Kurz v. EMAK Worldwide, Inc.Kurz v. EMAK Worldwide, Inc.
OPINION
Presently before the Court are Plaintiff Donald A. Kurz’s Motion to Remand to the State of Delaware’s Court of Chancery, and Defendant EMAK Worldwide Inc.’s Motion to Change Venue to the United States District Court for the Central District of California. For the reasons set forth below, Plaintiffs Motion to Remand [Doc. 3] will be denied, and Defendant’s Motion to Change Venue [Doc. 5] will be granted.
I. Background
Plaintiff served on Defendant’s Board of Directors (hereinafter “Board”) from 1990 until his resignation in 2005. At the request of its remaining members, Plaintiff rejoined the Board in 2009. As an incentive for his return, Defendant offered Plaintiff an indemnification agreement (hereinafter “Agreement”). This agreement provided Plaintiff with the right to the advancement of fees and expenses, including expenses related to enforcement of the Agreement, incurred in his capacity as director.
Advancement of Expenses. Notwithstanding any provision of this Agreement to the contrary, the Company [Defendant] shall advance the expenses incurred by [Plaintiff] in connection with any Proceeding.... Advances shall be made without regard to [Plaintiffs] ability to repay the expenses and without regard to [Plaintiffs] ultimate entitlement to indemnification under the other provisions of this Agreement. Advances shall include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Company to support the advances claimed.
Doc. 4, Exhibit A § 9. The Agreement additionally contains a forum selection clause. This clause provides the Chancery Court of the State of Delaware with the exclusive jurisdiction to adjudicate all actions arising out of the Agreement. Id. at § 22 (The parties consent to “submit to the exclusive jurisdiction of the Chancery Court for purposes of any аction or proceeding arising out of or in connection with the Advancement Agreement”).
On July 20, 2010, Plaintiff initiated the present matter (hereinafter “Advancement Action”) in the Delaware State Chancery Court to compel enforcement of the Agreement with respect to three actions: (1) the matter currently before the Court (the Advancement Action); (2) a separate action in Delaware (hereinafter “Delaware Action”); and (3) a civil action in California (hereinafter “California Action”). In the Delaware Action, Plaintiff commenced a lawsuit in the Chancery Court in October 2009 regarding the validity of an agreement that related to the size and membership of the Board. Defendant, in May 2010, initiated the California Action because of Plaintiffs conduct relating to the Delaware Action. On July 19, 2010, the Court of Chancery determined Plaintiff
Approximately one month later, on August 5, 2010, in the United States Bankruptcy Court, Central District of California, Defendant filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code. The bankruptcy filing automatically stayed Plaintiffs Advancement Action. Shortly thereafter, the bankruptcy court approved the appointment of a special litigation committee (hereinafter “Special Litigation Committee”). On December 23, 2010, Plaintiff filed a proof of claim with the bankruptcy court, asserting indemnification pursuant to the Agreement with respect to the Delaware, California and Advancement Actions. In response, the Special Litigation Committee objected to Plaintiffs proоf of claim and asserted that the fees and expenses incurred in the California Action were not within the scope of the Agreement. Plaintiff, on April 20, 2011, moved for relief from the automatic stay in order to pursue the Advancement Action and prove the Agreement’s applicability to the California action.
II. DISCUSSION
A. Motion to Remand
Plaintiff asserts that this Court cannot exercise jurisdiction because Defendant waived its right to removal when it agreed to litigate any claims related to the Agreement “in the Court of Chancery of the State of Delaware (the ‘Delaware Court’), and not in any other state or federal court ...” Doc. 4, Exhibit A § 22. According to Plaintiff, Defendant’s consent to the forum selection clause “waivefd] any objection to the laying of venue of any such action or proceeding in the Delaware Court.” Id. In response, Defendant contends this Court can adjudicate this matter because the forum selection clause is unenforceable for reasons of public policy.
