Kozec v. Murphy (In re Murphy), CASE NO. 15–06918–5–DMW

Citation569 B.R. 402
Decision Date27 June 2017
Docket NumberADVERSARY PROCEEDING NO. 16–00024–5–DMW,CASE NO. 15–06918–5–DMW
CourtU.S. Bankruptcy Court — Eastern District of North Carolina
Parties IN RE: Kristen Anne MURPHY, Debtor Robert Richard Kozec, Jr., Plaintiff v. Kristen Anne Murphy, Defendant

Paul Faison Winborne, Dixon & Thompson Law Firm PLLC, Edenton, NC, for Plaintiff.

John T. Orcutt, Shawn Christopher Orcutt, Law Offices of John T. Orcutt, P.C., Raleigh, NC, for Defendant.

AMENDED ORDER DENYING MOTION TO DISMISS

David M. Warren, United States Bankruptcy Judge

This matter comes before the court upon the Motion to Dismiss for Lack of Subject Matter Jurisdiction ("Motion to Dismiss") filed by Kristen Anne Murphy ("Defendant") on March 20, 2017 and the Responseto Motion to Dismiss ("Response") filed by Robert Richard Kozec, Jr. ("Plaintiff") on April 20, 2017. After a review of the Motion to Dismiss, Response, and applicable law, the court finds the matter ripe for adjudication without the need for a hearing and makes the following findings of facts and conclusions of law:

BACKGROUND

On December 23, 2015, the Defendant filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code. The court designated the case as "no-asset," and the appointed Chapter 7 trustee filed a Report of No Distribution on March 11, 2016.

On March 17, 2016, the Plaintiff initiated this adversary proceeding by filing a complaint against the Defendant. In a Second Amended Complaint ("Complaint") filed on November 14, 2016, the Plaintiff asserted that, based upon pre-petition actions and occurrences, the Defendant is liable to the Plaintiff for malicious prosecution under North Carolina law ("Malicious Prosecution Claim"). The Plaintiff requested the court to enter a monetary judgment against the Defendant on the Malicious Prosecution Claim and declare that debt non-dischargeable pursuant to 11 U.S.C. § 523(a)(6) ("Dischargeability Claim"). Paragraph 3 of the Complaint contains the following allegation:

This matter is a core proceeding pursuant to 28 U.S.C. § 157, and the court has jurisdiction pursuant 28 U.S.C. §§ 151, 157, and 1334. The court has the authority to hear this matter pursuant to the General Order of Reference entered August 3, 1984 by the United States District Court for the Eastern District of North Carolina.

On November 25, 2016, the Defendant filed an Amended Answer to Amended Complaint ("Answer"), requesting the court to dismiss the Malicious Prosecution Claim or alternatively find that any determined liability of the Defendant to the Plaintiff is dischargeable. Paragraph 3 of the Answer provides that the "Defendant admits the allegations of Paragraph 3 of the Complaint."

On December 20, 2016, the court entered a Final Pretrial Order that was jointly submitted by the Plaintiff and the Defendant and contains the following provisions:

1. All parties are properly before the court;
2. The Court has jurisdiction of the parties and of the subject matter;
3. The proceeding is a core proceeding, and Counsel have agreed that this is a core proceeding pursuant to 28 U.S.C. § 157(c)(2) and agree that the Court may enter a final judgment ....

Kozec v. Murphy (In re Murphy) , Adv. Proc. No. 16–00024–5–DMW (Bankr. E.D.N.C. Dec. 20, 2016).

On February 14, 2017, the court conducted a bench trial of this adversary proceeding and ruled orally that the Defendant is liable to the Plaintiff for the amount of $8,274.94, and this debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(6).1 Pending entry of a written judgment and opinion, the Defendant filed the Motion to Dismiss and for the first time asserts that the court lacks subject matter jurisdiction over the Malicious Prosecution Claim. The court suspended entry of its judgment and opinion to allow it to consider and address the Motion to Dismiss.

The Defendant alleges that the Malicious Prosecution Claim is a personal injury tort claim over which the court lacks subject matter jurisdiction pursuant to 28 U.S.C. § 157(b)(5) ; therefore, the court must dismiss the adversary proceeding pursuant to Rules 12(b)(1) and 12(h)(3) of the Federal Rules of Civil Procedure, incorporated by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure. In his Response, the Plaintiff vaguely denies that the Malicious Prosecution Claim is a personal injury tort claim yet does not disagree with the Defendant's contention that the court cannot adjudicate this claim. Instead, the Plaintiff suggests that the court rule on the Dischargeability Claim and either refer the Malicious Prosecution Claim to the United States District Court for the Eastern District of North Carolina or grant the Plaintiff relief from the automatic stay imposed by 11 U.S.C. § 362 to allow adjudication in state court.2

