In re Wellington Apartment, LLC

• Citation: 353 B.R. 465
• Decision Date: 20 October 2006
• Docket Number: Adversary No. 05-5029.,Bankruptcy No. 04-50301-DHA.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re WELLINGTON APARTMENT, LLC, Debtor. Wellington Apartment, LLC, Plaintiff, v. Charles Clotworthy, et al., Defendants.

353 B.R. 465

In re WELLINGTON APARTMENT, LLC, Debtor Wellington Apartment, LLC, Plaintiff, v. Charles Clotworthy, et al., Defendants.

Bankruptcy No. 04-50301-DHA.

Adversary No. 05-5029.

United States Bankruptcy Court, E.D. Virginia, Newport News Division.

October 20, 2006.

COPYRIGHT MATERIAL OMITTED

John M. Ryan, Jr., Karen M. Crowley, Kelly Megan Barnhart, Marcus, Santoro & Kozak, P.C., Chesapeake, VA, for Debtor.

MEMORANDUM OPINION AND ORDER

DAVID H. ADAMS, Bankruptcy Judge.

This matter is before the Court on the debtor's Motion to Approve Entry of Order Relating to Poydras (Louisiana), LLC. The debtor is asking this Court to approve an agreement it reached with Poydras (Louisiana), LLC ("Poydras LA"), whereby Poydras LA would pay to the debtor any monetary distributions that Poydras LA would ordinarily make to WP New Orleans, L.L.C. ("WP New Orleans") and WPN, L.L.C. ("WPN") and would send to the debtor any correspondence, notices, financial reports and other documents relating to Poydras LA to which WP New Orleans and WPN are entitled.

FACTS

On January 5, 2004, Wellington filed for relief under Chapter 11 of the Bankruptcy Code in the District of Connecticut, Bridgeport Division, and its case was transferred to the Eastern District of Virginia, Newport News Division, on February 3, 2004. Wellington's sole asset was a 152-unit apartment complex located in Newport News, Virginia.

On June 1, 2005, the debtor filed an adversary proceeding against Charles H. Clotworthy, III, Richard Merel, Steven Byers, Garfield & Merel, Ltd., WP New Orleans, and WPN,¹ based on their allegedly fraudulent conduct surrounding the placement of First Bank's Second Deed of Trust on the debtor's apartment complex. The money obtained from the Second Deed of Trust was used by the defendants to invest in a piece of property in Louisiana ("the Poydras building").

A five day trial was held that resulted in a judgment in favor of the debtor in the amount of $2,546,174.59; additionally, an equitable lien was imposed upon WPN's interest in the Poydras building, a resulting trust was imposed upon Byers' and WPN's interests in the Poydras building and a constructive trust was imposed upon WPN and WP New Orleans' interests in the Poydras building, all until such time that the judgment is paid in full to the debtor.

On September 6, 2006, the debtor filed the instant motion, which was objected to by WPN and WP New Orleans, and therefore a hearing was held on the motion and the objections thereto.

ARGUMENTS

The debtor argues that it is entitled to the relief requested because a resulting or a constructive trust has been imposed upon WPN and WP New Orleans until the judgment is paid in full. The debtor states that it is entitled to receive all distributions that would be paid to either WPN or WP New Orleans and copies of all correspondence Poydras LA sends to either entity. The debtor argues that this information is its only form of protection against these defendants.

WPN and WP New Orleans argue that the debtor is attempting to exercise ownership and control over both entities through a document that does not confer such rights. They argue that the Court did not void any transfers or bestow upon the debtor any type of control over WPN or WP New Orleans, but rather merely granted an in personam judgment and pursuant to FRBP 7069 the only remedies the debtor has arise under state execution laws.

CONCLUSIONS OF LAW

A. Subject Matter Jurisdiction

The issue that necessarily must be addressed first is that of subject matter jurisdiction; can this Court properly decide the motion before it? Bankruptcy Courts are courts of limited jurisdiction. Celotex v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Their subject matter jurisdiction is derived from 28 U.S.C. §§ 1334 and 157.

1. § 1334

In § 1334 Congress bestows upon the District Courts "original and exclusive jurisdiction of all cases under title 11" and "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(a) and (b) (2006).

2. § 157

Section 157 authorizes the District Courts to refer "any and 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" to the Bankruptcy Courts. Id. at § 157(a). The District Court for the Eastern District of Virginia did refer all such cases to the Bankruptcy Judges of the Eastern District of Virginia pursuant to a Standing Order filed on August 15, 1984. Further, on December 13, 1985, that the District Court ordered that because "the bankruptcy court is a unit of the district court, the judgments rendered by the bankruptcy judge and entered by the clerk of the bankruptcy court are judgments of the district court." Standing Order, E.D. Va., Dec. 13, 1985.

