Foxwood Hills Prop. Owners Ass'n, Inc. v. 783-C, LLC (In re Foxwood Hills Prop. Owners Ass'n, Inc.)
| Decision Date | 20 January 2021 |
| Docket Number | C/A No. 20-02092-HB,Adv. Pro. No. 20-80049-HB |
| Citation | 625 B.R. 862 |
| Court | U.S. Bankruptcy Court — District of South Carolina |
| Parties | IN RE, FOXWOOD HILLS PROPERTY OWNERS ASSOCIATION, INC., Debtor(s). Foxwood Hills Property Owners Association, Inc., Plaintiff(s), v. 783-C, LLC et al. Defendant(s). |
Kyle A. Brannon, Julio E. Mendoza, Jr., Nexsen Pruet, LLC, Columbia, SC, for Debtor(s).
THIS MATTER came before the Court for a hearing on January 12, 2021, to consider the Motion to Dismiss Plaintiff's Amended Complaint filed by Defendant Richard F. Dixon.1 The Motion asserts the Amended Complaint should be dismissed for lack of subject matter jurisdiction, failure to state a claim, and failure to join a necessary party pursuant to Fed. R. Civ. P. 12(b)(1), (6), and (7).2 Plaintiff Foxwood Hills Property Owners Association, Inc. (the "Association") filed an Objection.3
The Association is the property owners’ association for a residential development known as Foxwood Hills (the "Community") located on Lake Hartwell in Oconee County, South Carolina. The Association filed a petition for voluntary Chapter 11 relief on May 8, 2020. This adversary proceeding was filed in July 2020 and includes over 3,300 defendants – many have answered or appeared, while others have not. The defendants are property owners of record of the approximate 4,100 lots within the Community.
This adversary proceeding seeks to resolve controversies regarding membership in the Association, voting rights, and the amount and calculation of the fees, dues, and assessments payable to the Association by the parties named. Pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, et seq. , the Association seeks a declaratory judgment based on equitable grounds for relief that defendants are members of the Association with equal voting rights and are required to pay budget-based dues, fees, and assessments.4 The Amended Complaint also asserts the various covenants and restrictions on certain deeds and recorded real property filings did not address membership in the Association and failed to contemplate an adequate source of funding for the privately maintained roads and amenities of the Community. The Association alleges the requested equitable relief is needed because enforcing these various restrictions, some of which have not been followed or enforced for decades, would cause a great wrong and leave the Association insolvent and inoperable. Therefore, the Association requests the covenants and restrictions be rescinded/cancelled or reformed to provide that all property owners within the Community are members of the Association, subject to its bylaws, and must pay budget-based dues, fees, and assessments.
Certain defendants were served by first class mail, but the mailings were returned "undeliverable" (the "Returned Mail Defendants"). Additionally, the Amended Complaint includes designated classes of defendants identified as the John Doe Defendants, Richard Roe Defendants, and Steven Stoe Defendants and defined in detail therein. Pursuant to Fed. R. Bankr. P. 7004(c), on October 26, 2020, the Court granted the Association's request to serve by publication a summons for the Amended Complaint on the Returned Mail Defendants, as well as Doe, Roe, and Stoe Defendants. 5
Primarily relying on Stern v. Marshall , 564 U.S. 462, 480, 131 S. Ct. 2594, 2607, 180 L.Ed. 2d 475 (2011), Dixon asserts this Court lacks subject matter jurisdiction to adjudicate the declaratory judgment claims asserted against him because they are state law claims not resolved in the claims allowance process. Dixon also argues this matter is not a core proceeding and the Court lacks subject matter jurisdiction over adversary proceedings that seek declaratory relief presenting only questions of state law. The Association contends Dixon's argument focuses on the issue of core versus non-core proceedings, which does not affect the Court's subject matter jurisdiction.
