Wayne Film Systems v. Film Recovery Systems

Decision Date14 May 1986
Docket NumberNo. 84 A 807 (83 B 10803).,84 A 807 (83 B 10803).
Citation64 BR 45
CourtU.S. District Court — Northern District of Illinois

Shalom L. Kohn, Bryan Krakauer, Sidley & Austin, Chicago, Ill., Richard B. Ferrari, Watkiss & Campbell, Salt Lake City, Utah, Mark Krum, Lord, Bissell & Brook, Chicago, Ill., for plaintiff.

Kent R. Carlson, Thomas J. Royce, Thomas J. Royce, Ltd., Chicago, for defendants.


GRADY, Chief Judge.

This bankruptcy case is before us on a motion to withdraw reference pursuant to 28 U.S.C. § 157(d). The basic issue is whether there is bankruptcy jurisdiction over plaintiff's adversary complaint.1 If not, we must then determine whether any alternative federal jurisdiction exists to entertain plaintiff's claim.


On September 1, 1983, an involuntary petition under Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., was filed against one of the defendants in the instant proceeding, Film Recovery Systems Corp. ("FRS"). On September 29, 1983, the bankruptcy court converted the case to one under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. Subsequently, a trustee, also a defendant here, was appointed to administer FRS' estate. See 11 U.S.C. § 1104.

In the complaint of plaintiff Wayne File Recovery, Inc. ("Wayne"), it is alleged that throughout 1983 Wayne delivered raw silver base to FRS in order to have the base refined into pure silver. Wayne also entered into agreements with FRS to the effect that FRS would store and sell the refined silver on Wayne's behalf. Wayne alleges that FRS never returned the refined silver or paid Wayne for the refined silver which it sold on Wayne's behalf.

Also included as defendants in the complaint are B.R. Mackay & Sons, Inc. ("BRM"), Michael T. Mackay, Alvin Tolin, Fred Haynie, Silver Recovery Systems, Inc. ("SRS"), and various other defendants. Wayne alleges that BRM was one of FRS' two original shareholders, and that Mackay and Tolin were officers and directors of FRS. Mackay was also an officer and director of BRM, and Haynie was an officer of BRM. Wayne alleges that FRS was the initial refinery to which Wayne's raw silver base was sent, and that BRM then further refined FRS' product. Wayne states that it transacted business with BRM between 1981 and May 1983. Sometime between December 1, 1982, and February 28, 1983, Wayne claims that FRS ceased operating, and BRM took over the operation of FRS' business.

The complaint consists of ten counts. Count I is directed against FRS, the trustee, BRM, Mackay, Tolin and Haynie (and other defendants), and is based on breach of trust. Wayne claims that in 1983 it delivered raw silver base to FRS and BRM in trust and that the defendants did not return its silver.

Count II is directed against the same group of defendants and is based on conversion: Wayne claims that FRS and BRM received possession of Wayne's raw silver base and have converted it to their own use.

Count III, directed against the same group of defendants, is based on bailee negligence. As in Counts I and II, Wayne alleges that this group of defendants received Wayne's silver base and failed to preserve it.

Count IV alleges that if BRM did not receive Wayne's property, then FRS was an undisclosed agent of BRM when FRS dealt with Wayne. Additionally, Wayne claims that FRS was a mere shell, controlled by BRM, which ignored FRS' corporate status.

Count V is a conversion claim directed against a defendant alleged to have received Wayne's silver.

Count VI is captioned "partnership" and alleges that FRS, BRM, SRS and other defendants did business together as a partnership.

Count VII, captioned "merger," alleges that BRM's takeover of FRS in January 1983 constituted a merger of FRS and BRM. Wayne claims that BRM is the entity resulting from this merger, that BRM assumed all of FRS' obligations, and that "the entity resulting from the merger of FRS and BRM is the true party to all dealings with Plaintiff which allegedly were with FRS subsequent to the merger." Complaint, Count VII, ¶ 75.

Count VIII is captioned "illegality of corporate purpose" and alleges that BRM, Mackay, SRS, Tolin, Haynie and various other defendants controlled FRS, profited by FRS' activities, and caused FRS to engage in various illegal activities, including murder.

Count IX is a RICO2 claim directed against all the defendants.

Finally, in Count X, Wayne requests that the court lift the automatic stay entered pursuant to 11 U.S.C. § 362 in order to permit Wayne to pursue Counts I through IX.

As relief, Wayne requests, among other items, the value of the raw silver base, $1 million in punitive damages, a declaratory judgment that the defendants cannot hide behind FRS' corporate shield, treble damages under RICO, and attorney's fees.

