SG & Co. Northeast v. Good

• Decision Date: 21 November 2011
• Docket Number: No. 11 A 452.,11 A 452.
• Citation: 55 Bankr.Ct.Dec. 216,461 B.R. 532
• Parties: SG & COMPANY NORTHEAST, LLC, et al., Plaintiffs, v. Jami Sue GOOD, individually and as trustee of the Steven L. Good Irrevocable Trust; and Northern Trust Corporation d/b/a The Northern Trust Company, as corporate trustee of the Steven L. Good Irrevocable Trust, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

461 B.R. 532

55 Bankr.Ct.Dec. 216

SG & COMPANY NORTHEAST, LLC, et al., Plaintiffs,

v.Jami Sue GOOD, individually and as trustee of the Steven L. Good Irrevocable Trust; and Northern Trust Corporation d/b/a The Northern Trust Company, as corporate trustee of the Steven L. Good Irrevocable Trust, Defendants.

No. 11 A 452.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Nov. 21, 2011.

Heidi J. Sorvino, Carmine J. Castellano, Lewis Brisbois Bisgaard & Smith LLP, New York, NY, for plaintiffs SG & Company Northeast, LLC, et al.

John T. Ruskusky, Patrick F. Ross, Ungaretti & Harris LLP, Chicago, IL, for defendant Jami Sue Good.

David C. Blickenstaff, Jason M. Torf, Schiff Hardin LLP, Chicago, IL, for defendant Northern Trust Corporation.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

Before the court for ruling is the question of subject matter jurisdiction over an adversary proceeding transferred here earlier this year from another district. For the reasons set forth below, the court concludes that it lacks subject matter jurisdiction and dismisses the adversary proceeding without prejudice.

1. Background

In February 2011, the adversary proceeding captioned SG & Co. Northeast LLC, et al. v. Good, et al., No. 11 A 452, was transferred to the Northern District of Illinois pursuant to 28 U.S.C. § 1404(a) from the Southern District of New York where the chapter 11 case of the debtors (who are also the adversary plaintiffs) is pending.¹ Accompanying the adversary proceeding on its arrival was the defendants' fully briefed motion to dismiss the amended complaint and to strike certain claims as barred by Illinois law. (The request to dismiss and strike was what remained after the New York court granted the defendants' alternative request to transfer venue.)

Briefly, the amended adversary complaint alleges the following facts. Steven L. Good was chairman and CEO of debtor SG & Company Northeast, LLC (as it is now known), a large real estate auction firm. Good used his position to steal money from the company, shielding the stolen funds by contributing them to an irrevocable life insurance trust. The funds were then used to pay, among other things, premiums on life insurance policies that Good had contributed to the trust. In 1997, Good's wife, defendant Jami Sue Good, became sole trustee of the trust. In 2009, Steven Good was found shot to death in his car in a suburban Chicago parking lot. After his death, proceeds of the insurance policies were paid to the trust. Defendant Northern Trust Corporation was subsequently appointed corporate co-trustee.

The amended complaint has three counts, each arising under Illinois state law. Count I is a claim against Northern Trust and Jami for unjust enrichment. Count II requests a declaratory judgment invalidating the trust. Count III is a claim against Jami for fraud. In Counts I and III, the plaintiffs seek damages of at least $2.28 million.

At the initial status hearing in March 2011, this court set a ruling date in mid-July on the defendants' motion to dismiss and strike. After reviewing the briefs, however, the court concluded supplemental briefing would be necessary. Because the plaintiffs' claims arose under Illinois state law, and because there was a parallel proceeding pending in the state court,² it appeared abstention pursuant to 28 U.S.C. § 1334(c)(1), rather than dismissal, might be appropriate. On June 21, 2011, the court therefore issued an order raising the abstention question and permitting the parties to brief it.

Both sides filed short memoranda on abstention. In the plaintiffs' memorandum, however, it was disclosed that the plaintiffs were not actually the real parties in interest to prosecute the adversary proceeding. See Fed.R.Civ.P. 17(a)(1) (made applicable by Fed. R. Bankr.P. 7017) (stating that “[a]n action must be prosecuted in the name of the real party in interest”). The real party in interest, they said, was someone named Mark S. Stickel, identified in the memorandum simply as “Plaintiffs' Liquidation Trustee”—no further information given. The plaintiffs promised that Stickel would be substituted as the plaintiff but did not say when.

A review of the record in the underlying New York bankruptcy case clarified Stickel's identity.³ It appears that after this adversary proceeding was filed, the debtors successfully confirmed a liquidating plan. The plan established a liquidation trust, and on the plan's effective date all of the “liquidation trust assets,” a term defined in the disclosure statement to mean “assets” as well as “all other property and proceeds of property of the Estates or of the Debtors,” were transferred to the liquidation trust. The liquidation trust agreement named Stickel the initial liquidation trustee and charged him with, among other things, managing the assets and paying the claims of creditors. Under the plan and liquidation trust agreement, then, the claims in this adversary proceeding are “liquidation trust assets,” not assets of the debtors or their estates, and the proceeds of any successful recovery will inure to the liquidation trust, not to the bankruptcy estate. The party ultimately asserting those claims, once the proper plaintiff is substituted, will be Stickel, not the debtors.

