Calvert v. Frederick Darren Berg & Moss Adams LLP (In re Funds)

• Decision Date: 28 May 2014
• Docket Number: No. C13–1842RSL.,C13–1842RSL.
• Court: U.S. District Court — Western District of Washington
• Parties: In re CONSOLIDATED MERIDIAN FUNDS, a/k/a Meridian Investors Trust, et al., Debtors. Mark Calvert, as Liquidating Trustee, et al., Plaintiffs, v. Frederick Darren Berg and Moss Adams LLP, Defendants.

511 B.R. 140

In re CONSOLIDATED MERIDIAN FUNDS, a/k/a Meridian Investors Trust, et al., Debtors.Mark Calvert, as Liquidating Trustee, et al., Plaintiffs,

v.Frederick Darren Berg and Moss Adams LLP, Defendants.

No. C13–1842RSL.

United States District Court,

W.D. Washington,

at Seattle.

Signed May 28, 2014.

Michael J. Avenatti, Eagan O'Malley & Avenatti LLP, Newport Beach, CA, Simeon J. Osborn, Osborn Machler, Seattle, WA, for Plaintiffs.

Frederick Darren Berg, Lompoc, CA, pro se.

Benjamin Ellison, Linda Coberly, Winston & Strawn, Chicago, IL, Kelly P. Corr, Steven W. Fogg, Corr Cronin Michelson Baumgardner & Preece, Seattle, WA, for Defendants.

ORDER REVERSING BANKRUPTCY COURT'S ORDER GRANTING MOTION TO DISMISS

ROBERT S. LASNIK, District Judge.

I. INTRODUCTION

This matter comes before the Court on plaintiffs' appeal of an order by the United States Bankruptcy Court for the Western District of Washington granting defendants' motion to dismiss for lack of subject matter jurisdiction under Fed.R.Civ.P. 12(b)(1). The Court has reviewed the parties' submissions. For the reasons discussed below, the Court REVERSES the bankruptcy court's order granting defendants' motion to dismiss and REFERS the matter to the bankruptcy court for further proceedings consistent with this order.

II. DISCUSSION

A. Background

The bankruptcy proceedings underlying this adversary proceeding began in 2010 and 2011 when a group of investment funds controlled by defendant Frederick Darren Berg, known collectively as the “Meridian Funds,” collapsed and entered into bankruptcy. The bankruptcy court consolidated the various bankruptcy proceedings connected with Berg and entered an order confirming a consensual Chapter 11 plan (the “Plan”). Appendix II (Dkt. # 9–1) at 4–5. The Plan provides for the creation of a liquidating trust for the Meridian Funds and named Mark Calvert, one of the named plaintiffs in this adversarial proceeding, as the liquidating trustee. The trust holds all claims of the consolidated bankruptcy estate, including any claims the participating investors have against the auditors and accountants for Berg and his funds. Id. The Plan further provides that “the Bankruptcy Court shall retain and have exclusive jurisdiction after the Effective Date over any matter arising under the Bankruptcy Code, arising in or related to the Chapter 11 Cases or the Plan.” Appendix I (Dkt. # 9) at 116.

The trustee and 700+ individual investors filed this action seeking to recover damages from Berg and Moss Adams LLP, an auditor of the Meridian Funds. The trustee sued as the assignee of the investors who were allegedly injured by defendants' malfeasance. Plaintiffs allege three causes of action against defendants: (1) professional negligence; (2) negligent misrepresentation; and (3) fraud. Appendix II (Dkt. # 9–1) at 4, 6.¹ Defendants moved to dismiss plaintiffs' First Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(1) and (6). Appendix II (Dkt. # 9–1) at 4. Applying the “close nexus” test, the Honorable Karen A. Overstreet, United States Bankruptcy Judge, found that this action was not sufficiently “related to” the Meridian Funds bankruptcy proceeding for the court to exercise subject matter jurisdiction under 28 U.S.C. § 1334(b) and dismissed the action. Plaintiffs filed this appeal.

B. Subject Matter Jurisdiction1. Applicable Legal Standard

Plaintiffs allege that the bankruptcy court applied the wrong legal standard for determining when “related to” jurisdiction attaches under § 1334(b). Opening Brief (Dkt. # 8) at 10–11. They argue that the court should have applied the Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir.1984), “conceivable effects” test instead of the In re Pegasus Gold Corp., 394 F.3d 1189 (9th Cir.2005), “close nexus” test. Pursuant to § 1334(b), federal courts have original 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). As plaintiffs' underlying causes of action are unrelated to Title 11, the bankruptcy court correctly concluded that the “related to” prong was the sole available jurisdictional hook for plaintiffs' claims.

