Beskrone v. Int'l Educ. Corp. (In re Pennysaver USA Publ'g, LLC)

• Decision Date: 02 July 2018
• Docket Number: Case No.: 15–11198 (CSS) (Jointly Administered),Adv. Proc. No.: 17–50523 (CSS)
• Citation: 587 B.R. 43
• Parties: IN RE: PENNYSAVER USA PUBLISHING, LLC, et al., Debtors. Don a Beskrone, Chapter 7 Trustee PennySaver USA Publishing, LLC, et al., Plaintiff, v. International Education Corporation, Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

587 B.R. 43

IN RE: PENNYSAVER USA PUBLISHING, LLC, et al., Debtors.

Don a Beskrone, Chapter 7 Trustee PennySaver USA Publishing, LLC, et al., Plaintiff,

v.International Education Corporation, Defendant.

Case No.: 15–11198 (CSS) (Jointly Administered)

Adv. Proc. No.: 17–50523 (CSS)

United States Bankruptcy Court, D. Delaware.

Signed July 2, 2018

ASHBY & GEDDES, P.A., Ricardo Palacio, Andrew D. Cordo, Lauren Dunkle Fortunato, Hayley M. Lenahan, 500 Delaware Avenue, 8^th Floor, P.O. Box 1150, Wilmington, Delaware 19899, Counsel for Don A. Beskrone, Chapter 7 Trustee

BAYARD, P.A., Scott D. Cousins, Evan T. Miller, 600 N. King Street, Suite 400, Wilmington, DE 19801, Counsel for the Defendant

OPINION ¹

Sontchi, J.

INTRODUCTION ²

Before the Court is Defendant's Rule 12(b)(1) Motion to dismiss the Trustee's single-count Complaint seeking payment for services previously rendered.

The Motion incorporates both factual and facial challenges to the Adversary Proceeding's subject-matter jurisdiction. As a threshold matter, the Court finds that the factual challenges should not be reviewed at this time because they cannot be removed from the substantive claims in the Complaint. This leaves the facial question: whether the Court has proper subject-matter jurisdiction over the Trustee's attempt to recover disputed prepetition accounts receivable as part of a chapter 7 liquidation.

The Court holds that it does. An action to recover alleged prepetition accounts receivable by a chapter 7 trustee, at least before discharge or close of a debtor's liquidation, conceivably impacts a debtor's estate. Non-core "related to" jurisdiction thus exists under the Bankruptcy Code, and the Defendant's Motion to Dismiss is consequently denied.

JURISDICTION & VENUE

The question of the Court's jurisdiction over the Adversary Proceeding is central to the Rule 12(b)(1) Motion. "A court has jurisdiction to determine whether or not it has subject matter jurisdiction over a proceeding."³ The Court may accordingly determine the Motion over whether to dismiss the Complaint for lack of subject-matter jurisdiction.

To the extent jurisdiction is proper, venue is also proper before the United States Bankruptcy Court for the District of Delaware under 28 U.S.C. §§ 1408 and 1409. The Court has the judicial authority to enter a final order.

STATEMENT OF FACTS & PROCEDURAL HISTORY

On May 29, 2015, PennySaver USA Publishing, LLC ("PennySaver") and affiliated entities (with PennySaver, the "Debtors") filed voluntary petitions for relief under chapter 7 of title 11 of the United States Code ( 11 U.S.C. §§ 101 – 1532, the "Bankruptcy Code"). The Court later entered an order authorizing joint administration of the Debtors' cases.⁴

The United States Trustee for the District of Delaware later appointed Don A. Beskrone to serve as the chapter 7 trustee of the Debtors' bankruptcy estates ("Trustee"). On May 26, 2017, the Trustee filed a single-count complaint (the "Complaint") against International Education Corporation ("Defendant" or "IEC"), initiating this adversary proceeding (the "Adversary Proceeding").⁵

The Trustee's Complaint contends that IEC entered into a prepetition agreement for advertising services with PennySaver for an agreed-upon amount. PennySaver allegedly provided the services and sent bills to IEC for payment. The Complaint seeks damages in an amount no less than $96,858.65 for payments allegedly requested by PennySaver that IEC did not pay in full.⁶ The Complaint states that the Court has jurisdiction over the Adversary Proceeding, and separately contends that the Adversary Proceeding is a "core" matter.⁷

Both parties agreed to extend the Defendant's response deadline to October 13, 2017 due to settlement discussions,⁸ at which point Defendant filed its Motion to Dismiss the Adversary Proceeding under Federal Rule of Civil Procedure 12(b)(1) for lack of subject-matter jurisdiction (the "Motion") and an accompanying opening brief.⁹ The Trustee filed a brief in opposition fourteen days later, and Defendant filed its reply the following week.¹⁰ The Court held oral arguments on the Motion on January 18, 2018.¹¹ The issue is now fully briefed and ripe for review.

