In re Bell, Bky. No. 09-15352 ELF
| Decision Date | 30 July 2012 |
| Docket Number | Bky. No. 09-15352 ELF |
| Parties | In re: KENNITH L. BELL, Debtor. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
This no-asset chapter 7 case remains open because an adversary proceeding to determine the dischargeability of a debt is pending. Presently before the court are two motions.
On March 6, 2012, Debtor Kennith L. Bell ("the Debtor") filed a Motion to Compel Custodian to Release Funds Pursuant to 11 U.S.C. §543 ("the Debtor's Motion"). (Doc. # 40). The Debtor requests the entry of an order compelling his former employer, NWI Orthodontics, P.C. ("NWI"), to release certain assets presently held in the Debtor's 401(k) account. NWI, which sponsors and administers the 401K plan and made all of the contributions to the account, objected to the Debtor's Motion and then filed its own Motion for Relief from the Automatic Stay ("NWI's Motion"). (Doc. # 44). NWI requests authority to resume prosecuting a pre-petition federal lawsuit that it contends will resolve the parties' competing claims to the 401(k) account. NWI further asserts that the dispute is properly determined in the federal district court case, not by this bankruptcy court.
For the reasons set forth below, I conclude that both Motions should be denied.
From October 1996 to July 2006, the Debtor was employed by NWI and its predecessor entity (collectively, "NWI"). During his tenure with NWI, the Debtor served as NWI's practice administrator and, later, as its executive director. In approximately 2003, the Debtor was granted a stock ownership interest in the entity. In July 2006, after coming to the conclusion that the Debtor had abused his authority as practice administrator and executive director, NWI's principals terminated the Debtor's employment.
As of the commencement of the Debtor's bankruptcy in July 2009, the Debtor and NWI were adverse parties in two (2) lawsuits.
In the first of the two (2) lawsuits, filed in July 2006, the Debtor sued NWI in the Superior Court of Indiana at No. 64D05-0607-PL6641 ("the State Court Action"), asserting various claims for monetary damages arising from his employment and stock ownership. NWI filed a counterclaim for, inter alia, breach of contract, breach of fiduciary duty, fraud and conversion.
NWI commenced the second lawsuit by filing a complaint against the Debtor in 2008 in the U.S. District Court for the Northern District of Indiana, NWI Orthodontics v. Bell, No. 2:08-cv-332 ("the District Court Action"). (See Doc. # 44-1). NWI brought the District Court Action in its capacity as sponsor and fiduciary of its 401(k) plan ("the 401(k) Plan"). NWI requested a declaratory judgment that:
The Debtor commenced this bankruptcy case by filing a voluntary petition under chapter 7 of the Bankruptcy Code on July 22, 2009. (See Doc. # 1).3 With the petition, the Debtor filed his bankruptcy schedules and statement of financial affairs. The filing of this bankruptcy case in July 2009 stayed both the State Court Action and the District Court Action.
On Schedule B, the Debtor disclosed his interest in the 401(k) Plan that is the subject of the District Court Action. He valued that interest at $105,831.42. In Schedule C, the Debtor claimed that his interest in the 401(k) Plan was excluded from the bankruptcy estate under 11U.S.C. §541(c)(2).4
The Debtor's meeting of creditors pursuant to 11 U.S.C. §341 was held and concluded on September 2, 2009. No party in interest objected to the Debtor's claimed exemptions prior to the expiration for doing so. See Fed. R. Bankr. P. 4003(b) ().5 Presently, the parties agree that Debtor's interest in the 401(k) account is not part of the bankruptcy estate.6
On October 30, 2009, NWI Orthodontics, P.C. ("NWI") initiated an adversary proceeding ("the Adversary Proceeding") against the Debtor in this court, requesting a determination that its claims against the Debtor are nondischargeable under 11 U.S.C. §523(a)(4) and (a)(6). (Adv. No. 09-0339, Doc. # 1).7
In the Adversary Proceeding, NWI alleged, inter alia, that, while employed at NWI the Debtor:
On June 18, 2010, at the suggestion of the parties, the court placed the Adversary Proceeding in suspense, pending the outcome of the State Court Action. (See Adv. No. 09-0339, Doc. #'s 19, 21). On May 16, 2012, the court "reactivated" the Adversary Proceeding and scheduled trial to commence on September 27, 2012. (Adv. No. 09-0339, Doc. # 34).8
On March 6, 2012, the Debtor filed the Debtor's Motion.
