Opinion ID: 806790
Heading Depth: 3
Heading Rank: 2

Heading: Application to Nuveen’s Action

Text: Nuveen’s primary argument is that its recovery from Bayonne’s estate was fixed by the Settlement Agreement, which was approved by the Bankruptcy Court prior to its filing of the action. Under Nuveen’s theory, if it recovers from Withum and Lindabury in this action, its claim against Bayonne’s estate can be assigned to them. Bayonne’s estate thus would not be affected. Likewise, if Nuveen recovers from the estate first, that recovery would offset its recovery in this action, decreasing Nuveen’s recovery from Withum and Lindabury and not affecting Bayonne’s estate. Nuveen dusts off the rarely cited Ivanhoe Bldg. & Loan Assn. v. Orr, 295 U.S. 243 (1935), which was decided under the Bankruptcy Act (the immediate predecessor to the 19 Bankruptcy Code), for the proposition that a creditor may recover from non-debtor parties without reducing the value of its claim against a bankruptcy estate. Because Nuveen stakes its argument on Ivanhoe, some background is required. The debtor there executed a bond to a creditor; the bond was secured by a mortgage on real estate. The creditor purchased the real estate at a foreclosure sale. Though it then had the collateral in partial payment for its debt, the creditor nonetheless filed a claim for the full amount (principal and interest) of the debtor’s obligation under the bond. The Supreme Court held that the claim was valid even though the creditor held property that partially satisfied the claim. However, the Court expressly clarified that the creditor “may not collect and retain dividends which with the sum realized from the foreclosure will more than make up that amount.” Id. at 246. It subsequently explained this ruling as settling that “in bankruptcy proceedings . . . a creditor secured by the property of others need not deduct the value of that collateral or its proceeds in proving his debt.” Reconstruction Fin. Corp. v. Denver & Rio Grande W. R.R. Co., 328 U.S. 495, 529 (1946). Ivanhoe thus provides that a creditor may file a proof of claim for the total amount it is owed by a debtor even if it has recovered or may recover all or a portion of that amount from a non-debtor. It does not hold that the actual amount the creditor collects from the estate evades reduction by recovery from third parties. Rather, it states the exact opposite: a creditor cannot collect more, in total, than the amount it is owed. Indeed, this distinction was present in case law prior to the Supreme Court’s holding in Ivanhoe. See, e.g., Bd. of Comm’rs v. Hurley, 169 F. 92, 97 (8th Cir. 1909) (“[T]he holder of a claim, upon which several parties are personally liable, may prove his claim against the estates of those who become bankrupt and may at the same time pursue the others at law, and, notwithstanding partial payments after the 20 bankruptcy by other [parties] or their estates, he may recover dividends from each estate in bankruptcy upon the full amount of his claim at the time the petition in bankruptcy was filed therein until from all sources he has received full payment of his claim, but no longer.” (emphasis added)). The distinction also has been associated with Ivanhoe in subsequent decisions. See, e.g., Feder v. John Engelhorn & Sons, 202 F.2d 411, 412 (2d Cir. 1953) (citing Ivanhoe for the holding that “the creditor . . . may prove his claim in full in the bankruptcy proceeding, although of course he may not retain dividends [from the estate] which, when combined with the amount realized on the security, exceed his claim”); In re Sacred Heart Hosp., 182 B.R. 413, 417 (Bankr. E.D. Pa. 1995) (citing Ivanhoe and Reconstruction Finance and noting that “a creditor can seek to prove its entire claim in the bankrupt’s case notwithstanding the existence of third party collateral or guarantees of payment so long as the claimant does not seek to recover more than one full payment of its claim from whatever source”); see also Nat’l Energy & Gas Transmission, Inc. v. Liberty Elec. Power, LLC (In re Nat’l Energy & Gas Transmission, Inc.), 492 F.3d 297, 301 (4th Cir. 2007) (“In Ivanhoe, the Supreme Court held that a creditor need not deduct from his claim in bankruptcy an amount received from a non-debtor third party in partial satisfaction of an obligation.” (emphasis added)). Ivanhoe is not codified explicitly in the Bankruptcy Code. What we have are § 502, 5 which deals with the 5 In pertinent part, § 502 provides that “[a] claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.” 11 U.S.C. § 502(a). 