MidOcean Partners IV, L.P. v. Baker

Background

MidOcean Partners IV, L.P. began the case in New York Supreme Court on July 1, 2020. It alleged that Aaron Baker, William Lew, and Alpha Bravo Holding Company, Inc. breached “best efforts” obligations in a February 2020 loan Purchase and Sale Agreement. It also asserted state-law claims for unjust enrichment, breach of the implied covenant of good faith, and tortious interference.

The defendants removed the case to the U.S. District Court for the Southern District of New York, relying on a bankruptcy proceeding involving a company called Alpha Guardian in the U.S. Bankruptcy Court for the District of Nevada. The bankruptcy court had entered an order confirming a reorganization plan before the removal. The plaintiff moved to remand, meaning to return the case to state court. The defendants moved to transfer the case to Nevada.

Jurisdiction and Abstention

The defendants identified 28 U.S.C. § 1334 as the only basis for federal subject-matter jurisdiction. That statute gives federal courts jurisdiction over civil proceedings that arise under the Bankruptcy Code, arise in a bankruptcy case, or are related to a bankruptcy case.

The court concluded that the plaintiff’s claims did not “arise under” the Bankruptcy Code because they were not based on a provision of that Code. The claims also did not “arise in” a bankruptcy case because they were based on a contract negotiated and signed before the bankruptcy case began, the debtor was not a party to that contract, and the claims could exist without the bankruptcy case. The plaintiff also sought damages only from the defendants, who were not bankruptcy debtors, rather than seeking to change a decision in the bankruptcy case.

The court did not decide whether the claims were “related to” the bankruptcy case. It explained that, if the claims were not related, the federal court lacked subject-matter jurisdiction. If they were related, however, mandatory abstention required the federal court to refrain from hearing them. Mandatory abstention is a statutory requirement that a federal court not hear certain state-law matters related to a bankruptcy case when specified conditions are met, including that the case began in state court and can be timely decided there.

The court found that the required conditions were met. The action asserted only state-law claims, began in New York Supreme Court, was removed based only on § 1334, and the plaintiff’s request for abstention was timely. The court also found that timely adjudication in state court was appropriate because the Alpha Guardian bankruptcy case was closed and the action could not affect administration of that bankruptcy estate. The court noted that it was unlikely the plaintiff’s claims would have any conceivable effect on the estate.

Disposition

The court granted Plaintiff’s Motion to Remand. It denied Defendants’ Motion to Transfer as moot, meaning the transfer request no longer required a decision after remand was ordered. Judge Mary Kay Vyskocil directed the Clerk of Court to remand the action to New York Supreme Court and close the federal case.