Randall & Blake Inc. v. Evans

• Decision Date: 19 November 1999
• Docket Number: No. 98-50865,98-50865
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: (5th Cir. 1999) IN THE MATTER OF: J.R. CANION, JR., Debtor. RANDALL & BLAKE, INC. Appellant, v. CHARLES R. EVANS; MARY E. EVANS; CINDY RICH; TIMOTHY N. RICH; KATHY HICKS; KENNETH G. HICKS; EVANS EQUIPMENT, INC.; OTIS FREEMAN; and OSCAR MACKEY, Appellees

Page 579

196 F.3d 579 (5th Cir. 1999)

IN THE MATTER OF: J.R. CANION, JR., Debtor.

RANDALL & BLAKE, INC. Appellant, v. CHARLES R. EVANS; MARY E. EVANS; CINDY RICH; TIMOTHY N. RICH; KATHY HICKS; KENNETH G. HICKS; EVANS EQUIPMENT, INC.; OTIS FREEMAN; and OSCAR MACKEY, Appellees.

No. 98-50865

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

November 19, 1999

[Copyrighted Material Omitted]

Appeal from the United States District Court for the Western District of Texas

Before JONES and WIENER, Circuit Judges, and WALTER, District Judge.^*

WIENER, Circuit Judge:

At the core of this appeal is the issue of federal bankruptcy jurisdiction under 28 U.S.C. 1334(b). Plaintiff-Appellant Randall and Blake, Inc. ("R&B") is a judgment creditor of J.R. Canion, Jr. ("Canion"). After Canion Filed for bankruptcy, R&B brought suit in federal district court against several of Canion's friends, relatives, business associates, and employees (collectively, "defendants"),¹ alleging that they had conspired to interfere with R&B's efforts to collect on its judgment. The district court referred the case to bankruptcy court pursuant to 28 U.S.C. 157. At the close of R&B's case-in-chief, the bankruptcy judge ruled in favor of the defendants, finding R&B had failed to prove that they were anything more than unwitting participants in Canion's scheme to prevent R&B from collecting on its judgment.

After trial, R&B argued first to the bankruptcy court, then to the district court, and now to us, that the bankruptcy court lacked jurisdiction to hear the case and, accordingly, R&B should be allowed to try its case again but in the district court. We find, as did the other two courts, that at the time the jurisdiction of the bankruptcy court was invoked, it was conceivable that R&B's suit against the defendants could have an effect on the bankruptcy estate, and thus conclude that there was "related to" bankruptcy jurisdiction under 28 U.S.C. 1334(b). On the merits, R&B had the burden of proving that the defendants intended to impede R&B's collection efforts. We find no clear error in the bankruptcy court's determination that R&B failed to meet this burden. We therefore affirm the judgment of the district court.

I. FACTS & PROCEEDINGS

R&B holds a non-discharged judgment against Canion stemming from an unrelated breach-of-contract action that R&B successfully brought against Canion in his role as principal of Austin Construction Company ("ACCO I"), a paving and excavation business. R&B has repeatedly but unsuccessfully attempted to collect on its judgment. According to R&B, the defendants, together with Canion and his ex-wife, conspired to secret Canion's assets and thereby thwart R&B's collection efforts. Allegedly, as part of this effort some of the defendants incorporated ACCO Equipment Rental, Inc. ("ACCO II") to which Canion transferred assets from ACCO I and through which Canion continued to operate his business.

Canion filed for protection under Chapter 7 of the Bankruptcy Code in January, 1992. R&B filed a proof of claim in Canion's bankruptcy for $302,977.42, the amount of its judgment, plus interest. Three months later, R&B instituted the instant proceeding in federal district court against the defendants and Canion's ex-wife, apparently without making Canion a party.² R&B's compliant includes a detailed account of fraud and deception by Canion, his ex-wife, and the defendants.³ The following causes of action were pleaded:

(1) tortious interference with judgments;

(2) conspiracy to interfere with judgments;

(3) actual and constructive fraud;

(4) conspiracy to defraud;

(5) fraudulent transfers; and

(6) alter ego liability.

The first four causes of action sound in tort; the last two allege violations of the Texas Uniform Fraudulent Transfer Act⁴ and abuse of the corporate form. R&B's complaint seeks the following monetary and injunctive relief: (1) A judgment holding the defendants personally liable to R&B for the amount of Canion's judgment⁵; (2) an order compelling the defendants to identify assets, proceeds of assets, and documents relating to assets belonging to Canion; (3) a decree setting aside the fraudulent transfers made by Canion to the defendants; and (4) dissolution of ACCO II.

