MAGDELINE D. COLEMAN, Bankruptcy Judge.
On November 15, 2011, this Court held a hearing to address Third Party Defendant, Security Abstract of PA, Inc.'s ("Security") Motion to Dismiss Third Party Complaint ("Motion to Dismiss"). At the hearing and prior to hearing the merits of the Motion to Dismiss, this Court raised the issue of whether, consistent with Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this Court lacks subject matter jurisdiction to adjudicate the claims asserted against Security by Richard Wezner and Felicia Wezner (the "Wezners" or the "Defendants") in their Third-Party Complaint (the "Third-Party Complaint").
This Court is now in receipt of parties' briefs and is prepared to issue its decision. Having considered the issues raised by the parties at the hearing and in their post-hearing briefs, this Court finds that it lacks subject matter jurisdiction over the claims asserted in the Third-Party Complaint and will grant dismissal on that basis. Consistent with Fed. R. Bankr.P. 7052, the following discussion constitutes this Court's findings of fact and conclusions of law.
Debtor, Richard Wezner (the "Debtor" or "Wezner"), filed for chapter 11 bankruptcy relief on February 15, 2011 (the "Petition Date"). Plaintiffs, Anthony F. Cilio and KellyAnn Cilio (the "Plaintiffs" or "Cilios") then initiated this adversary proceeding by filing the Complaint Objecting to Discharge of Debtor and Requesting Other Relief dated May 27, 2011 (the "Complaint"). The Complaint named as defendants the following parties: the Debtor; Felicia Wezner; and Citizens Bank of Pennsylvania ("Citizens Bank"). The Complaint contains eight counts: (1) an objection to the Debtor's discharge pursuant to §§ 523 and 727 (Count I); (2) Breach of Warranty (Count II); (3) Breach of Contract (Count III); (4) Fraud (Count IV); (5) Negligent Misrepresentation (Count V); (6) Unjust Enrichment (Count VI); (7) Detrimental Reliance (Count VII); and (8) Quiet Title (Count VIII). Counts I through VII are alleged solely against the Wezners whereas Count VIII is alleged solely against Citizens Bank. As relief for their alleged injury, the Cilios seek a judgment against (1) the Debtor denying his discharge; (2) the Wezners in the amount of $708,496.75 for failure to satisfy a mortgage against certain real estate sold to the Cilios; and (3) Citizens Bank for equitable relief in the form an injunction requiring Citizens Bank to mark the mortgage at issue as satisfied.
In response to the Complaint, the Defendants filed Debtor's Motion to Dismiss the Complaint and In the Alternative, Motion for More Definite Statement (the "Motion to Dismiss Complaint"). In the Motion to Dismiss Complaint, the Wezners relied upon five grounds for dismissal: (1) pursuant to F.R.C.P. 12(b)(1) the Cilios lack standing and therefore the Complaint should be dismissed; (2) the automatic stay as provided by § 362(a)(1) bars the Cilios from filing an action to recover money damages arising from a prepetition breach of contract; (3) pursuant to F.R.C.P. 12(b)(6) the Complaint fails to state a claim and should be dismissed; (4) as required by F.R.C.P. 12(b)(7) the Complaint fails to join a necessary party; and (5) the Plaintiffs' claims are barred by the applicable statute of limitations. In the alternative, the Wezners argued that Count I, the Cilios' § 523(a) claim, should be re-plead with particularity as required by F.R.B.P. 7012(e).
Simultaneous with the filing of the Motion to Dismiss Complaint, the Wezners also filed a Motion to Disqualify. The Motion to Disqualify sought to disqualify the firm of Hamburg Rubin Mullin & Maxwell Corp. (the "Hamburg Firm") from representing the Cilios. Specifically, the Motion to Disqualify alleged that the Hamburg Firm possessed an irremediable conflict of interest that prevented it from
Citizens Bank filed its Answer to the Complaint ("Citizens Answer"). In the Citizens Answer, Citizens Bank raised certain cross-claims against the Wezners. Citizens Bank asserted a breach of contract claim in the amount of $708,496.75 plus interest accruing at the rate of $41.86 per day arising from the Wezners' failure to make payments on a home equity line of credit ("HELOC") and the Wezners' conveyance of the Property to the Cilios. In addition, Citizens Bank asserted an unjust enrichment claim against the Wezners. Finally, Citizens Bank asserted a claim for fraud based on Citizens Banks' allegation that the Wezners concealed the conveyance of the real estate to the Cilios. Citizens Bank did not include a claim for nondischargeability.
