196 F.3d 579 | 5th Cir. | 1999
Lead Opinion
At the core of this appeal is the issue of federal bankruptcy jurisdiction under 28 U.S.C. § 1334(b). Plaintiff-Appellant Randall and Blake, Inc. (“R&B”) is a judgment creditor of J.R. Canion, Jr. (“Can-ion”). After Canion Filed for bankruptcy, R&B brought suit in federal district court against several of Canion’s friends, relatives, business associates, and employees (collectively, “defendants”),
After trial, R&B argued first to the bankruptcy court, then to the district court, and now to us, that the bankruptcy court lacked jurisdiction to hear the case and, accordingly, R&B should be allowed to try its case again but in the district court. We find, as did- the other two courts, that at the time the jurisdiction of the bankruptcy court was invoked, it was conceivable that R&B’s suit against the defendants could have an effect on the bankruptcy estate, and thus conclude that there was “related to” bankruptcy jurisdiction under 28 U.S.C. § 1334(b). On the merits, R&B had the burden of proving that. the defendants intended to impede R&B’s collection efforts. We find no clear error in the bankruptcy court’s detenhination that R&B failed to meet this burden. We therefore affirm the judgment of the district court.
I.
FACTS & PROCEEDINGS
R&B holds a non-discharged judgment against Canion stemming from an unrelated breach-of-contract action that R&B successfully brought against Canion in his role as principal of Austin Construction Company (“ACCO I”), a paving and excavation business. R&B has repeatedly but unsuccessfully attempted to collect on its judgment. According to R&B, the defendants, together with Canion and his ex-wife, conspired to secret Canion’s assets and thereby thwart R&B’s collection efforts. Allegedly, as part of this effort,
Canion filed for protection under Chapter 7 of the Bankruptcy Code in January, 1992. R&B filed a proof of claim in Can-ion’s bankruptcy for $302,977.42, the amount of its judgment, plus interest. Three months later, R&B instituted the instant proceeding in federal district court against the defendants and Canion’s ex-wife, apparently without making Canion a party.
(1) tortious interference with judgments;
(2) conspiracy to interfere with judgments;
(3) actual and constructive fraud;
(4) conspiracy to defraud;
(5) fraudulent transfers; and
(6) alter ego liability.
The first four causes of action sound in tort; the last two allege violations of the Texas Uniform Fraudulent Transfer Act
While the suit by R&B against the defendants was pending in district court, R&B filed a complaint in Canion’s bankruptcy proceeding alleging that because of Canion’s fraudulent pre-bankruptcy activities, his debts should not be discharged. The court found that Canion had purposefully clouded title to property on the eve of bankruptcy and therefore denied Canion a discharge with respect to ah creditors under alternative subsections of 11 U.S.C. § 727.
Thereafter, in the district court proceeding between the defendants and R&B, the defendants moved to (1) join Canion’s Chapter 7 bankruptcy Trustee as a plaintiff, arguing that she was a necessary party, and (2) transfer the case to the bankruptcy court that was adjudicating Canion’s bankruptcy. While the defendants’ motion was pending, the Trustee
In response, R&B asserted that its “claims include claims other than for fraudulent conveyances that would be non-core proceeding^], but related to the bankruptcy court proceeding,” and that it had “no objection to the transfer of this entire case to the bankruptcy court.” The district court allowed the Trustee to intervene and transferred the proceeding to the bankruptcy court for trial.
On April 18, 1994, the first day of trial, the bankruptcy court struck ACCO II’s answers because it failed to comply with bankruptcy court orders and sanctions. Consequently, the allegations that ACCO II was Canion’s alter ego were deemed admitted, the company was liquidated, and its assets (worth approximately $200,000) were brought into Canion’s bankruptcy estate.
After five days of testimony, R&B concluded its case in chief, and, sua sponte, the court entered a take nothing judgment in favor of the defendants, pursuant to Rule 52 of the Federal Rules of Civil Procedure.
After the trial, the bankruptcy court inquired into the effect of our recent decision in In re Educators Group Health Trust.
The court denied R&B’s motion as being wholly without merit. R&B then filed a motion in the district court, making the same jurisdictional and substantive arguments. On the magistrate judge’s recommendation, the district court denied R&B’s motion, holding:
The fraudulent conveyance clauses of action are “core” claims, 28 U.S.C. § 157(b)(2)(H), and obviously belong to the Trustee. [R&B] contends its causes of action against the Evans for (i) tor-tious interference with judgment, (ii) conspiracy to interfere with judgments, (iii) fraud, (iv) conspiracy to defraud,*584 and (v) receipt of fraudulent conveyances are outside the subject matter of the bankruptcy court. Despite [R&B]’s protestations to the contrary, each of these causes of action, even assuming they belong solely to R&B, “relate to” the Canion bankruptcy....
