Opinion
No. 85-A-2277-PM.
March 30, 1989.
Nelson C. Cohen, attorneys for the debtors.
Joyce A. Kuhns, attorney for the defendants.
Roger Schlossberg, attorney for the defendants.
Jurisdiction-Partnerships-Realty — Property of the Estate — Foreclosure Sale — Injunctions. — A bankruptcy court lacked subject matter jurisdiction over the review of a foreclosure sale of partnership realty, inasmuch as the filing of bankruptcy by all partners of a partnership did not cause the partnership to be placed into bankruptcy. As a separate entity from its partners, the partnership was required to file a separate bankruptcy case. The partnership did not. The realty was purchased in the partnership name, which made it part of the partnership assets. No injunction was issued which extended the protection to the partnership. For these reasons, the case was dismissed.
See 28 U.S.C. § 1334 at ¶ 4101, Sec. 302(a) at ¶ 8002, and Sec. 541(a)(1) at ¶ 9502.
Two matters are jointly before the court. In the first matter (88-A-0241-PM), Kenneth P. Kennedy ("Kennedy") and Pelican Island Groves move to dismiss debtors' complaint to avoid the foreclosure sale of realty sited in Indian River County, Florida, and for damages occasioned by the foreclosure. In the second matter (87-0377A), Pelican Island Groves moves for summary judgment on the debtors' motion for contempt and sanctions. The creditors' committee initiated the complaint, seeking to enjoin the sale of the property. The debtors intervened and, after the foreclosure, filed their motion for contempt. The court heard both matters on February 15, 1989. Because the subject property at the heart of both matters belonged to P.A.K. Associates and not the debtors, this court lacks subject matter jurisdiction over the property and must grant the motions to dismiss.
FACTS
The property at issue is part of two sizable parcels of land located in Indian River County, Florida, previously titled to Pelican Island Groves. Pelican Island Groves is a Florida partnership composed of Max D. Puyanic; Robert Russell; Susan Russell; Peter Previti; Albarc, Inc.; and Pelican Island Groves, Inc. On December 15, 1983, Pelican Island Groves conveyed one parcel by a warranty deed and the other parcel by a quitclaim deed. The grantee named on both deeds is "P.A.K. Associates, a Florida general partnership." Both conveyances were subject to the mortgage held by Henry Gesmer. Additionally, P.A.K. Associates granted a purchase-money second mortgage to Pelican Island Groves. Amile A. Korangy signed the mortgage on behalf of P.A.K. Associates.
Previous to the conveyances, Amile Korangy, P.A.K. Associates, and Korangy Radiology Associates, Inc. had entered into a land trust agreement with the Beach Bank of Vero Beach on April 28, 1983. Pursuant to that agreement, P.A.K. Associates by its general partner, Amile Korangy reconveyed part of the property acquired from Pelican Island Groves to the Beach Bank of Vero Beach as trustee on May 9, 1984. On May 16, 1984, Great Western Savings took a third mortgage on the property conveyed to the trustee through a document styled, "Mortgage Modification and Spreader."
Mortgage payments were not made, and Pelican Island Groves and Great Western Savings began foreclosure actions in Indian River County Circuit Court. The debtors filed their petition under Chapter 11 with this court on December 12, 1985. That petition names as debtors Amile A. Korangy, M.D., and Parvane S. Korangy d/b/a P.A.K. Associates.
Upon the commencement of this case, the parties believed that 11 U.S.C. § 362(a) stayed the foreclosure proceedings in the Florida court. Thereafter followed motions to modify the automatic stay under § 362(d) by Pelican Island Groves (86-M-0029A) and Great Western Savings (86-M-0179A). The court consolidated the motions and, after protracted litigation, lifted the stay on November 16, 1987.
Pelican Island Groves obtained from the Florida court an order for a foreclosure sale scheduled on December 30, 1987, between 11 a.m. and 2 p.m. The creditors' committee then initiated the first of the instant matters (87-0377A) to stop the foreclosure inasmuch as a potential buyer for the property had been found. The court heard the committee's motion for a temporary restraining order (TRO) on December 29, 1987. At the conclusion of the hearing, the court signed an order enjoining Pelican Island Groves from continuing in any way with the foreclosure sale.
