BENJAMIN A. KAHN, Bankruptcy Judge.
This case came before the Court for hearing on August 28, 2014, upon the Answer to Counterclaim filed by John J. Harvey, Jr. ("Harvey") and Impact Point Consulting, Incorporated ("Impact Point") (together, "Plaintiffs") on May 5, 2014 [Doc. # 16] ("Answer to Counterclaim"), the Court's Scheduling Order entered May 19, 2014 [Doc. # 18] (the "Scheduling Order"), the Plaintiffs' Brief in Support of Dispositive Threshold Defenses Pursuant to Scheduling Order [Doc. # 21] ("Plaintiffs" Brief), and Defendant's Response Brief Regarding Plaintiffs' Demand for Dismissal of Counterclaim [Doc. # 23] ("Defendant's Brief").
This adversary proceeding was commenced on February 9, 2014, by the filing of the Plaintiffs' Complaint (the "Complaint") seeking a judgment excepting certain obligations from the Debtor's discharge, or, in the alternative, barring the Debtor's discharge pursuant to 11 U.S.C. § 727. On February 10, 2014, the Plaintiffs filed their first Amended Complaint [Doc. # 4] (the "First Amended Complaint"). On March 12, 2014, the Defendant filed his Motion to Dismiss the First Amended Complaint [Doc. # 7] (the "Motion to Dismiss"), alleging improper service. On March 25, 2014, the Defendant withdrew his Motion to Dismiss, and, on April 11, 2014, the Defendant filed his Answer to the Complaint [Doc. # 14] (the "Answer"). In the Answer, the Defendant asserted a counterclaim requesting that the Court liquidate the amount of any damages determined to be non-dischargeable (the "Counterclaim").
In their Reply, the Plaintiffs demand that the Court dismiss the Counterclaim, asserting that the Court lacks subject matter jurisdiction over the underlying state court claims. In the alternative, Plaintiffs argued that dismissal of the Counterclaim is appropriate under the principles of permissive abstention. At the hearing, J. Daniel Bishop appeared for the Plaintiffs and Daniel C. Bruton appeared for the Defendant, Jan Marshall Dambowsky (the "Debtor" or "Dambowsky"). Pursuant to the terms of the Scheduling Order, the Court construed the Plaintiffs' brief as a motion to dismiss the Counterclaim, or, in the alternative, a motion for permissive abstention. At the conclusion of the hearing, the Court denied the motion to dismiss and the motion for permissive abstention.
The claims in this adversary proceeding arise from the business relationship between Harvey and Dambowsky. At the time Plaintiff John J. Harvey ("Harvey") met Dambowsky, both were independently engaged in businesses dealing with military procurement contracts. [Second Amended Complaint ¶ 7-8]. Dambowsky, identifying himself as "Jon Marshall," worked as a consultant to military contractors and had a business called Defense Logistics Solutions, Inc. ("DLS"). [Second Amended Complaint ¶ 8-11].
In Plaintiffs' Reply, the Plaintiffs assert three legal defenses to the Counterclaim. Plaintiffs contend that: (1) the Court does not have subject matter jurisdiction to liquidate a non-dischargeable claim; (2) if the Court were to liquidate any debt found to be non-dischargeable, Plaintiffs would be denied their Seventh Amendment right to a jury trial; and (3) to the extent that the Court finds it has subject matter jurisdiction to liquidate any claims found to be non-dischargeable, the Court should decline to exercise that jurisdiction in the interest of judicial economy. [Plaintiffs' Reply, at 2]. For the reasons set forth herein, the Court denied the Plaintiffs' request for this Court to dismiss or to abstain from hearing the Counterclaim.
There are four issues to be resolved in the matter before the Court: (1) whether the Court has subject matter jurisdiction to liquidate Plaintiffs' claims in the context of a non-dischargeability action; (2) whether this Court, as a non-Article III court, has statutory and constitutional authority to liquidate and enter final judgment with respect to any amounts determined to be non-dischargeable without the Plaintiffs' consent; (3) if the Court does have jurisdiction and authority, whether the Court nevertheless should abstain from liquidating the claims; and (4) whether the Plaintiffs have a right to trial by jury under the Seventh Amendment to the United States Constitution in connection with this dischargeability action.
