Castle Cheese, Inc. v. Firstmerit Bank, N.A. (In re Castle Cheese, Inc.)

541 B.R. 586

In re: Castle Cheese, Inc., Debtor.Castle Cheese, Inc., Plaintiff

v.FirstMerit Bank, N.A., Defendant.

Bankruptcy No. 14–22214–JAD

Adversary No. 15–02006–JAD

United States Bankruptcy Court, W.D. Pennsylvania.

Signed December 2, 2015

Craig W. Beil, Bruce E. Rende, Robb Leonard Mulvihill LLP, Allison L. Carr, Bernstein–Burkley, PC, Pittsburgh, PA, for Plaintiff.

Joseph F. Butcher, Christopher T. Yoskosky, Zimmer Kunz, PLLC, Lauren D. Rushak, Beth L. Slaby, Clark Hill PLC, Pittsburgh, PA, Scott N. Schreiber, Clark Hill PLC, Chicago, IL, for Defendant.

MEMORANDUM OPINION

JEFFERY A. DELLER, Chief U.S. Bankruptcy Judge

The matter before the Court is a Motion to Remand and/or Abstention filed by the Debtor and Plaintiff herein, Castle Cheese, Inc., against one of its secured creditors and the Defendant herein, FirstMerit Bank, N.A. For the reasons set forth below, the motion is denied.

I.

On or about May 30, 2014, Castle Cheese, Inc., (the “Debtor”) commenced this bankruptcy case by filing a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Case”).

On October 16, 2014, secured creditor FirstMerit Bank, N.A. (“FirstMerit”) timely filed a proof of claim at Claim No. 25, as later amended on October 21, 2014 and June 25, 2015 (the “Proof of Claim”). In the Proof of Claim, FirstMerit asserts claims against the Debtor as a result of two loans (the “Loans”) extended by FirstMerit directly to the Debtor, and three additional loans (the “Additional Loans”) that FirstMerit extended to entities related to the Debtor for which the Debtor guaranteed repayment, in the total amount of $6,249,324.56. (Doc. # 1, p. 2).¹

As of the petition date, First Merit contends that its claim approximated $7 million (as a result of unpaid interest, attorneys' fees and other costs associated with collection). As of the date of this Memorandum Opinion, First Merit acknowledges that its claim has been reduced to approximately $2.14 million on account of recoveries it has had with respect to liquidation of collateral or other non-debtor assets to pay the claim. (SeeAmended Claim 25–3 filed 6–25–2015 at Case No. 14–22214–JAD).

About seven months after the commencement of this bankruptcy case and about two months after FirstMerit filed its Proof of Claim, the Debtor filed a complaint (the “Complaint”) against FirstMerit on December 31, 2014 in the Court of Common Pleas of Butler County, Pennsylvania, at Docket No. 14–11095 (the “Lawsuit”). In the Lawsuit, the Debtor asserted claims sounding in breach of contract, tortious interference with contractual relations, commercial disparagement, and defamation. (Doc. # 1, Exhibit A).

Specifically, in the Complaint filed in the state court action, the Debtor avers that FirstMerit notified the Debtor that the Debtor was in default of the Loans on or about February 20, 2014, and “demanded immediate payment in an amount equal to the difference between the outstanding principal balances combined as compared to the borrowing base dated December 31, 2013.” (Doc. # 1, Exhibit A, p. 8). Thereafter, a representative of FirstMerit is alleged to have “orally agreed to modify the original terms of the lending agreements ... by placing the lending agreements which were allegedly in default in forbearance status and agreed to forego taking any negative actions against [the Debtor] in furtherance of the alleged defaults of the original lending agreements” if the Debtor paid $2,500,000 to FirstMerit by August 1, 2014 and the remaining balances of all related loans by December 31, 2014. (Id.).

Despite this purported oral modification, the Debtor asserts that FirstMerit then “breached the oral agreement” by again asserting the Debtor's default under the loan documents, and by demanding immediate payment of the entire principal amounts allegedly due plus interest, late charges, and applicable attorneys' fees. (Id.at p. 9). Further, the Debtor asserts that in connection with the demand for immediate payment, FirstMerit improperly contacted the Debtor's suppliers and/or customers demanding direct payment of amounts owed to the Debtor be paid directly to FirstMerit and threatening legal action against them if the sums outstanding were not paid to FirstMerit. (Id.at pp. 9–10).

On January 14, 2015, FirstMerit filed a Notice of Removal of the Lawsuit to this Court thereby initiating the instant adversary proceeding (the “Adversary Proceeding”).

