Balzotti v. RAD Investments

2002 DNH 041

• Court: District Court, D. New Hampshire
• Decided: February 9, 2002
• Docket: CV-01-289-B
• Status: Published

Opinion

Balzotti v. RAD Investments CV-01-289-B 02/09/02

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Anthony F. Balzotti, et al

v. Civil No. 01-289-B Opinion No. 2002 DNH 041 RAD Investments, et a l .

MEMORANDUM AND ORDER

On April 2 , 1999, Shepherds Hill Development Co., L.L.C. (the "Debtor"), filed a Chapter 11 bankruptcy petition in the

United States Bankruptcy Court for the District of New Hampshire.

Plaintiffs -- majority membership interest holders in the Debtor

and the Chapter 11 trustee -- later commenced this action as an

adversary proceeding in the bankruptcy court. Their complaint

seeks damages from defendants Robert Dianni and RAD Investments,

L.L.C., arising out of, inter alia, defendants' alleged breach of

a post-petition purchase and sale agreement. Defendants failed

to answer the complaint and the bankruptcy court entered a

default judgment against them. After defendants moved to set

aside the default judgment, the court became concerned that it lacked subject matter jurisdiction. Briefing and argument did

not resolve the court's concerns and it ultimately dismissed the

proceeding on jurisdictional grounds. Plaintiffs appeal. For

the reasons set forth below, I vacate and remand for further

proceedings.

I. APPLICABLE JURISDICTIONAL PRINCIPLES

A bankruptcy court's jurisdiction to hear adversarial

proceedings is governed by 28 U.S.C. §§ 1334 and 157. Section

1334 provides that district courts shall have "original but not

exclusive jurisdiction of all civil proceedings arising under

title 11, or arising in or related to cases under title 11." 28

U.S.C. § 1334(b). Section 157(a) gives district courts the power

to refer such proceedings to bankruptcy judges within their

districts. 28 U.S.C. § 157(a). This court has issued a standing

order referring all such cases and proceedings to the bankruptcy

court. See Local Rule 77.4, United States District Court for the

District of New Hampshire.

Section 157 divides the matters over which the bankruptcy

court has jurisdiction into core and non-core proceedings.

- 2 - Section 157(b)(2) grants bankruptcy judges the power to hear and

determine "all cases under title 11, and all core proceedings

arising under title 11 or arising in a case under title 11." 28

U.S.C. § 157(b) (2). The section also provides a non-exclusive

list of matters that qualify as core proceedings. See id. A

bankruptcy court's factual findings in core proceedings are

subject to clear error review while its legal determinations are

reviewed de novo. See Briden v. Folev, 776 F.2d 379, 381 (1st

Cir. 1985) .

Non-core proceedings are matters that do not qualify as core

proceedings but that are "otherwise related to a case under title

11." 28 U.S.C. § 157(c)(1). "Related to" jurisdiction

encompasses both "causes of action owned by the debtor . . . and

suits between third parties which have an effect on the

bankruptcy estate." Celotex v. Edwards, 514 U.S. 300, 308 n.5

(1995). The most common test for assessing "related to"

jurisdiction asks whether the proceeding under examination "could

conceivably have any effect on the estate" Id. at 308 n.6 (1995)

(quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.

1984)); see also In re G .S .F . Corp., 938 F.2d 1467, 1475 (1st

- 3 - Cir. 1991) (applying the Pacor formulation) .1 In the absence of

consent by all parties to be bound by the bankruptcy court's

determinations in such "related" proceedings, the court may only

recommend findings of fact and conclusions of law, subject to de

novo review by the district court. In Re Arnold Print Works, 815

F .2d 165, 167 (1st Cir. 1987).

I review a bankruptcy court's jurisdictional rulings de

novo. See In Re G.I. Industries, Inc.. 204 F.3d 1276, 1279 (9th

Cir. 2000).