Although they are related concepts as explained below, the scope of the bankruptcy courts' subject matter jurisdiction, their statutory authority to hear and/or determine any particular matter, and their constitutional authority to do so, each are delineated by different statutory, constitutional, and/or judicial authorities. Section 1334 of title 28 sets forth the extent of bankruptcy subject matter jurisdiction. The bankruptcy courts' statutory authority to hear and/or determine matters is set forth in 28 U.S.C. § 157. Section 157 is not jurisdictional, but simply allocates the statutory authority to enter final judgments between the bankruptcy court and the district court. Stern v. Marshall, ___ U.S. ___, ___, 131 S.Ct. 2594, 2606-07, 180 L.Ed.2d 475 (2011). The bankruptcy courts' constitutional powers, in turn, are governed by the scope of power conferred upon Congress under the Bankruptcy Clause of the United States Constitution, Article I, Section 8, Clause 4 ("The Congress shall have Power To ... establish... uniform Laws on the subject of Bankruptcies throughout the United States...."), and the scope of authority allocated by and between tribunals created under Articles I and III of the United States Constitution, each as applied and interpreted by the opinions of the United States Supreme Court. Therefore, in order for a bankruptcy court to hear and determine any matter, it must have subject matter jurisdiction under 28 U.S.C. § 1334, statutory authority under 28 U.S.C. § 157, and constitutional authority.
Primarily relying upon Stern, Plaintiffs assert that this Court does not have subject matter jurisdiction to liquidate any claims the Plaintiffs have asserted against Dambowsky. Plaintiffs' filings with the Court generally conflate the Court's subject matter jurisdiction with the Court's constitutional authority as an Article I tribunal. In Stern, the Supreme Court instructed that whether the bankruptcy court has subject matter jurisdiction to hear a matter is distinct from whether the bankruptcy court has the statutory authority to liquidate a claim and enter a final order and judgment on that matter. See Stern, 131 S.Ct. at 2607-08 (whether a proceeding is core or non-core under 28 U.S.C. § 157(b) "does not implicate questions of subject matter jurisdiction").
Bankruptcy subject matter jurisdiction is granted to the district courts under 28 U.S.C. § 1334. Section 1334(a), with some exception, gives the district courts exclusive and original jurisdiction of all cases under title 11. Section 1334(b), also with some exceptions, gives the district
Burns v. Dennis (In re Southeastern Materials, Inc.), 467 B.R. 337, 346 n. 4 (Bankr.M.D.N.C.2012) (citations omitted).
Courts and commentators alike have struggled with enunciating the precise bases upon which the bankruptcy courts have subject matter jurisdiction and constitutional authority to enter money judgments in dischargeability proceedings. Despite this struggle, the vast majority of the courts to consider the issue have concluded that the bankruptcy courts have both subject matter jurisdiction and constitutional authority to liquidate such debts in the context of dischargeability actions.
While there appears to be virtual unanimity among the courts that bankruptcy courts can liquidate claims in dischargeability actions, there is disagreement over the nature of the bankruptcy courts' subject matter jurisdiction to do so. The variance among courts and commentators alike is caused by uncertainty of the nature and relationship of the dischargeability action vis-a-vis the establishment of the underlying claim under non-bankruptcy substantive law which is sought to be excepted from the debtor's discharge.
The determination of the dischargeability of a debt arises solely in the context of the bankruptcy proceeding, but the underlying debt is not based upon any right expressly created by title 11. Collier on Bankruptcy ("Collier") therefore concludes that dischargeability actions "arise in" cases under title 11. As explained by Collier, the matters that "arise in" a title 11 proceeding include:
Collier on Bankruptcy ¶ 3.01[3][e][iv] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (emphasis added).
