Mckinstry v. Sergent

Decision Date12 January 2011
Docket NumberCivil No. 10–110–ART.
Citation442 B.R. 567
PartiesTaft A. McKINSTRY, Plaintiff,v.Harold E. SERGENT, et al., Defendants.
CourtU.S. District Court — Eastern District of Kentucky

OPINION TEXT STARTS HERE

Adam P. Schiffer, Andrew S. Hicks, Logan E. Johnson, Amy E. Tabor, Schiffer Odom Hicks & Johnson, PLLC, Houston, TX, C.V. Reynolds, Geoffrey D. Marsh, Reynolds Law Offices, PSC, Prestonsburg, KY, Ellen Arvin Kennedy, Grahmn Morgan, Lee A. Smith, Dinsmore & Shohl LLP, Lexington, KY, for Plaintiff.Jay S. Geller, Jeremy R. Fischer, Paul McDonald, Bernstein, Shur, Sawyer & Nelson, P.A., Portland, ME, Jay Edward Ingle, Mary Elisabeth Naumann, Jackson Kelly PLLC, Lexington, KY, John C. Goodchild, III, Morgan, Lewis & Bockius, LLP, Philadelphia, PA, Kevin B. Dreher, Morgan, Lewis & Bockius, LLP, Chicago, IL, for Defendants.

MEMORANDUM OPINION & ORDER

AMUL R. THAPAR, District Judge.

The plaintiff trustee's trust is designed specifically to wind up the extinct debtor's affairs in the aftermath of its bankruptcy, including its causes of action. In fact, some of the causes of action here were specifically assigned to the trust to pursue on behalf of the debtor's unsecured creditors. And all of the causes of action seek to redress conduct that purportedly led to the debtor's bankruptcy or occurred in the context of the bankruptcy. These claims therefore “relate to” the underlying bankruptcy case, and so the Court has the jurisdiction necessary to refer this case to the bankruptcy court.

BACKGROUND

Harold Sergent was the founder of both the Black Diamond coal company and Global Energy Holdings. R. 1, Attach. 1 (“Complaint”) at 7, 11. Some time in 2006, he caused the former to enter a Consulting and Sales Agreement with the latter. Under that agreement, Black Diamond agreed to pay Global Energy $.25 per ton of coal Black Diamond mined or sold, with a minimum monthly payment of $30,000. Id. at 11. And in May of that same year, Sergent purportedly led Black Diamond to enter a Royalty Agreement with one of its lenders, under which the lender would receive a $.13 royalty for every ton of coal mined or sold. Id. at 12. Sergent himself would receive $.04 of that per-ton royalty. Id. Succumbing to the consequent incentive to produce or sell a lot of coal, Sergent then allegedly committed to sell more coal than Black Diamond could possibly produce—leading to Black Diamond's financial troubles. Id.

The lender, CIT, insisted that Black Diamond retain Alvarez & Marsal North America, LLC, as a financial advisor. Id. at 14. But the company's financial condition continued to worsen, and CIT joined others to file involuntary Chapter 11 petitions against Black Diamond. Id. at 14. At the urging of CIT, the bankruptcy court then appointed two A & M representatives, Ira Genser and Larry Tate, as the company's Chief Restructuring Officer and Chief Financial Officer. Id. at 14–15. In furtherance of their duties, the appointees secured the bankruptcy court's permission to reject the Sales Agreement and Royalty Agreement, prompting Sergent to file a proof of claim for damages suffered as a result—entering a new role as a Black Diamond creditor. R. 44 at 9. The Trustee nevertheless claims that the A & M defendants mismanaged Black Diamond and oversaw its eventual financial destruction. See Complaint at 15–24.

The unsecured creditors pursued claims against Harold Sergent and the A & M defendants. To permit confirmation of a bankruptcy plan, the unsecured creditors and the A & M defendants entered a settlement agreement, and the claims against the A & M defendants were to be assigned to an Unsecured Creditors Trust. R. 26, Attach. 1 at 4. The bankruptcy plan incorporated this agreement, R. 26, Attach. 2 at 137, further transferred all the unsecured creditors' other “rights, title and interest in the Contributed Assets” to the trust—including potential claims against Sergent, see R. 44 at 10; R. 26, Attach. 2 at 76, and purported to “retain such jurisdiction over [the case] ... as is legally permissible,” R. 26, Attach. 2 at 152.

The plaintiff filed a complaint in state court lodging several claims against the A & M defendants and Harold Sergent relating to their management of the Black Diamond business. The A & M defendants removed the entire “action” to this Court, R. 1, and Harold Sergent joined, R. 55. The plaintiffs filed a motion to remand or abstain. R. 26. The defendants ask the Court to either deny the motion or refer it to the bankruptcy court.

