Permissive Abstention Appropriate Where Claims For Payment Of Outstanding Invoices Centered On Contractual Dispute.
DHP Holdings II Corp. v. Peter Skop Industries, Inc. (DHP Holdings II Corp.), Case No. 08-13422, Adv. No. 09-52811 (August 13, 2010) (J. Walrath)
On December 29, 2008 (the “Petition Date”), DHP Holdings II Corporation and several of its affiliates (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. Prior to the Petition Date, PSI purchased several products from the Debtors for which PSI had not remitted payment as of the Petition Date. The Debtors commenced an adversary proceeding on November 20, 2009 to recover the amounts due under the invoices (a total of $123,261.00) it had submitted to PSI, for turnover of the property pursuant to section 542 of the Bankruptcy Code, for breach of contract, and to disallow any claims of PSI pursuant to section 502(d).
In PSI’s answer, it denies that it owes a debt to the Debtors because, inter alia, the Debtors fraudulently misrepresented their financial condition in order to induce PSI to purchase products, even though the Debtors were aware that they would not be able to satisfy their warranty obligations. As a result, PSI argues that it possesses setoff and recoupment rights due to known warranty claims, anticipated warranty claims, and tort claims brought by customers who purchased the Debtors’ products from it. PSI moved for permissive abstention, arguing that the twelve factors to be considered in granting permissive abstention weighed in favor of the Court abstaining. The Court agreed for the reasons set forth more fully below.
The Court determined that PSI’s motion for permissive abstention should be granted because:
(1) Recovery by the Debtor of the amount at issue, $123,261.00 was, as admitted by the Debtors themselves, insignificant and would therefore have a de minimus effect on the estate and the Debtors concerns that the recovery of this amount could prove to be the difference between continued reorganization under chapter 11 and liquidation under chapter 7 were moot as a result of the Debtors’ earlier motion to convert the cases to chapter 7;
(2) The issues were primarily contractual issues and, accordingly, state law issues were predominant, despite the Debtors’ argument that the claims involved bankruptcy issues under section 542 and 502(d), because such claims were premature prior to the Debtors obtaining a judgment against PSI;
(3) The state court was the better forum in which to resolve the matter because state law issues predominated even though the issues presented were not complex or novel;
(4) The claims were not closely related to the main bankruptcy case because the dispute “is not inextricably intertwined with the administration of the estate”;
(5) The turnover proceeding was non-core because the debts underlying the section 542 claim were disputed, making the section 542 claim premature and the goods were all delivered pre-petition and PSI’s defenses did not constitute a claim against the estate for purposes of submitting itself to the Court’s jurisdiction;
(6) All matters were non-core, thus negating the need to sever state law claims from core bankruptcy matters;
(7) The Court’s docket is overburdened;
(8) The Debtors were not forum shopping; and
(9) PSI asserted a right to a jury trial.
Although the Court found that there was an absence of a similar proceeding in state court, that an independent basis for federal jurisdiction existed under 28 U.S.C. § 1332(a) due to diversity, and that the proceeding did not involve only non-debtor parties, the Court determined that, overall, the factors favored abstention.
