Andrews v. RBL, L.L.C. (In re Vista Bella, Inc.)

In re: VISTA BELLA, INC., Debtor.LYNN HARWELL ANDREWS, Trustee,

v.RBL, L.L.C., ROBERT W. SHALLOW, SUSAN SHALLOW, and RONALD H. CARR, Defendants.

Case No.: 11-00149-MAM-7

Adv. Proc. No.: 12-00060-MAM

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF ALABAMA MOBILE DIVISION

Dated: August 30, 2012

ORDER DENYING MOTION TO DISMISS

William M. Lyon, Jr., Attorney for the Trustee, Mobile, Alabama

Lynn Harwell Andrews, Chapter 7 Trustee, Mobile, Alabama

Mark H. Taupeka, Attorney for Defendants

Christopher T. Conte, Attorney for Vista Bella, Inc., Mobile, Alabama

This case is before the court on the Defendants' Motion to Dismiss for lack of subject matter jurisdiction. The court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. The court has the authority to enter a final order pursuant to 28 U.S.C. § 157(b)(2). For the reasons detailed below, the Defendants' Motion to Dismiss is DENIED.

FACTS

On June 4, 2012, the Chapter 7 Trustee filed an adversary complaint against defendants Robert Shallow; Susan Shallow; RBL, L.L.C; and Ronald H. Carr (collectively, "Defendants") asserting four causes of action: (1) avoidance of fraudulent transfers pursuant to 11 U.S.C. §§548 and 550; (2) avoidance of transfers under the Alabama Fraudulent Conveyance Act for Constructive Fraud pursuant to 11 U.S.C. § 544 and Ala. Code § 9-9A-1, et. seq.; (3) avoidance of transfers under the Alabama Fraudulent Conveyance Act for actual fraud pursuant to 11 U.S.C. § 544 and Ala. Code § 9-9A-1, et. seq.; and (4) for a preliminary injunction pursuant to Federal Rule of Bankruptcy Procedure 7065. The complaint was amended on June 26, 2012 to include a state law constructive trust claim and a cause of action seeking to avoid certain preferential transfers pursuant to 11 U.S.C. § 547.

The debtor in this action is Vista Bella, Inc. ("Vista Bella"). Vista Bella was the developer of a fifty unit high-rise residential development in Orange Beach, Alabama. In January of 2011, Vista Bella was the subject of an involuntary petition that was later converted to a Chapter 7 case. Generally, the underlying adversary proceeding seeks to avoid certain pre-bankruptcy transfers made by Vista Bella that the Trustee alleges to be fraudulent, the first of which occurred in July of 2007. The Trustee asserts that Vista Bella's only assets are two bank accounts containing less than $2,000 and the potential recovery from the causes of action alleged in the underlying adversary proceeding.

On July 2, 2012, the Defendants filed a motion to dismiss the Trustee's complaint for lack of subject matter jurisdiction pursuant to Federal Rule of Bankruptcy Procedure 7012(b) and Federal Rule of Civil Procedure 12(b)(1). The Trustee filed a response on August 6, 2012. The court held a hearing on the Defendants' motion to dismiss on August 7, 2012 and took the matter under advisement. At the hearing, the parties indicated that the Trustee would dismiss her preliminary injunction cause of action.

LAW

The Defendants assert that, in light of the Supreme Court's recent ruling in Stern v. Marshall, 131 S. Ct. 2594 (2011), this Court lacks subject matter jurisdiction to adjudicate the underlying adversary proceeding. The Defendants' motion is made pursuant to Federal Rule of Civil Procedure 12(b)(1), which is made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b). A claim is properly dismissed under Rule 12(b)(1) "when the court lacks the statutory or constitutional power to adjudicate" the claim. In re Easterly Const. Co., Inc., 408 B.R. 627, 629 (Bankr. M.D. La. 2009). The burden of establishing subject matter jurisdiction is on the party asserting jurisdiction. Sweet Pea Marine, Ltd. v. APJ Marine, Inc., 411 F.3d 1242, 1248 n.2 (11th Cir. 2005).

The validity of the Defendants' 12(b)(1) assertion depends on the claims asserted by the Trustee. The Trustee's complaint alleges a combination of federal and state law claims. If the Trustee's complaint alleged only state law claims, the conclusion to dismiss would be foregone. However, the Trustee also makes claims under federal bankruptcy statutes, alleging fraudulent conveyances. In this court's estimation, the Defendants' motion raises three issues. First, whether Stern v. Marshall divests this court of subject matter jurisdiction to hear and enter a final order as to the fraudulent transfer claims alleged. Second, if not, whether this court may hear and decide the Trustee's constructive trust cause of action. Third, whether it is otherwise appropriate for this court to hear and decide these matters. Those issues will be discussed in turn.

1.

