In re Morrison

• Citation: 555 F.3d 473
• Decision Date: 16 January 2009
• Docket Number: No. 07-51118.,07-51118.
• Parties: In the Matter of: David Wilson MORRISON, Debtor. David Wilson Morrison, Appellant, v. Western Builders of Amarillo, Inc., Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

555 F.3d 473

In the Matter of: David Wilson MORRISON, Debtor.

David Wilson Morrison, Appellant, v. Western Builders of Amarillo, Inc., Appellee.

No. 07-51118.

United States Court of Appeals, Fifth Circuit.

January 16, 2009.

Stephen Howard Lee, Doyle, Restrepo, Harvin & Robbins, Houston, TX, for Morrison.

David L. LeBas, Naman, Howell, Smith & Lee, Austin, TX, for Appellee.

Appeal from the United States District Court for the Western District of Texas.

Before JONES, Chief Judge, and GARWOOD and SMITH, Circuit Judges.

EDITH H. JONES, Chief Judge:

David Wilson Morrison ("Morrison") appeals the bankruptcy court's decision, affirmed by the district court, holding him personally liable for a $549,773.63 nondischargeable debt pursuant to 11 U.S.C. § 523(a)(2)(B). We hold that the bankruptcy court had jurisdiction to enter a monetary judgment against Morrison, and we reject his challenges to the nondischargeability conclusion of the court. The judgment is AFFIRMED.

I. BACKGROUND

Morrison was the president and principal shareholder of Morrison Excavation, Inc. On February 6, 2002, Morrison was informed by Larry Fuller, his long-time business adviser and CPA, that his company was in serious financial trouble.¹ On February 14, Morrison Excavation submitted a bid for a subcontract with Western Builders. On February 15, Shelly Dexter, the bookkeeper for Morrison Excavation, found an accounting error that overstated the company's accounts receivable by approximately $857,000, which meant that Morrison Excavation was no longer solvent. On February 22, Western Builders, after reviewing Morrison Excavation's work at several sites and doing a credit reference check, requested a copy of Morrison Excavation's financial statement. The same day, Morrison faxed a copy of a financial statement that still reflected the inflated accounts receivable error to Western Builders. On March 6, Morrison Excavation and Western Builders entered into a contract.

Starting on March 28, 2002, Western Builders began making advance payments at the request of Morrison Excavation in order to allow Morrison to pay subcontractors and suppliers. Morrison Excavation, however, used some of the money to pay materialmens lienholders despite having certified to Western Builders that prior payments to lien claimants and suppliers had been made. During this time, Morrison also paid off his personal home equity loan from the company account and gave himself a substantial raise. By mid-August, Morrison Excavation abandoned the job. Western Builders paid the outstanding liens and hired a new excavation company to finish the project for more than a half million dollars over the original contract price.

On March 13, 2004, Morrison filed an individual Chapter 7 bankruptcy case. Western Builders commenced an adversary proceeding to determine the nondischargeability of the debt owed to it pursuant to 11 U.S.C. § 523(a)(2)(B). At the trial of the nondischargeability claim, Morrison testified that he did not learn about the accounting error until March 23 or 24, 2002. Dexter said that she told Morrison "around February 15," but she could not pinpoint an exact date or month. Another employee, Jackie Davenport, testified that Morrison was told "at or about the same time that the error was discovered." This information, at least in part, came from a conversation she overheard between Morrison and Dexter. Morrison objected to Davenport's testimony as hearsay. The bankruptcy court held that the testimony of Davenport was an admission under FED. R. EVID. 801(d)(2)(D) as a statement by an agent or servant concerning matters within the scope of his agency or employment. The court found that her testimony "strongly suggest[ed] that Morrison most likely knew by February 22, 2002, that the financial statement contained an error— but perhaps did not know the magnitude of the error."

In a thorough and comprehensive opinion, the bankruptcy court held that the subcontract for services created a debt that could be found nondischargeable under 11 U.S.C. § 523(a)(2)(B) because Morrison could be held liable for the misrepresentation that benefited Morrison Excavation. The court concluded that Morrison personally committed common law fraud in order to obtain the subcontract. Thus, Morrison was personally liable for the debt either under Texas common law, which holds a corporate agent liable for his misrepresentations made on behalf of the corporation, or under TEX. BUS. CORP. ACT, art. 2.21(A)(2) (Vernon 2006), which authorizes "veil-piercing" shareholder liability.²

The bankruptcy court rendered judgment for the entire debt due to Western Builders and declared the debt nondischargeable under 11 U.S.C. § 523(a)(2)(B). On appeal, the district court affirmed. We affirm the judgment of the district court.