Removal of this matter is governed by 28 U.S.C. § 1452, which provides, in pertinent part, that:
(a) A party may remove any claim or cause of action in a civil action ... to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title
28 U.S.C. § 1452(a). Section 1334 grants district courts with “original and exclusive jurisdiсtion of all cases under title 11”, and “original but not exclusive jurisdiction of
The Third Circuit has opined that the “law of the state ... whose law governs the construction of the contract” determines the enforceability of a forum selection clause, unless a “significant conflict between some federal policy or interest and the use of state lаw exists.” In re Diaz Contracting Inc.,
In Bremen, the Supreme Court held that a forum selection clause is presumptively valid, and should be enforced unless the resisting party demonstrates that enforcement would be unreasonable under the circumstances. Bremen,
Courts have recognized the strong public policy favoring centralization of bankruptcy proceedings in a bankruptcy court. In re Iridium Operating LLC,
The Third Circuit’s decision in In re Exide Technologies implies that forum selection clauses are unenforceable in core bankruptcy proceedings when their enforcement would remove the matter from the bankruptcy court’s jurisdiction. Id. at 206; see Diaz Contracting Inc.,
To determine whether a claim is core, a court must first consult the list of
Defendant contends that the pending matter, the Advancement Action, constitutes a core proceeding because it involves the allowance or disallowance of claims against the estate. 28 U.S.C. § 157(b)(2)(B) (stating that “[e]ore proceedings include [the] allowance of disal-lowance of claims against the estate ... ”). Plaintiff retorts that the Advancement Action does not invoke a substantive right under the Bankruptcy Code because it concerns contract-based state law claims that arose from a pre-petition contract. Although Defendant acknowledges that Plaintiffs claims are entirely based upon state law, it additionally argues that when Plaintiff filed his proof of claim with the bankruptcy court, the Advancement Action transformed into a core proceeding, thus subjecting it to the bankruptcy court’s jurisdiction.
After a review of the applicable case law, this Court concludes that a precise point of delineation for whether a pre-petition state law claim constitutes either a core or non-core proceeding depends upon (1) whether the creditor filed a proof of claim with the bankruptcy court, and (2) the relationship between the state action and proof of claim. If a creditor does not file a proof of claim with the bankruptcy court, courts categorize pre-petition state law claims as non-core proceedings. See e.g., Stoe v. Flaherty,
The filing of a proof of claim, however, only transforms a pre-petition state law action into a core proceeding when the proof of claim raises the identical issues as the state action. In re Argus Group 1700, Inc.,
The Third Circuit’s decision in In re Meyertech Corp., a case similar to the pending matter, is especially illustrative of the relationship between the filing of a proof of claim and a related state action. In that case, after the creditor filed a proof of claim, its state law product liability action for allegedly negligent pre-petition
Presently, the Advancement Action constitutes a core bankruptcy proceeding because it directly affects the allowance or disallowance of claims- аgainst Defendant’s estate. See 28 U.S.C. § 157(b)(2)(B). On December 23, 2010, Plaintiff filed a proof of claim in the bankruptcy court asserting a claim, pursuant to the Agreement, for all fees and expenses related to the Delaware, California and Advancement Actions. Doc. 10, Ex. C at ¶ 4(a)-(c) (Plaintiffs “claims for advancement and indemnification under the Indemnification Agreement arise from the following actions” the Delaware, California and Advancement Actions). This proof of claim involves the identical legal and factual issues currently pending before the Court, whether the Agreement entitles Plaintiff to all fees and expenses with respect to the Delaware, California and Advancement Actions. Doc. 10, Ex. B at ¶ 1 (Plaintiff “brings this action ... to compel the advancement of expenses (including attorneys’ fees) incurred by Plaintiff: (1) in connection with this action; (2) in defense of counterclaims brought agаinst him in this Court ...; and (3) in a civil action pending in the Superior Court of the State of California ... ”). As a result, this case is intertwined with the bankruptcy matter. Prior to the confirmation of a reorganization plan or payment to creditors, the extent of Defendant debtor’s liability to Plaintiff because of the Agreement, if any, must first be resolved. See Regal Row Fina, Inc.,
B. Equitable Remand
In the alternative, Plaintiff asserts that the Advancement Action should be remanded on equitable grounds under 28 U.S.C. § 1452. Section 1452(b) provides the court with authority to remand a removed action “on any equitable grounds.” 28 U.S.C. § 1452(b). Courts in this dis
1. the court’s duty to decide matters properly before it;
2. plaintiffs choice of forum as between state and federal courts;
3. nature of the claim or claims, that is, whether purely state law matters which could be better addressed by the state court are involved;
4. prejudice to involuntarily removed parties;
5. comity considerations;
6. economical and/or duplicative use of judicial resources and
7. effect a remand decision would have on the efficient and econоmic administration of the estate.
