In re Cumberland Enterprises, Inc.

Decision Date18 August 1982
Docket NumberBankruptcy No. 381-01797,Adv. No. 382-0289.,382-00758 and 382-00757
Citation22 BR 626
CourtU.S. Bankruptcy Court — Middle District of Tennessee
PartiesIn re CUMBERLAND ENTERPRISES, INC., Northeast Enterprises, Inc., Northeast Enterprises of Columbus, Inc., Debtors. Mark A. SCHNEIDER, Trustee, in Bankruptcy for Cumberland Enterprises, Inc., Northeast Enterprises, Inc., Northeast Enterprises of Columbus, Inc., and on behalf of himself as sole stockholder of The 1727 Corporation, Plaintiff, v. 2-STAR FOODS, INC., The Chipper Foods Co., Inc., Gulf Coast Foods, Inc., Leon Moore, Moore & Associates, Inc., Venture Enterprises, Inc., Shoney's Inc., David Wachtel, William Tell, Inc., Wilson C. Tate, Sr., Harold F. Morris, Mark R. Moore, Charles Cox, Jr., Tate, Cox & Moore, A Partnership, Sequel II Corporation, James C. Smith, Seafood Distributors, Defendants.

Harry D. Lewis, Nashville, Tenn., for plaintiff/trustee.

Larry Stewart, Nashville, Tenn., for 2 Star Foods, Inc. and The Chipper Foods Co., Inc.

Kenneth Switzer, Nashville, Tenn., for David Wachtel and William Tell, Inc.

David B. Herbert, Nashville, Tenn., for Wilson C. Tate, Sr., Tate, Cox & Moore, and Sequel II Corp.

Russell H. Hippe, Jr., Nashville, Tenn., for Shoney's Inc.

Patrick L. Alexander, Nashville, Tenn., for Gulf Coast Foods, Inc., Leon Moore, Leon Moore & Associates, Inc. and Venture Enterprises, Inc.

MEMORANDUM

KEITH M. LUNDIN, Bankruptcy Judge.

The defendants' motions to dismiss raise two issues: (1) whether this adversary proceeding may continue after the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co., ___ U.S. ___, 102 S.Ct. 2858, 73 L.Ed.2d 598 (U.S.1982); and, (2) whether the debtors' trustee may bring a shareholder's derivative action to recover the value of assets belonging to the debtors' wholly-owned subsidiary. For the reasons discussed below, the court holds that the bankruptcy court has jurisdiction to hear this adversary proceeding and the debtors' trustee is entitled to bring the derivative action.

On May 12, 1980, Cumberland Enterprises, Inc. filed a voluntary Chapter 7 petition in the United States Bankruptcy Court for the Southern District of Indiana. On May 24, 1980, Northeast Enterprises, Inc. and Northeast Enterprises of Columbus, Inc. filed Chapter 7 petitions with the United States Bankruptcy Court for the Southern District of Ohio. On May 5, 1981, the United States Bankruptcy Court for the Southern District of Indiana transferred the Cumberland Enterprises, Inc. case to the United States Bankruptcy Court for the Middle District of Tennessee. On February 1, 1982, the United States Bankruptcy Court for the Southern District of Ohio transferred the Northeast Enterprises, Inc. and Northeast Enterprises of Columbia, Inc. cases to the United States Bankruptcy Court for the Middle District of Tennessee. On April 12, 1982, this court ordered the consolidation of the cases of Cumberland Enterprises, Inc., Northeast Enterprises, Inc., and Northeast Enterprises of Columbus, Inc. ("the debtors"). Mark A. Schneider ("plaintiff") is the duly appointed, qualified and acting trustee in bankruptcy for the debtors.

On May 11, 1982, plaintiff filed a complaint against the defendants alleging conversion of assets, preferential transfers, fraudulent conveyances, and seeking the subordination of all claims held by the defendants. The plaintiff alleged that the bankruptcy court has jurisdiction pursuant to 28 U.S.C.A. §§ 1471, 1481 (West Supp. 1982), as well as 11 U.S.C.A. § 105 (West 1979).1 Several of the defendants moved to dismiss for lack of subject matter jurisdiction pursuant to Rule 9152, Fed.R.Bankr.P., and Rule 12(b), Fed.R.Civ.P., made applicable herein by Rule 712(b), Fed.R.Bankr.P.

Defendants contend that the Supreme Court's holding in Northern Pipeline has the immediate effect to oust the bankruptcy court of jurisdiction to hear "traditional state created causes of action." A number of the defendants assert that the stay imposed by the Supreme Court (until October 4, 1982) allows the bankruptcy courts to only handle administrative and other matters not requiring the attention of an article III judge. Those defendants interpret the Northern Pipeline decision as a mandate to the bankruptcy court to revert to its pre-Code summary jurisdiction at this time. Other defendants admit that the effect of the stay imposed by the Supreme Court is unclear, but argue that immediate dismissal of this action would be judicially economical since this proceeding could then be brought in state court. It is plaintiff's position that Northern Pipeline holds the broad jurisdictional grant of § 241(a) of the Bankruptcy Act of 1978, 28 U.S.C.A. § 1471 (West Supp. 1982) unconstitutional. However, the plaintiff interprets the stay of the Court's judgment to impose no limitation on the bankruptcy court's exercise of the jurisdiction granted by § 1471 until October 4, 1982.

