Opinion
5:01-CV-1532
September 29, 2003
ROBERT J. ROCK, Esq., Albany, New York, for Plaintiff/Appellant
Madeline H. Kibrick Kauffman, Esq., NOLAN HELLER, LLP, Albany, New York, for Defendant/Appellee
MEMORANDUM-DECISION AND ORDER
BACKGROUND
By Memorandum-Decision and Order dated August 21, 2001, Hon. Robert E. Littlefield, Jr., U.S. Bankruptcy Court Judge, granted the motion of Evergreen Bank, N.A. ("Evergreen Bank") to dismiss for lack of jurisdiction an adversary proceeding brought by Northwood Estates ("Northwood") against Evergreen Bank. Presently before the Court is Northwood's appeal from Judge Littlefield's order. District Court has jurisdiction pursuant to 28 U.S.C. § 158(a) and Rule 8001 of Federal Rules of Bankruptcy Procedure. For the reasons set forth herein, Judge Littlefield's order is affirmed.
On November 1, 2002, this Court denied Evergreen Bank's motion to dismiss the appeal pursuant to sections 8009 and 8011 of the Federal Rules of Bankruptcy Procedure, and set a briefing schedule.
BACKGROUND
On May 22, 1995, Evergreen Bank brought an action in New York State Supreme Court to foreclose a mortgage given by Henry N. Dashnaw and Kevin N. Dashnaw (collectively, "Dashnaws") in their individual capacities. On August 7, 1995, Dashnaws interposed an amended answer with lender liability counterclaims alleging fraud, breach of fiduciary duty and similar claims, and seeking money damages and reformation of the notes.
On August 9, 1995, Northwood, a general partnership in which Dashnaws were sole partners, filed a petition for reorganization under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101, et seq. ("chapter 11"). Dashnaws were not named as parties. The schedules listed the mortgage to Evergreen Bank as a secured debt and the lender liability claims against Evergreen Bank as Northwood's asset.
Judge Littlefield confirmed Northwood's chapter 11 reorganization plan ("plan") on February 13, 1996. The confirmation order allowed Evergreen Bank's claims regarding the mortgage but made no reference to the lender liability counterclaims. No party objected to the plan on the ground that it did not address the lender liability claims.
While the chapter 11 case was proceeding, Evergreen Bank discontinued its state court mortgage foreclosure action against Dashnaws. Dashnaws did not, however, discontinue their state court lender liability counterclaims against Evergreen Bank, and on June 24, 1996, Evergreen Bank moved to dismiss those claims in state court.
On December 23, 1996, while Evergreen Bank's dismissal motion was pending before State Supreme Court, Judge Littlefield signed an order modifying Northwood's chapter 11 plan to provide that, in the event that Dashnaws prevailed on their lender liability claims in state court, the proceeds would be distributed to Northwood's "Class 15 creditors." After Northwood filed a report of substantial consummation, the bankruptcy case was closed on January 23, 1997.
On January 23, 1997, State Supreme Court dismissed Dashnaws' lender liability claims on the ground of res judicata, holding that bankruptcy court's approval of Northwood's reorganization plan precluded further assertion of Dashnaws' counterclaims. On January 15, 1998, the Appellate Division, Third Department, affirmed. See Evergreen Bank N.A. v. Dashnaw, 668 N.Y.S.2d 256 (3d Dep't 1998). The Third Department found "that the lender liability counterclaims arose out of the same series of transactions as plaintiffs financial claims in the bankruptcy proceeding for the purpose of res judicata." It further found that Dashnaws, as general partners in Northwood, were in privity with Northwood for res judicata purposes because they "were intimately involved in the bankruptcy proceeding[,]" "clearly possessed controlling status over the bankruptcy proceeding" and "were afforded ample opportunity to litigate the counterclaims, which were scheduled as partnership assets." Id. at 257-58.
On February 18, 1998, Dashnaws moved in state court for reargument and vacatur of the state court dismissal of their lender liability claims, arguing that Judge Littlefield's December 1996 modification order constituted newly-discovered evidence showing that the lender liability claims had survived the bankruptcy proceeding and that Evergreen Bank's counsel had engaged in fraud by not bringing the modification order to the attention of state court. See N.Y.C.P.L.R. 5015(a)(2), (3). On April 17, 1998, State Supreme Court denied reargument and vacatur. The Third Department affirmed on June 10, 1999, holding that Judge Littlefield's modification order was not newly-discovered evidence and stating that Evergreen Bank's "mere awareness of the existence of the amended [i.e., modification] order does not constitute fraud or misrepresentation warranting vacatur[.]" Evergreen Bank N.A. v. Dashnaw, 691 N.Y.S.2d 637, 640 (3d Dep't 1999). Moreover, the court concluded that the modified order would not have produced a different result in the state court proceedings.
