Chapter 11 Bankruptcy Procedure and the Recent Case of Dondero v. Alvarez & Marsal CRF Management, LLC

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Gregory W. Mitchell

Gregory W. Mitchell

Attorney

469.998.8486
gmitchell@freemanlaw.com

Gregory Mitchell joins Freeman Law to lead its bankruptcy practice. Mr. Mitchell is a native of the Dallas area, graduating from Southern Methodist University with a Bachelor’s Degree in Economics in 1991 and with his J.D. in 1994. In 1995, he obtained an LL.M. in Taxation from New York University. Mr. Mitchell currently directs the SMU Dedman School of Law’s federal taxpayer clinic. Mr. Mitchell’s background in tax makes him a natural fit for Freeman Law.

Prior to joining Freeman Law, Mr. Mitchell was the managing partner of The Mitchell Law Firm, L.P., a small firm he started in 2004, where he ran a diverse practice primarily focused on bankruptcy, tax and related litigation matters.

Prior to starting his own firm, Mr. Mitchell served as a Partner and General Counsel with Tax Automation, L.P., a national tax consulting firm. Mr. Mitchell was previously the National Director of Tax Technology at Ryan & Company, a national tax consulting practice, as well as a Senior Manager with KPMG, a “Big Four” accounting firm.

The recent case of Dondero v. Alvarez & Marsal CRF Management, LLC et al, Adv. Proc. 21-03051 (Bankr. N.D. – Tex., January 4, 2022) illustrates Chapter 11 procedural issues.

Judge Stacey G.C. Jernigan

Introduction

Civil procedural issues are not the sexiest of topics, and probably for that reason, I rarely see blog posts focusing on pure procedural matters.  The Bankruptcy Court out of the Northern District of Texas was recently presented with an interesting (as interesting as civil procedure matters can get) scenario involving the interplay between removal/remand issues to and from state court and federal court (in this case, bankruptcy court) and state law pre-suit discovery tools (in this case Texas Rule of Civil Procedure 202, which authorizes certain pre-suit discovery).

In this case, a state court proceeding (the “Rule 202 Proceeding”) was commenced by James Dondero (“Dondero”)—the founder and former chief executive officer (“CEO”) of Highland Capital Management, L.P. (“Highland” or “the Reorganized Debtor”).  It was commenced against Alvarez & Marsal CRF Management, LLC (“Alvarez”) and Farallon Capital Management LLC (“Farallon”).  Dondero sought discovery from Alvarez and Farallon regarding certain claims-trading that occurred shortly after a Chapter 11 plan was confirmed in the Highland bankruptcy case.  Alvarez and Farallon removed the Rule 202 Proceeding to bankruptcy court pursuant to 28 U.S.C. §1452(a)—asserting that it was “related to” the Highland bankruptcy case, as contemplated by 28 U.S.C. §1334(b).

Following removal to bankruptcy court, Dondero filed a motion to remand the case back to state court (the “Motion to Remand”), arguing that a pre-suit discovery mechanism under Rule 202 is not a “claim” or “cause of action” in a “civil action” that is subject to removal under 28 U.S.C. §1452(a).  Specifically, he urged that there is no live case or controversy yet.  The Motion to Remand is the subject of the Court’s opinion.

Ultimately, the bankruptcy court determined that, in spite of the apparent relatedness to the Highland bankruptcy case, the Rule 202 Proceeding was not removable and the motion to remand was granted.

Relevant Facts

Highland filed a voluntary Chapter 11 bankruptcy petition on October 16, 2019.  The bankruptcy was extremely contentious, but on February 22, 2021, the Bankruptcy Court confirmed a Chapter 11 plan (over the objection of Dondero, who subsequently appealed the confirmation ruling).  The plan was supported by the Creditors’ Committee (“CC”).

After confirmation, but prior to the effective date of the plan, certain CC members sold their proofs of claim that they filed in the bankruptcy case.  Multiple claims were transferred to an entity known as Muck Holdings, LLC (“Muck Holdings”).  Other claims were transferred to an entity known as Jessup Holdings, LLC (“Jessup Holdings”).  As it turns out, Farallon is an investment fund, which is affiliated with Muck Holdings.  Dondero further had reason to believe that Jessup Holdings is related to Farallon.

