Opinion
No. 01 Civ 8854 (LTS) (THK)
December 18, 2003
KAPLAN, THOMASHOWER LANDAU LLP, New York, NY, for Plaintiff
ENGEL McCARNEY, New York, NY, for Defendant Scott J. Hyten
MICHAEL A. CHODOS, ESQ., Palos Verdes Estate, CA, for Plaintiff
MEMORANDUM OPINION AND ORDER
This is an action for breach of contract brought by Urban Box Office Network, Inc. ("Plaintiff" or "UBO") against Interfase Managers, L.P., various other business entities, Scott J. Hyten, and DOES 1 through 100, inclusive ("Defendants"). Plaintiff initiated this action as an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York, invoking that court's subject matter jurisdiction pursuant to 28 U.S.C. § 157 and 1334. The action was transferred to this court upon the grant of Defendant Hyten's unopposed motion to withdraw the reference to the bankruptcy court. Defendant Hyten, who is alleged to be the principal and/or alter ego of the remaining defendant entities, has now moved pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure to dismiss the action for lack of subject matter jurisdiction. For the reasons stated below, the motion is denied.
By stipulation and order dated March 18, 2002, UBO dismissed its claims against R. Steven Hicks, Capstar Investments Partners, LP, and Capstar Partners, LLC. See Declaration of Thomas E. Engel dated May 31, 2002 Ex. 4. The parties agree that Plaintiffs second cause of action, for equitable subordination, was mooted by the bankruptcy court's expungement of certain claims asserted in UBO's bankruptcy proceedings.See infra n. 4.
BACKGROUND
In its Complaint UBO alleges that, in August and September 2000, Defendants entered into a contract with UBO to purchase $20 million in UBO stock. See Complaint, Affidavit of Jonathan P.Wolfert dated July 12, 2002 ("Wolfert Aff") Ex. A, ¶ 14. UBO further alleges that, in late September 2000, Defendants advanced $3 million to UBO in anticipation of the stock purchase and knowingly gave UBO false assurances of proper and timely performance of their contractual obligations. See id., ¶¶ 18-19. Finally, UBO alleges that, in October 2000, Defendants breached the agreement by refusing to purchase the UBO stock and that, as a result, UBO ran out of funds and was forced to shut down its operations.See id., ¶ 20.
On November 2, 2000, UBO filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. See Wolfert Aff. Ex. Q, Docket Sheet entry #1. On December 11, 2000, UBO commenced this adversary proceeding against Defendants in the bankruptcy court, alleging breach of contract and seeking equitable subordination of Defendants' $3 million secured claim in the bankruptcy proceeding.See Wolfert Aff. Ex. A. On May 30, 2001, the bankruptcy court determined that the breach of contract claim appeared to be a non-core proceeding but that the equitable subordination claim was likely a core proceeding. See Wolfert Aff. Ex. F. The bankruptcy court decided to try the issues together and enter proposed findings as to the breach of contract claim. See id.
UBO's bankruptcy proceeding was assigned Bankruptcy Case No. 00 B 42468.
Core proceedings are civil proceedings that arise under title 11 or arise in bankruptcy cases under title 11, while non-core proceedings are civil proceedings that are merely related to cases under title 11. See 28 U.S.C.A. §§ 157, 1334 (West 1993 Supp. 2003); Plaza at Latham Assocs. v. Citicorp N. America. Inc., 150 B.R. 507, 510-11 (N.D.N.Y. 1993).
UBO's equitable subordination cause of action became moot on November 20, 2001, when the bankruptcy court expunged the claim.See Declaration of Thomas E. Engel dated May 31, 2002 ("Engel Decl.") Ex. 2.