Further proceedings in the bankruptcy court followed,
II.
ANALYSIS
A. Standard of Review
Federal courts must be assured of their subject matter jurisdiction at all times.
B. Bankruptcy Court Jurisdiction
Federal courts are courts of limited jurisdiction, and bankruptcy courts are no exception. Their jurisdiction is “wholly ‘grounded in and limited by statute.’ ”
(1) “cases under title 11”;
(2) “proceedings arising under title 11”;
(3) proceedings “arising in” a case under title 11; and
(4) proceedings “related to” a case under title 11.
The first category refers to the bankruptcy petition itself.
“Related to” is a term of art. As we recently explained in In re Bass: “A proceeding is ‘related to’ a bankruptcy ‘if the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.’ ”
The defendants argue that, as R&B consented to the jurisdiction of the bankruptcy court at the time the case was referred there by the district court, it cannot now claim that jurisdiction is lacking. It is well settled, however, that the subject matter jurisdiction of a federal court can be challenged at any stage of the litigation (including for the first time on appeal), even by the party who first invoked it.
R&B’s argument contesting jurisdiction is that if it successfully prosecutes its claims against the defendants, its judgment against Canion will not be extinguished; instead, the judgment will persist in favor of the defendants who will stand in R&B’s shoes as a judgment creditor of Canion. This is so, according to R&B, because if it successfully collects Canion’s debt from the defendants, they will be legally subrogated to R&B’s rights against Canion. It follows, R&B insists, that whatever might be the outcome of R&B’s suit against the defendants, Canion will still owe the same sum, the only possible difference being to whom the sum is owed.
There is a flaw in R&B’s argument regarding the application of legal subrogation to the instant facts: Although Texas courts liberally apply the doctrine of legal subrogation
Assuming that R&B should successfully collect from the defendants the judgment it holds against Canion, and assuming that the defendants’ fraudulent conduct would preclude legal subrogation, the total amounts due on claims against Canion’s bankruptcy estate would be decreased. This decrease would inure to the benefit of all other unsecured creditors, each of whom would then share in the disbursement that would otherwise have been paid to R&B.
Courts in other circuits that have faced this question have held that a claim between two non-debtors that will potentially reduce the bankruptcy estate’s liabilities produces an effect on the estate sufficient to confer “related to”- jurisdiction.
We find that at the time the district court referred the case to the bankruptcy court (which is the time its jurisdiction is tested), the outcome of this proceeding could have affected Canion’s bankruptcy estate. We conclude, therefore, that the test for “related to” jurisdiction has been met.
C. Factual sufficiency
R&B urges that if we find (as we have) that the bankruptcy court had jurisdiction to try this case, we should nevertheless reverse on the grounds that it clearly erred in its ruling on the merits. We decline to do so.
To prevail on its causes of action against the defendants, R&B had to prove intentional misconduct on their part.
The bankruptcy court based these conclusions on its determination of the credibility of the witnesses—specifically,
III.
CONCLUSION
R&B’s challenge to the bankruptcy court’s jurisdiction assumes that eventual success against the defendants would automatically lead them to be legally subrogat-ed to R&B’s judgment against Canion. As we have demonstrated, however, even though this outcome would be possible, it is not inevitable. Another possibility is that R&B’s judgment against Canion would be satisfied by the defendants and R&B’s claim against Canion’s bankruptcy estate would evaporate, thereby reducing the liabilities of the estate and producing an effect sufficient to confer “related to” jurisdiction. On the merits, the bankruptcy court’s determination that R&B failed to establish the fraudulent intent necessary to hold the defendants (or any of them) hable under any of the asserted causes of action was not clearly erroneous. For the forgoing reasons the judgment of the bankruptcy court is, in all respects,
AFFIRMED.
. This group includes: Charles and Mary Evans (long-time friends of Canion); Evans Equipment, Inc. (business owned by Charles and Mary Evans); Kathy and Kenneth Hicks (daughter and son-in-law of Canion); Cindy and Timothy Rich (daughter and son-in-law of Canion); Otis Freeman (employee of ACCO II); and Oscar Mackey (Shareholder of ACCO II).
. Jurisdiction was based on the diversity of the parties. 28 U.S.C. § 1332.
