Solution Trust v. 2100 Grand LLC (In re AWTR Liquidation Inc.)

547 B.R. 831

In re: AWTR Liquidation Inc., Debtor

Solution Trust, as Trustee of the AWTR Liquidation Trust, Plaintiff,

v.2100 Grand LLC, Lee Berger, Prashant Buyyala, CCC Diagnostics LLC, Raymond Feeney, Keith Goldfarb, John Patrick Hughes, Rhythm & Hues Sdn. Bhd, Pauline Ts'o, David Weinberg, Defendants.

Case No.: 2:13–bk–13775–NB

Adv No: 2:15–ap–01095–NB

United States Bankruptcy Court, C.D. California, Los Angeles Division .

Argued Date: September 1, 2015

Signed March 11, 2016

Todd M. Arnold, Gary E. Klausner, Levene, Neale, Bender, Yoo & Brill L.L.P, Los Angeles, CA, Angela J. Somers, Reid Collins & Tsai LLP, New York, NY, for Plaintiff.

Brian E. Shear, Scott J. Spolin, Spolin Cohen Mainzer LLP, Manhattan Beach, CA, James Andrew Hinds, Jr., Torrance, CA, John B. Marcin, Marcin Lambirth LLP, Keith C. Owens, Venable LLP, Los Angeles, CA, Michael K. Maher, Maher & Maher, Orange, CA, Joshua T. Foust, Mintz Levin, San Francisco, CA, for Defendants.

OPINION ON JURISDICTION AND AUTHORITY, AND RELATED MATTERS

Neil W. Bason, United States Bankruptcy Judge

I. INTRODUCTION

The factual and procedural background is set forth in the concurrently issued Opinion On Directors' And Officers' Duties Upon Insolvency, And Related Issues. Capitalized words have the meanings set forth in that opinion.

II. JURISDICTION, AUTHORITY, AND OTHER PRELIMINARY ISSUES

This Bankruptcy Court has an independent duty to examine its jurisdiction and authority. See In re Rosson, 545 F.3d 764, 769 n. 5 (9th Cir.2008) (jurisdiction); In re Pringle, 495 B.R. 447, 455 (9th Cir. BAP 2013) (authority). Although "jurisdiction" and "authority" sound very similar, the Supreme Court has distinguished between (A) bankruptcy courts' broad subject matter jurisdiction and (B) their narrower constitutional and statutory authority to issue final judgments or orders, as opposed to issuing proposed findings of fact and conclusions of law that are subject to de novo review by an Article III Court. See Wellness Int'l Network, Ltd. v. Sharif, –––U.S. ––––, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) ; Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ; In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 567 (9th Cir.2012), aff'd sub nomExecutive Benefits Ins. Agency v. Arkison, ––– U.S. ––––, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014).

For the reasons set forth below, this Bankruptcy Court concludes that it has subject matter jurisdiction on all claims, and has the authority to issue final judgments or orders on pretrial matters that do not involve factual findings such as the present motions. In addition, this Bankruptcy Court has the authority to issue final judgments or orders, including factual findings, on (1) the plaintiff's objections to the Directors' claims (including equitable subordination) and (2) the avoidance claims against the Primary Directors. To the extent that this Bankruptcy Court does not have the authority to issue a final judgment or order, the accompanying opinion should be deemed to be proposed findings of fact and conclusions of law for de novo review by an Article III Court.

A. Subject Matter Jurisdiction

Bankruptcy courts are "units" of the federal district courts, to which all bankruptcy proceedings have been referred. See 28 U.S.C. § 151 ; Cent. Dist. Cal. General Order No. 13–05; LBR 5011–1(a). As such, this Bankruptcy Court has jurisdiction over all civil proceedings (1) "arising under title 11," i.e., any proceedings to enforce rights created by the Bankruptcy Code, (2) "arising in" a bankruptcy case, i.e., other proceedings that would not exist outside a bankruptcy case, such as case administration, or (3) "related to" a bankruptcy case, i.e., any proceedings the outcome of which could "conceivably" have any effect on the bankruptcy estate. See 28 U.S.C. §§ 157(a), 1334(b) ; In re Harris, 590 F.3d 730, 737 (9th Cir.2009) ; In re Marshall, 600 F.3d 1037, 1054 (9th Cir.2010) ; In re Fietz, 852 F.2d 455, 457 (9th Cir.1988) (adopting "related to" test of Pacor, Inc. v. Higgins, 743 F.2d 984 (3rd Cir.1984) ) (the "related to" test is not quite as broad as it sounds, based on the actual holding of Pacor, but is sufficiently broad for present purposes).

The complaint's claims for avoidance and recovery under §§ 547, 548 and 550 all "arise under" the Bankruptcy Code. In contrast, the complaint's avoidance claims against the Directors under State law do not "arise under" the Bankruptcy Code, nor do its claims for breach of fiduciary duty, waste, and unjust enrichment. All of those claims also can exist outside of the bankruptcy case so they do not "arise in" this case within the meaning of the statute. As to those claims this Bankruptcy Court only has "related to" jurisdiction (which, as discussed below, bears on whether this Bankruptcy Court can only issue proposed findings of fact and conclusions of law).

