Harvey v. Dambowsky (In re Dambowsky)

• Decision Date: 06 January 2015
• Docket Number: Bankruptcy No. 13–81410.,Adversary No. 14–9010.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: In re Jan Marshall DAMBOWSKY, Debtor. John J. Harvey, Jr. and Impact Point Consulting, Inc., Plaintiffs, v. Jan Marshall Dambowsky, a/k/a Jon Marshall, Defendant.

526 B.R. 590

In re Jan Marshall DAMBOWSKY, Debtor.

John J. Harvey, Jr. and Impact Point Consulting, Inc., Plaintiffs

v.Jan Marshall Dambowsky, a/k/a Jon Marshall, Defendant.

Bankruptcy No. 13–81410.

Adversary No. 14–9010.

United States Bankruptcy Court, M.D. North Carolina, Durham Division.

Signed Jan. 06, 2015.

Filed Jan. 07, 2015.

J. Daniel Bishop, Erwin, Bishop, Capitano & Moss, P.A., Charlotte, NC, for Creditor.

Daniel C. Bruton, Bell, Davis & Pitt, P.A., Winston–Salem, NC, for Debtor.

John A. Northen, Chapel Hill, NC, for Trustee.

ORDER DENYING MOTION TO DISMISS COUNTERCLAIM

BENJAMIN A. KAHN, Bankruptcy Judge.

This case came before the Court for hearing on August 28, 2014, upon the Answer to Counterclaim filed by John J. Harvey, Jr. (“Harvey”) and Impact Point Consulting, Incorporated (“Impact Point”) (together, “Plaintiffs”) on May 5, 2014 [Doc. # 16] (“Answer to Counterclaim”), the Court's Scheduling Order entered May 19, 2014 [Doc. # 18] (the “Scheduling Order”), the Plaintiffs' Brief in Support of Dispositive Threshold Defenses Pursuant to Scheduling Order [Doc. # 21] (“Plaintiffs” Brief), and Defendant's Response Brief Regarding Plaintiffs' Demand for Dismissal of Counterclaim [Doc. # 23] (“Defendant's Brief”).

Procedural Background

This adversary proceeding was commenced on February 9, 2014, by the filing of the Plaintiffs' Complaint (the “Complaint”) seeking a judgment excepting certain obligations from the Debtor's discharge, or, in the alternative, barring the Debtor's discharge pursuant to 11 U.S.C. § 727. On February 10, 2014, the Plaintiffs filed their first Amended Complaint [Doc. # 4] (the “First Amended Complaint”). On March 12, 2014, the Defendant filed his Motion to Dismiss the First Amended Complaint [Doc. # 7] (the “Motion to Dismiss”), alleging improper service. On March 25, 2014, the Defendant withdrew his Motion to Dismiss, and, on April 11, 2014, the Defendant filed his Answer to the Complaint [Doc. # 14] (the “Answer”). In the Answer, the Defendant asserted a counterclaim requesting that the Court liquidate the amount of any damages determined to be non-dischargeable (the “Counterclaim”).¹ On May 5, 2014, the Plaintiffs filed their Reply to the Counterclaim (“Plaintiffs' Reply”).²

In their Reply, the Plaintiffs demand that the Court dismiss the Counterclaim, asserting that the Court lacks subject matter jurisdiction over the underlying state court claims. In the alternative, Plaintiffs argued that dismissal of the Counterclaim is appropriate under the principles of permissive abstention. At the hearing, J. Daniel Bishop appeared for the Plaintiffs and Daniel C. Bruton appeared for the Defendant, Jan Marshall Dambowsky (the “Debtor” or “Dambowsky”). Pursuant to the terms of the Scheduling Order, the Court construed the Plaintiffs' brief as a motion to dismiss the Counterclaim, or, in the alternative, a motion for permissive abstention. At the conclusion of the hearing, the Court denied the motion to dismiss and the motion for permissive abstention.³ This opinion explains the bases for the Court's ruling.

Factual Allegations⁴

The claims in this adversary proceeding arise from the business relationship between Harvey and Dambowsky. At the time Plaintiff John J. Harvey (“Harvey”) met Dambowsky, both were independently engaged in businesses dealing with military procurement contracts. [Second Amended Complaint ¶ 7–8]. Dambowsky, identifying himself as “Jon Marshall,” worked as a consultant to military contractors and had a business called Defense Logistics Solutions, Inc. (“DLS”). [Second Amended Complaint ¶ 8–11].

The Complaint alleges that DLS was a sham corporation, and that Dambowsky intentionally misled Plaintiffs about DLS in order to defraud Plaintiffs and to misappropriate commission and other funds owed to Harvey as a result of their business ventures. [Second Amended Complaint ¶ 59]. Dambowsky allegedly also made false statements concerning these funds in order to prevent Plaintiffs from recovering funds owed to them. [Second Amended Complaint ¶ 42]. Plaintiffs further contend that Dambowsky's bankruptcy petition was strategically filed to conceal future profits. [Second Amended Complaint ¶ 56].