Gorse v. Long Neck, Ltd.,
Plaintiff contends equitable remand is appropriate because Defendant removed the Advancement Action as part of its scheme to forum shop and avoid litigation before Delaware State Chancery Court Vice Chancellor Laster. According to Plaintiff, Defendant seeks to avoid Vice Chancellor Laster because he has “ruled in favor of plaintiffs, adopted plaintiffs view of the facts and the case, and has made comments reflecting a strong distrust for some of the defendants and their motives ...” Doc. 4, PI. Br. 13 (quoting Debtors’ Revised First Amended Disclosure Statement, In re EMAK Worldwide, Inc., et al., Case No. 2:10-42779-RN, (Bankr.C.D. Cal. April 15, 2011), 64, Ins. 17-21).
The Court does not agree that Plaintiffs interpretation of these facts justifies equitable remand. Defendant only filed for bankruptcy after Vice Chancellor Laster ordered it to pay approximately 87% of its available, unrestricted cash, to Plaintiff for his attorneys’ fees regarding the Delaware Action. As the Court discussed above, the relationship between potential indemnification pursuant to the Advancement Action, and the allowance or disallowance of claims against the estate are substantially entwined. Plaintiff is a creditor, and the outcome of its state action could substantially impact the distribution of Defendant’s estate. Thus, removal and consolidation of this matter with the bankruptcy case would ensure the most timely and inexpensive resolution of both cases.
The factors discussed in Gorse also weigh against equitable remand.
1.The court’s duty to decide matters properly before it
As addressed above, the forum selection clause is unenforceable in a core proceeding, thus it cannot form an equitable ground for abstention. As such, this factor weighs in favor of Defendant.
2.Plaintiffs choice of forum as between state and federal courts
This factor weighs in favor of equitablе remand because Plaintiff chose Delaware as the forum state.
3.Nature of the claim or claims, that is, whether purely state law matters which could be better addressed by the state court are involved
Plaintiff argues that remand is appropriate because the resolution of the Advancement Action turns squarely on the interpretation of the provisions of the Agreement under Delaware state law. The Court does not agree with Plaintiff. Although the Advancement Action solely involves an interpretation of Delaware law, the questions raised by the Agreement are neither novel nor complex. Thus, they can be adjudicated by the bankruptcy court. See In re Red Top Rentals, Inc., No. 09-5229,
4.Prejudice to involuntarily removed parties
Given that Plaintiff is already a party to the bankruptcy case because he voluntarily filed a proof of claim in the bankruptcy court, the Court cannot conclude that he would suffer any prejudice if this matter is not remanded. See Street,
5.Comity considerations
Plaintiff contends that the interests of comity favor remand because the Chancery Court has a vested interest in the adjudication of disputes arising under Delaware law. In response, Defendant argues that the relationship between the bankruptcy case and Advancement Action disfavors equitable remand, and favors transfer to California for automatic referral to the bankruptcy court. The Court agrees with Defendant. Since, as discussed above, the ultimate resolution of the Advancement Action implicates matters of bankruptcy, considerations of judicial economy and comity favor the adjudication of all matters in the bankruptcy court. See LJM2 Co-Investment, L.P. v. LJM2 Capital Mgmt., L.P., No. 02-1498,
6.Economical and/or duplicative use of judicial resources & Effect a remand decision would have on the efficient and economic administration of the estate
Plaintiff argues that remand is appropriate because the Chancery Court’s familiarity with the applicable law and underlying facts would provide the most efficient and economical resolution of this matter. In contrast, Defendant contends that transferring the Advancement Action to the bankruptcy court would prоmote the most efficient use of judicial resources, and that remand would be detrimental to the goals of bankruptcy. The Court agrees with Defendant. Plaintiff filed an adversary proceeding against Defendant in the bankruptcy court that raises the identical issues in the pending matter. As noted several times above, the extent of Defendant’s liability, if any, is dependent upon the outcome of the Advancement Action. Thus, if both the bankruptcy case and Advancement Action were resolved in the same forum, judicial efficiency would be better served. See In re Red Top Rentals, Inc.,
After weighing the above factors, the Court concludes that equitable remand is inappropriate. The Court, therefore, will deny Plaintiffs Motion to Remand.