On September 25, 2001, UBO filed its First Amended Chapter 11 Plan of Reorganization (the "Plan" or "Plan of Reorganization") with the bankruptcy court. See Wolfert Aff. Ex. O. On October 17, 2001, this Court granted as unopposed Defendant Hyten's motion to withdraw the reference from the bankruptcy court so that the breach of contract action could be tried by a jury in the district court. See Declaration of Thomas E. Engel dated May 31, 2002 ("Engel Decl.") Ex. 3. The bankruptcy court confirmed UBO's Plan of Reorganization on November 28, 2001. See Wolfert Aff. Ex. P. On February 5, 2002, the bankruptcy court directed, as part of its Post Confirmation Order, that a Final Decree closing the bankruptcy case be filed on May 28, 2002. See Engel Decl. Ex. 7. On May 31, 2002, Defendant Hyten filed the instant motion to dismiss the breach of contract action for lack of subject matter jurisdiction. On August 23, 2002, the bankruptcy court granted UBO's motion to amend the Post Confirmation Order by postponing the deadline for filing a Final Decree. To this Court's knowledge, a Final Decree has not yet been filed.
DISCUSSION
Federal district courts have subject matter jurisdiction of title 11 bankruptcy cases pursuant to 28 U.S.C. § 1334. That statute also confers upon the district courts jurisdiction of "all civil proceedings arising under title 11, or arising in or related to cases under title 11." See 28 U.S.C.A. § 1334(b) (West 1993 Supp. 2003).
The parties agree that, if subject matter jurisdiction exists in this case, it must be based upon the Court's jurisdiction of all civil proceedings "related to cases under title 11." Although "related to" jurisdiction is not limitless, Congress intended to grant federal district and bankruptcy courts comprehensive jurisdiction so that they might deal efficiently with all matters connected with the bankruptcy estate. See Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995). Moreover, "related to" jurisdiction may extend more broadly when it concerns a reorganization under Chapter 11 as opposed to a liquidation under Chapter 7. See id. at 310. The dominant test for "related to" jurisdiction is that set forth by the Third Circuit inIn re Pacor. Inc., 743 F.2d 984, 994 (3d Cir. 1984), where the court held that a civil proceeding is "related to bankruptcy" if "the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy." See Celotex, 514 U.S. at 308 n. 6. Although the Second Circuit has articulated the test as whether a civil proceeding has a "significant connection with bankruptcy," see Turner v. Ermiger, 724 F.2d 338, 341 (2d Cir. 1983), satisfaction of either test suffices to establish "related to" jurisdiction under 28 U.S.C. § 1334(b). See Publicker Industries Inc. v. United States (In re Cuvahoga Equipment Corp.X 980 F.2d 110, 114 (2d Cir. 1992).
The Court has jurisdiction of this case because the case has a significant connection with UBO's bankruptcy and has a conceivable effect on UBO's bankruptcy estate. Plaintiff, the debtor in the bankruptcy proceeding, has sued Defendants, some or all of whom had filed claims in UBO's bankruptcy proceeding, for damages arising from their alleged failure to perform a contract to purchase $20 million in UBO stock. This action, in which UBO asserts that Defendants' alleged breach of contract precipitated its bankruptcy filing, was commenced approximately one month after UBO's bankruptcy filing. Defendants do not seriously dispute that the pursuit of this cause of action, which was unquestionably an asset of UBO's bankruptcy estate (see 11 U.S.C.A. § 541(a) (West 1993 Supp. 2003)), had a "significant connection" with UBO's bankruptcy so as to warrant "related to" jurisdiction as of the time the action was commenced.
Rather, Hyten argues chiefly that the confirmation of UBO's Plan of Reorganization divested the Court of "related to" jurisdiction over UBO's breach of contract claim. This argument is meritless. Subject matter jurisdiction is assessed as of the commencement of an action.Freeport-McMoRan. Inc. v. K N Energy. Inc., 498 U.S. 426, 428 (1991) ("We have consistently held that if jurisdiction exists at the time an action is commenced, such jurisdiction may not be divested by subsequent events."). Moreover, UBO's Plan specifically provides for the distribution to creditors of any net proceeds that the instant action may yield and for retention of jurisdiction over this litigation. See Wolfert Aff. Ex. O, Plan of Reorganization, ¶ 10.05(c). The outcome of the instant action will affect the size of UBO's estate and the assets available for distribution to its creditors. It has been held that "[a] civil proceeding is related to a bankruptcy [even] where an action between non-debtors would affect how much property is available for distribution to the creditors of a bankruptcy estate or the allocation of property among such creditors, or if the outcome could alter the debtor's rights or liabilities." See Geron v. Schulman fin re Manshul Construction Corp.), 225 B.R. 41, 45 (Bankr. S.D.N.Y. 1998) (citing In re Kolinsky, 100 B.R. 695, 702 (Bankr. S.D.N.Y. 1989)) (emphasis added). A fortiori, a civil proceeding is related to a bankruptcy where one of the parties is the debtor and where the outcome will affect how much property is distributed to its creditors. Therefore, the Court has "related to" jurisdiction of the instant lawsuit pursuant to 28 U.S.C. § 1334(b).