"Federal bankruptcy courts, like the federal district courts, are courts of limited jurisdiction." Educ. Credit Mgmt. Corp. v. Kirkland (In re Kirkland) , 600 F.3d 310, 315 (4th Cir. 2010). "Although they are related concepts ... the scope of the bankruptcy courts’ subject matter jurisdiction, their statutory authority to hear and/or determine any particular matter, and their constitutional authority to do so, each are delineated by different statutory, constitutional, and/or judicial authorities." In re Dambowsky , 526 B.R. 590, 595 (Bankr. M.D.N.C. 2015). Under 28 U.S.C. § 1334(a), the district courts "have original and exclusive jurisdiction of all cases under title 11." They also have "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases until title 11." 28 U.S.C. § 1334(b).
A proceeding or claim "arising in" Title 11 is one that is not based on any right expressly created by Title 11, but nevertheless, would have no existence outside of the bankruptcy. Therefore, a controversy arises in Title 11 when it would have no practical existence but for the bankruptcy.
Valley Historic Ltd. P'ship v. Bank of New York , 486 F.3d 831, 835 (4th Cir. 2007) (emphasis in original) (internal quotation marks and citations omitted). A civil proceeding is "related to" a title 11 case if its outcome might have any conceivable effect on the bankruptcy estate. Id. at 836 (). "Therefore, ‘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 it in any way impacts upon the handling and administration of the bankruptcy estate.’ " Id. (quoting Owens-Ill., Inc. v. Rapid Am. Corp. (In re Celotex Corp.) , 124 F.3d 619, 625 (4th Cir. 1997). If the proceeding in question does not "arise in" or is not "related to" the bankruptcy, then the bankruptcy court has no jurisdiction to hear the matter. See 28 U.S.C. § 1334(b).
While 28 U.S.C. § 1334 determines subject matter jurisdiction, 28 U.S.C. § 157(b) and (c) determine "the bankruptcy court's authority to act once that jurisdiction is established." Kirkland , 600 F.3d at 315 ; see also Stern , 564 U.S. at 480, 131 S.Ct. 2594 . Under § 157, district courts can refer cases or proceedings under § 1334 to the bankruptcy courts. 28 U.S.C. § 157(a). Additionally, district courts may withdraw, in whole or in part, any case or proceeding that it referred. 28 U.S.C. § 157(d). The District of South Carolina has referred to this Court any and all cases within the scope of § 1334. See Local Civ. Rule 83.IX.01 (D.S.C.).
Upon referral from the district court, "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 ... and may enter appropriate orders and judgments." 28 U.S.C. § 157(b)(1). For non-core proceedings that otherwise relate to the bankruptcy case under title 11, "the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge ..." 28 U.S.C. § 157(c)(1).
"Outside of a bankruptcy court's statutory authority to enter final orders in certain proceedings, however, the court must still possess the constitutional authority to do so." MDC Innovations, LLC v. Hall , 726 F. App'x 168, 171-72 (4th Cir. 2018) (citing Stern , 564 U.S. at 482-83, 131 S.Ct. 2594 )). In Stern , the Supreme Court held that despite having authority under § 157(b)(2)(C) to enter a final judgment, the bankruptcy court lacked authority under Article III of the Constitution where the debtor asserted a state law counterclaim against an entity that files a proof of claim in the case, unless that counterclaim "stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." 564 U.S. at 499, 131 S.Ct. 2594. Under these circumstances, the bankruptcy court may not enter a final order absent the consent of the parties. See Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 135 S. Ct. 1932, 191 L.Ed. 2d 911 (2015). Further, "when, under Stern ’s reasoning, the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, [ § 157(c) ] nevertheless permits a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court." Exec. Benefits Ins. Agency v. Arkison , 573 U.S. 25, 28, 134 S. Ct. 2165, 2168, 189 L.Ed. 2d 83 (2014).6
The Association's claims appear, at a minimum, related to its bankruptcy case because the outcome of this adversary proceeding affects its bankruptcy estate and ability to reorganize and continue operating. The relief sought will alter the Association's rights in a way that impacts the handling and administration of the bankruptcy estate because, as the Association has represented, its ability to declare all property owners within the Community members of the Association and require them to pay budget-based dues, fees, and assessments is how the Association intends to continue its operations. Accordingly, the Court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and Dixon's Motion to Dismiss under Fed. R. Civ. P. 12(b)(1) must be denied.
A motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) tests the sufficiency of the complaint without resolving contests...
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