In re John Peterson Motors, Inc., Bankruptcy No. 4-84-1908

CourtUnited States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota
Writing for the CourtROBERT J. KRESSEL
Citation56 BR 588
PartiesIn re JOHN PETERSON MOTORS, INC., Debtor. Robert C. NEILL, Trustee, Plaintiff, v. John BORRESON, Defendant and Third-Party Plaintiff, v. John PETERSON, Third-Party Defendant.
Docket NumberAdv. No. 4-85-151.,Bankruptcy No. 4-84-1908
Decision Date10 January 1986

56 B.R. 588 (1986)

Robert C. NEILL, Trustee, Plaintiff,
John BORRESON, Defendant and Third-Party Plaintiff,
John PETERSON, Third-Party Defendant.

Bankruptcy No. 4-84-1908, Adv. No. 4-85-151.

United States Bankruptcy Court, D. Minnesota.

January 10, 1986.

56 BR 589

Phillip L. Kunkel, Hastings, Minn., for plaintiff.

Regina M. Chu, Minneapolis, Minn., for defendant/third-party plaintiff.

Donald John Peterson, Lake City, Minn., pro se.


ROBERT J. KRESSEL, Bankruptcy Judge.

This matter came on for hearing on November 27, 1985, on the motion of the third-party defendant, John Peterson, for dismissal

56 BR 590
of the third-party complaint filed by the defendant, John Borreson. Pursuant to Bankruptcy Rule 7012 and Fed.R.Civ.P. 12(b)(1) and (6), Peterson asserts that this Court lacks subject matter jurisdiction and that Borreson has failed to state a claim upon which relief can be granted. Phillip L. Kunkel appeared for the plaintiff and Regina M. Chu appeared for the defendant and third-party plaintiff. John Peterson appeared pro se. Based on the files and records, the memoranda and arguments of counsel, I make the following Memorandum Order


The debtor automobile dealership, John Peterson Motors, Inc., filed a voluntary petition under Chapter 11 of the Bankruptcy Code on October 30, 1984. An examiner was appointed pursuant to 11 U.S.C. § 151104 on February 25, 1985. Pursuant to 11 U.S.C. § 547 the examiner commenced this adversary proceeding against Borreson seeking to recover $43,856.68 in allegedly preferential payments. Subsequently Borreson filed an answer together with a third-party complaint naming John Peterson individually as a defendant. Borreson alleges that Peterson is liable for: the return of $14,000.00 owed as a result of the rescission of an alleged stock purchase agreement,1 indemnity or contribution for any sums recovered against Borreson by the plaintiff, and for costs and disbursements.

The case was converted from Chapter 11 to Chapter 7 on July 10, 1985. The Chapter 7 trustee, Robert C. Neill, was substituted for the examiner as the plaintiff on October 7, 1985.


The motion to dismiss the third-party complaint is grounded in two provisions of Rule 12, Fed.R.Civ.P. First, Peterson alleges that this court does not have subject matter jurisdiction to hear the $14,000.00 claim. Peterson also alleges that both the $14,000.00 claim for monies owed on rescission of the alleged stock purchase agreement and the claim for indemnity or contribution for any and all sums recovered by the trustee in the main action fail to state a claim upon which relief can be granted. I agree that this court does not have the requisite subject matter jurisdiction to hear the $14,000.00 claim, and I have decided that the claim for indemnity or contribution must be dismissed for the same reason.2

The proper focus on a motion to dismiss for lack of subject matter jurisdiction must be on the district court because this court is not jurisdictionally a separate court. See Firestone v. Dale Beggs & Associates (In re Northwest Cinema Corp.), 49 B.R. 479 (Bktcy.D.Minn.1985). The district court has 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). The bankruptcy court is a unit of the district court. 28 U.S.C. § 151.3 Thus, 28 U.S.C. § 1334 defines the limits of this court's subject matter jurisdiction.

56 BR 591

The outer limits of the statutory jurisdictional grant consist of civil proceedings "related to cases under Title 11". 28 U.S.C. § 1334(b). A number of courts have attempted to define "related" proceedings. See, e.g., In re Lafayette Radio Electronics Corp., 761 F.2d 84 (2nd Cir.1985); In re K & L Limited, 741 F.2d 1023 (7th Cir. 1984); Pacor v. Higgins, 743 F.2d 984 (3rd Cir.1984); In re Davis, 730 F.2d 176 (5th Cir.1984); Matter of Colorado Energy Supply, Inc., 728 F.2d 1283 (10th Cir.1984); Kelley v. Salem Mortgage Co., 41 B.R. 420 (D.C.E.D.Mich.1984); In re Earl Roggenbuck Farms, Inc., 51 B.R. 913 (Bktcy.E.D. Mich.1985); In re American Energy, Inc., 50 B.R. 175 (Bktcy.N.D.1985); In the Matter of McRae Fire Protection, Inc., 49 B.R. 773 (Bktcy.E.D.Mich.1985); In re Hall, 30 B.R. 799 (Bktcy.M.D.Tenn.1983). In doing so, courts tend to focus on the nexus between an allegedly "related" civil proceeding and the underlying bankruptcy case. Of the many standards articulated for determining whether a proceeding is related, the most inclusive test is "whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy." Pacor, Inc. v. Higgins, 743 F.2d 984 (3rd Cir.1984); In re General Distributors, Inc., 21 B.R. 888 (Bktcy.E.D.N.Y.1982); In re Hall, 30 B.R. 799 (Bktcy.M.D.Tenn.1983); In re Pierce Coal & Const., Inc., 49 B.R. 779 (Bktcy.E. D.Mich.1985).

