Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-07-06046/USCOURTS-ca8-07-06046-0/pdf.json

Parties Involved:
Black Diamond Capital Management
Not Party
Farmland Industries
Not Party
GAF Holdings
Appellant
J.P. Morgan Trust Company
Appellee
Pegasus Capital Partners
Appellee
Pegasus Investors II
Appellee
Pegasus Partners II
Appellee
Stanley Riemann
Appellee
Philip Rinaldi
Appellee
Robert Terry
Appellee

Document Text:

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

 

No. 07-6046 WM

 

In re: *

*

Farmland Industries, Inc., *

*

Debtor. *

*

GAF Holdings, LLC, * Appeal from the United States

* Bankruptcy Court for the 

Plaintiff-Appellant, * Western District of Missouri 

*

v. *

*

Philip Rinaldi; Stanley Riemann; *

Robert Terry; Pegasus Partners II, L.P.; *

Pegasus Investors II, L.P.; Pegasus *

Capital Partners, L.P.; J.P. Morgan Trust *

Company, National Association, in its *

capacity as Trustee of the FI Liquidating *

Trust, *

*

Defendants - Appellees. *

 

Submitted: November 26, 2007 

Filed: December 5, 2007

 

Before KRESSEL, Chief Judge, SCHERMER and MCDONALD, Bankruptcy

Judges

SCHERMER, Bankruptcy Judge

Appellate Case: 07-6046 Page: 1 Date Filed: 12/05/2007 Entry ID: 3379119
2

GAF Holdings, LLC (“GAF”) appeals the bankruptcy court order dismissing

with prejudice its complaint against Philip Rinaldi (“Rinaldi”); Stanley Riemann

(“Riemann”); Robert Terry (“Terry”); Pegasus Partners II, L.P.; Pegasus Investors II,

L.P.; Pegasus Capital Partners, L.P. (the three Pegasus entities are referred to herein

as “Pegasus”); and J.P. Morgan Trust Company, National Association in its capacity

as Trustee of the FI Liquidating Trust (“Liquidating Trustee”). We conclude that the

complaint is beyond the subject matter jurisdiction of the bankruptcy court and

therefore remand with instructions to dismiss for lack of subject matter jurisdiction.

ISSUE

The issue on appeal is whether the bankruptcy court has subject matter

jurisdiction over a complaint between non-debtor entities seeking damages for

intentional interference with a business expectancy and civil conspiracy. We conclude

that the bankruptcy court lacks subject matter jurisdiction over the complaint.

BACKGROUND

On March 2, 2007, GAF filed its complaint alleging misconduct on the part of

Rinaldi, Riemann, Terry, and Pegasus in connection with the 2004 sale of a refinery

and fertilizer complex in Coffeyville, Kansas to Coffeyville Resources, LLC

(“Purchaser”). At the time of the sale, the Coffeyville complex was part of the

Chapter 11 bankruptcy estate of Farmland Industries, Inc. (“Farmland”). Riemann

and Terry were officers of Farmland or one of its subsidiaries. The Purchaser was a

subsidiary of one of the Pegasus entities formed for the purpose of acquiring the

Coffeyville complex. Rinaldi was an executive with Pegasus and an officer and

director of the Purchaser. The sale was conducted according to procedures approved

by the bankruptcy court. GAF failed to qualify as a bidder under the sale procedures.

The bankruptcy court approved the sale to the Purchaser by order dated November 14,

2003.

Appellate Case: 07-6046 Page: 2 Date Filed: 12/05/2007 Entry ID: 3379119
1 GAF named Black Diamond Capital Management, L.L.C. as a defendant. 

Black Diamond Capital Management, L.L.C. is not a party to this appeal.

3

On December 19, 2003, the bankruptcy court entered its order confirming

Farmland’s plan. Pursuant to the plan, Farmland transferred certain assets to a

liquidating trust to liquidate and distribute proceeds to certain creditors of and interest

holders in Farmland. The Liquidating Trustee is the trustee of that trust.

