In re Franklin
| Decision Date | 31 March 1995 |
| Docket Number | Misc. No. 94-M206-C-7. Adv. No. 94-2540. |
| Citation | 179 BR 913 |
| Parties | In re James Loren FRANKLIN, Debtor. FIDELITY NATIONAL TITLE INSURANCE COMPANY, an Arizona Corporation, Plaintiff, v. James Loren FRANKLIN; JL Construction Company, a California Corporation; Stratus Group, a California Corporation; Pennsylvania River Run Partners, a Pennsylvania Limited Partnership; Wooldridge Construction Co., Inc., a California Corporation; Charlestown Investments, Ltd.; The Stratus Group, a California Corporation; Stratus Development Inc., a California Corporation; and Does 1 through 500, inclusive, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of California |
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
Gary M. Funamura, Gilbert Khachadourian, Jr., Trainor, Robertson, Smits & Wade, Sacramento, CA, for plaintiff Fidelity Nat. Title Ins. Co.
Timothy J. Truxaw, Dickstein & Truxaw, San Diego, CA, for defendant James Loren Franklin.
This motion to transfer venue of an action removed from state court presents a poorly understood question regarding the concurrent jurisdiction of state and federal courts to determine whether particular debts are discharged in a bankruptcy case. Here, the debtor in his bankruptcy schedules omitted debts that are allegedly based on indemnification, contribution, negligent misrepresentation, and fraud and was sued post-bankruptcy in a fourteen-count, eight-defendant state court action. The debtor removed that action to federal court as an "adversary proceeding" in bankruptcy and now seeks to have it transferred to the judicial district where the original bankruptcy case was filed.
I conclude that the state court has concurrent jurisdiction to determine whether the omitted debts are nondischargeable in bankruptcy, that the stay that impedes the prosecution of that litigation against the debtor in state court has expired, and that considerations of convenience and wise judicial administration are better served by abstention and remand to state court rather than transfer to the bankruptcy court that has jurisdiction over the debtor's bankruptcy case.
James Loren Franklin ("Franklin") filed a chapter 7 bankruptcy case in the Southern District of California on May 28, 1993. It was processed as a "no-asset" case in which no deadline for filing proofs of claim is fixed.1 Franklin was discharged of all dischargeable debts on September 28, 1993. The case was subsequently closed.
Franklin did not schedule any debts owed to Fidelity National Title Insurance Company ("Fidelity"), list Fidelity as a creditor, or otherwise give Fidelity notice of the bankruptcy case.
Fidelity filed a complaint on April 1, 1994, in the Superior Court of the State of California, County of Sacramento, against Franklin and seven other defendants seeking recovery on fourteen counts sounding in contract and tort arising from four Franklin real estate development projects in Placer, Sacramento, and Contra Costa counties.2 Count 13 alleges that Franklin committed civil fraud in the course of inducing Fidelity to issue loan policies of title insurance totaling $56.975 million.
Franklin, who now resides in Placer County in the Eastern District of California, removed the state court action to this court pursuant to 28 U.S.C. § 1452, filed an answer raising the affirmative defense of discharge in bankruptcy, and now, under 28 U.S.C. § 1412, seeks to transfer the action to the Southern District of California, which is (in Franklin's words) his "home court."
The first task is to identify the courts that have jurisdiction over Fidelity's dispute with Franklin.
The dispute itself has a number of components. Fidelity pleads the fourteen state-law counts in the complaint: twelve counts sound in contract and seek indemnity or subrogation; two counts seek damages for the torts of fraud and negligent misrepresentation. All of these claims are within the traditional purview of state courts. The only apparent basis for a federal court to entertain them is bankruptcy jurisdiction. 28 U.S.C. § 1334(b).
Fidelity's allegations supporting the fraud count incidentally plead all of the essential elements of a nondischargeable fraud debt under Bankruptcy Code § 523(a)(2).3 Fidelity has indicated that it intends to amend the pleadings to add a fifteenth count to declare that the debt was not discharged because it is an unlisted fraud debt under Bankruptcy Code § 523(a)(3)(B).4 Such a judgment would be a declaratory judgment based on a question of federal law.
