STEFAN R. UNDERHILL, District Judge.
Appellant Vanguard Products Corporation ("Vanguard") appeals from the order of the United States Bankruptcy Court for the District of Connecticut, dated March 30, 2012, granting Joseph Tesoriere's ("Tesoriere") letter motion to dismiss an adversary proceeding against him and dismissing sua sponte Vanguard's adversary proceeding against the other defendants. (Bankr.No. 11-05133(AHS), doc. #116). For the reasons that follow, the order is
This appeal from the bankruptcy court is brought by the former landlord of the debtor. The landlord, Vanguard, brought claims in an adversary proceeding against the debtor, Indicon, after it discovered the debtor's Chapter 11 bankruptcy case. Vanguard's complaint alleged a series of violations of the Bankruptcy Code and breach of a commercial lease committed by the debtor, its president, and other employees and agents. The bankruptcy court dismissed Vanguard's complaint for lack of subject matter jurisdiction.
On November 30, 2004, Indicon commenced its chapter 11 bankruptcy case. During the reorganization proceeding, but prior to confirmation of the bankruptcy plan (the "Plan") (Bankr.No. 04-51376 (AHWS), doc. # 233), Indicon, through its president, Kim Citrin, entered into a letter of intent with Dymax Corporation ("Dymax"), dated March 18, 2008, which provided for the prospective sale of Indicon's assets. Tesoriere, a financial advisor, alone or with his company, Omni Solo, Inc. ("Omni Solo"), assisted in the negotiation of the letter of intent.
Three days after the hearing on the disclosure statement, a letter dated July 18, 2008 and signed by Citrin was sent to Indicon's employees on Dymax letterhead advising them that Indicon was "nearing the final steps in the Dymax acquisition of Tridak" and now was integrating Tridak's operations with Dymax's.
While the sale was proceeding, Indicon continued to seek confirmation of the Plan, which provided for Indicon to continue operating as a going-concern while providing creditors a dividend of 20% of their claims. Indicon represented in its disclosure statement that the source of payment to creditors was "shareholder loans and third-party loans in the amount of $41,000."
On August 21, 2008, the bankruptcy court confirmed the Plan and the asset sale was consummated three weeks later. From the sale proceeds, Omni Solo was paid $82,800 and Stephen Curley ("Curley") was paid to represent Indicon in a state court dispute with a secured creditor. The debtor continued to hide the sale of its assets by representing in its September 2008 monthly operating report that there
At the time Indicon filed for bankruptcy, Vanguard was the debtor's landlord on a five-year commercial lease. During the bankruptcy case, the debtor entered into a lease extension agreement with Vanguard for an additional five years, to October 31, 2011. Although Indicon disclosed the lease in bankruptcy, it was not assumed or rejected. Vanguard had no notice of any of the proceedings in the bankruptcy case, including a hearing on Indicon's disclosure statement or confirmation of the Plan.
Vanguard brought pre-judgment proceedings in state court for breach of the extended lease on November 21, 2008, three months after confirmation of Indicon's bankruptcy plan. In response, Indicon filed a notice to stay that action. While the stay was pending, Indicon also filed several applications for entry of a final decree with the bankruptcy court. The applications did not disclose the state court action. A final decree was entered on February 10, 2009. The state court dismissed the action before it on procedural grounds.
On February 24, 2010, the bankruptcy court granted Vanguard's motion to reopen the bankruptcy case. Vanguard filed an amended complaint seeking: (1) damages for breach of the lease agreement; (2) a determination that the damage claim was not discharged by confirmation of the Plan; (3) allowance of the damage claim as an administrative expense; (4) redress for the fraudulent disclosure of Indicon's asset sale; (5) recovery from Tesoriere and Omni Solo for receiving a fraudulent transfer and for receiving substantial compensation without obtaining an order from the bankruptcy court authorizing their employment; (6) recovery from fees paid to Curley during the bankruptcy case without bankruptcy court approval; and (7) recovery from Tridak and Dymax relating to fraudulent transfers and successor liability.
