IN RE SOUTH CANAAN CELLULAR INVESTMENTS

• Decision Date: 25 March 2010
• Docket Number: Bankruptcy No. 09-10473bf.,Adversary No. 09-0218.
• Citation: 427 B.R. 85
• Parties: In re SOUTH CANAAN CELLULAR INVESTMENTS, LLC, and South Canaan Cellular Equity, LLC, Debtors South Canaan Cellular Investments, LLC, and South Canaan Cellular Equity, LLC, Plaintiffs v. Lackawaxen Telecom, Inc. and Frank M. Coughlin, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

427 B.R. 85

In re SOUTH CANAAN CELLULAR INVESTMENTS, LLC, and South Canaan Cellular Equity, LLC, Debtors

South Canaan Cellular Investments, LLC, and South Canaan Cellular Equity, LLC, Plaintiffs v. Lackawaxen Telecom, Inc. and Frank M. Coughlin, Defendants.

Bankruptcy No. 09-10473bf. Adversary No. 09-0218.

United States Bankruptcy Court, E.D. Pennsylvania.

March 25, 2010.

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Gretchen M. Santamour, Julie M. Murphy, Stradley Ronon Stevens & Young, LLP, Michael L. Temin, Fox Rothschild LLP, Philadelphia, PA, for Debtors and Plaintiffs.

John J. Barrett, Jr., Reger Rizzo & Darnall LLP, Philadelphia, PA, Mark T. Vuono, Vuono & Gray LLC, Pittsburgh, PA, for Defendants.

MEMORANDUM AND REPORT

BRUCE FOX, Bankruptcy Judge.

Defendants Lackawaxen Telecom, Inc. ("LTI") and Mr. Frank Coughlin have filed a joint motion seeking to dismiss the above-captioned adversary proceeding. They assert that dismissal is warranted under Fed. R. Bankr.P. 7012, which incorporates, inter alia, Fed.R.Civ.P. 12(b)(1), (2), (5), (6), (7). The plaintiffs oppose dismissal. For the following reasons, I shall recommend to the district court that all counts of the complaint be dismissed as to defendant Coughlin. I shall further dismiss one count of the complaint against defendant LTI.

I.

A.

In this adversary proceeding, the debtors allege that defendant Frank Coughlin, who is a shareholder of LTI and a member of both limited liability company debtors, improperly obtained assignments of the debtors' loan obligations from CoBank, ACB in 2007. The debtors assert seven alternative and overlapping claims against Mr. Coughlin in connection with those loan assignments: breach of duty of loyalty; breach of duty of candor/disclosure; usurpation of business opportunity; breach of duty of good faith; breach of duty of care; breach of fiduciary duty; and breach of duty of good faith and fair dealing.

In addition, the debtors assert a claim against defendant LTI for allegedly aiding and abetting Mr. Coughlin in his breach of these various duties to the debtors. They also include an objection to the $13.5 million secured proofs of claim filed by LTI in each of the debtors' chapter 11 bankruptcy cases. See Fed. R. Bankr.P. 3007(b) (an objection to a proof of claim "may be included in an adversary proceeding").

In their objection to LTI's proofs of claim, the debtors seek to disallow LTI's claims because: the assignments of the loans from Co-Bank to LTI should be invalidated; a constructive trust should be imposed upon any gain or profit LTI received owing to these loan assignments; LTI should be precluded from receiving any accrued interest or attorney's fees arising from the Co-Bank loans; the prepetition interest component of LTI's proofs of claim was improperly computed; and the attorney's fees components of the proofs of claim are excessive. In addition, as to both defendants, the debtors demand damages, imposition of a constructive trust, invalidation of the CoBank assignment, injunctive relief, and attorney's fees and costs, based upon their claims of breaches of duties and aiding and abetting such breaches.

Defendant Coughlin contends that this court has no subject matter jurisdiction over the six state-law breach of duty counts raised against him and well as the one implied contractual claim, and so asserts that dismissal as to all counts is warranted under Rule 12(b)(1). In addition, he contends that the debtors did not obtain personal jurisdiction over him and failed to make proper service, requiring dismissal under Rule 12(b)(2), (5).

By virtue of 28 U.S.C. § 1334, there are three types of adversary proceedings for which bankruptcy court subject matter jurisdiction exists: those adversary proceedings involving claims "arising in" or "arising under" the Bankruptcy Code, and those proceedings whose claims are "related to" the bankruptcy case. See, e.g., In re W.R. Grace & Co., 591 F.3d 164, 171 (3d Cir.2009). The first two categories are classified as "core" proceedings, while the third is classified as "non-core" or "related."

An adversary proceeding "arises under" the Bankruptcy Code if it asserts a claim based upon a particular provision of title 11. See, e.g., Stoe v. Flaherty, 436 F.3d 209, 216 (3d Cir.2006). "A civil proceeding `arises in' a Title 11 case when it is not created or determined by the bankruptcy code, but where it would have no existence outside of a bankruptcy case." In re Harris, 590 F.3d 730, 737 (9th Cir. 2009). That is, "proceedings `arise in' a bankruptcy case, if they have no existence outside of the bankruptcy." United States Trustee v. Gryphon at the Stone Mansion, Inc., 166 F.3d 552, 556 (3d Cir.1999); see Stoe v. Flaherty, 436 F.3d at 216. "The `arising in a case under' category is generally thought to involve administrative-type matters." In re Toledo, 170 F.3d 1340, 1345 (11th Cir.1999).

