Opinion
Case No. 97-15864-SSM, Adversary Proceeding No. 97-1499
March 24, 1998
Daniel L. Hawes, Esquire, Fairfax, VA, for Plaintiff, Pro se
Steven M. Frei, Esquire, Haight, Tramonte, Siciliano, Flask Yeonas, P.C., Vienna, VA, Of Counsel for defendant
Gerald M. O'Donnell, Esquire, Alexandria, VA, for Chapter 13 trustee
MEMORANDUM OPINION AND ORDER
A hearing was held on March 10, 1998, on the plaintiff's motion under F.R.Bankr.P. 7017 to join Hawes Associates, P.C. . . . the debtor's wholly-owned professional corporation . . . as a plaintiff in this adversary proceeding. Defendant's counsel was not present because of a conflict in another court, but it was represented that the defendant had no objection to the motion to join. Because the court was concerned that it would not have jurisdiction over an action brought by the debtor's corporation, rather than the debtor individually, the court took the motion under advisement. Upon review of the applicable law, the court concludes that joinder or substitution of the corporation as plaintiff will not defeat jurisdiction, but that, regardless of whether the debtor or his corporation is the proper party plaintiff, this action is not a core proceeding.
The defendant had filed a motion to dismiss under F.R.Bankr.P. 7012 for failure to state a claim for relief. That motion was continued to April 28, 1998, at 9:30 a.m.
Background
The debtor, Daniel L. Hawes, is an attorney. He filed a voluntary petition under chapter 13 of the Bankruptcy Code in this court on August 7, 1997. A plan has not yet been confirmed.
On his schedules, the debtor, who is proceeding pro se, listed among his assets $35,371.92 in accounts receivable from his law practice. The present adversary proceeding, which was commenced on December 31, 1997, seeks to recover $5,484.85 due under a contract for legal services between "Hawes Associates" and Innovative Micro Products, Inc., the defendant. The contract is attached as an exhibit to the complaint. The defendant filed a motion under F.R.Bankr.P. 7012 and Fed.R.Civ.P. 12(b)(6) to dismiss the complaint on the ground that any legal fees due were owed to Hawes Associates, P.C., a professional corporation, and not to the debtor individually. In response, the debtor has filed the current motion to join his professional corporation as a plaintiff. At the hearing, the debtor admitted that "Hawes Associates" was a professional corporation but represented that he was the sole shareholder of the corporation.
The debtor's interest in the corporation is not listed on Schedule B. The debtor explained that he had not previously focused on the existence of the corporation as a separate entity, and that the corporation did not have its own operating bank account. The debtor should promptly amend his schedules to reflect his interest in the corporation.
Discussion A.
Federal Rule of Civil Procedure 17(a), made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7017, requires that all actions be prosecuted in the name of the "real party in interest," but, where a challenge is made that the plaintiff is not the real party in interest, allows such party to be joined with, or substituted for, the plaintiff. The question is whether this court would have jurisdiction to hear and determine a cause of action asserted by a party that is not itself a debtor, and which is asserted against another party that is neither a creditor nor has any other direct connection with the case.
The relevant text of Rule 17(a) is as follows:
(a) Real Party in Interest. Every action shall be prosecuted in the name of the real party in interest. . . . No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest; and such ratification, joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.
Under 28 U.S.C. § 1334(a) and (b), bankruptcy judges, in matters referred to them by the district court under 28 U.S.C. § 157(a), have exclusive jurisdiction over bankruptcy "cases" and concurrent jurisdiction with other courts over "civil proceedings" that "arise under" the Bankruptcy Code or that "arise in" or are "related to" a bankruptcy case. In this district, all such civil proceedings have been referred to the bankruptcy judges by a standing order of referral from the United States District Court dated August 15, 1984. However, as Chief Judge Bostetter of this court has explained,
Like other federal courts, bankruptcy courts are courts of limited jurisdiction, and as such, they "must be alert to overstepping their limited grants of jurisdiction." At any stage of a litigation . . . subject-matter jurisdiction may be questioned. By failing to do so, the parties cannot confer jurisdiction by consent. If the court perceives the defect, it is obligated to raise the issue sua sponte. "It is to be presumed that a cause lies outside this limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting jurisdiction."