Prior cases relied upon Collier for the proposition that dischargeability proceedings "arise under" title 11 because the exceptions to discharge are exclusively set forth in section 523 of the Bankruptcy Code. See In re Toussaint, 259 B.R. 96, 101 (Bankr.E.D.N.C.2000) (citing Fidelity Nat'l Title Ins. Co. v. Franklin (In re Franklin), 179 B.R. 913, 919-20 (Bankr. E.D.Cal.1995), which, in turn, cites a prior edition of Collier, for the proposition that "causes of action for nondischargeability are created by Bankruptcy Code § 523" and therefore "arise under" title 11). In its most recent edition, Collier concludes that dischargeability actions "arise in" cases under title 11, in contrast to its previous conclusion that they "arise under" title 11. The distinction between these conclusions and the varying opinions of courts and commentators likely lies in whether the liquidation of the underlying claim is seen as part of the dischargeability proceeding, or whether those matters are considered to be distinct claims for relief. As explained by one court:
Stanbrough v. Valle (In re Valle), 469 B.R. 35, 43 (Bankr.D.Idaho 2012). Cf., Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473, 479 (5th Cir. 2009) (noting that, in dischargeability actions, courts pay "little attention" to the distinctions between "arising under," "arising in,"
Other courts see two distinct claims — one on the debt and one on dischargeability.
Despite the conclusion of these courts that bankruptcy courts have subject matter jurisdiction to liquidate the underlying claims, this view that establishment of the underlying claim constitutes a distinct proceeding from the dischargeability determination in fact calls into question whether the bankruptcy court has subject matter jurisdiction over these underlying claims at all. As explained by a leading commentator:
Ralph Brubaker, On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory ("Brubaker"), 41 Wm. & Mary L.Rev. 743, 914-15 (2000) (footnotes omitted);
For the reasons set forth below, this Court believes that consideration of its subject matter jurisdiction implicates constitutional concerns because consideration of the Court's constitutional authority affects the nature of whether the claim "arises in" a case under title 11, "arises under" title 11, or is "related to" a case under title 11. Concluding that the Court has constitutional authority to liquidate claims against a bankruptcy debtor in the context of a dischargeability action, the Court agrees with the court in Valle and the current version of Collier. A proceeding to except a debt from the debtor's
As observed by Judge Markell in his concurring opinion in Deitz, "it is beyond doubt that Congress has the power to provide for a discharge in bankruptcy." Deitz, 469 B.R. at 26 (Markell, J., concurring) (citing U.S. Const. art. 1, § 8, cl. 4, and In re Klein, 42 U.S. (1 How.) 277, 281, 11 L.Ed. 275 (1843) (Catron J., sitting as circuit justice; case reported in a note to Nelson v. Carland, 42 U.S. (1 How.) 265, 11 L.Ed. 126 (1843), for the proposition that the bankruptcy power extends from its smallest limit to distribute the property of the debtor to his creditors, to its greatest limit to discharge a debtor from his contracts and "all intermediate legislation")). Moreover, "[a]lthough Congress cannot `withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law or in equity, or admiralty,'" id. n. 2 (citing Murray's Lessee v. Hoboken Land & Improvement Co., 59 U.S. (18 How.) 272, 284, 15 L.Ed. 372 (1856)), Congress may delegate the implementation of the discharge to non-Article III judges. Id. (citing, inter alia, Hanover Nat'l Bank. v. Moyses, 186 U.S. 181, 188, 22 S.Ct. 857, 46 L.Ed. 1113 (1902), for the proposition that "[t]he subject of `bankruptcies' includes the power to discharge the debtor from his contracts and legal liabilities, as well as to distribute his property" (emphasis added)).
As implicitly stated in the above quote from the Court in Moyses, the Court has consistently recognized that the equitable power of the bankruptcy courts extends to two principle aspects of bankruptcy relief: "(1) the discharge, under some circumstances, of an honest debtor from legal liability for debts he could not pay; and (2) an early pro rata distribution, according to equity, of his available assets among his several creditors." Wiswall v. Campbell, 93 U.S. 347, 350, 23 L.Ed. 923 (1876) (emphasis added) (concluding that the bankruptcy power includes the non-Article III authority to adjudicate state-law based claims against the estate).