. The factual allegations in R&B's complaint are that, to avoid collection of the judgment, Canion, his ex-wife, and the various defendants engaged in certain bad acts, including: (1) engaging in fraudulent transfers of real and personal property; (2) forming ACCO II, a sham corporation, for the purpose of hiding assets; (3) falsifying financial statements; (4) hiding property from the federal marshal who attempted to execute a Writ of Seizure; (5) lying about the ownership and whereabouts of personal property; (6) setting up a bogus security interest in assets to prevent their seizure and sale; and (7) Canion and his wife entering into a sham divorce to create multiple bankruptcy exemptions.
. See Tex. Bus. & Comm.Code § 24.001 et seq.
. R&B did not seek to impose personal liability on Oscar Mackey; rather, it sought a judgment canceling the stock Mackey held in ACCO II.
. 11 U.S.C. § 727(a) provides that individual Chapter 7 debtors, like Canion, shall be granted a discharge for all pre-petition debts unless they engage in any one of an enumerated list of bad acts. The bankruptcy court found that "every action taken by the debtor [Canion] was a direct reaction to action that [R&B] had taken.” It therefore denied Canion a discharge alternatively under 11 U.S.C. § 727(a)(3) (exception to discharge for failure to make full financial disclosure), (4) (exception to discharge for "bankruptcy crimes”), and (5) (exception to discharge for failure adequately to explain a loss or deficiency of assets).
. The court did not rule on the plaintiffs’ (R&B’s and the Trustee's) claims against Geneva Canion. These matters later settled and are not before us on appeal.
. 25 F.3d 1281, 1284 (5th Cir.1994).
. In Educators, we were faced with competing claims of ownership of causes of action against third party nondebtors by the bankruptcy trustee on one hand and individual creditors on the other. We held that the nature of the injury for which relief is sought determines who owns a given claim: If the complaint alleges injury to the debtor that, in turn, injures all creditors indirectly, then the claim belongs to the estate and is properly asserted by the trustee; by contrast, if the complaint alleges direct (as opposed to derivative) injury to a creditor, the claim belongs to the creditor. See 25 F.3d at 1284.
In its post-trial motion requesting that the bankruptcy court find that it was without jurisdiction, R&B asserted that ”[I]n light of [Educators ], [R&B’s] claims against nondebt-ors belong to [R&B] so they are not within the jurisdiction of this Bankruptcy Court.” As R&B had, from the very beginning, asserted that it owned all the claims against the defendants, it is difficult to see how Educators led R&B to the revelation that bankruptcy jurisdiction was lacking.
. Subsequent to R&B’s first appeal to the district court, the bankruptcy court issued an order regarding ownership of the causes of action first brought by R&B: In response to the Trustee's motion to abandon as burdensome property (i.e., the causes of action over which both R&B and the Trustee had claimed ownership) the bankruptcy court ruled that (1) as the allegations that ACCO II was Can-ion’s alter ego had been deemed admitted and the company liquidated and (2) as the fraudulent conveyance suit had settled, the question of the Trustee's right to abandon these two causes of action was moot. The court further held that R&B owned the remaining causes of action so they were not subject to abandonment by the Trustee.
. See Bass v. Denney (In re Bass), 171 F.3d 1016, 1021 (5th Cir. 1999).
. Id. (citing Calhoun County v. United States, 132 F.3d 1100, 1103 (5th Cir. 1998)).
. Id. (citing Shurley v. Texas Commerce Bank (In re Shurley), 115 F.3d 333, 336 (5th Cir.1997)).
. Id. (citing Southmark Corp. v. Marley (In re Southmark Corp.), 62 F.3d 104, 106 (5th Cir.1995), cert. denied 516 U.S. 1093, 116 S.Ct. 815, 133 L.Ed.2d 760 (1996); Blakeman v. United States, 510 U.S. 1042, 114 S.Ct. 687, 126 L.Ed.2d 654 (1994)).
. See Bass v. Denney (In re Bass), 171 F.3d 1016, 1022 (5th Cir.1999) (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995)).
. See Wood v. Wood (In re Wood), 825 F.2d 90, 92 (5th Cir.1987).
. Bass v. Denney, 171 F.3d at 1022 (quoting Walker v. Cadle Co. (In re Walker), 51 F.3d 562, 569 (5th Cir.1995) (quoting In re Wood, 825 F.2d at 93)).
. 28 U.S.C. § 157 grants bankruptcy judges authority to “hear and determine” (1) core proceedings and (2) non-core proceedings if all parties consent. See § 157(b)(1), (c)(2). In non-core "related to” proceedings, however, if all of the parties do not consent to the referral, the district court may refer the case to the bankruptcy court for hearings only. In such cases, "the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge (4)27” § 157(c)(1).
