IN THE MATTER OF: TMT PROCUREMENT CORPORATION; A WHALE CORPORATION; B WHALE CORPORATION; C WHALE CORPORATION; D WHALE CORPORATION; E WHALE CORPORATION; G WHALE CORPORATION; H WHALE CORPORATION; A DUCKLING CORPORATION; F ELEPHANT INCORPORATED; A LADYBUG CORPORATION; C LADYBUG CORPORATION; D LADYBUG CORPORATION; A HANDY CORPORATION; B HANDY CORPORATION; C HANDY CORPORATION; B MAX CORPORATION; NEW FLAGSHIP INVESTMENT COMPANY LIMITED; RORO LINE CORPORATION; UGLY DUCKLING HOLDING CORPORATION; GREAT ELEPHANT CORPORATION, Debtors. TMT PROCUREMENT CORPORATION; A WHALE CORPORATION; B WHALE CORPORATION; C WHALE CORPORATION; D WHALE CORPORATION; E WHALE CORPORATION; G WHALE CORPORATION; H WHALE CORPORATION; A DUCKLING CORPORATION; F ELEPHANT INCORPORATED; A LADYBUG CORPORATION; C LADYBUG CORPORATION; D LADYBUG CORPORATION; A HANDY CORPORATION; B HANDY CORPORATION; C HANDY CORPORATION; B MAX CORPORATION; NEW FLAGSHIP INVESTMENT COMPANY LIMITED; RORO LINE CORPORATION; UGLY DUCKLING HOLDING CORPORATION; GREAT ELEPHANT CORPORATION, Appellees v. VANTAGE DRILLING COMPANY, Appellant
No. 13-20622 Consolidated with No. 13-20715
United States Court of Appeals for the Fifth Circuit
September 3, 2014
Lyle W. Cayce, Clerk
Before HIGGINBOTHAM, DAVIS, and HAYNES, Circuit Judges.
PER CURIAM:
Vantage Drilling Company (“Vantage“) appeals three orders from the district court and two orders from the bankruptcy court. The orders were entered during the course of the Chapter 11 proceedings of twenty-one shipping companies. Their combined effect was to place certain shares of Vantage stock in custodia legis with the clerk of the court. Because we find that both courts below lacked subject-matter jurisdiction, we VACATE and REMAND.
I
A
In 2012, Vantage, an offshore drilling company, brought an action in Texas state court against Hsin-Chi Su, also known as Nobu Su, alleging breach of fiduciary duty, fraud, fraudulent inducement, negligent misrepresentation, аnd unjust enrichment (the “Vantage Litigation“). In its original petition, Vantage alleged that Su made material misrepresentations to induce Vantage to contract with companies controlled by Su for the acquisition of certain offshore drilling rigs and drillships. Vantage alleges that, in exchange, it issued approximately 100 million shares of Vantage stock to F3 Capital, an entity solely owned and wholly controlled by Su, and granted Su three seats on Vantage‘s board of directors, including a seat for himself. According to Vantage, the subsequent disclosure of Su‘s misrepresentations placed Vantage
Su removed the Vantage Litigation pursuant to
B
Meanwhile, in 2013, twenty-three foreign marine shipping companies, each owned directly or indirectly by Su, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas.4 Certain creditors of the shipping companies moved to dismiss the bankruptcy actions, arguing, among other things, that: (a) the shipping companies had filed the petitions in bad
The bankruptcy court held an evidentiary hearing on the motion to dismiss. At the hearing, Su offered to place approximately 25 million shares of Vantage stock held by F3 Capital into an escrow to be administered by the bankruptcy court to secure the shipping companies’ compliance with court orders and to serve as collateral for post-petition borrowing or working capital. The bankruptcy court denied the motion to dismiss, except with respect to F Elephant Corporation and TMT USA Shipmanagement LLC. In its order (the “Dismissаl Order“), the bankruptcy court ordered that the twenty-one remaining shipping companies (the “Debtors“) “must cause non-estate property (the ‘Good Faith Property‘) with a fair market value of $40,750,000 to be provided to the Estates,” and that, if the Good Faith Property was not provided in cash, then it “must include at least 25,000,000 shares of the common stock of” Vantage. The bankruptcy court provided that the Good Faith Property would be used to, among other things: (a) ensure compliance with court orders; (b) pay sanctions; (c) serve as collateral for working capital loans; and (d) satisfy any amounts arising under
The Debtors moved the bankruptcy court to approve a proposed escrow agreement, by which F3 Capital would deposit 25 million shares of Vantage stock with the clerk of the court tо be held in custodia legis for the benefit of the Debtors.5 In that motion, F3 Capital and Su represented and warranted that they could “enter into the Share Escrow Agreement and deliver the Good
