ABRAHAM PETROLEUM CORPORATION v. HASSAN & SONS CORP

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Case:10-00015-ESL Doc#:31 Filed:02/02/11 Entered:02/02/11 11:51:27 Desc: Main
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1 IN THE UNITED STATES BANKRUPTCY COURT

5 FOR THE DISTRICT OF PUERTO RICO

3 |

IN RE: : CASE NO. 09-05928(ESL)

‘ ABRAHAM PETROLEUM CORP. :

5 Debtor CHAPTER 11

6

7 [ABRAHAM PETROLEUM CORP. : ADVERSARY NO. 10-0015

8 Plaintiff

9 |v.
10 HASSAN AND SONS CORP.
Ti Defendant
12
3 OPINION AND ORDER
4 This case is before the court on the motion to dismiss filed by Hassan and Sons Corp. (the
- “Defendant’”) on March 31, 2010 (Docket Nos. 13, 14). Abraham Petroleum Corp. (the “Debtor”
6 or “Plaintiff’) filed oppositions to the motion to dismiss on April 30, 2010 (Docket No. 17) and
” September 1, 2010 (Docket No. 29). The request for dismissal is based on the existence of a state
8 court action brought against the Debtor by the Defendant herein, based on the same facts as the
19 complaint filed in the present adversary proceeding. The Defendant is requesting that this court
30 abstain from hearing the present case and dismiss the case. F or the reasons stated herein this court
44 grants the Defendant’s motion to dismiss.
- On February 8, 2010 the Debtor filed a complaint against the Defendant for recovery of
33 property, eviction, breach of contract, collection of money and damages. The complaint is
34 premised on the breach of a lease and supply agreement entered into by the Debtor with the
35 Defendant on March 30, 2008, for the use by the Defendant of the Debtor’s service station at
06 Barrio Hato Abajo, Arecibo, Puerto Rico. The Defendant agreed to operate the service station and
37 purchase fuel from the Debtor. The complaint alleges that the Defendant failed to pay for rent and
3g merchandise since February 2009. Additionally, the Defendant failed to pay the amounts

corresponding to partial payments of the “key” or right to operate. Also, the complaint alleges

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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breach of a sub lease agreement executed on May 1, 2007 between the Debtor and the Defendant
for the use of real property located at Urbanizacion San Fernando in Bayamon, Puerto Rico in

which the Defendant agreed to operate the service station and purchase products from the Debtor.

The Debtor notified the Defendant of its decision to rescind or cancel both contracts. The
complaint includes six causes of action: breach of contract and eviction; debt collection; temerity;
dispossession of premises and equipment; indemnification and damages; and damages, attorney’s
fees and expenses.

The Defendant filed a motion to dismiss alleging that it filed a state court action against
the Debtor on February 20, 2009 before the Superior Court of Bayamon, based on the same
allegations as the ones raised in the present adversary proceeding, and therefore, the court should

abstain from these proceedings. In effect the state court complaint filed against the Debtor raises

five causes of action: cancellation of supply contract; cancellation of the lease of the property at
Urb. San Fernando, Bayamon; cancellation of the lease of the property at Barrio Hato Abajo,
Arecibo; cancellation of the sales contract of the going concern located at Urb. San Fernando and
cancellation of the sales contract of the going concern located at Barrio Hato Abajo.

Clearly both complaints are premised upon the same facts: the alleged breach and
cancellation of the lease and sales contracts related to the properties located at Bayamon and
Arecibo. The Defendant filed a proof of claim in the Debtor’s bankruptcy case, in the amount of

$3,775,000.00.

Discussion

Core and Non-Core Matters

The Defendant argues that pursuant to 28 U.S.C. § 1334(c) this case requires abstention as
it does not arise under title 11 and it raises only state law claims’. In turn the Plaintiff argues that
the abstention provision does not apply as this is a core matter arising under title 11, or arising in a

case under title 11, as per 28 U.S.C. § 157(b).

’ The Defendant also argues that the case must be remanded to state court. However, the
state court action was never removed to this court therefore it may not be remanded.

