King v. Skolness (In re King)

• Decision Date: 14 October 2020
• Docket Number: ADVERSARY PROCEEDING NO. 19-5026-WLH,CASE NO. 18-71778-WLH
• Citation: 624 B.R. 259
• Parties: IN RE: Stephen D. KING, Debtor, Stephen D. King, Plaintiff, v. Dan Skolness, et al., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

624 B.R. 259

IN RE: Stephen D. KING, Debtor,Stephen D. King, Plaintiff,

v.Dan Skolness, et al., Defendants.

CASE NO. 18-71778-WLH

ADVERSARY PROCEEDING NO. 19-5026-WLH

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

Signed October 14, 2020

David S. Klein, William A. Rountree, Samantha L. Tzoberi, Rountree Leitman & Klein, LLC, Atlanta, GA, for Plaintiff.

Phillip J. Ashfield, Stinson LLP, Minneapolis, MN, Bradley S. Wolff, Swift Currie McGhee & Hiers, Atlanta, GA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

Wendy L. Hagenau, U.S. Bankruptcy Court Judge

This case arises from the Defendants' investment in a company to bring iron ore from a Chinese mine. Debtor Stephen King ("King" or "Debtor") was the CEO of the company. Defendants lost their investment and seek to hold King personally liable. The posture of this case is atypical. The motion before the Court is King's Motion for Summary Judgment on his complaint and the Defendants' counterclaims, seeking to determine he is not liable to the Defendants and, even if he is, such claims are dischargeable.¹

Jurisdiction

The Defendants' ("Minnesota Parties") Answer and Counterclaim denies that this Court has jurisdiction of this matter and that venue is proper. They assert as an affirmative defense that the Court does not have subject matter jurisdiction of "some" claims, although which ones are not identified. They assert the Court is not authorized to enter final judgment under the principles of Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).

Bankruptcy courts are courts of limited jurisdiction and federal courts have an independent duty to inquire into subject matter jurisdiction. Galindo-Del Valle v. Attorney Gen., 213 F.3d 594, 598 n.2 (11th Cir. 2000). Bankruptcy courts have subject matter jurisdiction over "civil proceedings arising under title 11, or arising in or related to cases under title 11." See 28 U.S.C. § 1334(a)(b) ; see also LR 83.7A, NDGa. "Arising under" jurisdiction involves "a substantive right created by the Bankruptcy Code," while "arising in" jurisdiction pertains to claims that are "not based on any right expressly created by title 11, but nevertheless could have no existence outside of bankruptcy." Grausz v. Englander, 321 F.3d. 467, 471 (4th Cir. 2003). Typically, the facts giving rise to a claim "arising in" a bankruptcy case occur during the course of the bankruptcy case. See Mercer v. Allen, 2014 WL 185252 (M.D. Ga. Jan. 15, 2014) ; In re Taylor, 2006 WL 6591616 (Bankr. N.D. Ga. May 4, 2006). "Related to" jurisdiction exists over proceedings where the outcome "could alter the debtor's rights, liabilities, options, or freedom of action" and would "impact[ ] upon the handling and administration of the bankrupt estate." Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.), 910 F.2d 784, 788 (11th Cir. 1990).

After jurisdiction is established, the next question is whether the cause of action is "core". Core proceedings are set out in 28 U.S.C. § 157(b)(2)(B). The fact that a proceeding is a statutorily core proceeding, however, does not necessarily mean that this Court has the constitutional authority to determine it. Stern, 564 U.S. 462, 131 S.Ct. 2594. A matter is constitutionally core if "the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." Stern, 564 U.S. at 499, 131 S.Ct. 2594. Bankruptcy courts may enter final orders only in those matters that are constitutionally "core." When a bankruptcy court lacks constitutional authority to determine a proceeding, however, the remedy is not dismissal for lack of jurisdiction. Instead, the bankruptcy court may hear the matter and issue proposed findings of fact and conclusions of law for de novo review by the district court under 28 U.S.C. § 157(c)(1). Executive Benefits Insurance Agency v. Arkison, 573 U.S. 25, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014).

Even if the question of the court's constitutional authority is raised, the Court may not need to decide it at the summary judgment stage. As one court said,

It is immaterial to this Court's job in this proceeding whether it [...] determines the issues or only hears them [and submits proposed findings and conclusions]. With regard to the motion for summary judgment, the Court can only decide issues of law based on undisputed facts. The District Court will review any such result de novo regardless of the Court's authority, so [a determination of authority] does not matter. If the matter proceeds to trial, the Court's tasks are to decide disputes of fact and to apply the law. From the Court's standpoint, whether the result of the Court's work is the determination of those factual and legal issues or a proposed determination of them, the Court's work is the same. Determination of the Stern issue, therefore, is immaterial to how this matter proceeds in this Court.

