Harvey v. Dambowsky (In re Dambowsky)Harvey v. Dambowsky (In re Dambowsky)
ORDER DENYING MOTION TO DISMISS COUNTERCLAIM
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.
Factual Allegations
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.
Discussion
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-dischargeábility 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 actipn.
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. -, -,
Primarily relying upon Stem, 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 Stem, 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 Stem,
Various Analyses for the Bases of Subject Matter Jurisdiction in Discharge-ability Proceedings
Bankruptcy subject mátter 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 dis
Cases “arise under” Title 11 when the cause of action or substantive right claimed is created by the Bankruptcy Code.... Cases “arise in” a title 11 proceeding if they “are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy.”
Burns v. Dennis (In re Southeastern Materials, Inc.),
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 discharge-ability 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:
such things as allowance and disallowance of claims, orders in respect of ob-taming credit, determining discharge-ability of debt, discharges, confirmation of plans and like matters. In none of these instances is there a “cause of action” created by statute, nor could any of the matters illustrated have been the subject of a lawsuit absent the filing of a bankruptcy case. Since they are not “related” proceedings, and do not “arise under title 11,” they must perforce “arise in” title 11 cases.
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,
At times the debt at issue has previously been liquidated; other times it has not. In the case of an unliquidated debt, the bankruptcy court must necessarily determine liability and damages in order to establish the underlying debt. Adju- ' dication of the underlying claim, which arises under nonbankruptcy law, becomes part and parcel of the discharge-ability determination and thus integral to restructuring the debtor-creditor relationship.
Stanbrough v. Valle (In re Valle),
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:
Notwithstanding Congress’s desire that the federal courts should have bankruptcy jurisdiction under the current statute, if we apply the prevailing jurisdictional test to the creditor’s request for a money judgment on a nondischargeable debt, we come to the inescapable conclusion that there is no federal bankruptcy jurisdiction.
A state-law claim on which a creditor seeks a money judgment does not “arise under” the Bankruptcy Code. Furthermore, it does not “arise in” the bankruptcy case under the standard test for “arising in” proceedings, because the creditor’s claim against the debtor would exist in exactly the same form even inthe absence of the debtor’s bankruptcy filing. Indeed, that is precisely the upshot of the determination of non-dischargeability. Thus, if the claim on the underlying debt is within federal bankruptcy jurisdiction at all, it is because it is “related to” the debtor’s bankruptcy case. Utilizing the Pacor test, however, because the only effect of any money judgment against the debtor would ... [have] no effect at all on property of the bankruptcy estate or creditors’ claims against the estate, we would conclude that the claim is not “related to” the bankruptcy case.
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
Liquidation of Underlying State Law Claims to be Excepted from Discharge is Part of the Bankruptcy Process and Does not Offend Constitutional Limitations
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,
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,
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 preBAPCPA. 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,”
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.,
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.),
The Court in Stem recognized that the bankruptcy power afforded to non-Artiele III courts does not exclusively lie in the process of claims determination. According to Stem, 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,
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),
Statutory Authority
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 author
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. Stem,
Permissive Abstention
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,
[t]he factors that a court should consider are: (1) efficiency in the administration of the debtor’s estate; (2) the extent to which state law issues predominate over bankruptcy issues; (3) whether the issues involve difficult or unsettled issues of state law; (4) the presence of a related proceeding commenced in state court; (5) the existence of a jurisdictional basis other than 28 U.S.C. § 1334; (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case; (7) the substance rather than form of an asserted “core” proceeding; (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state courts; (9) the burden of the bankruptcy court’s docket; (10) the likelihood that the commencement of the proceedings in bankruptcy court involved forum shopping by one of the parties; (11) the existence of a right to a jury trial; (12) whether non-debtor parties are involved in the proceeding.
Walter v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.),
The reasons usually given [why circuit courts have held that bankruptcy courts have jurisdiction to liquidate debts and enter monetary judgments in a dischargeability action] include: 1) determination of the debt lies within the equitable jurisdiction of the bankruptcy court; 2) the debtor by filing bankruptcy has consented to jurisdiction of the bankruptcy court over matters necessary to the determination of adversarial [sic] proceedings; and 3) judicial economy and efficiency require that the bankruptcy court be empowered to settle both the dischargeability of the debt and the amount of the monetary judgment.
In re Neves,
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
There is no Right to a Jury Trial
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,
CONCLUSION
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.
SO ORDERED.
Notes
. At the hearing on this matter, the Court asked why the request for liquidation was brought as a counterclaim, when the Defendant (correctly) argued that liquidation was integral to the determination of dischargeability in this case. Counsel responded that he asserted the counterclaim out of an abundance of caution after being told by Plaintiffs’ counsel that the Plaintiffs objected to any liquidation of dischargeable claims by this Court.
. On June 26, 2014, the Plaintiffs filed their second Amended Complaint [Doc. # 22] (the “Second Amended Complaint’’). On July 10, '2014, Defendant filed his Answer to the Amended Complaint [Doc. # 24] (the "Amended Answer”). The Amended Answer contained an identical counterclaim to that asserted in the Answer. The Plaintiffs did not file a duplicate reply to the counterclaim in the Amended Answer. However, the Defendant has not contended that an amended answer to the identical counterclaim was required, and this Court has considered the Reply with respect to the Amended Answer.
