Tilton v. MBIA Inc.

Background

Lynn Tilton and Patriarch Partners XV, LLC sued MBIA Inc. and MBIA Insurance Corporation in New York Supreme Court, Westchester County. The plaintiffs asserted New York state-law claims involving alleged representations that MBIA would extend the maturity dates of certain Zohar investment funds if Tilton purchased certain notes. The state court dismissed a breach-of-contract claim but allowed fraud and promissory-estoppel claims to proceed. The parties conducted discovery and filed summary-judgment motions, but the state court had not ruled on those motions.

A related Chapter 11 bankruptcy case was later filed in the Delaware Bankruptcy Court. MBIA removed this stayed state-court action to the federal district court and moved to transfer it to the District of Delaware for referral to the Delaware Bankruptcy Court. Tilton moved to remand the case to state court.

Subject-Matter Jurisdiction and Removal

The court held that it had federal bankruptcy jurisdiction under 28 U.S.C. § 1334(b). That statute gives federal courts jurisdiction over civil proceedings that could have a conceivable effect on a bankruptcy estate. The court found that a judgment for Tilton could affect her ability to seek equitable subordination of MBIA in the bankruptcy case and that the two proceedings substantially overlapped.

The court also held that MBIA’s removal was proper. MBIA learned of the action’s removability from a complaint filed in the related bankruptcy proceeding. Relying on Second Circuit precedent, the court concluded that documents outside the removed case may reveal federal jurisdiction without starting the 30-day removal period under 28 U.S.C. § 1446(b)(3). The court therefore rejected Tilton’s argument that MBIA’s removal was untimely.

Equitable Remand and Abstention

Even though jurisdiction existed and removal was proper, the court granted equitable remand under 28 U.S.C. § 1452(b) and permissive abstention under 28 U.S.C. § 1334(c)(1). The court emphasized that Tilton asserted only state-law claims, those claims predominated, the action had progressed substantially in state court, and the case could not be consolidated with the Delaware bankruptcy proceeding. The court also found that the relationship to the bankruptcy favored remand, while other factors were neutral or did not outweigh those considerations.

The court denied Tilton’s request for attorneys’ fees and costs under 28 U.S.C. § 1447(c). It found that MBIA had an objectively reasonable basis for removal because federal jurisdiction existed and the removal was proper; the remand resulted from equitable considerations instead.

Motion to Transfer

MBIA moved under 28 U.S.C. § 1412 to transfer the case to the District of Delaware. The court held that § 1412 permits transfer only of a case or proceeding “under title 11,” not merely a case that is related to a bankruptcy proceeding.

The court concluded that Tilton’s contract and tort claims did not arise under the Bankruptcy Code. The claims concerned conduct and agreements that predated the bankruptcy, could exist outside bankruptcy, and were asserted between non-debtors. Similarities between the complaint and a complaint filed in the bankruptcy case, and the possible effect of a damages award on the bankruptcy estate, did not make the action a core bankruptcy proceeding. The court therefore held that it lacked authority to transfer the action under § 1412.

Disposition

Judge William H. Pauley III granted Tilton’s motion to remand the case to the New York Supreme Court, Westchester County. He denied MBIA’s motion to transfer the case to the District of Delaware and directed the clerk to remand the action to state court. The court also denied Tilton’s request for attorneys’ fees and costs.