In re Arrowmill Development Corp.

• Citation: 211 BR 497
• Decision Date: 24 July 1997
• Docket Number: Bankruptcy No. 93-37013.
• Parties: In re ARROWMILL DEVELOPMENT CORP., Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

211 B.R. 497 (1997)

In re ARROWMILL DEVELOPMENT CORP., Debtor.

Bankruptcy No. 93-37013.

United States Bankruptcy Court, D. New Jersey.

July 24, 1997.

COPYRIGHT MATERIAL OMITTED

Lindabury, Mccormick & Estabrook, Stephen A. Santola, Westfield, NJ, for Mary, Joan and Vincent Caglianone.

Benbrook & Benbrook, Kevin P. Benbrook, Clinton, NJ, for Creditor, Stefano Delliturri.

OPINION

WILLIAM H. GINDIN, Chief Judge.

PROCEDURAL HISTORY

This dispute, between two nondebtors, comes before the court as a motion by Stefano Delliturri ("Delliturri") to correct a clerical error pursuant to Fed.R.Civ.P. 60(b) and to interpret language contained in the debtor's third amended plan of reorganization as advised by the state court. Delliturri and John, Mary, Joan and Vincent Caglianone (the "Caglianones") were parties to a state court fraudulent conveyance action, Stefano Delliturri v. John Caglianone, Mary Caglianone et al., Superior Court of the State of New Jersey, Chancery Division, Hunterdon County, HNT-C-14042-94. Delliturri asserted that John Caglianone fraudulently transferred real property to his wife Mary and their children. The state court, Hon. Wilfred Diana, found that the reorganization plan of debtor, Arrowmill Development Corp. ("debtor"), discharged John Caglianone from all debts against him, including the debt of Delliturri.

On December 12, 1996 the Appellate Division, A-3876-95TI, issued a decision reversing Judge Diana ("Dreier Opinion"). The Appellate Division raised several issues concerning the propriety of discharging a nondebtor through a reorganization plan. The Dreier Opinion thus directed the state trial court to supervise the parties' submission of the present dispute to the bankruptcy court. Judge Diana communicated with this court concerning the matter and thereafter advised the parties that this court would undertake to resolve the issues raised by the Appellate Division.

This court heard the matter on April 14, 1997 and reserved. The parties thereafter submitted supplemental briefs. The bankruptcy court has jurisdiction to hear the matter pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(a). The issue of jurisdiction will be specifically addressed below. See infra p. 501, n. 2.

FACTS

Movant, Stefano Delliturri, leased space for his pizzeria and restaurant in debtor's shopping center. Delliturri sued debtor and John Caglianone in a separate state court action seeking damages for fraudulent inducement to enter into a commercial lease. John Caglianone is an equity holder of debtor, and negotiated the lease with Mr. Delliturri on debtor's behalf. The state court action was the object of a settlement in which Delliturri was to receive $102,000 from the defendants, jointly and severally. On April 7, 1994, after a default and in accordance with the terms of the settlement, a judgment in the same amount was entered in Delliturri's favor. The judgment was later amended on March 3, 1995 to adjust the amount to $77,555.

Delliturri filed a timely proof of claim in debtor's chapter 11 proceeding in March 1994. Various reorganization plans were filed. The main protagonists in the plan confirmation process were Shoprite of Clinton, the chief tenant of the shopping center and the major secured creditor, YBF Clinton, Inc. ("YBF"). YBF ultimately obtained ownership of the shopping center. Delliturri was served with copies of those plans as well as the final third amended plan submitted by the debtor corporation. Delliturri took no position with regard to the plan and did not participate in negotiations. The third amended plan was eventually confirmed by this court.

The reorganization plan contained two paragraphs, ¶¶ 1.17 and 2.3, which are at the heart of this dispute. The paragraphs state: "`Discharge' . . . includes a release of all liability on each Allowed Claim of any Equity Interest Holder." ¶ 1.17 . . . "Pursuant to § 1141 of the Code, confirmation of this Plan shall also discharge all claims against Debtor's equity Interest holders or Affiliates." ¶ 2.3 (emphasis added).

Delliturri thereafter sought to enforce his judgment against property of John Caglianone. As part of enforcement efforts Delliturri brought the subject action in state court to set aside conveyance of real estate described above. The Caglianones claimed that debtor's reorganization plan discharged John Caglianone from his individual debt to plaintiff, relying on paragraphs 1.17 and 2.3 above. Judge Diana agreed and dismissed the complaint.