21 allowance of claims, and § 506(a), 6 which concerns in part what constitutes a secured claim. Of importance is that §§ 502 and 506(a) do not change the outcome that a creditor cannot collect more in total than it is owed. For example, consistent with Ivanhoe and § 506(a), the Court in In re F.W.D.C., Inc., 158 B.R. 523, 528 (Bankr. S.D. Fla. 1993), allowed a creditor to prove the total indebtedness against a guarantor-debtor without deducting the amount of collateral received from a third party. But it emphasized that the creditor may not be able to collect the total indebtedness from the debtor, providing this instructive example: “[I]f a creditor received collateral of a third party worth $8 million securing the third party’s indebtedness of $10 million and the guarantor of this $10 million indebtedness were in bankruptcy, such creditor would be allowed to prove a claim of $10 million but would not be allowed to realize more than $2 million.” Id. Nuveen cannot rely on Ivanhoe and the Settlement Agreement to establish that the amount it will collect from 6 In pertinent part, § 506(a) reads: An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. 11 U.S.C. § 506(a)(1). 22 Bayonne’s estate is fixed regardless of its recovery in this action. 7 Yet its argument raises the issue of the timing of its recovery in this action and from Bayonne’s estate. If a creditor’s recovery from a non-debtor definitely will not affect the amount of its payment from a bankruptcy estate, the third-party action is not “related to” the bankruptcy proceeding. As the Fifth Circuit Court explained, this is true, for example, where a plan has been confirmed and the bankruptcy estate has been administered. If, at the time of [the] suit . . ., [the] bankruptcy estate had already been administered by the trustee—i.e., if all property of the estate were collected, liquidated, and the proceeds distributed to creditors—then presumably [the plaintiff’s] potential damage recovery against 7 Nuveen also argues that the Settlement Agreement must be read to fix the amount it will collect from Bayonne’s estate because the Agreement distinguishes between claims arising within the bankruptcy proceeding (“internal” claims) and claims arising from sources collateral to the bankruptcy proceeding, such as this action (“external” claims). For internal claims, the Agreement defines the manner in which any recovery will offset a creditor’s claim. Because the Agreement does not include similar express provisions regarding offsetting for external claims, Nuveen argues that to read it to allow offset of external claims inappropriately adds a term to the Agreement. However, the Agreement merely fixes Nuveen’s claim against Bayonne’s estate. Ivanhoe teaches that granting a creditor a claim against the estate does not mean that the creditor necessarily is entitled to collect from the estate that amount if that collection will allow it to receive more than it is owed. Ivanhoe, 295 U.S. at 246. 23 the [non-debtor] defendants would have been limited to the amount of the outstanding judgment (that part of the judgment not paid through bankruptcy), and no effect on the estate would have been possible. Randall & Blake, Inc. v. Evans (In re Canion), 196 F.3d 579, 586 n.27 (5th Cir. 1999). Similarly, if the amount of a creditor’s recovery from a nondebtor depends on its recovery from a bankruptcy estate such that the asserted losses against the non-debtor only can be calculated when the creditor’s recovery from the bankruptcy estate is certain, there is no “related to” jurisdiction. See, e.g., In re J&J Towne Pharmacy, Inc., No. 09-17560, 2000 WL 568355 (Bankr. E.D. Pa. May 5, 2000) (concluding that there was no “related to” jurisdiction over a malpractice action that could be adjudicated only after the bankruptcy estate had been administered because the amount of the losses sought in the action depended on the actual recoveries of secured and unsecured creditors in the bankruptcy proceeding). In contrast, courts have held that “related to” jurisdiction does exist where a creditor’s recovery from a non-debtor conceivably could alter the amount of the creditor’s recovery from a bankruptcy estate. For example, in advancing an argument similar to Nuveen’s in Canion, the creditor argued that were it successful in prosecuting its action against a non-debtor, its claims against the debtor’s estate would not be reduced or extinguished because the nondebtor would stand in its shoes as a judgment creditor of the debtor based on legal subrogation (thus the debtor’s estate would owe the same amount regardless). The Fifth Circuit rejected this argument, noting that there was no guarantee that the non-debtor would be allowed to step into the creditor’s shoes. 