In Re Conejo Enterprises, Inc., Debtor (two Cases).benedor Corporation, Plaintiff-appellee, v. Conejo Enterprises, Inc., Defendant-appellant,ronald L. Durkin, Chapter 11 Trustee, on Behalf of Conejoenterprises, Inc., Appellant.benedor Corporation, Plaintiff-appellee, v. Conejo Enterprises, Inc., Defendant,andwestern Waste Industries, Appellant, 71 F.3d 1460 (9th Cir. 1995)

OVERVIEW

Ronald L. Durkin, the trustee in bankruptcy, and Western Waste Industries, a creditor in bankruptcy, (collectively "the appellants") appeal the district court's mandatory abstention, pursuant to 28 U.S.C. § 1334(c) (2), from a pre-petition state action brought by Benedor Corporation (Benedor) against the debtor in bankruptcy, Conejo Enterprises (Conejo), and granting Benedor relief from the automatic stay. We vacate the district court's order and remand.

FACTS AND PROCEDURAL BACKGROUND

Conejo collects and disposes of waste. In May 1993, it allegedly entered into a contract with Benedor, obligating it to deliver its "green waste" to Benedor and to pay Benedor for disposal. When Conejo refused to deliver its "green waste" pursuant to the contract, Benedor filed suit against Conejo in a California state court alleging, inter alia, a state law breach of contract claim (referred to as the "state action"), seeking $26,000,000 in damages. One year later, in May 1994, Conejo filed for Chapter 11 bankruptcy and removed the Benedor state action to the bankruptcy court.

Prior to filing a proof of claim, Benedor requested that the bankruptcy court abstain from hearing its state action and moved for relief from the automatic stay so it could pursue the action in state court. The bankruptcy court denied the motions. In declining to abstain, the bankruptcy court reasoned that, if Benedor filed a proof of claim, the state action would become a core proceeding under 28 U.S.C. § 157(b) (2) (B) (allowance or disallowance of claims), which would not be subject to mandatory abstention. Conversely, if Benedor did not file a proof of claim, the claim would be discharged in bankruptcy, and there would be no purpose in requiring the estate to litigate the claim in state court.

Benedor appealed the bankruptcy court's decision to the district court and requested an extension of the bar date for filing its proof of claim. The district court extended the bar date until September 26, 1994. On that date, the district court heard Benedor's appeal, and significantly, Benedor also filed its proof of claim.

After Benedor had filed its proof of claim, on November 16, 1994, the district court reversed the bankruptcy court's decision.¹  It held that Benedor's state action was a non-core proceeding subject to mandatory abstention under 28 U.S.C. § 1334(c) (2), and that, because mandatory abstention applied, there was cause for relief from the automatic stay. The district court remanded the case to the bankruptcy court with instructions to remand Benedor's state action to state court. The appellants timely appeal the district court's decision.

DISCUSSION

The district court has "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). It has discretionary authority to abstain from core proceedings which are proceedings arising under or in title 11. 28 U.S.C. § 1334(c) (1). However, pursuant to 28 U.S.C. § 1334(c) (2), a district court must abstain from non-core proceedings which are proceedings that are only related to a case under title 11. In this case, the district court held that it was required to exercise mandatory abstention because Benedor's state action was a non-core proceeding.

Relying on the version of Sec. 1334(c) (2) in effect when Conejo filed its petition for bankruptcy, Benedor argues we lack appellate jurisdiction in this case.²  Section 1334(c) (2) provided in part that:

Any decision to abstain or not to abstain made under this subsection is not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of this title.

28 U.S.C. § 1334(c) (2) (1994) (emphasis added).

Despite the proscriptive language of Sec. 1334(c) (2), at least one court has held that it has appellate jurisdiction to review a mandatory abstention decision. S.G. Phillips Constructors, Inc. v. City of Burlington, Vt. (In re S.G. Phillips Constructors, Inc.), 45 F.3d 702, 708 (2d Cir. 1995). In In re Phillips, the Second Circuit held that it has "limited reviewability of abstention decisions under Sec. 1334(c) (2) to ensure that the statutory requirements prerequisite to mandatory abstention are met," even though "Congress proscribed general review of mandatory abstention." Id. We adopt the Second Circuit's reasoning and hold that we have jurisdiction in this case to review whether the statutory prerequisites for mandatory abstention are met.

