In a lawsuit between two nondebtors, the mere fact that the claim would not have existed had there been no bankruptcy does not give rise to “arising in” bankruptcy jurisdiction, according to a district judge in Manhattan.
The plaintiffs were investors in a company formed to loan to a business that ended up in bankruptcy. The collateral included the right to make a credit bid for some of the borrower’s assets in a process known as credit bidding.
The plaintiffs alleged that some of the lender’s other part owners diverted credit bidding rights to themselves. In the suit originally filed in New York State court against the lender’s other part owners, the plaintiffs sought damages under state law for fraud, breach of fiduciary duty and breach of contract.
The defendants removed the suit to federal court in New York, intending for the district judge to transfer venue to Kentucky where the bankruptcy was pending, so that the suit could be referred to the Kentucky bankruptcy judge.
The plaintiffs counter-moved for remand to the New York State court and won in a June 13 opinion by District Judge Victor Marrero of Manhattan.
The defendants claimed there was “arising in,” “arising under” and “related to” bankruptcy jurisdiction. Judge Marrero disagreed.
The defendants argued there was “arising in” jurisdiction because there would have been no claim had there been no bankruptcy and no sale to someone else. Judge Marrero said that a “but for” analysis “mistakenly describes the ‘arising in’ jurisdictional analysis.” He said there is “arising in” jurisdiction if the suit “could only arise in the context of a bankruptcy case.”
At most, Judge Marrero said, there might be “related to” jurisdiction because the state law claims were “factually related to the proceedings in” bankruptcy court. The defendants also argued for bankruptcy jurisdiction because they might make a claim on the bankrupt company’s insurance policy to cover defense costs.
Then proceeding to rule that the complaint fell within the rubric of mandatory abstention under 28 U.S.C. Section 1334(c)(2), Judge Marrero said he would remand the suit to state court because, among other factors, it was at best “related to” bankruptcy and could be timely adjudicated in state court.