In the Debtor's Motion, the Debtor alleged that NWI (presumably, in its capacity as a fiduciary of the 401(k) Plan), refused to turn over to the Debtor that portion of his interest in the 401(k) Plan that was undisputed, (i.e., not subject to the claims NWI asserted in the DistrictCourt Action), and requested that the court enter an order compelling NWI to turn over the "undisputed" funds to the Debtor. The Debtor's view is that because the value of the 401(k) account exceeds $100,000.00, even if NWI is entitled to collect against his 401(k) account based on the claim raised by NWI in the District Court Action (for $19,124.00, plus attorney's fees),9 there remains a substantial sum of undisputed funds in the 401(k) account that NWI is withholding unreasonably.
On March 20, 2012, NWI filed an objection to the Debtor's Motion, arguing that the actual amount to which each party is entitled cannot be determined at this time. (See Doc. # 42). NWI asserted that because attorney's fees and costs continue to accrue, it is impossible to determine how much money could be released to the Debtor without prejudicing the claims NWI has raised in the District Court Action. Therefore, according to NWI, the 401(k) funds should not be distributed at this time and should be distributed only after the resolution of the Adversary Proceeding. (NWI Objection to Debtor's Motion ¶ 12) (Doc. # 42).10
On May 9, 2012, NWI responded further by filing NWI's Motion. In that motion, NWI asserted that the bankruptcy court lacks jurisdiction to determine the parties' respective rights in the 401(k) funds because the funds are not property of the bankruptcy estate and resolution of the issue would not have any impact on the bankruptcy estate or the administration of this case. (NWI's Motion ¶12). NWI sought relief from the automatic stay to proceed with the DistrictCourt Action "so that the rights of NWI and [the Debtor] in the 401(k) funds can be determined." (Id. at ¶ 9).
The Debtor filed a response to NWI's Motion on May 29, 2012, arguing that it should be denied because the 401(k) issues "can be determined in the pending [Debtor's] Motion under Section 543 [of the Bankruptcy Code]." (Debtor's Response to NWI's Motion ¶ 3).
At the court's request, the parties filed memoranda of law in support of their respective positions on the issue of this court's subject matter jurisdiction. A hearing on both pending Motions was held and concluded on June 6, 2012.
Based on the premise that NWI is a "custodian" of the Debtor's interest in the 401(k) plan, the Debtor asserts that NWI is obligated to turn over the undisputed portion of his 401(k) account pursuant to 11 U.S.C. §543. Section 543(b) provides:
NWI's lead argument is that the court lacks subject matter jurisdiction to grant the relief requested in the Debtor's Motion. I address this issue first because, as a general rule, a federal bankruptcy court has an independent duty to satisfy itself that it has subject matter jurisdictionover any pending matter before reaching the merits of a case. See, e.g., Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94 (1998); In re Mullarkey, 536 F.3d 215, 220-21 (3d Cir. 2008); Hubi v. Nalty, 2011 WL 2292808, at *1 (E.D. Pa. June 8, 2011); In re Olick, 2010 WL 4509828, at *1 n.5 (Bankr. E.D. Pa. Nov. 9, 2010) (citing cases); see also In re Shuman, 277 B.R. 638, 654 n.8 (Bankr. E.D. Pa. 2001).
Bankruptcy subject matter jurisdiction, provided in 28 U.S.C. §1334(a) and (b), potentially extends to four (4) types of title 11 matters: (1) cases under title 11; (2) proceedings arising under title 11; (3) proceedings arising in a case under title 11; and (4) proceedings related to a case under title 11. See, e.g., In re Combustion Eng'g, Inc., 391 F.3d 190, 225 (3d Cir. 2004).
All matters that a bankruptcy court may hear, other than the bankruptcy case itself, fall into two (2) categories: (1) "core proceedings" arising under or arising in title 11 or cases under title 11; and (2) "non-core proceedings" that are otherwise "related to" a case under title 11. See 28 U.S.C. §157(b), (c); Mullarkey, 536 F.3d at 221. Generally speaking, the...
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