In re Bliss Technologies, Inc.

• Decision Date: 14 April 2004
• Docket Number: Bankruptcy No. 00-40886.,Adversary No. 02-4085.
• Citation: 307 B.R. 598
• Parties: In re BLISS TECHNOLOGIES, INC., Debtor. Bliss Technologies, Inc., by and through its Unsecured Creditors Committee, Plaintiff, v. HMI Industries, Inc., Mark A. Kirk, and Carl H. Young, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

307 B.R. 598

In re BLISS TECHNOLOGIES, INC., Debtor.

Bliss Technologies, Inc., by and through its Unsecured Creditors Committee, Plaintiff, v. HMI Industries, Inc., Mark A. Kirk, and Carl H. Young, Defendants.

Bankruptcy No. 00-40886.

Adversary No. 02-4085.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

April 14, 2004.

Robert A. Weisberg, Birmingham, MI, Joann A. Weatherford, Kemp, Klein, Umphrey, et al., Jack A. Gibson, Troy, MI, for Debtor.

Claretta Evans, Detroit, MI, for U.S. Trustee.

Clay E. Ottoni, Troy, MI, for Plaintiff.

Richard S. Gurbst, Cleveland, OH, for Defendants.

OPINION REGARDING CORE/NON-CORE DETERMINATION IN ADVERSARY PROCEEDING

THOMAS J. TUCKER, Bankruptcy Judge.

At the request of Defendants, and in response to an Order of the United States District Court that denied Defendants' motion to withdraw the reference without prejudice,¹ this Court must determine whether Plaintiff's causes of action in this adversary proceeding are core or non-core under 28 U.S.C. § 157(b). See 28 U.S.C. § 157(b)(3). The parties have briefed this issue, and have agreed that the Court should make its determination based on the briefs, without a hearing or oral argument.

For the reasons stated in this opinion, the Court concludes that: (1) Count I of the adversary complaint, alleging a fraudulent transfer under state law and 11 U.S.C. § 544(b)(1), is a core proceeding; (2) Count II, seeking recovery of an avoided transfer under 11 U.S.C. § 550(a), is a core proceeding; and (3) Count III, alleging a pre-petition breach of fiduciary duty by Debtor's former officers and directors, is a non-core proceeding.

I. Background.

Defendant, HMI Industries, Inc. ("HMI") was the parent company and sole shareholder of its subsidiary Bliss Manufacturing, Inc. ("Bliss"). Rhone Capital, LLC ("Rhone") agreed to purchase all of HMI's shares of Bliss under a stock purchase agreement dated December 17, 1997. Rhone assigned its right under the stock purchase agreement to Danube, Inc. ("Danube") on March 27, 1998. That same day, Danube acquired all of the shares of Bliss for approximately $31.25 million, and Danube and Bliss merged, leaving Bliss as the surviving entity. After the merger, Bliss changed its name to Bliss Technologies, Inc. ("Bliss Technologies" or "Debtor"). The Committee characterizes this transaction as a leveraged buy-out ("LBO") (First Am. Compl. (Docket # 45,) at ¶¶ 7-8, 10-14, 23-24.)

On January 21, 2000, Bliss Technologies filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. An official unsecured creditors' committee ("Committee") was appointed on February 2, 2000. On January 18, 2002, before confirmation of Debtor's Plan and with authorization from the Bankruptcy Court,² the Committee, acting on behalf of the Debtor-in-Possession, filed this adversary proceeding against HMI and two former officers and directors of Bliss, Mark A. Kirk, and Carl H. Young (collectively "Individual Defendants"). The complaint contains three counts: (1) Count I seeks to avoid some or all aspects of the LBO as a fraudulent transfer under 11 U.S.C. § 544(b)(1) and the Ohio Uniform Fraudulent Transfer Act, Ohio Rev.Code §§ 1336.01-1336.12; (2) Count II seeks to recover the fraudulent transfer under 11 U.S.C. § 550(a); and (3) Count III seeks damages against the Individual Defendants for breach of fiduciary duty.

On March 11, 2002, Defendants filed a joint answer to the Committee's Complaint, and a jury demand. Later, Defendants twice amended their answer, on March 22, 2002 and on June 13, 2003 (see"Amended Answer of All Defendants" (Docket # 11); "Second Amended Answer of All Defendants" (Docket # 42)). In their Second Amended Answer, Defendants requested that the Court award them attorney fees against the Committee's counsel.