Northwood commenced this adversary proceeding in bankruptcy court on December 28, 2000, asserting the lender liability claims against Evergreen Bank. On motion of Evergreen Bank, Judge Littlefield dismissed the adversary proceeding, holding that he lacked subject-matter jurisdiction because the confirmed reorganization plan did not provide for bankruptcy court to retain post-confirmation jurisdiction. Northwood appeals.
In view of this holding, Judge Littlefield did not reach Evergreen Bank' contention that the adversary proceeding was a non-core proceeding pursuant to 28 U.S.C. § 157(b)(3).
DISCUSSION
Standard of review
District court applies a "clearly erroneous" standard of review to a bankruptcy court's findings of fact. See In re Fabricators, Inc., 926 F.2d 1458, 1464 (5th Cir. 1991). It reviews conclusions of law de novo. See In re McLean Indus., Inc., 30 F.3d 385, 387 (2d Cir. 1994). Matters within bankruptcy court's discretion, including its exercise of its equitable powers to achieve fairness in the reorganization process, are reviewed for abuse of discretion. See Capital Communications Fed. Credit Union v. Boodrow, 126 F.3d 43, 47 (2d Cir. 1997); In re Casse, 198 F.3d 327, 341 (2d Cir. 1999).
Judge Littlefield's Memorandum-Decision and Order
Judge Littlefield's factual recitation of the history of the case is undisputed and is supported by the record. In recounting the events in state court, he noted that state court's finding that Dashnaws were "intimately involved in the Chapter 11 case" was correct, but he questioned whether Northwood had had a full and fair opportunity to litigate the lender liability claims in bankruptcy court such as would warrant the application of the doctrine of res judicata to bar Dashnaws from pursuing the claims in state court. He concluded, however, that he need not consider the issues surrounding the application of the doctrine of res judicata, because bankruptcy court did not have subject-matter jurisdiction over Northwood's adversary proceeding. He based this conclusion on the legal principle that a bankruptcy court retains post-confirmation jurisdiction in a chapter 11 proceeding only to the extent provided in the confirmed reorganization plan. It is undisputed that neither Northwood's plan nor the relevant bankruptcy court orders provided for bankruptcy court to retain jurisdiction over the lender liability claims. He further rejected Northwood's contention that equity compelled bankruptcy court to hear those claims after state court dismissed them.
Judge Littlefield explained the basis for his conclusion that bankruptcy court lacked subject-matter jurisdiction as follows:
Evergreen accurately argues that a bankruptcy court's jurisdiction post-confirmation, and certainly post-substantial consummation, is extremely limited. The Second Circuit has held, "A bankruptcy court retains post-confirmation jurisdiction in a Chapter 11 proceeding only to the extent provided in the plan of reorganization." In re Johns-Manville Corp., 1 F.3d 32, 34 (2d Cir. 1993). Without dispute, neither the Debtor's [ i.e., Northwood's] plan, the confirmation order or the modification order provided for retention of this court's jurisdiction over the lender liability lawsuit. Most likely, it was not provided for because neither the Debtor nor the individual partners anticipated the state courts' res judicata determinations.
Why the failure to provide for retention jurisdiction occurred does not affect the court's decision. Evergreen made it clear on several occasions that it would argue the matter was res judicata in state court and this court's rulings reflect that . . . Evergreen's . . . reservation of rights, if any, were continually preserved during the administration of the Chapter 11 case. After reviewing all that happened in this case, especially the numerous occasions it was represented on the record that the lender liability lawsuit belonged to the individual partners and not to the Debtor, it becomes abundantly clear that no one, including the Debtor, ever intended this court to decide the matter. With that in mind, the court fails to see how "equity" dictates that it now consider the lawsuit no one wanted heard here before, especially since the beneficiaries of any proceeds appear to be the individual partners themselves, at least according to the literal terms of the now "final" modification order.
