In re Hospitality Ventures/Vavista

• Decision Date: 04 January 2007
• Docket Number: Adversary No. 03-06596.,Bankruptcy No. 01-88200.
• Citation: 358 B.R. 462
• Parties: In re HOSPITALITY VENTURES/LAVISTA, a Georgia General Partnership, Debtor. Hospitality Ventures/LaVista, Plaintiff, v. Heartwood 11, L.L.C., Vesta Holdings I, L.L.C., and Vesta Holdings, Inc., Defendants and Third-Party Plaintiffs, v. DeKalb County, Georgia, and Tom Scott, in his official capacity as Tax Commissioner of DeKalb County, Third-Party Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

358 B.R. 462

In re HOSPITALITY VENTURES/LAVISTA, a Georgia General Partnership, Debtor.

Hospitality Ventures/LaVista, Plaintiff, v. Heartwood 11, L.L.C., Vesta Holdings I, L.L.C., and Vesta Holdings, Inc., Defendants and Third-Party Plaintiffs, v. DeKalb County, Georgia, and Tom Scott, in his official capacity as Tax Commissioner of DeKalb County, Third-Party Defendants.

Bankruptcy No. 01-88200.

Adversary No. 03-06596.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

January 4, 2007.

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Joshua M. Katz, Stites & Harbison, PLLC, Louis G. McBryan, Macey, Wilensky, Kessler, Howick & Westfall, Atlanta, GA, for Hospitality Ventures/LaVista.

Robert J. Proctor, Bradley A. Hutchins, John C. Clark, Proctor & Chambers, Bruce Z. Walker, Kelly Serene Scarbrough, Mark S. Marani, Cohen, Pollock, Merlin, Axelrod & Small, Atlanta, GA, for Heartwood 11, L.L.C. and Vesta Holdings I, LLC, Vesta Holdings, Inc.

Mark A. Thompson, DeKalb County Law Dept., Decatur, GA, for Tom Scott.

OPINION ON REMAND WITH REGARD TO JURISDICTION AND REFERRAL OF THIRD-PARTY CLAIM AGAINST DEKALB COUNTY

PAUL W. BONAPFEL, Bankruptcy Judge.

This Opinion considers whether the District Court, under principles of supplemental jurisdiction codified in 28 U.S.C. § 1367, has subject matter jurisdiction of, and if so, whether a bankruptcy judge may hear, a third-party claim for which no independent basis of jurisdiction exists under 28 U.S.C. § 1334(b).

Section 1334(b) vests original, but not exclusive, jurisdiction of "proceedings arising under [the Bankruptcy Code], or arising in or related to cases under [the Bankruptcy Code]" in the district courts. Under 28 U.S.C. § 157(a), a district court may refer such proceedings to its bankruptcy judges. In this District, the District Court has referred all proceedings within its bankruptcy jurisdiction to the bankruptcy judges. LR 83.7, NDGa.

The complaint of the chapter 11 Debtor in this adversary proceeding asserts a claim against the Defendant that arises under the Bankruptcy Code. The Debtor's claim is within the District Court's jurisdiction under § 1334(b), and it `was referred to the bankruptcy judges under § 157(a) and LR 83.7, NDGa. The Debtor's claim is a "core proceeding" within the meaning of § 157(b) that a bankruptcy judge may hear and determine.

In response to the complaint, the Defendant filed a third-party complaint under FED.R.CIV.P. 14, applicable under FED. R. BANKR.P. 7014. The third-party claim does not "arise under" the Bankruptcy Code, it does not "arise in" the bankruptcy case, and it is not "related to" the bankruptcy case under the usual "conceivable effect" test of Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir.1984), adopted by the Eleventh Circuit in Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.), 910 F.2d 784 (11th Cir.1990), because its resolution could not conceivably have an effect on the bankruptcy estate or administration of the bankruptcy case. Thus, no independent basis of subject matter jurisdiction of the third-party claim exists under 28 U.S.C. § 1334(b).

Under traditional principles of ancillary jurisdiction that have been codified as part of the supplemental jurisdiction of the district courts in 28 U.S.C. § 1367, a district court may exercise jurisdiction of a Rule 14 third-party claim that lacks an independent basis of federal jurisdiction if the third-party claim has a "tight nexus" with a primary claim within the court's original jurisdiction. The Defendant's third-party claim has such a nexus with the Debtor's primary claim.

The first question here is whether the supplemental jurisdiction principles of § 1367 apply such that the District Court has jurisdiction of the third-party claim. If so, the second question is whether § 157(a) authorizes its referral to a bankruptcy judge.¹ (Because the third-party claim is not a core proceeding, referral will permit a bankruptcy judge to hear, but not determine, the claim under § 157(c), which provides for the entry of final judgment in non-core proceedings by the District Court after de novo review of the bankruptcy judge's proposed findings of fact and conclusions of law.)

