In re Katz

• Decision Date: 01 May 2006
• Docket Number: Bankruptcy No. 01-41068-JBR.,Adversary No. 05-4124.
• Parties: In re Melvin KATZ, Debtor. David M. Nickless, Plaintiff, v. Mark J. Aaronson et al., Defendants.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

341 B.R. 123

In re Melvin KATZ, Debtor.

David M. Nickless, Plaintiff, v. Mark J. Aaronson et al., Defendants.

Bankruptcy No. 01-41068-JBR.

Adversary No. 05-4124.

United States Bankruptcy Court, D. Massachusetts.

May 1, 2006.

COPYRIGHT MATERIAL OMITTED

Russell S. Chernin, Worcester, MA, for Debtor.

MEMORANDUM OF DECISION ON DEFENDANTS' MOTION TO DISMISS COUNTS I THROUGH VII OF THE AMENDED COMPLAINT FOR LACK OF SUBJECT MATTER JURISDICTION

JOEL B. ROSENTHAL, Bankruptcy Judge.

Before the Court is the Defendants' Motion to Dismiss Counts I through VII of the Amended Complaint for Lack of Subject Matter Jurisdiction [#34] and the Trustee's Opposition thereto [#39]. The Motion to Dismiss seeks a dismissal of all counts on the grounds that the Amended Complaint is, at its essence, an impermissible attempt to have this Court exercise jurisdiction over assets of a partnership in which the Debtor is a partner. The Trustee argues that as the assignee of the Debtor's partnership interest, and because cause exists, he has the right to seek a winding up of the partnership business and ultimately a sale of its assets.

FACTS

The relevant facts are largely undisputed. On or about July 19, 1988 the Debtor along with Marlene Markarian and Defendants Mark J. Aaronson, Leon Hovsepian¹ and Sara Hovsepian formed LeMar Crossing Unlimited (the "Partnership"), a Massachusetts partnership, to own, develop, lease and operate property, including real property. At the same time the LeMar Crossing Trust, of which Defendant Aaronson is the trustee (the "LeMar Trustee"), was established to hold certain property. Under the Declaration of Trust, the LeMar Trustee is to "hold any and all property which may be transferred to the Trustee hereunder for the sole benefit of the Partnership." "Article First" of the Declaration of Trust, a copy of which is attached to the Amended Complaint (emphasis added). "Article Third" of the same document provides in part that "The TRUSTEE hereunder shall hold the principal of the Trust and receive the income therefrom or [sic] for the benefit of the Partners and shall pay over the principal and income pursuant to the directions of the Partners at least annually," (Emphasis added). Currently the LeMar Trustee holds legal title to real estate located at 246 Boston Turnpike, Shrewsbury, Massachusetts, a commercial mixed-use property which is the Trust's primary, and perhaps only, asset.

Originally the Debtor and Ms. Markarian collectively owned a one-third interest in the Partnership as tenants in common. Ms. Markian's interest has been transferred to the Chapter 7 Trustee in settlement of an adversary proceeding brought against her by the Chapter 7 Trustee. The collective Partnership interest now held by the Chapter 7 Trustee, however, has been reduced to approximately 10% as a result of offsets to the Debtor/Markarian capital account.

On February 27, 2001 the Debtor filed a voluntary petition pursuant to Chapter 7 of the United States Bankruptcy Code and shortly thereafter the Chapter 7 Trustee was appointed.

The Partnership Agreement provides in pertinent part:

Except as otherwise expressly provided in this Partnership Agreement, dissolution of the Partnership shall be subject to the provisions of Chapter 108A of the Massachusetts General Laws, as now constituted or hereafter amended or substituted. Unless otherwise required by law or by court order and subject to the provisions of ARTICLE XIV of this Partnership Agreement, the Partnership business shall not terminate upon the occurrence of any event causing dissolution of the Partnership. Any successor by operation of law to a surviving Partner's interest, including by way of example and not by way of limitation, a guardian, a receiver, or a trustee in bankruptcy, shall be deemed an assignee having the rights which an assignee of such Partner's interest would have under the provisions of the said Chapter 108A of the Massachusetts General Laws.

In June 2005 the Chapter 7 Trustee filed the instant adversary proceeding. The Defendants moved to dismiss those counts in the original complaint that sought a declaration that the Partnership was dissolved by the Debtor's bankruptcy (Count I), an accounting pursuant to M.G.L.c. 108A, §§ 21 and 22 (Count II),² and an order permitting the Chapter 7 Trustee to sell the Partnership's assets (Count VI) on the grounds that this Court lacked subject matter jurisdiction. After a hearing the Court dismissed Counts I and II without prejudice and dismissed Count VI. The Chapter 7 Trustee was also given 30 days within which to file an amended complaint. It is that Amended Complaint which the Defendants seek to have dismissed.

