MEMORANDUM DECISION
Defendants have filed objections to the proposed findings and conclusions of the Hon. Howard Schwartzberg, United States Bankruptcy Judge,
dated January 7, 1991.
Defendants had moved in the District Court for a withdrawal of the reference to the bankruptcy court and to dismiss for lack of personal jurisdiction pursuant to Rule 12(b)(2), Fed.R.Civ.P. This court had, by order dated December 14, 1990, referred
With respect to the objection to certain of the proposed findings, we see that as much ado about nothing. Certain of the findings are merely meant to recite the issues set forth in the plaintiff’s complaint in this adversary proceeding. Other findings such as whether AmCo or Overland issued the surplus notes to the plaintiff and whether the notes were unconditional are matters totally irrelevant to the questions of withdrawal and jurisdiction. The court does not, therefore, see any need to consider or adopt those findings as they relate to the conclusion of law concerning jurisdiction.
Turning to the more important question of jurisdiction, the defendants argue that if this case had been brought outside the context of a bankruptcy proceeding, they would not have been subject to personal jurisdiction in this state in either federal or state court, since it is claimed that the defendants had insufficient minimum contacts with the forum so as to satisfy C.P.L.R. 302(a)(1) and the due process clause of the Fourth Amendment. However, Rule 7004(d) of the Bankruptcy Rules confers personal jurisdiction over parties in adversary proceedings before the bankruptcy court. Consequently, the defendants seek to have this court declare the rule unconstitutional. They offer a convoluted argument that the bankruptcy rule is unconstitutional in actions based on state law claims which are non-core cases, regardless of whether the rule confers personal jurisdiction in the bankruptcy court or the district court. They state that this is not an argument in favor of different jurisdictional standards in the bankruptcy court than in the district court.
Despite defendants’ objections, we think it clear that under 28 U.S.C. § 1334(d) the court has exclusive jurisdiction over the property of the plaintiff. In a Chapter 11, it has nationwide personal jurisdiction over the defendants.
Diamond Mortgage Corp. of Ill. v. Sugar,
For the foregoing reasons, the court adopts the findings (to the extent material) and the conclusions of the bankruptcy judge regarding the motion to withdraw the reference, and grants the withdrawal, but denies the motion to dismiss for lack of jurisdiction.
SO ORDERED.
The defendants in this adversary proceeding, American Consolidated Financial Corporation (“AMCO”) and Overland Insurance Company Limited (“Overland”) have filed a motion with Judge Gerard L. Goet-tel, in the United States District Court for the Southern District of New York, to withdraw the reference of the adversary proceeding and, upon such withdrawal, to dismiss the complaint for lack of jurisdiction because the defendants are not amenable to personal jurisdiction in New York. The plaintiffs are J.T. Moran Financial Corp. (“JTMFC”), and its two affiliated entities, J.T. Moran & Co., Inc. and Moore & Schley, Cameron & Co. JTMFC is a debtor in possession, having filed with this court a petition for reorganizational relief under Chapter 11 of the Bankruptcy Code on January 29, 1990, the same day that its affiliate, J.T. Moran & Co., Inc. filed a similar Chapter 11 petition with this court.
In accordance with an order dated December 14, 1990, Judge Goettel referred to this court the defendants’ motion for a withdrawal of the reference pursuant to 28 U.S.C. § 157(d) with instructions to submit proposed findings and recommendations with respect to the withdrawal motion.
Proposed Findings
1. Defendant AMCO is a Delaware corporation with its principal place of business in Overland Park, Kansas. AMCO has a wholly-owned subsidiary corporation known as CCDC Financial Corporation (“CCDC”).
2. Defendant Overland is an insurance company and a Cayman Island corporation. Overland is a wholly-owned subsidiary of CCDC, which, in turn, is a wholly-owned subsidiary of defendant, AMCO.
