The bankruptcy court judge in the AOG Entertainment case — the company that runs, among others, the popular American Idol and So You Think You can Dance television contest shows — recently published on its website an interesting memorandum decision on mandatory and permissive abstention.
Phillip Phillips, the winner of the 11th season of American Idol, entered into four agreements with AOG concerning the management of his career and publishing and recording of his music. All of the agreements were governed by California law. Certain California laws, namely, the Talent Agencies Act (“TAA”), regulate these types of agreements. The TAA vests original jurisdiction to hear and determine controversies arising under the TAA in the California Labor Commissioner. Appeals from Commissioner decisions are made to the California Superior Courts.
In January 2015, Phillips filed a petition before the Commissioner claiming violations of the TAA and breaches of the agreements between himself and AOG. AOG filed an answer and the matter was assigned to a hearing officer for December 4, 2015. The hearing was adjourned without a new hearing date being set. Matters were briefed and documents were filed under seal with the hearing officer in the interim. On April 28, 2016, AOG and its related companies filed for Chapter 11 in the SDNY and the California proceedings were stayed. The Debtors then filed a complaint against Phillips in the bankruptcy case claiming, among other things, anticipatory repudiation and breach of contract. Phillips filed an answer denying the material allegations and raising affirmative defenses. The Debtors confirmed a plan of reorganization in September 2016 and they had previously designated their agreements with Phillips as contracts to be assumed under section 365 while contesting the validity of them. An interim resolution allowed the plan of reorganization to go forward while the disputes over the Phillips agreements were resolved.
Phillips had filed a motion seeking mandatory, or in the alternative, permissive abstention. Phillips argued that mandatory abstention applied, the dispute was a garden variety, non-core contract action, and the California Labor Commissioner had exclusive and original jurisdiction over TAA disputes. In the end, the bankruptcy court denied Phillips’ request for mandatory abstention but granted the request for permissive abstention.
Title 28, section 1334(c) of the US Code governs mandatory abstention. The bankruptcy court must abstain if (1) a motion is timely filed, (2) the action is based on a state law claim, (3) the action is related to but not arising in a bankruptcy case or arising under the bankruptcy code, (4) section 1334 provides the sole basis for federal jurisdiction, (5) an action was commenced in state court, and (6) that action can be timely adjudicated in state court. In this case, the bankruptcy court found that Phillips failed one factor — diversity jurisdiction between the parties existed (Phillips resides in Georgia, the Debtors are incorporated in either Delaware or New York, and the principal place of business is California).
The bankruptcy court then turned to permissive abstention and found in Phillips’ favor. Under Title 28, section 1334(c)(1) of the US code, the court has the discretion to abstain from hearing cases in the interests of justice, or in the interests of comity with State court or respect for State law. The courts look at a variety of factors implicating concerns of judicial efficiency, the nature of the state laws, the relation of the dispute to the bankruptcy case, if forum shopping is in play, and the presence of non-debtor parties. After looking at the factors, the court decided, among other things, that Phillips’ claims were garden variety breach of contract claims that could not decided without the TAA claims and the state law questions predominated. Debtors cannot run to the bankruptcy court, especially after a plan has been confirmed and consummated, to have that court decide every dispute it runs into.