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Enslein v. Johnston

United States District Court, W.D. Missouri, Western Division

March 27, 2018

JERALD S. ENSLEIN, in his capacity as Chapter 7 Trustee of Xurex, Inc., Plaintiff/Appellee,
v.
JOE JOHNSTON, CVM TECHNOLOGY, LLC, and JOHN DOES 1-10 Defendant/Appellants, Bk. No. 14-43536-11-DRD

          ORDER AFFIRMING BANKRUPTCY COURT RULING

          GREG KAYS, JUDGE

         This is an appeal brought pursuant to 28 U.S.C. § 158(a)(1) appealing the bankruptcy court's[1] order granting Plaintiff/Appellee's motion to remand.

         Plaintiff/Appellee Jerald Enslein, in his capacity as Chapter 7 Trustee of Xurex, Inc. (“the Trustee”), filed a lawsuit in the Circuit Court of Jackson County, Missouri, asserting a variety of state common law claims on the Debtor's behalf. Among these claims were that Defendant/Appellant Joe Johnson, Defendant/Appellant CVM Technology, LLC's and John Does 1-10 (collectively “Appellants”) usurped the Debtor's corporate opportunities, misappropriated trade secrets, and breached various fiduciary duties. Appellants removed this lawsuit to the bankruptcy court for the Western District of Missouri, contending that the lawsuit related to the Debtor's pending bankruptcy. The Trustee timely filed a motion to remand arguing mandatory abstention applied under 28 U.S.C. § 1334 (c)(2) and permissive abstention was also approriate under 28 U.S.C. § 1334 (c)(1). The bankruptcy court granted the motion.

         The bankruptcy court's order is AFFIRMED because: (1) this lawsuit is not a “counterclaim, ” therefore it is not statutorily core and abstention is mandatory; and (2) the bankruptcy court did not abuse its discretion in determining permissive abstention was warranted.

         Standard of Appellate Review

         This Court reviews de novo the bankruptcy court's conclusion of law that the removed claims were not core claims and 28 U.S.C. § 1334(c)(2) mandates abstention. In re Schmidt, 453 B.R. 346, 349 (8th Cir. BAP 2011). It reviews the bankruptcy court's permissive abstention ruling for abuse of discretion. In re Stabler, 418 B.R. 764, 766 (8th Cir. 2009).

         Background

         Debtor Xurex, Inc. (“Xurex”) filed for federal bankruptcy protection under Chapter 7 of Title 11 of the United States Code on October 17, 2014. Appellants Joe Johnston (“Johnston”), an officer and director of Xurex, and CVM Technology, LLC (“CVM Technology”) filed proofs of claim on February 17, 2015, and so both are creditors of Xurex's estate. The basis for Johnston's proof of claim was indemnification for litigation costs in the Delaware Court of Chancery. The basis for CVM Technology's proof of claim was money loaned to Xurex.

         On August 31, 2016, the Trustee filed an adversary proceeding in the United States Bankruptcy Court for the Western District of Missouri against numerous defendants, including Johnston. Jerald S. Enslein, in his capacity as Chapter 7 Trustee for XUREX, INC. v. Giacomo DiMase et al., Adv. Proc. No. 16-0-4103-DRD (the “DiMase adversary proceeding”). The complaint largely targets alleged misconduct surrounding long-term minimum purchase agreements in markets where Xurex was active, and these agreements explicitly excluded ceramic vacuum microsphere technology.[2] A portion of the complaint alleges Johnston breached his fiduciary duty to Xurex by disclosing trade secret information and using its technology when he formed CVM Technology. It also states that the Trustee anticipated bringing another lawsuit against Johnston, CVM Technology, and potentially others in connection with CVM Technology's misappropriation and use of Xurex's intellectual property and trade secrets.

         On October 13, 2016, the Trustee filed a different lawsuit in the Circuit Court of Jackson County, Missouri captioned Jerald S. Enslein, in his capacity as Chapter 7 Trustee for Xurex, Inc. v. Joe Johnston, CVM Technology, LLC and John Does 1-11, No. 1616-CV24849 (“the state court action”). The state court action seeks a monetary recovery in favor of Xurex's bankruptcy estate against Johnston and CVM Technology for breach of fiduciary duties owed Xurex, usurpation of corporate opportunities, and misappropriation of trade secrets and corporate resources based on Johnston allegedly sharing Xurex's secrets with CVM Technology. Although this action makes some general allegations that are identical to those made against Johnston in the DiMase adversary proceeding, it targets Johnston's alleged misconduct as an officer, director, and fiduciary of Xurex in the ceramic vacuum microsphere technology market.

         Although both the DiMase adversary proceeding and the state action allege Johnson breached his fiduciary duties, both allege he did so in separate and independent ways involving different people, different markets, different entities, and different agreements. Neither lawsuit has anything to do with Defendants' proofs of claim against Xurex.

         On November 21, 2016, Johnston filed his answer in the DiMase adversary proceeding.

         On December 2, 2016, Johnston and the other Defendants removed the state court action to the bankruptcy court for the Western District of Missouri on the grounds that it related to the DiMase adversary proceeding. Their notice of removal states that “[t]he removed matter presents non-core claims pursuant to the United States Bankruptcy Code.” After the Trustee filed the Motion to Abstain and for Remand, Defendants changed their position, arguing the state court action presents claims that are statutorily core, but constitutionally non-core.

         On March 8, 2017, the bankruptcy court granted the Trustee's motion to abstain and remand.

         Discussion

         I. The removed claims are not counterclaims, thus ...


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