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The federal courts have Jurisdiction over bankruptcy cases pursuant to 28 U.S.C. § 1334,
which provides in subsection (a) that the district courts have original and exclusive jurisdiction
over “cases under title 11” (such as the bankruptcy petition itself), and in subsection (b) that the

district courts have original but not exclusive Jurisdiction over “proceedings arising under title 1 1,

or arising in or related to cases under title 11”. The statute distinguishes between cases “arising
under”, “arising in” and “related to” proceedings under title 11. “ ‘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). “ ‘Arising in’ proceedings are those that are not

based on any right expressly created by title 11, but nevertheless, would have no existence outside
of the bankruptcy.” Id. (citation omitted). “ ‘Related to’ proceedings are those which potentially
have some effect on the bankruptcy estate, such as altering bankrupt's rights, liabilities, options, or
freedom of action, or otherwise have an impact upon the handling and administration of the
bankruptcy estate.” Id. (citations omitted). Core proceedings are those involving matters “arising
under title 11" or “arising in a case under title 11" of the United States Code; that is, they would

not exist outside of bankruptcy. 1 Daniel R. Cowans, Bankruptcy Law and Practice §1.2 at 31

(1989).
Core matters, as inherently bankruptcy matters, can be determined by bankruptcy judges.
Id. Subsection (b)(2) of § 157 sets forth a non- exclusive list of core proceedings which include,

matters concerning the administration of the estate (§ 157(b)(2)(A)), motions affecting the

automatic stay (§ 157(b)(2)(G)), and proceedings affecting the liquidation of assets of the estate or
the adjustment of the Bankrupt-creditor or equity security holder relationships (§ 157(b)(2)(O)).

A determination of whether a controversy is core or non-core depends upon its relation to
the basic functions of the bankruptcy court and not on the federal or state basis for the claim. In re

Arnold Print Works, Inc., 815 F.2d 165, 169 (1st Cir. 1987). If the proceeding, by its nature,

arises only within the bankruptcy context because it involves a right created by federal bankruptcy
law, then it is a core proceeding. In re Wood, 825 F.2d 90, 97 (Sth Cir. 1987). If an action would
survive outside of bankruptcy, and in the absence of bankruptcy would have been initiated in a

state or a district court, then it clearly involves a non-core matter. 1 Lawrence P. King et al.,

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Collier on Bankruptcy {3.01[1]fc][iv] at 3-27 (15th ed. 1991), citing In re Colorado Energy

Supply, Inc., 728 F.2d 1283 (10th Cir. 1984),

The non-core related actions referred to by 28 U.S.C. §157(a) are those that "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

bankruptcy estate.” In re G.S.F. Corporation, 938 F.2d 1467, 1475 (Ist Cir. 1991) citing In re

Smith, 866 F.2d 576, 580 (3rd Cir. 1989). If the determination of the case could conceivably have
any effect on the bankruptcy estate, it is a related matter. 938 F.2d at 1475.

As to proceedings that are non-core but related to a case under title 11, a bankruptcy judge

"shall submit proposed findings of fact and conclusions of law to the district court, and any final
order or judgment shall be entered by the district judge ...." 28 U.S.C. §157(c)(1). However, a
bankruptcy judge may enter final orders and judgments concerning non-core but related matters if
all parties to the proceeding have consented. 28 U.S.C. §157(c)(2); G.S.F., 938 F.2d at 1476.
These classifications and parameters were introduced by the Bankruptcy Amendments and
Federal Judgeship Act of 1984 ("BAFJA") as a result of the landmark decision by the Supreme

Court in the case of Northern Pipeline Construction Co. v. Marathon Pipe Line Company, 458

USS. 50, 102 S.Ct. 2858, 73 L.Ed.2d. 598 (1982). In Marathon the debtor brought an action in the

bankruptcy court seeking damages for breach of contract and warranty, along with
misrepresentation, coercion and duress. The Supreme Court held unconstitutional the grant by the
Bankruptcy Reform Act of 1978? of Article III judicial powers upon non-tenured Article I courts.
102 S.Ct. at 2880. Article I judges do not have the constitutional power to enter final orders
without the parties’ consent in traditionally common law cases involving state created private
rights. As a result of this decision the bankruptcy court may not enter a final determination in
those cases that are classified as non-core related matters. The Marathon decision, however, was
given a narrow interpretation by subsequent Supreme Court opinions. In re Arnold, 815 F.2d at

166, citing Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568 (1985) and

*28 U.S.C. $1471(b) (1976 ed., Supp. IV) (repealed 1984).

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Commodity Futures Trading Commission v. Schor, 478 U.S. 833 (1986).

In Arnold the Court of Appeals for the First Circuit differentiates Marathon-type contract

claims arising pre-petition from those arising post-petition. If the claim arose after the filing of

the petition it involves a matter directly related to the administration of the estate and is therefore
a core matter upon which a bankruptcy judge has the power to enter final orders. 815 F.2d at 168.
On the other hand, if the claim arose before the filing of the petition it is only a related case and a
bankruptcy judge is limited to submit proposed findings of fact and conclusions of law to the
district court. Id.