Thus, a proceeding is classified as "core" under 28 U.S.C. § 157 "if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case." In re Marcus Hook Development Park, Inc., 943 F.2d 261, 267 (3d Cir.1991) (quoting Beard v. Braunstein, 914 F.2d 434, 444 (3d Cir.1990), which, in turn, quoted Matter of Wood, 825 F.2d 90, 97 (5th Cir.1987)). Accordingly, "if the proceeding does not invoke a substantive right created by the federal bankruptcy law and is one that could exist outside of bankruptcy it is not a core proceeding...." In re Guild and Gallery Plus, Inc., 72 F.3d 1171, 1178 (3d Cir.1996).

"Even if a claim is not a core proceeding, a bankruptcy court may still have jurisdiction over the claim if the claim is `related to a case under title 11.'" In re Winstar Communications, Inc., 554 F.3d 382, 405 (3d Cir.2009) (quoting 28 U.S.C. § 157(c)(1)). As the Third Circuit Court of Appeals has explained:

Non-core proceedings include the broader universe of all proceedings that are not core proceedings but are nevertheless "related to" a bankruptcy case. See 28 U.S.C. § 157(c)(1). "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." Pacor v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) (emphasis omitted); see In re Guild, 72 F.3d at 1180-81. "The proceeding need not necessarily be against the debtor or against the debtor's property." In re Guild, 72 F.3d at 1180-81. "`A key word in this test is conceivable. Certainty, or even likelihood, is not a requirement. Bankruptcy jurisdiction will exist so long as it is possible that a proceeding may impact on the debtor's rights, liabilities, options, or freedom of action or the handling and administration of the bankrupt estate.'" Id. at 1181 (quoting In re Marcus Hook, 943 F.2d at 264) (emphasis omitted).

Halper v. Halper, 164 F.3d 830, 837 (3d Cir.1999) (footnote omitted); see, e.g., In re W.R. Grace & Co., 591 F.3d 164, 2009 WL 5151089, at *4-*5; Stoe v. Flaherty, 436 F.3d at 216.

In other words, "for an action to be related to a bankruptcy case, its outcome must potentially have some effect on the bankruptcy estate, such as altering debtor's rights, liabilities, options, or freedom of action, or otherwise have an impact upon the handling and administration of the bankrupt estate." In re Smith, 866 F.2d 576, 580 (3d Cir.1989). A proceeding may be related to a bankruptcy case even though the debtor is not a party. See In re Guild and Gallery Plus, Inc., 72 F.3d 1171, 1181 (3d Cir.1996).

In general, adversary proceedings whose outcome could affect the amount of claims against the estate or the assets available for distribution to creditors or equity holders are related to the underlying bankruptcy case. See, e.g., In re Toledo, 170 F.3d at 1345-46 (finding "related to" jurisdiction when the outcome of the proceeding could affect the assets distributed to creditors); Diamond Mortg. Corp. v. Sugar, 913 F.2d 1233, 1239 (7th Cir. 1990), cert. denied, 498 U.S. 1089, 111 S.Ct. 968, 112 L.Ed.2d 1054 (1991); Brock v. Morysville Body Works, Inc., 829 F.2d 383, 385 (3d Cir.1987) ("Enforcement of the Commission's citations against the debtor will undoubtedly alter its liabilities and have an impact on the administration of the debtor's estate."); Matter of Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987) (A proceeding is "related to" a bankruptcy case when "it affects the amount of property available for distribution or the allocation of property among creditors.").

In this adversary proceeding, where multiple claims are raised, the various claims must be analyzed for bankruptcy jurisdictional purposes on a claim-by-claim basis. Halper v. Halper, 164 F.3d at 839; see In re Mullarkey, 536 F.3d 215, 223 (3d Cir.2008).

In considering first the aiding and abetting claim raised against LTI, as well as the debtors' objection to LTI's proofs of claim, I conclude that both are core matters, as they are part of the claims allowance process that could only occur in this bankruptcy case. See 28 U.S.C. § 157(b)(2)(B); see also In re CBI Holding Co., Inc., 529 F.3d 432, 460-61 (2d Cir. 2008); In re Iridium Operating LLC, 285 B.R. 822, 831 (S.D.N.Y.2002) (and cases cited).

Conversely, the seven claims asserted against Mr. Coughlin are all based upon state law and could have been asserted independently of the debtors' two bankruptcy cases. They are "related" to those bankruptcy cases, however, as the relief requested includes a demand for damages and for equitable relief that, if successful, would increase the assets of the bankruptcy estate available for distribution. See, e.g., Matter of Delaware & Hudson Ry. Co., 122 B.R. 887, 894-95 (D.Del.1991); In re Jamuna Real Estate, LLC, 357 B.R. 324, 336 (Bankr.E.D.Pa.2006) (and cases cited). The defendants' contention that the assets owned by the...