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SWN Properties Inc. v. Androla

United States District Court, W.D. Kentucky, Louisville

October 10, 2017




         This matter is before the Court on Plaintiff's Motion to Strike and Substitute Defendants' Answer to Complaint and Counterclaim. [R. 6.] Defendants responded, [R. 11.], and Plaintiff replied, [R. 13.] Also before the Court is Defendants' Motion to Refer this case to the United States Bankruptcy Court for the Western District of Kentucky. [R. 14.] Plaintiffs responded, [R. 16.], and Defendants replied, [R. 17.]. These matters are now ripe for adjudication. For the following reasons, Defendants' Motion to Refer to Bankruptcy Court, [R.14], is GRANTED, and Plaintiff's Motion to Strike, [R. 6], is REFERRED to the Bankruptcy Court for further proceedings.


         All the issues in this case originate from the sale of a family business. On June 30, 2013, Plaintiff, SWM Properties, Inc. (“SWM”), entered into an asset purchase agreement with Defendant, Service Welding & Machine Company, LLC (“Debtor”), in which SWM sold the assets that comprised its metal storage tank manufacturing business to Debtor. [See R. 6-2 (Asset Purchase Agreement); R. 5 at 4, ¶24 (Defendants' Answer and Counterclaim); R. 6-1 at 3-4 (Plaintiff's Motion to Strike).] On July 1, 2013, a payment of $700, 000.00 for the assets was financed through a five year promissory note. [See R. 6-8 at 8 (Promissory Note); R. 6-2 at 10, §1.3(ii).] The note was secured by the guaranty of “Buyer and its members, ” Jeffrey Androla, Douglas Voet, and James St. Clair (“Defendants”). [Id.] On that same day, the parties also entered a lease agreement for the land on which the business operated, [See R. 6-4 (Lease Agreement)], and a consulting agreement in which SWM promised to guide the transition of the business, [See R. 6-3 (Consulting Agreement)].

         The parties assert conflicting reasons for why the business began to fail after Debtor took control. SWM alleges that concern over the struggling business motivated it to send a letter to Debtor on September 23, 2015, notifying them of SWM's desire to terminate the lease at the end of its term, July 1, 2016. [See R. 6-7 (Letter to Gregory Compton).] Around that same time, SWM sold part of the land upon which the business was located. [R. 5 at 5, ¶ 30.] Defendants claim that sale was executed purposely at their detriment. [R. 5 at 5, ¶ 34.] On February 17, 2017, Debtor filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Western District of Kentucky (“the Bankruptcy Court”), [See In re Service Welding & Machine Co., No. 17-30485 (Bankr. W.D. Ky. Feb., 17, 2017)], which imposed an automatic stay that prevented SWM from pursuing Debtor on the promissory note. [See R. 1-1 at 4, ¶ 11-12 (Plaintiff Complaint); R. 5 at 5, ¶ 35.] In an effort to compel payment, SWM sued the guarantors, Androla, St. Clair, and Voet, in Jefferson County Circuit Court, demanding performance of the promissory note. [R.1-1 at 5.]

         On April 28, 2017, Defendants removed the case to this Court and filed an Adversary Proceeding against SWM in the Bankruptcy Court. [See R. 1 (Notice of Removal); In re Service Welding & Machine Co., A.P. No. 17-03022 (Bankr. W.D. Ky. Apr. 28, 2017).] The following month, Defendants filed an Answer and Counterclaim, [R. 5], which SWM moves to strike, [R. 6]. On August 23, 2017, Defendants moved to refer this case to the Bankruptcy Court in order to consolidate it with the pending actions there. [R. 14.]

         If the Court grants Defendants' Motion to Refer, SWM's Motion to Strike will be referred to the Bankruptcy Court with the case. Therefore, the Court will address the Motion to Refer first and discuss the Motion to Strike as needed thereafter.


