Dondero vs. Alvarez & Marsal CRF Management, LLC et al, Adv. proc. 21-03051 (Bankr. ND – Texas, January 4, 2022)
Judge Stacey GC Jernigan
Civil procedure matters aren’t the sexiest topics, and probably for that reason, I rarely see blog posts focused on purely procedural matters. The Northern District of Texas Bankruptcy Court was recently presented with an interesting scenario (as interesting as civil procedural matters get) involving the interplay between removal/removal issues to and from the bankruptcy court. state and federal court (in this case, bankruptcy court) and state pre-trial discovery tools (in this case, Texas Rule of Civil Procedure 202, which permits certain pre-trial discovery). legal action).
In this case, a proceeding in state court (the “Procedure under Rule 202”) was started by James Dondero (“Dondero”) – the founder and former CEO (“CEO”) of Highland Capital Management, LP (“mountains” Where “the reorganized debtor”). It was brought against Alvarez & Marsal CRF Management, LLC (“Alvarez”) and Farallon Capital Management LLC (“farallon”). Dondero asked Alvarez and Farallon to be told about certain debt swaps that occurred shortly after a Chapter 11 plan was confirmed in the Highland bankruptcy case. Alvarez and Farallon removed the Rule 202 proceeding in bankruptcy court under 28 USC §1452(a) – claiming it was “related” to Highland’s bankruptcy case, as provided for in 28 USC § 1334(b).
Following the remand to bankruptcy court, Dondero filed a motion to have the case remanded to state court (the “Motion for referral“), arguing that a pretrial discovery mechanism under Rule 202 is not a “claim” or “cause of action” in a “civil action” capable of being withdrawn under 28 USC §1452(a). Specifically, he insisted that there was no pending case or controversy yet. The motion to dismiss is the subject of the Court’s opinion.
Ultimately, the bankruptcy court determined that, despite the apparent connection to the Highland bankruptcy case, the Rule 202 proceeding was not removable and the motion to dismiss was granted.
Highland filed for voluntary Chapter 11 bankruptcy on October 16, 2019. The bankruptcy was extremely controversial, but on February 22, 2021, the bankruptcy court upheld a Chapter 11 plan (over Dondero’s objection , who later appealed the confirmation decision). The plan was supported by the creditors’ committee (“CC”).
After confirmation, but prior to the plan’s effective date, some CC members sold their proofs of claim that they had filed in the bankruptcy case. Several claims have been transferred to an entity known as Muck Holdings, LLC (“Manure fund”). Other receivables were transferred to an entity known as Jessup Holdings, LLC (“Jessup Holdings”). It turns out that Farallon is an investment fund affiliated with Muck Holdings. Dondero further had reason to believe that Jessup Holdings was related to Farallon.
In the Rule 202 proceeding filed by Dondero, he sought an order directing representatives of Farallon and Alvarez’s businesses to sit for depositions and produce certain documents. Dondero sought to investigate the sale of proofs of claim made by Alvarez and Farallon to Jessup Holdings and Muck Holdings.
The Rule 202 proceeding was withdrawn by the defendants pursuant to 28 USC §1452, and Dondero promptly filed a motion to dismiss in state court. The analysis of the motion for dismissal, in accordance with the relevant case law, requires a two-part analysis, which the bankruptcy court undertook as follows:
- First, the court had to determine whether a proceeding under Rule 202 is a “claim” or a “cause of action” in a “civil action,” as provided in 28 USC § 1452.
- Then, assuming that is the case, it must then determine whether the court had jurisdiction over the matter over the proceeding under rule 202 as “related to”, “arising from” or “arising from” the Code of bankruptcy pursuant to 28 USC § 1334(b).
Ultimately, the bankruptcy court determined that the answer to both questions required that the motion for dismissal be granted. With respect to the first element of the analysis, the bankruptcy court held that the proceeding under Rule 202 had not evolved sufficiently to be a “claim” or a “cause of action” in a “civil action”. Likewise, he concluded that the procedure was also not sufficiently complicated for there to be jurisdiction in bankruptcy.
Withdrawal pursuant to 28 USC §1452
Turning first to the characterization of the proceedings under Rule 202, the Court first considered the wording of 28 U.S.C. §1452, which reads as follows:
A party may withdraw all Claim Where cause of action in one civil action other than a proceeding in the United States Tax Court or a civil action brought by a governmental unit to enforce the police or regulatory authority of that governmental unit, in the district court for the district where such civil action is pending , if that district court has jurisdiction of this claim or cause of action under section 1334 of this title. 28 USC § 1452(a) (emphasis in original).
Thus, to properly effect withdrawal under this statute, there must be a “claim” or “cause of action” in a “civil action” over which there would be jurisdiction in bankruptcy, pursuant to 28 U.S.C. § 1334, which, in turn, provides that there shall be jurisdiction in bankruptcy over “civil proceedings arising under Title 11 or arising out of or relating to a matter referred to in Title 11”. 28 USC § 1334(b).
Analyzing the nature of a proceeding under Rule 202, the Court noted that Rule 202 is a discovery tool that was added to the Texas Civil Procedure Rules in 1999. Citing virtually the only case that had considered a similar question in the context of bankruptcy – In re Enron Corporation SecuritiesMDL-1446, Civil Action No. H-01-3624 Consolidated Cases, Civil Action No. H-02-3193, DE # 1106 (SD Tex. Oct. 23, 2002) – the Court noted that in this case, the federal district court said that “[b]Both the Texas and federal district courts have ruled that a Rule 202 claim is an ancillary proceeding, not a separate civil suit, and not appropriate for dismissal. ID. to the P. 3 (citing numerous dismissal cases under 28 USC §§ 1441 and 1442). Although the District Court’s comment was dictatedhe went on to comment that:
[B]Because the plaintiffs seek pre-trial depositions solely to determine whether they may have claims against the respondents before considering whether or not to bring a civil action, this Court finds that this procedure is too incomplete, premature and attenuated to “conceivably affect” Enron Corporation bankruptcy and thus confers on the court jurisdiction “related to”, although if this leads to a civil suit which may be “related to” Enron’s bankruptcy, the question may be raised in this action. Identifier. to the P. 5.
After careful analysis of virtually all of the notices regarding termination of a Rule 202 proceeding (primarily from the district courts), the bankruptcy court ultimately determined that “[t]The vast majority of reported case law dealing with motions to dismiss motions under Rule 202 holds that dismissal of such motions to federal courts is not appropriate and, therefore, a dismissal is necessary. However, he left open the possibility that, if the proceedings under Rule 202 did lead to an actual civil lawsuit, that lawsuit might ultimately be sufficiently “tied” to Highland’s confirmed plan to warrant reconsideration of the dismissal at this time. the.
As noted at the outset, procedural decisions are not often the focus of strategic planning, but an understanding of the various rules, including what the courts may consider important, can be a valuable resource in overall planning. It is further worth noting that a court’s decision to dismiss (or not) is not reviewable under 28 USC §1452(b).