II. DISCUSSION

A. Jurisdiction

Before reaching the substantive questions Morrison raises, this court must determine sua sponte the legal issue whether the bankruptcy court had the power to render a money judgment for the nondischargeable debt. See Bass v. Denney (In re Bass), 171 F.3d 1016, 1022 (5th Cir.1999). We received supplemental briefing from the parties after identifying this issue, which has not previously been decided by this court.

"The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute." Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Pursuant to 28 U.S.C. § 1334, the district court has exclusive jurisdiction of all bankruptcy cases under title 11 and "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). See also 28 U.S.C. § 157(b) (authorizing district courts to refer "core" and "related-to" proceedings to bankruptcy courts for adjudication). Western Builders' claim for a declaration of nondischargeability is a core proceeding under 28 U.S.C. § 157 and "is, without question, a constitutional and statutory federal question claim `arising under' the Bankruptcy Code, because the bankruptcy discharge is relief established by federal bankruptcy law and Section 523 expressly authorizes such a declaration regarding the effect of the federal bankruptcy discharge." Ralph Brubaker, On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory, 41 WM. & MARY L. REV. 743, 911 (2000).

The bankruptcy court here, however, went beyond a mere declaration to award judgment against David Morrison individually in the amount of $549,773.63 plus interest. See Western Builders of Amarillo, Inc. v. Morrison (In re Morrison), 361 B.R. 107, 128 (Bankr.W.D.Tex. 2007). Thus, the question presented is whether a bankruptcy court, in addition to declaring a debt non-dischargeable, has jurisdiction to liquidate the debt and enter a monetary judgement against the debtor. Several of our sister circuits that have considered this question found that the bankruptcy courts have the power to enter judgment in exactly this manner. See Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1017-18 (9th Cir.1997); Longo v. McLaren (In re McLaren), 3 F.3d 958, 965-66 (6th Cir.1993); Abramowitz v. Palmer, 999 F.2d 1274, 1278-79 (8th Cir. 1993); N.I.S. Corp. v. Hallahan (In re Hallahan), 936 F.2d 1496, 1508 (7th Cir. 1991); cf. Porges v. Gruntal & Co. (In re Porges), 44 F.3d 159, 163-65 & n. 7 (2d Cir.1995). Their reasoning, while pragmatic, stands in tension with the predominant theory of bankruptcy court jurisdiction. Nevertheless, while acknowledging the tension, we too conclude that jurisdiction existed to issue, if not necessarily later to enforce, the personal judgment against Morrison.

As noted, bankruptcy courts exercise jurisdiction, through referral from the district courts, of two types of cases. "Core" proceedings are those that "invoke[] a substantive right provided by title 11" or "could arise only in the context of a bankruptcy case." Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir.1987). Cases "related to" the bankruptcy case are those whose outcome could have any conceivable effect on the estate being administered in bankruptcy. Id. at 93 (citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir.1984)). The bankruptcy court's "related-to" jurisdiction is not limitless. Celotex, 514 U.S. at 308, 115 S.Ct. 1493. Although determining that a debt is nondischargeable is plainly a "core" proceeding governed by a specific provision of the Bankruptcy Code, the rendition of a monetary judgment in favor of the creditor on that debt is not itself a core proceeding and, further, is not clearly related to the bankruptcy case or administration of the debtor's estate. Indeed, that portion of the judgment has, in the usual case, no bearing on the bankruptcy case because it requires the debtor to pay a single debt outside of, apart from, and even after the completion of bankruptcy, and it frees the creditor thereafter from limiting its collection efforts to those afforded by the bankruptcy system. Commentators have noted the inconsistency inherent in a conclusion that rendering a money judgment for a debt found to be nondischargeable falls within the bankruptcy court's "related-to" jurisdiction. See Ralph Brubaker, supra, at 912-920 (2000).

Circuit courts that have approved the entry of money judgments by bankruptcy courts in nondischargeability cases have paid little attention to the jurisdictional dichotomy of core and related-to jurisdiction and have instead relied principally on tradition and pragmatism. "Traditionally," under Section 17(c)(3) of the 1898 Bankruptcy Act, bankruptcy courts were empowered to enter such money judgments. See 11 U.S.C. § 35(c)(3) (repealed 1978). The Bankruptcy Code did not specifically codify this authority upon its enactment in 1978, but, as one court noted, the Code authorized bankruptcy courts generally to hear all core...