         A. Defendants' Motion to Refer

         Defendants seek referral based upon the provisions of 28 U.S.C. § 157(a), which sets forth procedures for district courts to refer cases to the bankruptcy court. 28 U.S.C. § 157(a). However, a district court cannot refer a case to the bankruptcy court unless it has bankruptcy jurisdiction under 28 U.S.C. § 1334(b). See Sanders Confectionary Products, Inc., 973 F.2d 474, 482-83 (6th Cir. 1992) (“If a district court has bankruptcy jurisdiction over a case, 28 U.S.C. § 157(a) allows the court to refer the case to the bankruptcy court.”) (citation omitted). Thus, the main issue before the Court is whether it has bankruptcy jurisdiction under Section 1334(b) required to refer the case to the Bankruptcy Court.

         B. Jurisdiction Under 28 U.S.C. § 1334(b)

         Under Section 1334(b), “the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). Since these categories operate conjunctively to define the scope of jurisdiction, the Sixth Circuit has stated that “it is necessary only to determine whether a matter is at least ‘related to' the bankruptcy.” Michigan Emp't Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1141 (6th Cir. 1991). The Sixth Circuit has adopted the expansive definition of a “related to” proceeding first articulated by the Third Circuit in Pacor, Inc. v. Higgins (In re Pacor). See In re Wolverine Radio Co., 930 F.2d at 1142 (adopting In re Pacor, 743 F.2d 984 (3d Cir. 1984), overruled on other grounds by Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 124-25 (1995)). Under this definition, a proceeding is “related to” a bankruptcy action if “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” In re Pacor, 743 F.2d at 994 (emphasis omitted). “An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” Robinson v. Michigan Consol. Gas Co. Inc., 918 F.2d 579, 583 (6th Cir. 1990) (quoting In re Pacor, 743 F.2d at 994); see also In re Dow Corning Corp., 86 F.3d 482, 489 (6th Cir. 1996) (emphasizing that the impact on the debtor or bankruptcy estate only needs to be “conceivable”). This is a “broad” basis for jurisdiction that “empowers courts to deal efficiently and effectively with the entire universe of matters connected with bankruptcy estates.” McKinstry v. Sergent, 442 B.R. 567, 573 (quoting Kelley v. Nodine (In re Salem Mortg. Co.), 783 F.2d 626, 633-34 (6th Cir.1986) and Boston Reg'l Med. Ctr., Inc. v. Reynolds (In re Boston Reg'l Med. Ctr., Inc.), 410 F.3d 100, 105 (1st Cir.2005)) (internal quotations omitted). However, the Sixth Circuit has permitted one caveat to the test stating that “situations may arise where an extremely tenuous connection to the estate would not satisfy the jurisdictional requirement . . ..” In re Salem Mortgage Co., 783 F.2d at 634.

         The Court finds that the instant case is “related to” Debtor's action against SWM Properties in the Bankruptcy Court because the outcome could conceivably impact the handling and administration of the bankruptcy estate. Specific to the facts of this case, a holding of liability against the defendant guarantors could reduce SWM's claim against the assets of the bankruptcy estate. See In re Showcase Natural Casing Co., Inc., 54 B.R. 142, 144 (Bankr. S.D. Ohio 1985); In re Red Top Rentals, Inc., 2010 WL 2737182, at *3 (Bankr. E.D. Mich. 2010) (holding that there was “related to” jurisdiction because an action “to enforce the guaranty ‘could conceivably' affect the Debtor's estate.”).[1] In In re Showcase, the plaintiff sued the defendants on their guaranty while the debtor had an ongoing bankruptcy case. 54 B.R. at 143. After acknowledging the general order of reference from the district court, the bankruptcy court looked to the newly adopted Section 1334 and had “no doubt that the present suit [was] within the jurisdiction conferred by Congress on the district court in bankruptcy matters.” Id. at 144. The court reasoned that “the requisite relationship [was] to be found because if there [was] a holding of liability against defendants on their guaranty, this [would] necessarily reduce plaintiff's claim against the debtor.” Id.

         Similarly, in the case at hand, SWM sues the president of Service Welding, Androla, as well as two other “managers” of Service Welding, St. Clair and Voet, over the personal guaranty of payment they signed for the debts owed by Service Welding to SWM. [R. 6-8 at 8.][2]Following the reasoning of In re Showcase, a recovery against Androla, St. Clair, and Voet on their guaranty could reduce SWM's claim against the debtor, Service ...

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