II. BACKGROUND

As previously noted, the Debtor filed for bankruptcy on

April 2, 1999. The Debtor valued its principal asset. Shepherds

Hill, a 400-unit, residential development located in Hudson, New

Hampshire, at $7,500,000.00, but admitted to liabilities in the

1 While I am obliged to apply the Pacor formulation by binding First Circuit precedent, I note that the wisdom and efficacy of some of its marginal applications is the source of an interesting scholarly debate. Compare Ralph Brubaker, On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory, 41 Wm. & Mary L. Rev. 74 3 (2000) with Susan Block-Lieb, The Case Against Supplemental Bankruptcy Jurisdiction: A Constitutional. Statutory, and Political Analysis, 62 Fordham L. Rev. 721 (1994) .

- 4 - amount of $7,200,915.00. At the time of the Chapter 11 filing,

plaintiffs Anthony Balzotti, Dawn Balzotti, Michael Balzotti,

Thomas larrobino, and Ann Burgess (collectively, the "Members")

held majority membership interests in the Debtor.

After making the bankruptcy filing, the Debtor and several

of the plaintiffs attempted to find investors who would purchase

either the project or the Members' interests in the Debtor. On

December 3, 1999, the Balzottis, larrobino, Burgess, and other

members of the Debtor filed a motion to dismiss the bankruptcy

proceeding because they had found a buyer for the project and

their membership interests. The Members provided the bankruptcy

court with a copy of the purchase and sale agreement (the

"Agreement"), signed by themselves and defendant Robert Dianni,

the managing member of defendant RAD Investments, L.L.C. The

Agreement, which provided for both payment in full to the

Debtor's unsecured creditors and payment to the Members for their

membership interests, was explicitly conditioned on the dismissal

of the bankruptcy petition. The Agreement ultimately collapsed,

however, allegedly because defendants failed to transfer the

funds required to pay the creditors and thereby obtain dismissal

of the Chapter 11 proceeding. Because the Members lacked the

- 5 - money necessary to pay the creditors' claims, the court denied

the motion to dismiss.

On February 22, 2000, the court appointed Edmond Ford as a

Chapter 11 trustee. After agreements with several potential

buyers fell through, the court approved a liquidation plan

("confirmed Plan") on July 21, 2000. The confirmed Plan gave

each class of creditors the right to participate in any net

recovery in this adversary proceeding, which the Members and the

chapter 11 trustee had initiated several weeks earlier.

In their complaint commencing the adversary proceeding, the

Members sought $19,000,000 in damages for breach of a post­

petition purchase and sale agreement, negligent misrepresentation

and detrimental reliance, violation of the New Hampshire Unfair

Business Practices Act, and violation of the common law covenants

of good faith and fair dealing. The trustee, to whom plaintiffs

have assigned the first $200,000 of any damages they recover in

the proceeding, was named as a plaintiff, but only with respect

to the breach of contract count. Plaintiffs claimed that the

bankruptcy court had subject matter jurisdiction over the

proceeding because it consisted of non-core claims that were

"related to" the bankruptcy case.

- 6 - The defendants failed to answer the complaint and, as a

result, the bankruptcy court entered a default judgment against

them. Defendants subsequently appeared and moved to set aside

the judgment. The court then became concerned about its

jurisdiction and asked the parties to submit briefs addressing

the issue.

Plaintiffs offered two arguments to support their contention

that the adversary proceeding was within the court's "related to"

jurisdiction.2 First, they argued that the proceeding was

"related to" the bankruptcy case because the members had assigned

the first $200,000 of any net recovery from the proceeding to the

trustee. Alternatively, Plaintiffs argued that the court had

jurisdiction because the trustee was a third-party beneficiary of

the contract on which the proceeding was based.

In a pair of written orders, the bankruptcy court rejected

2 Plaintiffs alternatively claimed in their bankruptcy court brief that the court had jurisdiction because one or more of their claims were within either the court's "arising under" or "arising in" jurisdiction. See 28 U.S.C. § 1334 (b). Plaintiffs did not attempt to develop this argument in the bankruptcy court, the bankruptcy court did not consider the argument, and plaintiffs have made only a passing reference to the argument in this court. Accordingly, I decline to consider this difficult issue.