The Plaintiff argues that this is a core matter as it involves the administration of the estate,
the allowance or disallowance of a claim before the bankruptcy court and an adjustment of the

debtor/creditor relationship. See, 28 U.S.C. § 157(b)(2)(A), (B) and (O). Actions initiated in

bankruptcy court to collect a pre-petition account receivable are clearly non core related matters
because they existed prior to the filing of the bankruptcy petition, to hold otherwise would be to
ignore the Marathon decision. In re Mec Steel Buildings, Inc., 136 B.R. 606, 609 (Bankr. D.P.R.

1992),

The court finds that this is a non-core related proceeding. The causes of action of this
adversary proceeding do not arise from the bankruptcy proceedings, they exist independently of
the bankruptcy, although their determination may affect the bankruptcy estate. All causes of

action brought in the present adversary proceeding stem from an alleged breach of contract

between the parties that arose prior to the filing of the petition, thus they are all Marathon-type
pre-petition breach of contract actions. See, Arnold, 815 F.2d at 168, Mec Steel, 136 B.R. at 610
(“this is a state law contract claim which arose before the filing of the petition, specifically
classified by the court in Arnold as a non-core matter.”’).

If the court were to hear this matter it would be limited to submitting proposed findings of
fact and conclusions of law to the district court for entry of a final order. “Whether a proceeding is
core or non-core affects the power of the bankruptcy judge to issue a final order or judgment, but
not the ability to hear a proceeding.” Mec Steel, 136 B.R. at 610 citing In re Reed, 94 B.R. 48

(E.D. Pa 1988). Consequently, judicial economy principles dictate that the instant action be heard

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by a court with jurisdiction to enter a final order.

Abstention

28 U.S.C. § 1334(c)( 1) provides for permissive abstention as follows:

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.

The discretionary abstention provision of § 1334(c)(1) provides that the district court may
abstain from hearing a particular proceeding “arising under title 11 or arising in or related to a
case under title 11” if to do so would be “in the interest of justice, or in the interest of comity with

State courts or respect for State law”. See, Middlesex, 292 F.3d at 69 (citation omitted). In

Middlesex, the First Circuit Court of Appeals observed that “[t]he statute itself delineates ‘three ...

criteria to determine whether abstention is appropriate’: the interests of justice, comity, and

respect for state law.” Id. (citation omitted). The Court of Appeals further stated that other circuits
have considered certain factors in determining whether permissive (discretionary) abstention is
appropriate, including the extent to which state law issues predominate over bankruptcy issues,

the presence of a related proceeding commenced in state court, and the likelihood that the

commencement of the bankruptcy proceeding involves forum shopping.” Id.
The First Circuit Court of Appeals observed that the abstention doctrines are “concepts

that reflect ‘a complex of considerations designed to soften the tensions inherent in a system that

contemplates parallel judicial processes’.” Cruz v. Melecio, 204 F.3d 14, 23 (1 Cir, 2000)
(citations omitted). The court found that abstention was “appropriate until the proceedings
pending before the courts of the Commonwealth of Puerto Rico had ‘run their course’, including
that the Commonwealth proceedings were filed first and have progressed further [and to avoid the
‘discomfiting specter of forum shopping’].” Id. at 24.

In the present case abstention of the of the instant adversary proceeding is proper. Firstly,

this is a non core matter which only involves State law issues. Flores Rivera v. Telemundo

Group, 133 BR. 674, 677 (D. Puerto Rico, 1991)(“‘Two factors that weigh in favor of abstention

are that this case is a non-core proceeding and only Commonwealth law issues are involved since

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the sole question is whether defendants actions were defamatory.”) Secondly, he interests of
Justice and comity favor abstention. All the claims in this adversary proceed ing should have been
counterclaims in the Defendant’s state court case which was filed approximately one year before
this adversary proceeding was filed. The only reason these claims were not filed as counterclaims

was because of the Plaintiff's bankruptcy filing. Judicial economy and comity with State courts

favor that all claims be brought before and decided by the Superior Court of Bayamon. Lastly, the
filing of the present adversary proceeding may be viewed as forum shopping.
Conclusion
Under the First Circuit’s analysis, discretionary abstention is warranted in this case

because, 1) Plaintiff's claims are based entirely on state law, 2) there is an open and ongoing state

court proceeding available to the Debtor, and 3) Plaintiff's resort to this court in this case at this
time can be viewed as forum shopping. The claims for relief alleged in the complaint wholly
revolve upon matters of local law, and resolution would not involve any issues of bankruptcy law.
Therefore, discretionary abstention in favor of the State courts is appropriate. Therefore, this case
is hereby dismissed. Notwithstanding, any monetary award against the debtor must be channeled

through the bankruptcy proceeding.

Judgment shall be entered accordingly.
SO ORDERED.
In San Juan, Puerto Rico, this 2"! day of February 2011.