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Machine Zone, Inc. v. Peak Web, LLC

United States District Court, D. Oregon

February 7, 2017

MACHINE ZONE, INC., Appellant,
v.
PEAK WEB, LLC, Appellee. Bank. Ct. No. 16-32311-pcm11 Adv. Pro. No. 16-03083-pcm

          Douglas R. Pahl, Perkins Coie LLP, Michael L. Bernstein, Arnold & Porter LLP, Of Attorneys for Appellant Machine Zone, Inc.

          Timothy J. Conway and Ava Schoen, Tonkon Torp LLP, Oleg Elkhunovich, Susman Godfrey LLP, and Vineet Bhatia, Susman Godfrey LLP, Of Attorneys for Appellee Peak Web, LLC.

          OPINION AND ORDER

          Michael H. Simon United States District Judge

         This case comes to the district court as an appeal of an order from the United States Bankruptcy Court granting a motion for equitable remand of underlying civil litigation to state court, pursuant to 28 U.S.C. § 1452(b). Appellant Machine Zone, Inc. (“Machine Zone”) and Appellee Peak Web, LLC (“Peak Web”) originally filed competing lawsuits against each other in California state court, which the state court then consolidated into a single civil action. After Peak Web filed for voluntary bankruptcy, Machine Zone removed the consolidated civil action to the Bankruptcy Court on the ground that the consolidated action was related to the bankruptcy case, pursuant to 28 U.S.C. § 1452(a). Peak Web then filed a motion with the Bankruptcy Court seeking, in the alternative, permissive abstention under 28 U.S.C. § 1334(c) or equitable remand under 28 U.S.C. § 1452(b). The Bankruptcy Court granted the motion for equitable remand, and Machine Zone appealed. Because Peak Web objected to having Machine Zone's appeal heard by the Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”), this district court will hear the appeal. In this appeal, the parties disagree about both the applicable standard of review and whether the Bankruptcy Court correctly applied the relevant law. For the reasons that follow, the Court holds that the Bankruptcy Court did not err in equitably remanding the proceeding to the state court and affirms the decision below.

         STANDARDS

         A district court reviews a bankruptcy court's “findings of fact for clear error and conclusions of law and of mixed questions of law and fact de novo.” In re Icenhower, 757 F.3d 1044, 1049 (9th Cir. 2014). “Matters committed to the bankruptcy court's discretion, ” including equitable remand under 28 U.S.C. § 1452(b), “are reviewed for abuse of discretion.” Id. “A court abuses its discretion when it fails to identify and apply ‘the correct legal rule to the relief requested, ' or if its application of the correct legal standard was ‘(1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from the facts in the record.'” In re Roman Catholic Archbishop of Portland in Or., 661 F.3d 417, 424 (9th Cir. 2011) (citation omitted) (quoting United States v. Hinkson, 585 F.3d 1247, 1262-63 (9th Cir. 2009) (en banc)); see also In re Taylor, 599 F.3d 880, 887-88 (9th Cir. 2010) (“If the bankruptcy court did not identify the correct legal rule, or its application of the correct legal standard to the facts was illogical, implausible, or without support in inferences that may be drawn from the facts in the record, then the bankruptcy court has abused its discretion.”).

         BACKGROUND

         Machine Zone is a developer of multiplayer, free-to-play online games, including Game of War: Fire Age and Mobile Strike. These games allows players to interact in real time with other players around the world. Although Machine Zone's games are free to download and play, Machine Zone generates revenues when players make in-game purchases during their participation in live, online gameplay. Peak Web, also doing business as “Peak Hosting, ” provides network infrastructure services. In March 2015, Machine Zone and Peak Web entered into a series of agreements under which Peak Web provided network hosting services for Machine Zone (collectively, the “Agreement”). On October 29, 2015, Machine Zone gave notice to Peak Web that Machine Zone was terminating the Agreement after Peak Web allegedly breached the Agreement.

         On November 25, 2015, Machine Zone filed suit against Peak Web in the Superior Court for the County of Santa Clara, California (“Santa Clara Court”).[1] In this lawsuit, Machine Zone asserted claims under California state law, including breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, negligent misrepresentation, and promissory estoppel. As relief, Machine Zone requested a minimum of $23 million in compensatory damages, plus punitive damages, a declaratory judgment that Machine Zone had properly terminated the Agreement, and rescission.