In the Rule 202 Proceeding filed by Dondero, he sought an order directing corporate representatives of Farallon and Alvarez to sit for depositions and to produce certain documents. Dondero sought to investigate the sale of the proofs of claim effected by Alvarez and Farallon to Jessup Holdings and Muck Holdings.

The Rule 202 Proceeding was removed by the Defendants pursuant to 28 U.S.C. §1452, and Dondero promptly filed a motion for remand back to the state court.  Analyzing the motion to remand, pursuant to relevant case law, requires a two-part analysis, which the Bankruptcy Court undertook, as follows:

  1. First, the court had to determine whether a proceeding under Rule 202 is a “claim” or “cause of action” in a “civil action,” as contemplated by 28 U.S.C. § 1452.
  2. Then, assuming it is, it then must determine whether the court had subject matter jurisdiction over the Rule 202 Proceeding as either “related to,” “arising in,” or “arising under” the Bankruptcy Code pursuant to 28 U.S.C. § 1334(b).

Ultimately, the Bankruptcy Court determined that the answer to both questions required that the Motion to Remand be granted.  With respect to the first component of the analysis, the Bankruptcy Court held that the Rule 202 Proceeding had not sufficiently evolved to be a “claim” or “cause of action” in a “civil action.” Similarly, it found that the proceeding was also not choate enough for bankruptcy subject matter jurisdiction to exist.

Removal Pursuant to 28 U.S.C. §1452

Turning first to the characterization of the Rule 202 Proceeding, the Court first looked at the language under 28 U.S.C. §1452, which reads as follows:

A party may remove any claim or cause of action in a civil action other than a proceeding before the United States Tax Court or a civil action by a governmental unit to enforce such governmental unit’s police or regulatory power, to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title. 28 U.S.C. § 1452(a) (emphasis provided in original).

Thus, to properly effectuate removal under this statute, there must be a “claim” or “cause of action” in a “civil action” over which there would be bankruptcy subject matter jurisdiction, pursuant to 28 U.S.C. § 1334—which, in turn, provides that there will be bankruptcy subject matter jurisdiction over “civil proceedings arising under title 11 or arising in or related to a case under title 11.” 28 U.S.C. § 1334(b).

Analyzing the nature of a Rule 202 proceeding, the Court noted that Rule 202 is a discovery tool that was added to the Texas Rules of Civil Procedure in 1999.  Citing to virtually the only case that had considered a similar issue in the bankruptcy context – In re Enron Corporation Securities, MDL-1446, Civil Action No. H-01-3624 Consolidated Cases, Civil Action No. H-02-3193, DE # 1106 (S.D. Tex. Oct. 23, 2002) – the Court noted that, in that case, the federal District Court stated that “[b]oth Texas and federal district courts have held that a Rule 202 request is an ancillary proceeding, not a separate civil suit, and not appropriate for removal.” Id. at p. 3 (citing numerous cases involving removal pursuant to 28 U.S.C. §§ 1441 and 1442).  Although the District Court’s comment was dicta, it went on to comment that:

[B]ecause Petitioners seek pre-suit depositions only to determine whether they may have any claims against Respondents prior to consideration of whether to file a civil action, this Court finds that this proceeding is too inchoate, premature, and attenuated to “conceivably affect” Enron Corporation’s bankruptcy and thus provide the court with “related to” jurisdiction, although if it leads to a civil suit that may be ‘related to’ Enron’s bankruptcy, the issue may be raised in that action.” Id. at p. 5.

Following a thorough analysis of virtually every opinion addressing the removal of a Rule 202 proceeding (primarily emanating from District Courts), the Bankruptcy Court ultimately determined that “[t]he vast majority of the reported case law dealing with motions to remand Rule 202 petitions holds that removal of these petitions to federal courts is not proper and, thus, remand is required.”  However, it left open the possibility that, if the Rule 202 Proceeding led to an actual civil suit, that suit may ultimately be sufficiently “related to” the Highland confirmed plan to warrant reconsideration of removal at that time.

Insight

As noted at the outset, procedural rulings are not often the focus of strategical planning, but an understanding of the various rules, including what courts can consider what matters, can be a valuable resource in overall planning.  It is further interesting to note that a court’s decision to remand (or not) is not reviewable pursuant to 28 U.S.C. §1452(b).

 

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