As set forth above, it is beyond purview that, even though a debtor's legal liabilities are based upon and arise out of non-bankruptcy state or federal law, Congress can entirely withdraw such claims as might otherwise be asserted against a debtor (as distinct from claims asserted against a bankruptcy estate) from judicial cognizance in the form of providing a bankruptcy discharge to the debtor/obligor. In fact, Congress may withdraw claims from judicial cognizance even where such claims are based upon fraud, as it previously provided under Chapter 13 pre-BAPCPA. See An Act to Establish a Uniform Law on the Subject of Bankruptcies, Pub.L. No. 95-598, 92 Stat. 2549 (1978), amended, inter alia, by Pub.L. No. 101-647 (1990) (current version at 11 U.S.C. § 1328). Even post-BAPCPA, and even if the debtor is not simply "honest but unfortunate" and a creditor's claims consist of the types of claims asserted in this case, if a timely request for adjudication of these claims is not commenced in this Court, the bankruptcy discharge entered by this Court will entirely remove these claims from judicial cognizance by discharging
Therefore, by providing a bankruptcy discharge, legitimate Congressional authority has fully and completely removed from judicial cognizance myriad non-bankruptcy based and otherwise private right claims. Moreover, as implied by the Court in Wiswall when it stated that the bankruptcy power includes the discharge of legal obligations "under some circumstances," 93 U.S. at 350 (emphasis added), the bankruptcy power includes the determination of the circumstances under which a discharge might be limited. Since it is beyond question that Congress is empowered to entirely remove these types of claims from judicial cognizance by granting a bankruptcy discharge, it certainly would be incongruous to conclude that Congress cannot delegate the determination of specific claims that will be excepted from the discharge to a non-Article III court.
In any event, such a counter-intuitive and illogical conclusion is unnecessary. The Supreme Court has recognized that the bankruptcy discharge involves the "restructuring of the debtor-creditor relations... [and] is at the core of the federal bankruptcy power." N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S.Ct. 2858, 2871, 73 L.Ed.2d 598 (1982). In Northern Pipeline, the plurality of the Court contrasted the bankruptcy discharge to the right to recover contract damages to augment the estate, the latter of which "is a private right, that is, of the liability of one individual to another under the law as defined." Id. However, this statement should not be read to affect the conclusion that the nature and extent of the discharge, including the determination of any debts that will be excepted from discharge, is well within the bankruptcy power-even when those debts are based upon non-bankruptcy law. Certainly it cannot be concluded from this statement that any determination of the liability of one individual to another based upon "the law as defined" is removed from determination under the bankruptcy power. If that were so, the bankruptcy courts could not determine state law based claims against the estate, a power which the Court clearly has held is within the equitable bankruptcy power. See Wiswall, 93 U.S. at 350.
Rather, the proper distinction lies in whether the determination of a non-bankruptcy claim or issue necessarily arises in a proceeding lying at the "core" of the bankruptcy power. As observed by the Court in Wiswall, the bankruptcy power has two aspects: (1) the extent of the discharge; and (2) the distribution of the assets of the estate. Id. The determination of the nature and extent claims for the purpose of the discharge is no less central to the bankruptcy process than the determination of the nature and extent of claims for the purpose of the pro rata distribution of assets to creditors. In fact, it could easily be argued that the former is vastly more important and central to the process than the latter. The debtor is the central figure in the process, and the bankruptcy discharge has been appropriately characterized as the "sin qua non" of bankruptcy relief. See Franklin Computer Corp. v. Apple Computer, Inc. (In re Franklin Computer Corp.), 60 B.R. 795, 801 (Bankr. E.D.Penn.1986) ("creditors' dischargeable claims are extinguished even though they may arise through, or as, state created rights"); see also Valley Historic Ltd. Partnership v. Bank of New York, 486 F.3d 831, 836 (4th Cir.2007) ("the very purpose of bankruptcy is to discharge or restructure the debt that has caused the bankruptcy"); State of California v. Harleston (In re Harleston), 275 B.R. 546, 552 (9th Cir. BAP 2002) ("Discharge is no
The Court in Stern recognized that the bankruptcy power afforded to non-Article III courts does not exclusively lie in the process of claims determination. According to Stern, in order for a non-Article III court to enter a final judgment constitutionally, the action must either "stem[] from the bankruptcy itself or ... necessarily be resolved in the claims allowance process." Stern, 131 S.Ct. at 2618; see also Yellow Sign, Inc. v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.), 466 B.R. 750, 768 (Bankr.M.D.N.C.2012) ("If either prong of the test is met, then the bankruptcy court has constitutional authority to enter a final order."). Where a final ruling is a "central part of the `restructuring of the debtor-creditor relationship,'" no Article III powers are exercised. Bakst v. Smokemist, Inc. (In re Gladstone), 513 B.R. 149, 158 (Bankr.S.D.Fla.2014) (citing Stern, 131 S.Ct. at 2617); see also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56 n. 11, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989).
