In re Petrolia Corp., Bankruptcy No. 85-02349-R

Decision Date06 November 1987
Docket Number86-0264-R.,Bankruptcy No. 85-02349-R
Citation79 BR 686
PartiesIn re PETROLIA CORPORATION, Debtor. PETROLIA CORPORATION, a Michigan corporation, Wicklund Petroleum Corporation, a Delaware corporation, and Willard D. Wicklund, an individual, Plaintiffs, v. Theodore M. ELAM, an individual, and McAfee & Taft, P.C., an Oklahoma professional corporation, Defendants.
CourtU.S. Bankruptcy Court — Eastern District of Michigan

Julie Fershtman, Detroit, Mich., for plaintiffs.

Richard Wilhelm, Detroit, Mich., for defendants.

MEMORANDUM OPINION DENYING DEFENDANTS' MOTION TO DISMISS FOR LACK OF JURISDICTION

STEVEN W. RHODES, Bankruptcy Judge.

The defendants filed a motion to dismiss plaintiffs Wicklund Petroleum Corporation and Willard Wicklund for lack of jurisdiction. For the reasons stated below, the Court concludes that the motion should be denied.

The defendants have not consented to the jurisdiction of the bankruptcy court to hear this non-core proceeding. Therefore, pursuant to 28 U.S.C. § 157(c)(1), this Court lacks authority to enter a final order such as an order granting a motion to dismiss; however, this Court does have the authority to enter an order denying a motion to dismiss, because such an order is not a final order. Accordingly, the following constitutes this Court's memorandum opinion denying the motion to dismiss for lack of jurisdiction.

I. Findings of Fact

1. One of the plaintiffs, Petrolia Corporation, is the debtor in this Chapter 11 reorganization. Petrolia, a closely held Michigan corporation, was engaged in the oil and gas business.

2. Another plaintiff, Willard Wicklund, was the sole shareholder, president, and a director of Petrolia. Wicklund was also a principal shareholder, director, and chairman of the board of Wicklund Petroleum Corporation.

3. Plaintiff Wicklund Petroleum Corporation (WPC), was a publicly held Delaware corporation engaged in the oil and gas business.

4. A merger was planned for WPC and Petrolia.

5. Defendant McAfee & Taft, P.C. is a law firm; it performed some of the legal work for the planned merger. The parties dispute the extent of McAfee & Taft's involvement and who was McAfee & Taft's client.

6. Defendant Theodore M. Elam is a shareholder and attorney in the law firm of McAfee & Taft, P.C.

7. The defendants drafted a proxy statement for presentation to the WPC shareholders recommending the merger. In drafting this proxy statement, the defendants gathered information from WPC, Wicklund, Wicklund's accountants, Wicklund's financial advisor and investment banker, and Douglas Wicklund.

8. WPC and Petrolia approved the proxy statement and issued it May 14, 1984. It was also filed with the Securities Exchange Commission.

9. The proxy statement announced a shareholder vote to approve the merger to be held on June 15, 1984 at the annual meeting of WPC shareholders. The proxy statement also advised WPC shareholders of dissenting shareholders' appraisal rights under Delaware law. The plaintiffs allege that this statement concerning dissenting shareholders' rights under Delaware law was incorrect. The plaintiffs also allege that the proxy statement omitted required financial information.

10. On May 25, 1984, Sumner H. Woodrow, a minority WPC shareholder, filed suit to enjoin the merger on the basis of errors and misstatements in the proxy statement. The parties dispute the basis for Woodrow's suit.

11. The defendants advised the plaintiffs to settle Woodrow's suit and call off the merger.

12. On June 15, 1984, the plaintiffs determined that the defendants would no longer represent them.

13. Another firm, Skadden, Arps, Slate, Meagher & Flom, was retained. On August 22, 1984, the plaintiffs entered a settlement of Woodrow's suit which foreclosed this merger and required advance notice to Woodrow of any future attempts at merger. Petrolia paid WPC $40,000 in its costs for the merger, and WPC paid Woodrow $54,000 in legal costs.

14. In March of 1985, Petrolia's creditors filed this involuntary bankruptcy proceeding in Oklahoma.

15. In June of 1985, the venue of the Chapter 11 proceeding was transferred to the Eastern District of Michigan as a more convenient forum.

16. On March 10, 1986, the plaintiffs filed this adversary proceeding, claiming that the failure of the merger caused its financial problems, precipitating the involuntary bankruptcy.

17. In Count I of their amended complaint, filed May 20, 1986, the plaintiffs allege that the defendants violated Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), violated Rule 14a-9(a) of the Securities and Exchange Commission, SFR § 240.14a-9, and aided and abetted a violation of the federal securities law.