Poplar Run Five L.P. v. Virginia Electric Power Co. (In re Poplar Run Five L.P., 192 B.R. 848, 854-55 (Bankr. E.D. Va. 1995) (internal citations omitted). To determine whether a civil case "arises under" the Bankruptcy Code, a court must
apply the same test for deciding whether a civil action presents a federal question under 28 U.S.C. § 1331. This means that "arising under" jurisdiction in bankruptcy extends to "only those cases in which a well-pleaded complaint establishes either that federal [bankruptcy] law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal [bankruptcy] law.
Id. (internal citations omitted) (alterations in original). Proceedings "arising in" a bankruptcy case, as the Fourth Circuit recently explained, are those proceedings that "are not based on any right expressly created by [the Bankruptcy Code], but nevertheless would have no existence outside of the bankruptcy." Bergstrom v. Dalkon Shield Claimants Trust (In re A. H. Robins Co., Inc.), 86 F.3d 364, 372 (4th Cir. 1996), cert. denied, U.S. —,117 S.Ct. 483, 136 L.Ed.2d 377 (1996). Finally, the "related to" category of proceedings is "quite broad and includes proceedings in which the outcome could have an effect on the estate being administered." Id., citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984) ("An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedoms of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.") Nevertheless, the "related to" category is not so broad as to encompass litigation of state law claims that will not have an effect on the bankruptcy estate, simply because one of the litigants filed a petition in bankruptcy. Lux v. Spotswood Construction Loans, 176 B.R. 416 (E.D. Va. 1994), aff'd, 43 F.3d 1467 (table), 1994 WL 621820 (4th Cir. 1994) (after chapter 7 case was closed, there was no "related to" jurisdiction over adversary proceeding brought by debtor challenging a foreclosure).
The Pacor formulation was cited with approval by the Supreme Court in Celotex Corp v. Edwards, 514 U.S. 300, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995).
This is a chapter 13 individual reorganization case in which the debtor is proposing to pay his creditors over time from income he expects to earn in his law practice. There appears to be no dispute that the debtor is the sole shareholder of his law firm, Hawes Associates, P.C., and thus, as a practical matter the likely beneficiary of any monetary recovery by the corporation. Whether those funds, if recovered and paid by the corporation to the debtor, are then paid directly to the chapter 13 trustee or whether instead, by covering the debtor's living expenses or office overhead, they free up other funds that can then be paid into the plan, the effect either way is to promote the debtor's reorganization efforts. See Kolinsky v. Russ (In re Kolinsky), 100 B.R. 695 (Bankr. S.D. N.Y. 1989) (bankruptcy court had "related to" jurisdiction over action by chapter 11 debtor's wholly-owned corporation to rescind a sale of real estate to a third party where such action could affect the amount of property available for distribution to creditors). Accordingly, the court concludes that "related to" subject matter jurisdiction exists under 28 U.S.C. § 1334(b).
B.
One remaining issue, however, requires discussion. In his complaint, the debtor alleges that this action is a "core" proceeding within the meaning of 28 U.S.C. § 157(b). Under 28 U.S.C. § 157(b), bankruptcy judges may hear and enter final judgments or orders with respect to "core" proceedings "arising under" the Bankruptcy Code or "arising in" a bankruptcy case. A bankruptcy judge may also "hear" . . . that is, may conduct the trial . . . of non-core "related" proceedings, but may not enter a final judgment or order unless all parties consent, 28 U.S.C. § 157(c). Absent such consent, the bankruptcy judge transmits recommended findings of fact and conclusions of law to the District Court, which must review de novo those matters to which any party has timely and expressly objected. Id; F.R.Bankr.P. 9033.
See, 28 U.S.C. § 157(b)(3):
The bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11.
(emphasis added).
As one court in this district has aptly observed, "The statute's definitions of core and non-core related proceedings are quite opaque." In re McLean Square Associates, G.P., 200 B.R. 128 (E.D. Va. 1996) (Ellis, J.). Nevertheless, it seems clear that any matter which is only "related to" a bankruptcy case is by definition non-core:
Essentially, a core proceeding connotes those actions created or determined by a provision of title 11 or matters that can only arise in the context of a bankruptcy case. A non-exhaustive list of examples is set forth in the statute at § 157(b)(2). On the other hand, a non-core related proceeding exists independently of title 11 and the particular bankruptcy case at issue but nevertheless affects the outcome.
