In re Boston Regional Medical Center, Inc.

• Decision Date: 14 June 2005
• Docket Number: No. 04-2241.,04-2241.
• Citation: 410 F.3d 100
• Parties: In re BOSTON REGIONAL MEDICAL CENTER, INC., Debtor. Boston Regional Medical Center, Inc., Plaintiff, Appellee, v. Hanson S. Reynolds, Trustee, et al., Defendants, Appellees. First Lutheran Church and the First Church of Christ, Scientist, Intervenors, Appellants.
• Court: U.S. Court of Appeals — First Circuit

410 F.3d 100

In re BOSTON REGIONAL MEDICAL CENTER, INC., Debtor Boston Regional Medical Center, Inc., Plaintiff, Appellee, v. Hanson S. Reynolds, Trustee, et al., Defendants, Appellees First Lutheran Church and the First Church of Christ, Scientist, Intervenors, Appellants.

No. 04-2241.

United States Court of Appeals, First Circuit.

Heard April 6, 2005.

Decided June 14, 2005.

COPYRIGHT MATERIAL OMITTED

Theodore E. Dinsmoor, with whom Burns & Levinson LLP was on brief, for appellant First Church of Christ, Scientist.

Michael C. Gilleran and Pepe & Hazard, LLP on brief for appellant First Lutheran Church.

Charles R. Bennett, Jr., with whom David C. Kravitz, Christopher M. Morrison, and Hanify & King, P.C. were on brief, for debtor-appellee.

Robert B. Foster and Rackemann, Sawyer & Brewster, P.C. on brief for trustee-appellee.

Before BOUDIN, Chief Judge, TORRUELLA and SELYA, Circuit Judges.

SELYA, Circuit Judge.

This appeal presents a mare's nest of exotic legal problems. At the outset, it requires us to resolve a novel question of bankruptcy jurisdiction. After deciding that question, we must then determine whether, under Massachusetts law, a nonprofit organization that has ceased operations may nonetheless receive a charitable bequest. Because the charitable organization was still functioning as such at the time its entitlement to the bequest vested, we conclude that the bequest may be paid.

I. BACKGROUND

Elizabeth Krauss executed her last will and testament in 1975. That instrument bequeathed the residue of her estate in equal shares to the New England Sanitarium and Hospital of Stoneham, Massachusetts (New England Sanitarium), First Lutheran Church of Boston (First Lutheran), and First Church of Christ, Scientist (the Mother Church). It specified that the bequest to the New England Sanitarium was "to be used to provide a bed for indigent patients."

In 1988, a state probate court adjudged Ms. Krauss incompetent and placed her under guardianship. Eight years later, the court appointed successor guardians in the persons of Gary Douglas Rose (Ms. Krauss's grand-nephew) and Hanson S. Reynolds (an attorney). The new guardians found Ms. Krauss's financial affairs in disarray. They concluded that it would be best to sell her realty, thus making her estate more liquid and raising funds that could be used to settle her debts and defray the costs of her nursing care.

To minimize potential tax liabilities, the guardians proposed to transfer the real estate to certain inter vivos charitable trusts as a precursor to any sale. These transfers would render the testamentary bequests nugatory but, to effectuate Ms. Krauss's original intent, the guardians drew the trust indentures to provide that, upon Ms. Krauss's death, the remaining corpus would be divided in equal portions among the three residuary beneficiaries named in the will. By then, the New England Sanitarium had changed its name to Boston Regional Medical Center (BRMC), and the indentures of trust named BRMC, First Lutheran, and the Mother Church as residuary beneficiaries. This stipulation did not include the preexisting limitation on the gift to BRMC (that the funds "be used to provide a bed for indigent patients"). According to Reynolds, the guardians deliberately eliminated the restriction because they believed that it was ambiguous and, as such, might cause a failure of the bequest.

On October 10, 1997, the probate court confirmed the guardians' plan for transferring and then selling Ms. Krauss's assets. The real estate was transferred and sold, and the trusts were funded. The guardians were named as co-trustees.

On March 1, 1998, Ms. Krauss died at the age of 105. The trustees neither initiated any contact with the named beneficiaries at that time nor made any immediate distribution of the corpus. The record does not indicate that BRMC even knew of Ms. Krauss's death, let alone of the windfall that her demise betokened.

Approximately eleven months later, BRMC closed its doors, halted hospital operations, and filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. At the time, it was still not aware that it was a beneficiary of the Krauss trusts. Thus, BRMC did not list any expected distribution from the trusts among the assets of the bankruptcy estate.

On January 18, 2000, the bankruptcy court confirmed BRMC's plan of reorganization (the Plan). The Plan was strictly a liquidating plan. Under it, all of BRMC's assets were vested in a reorganized BRMC, which we shall call liquidating BRMC or L-BRMC.¹ L-BRMC's sole purpose is to liquidate the marshaled assets and distribute the net proceeds to BRMC's creditors in accordance with the provisions of the Plan.

