Porges, In re

• Decision Date: 05 January 1995
• Docket Number: No. 94-5013,94-5013
• Citation: 44 F.3d 159
• Parties: , 32 Collier Bankr.Cas.2d 1354, Bankr. L. Rep. P 76,342 In re Erwin A. PORGES, also known as E. Allen Porges, Debtor. Erwin A. PORGES, also known as E. Allen Porges, Plaintiff-Appellant, v. GRUNTAL & COMPANY, INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

Page 159

44 F.3d 159

63 USLW 2475, 32 Collier Bankr.Cas.2d 1354,

Bankr. L. Rep. P 76,342

In re Erwin A. PORGES, also known as E. Allen Porges, Debtor.

Erwin A. PORGES, also known as E. Allen Porges, Plaintiff-Appellant, v. GRUNTAL & COMPANY, INCORPORATED, Defendant-Appellee.

No. 94-5013.

United States Court of Appeals, Second Circuit.

Argued Oct. 4, 1994.

Decided Jan. 5, 1995.

Charles Jacobson, Woodbury, NY, for appellant.

John J. O'Donnell, New York City (Kevin T. Rover, Morgan, Lewis & Bockius, New York City), for appellee.

Before: MESKILL, MAHONEY and McLAUGHLIN, Circuit Judges.

MESKILL, Circuit Judge:

In this appeal we must determine whether a bankruptcy court, following a bench trial, properly may enter a money judgment against a debtor on the basis of a creditor's claims when the debtor voluntarily withdraws his Chapter 13 bankruptcy petition after the trial. The United States Bankruptcy Court for the Eastern District of New York, Hall, B.J., answered this question in

the affirmative, exercising jurisdiction pursuant to 28 U.S.C. Sec. 157. The United States District Court for the Eastern District of New York, Spatt, J., affirmed. We have jurisdiction over appellant's timely appeal pursuant to 28 U.S.C. Sec. 158(d), and we in turn affirm.

BACKGROUND

Erwin A. Porges began working as a stockbroker for Gruntal & Co., Inc. (Gruntal) in February 1989. Porges came to the firm from Dean Witter Reynolds, Inc. (Dean Witter), and several of his Dean Witter clients transferred their accounts to Gruntal. While employed at both firms Porges "churned" the account of a client named Suzanne Breen by making numerous trades to generate commissions while using improperly obtained discretionary authority. Gruntal ultimately discovered the activity and fired Porges, thereby activating Porges' liability under his employment contract for two promissory notes Porges previously executed in favor of Gruntal. Gruntal commenced a New York Stock Exchange (NYSE) arbitration against Porges to recover on the promissory notes (Gruntal Arbitration), while Breen commenced a separate NYSE arbitration against Porges, Dean Witter and Gruntal to recover damages for Porges' mishandling of her accounts at both brokerage firms (Breen Arbitration).

Porges filed for Chapter 13 bankruptcy protection three days before the first hearing in the Gruntal Arbitration, thereby staying all arbitration proceedings against Porges under the Bankruptcy Code's automatic stay provision. See 11 U.S.C. Sec. 362. The Breen Arbitration, however, proceeded against Dean Witter and Gruntal. Dean Witter and Breen reached a settlement, while the arbitration panel awarded Breen $205,345 in damages against Gruntal. Gruntal paid Breen this amount.

Gruntal then sought indemnification and contribution from Porges by filing a proof of claim for the full amount paid to Breen in Porges' bankruptcy proceeding. Gruntal also filed a proof of claim for the amount owed by Porges on the two promissory notes, and filed an objection to Porges' first amended plan of reorganization on the ground that the plan provided for full repayment of all unsecured creditors except Gruntal and Dean Witter. Porges objected to Gruntal's proofs of claim, and commenced an adversary proceeding in bankruptcy court pursuant to 11 U.S.C. Sec. 502(b). Porges argued that Gruntal could not obtain indemnification of the amount paid to Breen because the firm's improper supervision made it wholly liable for his activities. Porges also objected to Gruntal's claims for repayment of the promissory notes, asserting that Gruntal breached the employment contract of which the promissory notes were an essential part. Finally, Porges filed counterclaims against Gruntal alleging, inter alia, that Gruntal breached his employment contract and wrongfully terminated him.

The bankruptcy court held a bench trial on the adversary proceeding on March 29, 1993. At the close of evidence the court orally ruled in Gruntal's favor and directed Gruntal's attorney to submit proposed findings of fact and conclusions of law. On April 23, 1993, however, one day before Gruntal's submissions were due, Porges moved to dismiss his Chapter 13 petition. The bankruptcy court signed the order of voluntary dismissal, but specifically retained jurisdiction pursuant to 11 U.S.C. Sec. 349 to enter its findings of fact and conclusions of law on the issues previously adjudicated. The court issued its findings and conclusions the same day, allowing both of Gruntal's claims, dismissing Porges' counterclaims with prejudice, and awarding attorney's fees. ¹ Gruntal then submitted a proposed judgment which provided for a money judgment against Porges on its Porges did not appeal the merits of the bankruptcy court's trial rulings. Rather, he appealed the judgment on the grounds that the bankruptcy court was without jurisdiction to enter a judgment in an adversary proceeding following dismissal of the underlying bankruptcy case, and, moreover, that the bankruptcy court lacked authority to enter a money judgment after allowing claims in an adversary proceeding conducted pursuant to 11 U.S.C. Sec. 502. The district court rejected these arguments, and Porges now appeals.