On August 19, 2011, the Wezners responded to Citizens Banks' cross-claims by filing a Motion to Dismiss the Cross Claims (the "Motion to Dismiss Cross Claims"). In the Motion to Dismiss Cross Claims, the Wezners made three arguments: (1) Citizens Bank's cross-claims consist of a state law contract claim that may not be prosecuted as an adversary proceeding; (2) Citizens Bank failed to plead its fraud claim with the requisite particularity as required by F.R.C.P. 9(b); and (3) the gist of the action doctrine bars Citizens Bank from recasting its breach of contract claims as tort claims.
On September 6, 2011, this Court held a hearing on the Wezners' Motion to Dismiss Complaint, Motion to Disqualify, and Motion to Dismiss Cross Claims. At the hearing, this Court denied the Motion to Disqualify finding that the interests of Security could not be imputed to the law firm representing the Cilios simply due to the status of one of the firm's partners also being a shareholder of Security.
On September 15, 2011, the Wezners filed their Answer (the "Answer"). In addition to their Answer, the Wezners filed the Third-Party Complaint against Security alleging Security to be solely liable to the Cilios or, in the alternative, that Security is liable to the Wezners by way of contribution or indemnification for all losses the Wezners may suffer as a result of the prosecution of the Cilios' claims against the Wezners. In addition, the Third-Party Complaint purports to "incorporate" all of the Cilios' claims alleged in the original Complaint and replead them against Security.
On October 17, 2011, Security filed the Motion to Dismiss. The Motion to Dismiss seeks dismissal of the Third-Party Complaint for the following reasons: (1) F.R.C.P. 14(a) does not permit joinder of a third-party defendant on the theory that the third-party defendant is solely liable to the Plaintiffs; (2) Pennsylvania's economic loss doctrine bars the Defendants' claims for contribution and indemnification; (3) the Defendants have failed to state a claim for contractual or common law indemnification; and (4) the Defendants have failed to state a claim for contribution.
On November 15, 2011, this Court held a hearing on Security's Motion to Dismiss. Counsel for the Wezners and Security both appeared at this hearing. Before this Court heard any arguments on the Motion to Dismiss, this Court advised the parties of its concerns with regard to whether, pursuant to the Supreme Court's then recent decision, Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this Court lacks subject matter jurisdiction to hear the Wezners' claims against Security. As discussed above, this Court requested that the parties brief the issue and took the matter under advisement.
On February 6, 2003, the Wezners obtained a HELOC from Roxborough Manayunk Bank ("Roxborough").
On August 16, 2005 (the "Date of Closing"), the Wezners conveyed the Property to the Cilios for $1,800,000. In connection with the conveyance, the parties executed an Indenture dated August 16, 2005 (the "Indenture"). The Indenture contained the following covenant:
Complaint, Exh. D.
Simultaneously, the Wezners executed an Affidavit dated August 16, 2005 (the "Affidavit"). In the Affidavit, the Wezners warranted "there are no liens or encumbrances (Mortgages, Deeds of Trust, Judgments, Tax Liens, Mechanics Liens, etc.) known to the undersigned which are not being properly provided for in this transaction." Complaint, Exh. F. The Affidavit was made on behalf of Fidelity National Title Insurance Company ("Fidelity"), the title insurer for the Cilios. As stated in the Affidavit,
Complaint, Exh. F.
The Cilios allege and the Wezners admitted that as of the Date of Closing, the HELOC had a zero balance. The Cilios further allege that as a result of the Wezners' representation made to Fidelity in the Affidavit, the Wezners had an obligation to insure that the Mortgage was satisfied. In response, the Wezners argue that they owed no obligation to insure that the Mortgage was marked satisfied. Rather, the Wezners attribute this obligation to Security. The Wezners specifically allege that Security failed to file the mortgage satisfaction piece. None of the papers filed with this Court contain any averment with regard to why Security failed to mark the Mortgage as satisfied.
All parties agree that the failure to mark the Mortgage satisfied was not discovered by any of the parties until sometime during the year of 2009. In the interim period between the Date of Closing when the HELOC had a zero balance and the parties' discovery that the Mortgage had not been satisfied, the Wezners continued to draw on the HELOC. As of the commencement of this adversary proceeding, the Wezners had drawn $708,496.75 on the HELOC, all of which remained unpaid and outstanding.