3. The debtor JTMFC, was an underwriter and was engaged in the securities business.
4. In June of 1989, AMCO acquired a 20% equity position in the debtor, JTMFC, by tendering certificates of mortgage participation which bore interest at the rate of 10% per annum for approximately 4,500,000 shares of JTMFC stock. In August of 1989, AMCO issued to JTMFC certain note instruments known as surplus notes (the “surplus Notes”), bearing interest at the rate of 8% per annum, on a quarterly basis, in substitution for the mortgage participation certificates which were not sufficiently liquid to serve as collateral for other financing by the debtor, JTMFC.
5. The surplus notes were issued to the debtor by defendants AMCO and Overland before January 29, 1990, when the debtor filed its Chapter 11 petition with this court. The surplus notes constitute unconditional prepetition obligations of the defendants for the payment of money to the debtors.
6. The defendant’s initial nonpayments under the notes occurred prepetition, but the overwhelming preponderance of the interest and principal claimed by the debtor arose as a result of post-petition nonpayments. Debtor, JTMFC, asserts that each nonpayment by defendants gives rise to a separate claim.
7. On May 17, 1990, debtor, JTMFC commenced an adversary proceeding in the Bankruptcy Court for the Southern District of New York, for the past due interest on the surplus notes issued by the defendants. JTMFC also seeks a declaratory judgment to determine the total liability on the notes.
8. The defendants filed substantially similar answers raising issues as to fraud, estoppel, waiver and other defenses. Additionally, the defendants counterclaimed against debtor, JTMFC, asserting statutory fraud involving federal and state securities laws, common law fraud, and breach of contract. In their counterclaims, the defendants seek compensatory and punitive damages, including relief cancelling the notes because of the debtor’s alleged fraud and other violations.
9. In their answers, the defendants have demanded a jury trial on all issues.
10. Although the defendants filed counterclaims to the debtor’s adversary com
11. In its adversary complaint, the debt- or states that this is a non-core adversary proceeding within the meaning of 28 U.S.C. § 157(c)(1). Although the debtor alleged in the complaint that its adversary proceeding was non-core, it did not state that it “does or does not consent to entry of final orders or judgment by the bankruptcy judge” as expressly directed under Bankruptcy Rule 7008(a).
12. The defendants contend that since neither the debtor nor the defendants consented to the entry of final orders or judgment by the bankruptcy judge, the bankruptcy court lacks subject matter jurisdiction to enter any final orders or judgment in this proceeding, citing 28 U.S.C. § 157(c)(1). Accordingly, the defendants reason that if the reference is not withdrawn any trial before the bankruptcy court would require de novo review by the district court, resulting in duplicative and wasteful litigation, especially since the defendants demanded a jury trial.
Discussion
A bankruptcy judge is directed pursuant to 28 U.S.C. § 157(b)(1) to hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, and may enter final orders and judgments with respect to such proceedings. If the proceeding is noncore, but otherwise related to a case under title 11, a bankruptcy judge has jurisdiction to hear, but not determine, or enter final orders and judgments in such non-core proceedings. Additionally, in these nonconsensual related proceedings, the bankruptcy judge is mandated under 28 U.S.C. § 157(c)(1) to submit proposed findings of fact and conclusions of law to the district court, subject to de novo review for the entry of a final order or judgment by the district court.
However, if the proceeding is non-core, but related to a case under Chapter 11, with the consent of all the parties, and pursuant to the comprehensive reference to the bankruptcy court of all bankruptcy cases and proceedings related to bankruptcy cases, as expressed in 28 U.S.C. § 157(a), the bankruptcy court may determine and enter final orders and judgments in the non-core related proceedings in accordance with 28 U.S.C. § 157(c)(2). In any event, the district court may withdraw the reference, in whole or in part, of any core or non-core proceeding referred to in 28 U.S.C. § 157, on its own motion or on timely motion of any party for cause shown, as authorized under 28 U.S.C. § 157(d). Thus, when any party moves timely for the withdrawal of the reference, cause must be shown before the reference can be withdrawn.