As for the Debtor's plea that this court decide whether it intended to extinguish the lender liability claims raised in the partnership's bankruptcy petition and not let Evergreen's attribution of that intent to this court during the state court proceedings control, the record shows that this court did not make any substantive or procedural ruling regarding what or whose causes of action, if any, survived post-confirmation. The only acknowledgment, if it can even be characterized as such, the court made regarding the modification was that any proceeds derived from a successfully litigated lender liability lawsuit by the individual partners be paid to the Class 15 creditors. Ironically, the individual partners are the only two members of that class.
Northwood's argument on appeal
Northwood does not dispute Judge Littlefield's factual findings. Nor does it challenge his characterization of the general law regarding a bankruptcy court's post-confirmation jurisdiction, or the manner in which that law is applied in typical cases. Rather, Northwood urges that in this unique case, Judge Littlefield should have exercised bankruptcy court's equitable powers to assume jurisdiction over Northwood's lender liability claims. Northwood's appeal to equity is based on its contention that Evergreen Bank procured state court's dismissal of Dashnaws' lender liability claims through extrinsic fraud when it failed to apprize state court of Judge Littlefield's modification order; according to Northwood, the modification order would have demonstrated to state court that the lender liability claims survived the bankruptcy proceeding and were not barred by res judicata or judicial estoppel. Northwood further argues, relying on In Re American Preferred Prescription, Inc., 255 F.3d 87, 91-92, 94-95 (2d Cir. 2001), that the question of Judge Littlefield's authority to hear the lender liability claims is not properly a question of subject-matter jurisdiction, but rather merely a question of judicial power, such that Judge Littlefield was free to exercise his discretion to hear the claims.
Analysis
"The extent to which the bankruptcy court can or should exercise post-confirmation jurisdiction is an issue that has long troubled the bankruptcy court system." Collier on Bankruptcy ¶ 1142.04 at 1142-6 (King ed., 15th ed. 2000). As a general rule a bankruptcy court retains post-confirmation jurisdiction in a chapter 11 proceeding only to the extent provided in the confirmed plan of reorganization. See In re Johns-Manville Corp., 7 F.3d 32, 34 (2d Cir. 1993). Thus, ordinarily, bankruptcy court's post-confirmation jurisdiction is defined by reference to the plan. See id.
It is undisputed that under Northwood's reorganization plan, confirmed on February 13, 1996, bankruptcy court did not retain post-confirmation jurisdiction over the lender liability claims, or over any adversary proceeding. Under the general rule of Johns-Manville, then, Judge Littlefield correctly concluded that he lacked subject-matter jurisdiction over the lender liability claims, and Northwood's equitable arguments are to no avail. A bankruptcy court may exercise its equitable powers only within the limits of its jurisdiction; equitable considerations cannot create subject-matter jurisdiction where it does not otherwise exist. See generally Securities and Exch. Comm. v. United States Realty Improvement Co., 310 U.S. 434, 455 (1940).
Northwood's confirmed plan provides in Article X for post-confirmation retention of jurisdiction over a few specified matters until substantial consummation of the plan. These matters include: the correction of defects in the Plan or Confirmation order, modification of the Plan, enforcement and interpretation of the terms and conditions of the Plan, and the entry of an order concluding and terminating the case. There is no provision for retention of jurisdiction over adversary proceedings. Moreover, the plan does not provide for retention of jurisdiction over any matter subsequent to substantial consummation of the plan, which is defined as "when the first payment is made pursuant to the Plan." There is no dispute that both confirmation and substantial consummation occurred long before Northwood commenced the instant action.
Northwood argues, however, that subject-matter jurisdiction is not in issue here, but rather merely bankruptcy court's power to take a particular action, and that therefore equitable considerations may properly be taken into account. American Preferred Prescription, upon which Northwood relies, concerns a post-confirmation order in which bankruptcy court, invoking its equitable powers, appointed a trustee to supervise the debtor for the purpose of protecting creditors from fraud pending execution of the chapter 11 plan. 255 F.3d at 91-92, 94-95. The Second Circuit rejected district court's treatment of the issue as one of jurisdiction and held that the issue was rather one of bankruptcy court's statutory power to take a particular action, that is, to appoint a post-confirmation trustee, an issue which is clearly within bankruptcy court's subject-matter jurisdiction. See 28 U.S.C. § 151, 157, 1334(b). In so holding, the Second Circuit noted that "'[s]ubject matter jurisdiction is the court's authority to entertain an action between the parties before it. Power . . . is the scope and forms of relief the court may order in an action in which it has jurisdiction.'" 255 F.3d at 95 (quoting In re American Hardwoods, Inc., 885 F.2d 621, 624 (9th Cir. 1989)).
