American Hardwoods, Inc., In re

• Decision Date: 15 September 1989
• Docket Number: No. 87-4438,87-4438
• Citation: 885 F.2d 621
• Parties: , Bankr. L. Rep. P 73,130 In re AMERICAN HARDWOODS, INC., Debtor. AMERICAN HARDWOODS, INC., Plaintiff-Appellant, v. DEUTSCHE CREDIT CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 621

885 F.2d 621

19 Bankr.Ct.Dec. 1354, Bankr. L. Rep. P 73,130

In re AMERICAN HARDWOODS, INC., Debtor AMERICAN HARDWOODS, INC., Plaintiff-Appellant, v. DEUTSCHE CREDIT CORPORATION, Defendant-Appellee.

No. 87-4438.

United States Court of Appeals Ninth Circuit.

Argued and Submitted June 6, 1989.

Decided Sept. 15, 1989.

Susan MacDonald Nelson, Ball, Janik & Novack, Portland, Or., for plaintiff-appellant.

John P. Davenport, Sussman, Shank, Wapnick, Caplan & Stiles, Portland, Or., for defendant-appellee.

Appeal from the United States District Court for the District of Oregon.

Before BROWNING, WALLACE and FLETCHER, Circuit Judges.

WALLACE, Circuit Judge:

American Hardwoods, Inc. (American) appeals from a district court order affirming the bankruptcy court's partial summary judgment in favor of Deutsche Credit Corporation (Deutsche). American argues that the bankruptcy court erred in holding that it lacked both jurisdiction and power to enjoin Deutsche permanently from enforcing a state court judgment against Craig and Gabriele Keeler (the Keelers), who are nondebtor guarantors of American's liabilities to Deutsche. The district court had jurisdiction pursuant to 28 U.S.C. Sec. 158(a) and we have jurisdiction pursuant to 28 U.S.C. Sec. 158(d). We affirm.

I

The Keelers are the president and vice president of American, which manufacturers hardwood veneer and veneer-faced plywood. To manufacture its plywood, American uses large machinery, which was financed by Deutsche. The Keelers initially purchased this machinery then transferred it to American in consideration for the company's assumption of liability for the debt.

On December 9, 1986, Deutsche obtained an order in Oregon state court permitting Deutsche to seize American's machinery. In response, American filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code in United States bankruptcy court and obtained an automatic stay under 11 U.S.C. Sec. 362. The Keelers did not offer to contribute assets to American's bankruptcy estate. Deutsche then moved for summary judgment in state court against the Keelers, who remained jointly and severally liable for American's debt. American commenced an adversary proceeding in the bankruptcy court, seeking to enjoin Deutsche preliminarily and permanently from both continuing its state court action against the Keelers and from enforcing any state court judgment against them. American argued that pursuance by Deutsche of its state court action against the Keelers would irreparably harm American's efforts to confirm and administer a reorganization plan.

The bankruptcy court temporarily enjoined Deutsche from enforcing any state court judgment against the Keelers until trial on the merits of American's motion. Deutsche moved for partial summary judgment on the grounds that any injunction the bankruptcy court could issue would have to terminate upon confirmation of a Chapter 11 plan or conversion to a Chapter 7 bankruptcy. Following trial, the bankruptcy court awarded preliminary relief to American, but denied its request for a permanent injunction. The bankruptcy court found that American's efforts to confirm and administer a reorganization plan would likely fail if Deutsche were to enforce the state court judgment against the Keelers. Nonetheless, the court concluded that it lacked both jurisdiction and power to order a permanent injunction against nondebtors. The bankruptcy court therefore enjoined Deutsche from enforcing the state court judgment against the Keelers until the plan was confirmed or 60 days had elapsed, whichever came later. The district court affirmed the bankruptcy court's judgment. We review the district court's findings of fact for clear error and its conclusions of law independently. Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986).

II

This appeal presents a narrow issue of first impression in our circuit: does the bankruptcy court have jurisdiction and power to enjoin permanently, beyond confirmation of a reorganization plan, a creditor from enforcing a state court judgment against nondebtors?

A.

We first address the issue of subject matter jurisdiction. 28 U.S.C. Sec. 1334(b) grants to federal district courts subject matter jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. Sec. 151 in turn designates bankruptcy courts as units of the district courts and 28 U.S.C. Sec. 157(a) defines the scope of bankruptcy courts' jurisdiction. Similar to section 1334(b), section 157(a) grants to bankruptcy courts jurisdiction over "any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11." 28 U.S.C. Sec. 157(a). We must therefore decide whether American's motion is, at a minimum, "related" to a proceeding under title 11. 28 U.S.C. Sec. 1334(b).