24 Assuming that [the creditor] should successfully collect from the defendants the judgment it holds against [the debtor], and assuming that . . . legal subrogation [would not be allowed], the total amounts due on claims against [the] bankruptcy estate would be decreased. This decrease would inure to the benefit [of] all other unsecured creditors, each of whom would then share in the disbursement that would otherwise have been paid to [the creditor]. Canion, 196 F.3d at 586. See also Owens-Ill., Inc. v. Rapid Am. Corp (In re Celotex Corp.), 124 F.3d 619, 626–27 (4th Cir. 1997) (finding “related to” jurisdiction where a creditor’s claim against a non-debtor would reduce its claim in bankruptcy); Kaonohi Ohana, Ltd. v. Sutherland (In re Sutherland), 873 F.2d 1302, 1306–07 (9th Cir. 1989) (finding “related to” jurisdiction over a third-party action because the specific performance remedy sought in the third-party action would reduce the amount of damages in the related breach-ofcontract claim against a bankruptcy estate); Nat’l 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) (holding that a coverage dispute between the debtor’s insurance company and a creditor was “related to” the bankruptcy because a finding of coverage would reduce the claims against the estate); Wood v. Wood (In re Wood), 825 F.2d 90, 94 (5th Cir. 1987) (“Although we acknowledge the possibility that this suit may ultimately have no effect on the bankruptcy, we cannot conclude, on the facts before us, that it will have no conceivable effect.”) (emphasis in original). At the time Nuveen filed its complaint against Withum and Lindabury, the same loss it sought to recover in that action (primarily the unpaid principal and interest on the BAN) was included in the proof of claim filed by the master 25 trustee against Bayonne’s estate. The loss also was included in the provisions of the Settlement Agreement whereby Nuveen’s portion of the proof of claim was resolved as an unsecured claim against Bayonne’s estate (which would be reduced dollar for dollar by other recoveries from the estate). Nonetheless, Nuveen now argues that it is not seeking to recover for the same grievance in this action as the harm encompassed by the proof of claim. See Appellant’s Br. 35 (“Nuveen’s bankruptcy claim and its claims against [Withum and Lindabury] are not ‘for the same grievance’ . . . .”). This argument contradicts its statements throughout Bayonne’s bankruptcy proceeding acknowledging that this action and its claim against Bayonne’s estate relate to the same harm. In seeking documents related to Bayonne’s pre-petition professionals, Nuveen stated that any recovery from claims brought against those professionals would decrease its claim against Bayonne’s estate. See Application in Support of Motion for Nuveen High Yield Municipal Bond Fund to Compel the Production of Documents from the Debtor, In re Bayonne Medical Center, Case No. 07-15195 (Bankr. D. N.J. 2007), ECF No. 1503 at 2, 8. In this action, it asserts damages of $9.5 million, less any amounts recovered in Bayonne’s bankruptcy proceeding. Moreover, before us Nuveen acknowledges that if it recovers in this action first, there will have to be an “accounting” in the bankruptcy to prevent double recovery by it. Appellant’s Br. 36 n.10. The bottom line is that if Nuveen prevails in this action, it will not be permitted to recover more in total from Withum, Lindabury, and Bayonne’s estate than will make it whole as to its losses on the BAN. Though Nuveen asserts that its claim against Bayonne’s estate should be assigned to Withum and Lindabury, there is no guarantee that if they moved to have the claim assigned to them, the assignment would be allowed. Indeed, it is most likely that someone 26 would object to the assignment on the basis that it would be inequitable for a bad acting party to be assigned all or a portion of the claim, and that the money instead should go to unpaid creditors who acted in good faith. Thus, at the time Nuveen filed its action, Bayonne’s liability to it conceivably could have been reduced, having a direct, indeed substantial, effect on the pool of assets available for distribution to Bayonne’s creditors. The Pacor inquiry thus leads to the conclusion that Nuveen’s action is “related to” Bayonne’s bankruptcy proceeding. 