On August 1, 2011, Tesoriere filed, in the form of a letter, a motion "pursuant to Federal Rule of Civil Procedure 12(b)(1), to dismiss the adversary proceeding as to me ..." (Bankr.Ct. doc. #50 at 1). The bankruptcy court began its decision by noting that Vanguard began the adversary proceeding on May 9, 2011, "more than three years after confirmation of the debtor's Plan and the sale of all of its assets; more than two years after the entry of a final decree; and almost two years after the debtor ceased to exist." Bankr.Court Mem. Granting Def.'s Rule 12(b)(1) Letter Motion (doc. #116) at 4. It then applied the "close nexus test," see infra, under which a party may invoke the bankruptcy
The bankruptcy court granted Tesoriere's motion and dismissed sua sponte the adversary proceeding against the other defendants. This appeal followed.
Federal district courts have jurisdiction to hear appeals of final judgments, orders, and decrees of the Bankruptcy Court under 28 U.S.C. § 158(a)(1). In re Flanagan, 415 B.R. 29, 38 (D.Conn.2009). On appeal, the district court will "review Bankruptcy Courts' conclusions of law de novo, and their findings of fact for clear error." Mercury Capital Corp. v. Milford Connecticut Associates, L.P., 354 B.R. 1, 6-7 (D.Conn.2006) (citing Fed. R. Bankr.P. 8013). The district court may "affirm, modify, or reverse a bankruptcy court's judgment, order, or decree or remand with instructions for further proceedings." Fed. R. Bankr.P. 8013.
The appeal presents two issues. First, whether the bankruptcy court erred when it ruled that it had no subject matter jurisdiction over the appellant's complaint because the debtor's plan stated that the bankruptcy court would only retain jurisdiction of the bankruptcy case until entry of a final decree. The second issue is whether the bankruptcy court erred when it ruled that it lacked subject matter jurisdiction because there was no "close nexus" between the resolution of the adversary proceeding and the Plan.
When deciding a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1), a court must accept the material factual allegations in the complaint as true, but need not draw inferences favorable to the plaintiff. J.S. v. Attica Cent. Schs., 386 F.3d 107, 110 (2d Cir. 2004), cert. denied, 544 U.S. 968, 125 S.Ct. 1727, 161 L.Ed.2d 616 (2005); Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir.1998). A court may also consider materials outside of the pleadings to resolve any jurisdictional disputes, but cannot rely on conclusory or hearsay evidence. J.S., 386 F.3d at 110; Zappia Middle East Constr. Co. v. Emirate of Abu Dhabi, 215 F.3d 247, 253 (2d Cir.2000). Finally, the party asserting the court's subject matter jurisdiction has the burden of proving it by a preponderance of the evidence. Luckett v. Bure, 290 F.3d 493, 497 (2d Cir.2002); Malik v. Meissner, 82 F.3d 560, 562 (2d Cir.1996). Thus, the court must accept as true Vanguard's material factual allegations, but it need not liberally construe its complaint.
Vanguard invoked the bankruptcy court's jurisdiction under 28 U.S.C.
The bankruptcy court's post-confirmation jurisdiction is not expressly limited under section 1334. Park Ave. Radiologists, P.C. v. Melnick (In re Park Ave. Radiologists, P.C.), 450 B.R. 461, 467 (Bankr.S.D.N.Y.2011). Nevertheless, "most courts agree that once confirmation occurs, the bankruptcy court's jurisdiction shrinks." Id. Therefore, courts have crafted tests to determine when a bankruptcy court may exercise subject matter jurisdiction after confirmation of a bankruptcy plan. The Second Circuit has used the "close nexus test" to determine post-confirmation subject matter jurisdiction.
"A party can invoke the authority of the bankruptcy court to exercise post confirmation jurisdiction if the matter has a close nexus to the bankruptcy plan and the plan provides for the retention of such jurisdiction." In re DPH Holdings Corp., 448 Fed.Appx. at 137; In re New England Nat., 2012 WL 3987648, at *5.
Vanguard must show that the matter has a close nexus to the Plan. In DPH Holdings, the Second Circuit found a close nexus where the disputed issue would "impact the implementation, execution, and administration" of the bankruptcy plan. 448 Fed.Appx. at 137.
