RAF Financial Corp. v. Resurgens Communications Group, Inc.
| Decision Date | 26 April 1991 |
| Docket Number | Civ. A. No. 89-A-1878. |
| Citation | 127 BR 458 |
| Court | U.S. District Court — District of Colorado |
| Parties | RAF FINANCIAL CORPORATION, et al., Plaintiffs, v. RESURGENS COMMUNICATIONS GROUP, INC., Defendant and Third-Party Plaintiff, v. KIRKPATRICK & LOCKHART, Third-Party Defendant. |
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Charles C. Bonniwell, Dennis A. Graham, Hopper, Kanouff, Smith, Peryam & Terry, Denver, Colo., for plaintiffs.
Glenn W. Merrick, Thomas C. Bell, Davis, Graham & Stubbs, Denver, Colo., for defendant and third-party plaintiff.
Edwin S. Kahn, Kelly, Haglund, Garnsey & Kahn, Denver, Colo., Paul C. Huck, H. Mark Vieth, Proenza, White, Huck & Roberts, P.A., Miami, Fla., for third-party defendant.
This matter is before the court on the motion of third-party defendant Kirkpatrick & Lockhart ("K & L") to dismiss the third-party complaint. A hearing was held on February 21, 1991. The court had considered the briefs, papers, and oral arguments submitted by counsel and finds and rules as follows.
On October 27, 1989, RAF Financial Corporation, et al. ("RAF") brought suit against Resurgens Communications Group, Inc. ("Resurgens") under the terms of a previous settlement agreement between the two parties. RAF claimed that Resurgens did not effectuate the registration of certain warrants and underlying shares with the Securities Exchange Commission as required by the settlement, and hence plaintiffs suffered losses in excess of one million dollars. Resurgens claims that the settlement agreement is null and void and that any claim of the plaintiffs was discharged in the bankruptcy proceedings of Central Corporation (now Resurgens) commenced in November, 1988. Resurgens moved for summary judgment which was denied by this court on September 27, 1990.
The third-party defendant, Kirkpatrick & Lockhart ("K & L"), is a law firm which maintains offices in Pittsburgh, Harrisburg, Washington D.C., Boston and Miami. The legal services which are the basis for the third-party complaint were performed primarily in the Miami office in connection with Central Corporation's bankruptcy proceeding pending in the Southern District of Florida. K & L has no partners who are residents of Colorado and no partnership assets in Colorado.
The K & L firm represented Central in its bankruptcy action under chapter 11 which remains pending in the Southern District of Florida. Resurgens' third-party complaint alleges legal malpractice in the handling of the bankruptcy case, breach of express and implied contract to provide legal services and obtain a discharge of RAF's claims, and negligent misrepresentation. The third-party complaint was based upon diversity jurisdiction under 28 U.S.C. § 1332 and federal question, 28 U.S.C. § 1334(b).
K & L argues that this court does not have in personam jurisdiction over it because K & L does not have the minimum contacts required under Colorado's long arm statute. Resurgens argues that K & L is subject to nationwide service of process under the provisions of Bankruptcy Rule 7004(d), and in the alternative that K & L is subject to Colorado's long-arm statute.
Rule 7004(d) provides that the summons and complaint and all other process except a subpoena may be served anywhere in the United States. 11 U.S.C.A. § 7004(d). In Diamond Mortgage Corp. of Illinois v. Sugar, 913 F.2d 1233 (7th Cir.1990), cert. denied, ___ U.S. ___, 111 S.Ct. 968, 112 L.Ed.2d 1054 (1991), the Seventh Circuit addressed the issue of whether Rule 7004(d) applies to "non-core" bankruptcy actions. The defendants in Diamond were attorneys who resided and practiced in Michigan. The plaintiffs, chapter 11 debtors, brought an action against them in Illinois alleging legal malpractice and breach of fiduciary duties. Id. at 1236. The defendants filed a motion to dismiss for lack of personal jurisdiction claiming that they were neither citizens nor residents of Illinois, and that the legal services they rendered had been performed in Michigan. Id. The plaintiffs maintained that the defendants were amenable to service under 7004(d).
