Superpumper, Inc. v. Leonard

• Decision Date: 16 September 2021
• Docket Number: No. 79355,79355
• Citation: 495 P.3d 101
• Parties: SUPERPUMPER, INC., an Arizona Corporation; Edward Bayuk, Individually and as Trustee of the Edward William Bayuk Living Trust; Salvatore Morabito, an Individual; and Snowshoe Petroleum, Inc., a New York Corporation, Appellants, v. William A. LEONARD, TRUSTEE FOR the BANKRUPTCY ESTATE OF Paul Anthony MORABITO, Respondent.
• Court: Nevada Supreme Court

495 P.3d 101

SUPERPUMPER, INC., an Arizona Corporation; Edward Bayuk, Individually and as Trustee of the Edward William Bayuk Living Trust; Salvatore Morabito, an Individual; and Snowshoe Petroleum, Inc., a New York Corporation, Appellants,

v.William A. LEONARD, TRUSTEE FOR the BANKRUPTCY ESTATE OF Paul Anthony MORABITO, Respondent.

No. 79355

Supreme Court of Nevada.

FILED SEPTEMBER 16, 2021

Claggett & Sykes Law Firm and Micah S. Echols, Las Vegas; Hartman & Hartman and Jeffrey L. Hartman, Reno; Robison, Sharp, Sullivan & Brust and Frank C. Gilmore, Reno, for Appellants.

Garman Turner Gordon and Gerald M. Gordon, Gabrielle A. Hamm, Erika A. Pike Turner, and Teresa M. Pilatowicz, Las Vegas; Jones Lovelock and Stephen A. Davis, Las Vegas, for Respondent.

BEFORE THE SUPREME COURT, EN BANC.

OPINION

By the Court, HARDESTY, C.J.:

In this appeal, we examine whether a state district court had subject matter jurisdiction over a fraudulent conveyance action or whether such an action is within the exclusive jurisdiction of the federal bankruptcy court. We hold that the district court here had subject matter jurisdiction over the action because there is concurrent federal and state jurisdiction over fraudulent conveyance actions. We also conclude that, unlike subject matter jurisdiction, a defect as to in rem jurisdiction is a defect that is waived if not timely asserted. Accordingly, because the district court properly exercised jurisdiction over the action and did not abuse its discretion in its rulings on the discovery and evidentiary issues discussed below, we affirm the district court's judgment.

FACTS AND PROCEDURAL HISTORY

In 2007, Paul Morabito and Consolidated Nevada Corporation (CNC) filed a lawsuit against JH, Inc., Jerry Herbst, and Berry-Hinckley Industries (collectively, the Herbsts). The Herbsts filed counterclaims against Morabito and CNC and ultimately prevailed. The Herbsts were awarded in excess of $149.4 million in damages. Thereafter, the parties entered into a settlement agreement for $85 million. By that time, Morabito had already moved most of his assets out of his name. Morabito and CNC defaulted on the settlement agreement, and, as a result, the Herbsts filed an involuntary Chapter 7 bankruptcy petition against Morabito and CNC. The bankruptcy court adjudicated Morabito as a Chapter 7 debtor.

In an attempt to collect on the settlement agreement, the Herbsts filed a fraudulent transfer action under NRS Chapter 112 against Morabito, as well as the transferees of his assets, in state district court. The transferees (appellants in this case) are Superpumper, Inc., an Arizona corporation; Salvatore (Sam) Morabito, who is Paul Morabito's brother; Edward Bayuk, individually and as trustee of the Bayuk Trust; and Snowshoe Petroleum, Inc., a New York corporation (collectively, when possible, Superpumper). All of the transferees received substantial assets from Morabito.

After the bankruptcy court appointed respondent William A. Leonard as Morabito's bankruptcy trustee (the Trustee), the Herbsts and Superpumper stipulated to substitute the Trustee for the Herbsts and to remove Morabito as a defendant in the state court action. Following an eight-day bench trial, the state district court avoided all of Morabito's transfers to Superpumper and awarded the Trustee the subject property or the value thereof.

Superpumper appeals, arguing that the district court (1) did not have subject matter jurisdiction over the underlying fraudulent conveyance action, (2) did not have in rem jurisdiction over the Bayuk Trust, and (3) erred in allowing attorney-client communications to be disclosed during discovery and admitted into evidence at trial.

DISCUSSION

The district court had subject matter jurisdiction over the fraudulent conveyance action

Superpumper's argument regarding subject matter jurisdiction is twofold. First, Superpumper asserts that the state district court did not have jurisdiction over the entire case because fraudulent transfer proceedings are within the exclusive jurisdiction of the bankruptcy court. Specifically, citing In re Gruntz, 202 F.3d 1074, 1080-81 (9th Cir. 2000), Superpumper argues that bankruptcy courts have exclusive jurisdiction over "core proceedings" and that a fraudulent conveyance action is a core proceeding. Second, Superpumper contends that the Trustee lacked standing to maintain the underlying action.