Vanguard argues that, because, under the terms of the Plan, any recovery must go toward payment of Vanguard's
In Savoy Senior Hous. Corp. v. TRBC Ministries, LLC, the court held that the plaintiffs' suit had a close nexus to the bankruptcy case because it implicated the bankruptcy court's confirmation order and alleged, "in effect" a fraud on the bankruptcy court. 401 B.R. 589 (S.D.N.Y. 2009). Vanguard seizes on that case in support of its contention that a close nexus may be found when the adversary proceedings allege, "in effect," fraud "as part of a scheme to secure the liquidation plan's most valuable assets." In Savoy, the two partner-debtors sued a third partner who they alleged concealed his involvement in a plan to purchase the partnership's assets in a sale conducted, with bankruptcy court approval, as part of the partnership's bankruptcy plan. The Savoy Court concluded that, because the plaintiffs' allegations of fraud "str[uck] at the heart of the liquidation plan," they implicated matters that affected the interpretation and administration of the confirmed plan. Id. at 597. Vanguard fails to mention that the Savoy plaintiffs also met the second prong of the test for post-confirmation jurisdiction — that the plain text of the confirmation order "made clear that the Bankruptcy court intended to retain broad post-confirmation jurisdiction." Id. at 598. In contrast, the Plan here clearly terminates the court's jurisdiction upon entry of a final decree. See infra, Part A.2.
Vanguard also cites Baker v. Simpson, 613 F.3d 346 (2d Cir.2010), in support of its contention that an alleged fraud implicated the bankruptcy court's jurisdiction. Although the court may consider allegations of fraud in determining its jurisdiction, it is important to look at the factual circumstances. See In re New England Nat., 2012 WL 3987648, at *6 ("Determining whether the `close nexus' test has been satisfied is a fact sensitive endeavor."). It is clear that a mere allegation of fraud is not sufficient to confer post-confirmation subject matter jurisdiction. In Baker, the plaintiff-debtor alleged legal malpractice against counsel who represented him in the bankruptcy process. The Second Circuit held that the plaintiff's claim that he was afforded substandard legal representation in his bankruptcy case did "arise in" the Title 11 case, such that the bankruptcy court had jurisdiction over them. There, legal malpractice related directly to the plan. The relationship between the parties arose only in the bankruptcy. The plaintiff's claims would have no meaning outside of the bankruptcy context and no practical existence but for the bankruptcy. In the case at bar, not only did the relationship between Indicon and Vanguard arise before the bankruptcy proceedings, the asset sale was not consummated until after the confirmation of the plan, and Vanguard's fraud allegations, although they arose in the context of the bankruptcy, affect only Vanguard's right to recovery as an administrative claimant.
Plan, Art. IV, § 3.A.2. Although payments to Curley and Solo for services may have been made post-confirmation, it cannot be the case that simply because the Plan provides procedures for approving payments to retained professionals that the bankruptcy court retains continuing jurisdiction to order disgorgement of such payments. Again, such a broad reading would obliterate any limits on the bankruptcy court's jurisdiction in any case where a retained professional received a payment connected to an adversary proceeding.
Vanguard also offers an argument that rejects the Second Circuit's adoption of the "close nexus" test, contending that the bankruptcy court has post-confirmation jurisdiction because the debtors' actions implicate the integrity of the bankruptcy process. Specifically, Vanguard describes the bankruptcy proceedings as an "engine of fraud" that individuals used to consummate an asset purchase and sale, enrich Indicon's president and other professionals, and divert asset sale proceeds away from creditors, in violation of the Bankruptcy Code.
