In re Pegasus Gold Corp.

• Decision Date: 11 January 2005
• Docket Number: No. 03-15958.,03-15958.
• Citation: 394 F.3d 1189
• Parties: In re PEGASUS GOLD CORPORATION, et al., Debtor. The State of Montana; The State of Montana Department of Environmental Quality; The State of Montana Department of Administration, Risk Management Division; The Attorney General of the State of Montana; and Spectrum Engineering, Inc., Appellants, v. Harrison J. Goldin, in his capacity as liquidating trustee for the Pegasus Gold Corporation Liquidating Trust; and Reclamation Services Corporation, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

394 F.3d 1189

In re PEGASUS GOLD CORPORATION, et al., Debtor.

The State of Montana; The State of Montana Department of Environmental Quality; The State of Montana Department of Administration, Risk Management Division; The Attorney General of the State of Montana; and Spectrum Engineering, Inc., Appellants, v. Harrison J. Goldin, in his capacity as liquidating trustee for the Pegasus Gold Corporation Liquidating Trust; and Reclamation Services Corporation, Appellees.

No. 03-15958.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 5, 2004.

Filed January 11, 2005.

COPYRIGHT MATERIAL OMITTED

Brian M. Morris (argued), Office of the Montana Attorney General, Helena, MT, for the appellants.

Michael P. Richman (argued), Mayer, Brown, Rowe & Maw, LLP, New York, NY, and Edmond "Buddy" Miller (briefed), Downey, Brand, LLP, Reno, NV, for the appellees.

Appeal from the United States District Court for the District of Nevada; David Warner Hagen, District Judge, Presiding. D.C. No. CV-02-00255-DWH.

Before: RYMER and HAWKINS, Circuit Judges, and BREWSTER,^* Senior District Judge.

MICHAEL DALY HAWKINS, Circuit Judge:

We must decide difficult questions regarding the bankruptcy court's post-confirmation subject matter jurisdiction and the scope of a state's waiver of Eleventh Amendment immunity. We conclude that even though a bankruptcy court's post-confirmation "related to" jurisdiction is substantially more limited than its pre-confirmation jurisdiction, there is a sufficiently close nexus in this case between the current action and the original bankruptcy proceeding to confer subject matter jurisdiction on the bankruptcy court. Nonetheless, because the current adversarial action is not "logically related" to the original proofs of claims that the State of Montana filed in the underlying bankruptcy action, the State has not waived its Eleventh Amendment immunity with respect to the current action and the claims against it must be dismissed.

FACTS AND PROCEDURAL HISTORY

In 1998, Pegasus Gold Corporation and eighteen of its affiliates (collectively, the "Debtors") commenced voluntary Chapter 11 proceedings in the United States Bankruptcy Court in Nevada. The Debtors operated two mines in Montana (the "Zortman Sites"). The State of Montana and its Department of Environmental Quality ("DEQ") (collectively, the "State") filed several proofs of claims against the Debtors. These claims pertained to the Debtors' reclamation obligations and various environmental compliance and clean up obligations. According to the State, although Pegasus had posted substantial reclamation bonds in connection with the mines, the existing amounts would not be sufficient and the State sought an additional $8.5 million in the bankruptcy proceeding.

The Debtors and the State then participated in lengthy and extensive negotiations concerning financial responsibility for reclamation and water treatment at the Zortman Sites. Eventually, the Debtors, the State and a number of other parties reached a settlement agreement, which the Bankruptcy Court approved on December 22, 1998 (the "Zortman Agreement"). Under the Zortman Agreement, the Debtors would form a new entity, Reclamation Services Corporation ("RSC"), which would perform reclamation work for the State at the mines, at least until the State could conduct a competitive bidding process for such work. The bankruptcy estate would contribute up to $1 million in operating capital for RSC, and also transfer $600,000 to the State to be used only for paying RSC for the reclamation work. The estate also transferred another $450,000 to the State for reclamation purposes, but this sum was not expressly designated to be paid to RSC.

A few days later, the Bankruptcy Court confirmed the Debtors' liquidating/reorganizing plan (the "Plan"). Article VIII of the Plan specifically provided for the formation of RSC, as contemplated by the Zortman Agreement, and called for the Debtors to contribute up to $1 million in equity capital for RSC. Shares of RSC became assets of the Debtors' Liquidating Trust.

Shortly after Plan confirmation, Montana and RSC entered into a letter agreement enabling RSC to begin interim reclamation work while the parties negotiated a more comprehensive agreement. Montana and RSC eventually executed a formal work agreement in April 1999 (the "Master Agreement"). Among other things, the Master Agreement calls for disputes between Montana and RSC to be decided by arbitration or in Montana state court pursuant to Montana law.