         On December 3, 2015, Peak Web filed its own suit in the Santa Clara Court against Machine Zone and its subsidiary, Epic War.[2] In that lawsuit, Peak Web asserted claims under California state law, including misappropriation of trade secrets, breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, negligent misrepresentation, unfair competition, promissory estoppel, and conversion. As relief, Peak Web requested at least $93.7 million in compensatory damages, plus punitive damages, a declaratory judgment that Machine Zone and Epic War improperly terminated the Agreement, disgorgement of Machine Zone and Epic War's profits allegedly wrongfully obtained, and an injunction enjoining Machine Zone and Epic War's continued use of Peak Web's alleged confidential information and intellectual property.

         The Santa Clara Court consolidated the two cases and assigned the consolidated action to one judge for all purposes in that court's “complex civil litigation department.” As a result, the same judge would hear all pretrial motions, including discovery disputes, and would preside over the jury trial. Further, because the Santa Clara Court placed this case within the court's complex civil litigation department, any assigned trial date would not be postponed due to the higher priority that otherwise must be given to criminal cases. The Santa Clara Court denied Peak Web's motion for a temporary restraining order, but set a trial date for early March 2017, over Machine Zone's objection.

         On June 13, 2016, Peak Web filed a petition for voluntary bankruptcy in the United States Bankruptcy Court for the District of Oregon (the “Bankruptcy Court”). Machine Zone then removed the consolidated civil action from the Santa Clara Court to the United States Bankruptcy Court for the Northern District of California. This resulted in the Santa Clara Court vacating the March 2017 trial date.

         On July 8, 2016, the parties submitted a stipulation and proposed order to the Bankruptcy Court for the Northern District of California, requesting transfer of venue to the United States District Court for the District of Oregon, pursuant to 28 U.S.C. § 1412. The parties also stipulated that any such transfer would be without prejudice to the rights of any party to file or oppose a motion to remand the consolidated action back to the Santa Clara Court. On July 15, 2016, the Northern District of California Bankruptcy Court transferred the removed litigation to the United States District Court for the District of Oregon, and on July 21, 2016, this District Court referred the consolidated litigation to the Bankruptcy Court.

         Peak Web then moved the Bankruptcy Court, in the alternative, for permissive abstention pursuant to 28 U.S.C. § 1334(c) or to remand the consolidated action back to the Santa Clara Court pursuant to 28 U.S.C. § 1452(b). On August 24, 2016, the Bankruptcy Court issued its 16-page Memorandum Opinion setting forth its reasons for why Peak Web's motion for equitable remand under § 1452(b) should be granted (“Memorandum Opinion”). On August 29, 2016, the Bankruptcy Court issued its Order Remanding Proceeding to State Court (“Remand Order”). Machine Zone timely gave notice of its appeal. After Peak Web objected to Machine Zone's appeal being heard by the BAP, the appeal was transferred to this Court, pursuant to 28 U.S.C. § 158(c)(1)(B).

         After the Bankruptcy Court issued its Remand Order, the Santa Clara Court reassumed jurisdiction over the consolidated civil action. On October 28, 2016, the assigned judge, the Hon. Peter H. Kirwan, held a case management conference and reset the trial date to July 10, 2017. The parties currently are engaged in pretrial discovery, including third-party discovery. At oral argument, the parties notified the Court that Judge Kirwin had rotated out of the complex civil litigation department and that Judge Brian C. Walsh has been assigned the litigation.

         Additionally, Machine Zone recently substituted its trial counsel and so, at Machine Zone's request, during a case management conference held on January 16, 2017 Judge Walsh vacated the July 10, 2017 trial date. Judge Walsh also rejected Machine Zone's proposal for a trial date in 2018 and indicated that he will likely set trial for the fall of 2017. Judge Walsh instructed the parties to prepare a list of the milestones that needed to be completed before trial and set a further case management conference for February 10, 2017. Judge Walsh also indicated that he would be available for regular status conferences, had availability on his docket because Judge Kirwin's docket of complex civil cases had been divided between two judges, and intended to continue expeditiously to move the consolidated case forward toward resolution.