In re Pruitt,
The defendants in this case contend that cause exists for withdrawing the reference with respect to the debtor’s adversary proceeding to collect interest claimed under the surplus notes which the defendants issued to the debtor before the filing of the debtor’s Chapter 11 petition. The defendants maintain that withdrawal of the reference is required because the debtor’s adversary proceeding against them is a pre-petition contract action which is non-core in nature and with respect to which the defendants did not file any proofs of claim and in which action they timely demanded a jury trial.
The debtor does not contend that the bankruptcy court has authority to conduct a jury trial in a non-core proceeding without the consent of the defendants. However, the debtor argues that the instant action involves a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(E), in that this is a turnover proceeding whereby the debtor seeks to recover interest under separate quarterly installments that become due after the debtor filed its Chapter 11 petition. Additionally, the debtor asserts that the defendants consented to the trial of the adversary proceeding in the bankruptcy court by having filed counterclaims
Core or Non-Core
The term “core” is not defined in 28 U.S.C. § 157(b)(2), which delineates fifteen nonexclusive proceedings which may be regarded as comprising the core of bankruptcy administration. Core proceedings are generally defined as matters arising under title 11, or arising in a case under title 11 and which would have no existence outside of the bankruptcy case.
Diamond Mortgage Corp. of Ill. v. Sugar (In re Sugar),
The debtor reasons that its prepetition contract action against the defendants is a core proceeding because nearly all of the causes of action with respect to the defendants’ nonpayments arose after the debtor’s Chapter 11 petition was filed. Accordingly, the debtor concludes that the proscription against a bankruptcy court’s determination of a state law prepetition contract action, as held in
Northern Pipeline Construction Co. v. Marathon Pipeline Co.,
Courts have held that certain post-petition transactions are matters concerning the administration of the bankruptcy estate within the meaning of 28 U.S.C. § 157(b)(2)(A) and should be treated as core proceedings. Thus, a post-petition contract entered into with the debtor in possession was regarded as a core matter in
In re Ben Cooper, Inc.,
[a] party who contracts with an apparently healthy company — a company that has not filed a petition in bankruptcy — may find it unpleasantly surprising to have to defend its prepetition contract in a bankruptcy court, without a jury or Article III protections. But it is difficult to see any unfair surprise in bringing a post-petition contract action before a bankruptcy court. Parties who contract with a bankrupt company’s trustee or with a debtor-in-possession know that they are dealing with an agent responsible to a bankruptcy court; that the bankruptcy court would resolve subsequent disputes should therefore come as no surprise.
In the instant case, there were no post-petition transactions between the parties. It was probably a surprise to the defendants to learn that the debtor filed a Chapter 11 petition after they purchased the debtor’s stock and contracted to make payments for such stock pursuant to the surplus notes in question. Indeed, the defendants have asserted in their counterclaims fraud on the part of the debtor as a basis for cancelling the surplus notes and terminating their liabilities with respect to the notes. The agreements involving the surplus notes were admittedly negotiated and entered into before the debtor filed its Chapter 11 petition. Thus, the instant proceeding involves prepetition agreements which the debtor claims were initially breached during the prepetition period, but
In a case with a strikingly similar fact pattern, the Third Circuit Court of Appeals in
Beard v. Braunstein,
Turnover
Orders to turn over property of the estate are expressly characterized as core proceedings under 28 U.S.C. § 157(b)(2)(E). The debtor asserts that there is no dispute that the defendants issued the promissory notes and that the separate quarterly payments of interest at the specified rates were not made by the defendants and are now owed to the debtor as property of the estate, subject to a turnover proceeding, which is a core matter. Although the debtor argues that there is no disputed issue as to the defendants’ liability for the specific interest payments, the debtor overlooks the fact that the defendants have asserted counterclaims seeking to cancel the notes for various reasons, including fraud. Thus, the defendants clearly dispute that they are liable for the amounts claimed. Where, as here, the court must resolve whether or not the debt claimed is due, the action to collect the disputed funds cannot be regarded as a turnover proceeding under the core jurisdiction of the bankruptcy court.