"We review the district court's decision on an appeal from a bankruptcy court de novo." Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir. 1990). "We apply the same standard of review to the bankruptcy court findings as does the district court: findings of fact are reviewed under the clearly erroneous standard, and conclusions of law, de novo." Id. We review the district court's grant of relief from the stay for an abuse of discretion. Id.

C. Filing a Proof of Claim and Core Jurisdiction

In order for mandatory abstention to apply, the proceeding must: 1) be based on a state law claim or cause of action, 2) lack a federal jurisdictional basis absent the bankruptcy, 3) be commenced in a state forum of appropriate jurisdiction, 4) be capable of timely adjudication, and 5) be a non-core proceeding. 28 U.S.C. § 1334(c) (2). In this case, the appellants challenge only the district court's conclusion that the action is a non-core proceeding; they do not challenge the remaining four elements. Thus, the crucial issue we must resolve in determining whether mandatory abstention applies in this case is whether Benedor's pre-petition state action, alleging a breach of contract, is a core or a non-core proceeding.³ 

The district court stated " [t]he heart of the dispute before the Court is whether the creditor's filing of a proof of claim determines when the bankruptcy court has jurisdiction over the claim." It held that " [a] cause of action is not automatically subject to the bankruptcy court's [core] jurisdiction when the creditor files a proof of claim...."⁴  However, contrary to the district court's reasoning, the Supreme Court has held that "by filing a claim against a bankruptcy estate the creditor triggers the process of 'allowance and disallowance of claims,' " Langenkamp v. Culp, 498 U.S. 42, 44, 111 S. Ct. 330, 331, 112 L. Ed. 2d 343 (1990) (citing Granfinanciera v. Nordberg, 492 U.S. 33, 58-59 and n. 14, 109 S. Ct. 2782, 2799 and n. 14, 106 L. Ed. 2d 26 (1989)), a process which is within the bankruptcy court's core jurisdiction pursuant to Sec. 157(b) (2) (B).

In Langenkamp, creditors filed proofs of claim against the bankruptcy estates, and then the trustee instituted adversary proceedings against the creditors to recover voidable preferences. 498 U.S. at 43, 111 S. Ct. at 330. Relying on the fact that the creditors had filed proofs of claim, the Court held that the creditors had triggered "the process of 'allowance and disallowance of claims,' thereby subjecting [themselves] to the bankruptcy court's equitable power." Id. at 44, 111 S. Ct. at 331. Because "a creditor's right to a jury trial on a bankruptcy trustee's preference claim depends upon whether the creditor has submitted a claim against the estate," and the creditors had submitted claims, the Court held that there was no Seventh Amendment right to a jury trial. Id. at 45, 111 S. Ct. at 331 (quotation omitted).

In this case, the district court declined to apply the rule in Langenkamp that filing a proof of claim triggers the allowance and disallowance process. It distinguished Langenkamp on the basis that Langenkamp dealt with preferential payment claims which are clearly core proceedings. See 28 U.S.C. § 157(b) (2) (F). However, as the Court in Langenkamp noted, absent the filing of a proof of claim by a creditor, "the trustee can recover allegedly preferential transfers only by filing what amounts to a legal action to recover a monetary transfer." Langenkamp, 498 U.S. at 45, 111 S. Ct. at 331. Thus, the crucial factor triggering the allowance process in Langenkamp was not that the trustee sought to avoid preferences, but that the creditors filed proofs of claim. We hold that under the rule in Langenkamp, when a creditor files a proof of claim and triggers the allowance and disallowance process, it necessarily triggers the bankruptcy court's core jurisdiction.

Our holding is in accord with the law of other circuits. The Second Circuit in In re Phillips held that the filing of a proof of claim is the "determinative factor" in resolving whether a claim is a core or non-core proceeding. 45 F.3d at 705. In that case, the creditor filed a pre-petition state action against the debtor, and the debtor alleged counterclaims against the creditor. Id. at 703. The court held that, when a creditor files a proof of claim, the claim becomes an adversary proceeding in bankruptcy for an allowance or disallowance of the claim, and the creditor necessarily becomes a party under the bankruptcy court's core jurisdiction pursuant to Sec. 157(b) (2) (B). Id. The Second Circuit relied on its previous decision in Gulf States Exploration v. Manville Forest Products Corp. (In re Manville Forest Products Corp.), 896 F.2d 1384, 1389-90 (2d Cir. 1990), which held that "when a creditor files a proof of claim, the bankruptcy court has core jurisdiction to determine that claim, even if it was a prepetition contract claim arising under state law." In re Phillips, 45 F.3d at 705; see also In re Manville Forest Products, 896 F.2d at 1389 ("By filing a proof of claim, [the creditor] submitted itself to the equitable power of the bankruptcy court to disallow its claim.").

