372 F.3d 154 (3rd Cir. 2004), 03-1857, In re Resorts Intern., Inc.
|Citation:||372 F.3d 154|
|Party Name:||In re: RESORTS INTERNATIONAL, INC., Resorts International Financing, Inc., Griffin Resorts, Inc., Resorts Holding, Inc., Debtors J. Louis Binder, as Trustee of the Resorts International, Inc. Litigation Trust v. Price Waterhouse & Co., LLP, Appellant.|
|Case Date:||June 22, 2004|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued Oct. 29, 2003.
[Copyrighted Material Omitted]
Alan E. Kraus (Argued), Latham & Watkins, Newark, NJ, for Appellant.
David H. Pikus (Argued), Bressler, Amery & Ross, P.C., Florham Park, NJ, for Appellee, J. Louis Binder, as Trustee of the Resorts International, Inc. Litigation Trust.
Before: SCIRICA, Chief Judge, NYGAARD and AMBRO, Circuit Judges.
SCIRICA, Chief Judge.
This appeal addresses the scope of "related to" jurisdiction of the bankruptcy court for post-confirmation claims brought on behalf of a litigation trust against an accounting firm. The trustee sued the accounting firm for professional negligence and breach of contract for work it performed for the trust. The Bankruptcy Court declined to hear the claim, finding it lacked subject matter jurisdiction. The District Court disagreed and reversed. We will reverse the order of the District Court and remand for proceedings consistent with this opinion.
A. Overview of Affected Parties
The underlying matter in this appeal is an accounting malpractice action. J. Louis Binder, the Trustee for the Resorts International, Inc. Litigation Trust, brought a claim in excess of $500,000 against accounting
firm Price Waterhouse & Co. for professional malpractice and breach of contract in connection with accounting services performed for the Litigation Trust. The Trustee's principal allegation is that Price Waterhouse erroneously reported in its audit that accrued interest on Litigation Trust accounts belonged to the debtor rather than to the Litigation Trust. Underlying this claim was a suit between the Litigation Trust and the debtor, Resorts International, Inc., over entitlement to the accrued interest. According to the Trustee, Price Waterhouse's erroneous reports were relied on by the bankruptcy court to the Litigation Trust's detriment.
The debtor, Resorts International, Inc., is not a party to the malpractice action. The debtor assigned to the Litigation Trustee all its rights, title, and interest in the Litigation Trust's primary asset, its claim against Donald Trump and affiliated entities. Because the Bankruptcy Court confirmed the Reorganization Plan, the debtor's estate no longer exists.
Nonetheless, the Trustee alleges the debtor's estate would still be affected by the malpractice suit because the Litigation Trust is effectively a continuation of the bankruptcy estate. Furthermore, contends the Trustee, any recovery obtained in this action would necessarily become Trust assets, available to cover any liability that might arise in the accrued interest lawsuit or available for possible distribution to the beneficiaries of the Litigation Trust, who were former creditors of the debtor's estate.
Price Waterhouse responds that the Litigation Trust, a legally distinct entity, is not a continuation of the bankruptcy estate for jurisdictional purposes. Moreover, Price Waterhouse contends the debtor is only tangentially affected by this malpractice action after it assigned away its interests in the litigation claims, and the Litigation Trust beneficiaries traded their creditor status to attain rights to the Trust's assets.
On November 12, 1989, creditors of Resorts International, Inc. 1 and Resorts International Financing, Inc. filed against them Chapter 11 involuntary reorganization petitions in the United States Bankruptcy Court for the District of New Jersey. On December 22, 1989, Griffin Resorts and Griffin Resorts Holding, Inc., affiliates of Resorts International, filed separate voluntary petitions under Chapter 11. All of the cases were consolidated.
On August 28, 1990, the Bankruptcy Court issued an Order confirming the Second Amended Joint Plan of Reorganization. On September 17, 1990, the parties entered into a Final Plan and Litigation Trust Agreement. The Final Plan created a Litigation Trust for the benefit of certain creditors. Section 7.10(a) of the Plan provided: "Litigation Trustee shall retain and preserve the Litigation Claims for enforcement, as representative of and successor to the Reorganizing Entities in accordance with Bankruptcy Code §§ 1123(b)(3)(B) and 1145(a)." The beneficial interests in the Litigation Trust were divided into ten million Litigation Trust Units and allocated to certain creditors, the Unitholders, 2
under a formula set forth in section 7.10(b) of the Plan. Under section 7.10(d), each Unitholder was entitled to a pro rata share of any distribution from the Litigation Trust.
