In re Trans-Industries, Inc.

• Decision Date: 13 November 2009
• Docket Number: Adversary No. 07-6790.,Bankruptcy No. 06-43993.
• Citation: 419 B.R. 21
• Parties: In re TRANS-INDUSTRIES, INC., et al., Debtors. David W. Allard, Plaintiff, v. Dale S. Coenen, Kai R. Kosanke, Richard A. Solon, and Delmar E. Fields, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

419 B.R. 21

In re TRANS-INDUSTRIES, INC., et al., Debtors.

David W. Allard, Plaintiff, v. Dale S. Coenen, Kai R. Kosanke, Richard A. Solon, and Delmar E. Fields, Defendants.

Bankruptcy No. 06-43993.

Adversary No. 07-6790.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

November 13, 2009.

COPYRIGHT MATERIAL OMITTED

Brian E. Etzel, Marc L. Newman, The Miller Law Firm, P.C., Rochester, MI, for Plaintiff.

David W. Allard, Detroit, MI, Pro se.

Sara Klettke MacWilliams, Steven C. Susser, Southfield, MI, Clyde B. Pritchard, Franklin, MI, Allison Bach, Dickinson Wright PLLC, Detroit, MI, David Ruiz, Calfee Halter & Griswold, LLP, Nathan A. Wheatley, Peter J. Comodeca, Cleveland, OH, Delmer F. Fields, Lyle D. Russell, Paul M. Stoychoff, Waterford, MI, for Defendants.

OPINION REGARDING DEFENDANT'S MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION

THOMAS J. TUCKER, Bankruptcy Judge.

(Jointly Administered)¹

In this adversary proceeding, the Chapter 7 trustee asserts multi-million dollar claims against three alleged fiduciaries of the Debtor's pension plan. One of the defendants has filed a motion to dismiss, challenging this Court's subject matter jurisdiction. Although the motion raises novel issues, the Court concludes that it has jurisdiction.

I. Introduction

The Chapter 7 trustee, David W. Allard, filed this adversary proceeding against three pre-petition fiduciaries of the Debtor's pension plan, seeking damages for alleged breaches of fiduciary duty and for breach of contract. The Trustee's claims are based on the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. ("ERISA"), including 29 U.S.C. §§ 1132 and 1109, and on state common law.

The parties agree that the Trustee has standing to pursue the ERISA claims, based on § 704(a)(11) of the Bankruptcy Code. That section was added to the Bankruptcy Code in 2005 by the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" ("BAPCPA"). It added a new duty to § 704(a)'s list of the Chapter 7 trustee's duties. That duty applies in any case where, as here, the debtor was serving as the plan administrator of an ERISA employee benefit plan when the bankruptcy petition was filed. In such a case, the Chapter 7 trustee must "continue to perform the obligations required of the administrator." 29 U.S.C. § 704(a)(11).²

While BAPCPA added this new trustee duty, it made no related changes to the statutes governing the bankruptcy court's subject matter jurisdiction, 28 U.S.C. §§ 1334 and 157.

One of the Defendants, Richard A. Solon, has filed a motion to dismiss the Trustee's claims, arguing that the bankruptcy court lacks subject matter jurisdiction.³ Solon's argument is based on the undisputed fact that the Trustee's claims, and any recovery on those claims, belong to the ERISA pension plan, a legal entity separate from the bankruptcy estate, and not to the estate. From this premise Solon argues, among other things, that the adversary proceeding cannot benefit the bankruptcy estate, or otherwise have any effect on the bankruptcy estate, sufficiently to support bankruptcy court jurisdiction.

For the reasons stated in this opinion, the Court concludes that it has "related to" subject matter jurisdiction, and therefore must deny Solon's motion to dismiss.

II. Procedural history and Allard's complaint

On April 3, 2006, Trans-Industries, Inc. ("Trans-Industries" or "Debtor") and three of its wholly-owned subsidiaries (Transign, Inc., Transmatic, Inc., and Vultron, Inc.) filed voluntary petitions for relief under Chapter 11. The four cases are jointly administered. On October 17, 2006, these cases were converted to Chapter 7.⁴ David W. Allard is the Chapter 7 Trustee in each case. Allard filed this adversary proceeding against Defendants Dale S. Coenen, Kai R. Kosanke, Richard A. Solon, and Delmar E. Fields.

