Renaissance Cosmetics, Inc. v. Development Specialists Inc.Renaissance Cosmetics, Inc. v. Development Specialists Inc.
OPINION AND ORDER
Plaintiffs Renaissance Cosmetics, Inc., et al., (collectively “RCI”) filed for chapter 11 bankruptcy in Delaware Bankruptcy Court (the “Bankruptcy Proceeding”) and subsequently filed this action against defendants in New York State Court (the “Action”). Defendants removed the Action to this Court based on federal bankruptcy jurisdiction and RCI now seeks remand. Defendants cross-move for change of venue to the Delaware District Court in contemplation of referral to the Delaware Bankruptcy Court. For the reasons below, RCI’s motion is denied and defendants’ cross-motion is granted.
I. BACKGROUND
Prior to filing for bankruptcy, RCI was a manufacturer and marketer of mass market cosmetics and related products. See Complaint (“Compl.”) ¶ 38. RCI is a holding company incorporated in Delaware that conducts its principal business operations through its operating subsidies, which are also named as plaintiffs in this Action. 1 See id. ¶ 17. Defendants include: Development Specialists, Inc. (“DSI”), a Delaware corporation that provides consulting services regarding reorganization, bankruptcy, and turnaround management; William Brandt (“Brandt”), the principal owner of DSI; Chanin Capital Partners (“Chanin”), a Delaware corporation primarily engaged in investment banking; and nine corporations and partnerships that are primarily engaged in the evaluation, acquisition and management of securities (collectively, the “Bondholders”). See id. ¶¶ 26-37. The facts alleged in the Complaint follow.
In February 1997, RCI issued a number of 11-3/4% Senior Notes (the “Notes”).
See id.
¶ 43. The Bondholders began purchasing the Notes in 1998 and soon became the majority holders of the Notes.
See id.
¶¶6, 66. In 1998, RCI was in financial difficulties and was facing potential default on the Notes.
See id.
¶ 57. The company decided on a plan for operational and financial restructuring, including a “prepackaged” chapter 11 bankruptcy filing intended to restructure the outstanding Notes, as well as RCI’s preferred and common stock.
Id.
¶¶ 48-56. To avoid default on the Notes, RCI sought to file for bankruptcy prior to August 1988, when
RCI’s management and advisors consulted with the Bondholders regarding these plans and, by Summer 1998, obtained the Bondholders’ agreement to allow for the planned restructuring, including the chapter 11 filing. See id. ¶ 6. Having secured the Bondholders’ agreement, RCI issued a press release announcing the pending bankruptcy filing. See id. ¶ 17. The press release was intended to shore up confidence among RCI’s business partners in anticipation of the upcoming holiday season. See id. Shortly after the agreement with the Bondholders was reached, and just days prior to the impending August 15 payment date for the Notes, the Bondholders demanded that RCI immediately retain DSI and Brandt to serve as RCI’s “crisis management team.” Id. ¶ 8. They also demanded that RCI allow the Bondholders’ professional advisors, particularly Chanin, complete access to RCI’s operations. See id.
As part of DSI’s seizing control of RCI, Brandt was given the position of CEO of RCI. See id. ¶ 9. Brandt then installed other DSI professionals in management positions at RCI and other RCI companies. See id. Non-DSI members of management were excluded from RCI’s day-today operations and decision-making. See id. DSI and Brandt also terminated all of RCI’s professionals, including its accountants, lawyers and financial consultants, installing new professionals with allegiance to DSI. See id. ¶ 73. Shortly after assuming control, Brandt and DSI reversed RCI’s decision to immediately file for bankruptcy, thereby destroying RCI’s restructuring plan. See id. ¶ 5.
According to the Complaint, DSI and Chanin collected multimillion dollar fees while DSI and Brandt mismanaged RCI. See id. ¶ 12. Due to this mismanagement, RCI experienced severe financial problems and was ultimately forced into bankruptcy. See id. On June 2, 1999, RCI filed the Bankruptcy Proceeding in the Delaware Bankruptcy Court. See In re Renaissance Cosmetics, Inc. et al., No. 99-2136(MFW), jointly administered with 99-2137 through 99-2144. The Bondholders filed proofs of claim against RCI’s estate seeking payment on the Notes. See 11/23/01 Letter from Michael H. Diamond, counsel for the Bondholders, to this Court (“Def. 11/23/01 Ltr.”) at 2-3 2 ; 12/6/01 Letter from Steven R. Schindler, counsel for RCI, to this Court (“Pl. 12/6/01 Ltr.”) at 2. DSI and Brandt filed proofs of claim against RCI’s estate seeking “indemnification and/or contribution for expenses (including attorneys’ fees), judgments, fines and other amounts that DSI has paid or will pay, including without limitation any such payments in connection with allegations made by Houbigant .... ” Proof of Claim, Ex. A to 12/26/01 Letter from Pamela Jarvis, attorney for DSI and Brandt, to this Court (“Def. 12/26/01 Ltr.”), at 3. Whereas RCI’s going-concern value in June 1998, when it had first contemplated restructuring, had exceeded $200 million, by June 1999 the company was forced to liquidate its assets for approximately $29 million. See Compl. ¶¶ 12, 90.
On June 1, 2001, RCI sued defendants in New York State Court, alleging that defendants caused it to sustain losses in excess of $200 million and seeking “to recover those losses for the benefit of their creditors.”
See id.
¶ 1. The Complaint includes claims against DSI, Brandt, and/or
The Complaint was served on defendants over the course of a few weeks, beginning on September 24, 2001. See Def. 11/23/01 Ltr. at 2; Notice of Removal ¶ 3. On October 24, 2001, the Bondholders and defendant Chanin removed the Action to this Court pursuant to 28 U.S.C. § 1334(b) and § 1452, which provides that a state court case related to a bankruptcy proceeding may be removed to the federal court within the same district as the pending state court action. See Notice of Removal ¶ 5; Def. 11/23/01 Ltr. at 2. DSI and Brandt consented to the removal. See Notice of Removal ¶ 2.
II. DISCUSSION
RCI moves to remand this Action pursuant to the mandatory and discretionary abstention provisions of 28 U.S.C. §§ 1334(c)(1) and (2), as well as 28 U.S.C. § 1452(b), which permits remand on equitable grounds where the basis of removal was federal bankruptcy jurisdiction (the “Remand Motion”). 3 See Pl. 11/23/01 Ltr. at 1. Defendants cross-move for transfer of venue pursuant to 28 U.S.C. § 1412, the general change of venue provision, or 28 U.S.C. § 1404(a), which permits transfer on convenience grounds, as well as 28 U.S.C. § 157(a), which provides for automatic referral of bankruptcy-related cases to the Bankruptcy Court (the “Venue Motion”). See Def. 11/23/01 Ltr. at 1; 12/21/01 Letter from Jarvis to this Court (“Def. 12/21/01 Ltr.”) at 1-3.
As an initial matter, I note that the Remand and Venue Motions raise distinct yet related issues. A party seeking to consolidate a state action with a bankruptcy proceeding pending in another judicial district must first remove the state action to the district in which that state action was filed, and then move to transfer venue to the district in which the bankruptcy case is pending.
See Renaissance Cosmetics, Inc. v. Oleg Cassini Inc.,
No. 99 Civ. 11248,
1. Mandatory Abstention
Under section 1334(c)(2), a district court is required to abstain from hearing a proceeding based on state law that is before the court based on federal bankruptcy jurisdiction if certain criteria are met. The party seeking mandatory abstention must show that: (1) the abstention motion was “timely” brought; (2) the action is based upon a state law claim; (3) the action is ‘related to’ a bankruptcy proceeding, as opposed to ‘arising under’ the Bankruptcy Code or ‘arising in’ a case under the Bankruptcy Code; (4) the sole federal jurisdiction for the action is section 1334; (5) there is an action ‘commenced’ in state court; and (6) the action is capable of being ‘timely adjudicated’ in state court.
See Channel Bell Assoc. v. W.R. Grace & Co.,
No. 91 Civ. 5485,
Defendants argue that, regardless of whether this case meets the above criteria, mandatory abstention has no application to a removed action where no parallel court proceeding exists by virtue of removal.
