pacor, Inc. v. Higgins, 743 F.2d at 984, 994,
overruled on other grounds by Things Remembered, Inc. v. Petrarca, 516 U.S. 124 (1995). See also,
In re G.S.F. Corp., 938 F.2d at 1475 (quoting Pacor). “An action is ‘related to’ bankruptcy 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 bankruptcy
estate.” Pacor, Inc., 743 F.2d at 994. Accord In re G.S.F. Corp., 938 F.2d at 1475; see also, In re
Parque Forestal, Inc., 949 F.2d 504, 509 (1st Cir. 1991).
Simply stated, if the determination of the controversy could have an effect on the bankruptcy estate,
the controversy is a “related matter.” 28 U.S.C.A. § 157(a). Plaintiff’s complaint is clear that the
lack of payment from these Defendants was the direct cause of the bankruptcy filing. The funding
of the plan would come in large part from the final determination of the amounts owed. There exists
a sufficient nexus between the determination of this controversy and the administration of the estate
to find that this Court has jurisdiction over this matter.
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B. Core vs. Non-Core
Once this Court’s jurisdiction is established, the Court determines whether a civil proceeding is
categorized as either a “core proceeding” or a “non-core proceeding.” The Judicial Code
differentiates between core proceedings and non-core proceedings and includes a non-exhaustive list
of core proceedings. See 28 U.S.C. § 157(b)(2). Section 157 does not provide the bankruptcy courts
with the full authority over all matters as to which a district court may exercise jurisdiction under
Section 1334. Pursuant to 28 U.S.C. §157(b)(1), a bankruptcy judge "may hear and determine
all…core proceedings arising under title 11…and may enter appropriate orders and judgments,
subject to review [under 28 U.S.C. § 158]." 	A core proceeding, for bankruptcy jurisdictional
purposes, is an action that has as its foundation the creation, recognition, or adjudication of rights
which would not exist independent of a bankruptcy environment.
Section 157(c) effectively creates three categories of proceedings: (1) a core proceeding, in which a
bankruptcy court may hear the proceeding and make final determinations; (2) a non-core, related
proceeding, in which a bankruptcy court may hear the proceeding, but cannot make final
determinations absent consent; and (3) proceedings that are non-core and not “related to” a case
under title 11, wherein a bankruptcy court may not hear the proceeding.
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
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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.’” In re Arnold Print Works, Inc., 815 F.2d at 167 (quoting 130 Cong. Rec.
H1848 (daily ed. March 21, 1984)(statement of Representative Kindness)). In this case, 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 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.
Actions 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. 1 Lawrence P.
King et al, Collier on Bankruptcy ¶ 3.01 [2][b][iv] at 3-51 (15th ed. 1991). The present adversary
proceeding relates to a pre-petition action for collection of ‘accounts due’ that commenced outside
the bankruptcy court. The Plaintiff’s action could survive outside of bankruptcy and in the absence of
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bankruptcy, would have been resolved in local court. Plaintiff’s 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. Cases where courts find that there is “related to”
jurisdiction are deemed non-core.
By definition, these actions are non-core related proceedings because they existed prior to the filing
of the bankruptcy petition. In re Mec Steel Bldgs., Inc., 136 B.R. 606 (Bankr. D.P.R. 1992), a case
which involved an almost identical scenario as the matter before this Court, a chapter 11 debtor
brought suit against a defendant to recover an alleged pre-petition debt, seeking a recovery of
$15,500. The debtor argued that this involved administration of the estate and the turning over of
property of the estate, both core proceedings under 28 U.S.C. § 157(b)(2). The court in Mec Steel
Bldgs. concluded that “actions initiated in the bankruptcy court to collect prepetition 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.” In re Mec Steel Bldgs. 136 B.R. at 609. The Court went on to hold 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.” Id. Applying the case law and
statutes to the facts of the case before us, this Court concludes that this is a non-core proceeding
“related to” a case under Title 11.
ABSTENTION
Our analysis now turns to whether this Court should consider abstaining from this proceeding
altogether, even though jurisdiction has been established over the controversy. 28 U.S.C. § 1334(c)
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provides for two types of abstention, mandatory and discretionary (sometimes referred to as
permissive). Mandatory abstention under §1334(c)(2) provides that “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 key factors for discretionary
abstention under 28 U.S.C. § 1334 (c)(1) implicate: (1) the interest of justice; (2) the interest of
comity with state courts; or (3) respect for state law.