The Ninth Circuit generally applies the Pacor test for determining the scope of “related to” jurisdiction. See In re Marshall, 600 F.3d 1037, 1055 (9th Cir.2010). A court may assert “related to” jurisdiction over a claim that arises while the bankruptcy is pending when

the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy.... 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, 743 F.2d at 994). When a Chapter 11 plan has already been confirmed, however, the Ninth Circuit applies a narrower “close nexus” standard. Pegasus Gold, 394 F.3d at 1193–94. In adopting the “close nexus” standard, the Ninth Circuit found that post-confirmation bankruptcy jurisdiction should be limited to claims that could affect the interpretation, implementation, consummation, execution, or administration of the plan. Such a test “recognizes the limited nature of post-confirmation jurisdiction but retains a certain flexibility, which can be especially important in cases with continuing trusts.” Id. at 1194.

Despite the existence of a confirmed liquidation plan in this proceeding, plaintiffs assert that the Pacor “conceivable effects” test should control as opposed to the narrower “close nexus” test. Opening Brief (Dkt. # 8) at 13. Plaintiffs rely on In re Boston Regional Med. Ctr., Inc., 410 F.3d 100 (1st Cir.2005), for the proposition that the “close nexus” standard should be limited to reorganization plans and does not apply to post-confirmation liquidations. Opening Brief (Dkt. # 8) at 14. Although the Ninth Circuit has not explicitly addressed this distinction, the case law does not support plaintiffs' theory. The “close nexus” standard has generally been applied in a bright-line fashion. If the proceedings arise pre-confirmation, the Pacor test applies. If the proceeding arises post-confirmation, a “close nexus” is required to give rise to “related to” jurisdiction. See In re Wilshire Courtyard, 729 F.3d 1279, 1287 (9th Cir.2013) (“The ‘close nexus' test determines the scope of bankruptcy court's post-confirmation ‘related to’ jurisdiction.”); In re Ray, 624 F.3d 1124, 1133 (9th Cir.2010) (noting that “post-confirmation bankruptcy court jurisdiction is necessarily more limited than pre-confirmation jurisdiction”). See also Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 447 B.R. 302, 308 (C.D.Cal.2010) ( “Once a bankruptcy plan has been confirmed, the Ninth Circuit has curtailed the reach of ‘related to’ jurisdiction to ensure that bankruptcy jurisdiction does not continue indefinitely.”). There is no indication that the Ninth Circuit would treat claims arising after confirmation of a plan of liquidation differently than claims arising in the context of a reorganization, and it has not cited the reasoning of Boston Regional with approval in the nine years since the case was decided.²

Nor is the First Circuit's dichotomy between reorganization plans and liquidation plans particularly persuasive. The First Circuit suggests that the holding in Pegasus Gold was motivated by the convictions that (a) a reorganized company should reemerge in the marketplace emancipated from the bonds of its former self and “without any special swaddling” from the bankruptcy courts and (b) disputes involving a new company have an ever-decreasing chance of being related to the underlying bankruptcy proceeding. Boston Regional, 410 F.3d at 106–07. The Ninth Circuit does not mention or rely upon either of these considerations, however, and the test it adopted allows the reviewing court to evaluate the actual relatedness of post-confirmation claims, rather than simply presuming that reorganized companies have moved past their pre-confirmation obligations. In explaining why a more generous test for “related to” jurisdiction should apply when a liquidation plan is at issue, the First Circuit reasons that bankruptcy jurisdiction is appropriate because a liquidated debtor is interested in “wind[ing] up its affairs, convert[ing] its assets to cash, and pay[ing] creditors a pro rata dividend,” activities that are “intimately connected with the efficacy of the bankruptcy proceeding” because they “directly impact the amount of the liquidating dividend eventually paid to [the] creditors.” Id. at 107. The Ninth Circuit, on the other hand, has no interest in extending bankruptcy jurisdiction to cases in which the debtor or the trustee is simply attempting to increase the assets available for distribution to the creditors. Pegasus Gold, 394 F.3d at 1194 n. 1 (“[W]e are not persuaded by the Appellees' argument that jurisdiction lies because the action could conceivably increase the recovery to the creditors. As the other circuits have noted, such a rationale could endlessly stretch a bankruptcy court's jurisdiction.”). The Supreme Court's jurisprudence also throws doubt on the First Circuit's rationale: the Court has noted that “[t]he jurisdiction of bankruptcy courts may extend more broadly” when dealing with a reorganization under Chapter 11 than a liquidation under Chapter 7.³Celotex Corp. v. Edwards, 514 U.S. 300, 310, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Having found no support in this jurisdiction for the First Circuit's reorganization/liquidation dichotomy and being unconvinced of its soundness, the Court finds that the “close nexus” test applies to all post-confirmation claims.

2. Application of “Close Nexus” Standard

Under the “close nexus” standard, the Court evaluates the nexus between the claims asserted and the bankruptcy plan or proceeding to determine whether it is...