Bakst v. Smokemist, Inc. (In re Gladstone)

• Decision Date: 07 July 2014
• Docket Number: Case No.: 10–32093–EPK,Adv. Proc. No.: 14–01343–EPK
• Citation: 513 B.R. 149
• Parties: In re: Richard J. Gladstone, Debtor. Michael R. Bakst, as Trustee in Bankruptcy for Richard J. Gladstone, Plaintiff, v. Smokemist, Inc.; West Coast Investment Partners, LP, through its general partner The Richard J. Gladstone Living Revocable Trust, through its Trustee Richard J. Gladstone; The Richard J. Gladstone Revocable Trust through its Trustee Richard J. Gladstone; The Rio Trust, through its Trustee Jack Levine; Gladstone Group Investments, Inc.; and Galena Associates, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Florida

513 B.R. 149

In re: Richard J. Gladstone, Debtor.Michael R. Bakst, as Trustee in Bankruptcy for Richard J. Gladstone, Plaintiff,

v.Smokemist, Inc.; West Coast Investment Partners, LP, through its general partner The Richard J. Gladstone Living Revocable Trust, through its Trustee Richard J. Gladstone; The Richard J. Gladstone Revocable Trust through its Trustee Richard J. Gladstone; The Rio Trust, through its Trustee Jack Levine; Gladstone Group Investments, Inc.; and Galena Associates, Inc., Defendants.

Case No.: 10–32093–EPK

Adv. Proc. No.: 14–01343–EPK

United States Bankruptcy Court,

West Palm Beach Division.

West Palm Beach Division

Signed July 7, 2014

G. Steven Fender, Esq., West Palm Beach, FL, for Plaintiff.

Joel M. Aresty, Esq., Tierra Verde, FL, Leslie N. Reizes, Boynton Beach, FL, for Defendants.

Chapter 7

ORDER DETERMINING THAT THIS PROCEEDING IS A CORE MATTER IN ITS ENTIRETY AND THAT THIS COURT MAY ENTER FINAL ORDERS AND JUDGMENTS

Erik P. Kimball, Judge

This matter comes before the Court pursuant to 28 U.S.C. § 157(b)(3) and the Defendants' Motion Requesting That This Court Determine Whether This Proceeding Is A Core Proceeding Or Otherwise Subject To The Entry Of Final Orders Or Judgments By This Court, And Objection To The Entry Of Final Orders Or Judgments By This Court [ECF No. 53] filed by Smokemist, Inc., West Coast Investment Partners, LP, The Rio Trust, Gladstone Group Investments, Inc., and Galena Associates, Inc. (together, the “Movant Defendants”).¹ For the reasons that follow, the Court determines that there is subject matter jurisdiction over this proceeding under 28 U.S.C. § 1334(b), all requests for relief in this adversary proceeding are core matters under 28 U.S.C. § 157(b), and this Court may enter finals orders and judgments in this adversary proceeding.

BACKGROUND

Michael R. Bakst, as trustee in the chapter 7 case of Richard J. Gladstone, is the plaintiff in this action. In the complaint [ECF No. 1], the plaintiff argues that the debtor Richard J. Gladstone (the “Debtor”) “holds cash, property, investments, and other assets in a complex web of trusts, corporations, and limited liability companies” including the defendants. The plaintiff alleges that the Debtor's financial arrangements are “intended to obfuscate the source and disposition of funds” to make the Debtor “appear judgment proof and to defraud present and future creditors.” The plaintiff alleges that the Debtor “completely controls and dominates” the defendants, that he “oversees all aspects of each one's assets and property, signs checks, pays personal expenses from their accounts, and treats all of their assets as his own.” The plaintiff alleges “[t]here is a complete blurring of the entity form between [the defendants] and the Debtor.” The plaintiff alleges that there is no proper purpose for the Debtor's financial arrangementsand that the defendants themselves and all assets of the defendants should be recognized as property of the Debtor and thus property of the estate in this chapter 7 case.

The complaint states four counts for relief. Count I seeks a declaratory judgment that all of the defendants “are owned by the Debtor and/or are his alter ego, that they and their assets are accordingly property of the estate under 11 U.S.C. § 541.” Count II seeks an order of turnover under 11 U.S.C. § 542 of those assets identified as property of the estate as a result of relief granted under Count I. Count III seeks an order substantively consolidating all of the defendants into the Debtor's bankruptcy estate, with their assets and liabilities to be administered in this chapter 7 case. Count IV seeks an accounting from each defendant.

