In re Premium Escrow Services, Inc.

• Decision Date: 23 May 2006
• Docket Number: Bankruptcy No. 02-02358.,Adversary No. 04-10455.
• Parties: In re PREMIUM ESCROW SERVICES, INC., Debtor. Premium of America, LLC, Plaintiff, v. William C. Sanchez and William C. Sanchez, M.D., P.C., Defendants.
• Court: United States Bankruptcy Courts. District of Columbia Circuit

342 B.R. 390

In re PREMIUM ESCROW SERVICES, INC., Debtor.

Premium of America, LLC, Plaintiff, v. William C. Sanchez and William C. Sanchez, M.D., P.C., Defendants.

Bankruptcy No. 02-02358.

Adversary No. 04-10455.

United States Bankruptcy Court, District of Columbia.

May 23, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Steven H. Greenfeld, Gins and Greenfeld, PC, Washington, DC, for Debtor.

DECISION REGARDING DEFENDANTS' MOTION TO DISMISS

S. MARTIN TEEL, JR., Bankruptcy Judge.

Defendants William C. Sanchez, M.D., and William C. Sanchez, M.D., P.C. (collectively the "Defendants") have filed a motion to dismiss this adversary proceeding brought by Premium of America, LLC ("POA") as successor-in-interest to the debtor Premium Escrow Services, Inc. ("PES") with respect to certain claims assigned to POA by former investors of PES (the "Investor-Related Claims"). Alternatively the Defendants request that this court sever the Investor-Related Claims from those claims asserted directly by POA.

The Defendants' argument for dismissal is purely jurisdictional: they assert that the court lacks subject matter jurisdiction over the Investor-Related Claims, and that, to the extent jurisdiction exists, it is the product of collusive efforts by PES and its investors in contravention of 28 U.S.C. § 1359.¹ In addition, the Defendants urge the court to rule that its jurisdiction over the adversary proceeding is "non-core" within the meaning of 28 U.S.C. § 157.

The court agrees with the Defendants that it lacks subject matter jurisdiction over the Investor-Related Claims, and further agrees that its jurisdiction over the remaining claims in this adversary proceeding is non-core. Accordingly, the court will grant the Defendant's motion to dismiss in its entirety and will amend its scheduling order to state that its jurisdiction is non-core.

I

PES is a subsidiary company and co-debtor of Beneficial Financial Services, Inc. ("Beneficial"), a "viatical settlement company" that sold interests in life insurance policies formerly owned by terminally ill patients known as "viators." Upon soliciting funds from investors, Beneficial would bid for the right to receive the death benefits of a viator's policy. When Beneficial was the winning bidder, it would match an investor's contribution with the purchased interest. Each viaticated interest would be matched with a number of investors, such that all of Beneficial's investors owned only fractional interests in the actual insurance policies.

Beneficial's business model depended on the purchase of life insurance policies held by viators with short life expectancies; the shorter the life expectancy, the higher the profit would be for Beneficial's investors. To that end, Beneficial paid a number of doctors, including the defendant Dr. Sanchez, to review the medical file of each viator and make a prediction as to the probable life span of that viator. Beneficial would then share the conclusions drawn by the examining physician with its investors as part of a "summary package" prepared after the closing on each viaticated policy.

Initially, Beneficial retained a series of individual escrow agents to serve as the title holder for all of its purchased interests, pay the monthly premiums on those interests, and collect on the interests when a viator died. This process proved to be inefficient, so in 2001 Beneficial created PES to function as a permanent escrow agent. PES served in that role until its bankruptcy in 2002.

Beneficial's business ultimately proved unsuccessful, due in large part to the unexpectedly long life span of many of the viators whose policies Beneficial purchased. Put simply, too many viators lived too long for Beneficial to make any money off of its purchased interests. Beneficial filed for bankruptcy on November 20 2002. PES followed suit on December 9, 2002.²

The court entered an order procedurally consolidating the two cases on June 26, 2003. Separate plans of reorganization for Beneficial and PES were confirmed on August 12, 2003. PES's plan called for the creation of a new corporation — POA — that would administer PES's remaining viaticated insurance policies.

As is typical in the creation of a successor company like POA, the debtor's plan of reorganization provided for the transfer of all causes of action held by PES to the new entity. The plan also provided that investors who still held interests in life insurance policies viaticated through Beneficial would assign their claims to POA in exchange for ownership interests in the new company proportionate to their prior interests. This transfer consolidated all of the fractional interests held by PES's investors in one entity — the successor corporation — thereby improving the chances of recovery on outstanding policies overall (e.g., by eliminating the risk that one owner of a fractional interest in a policy would fail to pay the owner's pro rata share of the monthly premium, which would cause every fractional interest holder to default on the premium). It also allowed POA to assert the claims of all of PES's former investor-creditors as well as PES itself, thus streamlining recovery of assets for those creditors as a whole.