Stripping the complaint to its essence, Wayne, realizing that its debtor FRS has few assets, is attempting to extend liability to FRS' officers, directors and shareholders (the third-party defendants) under various theories of agency, merger, partnership and RICO enterprise. While FRS and the trustee are named as defendants, Wayne has asserted that it is really after the other defendants, and that FRS and the trustee should actually be plaintiffs in this action. See Memorandum Answering Motion to Dismiss of Defendant Trustee at 4. Wayne claims in Count X of its complaint that it does not seek to interfere with FRS' estate. Complaint, Count X, ¶ 89.

In a separate adversary proceeding, the Trustee also attempted to sue BRM on an alter ego theory. Fahner v. B.R. Mackay & Sons, Inc., 84 A 1123 (83 B 10803). The trustee's complaint was dismissed without prejudice by Judge Hertz, because the only injury the trustee alleged in his complaint was injury to FRS' creditors, and a trustee cannot bring a suit on a cause of action belonging only to individual creditors. Fahner v. B.R. Mackay & Sons, Inc., 84 A 1123 (83 B 10803), Order (Bankr.N.D.Ill. June 28, 1985) (Hertz, J.). We will discuss this principle of law in more detail, infra at 49-50, because it is this principle which establishes that bankruptcy jurisdiction is lacking here.


Bankruptcy Jurisdiction

Applicable Law.

The source of a federal court's jurisdiction over bankruptcy matters is 28 U.S.C. § 1334.3 Subsection 1334(a) states that except as provided in § 1334(b), district courts4 have jurisdiction "of all cases under title 11." A "case" is the bankruptcy case itself, that is, the case upon which all of the proceedings which follow the filing of a petition are predicated. Thus, § 1334(a) basically applies to "core" administrative matters. See L. King, 1 Collier on Bankruptcy, ¶ 3.01 at 3-20, 3-25 (15th ed. 1985). See 28 U.S.C. § 157.

Subsection 1334(b) states that district courts have jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." A civil proceeding arising "under" Title 11 means a cause of action created by Title 11, or administrative matters involving no third party (that is, only the debtor and trustee). Id. at 3-22. See In re Hartley, 16 B.R. 777, 778 (Bankr.W.D.Mo.1982).

Matters "arising in or related to" a case under Title 11 are all matters having a sufficient effect upon the bankruptcy estate to warrant the exercise of jurisdiction. The test for this type of matter is whether the outcome of the proceeding could have an effect on the administration of the estate. In re Bobroff, 766 F.2d 797, 802 (3d Cir.1985); Dore & Associates Contracting, Inc. v. American Druggists' Insurance Co., 54 B.R. 353, 356 (Bankr.W.D.Wis. 1985); In re Bottles, 20 B.R. 947, 950 (Bankr.C.D.Ill.1982).

Subsection 1334(d)5 states that district courts have jurisdiction over "all of the property, wherever located, of the debtor as of the commencement of the case under title 11, and of the estate." Thus, if a debtor owned the property involved in the matter at the time the petition was filed, then bankruptcy jurisdiction exists over that matter. "Property of the estate" includes the debtor's legal and equitable interests in property as of the commencement of the bankruptcy case, both tangible and intangible, including causes of action. See 11 U.S.C. § 541; 4 Collier ¶ 541.01 at 541-6.

In its memorandum in opposition to the defendants' motion to dismiss, Wayne relies on § 1334(d) as the basis of bankruptcy jurisdiction here, arguing that a finding that BRM and the other defendants are FRS' alter egos would make the defendants' assets FRS' assets. Plaintiff's Memorandum Answering Motion to Dismiss of Defendants B.R. Mackay & Sons, Inc., Michael T. Mackay, Alvin Tolin and Silver Recovery Systems, Inc. at 6-7. Additionally, Wayne argues that a finding of alter ego, merger or partnership liability would affect the administration of the estate, and, therefore, its claim relates to FRS' Title 11 case under § 1334(b).6

Alter Ego Cases

Wayne's argument is supported by a district court case, Steyhr Daimler Puch of America Corp. v. Pappas, 35 B.R. 1001 (E.D.Vir.1983). In Steyhr, the plaintiff obtained a default judgment against a company in state court, shortly before the company filed for bankruptcy. The plaintiff filed a proof of claim in the bankruptcy case, but the bankrupt had few assets, so the plaintiff filed a diversity action against defendants which the plaintiff claimed were the bankrupt's alter egos and instrumentalities. In response, the defendants filed a counterclaim based on an alleged breach of contract and fraudulent trade practices by the plaintiff against the bankrupt. The plaintiff argued that only the debtor, and therefore the trustee, could assert the defendants' counterclaims, because under § 541 such claims belong to the bankrupt.

The court agreed that a determination that the defendants were the bankrupt's alter egos would benefit the bankrupt's creditors, and that the trustee had a duty...

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