Problems arose almost immediately. After a series of billing disputes, Montana terminated RSC on June 24, 1999, and hired a new company, Spectrum Engineering, Inc. ("Spectrum"), to perform the reclamation work. Spectrum apparently hired a number of RSC employees to do this work. RSC went out of business shortly thereafter.

RSC and the bankruptcy trustee (collectively, "Appellees") then brought the current action against the State and Spectrum in bankruptcy court, alleging a number of contract claims stemming from the State's alleged breach of the Zortman Agreement, the Plan, and the Master Agreement. The complaint also alleges that the State: was unjustly enriched, fraudulently induced RSC to enter into the Letter Agreement and Master Agreement, and tortiously interfered with RSC's relationship with its employees. Separate claims against Spectrum for tortious interference and conversion round out the complaint.

The State and Spectrum (collectively, "Appellants") moved to dismiss the complaint, arguing that the bankruptcy court lacked subject matter jurisdiction over the action. The State also asserted Eleventh Amendment immunity from suit. The bankruptcy court denied the motion, and the district court affirmed the bankruptcy court's denial. In re Pegasus Gold Corp., 296 B.R. 227 (D.Nev.2003).

This appeal followed. With respect to the determination that the State waived its sovereign immunity, the bankruptcy court's and district court's orders on this issue are immediately appealable under the "collateral order doctrine." Puerto Rico Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 147, 113 S.Ct. 684, 121 L.Ed.2d 605 (1993). Moreover, we are also required to resolve issues of subject matter jurisdiction in an interlocutory appeal from a denial of immunity, because "if appellate courts lack jurisdiction, they cannot review the merits of these properly appealed rulings." Meredith v. Oregon, 321 F.3d 807, 816 (9th Cir.2003). Thus, we consider the existence of subject matter jurisdiction before determining the sovereign immunity issue.

STANDARD OF REVIEW

Questions of subject matter jurisdiction are reviewed de novo, In re McGhan, 288 F.3d 1172, 1178 (9th Cir.2002), as are questions of sovereign immunity. In re Bliemeister, 296 F.3d 858, 861 (9th Cir.2002).

DISCUSSION

I. Subject Matter Jurisdiction

A bankruptcy court has jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). Proceedings "arising in" bankruptcy cases are generally referred to as "core" proceedings, and essentially are proceedings that would not exist outside of bankruptcy, such as "matters concerning the administration of the estate," "orders to turn over property of the estate," and "proceedings to determine, avoid, or recover preferences." 28 U.S.C. § 157(b)(2); see also In re Harris Pine Mills, 44 F.3d 1431, 1435-37 (9th Cir.1995).

The bankruptcy court also has jurisdiction over a much broader set of cases: those proceedings that are "related to" a bankruptcy case. The Ninth Circuit has adopted the "Pacor test" for determining the scope of "related to" jurisdiction. In re Fietz, 852 F.2d 455, 457 (9th Cir.1988). Under this formulation, the test is whether:

the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or against the debtor's property. An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.

Id. (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)) (emphasis in original).

We have yet to apply the Pacor test in the postconfirmation context. Many other circuits and bankruptcy courts have modified or limited the test when the proceeding arises post-confirmation. See, e.g., In re Craig's Stores of Texas, Inc., 266 F.3d 388, 390-91 (5th Cir.2001) (bankruptcy jurisdiction ceases to exist "other than for matters pertaining to the implementation or execution of the plan"); Trans World Airlines, Inc. v. Karabu Corp., 196 B.R. 711, 714 (Bankr.D.Del.1996) (subject matter jurisdiction over proceedings that could affect the debtor's ability to consummate the plan); In re Walker, 198 B.R. 476, 482 (Bankr.E.D.Va.1996) (post-confirmation jurisdiction remains to the extent disputes affect successful implementation and consummation of the plan); Eubanks v. Esenjay Petroleum Corp., 152 B.R. 459, 464 (E.D.La.1993) (jurisdiction exists if proceeding has "a conceivable effect on the debtor's ability to consummate the confirmed plan").

The Third Circuit recently reviewed the assorted postconfirmation approaches, concluding that although the courts "have varied the standard they apply post-confirmation, the essential inquiry appears to be whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter." In re Resorts Int'l, Inc., 372 F.3d 154, 166-67 (3d Cir.2004). The court also recognized that in cases involving continuing trusts (such as litigation trusts, or, as here, a liquidating trust), trusts "by their nature maintain a connection to the bankruptcy even after the plan has been...