On February 2, 2004, GAF filed a motion pursuant to Federal Rule of Civil

Procedure 60(b) and Federal Rule of Bankruptcy Procedure 9024 to set aside the sale

order as the product of collusion between Riemann, Terry, and the Purchaser. After

discovery and a hearing, the bankruptcy court denied the motion. On February 20,

2004, the court entered an amended order approving the sale.

Three years later, GAF filed the complaint with the bankruptcy court again

alleging misconduct in connection with the sale of the Coffeyville complex. In the

complaint, GAF sought damages against Rinaldi, Riemann, Terry and Pegasus for

intentional interference with business expectancy and conspiracy.1

 GAF also named

the Liquidating Trustee as a defendant in the complaint, however sought no damages

against the Liquidating Trustee. Instead GAF sought to force the Liquidating Trustee

to set forth any interest the Liquidating Trust might have in any proceeds of the

litigation.

Each defendant filed a motion to dismiss the complaint for various reasons.

The Liquidating Trustee sought a dismissal for lack of subject matter jurisdiction. The

bankruptcy court dismissed the complaint with prejudice as an impermissible

collateral attack on the prior orders approving the sale and for failing to state a claim

upon which relief can be granted. The bankruptcy court denied the Liquidating

Trust’s motion to dismiss for lack of subject matter jurisdiction as moot.

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2

 For a non-exclusive a list of core proceedings, see 28 U.S.C. 157(b)(2).

4

GAF appealed the order dismissing its complaint. At oral argument, we raised

the issue of subject matter jurisdiction and granted the parties additional time to brief

the issue. 

STANDARD OF REVIEW

Before addressing the merits of an appeal, this court must first determine that

it has subject matter jurisdiction. Specialty Mills, Inc. v. Citizens State Bank, 51 F.3d

770, 773 (8th Cir. 1995). In order to answer this question, we must determine whether

the bankruptcy court had jurisdiction over the complaint. Id. We make this

determination de novo. 

DISCUSSION

Bankruptcy courts are courts of limited jurisdiction which is derived from

statute. Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995). District courts have

original and exclusive jurisdiction of all bankruptcy cases and original but not

exclusive jurisdiction of all civil proceedings arising under the Bankruptcy Code or

arising in or related to a bankruptcy case. 28 U.S.C. § 1334(a) and (b). District courts

may in turn refer any or all bankruptcy cases and any or all proceedings arising under

the Bankruptcy Code or arising in or related to a bankruptcy case to the judges of the

bankruptcy courts for the district. 28 U.S.C. § 157(a)(1). Bankruptcy judges may

hear and determine all bankruptcy cases and all core proceedings arising under the

Bankruptcy Code or arising in a bankruptcy case. 28 U.S.C. § 157(b)(1). Core

proceedings are actions which arise only in bankruptcy or involve a right created by

federal bankruptcy law. Specialty Mills, 51 F.3d at 773.2

 Bankruptcy judges may also

hear non-core proceedings that are otherwise related to a bankruptcy case. 28 U.S.C.

§ 157(c).

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5

GAF’s complaint involves a dispute between non-debtor third parties grounded

in state tort law and is therefore not a core proceeding arising under the Bankruptcy

Code nor in a bankruptcy case. The question we must decide is whether the complaint

falls within the bankruptcy court’s jurisdiction over non-core matters related to

Farmland’s bankruptcy case. We conclude that it does not.

Congress did not define “related to” jurisdiction. Celotex, 514 U.S. at 307-08.

The words suggest a jurisdictional grant of some breadth. Id. “Congress intended to

grant comprehensive jurisdiction to the bankruptcy courts so that they might deal

efficiently and expeditiously with all matters connected with the bankruptcy estate.”

Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984), citing H.R. Rep. No. 95-

595, at 43-48 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6004-08, quoted in

Celotex, 514 U.S. at 308. “Related to” jurisdiction gives the bankruptcy courts

jurisdiction over more than simple proceedings involving property of the debtor or the

bankruptcy estate. Celotex, 514 U.S. at 308. The test for “related to” jurisdiction has

been articulated as “whether the outcome of that proceeding could conceivably have

any effect on the estate being administered in bankruptcy.” Id. An action is related

to bankruptcy “if the outcome could alter the debtor’s rights, liabilities, options, or

freedom of action (either positively or negatively) and which in any way impacts upon

the handling and administration of the bankrupt estate.” Id. 

Despite its breadth, “related to” jurisdiction is not limitless. Celotex, 514 U.S.

at 308.

The jurisdiction of the bankruptcy courts to hear cases related to

bankruptcy is not without limit, however, and there is a statutory, and

eventually constitutional limitation to the power of a bankruptcy court.

For subject matter jurisdiction to exist, therefore, there must be some

nexus between the “related” civil proceeding and the [bankruptcy] case.

Pacor, 743 F.2d at 994.

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6

The mere fact that there may be common issues of fact between a civil

proceeding and a controversy involving the bankruptcy estate does not bring the

matter within the bankruptcy court’s subject matter jurisdiction. Pacor, 743 F.2d at

994. Likewise, judicial economy does not justify federal jurisdiction. Id. Jurisdiction

over non-bankruptcy controversies between third parties who are otherwise strangers

to the civil proceeding and to the bankruptcy case does not exist. Id., citing In re

Haugh, 19 B.R. 223, 224-25 (Bankr. D. Ore. 1982). 

The Pacor test has been adopted in this Circuit. Specialty Mills, 51 F.3d at 774;

Abramowitz v. Palmer, 999 F.2d 1274 (8th Cir. 1993); National Union Fire Ins. Co.

of Pittsburgh, Pa. v. Titan Energy, Inc. (In re Titan Energy, Inc.), 837 F.2d 325, 329-

30 (8th Cir. 1988); Dogpatch Properties, Inc. v. Dogpatch U.S.A., Inc. (In re Dogpatch

U.S.A., Inc.), 810 F.2d 782, 786 (8th Cir. 1987); National City Bank v. Coopers &

Lybrand, 802 F.2d 990, 994 (8th Cir. 1986); Safeco Ins. Co. of America v. Farmland

Indus., Inc. (In re Farmland Indus., Inc.), 296 B.R. 793, 803-04 (B.A.P. 8th Cir. 2003);

Williams v. Citifinancial Mortgage Co. (In re Williams), 256 B.R. 885, 891 (B.A.P.

8th Cir. 2001).

The type and stage of a bankruptcy proceeding impact the analysis of “related

to” jurisdiction. Jurisdiction may extend more broadly in the context of a Chapter 11

reorganization than in a Chapter 7 liquidation. Celotex, 514 U.S. at 310. In the instant

case, Farmland’s liquidating plan was confirmed years ago. Therefore, the case is

akin to a Chapter 7 liquidation in which the bankruptcy court’s “related to”

jurisdiction is not necessarily so broad.

Applying the “related to” test to GAF’s complaint we conclude that the

bankruptcy court lacks subject matter jurisdiction over it. The complaint is between

a disgruntled entity which did not purchase the Coffeyville complex and certain nondebtor individuals and entities who played a role in the sale. The complaint does not

seek to undo the sale; rather it seeks damages for the tort of intentional interference

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7

with a business expectancy. The sale is a necessary element of the alleged tort and

therefore a pre-requisite to GAF’s suit. See Lange v. Schropp (In re Brook Valley VII,

Joint Venture), 496 F.3d 892, 899 (8th Cir. 2007).

