Can SCO remove the Novell case to bankruptcy court?

El Corton

September 17, 2007

I'm temporarily rising from the dead to address the question of whether SCO can, by right, remove the Novell case from Utah district court to the Delaware bankruptcy court, as a way of escaping Kimball's jurisdiction. The short answer is no, as far as I can tell, but there may be other complications besides mere delay that SCO can create by filing for bankruptcy.

"Removal" means transferring a case from one court to another as a matter of right, i.e., without the need for either court's permission. After a notice of removal is filed by either party, the other party may move the court to which the case has been removed to remand it back to the original court. That is to say, the burden of proof is on the party opposing removal, and the receiving court has jurisdiction to decide. Both the IBM and Novell cases were removed from state to federal court by the respective defendants. In the IBM case, SCO didn't oppose the removal. In the Novell case it did, and the denial of remand by Kimball was the beginning of SCO's long descent into judicial hell.

The authority to remove a civil action to the bankruptcy unit of a district court comes from 28 U.S.C. 1452(a):

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Removal of claims related to bankruptcy cases

(a) 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.

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http://www.law.cornell.edu/uscode/html/uscode28/usc_sec_28_00001452----000-.html

Before Congress amended the Bankruptcy Code in 1984, after it was hacked to pieces by the Supreme Court in Northern Pipeline v. Marathon, it was apparently common for pre-petition civil actions in district court involving a bankrupt debtor to be removed to the bankruptcy court of that district. But that was under the old law. The history and current situation are reviewed in an article by H. Karwowski in the Journal of the American Bankruptcy Institute, Vol. XXII, No. 10, December/January 2004:

http://www.trenklawfirm.com/PDFs/articles/karwowski_color_12-03.pdf

The author writes:

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Bankruptcy attorneys sometimes find themselves in the unique position of determining how to effect transfer of a pending federal district court action to bankruptcy court. Some may consider removing the action. Indeed, they may argue that on its face, 1452(a) of Title 28, which authorizes removal of actions related to a bankruptcy case, can be construed to apply to district court actions. A close examination of applicable law, however, renders this interpretation questionable. For instance, because a bankruptcy court technically constitutes a “unit” of a district court, removal of a district court action to bankruptcy court seems to produce the apparent absurdity of removing a case from itself to itself. Additional grounds, implicating the Marathon case and the Code’s 1984 amendments, provide even stronger support for denying the right to removal. ...

This article assumes that, despite the deletion of the term “bankruptcy court” from subsection 1452(a), removal to bankruptcy court is not per se prohibited. See, e.g., Levin v. State of New York Dep’t. of Health (In re Levin), 284 B.R. 308, 312 (Bankr. S.D. Fla. 2002) (observing that although subsection 1452(a) speaks of removal to the district court, “the majority of courts faced with bankruptcy removal find the applications for removal may be made in the bankruptcy court” (quoting In re Boyer, 108 B.R. 19, 24 (Bankr. N.D.N.Y. 1988))). It assumes also that a party can remove an action only to the district in which it is pending. See, e.g., U-Haul Int’l. Inc. v. Gross Metal Prods. Inc. (In re Gross Metal Prods. Inc.), No. 97-30376DAS, 1997 WL 778756 at *1 (Bankr. E.D. Pa. Dec, 16, 1997) (holding that because “[subsection 1452(a)] speaks of removal to the district where the removed matter is pending,” “it seems clear that a removal to a court in a different district is not permissible”). Incidentally, courts have disagreed over the issue of whether district court actions may be removed to district court. Compare Aurora Parking Co. v. Hide Co., No. 90 C 7332, 1991 WL 275047, at *4 n.1 (N.D. Ill. Dec. 17, 1991) (citing treatise for the propositions that “where a bankruptcy case is involved, the district court wears two hats: one quadistrict court; secondly as the court to which 28 U.S.C. 1334(a) and (b) has assigned bankruptcy jurisdiction” and that “[t]he removal petition is the document which transfers a pending piece of litigation from the district court acting in the former capacity to the district court acting in the latter capacity...” (quoting Collier on Bankruptcy, 3.02 (15th ed. 1990))); Gabel v. Engra Inc. (In re Engra Inc.),86 B.R. 890, 896 (S.D. Tex. 1988) (“[W]hen a party files an application for removal, although technically the proceeding is removed to the district court, the reference of proceedings related to a bankruptcy case is invoked, and the proceeding is automatically referred to the bankruptcy court.”), with Mitchell v. Fukuoka Daiei Hawks Baseball Club (In re Mitchell), 206 B.R. 204, 210 (Bankr. C.D. Cal. 1997) (“It violates the plain language of 28 U.S.C. 1452(a) to say that an action can be removed ‘to district court’ when it is already pending in district court, because the words ‘to district court’ by necessity involve the concept of bringing the action to district court from some other forum.”). ...