On March 11, 2002, Defendants filed in the United States District Court a motion to withdraw the reference under 28 U.S.C. § 157(d). On October 25, 2002, the District Court issued an order denying the motion without prejudice. The District Court held, among other things, that under 28 U.S.C. § 157(b)(3) the Bankruptcy Court must determine, in the first instance, whether the causes of action in the Committee's Complaint are core or non-core proceedings. (Or. Denying Without Prejudice, Defs.' Mot. to Withdraw Reference Pursuant to 28 U.S.C. § 157(d) (Docket # 23) at 5.)³

After the District Court's decision, the Committee filed a "First Amended Complaint," which contains additional allegations in the breach of fiduciary duty count but does not plead any new causes of action. (Docket # 45.) Defendants filed their "Answer of All Defendants to First Amended Complaint," and a jury demand. (Docket # 46.)

This opinion considers these most recent amended pleadings. However, given that the causes of action are the same in the original and amended complaint, the Court's determination on the core/non-core issue would be the same even if it had only considered the Committee's original complaint.

II. Jurisdiction.

This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D.Mich.). At a minimum, the Committee's causes of action are all "related to" the Bliss Technologies bankruptcy case, which is "a case under title 11."⁴ No party contests this, although the parties disagree over whether the causes of action in the case are core or non-core.

III. Discussion.

A bankruptcy court has the authority to determine whether a proceeding is core or non-core under 28 U.S.C. § 157(b)(3), which provides:

The bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11. A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law.

Resolution of the core/non-core issue will determine the extent of the bankruptcy court's authority to enter a final order or judgment on the claims over which it has subject matter jurisdiction. Consistent with Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the Court may hear and determine all "core proceedings." The bankruptcy court may also hear non-core proceedings but may not enter a final judgment. In non-core proceedings, the bankruptcy court must:

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 after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.

28 U.S.C. § 157(c)(1).

While 28 U.S.C. § 157(b)(2) gives a non-exclusive list of matters that are "core proceedings,"⁵ neither Title 28 nor the Bankruptcy Code explicitly defines the phrase "core proceedings." As the Sixth Circuit has held, two of the phrases used in 28 U.S.C. § 157(a) describe core proceedings — proceedings "arising under title 11" and proceedings "arising in" cases under title 11. Michigan Employment Security Commission v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1144 (6th Cir.1991) (citing Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir.1987)).

The phrase "arising under title 11" describes those proceedings that involve a cause of action created or determined by a statutory provision of title 11, and "arising in" proceedings are those that, by their very nature, could arise only in bankruptcy cases. Conversely, if the proceeding does not invoke a substantive right created by federal bankruptcy law and is one that could exist outside of the bankruptcy, then it is not a core proceeding.

Id. (citing 1 Collier on Bankruptcy ¶¶ 3.01[1][c][iii], [v], and Wood, 825 F.2d at 97); see also Browning v. Levy, 283 F.3d 761, 773 (6th Cir.2002)("Such claims, referred to as `core' proceedings, either invoke[ ] a substantive right created by federal bankruptcy law or ... could not exist outside of the bankruptcy.")(citing Sanders Confectionery Products, Inc. v. Heller Financial, Inc., 973 F.2d 474, 483 (6th Cir.1992)).

In determining whether a proceeding is core or non-core, "both the form and the substance of the proceeding" must be examined. Wolverine Radio, 930 F.2d at 1144 (citing Wood, 825 F.2d at 97). "`[T]he word "proceeding" [in the context of a core/non-core analysis] must refer to the specific causes of action and grounds for relief sought by a party, and not to the entire action. Any broader meaning would fail to comply with the Constitutional concerns of [Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)].'" Beneficial National Bank, USA v. Best Receptions Systems, Inc. (In re Best Reception Systems, Inc.), 220 B.R. 932, 945 (Bankr.E.D.Tenn.1998) (quoting Ralls v. Docktor Pet Centers, Inc., 177 B.R. 420, 425 (D.Mass.1995)). For this reason, a bankruptcy court "must examine each cause of action separately to determine if it is core or non-core." Beneficial National Bank, 220 B.R. at 945; Hudgins v. Shah (In re Systems Engineering & Energy Management Associates, Inc.), 252 B.R. 635, 642-43 (Bankr.E.D.Va.2000).

The Court will therefore examine each count in the Committee's complaint separately.

A. "CountI — Fraudulent Transfer Under State Law and 11 U.S.C. § 544(b)."

In Count I, the Committee alleges that Debtor (1) incurred loan obligations to finance Danube's purchase of all of the stock of Bliss from HMI for approximately $31.25 million, and (2) granted "a perfected first priority lien in all or substantially all of [its] assets" to secure the loans. The Committee alleges that the sale of Debtor was a leveraged buy-out which rendered Debtor insolvent, insufficiently...