The Appellate Division found that the language of the above stated paragraphs violated 11 U.S.C. § 1141(d)(1)(A) which states that the discharge is effective against the debtor only. Further, Judge Dreier, speaking for the court, found that the language in the plan closely paralleled the language of 1141(d)(1)(A) except that the statute provides for the opposite result, i.e. that confirmation terminates the claims of the equity interest holders (not claims against equity).

Judge Dreier posited that either the bankruptcy court deliberately modified the provisions of 1141(d)(1)¹, or that there was a mistake in the language which could be corrected under Fed.R.Civ.P. 60(a). The Dreier Opinion rejected the Caglianones' argument that Delliturri is bound by the terms of the plan since he was provided notice of the plan and failed to object. Judge Dreier found that even an experienced bankruptcy attorney quickly reading the plan might have assumed that paragraph 2.3 merely paralleled 11 U.S.C. § 1141(d)(1)(A). Judge Dreier further held that, the issue of equity discharge was never made clear by debtor or John Caglianone during the plan confirmation process, hearings or negotiations, and that it would have made no sense for Delliturri to agree to it. The Appellate Division also rejected the argument that the equity holders contributed capital to the corporation as a quid pro quo for the discharge, because that capital was only $50,000 which amount is less than Delliturri's claim. Movant asserted that, in fact, John Caglianone did not contribute any capital to the corporation. The Caglianones did not controvert that assertion.

The Dreier Opinion held that reorganization plans may contain a voluntary discharge of debts against stockholders if the intent is clear from the documents. In re Elsinore Shore Assocs., 91 B.R. 238, 250 (Bankr. D.N.J.1988). However, the Appellate Division found such clarity lacking in this case and could not resolve the conflicting testimony about what occurred during plan confirmation.

Recognizing that the circuit courts are in disagreement and that the Third Circuit has yet to address the issue, this court questioned, at the hearing held after the matter was returned from the Appellate Division, whether it had jurisdiction to discharge a nondebtor through a chapter 11 reorganization plan in contravention of 11 U.S.C. § 524(e) which specifically limits discharge to the debtor alone. The parties submitted supplemental briefs, each urging the court to follow the particular circuit court opinion which supports its position. For the reasons stated below, the court finds that while it had subject matter jurisdiction to hear the matter, it did not have the statutory power or authority to discharge John Caglianone from the debt of creditor, Stefano Delliturri. The court also finds that a contractual release of liability was not formed between John Caglianone and Delliturri as there was no affirmative manifestation of assent by Delliturri to such release.

DISCUSSION

Jurisdiction

Whenever a bankruptcy court is asked to resolve a dispute or to enter relief pertaining to nondebtors, it must take a hard look at its jurisdictional basis to do so. As noted by the Third Circuit, "bankruptcy jurisdiction, however, was not conferred for the convenience of those not in bankruptcy." Pacor, Inc. v. Higgins, 743 F.2d at 996 (3d Cir.1984). In this case, nondebtor Delliturri has asked the court to determine whether or not it should have granted nondebtor John Caglianone a discharge through the reorganization plan.² Thus the starting place for analysis of nondebtor discharge is jurisdiction under 28 U.S.C. § 1334(b).³

In the context of nondebtor releases, the Fifth Circuit explained that "the existence of power within the bankruptcy case does not imply an expansion of jurisdiction beyond it. To the contrary, it suggests that courts must be particularly careful in ascertaining the source of their power, lest bankruptcy courts displace state courts for large categories of disputes . . ." Matter of Zale Corp. (Feld v. Zale Corp.), 62 F.3d 746, 755 (5th Cir.1995). Accordingly, the bankruptcy court may entertain a release of a nondebtor entity only once subject matter jurisdiction is established. Id.

Pursuant to 28 U.S.C. § 1334(b) bankruptcy courts have original jurisdiction over proceedings (1) arising under Title 11, (2) arising in a case under Title 11 and (3) proceedings related to a case under Title 11. See Donaldson v. Bernstein, 104 F.3d 547, 552 (3d Cir.1997). Cases involving relief between two nondebtors fall under the third category of "related to" jurisdiction. Quattrone Accountants, Inc. v. IRS, 895 F.2d 921, 926 (3d Cir.1990). See also Donaldson v. Bernstein, 104 F.3d at 552 ("since the third category is the broadest, `a court need only determine "whether a matter is at best related to the bankruptcy."'" Id.) (citing In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 264 (3d Cir.1991)).

The almost universally accepted test, developed by the Third Circuit in Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984), for determining whether a matter is "related to" the bankruptcy proceeding is "if the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." 743 F.2d at 994. Although "related to" jurisdiction is extremely broad, the Third Circuit has warned that "courts must be confined within appropriate limits and...