Opinion
Case No. 97-20252, Chapter 11, Adversary No. 98-2047
August 30, 1999
DECISION ON THIRD PARTY DEFENDANT THOMAS M. FALCEY'S MOTION TO DISMISS
On April 28, 1999, the court heard oral argument on Thomas M. Falcey's motion to dismiss the third party complaint filed against him by defendant and third party plaintiff, William J. Young. The court took the motion under advisement and is prepared to rule.
Background
The background discussing the relationship of the parties in this case is set forth in the court's simultaneous Decision on Motions for Summary Judgment and is incorporated herein.
The third party plaintiff, William J. Young (Young), was a former business associate of the debtor, Donald H. Albrecht (Albrecht). Young and Albrecht had direct business dealings and were also associated through several partnerships and corporations which may or may not have been validly constituted.
One of those business entities was Rivermeadows Associates, Ltd. (RMA), a California limited partnership. Albrecht was the managing general partner of RMA. On January 17, 1995, Albrecht caused RMA to file a chapter 11 petition for relief. Subsequently Thomas M. Falcey (Falcey) was appointed the chapter 11 trustee of the RMA estate.
Young is a limited partner of RMA with a 0.01% equity interest. However, Young has more at stake than that. He is a partner in a California limited partnership called Crescent Investments, Ltd. (Crescent). Crescent also asserts a limited partnership interest in RMA of 29.99%.
Tom H. Connolly (Connolly) is the chapter 11 trustee of the estate in the underlying bankruptcy case. He disputes the extent of Crescent's interest in RMA, asserting that the 29.99% interest is property of the Albrecht estate.
On December 3, 1998, this court confirmed RMA's Third Amended Liquidating Plan of Reorganization Dated November 5, 1998. The order is a final order. Under the terms of that confirmed plan, Falcey was appointed the Liquidation Conservator.
Under the plan, the equity interests of Young and Crescent are treated in Class 8. Young is to be paid his undisputed equity interest on the effective date of the plan, except for any portion he may later be entitled to receive after disputed claims are resolved and paid. Funds representing the disputed equity interest of 29.99% are held in trust by Connolly. Under the terms of the plan, Connolly retains the exclusive right to prosecute claims of the RMA estate, and to litigate the dispute between the Albrecht estate and Crescent as to the extent of equity in RMA.
Young filed on his own and on Crescent's behalf, proofs of claim in the RMA case. Young's proof of claim includes a request for "Albrecht, as the managing general partner of Rivermeadows, to provide an accounting under applicable law." Young also alleges Albrecht breached his fiduciary duties owning to Crescent and Young in his role as managing general partner of RMA. Connolly, with the authority granted in the confirmed plan, objected to the proofs of claim.
Young also filed on his own and on Crescent's behalf, Proofs of Interest in the RMA case. Connolly also objected to those proofs. Litigation is pending in the RMA case on the four disputed claims. Falcey is not a party to that litigation.
Conclusions
Young filed his third party complaint against Falcey and Crescent seeking an accounting with regard to the affairs of RMA, a right to partnership distribution from RMA and other funds, and for fees and costs. Young filed an answer on behalf of Crescent, confessing the claim.
Falcey filed his motion to dismiss pursuant to Fed R. Bankr. P. 7012 and Fed.R.Civ.P. 12(b)(1)and 12(b)(6). Young responded claiming Falcey was an indispensable party as he is allegedly in possession of the financial information necessary for Young and Crescent to obtain an accounting and to prove their RMA based claims.
For purposes of a motion to dismiss, the court must take the facts of the third party complaint as true for purposes of the motion. However, the court does not have to take as true Young's conclusory statements therein.
Jurisdiction
Falcey argues the court has no jurisdiction over the third party complaint. The United States District Court has exclusive jurisdiction over matters in bankruptcy pursuant to 28 U.S.C. § 1334 (b). In this district, as all others, the matters are referred to the bankruptcy court under § 157(a). Thus, the bankruptcy court has jurisdiction over matters arising under Title 11, i.e., claims for relief created by the Bankruptcy Code; matters arising in Title 11, i.e., administrative matters and other claims which could not exist but for the bankruptcy case; and matters related to a bankruptcy case. In re Midgard, 204 B.R. 764 (Bankr. 10th Cir. 1997).
