UNITED STATES DISTRICT COURT FOR THE 

DISTRICT OF NEW HAMPSHIRE

Marotta Gund Budd & Dzera LLC

and J. Richard Budd, III

v. Civil No. 05-cv-452-JD

Pat V. Costa and 

Robert H. Walker

O R D E R

The plaintiffs, Marotta Gund Budd & Dzera LLC (“MBGD”) and

J. Richard Budd, III, brought this state law action in state

court in New York, alleging that the defendants defamed them by

republishing statements originally made in motions filed in a

bankruptcy case pending in the United States Bankruptcy Court for

the District of New Hampshire. The defendants, Pat V. Costa and

Robert H. Walker, removed the defamation action to the United

States District Court for the Eastern District of New York,

invoking its original jurisdiction over “all civil proceedings 

. . . arising in or related to cases under Title 11” of the

United States Code. 28 U.S.C. § 1334(b).

The plaintiffs then moved to remand the action to state

court for lack of subject-matter jurisdiction or, in the

alternative, under either the “permissive” or “mandatory”

abstention principles of 28 U.S.C. § 1334(c). See, e.g.,

Middlesex Power Equip. & Marine, Inc. v. Town of Tyngsborough,

Mass. (In re Middlesex Power Equip. & Marine, Inc.), 292 F.3d 61,

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 1 of 23
1Both sides have requested oral argument on the motion, but

neither “outlin[es] the reasons why oral argument may provide

assistance to the court” as required by L.R. 7.1(d). The

requests are therefore denied.

2

67-68 & n.6 (1st Cir. 2002). In response, the defendants opposed

the motion to remand and cross-moved to transfer the case to this

court under 28 U.S.C. § 1404(a), which the plaintiffs opposed. 

The United States District Court for the Eastern District of New

York (Ross, J.) granted the motion to transfer but took no action

on the motion to remand, reasoning that the New Hampshire

bankruptcy court, where this court could refer the motion, see 28

U.S.C. § 157, “is in the best position to determine whether this

action is ‘arising in’ or ‘related to’ the pending bankruptcy

case.” Order (Dec. 15, 2005), at 1. Once the case arrived here,

the plaintiffs renewed their motion for remand or abstention and

the defendants filed an objection. The plaintiffs also filed a

reply to the defendants’ renewed objection.1

At the outset, the court notes that, in accordance with

Judge Ross’s suggestion, the defendants have asked this court to

refer the remand motion to the bankruptcy court; the plaintiffs

have indicated that they do not object to that course. If this

court lacks subject matter jurisdiction, however, it necessarily

lacks the authority to refer the case to the bankruptcy court. 

See Muratore v. Darr, 375 F.3d 140, 147-48 (1st Cir. 2004);

accord Standing Order BK-1, In re Referral of Title 11

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 2 of 23
2Similarly, the District Court for the Eastern District of

New York should have decided whether it had subject matter

jurisdiction over this case before deciding to transfer it here.

“Transfer under § 1404(a) is possible only if venue is proper in

the original forum and federal jurisdiction existed there. If

subject matter jurisdiction is lacking, there is no power to do

anything with the case except dismiss” or remand it. 15 Charles

Alan Wright et al., Federal Practice & Procedure § 3844, at 332

(2d ed. 1984 & 2005 supp.).

3The court has also taken judicial notice of certain other

events in the bankruptcy case. See Rodi v. S. New England Sch.

3

Proceedings (D.N.H. Jan. 18, 1994), available at

http://www.nhd.uscourts.gov (referring cases which meet the

standard for subject matter jurisdiction under section 1334(b)). 

This court must therefore decide for itself whether it has

subject matter jurisdiction.2 

Standard of Review

In sparring over the issues of subject matter jurisdiction

and abstention, the parties have accepted the factual allegations

set forth in the complaint as true. The court will therefore do

the same. See, e.g., Gabriel v. Preble, 396 F.3d 10, 11-12 (1st

Cir. 2005); Muniz-Rivera v. United States, 326 F.3d 8, 11 (1st

Cir. 2003). Although counsel for each side has submitted

affidavits recounting certain events and appending certain

filings from the bankruptcy proceeding, the court can consider

these materials in ruling on the motion without necessitating an

evidentiary hearing.3 See McIntyre v. United States, 326 F.3d

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 3 of 23
of Law, 389 F.3d 124, 130 (1st Cir. 2004). That case actually

represents two different petitions, In re Robotic Vision Sys.,

Inc., No. 04-14151-JMD, and In re Auto Image ID, Inc., No. 04-

14152-JMD (Bkrtcy. D.N.H. Nov. 19, 2004), which have been

administratively consolidated. 