18. Counts II through IV of the plaintiffs' first amended complaint allege professional malpractice, negligence, breach of the Code of Professional Responsibility, breach of contract and unjust enrichment. In their motion to dismiss for lack of jurisdiction, the defendants contend that the claims of the nondebtor plaintiffs (WPC and Wicklund) are not related to Petrolia's bankruptcy and therefore beyond the jurisdiction of this Court.

II. Conclusions of Law
1. The test for determining "related to" jurisdiction under 28 U.S.C. § 1334(b) is whether the outcome of the proceeding will have any effect on the bankruptcy estate.

Section 1334(b) provides:

Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.

In In re Salem Mortgage Company (Kelley v. Nodine), 783 F.2d 626 (6th Cir. 1986), the United States Court of Appeals for the Sixth Circuit defined the scope of "related to" jurisdiction in terms of the proceeding's effect upon the bankruptcy estate.

Courts have developed different tests in determining whether subject matter jurisdiction exists in a proceeding claimed to be "related to" a particular bankruptcy case. Some courts would find jurisdiction "only where the action clearly involved property of the estate . . . or where a determination of the controversy is required for the proper administration or reorganization of the estate. . . ." In re General Oil Distributors, Inc., 21 B.R. 888, 892 n. 13 (Bankr. E.D.N.Y.1982) (citations omitted). Another test finds jurisdiction "whenever `the outcome of the proceeding could conceivably have any effect upon the estate being administered in bankruptcy\'" Id. (citing Mazur v. U.S. Air Duct Corp., 8 B.R. 848, 851 (Bankr.N.D.N.Y.1981) (emphasis in original)). Although situations may arise where an extremely tenuous connection to the estate would not satisfy the jurisdictional requirement, we believe that a broader interpretation of the statute more closely reflects the congressional intent in adopting the new bankruptcy laws.

783 F.2d at 634. See also In re Southern Industrial Banking Corporation (DuVoisin v. Foster), 809 F.2d 329 (6th Cir.1987); In re Maislin Industries, U.S., Inc. (Maislin Industries, U.S., Inc. v. Certified Brokerage Sys., Inc.), 75 B.R. 170 (Bankr.E.D. Mich.1987).

2. The claims of WPC and Wicklund are not "related to" the Petrolia bankruptcy case.

Applying this test to the claims of the two non-debtor plaintiffs, the Court concludes that the outcomes of these claims would have no effect on the Petrolia bankruptcy estate. There is nothing in the record indicating any connection between the debtor and the two non-debtor plaintiffs which would cause recovery by the non-debtor plaintiffs to affect the bankruptcy estate. Compare: In the Matter of McRae Fire Protection, Inc., 49 B.R. 773 (Bankr.E.D.Mich.1985); In re Earl Roggenbuck Farms, Inc. (Cook v. United States), 51 B.R. 913 (Bankr.E.D.Mich.1985). See Wayne Film Recovery Systems, 64 B.R. 45 (N.D.Ill.1986). Thus, this Court has no "related to" jurisdiction over the claims of Wicklund or WPC.

3. Subject to statutory limitations, the federal district court may exercise jurisdiction over a claim ancillary to a claim over which it has jurisdiction.

In determining whether there is ancillary jurisdiction over the claims of WPC and Wicklund, "the proper focus in determining the jurisdictional issue is on the district court because the bankruptcy court is a unit of the district court. 28 U.S.C. § 151." In re Coral Petroleum, Inc., 62 B.R. 699, 702 (Bankr.S.D.Tex.1986).

Federal courts have ancillary jurisdiction to hear nonfederal claims in order to effectively resolve an entire, logically entwined lawsuit. See, e.g., Owen Equipment & Erection Company v. Kroger, 437 U.S. 365, 377, 98 S.Ct. 2396, 2404, 57 L.Ed. 2d 274 (1978).

The term ancillary jurisdiction, in fully flowered form, then, is used to consider the court\'s jurisdiction over claims which are an outgrowth of the claims by the original plaintiff or plaintiffs against the original defendant or defendants. These would include compulsory counterclaims, cross-claims, third-party claims, claims against an additional party as part of one of the above, and intervention as of right.

J. Landers & James A. Martin, Civil Procedure 214 (1981).1

The contours of ancillary jurisdiction were defined by the Supreme Court in United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), then further limited by Aldinger v. Howard, 427 U.S. 1, 96 S.Ct. 2413, 49 L.Ed.2d 276 (1975), and Zahn v. International Paper Co., 414 U.S. 291, 94 S.Ct. 505, 38 L.Ed.2d 511 (1973). Owen Equipment, 437 U.S. at 371-373, 98 S.Ct. at 2401-2402.

Gibbs involved pendent jurisdiction, but it delineated the constitutional limits of the federal judicial power to hear state law claims when independent bases for federal jurisdiction are not present.

The state and federal claims must derive from a common nucleus of operative fact. But if, considered without regard to their federal or state
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