FEDERAL BANKRUPTCY JURISDICTION, DETERMINATION OF CORE MATTERS, AND LIMITATIONS UNDER ARTICLE III

Pursuant to Article I, Section 8 of the United States Constitution, Congress enacted 28 U.S.C. § 1334. Section 1334 is the sole source of subject matter jurisdiction in bankruptcy. Subsection (a) of that provision grants to the district courts “original and exclusive jurisdiction of all cases under title 11,” and subsection (b) grants to the district courts “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. §§ 1334(a) and (b).

A proceeding “arising under” title 11 is one based in a provision of the Bankruptcy Code itself. Cont'l Nat'l Bank of Miami v. Sanchez (In re Toledo), 170 F.3d 1340, 1345 (11th Cir.1999) (citation omitted). For example, an action to avoid and recover a preferential transfer under 11 U.S.C. §§ 547 and 550 is one “arising under” title 11. A proceeding “arising in” a case under title 11 is a proceeding that, even if not specifically provided for in the Bankruptcy Code, can take place only in the context of a case under title 11. This includes various matters affecting administration of a bankruptcy estate. Id. (citations omitted). Proceedings arising under title 11 or arising in a title 11 case are to be contrasted with “related to” matters. A “related to” matter is one which does not find its source in the Bankruptcy Code, and could be pursued outside a title 11 case, but which nonetheless bears a connection with the title 11 case sufficient to bring it within federal bankruptcy jurisdiction. Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.), 910 F.2d 784, 788 (11th Cir.1990) (“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.”) (citation omitted).

All bankruptcy jurisdiction is initially lodged in the district courts. Under 28 U.S.C. § 157(a), each district court may refer to the bankruptcy court “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.” Thus, the district court may refer to the bankruptcy court any and all matters covered by 28 U.S.C. § 1334. This has been accomplished in every district in the United States by standing orders of reference. On March 27, 2012, the district court for the Southern District of Florida issued a revised Order of Reference, Administrative Order 2012–25 (the “Standing Order”). The Standing Order refers to the bankruptcy court in this district any and all cases and proceedings covered by federal bankruptcy jurisdiction. The district court may for cause shown withdraw, in whole or in part, any case or proceeding referred to the bankruptcy court under the Standing Order. 28 U.S.C. § 157(d).

Not all matters referred to the bankruptcy court are subject to entry of final orders or judgments in the bankruptcy court. Congress decreed that “all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11” referred to the bankruptcy court are subject to entry of final orders and judgments in the bankruptcy court. 28 U.S.C. § 157(b)(1). Thus, once referred to the bankruptcy court, the bankruptcy court has the statutory power (and in most cases the duty) to enter final orders and judgments in cases under title 11 and in “core” matters “arising under” or “arising in” cases under title 11. With regard to non-core proceedings, the bankruptcy court may hear such proceedings but, absent consent of the parties, must then submit proposed findings of fact and conclusions of law to the district court. 28 U.S.C. § 157(c).² If the parties consent in a non-core proceeding, the bankruptcy court may enter a final order or judgment. 28 U.S.C. § 157(c)(2).

Thus, absent consent of the parties, the statutory power of the bankruptcy court to enter final orders and judgments depends on whether the matter before the court is core or non-core. 28 U.S.C. § 157(b)(2) sets out a non-exclusive list of matters defined as core proceedings. In this provision, Congress exhibited its intent to provide to the bankruptcy court the broadest power to enter final orders and judgments that is consistent with the requirements of the Constitution. Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553, 565 (9th Cir.2012), aff'd,––– U.S. ––––, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014).

The bankruptcy court is not a tribunal provided for in Article III of the Constitution. As such, there are limits on the power of Congress to direct what matters may be subject to final orders and judgments in the bankruptcy court. Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2608–20, 180 L.Ed.2d 475 (2011). The proceedings described as core in 28 U.S.C. § 157(b) could include matters in which the bankruptcy court may not enter final orders or judgments consistent with the limits of Article III, absent consent of the parties. Id. Thus, to determine whether a particular proceeding may be subject to entry of a final order or judgment in the bankruptcy court, it is necessary to determine whether the proceeding is a core proceeding within the meaning of section 157(b), and also whether entry of such final order or judgment would exceed the limits imposed by Article III of the Constitution. Id.

Orders and judgments of the bankruptcy court entered in core matters and in non-core matters with the consent of the parties are subject to appeal to the district court under 28 U.S.C. § 158. Proposed findings of fact and conclusions of law submitted by the bankruptcy court, in non-core matters and in matters where Article III requires final orders to be entered by the district court, are subject to de novo review by the district court. 28 U.S.C. § 157(c)(1).³ These are submitted to the district court pursuant to Fed. R. Bankr.P. 9033 and are subject to objections of the parties under that rule. The primary difference between a final order or judgment of the bankruptcy court and proposed findings of fact and conclusions of law is that the former has...