Avila v. Long (In re Avila ), 621 B.R. 53, 57 (Bankr. N.D. Ga. 2020).

With this jurisdictional background, the Court must review the causes of action to be considered. The complaint in this case asserts three causes of action: a declaratory judgment that King is not liable to the Minnesota Parties on the claims they assert, a determination that such claims are dischargeable, and an injunction against the Minnesota Parties continuing the litigation in Minnesota State Court. The counterclaim asserts that the Minnesota Parties' claims are non-dischargeable.

The bankruptcy courts have jurisdiction to grant declaratory judgments.

The Declaratory Judgment Act, 28 U.S.C. § 2201 states "[i]n a case of actual controversy within its jurisdiction ... any court of the United States... may declare the rights and other legal relations of any interested party seeking such declaration...." "Bankruptcy courts are among the federal courts that may grant declaratory relief under this statute." In re City of Cent Falls, R.I., 468 B.R. 36, 44 (Bankr. D.R.I. 2012). But, "[t]he Declaratory Judgment Act does not itself confer subject-matter jurisdiction. Rather, it makes available a declaratory remedy for disputes that come within the court's jurisdiction on some other basis." Id. at 48. Here, the request is to declare the rights of the Debtor and the Minnesota Parties with respect to their claim in this bankruptcy case. Since the filing of this adversary proceeding, the Minnesota Parties have filed a proof of claim asserting the very same claims on which King seeks a declaratory judgment. Adjudication of claims in a bankruptcy case is a matter that arises under section 502 of the Bankruptcy Code and is therefore a matter over which the court has jurisdiction under 28 U.S.C. §§ 1334 and 157. Adjudication of claims in a bankruptcy case is also a core matter under 28 U.S.C. § 157(b)(2)(B). See In re Alternate Fuels Inc, 2010 WL 3490260, *4 (Bankr. D. Kan. Aug. 26, 2010). Since adjudication of claims is a core matter arising under title 11 and in the bankruptcy case, and the claims allowance process was recognized by the Stern court as constitutionally core, the Court has authority to hear and determine and enter a final order with respect to it. Cent Falls, 468 B.R. at 49 ; Schmid v. Bank of America (In re Schmid), 494 B.R. 737, 744 (Bankr. W.D. Wis. 2013) ; In re Simon, 606 B.R. 695, 698 (Bankr. W.D La. 2019).

King also asks the Court to determine the dischargeability of the Minnesota Parties' claims. This issue is also raised in the Minnesota Parties' counterclaim seeking a determination of dischargeability. Discharge is an issue that only arises under the Bankruptcy Code and the Court therefore has jurisdiction under 28 U.S.C. §§ 1334 and 157 to hear it. Determination of the dischargeability of debts is a core matter under 28 U.S.C. § 157(b)(2)(I), is fundamental to the bankruptcy system, and is a matter on which the Court can enter a final order. De La Rosa v. Kelly (In re Kelly), 582 B.R. 905, 908-09 (Bankr. S.D. Tex. 2018).

Finally, King asks the Court to enjoin the Minnesota Parties from pursuing claims in state court. Effectively, this is a request by the Debtor to enforce the automatic stay. The automatic stay only arises under the Bankruptcy Code and the Court has jurisdiction to hear matters related to its effect and enforcement. Matters regarding the automatic stay are core proceedings under 28 U.S.C. § 157(b)(2)(G). The Court has authority to enter a final judgment as to such cause of action since the automatic stay arises from the bankruptcy case itself. In re Williams, 545 B.R. 917, 923 (Bankr. S.D. Tex. 2016).

The Minnesota Parties also assert that venue of this action is improper. The assertion is incorrect. "[A] proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending". 28 U.S.C. § 1409(a). The Northern District of Georgia is the appropriate venue for this adversary proceeding.

Evidentiary Issues

Before setting out the undisputed facts in this case, the Court must consider several evidentiary issues raised by the parties. By separate orders, the Court has sustained the objections of the Debtor to certain portions of two affidavits of John Mahoney.

1. "Sham" Affidavits

The Debtor has raised concerns about the affidavits of Bryan Reichel ("Reichel") and the Minnesota Parties and asserts they should not be considered to the extent they are inconsistent with deposition testimony. A party may not create a material issue of fact to defeat summary judgment by filing an affidavit disputing his or her own sworn testimony without demonstrating a plausible explanation for the conflict. Baer v. Chase, 392 F.3d 609, 623–24 (3d Cir. 2004). When a party does not explain the contradiction between the subsequent affidavit and the prior deposition, the alleged factual issue in dispute can be perceived as a "sham." Id. Under the "sham affidavit" doctrine, a court can...