Case Name: In re John W. MORRIS, d/b/a John Morris Building Systems, Debtor. FIDELITY & DEPOSIT COMPANY OF MARYLAND; Anniston Housing Authority, Plaintiffs-Appellants, Cross-Appellees, v. John W. MORRIS, d/b/a John Morris Building Systems, Defendant-Appellee, Cross-Appellant
Court: United States Court of Appeals for the Eleventh Circuit
Jurisdiction: United States
Decision Date: 1992-01-15
Citations: 950 F.2d 1531
Docket Number: No. 90-7632
Parties: In re John W. MORRIS, d/b/a John Morris Building Systems, Debtor. FIDELITY & DEPOSIT COMPANY OF MARYLAND; Anniston Housing Authority, Plaintiffs-Appellants, Cross-Appellees, v. John W. MORRIS, d/b/a John Morris Building Systems, Defendant-Appellee, Cross-Appellant.
Judges: Before HATCHETT and DUBINA, Circuit Judges, and CLARK, Senior Circuit Judge.
Reporter: West's Bankruptcy Reporter
Volume: 134
Pages: 1531–1540

Head Matter:
In re John W. MORRIS, d/b/a John Morris Building Systems, Debtor. FIDELITY & DEPOSIT COMPANY OF MARYLAND; Anniston Housing Authority, Plaintiffs-Appellants, Cross-Appellees, v. John W. MORRIS, d/b/a John Morris Building Systems, Defendant-Appellee, Cross-Appellant.
No. 90-7632.
United States Court of Appeals, Eleventh Circuit.
Jan. 15, 1992.
Thomas J. Knight, Anniston, Ala., for plaintiffs-appellants, cross-appellees.
Kenneth T. Horton, John T. Hinchey, Phillips, Hinchey & Reid, Atlanta, Ga.; Bruce N. Adams, Wilson, Pumroy, Rice & Adams; and Thomas M. Sowa, and Richard H. Cater, Burnham, Klinefelter, Halsey, Jones & Cater, Anniston, Ala., for defendant-appellee, cross-appellant.
Before HATCHETT and DUBINA, Circuit Judges, and CLARK, Senior Circuit Judge.

Opinion:
DUBINA, Circuit Judge:
John W. Morris, d/b/a John Morris Building Systems ("Morris"), appeals the district court's judgment that the bankruptcy court did not have jurisdiction to hear his adversary proceeding against the Anni-ston Housing Authority ("the Authority") after his Chapter 11 bankruptcy case was dismissed. For the reasons which follow, we reverse the district court.
I. FACTUAL BACKGROUND
Morris, a building contractor, built two housing projects for the Authority. Morris was unable to complete the construction, and as a result, the Authority had to call upon Fidelity & Deposit Company of Maryland ("Fidelity"), which had issued a bond to Morris, to provide the funds needed to finish the project. Fidelity paid the Authority the difference between the total amount necessary to complete the project and the retainage withheld from Morris, and agreed to indemnify the Authority in the event Morris made any claim for the retainage. Morris filed a Chapter 11 reorganization in 1985. He also filed an adversary proceeding in the bankruptcy court against the Authority for the unpaid retain-age.
Morris' Chapter 11 case remained essentially dormant for approximately three years. In February 1988, the bankruptcy court noted that Morris had not filed a plan of reorganization or the required disclosure statements and operating reports, and entered an order to show cause why the case should not be dismissed. After an additional eighteen months of inactivity, the bankruptcy court entered a second show cause order. In August 1989, the bankruptcy court dismissed Morris' Chapter 11 case.
Morris was more active in litigating the adversary proceeding. After the Chapter 11 case was dismissed, the bankruptcy court held a hearing in September 1989 on a show cause order regarding the dismissal of the adversary proceeding. The Authority's attorney mentioned to the bankruptcy court that the Chapter 11 case had been dismissed and that he thought the case would be more appropriately tried in state court, but he did nothing further to object to the jurisdiction of the bankruptcy court. The bankruptcy court proceeded to set the case for trial in October. The trial resulted in the bankruptcy court's ruling in favor of Morris and entering judgment against the Authority in the amount of $107,465.08. Thereafter, the Authority filed motions for new trial and to set aside judgment, which the bankruptcy court denied. In addition, Fidelity sought unsuccessfully to intervene in the case.
