In re Pegasus Gold Corp., Bankruptcy No. BK-N-98-30088 (GWZ).

• Decision Date: 29 April 2003
• Docket Number: Bankruptcy No. BK-N-98-30088 (GWZ).,CV-N-02-0255-DWH (RAM).
• Citation: 296 B.R. 227
• Parties: In re PEGASUS GOLD CORPORATION, et al., Debtor. The State of Montana; the Montana Department of Environmental Quality; and Spectrum Engineering, Inc., Appellants, v. Harrison J. Goldin, in his capacity as Liquidating Trustee for the Pegasus Gold Corporation Liquidating Trust; and Reclamation Services Corporation, Appellees.
• Court: U.S. District Court — District of Nevada

296 B.R. 227

In re PEGASUS GOLD CORPORATION, et al., Debtor The State of Montana; the Montana Department of Environmental Quality; and Spectrum Engineering, Inc., Appellants, v. Harrison J. Goldin, in his capacity as Liquidating Trustee for the Pegasus Gold Corporation Liquidating Trust; and Reclamation Services Corporation, Appellees.

Bankruptcy No. BK-N-98-30088 (GWZ).

CV-N-02-0255-DWH (RAM).

United States District Court, D. Nevada.

April 29, 2003.

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ORDER

HAGEN, District Judge.

Before the court is an appeal by the State of Montana, Montana Department of Environmental Quality ("DEQ"), and Spectrum Engineering, Inc. ("Spectrum") (collectively, "Appellants") from the bankruptcy court's March 29, 2002 order (Bankr.File # 59) denying their motion to dismiss plaintiffs' complaint. Appellees and plaintiffs below are Harrison J. Goldin, bankruptcy trustee for Pegasus Gold Corporation ("PGC"), and Reclamation Services Corporation ("RSC"), an entity created during the administration of the bankruptcy estate for the purpose of performing reclamation work at two mine sites run by a PGC affiliate in Montana. On December 5, 2002, appellants filed their opening brief (# 26). Appellees filed their answering brief (# 31) and appellants replied (# 35).

I. Factual Background

On January 16, 1998, PGC and eighteen of its affiliates (collectively, "Debtors") commenced voluntary chapter 11 proceedings in the United States Bankruptcy Court for the District of Nevada. Because one of PGC's affiliates had engaged in mining operations at two mine sites in Montana, DEQ filed proofs of claim in PGC's bankruptcy proceedings pursuant to the Montana Metal Mine Reclamation Act, which requires mine operators to prepare a reclamation plan in connection with their mining operations and to post bonds as security for their reclamation obligations. (See App. to Appellees' Br., Vol. 1(# 32), Tabs 19-22.)

According to the bankruptcy court and as demonstrated by the record below, the debtors and DEQ engaged in extensive negotiations regarding the financial responsibility for reclamation and water treatment work at two mines in Montana, known as the "Zortman Sites." (See Bankr.Ct. Order (Bankr.File # 59) at 3:12-24, App. Appellants' Opening Br. (# 26), Tab 1.) These negotiations involved both judicial and non-judicial settlement conferences, objections to the proposed disclosure statement and amendments thereto, negotiations with sureties, and objections to and active participation in the plan confirmation process. (See id.; App. Appellee's Br., Vol. 1(# 32), Tab 28; Vol. 2 (# 33), Tabs 35, 37-38; and Vol. 3(# 34), Tab 52.) Ultimately, on December 4, 1998, the debtors and DEQ reached a settlement agreement, known as the "Zortman Agreement," which was approved by the bankruptcy court on December 22, 1998. (Id., Vol. 2(# 33) at Tab 33.) Soon thereafter, the bankruptcy court confirmed the Second Amended Joint Liquidation Plan of Reorganization of Pegasus Gold Corporation et al. ("Plan"). (Id., Vol. 3(# 34) at Tab 57.)

The Zortman Agreement and the Plan called for the creation of a new entity, RSC, to conduct the required reclamation and water treatment work at the Zortman sites on an interim basis, until the completion of a competitive bidding process. (Id. at Art. VIII, § 8.1; Vol. 2(# 33), Tab 33 at 1-2.) According to appellees, RSC was created in order to benefit the overall Plan goal of preserving the jobs of Debtors' employees to thereby maximize the possibility of creditor recovery. (Appellees' Br. (# 31) at 14:18-24.) The Plan embodied explicit language describing the incorporation of RSC and the arrangement between Debtors, DEQ, and RSC for funding interim reclamation activities. (See Plan at Art. VIII, § 8.1, App. Appellees' Br., Vol. 3(# 33), Tab 57.) Although not mentioned in the Zortman Agreement or Plan, appellees also contend that DEQ had represented to them that RSC would be given a preference in the competitive bidding process for the long-term reclamation work at the Zortman sites. (Am. Compl. at ¶ 6, App. Appellants' Opening Br.(# 26), Tab 2.) In addition, the Plan contained a provision in which the bankruptcy court retained jurisdiction "[t]o construe and to take any action authorized by the Code and requested by such Debtor, the Liquidating Trustee, or any other party in interest to enforce this Plan and the documents and agreements filed in connection with this Plan, issue such orders as may be necessary for the implementation, execution, and consummation of this Plan." (Plan at Art. X, § 10.1(b), App. to Appellees' Br., Vol. 3(# 33), Tab 57.)

