Opinion ID: 783302
Heading Depth: 2
Heading Rank: 3

Heading: Bankruptcy Court Jurisdiction to Enter the Underlying Order

Text: 10 CVPS argues that the bankruptcy court's order was void for lack of subject matter jurisdiction. CVPS contends that the bankruptcy court issued a final order in a non-core proceeding without the parties' consent and without a district court's de novo review, and that therefore it exceeded its jurisdiction under Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (plurality opinion), and 28 U.S.C. § 157. Where bankruptcy courts have exceeded their jurisdiction in non-core proceedings, we have not hesitated to vacate the bankruptcy court judgment on direct appeal. See, e.g., Orion Pictures Corp. v. Showtime Networks, Inc. ( In re Orion Pictures Corp. ), 4 F.3d 1095, 1102-03 (2d Cir.1993); see also Cathedral of the Incarnation v. Garden City Co. ( In re Cathedral of the Incarnation ), 90 F.3d 28, 34 n. 5 (2d Cir.1996); Gallucci v. Grant ( In re Gallucci ), 931 F.2d 738, 744 (11th Cir.1991). 11 However, this case comes to us, not on direct appeal, but on appeal from a denial of a Rule 60(b)(4) motion through which CVPS seeks to overturn a final default judgment. Because final judgments should not be lightly reopened, [Rule 60(b)] may not be used as a substitute for timely appeal.... Since 60(b) allows extraordinary relief, it is invoked only upon a showing of exceptional circumstances. Nemaizer, 793 F.2d at 61-62 (citations omitted). In the context of a Rule 60(b)(4) motion, a judgment may be declared void for want of jurisdiction only when the court plainly usurped jurisdiction, or, put somewhat differently, when there is a total want of jurisdiction and no arguable basis on which it could have rested a finding that it had jurisdiction. Id. at 65 (internal quotation marks and citations omitted). 12 CVPS claims that the bankruptcy court's injunction is void under Marathon because the court lacked jurisdiction to adjudicate pre-petition state law rights. In Marathon, the Supreme Court held that Congress could not constitutionally empower a bankruptcy court, which is not an Article III court, to adjudicate a state breach-of-contract action (based on a pre-petition contract) brought by a debtor against a defendant that had not filed a claim with the bankruptcy court. See 458 U.S. at 85, 102 S.Ct. 2858. The Supreme Court observed that our Constitution reserves for Art[icle] III courts traditional functions of the judicial power such as adjudicating state breach-of-contract claims like debtor's claim in that case. Id. at 83, 102 S.Ct. 2858. The Marathon Court found unconstitutional the Bankruptcy Act of 1978's broad grant of jurisdiction to the bankruptcy courts to adjudicate such state law claims. 13 In the wake of Marathon, Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984 (1984 Amendments), categorizing core and non-core proceedings. 28 U.S.C. § 157. Core proceedings are actions essential or basic to the administration of a bankruptcy case, and Congress offered a non-exhaustive list of such actions. 28 U.S.C. § 157(b)(2). In a core proceeding, a bankruptcy court may enter appropriate [final] orders and judgments. § 157(b)(1). Where a bankruptcy court acts in a noncore proceeding, a final order may be issued only in one of two ways: by the district court after de novo review of the bankruptcy court's proposed factual findings and legal conclusions, § 157(c)(1); or by the bankruptcy court with the consent of the parties, § 157(c)(2). See generally Orion Pictures Corp., 4 F.3d at 1100-01. In this case, because the district court did not originally review nor independently adjudicate the bankruptcy court's order enjoining CVPS from pursuing its state claims against the Herberts, bankruptcy jurisdiction can exist only if the proceeding was core or was consented to by the parties. 14 As noted above, when reviewing the denial of a Rule 60(b)(4) motion to vacate for want of jurisdiction, we consider only whether there is at least an arguable basis for jurisdiction. If so, we will not disturb the judgment on jurisdictional grounds. In this case, we easily conclude that there is, at a minimum, an arguable basis for bankruptcy court jurisdiction, because CVPS's claims are arguably part of the core proceeding before the bankruptcy court and because CVPS consented to the bankruptcy court's jurisdiction. 15 The non-exhaustive list of core proceedings in the 1984 Amendments includes: matters concerning administration of the estate, 28 U.S.C. § 157(b)(2)(A), proceedings to ... recover fraudulent conveyances, § 157(b)(2)(H), and other proceedings affecting ... the adjustment of the debtor-creditor ... relationship, § 157(b)(2)(O). The 1984 Amendments clarified 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. § 157(b)(3). Since the 1984 Amendments, both the Supreme Court and this court have concluded that the Marathon holding was a narrow one and have broadly construed the jurisdictional grant in the 1984 Bankruptcy Amendments. See S.G. Phillips Constructors, Inc. v. City of Burlington ( In re S.G. Phillips Constructors, Inc. ), 45 F.3d 702, 707 (2d Cir.1995) (citations omitted). [B]ankruptcy courts are not precluded from adjudicating state-law claims [as core proceedings] when such claims are at the heart of the administration of the bankruptcy estate. Ben Cooper, Inc. v. Ins. Co. of the State of Pa. ( In re Ben Cooper ), 896 F.2d 1394, 1399 (2d Cir.), vacated, 498 U.S. 964, 111 S.Ct. 425, 112 L.Ed.2d 408 (1990), reinstated, 924 F.2d 36 (2d Cir. 1991). A finding that a proceeding is core, we have held, may be based upon the nature of the proceeding, S.G. Phillips Constructors, 45 F.3d at 706, and the ramifications of the dispute on the administration of the estate, Shugrue v. Air Line Pilots Ass'n Int'l ( In re Ionosphere Clubs, Inc. ), 922 F.2d 984, 994 (2d Cir. 1990). 