While the suit by R&B against the defendants was pending in district court, R&B filed a complaint in Canion's bankruptcy proceeding alleging that because of Canion's fraudulent pre-bankruptcy activities, his debts should not be discharged. The court found that Canion had purposefully clouded title to property on the eve of bankruptcy and therefore denied Canion a discharge with respect to all creditors under alternative subsections of 11 U.S.C. 727.⁶

Thereafter, in the district court proceeding between the defendants and R&B, the defendants moved to (1) join Canion's Chapter 7 bankruptcy Trustee as a plaintiff, arguing that she was a necessary party, and (2) transfer the case to the bankruptcy court that was adjudicating Canion's bankruptcy. While the defendants' motion was pending, the Trustee filed her own motion seeking to intervene as plaintiff in R&B's district court suit against the defendants, advancing that all of the causes of action asserted by R&B against the defendants were property of Canion's bankruptcy estate. Accordingly, the Trustee argued, she was "the only proper party Plaintiff in all these causes of action."

In response, R&B asserted that its "claims include claims other than for fraudulent conveyances that would be non-core proceeding[s], but related to the bankruptcy court proceeding," and that it had "no objection to the transfer of this entire case to the bankruptcy court." The district court allowed the Trustee to intervene and transferred the proceeding to the bankruptcy court for trial.

On April 18, 1994, the first day of trial, the bankruptcy court struck ACCO II's answers because it failed to comply with bankruptcy court orders and sanctions. Consequently, the allegations that ACCO II was Canion's alter ego were deemed admitted, the company was liquidated, and its assets (worth approximately $200,000) were brought into Canion's bankruptcy estate.

After five days of testimony, R&B concluded its case in chief, and, sua sponte, the court entered a take nothing judgment in favor of the defendants, pursuant to Rule 52 of the Federal Rules of Civil Procedure.⁷ Specifically, the court found that the defendants "were being used as . . . tools unwittingly and unknowingly by [Canion] and [that] they were duped like everybody else."

After the trial, the bankruptcy court inquired into the effect of our recent decision in In re Educators Group Health Trust.⁸ In response to this inquiry, R&B for the first time argued that the bankruptcy court lacked jurisdiction over all causes of action that it had brought against the defendants. R&B urged that these "claims are not core or 'related to' (noncore) proceedings because they are personal claims against nondebtors [seeking] relief for the direct injuries to R&B," and, therefore, the district court's reference of those claims to the bankruptcy court was improper.⁹ R&B requested in the alternative that the bankruptcy court reverse its substantive finding that R&B failed to meet its burden of proof.

The court denied R&B's motion as being wholly without merit. R&B then filed a motion in the district court, making the same jurisdictional and substantive arguments. On the magistrate judge's recommendation, the district court denied R&B's motion, holding:

The fraudulent conveyance clauses of action are "core" claims, 28 U.S.C. 157(b)(2)(H), and obviously belong to the Trustee. [R&B] contends its causes of action against the Evans for (i) tortious interference with judgment, (ii) conspiracy to interfere with judgments, (iii) fraud, (iv) conspiracy to defraud and (v) receipt of fraudulent conveyances are outside the subject matter of the bankruptcy court. Despite [R&B]'s protestations to the contrary, each of these causes of action, even assuming they belong solely to R&B, "relate to" the Canion bankruptcy. . . .

Further proceedings in the bankruptcy court followed,¹⁰ after which R&B again appealed the adverse rulings of the bankruptcy court, raising the same issues. The district court rejected R&B's arguments a second time and this appeal followed.

II. ANALYSIS

A. Standard of Review

Federal courts must be assured of their subject matter jurisdiction at all times.¹¹ Both the bankruptcy and district courts' finding that they had subject matter jurisdiction is a legal determination that we review de novo.¹² With regard to the substantive elements of the appeal, bankruptcy court rulings and decisions are reviewed by this court under the same standards employed by the district court hearing an appeal from bankruptcy court, i.e., conclusions of law are reviewed de novo and findings of fact are reviewed for clear error.¹³ Mixed questions of fact and law are reviewed de novo.¹⁴

B. Bankruptcy Court Jurisdiction

Federal courts are courts of limited jurisdiction, and bankruptcy courts are no exception. Their jurisdiction is "wholly 'grounded in and limited by statute.'"¹⁵ 28 U.S.C. 1334 lists the following four types of bankruptcy matters over which district courts have jurisdiction:

(1) "cases under title 11";

(2) "proceedings arising under title 11";

(3) proceedings "arising in" a case under title 11; and

(4) proceedings "related to" a case under title 11.

The first category refers to the bankruptcy petition itself.¹⁶ The second, third, and fourth categories "operate conjunctively to define the scope of jurisdiction. Therefore, it is necessary only to determine whether a matter is at least 'related to' the bankruptcy."¹⁷ 28 U.S.C. 157 empowers district courts to refer such proceedings to the bankruptcy court; thus, if R&B's claims against the defendants are at least "related to" Canion's bankruptcy the district court's referral of the proceeding to the...