Vantage responded in two ways. First, Vantage filed an application for a preliminary injunction with the district court in the Vantage Litigation, requesting that Su be enjoined from “transferring, selling, pledging or otherwise encumbering any of the Vantage stock . . . obtained as a result of his fraud and breaches of fiduciary duty to [Vantage], including by placing the shares into escrow to serve as collateral in an unrelated bankruptcy recently initiated by twenty-three insolvent foreign companies that are wholly-owned and controlled by Su.”6 In response, the district court entered an order in which it stated: (a) “[c]omplaints about the encumbrance of [Vantage‘s] stock arising out of the bankruptcy must be addressed to the bankruptcy court,” and (b) Su “may not otherwise sell, transfer, pledge, or encumber his Vantage stock without court permission.”7
Second, Vantage also appeared as a “party in interest” before the bankruptcy court and opposed the Debtors’ motion to approve the proposed escrow agreement. The bankruptcy court held a hearing on the Debtors’ motion, at which it concluded that:
[T]he shares owned by F3 Capital are not subject to a constructive trust as a matter of law and, therefore, may be placed in custodia legis without complaint by any other party who has claimed ownership of the shares. . . .
. . . .
I find that this is a due рrocess issue and that an entity that is not a party to a lawsuit, which is the
situation with F3 Capital in [the Vantage Litigation], may not be deprived of its property in a suit in which, (a) it is not a party, and (b) it received the assets prior to the commencement of the lawsuit.
The bankruptcy court entered an order (the “Escrow Order“) in which, among other things, it: (a) authorized the deposit of 25,107,142 shares of Vantage stock with the clerk of the court in custodia legis; (b) provided that the deposited shares of Vantage stock would be used for the same reasons enumerated in the Dismissal Order; (c) required F3 Capital to deposit an additional 900,000 shares of Vantage stock; (d) provided that F3 Capital would retain its voting rights in the deposited shares of Vantage stock; and (e) required F3 Capital to transfer to the Debtors “all of its interests in any chose of aсtion arising against [Vantage], its officers, agents or directors.” Vantage filed an interlocutory appeal of the Escrow Order with the United States District Court for the Southern District of Texas.
C
The district court withdrew the reference to the bankruptcy court and denied leave to appeal. It then set a hearing to reconsider, among other issues, Vantage‘s objections to the Escrow Order. Before the hearing, the Debtors filed an emergency motion in which they requested permission to borrow up to $20 million in post-petition financing (the “DIP Facility“), including up to $6 million on an interim basis pursuant to an attached term sheet. The district court approved in principle the emergency motion and entered an order (the “Interim DIP Order“), which authorized an initial loan of $6 million under the DIP Facility. The Interim DIP Order granted Macquarie Bank Limited (the “DIP Lender“) a first priority lien and security interest in the deposited shares of Vantage stock. The Interim DIP Order further provided that the DIP Lender‘s interests in the deposited shares of Vantage stock “shall not be
The next day, the district court entered an order (the “DIP Addendum“), in which it ordered F3 Capital to deposit an additional 4 million shares of Vantage stock (together with the 25,107,142 shares of Vantage stock originally deposited, the “Vantage Shares“) with the clerk of the court to be held in custodia legis. The district court also entered another order (the “Order Affirming Escrow“), which provided that the Vantage Shares would “remain under the control” of the bankruptcy court. The district court then re-referred the action to the bankruptcy court. Vantage timely appealed these three district court orders to this Court.8
D
After holding hearings, the bankruptcy court entered two orders (the “Final DIP Order” and thе “Cash Collateral Order“) over the objections of Vantage. The Final DIP Order approved the remaining $14 million in post-petition financing under the DIP Facility requested by the Debtors on terms
Vantage timely appealed these two bankruptcy court orders. The bankruptcy court certified the appeal for direct review by this Court. This Court accepted that direct appeal10 and consolidated it with the prior pending appeal of the district court orders.