Because this new information suggested the absence of subject matter jurisdiction under 28 U.S.C. § 1334(b), see CLC Creditors' Grantor Trust v. Sonnenschein Nath & Rosenthal LLP (In re Commercial Loan Corp.), 363 B.R. 559, 564–66 (Bankr.N.D.Ill.2007); Federalpha Steel LLC Creditors' Trust v. Federal Pipe & Steel Corp. (In re Federalpha Steel LLC), 341 B.R. 872, 879–82 (Bankr.N.D.Ill.2006), the court felt compelled to order still more briefing, this time on jurisdiction. The court sought assistance with two questions: (1) when a bankruptcy matter is transferred to another district pursuant to section 1404(a), as the adversary proceeding here was, does the jurisdictional law of the transferee forum or the transferor forum apply; and (2) if the jurisdictional law of the transferee forum applies, does section 1334(b) as the Seventh Circuit understands it confer subject matter jurisdiction over the plaintiffs' claims.

Both sides filed supplemental memoranda in which they agreed on the answers to the two questions posed. According to the parties, the law of the transferee forum applies, and under that law the court has subject matter jurisdiction over the adversary proceeding.

2. Discussion

The court agrees with the parties' first answer but not the second. The applicable law is indeed the jurisdictional law of the Seventh Circuit. Under Seventh Circuit law, however, the court lacks subject matter jurisdiction. The adversary proceeding will therefore be dismissed.

a. Applicable Law

As the parties observe, the jurisdictional law of the transferee court governs the plaintiffs' claims in their amended complaint.

When an action is transferred to another district under section 1404(a), the law that applies to questions of state law is the law that the transferor court would have applied had the action not been transferred. Van Dusen v. Barrack, 376 U.S. 612, 639, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964); see also Cromeens, Holloman, Sibert, Inc. v. AB Volvo, 349 F.3d 376, 383 (7th Cir.2003); 15 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure § 3846 at 83–84 (3d ed. 2007). The transfer does no more than produce “a change of courtrooms.” Van Dusen, 376 U.S. at 639, 84 S.Ct. 805.

When an action involving federal claims is transferred, however, the law of the transferee forum applies. McMasters v. United States, 260 F.3d 814, 819 (7th Cir.2001); Murphy v. FDIC, 208 F.3d 959, 965–66 (11th Cir.2000); Campos v. Ticketmaster Corp., 140 F.3d 1166, 1171 n. 4 (8th Cir.1998); Newton v. Thomason, 22 F.3d 1455, 1460 (9th Cir.1994); Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1126–27 (7th Cir.1993); In re Korean Air Lines Disaster, 829 F.2d 1171, 1174–74 (D.C.Cir.1987), aff'd sub nom. Chan v. Korean Air Lines, Ltd., 490 U.S. 122, 109 S.Ct. 1676, 104 L.Ed.2d 113 (1989). The difference is that whereas state law is expected to be non-uniform, federal law is not. Ultimately, there is only “a single proper interpretation of federal law.” Korean Air Lines, 829 F.2d at 1175; see also Eckstein, 8 F.3d at 1126 (“A single federal law implies a national interpretation.”). The transferee court must therefore presume that the law prevailing in its own circuit is as valid as the law of the transferor circuit. Singleton v. Wells Fargo Bank, N.A. (In re Singleton), 269 B.R. 270, 273 (Bankr.D.R.I.2001).⁴

The principle that the law of the transferee forum applies to federal claims includes not only substantive federal law but also federal jurisdictional law. In re Mastercard Int'l Inc. Internet Gambling Litig., Nos. Civ.A.00–MD–1321, Civ.A.00–MD–1322, Civ.A.00–1169, Civ.A.00–0661, 2004 WL 287344, at *2 (E.D.La.2004) (noting that the transferee court follows the law of its own circuit in federal question cases, and “[s]ubject matter jurisdiction ... is just such a federal question”); see also In re StarLink Corn Prods. Liab. Litig., 211 F.Supp.2d 1060, 1063–64 (N.D.Ill.2002) (transfer under 28 U.S.C. § 1407); In re Linerboard Antitrust Litig., No. Civ.A.04–4001, MDL No. 1261, 2005 WL 1625040, at *4 (E.D.Pa. July 11, 2005) (same). Indeed, jurisdiction “is arguably the area where the need for uniformity of federal law is most compelling” and is therefore the occasion when application of the law of the transferee forum is most appropriate. StarLink, 211 F.Supp.2d at 1063–64.

Because the law of the transferee circuit applies here, subject matter jurisdiction over the plaintiffs' claims depends on the Seventh Circuit's interpretation of bankruptcy jurisdiction, not the Second Circuit's interpretation.

b. Subject Matter Jurisdiction

Under Seventh Circuit jurisprudence, the adversary proceeding must be dismissed for...