In re Remington Development Group, Inc.

• Citation: 180 BR 365
• Decision Date: 11 April 1995
• Docket Number: Bankruptcy No. 93-13020. Adv. No. 94-1214.
• Parties: In re REMINGTON DEVELOPMENT GROUP, INC., Debtor. John BOYAJIAN, Trustee, Plaintiff, v. Shirley DeLUCA, Defendant and 3rd Party Plaintiff, v. Keven A. McKENNA, 3rd Party Defendant.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Rhode Island

180 B.R. 365 (1995)

In re REMINGTON DEVELOPMENT GROUP, INC., Debtor.

John BOYAJIAN, Trustee, Plaintiff, v. Shirley DeLUCA, Defendant and 3rd Party Plaintiff, v. Keven A. McKENNA, 3rd Party Defendant.

Bankruptcy No. 93-13020. Adv. No. 94-1214.

United States Bankruptcy Court, D. Rhode Island.

April 11, 1995.

Stephen A. Rodio, Rodio & Brown, Providence, RI, for Shirley DeLuca.

Keven A. McKenna, Providence, RI, pro se.

John Boyajian, Trustee, Boyajian, Harrington & Richardson, Providence, RI, for trustee.

MEMORANDUM OF DECISION

JAMES B. HAINES, Jr., Bankruptcy Judge.^*

In this adversary proceeding, third-party defendant Keven A. McKenna ("McKenna") has moved to dismiss the third-party complaint. The motion poses the question whether this court has 28 U.S.C. § 1334 "related-to" jurisdiction or 28 U.S.C. § 1367 "supplemental" jurisdiction over a third-party dispute between non-debtors. For the reasons set forth below, I conclude jurisdiction is lacking and grant the motion to dismiss.¹

Background

Remington Development Group, Inc., ("Remington" or "debtor") filed a voluntary Chapter 11 petition on December 1, 1993. John Boyajian, who was subsequently appointed Chapter 11 trustee, initiated this adversary proceeding against Shirley DeLuca ("DeLuca"), objecting to her claim, seeking a declaration that Remington received funds from her in usurious loan transactions per Rhode Island General Laws § 6-26-4, and asking that a judgment be entered against her for all payments previously made by Remington. DeLuca answered, asserting inter alia, that she did not advance funds to Remington as "loans." She filed a third-party complaint against McKenna, seeking indemnification to the extent she might be found liable to the trustee.² McKenna moved to dismiss for lack of subject matter jurisdiction, Fed.R.Bankr.P. 7012(b),³ and, in the alternative, for abstention.

Discussion

1. The Dismissal Standard.

In ruling upon the motion to dismiss, "whether on the ground of lack of jurisdiction over the subject matter or for failure to state a cause of action, the allegations of the third-party complaint should be construed favorably to the pleader." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Cioffi v. Old Stone Bank (In re C.A.C. Jewelry, Inc.), 124 B.R. 419, 421 n. 3 (Bankr.D.R.I.1991); Realty Data, Inc. v. Lanciaux (In re Lanciaux), 76 B.R. 254, 256 (Bankr.D.R.I.1987). See Watterson v. Page, 987 F.2d 1, 3 (1st Cir.1993) ("In considering a motion to dismiss, a court must take the allegations in the complaint as true and must make all reasonable inferences in favor of the plaintiffs.") (citing Monahan v. Dorchester Counseling Ctr., Inc., 961 F.2d 987, 988 (1st Cir.1992)). See 5A Wright & Miller, Federal Practice and Procedure: Civil 2d §§ 1350, 1363 (1990) hereinafter "Wright & Miller".

2. Facts.

Remington received a total of approximately $240,000.00 from DeLuca during May, June and July of 1993 in three transactions.⁴ Remington used the funds to "purchase various art pieces, antiques, furniture and/or property from various estates." A portion of the proceeds from planned auction sales of these items was to be paid over to DeLuca. Third-Party Complaint at 2. Remington repaid DeLuca no more than $100,000.00 plus some undefined "share" of auction proceeds in the period preceding its bankruptcy filing. Id. at 2-3.

During the course of the Remington-DeLuca transactions, DeLuca met McKenna, a Rhode Island attorney. He helped resolve several disagreements between Remington and DeLuca. Id. at 3. In addition, he prepared or reviewed documentation for the Remington-DeLuca dealings, and gave DeLuca related legal advice. Id. at 3-4. DeLuca asserts that if she is unable to enforce her rights against Remington or is liable to Remington as a consequence of her relationship to it, it was because McKenna breached one or more state law duties to her.⁵

3. The Parties' Contentions.

DeLuca posits alternative bases for bankruptcy court jurisdiction over the third-party complaint. First, she asserts that the third-party dispute is "related-to" Remington's bankruptcy proceeding. 28 U.S.C. § 1334(b). Second, DeLuca contends that this court may exercise "supplemental" jurisdiction pursuant to 28 U.S.C. § 1367 because the trustee's action and the third-party complaint have "the identical common nucleus of facts." DeLuca's Objection To McKenna's Motion To Dismiss at 3. She adds that this court can hear the matter because it meets Fed. R.Civ.P. 14(a)'s (as incorporated by Fed. R.Bankr.P. 7014) requirements for impleader actions.