See
12/6/01 Letter from Jarvis to this Court (“Def. 12/6/01 Ltr.”) at 2 (citing
In re Lazar,
Even if section 1334(c) were applicable to this Action, RCI has not established one of the elements required for mandatory abstention — that this Action could be “timely adjudicated” in New York State Court.
7
RCI claims that the state court would expeditiously resolve the matter because the Action was filed in the Commercial Division of New York State Court which handles only complex commercial matters and is intended to provide “efficient, expeditious, sound and inexpensive adjudication of such cases.” PL 11/23/01 Ltr. at 2 (citing the New York State Unified Court System Web site). Although the Commercial Division is well-intentioned, the backlog and delay in that court is well-documented.
See
Def. 12/06/01 Ltr. at 2. Evidence from 1998 shows that the average contract dispute in
2. Equitable Remand
RCI also argues that the Court should remand this Action on equitable grounds. Under 28 U.S.C. § 1452(b), a district court to which a claim or cause of action has been removed may remand on “any equitable ground.”
Id.; see also In re 183 Lorraine Street Assoc.,
a. Applicable State Law
The Complaint asserts claims for: breach of fiduciary duty, malpractice, breach of contract, fraud, fraudulent concealment, corporate waste and fraudulent conveyance.
See
Compl. ¶¶ 90-163. Renaissance concedes that Delaware law will apply to the breach of fiduciary duty claims against Brandt in his capacity as an officer of DSI.
See
Pl. 12/18/01 Ltr. at 4;
see also Solow v. Stone,
Contrary to RCI’s assertion, it is unlikely that a court applying New York choice-of-law rules would find that New York law applies to the remaining tort claims.
See
Pl. 12/18/01 Ltr. at 4. “In tort cases, New York courts apply the law of the jurisdiction with the greatest interest in the dispute.”
Solow,
For choice-of-law purposes, the domicile of a corporation is the state where it maintains its principal place of business. See
Dorsey v. Yantambwe,
The locus of the tort “is the place where the injury was felt,” not where the fraudulent activity took place.
Alnwick,
Nor is there any reason to suppose that New York law will apply to RCI’s breach of contract claims. In contract cases, New York courts look to the jurisdiction with “the most significant connection to the dispute.”
Alnwick,
RCI alleges that DSI and Brandt breached their contract to provide turnaround services to RCI, and that Chanin breached its agreement to provide merger and acquisition advice to RCI.
See
Compl. ¶¶ 105-108, 145. The contracts between DSI and RCI were executed in Illinois (by DSI) and Connecticut (by RCI) while the contract between Chanin and RCI was
b.Difficulty of State Law
Even if New York law were to apply to some claims, RCI has admitted that there are no state law issues in this case that are unsettled or particularly difficult.
See
Tr. at 8 (RCI’s counsel described the claims as ones that are “adjudicated every day in state court.”). This lack of complexity “significantly undercuts the degree to which the state law factor weighs in favor of remand to [the] New York courts.”
Nemsa,
c. Comity
Comity “focuses on the state’s interest in developing its law and applying its law to its citizens.”
Renaissance Cosmetics,
d. Effect on the Bankruptcy Proceeding and Administration of RCI’s Estate
The first and sixth
Drexel
factors — effect on the efficient administration of the estate and relatedness to the Bankruptcy Proceeding — weigh heavily against remand. As RCI concedes, this Action is clearly “related to” the Bankruptcy Proceeding.
See
Pl. 11/23/01 Ltr. at 1. The crux of the Complaint is that defendants caused RCI to file for bankruptcy in June 1999 rather than August 1998, significantly depleting its assets in the interim. Moreover, the outcome of the Action will significantly effect both the size and administration of RCI’s estate, including resolution of the Bondholders’ and DSI’s proofs of claim against the estate. Thus, RCI’s claims are
e. Prejudice to Defendants
Another Drexel factor weighing against remand is the possibility of prejudice to defendants. Because all defendants have consented to removal, refusing remand would not prejudice involuntarily removed defendants. Meanwhile, remand of this action would prejudice defendants because it would moot their motion for change of venue and preclude referral to the Delaware Bankruptcy Court.
f. Right to Jury Trial
The one
Drexel
factor weighing in favor of remand is the possibility that RCI’s right to a jury trial might be compromised. Pursuant to 28 U.S.C. § 157(e), a bankruptcy court may only conduct a jury trial if both parties expressly consent and a special designation of jurisdiction is granted by the district court. Thus, to the extent that the right to a jury trial may apply to this action, RCI would not be entitled to a jury trial as of right in the Bankruptcy Court. However, because every other
Drexel
factor weighs against remand, the jury factor alone does not tip the balance in favor of remand.
