In re Conseco, Inc.

• Decision Date: 08 December 2004
• Docket Number: Adversary No. 03 A 04545.,Bankruptcy No. 02 B 49672.
• Citation: 318 B.R. 425
• Parties: In re CONSECO, INC., Debtor. Conseco, Inc, Plaintiff, v. James S. Adams, et al., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

318 B.R. 425

In re CONSECO, INC., Debtor Conseco, Inc, Plaintiff, v. James S. Adams, et al., Defendants.

Bankruptcy No. 02 B 49672.

Adversary No. 03 A 04545.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

December 8, 2004.

COPYRIGHT MATERIAL OMITTED

James Sprayregen, Kirkland & Ellis, Chicago, IL, for debtor.

MEMORANDUM OPINION

CAROL A. DOYLE, Bankruptcy Judge.

This adversary proceeding is before the court on the motion of each of the defendants to dismiss for lack of subject matter jurisdiction and other grounds. For the reasons stated below, the court concludes that it does not have jurisdiction. The motions to dismiss will be granted.

I. Factual Background

Conseco, Inc. ("Old Conseco") and various related entities filed petitions under Chapter 11 of the Bankruptcy Code in December 2002. The court confirmed a plan of reorganization for Old Conseco and related debtors on September 9, 2003. A new corporate entity was created, also called Conseco, Inc. ("New Conseco"), and Old Conseco was dissolved in November 2003. The plan transferred Old Conseco's assets to New Conseco and was substantially consummated on September 10, 2003, the effective date of the plan.

One class of creditors, the Trust Originated Preferred Shareholders ("TOPrS"), objected to confirmation of Old Conseco's plan. Ultimately, their objection was resolved by a settlement among various parties that was incorporated into Section V(I) of the plan (the "TOPrS Settlement"). Under the TOPrS Settlement, participating TOPrS received stock and warrants of New Conseco, plus a right to receive 45% of the net recovery, up to $30 million, from any actions New Conseco chooses to pursue against certain participants in a pre-petition loan program for directors and officers. Under that loan program, various directors and officers of Old Conseco (including the defendants) purchased Old Conseco stock using loans guaranteed by Old Conseco ("D & O Loan Program"). Old Conseco's rights against these parties were transferred to New Conseco under the plan. The lenders who made the loans transferred their rights against the participants in the D & O Loan Program to New Conseco under an agreement approved by the court on September 15, 2003 ("Transfer Agreement").

In March 2004, New Conseco filed a complaint against a number of participants in the D & O Loan Program and some of their family members. Counts I through VII allege various claims under state law, including breach of contract for failure to repay the loans and breach of participation agreements and entry guarantees. Count VIII alleges fraudulent transfer of assets by various defendants. The defendants have moved to dismiss, challenging the court's subject matter jurisdiction and raising other substantive and procedural issues.

II. Subject Matter Jurisdiction

District courts have jurisdiction over "civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334. District courts may refer these proceedings under Title 11 to the bankruptcy judges in their district under 28 U.S.C. § 157(a), and the district judges in this district have done so. Internal Operating Procedure 15 of the Northern District of Illinois. Proceedings arising in or under Title 11 are core proceedings, while related matters are non-core proceedings. In re Kewanee Boiler Corp., 270 B.R. 912, 917 (Bankr.N.D.Ill.2002). A bankruptcy case or proceeding "arises under" Title 11 when the cause of action is based on a right or remedy expressly provided in the Bankruptcy Code. Id. "Arising in" jurisdiction exists when the proceeding does not arise under a specific statutory provision of the Bankruptcy Code but would have no practical existence but for the bankruptcy. Banc of Am. Inv. Serv., Inc. v. Fraiberg (In re Conseco), 305 B.R. 281, 285 (Bankr.N.D.Ill.2004). "Related to" jurisdiction exists over proceedings that affect the amount of property for distribution from the estate or the allocation of property among creditors. In re FedPak Sys., Inc., 80 F.3d 207, 213-14 (7th Cir.1996).

The defendants argue that the complaint does not raise any issue within either the court's core jurisdiction or its "related to" jurisdiction. They contend that this is essentially a collection action by a non-debtor (New Conseco) against non-debtors, and that the relief sought can have no tangible impact on the debtor's estate because the debtor and the estate no longer exist and because all issues regarding distributions to creditors under the plan have been resolved. New Conseco argues that the court has core jurisdiction over the complaint because the defendants will raise defenses that will require interpretation of the confirmation order and various stipulations entered between Old Conseco and some of the defendants. New Conseco also argues that the defendants will raise set-off and recoupment defenses or counterclaims arising from prepetition conduct or agreements of Old Conseco, which New Conseco contends may violate the discharge injunction. At a minimum, New Conseco contends that this proceeding is related to the Old Conseco's bankruptcy case because the TOPrS are entitled to a portion of any recovery under the TOPrS Settlement that was incorporated into the Plan. New Conseco therefore asserts that this action will affect the amount the TOPrS will receive under the plan and so is within the related jurisdiction of the court.

