Kelley v. Salem Mortg. Co., Adv. No. 83 0694.
| Decision Date | 22 June 1984 |
| Docket Number | Adv. No. 83 0694. |
| Citation | 41 BR 420 |
| Parties | Frank J. KELLEY, Plaintiff, v. SALEM MORTGAGE COMPANY, et al., Defendants. |
| Court | U.S. District Court — Western District of Michigan |
Luis Fernandez, Asst. Atty. Gen., Lansing, Mich., for plaintiff.
Franklin D. Gettleson, Birmingham, Mich., Clark D. Cunningham, Detroit, Mich., Emily Kurrasch, Jackson, Mich., Robert A. Fineman, Detroit, Mich., Mark Magidson, Port Huron, Mich., Michael Chielens, Grand Rapids, Mich., Irwin Alterman, Southfield, Mich., Howard Rosenberg, Southfield, Mich., L. Nicholas Treinen, Lake Orion, Mich., Arnold Schafer, Birmingham, Mich., for defendants.
The bankruptcy court, 34 B.R. 902, entered a proposed order approving class certification, settlement of a class action suit, and a final consent judgment. This proposed order was stipulated to by the parties following extensive hearings in the bankruptcy court. While the proposed order was before this court, pursuant to the Interim Rule, a group of similarly situated investors filed a motion to intervene. This motion, for the first time, questioned the court's subject matter jurisdiction over a settlement that, for the most part, only compromised the claims of borrowers and investors, neither of whom were debtors in bankruptcy. This passing reference to the court's subject matter jurisdiction caused us to seriously consider whether this court could entertain a proposed order that significantly compromised a class of defendant investors, who for the most part had extremely limited contact with the debtors. For many of these investors, the only contact that they ever had with the debtors in possession was that, sometime in the past, they had purchased a note from the debtors for investment purposes. At oral argument, the court expressed its concern that it lacked subject matter jurisdiction and invited all interested parties to file briefs on the issue. After reviewing the briefs on this issue and listening to oral arguments, we find that we do not have subject matter jurisdiction to entertain this proposed order. The jurisdictional provisions of 28 U.S.C. § 1471(b), though excessively broad, were not meant to encompass an adversary proceeding involving plaintiffs and defendants who are virtually unconnected to the debtors.
A factual summary of these proceedings will clearly demonstrate that we lack subject matter jurisdiction to enter this proposed order. On March 30, 1983, the defendant debtors—Salem, Fidelity Fund, Fidelity Securities and Nationwide—filed separate Chapter 11 bankruptcy petitions. Less than two weeks later, Attorney General Frank Kelley filed the present adversary proceeding to allege violations of the Michigan Consumer Protection Act (MCPA) M.C.L.A. § 445.901 et seq. The complaint was filed on behalf of a class of consumers composed of all borrowers who have entered mortgage loan transactions arranged by the debtors and certain individuals involved in the operations of these debtors, the named defendants. The complaint alleged, in general terms, that jurisdiction over this dispute was based on 28 U.S.C. § 1471. On May 23, 1983, the first stipulation for temporary class certification and a proposed final consent judgment were presented to the bankruptcy court. The stipulation was amended on June 3, 1983, and by order of the bankruptcy court the proposed settlement and consent judgment were published in the major Michigan newspapers for five consecutive days. In July, the Attorney General conducted public meetings in all the major cities in lower Michigan. For various reasons, a hearing on the class certification and settlement was postponed, and thus the hearings on this matter did not commence until October 6, 1983. The transcripts of the hearings are voluminous since the objectors to the settlement were allowed to present evidence dealing with the adequacy of the class representation and the merits of the proposed settlement. The parties were so engrossed in the merits of the settlement that the jurisdictional basis for reaching such a settlement in the bankruptcy court was never challenged.
The problem with the settlement is that it basically compromises the interests of the defendant investors who have virtually no present connection with the debtor. The settlement's only reference to the debtors is with regard to their absconding with escrow funds and it states that the party, borrower or investor, who suffers financial loss as a result of the debtors' offensive conduct shall have a claim against the estate of Salem. The rest of the settlement compromises the claims of borrowers and investors in relation to each other. For example, the settlement with regard to the second class of mortgagees/mortgagors provides for a reformation of the loan to eliminate the brokers' fees, and also reduces the interest rate to 15%. The borrowers are asked to relinquish any claims they may have against the debtors and in return the investors will have the terms of their investment materially altered. We are not evaluating the wisdom of the settlement; the devious conduct of the debtors has placed the innocent borrowers and investors in such a financial quagmire, no resolution of the dilemma could be fair to all parties. We are merely emphasizing the extremely attenuated connection between the settlement and the bankruptcy proceedings.
We find that the proposed order did not derive from a civil proceeding "arising under Title 11 or arising in or related to cases under Title 11." 28 U.S.C. § 1471(b). In reaching this conclusion, we are not insinuating in the slightest that the district court does not have jurisdiction over "related to" civil proceedings after Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). The continuing vitality of 28 U.S.C. § 1471(b) after Northern Pipeline is well established. White Motor Corp. v. Citibank, N.A., 704 F.2d 254 (6th Cir.1983). In re Kaiser, 722 F.2d 1574 (2d Cir.1983). Rather, we find that the proposed order is simply not "related to" a case under Title 11.
We...
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