Valley Historic Ltd. v. Bank of New York

• Decision Date: 17 May 2007
• Docket Number: No. 06-1571.,06-1571.
• Citation: 486 F.3d 831
• Parties: VALLEY HISTORIC LIMITED PARTNERSHIP, Plaintiff-Appellant, v. The BANK OF NEW YORK, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

486 F.3d 831

VALLEY HISTORIC LIMITED PARTNERSHIP, Plaintiff-Appellant, v. The BANK OF NEW YORK, Defendant-Appellee.

No. 06-1571.

United States Court of Appeals, Fourth Circuit.

Argued: March 13, 2007.

Decided: May 17, 2007.

ARGUED: Steven Bret Ramsdell, Tyler, Bartl, Gorman & Ramsdell, P.L.C., Alexandria, Virginia, for Appellant. Benjamin C. Ackerly, Sr., Hunton & Williams, Richmond, Virginia, for Appellee. ON BRIEF: Thomas P. Gorman, Tyler, Bartl, Gorman & Ramsdell, P.L.C., Alexandria, Virginia, for Appellant. Michael C. Shepherd, Hunton & Williams, Richmond, Virginia, for Appellee.

Before SHEDD and DUNCAN, Circuit Judges, and SAMUEL G. WILSON, United States District Judge for the Western District of Virginia, sitting by designation.

Affirmed in part, vacated in part, and remanded with instructions by published opinion. Judge WILSON wrote the opinion, in which Judge SHEDD and Judge DUNCAN joined.

OPINION

WILSON, District Judge.

This is an appeal by appellant, Chapter 11 debtor, Valley Historic Limited Partnership ("Debtor"), from the district court's determination that the bankruptcy court lacked jurisdiction over the Debtor's post-confirmation adversary proceeding against appellee, the Bank of New York ("Bank"), for breach of contract and for tortious interference. We affirm the district court's determination that the bankruptcy court lacked jurisdiction.

I.

In May 1992, Valley Historic Properties, Inc. ("Borrower") acquired two office buildings in downtown Staunton, Virginia. The Borrower financed the acquisition and renovation of the buildings through the issuance of economic development bonds. First Vantage Bank, First Virginia Bank, Inc., and First Bank & Trust Co. owned the beneficial interest in the bonds. The bonds were payable solely from revenues derived from payments under a loan agreement and promissory note, which were ultimately assigned to the Bank as successor indenture trustee. The loan agreement, which was secured by a first priority lien on the property and an assignment of leases, rents, and profits, called for scheduled payments over a ten-year period, with all payments to have been completed by May 2002. Lease payments, under a ten-year lease of the property by a single tenant, Valley Community Services Board, provided the Borrower the source of funds to make the monthly payments to the Bank that the loan agreement required. Following the execution of the loan agreement and the issuance of the bonds, the Borrower conveyed its interest in the property to the Debtor.

In mid-2001, the Bank apprised the Debtor that the loan agreement required the Debtor to increase its monthly payments nearly tenfold to $100,000 per month for the period of May 2001 through May 2002 so that the loan would be paid fully, rather than simply mature, in May 2002. The Debtor disagreed and continued to pay at the same rate it had in the past. Consequently, in February 2002 the Bank issued a notice of default, and the Debtor responded by filing its Chapter 11 bankruptcy petition that same month.

The Debtor filed a plan of reorganization ("Plan") on September 20, 2002. The Bank objected to the Plan and filed a proof of claim in the amount of $1,051,866.43, to which the Debtor objected. The bankruptcy court ultimately confirmed the Plan on December 30, 2003, granting the Bank an allowed secured claim in the amount of $967,148.17. The Plan provided, in part, that the court would fix and liquidate the amount of the Bank's claim "subject to the Debtor's claims, setoffs, etc. which [would] be liquidated at another date via an adversary proceeding" and that the bankruptcy court would "retain jurisdiction" over the "adversary proceeding filed by the Debtor against [the Bank]." The Plan did not provide for the use of any recovery from the adversary proceeding but instead provided for the satisfaction of the Debtor's obligations "entirely from the post-petition rents and earnings of the Debtor through the operation of its real estate."

After confirmation, the tenant vacated the Debtor's property, and the Debtor sold that property on March 1, 2005, and used the proceeds to pay all of its creditors, including the Bank. Approximately three months later, the Debtor filed an adversary proceeding raising two claims against the Bank. In Count I, the Debtor alleged that the Bank breached the loan agreement when it increased the monthly lease payments and declared the Debtor to be in default. In Count II, the Debtor alleged that the Bank and the three beneficial owners of the bonds tortiously interfered with the Debtor's contractual relationship with its tenant in December 2002 by meeting with the tenant and offering to sell the property to the tenant below fair market value.

