Empery Tax Efficient, LP v. MusclePharm Corporation

Background

Empery Tax Efficient, LP sued MusclePharm Corporation, White Winston Select Asset Funds, LLC, White Winston Select Asset Fund Series MP-18, LLC, and Ryan Drexler in New York State Supreme Court. The original complaint asserted four breach-of-contract claims against MusclePharm, a claim under New York’s Uniform Voidable Transactions Act, and a claim for indemnification. The dispute concerned notes issued by MusclePharm, alleged defaults, a planned sale of MusclePharm’s assets, and a settlement agreement involving the White Winston Defendants and Drexler.

After a state-court temporary restraining order was entered, MusclePharm filed for Chapter 11 bankruptcy. Drexler removed the case to federal court under the bankruptcy-related jurisdiction statute, arguing that the case was connected to MusclePharm’s bankruptcy. Empery then dismissed MusclePharm, filed an amended complaint against the White Winston Defendants and Drexler, and replaced the original claims with two state-law claims for tortious interference.

Remand and Abstention Analysis

The court treated the original complaint as controlling for deciding whether removal was proper. It rejected the defendants’ argument that the New York voidable-transactions claim automatically arose under or in bankruptcy. The claim was brought under state law by Empery—not by a bankruptcy trustee—and before MusclePharm filed for bankruptcy. The court also rejected the argument that the contempt motion concerning the state-court restraining order created bankruptcy jurisdiction.

The court nevertheless found “related to” bankruptcy jurisdiction because the outcome of the original claims could affect MusclePharm’s bankruptcy estate. That finding meant the case was a non-core bankruptcy proceeding. The court held, however, that mandatory abstention applied because the motion was timely, the claims were based on state law, the case was related to but did not arise under or in bankruptcy, bankruptcy jurisdiction was the only established basis for federal jurisdiction, the case began in state court, and the state court could timely decide it.

The court also stated that it would abstain permissively and remand on equitable grounds. It emphasized that state-law issues predominated, the remaining defendants were not bankruptcy debtors, and the state judge was already familiar with the dispute. The court was not persuaded that Empery’s actions amounted to forum shopping.

Disposition

Judge Victor Marrero granted Empery’s motion to remand the action to New York State Supreme Court, New York County. The court denied Empery’s request for limited expedited discovery on the contempt motion as moot because the case was being remanded. It directed the clerk to transmit the order to the state court, terminate pending motions, and close the federal case.