LEGAL DISCUSSION

A. Standard of Review for Rule 12(b)(1) Motion to Dismiss

A party may assert a motion for lack of subject-matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure, made applicable to bankruptcy proceedings by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure. Such a motion "is an objection to the federal court's power to adjudicate a case."¹² As a rule, the burden of establishing that the Court has the requisite jurisdiction falls on the party invoking the federal court's jurisdiction.¹³

A Rule 12(b)(1) motion comes in two forms, the first being a "facial" challenge that contests the sufficiency of the complaint for want of subject-matter jurisdiction.¹⁴ For facial challenges, the court accepts as true the factual allegations set out in the plaintiff's complaint and then "examines the pleadings to determine if they present a case within the court's jurisdiction."¹⁵

The second form comes as a "factual" challenge. A factual challenge is one where "the pleadings satisfy a finding that jurisdiction exists, but [where] the allegations are false, thereby taking the case outside the court's jurisdiction."¹⁶ When the "defendant contests any of the jurisdictional allegations as pled by the plaintiff, the court must permit the plaintiff to respond with rebuttal evidence in support of jurisdiction, and the court then decides the jurisdictional issues by weighing the evidence."¹⁷

Factual disputes normally give rise to "discovery ... extrinsic evidence, and ... evidentiary hearings in order to determine [the court's] own jurisdiction."¹⁸ Unless "the jurisdictional facts, though genuinely disputed, are inextricably intertwined with the merits of the case. In that event, the court may defer resolution of the jurisdictional issue until the time of trial."¹⁹

Defendant has made both factual and facial challenges in its Rule 12(b)(1) Motion. Given that the factual challenge may require further discovery, the Court will review the factual and then facial challenges, in that order.

B. Factual Challenge to Subject–Matter Jurisdiction

Defendant has highlighted several factual disputes, including the amount, if any, IEC still owes Debtor PennySaver; the effect that certain alleged prepetition payments made by IEC had, if any, on the alleged debt owed; and the facts surrounding invoicing for PennySaver's services.²⁰ The Trustee argues that none of these are jurisdictional facts capable of a factual challenge under Rule 12(b)(1).²¹

While some of the factual disputes may remove the Court's jurisdiction over the Adversary Proceeding, they would only do so by attacking the very substance of the Trustee's accounts receivable action. There is no easy way for the Court to remove the factual challenges from the merits. "[W]hen a factual challenge to jurisdiction attacks facts at the core of the merits of the underlying action, the proper procedure for the [ ] court is to find that jurisdiction exists and to deal with the objection as a direct attack on the merits of the plaintiff's case."²²

The Court accordingly will hold the Defendant's factual challenges for a later proceeding and move to the Motion's facial challenge.

C. Facial Challenge to Subject–Matter Jurisdiction

The Motion's facial challenge focuses on one question: whether a bankruptcy court has subject-matter jurisdiction over an action brought by a chapter 7 trustee, before discharge and close of a debtor's case, to recover alleged accounts receivable.

Pursuant to 28 U.S.C. § 1334, "district courts shall have original and exclusive jurisdiction of all cases under title 11 ... [and] original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11."²³ A district court may provide, under section 157(a), that any such cases "be referred to the bankruptcy judges for the district," and the bankruptcy court "may hear and determine [such] cases ... and may enter appropriate orders and judgments, subject to review under section 158 of this title."²⁴ The United States District Court for the District of Delaware has so provided in this Adversary Proceeding.

Bankruptcy court jurisdiction under section 1334 can be divided among four types of matters: cases under title 11, proceedings arising under title 11, proceedings arising in a case under title 11, and proceedings related to a case under title 11.²⁵ The first three categories are considered "core" proceedings, and the last category "non-core" proceedings.²⁶ The bankruptcy court lacks jurisdiction over a matter to the extent it does not fall into any of these categories.²⁷

While the Complaint states that the Adversary Proceeding is a "core" proceeding under 28 U.S.C. § 157(b)(2), both parties now reject this position.²⁸ The Court agrees. "A proceeding to collect accounts receivable in which the underlying transaction occurred prepetition is only ‘related to a case under title 11’ and is, therefore, non-core."²⁹ To hold otherwise would "create[ ] an exception to Marathon that would swallow the rule" concerning Marathon - and Stern -type contract actions.³⁰

Yet whether or not a matter is "core" to a bankruptcy does not decide the issue of subject-matter jurisdiction, let alone the Rule 12(b)(1) Motion.³¹ "Non-core ‘related to’ jurisdiction is the broadest of the potential paths to bankruptcy jurisdiction, so we need only determine whether a matter is at least ‘related to’ the bankruptcy."³²

Congress intended for non-core "related to" jurisdiction to grant "comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate."³³ The Supreme Court in Celotex Corp. v. Edwards favorably acknowledged the "related to" jurisdiction...