4The bankruptcy court later approved this agreement as well

as a subsequent amended and restated version of it. The latter

version was approved over Costa’s objection.

4

38, 42 (1st Cir. 2004); Valentin v. Hosp. Bella Vista, 254 F.3d

358, 363 (1st Cir. 2001). When decided in this fashion, a motion

to dismiss for lack of subject matter jurisdiction can be granted

“only when the facts alleged in the complaint . . . do not

justify the exercise of subject matter jurisdiction.” MunizRivera, 326 F.3d at 11.

Background

Budd is a principal of MGBD, a company “specializing in

advising companies, creditors, investors, and other parties with

interests in companies facing operational and financial

difficulties.” Compl. ¶ 2. In November, 2004, MGBD entered into

a management agreement with Robotic Vision Systems, Inc. (“RSVI”)

and Auto Image ID, Inc. (collectively, “the debtors”), two

corporations that had just voluntarily filed for bankruptcy under

Chapter 11. The agreement appointed Budd as the debtors’ “Chief

Restructuring Officer” and obligated the debtors to reimburse

MGBD for his services and expenses in that regard.4 The

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 4 of 23
5The complaint alleges that Costa is “presently on

administrative leave,” but does not say when this leave began. 

Compl. ¶ 4. The complaint identifies Walker merely as “a former

officer and director of RSVI . . . .” Id. ¶ 5. The court will

therefore assume for purposes of this motion that Costa and

Walker were still officers or directors of RSVI at the time they

made the allegedly defamatory statements. 

5

bankruptcy court subsequently issued an order that, inter alia,

appointed Budd “as the person in control of” RSVI, or “the

‘Controlling Person.’” Bkrtcy. Ct. Order (Jan. 20, 2005), at 2.

Around this time, Costa, who remained RVSI’s chairman,

president, and chief executive officer, allegedly began making

the statements about the plaintiffs which form the basis of their

defamation action.5 The plaintiffs claim that, in an e-mail to

one of RVSI’s consultants, Costa “falsely and maliciously accused

Plaintiffs of ‘improper actions’ relating to the management of

RVSI and engaging in ‘assassination attempts’ against Costa.” 

Compl. ¶ 8. Costa also allegedly sent a letter to the Lehman

Group, L.L.C., whose relationship to these matters is unclear,

accusing Budd of various acts of malfeasance in managing RVSI,

including “run[ning] a sham . . . auction process” for the sale

of one of RVSI’s divisions and “perpetrating a fraud in a Federal

court.” Id. ¶ 10.

Costa subsequently filed a motion in the bankruptcy court

seeking to oust Budd as RVSI’s controlling person and to appoint

a Chapter 11 trustee in his stead. According to the complaint,

this motion contained a number of false statements about Budd,

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 5 of 23
6

accusing him of “deceiving RSVI’s shareholders and . . . filing a

false affidavit with the [bankruptcy] court.” Compl. ¶ 12. 

Costa later filed a motion to modify and clarify the scheduling

order the bankruptcy court had entered in connection with his

motion to appoint a trustee, which allegedly repeated many of the

same false accusations about Budd set forth in Costa’s earlier

filing. Costa allegedly made similar statements in other papers

he filed in the bankruptcy court in response to motions by both

the debtors and their counsel, Sheehan Phinney Bass + Green

(“Sheehan Phinney”), to quash discovery demands he had made on

them, also in connection with his motion to appoint a trustee.

The plaintiffs have disavowed any claim that Costa defamed

them through the statements contained in these bankruptcy court

filings. Rather, they assert that the defamation occurred when

Costa posted those filings to a publicly available website,

effecting a “re-publication” of the allegedly false statements. 