DISCUSSION

The Court's initial inclination was to resolve this motion to remand rather than refer it to the bankruptcy court. But a closer look reveals difficult issues which the bankruptcy court's familiarity with the case may help resolve: For example, consider the plaintiff's non-jurisdictional argument that the Court must abstain under 28 U.S.C. § 1334(c)(2) from hearing the state law claims against Harold Sergent. See Robinson v. Mich. Consol. Gas Co., Inc., 918 F.2d 579, 584 (6th Cir.1990) (“Mandatory abstention under section 1334(c)(2) is not jurisdictional[.]); Fed. R. Bankr.P. 5011, Comment (b) (“The bankruptcy judge ordinarily will be in the best position to evaluate the grounds asserted for abstention.”); Navon v. Mariculture Prods. Ltd., 395 B.R. 818, 822–23 (D.Conn.2008). To decide whether it must abstain, the Court has to determine (among other things) whether those claims are “core” bankruptcy claims—claims over which the bankruptcy court is at the height of its power. In turn, whether those claims are “core” depends largely on whether their resolution could impact the process for administering Sergent's own claim against the estate in his alternate role as a creditor. 28 U.S.C. § 157(b)(2)(B). As a newcomer to this case, it is hard for the Court to tell. Perhaps the bankruptcy court has a clearer picture.1

I. This Court must confirm its own jurisdiction before referring the case to the bankruptcy court

Yet the Court must confirm its own jurisdiction before sending it to bankruptcy. Muratore v. Darr, 375 F.3d 140, 147–48 (1st Cir.2004) (holding that district courts cannot refer cases to bankruptcy court if the district court lacks subject matter jurisdiction). And not just because Fed.R.Civ.P. 12(h)(3) says that the Court “must dismiss” a case over which it lacks subject matter jurisdiction. Id. The bankruptcy court itself has no jurisdiction unless this Court has jurisdiction first: Congress has vested bankruptcy jurisdiction in the district courts—saying “the district courts shall have original and exclusive jurisdiction of all cases under title 11 and that “the district courts shall have 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), (b) (emphasis added). The bankruptcy court thus only has jurisdiction on discretionary referral from this Court. In re Pioneer Inv. Servs. Co., 946 F.2d 445, 448 (6th Cir.1991) ([T]he Code grants broad jurisdictional powers to Article III district courts, and these courts have discretion to exercise this jurisdiction or refer the case or proceeding to the bankruptcy courts.”); In re Long, 43 B.R. 692, 697 (Bankr.N.D.Ohio 1984) (“The bankruptcy court acquires jurisdiction over an action only by referral from the district court.”).

Confirming the need to decide this Court's jurisdiction first is the text of the referral statute. To begin, it says that district courts can only refer cases that arise under one of the three categories of bankruptcy jurisdiction—that is, proceedings “arising under title 11 or arising in or related to a case under title 11.” 28 U.S.C. § 157(a); cf. Marotta Gund Budd & Dzera, LLC v. Costa, 340 B.R. 661, 663 (D.N.H.2006) (holding that district court must confirm its own jurisdiction first because the local referral rule authorized “referring [only those] cases which meet the standard for subject matter jurisdiction under section 1334(b)). These jurisdictional prerequisites distinguish the bankruptcy referral statute from the magistrate judge referral statute—suggesting the Court does not enjoy the same broad discretion to refer matters to bankruptcy courts that it has with magistrate judges. In re JMP–Newcor Int'l, Inc., 225 B.R. 457, 460 (Bankr.N.D.Ill.1998) (citing 28 U.S.C. § 636). Underscoring this fact is the magistrate referral statute's allowance for reports and recommendations on discreet issues (jurisdictional or otherwise), a feature noticeably absent from the bankruptcy statute. Id.

Sure, other courts do not see it this way. Some simply refer cases to bankruptcy as a matter of course, see, e.g., Mkt. St. Props. Palm Beach, LLC v. Nola Dev. Partners, LLC, No. 10–00951, 2010 WL 2696848, at *1–2 (E.D.La. July 1, 2010); Jenkins v. Oakhurst Dev., LLC, No. 09–00282, 2009 WL 1473960, at * 1–2 (S.D.W. Va. May 22, 2009), apparently on the theory that 28 U.S.C. § 157(b)(3) requires that bankruptcy courts play an important (perhaps mandatory) role in the initial jurisdictional determination, see Mkt. St. Props., 2010 WL 2696848 at *1; MD Acquisition, LLC v. Myers, No. 08–494, 2009 WL 466383, at *4–5 (S.D.Ohio Feb.23, 2009). As they note, § 157(b)(3) says the bankruptcy judge “shall determine” whether a case is a “core” proceeding—more specifically, a matter that bankruptcy courts can both finally resolve and over which they can exercise jurisdiction because it “arises under” Title 11 or “arises in” a case under title 11. 28 U.S.C. § 157(b)(1); Browning v. Levy, 283 F.3d 761, 772–73 (6th Cir.2002). But the requirement that a bankruptcy judge determine whether a proceeding is “core” is not the same as requiring him to decide whether he has jurisdiction. After all, bankruptcy courts also have jurisdiction over “non-core” proceedings which are still “related-to” a case under title 11. 28 U.S.C. § 157(c)(1). Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 483 (6th Cir.1992) (“In...

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