Superior Contracting Grp. Inc. v. Rachmale (In re LTC Holdings, Inc.)

587 B.R. 25

IN RE: LTC HOLDINGS, INC., et al., Debtor.

Superior Contracting Group Inc., Plaintiff,

v.Avinash Rachmale, Defendant.

Case No. 14–11111 (CSS) (Jointly Administered)

Adv. No.: 16–50948 (CSS)

United States Bankruptcy Court, D. Delaware.

Signed June 12, 2018

HILLER LAW, LLC, Adam Hiller, 1500 North French Street, 2^nd Floor, Wilmington, DE 19801, Ian M. Williamson, Jordan B. Segal, Mantese Honigman, P.C., 1361 E Big Beaver Road, Troy, MI 48083, Counsel for Defendant

POTTER ANDERSON & CORROON LLP, Hercules Plaza, Sixth Floor, 1313 North Market Street, P.O. Box 951, Wilmington, DE 19899–0951, Counsel for Plaintiff

OPINION ¹

Sontchi, J.

INTRODUCTION ²

Before the Court is a sua sponte Order wherein the parties were asked to brief three issues, i.e. , whether the Proceeding should be dismissed for lack of subject matter jurisdiction, if the Court should abstain from hearing the Proceeding, or if the Court should remand the Proceeding to state court.

The law of the case doctrine and a review of the jurisdictional issues under Third Circuit law both lead the Court to establish a finding of "related to" jurisdiction in this Proceeding. Neither abstention, nor remand to state court are appropriate. Given such findings, the Court will maintain jurisdiction over the Proceeding.

JURISDICTION AND VENUE

Courts generally maintain "an independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party."³ This obligation has been applied to bankruptcy courts when reviewing questions of subject matter jurisdiction sua sponte ,⁴ as codified under FED. R. BANKR. P. 7012(b), incorporating FED. R. CIV. P. 12(h).

The Court may also review certain questions of abstention and remand. A court may not apply the principles of mandatory abstention absent a "timely motion of a party."⁵ A motion for abstention has not been filed here. Yet nothing prevents a bankruptcy court from considering the issue of permissive abstention sua sponte .⁶ To the extent a bankruptcy court finds reasons for permissive abstention, the court may also "remand such claim or cause of action on any equitable ground."⁷

To the extent the Court maintains jurisdiction over this Proceeding, venue is proper before the United States Bankruptcy Court for the District of Delaware under 28 U.S.C. §§ 1408 and 1409. The Court has the judicial authority to enter a final order.

STATEMENT OF FACTS

A. Procedural Background

Superior Contracting Group, Inc. ("Plaintiff" or "Superior") filed the current action against Avinash N. Rachmale ("Defendant" or "Rachmale") in the United States District Court for the Western District of Tennessee (the "Proceeding").⁸ The Western District of Tennessee went on to issue an opinion granting Defendant's Rule 12(b)(3) motion to dismiss for improper venue and transferring the Proceeding to the United States District Court for the Eastern District of Michigan.⁹

The Eastern District of Michigan subsequently issued another opinion granting Rachmale's second Rule 12(b)(3) motion to dismiss for improper venue and ordered the Proceeding transferred to the United States District Court for the District of Delaware.¹⁰ The Delaware District Court later referred the Proceeding to this Court,¹¹ where the Defendant filed a motion to dismiss, which this Court denied.

The Court later issued a sua sponte order (the "Order") requesting the parties' written positions on three questions: (1) the Proceeding's proper subject matter jurisdiction, (2) the Court's option to permissively abstention from hearing the Proceeding, and (3) the possible removal of the Proceeding to state court.¹² Both Defendant and Plaintiff filed writings supporting their positions on the April 7, 2017 deadline, and Defendant filed a supplemental response five days later.¹³ The Order has been fully briefed and is the subject of this memorandum.¹⁴

B. Factual Background

1. Rachmale and Lakeshore

Lakeshore Engineering Services, Inc. ("Lakeshore") was founded by Rachmale to provide construction services to municipal, commercial, and government clients. Initially Rachmale acted as Lakeshore's President, CEO, director, and majority shareholder.¹⁵ In 2010, as a result of a merger, Lakeshore became a subsidiary of Lakeshore Toltest Corporation ("LTC"). Post-merger, Rachmale continued in his role as President and CEO of both the new entity, LTC, and Lakeshore until at least 2012.¹⁶

