Ammini v. Labgold (In re Labgold)

532 B.R. 276

In re: Marc R. Labgold, Debtor.

Chandramohan V. Ammini, et al., Plaintiffs

v.Marc R. Labgold, Defendant.

Case No. 13–13389–BFK

Adversary Proceeding No. 14–01043–BFK

United States Bankruptcy Court, E.D. Virginia, Alexandria Division .

Signed June 16, 2015

Robert M. Marino, Esquire, Redmon Peyton & Braswell, LLP, Alexandria, VA, Bahram Seyedin–Noor, Esquire, Bryan Ketroser, Esquire, James de los Reyes, Esquire, Alto Litigation, PC, San Francisco, CA, for Plaintiffs.

Linda Dianne Regenhardt, Esquire, Linda Regenhardt, L.L.C., Richard W. Driscoll, Esquire, Driscoll & Seltzer, PLLC, Alexandria, VA, for Defendant.

MEMORANDUM OPINION

Brian F. Kenney, United States Bankruptcy Judge

This adversary proceeding presents the question of whether the Court has continuing jurisdiction to determine the dischargeability of debts under Section 523 of the Bankruptcy Code, after the Court has denied the Debtor a discharge in a separate action brought by the U.S. Trustee pursuant to Section 727 of the Code. The matter is complicated by the fact that the trial in this adversary proceeding started, but was not completed, before the Court heard and ruled on the U.S. Trustee's Complaint. On February 10, 2015, the Court conducted a status hearing in this adversary proceeding and invited the parties to brief the issue. Both parties have now filed their Memoranda of Law. Docket Nos. 141, 142. For the reasons stated below, the Court finds that it lacks continuing jurisdiction over this adversary proceeding. Alternatively, the Court will abstain pursuant to 28 U.S.C. § 1334(c)(1).

Procedural Background

A. This Adversary Proceeding.

The Plaintiffs in this adversary proceeding are former employees of a company by the name of Antara Biosciences, Inc. (“Antara”), which was located in California. The Debtor was the Chief Executive Officer and a director of Antara (he is also a practicing patent attorney). Prior to the Debtor's bankruptcy filing in this Court, the Plaintiffs had filed an action against the Debtor in State court in California. In their Amended Complaint in the State court action, the Plaintiffs alleged that the Defendant engaged in a series of improper, self-dealing transactions in connection with the wind-down of Antara's business affairs. The California litigation was stayed when the Debtor filed for bankruptcy protection in this Court on July 23, 2013.

The Plaintiffs filed this adversary proceeding on February 28, 2014. The Plaintiffs originally asserted claims in this adversary proceeding for wages and other amounts owed to them as former employees of Antara, as well as for breach of fiduciary duty and related claims brought by the Plaintiffs as the assignees of Antara (Antara filed for Chapter 7 bankruptcy in California, and the Plaintiffs in this action purchased Antara's claims against the Debtor out of that bankruptcy case). Shortly before the trial in this action, the Plaintiffs voluntarily dismissed their individual, employment-related claims, and elected to go to trial solely on the assigned Antara claims.

The trial commenced on Monday, November 17, 2014, and continued through Friday, November 21, 2014. The first two days of the trial were almost completely taken up by the parties' competing motions for sanctions, arising out of the alleged spoliation of evidence. Docket Nos. 56, 63 (together, the “Spoliation Motions”). The Court took both Spoliation Motions under advisement. The parties completed their presentations of the Spoliation Motions, and began their opening statements, on the afternoon of Tuesday, November 18th. Docket No. 112 at 137 (Tr., 11/18/2014).

During the course of the trial, the Court requested the Defendant to advise the Court whether the Defendant consented to the entry of a final money judgment if the evidence warranted it (in addition to a potential declaration of non-dischargeability, over which the Court inarguably had jurisdiction to enter a final Order pursuant to 28 U.S.C. § 157(b)(2)(I) at the time). If the Defendant did not consent, then the Court requested the parties to brief whether or not the Court could enter a final money judgment over the Defendant's objection. On December 19, 2014, the Defendant filed a Notice of No Consent, indicating that he did not consent to the entry of a final money judgment, in the event of an adverse ruling in the case. Docket No. 133. The parties then filed their Memoranda of Law on the issue of whether or not the Court could enter a final money judgment in the case in the event that the Court found in favor of the Plaintiffs and against the Defendant on the merits of the Plaintiffs' claims. Docket Nos. 134, 135.

