Goldstein v. Eby-Brown, Inc. (In re Universal Mktg., Inc.)

• Decision Date: 15 November 2011
• Docket Number: Bankruptcy No. 09–15404 ELF.,Adversary No. 11–0520.
• Parties: In re UNIVERSAL MARKETING, INC., Debtor.Charles R. Goldstein, Chapter 7 Trustee for the Estate of Universal Marketing, Inc., et al., Plaintiff, v. Eby–Brown, Inc., Defendant.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

459 B.R. 573

In re UNIVERSAL MARKETING, INC., Debtor.Charles R. Goldstein, Chapter 7 Trustee for the Estate of Universal Marketing, Inc., et al., Plaintiff,

v.Eby–Brown, Inc., Defendant.

Bankruptcy No. 09–15404 ELF.

Adversary No. 11–0520.

United States Bankruptcy Court, E.D. Pennsylvania.

Nov. 15, 2011.

Aris J. Karalis, Robert W. Seitzer, Maschmeyer Karalis P.C., Philadelphia, PA, for Debtor.

MEMORANDUM

ERIC L. FRANK, Bankruptcy Judge.

I.

In this adversary proceeding, Charles Goldstein, the trustee (“the Trustee”) in the above chapter 7 bankruptcy case, seeks to set aside pre-petition and post-petition transfers allegedly made by the Debtor to Defendant Eby–Brown, Inc. (“the Defendant”). Presently before the court is the Defendant's Motion to Dismiss the Complaint (“the Motion”). The Defendant asserts that the complaint (“the Complaint”) fails to state a claim upon which relief can be granted. The Defendant also asserts that the bankruptcy court lacks subject matter jurisdiction over the Trustee's claim to set aside pre-petition transfers.

As explained below, I conclude that the bankruptcy court has subject matter jurisdiction over the pre-petition fraudulent transfer claim. I also conclude that the Complaint fails to state a claim and must be dismissed. However, the Trustee will be granted leave to file an amended complaint.

II.

This adversary proceeding is one (1) of 180 adversary proceedings commenced by the Trustee on July 20 and 21, 2011 seeking to avoid pre-petition and post-petition transfers and related relief. The prototypical complaint asserts six (6) claims under the Bankruptcy Code (claims under 11 U.S.C. §§ 502, 544, 547, 548, 549 and 550) and a claim for an award of attorney's fees. I described the complaint in some detail in a Memorandum entered last month in Goldstein v. BRT, Inc. (In re Universal Marketing), 2011 WL 5114826 (Bankr.E.D.Pa. Oct. 27, 2011) (“ BRT ”).

The Complaint in this adversary proceeding includes many of the same factual allegations as the complaint in BRT, but sets forth fewer claims for relief. Here, the Trustee makes no claim for a preference under § 547 or a fraudulent transfer under § 548. He does assert a fraudulent transfer claim under § 544 (incorporating 12 Pa.C.S.A. §§ 5101 et seq. (hereafter, “PUFTA”) as applicable nonbankruptcy law) and a claim for avoidance of post-petition transfers pursuant to § 549. Based on these two avoidance theories, the Trustee seeks additional relief under § 502(d) and (j) and § 550 and an award of attorney's fees.

As stated above, the Defendant seeks dismissal of the Complaint for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6) (incorporated in this proceeding by Fed. R. Bankr.P. 7012). If that were the sole basis of Motion, I would grant the Motion, dismiss the Complaint, but also grant the Trustee leave to file an amended complaint for the reasons set forth in BRT. However, pursuant to Rule 12(b)(1), the Defendant also asserts that the bankruptcy court lacks subject matter jurisdiction over the § 544 fraudulent transfer claim.¹

As a general rule, a federal bankruptcy court has an independent duty to satisfy itself that it has subject matter jurisdiction over any pending matter and must conclude that it has subject matter jurisdiction before reaching the merits of a case.² A corollary to this principle is that a federal court “has leeway ‘to choose among threshold grounds for denying audience to a case on the merits,’ ” which may include a variety of grounds for dismissal that are “short of reaching the merits.” Sinochem Int'l Co. v. Malaysia Int'l Shipping Corp., 549 U.S. 422, 430–31, 127 S.Ct. 1184, 167 L.Ed.2d 15 (2007) (quoting Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 585, 119 S.Ct. 1563, 143 L.Ed.2d 760 (1999)). Here, however, the asserted ground for dismissal is not “short of reaching the merits.” Dismissal of a complaint under Rule 12(b)(6) is a decision on the merits. E.g., Johnsrud v. Carter, 620 F.2d 29, 32–33 (3d Cir.1980); Hubicki v. ACF Indus., Inc., 484 F.2d 519, 523 (3d Cir.1973). If this court lacks subject matter jurisdiction, it would be improper to dismiss the § 544 and § 549 claims under Rule 12(b)(6) for failure to state a claim. Likewise, it would be improper to grant the Trustee leave to amend the Complaint. Therefore, I must address the Defendant's jurisdictional argument.

As explained below, I hold that the bankruptcy court has subject matter jurisdiction over the Trustee's § 544 claim.

III.

A.

