Catt, Jr v. Rtech Fabrications, LLCCatt, Jr v. Rtech Fabrications, LLC
MEMORANDUM OF DECISION
Plaintiff Jerry Catt, Jr. (“Plaintiff“) filed this adversary proceeding seeking to except from discharge a debt owed by Rtech Fabrications, LLC (“Rtech“) and obtain a judgment against the member/managers of Rtech, Randall Robertson and Dru-Ann Robertson (collectively the “Robertsons“). Rtech seeks dismissal of Plaintiff‘s amended complaint as against it and the Robertsons.1 See Doc. No. 6 (“Motion to Dismiss“).
FACTUAL AND PROCEDURAL HISTORY
Rtech is a limited liability company (“LLC“) operating in Coeur d‘Alene, Idaho. It specializes in custom vehicle builds and modifications. Plaintiff contracted with Rtech from early 2016 through February 2020 to build and modify two custom vehicles. See Doc. No. 8 (“Amended Complaint“). Plaintiff‘s relationship with Rtech did not end well and Plaintiff filed a complaint in the District Court of the First Judicial District of the State of Idaho, Kootenai County (“State Court“), against Rtech and the Robertsons, alleging claims for breach of contract, fraud, and alter ego veil piercing. Id. The State Court subsequently entered an “Order for Issuance of Writ of Attached,” attaching certain property owned by Rtech. Id. The next day, Rtech filed a chapter 11, subchapter V bankruptcy.2
Plaintiff‘s Amended Complaint seeks to except his claim against Rtech from discharge pursuant to
Rtech argues the Amended Complaint should be dismissed as to it due to Plaintiff‘s failure to state a claim. Doc. Nos. 6, 9. Namely, Rtech asserts Plaintiff has no cognizable legal claim because, as an LLC and not an individual, Rtech is not subject to the discharge exceptions found in
DISCUSSION AND DISPOSITION
A. Motion to Dismiss for Failure to State a Claim
1. Legal Standard
Rtech‘s Motion to Dismiss is premised upon Civil Rule 12(b)(6), made applicable here by Rule 7012(b). Civil Rule 12(b)(6) provides that a defendant may request dismissal of a plaintiff‘s complaint for “failure to state a claim upon which relief may be granted.” When evaluating a Civil Rule 12(b)(6) motion, the Court must construe the allegations found in the complaint in the light most favorable to the plaintiff. Torres v. Nicholas (In re Nicholas), 556 B.R. 465, 469 (Bankr. D. Idaho 2016). To survive a Civil Rule 12(b)(6) motion, the plaintiff must assert a plausible claim. Beach v. Bank of America (In re Beach), 447 B.R. 313, 318 (Bankr. D. Idaho 2011) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 554-58 (2007)). To be plausible, the claim must be based on “a cognizable legal theory.” Id.
Here, as noted, Plaintiff asserts his claim against Rtech should be excepted from discharge pursuant to
2. Application of § 523(a)
Rtech filed a voluntary chapter 11, subchapter V bankruptcy petition. Subchapter V was created as part of the Small Business Reorganization Act of 2019 (“SBRA“). Pub. L. No. 116-54, 133 Stat. 1079 (2019). Under the SBRA, a small business debtor—which includes individuals, partnerships, and corporations—may seek confirmation of their plan either consensually or through the cramdown provision of
However, if a chapter 11, subchapter V plan is confirmed via the cramdown provision of
a. Plain Language of Sections 1192 and 523(a)
First, the plain language of
Section 523(a) provides, in pertinent part, that “[a] discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor ....” Section 523(a) (emphasis added). Section 1192(2) in turn provides:
If the plan of the debtor is confirmed under section 1191(b) of this title ..., the court shall grant the debtor a discharge of all debts provided in section 1141(d)(1)(A) of this title, and all other debts allowed under section 503 of this title and provided for in this plan, except any debt—
(1) ...
(2) of the kind specified in section 523(a) of this title.
Section 1192(2) (emphasis added). In construing both statutes, the courts in Satellite Restaurants and Cleary Packaging considered the importance of § 523(a)‘s use of the word “individual” and the reference to § 1192. Satellite Rests., 626 B.R. at 876; Cleary Packaging, 2021 WL 2667735, at *4.
In Satellite Restaurants, the court relied on the well-established canon of statutory construction that every word in a statute must be given effect, so as to avoid rendering any language superfluous. Satellite Rests., 626 B.R. at 876. By its own terms, § 523(a) only applies to individual debtors. Additionally, the court in Satellite Restaurants found that, in amending § 523(a) to include a reference to § 1192, Congress intended to limit the application of § 523(a) to individual debtors in subchapter V cases. Satellite Rests., 626 B.R. at 876 (“Moreover, the reference to Section 1192 added to Section 523(a) by the SBRA must be given meaning, and the only reasonable meaning is that Congress intended to continue to limit the application of the Section 523(a) exceptions in a Subchapter V case to individuals.“).