The Plaintiffs had not completed the presentation of their case in chief, when the case was adjourned on November 21st. Plaintiffs' counsel estimated that he had “about a day-and-a-half of direct testimony left [,] ... [n]ot counting cross-time.” Docket No. 121 at 244 (Tr. 11/21/2014). The Defendant's counsel estimated that he had “probably two-and-a-half days of our case plus whatever time we cross their witnesses[.]” Id. at 245.

The Court continued the trial to February 2–9, 2015. Id. at 11, 245. The parties subsequently advised the Court that the Defendant had a scheduling conflict during the week of February 2nd. Docket No. 127 (Consent Motion to Reschedule Trial), 129 (Amended Motion to Reschedule Trial). Accordingly, the Court set the matter for a status hearing on February 10th. Docket No. 131. At the status hearing, the Court requested that the parties brief the issue of the Court's continuing jurisdiction, in light of the result in the U.S. Trustee's adversary proceeding, discussed below. The parties have each filed their Memoranda of Law, in response to the Court's request. Docket Nos. 141, 142.

B. The U.S. Trustee's Adversary Proceeding.¹

On January 27, 2014, the United States Trustee for this Region filed an adversary proceeding objecting to the Debtor's discharge under Section 727 of the Bankruptcy Code. Adv. Pro. 14–01017–BFK. The U.S. Trustee's adversary proceeding went to trial on December 12 and 15, 2014. The case was completed on December 15th, and the Court took the matter under advisement. On January 14, 2015, the Court issued its Findings of Fact and Conclusions of Law, and its Order in which the Court denied the Debtor a discharge pursuant to Section 727. Id. at Docket Nos. 48, 49. The Defendant has appealed. Id. at Docket Nos. 52, 54.

As a result of the disposition of the U.S. Trustee's adversary proceeding, the only remaining claims in this adversary proceeding are the Antara-assigned State law claims, for which the Plaintiffs seek the entry of a money judgment.

Conclusions of Law

I. The Court Concludes that it Lacks Subject Matter Jurisdiction.

We start with the proposition that bankruptcy courts are courts of limited jurisdiction. Educ. Credit Mgmt. Corp. v. Kirkland (In re Kirkland), 600 F.3d 310, 315 (4th Cir.2010) ; Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 399 (4th Cir.1992). Further, it is almost universally agreed that when a debtor is denied a discharge, any action to determine the dischargeability of individual debts becomes moot. In re Martinez, 500 B.R. 608, 635 (Bankr.N.D.Cal.2013) ; In re Adler, 494 B.R. 43, 56 (Bankr.E.D.N.Y.2013). The Court will proceed to examine the jurisdictional question in light of accepted principles of core and non-core jurisdiction.

A. This is Neither a Core Proceeding Nor a Related Proceeding, at this Point.

Bankruptcy 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) ; Valley Historic Ltd. P'ship v. Bank of N.Y., 486 F.3d 831, 835 (4th Cir.2007). A proceeding or claim “arising in” Title 11, known as a core proceeding, is one that is “ ‘not based on any right expressly created by Title 11, but nevertheless, would have no existence outside of the bankruptcy.’ ” Id. (quoting Grausz v. Englander, 321 F.3d 467, 471 (4th Cir.2003) ); 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.’ ” Valley Histor ic Ltd. P'ship, 486 F.3d at 835 (quoting Grausz, 321 F.3d at 471 ). The bankruptcy courts have jurisdiction to enter final orders in core proceedings, subject only to an analysis of the Court's Article I powers versus the Article III judicial powers of the District Courts under Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). See 28 U.S.C. § 157(b)(1) (“Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11”). Although this action was a core proceeding involving the dischargeability of debts under Section 523 when it was filed (See 28 U.S.C. § 157(b)(2)(I) ), it involves only State law claims at this point and is no longer a core proceeding.

The Fourth Circuit has adopted the Pacor test to determine whether a claim is “related to” a bankruptcy case. Valley Historic Ltd. P'ship, 486 F.3d at 836. Under the Pacor test, a claim is related to a bankruptcy case when “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) (emphasis omitted). The outcome of this adversary proceeding will have no impact on the bankruptcy estate. The creditors as a whole will not be better off, nor will they be worse off, as a result of the outcome of the adversary proceeding. The Plaintiffs either will be entitled to a final judgment against the Debtor on their State law claims or not.

The Court finds, therefore, that this action is no longer a core proceeding, and is not a non-core, related proceeding.

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