The Authority appealed the bankruptcy court's decision to the district court, and Fidelity appealed the denial of its motion to intervene. The district court did not reach the merits of their appeals, but concluded that the bankruptcy court did not have subject matter jurisdiction over the adversary proceeding. The district court found that the bankruptcy court lost jurisdiction over the adversary proceeding because it did not expressly retain jurisdiction of that proceeding in its order dismissing the Chapter 11 case. Alternatively, the district court found that the bankruptcy court abused its discretion in retaining jurisdiction of the adversary proceeding and trying the case because of Morris' lack of good faith as demonstrated by his failure to pursue the Chapter 11 reorganization. Morris then perfected his appeal to this court on the jurisdictional question. The Authority and Fidelity filed cross-appeals urging us to reach the merits of their appeals to the district court if we find jurisdiction.
II. DISCUSSION
We must first determine whether a federal court may retain jurisdiction of an adversary proceeding related to a bankruptcy case after the underlying bankruptcy case is dismissed. Conclusions of law made by either the bankruptcy court or the district court are subject to de novo review. In re Calvert, 907 F.2d 1069, 1070 (11th Cir.1990); In re Sublett, 895 F.2d 1381, 1383 (11th Cir.1990).
The jurisdictional issue before us presents a question of first impression in this circuit. The Third Circuit has previously examined a similar issue, however, and concluded that the bankruptcy court properly retained jurisdiction of an adversary proceeding following the discharge of the debtor. See In re Smith, 866 F.2d 576 (3d Cir.1989). The Smith court recognized that the dismissal of a bankruptcy case normally results in the dismissal of related proceedings because federal jurisdiction is premised upon the nexus between the underlying bankruptcy case and the related proceedings, but noted that the general rule is not without exceptions. Smith, 866 F.2d at 580.
In addition to the Third Circuit, numerous bankruptcy and district courts have addressed the precise issue presented by this case. These courts have consistently held that, notwithstanding the general rule, nothing in the statute governing jurisdiction granted to the bankruptcy courts prohibits the continuance of federal jurisdiction over an adversary proceeding which arose in or was related to a bankruptcy case following dismissal of the underlying bankruptcy case. See, e.g., In re Churchfield Management & Inv. Corp., 122 B.R. 76, 81 (Bankr.N.D.Ill.1990); In re Tim Wargo & Sons, Inc., 107 B.R. 626 (Bankr.E.D.Ark.1989); In re Kost, 102 B.R. 834, 835 (D.Wyo.1989); In re Tennessee Valley Center for Minority Economic Dev., Inc., 99 B.R. 845, 846 (Bankr.W.D.Tenn.1989); Un-Common Carrier Corp. v. Oglesby, 98 B.R. 751, 753 (S.D.Miss.1989); Hudak v. Woods, 91 B.R. 718, 720 (W.D.Pa.1988), aff'd in part & remanded in part, 879 F.2d 857 (3d Cir.) (unpublished opinion), cert. denied, 493 U.S. 976, 110 S.Ct. 501, 107 L.Ed.2d 504 (1989); In re GWF Inv., Ltd., 85 B.R. 771, 780 (Bankr.S.D.Ohio 1988); In re Walton, 80 B.R. 870, 874 (Bankr.N.D.Ohio 1987); In re Stardust Inn, Inc., 70 B.R. 888, 890 (Bankr.E.D.Pa.1987); In re Pocklington, 21 B.R. 199, 201 (Bankr.S.D.Cal.1982); In re Lake Tahoe Land Co., 12 B.R. 479, 480-81 (Bankr.D.Nev.1981).
In the case before us, the district court analogized federal court jurisdiction over adversary proceedings to pendent state claims. The district court reasoned that if a case with pendent claims was closed without the court's expressly retaining jurisdiction of the pendent claims, those claims would be dismissed; likewise, the bankruptcy court's dismissal of Morris' Chapter 11 case without expressly retaining jurisdiction over the unresolved adversary proceeding terminated the entire matter. We disagree with the district court. The disposition of an adversary proceeding is appropriately compared to the disposition of pendent state claims, but there is a distinction between the two that is critical to our resolution of this issue. Unlike a lawsuit in which a claim that gives rise to federal subject matter jurisdiction coexists with pendent or ancillary state claims, an adversary proceeding in the bankruptcy court and the companion bankruptcy case are two distinct proceedings. Since two separate cases are involved, express retention over the adversary proceeding upon disposition of the related bankruptcy case is unnecessary.
We find the reasoning of the courts which have previously considered the threshold issue presented by this case to be persuasive, and conclude that the dismissal of an underlying bankruptcy case does not automatically strip a federal court of jurisdiction over an adversary proceeding which was related to the bankruptcy case at the time of its commencement. The decision whether to retain jurisdiction over the adversary proceeding should be left to the sound discretion of the bankruptcy court or the district court, depending upon where the adversary proceeding is pending.
