In re Doctors Hospital of Hyde Park, Inc.

• Decision Date: 26 February 2004
• Docket Number: Bankruptcy No. 00 B 11520. Adversary No. 02 A 00363.
• Citation: 308 B.R. 311
• Parties: In re DOCTORS HOSPITAL OF HYDE PARK, INC., Debtor. Doctors Hospital of Hyde Park, Inc., Plaintiff, v. Dr. James H. Desnick, et al., Defendants. LaSalle Bank National Association, etc., Counterclaim, Cross-Claim and Third Party Plaintiff, v. Dr. James H. Desnick, et al., Counterclaim and Cross-Claim Defendants, and Nomura Asset Capital Corporation, et al., Third Party Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

308 B.R. 311

In re DOCTORS HOSPITAL OF HYDE PARK, INC., Debtor.

Doctors Hospital of Hyde Park, Inc., Plaintiff, v. Dr. James H. Desnick, et al., Defendants.

LaSalle Bank National Association, etc., Counterclaim, Cross-Claim and Third Party Plaintiff, v. Dr. James H. Desnick, et al., Counterclaim and Cross-Claim Defendants, and Nomura Asset Capital Corporation, et al., Third Party Defendants.

Bankruptcy No. 00 B 11520. Adversary No. 02 A 00363.

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

February 26, 2004.

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Wildman, Harrold, Allen & Dixon, Chicago, IL, for Movant or Plaintiff.

Schwartz Cooper Greenberger & Krauss; Adelman, Gettleman, Merens, Berish & Carter; Greenberg Traurig; Winston & Strawn, Chicago, IL, for Respondent or Defendant.

MEMORANDUM OPINION

CAROL A. DOYLE, Bankruptcy Judge.

This adversary proceeding is before the court on three motions: Doctors Hospital's ("DH") motion to dismiss the counter-claim and cross-claim complaint of defendant LaSalle Bank as Trustee ("LaSalle"), the cross claim defendants' (Desnick and various Desnick-related entities, collectively "Desnick Entities") motion to dismiss LaSalle's cross-claim, and Nomura Asset Capital Corporation ("Nomura") and Asset Securitization Corporation's ("ASC") motion to dismiss or, alternatively, transfer, abstain, or stay the third party complaint of LaSalle. For the reasons stated below, all three motions to dismiss are granted. Because the court concludes that it has no jurisdiction over LaSalle's third party complaint against Nomura and ASC, their motion in the alternative to transfer will be denied.

I. Factual Background and Issue

Desnick bought DH in 1992 for $2.4 million. Desnick later split off the hospital's operations from the real estate. DH managed the hospital's business operations, while ownership of the real estate was transferred to HPCH. DH rented the hospital property from HPCH for approximately $470,000 per month.

On August 28, 1997, Nomura Asset Capital Corporation loaned $50 million to HPCH. Nearly all of these proceeds were transferred to Desnick. The loan was secured by the real property, and guaranteed by DH. In October 1997, Nomura transferred the HPCH loan to ASC, which then deposited the HPCH loan into the REMIC Trust of which LaSalle is trustee.

DH filed for bankruptcy in April 2000. In May 2000, DH rejected the executory portions of its lease with HPCH. As a result, HPCH soon defaulted on the Nomura loan. DH has not made any of the missed loan payments. LaSalle filed a claim against DH for over $60 million in March 2001.

DH filed an adversary proceeding against LaSalle in April 2002 alleging fraudulent transfers. It seeks to avoid the guaranty by DH and the return of rental payments made under the HPCH lease. In June 2003, LaSalle filed a counter-claim, cross-claim, and third-party complaint, asserting claims against HPCH, DH, Desnick, Desnick Entities, ASC, and Nomura. Count I alleges breach of the loan contract by HPCH and/or Desnick as HPCH's alter ego. Count II alleges a breach of the loan guaranty by DH and/or Desnick as DH's alter ego. Count III asserts fraud by HPCH and/or Desnick as HPCH's alter ego. Count IV alleges fraud by DH and/or Desnick as DH's alter ego. Count V seeks substantive consolidation of the Desnick Entities and DH. Count VI alleges conspiracy to defraud by the Desnick Entities and DH. In addition, LaSalle filed a third-party complaint against Nomura and ASC, asserting negligence in making certain warranties and seeking a declaratory judgment that Nomura and ASC are liable to LaSalle in the amount of any recovery by DH against LaSalle in this proceeding.

DH, the Desnick Entities and Nomura/ASC have filed separate motions to dismiss LaSalle's counter-claims, cross-claims, and third-party complaint. For reasons set forth below, all three motions to dismiss will be granted.