. The Reply did not assert or purport to assert a motion for mandatory abstention, and no such motion was timely filed.
. Although this matter has been construed as Plaintiff's motion to dismiss -the Counterclaim, due to the peculiar procedural posture of the case and solely for purposes of the motion to dismiss and motion to abstain, the Court has considered the allegations in the Second Amended Complaint as true.
. The Court in Stem did not hold the converse, i.e. that the existence and nature of bankruptcy subject matter jurisdiction does not affect whether a matter is a core or non-core proceeding which the bankruptcy court has authority to hear and determine. Of course it does. In order for a proceeding to be a "core” proceeding that the bankruptcy court may “hear and determine,” it must first "arise in” a case under title 11 or "arise under” title 11. 18 U.S.C. § 157(b)(1) ("Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11 or arising in a case under title 11...." (emphasis added)). See Stem,
. Some courts and commentators have drawn a further distinction between the bankruptcy court’s liquidation of the debt on the one hand and the bankruptcy court's entering a money judgment upon which a plaintiff may seek a post-judgment enforcement of the liquidated obligation on the other. See, e.g., Juan Juan Chen v. Wen Jing Huang (In re Wen Jing Huang),
. The finding by the Fourth Circuit in Heckert that bankruptcy courts have the authority to
. Collier lists "discharges” in this description of matters "arising in” cases under title 11. Seemingly contradictorily, Collier describes “complaints objecting to the discharge of a debtor” as an example of matters "arising under” title 11. Collier ¶ 3.01 [3][e][i], Unlike an action to except a non-bankruptcy-law-based-debt from discharge, both the discharge and the enumerated bases upon which to deny a discharge arise solely under the Bankruptcy Code. See 11 U.S.C. § 727. Therefore, any proceeding objecting to a debtor’s discharge "arises under” title 11. To the extent that Collier draws a distinction between the bankruptcy courts’ jurisdiction to enter a discharge order and its jurisdiction with respect to a proceeding in which the plaintiff asserts an objection to the debtor’s discharge, it is not clear that such a distinction renders the former a proceeding "arising in” a case under title 11. Rather, it is more likely correct that the entry of discharge order itself is exclusively reserved to the jurisdiction and power of the bankruptcy court by the bankruptcy power under the United States Constitution. See Deitz,
. The court in Morrison speaks in terms of "core” versus "related to” proceedings. Nevertheless, in order for a proceeding to be a "core” proceeding that the bankruptcy court may "hear and determine,” it must first "arise in” a case under title 11 or "arise under” title 11. See supra, n. 5.
. The Court notes that 18 U.S.C. § 1334(b) grants bankruptcy subject matter jurisdiction with respect to “proceedings,” rather than "claims” or "causes of action.”
. For the reasons set forth herein, this Court finds that the entire dischargeability proceeding falls within this Court's subject matter jurisdiction as "arising in” a case under title 11. Nevertheless, even if the underlying claims were jurisdictionally severable, the Court would have subject matter jurisdiction. As Brubaker and others conclude, the underlying claims are at a minimum "related to” the bankruptcy case as contemplated by Congress in 18 U.S.C. § 1334(b) even though they do not have an effect on the estate. Brubaker, 41 Wm. & Mary L. Rev. at 920-21 ("The only reconciliation consistent with the terms of the statute and legislative history regarding its purposes simply is to recognize that Pacor was wrong; third-party 'related to’ bankruptcy jurisdiction is supplemental jurisdiction, and there is ‘related to’ bankruptcy jurisdiction over any third-party dispute sharing an in rem or an in personam supplemental relationship with a claim before the court (1) “arising under” the Bankruptcy Code, or (2) to which the federal bankruptcy estate is a party.”); see also Douglas G. Baird, Blue Collar Constitutional Law, 86 Am. Bankr. L.J. 3, 4 n. 4 (2012) (“This [Pacor] test, however, was not formed with this type of case [ (dischargeability) ] in mind, and one can reasonably conclude that 'related to’ jurisdiction should include resolving rights between the creditor and the debtor, even if they do not deal with-the bankruptcy estate proper.”).
. This Court questions whether the existence of distributable assets and the filing of a proof of claim against the estate have an effect on jurisdiction and authority over the underlying state law claims asserted in a dischargeability action. While the Court certainly would have jurisdiction and authority to determine these state law claims vis-a-vis the estate in the claim allowance process, the trustee (and therefore the estate) is not a party to the dischargeability action, and therefore might not be bound by its outcome. See Hawaii v. Parsons (In re Parsons),
. The liquidation of a non-bankruptcy law claim in the context of a dischargeability proceeding is practically and constitutionally indistinguishable from the liquidation of a non-bankruptcy law claim against the estate. Both of these claims are based solely upon non-bankruptcy law as ordinarily private rights. The Supreme Court has long recognized the authority of the non-Article III bankruptcy courts to determine these ordinarily private rights in the context of claim allowance and has expressly continued that recognition in Stem. See Wiswall,