- 7 - both arguments. The court's initial order focused on the effect

of the assignment and the provision in the confirmed Plan

requiring plaintiffs to pay the estate's creditors with any funds

obtained from defendants. Emphasizing that bankruptcy courts are

courts of limited jurisdiction, the court concluded that

contractual arrangements of the sort at issue here cannot create

bankruptcy jurisdiction because, "[i]f [reorganization] plan

proponents could use such methods to create jurisdiction in the

bankruptcy courts where it would not otherwise exist, juris­

diction over any case or controversy could be created . . . ."

In re Shepherds Hill Devel. Co., LLC, Bk. No. 99-11087-JMD, Adv.

Proc. No. 00-1087, at 7 (Bankr. D.N.H. May 15, 2001) (memorandum

and order) .

The court's second order, which responded to plaintiffs'

motion that it reconsider its ruling on the ground that the court

has jurisdiction because the Debtor is a third-party beneficiary

of the Agreement, concluded that (1) the Debtor is not, in fact,

a third-party beneficiary, and (2) even if it were, that fact

would not be sufficient to bring the proceeding within the

limited jurisdiction of the bankruptcy court. Plaintiffs

challenge these rulings in this appeal. Ill. DISCUSSION

Notwithstanding the bankruptcy court's thoughtful opinions

to the contrary, I agree with the plaintiffs that the Members'

assignment to the trustee of the first $200,000 of any net

proceeds obtained from the proceeding to the trustee gives the

bankruptcy estate a sufficient stake in the outcome of the

proceeding to bring the plaintiffs' claims within the scope of

the court's "related to" jurisdiction. My reasoning is simply

stated. I begin by noting that "[a]ny interest in property that

the estate acquires after the commencement of [the Chapter 11]

case" is property of the estate. 11 U.S.C. § 541(a)(7). The

$200,000 assignment therefore plainly qualifies as property of

the estate. Moreover, the resolution of the adversary proceeding

will affect the bankruptcy estate by determining how much, if

anything, the trustee will be able to recover on the assignment.

Since the court's "related to" jurisdiction has been interpreted

to cover proceedings commenced by either the debtor or a third

party which could have an effect on the estate, see, e.g.,

Celotex, 514 U.S. at 308 nn. 5, 6, the assignment alone is

sufficient to give the court jurisdiction over the plaintiffs'

- 9 - claims.3

The bankruptcy court rejected plaintiffs' argument that the

assignment gave the court jurisdiction because it was concerned

that post-petition assignments could be misused to manufacture

jurisdiction in the bankruptcy court. This concern, however,

cannot justify a categorical rule preventing the court from

basing its jurisdiction on such assignments. Instead, a court

must carefully examine any post-petition assignment and the

circumstances surrounding its issuance to determine whether the

assignment will have a sufficient impact on the estate to bring

the case within the scope of the court's "related to"

jurisdiction and, if so, whether the assignment nevertheless

violates 28 U.S.C. § 1359, the collusive joinder statute. Here,

the court determined that the trustee obtained the assignment by

offering the members valuable concessions concerning the timing

of the hearing on the confirmed Plan. See In re Shepherds Hill

Devel. Co., LLC, Bk. No. 99-11087-JMD, Adv. Proc. No. 00-1087, at

3 It is unclear from the complaint whether the trustee is suing in his capacity as an assignee or as a third-party beneficiary. As the trustee's status as a party is not determinative of the bankruptcy court's jurisdiction, I express no view as to whether the trustee is entitled to maintain his claim in either capacity.

- 10 - 4 n.4. Moreover, the court did not identify any countervailing

evidence suggesting that the Members granted the assignment in an

effort to manufacture jurisdiction in the bankruptcy court.

Because the record will not support a conclusion that the

assignment was collusively made or given, the bankruptcy court

could not disregard the assignment in determining its

jurisdiction.

IV. CONCLUSION

For the reasons stated above, the United States Bankruptcy

Court for the District of New Hampshire has subject matter

jurisdiction over the adversary proceeding. Accordingly, I

vacate the dismissal order and remand for further proceedings

consistent with this opinion.

SO ORDERED.

Paul Barbadoro Chief Judge February 9, 2002

cc: Clerk, USBC-NH David Chenelle, Esq. William S. Gannon, Esq. Norman Novinsky, Esq. Geraldine Karonis

- 11 -