Charter Grade Oil Co. v. Exxon Co. U.S.A. (In re Charter Company),
Core jurisdiction cannot be found to exist in all collection cases when the debtor’s right to the unpaid funds is disputed and not fixed until the debtor prevails in the litigation. That the amount in controversy is ascertainable is not decisive if the parties’ rights regarding the underlying contract are conditioned upon the outcome of the contractual dispute. In other words, if the amount in question can be characterized as property of the estate only if the debtor prevails and not property of the estate if the defendants succeed on their counterclaims, there is no unconditional property of the estate subject to a turnover proceeding for core jurisdiction unless the debtor ultimately prevails in the action on the contract.
Acolyte Electric Corp. v. City of New York,
Other Proceedings Affecting the Liquidation of Estate Assets
A “catch all” provision for core jurisdiction is set forth in 28 U.S.C. § 157(b)(2)(0) involving other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or
The Defendants’ Counterclaims
Counterclaims by the estate against persons filing claims against the estate are regarded as core proceedings pursuant to 28 U.S.C. § 157(b)(2)(C). In the instant case, however, the counterclaims were not filed by the debtor, but were filed by the defendants against the debtor’s estate. The defendants have not filed any proofs of claims against the estate. Therefore, the defendants’ counterclaims do not create a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(C).
However, the debtor contends that by filing counterclaims in the bankruptcy court, the defendants have waived a trial by jury and have consented to the determination of the debtor’s adversary proceeding by the bankruptcy court, with the result that a withdrawal of the reference should be denied. The United States Supreme Court has clearly ruled that when a party files a claim against a debtor, a trial by jury is unavailable because a determination of the claim is part and parcel of the process of an allowance and disallowance of claims which is integral to the restructuring of the debtor-creditor relations, and, therefore, a public right.
Granfinanciera v. Nordberg,
We hesitate to reach too far to imply the authority for an Article I court to try jury cases involving private rights simply because Congress seeks to introduce a more efficient bankruptcy scheme....
******
Given the absence of supporting legislative history, and the serious constitutional problems posed by an alternative interpretation, our interpretation is not only reasonable, but necessary.
Id. at 1456-1457.
No appellate federal court has ruled that a bankruptcy court may conduct a jury trial in a non-core case, such as in the instant case. Moreover, no appellate court has ever ruled that a defendant’s counterclaim to a plaintiff’s noncore proceeding transforms the action to a core proceeding.
In
Beard v. Braunstein,
It is not significant that under Fed.R.Civ.P. 13 the defendants’ counterclaims might be regarded as compulsory, because they arose out of the same transactions as the original claim by the debtor. The defendants were not compelled to file their counterclaims or forever lose their rights thereunder, because Bankruptcy Rule 7013 differs from Fed.R.Civ.P. 13 in that a party sued by a trustee or a debtor in possession need not assert as a counterclaim any claim against the trustee or debt- or in possession or the estate unless the claim arose after the order for relief. The defendants’ counterclaims arose as a result of agreements before the order for relief and are governed by Bankruptcy Rule 7013, which does not make them compulsory. However, the only option available to the defendants was either to file proofs of claims and waive their rights to a trial by jury or suffer the consequences of the automatic stay and a possible discharge of the prepetition claims pursuant to 11 U.S.C. § 1141(d)(1) in the event that the debtor succeeds in achieving a confirmed plan of reorganization. A confirmed plan of reorganization also acts as
res judicata
with respect to claims resolved as a result of the confirmation.
See Howe v. Vaughan (In re Howe),
Consent to Non-Article III Jurisdiction
A bankruptcy judge may enter a final order or judgment in a non-core proceeding in accordance with 28 U.S.C. § 157(c)(2) “with the consent of all the par
Moreover, the debtor has not consented to non-Article III jurisdiction. In its complaint, the debtor expressly stated that its action against the defendants was a non-core proceeding. However, such statement need not be regarded as a nonrebuttable judicial admission in the pleadings.