It is no surprise that this issue has already been brought to the attention of several bankruptcy courts. The first reported decision in which the existence of the Northern Pipeline decision was acknowledged was California Steel Co. v. Dodds, 21 B.R. 383 (Bankr.N.D.Ill.1982). In California Steel, the court denied the debtor's complaint to avoid a secured creditor's claim. In a footnote to the decision, Judge Hertz stated that "This decision is entered in compliance with the stay of enforcement until October 4, 1982 of the United States Supreme Court decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co., ___ U.S. ___, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)." There is no indication in the opinion that an objection to the court's jurisdiction had been raised. However, it is apparent that the court wished to make clear it's determination that its jurisdiction was not affected by Northern Pipeline.

The next court to acknowledge Northern Pipeline was the United States Bankruptcy Court for the Eastern District of New York in Pirrone v. Toboroff (In re Vaniman) International, Inc., 22 B.R. 166 (Bkrtcy.E.D. N.Y.1982). In a lengthy opinion, Judge Goetz dealt with many issues, including fraudulent conveyances, preferential transfers, breach of fiduciary duty by corporate directors, attorneys' fees, and equitable subordination of claims. Although there is no statement of an objection to the court's jurisdiction, the court addressed the basis of its jurisdiction subsequent to the Supreme Court's Northern Pipeline decision. The court found jurisdiction on three grounds: (1) the Supreme Court expressly denied retroactive application of its decision and stayed its judgment until October 4, 1982; (2) the matters actually decided by the court were within the traditional competence of the bankruptcy court; and (3) the bankruptcy court had in rem jurisdiction to decide the validity of the second mortgage at issue in the case since it held the proceeds of the sale of the realty upon which the mortgage had been given.

In Otero Mills, Inc. v. Security Bank & Trust, 21 B.R. 645, 9 Bankr.Ct.Dec. 238 (Bkrtcy.D.N.M.1982), a creditor moved for rehearing and amendment of previous orders prohibiting the creditor from foreclosure against the debtor's property. The creditor based its motion on the Northern Pipeline decision, asserting that as of June 28, 1982, the bankruptcy court no longer had jurisdiction over the case. To determine the extent of its jurisdiction post Northern Pipeline, the bankruptcy court first concluded that the grant of jurisdiction in 28 U.S.C.A. § 1471 (West Supp.1982) and the grant of power in 11 U.S.C.A. § 105 (West 1979), would have enabled it, absent Northern Pipeline, to enjoin the creditor. The bankruptcy court then examined the effect of Northern Pipeline on the court's jurisdiction. The creditor argued that the stay entered in Northern Pipeline was a stay of the judgment in that case only and that the Court's declaration of the unconstitutionality of § 1471 was effective in other proceedings from June 28, 1982 forward. The bankruptcy court rejected the creditor's argument and held that the stay rendered the Court's determination of the unconstitutionality of § 1471 ineffective until October 4, 1982. Judge McFeeley reasoned as follows:

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However, Northern Pipeline declared § 241(a) of the Bankruptcy Reform Act of 1978 unconstitutional. Section 241(a) is the whole grant of power to administer the Bankruptcy Code, and if we find it ineffective as of June 28, 1982, the unavoidable effect would be that no court presently existing could administer the bankruptcy laws.
That being contradictory to our interpretation of the intention of the Court as expressed in the Northern Pipeline decision, we are compelled to read the stay provision of the opinion to mean exactly what it says: the judgment is stayed and the jurisdiction of the bankruptcy court, as that jurisdiction was intended by Congress, should continue to be exercised until October 4, 1982. Unless or until Congress takes action which indicates a change in the policy of expanded jurisdiction of this Court, our power to grant injunctive relief complained of by the Bank remains intact until October 4, 1982.

A similar result was obtained in Hassett v. Ganz (In re O.P.M. Leasing Services, Inc.), 21 B.R. 986, 9 B.C.D. 335 (Bkrtcy.S.D. N.Y.1982), in which the plaintiff brought an action based upon the defendant's alleged "faithless conduct" while an employee of the debtor. The defendant moved to dismiss alleging that the jurisdictional grant of 28 U.S.C.A. § 1471 (West Supp.1982) was unconstitutional. Judge Lifland discussed the Northern Pipeline decision and concluded as follows:

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"However, it is not necessary at this time for the court to explore the justifications for and nuances and ramifications of this landmark decision because the Supreme Court therein expressly provided that my actions, as well as those of my brethren
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