Southern Indus. Banking Corp., In re

Decision Date22 January 1987
Docket NumberNo. 85-6130,85-6130
Citation809 F.2d 329,15 Bankr.Ct.Dec. 1011
Parties, Bankr. L. Rep. P 71,595 In re SOUTHERN INDUSTRIAL BANKING CORPORATION, Debtor. Thomas DuVOISIN, Liquidating Trustee, and Bank of Commerce, Intervening Plaintiff-Appellee, v. Emmett J. FOSTER, Defendant-Appellant.
CourtU.S. Court of Appeals — Sixth Circuit

Lewis S. Howard, Jr., argued, Howard and Ridge, Knoxville, Tenn., for defendant-appellant.

John A. Lucas, argued, Knoxville, Tenn., Jeffrey S. Norwood, for intervening plaintiff-appellee.

Before WELLFORD and GUY, Circuit Judges; and PECK, Senior Circuit Judge.

JOHN W. PECK, Senior Circuit Judge.

On March 22, 1982 defendant-appellant Emmett J. Foster paid $400,000 to Southern Industrial Banking Corporation (SIBC) for four investment Certificate Securities (Certificates). These Certificates were scheduled to mature on March 22, 1983, with accrued interest of $66,000. On February 4, 1983 Foster took out a $470,000 loan from SIBC, executing a promissory note (Note) to SIBC for $480,956.02 (principal plus interest and service charges), with the Certificates held as collateral. The Note was scheduled to be due on March 22, 1983, the same date that the Certificates were to mature. On March 10, 1983 SIBC filed a voluntary Chapter 11 petition in bankruptcy.

On May 21, 1984 the Liquidating Trustee for SIBC, Thomas DuVoisin, instituted an adversary proceeding against Foster, seeking to avoid SIBC's transfer of the proceeds of the Note to Foster as a preferential transfer under 11 U.S.C. Sec. 547(b) of the Bankruptcy Code. The Bank of Commerce (BOC) subsequently filed a motion to intervene in the adversary proceeding to enforce the Note, having been assigned the Note in SIBC's Modified Plan of Reorganization.

Foster asserted as defenses to both the original complaint and BOC's intervening complaint that the transfer of money from SIBC to Foster was not a preferential transfer and that Foster was entitled to set off the matured value of the Certificates against the Note according to 11 U.S.C. Sec. 553(a). The bankruptcy court held that the transfer of money from SIBC to Foster was not a voidable preferential transfer and that BOC, as holder of the Note, should recover the principal amount of the Note plus interest from Foster. The bankruptcy court therefore denied Foster's right to use the Certificates as a setoff against the amount owed. Foster appealed to the district court, claiming that the bankruptcy court acted outside its jurisdiction in adjudicating the dispute and that the court had erred in determining that Foster was not entitled to use the Certificates as a setoff against the amount owed the intervenor BOC. The district court found that the bankruptcy court had jurisdiction because the dispute between Foster and BOC was a core proceeding and affirmed the bankruptcy court's decision as to Foster's right of setoff.

In this appeal appellant Emmett Foster has claimed that the bankruptcy court, acted outside its jurisdiction in adjudicating the dispute between Foster and the Bank of Commerce because the dispute is neither a core proceeding in which a bankruptcy court may enter a final judgment nor a related proceeding which a bankruptcy court may hear. We disagree.

The district court found that the instant case was a core proceeding within the meaning of 28 U.S.C. Sec. 157(b)(2) over which the bankruptcy court properly had jurisdiction. We reach the same result as the district court in finding jurisdiction, albeit by taking a different route. We do not find the direct effect on the liquidation of assets of the bankrupt estate or the adjustment of the debtor-creditor relationship usually found in core proceedings. We would characterize the present case as a non-core but "related" proceeding covered by 28 U.S.C. Sec. 157(c)(2), with both parties consenting. A related proceeding with the consent of all parties functionally has the same effect as a core proceeding, permitting the bankruptcy court to entertain jurisdiction over the matter and to enter a final judgment, order, or decree. See K-Rom Construction Corp. v. Behling, 46 B.R. 745, 749-50 (Bankr.S.D.N.Y. (1985)).

It was the intention of Congress to extend a broad jurisdictional grant to the bankruptcy courts over all matters that arise in connection with bankruptcy cases. In re Salem Mortgage Co., 783 F.2d 626, 632-34 (6th Cir.1986). The court in In re Salem maintained that "[a]lthough situations may arise where an extremely tenuous connection to the estate would not satisfy the jurisdictional requirement, we believe that a broader interpretation of the statute more closely reflects the congressional intent in adopting the new bankruptcy laws." Id. at 634. With this as background, the facts of the present case warrant a finding of relatedness: the cause of action involving Foster and BOC arose because of a bankruptcy proceeding, the single substantive claim concerning setoff rights is based on bankruptcy law, and the debt to be set off is a debt owed Foster, not by BOC, but by the bankrupt SIBC.

We also find that appellant Foster consented to jurisdiction by acknowledging the jurisdiction of the bankruptcy court several times during the proceedings. Foster's counsel marked the order granting BOC's Motion to Intervene "agreed for entry." Foster also stated in his Answer to the Intervening Complaint that "[t]he defendant admits jurisdiction of the [bankruptcy] Court." Even if express consent has not been proven, we agree with recent cases in the bankruptcy courts that have supported the notion that the absence of a timely objection to the bankruptcy court's jurisdiction constitutes implied consent to the resolution of the controversy. See In re Energy Savings Center, Inc., 54 B.R. 100, 102 (Bankr.E.D.Pa.1985); In re Alloy Metal Wire Works, Inc., 52 B.R. 39, 40 (Bankr.E.D.Pa.1985); Lombard-Wall, Inc. v. New York City Housing Development Corp., 48 B.R. 986, 992 (Bankr.S.D.N.Y.1985). Mr. Foster did not object to the bankruptcy court's jurisdiction over the dispute between himself and BOC; the issue was not raised until Mr. Foster received an unfavorable judgment from the bankruptcy court and then filed an appeal.

As to the merits of the case, the bankruptcy court found that Foster did not have the right to set off the money he owed on the loan to SIBC by the value he paid for the Certificates. The district court held that this finding was not clearly...

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1 books & journal articles
  • Chapter 12 Bankruptcy, [section] 1232 v [section] 553: Setoff as an Effective Veto?
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    • The Journal of Corporation Law Vol. 47 No. 2, January 2022
    • January 1, 2022
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