See United States Aviex Co., Inc. v. Aviex International, Inc. (In re United States Aviex Co., Inc.)
In non-core proceedings final orders and judgments shall not be entered on the bankruptcy judge’s orders except with the express consent of the parties.
(Emphasis added).
In the instant case, neither the debtor, nor the defendants expressly consented to the bankruptcy judge’s authority to enter final orders or judgment in this non-core proceeding. Indeed, the defendants object to this proceeding being characterized as core, whereas the debtor expressly declared in its complaint in this adversary proceeding that the action was non-core. In these circumstances, the bankruptcy judge may not enter final orders or judgment in this non-core proceeding in which the defendants have not filed any proofs of claim and have demanded a jury trial with respect to all the issues because all of the parties have not consented to a final determination of this non-core proceeding by the bankruptcy court.
In sum, the debtor’s non-core adversary proceeding for a breach of a prepetition contract arising out of the defendants’ prepetition and post-petition alleged defaults in paying the amounts due under the surplus notes should be tried by a jury as to the disputed issues of fact after the district court withdraws the reference as to this proceeding pursuant to 28 U.S.C. § 167(d). A bankruptcy court does not have authority to conduct a jury trial in a non-core proceeding especially when all the parties have not consented.
In re Cinamatronics, Inc.,
Personal Jurisdiction
The defendants maintain that if the debt- or’s adversary proceeding is a non-core proceeding, Bankruptcy Rule 7004(d) “is unconstitutional as applied to non-consensual, non-core proceedings governed by state law.” Moreover, the defendants contend that if the district court withdraws the reference, their amenability to personal jurisdiction in New York should not be governed by Bankruptcy Rule 7004(d), which provides:
(d) Nationwide Service of Process. The summons and complaint and all other process except a subpoena may be served anywhere in the United States.
Both Rule 7004(b) and Fed.R.Civ.P. 4(c)(2)(C)(i) and (d) authorize that service may be made within the United States by first class mail postage prepaid.
If the reference to the debtor’s non-core proceeding against the defendants is not withdrawn, the amenability of the defendants to personal jurisdiction before the bankruptcy court in New York would be governed by Bankruptcy Rule 7004(d). The bankruptcy court need not resort to state law for service of process because Bankruptcy Rule 7004(d) authorizes the nationwide service of process in bankruptcy cases and in non-core proceedings related to bankruptcy cases. This is so because 28 U.S.C. § 1334(d) provides:
(d) The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.
(Emphasis added).
Because the district court has exclusive jurisdiction over property of the estate, including causes of action to recover such property, it follows that nationwide service for personal jurisdiction with respect to property within the exclusive jurisdiction of the district court is appropriate. Accordingly, if the district court withdraws the reference, in whole or in part, as to any case or proceeding referred to the bankruptcy court, the same nationwide service applicable under Bankruptcy Rule 7004(d) should govern the litigation after the withdrawal by the district court, especially since the district court continues to exercise exclusive jurisdiction over the debtor’s property and property of the estate, wherever located, as authorized under 28 U.S.C. § 1334(d).
The defendants rely upon
Holland Industries, Inc. v. Western Entertainment, Inc., (In re Mountain View Coach Line, Inc.),
The Seventh Circuit Court of Appeals in
Diamond Mortgage Corporation v. Sugar,
But nothing in the literal terms of the pertinent rules — and, in particular, nothing in Rule 1001, 7001 or 7004(d) — even remotely suggests that they are to be applied differently in core and non-core proceedings.
Consistent with these goals and the language of the rules, therefore, we hold that courts may apply Bankruptcy Rule 7004(2) — allowing nationwide service of process — in non-core, related proceedings.
Id. at 1243-1244.