Like the Second Circuit, the Third, Fifth and Sixth Circuits have also focused on whether the creditor has filed a proof of claim to determine whether that creditor's state court action is a core proceeding. See Atassi v. McLaren (In re McLaren), 990 F.2d 850, 853 (6th Cir. 1993) ("A suit by a third party creditor ... against the debtor (and thus the bankruptcy estate) is a core proceeding under Sec. 157(b) (2) (B)."); Southeastern Sprinkler Co., Inc. v. Meyertech Corp. (In re Meyertech Corp.), 831 F.2d 410, 417-18 (3d Cir. 1987) (holding state court action was core proceeding because creditor filed proof of claim); In re Wood, 825 F.2d at 97-98 (holding state action was non-core proceeding because creditor had not filed proof of claim).

Further, other courts have concluded that whether a creditor asserts its state action pre-petition or post-petition is not relevant for purposes of determining whether a proceeding is a core or non-core proceeding. Although the creditor in In re Meyertech filed its state action post-petition, instead of pre-petition, the Third Circuit held that:

[The creditor's] cause of action based upon state law is correctly characterized as a claim against the bankrupt estate of [the debtor]. As such, the litigation of its merits is a core proceeding under the bankruptcy judge's jurisdiction as provided by Sec. 157(b) (2) (B). The filing of the claim by [the creditor] created this action in bankruptcy court, and this is the proper forum for its adjudication. By its very nature it fits directly under the more specific definition of a core proceeding under Sec. 157(b) (2) (B).

831 F.2d at 418. As the court in In re Phillips noted, " [t]he sole fact that the [creditor's] state law claim was filed before [the] petition [for bankruptcy] has no [b]earing on whether the claim is characterized as core or non-core when a proof of claim has been filed." 45 F.3d at 705.

Based on the Langenkamp rule that a proof of claim triggers the allowance and disallowance process and in accord with other courts of appeals, we hold that the district court erred by concluding that Benedor's pre-petition state law action was a non-core proceeding. At the time the district court rendered its decision, Benedor had filed a proof of claim thereby triggering the allowance and disallowance process in the bankruptcy court and converting its claim into a core proceeding under Sec. 157(b) (2) (B). Consequently, Benedor failed to meet all the required elements of mandatory abstention.

Our holding in this case is not contrary to our decision in In re Tucson, 912 F.2d 1162 (9th Cir. 1990), relied on by the district court. In In re Tucson, the plaintiffs brought a pre-petition suit against the debtor and its shareholders alleging misappropriation of funds and a violation of a restrictive covenant. Id. at 1165. After the debtor filed its petition for bankruptcy and during the state court trial, the bankruptcy court stayed litigation of the covenant issue. Id. As one of its bases for staying the action, the bankruptcy court concluded the proceeding was a core proceeding pursuant to Sec. 157(b) (2) (B). However, we held that the proceeding was a non-core proceeding. Id. at 1168. We reasoned that the bankruptcy court's finding that the action was a core proceeding:

confuses the tasks of determining whether the [plaintiffs] have a claim, and determining what to do with it in the bankruptcy if they do. The parties dispute not whether a claim should be disallowed but instead whether the plaintiffs have a claim to bring to the bankruptcy court in the first place.

Id. We concluded that the action was a non-core proceeding and that the bankruptcy court should have exercised permissive abstention. Id. at 1169; see also id. at 1166 (reversing on permissive rather than mandatory abstention grounds).

Significantly lacking from our decision in In re Tucson was any mention of whether the plaintiffs had filed a proof of claim against the estate. We assume they did not and hold that the reasoning in In re Tucson is limited to cases in which a plaintiff has not filed a proof of claim. Absent a proof of claim, a plaintiff's state action may be subject to the bankruptcy court's non-core jurisdiction if it is a proceeding related to a case under title 11. In re Wood, 825 F.2d at 97-98 (holding plaintiff's state action is a non-core proceeding because no proof of claim was filed). However, in cases in which a creditor files a proof of claim seeking allowance of that claim, core jurisdiction arises.