Section 157 allows Bankruptcy Courts to hear and determine all cases under title 11 and all proceedings that arise under or in, or are related to a case filed under title 11. 28 U.S.C. § 157(a). A bankruptcy case is instituted when a petition is filed under Chapters 7, 9, 11, 12, 13, or 15 of the Bankruptcy Code and proceedings arise within bankruptcy cases. This Code section specifically authorizes the Bankruptcy Court to enter orders and judgments in core proceedings that are delineated in § 157(b)(2), and while core proceedings are not defined in the Code, they have been described as "`those proceedings that would not exist in law absent the Bankruptcy Code.'" Helmer v. Murray (In re Murray), 149 B.R. 383, 386 (E.D.Va.1993) (quoting Levy v. Butler, Payne & Griffin Equity Corp. (In re Landbank), 77 B.R. 44, 47 (E.D.Va.1987)). Finally, § 157 grants Bankruptcy Courts the authority to hear and determine non-core proceedings, but states that such courts may only enter judgments in those proceedings with the parties' consent. 28 U.S.C. § 157(c)(2). Without such consent, the Bankruptcy Court must submit findings of fact and conclusions of law in those proceedings to the District Court for determination. Id. at § 157(c)(1).

a. "Arises Under"

A proceeding "arises under" Title 11 when "`a well-pleaded complaint establishes either that federal [bankruptcy] law creates the cause of action or that the plaintiffs right to relief necessarily depends on resolution of a substantial question of federal [bankruptcy] law.'" Poplar Run Five Ltd. P'ship v. Va. Elec. & Power Co. (In re Poplar Run Five Ltd. P'ship), 192 B.R. 848, 855 (Bankr.E.D.Va. 1995) (quoting Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 27-28, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983)).

The Ninth Circuit has found that this sort of "arises in" jurisdiction exists in collection proceedings if the original matter was a core matter according to the Bankruptcy Code. McGowan v. Fraley (In re McCowan), 296 B.R. 1, 4 (9th Cir. BAP 2003); In re Lawson, 156 B.R. 43, 46 (9th Cir. BAP 1993). It reasons that the collection of any money judgment entered by the Bankruptcy Court is merely a continuation of the underlying matter and that the subject matter jurisdiction also relates to the collection proceeding. Id. The Fourth Circuit has not determined that any such extension of jurisdiction exists.

Thus, under the law in this Circuit, enforcement of the judgment in this case does not involve a substantial federal question and jurisdiction to determine the debtor's motion cannot lie under this wording of the statute.

b. "Arises In"

A proceeding "arises in" a bankruptcy case when Title 11 does not specifically provide the basis for it, but without the bankruptcy case, it is of no practical significance. In re Poplar Run Five Ltd. P'ship, 192 B.R. at 857 (i.e., the validity of a proof of claim, which must be filed by creditors in bankruptcy in order to be paid, may be a determination made under state law) Id.

It is clear that enforcement of the judgment in this case has practical significance outside of bankruptcy and therefore, jurisdiction cannot lie under this wording of the statute either.

c. "Related To"

The Fourth Circuit has adopted the definition of "related to" found in Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984). Celotex Corp. v. Edwards, 514 U.S. 300, 309, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995), New Horizon of N.Y. LLC v. Jacobs, 231 F.3d 143, 151 (4th Cir.2000). The Pacor court found that an action is related to a bankruptcy case "`if the outcome [of the proceeding] could alter the debtor's right, liabilities, options, or freedom of action (either positively or negatively) and [the proceeding] in any way impacts upon the handling and administration of the bankrupt estate.'" Spartan Mills v. Bank of Am. Ill., 112 F.3d 1251, 1255-56 (4th Cir.1997), cert. denied 522 U.S. 969, 118 S.Ct. 417, 139 L.Ed.2d 319 (1997) (quoting Pacor, 743 F.2d at 994); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1002 n. 11 (4th Cir.1986). Chief Justice Rehnquist best articulated the underlying reasons for this broad definition of "related to" when he said,

"Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate" ... and that the `related to' language of § 1334(b) must be read to give district courts (and bankruptcy courts under § 157(a)) jurisdiction over more than simply proceedings involving the property of the debtor or the estate."

Celotex, 514 U.S. at 309, 115 S.Ct. 1493 (citations omitted). In a Chapter 11 case with a confirmed plan, such as the case at bar, the Court must look to the terms of that plan to determine "related to" status. In re Poplar Run Five Ltd. P'ship, 192 B.R. at 858.

d. Post-confirmation Chapter 11 cases

Bankruptcy courts have more limited jurisdiction once a plan is confirmed as the confirmation order becomes the law of the case. Id. at 859, see 11 U.S.C. § 1142. According to § 1142 the...