Mot. Remand ¶ 5 (emphasis omitted); accord Compl. ¶ 34. The

plaintiffs further assert that Costa defamed them in both (1) a

letter he and Walker sent to Sheehan Phinney and (2) a letter

Costa sent to Sheehan Phinney’s co-counsel in representing the

debtors, Drier LLP. These letters allegedly accused Budd of,

inter alia, “‘perpetrat[ing] a fraud on the RVSI Board of

Directors, the company, and the [bankruptcy] court . . . .’” and

‘“fil[ing] knowingly false affidavits . . . .’” Compl. ¶ 23.

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 6 of 23
6In general, this provision allows the defendant “in an

action involving public petition and participation,” as more

specifically defined in the statute, to recover certain

categories of damages from the plaintiff to that action. N.Y.

Civ. Rights Law §§ 70-a, 76-a.

7

MGBD, “a limited liability company of the State of New

York,” Compl. ¶ 2, and Budd, who resides there, commenced this 

action against Costa, a Massachusetts resident, and Walker, a New

York resident, in Nassau County Supreme Court in New York on July

15, 2005. In response, the defendants answered, asserting a

counterclaim under the New York “anti-SLAPP” statute,6 then filed

a timely notice of removal of the case to the District Court for

the Eastern District of New York. The notice of removal invoked

that court’s “original jurisdiction over this action under 28

U.S.C. § 1334 in that this action is a civil proceeding arising

in or related to a case under Title 11.” Notice Remov. ¶ 3(d).

Meanwhile, on August 25, 2005, Costa and Walker moved the

bankruptcy court for an order requiring RVSI to indemnify them

against the defamation suit, to advance them their expenses in

defending it, and to accord administrative priority to these

claims under 11 U.S.C. § 503(b)(1)(A). Both the official

committee of unsecured creditors and the debtors objected to this

motion, arguing that the defendants’ claims were not entitled to

priority, and the defendants were not entitled to

indemnification, because their actions giving rise to the

defamation suit had conferred no benefit on the estate.

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 7 of 23
7Beginning in early 2005, MGBD had been compensated for its

services on a monthly basis as a result of the court’s approval

of the amended and restated management agreement. 

8

On October 11, 2005, the bankruptcy court converted the

debtors’ cases to Chapter 7 proceedings upon motion of the

official committee of unsecured creditors. In light of this

development, which necessitated the appointment of a Chapter 7

trustee, the bankruptcy court denied Costa’s motion to appoint a

Chapter 11 trustee as moot. The bankruptcy court also cancelled

a scheduled hearing on the defendants’ motion for indemnification

and administrative priority.

Just after the appointment of a Chapter 7 trustee, MGBD

relinquished its duties to the debtors and, on November 15, 2005,

filed an application with the bankruptcy court for final approval

of its fees and expenses.7 With Costa’s assent, the Chapter 7

trustee then sought a continuance of the hearing on this and

other final fee applications to permit additional investigation

on whether to object to them, including discussions with Budd and

Costa. The court granted the order, setting April 7, 2006, as

the deadline to file any objections to the fee applications, and

May 5, 2006, as the date of the hearing. So far, Costa has not

filed any objection to MGBD’s final fee application, though he

represents in his objection to the motion to remand that he

intends to do so. The bankruptcy court has yet to schedule a

hearing or take any other action on the defendants’ August 25,

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 8 of 23
8In turn, section 157(b) empowers bankruptcy judges to

decide “all core proceedings arising under title 11, or arising

in a case under title 11,” but not “a proceeding that is not a

core proceeding but that is otherwise related to a case under

title 11.” 28 U.S.C. §§ 157(b)(1), (c)(1). 

9The defendants acknowledge that this action does not arise

under title 11 within the meaning of section 1334(b).

9

2005, motion for indemnification and administrative priority of

their expenses in defending this action.

Discussion

As previously noted, section 1334(b) provides the federal

district courts with “original but not exclusive jurisdiction of

all civil proceedings arising under title 11, or arising in or

related to cases under title 11.”8 The plaintiffs argue that

their defamation action neither arises in nor is related to the

debtors’ bankruptcy case and that this court therefore lacks

subject-matter jurisdiction. The defendants, however, maintain

that this action both arises in and is related to the bankruptcy

case.9 The court will address these contentions in turn.