4. General Jurisdictional Provisions.

Section 1334 provides that district courts shall have "original and exclusive" jurisdiction of "all cases under title 11," § 1334(a), and "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." § 1334(b). The district courts may refer bankruptcy jurisdiction to bankruptcy courts: "Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district." § 157(a). The United States District Court for the District of Rhode Island, by its standing Order of Reference dated July 18, 1984, has provided for such referral to bankruptcy judges in the District of Rhode Island.⁶

DeLuca's third-party action does not "arise under" title 11 because it derives from state law, rather than federal bankruptcy law. See In re Wood, 825 F.2d 90, 96-97 (5th Cir.1987). It does not "arise in" the bankruptcy case because DeLuca can bring her action outside the context of Remington's bankruptcy case. Id. at 97. If the third-party complaint is within this court's jurisdiction at all, it must be because it is "related-to" Remington's bankruptcy proceeding. See 1 Norton Bankruptcy Law and Practice 2d § 4:39 at 4-234 (1994) hereinafter "Norton".⁷

"Related-to" jurisdiction is the most expansive component of § 1334(b). See, e.g., In re Arnold Print Works, Inc., 815 F.2d 165, 167 (1st Cir.1987); In re Walker, 168 B.R. at 118-19. As the following analysis reveals, however, even under the broadest construction of "related-to" jurisdiction, the connection between DeLuca's third-party complaint and Remington's Chapter 11 bankruptcy is too tenuous to tether it to this court's judicial power.

5. Related-To Jurisdiction: You Can't Get There From Here.

a. The Applicable Standard.

Generally speaking, related-to bankruptcy jurisdiction extends to matters "concerned only with State law issues that did not arise in the core bankruptcy function of adjusting debtor-creditor rights." In re Arnold Print Works, Inc., 815 F.2d at 167. See In re El San Juan Hotel Corp., 149 B.R. 263, 270 (D.P.R.1992) (describing related-to cases as "`those civil proceedings that, in the absence of bankruptcy, could have been brought in a district court or state court.'") (citations omitted). See generally 1 Norton § 4:39.

To define the reach of related-to jurisdiction, the bankruptcy court for this district utilizes the generally-adopted standard set out by the Third Circuit:

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. . . . Thus, the proceeding need not necessarily be against the debtor or against the debtor\'s property. An action is related to bankruptcy if the outcome could alter the debtor\'s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.

Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) (emphasis in original). See In re C.A.C. Jewelry, Inc., 124 B.R. at 422; In re Lanciaux, 76 B.R. at 256. See also In re Parque Forestal, Inc., 949 F.2d at 509 (remarking that Pacor provides a "broad construction" of related-to jurisdiction, without adopting the test for all cases); In re G.S.F. Corp., 938 F.2d at 1475 (recognizing Pacor as the "usual articulation" of the related-to jurisdiction test); Flores Rivera v. Telemundo Group, 133 B.R. 674, 675 (D.P.R.1991) (noting that most circuits have adopted the Pacor test); Philippe v. Shape, Inc., 103 B.R. 355, 356 (D.Me.1989) (applying Pacor test); In re Videocart, Inc., 165 B.R. 740 (Bankr. D.Mass.1994) (applying Pacor test); In re Summit Airlines, Inc., 160 B.R. at 922 (survey of circuits applying Pacor). But see In re Turner, 724 F.2d 338, 341 (2d Cir.1983) (requiring a "significant connection" to the bankruptcy estate); In re Pettibone Corp., 135 B.R. 847, 849-50 (Bankr.N.D.Ill.1992) (describing a narrower Seventh Circuit test requiring that resolution of the case "affects the amount of property available for distribution or the allocation of property among the creditors.").⁸

b. Third-Party Complaints: Non-Debtor Disputes.

I start with Judge Votolato's observation: "At best, our jurisdiction to adjudicate a dispute between two non-debtors is tenuous. . . . `In the absence of any tangible effect on the bankruptcy case, bankruptcy courts have regularly concluded that they lack jurisdiction to resolve claims by non-debtors against other non-debtors.'" In re C.A.C. Jewelry, Inc., 124 B.R. at 422 (citations omitted). See In re Walker, 168 B.R. at 119 (collecting cases and noting that, under the Pacor test, jurisdiction is wanting for the "vast majority" of third-party complaints); In re Summit Airlines, Inc., 160 B.R. at 922-23 (same).

Those third-party disputes over which related-to jurisdiction may exist often involve potential indemnification claims against the estate by the third-party defendant. For example, in Philippe v. Shape, Inc., 103 B.R. at 356, third-party claims against a corporate debtor's insiders were determined to be within...