Here, all of the parties consented to the reference; thus if there was "related to” jurisdiction, the bankruptcy court had the power both to hear the case and enter orders and judgments even if the case is a non-core proceeding. See § 157(c)(2); FDIC v. Majestic Energy Corp. (In re Majestic Energy), 835 F.2d 87, 90 (5th Cir.1988) ("In this case, the parties consented to the matter being determined by the bankruptcy judge. Consequently, even if the matter is a non-core proceeding, a determination by the bankruptcy judge was proper as long as the matter was at least related to the bankruptcy case.”).
. Bass v. Denney (In re Bass), 171 F.3d 1016, 1022 (5th Cir.1999) (quoting In re Walker, 51 F.3d 562, 569). This test was adopted from Third Circuit’s decision in Pacor, Inc. v. Higgins (In re Pacor), 743 F.2d 984, 994 (3d Cir.1984). See In re Wood, 825 F.2d at 93.
. See, e.g., Feld v. Zale Corp., 62 F.3d 746, 753 (5th Cir.1995) ("Shared facts between the third-party action and the debtor-creditor conflict do not in and of themselves suffice to make a third-party action 'related to' the bankruptcy.”) (citing cases).
. See American Fire & Cas. Co. v. Finn, 341 U.S. 6, 71 S.Ct. 534, 95 L.Ed. 702 (1951); Veldhoen v. U.S. Coast Guard, 35 F.3d 222, 225 (5th Cir.1994); Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure § 3522 at 67-69 (2d. ed.1984).
. See Sosna v. Iowa, 419 U.S. 393, 95 S.Ct. 553, 42 L.Ed.2d 532 (1975).
. In Argonaut Ins. Co. v. Allstate Ins. Co., 869 S.W.2d 537, 541 (Tex.App. 1993) the court explained the process of legal subrogation as follows:
Subrogation is the substitution of one person in the place of another, whether as creditor or as the possessor of some lawful*586 claim, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim. By subrogation, a court of equity, for the purpose of doing exact justice between parties in a given transaction, places one of them, to whom a legal right does not belong, in the position of a party to whom the right does belong. McBroome-Bennett Plumbing, Inc. v. Villa France, Inc., 515 S.W.2d 32, 36 (Tex.App. 1974).-
. Id. at 542.
. See Lazy M Ranch, Ltd. v. TXI Operations, LP, 978 S.W.2d 678, 683 (Tex.App.1998) ("Under the doctrine of unclean hands, a court may refuse to grant equitable relief to a plaintiff who has been guilty of unlawful or inequitable conduct regarding the issue in dispute.”); Schenck v. Halliday Real Estate, Inc., 803 S.W.2d 361, 366 (Tex.App.1990) ("It is well settled that a party seeking equity cannot come into a court with unclean hands.”).
. See Rotge v. Dunlap, 91 S.W.2d 905, 908 (Tex.App. 1936) ("The findings show fraud on [the part of the party seeking legal subrogation], He does not come into court with clean hands, and is therefore not in a position to invoke the equitable principles upon which legal subrogation rests.”); Christian v. Manning, 59 S.W.2d 234, 237 (Tex.App.1933) (applying to legal subrogation the maxim that "one who seeks equity must come into court with clean hands”); Bell v. Franklin, 230 S.W. 181, 185 (Tex.Civ.App.1921) (same).
. If, at the time of R&B’s suit against Can-ion, his bankruptcy estate had already been administered by the trustee—i.e., if all property of the estate were collected, liquidated, and the proceeds distributed to creditors—then presumably R&B’s potential damage recovery against the defendants would have been limited to the amount of the outstanding judgment (that part of the judgment not paid through bankruptcy), and no effect on the estate would have been possible. In this case, however, at the time of the district court’s reference, the estate had not been fully administered. In fact, after the case was referred to the bankruptcy court, the trustee recovered and distributed over $200,000 to the creditors of Canion’s estate, including distributions to R&B that would not have been made if its judgment against Canion—and therefore its claim against his estate—-had already been satisfied by the defendants.
. See Owens Illinois, Inc. v. Rapid American Corp (In re Celotex Corp.), 124 F.3d 619, 626 (4th Cir.1997) (finding "related to” jurisdiction when a creditor’s claim against a non-debtor would reduce its claim in bankruptcy); Kaonohi Ohana, Ltd. v. Sutherland, 873 F.2d 1302, 1306-07 (9th Cir.1989) (upholding "related to” jurisdiction over third-party action as specific performance remedy in third-party action would reduce damages in breach of contract claim against bankruptcy estate); National Union Fire Ins. Co. v. Titan Energy, Inc., 837 F.2d 325, 329 (8th Cir.1988) (holding that a coverage dispute between the debt- or’s insurance company and a creditor was "related to” the bankruptcy as a finding of coverage would reduce the claims against the estate); Carr v. Michigan Real Estate Ins. Trust (In re Michigan Real Estate Trust), 87 B.R. 447 (E.D.Mich.1988).
