PaeTec Commc'ns, Inc. v. Bull (In re Bull)

528 B.R. 473

In re David H. BULL and Mary A. Bull, Debtors.

PaeTec Communications, Inc., Appellant

v.David H. Bull and Mary A. Bull, Appellees.

Bankruptcy Case Nos. 3:12–bk–01522–3GI

3:14–cv–815–J–39.

United States District Court, M.D. Florida, Jacksonville Division.

Signed March 24, 2015.

Elizabeth Bowen, Robert D. Wilcox, Wilcon Law Firm, Ponte Vedra Beach, FL, for Debtor.

Timothy S. Laffredi, Office of the United States Trustee, Orlando, FL, for U.S. Trustee.

ORDER

BRIAN J. DAVIS, District Judge.

THIS CAUSE is before the Court on appeal from the United States Bankruptcy Court for the Middle District of Florida. Appellant, PaeTec Communications, Inc. (“PaeTec”), seeks review of the Bankruptcy Court's Order (1) sustaining the Appellee/Debtors' Objection to Claim 19 of PaeTec Communications, Inc., and disallowing Claim No. 19, and (2) denying PaeTec's Motion to Substantively Consolidate Debtor David Bull's Wholly Owned Company Into This Estate (Doc. 1–3; Bankruptcy Court Order),¹ entered on May 6, 2014. (See Doc. 1–1; Notice of Appeal). On September 1, 2014, PaeTec filed its initial brief, (Doc. 9; PaeTec Initial Brief). Appellees/Debtors David H. Bull and Mary A. Bull (collectively “Appellees/Debtors” or “the Bulls”) filed an answer brief on December 15, 2014 (Doc. 17; Answer Brief), and PaeTec filed a reply brief on January 16, 2015. (Doc. 18; PaeTec Reply Brief). The appeal is ripe for review.²

I. Background

On March 8, 2012, Debtors/Appellees David Bull and Mary Bull filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. (Doc. 1–3; Bankruptcy Court Order at 3); (Docs. 1–6 and 1–7). Among the assets that belong to the Bulls' bankruptcy estate is David Bull's 100% ownership interest in Bull Communications, Inc., (“BCI”), a closely held corporation. (Doc. 1–3; Bankruptcy Court Order at 2); (Doc. 1–10 at 6; Summary of Schedules). David Bull is also president of BCI, and Mary Bull, David Bull's wife, is an officer of BCI, but not an owner. Bankruptcy Court Order at 2; (Doc. 1–72 at 4; Amended Disclosure Statement). Though the Bulls listed shares of BCI as an asset on their statement of personal property, they listed the value of the asset is “unknown.” Bankruptcy Court Order at 3 (citing Doc. 1–10; Summary of Schedules).

BCI and PaeTec have a business relationship.

On October 26, 1998, BCI and PaeTec entered into a Sales Agent Agreement. (Attachment to Claim No. 19–1). Pursuant to the Agreement, PaeTec authorized BCI “to serve as a non-exclusive independent contractor to procure customers for PaeTec's various telecommunications products and services,” and agreed to pay BCI certain commissions on the products and services provided by PaeTec to the customers procured by BCI.

Bankruptcy Court Order at 2. “PaeTec terminated the Agreement with BCI in November of 2008.” Bankruptcy Court Order at 2 (citing Doc. 1–117; Evidentiary Hearing Transcript Volume I at 71 (“Transcript, Vol. I”)).

In 2010, BCI filed a state-court action against PaeTec in New York, styled Bull Communications, Inc. v. PaeTec Communications, Inc., which is currently pending in the state court in Monroe County, New York (“the New York Litigation”). Bankruptcy Court Order at 2; (Doc. 1–72 at 4; Amended Disclosure Statement). In the New York Litigation, BCI alleges that PaeTec “improperly reduced the commissions that were payable to BCI under the Agreement.” Bankruptcy Court Order at 2 (citing Doc. 1–44; Disclosure Statement at 4) and (Doc. 1–61; Case Management Order at 2). PaeTec has filed a counterclaim against BCI in the New York Litigation, alleging that BCI had been unjustly enriched by $1 million. Bankruptcy Court Order at 1, 3; (See Doc. 1–23 at 11; PaeTec Counterclaim). The Bulls are not parties to the New York Litigation, and have not identified that lawsuit as an asset of the bankruptcy estate. (See Doc. 1–10 at 4–7; Summary of Schedules). Nor did Bulls list PaeTec as a creditor holding an unsecured claim. Id. at 12–16.³

Following briefing and two evidentiary hearings, conducted on August 26, 2013, and continued on January 10, 2014, the Bankruptcy Court sustained Appellees'/Debtors' Objection to PaeTec's Claim No. 19 and disallowed the claim in this Chapter 11 case, and denied PaeTec's Motion to Substantively Consolidate Debtor David Bull's Wholly Owned Company Bull Communications, Inc. into this Estate. (Doc. 1–3; Bankruptcy Court Order at 12). PaeTec appeals the Bankruptcy Court's Order.

II. Jurisdiction

This Court has jurisdiction to hear an appeal from a final judgment, order, or decree entered by the United States Bankruptcy Court. 28 U.S.C. § 158(a).

