Ward v. White River Contracting LLC (In re White River Contracting, LLC)
| Decision Date | 10 September 2021 |
| Docket Number | Adv. 21-09001-BPH,20-90251-BPH |
| Parties | In re WHITE RIVER CONTRACTING, LLC, Debtor. v. WHITE RIVER CONTRACTING, LLC, d/b/a ROCKY MOUNTAIN LOG HOMES; CRAIG ROSTAD; JEREMY OURY; MIKE TURLEY; TERRY CLEVELAND; and JAKE HAYES Defendants. KURT and DIANE WARD, Plaintiffs. |
| Court | U.S. Bankruptcy Court — District of Montana |
In this adversary proceeding, Debtor/Defendant White River Contracting, LLC ("White River") and Non-Debtor Defendants, Craig Rostad, Jeremy Oury, Mike Turley, Terry Cleveland, and Jake Hayes ("Non-Debtor Defendants") filed Motions to Dismiss this proceeding.[1] Generally, White River's Motion asserts that dismissal is appropriate because Plaintiffs' Complaint fails to state claims upon which relief can be granted. The Non-Debtor Defendants' Motion contend that the matter must be dismissed because this Court lacks subject matter jurisdiction. Plaintiffs filed a Response to the Motions arguing that dismissal of this action was inappropriate. Plaintiffs argue that the Complaint states plausible causes of action sufficient to survive a motion to dismiss under Civil Rule 12(b)(6), and also argue that the Court's "related to" or supplemental subject matter jurisdiction permit the Court to resolve each of the issues presented in this proceeding. The matter is ripe for a decision.
This dispute stems from a prepetition contract between White River and Plaintiffs for the construction of Plaintiffs' retirement home hear Whitehall, Montana (the "Contract"). During the relevant time-period, the Non-Debtor Defendants collectively owned and/or operated White River, a log home designer, log home kit manufacturer, and general construction contractor based in Hamilton, Montana.[2]
On March 3, 2019, Plaintiffs and White River entered into a "cost-plus" residential construction contract (the "Contract"). The Contract, as originally drafted, estimated the total cost of the project would be $1, 000, 000. The parties amended the Contract on June 14, 2019 by adding to it Exhibit B-1, which projected the final cost of the project to be $1, 353, 496.40.[3] To date, the project remains incomplete. Despite the work that remains to be done, Plaintiffs allege they have paid White River in excess of $1.4 million.[4]
Plaintiffs' Complaint focuses on sixteen invoices issued by White River between July 19, 2019 and October 2, 2020. The Complaint generally alleges that throughout this time frame, White River's invoices misrepresented actual costs and purported to charge Plaintiffs for work that had not yet been completed or was never completed. In addition, White River allegedly issued at least nine "change orders" during this time frame, which Plaintiffs contend were intended to "defraud more money" from them and/or "appease" them when they questioned various charges on the invoices. Finally, Plaintiffs' Complaint alleges that White River failed to pay several subcontractors hired to work on the project and materially misrepresented to the subcontractors that it was Plaintiffs' failure to pay the invoices that prevented White River from paying them.[5]
These underlying allegations form the basis for the six state law claims set forth in the Complaint: (1) fraud; (2) breach of contract; (3) bad faith; (4) Montana Consumer Protection Statute; (5) defamation; and (6) negligent infliction of emotional distress.[6]
White River's Motion[7] generally asserts that dismissal is appropriate because Plaintiffs' fail to state any claims upon which relief can be granted. More specifically, White River's Motion contends that Plaintiffs' fraud claim fails to allege "willful" and "malicious" conduct on the part of White River or the Non-Debtor Defendants, as necessary to prevail on a nondischargeability claim premised upon § 523(a)(6).[8] Additionally, White River contends that Plaintiffs' remaining claims do not fall into any of the nine categories of controversies that can be resolved in an adversary proceeding under Rule 7001. Accordingly, White River contends that these too fail to state a claim upon which relief can be granted.
The Non-Debtor Defendants' Motion similarly seeks dismissal of each claim set forth in Plaintiffs' Complaint.[9] Non-Debtor Defendants' Motion, unlike White River's Motion, asserts that dismissal of this proceeding is appropriate because this Court lacks subject matter jurisdiction to decide the case. Non-Debtor Defendants contend that none of Plaintiffs' claims against them fall within this Court's jurisdiction under 28 U.S.C. §§ 1334(b) and 157. Further, Non-Debtor Defendants contend that their joinder is not required under Civil Rule 19, as applicable in this action under Rule 7019.