The facts underlying the complaint center around the conduct of a sale of assets

from Farmland’s bankruptcy estate. However, common facts do not create subject

matter jurisdiction. Pacor, 743 F.2d at 994. The bankruptcy judge is familiar with

the sale and the entities involved in the dispute because he has ruled on the validity

of the sale on at least three prior occasions: when he approved the sale in November

of 2003; when he denied GAF’s motion seeking to set aside the sale order; and when

he entered the amended sale order. Nonetheless, judicial economy does not justify

jurisdiction. Id. 

No conceivable bankruptcy administrative purpose will be served by GAF’s

complaint. Valley Historic Ltd. P’ship v. Bank of New York, 486 F.3d 831, 837 (4th

Cir. 2007). GAF is not seeking recovery for the benefit of Farmland’s creditors or

interest holders. To the contrary, GAF named the Liquidating Trustee as a defendant

for the sole purpose of seeking a determination that Farmland’s creditors and interest

holders have no right to the tort damages it seeks in the complaint. The outcome of

the suit will have no impact on the distributions to creditors or interest holders

pursuant to a liquidating plan which was confirmed almost four years ago. GAF is

merely seeking recovery for itself.

The defendants argue that GAF’s complaint is related to the Farmland

bankruptcy because it implicates the bankruptcy court’s orders approving the sale. In

ruling on the complaint, according to the defendants, the bankruptcy judge is merely

enforcing his own prior orders. The fact that an existing order of a court may impact

a subsequent dispute between different parties does not create subject matter

jurisdiction over the new dispute. To the extent the complaint is a collateral attack on

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8

prior orders, a defense grounded on such a theory can be presented to and evaluated

by any tribunal with subject matter jurisdiction over the controversy.

The defendants also argue that Farmland has a duty to indemnify Riemann and

Terry and to advance litigation costs in connection with GAF’s complaint. In support

of this argument, the defendants submitted an order issued by the bankruptcy court

requiring the Liquidating Trustee to advance litigation costs to certain individuals in

connection with litigation brought by the Liquidating Trustee against such individuals.

Neither Riemann nor Terry are parties entitled to receive an advancement of litigation

costs under that order which relates to litigation by the Liquidating Trustee and not

by GAF. This argument is not supported by the record before this Court.

The defendants argue that Farmland’s confirmed plan gives the bankruptcy

court subject matter jurisdiction over GAF’s complaint. This argument fails. “Only

Congress may determine a lower federal court’s subject-matter jurisdiction.” Kontrick

v. Ryan, 540 U.S. 443, 452 (2004)(citing U.S. CONST. art. III, § 1.) A plan cannot

create nor confer jurisdiction upon a bankruptcy court. It can merely provide for the

post-petition retention of existing subject matter jurisdiction. Harstad v. First Am.

Bank, 39 F.3d 898, 902 n.7 (8th Cir. 1994); Valley Historic Ltd. P’ship., 486 F.3d at

837. 

Finally, the defendants complain that GAF has reversed its position on the issue

of subject matter jurisdiction. GAF affirmatively asserted jurisdiction before the

bankruptcy court and lost the dispute on the merits. GAF has now changed course

hoping to gain a dismissal without prejudice and another bite at the apple. GAF’s

complete reversal of position and the tactical advantage it will receive by this ruling

is not lost on this Court. Nonetheless, we have an independent duty to evaluate

subject matter jurisdiction regardless of the litigant’s positions on the issue. Specialty

Mills, 51 F.3d at 773. Accordingly we have no choice but to remand for dismissal

based on lack of subject matter jurisdiction. We are confident that in the event GAF

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9

elects to pursue the issues raised in its complaint in another forum, any tribunal with

subject matter jurisdiction over the matter will address the merits of the dispute

including any defenses based on a theory of collateral attack. 

CONCLUSION

The bankruptcy court lacks subject matter jurisdiction over GAF’s state law

based tort claims against non-debtor third parties. Accordingly, we remand and

instruct the bankruptcy court to dismiss the complaint for lack of subject matter

jurisdiction.

 

Appellate Case: 07-6046 Page: 9 Date Filed: 12/05/2007 Entry ID: 3379119