The Diamond Mortgage court also rejected the argument that the application of Bankruptcy Rule 7004(d) and the concept of nationwide service violated the constitutional due process rights of the defendants because of lack of minimum contacts with the forum state, saying:
We have already established that district courts exercise original subject matter jurisdiction over non-core matters pursuant to 28 U.S.C.A. section 1334 (West Supp.1990). Since section 1334 provides federal question jurisdiction, the sovereign exercising its authority over the Barron and Jaffe Attorneys is the United States, not the State of Illinois. Hence, whether there exist sufficient minimum contacts between the attorneys and the State of Illinois has no bearing upon whether the United States may exercise its power over the attorneys pursuant to its federal question jurisdiction. Certainly, the attorneys have sufficient contacts with the United States to be subject to the district court’s in person-am jurisdiction.
Id. at 1244.
Accordingly, Bankruptcy Rule 7004(d) applies not only to the debtor’s adversary proceeding while pending in this bankruptcy court, but equally as well in the event of a withdrawal of the reference to the district court, so that upon such withdrawal of the reference, the district court need not reexamine the defendants’ personal jurisdictional nexus in the light of New York’s CPLR 302(a)(1) long-arm statute.
PROPOSED CONCLUSIONS OF LAW
1. The debtor’s adversary proceeding to collect some prepetition nonpayment and substantially all remaining nonpayments of interest which became due post-petition under the surplus notes executed and issued pursuant to prepetition contracts with the debtor is entirely a non-core proceeding related to a case arising under title 11 within the meaning of 28 U.S.C. § 157(c)(1).
2. The debtor’s adversary proceeding to collect unpaid interest due under surplus notes issued by the defendants to the debt- or, which the defendants seek to cancel because of allegations of fraud asserted in their counterclaims, cannot be characterized as a turnover proceeding with respect to property of the estate within the meaning of 28 U.S.C. § 157(b)(2)(E) for the purpose of core jurisdiction.
3. Even if the funds claimed by the debtor in its adversary proceeding are essential to the administration of the bankruptcy estate, it does not follow that the debtor’s adversary proceeding to recover such funds involves the liquidation of existing estate assets or the adjustment of a debtor-creditor relationship between the parties within the meaning of 28 U.S.C. § 157(b)(2)(0) for the purpose of core jurisdiction.
5. The counterclaims filed by the defendants in response to the debtor’s adversary proceeding do not constitute a waiver by the defendants of their right to a jury trial on all the issues or a consent to a determination of the adversary proceeding by the bankruptcy court, especially in light of the fact that the defendants did not file any proofs of claim in this case.
6. The defendants did not expressly consent to the bankruptcy court's entry of final orders or judgments in the non-core proceeding. Additionally, the debtor did not expressly consent to the bankruptcy court’s entry of final orders or judgments in this case and, instead, characterized this proceeding in the complaint as non-core. Thus, there was no consent by all the parties to this adversary proceeding that the bankruptcy court could make a final determination, as required by 28 U.S.C. § 157(c)(2) and Bankruptcy Rules 7008 and 7012(b).
7. Because this is a non-core adversary proceeding in which the defendants have requested and are entitled to a jury trial on all issues, and because all the parties have not consented to non-Article III treatment, and because the bankruptcy court may not conduct a jury trial in a non-core adversary proceeding, it is recommended that cause has been shown by the defendants for the district court to withdraw the reference with respect to this adversary proceeding, as authorized under 28 U.S.C. § 157(d).
8. Upon withdrawal of the reference the district court need not reexamine the basis for personal jurisdiction over the defendants in the context of the long-arm provisions expressed in New York C.P.L.R. 302(a)(1). Personal jurisdiction is based on Bankruptcy Rule 7004(d), which applies to all core and non-core cases in bankruptcy court, even if the reference is withdrawn, because jurisdiction is derived from the Bankruptcy Code and not as a result of diversity of jurisdiction or some non-bankruptcy federal source.
9.Pursuant to Bankruptcy Rule 9033 the foregoing proposed findings of fact and conclusions of law shall be served by the clerk on-all the parties.
Dated: White Plains, New York
January 7, 1991.
Notes
. No objections have been received from the plaintiff with respect to the withdrawal of the reference.