However, foreclosure sales in Florida are not conducted by the mortgagee but by the clerk of the court pursuant to the court's order. When informed of the TRO by Florida counsel for Pelican Island Groves, the Clerk of the Indian River County Circuit Court responded that the TRO did not enjoin her and would be ineffective to stop the sale.
Meanwhile, Pelican Island Groves had appealed the TRO to the United States District Court for the District of Maryland. Judge Kaufman heard the matter on December 30, 1987. However, Judge Kaufman suspended the hearing shortly after 11 a.m. upon learning from Maryland counsel for Pelican Island Groves that the sale was proceeding as scheduled.
The property was sold to Kennedy for $1,360,000.
The debtors continued litigation over the property in this court and in the Florida court. In Florida, debtors objected to the foreclosure sale. However, the judge for the Indian River County Circuit Court confirmed the sale.
This court permitted the debtors to intervene in the adversary proceeding commenced by the creditors' committee. The debtors then moved for sanctions and an order holding Pelican Island Groves in contempt. In response, Pelican Island Groves moved for summary judgment, and the court herein considers that motion.
Additionally, debtors instituted an adversary proceeding (88-A-0241-PM) to avoid the foreclosure sale or for damages. Defendant Kennedy filed the present motion to dismiss the complaint. He is joined by his successors in interest added to the complaint by amendment: Kennedy Groves, Inc.; Wabasso Industrial Groves, Inc.; and Barnett Bank of Indian River County. Pelican Island Groves as well moved to dismiss the complaint.
DISCUSSION
The essence of defendants' argument is that the disputed realty was property of P.A.K. Associates partnership. Since the debtors filed a joint Chapter 11 case and did not place the partnership under protection of the court, only the debtors' interest in the partnership property came into the estate and not the property itself. Debtors counter that they constituted the entire partnership, and that the court should look beyond formalities to the substance and find that the realty is property of the estate.
In Adversary 88-A-0241-PM, defendant Kennedy raises three grounds for dismissal: lack of subject matter jurisdiction, failure to state a claim upon which relief can be granted, and failure to join a necessary party. Fed.R.Civ.P. 12(b)(1), (6), and (7) and Bankruptcy Rule 7012(b). Similarly, Pelican Island Groves raises lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted as grounds for dismissal. In Adversary 87-0377A, Pelican Island Groves' motion for summary judgment is predicated upon a lack of subject matter jurisdiction.
When presented with more than one ground for dismissal under Rule 12, a court should consider the challenge to subject matter jurisdiction first. Jeffrey Banks, Ltd. v. Jos. A. Banks Clothiers, Inc., 619 F. Supp. 998 (D. Md. 1985). In considering a Rule 12(b)(1) motion, the court may go beyond the allegations of the complaint where, as here, a defendant claims the jurisdictional bases are not true. Adams v. Bain, 697 F.2d 1213, 1214 (4th Cir. 1982). In so doing, the court may hold an evidentiary hearing and consider testimony by affidavit, deposition, and live evidence without converting the motion into one for summary judgment under Fed.R.Civ.P. 56. Id. Moreover, a motion for summary judgment that suggests a lack of subject matter jurisdiction, like Pelican Island Groves' motion in 87-0377A, can properly be treated as a Rule 12(b)(1) motion. See Indium Corp. of American v. Semi-Alloys, Inc., 781 F.2d 879 (Fed. Cir. 1985) cert. denied 107 S.Ct. 84 (1986).
The fact that this jurisdictional challenge is raised for the first time after extended litigation is of no moment. Rule 12(h)(3) makes it clear that the defense cannot be waived and can be raised at any time.
Rule 12(h). Waiver or Preservation of Certain Defenses.
(3) Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action.
No party in either matter has attempted to deceive the court or manipulate the judicial machinery by not raising the jurisdictional challenge until this late date. Kennedy only became involved in this case after the foreclosure sale, and Pelican Island Groves has changed counsel since the sale. None of the participants to these matters had anything to gain by not making the challenge earlier and have only spent valuable time, resources, and anguish.
Federal courts are courts of limited jurisdiction. Bender v. Williamsport Area School Dist., 106 S.Ct. 1326, 1331 (1986). Their jurisdiction is lacking until it is proved. Fairfax Countywide Citizens v. Fairfax County, 571 F.2d 1299 (4th Cir. 1978) cert. denied 439 U.S. 1047 (quoting Turner v. President, Directors and Company of the Bank of North America, 4 Dall. 7, 10 (1799)). The burden of proving jurisdiction is on the party asserting it. McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 182-83 (1936); Goldsmith v. Mayor City Council of Baltimore, 845 F.2d 61 (4th Cir. 1988).