As set forth above, the vast majority of other courts similarly have concluded that the bankruptcy courts retain jurisdiction to liquidate claims as part of the dischargeability proceeding. In Farooqi v. Carroll (In re Carroll), 464 B.R. 293, 311 (Bankr.N.D.Tex.2011), aff'd, 486 B.R. 718 (N.D.Tex.2013), the court addressed the issue of whether it had the constitutional authority to enter a final, monetary judgment against a debtor for fraudulent inducement, fraud, and violations of state
The Court next considers whether it has the statutory authority to hear and determine the amount and extent of any claims in the context of a dischargeability action where those claims have not previously been liquidated by a court of competent jurisdiction. The Court clearly has statutory authority to do so. Pursuant to 28 U.S.C. § 157(a), the district courts have the authority to refer cases over which the district court has original subject matter jurisdiction under Section 1334 to the bankruptcy judges for their respective districts. The United States District Court for the Middle District of North Carolina has established a local rule of standing reference of all such matters to this Court. See Local Rule 83.11 for the United States District Court for the Middle District of North Carolina.
Section 157 further divides matters falling within the subject matter jurisdiction of the bankruptcy courts into core matters, which matters this Court may statutorily "hear and determine" pursuant to Section 157(b), and non-core matters, with respect to which this Court may issue proposed findings of fact and conclusions of law unless the parties consent to a final judgment being entered by the Court pursuant to Section 157(c). The bankruptcy courts' power to enter final orders and judgments extends to "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)(1). If a proceeding is non-core, the bankruptcy court may hear the proceeding but must have consent of the parties in order to enter final orders and judgments. 28 U.S.C. § 157(c)(2). If the parties do not consent, the court may still hear the proceeding but must submit proposed findings of fact and conclusions of law to the district court. 28 U.S.C. § 157(c). 28 U.S.C. § 157(b)(1) authorizes this Court to "hear and determine ... all core proceedings..., and may enter appropriate orders and judgments...." 28 U.S.C. § 157(b) lists what types of proceedings come within this Court's statutory "core" power. This section was intended to extend the authority of the bankruptcy court to the furthest extent of its constitutional authority.
Both parties, as they must, agree that Plaintiffs' discharge and dischargeability causes of action are core proceedings. Such actions do not stand independent of a bankruptcy filing, and are specifically listed as statutorily core matters that this Court may hear and determine pursuant to 28 U.S.C. § 157(b)(2)(I) and (J). As matters that are specifically listed as core, this Court has statutory authority to enter a final judgment with respect to the dischargeability claims. Stern, 131 S.Ct. at 2604-05. For the reasons set forth above, the act of liquidating the underlying claims that Plaintiffs seek to have declared non-dischargeable is integral to determination of the dischargeability question itself, see, e.g., Van-Voegler v. Myrtle (In re Myrtle), 500 B.R. 441, 446 (Bankr.W.D.Va.2013) (and cases cited therein), and, entering a judgment liquidating the non-dischargeable claims is statutorily "core" under 28 U.S.C. § 157. This Court has statutory authority to hear and determine the amount and extent of any claims asserted to be non-dischargeable.