In In re Fietz, 852 F.2d 455 (9th Cir.1988) (Fietz ), we adopted the Third Circuit's definition of a "related" proceeding under section 1334(b). The Third Circuit described the scope of the jurisdictional grant of 28 U.S.C. Sec. 1471(b), section 1334(b)'s identical predecessor, as follows:

The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. [citations omitted]. 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.

Fietz, 852 F.2d at 457, quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) (Pacor) (emphasis in original); see also Kaonohi Ohana, Ltd. v. Sutherland, 873 F.2d 1302, 1306-07 (9th Cir.1989) (applying Pacor definition of "related"); accord In re Franklin, 802 F.2d 324, 326 (9th Cir.1986) ("Congress' grants of jurisdiction under sections 1334 and 157 conferred upon bankruptcy courts that jurisdiction needed to implement effectively its function of administering the Bankruptcy Code."). We concluded in Fietz that the Pacor definition effectively promotes Congress's objectives in enacting section 1334(a). The definition (1) serves to reduce time-consuming and expensive litigation concerning a bankruptcy court's jurisdiction over a proceeding and (2) encourages efficient and expeditious resolution of all matters connected to the bankruptcy estate. Fietz, 852 F.2d at 457, citing H.R.Rep. No. 595, 95th Cong., 2d Sess., 43-48, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6004-08; Pacor, 743 F.2d at 994.

Under the Pacor definition, the bankruptcy court has jurisdiction over an action to enjoin Deutsche if enforcement of the state court judgment against the Keelers " 'could conceivably have any effect' " on the administration of American's bankruptcy estate. Fietz, 852 F.2d at 457 (emphasis omitted), quoting Pacor, 743 F.2d at 994. Under the Pacor rule, the proceeding " 'need not necessarily be against the debtor.' " Id. quoting Pacor, 743 F.2d at 994. Indeed, in Kaonohi, we found that section 1334(b) granted jurisdiction over an action involving nondebtors. 873 F.2d at 1306-07. There, a creditor filed an adversary proceeding in bankruptcy court seeking equitable relief--specific performance of a land sale contract--against a nondebtor-noncreditor. We reasoned that jurisdiction existed because this "nondebtor litigation may directly affect the estate's obligation to creditors whose claims are currently before the bankruptcy court." Id. at 1307.

American alleges and the bankruptcy court found that Deutsche's enforcement of the state court judgment against the Keelers could affect the bankruptcy proceeding. The bankruptcy court predicted that Deutsche, to satisfy the judgment, would likely execute on the Keelers' stock in American. Without an interest in the company, the Keelers would have little incentive to operate American and maintain the reorganization plan. No legal obstacles have been raised to impede this scenario. Nothing in the reorganization plan shields the Keelers' stock from creditors or obligates the Keelers to continue to operate American. Moreover, based upon the findings of the bankruptcy court, there is an undeniable relationship between the administration of the bankruptcy estate and the outcome of the motion for a permanent injunction. We conclude that Deutsche's enforcement of the judgment against the Keelers "could conceivably" affect the administration of American's plan. Fietz, 852 F.2d at 457. Sections 1334(b) and 157(a) therefore confer on the bankruptcy court subject matter jurisdiction over American's motion for a permanent injunction against Deutsche.

In arguing that the court lacked subject matter jurisdiction, Deutsche makes no reference to section 1334 or our law construing it. Rather, Deutsche points to In re A.J. Mackay Co., 50 B.R. 756 (D.Utah 1985) (Mackay ), a case relied on by the district court in holding that the bankruptcy court lacks jurisdiction to grant American's motion for a permanent injunction. Mackay baldly held that the bankruptcy court never possesses jurisdiction to issue an injunction affecting a nondebtor beyond confirmation of a plan. Id. at 762. Mackay reasoned that "[i]f the protection [of an injunction] does not end at [confirmation], it is the codebtor who is being protected, not the debtor." Id. We find this analysis incomplete and unpersuasive. This circuit's test for jurisdiction is whether the requested injunction "could conceivably" affect the plan--not whether the injunction protects a nondebtor after confirmation.

B.

American moved for a permanent injunction pursuant to the court's equitable power under 11 U.S.C. Sec. 105(a). The...