claims, plus attorney's fees. Porges objected to entry of the proposed judgment, and on August 13, 1993 the bankruptcy court overruled these objections and entered judgment in Gruntal's favor pursuant to Federal Rule of Civil Procedure 58 and Bankruptcy Rule 9021. See In re Porges, 157 B.R. 212, 214 (Bankr.S.D.N.Y.1993).

DISCUSSION

I. Jurisdiction

We first address the threshold issue whether the bankruptcy court properly exercised jurisdiction by entering a judgment on the adversary proceeding following the dismissal of Porges' bankruptcy case. Conclusions of law made by either the bankruptcy court or the district court on a bankruptcy appeal are subject to de novo review. In re Brody, 3 F.3d 35, 38 (2d Cir.1993); In re Manville Forest Prods., 896 F.2d 1384, 1388 (2d Cir.1990).

In its order of dismissal of Porges' bankruptcy case, the bankruptcy court retained jurisdiction pursuant to 11 U.S.C. Sec. 349 to issue a decision in the pending adversary proceeding. Although Porges concedes that the bankruptcy court possessed the authority to determine whether Gruntal's proofs of claim should be allowed, he argues that the dismissal of his case deprived the bankruptcy court of jurisdiction to enter a judgment.

This issue presents a question of first impression in this Circuit. We join several other circuits in adopting the general rule that related proceedings ordinarily should be dismissed following the termination of the underlying bankruptcy case. This general rule favors dismissal because a bankruptcy court's jurisdiction over such related proceedings depends on the proceedings' nexus to the underlying bankruptcy case. See In re Querner, 7 F.3d 1199, 1201-02 (5th Cir.1993); In re Morris, 950 F.2d 1531, 1533 (11th Cir.1992); In re Smith, 866 F.2d 576, 580 (3d Cir.1989). Notwithstanding this general rule, however, nothing in the Bankruptcy Code requires a bankruptcy court to dismiss related proceedings automatically following the termination of the underlying case. See, e.g., In re Querner, 7 F.3d at 1201-02; In re Carraher, 971 F.2d 327, 328 (9th Cir.1992) (per curiam); In re Morris, 950 F.2d at 1534; In re Roma Group, 137 B.R. 148, 150 (Bankr.S.D.N.Y.1992); In re Pocklington, 21 B.R. 199, 202 (Bankr.S.D.Cal.1982). Indeed, section 349 of the Bankruptcy Code authorizes bankruptcy courts to alter the normal effects of the dismissal of a bankruptcy case if cause is shown. See 11 U.S.C. Sec. 349 (setting forth consequences of dismissal "unless the court, for cause, orders otherwise"). Accordingly, we hold that the dismissal of an underlying bankruptcy case does not automatically strip a federal court of jurisdiction over an adversary proceeding which was related to the bankruptcy case at the time of its commencement. The decision whether to retain jurisdiction should be left to the sound discretion of the bankruptcy court or the district court, depending on where the adversary proceeding is pending.

In this appeal the district court, following several decisions in other circuits, analogized the bankruptcy court's exercise of jurisdiction over the adversary proceeding to a district court's jurisdiction over pendent state claims following dismissal of all federal claims. See, e.g., In re Carraher, 971 F.2d at 328; In re Smith, 866 F.2d at 580. In such cases a district court is not required to dismiss the state claims, although dismissal of such claims is the general rule. ² See DiLaura The bankruptcy court considered these factors and properly concluded that it possessed jurisdiction over the adversary proceeding following the dismissal of Porges' bankruptcy case. Porges, 157 B.R. at 215. The court had conducted a trial on all contested issues and had issued a decision, and the matter awaited only the filing of findings of fact and conclusions of law and the entry of a judgment. To have declined jurisdiction at that stage would have served no useful purpose, and would have wasted the resources already invested by the parties and the court. See In re Smith, 866 F.2d at 580; see also In re Roma Group, 137 B.R. at 150-51; In re Stardust Inn, 70 B.R. 888, 890-91 (Bankr.E.D.Pa.1987). Further, it would be unfair to compel Gruntal to relitigate the matter, particularly where, as here, a debtor voluntarily submitted himself to the jurisdiction of the bankruptcy court and thereby forced a creditor to litigate its claims in that forum. See In re Pocklington, 21 B.R. at 202; In re Roma Group, 137 B.R. at 151. Accordingly, we find that the above grounds amply support the bankruptcy court's decision to retain jurisdiction over Porges' adversary proceeding following the dismissal of his bankruptcy petition.

v. Power Authority of New York, 982 F.2d 73, 80 (2d Cir.1992). Rather, a court must...