Motion For Abstention Denied On Grounds Of Judicial Estoppel
Finova Capital Corp. v. Cote (In re Finova Capital Corp.), 358 B.R. 113 (Bankr. D. Del. 2006) (Judge Peter J. Walsh)
The debtor sued the defendants in Vermont Superior Court for breach of contract. The Superior Court granted the defendants’ motion to dismiss on the basis of lack of jurisdiction, which, the Superior Court held, was vested with the Bankruptcy Court. The debtor then commenced an adversary proceeding in the Bankruptcy Court asserting the same breach of contact claims. The defendants moved the Bankruptcy Court to abstain, alleging that the Bankruptcy Court lacked personal jurisdiction. The Bankruptcy Court denied the motion on the basis of judicial estoppel.
The defendants, residents of Vermont, defaulted on an equipment lease to which the debtor was a party as the successor of the original lessor under the lease agreement. The debtor commenced an action in Vermont Superior Court, to which the defendants failed to respond. The Superior Court therefore issued judgment for the debtor.The defendants thereafter moved to dismiss for lack of subject matter jurisdiction. The Superior Court granted the motion and vacated the judgment after examining the debtor’s confirmed plan of reorganization, which provided that the Bankruptcy Court “retains exclusive jurisdiction . . . for all matters arising out of, and related to, the Chapter 11 Cases and the Plan,” and finding that the breach of contract claim was related to the debtor’s Chapter 11 case.
The debtor then filed a motion in the Bankruptcy Court to clarify that the Plan did not preclude Superior Court jurisdiction over the cause of action against the defendants. The Bankruptcy Court denied the motion, ruling that it lacked authority to overturn the Superior Court ruling. The debtor then commenced this adversary proceeding against the defendants based on the lease default.
At the same time, the defendants then filed in the Vermont Superior Court a claim against the debtor for malicious prosecution. The defendants also filed the instant motion to abstain, or in the alternative, to dismiss for lack of personal jurisdiction.
The Court found the defendants’ litigation strategy to be a “textbook example that illustrates the need for the doctrine of judicial estoppel.” The defendants succeeded in getting the summary judgment vacated and the complaint dismissed in Vermont by arguing that the Bankruptcy Court is the proper forum for the breach of contract claims. Then, after the claims were brought in the Bankruptcy Court, the defendants argued to the Bankruptcy Court that the claims belonged in the Vermont Superior Court. If the defendants were to succeed, there would be no forum for the breach of contract claims. The Bankruptcy Court will generally not abstain if there is no other forum in which the plaintiff may seek relief.
The record was unclear as to whether an appeal was pending in the Vermont state courts. However, because there was possibly an appeal pending in the Vermont courts, the Bankruptcy Court found that neither mandatory abstention nor permissive abstention was warranted.
Mandatory abstention is required where (1) the motion to abstain is timely; (2) the action is based upon a state law claim or cause of action; (3) the plaintiff has commenced the action in state court; (4) the state court is capable of timely adjudicating the action; (5) there is no independent basis for federal jurisdiction that would have permitted the action to be commenced in federal court in the absence of the bankruptcy case; and (6) the matter is non-core. Although all of these requirements were probably met, the Bankruptcy Court ruled that until it is clear whether the relevant issues relating to the breach of contract claims were under consideration by an appellate court in Vermont, the defendants were estopped from requesting abstention, as such a request contradicted their arguments to the Vermont Superior Court. If it were to become clear to the Bankruptcy Court that an appeal was going forward in Vermont, then the Bankruptcy Court would be obliged to abstain.
For similar reasons, the Bankruptcy Court also declined to grant the defendants’ request to permissively abstain. However, the Bankruptcy Court indicated that it would abstain if an appeal were going forward in the Vermont state courts.
Finally, the Bankruptcy Court addressed the defendants’ arguments that the Bankruptcy Court lacked personal and subject matter jurisdiction. The Bankruptcy Court found that it had personal jurisdiction over the defendants because service of process was made in accordance with Fed. R. Bankr. P. 7004 and Fed. R. Civ. P. 4, which allow for nationwide service and permits the bankruptcy courts to exercise jurisdiction over a party to a case over which the bankruptcy court has subject matter jurisdiction. The Bankruptcy Court held that it possessed subject matter jurisdiction over the adversary proceeding under its “related to” jurisdiction under 28 U.S.C. § 1334.