The courts generally agree that a district court has supplemental jurisdiction under § 1367 with regard to its bankruptcy jurisdiction under § 1334.² Courts disagree, however, over whether a bankruptcy judge may³ or may not⁴ hear a matter within a district court's supplemental bankruptcy jurisdiction under § 157(a). For reasons explained below, the better view is that the system for the allocation of bankruptcy jurisdiction between a district court and its bankruptcy unit, comprised of the bankruptcy judges, authorizes the referral to a bankruptcy judge of a third-party claim within a district court's bankruptcy jurisdiction, as supplemented by § 1367, that is asserted in response to a claim arising under the Bankruptcy Code. Thus, although the third-party claim here has no independent jurisdictional basis, the District Court has supplemental jurisdiction of it, and it is properly referable to this bankruptcy judge under § 157(a) and LR 83.7, NDGa, to hear as a non-core matter, subject to de novo review by the District Court, under § 157(c).

I. FACTS AND PROCEDURAL BACKGROUND

The Debtor was (and remains) the owner of a hotel in DeKalb County, Georgia. DeKalb County assessed the value of the hotel as $6,178,700 for purposes of 1998 ad valorem taxes, resulting in a tax obligation of $93,075.92. Although the County made a similar assessment for 1997, assessments for prior and later years were substantially lower, $2,135,600 for 1995, and 1996 and $1,681,030 for 1999 through 2002.

The Debtor did not timely contest the 1998 assessment or pay the tax, and the County issued a tax fi. fa. for $97,750.22. Vesta Holdings I, LLC, as nominee for Heartwood II, LLC (formerly known as Heartwood II, Inc.) ("Heartwood") purchased the tax fi. fa. on March 18, 1999, by paying the County $100,549, the amount then due thereon, pursuant to now repealed O.C.G.A. § 48-3-19.⁵

On December 3, 2001, the Debtor filed its chapter 11 petition. On November 12, 2003, the Debtor filed this adversary proceeding against Heartwood [1]. Debtor's complaint sought a reduction of the tax claim under former § 505(a) of the Bankruptcy Code, as applicable in this proceeding prior to its amendment by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Former § 505(a) provides that a bankruptcy court "may determine the amount or legality of any tax . . . whether or not previously assessed."⁶ The complaint alleged that the hotel should have been assessed with a value of $1,466,897 for 1998 and the Debtor's tax liability for that year reduced accordingly.

Heartwood answered and filed the third-party complaint against DeKalb County,⁷ seeking relief from the County if Heartwood suffered a loss because its claim was allowed for less than what it paid the County [6, 7]. The third-party complaint asserted alternative remedies against DeKalb County in the event that the Court reduced the tax claim. First, Heartwood claimed that, if the tax claim were reduced under § 505(a), DeKalb County would be liable to Heartwood for the difference between what Heartwood had paid DeKalb County for the claim and such reduced amount. Alternatively, Heartwood asserted that, if the claim were reduced, its purchase from DeKalb County should be rescinded, thus substituting DeKalb County for Heartwood as the holder of the claim in the Debtor's bankruptcy case.

DeKalb. County's answer [12] raised the lack of subject matter jurisdiction, but it did not move to dismiss on this ground. The Debtor, however, eventually filed a motion to dismiss the third-party complaint against DeKalb County for lack of subject matter jurisdiction [72-73]. For reasons announced on the record at a hearing held on September 20, 2005, and summarized in the Court's Order entered on October 13, 2005[105], the Court denied the Debtor's motion to dismiss and its motion for summary judgment and deferred ruling on the cross-motions for summary judgment filed by Heartwood and DeKalb County with regard to the third-party complaint, pending determination of the value of the hotel at trial.

Prior to trial, the Debtor and Heartwood agreed to a compromise [106]. Among other things, the Debtor and Heartwood stipulated that the fair market value of the hotel in 1998 for ad valorem tax purposes was $2,500,000. This valuation resulted in allowance of the tax claim for $59,853.07 less than the amount of the tax as determined by DeKalb County and that Heartwood had paid. This compromise, approved without objection from DeKalb County, resolved the issues in this proceeding as between the Debtor and Heartwood. Based on the stipulation and the record as developed in connection with Heartwood and DeKalb County's motions for summary judgment and at the trial on the issue of the value of the hotel at which DeKalb County announced that it had no evidence of value to present, the Court determined in an order entered on January 10, 2006[116],⁸ that DeKalb County was liable to Heartwood for this difference and entered judgment [117] in Heartwood's favor.⁹

On DeKalb County's timely appeal, the District Court vacated the Court's judgment and remanded. The District Court ruled that this Court had not made a true factual finding of the hotel's value and remanded for this Court to "conduct a hearing and make a proper factual determination" regarding its value. (D.Ct. Order at 9). The District Court also questioned the existence of subject matter jurisdiction of the third-party claim and directed this Court to "re-assess whether it has subject matter jurisdiction over this dispute" before proceeding with the factual determination. (Id. at 9-10).

II. DISCUSSION

The issue of subject matter jurisdiction with regard to the third-party claim requires consideration of two questions. First,...