Because we find that jurisdiction over Morris' adversary proceeding was not lost after the underlying bankruptcy case was dismissed, we must now determine whether the bankruptcy court abused its discretion by retaining jurisdiction over the adversary proceeding and undertaking the trial of the case. Our review of the bankruptcy court's decision to dismiss the Chapter 11 case but not the adversary proceeding is de novo. See In Re Sublett, 895 F.2d at 1384. The bankruptcy court's retention of the adversary proceeding was reviewable by the district court on appeal for abuse of discretion. The question before us is whether the district court was correct when it concluded that the bankruptcy court abused its discretion. Id.
Although dismissal of the bankruptcy case usually results in dismissal of all remaining adversary proceedings, 11 U.S.C. § 349 gives the bankruptcy court the power to alter the normal effects of the dismissal of a bankruptcy case if cause is shown. Un-Common Carrier, 98 B.R. at 753; Pocklington, 21 B.R. at 202. The rationale for retention of jurisdiction over an adversary proceeding in an appropriate case can be explained as follows:
The bankruptcy court's jurisdiction to decide any matter is invoked by the filing of a bankruptcy petition. Absent that filing, the bankruptcy court is without power to decide the rights of any parties. On the other hand, during the pendency of a bankruptcy case, especially a reorganization case, the court enters orders that alter the rights of parties and the parties themselves enter into agreements that alter their rights; all because of the peculiarities of bankruptcy.
# *
Section 349 acknowledges that some cases . have progressed so far that judicial interference is needed to unravel or preserve the rights of parties.
Un-Common Carrier, 98 B.R. at 753 (quoting In re Lerch, 85 B.R. 491, 493 (Bankr.N.D.Ill.1988), aff'd, 94 B.R. 998 (N.D.Ill.1989)). Those courts which have examined the circumstances under which discretionary jurisdiction of an adversary proceeding should be exercised have utilized the following factors in determining whether jurisdiction should be retained: (1) judicial economy; (2) fairness and convenience to the litigants; and (3) the degree of difficulty of the related legal issues involved. Smith, 866 F.2d at 580; see also Stardust Inn, 70 B.R. at 890; Pocklington, 21 B.R. at 202.
The Third Circuit reviewed the bankruptcy court's retention of jurisdiction in Smith for abuse of discretion. The debtor in Smith initially filed a Chapter 13 petition, then commenced an adversary proceeding. The bankruptcy court tried the adversary proceeding, but prior to its disposition the debtor converted her Chapter 13 proceeding to a Chapter 7 case and received a discharge. Several months later, the bankruptcy court ruled against the debtor in the adversary proceeding. She appealed to the district court, which affirmed the bankruptcy court. On appeal to the Third Circuit, the prevailing parties in the adversary proceeding challenged the federal courts' continued exercise of jurisdiction over the adversary proceeding after the debtor's discharge. The Third Circuit determined that the bankruptcy court had not abused its discretion in retaining jurisdiction of the adversary proceeding. Judicial economy and fairness to the debtor weighed heavily in favor of the bankruptcy court's retention of jurisdiction, particularly since the adversary proceeding had already been tried when the debtor received her discharge. Smith, 866 F.2d at 579-80.
The bankruptcy court in the present case also based its retention of jurisdiction on the factors of judicial economy, fairness, and convenience to the litigants. At the time the bankruptcy court held a hearing on its show cause order relative to the adversary proceeding, the case had been pending for over four years and was ready for trial. We cannot fault the bankruptcy court for proceeding to trial rather than sending the case to state court to start all over. Although the Authority and Fidelity argue that the difficulty of the legal issues favors a trial in state court, we are not persuaded that this factor is so overwhelming that it outweighs the others.
The district court's finding that the bankruptcy court abused its discretion emphasized Morris' lack of good faith in failing to actively pursue his Chapter 11 case. Regardless of the district court's opinion concerning Morris' actions, the decision of the bankruptcy court was entitled to deference. Morris claims that his lack of activity in the bankruptcy case was due to the fact that the retainage claimed from the Authority was his principal asset, and his formulation of a plan depended on knowing the outcome of the adversary proceeding. Based upon the record before us, we cannot say that the bankruptcy court abused its discretion by retaining jurisdiction over the ad versary proceeding, and find that the district court erred in so concluding.
III. CONCLUSION
We reverse the judgment of the district court and remand this case to the district court with directions that on remand it consider the merits of the appeals taken by the Authority from the bankruptcy court's ruling in favor of Morris and by Fidelity from the bankruptcy court's denial of its motion to intervene.
REVERSED and REMANDED with directions.
. Because the district court did not rule on the merits of the case, it would he inappropriate for us to do so in this appeal. Cincinnati Ins. Co. v. Holbrook, 867 F.2d 1330, 1332 (11th Cir.1989).