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In re LTC Holdings, Inc.

United States District Court, D. Delaware

September 24, 2019

IN RE LTC HOLDINGS, INC., et al., Debtors.
v.
AVINASH N. RACHMALE, Defendant. SUPERIOR CONTRACTING GROUP, INC., Plaintiff, Adv. Proc. No. 16-50948 (CSS)

          John A. Sensing, R. Stephen McNeill, Potter Anderson & Corroon LLP, Wilmington, DE; Scott A. Frick, The Frick Law Firm, PLLC, Memphis, TN – Attorneys for Plaintiff

          Adam Hiller, Hiller Law, LLC, Wilmington, DE; Ian M. Williamson, Fatima M. Bolyea, Mantese Honigman, P.C., Troy, MI – Attorneys for Defendant.

          MEMORANDUM OPINION

          NOREIKA, U.S. DISTRICT JUDGE

         Pending before the Court is the motion (D.I. 1) (“Motion”) of Superior Contracting Group, Inc. (“Superior”), plaintiff in the above-captioned adversary proceeding (“Adversary Proceeding”)[1] currently pending in the United States Bankruptcy Court for the District of Delaware (“Bankruptcy Court”), seeking an order withdrawing reference of the Adversary Proceeding, pursuant to 28 U.S.C. § 157(d), and transferring venue back to the United States District Court for the Eastern District of Michigan (“Eastern District of Michigan”). For the reasons set forth herein, the Motion is denied without prejudice to Superior’s right to request withdrawal of the reference at such time as the proceeding is ready for trial.

         I. BACKGROUND

         A. The Parties

         The following facts are generally not in dispute. Lakeshore Engineering Services, Inc. (“Lakeshore”) was founded by defendant Avinash N. Rachmale (“Rachmale”) to provide construction services to municipal, commercial, and government clients. Initially, Rachmale acted as Lakeshore’s President, CEO, director, and majority shareholder. (Adv. D.I. 15, Exh. 1, ¶ 42).

         In May 2009, Superior and Lakeshore entered into a Mentor/Protégé Agreement for the purpose of pursuing certain U.S. government contracts. (Adv. D.I. 15, Exh.4). Superior and Lakeshore entered into a number of joint venture agreements for projects being constructed by the Army Corps of Engineers through this arrangement. (Id). Under the terms of these joint ventures, Superior was to receive 51% of the ventures’ profits and Lakeshore the remainder. (Id.).

         In 2010, as a result of a merger, Lakeshore became a subsidiary of Lakeshore Toltest Corporation (“LTC”). In 2011, LTC amended and restated its articles of incorporation. (Id., Exh. 2) to include certain indemnification obligations to officers and directors, which Rachmale argues are applicable in this litigation.[2] Post-merger, Rachmale continued in his role as President and CEO of LTC and Lakeshore until at least 2012. (Id., Exh. 1 ¶¶ 37-39). Rachmale was removed from his officer positions in LTC by October 2012. All works on the venture projects and final payment by the Army Corps of Engineers was completed by April 29, 2013. (Id., Exh.4). Rachmale resigned from LTC’s board of directors on April 2, 2014. (Id., Exh. 1).

         B. Superior’s Litigation Against Lakeshore and Rachmale

         On August 23, 2013, Superior filed an action against Lakeshore in the Chancery Court of Tennessee for the Thirteenth Judicial District at Memphis, Shelby County (“the Tennessee Chancery”), asserting claims for contractual breach of the joint venture agreements and seeking accounting for the joint ventures. (Id., Exh 4). In May 2014, Lakeshore, LTC, and other entities (collectively, “the Debtors”)[3] filed voluntary petitions for Chapter 7 relief in the Bankruptcy Court. A suggestion of bankruptcy and enforcement of the automatic stay was sent to Superior regarding their case in front of the Tennessee Chancery. (D.I. 15, Exh. 6). The Tennessee Chancery case saw no further action after the notice.

         In August 2014, Superior filed the present federal court proceeding against Rachmale in the United States District Court for the Western District of Tennessee (“Western District of Tennessee”). (Id., Exh. 3). Superior alleged in its complaint claims of conversion, fraud, and intentional misrepresentation. In addition, Superior sought to pierce the corporate veil and hold Rachmale “liable for all obligations owed by Lakeshore to Superior” because of acts committed by Rachmale while controlling Lakeshore. (Id.).

         The Western District of Tennessee found that the Proceeding satisfied the requirements for federal diversity jurisdiction, but in response to Rachmale’s Rule 12(b)(3) motion, determined that venue was more appropriate in the Eastern District of Michigan. (Id., Exh. 6).

         The Eastern District of Michigan again reviewed the issue of venue, but this time with regard to whether the proceeding should be transferred to this Court, given the Debtors’ bankruptcy filings. The Eastern District of Michigan issued an opinion granting Rachmale’s second Rule 12(b)(3) motion to dismiss for improper venue and ordered the proceeding transferred to this Court. The Eastern District of Michigan held that the claims in the proceeding “clearly related to the debtor Lakeshore’s bankruptcy proceedings before the District of Delaware.” Superior Contracting Grp., Inc. v. Rachmale, 2016 WL 1242432, *4 (E.D. Mich. Mar. 30, 2016). The Eastern District of Michigan concluded that Superior’s complaint alleged “joint conduct” claims against both Debtor Lakeshore and Rachmale, as well as a plausible indemnification claim by the Defendant against Debtor LTC for his role as officer and director of Debtor Lakeshore. See id. at *3. Because of the “joint conduct” claims and possible indemnification, the court granted Rachmale’s motion to dismiss, in part, on the basis of improper venue and ordered the case transferred to the District of Delaware. See id. at *3-*4. This Court referred the proceeding to the Bankruptcy Court pursuant to the authority granted by 28 U.S.C. § 157(a) and its standing order of reference. See Am. Standing Order of Reference, Feb. 29, 2012 (C.J. Sleet).

         C. Adversary Proceeding

         In the Bankruptcy Court, Rachmale filed a motion to dismiss (Adv. D.I. 3, 4) (“First Motion to Dismiss”), which the Bankruptcy Court denied (Adv. D.I. 11). Thereafter, the Bankruptcy Court issued a sua sponte order requesting the parties’ positions on three questions: (1) the proceeding’s proper subject matter jurisdiction, (2) the Bankruptcy Court’s option to permissively abstain from hearing the Proceeding, and (3) the possible removal of the proceeding to state court. On June 12, 2018, the Bankruptcy Court issued a decision regarding those issues. SuperiorContracting Grp., Inc. v. Rachmale (In re LTC Holdings, Inc.), 587 B.R. 25, 35 (Bankr. D. Del. 2018). At the outset of the decision, the Bankruptcy Court states: “To the extent the Court maintains jurisdiction over this Proceeding, venue is proper before the United States Bankruptcy Court for the District of Delaware under 28 U.S.C. §§ 1408 and 1409.” LTC Holdings, 587 B.R. at 30. Following a detailed and thorough analysis, the Bankruptcy Court determined that the law of the case doctrine counseled against any reconsideration of the determination, previously made by the ...


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