I. Whether This Is an Action “Arising In” The Bankruptcy Case

“‘Arising in’ proceedings generally ‘are those that are not

based on any right expressly created by title 11, but

nevertheless, would have no existence outside of the

bankruptcy.’” In re Middlesex Power Equip., 292 F.3d at 68

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 9 of 23
10In their original brief in opposition to the remand

motion, filed in the Eastern District of New York, the defendants

argued that the Second Circuit had rejected aspects of the Fifth

Circuit’s holding in Wood. The First Circuit, however, appears

to have embraced Wood’s interpretation of the term “arising in”

as it appears in both sections 1334(b) and 157(b), at least in

dicta. In re Middlesex Power Equip., 292 F.3d at 68; In re

Parque Forestal, Inc., 949 F.2d 504, 510 (1st Cir. 1991),

overruled on other grounds, Hartford Underwriters Ins. Co. v.

Union Planters Bank, N.A., 530 U.S. 1, 14 (2000). The defendants

do not argue to the contrary in their submissions to this court.

10

(quoting Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir.

1987)); see also Steele v. Ocwen Fed. Bank (In re Steele), 258

B.R. 319, 321 (Bkrtcy. D.N.H. 2001). The defendants characterize

this action as such a proceeding because “[t]he alleged

defamatory statements concern plaintiffs’ appointment in the

bankruptcy case as fiduciaries of the Debtors and their ‘improper

actions’ relating to the management of the bankruptcy estate” and

therefore “would not have occurred but for the existence of the

Bankruptcy Case.” Br. Opp’n Mot. Remand at 8. The court

believes that this argument depends on an overly expansive view

of the standard for “arising in” jurisdiction.

As the Fifth Circuit explained in In re Wood, section

1334(b)’s grant of jurisdiction over civil proceedings arising in

cases under title 11 “seems to be a reference to those

‘administrative’ matters that arise only in bankruptcy cases.”10

825 F.2d at 96-97 (emphasis added); see also, e.g., Eastport

Assocs. v. City of Los Angeles (In re Eastport Assocs.), 935 F.2d

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 10 of 23
11

1071, 1076 (9th Cir. 1991) (ruling that proceeding did not “arise

in a case under title 11 because it is not a cause of action 

. . . that only arises in title 11 cases”). The standard

therefore does not amount to a “but-for” test, conferring

jurisdiction over any proceeding that owes its existence to a

particular bankruptcy case in the manner the defendants suggest. 

See Stoe v. Flaherty, 436 F.3d 209, 218 (3d Cir. 2006). Indeed,

the Third Circuit rejected a like argument in Stoe. There, the

district court had exercised “arising in” jurisdiction over an

action by the debtor’s former employee to recover missed

severance payments from its officers, reasoning that “because

[the debtor] stopped making payments as a consequence of the

bankruptcy, [the] claim would not exist, but for the bankruptcy

filing.” Id. (internal quotation marks omitted). Disagreeing

with this conclusion, the Third Circuit held that “claims that

‘arise in’ a bankruptcy case are claims that by their nature, not

their particular factual circumstance, could only arise in the

context of a bankruptcy case.” Id. (emphasis added).

Thus, while the defendants may be correct that they could

not have made the allegedly defamatory statements about the

plaintiffs’ management of the debtors had the debtors not

declared bankruptcy in the first place, this point is irrelevant

to whether the defamation action arises in the bankruptcy case

within the meaning of section 1332(b). Like the plaintiff’s

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 11 of 23
11The defendants rely on Maitland v. Mitchell (In re Harris

Pine Mills), 44 F.3d 1431 (9th Cir. 1995), for the proposition

that “postpetition state law claims asserted by or against a

trustee in bankruptcy or the trustee’s agents for conduct arising

out of the sale of property belonging to the bankruptcy estate

qualify as core proceedings.” Id. at 1437 (footnote omitted). 

Although the court appears to have based this holding on 

28 U.S.C. § 157(b)(2)(O), which defines core proceedings to

include those “affecting the liquidation of the assets of the

estate,” the defendants do not convincingly explain how the

defamation claim itself--as opposed to the statements forming the

basis of it--is “for conduct arising out of” the sale of estate

property. See infra; cf. Arnold Print Works, Inc. v. Apkin (In

re Arnold Print Works, Inc.), 815 F.2d 165, 168 (1st Cir. 1987)

(ruling that debtor’s breach of contract claim against purchaser

of estate assets “falls within the literal wording of 28 U.S.C. §

157(b)(2)(O) . . . because the claim arose out of the debtor’s

efforts to liquidate estate assets” and therefore qualifies as

core proceeding). 