See Nemsa,
3. Discretionary Abstention
RCI also moves for discretionary abstention pursuant to 28 U.S.C. § 1334(c)(1). Section 1334(c)(1) states:
Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
As noted above, courts in the Second Circuit have generally held that abstention under 28 U.S.C. § 1334(c) does not apply to removed actions.
See Nemsa,
B. The Venue Motion
Defendants move to transfer this action to the District Court of Delaware pursuant to 28 U.S.C. § 1412. That 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. Courts in this district have generally held that section 1412 only applies to “core” proceedings, not to proceedings that are merely “related to” bankruptcy proceedings.
See Nemsa,
There is no need here to determine whether this action is core or non-core because transfer to the Delaware District Court is appropriate under 28 U.S.C. § 1404(a), which may be applied to a non-core proceeding. See id. at *10. Section 1404(a) states:
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). The factors relevant to the consideration of a section 1404(a) transfer are:
(1) the convenience of the witnesses; (2) the location of relevant documents and the relative ease of access to sources of proof; (3) the convenience of the parties; (4) the locus of the operative facts; (5) the availability of process to compel attendance of unwilling witnesses; (6) the relative means of the parties; (7) a forum’s familiarity with the governing law; (8) the weight accorded a plaintiffs choice of forum; and (9) trial efficiency and the interests of justice based on the totality of the circumstances. 12
See Everest Capital,
Normally, a plaintiffs choice of forum is entitled to substantial weight and should not be disturbed unless the balance of the factors weighs strongly in favor of transfer.
See Berman v. Informix Corp.,
The fourth and seventh factors do not favor any particular forum. The facts giving rise to RCI’s causes of action took place in various jurisdictions, and it is not
The convenience of the parties and witnesses, and ease of access to sources of proof, support transfer to Delaware. As RCI admits, none of the parties are physically located in New York.
See
Pl. 12/18/01 Ltr. at 4. Meanwhile, RCI has filed for bankruptcy in Delaware and is currently litigating there. RCI insists that a number of non-party witnesses are located in New York.
See id.
at 3. In particular, it points to the investment bankers, consultants and attorneys who were involved in the events giving rise to this case.
See id.
However, the deposition of a non-party witness is generally conducted where that non-party is located. Moreover, these parties are large, national professional firms who would not be seriously inconvenienced if required to travel to Delaware.
See Intel Corp. v. Broadcom Corp.,
Trial efficiency also favors Delaware. Because RCI’s bankruptcy proceeding has been pending in Delaware for two years, the Delaware Bankruptcy court is intimately familiar with the parties and the factual history of this case. In contrast, the New York court has done nothing with respect to this case, and there is no evidence that the case would be more timely adjudicated in New York. 13 See supra Part II.A.1.
Finally, transfer is in the interests of justice. In 1999, RCI sought the Delaware Bankruptcy court’s approval of DCI and Brandt as its turnaround profession-
While some deference is due to RCI’s choice of forum, that deference is diminished in the instant case because RCI chose a forum other than its home forum and there is no evidence that this choice was motivated by “legitimate reasons.”
Iragorri,
III. CONCLUSION
For the aforementioned reasons, RCI’s motion to remand is denied. Because defendants have met their burden under 28 U.S.C. § 1404(a), their motion to transfer venue to the Delaware District Court is granted.
SO ORDERED:
Notes
. All of the plaintiffs are Delaware corporations. See Compl. ¶¶ 17-25. The remaining plaintiffs are subsidiaries or business partners of RCI and debtors in the Bankruptcy Proceeding. Id.