In support of the removal, First Merit asserted that the Lawsuit “involves claims exclusively related to or originating from” the two Loans extended directly to the Debtor, and that each of the Debtor's claims against FirstMerit “arises under or is related to this Chapter 11 proceeding.” (Doc. # 1, p. 2).

FirstMerit further averred that the Lawsuit “is a core proceeding under 28 U.S.C. § 157(b)(2)as it involves matters concerning the administration of the estate, counterclaims against the estate by persons or entities filing claims against the estate, and other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or equity holder relationship.” (Doc. # 1, p. 3).

In addition, because “[a]ll of the Debtor's claims are based upon or relate to alleged transactions and occurrences between the Debtor and FirstMerit in connection with the Loans and the ... Proof of Claim,” FirstMerit argued that “[a]s a matter of law and for the sake of judicial economy, all claims asserted in the [Lawsuit] should be referred” to this Court. (Id.).

The Debtor filed a Response to the Notice of Removal on January 20, 2015, asserting that “the removed claims and/or causes of action are non-core” proceedings, and that the Debtor “does not consent to entry of final orders or judgment by a bankruptcy judge” in the instant adversary proceeding. (Doc. # 6, p. 2).

FirstMerit then filed a response to the Debtor's assertion that the claims are non-core on January 27, 2015, asserting in part that the Lawsuit is “inextricably woven into the administration of its estate,” as the Debtor's chapter 11 plan of reorganization recognized that “[a]ny recovery from [the State Court Action] shall be the property of the Reorganized Debtor, except that Ten Percent (10%) of the Reorganized Debtor's net recovery from this litigation (after reasonable expenses), if any, shall be disbursed pro ratato the holders of Class 3 Claims.” (Doc. # 11, p. 3).

On February 13, 2015, the Debtor then filed the instant Motion for Remand and/or Abstention (the “Motion”) and a brief in support. (Doc. ## 16, 17). The Motion is brought pursuant to 28 U.S.C. § 1334(c)(2), which states in relevant part:

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.

28 U.S.C. § 1334.

In the Motion, the Debtor averred that this Court should abstain from hearing the claims asserted in the Lawsuit and remand the matter to state court, because the Lawsuit is a non-core proceeding based on state law claims or causes of action which do not “arise under” title 11 nor do they “arise in” a case under title 11. (Doc. # 17, pp. 5–6).

In response to a motion to dismiss filed by First Merit as to the substantive claims in the Complaint, the Debtor then filed an amended complaint (the “Amended Complaint”) on March 10, 2015, asserting the same causes of actions contained in the original Complaint. (Doc. # 30). For purposes of clarity, the Court would parenthetically note that the Amended Complaint was actually first filed on March 9, 2015 at Doc. # 27, but was refiled for technical docketing reasons on March 10, 2015 at Doc. # 30.

FirstMerit thereafter filed a Response to the Motion to Remand and/or Abstention on March 10, 2015, again averring that “any ... dispute regarding the interpretation of and/or the rights and obligations existing under the Loans will, unquestionably, concern, impact and have a direct bearing on the payment and satisfaction of the Loans and administration of Debtor's estate.” (Doc. # 29, p. 2).

After a hearing was held on March 17, 2015, the Court ordered FirstMerit to file a supplemental brief and a motion to dismiss with respect to the Amended Complaint to the extent that First Merit still challenged the substantive components of the Debtor's Amended Complaint. (Doc. # 34). FirstMerit timely complied with the order (Doc. # # 36 and 37), and the Debtor filed responses shortly thereafter (Doc. ## 38 and 40).

Another hearing was held on April 20, 2015, at which time the Court took the Debtor's request to remand or abstain under advisement. The Court also took the substantive motion to dismiss the Amended Complaint under advisement as well. Subsequent to taking these dueling motions under advisement, the progress of the Debtor's chapter 11 case faltered.

On May 12, 2015, the Court denied confirmation of the Debtor's chapter 11 plan and denied approval of the disclosure statement. (Case No. 14–22214, Doc. # 524). Also on May 12, 2015, upon a motion of FirstMerit, the Debtor's Bankruptcy Case was converted to a case under chapter 7. (Case No. 14–22214, Doc. # 532).

Upon conversion of the case to chapter 7, Charles O. Zebley, Jr. (the “Interim Trustee”) was appointed as Interim Trustee for the Debtor's bankruptcy estate the same day. (Case No. 14–22214, Doc. # 533). The Interim Trustee requested, and FirstMerit consented to, the Court holding this Adversary Proceeding in abeyance, and defer ruling on the pending motions, to enable the Interim Trustee to become familiar with the litigation and to facilitate the parties reaching an amicable...