12

action for missed severance payments in Stoe, there is nothing

about the nature of a defamation action that limits its existence

to bankruptcy proceedings.

Indeed, claims subject to “arising in” jurisdiction consist

primarily of those proceedings peculiar to bankruptcy cases and

denominated as core by section 157(b)(2): “allowance and

disallowance of claims, orders in respect to obtaining credit,

determining the dischargability of debts, discharges,

confirmation of plans, orders permitting the assumption or

rejection of contracts, and the like.” 1 Collier on Bankruptcy ¶

3.01[4][c][iv], at 3-31 (Alan N. Resnick & Henry J. Sommer, eds.,

15th ed. 1995 & 2004 supp.). The defamation action plainly does

not fit any of those categories.11 Cf. Longchamps Elec., Inc. v.

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 12 of 23
13

Rothenberg (In re Wrenn Assocs., Inc.), 2004 WL 1746117, at *4-*6

(Bkrtcy. D.N.H. July 26, 2004) (treating mechanic’s lien claims

by subcontractor to recover against property owner for unpaid

work as core proceedings in general contractor’s bankruptcy

because, inter alia, such claims “only valid to the extent that

monies are owed the general contractor,” so adjudicating them

“will of necessity involve the determination of the amounts owed

to the Debtor” and therefore “involve what is property of the

estate” under § 157(b)(2)(A)).

The defendants also argue that this action arises in the

bankruptcy proceeding based on a string of cases they cite for

the proposition that “actions based on statements or conduct by

fiduciaries in their capacity as such are clearly subject to the

jurisdiction of the bankruptcy court.” Br. Opp’n Mot. Remand 

at 8. By and large, these cases recognized “arising in”

jurisdiction over state-law claims against a bankruptcy trustee

or his representatives for actions taken on behalf of the estate,

reasoning that the claims “would not have arisen but for the

defendant’s obligations and conduct as a trustee.” Kirk v.

Hendon (In re Heinson), 231 B.R. 48, 57-59 (Bkrtcy. E.D. Tenn.

1999), aff’d, 247 B.R. 237 (E.D. Tenn. 2000); see also Carter v.

Rodgers, 220 F.3d 1249, 1254 (11th Cir. 2000); In re Harris Pine

Mills, 44 F.3d at 1437; Honigman, Miller, Schwartz & Cohn v.

Allard (In re DeLorean Motor Co.), 155 B.R. 521, 525 (9th Cir.

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 13 of 23
14

B.A.P. 1993); Bryan v. Sillman (In re Bryan), 308 B.R. 583, 586

(Bkrtcy. N.D. Ga. 2004); accord Walsh v. Nw. Nat’l Ins. Co. of

Milwaukee, Wisc. (In re Ferrante), 51 F.3d 1473, 1476 (9th Cir.

1995) (treating trustee’s claim against bond ensuring predecessor

trustee’s performance, based on his embezzlement of estate

assets, as core proceeding).

Based on these authorities, the defendants construct two

syllogisms in support of their claim for “arising in”

jurisdiction. The court believes both are flawed. The first

syllogism likens the plaintiffs to trustees, and the defendants’

allegedly defamatory statements to the claims against trustees,

arguing that “such statements were based upon duties and

obligations imposed on plaintiffs under bankruptcy law . . . .” 

Br. Opp’n Mot. Remand at 11. But the defendants have not sued

the plaintiffs for violating their duties under the bankruptcy

code, cf. In re Harris Pine Mills, 44 F.3d at 1437, or even for

actions they took in apparent furtherance of those duties, cf.

Heinson, 231 B.R. at 57-59. Instead, the defendants were

themselves sued for making allegedly defamatory statements

accusing the plaintiffs of derogating from their duties in

managing the debtors during the bankruptcy. None of the

defendants’ authorities extends “arising in” jurisdiction this

far from the underlying bankruptcy proceeding. Cf. Hoffman v.

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 14 of 23
12The court expresses no opinion on whether the defendants

were, in fact, acting in accordance with their duties to the

debtors in making the allegedly defamatory statements. As noted

supra, that point has been disputed in the bankruptcy court by

both the debtors and the creditors’ committee.