Stern v. Marshall did not alter a bankruptcy court's ability to hear and finally decide fraudulent transfer actions.

A brief discussion of bankruptcy court jurisdiction and core versus noncore proceedings is warranted. 28 U.S.C. § 1334(a) grants federal district courts "original and exclusive jurisdiction of all cases under title 11." (emphasis added). Moreover, district courts possess "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." (emphasis added). Three distinct categories of jurisdiction are apparent in § 1334(b)'s grant: (1) those arising under title 11, (2) those arising in title 11, and (3) those related to cases under title 11. In re Toledo, 170 F.3d 1340, 1344-45 (11th Cir. 1999). District courts may refer the three categories of jurisdiction to bankruptcy courts via 28 U.S.C. § 157(a). In many jurisdictions, including the Southern District of Alabama, a general Order of Reference has been entered referring title 11 proceedings to bankruptcy courts. Importantly, a district court's reference only endows a bankruptcy court with the three bases of jurisdiction detailed in § 1334(b). Toledo, 170 F.3d at 1344 ("The bankruptcy court's jurisdiction is derivative of and dependent on these three bases.").

Bankruptcy courts may enter final orders with regard to matters "arising in" or "arising under" a case under title 11.¹ In re Custom Contractors, LLC, 462 B.R. 901, 905 (Bankr. S.D. Fla. 2011). 28 U.S.C. § 157(b)(1) explains that those matters "arising under" and "arising in" title 11 cases are core proceedings. In contrast, those matters that are only "related to" a caseunder title 11 are considered noncore. ² Id. A bankruptcy judge may only "submit proposed findings of fact and conclusions of law to the district court" in "related to" or noncore proceedings. 28 U.S.C. § 157(c)(1). Thus, whether a matter is core or noncore does not speak to a bankruptcy court's jurisdiction, but rather, whether the bankruptcy judge may enter a final order as to the matter. Nonetheless, "by definition all core proceedings are within the bankruptcy court's jurisdiction." Toledo, 170 F.3d at 1345 n.6.

11 U.S.C. § 157(b)(2) details a nonexhaustive list of core proceedings. Included in that list is § 157(b)(2)(H), which designates "proceedings to determine, avoid, or recover fraudulent conveyances" as core proceedings. In this case, the Trustee seeks to avoid particular transfers that she alleges were fraudulent pursuant to 11 U.S.C. §§ 548 and 544(b).

The Supreme Court's ruling in Stern v. Marshall implicated another subsection of § 157(b)(2). Section 157(b)(2)(C) designates as core proceedings "counterclaims by the estate against persons filing claims against the estate." The Supreme Court held that with § 157(b)(2)(C) Congress had, "in one isolated respect," improperly given Article I bankruptcy judges decision making power that exceeded constitutional limits. Stern, 131 S. Ct. at 2620. The Court deemed such a grant improper because the state law counterclaim at issue in Stern, which it described as a "state law action independent of the federal bankruptcy law," was reserved by the United States Constitution for decision to Article III courts. The Court explained that "[c]ongress may not 'withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty,'" id. at 2609 (quoting Murray'sLessee v. Hoboken Land & Improvement Co., 59 U.S. 272 (1856)), and concluded that the state law counterclaim was essentially a suit at common law. The Court reasoned that:

When a suit is made of "the stuff of the traditional actions at common law tried by the courts at Westminster in 1789," Northern Pipeline, 458 U.S., at 90, 102 S.Ct. 2858 (Rehnquist, J., concurring in judgment), and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts. The Constitution assigns that job—resolution of "the mundane as well as the glamorous, matters of common law and statute as well as constitutional law, issues of fact as well as issues of law"—to the Judiciary. Id., at 86-87, n. 39, 102 S.Ct. 2858 (plurality opinion).

Stern, 131 S. Ct. at 2610. With that in mind, the Court narrowly held that "[t]he Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." Stern, 131 S. Ct. at 2620.

It is this court's opinion that the Stern ruling only addressed § 157(b)(2)(C) and whether bankruptcy courts could finally decide certain state law counterclaims. Other courts have arrived at the same conclusion. In re AFY, Inc., 461 B.R. 541, 547-48 (B.A.P. 8th Cir. 2012); In re Custom Contractors, LLC, 462 B.R. 901 (Bankr. S.D. Fla. 2011); In re Safety Harbor Resort & Spa, 456 B.R. 703, 715 (Bankr. M.D. Fla 2011); In re MPC Computers, LLC, 465 B.R. 384, 388 (Bankr. D. Del. 2012); In re Agriprocessors, Inc., 2012 WL 2872054 (Bankr. N.D. Iowa July 12, 2012); In re Nanodynamics, Inc., 2012 WL 2886635, at *6 (Bankr. W.D.N.Y. July 16, 2012) ("[T]he High Court's decision stands only for the...