The Seventh Circuit undertook an extensive review of the history of the Bankruptcy Act. The defendants in Diamond "argued vigorously" that non-core claimants that advance state law claims should not be allowed to rely upon the broad reach of the Bankruptcy Rules to establish in personam jurisdiction. The court stated that ". . . nothing in Rules 1001, 7001, or 7004(d) — even remotely suggests that they are to be applied differently in core and non-core proceedings." Id. at 1243; see also Teitelbaum v. Choquette & Co., Inc. (In re Outlet Dep't Stores, Inc.), 82 B.R. 694, 698 (Bankr.S.D.N.Y.1988) (); Sonnyco Coal, Inc. v. Bartley (In re Sonnyco Coal, Inc.), 89 B.R. 658, 663-65, 669-70 (Bankr.S.D. Ohio 1988) (). The Diamond court stated that ". . . whether there exists sufficient minimum contacts between the attorneys and the State of Illinois has no bearing upon whether the United States may exercise its power over the attorneys pursuant to its federal question jurisdiction." Diamond Mortgage v. Sugar, 913 F.2d at 1244. In conclusion, the Diamond court held "that courts may apply bankruptcy rule 7004(d) — allowing nationwide service of process — in non-core, related proceedings." Id. at 1243-44.
Section 1334(b) of Title 28, provides 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." The court found that while the malpractice action was not a "core" proceeding in bankruptcy, the action was related to the bankruptcy proceeding in that its resolution ". . . may have a direct and substantial impact on the asset pool available for the distribution to estates." Id. at 1239. Consequently, ". . . the district court could have exercised its bankruptcy subject matter jurisdiction over the claim." Id. at 1239.
K & L argues that Diamond Mortgage is distinguishable because the third-party complaint in the case at bar is not "related to bankruptcy" under Section 1334(b).1 K & L maintains that since the assets have already been distributed and the bankruptcy reorganization plan has been confirmed, the third party case cannot have a "direct and substantial impact on the asset pool available for distribution." See Id. K & L points out that the Diamond court cited to Elscint, Inc. v. First Wisconsin Financial Corporation (In re Xonics, Inc.), 813 F.2d 127, 131 (7th Cir. 1987) for its definition of "related to." The Xonics court stated that "related to" means ". . . it affects the amount of property available for distribution or the allocation of property among creditors." Id. The Tenth Circuit has defined "related to" as:
"The test for determining whether a civil proceeding is related in bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) (emphasis omitted). Although the proceedings need not be against the debtor or his property, the proceeding is related to the bankruptcy if the outcome could alter the debtor\'s rights, liabilities, options or freedom of action in any way, thereby impacting on the handling and administration of the bankruptcy estate. Id.
Gardner v. United States (In re Gardner), 913 F.2d 1515, 1518 (10th Cir.1990).
Resurgens acknowledges that the bankruptcy plan has been confirmed in the underlying action, but contends that the malpractice action is related because the award of a large judgment against Resurgens could result in "frustrating" the purpose of the bankruptcy. It explains that an award of a large judgment against it would affect the company's profitability, and the bankruptcy would be frustrated because stock was issued under the reorganization plan and Resurgens would no longer be profitable.
In a similar case, a court concluded that the federal court had jurisdiction over the chapter 11 debtor's legal malpractice counterclaim. Murray, Hollander, Sullivan & Bass v. Hardwicke Companies, Inc. (In re Hardwicke), 64 B.R. 113, 116 (S.D.N.Y. 1986). Hardwicke had presented a plan of reorganization ("Plan") that was confirmed by the creditors. Id. at 114. Pursuant to the Plan, unsecured creditors could elect to receive either cash or stock in a new corporation into which Hardwicke was to merge after bankruptcy. Id. After confirmation of the Plan, Hardwicke objected to the claim of the law firm for unpaid legal services and counterclaimed for legal malpractice. Id. The Hardwicke court reasoned that the counterclaim was "related to" the bankruptcy proceedings because if successful the claims would confer a major benefit on the debtor's estate, and the alleged malfeasance took place before the filing of the petition and was claimed to be one of the reasons that the debtor was forced into bankruptcy. Id. at 116-117. Therefore, the court concluded that "the potential benefit to Hardwicke's creditors who elected to receive stock in the reorganized company is such as to justify federal bankruptcy . . . jurisdiction of this court." Id. at 117.
In Hardwicke, the court knew that ninety-seven percent of Hardwicke's unsecured creditors, who collectively held 99.4 percent of Hardwicke's unsecured debt, had elected to become shareholders in the reorganized debtor. Id. at 116. In the case at bar, however, the court has no knowledge of what the actual impact of a possible distribution would be on creditors who opted to become shareholders. Moreover, the court reasoned that the alleged malfeasance giving rise to the counterclaims occurred before the filing of the petition in...
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