C. Motion to Transfer
Defendant requests the Court transfer venue of this matter to the Central District of California for automatic referral to the bankruptcy court. In response, Plaintiff argues that the Agreement’s forum selec
Defendant contends transfer is warranted under 28 U.S.C. § 1404
1) plaintiffs choice of forum; 2) defendant’s forum preference; 3) whether the claim arose elsewhere; 4) the location of books and records and/or the possibility of viewing premises if applicable; 5) the convenience of the parties as indicated by their relative physical and financial condition; 6) the convenience of the witnesses, but only to the extent that the witnesses may actually be unavailable for trial in one of the fora; 7) the enforceability of the judgment; 8) practical considerations that would make the trial easy, expeditious, or inexpensive; 9) the relative administrative difficulty in the two fora resulting from congestion of the courts’ dockets; 10) the public policies of the fora; 11) the familiarity of the judge with applicable state law; and 12) the local interest in deciding local controversies at home.
Id. at *5 (citing Jumara v. State Farm Ins. Co.,
1. Plaintiffs choice of forum
Courts generally defer to a plaintiffs choice of forum as long as its legally proper. In re NWL Holdings, Inc.,
2. Defendant’s forum preference
The amount of weight given to a defendant’s choice of forum waxes and wanes according to whether the remaining
3. Whether the claim arose elsewhere
The primary dispute between the parties regarding the Advancement Action is whether Plaintiff is entitled to attorneys’ fees with respect to the California Action. Because the issue that gave rise to the Advancement Action occurred in California, the Court finds that this factor weighs in favor of transfer.
4. The location of books and records and/or the possibility of viewing premises if applicable
The location of the books and records is not a significant factor because of the ease of transporting documents. In re DHP Holdings II Corp.,
5. The convenience of the parties as indicated by their relative physical and financial condition
All parties with an interest in the outcome of the Advancement Action are in California. Plaintiff resides in Beverly Hills, and Defendant is headquartered in Santa Monica. Moreover, the added expense of litigating the dispute in Delaware might increase the expenses of the estate and lower the amount available for distribution. See In re Onco Invt. Co.,
6.The convenience of the witnesses, but only to the extent that the witnesses may actually be unavailable for trial in one of the fora
The convenience of the witnesses’ factor pertains “only to the extent that the witnesses may actually be unavailable for trial in one of the fora.” Jumara,
7. The enforceability of the judgment
There is no reason to believe that the bankruptcy court would not give full faith and credit to a judgment by this Court. This factor, therefore, is neutral. See In re NWL Holdings, Inc.,
8. Practical considerations that would make the trial easy, expeditious, or inexpensive
This factor gauges “whether it is actually easier, faster or less expensive to litigate this [proceeding] in another forum.” In re Onco Inv. Co.,
9.The relative administrative difficulty in the two fora resulting from congestion of the courts’ dockets
Although the removal of a single proceeding “will not alleviate this Court’s
10.The public policies of the fora
Defendant contends transfer is appropriate because of the strong public policy favoring centralization of bankruptcy matters. Although Plaintiff acknowledgеs this policy, it argues that a contract dispute is at the core of the pending matter. The Court disagrees. As stated above, this claim is a core proceeding. Thus, its “transfer would promote the economic and efficient administration of the estate,” id. at 275 (quoting In re Commonwealth Oil Refining Co., Inc.,
11.The familiarity of the judge with applicable state law