The Defendant's jurisdictional argument is based on the recent Supreme Court decision, Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In Stern, the court held that 11 U.S.C. § 157(b)(2)(C) was unconstitutional insofar as it authorized the bankruptcy court, to enter a final judgment, without the creditor's consent, on a debtor's counterclaim to the creditor's proof of claim, when the counterclaim need not necessarily be resolved in the process of allowing or disallowing the creditor's proof of claim. See Stern, 131 S.Ct. at 2620.

Here, the Defendant argues that:

(1) the Trustee's Complaint seeks to avoid fraudulent transfers “premised under Pennsylvania law;” (Motion ¶ 29);

(2) like the debtor's counterclaims in Stern, “[s]tate law avoidance actions” are designated as core proceedings under 28 U.S.C. § 157(b)(2)(H) ( id. ¶ 25); (3) fraudulent transfer actions are common-law type claims (rather than claims involving “public rights”) ³ and, as such, may not be assigned by Congress to the bankruptcy court for resolution, ( id. ¶ 23); and

(4) “[W]hile this Bankruptcy Court has statutory authority to hear the Trustee's fraudulent transfer claim, [it] lacks constitutional authority to hear the claim and should dismiss the Complaint” ( id.).⁴

The initial flaw in the Defendant's argument is its premise: that the Trustee is seeking to avoid pre-petition transfers under Pennsylvania law. I do not read the Complaint to assert an avoidance claim under Pennsylvania law, i.e., PUFTA. Rather, it appears that sole authority for the Trustee's fraudulent transfer claim is 11 U.S.C. § 544, a Bankruptcy Code provision that permits a trustee to avoid transfers that are avoidable under applicable nonbankruptcy law by certain hypothetical or actual creditors of the debtor. See 5 Collier on Bankruptcy ¶ 544.01 (16th ed. 2011) (Alan N. Resnick & Henry J. Sommer eds.).

While the Complaint makes a general reference to PUFTA in close proximity to its articulation of the § 544 claim, and perhaps is not as precise as it should be, it is counterintuitive to read the Complaint to assert a direct, state law PUFTA claim. PUFTA identifies transactions that are fraudulent “as to creditors” and accords remedies to “creditors.” See 12 Pa.C.S.A. §§ 5104(a), 5105, 5107(a). It is unreasonable to infer that the Trustee considers himself a “creditor” of the Debtors in this bankruptcy case. Notwithstanding the Complaint's joint reference to § 544 and PUFTA, the obvious inference to be drawn is that the Trustee seeks to invoke the power afforded him by 11 U.S.C. § 544 to act in a representative or derivative capacity and assert avoidance rights that creditors (actual or hypothetical) have under applicable state law. In short, the Complaint refers to PUFTA merely for the purpose of identifying the applicable state law incorporated by § 544.

Even though § 544 incorporates state law to provide the “rules of decision,” a § 544 claim is a federal bankruptcy cause of action. In re Hudson, 455 B.R. 648, 656–57 (Bankr.W.D.Mich.2011). In that respect, it differs from the debtor's claim in Stern. It is not a “state law action independent of the federal bankruptcy law,” Stern, 131 S.Ct. at 2611 (emphasis added). To the contrary, it “flow[s] from a federal statutory scheme,” id. at 2614. To the extent, then, that the Defendant is arguing that this court lacks jurisdiction to hear the fraudulent transfer claim because the claim, like the claim at issue in Stern, is a state law claim and not a federal bankruptcy claim, the Defendant is attacking a straw man.

Perhaps more fundamentally, however, the Defendant's argument reads far too much into Stern. In Stern, the Supreme Court held that Congress exceeded its constitutional authority when it designated certain types of counterclaims to proofs of claim as “core proceedings.” The Court did not hold that the bankruptcy court lacked subject matter jurisdiction to adjudicate the debtor's state law claim. The Court held only that Congress' delegation of authority to enter a final judgment, as a “core proceeding,” without the non-debtor's consent, was unconstitutional. Nothing in the specific holding in Stern precludes the bankruptcy court from exercising subject matter jurisdiction to hear a fraudulent transfer claim by treating it as a “related proceeding” and issuing proposed findings of fact and conclusions of law. In other words, Stern does not affect the exercise of federal bankruptcy jurisdiction to hear certain claims, but simply whether the authority to enter a final order resides in the district court or the bankruptcy court.

B.

The foregoing recitation, however, does not completely resolve the issue.

The Defendant's citation of In re Blixseth, 2011 WL 3274042 (Bankr.D.Mont. Aug. 1, 2011) suggests that the Defendant may be making a startling statutory (as opposed to constitutional) challenge to this court's subject matter jurisdiction to hear the fraudulent transfer claim— i.e., that the bankruptcy court lacks a statutory basis for exercising subject matter jurisdiction to hear the Trustee's claim for avoidance of pre-petition transfers under 11 U.S.C. § 544.

In Blixseth, the court held that there is no difference, for constitutional purposes, between the state law claim in Stern and a Bankruptcy Code-based fraudulent transfer claim. The court reasoned that the mere fact that the claim flows from the Bankruptcy Code does not make it a public right which may be...