Debtors claim jurisdiction in both matters under 28 U.S.C. § 1334, which states in pertinent part:
(d) The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction of all of the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.
The Bankruptcy Code, in turn, embraces a broad view of what comprises property of the estate. 11 U.S.C. § 541(a)(1) provides:
§ 541. Property of the estate.
(a) The commencement of a case under section 301, 301, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
The issue before the court, therefore, is what interest the debtors had in the disputed property.
The debtors in this case are Amile and Parvane Korangy. P.A.K. Associates is not a debtor notwithstanding the fact that the debtors listed themselves doing business as P.A.K. Associates on their petition and statement of financial affairs. 11 U.S.C. § 109(d) specifies that only a person can be a debtor under Chapter 11. A person, as defined by 11 U.S.C. § 101(35), includes an individual, partnership, or corporation. 11 U.S.C. § 302(a) permits only an individual and their spouse to be joint debtors. Individuals and a partnership or a corporation cannot be joint debtors.
Although a partnership cannot be a joint debtor with individuals, it can be a debtor in its own case. However, the Korangys by listing P.A.K. Associates on their petition did not place that entity in bankruptcy. The court in In re Clem, 29 B.R. 3, 5 (BC Idaho 1982) addressed the same factual situation and concluded, "[t]he first listed entity shall be treated as and deemed to be the debtor and all other listed entities disregarded."
No party disputes that P.A.K. Associates is a Florida general partnership. As such, P.A.K. Associates is subject to Florida partnership laws. Fla. Stat. § 620.595(3) (1987) provides:
The sine qua non of a partnership is an agreement to carry on a business as co-owners for profit. No evidence of such an agreement has been presented. Nevertheless, even if debtors disputed the issue, they are partners by estoppel through titling the property in the name of P.A.K. Associates, a Florida general partnership. They consistently held themselves out as partners in all their prepetition dealings respecting the disputed property. See Fla. Stat. § 620.635 (1987). See also In re Ward, 6 B.R. 93 (M.D. Fla. 1980) (wherein Judge Paskay discussed the existence of partnerships under Florida law in a husband-and-wife context).
Even if P.A.K. Associates is a Maryland partnership rather than a Florida partnership, the effect is the same inasmuch as both jurisdictions adhere to the Uniform Partnership Act.
620.594 Partnership property
(3) Any estate in real property may be acquired in the partnership name. Title so acquired may be conveyed in the partnership name.
The disputed property was acquired in the partnership name and became partnership property. The debtors' rights as partners are governed by Fla. Stat. § 620.675 (1987):
620.675 Extent of property rights of a partner
The property rights of a partner are:
(1) His right in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management.
The rights in specific partnership property are governed by Fla. Stat. § 620.68 (1987), which in pertinent part provides:
620.68 Nature of a partner's right in specific partnership property.
(1) A partner is coowner with his partners of specific partnership property holding as a tenant in partnership.
A tenancy-in-partnership interest is different than an ownership interest. This distinction was analyzed in In re Minton Group, Inc., 46 B.R. 222 (S.D. N.Y. 1985). The Minton court found that filing a petition dissolved a New York partnership but did not terminate it. The debtor's estate created by the filing included the debtor's interest in the specific partnership property, which was debtor's tenancy-in-partnership interest. However, the partnership continued to own the property. Thus the debtor's estate included an interest in specific partnership property, but the property itself did not become part of the debtor's estate. Rather debtor's estate included the debtor's entitlement to the distribution as a partner upon the winding up of partnership affairs. Accord In re Fulton, 43 B.R. 273 (BC M.D. Tenn. 1984) (applying Tennessee law).
Fla. Stat. §§ 620.705 and 620.71 (1987) are the comparable Florida provisions. The reasoning in Minton tracks Florida law.
The foregoing analysis seems dispositive, precluding subject matter jurisdiction by this court over the disputed property. However, debtors attempt to shoulder their burden of proving subject matter jurisdiction by a more subtle argument. Debtors do not deny that the property belonged to the partnership. Indeed, they could not do so given their past conduct regarding the property. Instead, debtors urge that, "[w]here, as here, the debtors are owners of the entire partnership, it would elevate form over substance to hold that partnership property does not become part of the bankruptcy estate." Plaintiff's Opposition to Defendant Kennedy's Motion to Dismiss at 7.