15

Roberto, 85 B.R. 417, 422-23 (W.D. Mich. 1988) (finding no

“arising in” jurisdiction over defamation and related claims

based on defendants’ publication of court’s reasons for

appointing trustee in bankruptcy of plaintiff’s business and

commencement of baseless adversary proceeding against plaintiff).

As the defendants’ second syllogism, they liken themselves

to the trustees in the cited cases, arguing that, as the

trustees’ duties to the debtors compelled them to take the

actions complained of there, so too did the defendants’ similar

duties compel them to make the allegedly defamatory statements

here. The defendants’ duties, however, existed prior to the

bankruptcy filing, by virtue of serving as the debtors’ officers

or directors, rather than as a result of the bankruptcy

proceedings. Thus, unlike the duties of a trustee, the

defendants’ duties did not proceed from the bankruptcy case, so

claims against them based on their purported allegiance to those

duties do not arise in the bankruptcy case.12 Cf. In re Bryan,

308 B.R. at 586; In re Heinson, 231 B.R. at 57.

For similar reasons, the defendants’ heavy reliance on

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 15 of 23
16

Lorence v. Does 1 through 50 (In re Diversified Contract Servs.,

Inc.), 167 B.R. 591 (Bkrtcy. N.D. Cal. 1994), is misplaced. 

There, a former trustee sued the attorneys who represented her

during the bankruptcy case, alleging that they had committed

various torts under state law when they secretly informed the

bankruptcy judge that the trustee had been defrauding the estate. 

Id. at 593. The bankruptcy court exercised “arising in”

jurisdiction over the former trustee’s claims because the

defendants’ “obligations to her arose in connection with a

bankruptcy case. Furthermore, their alleged breach of those

obligations was committed at and in connection with a hearing

before the bankruptcy judge.” Id. at 595.

The plaintiffs’ defamation claim has neither of these

features. It is not based on any particular duty that the

defendants owe the plaintiffs, let alone one that arose in the

bankruptcy case. Nor did the defendants’ allegedly tortious

behavior occur in the course of the bankruptcy proceedings. 

Although the defendants suggest otherwise, the complaint makes

clear that the defamation claim is based on the defendants’

repetition of certain allegations Costa initially made in his

motion to appoint a trustee and related filings, rather than in

the filings themselves. In re Diversified Contract Servs. does

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 16 of 23
13Likewise, the other cases cited by the defendants, in

which courts took “arising in” jurisdiction over a debtor’s

malpractice claim against his attorneys for their work in the

bankruptcy case, also fail to support “arising in” jurisdiction. 

See Simmons v. Johnson, Curney & Fields, P.C., 205 B.R. 834, 836-

41 (Bkrtcy. W.D. Tex. 1997); Billing v. Ravin Greenberg & Zackin,

P.A., 150 B.R. 563, 565-67 (D.N.J. 1993), rev’d on other grounds,

22 F.3d 1242 (3d Cir. 1994); accord Stanley v. First Nat’l Bank

of Sparta (In re Murphy), 213 B.R. 813, 817 (Bkrtcy. S.D. Miss.

1997) (exercising “arising in” jurisdiction over claim by

creditor against its attorneys for malpractice allegedly giving

rise to trustee’s claim against creditor). Again, unlike

attorneys who represent a party to a bankruptcy proceeding, the

defendants accrued no duty as a result of the bankruptcy cases. 

 

17

not support the exercise of “arising in” jurisdiction here.13

The defamation action is not a proceeding “arising in” a

bankruptcy case within the meaning of section 1334(b).

 

II. Whether This Is an Action “Related To” the Bankruptcy Case

“The usual articulation of the test for determining whether

a civil proceeding is related to bankruptcy is whether the

outcome of the proceeding could conceivably have any effect on

the estate being administered in bankruptcy.” In re G.S.F.

Corp., 938 F.2d 1467, 1475 (1st Cir. 1991) (quoting Pacor v.

Higgins, 743 F.2d 984, 994 (3d Cir. 1984)); see also Boston Reg’l

Med. Ctr., Inc. v. Reynolds (In re Boston Reg’l Med. Ctr., Inc.),

410 F.3d 100, 105 (1st Cir. 2005); In re Middlesex Power Equip.,

292 F.3d at 68. As these cases show, the First Circuit uses this

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 17 of 23
14The defendants argued before the District Court for the

Eastern District of New York that other courts in the Second

Circuit had adopted an alternative test for “related to”

jurisdiction. Br. Opp’n Mot. Remand at 19. They do not urge any

alternative test upon this court and, in fact, acknowledge that

the Pacor test applies. Obj. Renewed Mot. Remand at 4. In any

event, as this court noted in Balzotti, it is “obliged to apply

the Pacor formulation by binding First Circuit precedent,”

despite criticism of it in some quarters. 273 B.R. at 329 n.1.