Nor does our decision in Piombo Corp. v. Castlerock Properties (In re Castlerock Properties), 781 F.2d 159 (9th Cir. 1986), preclude our conclusion that Benedor's state action is a core proceeding. In In re Castlerock, the plaintiff filed a pre-petition state action against the debtor. After the debtor filed for bankruptcy, the plaintiff moved the bankruptcy court for relief from the automatic stay. The debtor incorporated state law counterclaims in its answer to the motion for relief. The bankruptcy court elected to try the debtor's counterclaims but denied the plaintiff relief from the automatic stay to proceed with its claim. In response, the plaintiff filed a proof of claim. Id. at 160. On appeal, the issue addressed by this court was "whether ... the bankruptcy court had jurisdiction to enter final judgment on [the debtor's] state law counterclaims." Id. at 161. We held that the bankruptcy court did not have jurisdiction over the debtor's counterclaims, concluding that their determination was not a core proceeding under Sec. 157(b) (2). Id. at 161-62. We rejected the debtor's argument that the plaintiff "impliedly consented to the jurisdiction of the bankruptcy court" over the debtor's counterclaims by filing a proof of claim. Id. at 162-63.

The rule in In re Castlerock, that a plaintiff does not consent to bankruptcy jurisdiction by filing a proof of claim, is limited to the unique facts of that case. The purpose behind the rule in In re Castlerock is to prevent the splitting of a cause of action. Otherwise, a trustee would be required to resolve a plaintiff's stayed claims in a plenary action while pursuing the debtor's counterclaims in bankruptcy. See id. The rule that a proof of claim does not constitute consent to the bankruptcy court's jurisdiction does not apply to garden variety cases, such as Benedor's, in which a creditor brings a state action and then files a proof of claim seeking allowance of that claim. Furthermore, we rendered our decision in In re Castlerock prior to the Supreme Court's decision in Langenkamp, which holds that filing a proof of claim triggers the core proceeding of allowance or disallowance. The Court's decision in Langenkamp precludes simplifying our decision in In re Castlerock to a broad rule that a creditor never consents to bankruptcy core jurisdiction by filing a proof of claim.

The question remains whether the Seventh Amendment entitles Benedor to a jury trial, even though its state action is properly characterized as a core proceeding. The district court indicated it held that Benedor's state action was a non-core proceeding to avoid constitutional concerns raised by denying Benedor's right to a jury trial. The appellants argue Benedor is not entitled to a jury trial.

"Neither Congress nor the courts may deprive litigants of their constitutional rights simply by labeling a cause of action 'core.' " Germain v. Connecticut Nat'l Bank, 988 F.2d 1323, 1327 (2d Cir. 1993) (citing Granfinanciera, 492 U.S. at 61, 109 S. Ct. at 2800-01). However, as previously noted, the Supreme Court has held that "by filing a claim against a bankruptcy estate the creditor triggers the process of 'allowance and disallowance of claims,' thereby subjecting [itself] to the bankruptcy court's equitable power." Langenkamp, 498 U.S. at 44, 111 S. Ct. at 331; see also Granfinanciera, 492 U.S. at 58-59, 109 S. Ct. at 2799; Katchen v. Landy, 382 U.S. 323, 336, 86 S. Ct. 467, 476, 15 L. Ed. 2d 391 (1966). As the Second Circuit has held, "the Katchen, Granfinanciera, and Langenkamp line of Supreme Court cases stands for the proposition that by filing a proof of claim a creditor forsakes its right to adjudicate before a jury any issue that bears directly on the allowance of that claim." Germain, 988 F.2d at 1329; see also In re Manville, 896 F.2d at 1389 (rejecting argument that claim must be adjudicated by Article III court because creditor filed proof of claim). " [A] creditor ... who submits to the equity jurisdiction of the bankruptcy court thereby waives any right to a jury trial for the resolution of disputes vital to the bankruptcy process, such as those involving the determination of who is a valid creditor." Germain, 988 F.2d at 1329 (emphasis added).

Because Benedor filed a proof of claim seeking allowance of its claim against Conejo, we hold it subjected itself to the equitable power of the bankruptcy court, and as a result, waived its right to a jury trial. Determination that Benedor is a valid creditor with an allowable claim is "integral to the restructuring of the debtor-creditor relationship through the bankruptcy court's equity jurisdiction, which [Benedor] has invoked by filing the claim." First Fidelity Bank v. Hooker Invs., Inc. (In re Hooker Invs., Inc.), 937 F.2d 833, 838 (2d Cir. 1991).

"A bankruptcy filing imposes an automatic stay of all litigation against the debtor." In re Tucson, 912 F.2d at 1166. "A bankruptcy court 'shall' lift the automatic stay 'for cause.' " Id. " 'Cause' has no clear definition and is determined on a case-by-case basis." Id. If a court must abstain, allowing a claim to proceed in state court, cause exists for lifting the stay as to the state court trial. Id.