Although arguments supporting removal of district court actions can be made, a party seeking to effect transfer of a matter from federal district court to its local bankruptcy court should, for the reasons cited above, move to refer, rather than remove, the matter.

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So while there may be some question of a right of removal from district court to bankruptcy court in the same district, there seems to be no question of a right of removal to bankruptcy court in different district.

Which is not to say SCO won't try it, but more likely they'll try to reargue the Novell case in BK court in a different way.

We've been assuming that a debt subject to a constructive trust is excluded from the bankruptcy estate, as provided by 11 U.S.C. 541(d). But this seems to apply only if a constructive trust has already been granted by a court. For example, the Sixth Circuit held in Poss v. Morris, 2001 FED App. 0264P:

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... Poss maintains that the bankruptcy court erred by failing to recognize that prior to Morris's filing of her petition in bankruptcy a constructive trust had attached to the property for his benefit under Ohio law. Poss relies on 11 U.S.C. 541(d), which provides:

"Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest . . . becomes property of the estate . . . only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold."

With regard to a constructive trust, we have been clear that this section does not authorize bankruptcy courts to recognize a constructive trust based on a creditor's claim of entitlement to one; rather, section 541(d) only operates to the extent that state law has impressed property with a constructive trust prior to its entry into bankruptcy. In XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1451 (6th Cir. 1994), we held that "a creditor's claim of entitlement to a constructive trust is not an 'equitable interest' in the debtor's estate existing prepetition, excluded from the estate under 541(d)." In that fairly typical bankruptcy proceeding in which the creditor had transferred property to the debtor in the ordinary course of business, allegedly due to the fraud of the debtor, the creditor pressed its case for imposition of a constructive trust in bankruptcy court when no state court proceedings had occurred prior to the filing of the bankruptcy petition and state law did not provide a clear answer to whether the circumstances warranted such a remedy. In short, the creditor in Omegas Group sought to use an equitable remedy to recover a greater amount of the estate's assets than that to which it would otherwise have been entitled. Reviewing the remedial nature of constructive trusts, we concluded that "a claim filed in bankruptcy court asserting rights to certain assets 'held' in 'constructive trust' for the claimant is nothing more than that: a claim." Id. at 1449. Even while stressing that the bankruptcy policy of ratable distribution among creditors conflicts with the constructive trust remedy and counsels its sparing use, id. at 1451 (quoting The Oxford Organisation, Ltd. v. Peterson (In re Stotler & Co.), 144 B.R. 385, 388 (N.D. Ill. 1992)), we acknowledged that in certain very limited circumstances not present in Omegas Group recognition of a constructive trust would be appropriate. For example, we noted that "[u]nless a court has already impressed a constructive trust upon certain assets . . . the claimant cannot properly represent to the bankruptcy court that he was, at the time of the commencement of the case, a beneficiary of a constructive trust held by the debtor." Id. at 1449 (footnote omitted). See also id. at 1451 ("We do not address here property already impressed with a constructive trust by a court in a separate proceeding prepetition.").

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http://caselaw.lp.findlaw.com/scripts/getcase.pl?case=/data2/circs/6th/994454.html

I think nobody gives a shit about SCO anymore; management, the board, and especially the lawyers are out to save their own asses from being pursued individually by Novell. If they can persuade the BK court not to lift the stay on SCO v. Novell, then they can argue that Novell has no special status as a creditor. They can then proceed to argue apportionment of SVRX royalties in the BK court -- not really caring what the outcome is. Even if Novell were to be awarded the full $37 M, including interest, it would come out of the estate and not out of Darl's salary and bonuses or BSF's fees.

I doubt that this tactic will succeed; it certainly shouldn't succeed, but it's the only chance the insiders have left.

11:09:56 PM


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