A. Core Jurisdiction — The Well-Pleaded Complaint Rule

New Conseco's arguments supporting core jurisdiction are based on defenses it believes the defendants are likely to raise, not on the allegations of the complaint. The court may not consider possible defenses in determining whether it has jurisdiction. Under the well-pleaded complaint rule, "a case arises under federal law ... only when the claim for relief depends in some way on federal law, `unaided by anything alleged in anticipation or avoidance of defenses which it is thought the defendant may interpose.'" Vorhees v. Naper Aero Club, Inc., 272 F.3d 398, 402 (7th Cir.2001) (quoting Taylor v. Anderson, 234 U.S. 74, 75-76, 34 S.Ct. 724, 58 L.Ed. 1218 (1914)); see also Rivet v. Regions Bank of Louisiana, 522 U.S. 470, 475, 118 S.Ct. 921, 139 L.Ed.2d 912 (1998) ("the `well-pleaded complaint rule'... provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint."); Caterpillar Inc. v. Williams, 482 U.S. 386, 400, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987) ("that a federal question must appear on the face of the complaint" is one of the "paramount policies embodied in the well-pleaded complaint rule"). The Seventh Circuit recently reiterated that jurisdiction must be based on the allegations in the complaint even when "the federal defense will be the only contested issue." City of Chicago v. Comcast Cable Holdings, L.L.C., 384 F.3d 901, 904 (7th Cir.2004).

New Conseco argues without support or reasoning that the well-pleaded complaint rule applies only to federal question jurisdiction under 28 U.S.C. § 1331, not to bankruptcy jurisdiction under 28 U.S.C. § 1334. It is true that most cases involving the well-pleaded complaint rule involve federal question jurisdiction under 28 U.S.C. § 1331. E.g., Franchise Tax Bd. of State of Californa v. Constr. Laborers Vacation Trust, 463 U.S. 1, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983); Comcast Cable, 384 F.3d at 904. A number of courts, however, have applied the well-pleaded complaint rule to bankruptcy jurisdiction. See, e.g., Yangming Marine Transp. Corp. v. Electri-Flex Co., 682 F.Supp. 368, 370 (N.D.Ill.1987) ("there is no bankruptcy exception to the well-pleaded complaint rule"); Liberty Mut. Ins. Co. v. Lone Star Indus., Inc., 313 B.R. 9, 16 (D.Conn.2004) (well-pleaded complaint rule applied to bankruptcy jurisdiction); In re Dally, 202 B.R. 724, 729 (Bankr.N.D.Ill.1996) (no jurisdiction over a state law cause of action where bankruptcy issues raised only in the answer); Poplar Run Five Ltd. Partnership v. Virginia Elec. & Power Co. (In re Poplar Run Five Limited Partnership), 192 B.R. 848, 855-56 (Bankr.E.D.Va.1995) (well-pleaded complaint rule applied to § 1334 "arising under" jurisdiction); see also Su-Ra Enter., Inc. v. Barnett Bank of South Florida, N.A., 142 B.R. 502, 504 (S.D.Fla.1992) (applying the well-pleaded complaint rule to potential bankruptcy defense in analyzing § 1331 jurisdiction).

Sections 1331 and 1334 are comparable in that they both employ the phrase "arising under" in defining the limits of district court jurisdiction. Section 1331 gives district courts jurisdiction over cases "arising under the Constitution, laws or treaties of the United States." 28 U.S.C. § 1331. Section 1334 gives district courts "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b) (emphasis added). In Franchise Tax Bd., the Court discussed the history of the well-pleaded complaint rule as applied to § 1331. It concluded that there is no "arising under" jurisdiction even when a federal defense of preemption is anticipated in the plaintiff's complaint and even if both parties admit that the defense is the only real issue in the case. 463 U.S. at 14, 103 S.Ct. 2841. Although the Court was not interpreting § 1334, it suggested that the well-pleaded complaint rule applies to other federal jurisdictional statutes as well, concluding that "[o]ur concern in this case is a consistent application of a system of statutes conferring original federal court jurisdiction, as they have been interpreted by this court over many years." 463 U.S. at 27, 103 S.Ct. 2841; see also Robinson v. Michigan Consol. Gas Co. Inc., 918 F.2d 579, 584 n. 4 (6th Cir.1990) (suggesting that the well-pleaded complaint rule applies to "jurisdictional statutes" generally).

New Conseco presents no reason that the well-pleaded...