II. Standard on Motion to Dismiss

When considering the debtor's motion to dismiss, the court "must accept as true all the factual allegations" made by the defendants, see Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U.S. 163, 164, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993), and must construe the pleadings in the light most favorable to the defendants. See Pickrel v. City of Springfield, 45 F.3d 1115, 1118 (7th Cir.1995); Sidney S. Arst Co. v. Pipefitters Welfare Educ. Fund, 25 F.3d 417, 420 (7th Cir.1994). The motion to dismiss for failure to state a claim should be granted "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the [defendants'] allegations." Appley v. West, 832 F.2d 1021, 1030 (7th Cir.1987) (citing Morgan v. Bank of Waukegan, 804 F.2d 970, 973 (7th Cir.1986)).

III. Counts I and III: Jurisdiction over Claims for Breach of the Loan Contract and Fraud by HPCH and/or Desnick as HPCH's Alter Ego

Count I of LaSalle's cross-complaint alleges a breach of the loan contract by HPCH and/or Desnick as HPCH's alter ego. Count III alleges fraud by HPCH and/or Desnick as HPCH's alter ego. Desnick and DH argue that these counts should be dismissed for several reasons, including that the court does not have jurisdiction over them. Because the court agrees that it does not have jurisdiction, it will not address the other substantive arguments regarding these counts.

DH argues that the court does not have jurisdiction over Counts I and III because the claims against HPCH and Desnick are not within the court's core jurisdiction, and they are not "related to" the DH bankruptcy case because their resolution will have no appreciable impact on the bankruptcy estate. LaSalle responds that the claims against HPCH and Desnick are within the court's core jurisdiction or its "related to" jurisdiction. In the alternative, LaSalle argues that the court should assert supplemental jurisdiction over these claims.

A. Core Jurisdiction

A bankruptcy court has jurisdiction only over "civil proceedings arising under title 11, or arising in or related to cases under title 11," to the extent those cases are referred to it by the district court. 28 U.S.C. § 1334(b), § 157(a). A case "arises under" Title 11 and is within the core jurisdiction of the court when the cause of action is based on a right or remedy expressly provided in the Bankruptcy Code. In re Kewanee Boiler Corp., 270 B.R. 912, 917 (Bankr.N.D.Ill.2002). LaSalle asserts that these claims "arise under" Title 11 because, if LaSalle recovers from either HPCH or Desnick, the amount of its claim against DH under DH's guaranty of the loan to HPCH will be reduced, thereby increasing the amount of estate assets available to other creditors. LaSalle cites no authority for this proposition. The claims in Counts I and III for breach of contract and fraud arise under state common law, not the Bankruptcy Code. They are not within the core jurisdiction of the court.

B. "Related to" Jurisdiction

Next, LaSalle argues that Counts I and III fall within the "related to" jurisdiction of the court. "Related to" jurisdiction exists over matters when they affect the amount of property for distribution from the estate or the allocation of property among creditors.'" In re FedPak Systems, 80 F.3d 207, 213-14 (7th Cir.1996) (quoting In re Memorial Estates, Inc., 950 F.2d 1364, 1368 (7th Cir.1992)); In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987). The Seventh Circuit Court of Appeals takes a narrow view of "related to" jurisdiction. As the court noted in In re Xonics, "bankruptcy jurisdiction is designed to provide a single forum for dealing with all claims to the bankrupt's assets. It extends no farther than its purpose. That two creditors have an internecine conflict is of no moment, once all disputes about their stakes in the bankrupt's property have been resolved." 813 F.2d at 131.

LaSalle makes the same argument regarding "related to" jurisdiction that it made regarding core jurisdiction. It asserts that, if it recovers from HPCH or Desnick on Counts I or III, the amount recovered will be deducted from the amount of LaSalle's claim against DH for DH's breach of the loan guaranty, leaving more estate assets for other creditors. LaSalle cites no case in its response brief supporting this argument. Under LaSalle's view of "related to" jurisdiction, any time a creditor who filed a claim against the debtor could potentially recover some portion of the amount claimed from a third party, the bankruptcy court would have "related to" jurisdiction over the creditor's claim against the third party. For example, if a creditor had a claim against a debtor, but insurance might also cover some of the creditor's losses, the creditor could sue the insurer in bankruptcy court. The Seventh Circuit's narrow view of "related to" jurisdiction does not stretch this far. The mere possibility that a creditor might recover from a non-debtor and thereby reduce the amount of the creditor's claim against the debtor is not sufficient to bring that claim within the "related to" jurisdiction of the court. See, e.g., Spaulding & Co. v. Buchanan (In re Spaulding & Co.), 131 B.R. 84, 88 (N.D.Ill.1990) (no "related to" jurisdiction even though third party defendant might have potential claim for indemnification against debtor when no proof of claim filed by creditor seeking indemnification). The court therefore concludes that it does not have "related to" jurisdiction over LaSalle's cross-claims against the non-debtor parties in Counts I and III.

C. Supplemental Jurisdiction

LaSalle next argues that the court can assert supplemental jurisdiction over these claims under 28 U.S.C. § 1367(a). LaSalle acknowledges that courts are divided on the question of whether a bankruptcy court may assert supplemental jurisdiction under § 1367. This court has recently addressed this issue in Banc of America Inv. Serv. v. Fraiberg (In re...