Clearly, the outcome of the third party action in this case cannot conceivably have any effect on the debtor's estate. Although at least two of the alleged preferences in the main action arise from the same set of facts as the third-party complaint, the sole legal issue in the third-party action appears to be the question of whether the debtor or Peterson himself is indebted to Borreson for $44,000.00, and that issue will be resolved to determine whether Borreson received preferential transfers from the debtor corporation. The dispute is between two non-debtors over who should be ultimately responsible for sums recovered from Borreson in the main action.4 As it stands, the trustee will recover preferences from Borreson or he will not. If the trustee prevails, Borreson will seek reimbursement from Peterson. The third-party action will have no bearing on whether or to what extent the estate recovers allegedly preferential payments. Thus, even under this liberal test, Borreson's third-party complaint is not a related proceeding and therefore falls outside of the jurisdictional grant of 28 U.S.C. § 1334.

Absent an independent basis for jurisdiction a federal court is empowered to adjudicate state law claims under the doctrine of ancillary jurisdiction.5 The test for ancillary jurisdiction, which generally permits a court to exercise jurisdiction over a closely related third-party complaint, is applicable only under limited circumstances:

Ancillary jurisdiction may only operate when there is a tight nexus with the subject matter properly in federal court. This nexus or logical relationship between the main federal claim and the incidental state claim arises (1) when the same aggregate of operative facts serves as the basis for both claims or (2) when the core of facts supporting the original claim activates legal rights in favor of a party defendant that would otherwise remain dormant.
56 BR 592
Eagerton v. Valuations, Inc., 698 F.2d 1115 (11th Cir.1983) (citations omitted). Borreson\'s third-party complaint does arise out of the same facts as at least two of the preference payments in dispute in the main action. More importantly, courts uniformly hold that a defendant\'s claim against a third-party defendant under Rule 14, Fed. R.Civ.P., is within the ancillary jurisdiction of the federal courts. See, e.g., In re Wood, 52 B.R. 513 (Bktcy.N.D.Ala.1985); Rogers v. Aetna Cas. Insur. Co., 601 F.2d 840 (5th Cir.1979); In re Albert & MacGuire Secs. Co., 70 F.R.D. 361 (D.C.Pa. 1976); Wright & Miller, FEDERAL PRACTICE & PROCEDURE: CIVIL § 1444.

The dispute between Borreson and Peterson is before this court on the third-party complaint of Borreson, who was himself named as a defendant in an action brought pursuant to 11 U.S.C. § 547. Rule 14, Fed.R.Civ.P., which is made applicable to this proceeding by Bankruptcy Rule 7014, governs third-party practice and provides in pertinent part:

At any time after commencement of the action a defending party, as a third-party plaintiff, may cause a summons and complaint to be served upon a person not a party to the action who is or may be liable to him for all or part of the plaintiff\'s claim against him.
. . . . .
The person served with the summons and third-party complaint, hereinafter called the third-party defendant, shall make his defenses to the third-party plaintiff\'s claim as provided in Rule 12 and his counterclaims against the third-party plaintiff and cross-claims against other third-party defendants as provided in Rule 13. . . .

Fed.R.Civ.P. 14 (emphasis added). The primary purpose of Rule 14 is to promote judicial efficiency and it is intended to provide a mechanism for disposing of multiple claims arising from a single set of facts in one action. Colton v. Swain, 527 F.2d 296 (7th Cir., 1975); Eastman Chemical International, Ltd. v. Virginia National Bank, 94 F.R.D. 21, (D.C.Tenn.1981); Tiesler v. Martin Paint Stores, 76 F.R.D. 640 (D.C. Pa.1977); In re Joyanna Holitogs, Inc., 21 B.R. 323 (Bktcy.S.D.N.Y.1982). A third-party action is proper only when the third-party's liability is somehow dependent on the outcome of the main action or when the third party is secondarily liable to the defendant. Hefley v. Textron, Inc., 713 F.2d 1487 (10th Cir.1983); U.S. v. Joe Grasso & Son, Inc., 380 F.2d 749 (5th Cir.1967); Index Fund, Inc. v. Hagopian, 417 F.Supp. 738 (S.D.N.Y.1976). In order to maintain a third-party complaint, a direct line of liability must be alleged to exist between the third-party plaintiff and third-party defendant. Moorhead Construction Company, Inc. v. City of Grand Forks, 508 F.2d 1008 (8th Cir.1975), citing 6 Wright and Miller, Federal Practice and Procedure § 1442. It is not enough that the third-party claim is alleged to stem from the same transaction. Nagunst v. Western Union Tel. Co., 76 F.R.D. 631 (D.C.Kansas 1977). Finally, while Rule 14 should be liberally construed, the permissibility of a third-party action is committed to the...

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