. Counsel for the Bondholders was permitted to address the Court on behalf of all defendants. See Def. 11/23/01 Ltr. at 1.
. RCI does not appear to dispute this Court’s jurisdiction over the Action for it explicitly states that this "is a matter 'related to’ a case under title 11.” 11/23/01 Letter from Schindler to the Court ("Pl. 11/23/01 Ltr.”) at 1.
. Renaissance cites a case from the Eastern District of Texas which noted that "it is the majority opinion that abstention does apply to cases removed under § 1452.” 12/18/01 Letter from Schindler to this Court ("Pl. 12/18 Ltr. at 1”) (quoting
In re United States Brass Corp.,
. RCI claims that in
In re Cathedral of the Incarnation in Diocese of Long Island,
. Courts from other circuits have also held that abstention under 28 U.S.C. § 1334(c) should not be employed in a removed action.
See, e.g., In re Lazar,
. RCI clearly meets the first, second, and fifth requirements of section 1334(c)(2). Defendants were aware that RCI sought to remand the matter within a month of its removal and before this Court or the New York State Court had taken any action,
see
Def. 11/23/01 Ltr.; there is no federal law at issue in the Complaint,
see
Compl.; and this action was ‘commenced’ in state court,
see Channel Bell,
Defendants contend that RCI has not met the third requirement because this case is a "core” proceeding, rather than a "non-core” “related to” proceeding.
See
Def. 11/23/01 Ltr. at 2-3;
see also In re Howe,
. At a December 11th conference before this Court, counsel for RCI initially asserted that Renaissance had its principal place of business in New York. See Transcript of 10/11/01 Conference ("Tr.”) at 12. Defendants’ counsel pointed out that this statement was incorrect. Id. at 16-17. Defendants’ counsel explained that RCI's principal place of business was in Connecticut and that, although "there was a time when [RCI] ‘had executive offices' ” in New York, those offices were simply a couple of conference rooms used by RCI marketing staff when they were in New York. Id. (quoting Complaint). Plaintiff's counsel did not contest this assertion.
. At the October 11th Conference, counsel for the Bondholders stated that defendant TCW has its principal place of business in California and he was not sure if any other Bondholder had an office or principal place of business in New York. See Tr. at 17-18. The Complaint only states that one defendant, Chanin, has an office in New York and RCI has offered no evidence that any other defendant has an office, let alone its principal place of business, in New York.
. Renaissance maintains that, if New York law does not apply, then Connecticut law will apply. See Pl. 12/18/01 Ltr. at 4.
. Plaintiff argues that there is little relation between this Action and the Bankruptcy Proceeding because the allegations are based on activities that "took place behind closed doors,” not "dealings that took place in front of the Bankruptcy Court in Delaware.” Pl. 11/23/01 Ltr. at 2-3. This argument misinterprets the "relatedness” inquiry. The question is not whether the Bankruptcy Court has personal knowledge of the facts giving rise to the removed action; it is whether the issues presented in this action are central to, or interrelated with, the Bankruptcy Proceeding.
. A
court should consider the relative means of the parties "[w]here a disparity exists between the means of the parties, in determining venue.”
Everest Capital Ltd. v. Everest Funds Mgmt. LLC,
. RCI argues that it would be more efficient to litigate this case in New York because it is related to Houbigant, Inc. et al. v. Dev. Specialists, Inc. et al., 01 Civ. 7888, currently before Judge Laura Taylor Swain. See Pl. 12/19/01 Ltr. at 4-5. In that case, Houbigant, one of RCI's creditors, seeks to recover damages for, inter alia, the particularized injury it suffered as a result of Brandt's alleged breach of fiduciaiy duty he owed RCI and its creditors. While Houbigant's allegations arise out of many of the same facts as this case, it involves different plaintiffs and, with the exception of Brandt and DSI, different defendants. Discovery has not yet commenced in Houbigant, but the parties have fully briefed the defendants' dispositive motions. See Pl. 12/18/01 Ltr. at 5; Def. 12/21/01 Ltr. at 1 n. 1. If some of the claims survive, defendants may seek to transfer that case to Delaware, but that does not mitigate against transfer of this case.