In May of 2000, the nature and extent of Ms. Krauss's philanthropy became known to her intended beneficiaries. Citing BRMC's bankruptcy, First Lutheran and the Mother Church filed a complaint against the trustees and L-BRMC in the probate court seeking to prohibit any distribution from the trust corpus to the bankrupt hospital. L-BRMC objected on several grounds, asserting in the first instance that the injunctive provisions of the Plan barred the maintenance of the suit.² The churches agreed to drop L-BRMC from the state court proceeding and filed a motion in the bankruptcy court for relief from the injunction so that the probate court proceeding could go forward. The bankruptcy court denied that motion on July 12, 2000.

Shortly thereafter, L-BRMC initiated an adversary proceeding in the bankruptcy court to compel the trustees to turn over the hospital's share of the trust assets. The churches intervened and counterclaimed for reformation of the indentures of trust, seeking to reimpose the "bed" limitation that had been contained in Ms. Krauss's will. First Lutheran simultaneously moved to dismiss the turnover complaint and the Mother Church filed a motion entreating the bankruptcy court to abstain. The bankruptcy court denied both of these motions. In re Boston Reg'l Med. Ctr., 265 B.R. 645, 651-52 (Bankr.D.Mass.2001) (BRMC I). Although it agreed that the adversary proceeding was not appropriately characterized as a turnover action (and, thus, was not a core proceeding), the court nevertheless found "related to" jurisdiction under 28 U.S.C. § 1334(b) (2000), id. at 651, and determined that abstention would be inappropriate, id. at 652.

On February 7, 2003, the bankruptcy court held a hearing on the merits. It thereafter concluded that because Ms. Krauss died before BRMC ceased to function as a hospital and because BRMC incurred its debts in furtherance of its charitable mission, there was no obstacle to paying out a one-third share of the trust residue. In re Boston Reg'l Med. Ctr., 298 B.R. 1, 27-30 (Bankr.D.Mass.2003) (BRMC II). The court further determined that the churches' counterclaim was barred by the doctrine of res judicata. Id. at 18-23. Based on these findings and conclusions, the bankruptcy court recommended that the district court enter an order directing the trustees to pay the disputed funds to L-BRMC.

The churches filed objections to the bankruptcy court's recommended decision. See 28 U.S.C. § 157(c)(1) (2000); Fed. R. Bankr.P. 9033(b). They also moved in the district court for (i) dismissal for want of subject matter jurisdiction, (ii) abstention, or (iii) certification of the state law questions to the Massachusetts Supreme Judicial Court (SJC). The district court denied the motions, conducted a de novo review of the record, adopted the bankruptcy court's proposed findings and conclusions with minor modifications, and entered judgment accordingly. In re Boston Reg'l Med. Ctr., No. Civ. A. 03-12215, 2004 WL 1778881, at *6 (D.Mass. Aug.9, 2004) (BRMC III). The churches now appeal.

II. JURISDICTION

We start with the jurisdictional question. The churches strive to persuade us that there is no "related to" jurisdiction because this litigation arose after the bankruptcy court confirmed the Plan. We are not convinced.

Bankruptcy jurisdiction is governed principally by statute. The general grant of bankruptcy jurisdiction is contained in 28 U.S.C. § 1334. That provision vests original jurisdiction in the district courts over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." Id. § 1334(b). In what is a typical arrangement, the District of Massachusetts, by standing order, has delegated to the bankruptcy court all cases in which jurisdiction is premised on section 1334, see D. Mass. R. 201, subject to review by the district court (or, alternatively, by the bankruptcy appellate panel) in accordance with 28 U.S.C. §§ 157, 158.

The statutory grant of "related to" jurisdiction is quite broad. Congress deliberately allowed the cession of wide-ranging jurisdiction to the bankruptcy courts to enable them to deal efficiently and effectively with the entire universe of matters connected with bankruptcy estates. See Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984). Thus, bankruptcy courts ordinarily may exercise related to jurisdiction as long as the outcome of the litigation "potentially [could] have some effect on the bankruptcy estate, such as altering debtor's rights, liabilities, options, or freedom of action, or otherwise have an impact upon the handling and administration of the bankrupt estate." In re G.S.F. Corp., 938 F.2d 1467, 1475 (1st Cir.1991) (quoting In re Smith, 866 F.2d 576, 580 (3d Cir.1989)).

In this instance, the bankruptcy court found the adversary proceeding to be "related to [a] case[ ] under title 11," as that phrase is used in section 1334(b). At first blush, this seems to be a garden-variety application of the general rule. Whether or not BRMC prevails will directly affect the amount of the liquidating dividend paid to creditors. There is, therefore, a fairly close connection between the adversary proceeding and the administration of the bankruptcy estate. That seemingly would...