The district court concluded that because Benedor's state action was subject to mandatory abstention, there was cause to grant Benedor relief from the automatic stay. Because the district court premised its grant of relief on an erroneous interpretation of law, i.e., that Benedor's state action was a non-core proceeding, we hold that the district court abused its discretion by granting relief from the stay. Cf. Northern Alaska Envtl. Ctr. v. Lujan, 961 F.2d 886, 889 (9th Cir. 1992) ("A district court abuses its discretion if it dissolves an injunction because of an erroneous interpretation of law.").

This holding does not prevent the district court from exercising permissive abstention under 28 U.S.C. § 1334(c) (1). The district court may, "in the interest of justice, or in the interest of comity," abstain from hearing a state law claim that "aris [es] under title 11 or aris [es] in or relate [s] to a case under title 11." Id.

CONCLUSION

In sum, we hold when Benedor filed a proof of claim, its state action became a core proceeding under Sec. 157(b) (2) (B). Consequently, the action was not subject to mandatory abstention and Benedor waived its Seventh Amendment right to a jury trial. We vacate the district court's order and remand for reconsideration of the motion for relief from the automatic stay in light of this opinion.

VACATED and REMANDED.

FLETCHER, Circuit Judge, Dissenting.

I respectfully dissent.

The majority holds that Benedor subjected itself to the core jurisdiction of the bankruptcy court by filing a proof of claim even though its claim is not within the traditional equitable jurisdiction of the bankruptcy court and Benedor was forced to file a proof of claim.

Had the bankruptcy court abstained as it was required to do, the appellee would not be in the Kafkaesque position the majority imposes on it today. Its contract claim is a state law claim. Absent bankruptcy, the claim could not be pursued in a federal forum. It was commenced in a state forum of appropriate jurisdiction prior to bankruptcy. It was capable of timely adjudication. It was a non-core proceeding. See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 55-56, 109 S. Ct. 2782, 2797-2798, 106 L. Ed. 2d 26 (1989) ("The plurality [in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S. Ct. 2858, 2871-72, 73 L. Ed. 2d 598 (1982) ] noted that the restructuring of debtor-creditor relations in bankruptcy 'may well be a "public right".' But the plurality also emphasized that state-law causes of action for breach of contract or warranty are paradigmatic private rights, even when asserted by an insolvent corporation in the midst of Chapter 11 reorganization proceedings."). The point further made emphatically in both cases is that there is a constitutional right to a jury trial for such claims.

The bankruptcy court was wrong not to abstain and to lift the stay on the state court proceedings. I think the majority would agree. Where our disagreement arises is over the effect of the filing of a creditor's claim. This occurred after the bankruptcy court's decision.

The district court, I submit, rightly reversed the bankruptcy court. The majority holds otherwise because Benedor filed a creditor's claim. Benedor, obviously frantic, on the last extended date to file a creditor's claim, the very day on which the district court heard Benedor's appeal, filed a claim as a defensive matter. The district court quite properly ruled that the filing did not transmute the state-law contract proceeding in state court into a core proceeding in the bankruptcy court under the circumstances of this case.

This is the sequence: Benedor's state court suit had been automatically stayed pursuant to 11 U.S.C. § 362(a). Conejo then removed Benedor's contract claim to the bankruptcy court. Benedor resisted Conejo's attempt to resolve its state law contract action in the bankruptcy court; it requested that the bankruptcy court abstain, asked that the action be remanded to state court, and sought to lift the automatic stay so that the state court could adjudicate its claim. The bankruptcy court decided against Benedor. Benedor sought an extension of the claims bar so that it could appeal. The extension was granted but because of the delay in the district court's hearing its appeal, Benedor filed a proof of claim on the last day of the extension period after receiving assurances from the district court that the filing of a proof of claim in these circumstances would not subject it to the bankruptcy court's core jurisdiction. The district court did not abuse its discretion in giving this assurance or in so holding in its subsequent ruling.

The majority need not have ventured into the treacherous and uncertain waters that led it to broad pronouncements on what are core and non-core proceedings that caused it to tread close to and possibly to overstep constitutional bounds in addition to sub silento overruling our court's precedents. It need have gone no further than to hold that the district court, exercising equitable jurisdiction as a bankruptcy court, did not abuse its discretion. Indeed, it invites the bankruptcy court on remand to exercise that very discretion.

Accordingly I dissent.