Plaintiff asserts that the resolution of the Advancement Action turns squarely on the interpretation of the Agreement under Delaware law. Accordingly, this Court would be more familiar with substantive Delaware law than the bankruptcy court in California. In response, Defendant states that the contract interpretation issues raised by the Advancement Action are neither novel nor complex. Therefore, the bankruptcy court is entirely capable of adjudicating the dispute. The Court disagrees. Although there is no reason to conclude that the bankruptcy court in California cannot apply Delaware law, a judge sitting in Delaware is more familiar with Delaware state law. In re Buffets Holdings, Inc.,
12.The local interest in deciding local controversies at home
Defendant does not dispute Plaintiffs contentions that the Advanсement Action is purely a Delaware controversy governed by Delaware law. Because “it is preferable for a court of the state whose substantive law controls the action to hear the case,” Sports Eye, Inc. v. Daily Racing Form, Inc.,
After weighing the above factors, the Court concludes Defendant has met its burden of establishing that transfer of the Advancement Action to the United States District Court for the Central District of California is warranted for the convenience of the parties and in the interest of justice.
III. Conclusion
For the reasons set forth above, the Court will deny Plaintiffs Motion to Remand [Doc. 3], and will grant Defendant’s Motion to Transfer [Doc. 6]. An appropriate Order will be entered.
Notes
. Plaintiff is entitled to advancement of fees with respect to “any threatened, pending or completed action ... in which [Plaintiff] was, is or will be involved as a party or otherwise by reason of the fact that [Plaintiff] is or was a director or officer of the Company, by reason of any action taken by him or of any action taken on his part while acting as director or officer of the Company.” Doc. 4, Exhibit A § 2(g)
. The parties agree that Plaintiff is entitled to indemnification with respect to the Delaware Action. Defendant, however, challenges the Agreement's applicability to the California Acton because it believes Plaintiff acted in his personal, not official capacity. Doc. 9, Def. Br. 6. The parties also seemingly dispute several associated costs with the Advancement Action. Doc. 11, PI. Br. 2.
. On May 11, 2011, the bankruptcy court denied Plaintiff's request to lift the stay. The court also declined to address Plaintiff's advancement claim until this Court determines the proper venue.
. Because the Court concludеs below that enforcement of the forum selection clause would violate public policy, it will not consider Defendant's alternative argument that the clause's enforcement is unreasonable under the circumstances of this case.
. Under 28 U.S.C. § 157(b)(2), "core proceedings include, but are not limited to”:
(A) matters concerning the administration of the estate;
(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11;
(C) counterclaims by the estate against persons filing claims against the estate;
(D) orders in respect to obtaining credit;
(E) orders to turn over property of the estate;
(F) proceedings to determine, avoid, or recover preferences;
(G) motions to terminate, annul, or modify the automatic stay;
(H) proceedings to determine, avoid, or recover fraudulent conveyances;
(I) determinations as to the dischargeability of particular debts;
(J) objections to discharges;
(K) determinations of the validity, extent, or priority of liens;
(L) confirmations of plans;
(M) orders approving the use or lease of property, including the use of cash collateral;
(N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate;
(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims; and
(P) recognition of foreign proceedings and other matters under chapter 15 of title 11.
. The Court pauses to note that neither In re Exide Technologies,
In Stern v. Marshall, the Supreme Court opined that the bankruptcy court "lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in thе process of ruling on a creditor’s proof of claim.” -U.S.-,
. This section provides: “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.” 28 U.S.C. § 1404(a).
. This section provides: "A district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.” 28 U.S.C. § 1412.