A. Standing

While conceding that the Court has jurisdiction to consider PaeTec's appeal from the Bankruptcy Court's Order sustaining the Appellees'/Debtors' Objection to Claim No. 19 of PaeTec, and disallowing the claim, Appellees/Debtors contend that the Court lacks jurisdiction to consider that portion of the Bankruptcy Court's Order denying PaeTec's Motion for Substantive Consolidation. (Doc. 17; Answer Brief at 7–8). Appellees/Debtors argue that PaeTec has not established its standing to pursue the appeal because it is not a creditor of the Bulls' estate. They argue that substantive consolidation can only be pursued by a trustee or creditor. Id. at 8–10. PaeTec responds that it has standing to pursue the appeal because “ ‘creditors have standing to pursue substantive consolidation.’ ” (Doc. 18; PaeTec Reply Brief at 1 (quoting First Owners Ass'n of Forty Six Hundred Condo. Inc. v. Gordon Prop., LLC (In re Gordon Prop., LLC), 478 B.R. 750, 756 (E.D.Va.2012) )).

Federal courts are courts of limited jurisdiction and therefore have an obligation to inquire into their subject matter jurisdiction. See Kirkland v. Midland Mortg. Co., 243 F.3d 1277, 1279–1280 (11th Cir.2001) ; see also Burns v. Windsor Ins. Co., 31 F.3d 1092, 1095 (11th Cir.1994). Standing is a “ ‘threshold jurisdictional question’ ” that must be addressed and satisfied at each stage of the litigation. See Florida Family Policy Council v. Freeman, 561 F.3d 1246, 1253 (11th Cir.2009) (quoting Elend v. Basham, 471 F.3d 1199, 1204 (11th Cir.2006) ).⁴

Both parties agree that creditors have standing to pursue substantive consolidation of a bankruptcy estate. At this juncture of the appeal, PaeTec arguendo is a creditor of the Bulls' bankruptcy estate by virtue of its pending counterclaim brought against BCI, and its position in this bankruptcy case that it can assert that claim on the Bulls' estate by piercing BCI's corporate veil. See generally Smith v. Atl. S. Bank (In re Smith), 522 Fed.Appx. 760, 765 (11th Cir.2013)⁵ (creditor had standing at the time it filed its motion for stay relief, based upon the allegations in its motion that it was a secured creditor).⁶ In this posture, PaeTec as a “creditor,” meets the Eleventh Circuit's standard for standing to appeal an order of the Bankruptcy Court as a “person aggrieved” by the Bankruptcy Court's Order. See Atkinson v. Ernie Haire Ford, Inc. (In re Ernie Haire Ford, Inc.), 764 F.3d 1321, 1325–26 (11th Cir.2014). “The person aggrieved doctrine limits the right to appeal a bankruptcy court order to ‘those parties having a direct and substantial interest in the question being appealed.’ ” Id. at 1325. “Aggrieved persons” are those who are “ ‘directly, adversely, and pecuniarily affect[ed]’ by a bankruptcy court's order,” which occurs “ ‘if that order diminishes their property, increases their burdens, or impairs their rights.’ ” Id. (quoting Westwood Cmty. Two Ass'n, Inc. v. Barbee (In re Westwood Cmty. Two Ass'n, Inc.), 293 F.3d 1332, 1337–38 (11th Cir.2002) ); see also Little Rest Twelve, Inc. v. Solby+Westbrae Partners (In re Fisher Island Inv., Inc.), 778 F.3d 1172, 1195–96 (11th Cir.2015).

B. Final Order

Appellees/Debtors also question whether the portion of the Bankruptcy Court's Order denying PaeTec's Motion for Substantive Consolidation is a final appealable order under 28 U.S.C. § 158(a) (1), properly before this Court on appeal. (Doc. 17; Answer Brief at 10). They argue that finality only attaches to orders granting substantive consolidation. Id. (citing Huntington Nat'l Bank v. Richardson (In re Cyberco Holdings, Inc.), 734 F.3d 432, 440 (6th Cir.2013) ). PaeTec responds that there is a split of authority on the question of finality, and that courts in other circuits have determined that substantive consolidation orders both granting and denying relief are final and appealable under § 158(a). (Doc. 18; PaeTec Reply Brief at 2–3) (citing Alexander v. Compton (In re Bonham), 229 F.3d 750, 762 (9th Cir.2000) (finding a substantive consolidation order appealable because it “seriously affects the substantive rights of the involved parties”); In re Owens Corning, 419 F.3d 195, 203–05 (3d Cir.2005) ; In re 599 Consumer Elec., Inc., 195 B.R. 244, 247 (S.D.N.Y.1996) (district court had 28 U.S.C. § 158(a) jurisdiction to review bankruptcy court's denial of a motion for substantive consolidation)). PaeTec argues that though the Eleventh Circuit Court of Appeals has not decided the question, this case is one in which the Bankruptcy Court's denial of PaeTec's Motion for Substantive Consolidation represents a final order because “[t]here is nothing left to adjudicate with respect to PaeTec.” PaeTec Reply Brief at 3.

In In re Cyberco Holdings, cited by Appellees/Debtors, the Sixth Circuit Court of Appeals held that the bankruptcy court's orders denying motions to substantively consolidate bankruptcy estates were not final appealable orders within the meaning of 28 U.S.C. § 158(a)(1). 734 F.3d at 440. The court differentiated between orders granting the relief and denying the relief, and reasoned that an order denying the relief was not an appealable final order because the impact of the ruling “is relatively minor,” in that “the parties will proceed to the administration of the separate bankruptcy estates according to traditional rules.” Id. On the other hand, the Third Circuit...