The Complaint includes the following allegations. "In 1974, [Debtor Trans-Industries] established the Trans-Industries, Inc. Salaried Employees' Retirement Plan [("Plan")]. In 1989, the [P]lan was amended to provide a 401(k) pre-tax savings option, and was renamed the Trans-Industries, Inc. Employee 401(k) Profit Sharing Plan and Trust."⁵ "The Plan was an `employee pension benefit plan' as defined in 29 U.S.C. § 1002[ (2) ](A)," and was governed by [ERISA].⁶ "The Plan was funded through ... (i) payroll contributions to individual retirement savings accounts made by participants, (ii) [Trans-Industries] matching cash contributions to eligible participants' accounts, and (iii) transfers and rollovers from certain prior retirement accounts."⁷ Debtor Trans-Industries was designated as the "Employer" and "Plan Administrator" under the Plan.⁸

The Complaint further alleges that the Plan named Defendants Coenen and Kosanke as Plan Trustees.⁹ In March 2005, Coenen resigned and Defendant Solon replaced him as a Trustee of the Plan.¹⁰ "Defendant ... Fields was also a Plan fiduciary, and served as the Official Employee Representative ... to the Plan's Trustees."¹¹

The Plan, as amended, "authorize[d] the Trustees [of the Plan] to `acquire or sell shares of the Employer [Debtor Trans-Industries]' provided that `no more than 50 percent of the Trust Fund assets shall be invested in such securities at any time.'"¹² Nevertheless, pre-petition, more than 50 percent of the Trust Fund assets consisted of the stock of Trans-Industries.¹³

In 2004 when Fields resigned, and in 2005 when Coenen resigned, each requested and received a lump sum distribution of his vested account balance under the Plan, in the amounts of $1.4 million and $1 million, respectively.¹⁴ The distributions to Fields and Coenen were made possible by "the liquidation of all Plan investments other than [Trans-Industries] stock," which was approved by the Trustees of the Plan.¹⁵ "By the time that Debtors sought bankruptcy protection in April 2006, there were few if any assets left in the Plan for the remaining Plan participants, depriving them of virtually all of their retirement savings."¹⁶

Based on the allegations in the Complaint, the Trustee, in his capacity as administrator of the Plan under 11 U.S.C. § 704(a)(11), seeks entry of a money judgment against the Defendants for breach of fiduciary duties in violation of ERISA (Count I), and for breach of contract (Count II). Defendant Solon's motion seeks dismissal of both counts of the Complaint for lack of subject matter jurisdiction.¹⁷ The Court held a hearing on the motion, and after the hearing, Allard sought leave to file a post-hearing affidavit.¹⁸ The Court granted the request and required the parties to file supplemental briefs.¹⁹

III. Standards applicable to motions to dismiss under Fed.R.Civ.P. 12(b)(1)

Solon brings his motion to dismiss under Fed.R.Civ.P. 12(b)(1) and 12(h)(3), applicable to this adversary proceeding through Fed. R. Bankr.P. 7012(b). Rule 12(b)(1) permits the defense of "lack of subject-matter jurisdiction" to be asserted by motion. Rule 12(h)(3) says that "[i]f the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action."

"A Rule 12(b)(1) motion can either attack the claim of jurisdiction on its face, in which case all allegations of the plaintiff must be considered as true, or it can attack the factual basis for jurisdiction, in which case the trial court must weigh the evidence and the plaintiff bears the burden of proving that jurisdiction exists." DLX, Inc. v. Kentucky, 381 F.3d 511, 516 (6th Cir.2004). In this case, Solon does not dispute any of the facts asserted by Allard in support of subject matter jurisdiction. Therefore, the Court will accept Allard's factual assertions as true for purposes of deciding the motion.

IV. Basic principles of bankruptcy court subject matter jurisdiction

This Court has subject matter jurisdiction over "all cases under title 11," and over "all civil proceedings" (1) "arising under title 11" or (2) "arising in" a case under title 11 or (3) "related to" a case under title 11.²⁰

A "case under title 11" refers "merely to the bankruptcy petition itself, filed pursuant to 11 U.S.C. §§ 301, 302, or 303." Michigan Employment Sec. Comm'n v. Wolverine Radio Co., Inc., 930 F.2d 1132, 1140 (6th Cir.1991). So this adversary proceeding is not a "case under title 11." Rather, it is a "civil proceeding" within the meaning of 28 U.S.C. § 1334(b), so that, in order for the Court to have jurisdiction, this adversary proceeding must fit one of the three categories of civil proceedings listed in § 1334(b).

"The phrase `arising under title 11' describes those proceedings that involve a cause of action created or determined by a statutory provision of title 11, and `arising in' proceedings are those that, by their very nature, could arise only in bankruptcy cases." Bliss Technologies, Inc. v. HMI Indus., Inc. (In re Bliss Technologies, Inc.), 307 B.R. 598, 602 (Bankr.E.D.Mich.2004)(quoting Wolverine Radio, 930 F.2d at 1144). These two categories of civil proceedings are "core" proceedings within the meaning of 28 U.S.C. §§ 157(b)(1) and 157(b)(2). Id.²¹ The bankruptcy court can enter final orders and judgments in all "core" proceedings. 28 U.S.C. § 157(b)(1).

Civil proceedings that fall only within the third category of the bankruptcy court's subject matter jurisdiction—its "related to" jurisdiction—are non-core. In a non-core proceeding, unless all parties consent, a bankruptcy court cannot enter final orders and judgments, but instead must "submit proposed findings of fact and conclusions of law to the district court," and the district court must enter the final order or judgment. 28 U.S.C. §§ 157(c)(1), 157(c)(2).

The Sixth Circuit has adopted the test articulated in Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir.1984), for determining "related to" jurisdiction:

"The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether...