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IN RE RESOURCE TECHNOLOGY CORP.

February 12, 2004.

In Re: RESOURCE TECHNOLOGY CORP., Debtor


The opinion of the court was delivered by: MATHEW KENNELLY, District Judge

MEMORANDUM OPINION AND ORDER

Appellant Gregg E. Szilagyi, Chapter 11 trustee for Resource Technology Corp. ("RTC"), appeals from a bankruptcy judge's June 24, 2003 decision to abstain from hearing a contract dispute between RTC, its former director, and National Seal Corp. ("NSC"). For the reasons stated below, the Court affirms the ruling of the bankruptcy judge.

Background

  RTC is in the business of extracting methane gas from landfills for disposal or conversion into usable energy. From 1996 through 1998, RTC contracted with NSC to provide labor and materials to construct methane collection systems at several Illinois landfills; NSC sent RTC invoices for services rendered. On January 20, 1998, Leon Greenblatt, who was an officer and director of RTC, signed a promissory note in favor of NSC for $2,607,067.73 allegedly to induce NSC to hold off suing RTC for unpaid invoices. Under the note's terms, NSC assigned its claims against RTC to Greenblatt to the extent of any payments he made on the note.

  On April 29, 1999, NSC sued RTC and Greenblatt in the Circuit Court of Kane County, Page 2 claiming RTC owed it payments for services rendered and seeking to enforce the note against Greenblatt in the amount of $1,762,927.73. RTC and Greenblatt asserted several affirmative defenses to NSC's contract claim, arguing among other things that NSC did not provide some services contracted for and provided other services inadequately. RTC also argued that Greenblatt's promissory note was a novation superseding the prior contracts between RTC and NSC and, thus, the note released RTC from further liability to NSC.

  Involuntary bankruptcy proceedings were initiated against RTC on November 15, 1999 under Chapter 7 of the Bankruptcy Code. The case was later converted to a Chapter 11 case. NSC filed a proof of claim on June 12, 2000 alleging an unsecured claim of $2,231,418 plus interest and costs relating to the contracts that were at issue in the state court proceeding. RTC objected to NSC's proof of claim for the same reasons it disputed NSC's claim in state court and alleged it was entitled to a set off of more than $1 million for costs related to NSC's inadequate performance. NSC increased its claim by $887,585 on February 8, 2002. Greenblatt filed a contingent proof of claim against RTC on April 15, 2003 because if he were found liable on the promissory note, he could pursue NSC's claims against RTC for the amount of the judgment against him. RTC faces a total of $12 million in liquidated unsecured claims.

  NSC filed a motion for permissive abstention under 28 U.S.C. § 1334(c)(1) on April 28, 2003, asking the bankruptcy judge to allow the state court to resolve its contract dispute with RTC. The bankruptcy judge granted the motion on June 24, 2003 in an oral ruling. Appellant appeals from the judge's decision to abstain.

  Standard of Review

  An order to permissively abstain is treated as a final order and is therefore appealable. Page 3 Brizzolara v. Fisher Pen Co., 158 B.R. 761, 768 (Bankr. N.D. Ill. 1993); In re Ascher, 128 B.R. 639, 645 (Bankr. N.D. Ill. 1991). "We review the reorganization court's decision to abstain under section 1334(c)(1) for an abuse of discretion." In re Chicago, Milwaukee, St. Paul & Pacific R.R. Co., 6 F.3d 1184, 1188 (7th Cir. 1993) (citations omitted) (hereinafter "In re Chicago, Milwaukee R.R.") — Despite this deferential standard, the Court "must nonetheless conduct a `meaningful review'" of the bankruptcy judge's decision. Id. at 1189 (citation omitted). The Seventh Circuit cautions that "federal courts generally should exercise their jurisdiction if properly conferred and that abstention is the exception rather than the rule." Id.(citation omitted).

  Analysis

  Under 28 U.S.C. § 1334(c)(1), a bankruptcy judge is permitted to abstain "in the interest of justice, or comity with state courts, or out of respect for state law." In re Carlson, 202 B.R. 946, 949 (Bankr. N.D. Ill. 1996) (citation omitted). The party seeking a permissive abstention has the burden of proving by a preponderance of the evidence mat abstention is appropriate. Brizzolara, 158 B.R. at 769 (citation omitted). The Seventh Circuit has enumerated twelve factors a bankruptcy judge should consider when deciding whether to abstain:

  (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 the 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 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, and (12) the presence in the proceeding of nondebtor parties. Page 4

 In re Chicago, Milwaukee R.R., 6 F.3d at 1189 (quoting In Re Eastport Assoc., 935 F.2d 1071, 1075-76 (9th Cir. 1991)). The Seventh Circuit advises that "[c]ourts should apply these factors flexibly, for their relevance and importance will vary with the particular circumstances of each case, and no one factor is necessarily determinative." Id.

  Applying this legal standard, the bankruptcy judge found three factors weighed against abstention: the state law at issue was neither difficult nor unsettled; the substance of the dispute was a core proceeding under 28 U.S.C. § 157(b)(2)(B) as a claim against the estate; and the claim had "substantial significance" to the bankruptcy proceeding because of the large amount of money at issue. June 24, 2003 Tr. at 6, But he found that the "substantial majority and weight of the factors favor abstention." Id. He reasoned that a resolution of NSC's claims against RTC in state court would enhance the efficient administration of the estate because a state court could consider NSC's claims against both RTC and Greenblatt, whereas if he denied abstention, NSC's claims against RTC ...


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