Appellees claim that soon after RSC commenced reclamation activities, disputes arose between DEQ and RSC regarding budgets, payments, and timing of the competitive bidding procedure for a long term contract. (Appellees' Br. at 20:12-20.) In addition, DEQ terminated RSC's interim contract and then hired Spectrum to perform the reclamation and water treatment work using RSC's employees. (Id. at 20:21-22.) Without its trained employees and cash flow to perform reclamation work, RSC was rendered defunct. (Id. at 2:17-26.) Appellees allege that DEQ never intended to follow through with the Zortman Agreement and that DEQ's actions caused the demise of RSC, thereby interfering with the reorganization plan. (Id. at 20:9-22.)

As a result of these events, the trustee and RSC brought a civil proceeding in the bankruptcy court asserting eleven claims for relief: (1) Trustee's and RSC's claims against DEQ for breach of the Plan and Zortman Agreement; (2) Trustee's and RSC's claims against DEQ for breach of the covenants of good faith and fair dealing; (3) RSC's claim against DEQ for breach of the Master Agreement¹; (4) RSC's claim against DEQ for unjust enrichment; (5) RSC's claim against DEQ for promissory estoppel/equitable estoppel; (6) RSC's claim against DEQ for fraud in the inducement; (7) Trustee's claim against DEQ for fraud in the inducement; (8) RSC's claim against DEQ and Spectrum for tortious interference with third party relations; (9) RSC's claim against DEQ for intentional interference with prospective economic advantage; (10) RSC's claim against DEQ and spectrum for conversion; and (11) RSC's claim against DEQ for defamation. DEQ and Spectrum filed a motion to dismiss on the grounds that the bankruptcy court lacked subject matter jurisdiction over the claims and that DEQ had sovereign immunity under the Eleventh Amendment. After the bankruptcy court denied this motion, DEQ and Spectrum filed the instant appeal in this court.

II. Analysis

A. Standard of Review

When reviewing bankruptcy court decisions, the district court functions as an appellate court and reviews the bankruptcy court's findings of fact under a "clearly erroneous" standard and the bankruptcy court's conclusions of law under a de novo standard. In re Global West. Dev. Corp., 759 F.2d 724, 726 (9th Cir.1985). Matters of jurisdiction are conclusions of law that warrant a de novo standard. Matter of Lockard, 884 F.2d 1171, 1174 (9th Cir.1989). Questions of Eleventh Amendment immunity are also reviewed de novo. In re Lazar, 237 F.3d 967, 974 (9th Cir.2001).

B. Subject Matter Jurisdiction

1. Bankruptcy Court's Retention of Jurisdiction

The Plan provision in which the bankruptcy court explicitly retained jurisdiction cannot serve as the sole basis of subject matter jurisdiction. A bankruptcy court "cannot establish jurisdiction merely by inserting [a provision to that effect] into a confirmation order, [since it has] no power to reserve jurisdiction beyond what Congress has given or what is necessary to effectuate the plan of reorganization." Matter of Leeds Bldg. Prods., Inc., 160 B.R. 689, 691 n. 3 (Bankr.N.D.Ga.1993); see In re Brass Corp., 301 F.3d 296, 303 (5th Cir.2002) ("[T]he source of the bankruptcy court's subject matter jurisdiction is neither the Bankruptcy Code nor the express terms of the Plan. The source of the bankruptcy court's jurisdiction is 28 U.S.C. §§ 1334 and 157"), quoting United States Tr. v. Gryphon at the Stone Mansion, Inc., 216 B.R. 764, 769 (W.D.Pa.1997). As a result, any language in the confirmation decree that seeks to retain jurisdiction is not sufficient on its own to confer jurisdiction on the bankruptcy court.

2. Jurisdiction under § 1142

Likewise, the bankruptcy court's jurisdiction can not stem from 11 U.S.C. § 1142 because this statutory provision can not serve as a source of jurisdiction separate from § 1334. Section § 1142(b) allows the bankruptcy court to "direct the debtor and any other necessary party to execute or deliver or to join in the execution or delivery of any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act, including the satisfaction of a lien, that is necessary for the consummation of the plan." Although this section allows the bankruptcy court to issue an order necessary for implementation of the plan, it does not serve as a basis for post-confirmation jurisdiction over civil proceedings. See Brass, 301 F.3d at 305-06. Rather, bankruptcy jurisdiction is governed exclusively by 28 U.S.C. § 1334 whether the matter at issue arises before or after confirmation of a plan. See id. at 305; see also 8 LAWRENCE P. KING, ET AL., COLLIER ON BANKRUPTCY ¶ 1142.02[1] (15th ed. rev.1996) ("Bankruptcy jurisdiction is governed by 28 U.S.C. § 1334; this is so whether the matter at issue arises before or after confirmation of a plan. Confirmation does not alter the basic jurisdictional analysis applicable to bankruptcy courts."). Accordingly, the suggestion by appellees that § 1442 grants authority in the bankruptcy court to hear their civil matter is unavailing.

3. "Related to" Jurisdiction under 28 U.S.C. § 1334(b)

Because the instant dispute bears directly on the implementation and execution of PGC's reorganization plan, the...