Young argues the third party complaint falls within the court's arising under jurisdiction because the complaint stated claims for relief pursuant to 11 U.S.C. § 544 and 548 by virtue of the doctrine of pendent jurisdiction. Pendent jurisdiction is not a jurisdictional basis by which bankruptcy jurisdiction can be obtained. The bankruptcy court's jurisdiction is wholly created and circumscribed by statute. Celotex Corp. v. Edwards, 514 U.S. 300, 307 115 S.Ct. 1493 (1995). The jurisdictional basis for Connolly's claims for relief against Young cannot support third party claims which must be viewed on their own merits for jurisdictional purposes.
Young also argues the court has "related to" jurisdiction over the third party complaint. The prevailing test for whether a matter is "related to" the bankruptcy case is whether it could conceivably have an effect on the estate being administered in bankruptcy. In re Gardner, 913 F.2d 1515, 1518 (10th Cir. 1990). Elaborating on the conceivable effect test, some courts require the matter must impact the handling and administration of the bankruptcy estate. Wee Luv Childcare, Inc. v. United States, 219 B.R. 607 (W.D.Okla. 1997). Other courts adopt a very expansive reading of "related to" jurisdiction. In re Toledo, 170 F.3d 1340, 1345 (11th Cir. 1999).
Nothing pleaded in the third party complaint satisfies this court that a request for an accounting of a liquidated partnership which has filed its own chapter 11 case could have an effect on the adversary proceeding before the court or the Albrecht case. Young's purpose in seeking the accounting is to establish entitlement to funds from the RMA case, not this case. RMA is a separate entity from Albrecht and filed its own separate chapter 11 case. Issues that affect partnership creditors should be litigated in the partnership case. In re Gunter, 179 B.R. 74, 75 (Bankr.S.D.Ohio 1995).
If the court does have "related to" jurisdiction over these issues, they are raised in the wrong arena. This is not a complaint related to administration of the Albrecht estate or claims' litigation in the Albrecht estate.
Failure to State a Claim
Falcey also argues that the third party complaint states no claim against him. The court agrees.
In this adversary case, the court simultaneously dismissed the RMA related counterclaims because they are pending and will be resolved in the RMA case. Young has not stated a setoff claim against Falcey, nor could he.
Young claims a right to an accounting from Falcey of the RMA partnership affairs. Whether under state law Young is entitled to an accounting from the partnership itself, rather than from the general partner, is not controlling.
Even if a partnership were liable to produce an accounting, which seems unlikely, the RMA partnership was liquidated pursuant to a confirmed chapter 11 plan. Young is bound by that confirmed plan which provides for no such proceedings against Falcey. Falcey is not the general partner of RMA or its successor in interest.
Nor is Young entitled to any distribution from the RMA estate that is not authorized by that confirmed plan. RMA cannot be bound by any judgment on an accounting except as provided in its plan. And finally, to the extent Young has a claim against Albrecht for a breach of fiduciary duty, that claim must be filed in and prosecuted in the Albrecht case and has nothing to do with Falcey.
In short, Young seeks relief from Falcey based on claims which have little to do with the Albrecht estate simply because the Albrecht estate is the successor in interest to an equity interest in RMA. Young has failed to show any basis to seek an accounting claim against Falcey.
This third party claim for relief against Falcey is only one of several claims brought in this case which border on the frivolous. The consequence has been a waste of court resources, an increase in the administrative costs to the Albrecht and RMA estates at the expense of the Albrecht estate's unsecured creditors, particularly those who cannot afford counsel. The ultimate reduction in funds available for creditors affects Young as well.
Accordingly, by simultaneous Order, the third party complaint against Falcey will be dismissed with prejudice and each party is to bear his own attorney fees and costs.