Hyten further argues that "related to" jurisdiction was vitiated upon this Court's withdrawal of the reference of this adversary proceeding and that the Plan's provision for bankruptcy court retention of jurisdiction is ineffective to support the exercise of continued jurisdiction by this court. Both positions are premised on a misperception of the relationship between district courts and bankruptcy courts and they are equally baseless.
The Bankruptcy Code grants jurisdiction in the first instance to the district courts of bankruptcy cases and matters arising under the Code or arising in or related to bankruptcy cases. 28 U.S.C.A. § 1334 (West 1993 Supp. 2003). 28 U.S.C. § 157(a) allows district courts to refer such cases and proceedings to the bankruptcy judges for their respective districts and further empowers the district courts to withdraw, in whole or in part, sua sponte or upon motion, any such referred matters. "Related to" jurisdiction thus is not limited to the bankruptcy court, and any jurisdiction exercisable by the bankruptcy court is necessarily derived from the jurisdiction of the district court. Since a district court has jurisdiction of all matters of which the bankruptcy court has jurisdiction, this court has jurisdiction of UBO's breach of contract action notwithstanding the withdrawal of the reference to the bankruptcy court. The Plan's provision for the retention of jurisdiction of this civil proceeding is effective to support the continued exercise of jurisdiction over the matter in this court.
Falise v. The American Tobacco Co., 241 B.R. 48 (E.D.N.Y. 1999), which Hyten cites for the proposition that confirmation or substantial consummation of UBO's Plan divested this court of jurisdiction, is not to the contrary. Falise involved a lawsuit commenced several years after plan confirmation and the termination of bankruptcy proceedings involving the asbestos manufacturer Johns-Manville Corporation ("Manville"), by a trust established to pay asbestos-related claims against Manville's estate. The trust sued major tobacco companies ("Tobacco"), seeking recovery over on asbestos-related claims, on account of Tobacco's alleged role in contributing to asbestos-related injuries.See id. at 51. The district court held that it had no "related to" jurisdiction of the case because Manville's plan of reorganization had already been confirmed and the bankruptcy proceeding had been terminated, and because the reorganization plan did not provide for continuing jurisdiction of the litigation. See id. at 56-60. Here, by contrast, the action was commenced early in the bankruptcy case, the Plan specifically provides for continuation of the litigation and distribution to creditors of the net proceeds thereof, and the Plan further provides specifically for retention of jurisdiction of the litigation. See Plan §§ 10.05(b), (c); 12.01(d), (e).
Confirmation of a plan of reorganization does not terminate "related to" jurisdiction for all purposes. As the United States Court of Appeals for the Fifth Circuit recently explained, "[a]fter a debtor's reorganization plan has been confirmed, the debtor's estate, and thus bankruptcy jurisdiction, ceases to exist, other than for matters pertaining to the implementation or execution of the plan." Craig's Stores of Texas. Inc. v. Bank of Louisiana, 266 F.3d 388, 390 (5th Cir. 2001) (citing, e.g., Hospital and Univ. Property Damage Claimants v. Johns-Manville Corp. Tin re Johns-Manville Corp.), 7 F.3d 32, 34 (2d Cir. 1993)) (emphasis added). In the instant case, the lawsuit pertains directly to the implementation of the Plan.
CONCLUSION
For the reasons stated above, the Court has subject matter jurisdiction of the instant action pursuant to 28 U.S.C. § 1334(b). Therefore, Defendant Hyten's motion to dismiss the action for lack of subject matter jurisdiction is denied. The parties shall meet with each other promptly to discuss settlement and the discovery required to be completed, and shall appear for a pre-trial conference on January 27, 2003, at 4:30 p.m.
SO ORDERED.