Silagy v. DeHaven (In re Allen)

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In Re: Brandon L. Allen, Debtor(s).

Anne Piero Silagy, Trustee, Plaintiff(s), v. Stacey Renae DeHaven, Defendant(s).

No. 22-60638

Adv. Pro. No. 23-06013

United States Bankruptcy Court, N.D. Ohio, Eastern Division

March 6, 2024

Chapter 7

MEMORANDUM OF DECISION AND ORDER

MARY ANN WHIPPLE, JUDGE.

The matter before the court in this adversary proceeding is Defendant's motion asking the court either to abstain from hearing it in favor of a Kansas state court or to transfer venue to bankruptcy court in Kansas. [Doc. # 10].

Plaintiff ("Plaintiff" or "Trustee") is the Chapter 7 trustee in the underlying Chapter 7 case, 22-60638, which was filed in this court by Debtor Brandon Allen on June 28 2022. Defendant is Debtor's former spouse. They were divorced in 2019 through a decree entered in a Kansas domestic relations action. Defendant lives and works in Kansas.

The factual basis for the Trustee's claims is Debtor's transfer to Defendant of his interest in their former marital home, located in Kansas, as part of the divorce. Plaintiff asserts against Defendant fraudulent transfer claims seeking recovery of $29,582 as the alleged value of the property transferred. Plaintiff's claims are premised on state law incorporated through § 544(b) of the Bankruptcy Code, 11 U.S.C. § 544(b). Defendant argues as to both abstention and transfer of venue that the adversary proceeding is unfair, inconvenient, and likely to enmesh this court in the Kansas divorce action from 2019. Plaintiff opposes the motion. [Doc. # 13].

The district court has original but not exclusive jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) as a civil proceeding arising under Title 11 or in a case under Title 11. The district court has exclusive jurisdiction of property of Brandon Allen's bankruptcy estate pursuant to 28 U.S.C. § 1334(e)(1). The underlying Chapter 7 case and this adversary proceeding have been referred to this court by the district court under its standing general order of reference. 28 U.S.C. § 157(a); General Order 2012-7 of the United States District Court for the Northern District of Ohio. Proceedings to "determine, avoid or recover fraudulent conveyances" are core proceedings that the bankruptcy court may hear and determine. 28 U.S.C. § 157(b)(2)(H). Motions for abstention or to change venue of civil proceedings are core proceedings that this court may hear and determine. 28 U.S.C. § 157(b)(2)(A); Enron Corp. v Arora (In re Enron), 317 B.R. 629, 638 (Bankr. S.D.N.Y. 2004) (venue); Bavelis v. Doukas (In re Bavelis), 453 B.R. 832, 845 (Bankr. S.D. Ohio 2011) (abstention, remand and transfer of venue).

ABSTENTION

While this court has jurisdiction over both the underlying Chapter 7 case and this adversary proceeding, "nothing in this section [28 U.S.C.§ 1334] prevents a 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." 28 U.S.C. § 1334(c)(1). Otherwise known as permissive abstention, abstention under § 1334(c)(1) is applied via "a multi-factor balancing test, not a rule in which every element must be satisfied…." DiGirolamo v. Applegate (In re Applegate), 414 B.R. 209 216 (Bankr.N.D.Ohio 2008). Factors (or some iteration of them) that federal courts look to include:

1) the effect or lack of effect on the efficient administration of the estate if a court abstains; 2) the extent to which state law issues predominate over bankruptcy issues; 3) the difficulty or unsettled nature of the applicable state law; 4) the presence of a related proceeding commenced in state court or other non-bankruptcy court; 5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334; 6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case; 7) the substance rather than form of an asserted "core" proceeding 8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court; 9) the burden of this court's docket; 10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties; 11) the existence of a right to a jury trial; 12) the presence in the proceeding of nondebtor parties; and 13) any unusual or other significant factors.

