Opinion
Case No.: 15-45220 Adversary Proceeding Case No.: 15-04659
10-21-2015
In re: Annette Compo, Debtor. Andre A. Salamy, Plaintiff, v. Annette S. Compo, Motor City Real Estate, LLC and Real Estate 411, LLC, Defendants.
Chapter 7
OPINION AND ORDER DENYING PLAINTIFF'S MOTION FOR DEFAULT JUDGMENT AND DISMISSING THE NON-DEBTOR CORPORATE DEFENDANTS WITHOUT PREJUDICE
I. INTRODUCTION
Andre Salamy asks the Court to enter a default judgment against two non-debtor limited liability corporations ("LLCs"). Because the Court lacks subject matter jurisdiction, it DENIES Salamy's motion for default judgment, and sua sponte DISMISSES the claims against the LLCs without prejudice.
II. FACTS
In 2013, Annette Compo hired Salamy as a real estate agent for her company, Motor City Real Estate, LLC ("Motor City LLC"), which does business as Michigan Real Estate Professionals ("MREP"). Compo is a real estate broker; she is also the sole member of both Motor City LLC and another company, Real Estate 411, LLC ("411 LLC"). Salamy worked as an independent contractor. His contract provided that he was to receive commissions for any real estate sales made on behalf of MREP and additional fees for any referrals that resulted in paid sponsorships for 411 LLC's local radio show.
At some point, the business relationship soured: Salamy alleged that Compo and the LLCs failed to pay him earned commissions and referral fees totaling $17,886.69; MREP terminated Salamy's contract. Salamy then filed a lawsuit against Compo and the two LLCs in Michigan's 47th District Court. As the trial date neared, Compo filed individual Chapter 7 bankruptcy, and the state court action was stayed.
Salamy filed an adversary complaint in Campo's bankruptcy case to determine the dischargeability of the alleged debt owed to him and generally objecting to Compo's discharge. He named Compo and the two LLCs as defendants and alleges claims of fraud and conversion. Compo answered Salamy's complaint. But neither LLC filed an answer, prompting the court clerk to issue defaults. Salamy's motion for entry of a default judgment against the LLCs is pending.
III. LEGAL ANALYSIS
The Court must conduct a sua sponte examination of its subject matter jurisdiction. Johnston v. City of Middletown (In re Johnston), 484 B.R. 698, 705 (Bankr. S.D. Ohio 2012) (explaining that even in the absence of a challenge from any party, federal courts have an "independent obligation to investigate and police the constitutional and statutory limits of their own jurisdiction"). This inquiry is critical. A court cannot enter a judgment if it lacks subject matter jurisdiction. Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006) (explaining a court's lack of subject matter jurisdiction requires dismissal of complaint in its entirety); see also In re G.T.L. Corp., 211 B.R. 241, 244 (Bankr. N.D. Ohio 1997) (citing Am. Fire & Cas. Co. v. Finn, 341 U.S. 6, 17 (1951)) ("Lack of subject matter jurisdiction is a defect that cannot be cured by consent of the parties and cannot be waived.").
A bankruptcy court has subject matter jurisdiction over all cases "under title 11," and all civil proceedings "arising under," "arising in," or "related to" a case under title 11. 28 U.S.C. § 1334(a), (b). Rachmale v. Conese, 515 B.R. 567, 572 (Bankr. E.D. Mich. 2014). Actions "arising under" title 11 involve claims created or determined by a statutory provision of title 11. Id. at 573 (citing Bliss Technologies, Inc. v. HMI Indus. (In re Bliss Technologies, Inc.), 307 B.R. 598, 602 (Bankr. E.D. Mich. 2004)). "Arising in" proceedings are those that are not based on any right expressly created by title 11, but would not exist outside of the bankruptcy. Id. Last, an action is "related to" a case under title 11 if its outcome could "conceivably have any effect" on the bankruptcy estate. Id. (quoting Michigan Emp't Sec. Comm'n v. Wolverine Radio Co., Inc. (Wolverine Radio Co.), 930 F.2d 1132, 1142 (6th Cir. 1991)).