Although the parties did not raise the issue of whether this Court has subject matter jurisdiction over the claims asserted by the Third-Party Complaint, this Court is obligated to address the issue.
Id., 544 F.3d at 205 (citations omitted).
Congress provided bankruptcy courts the power to "hear and determine" certain the types of proceedings that may be considered "core proceedings." 28 U.S.C. § 157(b). Section 157(b) contains a non-exclusive list of matters that are designated as core proceedings. The adjudication of nondischargeability claim asserted by the Cilios against the Debtor lies within this Court's core jurisdiction. 28 U.S.C. § 157(b)(2)(I).
The Wezners assert common law claims of indemnification and contribution against Security. Security has not filed a claim against the Debtor's estate and Security has not consented to and in fact opposes, the adjudication of the Third Party Complaint by this Court. The Wezners' claims are not core because they do not invoke a substantive right provided by title 11 and do not arise only in the context of bankruptcy case. See, e.g., Exide Technologies, 544 F.3d at 206 (discussing standard for determining whether a claim is "core"). As such, this Court has subject matter jurisdiction over the claims asserted by the Third-Party Complaint only if they are considered "related to" the Debtor's bankruptcy. Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984); Union Trust Philadelphia, LLC v. Singer Equipment Company, Inc., et al. (In re Union Trust Philadelphia, LLC), 460 B.R. 644, (Bankr. E.D.Pa.2011).
The Wezners argue that they may rely on Security's negligence to excuse some portion of their collective liability and therefore some portion of the Debtor's liability. On its face, the Wezners' argument does appear to carry weight because related-to jurisdiction is appropriate where a proceeding may impact a debtor's liabilities. In re Marcus Hook Dev. Park, Inc., 943 F.2d 261 (3d Cir.1991) (observing that related-to jurisdiction "will exist so long as it is possible that a proceeding may impact on `the debtor's rights liabilities"). However, a close comparison of the nature of the Cilios' claim against the Debtor to the Wezners' claims against Security quickly dispels this impression.
Assuming that the Wezners' allegations with regard to Security's negligence are true, Security's negligence would not absolve the Debtor of his liability for the Cilios' claim. Even if Security breached some duty when it failed to cause the satisfaction of the Mortgage, such breach does not excuse the Wezners' conduct or the Debtor's potential liability. Assuming this Court were to find that Security breached a duty owed to the Wezners or the Cilios, the Wezners may not as a matter of law rely on Security's negligence to excuse their alleged subsequent willful misconduct. Restatement (Second) of Torts § 448 (2011); Printy v. Dean Witter Reynolds, Inc., 110 F.3d 853, 859-60 (1st Cir.1997) (finding that debtor willfully and maliciously injured creditor when the debtor purchased shares on margin based upon shares erroneously attributed to the trust account managed by the debtor). Section 448 states:
Restatement (Second) of Torts § 448 (2011).
While Security may have breached a duty to the Cilios by negligently failing to mark the mortgage as satisfied, the Wezners may have also breached a separate duty by subsequently drawing on the HELOC. While Security's alleged error may have enabled the Wezners to engage in the conduct that caused the Cilios' damages, it cannot be said that Security therefore becomes responsible to the Wezners for their independent decision to take advantage of the Cilios by continuing to draw on the HELOC. Security's alleged negligence cannot serve as a defense to the Wezners' alleged intentional misconduct. As observed by the First Circuit when addressing a party's attempt to absolve itself from responsibility for its intentional conduct by reference to another party's negligent conduct:
Printy, 110 F.3d at 860.
Here, the same is true. It appears that the Wezners purposefully availed themselves of an opportunity made available to them by Security's alleged error. The Wezners may not rely on Security's alleged error as a defense to the Cilios' claim. For this reason, this Court finds that a determination of whether Security negligently failed to mark the Mortgage satisfied will not absolve the Debtor of his potential liability. As a result, the adjudication of the Wezners' claims against Security will not have a conceivable effect on the Debtor's liability to the Cilios.