Parrett v. Bank One, N.A. (In re Nat'l Century Fin. Enters., Inc., Inv. Litig.), 323 F.Supp.2d 861, 884-85 (S.D. Ohio 2004), quoting Mann v. Waste Mgmt. of Ohio, 253 B.R. 211, 214 (N.D. Ohio 2000); see also, In re Applegate, 414 B.R. at 216; In re Bavelis, 453 B.R. at 874. Though abstention is to be rarely exercised, "federal courts should not be hesitant to decline to exercise jurisdiction when 'state issues substantially predominate, whether in terms of proof, of the scope of the issues raised, or of the comprehensiveness of the remedy sought.'" Mann, 253 B.R. at 215, quoting In re White Motor Credit, 761 F.2d 270, 274 (6th Cir. 1985); see McDaniel v. ABN Amro Mortg. Grp., 364 B.R. 644, 650 (S.D. Ohio 2007). The movant bears the burden of establishing that permissive abstention is warranted. Murray v. Willkie Farr & Gallagher LLP (In re Murray Energy Holdings Co.), 654 B.R. 469, 495 (Bankr. S.D. Ohio 2023). Ultimately permissive abstention is left to the bankruptcy court's sound discretion. Id.

Defendant acknowledges that Factors 10 (likelihood that this action involves forum shopping) and 11 (right to a jury trial) are either neutral or do not apply. [Doc. # 10, p. 5/13].

The court finds for the following reasons that most of these factors weigh against permissive abstention.

Factor 1: Effect on Efficient Administration of the Estate

Defendant's motion and proposed order contemplate that this action would be filed anew by Plaintiff in the Kansas State Circuit Court, Cowley County. [Doc. # 10, p. 1 and attached proposed order of abstention]. No such action is pending. To do so, the Trustee would have to find and employ with this court's approval counsel in Kansas. According to the Trustee's most recent Interim Report filed in the Chapter 7 case, her claims in this adversary proceeding are the only asset she has to administer. [Case No. 22-60638, Doc. # 34, p.1, October 26, 2023].^[1] She has not received any funds in the estate, making payment of a filing fee in state court and the ability to engage out of state counsel on a matter seeking recovery of approximately $30,000 effectively impossible. In contrast the filing fee for this adversary proceeding was deferred by this court [Docket entry #1], as is routine in such matters. The court has already authorized employment of counsel, who will get paid from the bankruptcy estate, but only if the Trustee liquidates her claims in this action and has cash with which to pay administrative expenses. [Case No. 22-60638, Doc. # 19]. Trustee's counsel has invested time and estate resources to become familiar with this action and to prepare the pleadings to commence it in this court. Those efforts would have to be duplicated to some extent at estate expense by Kansas counsel, reducing further any potential recovery for the benefit of creditors. The added cost, delay and logistical roadblocks to starting this action anew in a state court in Kansas as Defendant suggests would be akin to ending Plaintiff's claims.

The effect of abstention on efficient administration of the bankruptcy estate would devastating if not fatal. This factor weighs heavily against abstention.

Factor 2: Extent to Which State Law Issues Predominate Over Bankruptcy Issues

Defendant postulates that the court and the parties will have to relitigate the divorce, arguing that this court will have to redo the parties' divorce settlement. The court disagrees. This argument is overstated.

Application of Bankruptcy Code avoidance powers to transfers occurring as part of a domestic relations proceeding is not a new, novel or unusual exercise of a Chapter 7 trustee's duties and authority. E.g., Corzin v. Fordu (In re Fordu), 201 F.3d 693 (6th Cir. 1999) (Chapter 7 trustee asserted avoidance claims against debtor's former wife under Ohio preference and fraudulent transfer statutes, attacking transfers made through divorce proceeding concluded approximately two years before debtor filed for bankruptcy); Hunter v. Dupuis (In re Dupuis), 265 B.R. 878 (Bankr.N.D.Ohio 2001) (preference action under § 547); Doeling v. O'Neill (In re O'Neill) 550 B.R. 482, 513 (Bankr. D. N.C. 2016) ("Nearly all courts that review dissolution judgments in the context of a section 548 analysis agree that the fact that a transfer occurs in the context of a divorce proceeding does not immunize the transfer from a section 548 attack by the bankruptcy trustee."; citations omitted).

The Kansas divorce action is implicated only in that it must be determined whether Debtor received reasonably equivalent value for transfer of his share of the marital residence to Defendant. That will be done by simply "comparing the value of the assets that Defendant received in the divorce with that of what Debtor received in the divorce…." Reisz v. Stinson (In re Stinson), 364 B.R. 278, 282 (Bankr. W.D. Ky. 2007) (Chapter 7 trustee's action under §§ 544 and 548 involving transfer of marital residence through divorce action), citing In re Fordu.

In In re Fordu, the Sixth Circuit observed that the statutory standards state courts are charged with applying to determine property settlements in divorce proceedings are "divergent decisional standards" from those applied in fraudulent conveyance proceedings to determine whether reasonably equivalent value was...