A. Mandatory Abstention
Therefore, in order for mandatory abstention to apply, the proceeding must: 1) be based on a state
law claim or cause of action, 2) lack a federal jurisdictional basis absent the bankruptcy, 3) be
commenced in a state forum of appropriate jurisdiction, 4) be capable of timely adjudication, and 5)
be a non- core proceeding. 28 U.S.C. Sec. 1334(c)(2). “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 state court.’” In re Interamericas Turnkey
Development Co., Inc., 94 B.R. 9, 13 (D.P.R. 1988), citing Matter of Candelero Sand & Gravel, Inc.,
66 B.R. 903, 908 (D.P.R. 1986)(quoting State Bank of Lombard v. Chart House, 46 B.R. 468, 472
(N.D. Ill. 1985)); see also Goya Foods v. Unanue-Casal (In re Unanue-Casal), 164 B.R. 216, 222-23
(D.P.R. 1993)(discussing requirements for mandatory abstention), aff'd., 32 F.3rd. 561 (1st Cir.
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1994). The language of the statute is clear that one of the prerequisites for mandatory abstention is
that an action must have been initiated in a state forum with jurisdiction. See, Juan Flores Rivera v.
Telemundo Group, 133 B.R. 674 (D.P.R. 1991); In re Mec Steel Bldgs., Inc., 136 B.R. at 610.
Applying these factors to the present case, it is clear that all factors can be satisfied except for,
arguably, factor four where the timeliness of the resolution in state court could be questioned; and
factor three, which requires that a state court case be pending. As there is no state litigation pending
in this case, and in view of the facts that not all of the required elements for mandatory abstention are
met, abstention in this form is deemed inapplicable.
B. Discretionary Abstention
Even though mandatory abstention does not apply, § 1334(c)(1) provides for
discretionary or permissive abstention. Section 1334(c)(1) states that “[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.” However, discretionary abstention is not warranted
despite the fact that state law issues are predominant when the applicable state law is neither
unsettled nor difficult, or the matters involved do not have an impact on state policy. Telemundo,
133 B.R. at 675.
In Telemundo, The District Court of Puerto Rico listed the factors to consider upon reaching a
determination as to discretionary abstention:
(1) the effect or lack thereof on the efficient administration of the estate if a court
recommends abstention, (2) the extent to which state law issues predominate over
bankruptcy issues, (3) the difficulty or unsettle nature of the applicable law, (4) the
presence of a related proceeding commenced in state court or other non bankruptcy
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court, (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334, (6) the degree
of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the
substance rather than form of an asserted core proceeding, (8) the feasibility of
severing state law claims from core bankruptcy matters to allow judgments to be
entered in state court with enforcement left to the bankruptcy court, (9) the burden of
[the bankruptcy's court] docket, (10) the likelihood that the commencement of the
proceeding in bankruptcy court involves forum shopping by one of the parties, (11)
the existence of a right to jury trial, and (12) the presence in the proceeding of non-
debtor parties.
Telemundo, 133 B.R. at 677.
This case involves a collection of monies action which requires the application of well established
state law. The fact that the case involves issues of state law alone is not sufficient to warrant
abstention. In fact, upon considering core matters this court must interpret state law routinely. For
example, when deciding which creditor has a better claim, the court must look at the validity of the
lien according to state law. See, In re Arnold Print Works, 815 F.2d at 169. As to the interest of
justice, an abstention with respect to the Plaintiff’s dispute would not advance judicial economy or
the administration of this bankruptcy case. The non-core related proceeding could result in the
payment of the substantial amounts claimed to be owed. This fact should be determined in the
context of this bankruptcy case and should not be delayed as the result of requiring Plaintiff to
commence another case in the state court. See, In re Earle Industries, Inc., 72 B.R. 131, 134 (Bankr.
E.D. Pa. 1987); In re Climate Control Engineers, Inc., 51 B.R. 359, 363 (Bankr. M.D. Fla. 1985)
(“Because there is no action commenced in state court covering the same subject matter ... and
because the power to abstain should be exercised sparingly”). In regard to the interest of comity with
state courts, there is no action pending in state court covering the same subject matter. As to the
requirement regarding the respect for state law, the action for payment of amounts due does not
involve unsettled issues of state law or matters of substantial public importance. Telemundo, 133
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B.R. at 675. Therefore, discretionary abstention with regard to Plaintiff’s claims, in either its
mandatory or discretionary form, is inapplicable to this proceeding.
CONCLUSION:
Based upon the foregoing, the motion to dismiss filed by MCS is hereby DENIED. Defendant MCS
is hereby ordered to file an answer to the complaint within ten (10) days, and to file a legal brief as
ordered at the August 7, 2009 hearing within twenty (20) days.
SO ORDERED.
San Juan, Puerto Rico, this 18 day of August, 2009.
Brian K. Tester
U.S. Bankruptcy Judge
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