At best, the only effect on the Debtor's estate that will result from the adjudication of the Wezners' claim against Security would be to augment the Debtor's bankruptcy estate. Assuming that the Wezners' alleged intentional misconduct does not preclude them from asserting a claim against Security, their claim would have the effect of augmenting the Debtor's estate. However, this assumption appears to be precluded by applicable law discussed above. Even if this Court was to look past the apparent legal insufficiency of the Wezners' claim, this Court finds that the adjudication of the Wezners' claim against Security, despite it having a conceivable effect on the Debtor's estate would still exceed the scope of this Court's related-to jurisdiction. An examination of the Supreme Court's decision in Stern compels this conclusion.
In Stern, the plaintiff-creditor in the original adversary proceeding "sought a declaration that [his] defamation claim was not dischargeable in the bankruptcy proceedings." Stern, 131 S.Ct. at 2601. Both the plaintiff-creditor's defamation and the debtor's tortious interference claim arose from private rights. The Supreme Court recognized that absent the plaintiff-creditor's consent the bankruptcy court would not have had the authority to adjudicate his defamation claim. The Supreme Court found that the plaintiff-creditor's conduct, the filing his proof of claim, evidenced his consent to the adjudication of his state law rights by an Article I court. Id. at 2608 ("Given Pierce's course of conduct before the Bankruptcy Court, we conclude that he consented to that court's resolution of his defamation claim (and forfeited any argument to the contrary)"). In response to the plaintiff-creditor's defamation claim, the debtor filed a counterclaim against the plaintiff-creditor for tortious interference with the debtor's expectancy of an intestate gift. However, the plaintiff-creditor objected to the bankruptcy court's adjudication of the debtor's counterclaim on the ground that the bankruptcy court lacked authority to adjudicate the debtor's counterclaim.
To determine the scope of the bankruptcy court's authority to adjudicate the counterclaim, the Supreme Court relied upon a distinction between claims derived from
To temper the scope of its ruling, the Supreme Court explained that Article III does not permit Congress to delegate to an Article I court the judicial power "to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." Stern, 131 S.Ct. at 2620 (emphasis added). As indicated by this quote, the Supreme Court acknowledged that if a bankruptcy court will in the process of resolving any rights provided under the Bankruptcy Code necessarily resolve state law counterclaims raised by a debtor, a bankruptcy court may also make determinations relating to those state law counterclaims. Id. at 2620. In other words, if the elements of a creditor's claim, including the adjudication of the causes of action that give rise to the claim, include all of the elements of a debtor's counterclaim, the bankruptcy court may in the process of ruling on the creditor's claim dispose of the debtor's counterclaim. In essence, the Supreme Court recognized that principles of claim or issue preclusion may apply to the adjudication of state law rights as a result of the adjudication of federal rights by bankruptcy court. Accordingly, the Supreme Court held that a bankruptcy court's related-to jurisdiction does not extend to the adjudication of common law claims, whether based on contract or tort, that seek to augment the bankruptcy estate and are not necessarily resolved in the process of
Against this framework, this Court must determine the scope of the Plaintiffs' state law causes of action and whether the adjudication of those state law causes of action will result in the resolution of the Wezners' counterclaims against Security. If so, this Court may have jurisdiction to hear the Wezners' counterclaims. If in adjudicating the Cilios' state law causes of action this Court will necessarily resolve the Wezners' counterclaims against Security, this Court may decide such claims. See, e.g., Safety Harbor Resort, 456 B.R. at 713 (observing that Stern permits bankruptcy courts to resolve claims that completely "overlap" with adjudication of creditor's claim).
As noted previously, the Wezners' claims against Security and the Cilios' claim against the Wezners arise from separate and independent conduct. Security's liability stems from its alleged negligent conduct whereas the Wezners' liability stems from their alleged intentional conduct. While Security is alleged to have breached a duty to the Cilios by negligently failing to mark the mortgage as satisfied, the Wezners are alleged to have committed an intentional tort by subsequently drawing on the HELOC. Based on this distinction, this Court finds that the adjudication of the Cilios' claim will not overlap with the determination of whether Security is liable to the Wezners for Security's alleged failure to mark the Mortgage satisfied.
The fact that the Wezners' claims against Security are not co-extensive with this Court's determination of the Cilios' nondischargeability claim is underscored by the Wezners' arguments with regard to their right to contribution
For the reasons discussed above, this Court will dismiss the Third Party Complaint for lack of subject matter jurisdiction. The scope of the Wezners' claims against Security are not encompassed by the scope of the Cilios' claim against the Debtor. The adjudication of the Cilios' nondischargeability claim is not dependent upon or coextensive with this Court's adjudication
An Order consistent with this Opinion will be entered.