The Bank moved to dismiss on the grounds that the bankruptcy court lacked subject matter jurisdiction, that the proceeding was not a core proceeding, and that the Debtor's complaint failed to state a claim upon which relief could be granted. The bankruptcy court held that it had jurisdiction, that the proceeding was a core proceeding, and that the Debtor's complaint stated valid claims. The Bank took an interlocutory appeal pursuant to 28 U.S.C. § 158(a)(3), and the district court reversed. The district court found no "related to" jurisdiction over Count I, the pre-petition contract claim, because the Debtor's plan of reorganization had been confirmed and substantially consummated by the time the Debtor filed the complaint. It found no "arising in" jurisdiction over Count II, the post-petition tortious interference claim, because, according to our precedent, "proceedings or claims arising in Title 11 are those that `are not based on any right expressly created by Title 11, but nevertheless, would have no existence outside of the bankruptcy.'" Grausz v. Englander, 321 F.3d 467, 471 (4th Cir. 2003) (quoting Bergstrom v. Dalkon Shield Claimants Trust (In re A.H. Robins Co.), 86 F.3d 364, 372 (4th Cir.1996)). It also found that neither Count I nor Count II was a core proceeding and that because there was no privity between the Debtor and the Bank, Count I failed to state a claim upon which relief could be granted.

II.

Because the district court sits as an appellate court in bankruptcy, our review of the district court's decision is plenary. See Bowers v. Atlanta Motor Speedway, Inc. (In re Se. Hotel Props. Ltd.), 99 F.3d 151, 154 (4th Cir.1996). Therefore, we review the district court's decision "by applying the same standard of review that it applied to the bankruptcy court's decision. That is, we review findings of fact for clear error and conclusions of law de novo." Kielisch v. Educ. Credit Mgmt. Corp. (In re Kielisch), 258 F.3d 315, 319 (4th Cir.2001) (citations omitted).

III.

The bankruptcy court derives its jurisdiction from the district court. See 28 U.S.C. § 157(a), (b)(1). District courts have "original and exclusive jurisdiction of all cases under title 11," and "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(a), (b). The Debtor maintains that the bankruptcy court had both "arising in" and "related to" jurisdiction over its post-confirmation adversary proceeding against the Bank as well as jurisdiction to adjudicate its claims under 28 U.S.C. § 1334(e), which gives the district court in a case under Title 11 exclusive jurisdiction over a debtor's property "as of the commencement" of the case and "of property of the estate." Additionally, it maintains that the confirmation order, which reserved jurisdiction over the Debtor's adversary proceeding, is preclusive and bars the Bank from relitigating the bankruptcy court's jurisdiction. We conclude, however, as did the district court, that the bankruptcy court did not have post-confirmation jurisdiction to adjudicate the Debtor's claims.

A proceeding or claim "arising in" Title 11 is one that is "`not based on any right expressly created by Title 11, but nevertheless, would have no existence outside of the bankruptcy.'" Grausz v. Englander, 321 F.3d 467, 471 (4th Cir.2003) (quoting Bergstrom v. Dalkon Shield Claimants Trust (In re A.H. Robins Co.), 86 F.3d 364, 372 (4th Cir.1996)). Therefore, a "`controversy arises in Title 11' when `it would have no practical existence but for the bankruptcy.'" Id. (quoting Bergstrom, 86 F.3d at 372). The Debtor argues that there is "arising in" jurisdiction under § 1334(b) because the breach of contract caused its bankruptcy and the tortious interference complicated the administration of the bankruptcy case. We do not find the argument persuasive.

It seems self-evident that a claim, like the Debtor's breach of contract claim, that pre-dates the filing of the Chapter 11 case cannot be said to have arisen within that case, and whether it caused the bankruptcy is immaterial. Indeed, if causation were a sufficient touchstone, then any debt would confer "arising in" jurisdiction. However, the very purpose of bankruptcy is to discharge or restructure the debt that has caused the bankruptcy. Nor is it sufficient to establish "arising in" jurisdiction that a claim, like the Debtor's tortious interference claim, arises during the pendency of the Chapter 11. Here, the Debtor's claims bear only a coincidental relationship to the Debtor's bankruptcy case. They would have existed whether or not the Debtor filed bankruptcy. It follows that because the Debtor's breach of contract claim and tortious interference claim would have existence outside of the bankruptcy, they were not within the bankruptcy court's "arising in" jurisdiction.

The Debtor also asserts that the bankruptcy court had subject matter jurisdiction because his claims are "related to" a case under Title 11. This Court, like the majority of the other circuits, has adopted the test articulated by the Third Circuit in Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984), for determining "related...