Plaintiffs argue in the alternative that, even where this Court may hear the case and enter a final judgment, the Court should not exercise that power. The Court has construed this request as a request that the Court permissively abstain from liquidating the claims in this case. When determining whether permissive abstention is appropriate,
Walter v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.), 449 B.R. 860, 879-80 (Bankr.M.D.N.C.2011). Plaintiffs provide four arguments in support of a request to exercise permissive abstention: (1) claims against co-conspirators of the debtors are "likely to be pursued in state court litigation;" (2) Plaintiffs will seek to impose a constructive trust against payments made to attorneys during state court litigation, and that remedy is more appropriately applied in the court where the attorneys made appearances; (3) liquidation of claims is insufficient remedy for all claims the Plaintiffs have against the Debtor, and a state court can more adequately handle equitable remedies; and (4) Plaintiffs have a right to a jury trial under the Seventh Amendment. [Plaintiffs' Reply, at 2].
In re Neves, 500 B.R. 651, 659 (Bankr. S.D.Fla.2013). Similarly, the constructive trusts and other equitable remedies that the Plaintiffs seek can be brought against other parties outside of the bankruptcy proceeding. No factor listed above weighs sufficiently in favor of permissive abstention for this Court to abdicate its responsibility to adjudicate the matters brought before it for which it has the authority to hear and determine. See In re Repurchase Corp., 329 B.R. 832, 835 (Bankr. N.D.Ill.2005) ("[A] decision to abstain must be weighed against a court's obligation to exercise the jurisdiction bestowed by Congress." (citing Colorado River Conservation Dist. v. United States, 424 U.S. 800, 813, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976))). "The doctrine of abstention is an `extraordinary and narrow exception' to a federal court's strict duty to adjudicate a controversy properly before it and it `may be invoked only in those `exceptional circumstances' in which surrendering jurisdiction `would clearly serve an important countervailing interest.''" Id. (citing Int'l Coll. of Surgeons v. Chicago, 153 F.3d 356, 360 (7th Cir.1998)). In this case, there are no such clear countervailing interests. Judicial economy concerns do not weigh against this Court issuing a final judgment in this case; any underlying state law issues are not so complicated as to be burdensome; and there are no other parties involved in the proceeding before the Court, nor are such parties necessary to fully adjudicate the issues presented by the pleadings in this case.
Even if Plaintiffs' arguments concerning judicial economy were more persuasive, the Court would not grant the request for permissive abstention. Here, an order that attempted to categorically except a putative debt from discharge without having determined the existence or amount of the debt would be an abdication of this Court's duty to determine dischargeability. As explained above, liquidation of any claims will be resolved in a determination of the dischargeability action. Were the Court to do as Plaintiffs ask and merely
Here, the Plaintiffs also have demanded a jury trial and have not consented to a jury trial before this Court. The Plaintiffs' claims are being determined and liquidated in the context of a non-dischargeability action. Such an action lies within the equitable powers of this Court, and Plaintiffs have no right to a jury trial with respect to the claims in this case. Varney v. Varney (In re Varney), No. 94-2045, 1996 WL 138684, at *2 (4th Cir. Mar. 28, 1996); Charlotte Commercial Grp., Inc. v. Fleet Nat'l Bank (In re Charlotte Commercial Grp., Inc.), 288 B.R. 715, 718 (Bankr.M.D.N.C.2003) ("[A] dischargeability proceeding is an equitable claim for which a party cannot obtain a jury trial pursuant to Granfinanciera."); M C Contractors, Inc. v. Fink (In re Fink), 294 B.R. 657, 659 (W.D.N.C.2003) (same).
For the foregoing reasons, the Court finds that it has subject matter jurisdiction, statutory authority, and constitutional authority to hear and determine Plaintiffs' non-dischargeability claim, liquidate the claims, and enter final judgment. Furthermore, the Plaintiffs have no right to a jury trial in this case. Therefore, the Plaintiffs' request to dismiss, or alternatively, to permissively abstain from hearing and determining the Defendant's counterclaim for liquidation of any claims determined to be non-dischargeable is DENIED.