Here, in contrast to American Preferred Prescription, bankruptcy court's jurisdiction over the subject matter is very much in issue. It is true that an adversary case asserting a lender liability claim may be within bankruptcy court's jurisdiction where it is "related to" a bankruptcy case over which the court has jurisdiction, see 28 U.S.C. § 151, 157, 1334(b); see generally Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 482 (6th Cir. 1992); however, as a general rule all related proceedings are dismissed upon termination of the underlying bankruptcy case on the ground that "a bankruptcy court's jurisdiction over such related proceedings depends on the proceedings' nexus to the underlying bankruptcy case." In Re Forges, 44 F.3d 159, 162 (2d Cir. 1995). Application of the general rule here supports Judge Littlefield's dismissal of the adversary proceeding because, by the time it was commenced, there was no bankruptcy case to which it could relate.
Northwood challenges this application of the general rule and points to the statement in Forges that "nothing in the Bankruptcy Code requires a bankruptcy court to dismiss related proceedings automatically following the termination of the underlying case." 44 F.3d at 162. Forges, however, concerned a related adversary proceeding that had been commenced during the course of the bankruptcy case, not after its termination. Indeed, in Forges, bankruptcy court had issued an oral decision after a bench trial in the adversary proceeding, but had not yet signed the decision and judgment when the bankruptcy case was terminated. The Second Circuit held that bankruptcy court properly exercised its discretion toretain its jurisdiction over the pending adversary proceeding until entry of judgment, based upon considerations of judicial economy, convenience to the parties, fairness and comity. See id. at 163; accord In re Stardust Inn, 70 B.R. 888, 890 (E.D.Pa. 1987) ("[D]ismissal of the bankruptcy case does not mandate dismissal of allpending adversary proceedings" (emphasis added)), hi the case at bar, inasmuch as the adversary proceeding was commenced after termination of the bankruptcy case, there was no existing bankruptcy case to which the adversary proceeding could relate and therefore no basis for bankruptcy court to exercise jurisdiction over the adversary proceeding. See, e.g., Presidential Gardens Assoc. v. United States, 175 F.3d 132, 142 (2d Cir. 1999); Leon v. Court, 1999 WL 1427724, *3 (S.D.N.Y. 1999); In re Walker, 198 B.R. 476, 482-83 (E.D.Va. 1996).
In any event, Judge Littlefield correctly determined that equitable principles do not call for any action on the part of bankruptcy court to remedy Evergreen Bank's alleged fraud in failing to inform state court of Judge Littlefield's modification order. As noted by Judge Littlefield, it was "abundantly clear" that neither Northwood nor Dashnaws nor Evergreen Bank ever intended that bankruptcy court would decide the lender liability claims. Rather, Northwood acquiesced in Dashnaws' pursuit of those claims in state court. Northwood cannot now reasonably argue that equity compels bankruptcy court to hear those claims merely because Dashnaws unexpectedly lost in state court. This is so regardless of whether the state court ruling was erroneous or obtained by fraud. Accordingly, Judge Littlefield did not err in dismissing the adversary proceeding on the ground of lack of jurisdiction.
Indeed, Dashnaws' fraud argument was heard by state court, which was unimpressed. On affirming State Supreme Court's denial of Dashnaws' motion to reargue and vacate the dismissal, the Third Department explicitly found that Evergreen Bank's "mere awareness of the existence of the amended [ i.e., modification] order does not constitute fraud or misrepresentation warranting vacatur[.]" Evergreen Bank, 691 N.Y.S.2d at 640. It also found that the terms of Judge Littlefield's modification order did not alter its decision that State Supreme Court properly dismissed the lender liability action.
CONCLUSION
This Court finds neither legal nor factual error, nor abuse of discretion, in the bankruptcy court's ruling. Judge Littlefield's factual determinations are undisputed and are fully supported by the record. He correctly applied the law pertaining to bankruptcy court's jurisdiction and properly declined to exercise his equitable powers to hear Northwood's lender liability claims. Accordingly, the Court does not reach the other issues raised on appeal. It is therefore
ORDERED that the Memorandum-Decision and Order of U.S. Bankruptcy Judge Littlefield dated August 21, 2001, granting Evergreen Bank's motion to dismiss is hereby AFFIRMED.
IT IS SO ORDERED.