16 The distinction between core and non-core is somewhat subjective and contextual, and we need not determine whether the injunction in this case was actually part of a core proceeding, because the issue before us is only whether the bankruptcy court arguably had jurisdiction. Here we conclude that the proceeding was arguably core. As part of a settlement by which the Herberts contributed to the bankruptcy estate, the injunction, at least arguably, was at the heart of the administration of the bankruptcy estate, had significant ramifications ... for the administration of the estate, or was core because of the nature of the proceeding. 17 Moreover, even if the injunction in itself was not part of a core proceeding as defined by the 1984 Amendments, CVPS's claims against the Herberts also were arguably subject to bankruptcy court jurisdiction based upon CVPS's filing a proof of claim in the bankruptcy court in January 1997, almost a year before the bankruptcy court's injunction. Our cases have upheld bankruptcy jurisdiction in what would otherwise be non-core proceedings where the party opposing the finding of jurisdiction has filed a proof of claim. In doing so, we have relied on two theories: (1) the proof of claim transforms litigation into a core proceeding; and (2) by filing the proof of claim, the creditor consents to the bankruptcy court's broad equitable jurisdiction. See S.G. Phillips Constructors, 45 F.3d at 706 (The City, by filing its proof of claim in this case, not only triggered § 157(b)(2)(B) [a listed core proceeding in allowing claims against an estate and estimating claims for the purposes of confirming a plan], but also necessarily submitted to the court's equitable power to resolve its claims.); see also Cibro Petroleum Prods. v. City of Albany ( In re Winimo Realty Corp. ), 270 B.R. 108, 120 & n. 7 (S.D.N.Y.2001) (citing numerous cases in which filing proof of claim is a sufficient basis for finding the proceeding core); Pan American World Airways, Inc. v. Evergreen Int'l Airlines, 132 B.R. 4, 7 (S.D.N.Y.1991) (When a creditor files a proof of claim it submits itself to the bankruptcy court's equitable power, and the claims, even though arising under state law, become core proceedings within the jurisdiction of the bankruptcy court.); cf. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 59 n. 14, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) ([B]y submitting a claim against the bankruptcy estate, creditors subject themselves to the court's equitable power to disallow those claims....); Orion Pictures Corp., 4 F.3d at 1102 (holding breach-of-contract action by a debtor against a party to a pre-petition contract, who has filed no claim with the bankruptcy court, is non-core). The foregoing authorities establish that after CVPS filed its proof of claim against Pico Mountain, the bankruptcy court had an arguable basis for jurisdiction to enter its injunction against CVPS. 18 One could argue that CVPS's proof of claim gave the bankruptcy court core jurisdiction only over CVPS's claims against Pico Mountain, Inc. and not over its claims against the Herberts. However, CVPS's claims against the Herberts are state law claims arising from the Herberts' alter ego relationship with Pico Mountain or the Herberts' liability for Pico Mountain's debts. In the context of cases such as this, we have ruled that the trustee is the proper person to assert claims .... against the debtor's alter ego or others who have misused the debtors property in some fashion, and by extension, we have held that such alter ego claims are core proceedings. St. Paul Fire and Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir.1989). As long as state law permits alter ego tort claims or similar actions, such actions are core proceedings because they relate[] to the property of the estate, and bring[] property into the estate of the debtor, particularly as a proceeding to recover fraudulent conveyances under 28 U.S.C. 157(b)(2)(H). Id. (internal quotations and citations omitted). 19 In this case, the trustee's complaint for injunctive relief specifically cited the creditors' derivative or alter-ego claim[s], and CVPS now bases its state claims against the Herberts, in part, on Vermont's alter ego doctrine and similar claims of incorporator liability and breach of fiduciary duty, citing Winey v. Cutler, 165 Vt. 566, 678 A.2d 1261 (1996), Hardwick-Morrison Co. v. Albertsson, 158 Vt. 145, 605 A.2d 529 (1992), Herbert v. Boardman, 134 Vt. 78, 349 A.2d 710 (1975). CVPS cannot pursue alter ego liability and similar derivative liability claims against the Herberts under Vermont state law, and, at the same time, assert that core jurisdiction is absent because Vermont does not recognize alter ego or derivative liability. One might argue that the injunction exceeds the bankruptcy court's core jurisdiction for alter ego and derivative liability claims because it protects the Herberts from all claims of any kind of nature, direct or derivative. Canney, Adv. Proceeding No. 97-1036, at 2. However, we need not consider whether there was an arguable jurisdictional basis for the potential reach of the injunction because all of CVPS's state claims are based on alter ego or derivative liability, or relate to the debtor-creditor relationship, and hence are at least arguably part of the core proceedings in the bankruptcy court. 20 In sum, we conclude that the bankruptcy court did not plainly usurp[] its power and that there was an arguable basis for jurisdiction. Nemaizer, 793 F.2d at 65. Therefore we conclude that the district court properly denied CVPS's Rule 60(b)(4) motion.