In 2011, LTC amended and restated its articles of incorporation.¹⁷ The articles of incorporation contain the following indemnification language:

The Corporation shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administration or investigative, (i) by reason of the fact that such person is or was a director is or was serving at the request of the Corporation as a director of another corporation, partnership, joint venture, trust or other enterprise ... or (ii) in such person's capacity as an officer, employee or agent of the Corporation or in such person's capacity as an officer ... of another corporation ... against expenses (including attorney's fees and expenses), judgments, fines, penalties and amounts paid in settlement incurred (and not otherwise recovered) in connection with the investigation, preparation to defend or defense of such action, suit, proceeding or claim; provided, however, that the foregoing shall not require the Corporation to indemnify any person in connection with any action ... initiated by or on behalf of such person other than an action authorized by the Board of Directors ... Any person seeking indemnification ... shall be deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established.¹⁸

The indemnification also covers "current and as-incurred basis expenses incurred ... defending or otherwise participating in any action, ... in advance of the final disposition of such action," but only "upon presentation of (i) an unsecured written undertaking to repay such amounts if it is ultimately determined that the person is not entitled to indemnification ... and (ii) adequate documentation reflecting such expenses."¹⁹

Rachmale was removed from his officer positions in LTC by October 2012, and resigned from LTC's board of directors on April 2, 2014.²⁰

2. Superior's Litigation Against Lakeshore and Rachmale

In May 2009, Superior and Lakeshore entered into a Mentor/Protégé Agreement for the purpose of pursuing certain U.S. government contracts.²¹ Superior and Lakeshore entered into a number of joint venture agreements for projects being constructed by the Army Corps of Engineers through this arrangement.²² Under the terms of these joint ventures, Superior was to receive 51% of the ventures' profits and Lakeshore the remainder.²³ All works on the venture projects and final payment by the Army Corps of Engineers was completed by April 29, 2013.²⁴ These facts are generally not in dispute.²⁵

On August 23, 2013, Superior filed an action against Lakeshore in the Chancery Court of Tennessee for the Thirteenth Judicial District at Memphis, Shelby County (the "Tennessee Chancery") asserting claims for contractual breach of the joint venture agreements and seeking accounting for the joint ventures under a special master.²⁶

In May 2014, Lakeshore, LTC, and other entities (collectively, the "Debtors") filed voluntary petitions for Chapter 7 relief in this Court.²⁷ A suggestion of bankruptcy and enforcement of the automatic stay was sent to Superior regarding their case in front of the Tennessee Chancery.²⁸ The Tennessee Chancery case saw no further action after the notice.²⁹

In August 2014, Superior filed the present federal court Proceeding against Rachmale in the Western District of Tennessee.³⁰ Superior alleged in its complaint claims of conversion, fraud, and intentional misrepresentation. In addition, Superior sought to pierce the corporate veil and hold Rachmale "liable for all obligations owed by Lakeshore to Superior Contracting" because of acts committed by Rachmale while controlling Lakeshore.³¹

The Western District of Tennessee found that the Proceeding satisfied the requirements for federal diversity jurisdiction, but venue was more appropriate in the Eastern District of Michigan.³² The District Court for the Eastern District of Michigan again reviewed the issue of venue, but this time with regard to whether the Proceeding should be transferred to the District of Delaware given the Debtors' bankruptcy filings. The Eastern District of Michigan held that the Proceeding "related to" the Debtors' bankruptcy because of both Rachmale's possible indemnification claim against Lakeshore and the intertwined action to pierce the corporate veil of Lakeshore against Rachmale.

The Proceeding was again transferred, this time to the District Court for the District of Delaware, which later referred the Proceeding to this Court.

LEGAL DISCUSSION

A. Bankruptcy Court Jurisdiction

The first question raised by the Order concerns whether this Court has subject matter jurisdiction over the Proceeding.

Pursuant to 28 U.S.C. § 1334, "district courts shall have original and exclusive jurisdiction of all cases under title 11 ... [and] original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11."³³ A district court may provide, under section 157(a), that any such cases "be referred to the bankruptcy judges for the district," and the bankruptcy court "may hear and determine [such] cases ... and may enter appropriate orders and judgments, subject to review under section 158 of this title."³⁴ The United States District Court for the District of Delaware has so provided in this Proceeding.

Defendant argues that the Court should not review...