DISCUSSION

The bankruptcy courts are somewhat of an anomaly within the federal judicial system established by the United States Constitution, and their jurisdiction over and authority to adjudicate various matters have been and continue to be broadly challenged and analyzed. "Although they are related concepts ... the scope of the bankruptcy courts' subject matter jurisdiction, their statutory authority to hear and/or determine any particular matter, and their constitutional authority to do so, each are delineated by different statutory, constitutional, and/or judicial authorities." Harvey v. Dambowsky (In re Dambowsky) , 526 B.R. 590, 595 (Bankr. M.D.N.C. 2015). A review of the applicable history of federal bankruptcy law and procedure is helpful, if not essential, to understanding this interplay.

History of Bankruptcy Courts in the United States
Bankruptcy Act of 1898

The Constitution allows Congress "[t]o establish ... uniform Laws on the subject of Bankruptcies throughout the United States." U.S. CONST. art. I, § 8, cl 4. Congress first codified provisions for bankruptcy relief with the Bankruptcy Act of 1898 ("1898 Act"), also known as the Nelson Act. Under the 1898 Act, the federal district courts possessed jurisdiction over bankruptcy matters but would generally refer these matters to "referees" who were employed upon appointment by the district courts for two year terms. The referees, often called the "bankruptcy court," held summary jurisdiction over and could enter final judgment on matters involving the administration of the bankruptcy estate; however, plenary jurisdiction over disputes arising out of or related to the bankruptcy proceeding was exercised by the district judges. This jurisdictional scheme of the 1898 Act is succinctly described as follows:

The Bankruptcy Act of 1898 vested original jurisdiction over all bankruptcy matters in the United States District Courts. In turn, the district judges referred certain matters to bankruptcy referees. There were two main types of bankruptcy matters under the Act of 1898: "proceedings" and "controversies." "Proceedings" generally involved the administration of the bankrupt's estate and were solely within the province of the bankruptcy court. "Controversies" were collateral disputes arising out of bankruptcy proceedings. These matters involved the trustee and third parties and could be heard by either the bankruptcy court or by a non-bankruptcy court that had jurisdiction. While proceedings fell within the "summary jurisdiction" of the bankruptcy court, controversies sometimes required the court to exercise "plenary jurisdiction." The two types of jurisdiction differed in the following manner. Matters within the summary jurisdiction of the bankruptcy court could be adjudicated through the use of more expeditious modes of procedure, with the court sitting in equity. The district court qua bankruptcy court could hear these matters; however, a bankruptcy referee usually rendered final judgment on such matters, subject only to "review" by the district court. In contrast, plenary jurisdiction was exercised only by the district court or state courts, following their general rules of procedure. According to some estimates, as much as fifty percent of all litigation under the Act of 1898 concerned whether the matter was within the bankruptcy court's summary jurisdiction.

Torkelsen v. Maggio (In re Guild & Gallery Plus, Inc.) , 72 F.3d 1171, 1176 (3rd Cir. 1996) (quoting Thomas S. Marion, Core Proceedings and "New" Bankruptcy Jurisdiction , 35 DePaul L. Rev. 675, 676–77 (1986) ).

Bankruptcy Reform Act of 1978

Congress completely revamped its bankruptcy laws with the passage of the Bankruptcy Reform Act of 1978 ("1978 Act"). Under the 1978 Act, Congress removed the referee courts from the umbrella of the district courts and in each district created a distinct and separate bankruptcy court as an adjunct of the district court. This action was set forth in Title 28 of the United States Code under Chapter 6 titled "Bankruptcy Courts." This chapter began with 28 U.S.C. § 151 titled "Creation and composition of bankruptcy courts" which provided as follows:

(a) There shall be in each judicial district, as an adjunct to the district court for such district, a bankruptcy court which shall be a court of record known as the United States Bankruptcy Court for the district.
(b) Each bankruptcy court shall consist of the bankruptcy judge or judges for the district in regular active service. Justices or judges designated and assigned shall be competent to sit as judges of the bankruptcy court.

Bankruptcy Reform Act of 1978, Pub. L. No. 95–598, § 201(a), 92 Stat. 2549, 2657 (1978) (codified as 28 U.S.C. § 151 ), amended by Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98–353, 98 Stat. 333 (1984) (current version at 28 U.S.C. § 151 ) (emphasis added). The 1978 Act provided that like federal district judges, bankruptcy judges were appointed by the President of the United States; however, unlike other presidential appointees, the bankruptcy judges were not afforded the protections of life tenure and salary non-diminution provided for in Article III of the Constitution.3 Rather,...

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