Plaintiff asserts that “debts of the kind specified in section 523(a)” should be interpreted to reference those types of debts and should not be interpreted to mean “debtors of the kind.” Doc. No. 11 at 12. Plaintiff argues
b. The Statutory Scheme Regarding Corporate Discharge
This reading of
First, it is important to note that subchapter V is part of chapter 11. The corporate discharge under chapter 11 has been “strenuously protected.” Cleary Packaging, 2021 WL 2667735, at *7 (citing Mallinckrodt PLC v. City of Rockford (In re Mallinckrodt PLC), 2021 WL 2460227, at *4 (Bankr. D. Del. June 16, 2021)). The court in Cleary Packaging noted that “the Bankruptcy Act of 1898 included exceptions to discharge for certain corporate debtors.” Id. at *5. Subsequently, in 1978, Congress rejected that approach and provided a more expansive discharge to corporate debtors in enacting the Bankruptcy Code, representing “an intentional and decisive change by Congress with respect to the scope of a corporate debtor‘s discharge.” Id. Since 1978, Congress has limited the corporate discharge though
Because subchapter V is part of chapter 11, its discharge provision must be interpreted consistent with chapter 11‘s overall statutory scheme.6 Moreover, in passing
When considering the plain language of
an LLC, and not an individual, Plaintiff has not presented a legally cognizable claim. As such, the Court will grant the Motion to Dismiss as to Rtech.
B. Motion to Dismiss for Lack of Subject Matter Jurisdiction
The Court now addresses whether it has subject matter jurisdiction to adjudicate Plaintiff‘s claims against the Robertsons.
1. Legal Standard
Any party, or the Court on its own initiative, may raise a federal court‘s lack of subject matter jurisdiction at any stage in the litigation, even after trial and the entry of judgment. Arbaugh v. Y & H Corp., 546 U.S. 500, 506 (2006). Here, Rtech invokes Civil Rule 12(b)(1) when arguing this Court lacks subject matter jurisdiction over the Robertsons.
A Rule 12(b)(1) jurisdictional attack may be facial or factual. White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000) (citation omitted). In a facial attack, the challenger asserts that the allegations contained in a complaint are insufficient on their face to invoke federal jurisdiction. Rtech makes such a facial attack, and the Court must therefore presume the factual allegations of the Amended Complaint to be true and construe them in the light most favorable to Plaintiff. Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004).
2. Jurisdiction
a. The Statutory Structure
Jurisdiction of bankruptcy courts is governed by statute. Congress conferred “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11” on the federal district courts.
“‘Arising under’ and ‘arising in’ are terms of art.” Eastport Assocs. v. City of Los Angeles (In re Eastport Assocs.), 935 F.2d 1071, 1076 (9th Cir. 1991). Proceedings arising under title 11 are those that are created or determined by a statutory provision of title 11. Id. (quoting Wood v. Wood (In re Wood), 825 F.2d 90, 96-97 (5th Cir. 1987)). “‘[A]rising in’ proceedings are those that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside
In addition, a bankruptcy court “may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11.”
whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy .... Thus, the proceeding need not necessarily be against the debtor or against the debtor‘s property. An action is related to bankruptcy if the outcome could alter the debtor‘s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.
Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1995) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984) (emphasis in original); see also Fietz v. Great W. Savs. (In re Fietz), 852 F.2d 455, 457 (9th Cir. 1988) (adopting the Pacor test in the Ninth Circuit). In Celotex Corp., the Supreme Court noted that although Congress intended the “related to” language to evidence a jurisdictional “grant of some breadth,” it was not intended to be “limitless.” Id. at 308.
b. The Claims Against the Robertsons Are Not Core
Plaintiff‘s claims against the Robertsons are based on breach of contract, violation of the Idaho Consumer Protection Act, fraud, embezzlement, and veil piercing, which would hold the Robertsons personally liable for Plaintiff‘s claim against Rtech. These claims do not “arise under” the Bankruptcy Code. These are not matters whose “existence depends on a substantive provision of bankruptcy law.” Battle Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124, 1131 (9th Cir. 2010). Plaintiff‘s causes of action against the Robertsons are not “created or determined by a statutory provision of the Bankruptcy Code.” Id. They therefore do not “arise under” the Code.
Further, Plaintiff‘s claims against the Robertsons do not “arise in” a bankruptcy case. The claims do not constitute an “administrative matter unique to the bankruptcy process that has no independent existence outside of bankruptcy and could not be brought in another forum.” Ray, 624 F.3d at 1131-33. In fact, there appears to be substantial overlap between Plaintiff‘s claims pending against the Robertsons in State Court and the claims Plaintiff advances against the Robertsons in this adversary proceeding. “If the proceeding does not invoke a substantive right created by the federal bankruptcy law and is one that could exist outside of bankruptcy, it is not a core proceeding; it may be related to the bankruptcy because of its potential effect, but . . . it is an ‘otherwise related’ or non-core proceeding.” Eastport Assocs., 935 F.2d at 1076 (quoting Wood, 825 F.2d at 97).
In determining whether Plaintiff‘s claims against the Robertsons are “related to” the bankruptcy, the Court must determine whether the outcome of the adversary proceeding could conceivably have any effect on the estate being administered in bankruptcy. If there is no conceivable effect, then dismissal is required for lack of subject matter jurisdiction. Plaintiff‘s written response to the Motion to Dismiss does not address this Court‘s subject matter jurisdiction over the Robertsons, and therefore, does not identify a conceivable effect on the bankruptcy. See Doc. No. 11. When questioned on this matter at hearing, counsel for Plaintiff was unable to effectively articulate what conceivable effect there would be on the Rtech bankruptcy estate if Plaintiff prevailed on his claims against the Robertsons. Neither has the Court identified a conceivable effect on its own. Accordingly, the Court determines that Plaintiff‘s claims against the Robertsons are not “related to” and dismissal is required.
CONCLUSION
The Court holds that an entity seeking discharge pursuant to
DATED: September 15, 2021
NOAH G. HILLEN
U.S. Bankruptcy Judge