"Subject matter jurisdiction is a question of law subject to de novo review." Ogawa v. Ogawa, 125 Nev. 660, 667, 221 P.3d 699, 704 (2009). Subject matter jurisdiction "can be raised by the parties at any time, or sua sponte by a court of review, and cannot be conferred by the parties." Landreth v. Malik, 127 Nev. 175, 179, 251 P.3d 163, 166 (2011) (internal quotation marks omitted). "[I]f the district court lacks subject matter jurisdiction, the judgment is rendered void." Id.

Federal district courts "have original and exclusive jurisdiction of all cases under title 11," which encompasses the federal bankruptcy provisions. 28 U.S.C. § 1334(a) (2005). However, "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." Id. at § 1334(b) (emphasis added). Federal district courts may refer all cases arising under title 11 to bankruptcy judges. 28 U.S.C. § 157(a). And "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11." Id. at § 157(b)(1) (emphases added). "[A] ‘core proceeding' in bankruptcy is one that invokes a substantive right provided by title 11 or ... a proceeding that, by its nature, could arise only in the context of a bankruptcy case." Gruntz, 202 F.3d at 1081 (internal quotation marks omitted). In contrast, " ‘[n]on-core proceedings’ are those not integral to the restructuring of debtor-creditor relations and not involving a cause of action arising under title 11." Id.

Although Superpumper suggests otherwise, just because a proceeding is considered "core" does not mean that it lies within the exclusive jurisdiction of the bankruptcy court. Rather, whether a proceeding is considered "core" determines the relationship between Article I bankruptcy courts and Article III federal district courts, not state courts. In Executive Benefits Insurance Agency v. Arkison, the United States Supreme Court explained that bankruptcy courts are authorized to enter final judgments in core proceedings, which the federal district court may then review "under traditional appellate standards." 573 U.S. 25, 33-34, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014). However, "for ‘non-core’ proceedings ...[,] a bankruptcy court" is merely authorized to " ‘submit proposed findings of fact and conclusions of law to the district court’ [which] must then review those proposed findings and conclusions de novo and enter any final orders or judgments." Id. at 34, 134 S.Ct. 2165 (quoting 28 U.S.C. § 157(c)(1) ).

Thus, whether a matter is "core" or "non-core" determines whether the bankruptcy court may enter a final judgment and the appropriate standard of review for that judgment, not whether a state court has jurisdiction over the matter. See Gruntz, 202 F.3d at 1081 ("[T]he separation of ‘core’ and ‘non-core’ proceedings ... creates a distinction between those judicial acts deriving from the plenary Article I bankruptcy power and those subject to general Article III federal court jurisdiction."); Hopkins v. Plant Insulation Co., 349 B.R. 805, 811 (Bankr. N.D. Cal. 2006) (stating that "[ 28 U.S.C. §] 157(b) governs the division of responsibility between Article III district courts and Article I bankruptcy courts in each judicial district, and has nothing to say about the division of responsibility between state and federal courts").

Instead, as the Bankruptcy Appellate Panel of the Ninth Circuit noted in In re McCarthy, state and federal courts share concurrent jurisdiction over certain "core" proceedings. 230 B.R. 414, 418 (B.A.P. 9th Cir. 1999) ("The fact that a fraudulent transfer action might be a ‘core proceeding’ under 28 U.S.C. § 157(b)(2) does not equate to exclusive federal jurisdiction. Rather, there is concurrent federal and state jurisdiction over fraudulent transfer actions and many other core proceedings." (citing 28 U.S.C. § 1334(b) )); see also In re Brady, Tex., Mun. Gas Corp., 936 F.2d 212, 218 (5th Cir. 1991) ("[T]he only aspect of the bankruptcy proceeding over which the district courts and their bankruptcy units have exclusive jurisdiction is the bankruptcy petition itself. In other matters arising in or related to title 11 cases ... , state courts have concurrent jurisdiction." (citation and internal quotation marks omitted)); Hopkins, 349 B.R. at 812 (concluding "that state courts retain concurrent jurisdiction over claims brought" by a trustee to recover fraudulent conveyances).

And although the Gruntz court stated broadly that a "bankruptcy court[ has] plenary power over core proceedings," 202 F.3d at 1082, Gruntz did not overrule McCarthy, which stated that a core proceeding "does not equate to exclusive federal jurisdiction," 230 B.R. at 418. Gruntz is also distinguishable because there the state court acted in derogation of a bankruptcy court automatic stay. 202 F.3d at 1077. Here, however, the bankruptcy court lifted the stay specifically so that the Trustee could pursue the underlying action. Further, a bankruptcy court's exercise of jurisdiction is permissive, not mandatory. 28 U.S.C. § 157(b)(l) provides that a "[b]ankruptcy judge[ ] may hear and determine all cases under title 11 and all core proceedings arising under title 11." (Emphasis added.) There is no language in the statute or Gruntz that demands that core proceedings be exclusively within the jurisdiction of bankruptcy courts as against state courts. See Hopkins, 349 B.R. at 811 (stating that "[n]othing in Gruntz indicates that a bankruptcy court lacks the power to...