Id. at 133 (internal citations omitted). That a debtor's pre-petition state-law causes of action against a party who is not a creditor in the case are not core proceedings is apparent from the Supreme Court decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). In Marathon, a chapter 11 debtor in possession (Northern) brought an action in the bankruptcy court against a non-creditor third party (Marathon) to recover damages for a pre-petition breach of contract. The defendant asserted that former 28 U.S.C. § 1471(c), which gave jurisdiction over such actions to bankruptcy judges, was unconstitutional. The Supreme Court agreed, and held that the broad grant of jurisdiction to bankruptcy judges violated Article III of the Constitution and that "a `traditional' state common-law action, not made subject to a federal rule of decision, and related only peripherally to [a bankruptcy case], must, absent the consent of the litigants, be heard by an `Art. Ill court' if it is to be heard by any court or agency of the United States." Marathon, 458 U.S. at 92, 102 S.Ct. at 2882 (summary of majority holding as explained by Burger, C.J., dissenting).
In response to Marathon, Congress enacted the current jurisdictional scheme in 1984. Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353. Borrowing a turn of phrase from Justice Brennan's plurality opinion in Marathon ("[T]he restructuring of debtor-creditor relations . . . is at the core of the federal bankruptcy power"), the statute drew the present distinction between "core" proceedings that could be heard and determined by Article I bankruptcy judges, and non-core matters which, absent the consent of the parties, had to be decided by Article III district judges. Given the genesis of the core/non-core distinction, it is obvious that the precise type of action that was before the Supreme Court in Marathon — a debtor's prepetition state law cause of action against a party who is not a creditor or otherwise involved in the case — necessarily lies outside the "core" of the federal bankruptcy power. And if the debtor's own cause of action would be non-core, his corporation's cause of action surely must be non-core.
See 1 Collier on Bankruptcy ¶ 3.01, p. 3-23 (Lawrence P. King, ed., 15th ed. rev. 1997):
In light of the Marathon case, the legislative history surrounding the 1984 jurisdictional proceedings, and the post-1984 case law, it seems clear that . . . "related proceedings" are those . . . which (1) involve causes of action owned by the debtor that become property of the estate under section 541, and (2) are suits between third parties which "in the absence of bankruptcy, could have been brought in a district court or a state court."
C.
The fact that this proceeding is non-core does not, as discussed above, affect this court's jurisdiction, nor its power to conduct a trial of this action; it is simply a limitation on this court's power to enter a final judgment or order unless the parties consent. Federal Rule of Bankruptcy Procedure 7008 requires: "In an adversary proceeding before a bankruptcy judge, the complaint, counterclaim, cross-claim, or third-party complaint shall contain a statement that the proceeding is core or non-core, and, if non-core, that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy judge." Similarly, Federal Rule of Bankruptcy Procedure 7012(b) requires: "A responsive pleading shall admit or deny an allegation that the proceeding is core or non-core. If the response is that the proceeding is non-core, it shall include a statement that the party does or does not consent to entry of final orders or judgment by the bankruptcy judge." Accordingly, in view of the court's determination that this proceeding is non-core, the court will require that the debtor and Hawes Associates, P.C. file with the court a statement as to whether they consent to the entry of a final order or judgment by a bankruptcy judge. Additionally, at such time as the defendant files a responsive pleading, the defendant will be required to state whether or not it consents to the entry of a final order or judgment by a bankruptcy judge.
There is, however, this caveat: if the defendant timely demands . . . and under Granfinanceria v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) is entitled to . . . a jury trial, such trial will have to be conducted by the District Court, since the bankruptcy judges in this district are not at this time specially designated under 28 U.S.C. § 157(e) to conduct jury trials.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The motion to join Hawes Associates, P.C., as a plaintiff is granted.
2. This adversary proceeding is determined to be a related non-core proceeding.
3. All plaintiffs shall, within ten (10) days of the entry of this order, file with the clerk, and serve upon the defendant, a statement as to whether they consent to the entry of a final judgment or order by a bankruptcy judge in this adversary proceeding.
4. In its responsive pleading, the defendant shall state whether it consents to the entry of a final judgment or order by a bankruptcy judge in this adversary proceeding.
5. The clerk shall mail a copy of this memorandum opinion and order to the plaintiff, counsel for the defendant, and the chapter 13 trustee.