DISCUSSION

When ruling on a motion to dismiss for lack of subject matter jurisdiction, a court must construe the complaint liberally, taking all well-pleaded facts as true and drawing all reasonable inferences in favor of the plaintiff. "Dismissal can be justified only if it clearly appears that no colorable hook exists upon which subject matter jurisdiction may be hung." Royal v. Leading Edge Products, 833 F.2d 1, 1 (1st Cir.1987). Because federal courts, including this court, are courts of limited jurisdiction, subject matter jurisdiction may not be presumed to exist. Rather the plaintiff must demonstrate its existence. Viqueira v. First Bank, 140 F.3d 12, 16 (1st Cir.1998). The quantum of proof required is a preponderance of the evidence. In re Geauga Trenching Corp., 110 B.R. 638, 642 (Bankr.E.D.N.Y.1990).

Bankruptcy Court Jurisdiction

Bankruptcy court subject matter jurisdiction emanates from the district court's jurisdiction under 28 U.S.C. § 1334 which endows the district court with original and exclusive jurisdiction for cases that are "under title 11," that is, the actual bankruptcy case commenced by the filing of a petition under one of the applicable chapters of the Bankruptcy Code, and original but not exclusive jurisdiction for civil proceedings "arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(a) and (b). The district courts may refer bankruptcy cases as well as civil proceedings which arise in or under the Bankruptcy Code and those related to bankruptcy cases to the bankruptcy courts. 28 U.S.C. § 157(a). In Massachusetts, the district court has referred the broadest possible universe of cases which a bankruptcy court could hear, namely all cases over which the district court may exercise jurisdiction under either § 1334(a) or (b). LR, D. Mass 201.

Because the adversary proceeding is not the same as the bankruptcy case, the Court must determine whether the adversary proceeding, which is a civil proceeding, "arises under" the Bankruptcy Code, "arises in" a case under the Bankruptcy Code, or is "related to" the bankruptcy case; if the adversary proceeding falls within none of the aforementioned categories, then this Court has no jurisdiction.

Proceedings "arise under" title 11 if they involve a "cause of action created or determined by a statutory provision of title 11." Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir.1987). In contrast, proceedings "arising in" a bankruptcy case "are those that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy." Id. at 97. Together, proceedings that "arise in" and "arise under" title 11 constitute the bankruptcy court's "core" jurisdiction. See 28 U.S.C. § 157(b); Id., at 96-97.

Concerto Software, Inc. v. Vitaquest Intern., Inc., 290 B.R. 448, 452 (D.Me.2003).

A bankruptcy court has jurisdiction over a non-core proceeding provided the proceeding is "related to" a bankruptcy case. The breadth of the bankruptcy court's related to jurisdiction is great but it is not unlimited. "The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." In re G.S.F. Corp., 938 F.2d 1467, 1475 (1st Cir.1991) (quoting Pacor v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)). Proceedings which are outside the boundaries of § 1334(a) or (b), that is, proceedings which do not fall even within the "related to" jurisdiction, are outside of the subject matter jurisdiction of a bankruptcy court. In an adversary proceeding, the court must determine whether it has jurisdiction, with respect "to each cause of action or right of recovery pled. This is the only interpretation which would adequately heed the constitutional concerns in Marathon." Ralls v. Docktor Pet Centers, Inc., 177 B.R. 420, 425 (D.Mass.1995).

Although "[t]he distinction between `core' and `non-core' matters does not affect the Court's subject matter jurisdiction to hear a matter," Treadway v. United Bank & Trust Co. (In re Treadway), 117 B.R. 76, 81 (Bankr.D.Vt.1990), the difference is critical in determining whether a bankruptcy court may enter final orders. In core matters it has this authority; in non-core matters it may only do so with the consent of the parties. 28 U.S.C. § 157.

It is axiomatic that the mere bankruptcy of a partner does not bring the partnership's assets within the jurisdiction of the bankruptcy court. A debtor's interest in a partnership is an asset of the debtor's estate under 11 U.S.C. § 541; the assets of the partnership are not. In re Olszewski, 124 B.R. 743, 746-47 (Bankr. S.D.Ohio 1991); Normandin v. Normandin (In re Normandin), 106 B.R. 14 (Bankr.D.Mass.1989). Before a partner is entitled to receive his share of the partnership's property, or his right to the profits of the partnership, if any, the partnership's creditors are entitled to payment. Consequently, a trustee of a partner's estate cannot rely upon 11 U.S.C. § 363(f) to sell partnership property. Olszewski, 124 B.R. at 746-47.

Despite the general rule that the simple act of a partner's filing of bankruptcy does not confer...