Opinion
CASE NO. 00-35214-SAF-7, ADVERSARY NO. 03-3163, CIVIL #3:03-CV-2273-N
November 19, 2003
REPORT TO DISTRICT COURT ON MOTION TO WITHDRAW REFERENCE
On September 30, 2003, the Cadle Company filed a motion to withdraw the reference. The United States Bankruptcy Court conducted a status conference on the motion on November 5, 2003. 11 U.S.C. § 105(d); L.B.R. 5011.1. The bankruptcy court submits the following report to the United States District Court:
1. On January 31, 2003, Scott Seidel, the Chapter 7 trustee of the bankruptcy estate of Jack E. Pratt, Jr., filed a complaint against Jack E. Pratt, Sr. The trustee's complaint alleged two claims against Pratt: one to avoid a transfer under the Texas Uniform Fraudulent Conveyance Act, a core matter, 28 U.S.C. § 157(b)(2)(H), and one for breach of fiduciary duty, a non-core matter.
2. By order entered September 8, 2003, in the underlying bankruptcy case, the bankruptcy court granted Seidel's motion to sell and assign the claims against Pratt, Sr., to Cadle for $30,000. The court authorized the trustee to make the sale without any warranty whatsoever.
3. On September 24, 2003, the court granted Cadle's motion to substitute as the plaintiff in this adversary proceeding. As the plaintiff, Cadle now moves to withdraw the reference.
4. Jack Pratt, Sr., the defendant, opposes the motion to withdraw the reference. Cadle had objected to the debtor's discharge. See The Cadle Company v. Pratt, adversary proc. no. 00-3600. Cadle premised its objection to discharge on the underlying facts concerning the transfer and distribution from certain trusts involved in the instant adversary proceeding. The bankruptcy court granted Pratt's discharge. Cadle has appealed that judgment. Meanwhile, the debtor, Pratt, Jr., has died. Pratt, Sr., argues that, in the event of a reversal, both adversary proceedings should be jointly tried in the bankruptcy court.
5. Cadle has filed a motion to stay the adversary proceeding pending a resolution of the motion to withdraw the reference. Bankruptcy Rule 5011. Pratt, Sr., has filed a motion to stay the adversary proceeding pending a decision on the appeal of adversary proc. no. 00-3600, the discharge complaint against the debtor. The bankruptcy court denied both motions from the bench on November 5, 2003. Assuming the instant litigation proceeds in either the bankruptcy or district court, the parties have to prepare for trial. A stay pending a decision on the motion to withdraw the reference only delays trial preparation. With regard to Pratt, Sr.'s, motion, the bankruptcy court will not stay a transfer avoidance adversary proceeding pending an appeal of a discharge adversary proceeding.
6. As a result of the trustee's assignment of the claims to Cadle, the bankruptcy court lacks subject matter jurisdiction over this adversary proceeding. "The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute."Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995). Federal court bankruptcy jurisdiction is set by 28 U.S.C. § 1334. Under that statute, the bankruptcy court has been granted comprehensive jurisdiction to deal efficiently and expeditiously with all matters connected with the Pratt, Jr., bankruptcy estate. Id. at 308. But the jurisdictional grant is limited. The key jurisdictional test for the bankruptcy court is whether the complaint against Pratt, Sr., is "related to" the Pratt, Jr., bankruptcy case. In re Walker, 51 F.3d 562, 568-69 (5th Cir. 1995). The matter is related for § 1334 purposes when "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." Id. at 569. "An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate." Id.
Cadle's litigation against Pratt, Sr., can have no conceivable effect on the administration of the bankruptcy estate. The litigation can have no effect on the debtor. While a recovery by the trustee would have had an effect on the administration of the bankruptcy estate, any recovery by Cadle will have no effect. With the sale of the claims to Cadle, the trustee will have no recovery to distribute to creditors should Cadle prevail. The debtor has received a discharge. Thus, the debtor's probate estate has no interest in whether Cadle recovers part or all of any discharged claim it might have had against the debtor.
The bankruptcy court is mindful of the general proposition that once a federal court acquires subject matter jurisdiction, the federal court will not lose it. See generally Carlton v. Baww, Inc., 751 F.2d 781, 785 (5th Cir. 1985) (regarding federal diversity jurisdiction, "[t]he general rule . . . is that diversity is determined at the commencement of the lawsuit; subsequent occurrences will not normally divest the court of subject matter jurisdiction."). However, subject matter jurisdiction may be lost in certain circumstances. See generally Molett v. Penrod Drilling Co., 872 F.2d 1221, 1227 (5th Cir. 1989) (a nondiverse defendant later added destroys complete diversity and has been held to defeat jurisdiction). "[A] lack of subject matter jurisdiction may be raised at any time. . . ." In re McCloy, 296 F.3d 370, 373 (5th Cir. 2002). In determining its jurisdiction, this court must consider the Supreme Court's admonition concerning the jurisdiction granted to the bankruptcy court. The trustee sold the claims to Cadle without any warranty that Cadle could prosecute them in federal court. With the claims now held by Cadle, this adversary proceeding involves a non-debtor litigating against a non-debtor over state law issues that will have no effect on the bankruptcy estate. There is no jurisdictional basis for the bankruptcy court to now preside over this litigation.
7. Cadle argues, however, that the district court would have diversity jurisdiction. By acquiring the trustee's claims against Pratt, Sr., Cadle contends that it may now invoke diversity jurisdiction as a basis for federal court jurisdiction. The bankruptcy court questions whether federal diversity jurisdiction may be obtained by a third party acquiring a claim and then creating diversity by intervening and substituting as the plaintiff. That jurisdiction call must be made by the district court. If the district court concludes that it has diversity jurisdiction, then the reference must be withdrawn.
8. If the district court concludes that it would not have diversity jurisdiction, then the bankruptcy court recommends that the adversary proceeding be dismissed. The two non-debtors, Cadle and Pratt, Sr., can litigate the state law fraudulent conveyance and breach of fiduciary duty claims in state court.
9. The parties are not ready for trial. They agree that trial preparation will take several months. The bankruptcy court has set trial docket call for March 8, 2004, at 1:30, should the matter remain pending on the bankruptcy court's docket.
10. There is no request for a jury trial.
11. The bankruptcy court recommends that the district court review the basis for federal jurisdiction. If the district court concludes that it has federal diversity jurisdiction, then the bankruptcy court recommends that the reference be withdrawn. If the district court concludes that it would lack jurisdiction, then the bankruptcy court recommends that the motion to withdraw the reference be denied. Upon denial, the bankruptcy court would dismiss the adversary proceeding without prejudice.