Plaintiffs filed a combined Response to the Motions asserting that dismissal was inappropriate.[10] With respect to Non-Debtor Defendants' Motion, Plaintiffs contend that their claims against Non-Debtor Defendants are rooted in corporate veil-piercing theories and, as such, may have an effect on White River's bankruptcy estate. Accordingly, Plaintiffs' Motion asserts that the claims against the Non-Debtor Defendants fall within this Court's "related to" jurisdiction and may appropriately be decided in this adversary proceeding.
As to White River's Motion, Plaintiffs contend that dismissal for failure to state a claim is similarly inappropriate. Plaintiffs' Response argues that, notwithstanding their failure to allege that White River acted "willfully" and "maliciously," or reference § 523 in their Complaint at all, their fraud claim satisfies the notice pleading standard and should survive dismissal. With respect to Plaintiffs' remaining claims, Plaintiffs contend that, like their claims against Non-Debtor Defendants, their claims against White River should not be dismissed because they fall within this Court's supplemental, "related to," jurisdiction.
The arguments presented by White River and the Non-Debtor Defendants require this Court to consider the statutory limitations on its subject matter jurisdiction and federal pleading standards. The Court deems it appropriate to address Non-Debtor Defendants' Civil Rule 12(b)(1) arguments first.
Civil Rule 12(b)(1) contemplates dismissal of a claim or cause of action where the presiding court lacks subject matter jurisdiction. Rule 7012 makes Civile Rule 12(b)(1) applicable in this adversary proceeding. A motion to dismiss under Civil Rule 12(b)(1) may either: (1) attack the allegations in the complaint facially, as insufficient to confer subject matter jurisdiction on the court; or (2) attack the existence of subject matter jurisdiction in fact. In re Livdahl, 2019 WL 1760797 *4 (9th Cir. BAP 2019).
When, as here, a party has yet to answer the complaint or engage in discovery, a motion to dismiss under Civil Rule 12(b)(1) is treated as a facial attack. Id. In a facial attack, the party seeking dismissal asserts that the allegations leveled in the complaint are insufficient on their face to invoke federal subject matter jurisdiction. Id. When analyzing whether a facial attack warrants dismissal under Civil Rule 12(b)(1), "all material allegations in the complaint are assumed true, and the question for the court is whether the lack of federal jurisdiction appears from the face of the pleading itself." Id. (citing Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004)). The burden of establishing subject matter jurisdiction rests on the party asserting that the court has jurisdiction. Thompson v. McCombe, 99 F.3d 352, 353 (9th Cir. 1996).
Federal district courts are vested with original and exclusive subject matter jurisdiction of "all cases under title 11" and original but not exclusive jurisdiction of "all civil proceedings arising under title 11, arising in or related to cases under title 11." 28 U.S.C. §§ 1334(a)-(b). 28 U.S.C. § 157(a) permits district courts to refer most of their bankruptcy jurisdiction to designated bankruptcy courts established under 28 U.S.C. § 151 as a unit of those same courts. 28 U.S.C. § 157(a). Every district court in the United States has availed themselves of this permission. 1 Collier on Bankruptcy ¶ 3.01[1] (16th ed. 2021).
Upon referral from the district court, a bankruptcy court's jurisdiction falls into four categories: (1) cases under title 11; (2) proceedings which "arise under" title 11; (3) proceedings that "arise in" a bankruptcy case; and (4) proceedings that are related to a bankruptcy case. See 28 U.S.C. § 1334(b). The "arising in" category generally encompasses "core proceedings" codified at 28 U.S.C. § 157(b)(2), which would not exist outside the context of a bankruptcy proceeding. In re Pegasus Gold Corp., 394 F.3d 1189, 1193 (9th Cir. 2005).
The "related to" category encompasses a much broader set of claims and controversies. In this Circuit, courts apply the Third Circuit's "Pacor" test for determining whether "related to" jurisdiction exists in a given case. See In re Fietz, 852 F.2d 455, 457 (9th Cir. 1988).[11] Under the Pacor test, a bankruptcy court may appropriately exercise its "related to" jurisdiction if:
the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or against the debtor's property. An action is related to bankruptcy if the outcome could alter the...
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