The complaint's objections to the Directors' claims, including both allowance generally (11 U.S.C. § 502 ) and equitable subordination (11 U.S.C. §§ 502, 510 ), are quintessentially "arising under" proceedings. They consist of determining the parties' "hierarchically ordered claims to a pro rata share of the bankruptcy res." Stern, 131 S.Ct. 2594, 2614 (quoting Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) ) (discussing the non-jurisdictional issue of what proceedings are "core," but the same concept presumably applies to jurisdictional issues because the Court interpreted statutory "core" proceedings to be coterminous with statutory "arising in" and "arising under" jurisdiction. Id. at 2605.).

In short, this Bankruptcy Court has subject matter jurisdiction, although as to some of the complaint's claims it has only "related to" jurisdiction.

B. Authority to Issue Final Judgments or Orders

This Bankruptcy Court's authority to issue final judgments or orders is governed by both (1) a federal statute and (2) the United States Constitution. Unfortunately, the analysis is not easy.

1. Statutorily "core" proceedings

Bankruptcy courts have the statutory authority to issue final judgments or orders in "core" proceedings. 28 U.S.C. § 157(b)(2). Congress used that terminology in an attempt to track the Supreme Court plurality's decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982).

The statutory list is non-exclusive (28 U.S.C. § 157(b)(2) ) but the courts have been careful to interpret the statute and its "catchall" provisions narrowly, and they "have considered factors such as whether the rights involved exist independent of title 11, depend on state law for their resolution, existed prior to the filing of a bankruptcy petition, or were significantly affected by the filing of the bankruptcy case." In re Cinematronics, Inc. , 916 F.2d 1444, 1450 n. 5 (9th Cir.1990). See also In re Castlerock Props., 781 F.2d 159 (9th Cir.1986). This court also bears in mind that a "determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law." 28 U.S.C. § 157(b)(3).

The complaint's avoidance actions are all statutorily "core." 28 U.S.C. § 157(b)(2)(F) & (H). As for the complaint's claims against the Directors for breach of fiduciary duty, waste, and unjust enrichment, they arguably could be interpreted to come within some of the broader statutory definitions of "core" proceedings, but such a reading would be too broad. That would run counter to both the Supreme Court's interpretation of statutory "core" proceedings, to be coterminous with statutory "arising in" and "arising under" jurisdiction (Stern, 131 S.Ct. 2594, 2605 ), and the Ninth Circuit's narrow interpretation of the "catchall" definitions of core proceedings (Cinematronics, 916 F.2d 1444, 1450 n. 5 ; Castlerock, 781 F.2d 159 ). As for the final category of claims in the complaint—allowance of the D & O claims, including subordination issues—those are statutorily core. See 11 U.S.C. §§ 502, 510 ; 28 U.S.C. § 157(b)(2)(B) & (O ).

2. Constitutionally "core" proceedings

On the one hand, the Supreme Court has directed the lower courts not to rule a statute unconstitutional (in this case 28 U.S.C. § 157(b) ) except to the extent truly necessary. See, e.g., Washington State Grange v. Washington State Republican Party, 552 U.S. 442, 450–51, 128 S.Ct. 1184, 170 L.Ed.2d 151 (2008) ; Boos v. Barry, 485 U.S. 312, 331, 108 S.Ct. 1157, 99 L.Ed.2d 333 (1988) ; Regan v. Time, Inc., 468 U.S. 641, 652, 104 S.Ct. 3262, 82 L.Ed.2d 487 (1984).

On the other hand, to safeguard "individual liberty and separation of powers" there are constitutional limits on the authority of Bankruptcy Judges, who are appointed under Article I instead of Article III of the Constitution, to issue final judgments and orders. Stern, 131 S.Ct. 2594, 2615. In analyzing those limits the Supreme Court has focused primarily on whether the "public rights" exception to Article III applies. See, e.g., id. at 2611–15 & 2618–19 (plurality opinion).

One definition of "public rights" is that if " ‘it depends upon the will of [C]ongress whether a remedy in the courts shall be allowed at all’ [then] Congress could limit the extent to which a judicial forum was available." Stern, 131 S.Ct. 2594, 2612 (quoting Murray's Lessee v. Hoboken Land & Imp. Co., 59 U.S. 272, 18 How. 272 at 284, 15 L.Ed. 372 (1855) ). For example, a bankruptcy discharge arguably is a matter of public rights because Congress need not provide any discharge at all. The same reasoning arguably could apply more broadly, because Congress need not enact any bankruptcy laws at all. At one point the Supreme Court stated that "the restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power ... may well be a ‘public right.’ " Marathon, 458 U.S. 50, 71, 102 S.Ct. 2858 (plurality opinion).

More recent decisions, however, have expressly declined to endorse such a broad general rule. Se...