In re Stardust Inn, Inc.
| Decision Date | 09 March 1987 |
| Docket Number | Bankruptcy No. 82-02849G,Adv. No. 83-0396G.,82-03583G |
| Parties | In re STARDUST INN, INC., Jointly administered with E & G Restaurant, Debtors. STARDUST INN, INC. and E & G Restaurant/Lounge, Inc., Plaintiffs, v. Rajnikant A. DOSHI, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Nelson J. Sacks, Media, Pa., for the debtors/plaintiffs, Stardust Inn, Inc. and E & G Restaurant/Lounge, Inc.
George M. Bobrin, The Jefferson Law Center, Philadelphia, Pa., for defendant, Rajnikant A. Doshi.
This is an action for breach of contract brought by two bankruptcy debtors, Stardust Inn, Inc. and E & G Restaurant Lounge, Inc., against Rajnikant A. Doshi. Although the case is a related proceeding, at trial the parties consented to the entry of a final judgment by the bankruptcy court. See 28 U.S.C. § 157(c)(2). For the reasons set forth below, judgment will be entered in favor of the debtors in the amount of $15,000.00.1
Before discussing either the facts or the merits, I must address a jurisdictional issue. The debtors filed their voluntary chapter 11 bankruptcy petitions on June 18, 1982 and July 30, 1982 respectively.2 This adversary proceeding was commenced by the debtors on February 10, 1983. After considerable activity in their bankruptcy cases, including the approval of a disclosure statement and the scheduling of a confirmation hearing, the debtors requested that their bankruptcy cases be dismissed pursuant to 11 U.S.C. § 1112(b). After notice and hearing, this court entered an order on March 31, 1985, granting the debtors leave to dismiss their petitions and in July 1985, these cases were closed. See 11 U.S.C. § 350.
Although the underlying bankruptcy cases were dismissed, this adversary proceeding went to trial, neither plaintiffs nor defendant noting to the court the fact of the bankruptcy dismissal. After trial and post-trial filings, this court discovered, sua sponte, that plaintiffs had no pending bankruptcy cases and requested memoranda from the parties addressing my power to decide this proceeding. The defendant declined to file any memorandum and the plaintiffs submitted one of extreme brevity without case citation.3
As a general rule, the dismissal of a bankruptcy case should result in the dismissal of all remaining adversary proceedings. In re Pocklington, 21 B.R. 199, 202 (Bankr.S.D.Cal.1982); accord, In re Rush, 49 B.R. 158 (Bankr.N.D.Ala.1985). This is particularly true of adversary proceedings which are "related" to the bankruptcy case, 28 U.S.C. § 157(c)(1), for the related proceedings can only be heard by a bankruptcy court because of their nexus to the debtor's bankruptcy case. See generally Pacor v. Higgins, 743 F.2d 984 (3d Cir. 1984).
The question then is whether dismissal of a bankruptcy case must always result in the dismissal of pending related adversary proceedings. If not, one must identify the relevant factors in determining whether dismissal is warranted.
The few courts which have considered the issue have concluded that dismissal of the bankruptcy case does not mandate dismissal of all pending adversary proceedings. See, e.g., In re Pocklington; In re Lake Tahoe Land Co., 12 B.R. 479 (Bankr.D.Nev.1981).4 Even In re Rush, which contains dictum to the contrary, holds only that a bankruptcy court should not undertake to enforce a settlement agreement, never approved by the bankruptcy court itself, after the bankruptcy case and adversary proceedings are voluntarily dismissed.5 Where dismissal would cause prejudice to one of the parties, the bankruptcy court has the power to retain jurisdiction. In re Pocklington.
This power to retain jurisdiction over adversary proceedings may be analogized6 to a federal court's retention of jurisdiction over state pendent or ancillary claims subsequent to the dismissal of the federal claim giving rise to subject matter jurisdiction.7 Even though the federal claims may have been dismissed prior to trial, the district court is not required to dismiss the state law claims, see Nationwide Mutual Fire Insurance Co. v. T & D Cottage Auto Parts and Service, Inc., 705 F.2d 685 (3d Cir.1983); Rogin v. Bensalem Township, 616 F.2d 680 (3d Cir.1980), cert. denied, 450 U.S. 1029, 101 S.Ct. 1737, 68 L.Ed.2d 223 (1981), although dismissal of such claims is the norm. National Research Bureau, Inc. v. Bartholomew, 482 F.2d 386 (3d Cir. 1973). See generally Financial Bankshares Inc. v. Metzger, 680 F.2d 768 (D.C. Cir.1982). Rather, the district court has the power to retain jurisdiction and decide the state law claim if such retention is an appropriate exercise of discretion. In determining whether to hear the pendent or ancillary claim, courts have identified various factors such as judicial economy, fairness and convenience to the parties and the degree of difficulty of the state law issues involved. See, e.g., United States v. Zima, 766 F.2d 1153 (7th Cir.1985); Financial General Bankshares, Inc. v. Metzger; Lentino v. Fringe Employee Plans, Inc., 611 F.2d 474 (3d Cir.1979). Judicial economy looks to preserve energies already invested by the parties and the court in the proceedings; fairness to the litigants considers whether the parties would be prejudiced by dismissal (such as, for example, if the state statute of limitations has run). L.A. Draper & Son v. Wheelabrator-Frye, Inc., 735 F.2d 414 (11th Cir.1984).