18

formulation of the standard for “related to” jurisdiction, known

as the “Pacor” test. Balzotti v. RAD Inv., 273 B.R. 327, 329 n.1

(D.N.H. 2002); In re Steele, 258 B.R. at 322.14 The defendants

argue that the defamation action is thus “related to” the

bankruptcy case in three ways: (1) Costa plans to object to

MGBD’s final fee application to the bankruptcy court on the same

bases articulated through the allegedly defamatory statements, 

(2) “one of the Debtor’s last remaining assets, a malpractice

claim against MGBD and Budd, could be adversely impacted by this

defamation action, thereby affecting the ultimate recovery

obtained by MGBD’s creditors,” and (3) the defendants have moved

the bankruptcy court to require the debtors to indemnify them

against the defamation action and advance them their legal fees

in defending it. Obj. Renewed Mot. Remand at 2. 

Essentially, the defendants’ first two arguments reduce to

the point that “if the allegations [the plaintiffs] claim to be

false in this suit are proven true, there would be little

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 18 of 23
15Naturally, this court expresses no opinions on the merits

of MGBD’s fee application, including the appropriate standard of 

review by the bankruptcy court, or the merits of any malpractice

claim against the plaintiffs.

19

question that [they] breached their . . . obligations to the

Debtors,” disqualifying MGBD from receiving its fees and

rendering the plaintiffs liable for malpractice. Obj. Renewed

Mot. Remand at 4. The defendants assert, and the plaintiffs do

not dispute, that the truth of the complained-of statements will

be an issue decided in the defamation case. But the defendants

fail to explain, with reference to the standards of bankruptcy

law or otherwise, how their allegedly defamatory allegations,

even if true, would necessarily prevent MGBD from collecting its

fees from the bankruptcy estate or support a malpractice action. 

This is a significant omission in light of the plaintiffs’

argument that, because “the Bankruptcy Court’s review of those

fees will be perfunctory and limited solely to a review of

whether the fees MGBD received were contemplated by and conformed

to the MGBD management agreements,” it would likely be entitled

to the fees even if the plaintiffs committed the alleged

malfeasance.15 Reply Br. at 18-19. Without any assistance from

the defendants in this regard, the court cannot conclude that

determining the truth of the statements at issue in this action

will conceivably affect the bankruptcy estate. See In re

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 19 of 23
20

Asbestos Litig., 217 B.R. 118, 125 (S.D. W. Va. 2001) (refusing

to recognize “related to” jurisdiction based on removing

defendants’ “incomplete and indeterminate” showing).

As the third basis for “related to” jurisdiction over the

defamation claim, the defendants assert that, because they have

sought indemnification against that claim from the debtors in the

bankruptcy court, the outcome of this suit will conceivably

affect whether the estate has to reimburse the defendants, and in

what amount. Courts have taken different views on whether

actions spawning indemnification claims against a debtor, or

having the potential to do so, fall within their “related to”

jurisdiction. See 1 Collier, supra, ¶ 3.01[4][c], at 3-27–-3-29. 

In Pacor itself, however, the Third Circuit ruled that “related

to” jurisdiction did not extend to a products liability claim

against a distributor of the debtor’s product, even though the

distributor had responded by filing a third-party complaint

against the debtor seeking indemnification. 743 F.2d at 996. 

The court reasoned that the products liability claim was “[a]t

best . . . a mere precursor to the potential third party claim

for indemnification,” which, furthermore, would have no

preclusive effect on the debtor. Id. at 995. Because “there

would be no automatic creation of liability against [the debtor]

on account of a judgment against” the distributor, the court

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 20 of 23
21

distinguished cases extending “related to” jurisdiction over a

claim against a debtor’s guarantor whom the debtor has agreed to

indemnify, where a judgment against the guarantor “would

automatically result in liability” against the debtor. Id.