The claims assigned to POA include the claims of PES's investors against Dr. Sanchez and his medical practice for negligence and misrepresentation. The Defendants challenge the propriety of the investors' assignment of claims as well as the jurisdiction of this court in general.

II

Although the Defendants move for dismissal of the complaint against them specifically under FED. R. CIV. P. 12(b)(6) (as incorporated by FED. R. BANKR. P. 7012), the court construes their request as a motion for dismissal under FED. R. Civ. P. 12(b)(1) instead. "Rule 12(b)(1) presents a threshold challenge to the court's jurisdiction, whereas 12(b)(6) presents a ruling on the merits with res judicata effect." Al-Owhali v. Ashcroft, 279 F.Supp.2d 13, 20 (D.D.C.2003).

In most cases,³ "[a] complaint may be dismissed on jurisdictional grounds only if `it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Loughlin v. United States, 393 F.3d 155, 162 (D.C.Cir.2004) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). Accordingly, the court will treat the Defendants' arguments in the same way that it would an argument raised in a Rule 12(b)(6) motion. See Price v. Socialist People's Libyan Arab Jamahiriya, 294 F.3d 82, 93 (D.C.Cir. 2002).

A. Post-Confirmation Subject Matter Jurisdiction

"Federal courts are courts of limited jurisdiction. They possess only the power authorized by Constitution and statute." Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994). "[F]ederal jurisdiction over the bankruptcy case or proceeding must exist pursuant to 28 U.S.C. § 1334, which is a broad grant of jurisdiction." In re U.S. Office Products Co. Sec. Litig., 313 B.R. 73, 79 (D.D.C. 2004). Section 1334 confers two types of jurisdiction: (1) "original and exclusive jurisdiction of all cases under title 11," 11 U.S.C. § 1334(a); and (2) "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." Id. at § 1334(b).⁴

"The first category [of jurisdiction] refers to the bankruptcy petition itself." U.S. Brass Corp. v. Travelers Ins. Group (In re U.S. Brass Corp.), 301 F.3d 296, 303-04 (5th Cir.2002); accord In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 264 (3d Cir.1991). As for the first two bases for jurisdiction found in § 1334(b), "[a] claim `arises under' title 11 if the claim is made pursuant to a provision of title 11," In re U.S. Office Products Co. Sec. Litig., 313 B.R. 73, 79 (D.D.C.2004), and "[c]laims `arising in' a case under title 11 are limited to `administrative matters that arise only in bankruptcy cases and have no existence outside of the bankruptcy proceeding.'" Id. (quoting Atkinson v. Kestell, 954 F.Supp. 14, 16 (D.D.C.1997) (further citation omitted)). Finally, with respect to so-called "related to" jurisdiction under § 1334(b), "the test is `whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.'" Id. at 80 (quoting Atkinson, 954 F.Supp. at 16 (further citation omitted)).

1. Post-confirmation jurisdiction in general

Prior to the confirmation of a debtor's plan of reorganization, an action to recover funds for the estate easily satisfies the criteria for "related to" jurisdiction because the recovery of such funds increases the size of the estate and improves the potential for and quantity of distributions to creditors. But "once confirmation occurs, the bankruptcy court's jurisdiction shrinks," Penthouse Media Group v. Guccione (In re Gen. Media, Inc.), 335 B.R. 66, 73 (Bankr.S.D.N.Y.2005), because "[a]t the most literal level, it is impossible for the bankrupt debtor's estate to be affected by a post-confirmation dispute" once the estate re-vests in the reorganized debtor pursuant to 11 U.S.C. § 1141. Binder v. Price Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 165 (3d Cir.2004).⁵

"Consequently, a party invoking the bankruptcy court's post-confirmation jurisdiction must satisfy two requirements." In re Gen. Media, Inc., 335 B.R. at 73. "First, the matter must have a close nexus to the bankruptcy court or proceeding, as when a matter affects the interpretation, implementation, consummation, execution[,] or administration of the confirmed plan[,] and second, the plan must provide for the retention of jurisdiction over the dispute." Kassover v. Prism Venture Partners, LLC (In re Kassover), 336 B.R. 74, 79 (Bankr.S.D.N.Y.2006). "At the post-confirmation stage, the claim must affect an integral aspect of the bankruptcy process — there must be a close nexus to the...