In Plaintiffs' Reply, the Plaintiffs assert three legal defenses to the Counterclaim. Plaintiffs contend that: (1) the Court does not have subject matter jurisdiction to liquidate a non-dischargeable claim; (2) if the Court were to liquidate any debt found to be non-dischargeable, Plaintiffs would be denied their Seventh Amendment right to a jury trial; and (3) to the extent that the Court finds it has subject matter jurisdiction to liquidate any claims found to be non-dischargeable, the Court should decline to exercise that jurisdiction in the interest of judicial economy. [Plaintiffs' Reply, at 2]. For the reasons set forth herein, the Court denied the Plaintiffs' request for this Court to dismiss or to abstain from hearing the Counterclaim.

Discussion

There are four issues to be resolved in the matter before the Court: (1) whether the Court has subject matter jurisdiction to liquidate Plaintiffs' claims in the context of a non-dischargeability action; (2) whether this Court, as a non-Article III court, has statutory and constitutional authority to liquidate and enter final judgment with respect to any amounts determined to be non-dischargeable without the Plaintiffs' consent; (3) if the Court does have jurisdiction and authority, whether the Court nevertheless should abstain from liquidating the claims; and (4) whether the Plaintiffs have a right to trial by jury under the Seventh Amendment to the United States Constitution in connection with this dischargeability action.

Although they are related concepts as explained below, 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. Section 1334 of title 28 sets forth the extent of bankruptcy subject matter jurisdiction. The bankruptcy courts' statutory authority to hear and/or determine matters is set forth in 28 U.S.C. § 157. Section 157 is not jurisdictional, but simply allocates the statutory authority to enter final judgments between the bankruptcy court and the district court. Stern v. Marshall, ––– U.S. ––––, ––––, 131 S.Ct. 2594, 2606–07, 180 L.Ed.2d 475 (2011). The bankruptcy courts' constitutional powers, in turn, are governed by the scope of power conferred upon Congress under the Bankruptcy Clause of the United States Constitution, Article I, Section 8, Clause 4 (“The Congress shall have Power To ... establish ... uniform Laws on the subject of Bankruptcies throughout the United States ....”), and the scope of authority allocated by and between tribunals created under Articles I and III of the United States Constitution, each as applied and interpreted by the opinions of the United States Supreme Court. Therefore, in order for a bankruptcy court to hear and determine any matter, it must have subject matter jurisdiction under 28 U.S.C. § 1334, statutory authority under 28 U.S.C. § 157, and constitutional authority.

Subject Matter Jurisdiction

Primarily relying upon Stern, Plaintiffs assert that this Court does not have subject matter jurisdiction to liquidate any claims the Plaintiffs have asserted against Dambowsky. Plaintiffs' filings with the Court generally conflate the Court's subject matter jurisdiction with the Court's constitutional authority as an Article I tribunal. In Stern, the Supreme Court instructed that whether the bankruptcy court has subject matter jurisdiction to hear a matter is distinct from whether the bankruptcy court has the statutory authority to liquidate a claim and enter a final order and judgment on that matter. See Stern, 131 S.Ct. at 2607–08 (whether a proceeding is core or non-core under 28 U.S.C. § 157(b) “does not implicate questions of subject matter jurisdiction”).⁵ The Court in Stern held that, while the bankruptcy court had subject matter jurisdiction and statutory authority to enter a final judgment on the counterclaim at issue in that case, it did not have constitutional authority to do so. Id. at 2608. Some bankruptcy courts have thus limited the holding in Stern to an analysis of the constitutional authority of the bankruptcy courts, rather than one affecting subject matter jurisdiction. See, e.g., Farooqi v. Carroll (In re Carroll), 464 B.R. 293, 311 (Bankr.N.D.Tex.2011), aff'd, 486 B.R. 718 (N.D.Tex.2013) (“Stern is not a subject matter jurisdiction case.”). Nevertheless, the sweeping rationale in Stern and perhaps the pre-Stern holdings interpreting 28 U.S.C. § 157 in terms of “jurisdiction,” have caused a number of courts to refer to bankruptcy courts' jurisdiction with respect to concepts of authority. See, e.g., Frazin v. Haynes & Boone, L.L.P. (In re Frazin), 732 F.3d 313 (5th Cir.2013) (finding that the bankruptcy court lacked constitutional authority to enter a judgment with respect to Texas' Deceptive Trade Practices Act (“DTPA”), and concluding that, “although the bankruptcy court did not have jurisdiction to make a final judgment on the DTPA claim, the district court may have that authority ” (emphasis added)). With deeper consideration, others have noted that the “concern over subject matter jurisdiction bleeds into Stern concerns.” Deitz v. Ford (In re Deitz), 469 B.R. 11, 28 (9th Cir. BAP 2012), aff'd, 760 F.3d 1038 (9th Cir.2014) (Markell, J., concurring). For the reasons set forth herein, this Court agrees, and further concludes that this is a two way street, i.e. consideration of the constitutional authority of the bankruptcy courts similarly bleeds into consideration of the bankruptcy courts' subject matter jurisdiction.

Various Analyses for the Bases of Subject Matter Jurisdiction in Dischargeability Proceedings

Bankruptcy subject matter jurisdiction is granted to ...