Franklin has denied the fraud allegations and has raised, as an affirmative defense to the contribution, indemnification, and negligent misrepresentation claims, his contention that any such debts were discharged notwithstanding that he omitted them from his bankruptcy schedules. Although he raised discharge in bankruptcy as an affirmative defense, he could equally have raised it either by counterclaim seeking a declaration that any such omitted debts were discharged or as a declaratory judgment action in his "home court."5
Regardless of how Franklin raises the question of discharge, the facts regarding the contribution and indemnification claims necessarily implicate the exclusion from discharge that applies to omitted debts that would have been discharged if they had been scheduled. 11 U.S.C. § 523(a)(3)(A).6 In other words, the contribution and indemnification claims reflect debts for which there is no independent theory of nondischargeability under the other subsections of section 523(a). 11 U.S.C. § 523(a)(1)-(2) & (4)-(16). And the facts related to the fraud count implicate the exception to discharge for fraud debts that are omitted from the debtor's schedules. 11 U.S.C. § 523(a)(3)(B). Under all alternatives, the same constellation of facts regarding omission and the state of the creditor's knowledge of bankruptcy would need to be established.
The underlying dispute, thus, includes aspects of state law and of federal bankruptcy law. No federal issues arise in the claims between Fidelity and any parties other than Franklin. Fidelity's claims against Franklin are all based on state law except the question of dischargeability of the fraud claim, the proof of which will be identical to the proof of the California fraud count. Franklin's federal defense to the contribution, indemnification, and negligent misrepresentation claims will be quite simple because he will prevail merely by demonstrating that the case was a "no-asset" bankruptcy in which no deadline for filing claims was fixed.7
Two federal statutes allocate jurisdiction over disputes in which determinations of nondischargeability in bankruptcy are sought regarding specific debts: Judicial Code § 1334 and Bankruptcy Code § 523(c). 28 U.S.C. § 1334; 11 U.S.C. § 523(c). In addition, the Bankruptcy Code's automatic stay functions as a quasi-jurisdictional statute that precludes proceedings, without leave of the bankruptcy court, in nonbankruptcy courts that otherwise have concurrent jurisdiction. 11 U.S.C. § 362(a).
The primary bankruptcy jurisdiction statute applicable to Fidelity's nondischargeability claim is 28 U.S.C. § 1334, of which the critical parts are subsections (a), (b), and (e):8
28 U.S.C. § 1334(a)-(b) & (e).
Section 1334(b) establishes the general proposition that state and federal courts have concurrent subject matter jurisdiction over civil proceedings that arise under, arise in, or are related to a bankruptcy case. In contrast, federal jurisdiction over the bankruptcy case itself and over the property of the debtor and of the estate is exclusive.
Whatever else the phrase "arise under" may mean in federal jurisprudence,9 civil proceedings that "arise under" the Bankruptcy Code within the meaning of 28 U.S.C. § 1334(b) include the causes of action for nondischargeability that are created by Bankruptcy Code § 523.10 1 L. King, Collier on Bankruptcy ¶ 3.011ciii (15th ed. 1994); 3 id. ¶ 523.05.
The general rule is that state and federal courts have concurrent jurisdiction over nondischargeability actions. Thus, for example, although federal law controls the determination of whether a divorce-based debt is in the nature of nondischargeable alimony or child support, 11 U.S.C. § 523(a)(5), both state courts and federal courts have jurisdiction to decide the issue. 28 U.S.C. § 1334(b); Siragusa v. Siragusa (In re Siragusa), 27 F.3d 406, 408 (9th Cir. 1994).
Franklin's dischargeable omitted debt defense and Fidelity's nondischargeability cause of action for fraud are within the ambit of section 1334(b) concurrent jurisdiction unless there is some applicable exception.
An exclusive jurisdiction exception to the general rule of concurrent jurisdiction per section 1334(b) is carved out by Bankruptcy Code § 523(c), which, in some circumstances, reserves exclusive federal jurisdiction over four of the sixteen categories of nondischargeability action, including fraud actions under section 523(a)(2). In other words, there is an exclusive jurisdiction exception to the general rule of concurrent jurisdiction, and there is a concurrent jurisdiction exception to that exclusive jurisdiction exception.
Franklin's...
To continue reading
Request your trial