The assets assigned to the Litigation Trust were claims originally held by the debtor, Resorts International, Inc., against Donald J. Trump and affiliated entities, arising from Trump's 1988 leveraged buyout of the Taj Mahal Resort. Upon formation of the Litigation Trust, the litigation claims were assigned to the Trustee. The Plan authorized the Trustee to prosecute the claims against the Trump entities. The Plan and Litigation Trust Agreement also required the debtor to provide an irrevocable letter of credit in the amount of $5,000,000 to the Litigation Trust to enable it to pursue the litigation claims.
On May 28, 1991, the Trustee entered into an agreement with Trump and his affiliates and the debtor settling the litigation claims on behalf of the Trust's Unitholders in the amount of $12,000,000, subject to approval by the Unitholders. Approval was solicited and received by July 15, 1991. The Settlement Agreement proceeds became assets of the Litigation Trust.
The Litigation Trust Agreement contained several provisions affecting Price Waterhouse, though it was never named in the document. Section 3.2 of the Litigation Trust Agreement provided that "[t]he Trustee shall retain an independent public accounting firm to audit the financial books and records of the Trust and to perform such other reviews or audits as may be appropriate in the Trustee's sole discretion," and that the Trustee "shall pay such accounting firm reasonable compensation from the Trust Assets" for its services. Section 5.5 of the Litigation Trust Agreement required the Trustee to report to all Unitholders the details of the Trust's transactions and disbursements at least annually and to have these reports "audited by the independent accounting firm retained by the Trustee ... not less frequently than annually."
On April 17, 1990, representatives of the Litigation Trust's Unitholders elected Kenneth R. Feinberg as Litigation Trustee. On November 1, 1990, after confirmation of the Plan, the Trustee retained Price Waterhouse to provide auditing and tax-related services to the Litigation Trust. Subsequently, under an order dated August 17, 1994, J. Louis Binder replaced Feinberg as Trustee. Shortly thereafter, the Trustee terminated the services of Price Waterhouse. On April 15, 1997, the Trustee filed this adversary proceeding against Price Waterhouse alleging professional negligence and breach of contract.
The Trustee alleged Price Waterhouse committed professional malpractice by making several errors in its accounting and tax advice. His principal allegation is that Price Waterhouse erroneously reported in its audit reports that certain accrued interest on the Litigation Trust accounts belonged to the debtor rather than to the Trust. The accrued interest was the subject of a dispute between the debtor and the Litigation Trust-a dispute the Bankruptcy Court decided in part in favor of the debtor and in part in favor of the Trust. See In re Resorts Int'l, 199 B.R. at 118-19. 3 The Trustee alleged that to the
extent the Bankruptcy Court approved the debtor's claim to the interest, it relied on Price Waterhouse's audit reports, so that its "errors" injured the Litigation Trust. The Trustee alleged that even though the Trust partially prevailed in the interest dispute, Price Waterhouse's erroneous characterization caused the Trust to incur unnecessary litigation costs in defending its entitlement. The Trustee also alleged certain errors in tax advice and auditing provided to the Trustee and faulted Price Waterhouse for failing to review and interpret certain Litigation Trust documents. The Trustee sought damages and disgorgement of fees in excess of $500,000.
C. Procedural History
On April 15, 1997, almost seven years after Reorganization Plan confirmation, the Trustee filed the underlying professional malpractice action against Price Waterhouse in the United States Bankruptcy Court for the District of New Jersey. On January 4, 2002, the Bankruptcy Court granted Price Waterhouse's motion to dismiss for lack of subject matter jurisdiction finding there was no "related to" or "core" jurisdiction. Binder v. Price Waterhouse & Co. (In re Resorts Int'l, Inc.), Adv. No. 97-2283, slip op. at 22, 30, 35 (Bankr.D.N.J. Jan. 4, 2002). Disagreeing with the Trustee that this was a "core" proceeding, the Bankruptcy Court characterized the matter as a post-confirmation dispute between two non-debtors involving state law claims that did not affect the "administration of the estate, property of the estate, or liquidation of assets of the estate." Id. at 21. Although finding its post-confirmation jurisdiction to be "extremely limited," the Bankruptcy Court recognized that it retained post-confirmation jurisdiction over disputes that potentially "affect the successful implementation and consummation of the plan." Id. at 28 (internal...
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