II
In reviewing the rulings of the bankruptcy court on direct appeal and the district court sitting in bankruptcy, we review findings of fact for clear error
III
The Debtors assert that Vantage‘s appeal of all the orders is moot under
The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.13
The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal.14
We begin first with Vantage‘s assertion that the appeal is not moot under either
The proponent of “good faith” bears the burden of proof.23 Both the district court sitting in bankruptcy and the bankruptcy court held that the DIP Lender was acting in good faith. Whеther a determination by a lower court
The Bankruptcy Code does not explicitly define “good faith.” In the context of
Before we turn to whether the DIP Lender had notice of an adverse claim, however, we must address a threshold argument. Essentially, the
We turn our attention, then, to whether the DIP Lender had notice of an adverse claim. The Bankruptcy Code does not provide a definition of “adverse claim.” But it defines “claim” broadly to include a right to payment or a right to equitable remedy.33 The Debtors assert that there was no “adverse claim” because F3 Capital, the owner of the Vantage Shares, was not a named defendant in the Vantage Litigation. But Vantage instituted the Vantage Litigation to, among other things, recover the Vantage Shares and has repeatedly asserted before the bankruptcy court and the district court that F3 Capital had fraudulently obtained the Vantage Shares and that Vantage had an adverse claim to the Vantage Shares. We find that this was enough: the DIP Lender had adequate notice of the adverse claim, and the DIP Lender does
IV
Vantage argues that the district court and the bankruptcy court erred in entering the orders because they lacked subject-matter jurisdiction over both the Vantage Shares and the Vantage Litigation.34
A
Jurisdiction for bankruptcy cases is defined by
B
Vantage first asserts that the district court and the bankruptcy court lacked jurisdiction over the Vantage Shares because they are not property of the Debtors or “property of the estate.”
Although the Bankruptcy Code does not define “property of the debtor,” the meaning of the term “property of the estate” is outlined in
To begin, it is undisputed that the Debtors had no legal or equitable interest in the Vantage Shares at the commencement of the case. The Vantage Shares thus could not have been “property of the estate” under
But the Debtors assert that the Vantage Shares are “propеrty of the estate” under
Vantage contends that the Debtors never acquired an interest in the Vantage Shares. “Property interests are created and defined by state law,” in this case Texas law.47 The Escrow Order required the Debtors to deposit “non-estate property” with the clerk of the court. F3 Capital deposited the Vantage Shares in custodia legis; however, F3 Capital continues to retain title to the Vantage Sharеs and control their voting rights. Moreover, the deposit of the Vantage Shares is neither a loan nor a gift. The Debtors also did not acquire the right to control or retain the Vantage Shares.48 As a result, Vantage argues that the Debtors have not acquired any cognizable interest. The Debtors reply that they acquired an interest in the Vantage Shares because they can use the Vantage Shares as collateral to secure loans from the DIP Lender pursuant to the Escrow Order. But Vantage correctly notes that courts have consistently
Wе need not decide this question of state law, however. Even assuming arguendo that the Debtors acquired an interest, Vantage asserts that the Vantage Shares are not property of the estate under
The Debtors do not assert that they have an interest in the Vantage Shares that was created with or by other “property of the estate” or that arose in the normal course of business. But they assert that these tracing limitations apply to individual debtors in Chapter 7 or Chapter 11 bankruptcies, not to corporate debtors in Chapter 11 bankruptcies. For corporate debtors in Chapter 11 bankruptcies, the Debtors assert that
Finally, Vantage points out that the Debtors cannot rely on the orders as the means by which the Vantage Shares became “property of the estate” because the bankruptcy court and the district court had no authority to issue the orders unless the Vantage Shares were already “property of the estate.” The bankruptcy court and the district court could not manufacture in rem jurisdiction over the Vantage Shares by issuing orders purporting to vest the Debtors with a post-petition interest in the Vantage Shares.54 We agree. The
For these reasons, we conclude that the Vantage Shares are not property of the Debtors or “property of the estate.”56 Therefore, the district court and the bankruptcy court lacked jurisdiction on this basis.