         DISCUSSION

         A. Appropriate Standard of Review

         Under 28 U.S.C. § 1452(a), “[a] party may remove any claim or cause of action in a civil action . . . 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.” Section 1334(b) provides that the district courts “shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 [the United States Bankruptcy Code], or arising in or related to cases under title 11” (emphasis added). 28 U.S.C. § 1334(b). Peak Web raised no objection to Machine Zone's removal of the underlying consolidated civil action from the Santa Clara Court to the United States Bankruptcy Court for the Northern District of California. Machine Zone moved to transfer the removed case to the District Court for the District of Oregon and eventually to the Bankruptcy Court for the District of Oregon on the grounds that the consolidated action was related to the pending bankruptcy case filed by Peak Web.

         In support its motion for equitable remand, Peak Web relied on 28 U.S.C. § 1452(b), which provides, in relevant part: “The court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground.” (Emphasis added.) Thus, the question addressed by the Bankruptcy Court was whether equitable remand was appropriate in this case. Because the phrase “on any equitable ground” is not defined in the statute, courts have established several tests or factors that are appropriate for a bankruptcy court to consider.[3]

         In its Memorandum Opinion, the Bankruptcy Court considered the fourteen-factor test set forth in In re Cedar Funding, Inc., 419 B.R. 807 (B.A.P. 9th Cir. 2009) (“Cedar Funding Factors”), plus three additional factors discussed in In re Sequoia Vill., LLC, 2012 WL 478926, at *1 (Bankr. D. Or. Feb. 14, 2012) (“Sequoia Factors”).[4] Neither party argues that the Bankruptcy Court did not correctly identify the applicable legal standards for evaluating equitable remand. The parties disagree, however, on the standard of review that this Court should apply when reviewing the Bankruptcy Court's analysis of the seventeen factors, among other things.

         Machine Zone argues that the district court must conduct a de novo review of all seventeen factors. Machine Zone does not dispute that deciding the question of equitable remand and considering the seventeen factors is a matter left to the discretion of the Bankruptcy Court. Instead, Machine Zone argues that even though matters left the Bankruptcy Court's discretion are subject to review for abuse of discretion, the Bankruptcy Court's identification of the correct legal standard, interpretation of that standard, and application of that standard to the facts are all legal conclusions that require de novo review. Machine Zone misstates the standard of review for abuse of discretion.

         In its en banc opinion in United States v. Hinkson, the Ninth Circuit adopted a two-part test to determine whether a court has abused its discretion. 585 F.3d at 1261-62. “[T]he first step of our abuse of discretion test is to determine de novo whether the trial court identified the correct legal rule to apply to the relief requested.” Id. Failure to do so is an abuse of discretion. Id. at 1262. The second step is “to determine whether the trial court's application of the correct legal standard” was illogical, implausible, or without support in inferences that may be drawn from the record. Id. (emphasis added). Thus, the “application” of the correct legal rule to the facts is not reviewed de novo. Id.; see also In re Roman Catholic Archbishop of Portland, 661 F.3d at 423-24) (noting that a court abuses its discretion where its “its application of the correct legal standard” is illogical, implausible, or without support in inferences that may be drawn from the facts in the record) (emphasis added); Carijano v. Occidental Petroleum Corp., 643 F.3d 1216, 1224 (9th Cir. 2011) (same); In re Taylor, 599 F.3d at 887-88 (noting that a court abuses its discretion if “its application of the correct legal standard to the facts was illogical, implausible, or without support in inferences that may be drawn from the facts in the record” (emphasis added)); In re Heers, 529 B.R. 734, 740 (B.A.P. 9th Cir. 2015) (“Under the abuse of discretion standard, reversal is appropriate only where the bankruptcy court applied an incorrect legal rule, or where its application of the law to the facts was illogical, implausible or without support from inferences that may be drawn from the record.” (emphasis added)).

         When, however, a court recites the correct legal standard but then misinterprets that legal standard or does not actually apply the recited legal standard, that constitutes a failure to apply the correct legal standard and is necessarily an abuse of discretion at “step one” of the Hinkson test. This is the ...


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