In support of its argument, Vanguard cites to two decisions from the Third Circuit. In the first, Mullarkey v. Tamboer (In re Mullarkey), the court held that where a post-confirmation adversary proceeding alleges a fraud or other wrongdoing that occurred during the bankruptcy process, "implicate[s] the integrity of the bankruptcy process" and "is inseparable from the bankruptcy context," a bankruptcy court has jurisdiction to adjudicate it. 536 F.3d 215, 223-24 (3d Cir.2008). In Mullarkey, the court conducted a fact-intensive analysis and held that the allegations of the complaint stated a claim for fraud that occurred during the bankruptcy process and affected an asset of the bankruptcy estate. The complaint alleged that the defendant-creditor concealed from the trustee assets belonging to the estate, made a false certification to the bankruptcy court, presented false claims to the court to obtain title to property in a fraudulent manner, committed the crime of solicitation of conspiracy, fraudulently foreclosed on estate property with a bogus lien, concealed the sale of the property from the bankruptcy court/trustee through false statements, and violated the RICO statute. The court also noted that the case implicated not only the integrity of the bankruptcy process, but involved the solvency of the debtor, "the cornerstone of the distribution plan." In Seven Fields, the other Third Circuit case Vanguard relies on, the court confirmed the bankruptcy plan in reliance on the advice of the same parties accused of fraud. 505 F.3d 237 (3d Cir.2007). There, the complaint alleged that the accounting firm advising them represented to the bankruptcy court that the debtors were insolvent, leading them to sell assets at below market prices. That court held that "arising in" jurisdiction was present and that the claims arose prior to confirmation of the plan "inasmuch as the conduct on which the parties predicated the claims occurred during the bankruptcy process." Id. at 260.
The complaint in the case before this court alleges a series of violations of the
Even if Vanguard could demonstrate that there is a close nexus between the adversary proceeding and the Plan, it must show that the Plan provided for the post-confirmation retention of jurisdiction. Vanguard cannot do so.
The Plan provides:
Plan, Art. X, Part B, § 9.1 (emphasis added). Thus, by the Plan's plain language, the court's jurisdiction ended with the entry of the final decree in February 2009.
Vanguard also argues that other provisions of the Plan provide the court with jurisdiction, pointing to section 9.1 of the Plan, which provides that
Plan, Art. X, Part B, § 9.1(f)-(h). Vanguard, invoking the bankruptcy court's equitable powers to prevent fraud in the bankruptcy process, argues that the court should exercise jurisdiction over Vanguard's attempts to raise these matters regardless of the Plan's requirement that the debtor raise them. The Plan could have granted creditors a right to seek court rulings regarding compensation to professionals, but it did not. Allowing any potential creditor to give the bankruptcy court subject matter jurisdiction merely by raising a concern relating to those issues seems beyond the intent of the Plan. Such a broad reading of that clear statement, without taking into consideration the jurisdiction retention clause, would effectively provide the bankruptcy court with subject matter jurisdiction over any dispute related to the bankruptcy at any time. The Plan clearly intends to limit the bankruptcy court's jurisdiction.
Vanguard argues that the Bankruptcy Court, even if it does not have post-confirmation jurisdiction pursuant to section 1334, has ancillary jurisdiction. As stated above, all courts addressing the question have ruled that the bankruptcy court's jurisdiction shrinks after confirmation of the plan. See In re General Media 335 B.R. 66, 72 (Bankr.S.D.N.Y.2005). Also, the Plan expressly terminated the bankruptcy court's jurisdiction upon entry of a final decree. Appeals to the general concept of ancillary jurisdiction are unavailing in light of statutory limitations on the bankruptcy court's post-confirmation jurisdiction and the express intention of the bankruptcy court to terminate its jurisdiction upon entry of a final decree.
Vanguard also argues that the bankruptcy court has supplemental jurisdiction to hear all of its claims if the court had jurisdiction to hear any of its claims. Although the Second Circuit has permitted the exercise of supplemental jurisdiction pursuant to 28 U.S.C. § 1367, see In re Lionel, 29 F.3d 88, 92 (2d Cir.1994), it is within the court's discretion to decline to exercise that power. The bankruptcy court expressed its intention to terminate jurisdiction upon entry of a final decree and has declined to exercise supplemental jurisdiction. That decision was not erroneous or an abuse of discretion.
Tesoriere argues that the proper vehicle for Vanguard to seek remedy
For the reasons stated above, the order of the Bankruptcy Court is
It is so ordered.