I believe these same factors are relevant in my determination of the jurisdictional issue sub judice, and that my discretion would be better exercised by retaining jurisdiction and deciding this adversary proceeding on its merits. First, the matter has already been fully tried with all parties simply awaiting the decision of this court. This is significant since dismissal of the action would require that the matter be refiled and relitigated in state court. Second, this matter involves no difficult or unsettled issues of state law. Third, the fact that both parties consented to my entering a final, binding decision (rather than a recommendation) leads me to believe that they were interested in bringing this matter to a close after more than three years.8 While I recognize that were I to dismiss this matter, plaintiffs could probably refile in state court because the statute of limitations has not yet run, see 42 Pa.C.S.A. § 5526(2) (), this is outweighed by the factors mentioned above, particularly the fact that this case has been fully tried. See generally Lentino v. Fringe Employee Plans, Inc. Moreover, I have no reason to believe that the parties were aware of the jurisdictional significance of the dismissal of the underlying bankruptcy case and were attempting to have this court retain jurisdiction by their silence.
This is not to say that this court would have retained jurisdiction had it known in July 1985 that there was a pending adversary proceeding. Generally, when the debtor dismisses his bankruptcy case, all pending adversary proceedings brought by the debtor should be dismissed as well. However, here I conclude that significant events have occurred since the bankruptcy dismissal warranting retention of the adversary proceeding. I therefore proceed to a discussion of the underlying merits.
The debtors, prior to their bankruptcy filings, were the owners of a restaurant, bar and motel located in Chester, Pa. On September 26, 1982, the debtors entered into a written agreement granting defendant Doshi (hereinafter "the buyer") an exclusive option to purchase a bar, restaurant, a motel and related personalty. The option agreement provided that the purchase price would be $200,000.00 to be paid as follows:
$ 10,000.00 on September 26, 1982
5,000.00 on October 4, 1982
25,000.00 on November 1, 1982
100,000.00 on November 15, 1982
(through the assumption of the
existing mortgage on the real
property)
At the time of the execution of the option agreement, the buyer paid the debtors $10,000.00. The option agreement also provided, inter alia that:
(a) the option had to be exercised no later than 5 P.M. on October 4, 1982 by the exercise of a formal agreement of sale;
(b) if the option were not exercised, the option would expire and the $10,000.00 paid by the buyer on September 26, 1982 would be retained by the debtors; and
(c) if the option agreement were exercised, the $10,000.00 paid by the buyer would be credited toward the $200,000.00 purchase price.
Notwithstanding the expiration of October 4, 1982 deadline for exercise of the option, the buyer exercised the option by entering into a written agreement of sale with the debtors dated October 21, 1982. Upon the execution of the agreement of sale, the buyer paid the debtors another $5,000.00. The October 21, 1982 agreement of sale:
(a) acknowledged that the buyer had exercised his exclusive option to purchase;
(b) provided for the sale of the bar, restaurant, motel and related personalty referred to in the September 26, 1982 option agreement and specifically provided for the sale of the debtors' liquor license to the buyer;
(c) acknowledged receipt of $15,000.00 from the buyer;
(d) provided for payments by the buyer of $25,000.00 on November 1, 1982, $60,000.00 at settlement and for assumption of the existing mortgage on the property (not to exceed $100,000.00) at the time of settlement;
(e) provided that the agreement was contingent upon approval of the buyer by the holder of the existing mortgage, approval of the sale by the bankruptcy court and approval of the transfer of the liquor license by the Pennsylvania Liquor Control Board (hereinafter "the LCB") and that in the event any of the foregoing approvals were not obtained, the agreement would be null and void and all deposit monies would be returned to the buyer;
(f) provided for settlement on or before November 18, 1982, but also that in the event the LCB had...
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