. Federal subject matter jurisdiction is tested when the jurisdiction of the federal court is
. See In re Wood, 825 F.2d at 94 ("Although we acknowledge the possibility that this suit may ultimately have no effect on the bankruptcy, we cannot conclude, on the facts before us, that it will have no conceivable ef-feet.”) (emphasis in original); Copelin v. Spirco, Inc., 182 F.3d 174 (3d Cir.1999) (“[T]he key word is ‘conceivable.’ Certainty, or even likelihood [of effect on the estate being administered in bankruptcy] is not a requirement.” (internal quotation marks and citation omitted; alteration in original)); In re Titan Energy, 837 F.2d at 325, 330 (8th Cir.1988) (”[E]ven a proceeding which portends a mere contingent to tangential effect on a debtor’s estate meets the broad jurisdictional test [for 'related to' jurisdiction].”); 1 Lawrence F. King, Collier on Bankruptcy § 3.01[4][c] at 3-26 (15th ed. 1998) (" '[A]u-tomatic' liability of the estate is not the sine qua non for related to jurisdiction; all that is necessary is that there could ‘conceivably’ be some effect upon the estate as a consequence of the litigation in question.”).
. R&B repeatedly cites to us the Texas Supreme Court case of Castleberry v. Branscum, 721 S.W.2d 270 (Tex.1986) as standing for the proposition that constructive fraud, which does not require intent, was sufficient grounds for a court to disregard the corporate form thereby extending liability to the shareholders—in that case some of the defendants. Castleberry was statutorily overruled. In 1989, in response to Castleberry the Texas legislature amended the Texas Business Corporation Act. Now, a shareholder cannot be held liable for corporate obligations unless actual fraud is shown. See Tex. Bus. Corp. Act art. 2.21(B); Puri v. Mansukhani, 973 S.W.2d 701, 713 (Tex.App.1998).
. Theriot v. Parish of Jefferson, 185 F.3d 477 (5th Cir.1999); Fed. R. Civ. Proc. 52(a) (“due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses.”).
. Id.; Travelers Indem. Co. v. Calvert Fire Ins. Co., 798 F.2d 826, 836 (5th Cir.1986).
Concurrence Opinion
concurring:
I concur in Judge Wiener’s careful and comprehensive opinion. I write separately to point out a possible procedural flaw that crept into this case and, while not material to its resolution, applies to district courts’ responsibility for bankruptcy cases. RBI, as part of its attack on the adverse bankruptcy court decision against the nondebtor defendants, moved the district court to withdraw the reference of the adversary proceeding. 28 U.S.C. § 157(d). The district court referred this motion to a magistrate judge who wrote a detañed memorandum recommending denial. The district court then issued its own opinion, stating that it had reviewed the motion de novo, and denied RBI’s request. Referral of this motion to the magistrate judge not only cost time and duplicated judicial resources, but it is also questionable procedurally.
This court has held that magistrate judges may not rule on appeals from decisions of bankruptcy courts. Minerex Erdoel, Inc. v. Sina, Inc., 838 F.2d 781 (5th Cir.) cert. denied, 488 U.S. 817, 109 S.Ct. 57, 102 L.Ed.2d 35 (1988). See also Allstate Ins. v. Foreman, 906 F.2d 123, 125 (5th Cir.1990). Those decisions are predicated on 28 U.S.C. § 158, which governs bankruptcy appeals, whereas this case was presented as a motion to withdraw reference from the bankruptcy court to the district court and was referred to the magistrate judge pursuant to 28 U.S.C. § 636(b). It is not at all clear, however, that § 636(b) authorizes a “reference” to the magistrate judge of what is essentially a motion challenging the propriety of the “reference” of a case to a bankruptcy judge. 28 U.S.C. § 157(a). Magistrate judges and bankruptcy judges enjoy equal status to each other, and both are subject to the district court’s control. The effect of reference to the magistrate judge was to seek a proposed ruling by one adjunct of the district court concerning an action of another adjunct of the district court. Pru
Without detracting from the conscientious work of the courts here, I lay it on the hearts of our lower courts to be careful of their prescribed boundaries.