C
Vantage next asserts that the district court and bankruptcy court lacked jurisdiction to adjudicate Vantage‘s claim in the Vantage Litigation because it is not “related to” the Debtors’ Chapter 11 proceedings. A matter is “related to” a bankruptcy proceeding if “the outcome of the proceeding could conceivably affect the estate being administered in bankruptcy.”57 Certainty, therefore, is “unnecessary; an action is ‘related to’ bankruptcy if the outcome could alter, positively or negatively, the debtor‘s rights, liabilities, options, or freedom of action or could influence the administration of the bankrupt estate.”58 But “‘related to’ jurisdiction cannot be limitless.”59
Vantage asserts that the bankruptcy court and the district court lacked jurisdiction to interfere with its rights in the Vantage Shares, which are the subject of the Vantage Litigation, because the outcome of that proceeding could not conceivably affect the Debtors’ estates. We agree. This Court has previously held that bankruptcy jurisdiction does not extend to state law
[T]he ‘related to’ language of
§ 1334(b) must be read to give district courts (and bankruptcy courts under§ 157(a) ) jurisdiction over more than simple proceedings involving the property of the debtor or the estate. We also agree . . . that a bankruptcy court‘s ‘related to’ jurisdiction сannot be limitless.61
However, even under Celotex‘s broad reading, there is no justifiable basis for exercising jurisdiction over the Vantage Litigation. The only discernable link between the Vantage Litigation and the Debtors’ Chapter 11 proceedings is that F3 Capital and the Debtors’ have a common owner. This is not enough. The resolution in the Vantage Litigation would not have had any effect on the bankruptcy. As a result, the bankruptcy court and the district court improperly interfered with the Vantage Litigation by ordering that the Vantage Shares be deposited in custodia legis with the clerk of the court; that no subsequent orders in the Vantage Litigation could impair the DIP Lender‘s interest in the Vantage Shares; that any rights in the Vantage Shares, including those of Vantage, are subordinated to those of the DIP Lender; and that the Vantage Shares are not subject to a constructivе trust as a matter of law.
We hold, therefore, that a proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case. The proceeding before us does not meet this test and, accordingly, is a non-core proceeding. The plaintiff‘s suit is not based on any right created by the federal bankruptcy law. It is based on state created rights. Moreover, this suit is not a proceeding that could arise
only in the context of a bankruptcy. It is simply a state contract action that, had there been no bankruptcy, could have proceeded in state court.66
But as explained above, not only was the Vаntage Litigation not a core proceeding, it was not even a non-core proceeding because there is no “related to” jurisdiction in this case. Simply put, the Debtors confuse the argument by putting the matter of placement of jurisdiction (core versus non-core proceedings) before the matter of the existence of subject-matter jurisdiction.
The Debtors also assert that the orders did not interfere with or impair the Vantage Litigation or Vantage‘s claim to the Vantage Shares. They note that the bankruptcy court and the district court expressed no views on the collateral estoppel effect of their rulings in the Vantage Litigation. This argument fails to persuade because the orders authorized the imposition of liens on the Vantage Shares, subordinated Vantage‘s rights in the Vantage Shares to those of the DIP Lender, prevented the district court in the Vantage Litigation from impairing the DIP Lender‘s interest in the Vantage Shares, and held that the Vantage Shares were not subject to a constructive trust as a matter of law. Finally, the Debtors contend that, in any event, Vantage‘s right to due process under the Fifth Amendment was not infringed because it had the opportunity to be heard at every stage of the proceedings that resulted in the orders.67 This argument misses the mark—the question is whether the bankruptcy court and the district court had jurisdiction to enter the orders, not whether Vantage‘s right to due process was violated.
V
We conclude that the appeals are not moot, that the Vantage Shares are not “property of the estate,” and that the Vantage Litigation is not “related to” the bankruptcy proceedings. The district court and the bankruptcy court had no subject-matter jurisdiction to enter the orders. The orders of the district court and the bankruptcy court аre VACATED and this case is REMANDED for proceedings consistent with this opinion. Accordingly, the Debtors’ Motion to Dismiss Appeals is DENIED.