Salamy's complaint alleges the two LLCs willfully and maliciously withheld his commissions in violation of Michigan's Uniform Fraudulent Transfer Act. MICH. COMP. LAWS § 566.35. He also alleges the LLCs kept his commissions and referral fees and wrongfully exerted control over the funds, illegally converting his property. MICH. COMP. LAWS § 600.2919A(1)(a). Salamy's claims do not "arise under" or "arise in" title 11 so as to fall within the scope of section 1334(a) or (b). Therefore, jurisdiction is only proper if the claims are at least "related to" the bankruptcy.
Salamy makes identical claims against Compo. He seeks a determination that the debt Compo owes to him is nondischargeable pursuant to 11 U.S.C. § 523(a)(6), and he objects to Compo's Chapter 7 discharge under 11 U.S.C. § 727(a)(2)(A),(3), and (4).
"While the scope of bankruptcy court jurisdiction is broad, it will not often encompass claims of non-debtors against non-debtors." Porter v. NationsCredit Consumer Disc. Co. (In re Porter), 295 B.R. 529, 541 (Bankr. E.D. Pa. 2003); see also Boyajian v. DeLuca (In re Remington Dev. Group, Inc.), 180 B.R. 365, 369 (Bankr. D.R.I. 1995) (explaining jurisdiction to adjudicate a dispute between two non-debtors is "tenuous in the absence of any tangible effect on the bankruptcy case") (quoting Cioffi v. Old Stone Bank (In re C.A.C. Jewelry, Inc.), 124 B.R. 419, 422 (Bankr. D.R.I. 1991)). Evans & Associates, CPAs, Inc. v. Macnichol (In re Macnichol), 240 B.R. 731 (Bankr. S.D. Ohio 1999), is illustrative of this point. In Macnichol, the plaintiff in the adversary action filed a motion for default judgment against an individual and a corporation, neither of whom was a bankruptcy debtor, for failure to answer the complaint. The plaintiff sought a judgment against the non-debtors on allegations of common law fraud, violations of the Ohio Fraudulent Transfer Act, and various theories under the federal Racketeer Influenced and Corrupt Organizations Act. Id. at 732. The court held that it did not have "related to" jurisdiction because the plaintiff only sought a money judgment, was not looking to recover or preserve property for the benefit of the bankruptcy estate, and the judgment would have no effect on the bankruptcy estate or the debtor's discharge. Id. The same holds true here. Any judgment against the LLCs will have no effect on the bankruptcy estate.
Courts have, however, found "related to" jurisdiction when a debtor is the guarantor or indemnifies the debts of a non-debtor corporation. See, e.g., Michigan Emp't Sec. Comm'n v. Wolverine Radio Co., Inc. (In re Wolverine Radio Co.), 930 F.2d 1132, 1141 (6th Cir. 1991) (finding that even where an indemnification agreement "may ultimately have no effect on the debtor," no conceivable effect could not be ruled out; related to jurisdiction was established). But in this case, the non-debtor companies are LLCs. The purpose of an LLC is to shield members from personal liability arising out of the LLC's actions. Thiel v. Baby Matters, LLC., No. 11-15112, 2013 WL 5913394, at *2 (E.D. Mich. Oct. 31, 2013). --------
Although Salamy's complaint arises from the actions of both Compo and the LLCs, these common allegations, alone, are insufficient to establish "related to" jurisdiction. Abbey v. Modern Africa One, LLC, 305 B.R. 594, 602 (D.D.C. 2004) (citing Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984)) (holding common issues of fact will not automatically render a civil proceeding "related to" the bankruptcy proceeding). Further, members of an LLC are not liable for the LLC's acts, debts, or obligations solely by virtue of their membership. MICH. COMP. LAWS § 450.4501(4). Therefore, a judgment against the LLCs will have no effect on Compo's bankruptcy case.
IV. CONCLUSION
The Court lacks subject matter jurisdiction. Salamy's claims against the LLCs are not "related to" the bankruptcy case. The Court, therefore, DENIES Salamy's motion for default judgment and DISMISSES his claims against the LLCs without prejudice.
IT IS ORDERED. Signed on October 21, 2015
/s/ Mark A. Randon
Mark A. Randon
United States Bankruptcy Judge