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ii. Ocwen Loan Servicing, LLC v. AIG Federal Savings Bank (In re Laddusire), 494 B.R. 383 (Bankr. W.D. Wis. 2013)
Issue: Whether a debtor's un-pleaded counterclaims in a removed foreclosure action made such action a core proceeding. Whether permissive abstention was warranted for a bank's foreclosure action on the debtor's home.
Holding: The bankruptcy court held that the debtor's counterclaims against the mortgage holder, which the debtor had yet to assert, were not proceedings at all and could not constitute a core proceeding. The court also held that the removed foreclosure proceeding was not a core proceeding because it did not invoke a substantive right created by the Bankruptcy Code and because it could exist outside of bankruptcy. The foreclosure action on the debtor's real property was removed to the federal court, where the secured creditor moved for abstention, remand, or dismissal. The debtor argued that the foreclosure proceeding was a core proceeding, preventing mandatory abstention. The debtor's argument was based on the counterclaims she intended to bring against the mortgage holder for, among others, a determination of the priority and validity of the lien and that would otherwise "adjust the debtor-creditor relationship." Because the un- pleaded counterclaims did not constitute a proceeding at all, the un-pleaded counterclaims were all state-law claims, and the foreclosure action could exist outside of bankruptcy, the court did not find the proceeding was a core proceeding so as to prevent mandatory abstention. However, as a matter of efficiency, the court decided the case on permissive abstention, holding that permissive abstention was warranted. The court used the following factors for permissive abstention: "1) the effect or lack thereof on the efficient administration of the estate if a Court recommends abstention; 2) the extent to which state law issues predominate over bankruptcy issues; 3) the difficulty or unsettled nature of applicable law; 4) the presence of a related proceeding commenced in state court or other nonbankruptcy court; 5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334; 6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case; 7) the substance rather than the form of an asserted 'core' proceeding; 8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court; 9) the burden of [the bankruptcy court's] docket; 10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties; 11) the existence of a right to a jury trial; 12) the presence in the proceeding of nondebtor parties." The court found that unsettled issues of state law are "always significant." Additionally, when there is "related to" removal, "it is generally appropriate" to remand. In analyzing the factors, the court found, among others, that there would be delay in re-litigating issues that had already progressed in state court; the state court action had been going on for over four years and should not be interrupted; further delay may occur if the parties did not consent to the bankruptcy court entering a final judgment; and the timing indicated that the debtor was at least partially motivated by desire to delay the foreclosure. The court concluded that the factors "weigh heavily in favor of permissive abstention and remand."
©2014 William L. Norton III