Debtors claim that they constituted all of P.A.K. Associates. Yet, the debtors only listed a 75% interest in P.A.K. Associates on their schedule of personal property. However, debtors produced an affidavit of publication pursuant to the Florida fictitious name statute that P.A.K. Associates was owned 75% by Amile Korangy and 25% by Parvane Korangy. Defendants did not dispute this contention, and the court will assume arguendo that the debtors owned all of P.A.K. Associates.
While not directly on point, debtors' argument derives analogous support from the legislative history to 11 U.S.C. § 109(e) dealing with eligibility under Chapter 13, Adjustment of Debts of an Individual with Regular Income:
Whether a small business operated by a husband and wife, the so-called "mom and pop grocery store," will be a partnership and thus excluded from chapter 13, or a business owned by an individual, will have to be determined on the facts of each case. Even if partnership papers have not been filed, for example, the issue will be whether the assets of the grocery store are for the benefit of all creditors of the debtor or only for business creditors, and whether such assets may be the subject of a chapter 13 proceeding. The intent of the section is to follow current law that a partnership by estoppel may be adjudicated in bankruptcy and therefore would not prevent a chapter 13 debtor from subjecting assets in such a partnership to the reach of all creditors in a chapter 13 case. However, if the partnership is found to be partnership by agreement, even informal agreement, then a separate entity exists and the assets of that entity would be exempt from a case under chapter 13. (Emphasis added.)
H.R. Rep. No. 95-595, (95th Cong., 1st Sess. 320 (1977).
One commentator contradicts the legislative language that current law ( i.e. under the Act) permitted adjudication of a partnership by estoppel:
However, in order to proceed to adjudication the fact of an actual partnership, and not one by estoppel, must be shown. But a formal partnership agreement was not required. The mere "holding out" of a person as a partner was not of itself sufficient to bring the alleged partnership within the Act.
1A Collier on Bankruptcy Para. 5.02 at 691-94 (14th ed. 1978).
Debtors' argument — that since they constituted the entire partnership, all partnership property and liabilities should come into the estate — is not without appeal. In fact it was the law under the former Bankruptcy Act. 11 U.S.C. § 1 et seq. (repealed 1978). Section 5 of the Act (11 U.S.C. § 23) in part provided:
§ 5. Partners.
a. A partnership, including a limited partnership containing one or more general partners, during the continuation of the partnership business or after its dissolution and before the final settlement thereof, may be adjudged a bankruptcy either separately or jointly with one or more or all of its general partners.
b. A petition may be filed by one or more or all of the general partners in the separate behalf of a partnership or jointly in behalf of a partnership and of the general partner or partners filing the same: Provided, however, that where a petition is filed in behalf of a partnership by less than all of the general partners, the petition shall allege that the partnership is insolvent. A petition may be filed separately against a partnership or jointly against a partnership and one or more or all of its general partners.
* * * * *
i. Where all the general partners are adjudged bankrupt, the partnership shall also be adjudged bankrupt. In the event of one or more but not all of the general partners of a partnership being adjudged bankrupt, the partnership property shall not be administered in bankruptcy, unless by consent of the general partner or partners not adjudged bankrupt; but such general partner or partners not adjudged bankrupt shall settle the partnership business as expeditiously as its nature will permit and account for the interest of the general partner or partners adjudged bankrupt.
However, enactment of the Bankruptcy Code in 1978 altered the law. As previously stated, 11 U.S.C. § 302(a) does not contemplate joint individual and partnership cases:
§ 301. Joint cases.
(a) A joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual's spouse. The commencement of a joint case under a chapter of this title constitutes an order for relief under such chapter.
The change from the Act to the Code evinces a legislative intent to adhere to the "entity doctrine." The entity doctrine evolved under the Act and embodied the concept that a partnership should be treated as a legal entity for purposes of bankruptcy. See 1A Collier on Bankruptcy Para. 5.03 (14th ed. 1978). Under the Code, a partnership is to be considered a distinct legal entity apart from its partners, requiring a separate case.