Here, although the defendants have sought indemnification

against the defamation claim from the debtors through the motion

filed with the bankruptcy court, the debtors have opposed any

such relief on the ground that the defendants’ allegedly

defamatory statements did not benefit the estate. Given this

state of affairs, any favorable judgment the plaintiffs obtain in

this action will not “automatically result in liability” against

the debtors. The possibility of indemnification from the

bankruptcy estate, then, does not bring the defamation claim

within this court’s “related to” jurisdiction under the rule

articulated in Pacor. See Cent. Me. Rest. Supply v. Omni Hotels

Mgmt. Corp., 73 B.R. 1018, 1023-24 (D. Me. 1987) (applying Pacor

in rejecting “related to” jurisdiction over claim against

debtor’s agent for acts undertaken in that capacity, despite

debtor’s agreement to indemnify agent, because “the

indemnification provision is subject to a number of conditions

that render [the] right to indemnification uncertain”).

Although there are cases that have founded “related to”

jurisdiction on potential indemnification claims, see, e.g.,

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 21 of 23
16In their brief in the Eastern District of New York, the

defendants discussed Rubin Baum Levin Constant & Friedman v.

Mushkin (In re Masterwear Corp.), 241 B.R. 511 (Bkrtcy. S.D.N.Y.

1999), where the bankruptcy court extended “related to”

jurisdiction over a law firm’s claim seeking indemnification from

the directors of a debtor against an action the debtor had filed

to recover legal fees paid to the firm. Id. at 514. Although

the court recited the Pacor test, it ultimately applied a rule,

derived from district court cases, that “‘[r]elated to’

jurisdiction . . . exists if a disputed or conditional indemnity

claim has a ‘reasonable legal basis.’” Id. at 515-16 (quoting

Back v. AM Gen. Corp. (In re Chateguay Corp.), 213 B.R. 633, 640

(S.D.N.Y. 1997)). The court concluded that the directors had

“articulated a ‘reasonable legal basis’” for their own

indemnification claim against the debtor with reference to both

the directors’ conduct on behalf of the debtor and the relevant

provisions of the debtor’s by-laws. Id. at 516-17. Here, in

contrast, the defendants have not presented any such analysis to

this court, but have simply attached a copy of the motion for

indemnification they filed in the bankruptcy court to their

opposition. In any event, the “reasonable legal basis” test

conflicts with Pacor, which remains the law in this circuit. 

22

Lindsey v. O’Brien, Tanski, Tanzer & Young Health Care Providers

of Conn. (In re Dow Corning Corp.), 86 F.3d 482, 494 (6th Cir.

1996), the defendants have not brought any of those authorities

to this court’s attention.16 Phillipe v. Shape, Inc., 103 B.R.

355 (D. Me. 1989), is not such a case. There, the court

exercised “related to” jurisdiction based on the absence of “any

indication that [the claimed] indemnification is subject to any

conditions, including those of the type found in Pacor and Omni

Hotels” so that “a judgment in favor of the Plaintiff . . . would

automatically result in indemnification liability on the part of

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 22 of 23
17Although the defendants also discuss In re Wrenn, that

case dealt with “arising in,” not “related to,” jurisdiction. 

23

[the debtor].” Id. at 357. Because the defendants’ claim for

indemnification is disputed, Phillipe is inapposite here.17

Furthermore, given the First Circuit’s continued allegiance to

Pacor, this court is not free to apply a different rule. Because

the defamation claim would not “automatically result in

liability” against the debtor, the defendants’ request for

indemnification does not confer “related to” jurisdiction here

under controlling First Circuit law.

Conclusion

For the foregoing reasons, the plaintiffs’ renewed motion

for remand (doc. no. 8) is GRANTED on the ground that the court

lacks subject matter jurisdiction. The court therefore does not

reach the plaintiffs’ abstention arguments. The case is remanded

to the Nassau County Supreme Court pursuant to 28 U.S.C. § 1447.

SO ORDERED.

Joseph A. DiClerico, Jr.

United States District Judge

March 31, 2006

cc: Peter G. Callaghan, Esquire

Charles A. Dale, III, Esquire

David Himelfarb, Esquire

David M. Kohane, Esquire

Thomas J. Pappas, Esquire

Michael D. Sirota, Esquire

Jeffrey Milton Traurig, Esquire

Case 1:05-cv-00452-JD Document 21 Filed 03/31/06 Page 23 of 23