8 8 Similarly focusing on Withum and Lindabury, Nuveen argues that if it is successful in this action, Bayonne’s estate will be affected if Withum and Lindabury file another, separate suit against Bayonne’s officers and directors based on their potential indemnification claims under Bayonne’s directors and officers liability insurance policy (the “D&O Policy”), which is property of Bayonne’s estate. ACandS, Inc. v. Travelers Cas. & Sur. Co., 435 F.3d 252, 260 (3d Cir. 2006) (“It has long been the rule in this Circuit that insurance policies are considered part of the property of a bankruptcy estate.”). These indemnification claims include common law indemnification claims, which are inchoate—that is, they can be asserted only when there is a determination of Withum’s and Lindabury’s liability to Nuveen in this action. See Bd. of Educ. of Florham Park v. Utica Mut. Ins. Co., 798 A.2d 605, 610 (N.J. 2002); W.R. Grace, 591 F.3d at 171 (“[A]n inchoate claim of common law indemnity is not, in and of itself, enough to establish the bankruptcy court’s subject matter jurisdiction.”). Because Withum and Lindabury agreed to dismiss without prejudice their third-party complaints against certain of Bayonne’s officers, they will need to file another suit if they want to assert indemnification against them (and, 27 In a final attempt to defeat this conclusion, Nuveen argues that we should deviate from the hornbook rule that jurisdiction is assessed at the time of the filing of a complaint and assess jurisdiction now because significant intervening events support looking at post-filing events in reviewing “related to” jurisdiction. Chief among these events is that the Plan has been confirmed and Bayonne’s bankruptcy proceeding is winding down. With this argument, Nuveen in we presume, Bayonne’s directors). Only after the filing of such a suit will Bayonne’s estate be implicated through the D&O Policy. Compare Pacor, 743 F.2d at 995 (“The fact remains that any judgment received by the plaintiff . . . could not itself result in even a contingent claim against [the debtor], since [the defendant] would still be obliged to bring an entirely separate proceeding to receive indemnification.”), and W.R. Grace, 591 F.3d at 173 (“Here, we are presented with state court actions that have only the potential to give rise to a separate lawsuit seeking indemnification from the debtor.”), with Stoe v. Flaherty, 436 F.3d 209, 217–19 (3d Cir. 2006) (finding “related to” jurisdiction where there was an automatic right to indemnification). However, because Nuveen asserted a claim, as established by the Settlement Agreement, against Bayonne’s estate, the estate already is implicated. Even though Withum and Lindabury may bring a third-party action against Bayonne’s officers depending on the outcome of this action, and the officers in turn may seek indemnification from Bayonne (thereby affecting Bayonne’s bankruptcy proceeding through another suit), the outcome of this action conceivably will resolve a portion of Bayonne’s possible liability. This is sufficient to establish “related to” jurisdiction. 28 effect requests that we apply a post-confirmation gloss on the Pacor inquiry discussed above. Nuveen offers no case law to support its contention that we should adopt a new rule for determining “related to” jurisdiction in situations in which a plan is confirmed after the filing of the complaint or in which a bankruptcy estate is almost fully administered at the time the jurisdictional analysis is undertaken. Indeed, had Nuveen initially filed the complaint in a New Jersey state court, as it now asserts it should have, Withum and Lindabury could have moved to transfer the action to the District Court based on “related to” jurisdiction immediately. Under this scenario, when the Court assessed its jurisdiction, the Plan either would not have been confirmed or would have been confirmed only recently. There would be few (if any) intervening events to consider, and the Court would not question that “related to” jurisdiction should be assessed as of the date Nuveen filed the complaint. Only because “related to” jurisdiction was raised after Nuveen’s reversal of its position regarding diversity jurisdiction is Nuveen able to create an argument about intervening events. Supreme Court precedent is clear that the date of filing is the date when subject matter jurisdiction is assessed. See, e.g., Grupo Dataflux, 541 U.S. at 582; Dole Food, 538 U.S. at 478. The unique procedural posture of this action should not affect that outcome. Moreover, Bayonne’s bankruptcy proceeding, though nearing closure, remains open. And even if it is closed, it can be reopened by a motion. See 11 U.S.C. § 350(b) (“A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.”); Fed. R. Bank. P. 5010 (“A case may be reopened on motion of the debtor or other party in interest pursuant to § 350(b) of the Code.”). As subject matter jurisdiction should be assessed at the time the 29 complaint was filed, Pacor’s analysis counsels that Nuveen’s action is “related to” Bayonne’s bankruptcy proceeding. We thus affirm the District Court’s holding that it has jurisdiction under 28 U.S.C. § 1334(b). 9