Of course, partners remain primarily liable for partnership debts. Francis v. McNeal, 228 U.S. 695,699-700 (1913) (Holmes, J.). See also e.g., Md. Corps. Ass'ns Code Ann. § 9-307 (1985) (codifying partner liability for partnership debts under the Uniform Partnership Act) and 11 U.S.C. § 723 (giving a partnership trustee rights against general partners).
Even under the Act, filing by all the partners did not automatically place the partnership into bankruptcy. One commentator noted:
Subdivision i [of § 5] provides that "where all the general partners are adjudged bankruptcy, the partnership shall also adjudged bankrupt." Subject to this, the firm must petition or be petitioned against; and where an act of bankruptcy is required, a member thereof, acting within the scope of his authority, must have committed the alleged act. Rule 105(d) provides that "If all the general partners of a partnership are adjudged bankrupt, any party in interest may file a petition in any court in which a partner's bankruptcy case is pending to have the partnership adjudged a bankrupt," modifying the first sentence of § 5i. If adjudication follows, the firm as such must be adjudicated.
1A Collier on Bankruptcy Para. 5.03 at 696 (14th ed. 1978). This procedure under the Act has been continued in the Code. 11 U.S.C. § 303(b)(3) provides:
§ 303. Involuntary cases.
(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title —
(3) if such person is a partnership —
(A) by fewer than all of the general partners in such partnership; or
(B) if relief has been ordered under this title with respect to all of the general partners in such partnership, by a general partner in such partnership, the trustee of such a general partner, or a holder of a claim against such partnership.
The interrelation of partners with their partnership is recognized by the current Bankruptcy Rules. For example, Rule 1004(a) requires that all general partners must consent to the filing of a voluntary partnership petition. Rule 1015(b) permits a partnership case to be jointly administered with a general partner's case. Rule 2009(e) allows a single trustee to serve for both a partnership estate and general partner's estate when the estates are jointly administered.
In this case, however, P.A.K. Associates is not a debtor; the Korangys are. The court concludes that P.A.K. Associates does not qualify as a "mom and pop grocery store," were this a case under Chapter 13. Rather, P.A.K. Associates was a business entity dealing on an equal footing with other sophisticated commercial concerns. P.A.K. Associates took title to the disputed land worth over $1 million. In all the dealings with the various mortgages, P.A.K. Associates was treated as a separate, distinct entity from its general partner, Amile Korangy. The Korangys created P.A.K. Associates and must live with the consequences of their own making. Debtors cannot say the distinctness of a separate partnership entity is without import.
The Bankruptcy Code mandates the property of a partnership to be considered as separate from the property of the partners. This mandate ensures that all assets and liabilities of petitioning entities are segregated and before the court. Otherwise, partners could file for bankruptcy and include or exclude partnership assets and obligations as convenience requires. A deviation from this rule is found in such cases as A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994 (4th Cir. 1986), cert. denied, ___ U.S. ___, 107 S.Ct. 251 (1986). In an unusual situation under 11 U.S.C. § 105(a) courts have extended the protection of § 362(a) to non debtor co-defendants. Without passing upon whether or not that was appropriate here, the fact is that no such injunction was obtained.
In this case, the real property at issue was property of P.A.K. Associates and was never part of debtors' estate. There was no injunction issued extending protection to P.A.K. Associates. Because the disputed property is not property of debtors' estate, this court lacks subject matter jurisdiction over the property. Pursuant to Fed.R.Civ.P. 12(h)(3), this court must dismiss both adversary proceedings.
An order will be entered in accordance with the foregoing.
ORDER (Dismissing Adversary Proceedings 87-0377A and 88-A-0241-PM)
Adversary proceeding 88-A-02141-PM came before the court on the motions to dismiss by Kenneth P. Kennedy and Pelican Island Groves. Adversary proceeding 87-0377 came before the court on the motion for summary judgment by Pelican Island Groves. The motion for summary judgment is in the nature of a motion to dismiss for lack of subject matter jurisdiction, and is treated by the court as such. Having heard the matters on February 15, 1989, and in accordance with the Memorandum of Decision filed herewith, it is this 30th day of March, 1989, by the United States Bankruptcy Court for the District of Maryland,
ORDERED that the motions to dismiss filed by Kenneth P. Kennedy and Pelican Island Groves are granted and Adversary proceedings 87-0337A and 88-A-0241-PM are hereby dismissed for want of subject matter jurisdiction.