Opinion ID: 2812940
Heading Depth: 2
Heading Rank: 2

Heading: Kathleen’s Appeal

Text: Kathleen contends that the district court erred by referring this matter to the bankruptcy court. Congress has provided that a district court may refer certain proceedings over which it has jurisdiction to a bankruptcy court, including those that are “related to a case under title 11” of the United States Code. 28 U.S.C. § 157(a) (emphasis added); see also id. § 1334(b) (“[T]he district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.”). The statute further specifies that “[a] bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11.” Id. § 157(c)(1). When the bankruptcy court hears such a proceeding, the court is to submit proposed findings of fact and conclusions of law to the district court. Id. “[A]ny final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically -7- objected.” Id. Whether a proceeding is “related to” a bankruptcy case is an issue that we review de novo. GAF Holdings, LLC v. Rinaldi (In re Farmland Indus.), 567 F.3d 1010, 1016-19 (8th Cir. 2009). A proceeding is “related to” a bankruptcy case if “the outcome of that proceeding could conceivably have any effect on the estate being administered in the bankruptcy.” Speciality Mills, Inc. v. Citizens State Bank, 51 F.3d 770, 774 (8th Cir. 1995) (quoting Dogpatch Props., Inc. v. Dogpatch U.S.A., Inc. (In re Dogpatch U.S.A., Inc.), 810 F.2d 782, 786 (8th Cir. 1987)). This broad test is met if the proceeding “could alter the debtor’s rights, liabilities, options, or freedom of action . . . and which in any way impacts upon the handling and administration of the bankruptcy estate.” Id. (ellipsis in original) (quoting In re Dogpatch U.S.A., 810 F.2d at 786). “Even a proceeding which portends a mere contingent or tangential effect on a debtor’s estate meets this broad jurisdictional test.” Buffets, Inc. v. Leischow, 732 F.3d 889, 894 (8th Cir. 2013) (alterations omitted) (quoting Nat’l Union Fire Ins. Co. of Pittsburgh v. Titan Energy, Inc. (In re Titan Energy, Inc.), 837 F.2d 325, 330 (8th Cir. 1988)). We agree with the district court that the conceivable-effects test is met here. First, when the plaintiffs requested that this matter be referred to the bankruptcy court, they unambiguously informed the district court of their intent to use the default judgment against Vertical Group to reach the assets in the Kathleen Trust. And at that time, the bankruptcy court had concluded that Nathan’s bankruptcy estate succeeded to Nathan’s powers with respect to this trust. Second, each of the plaintiffs had filed a proof of claim in Nathan’s bankruptcy based upon their claims against Vertical Group, on the ground that Nathan also is liable for these claims. Because the plaintiffs intended to use a judgment in this case to access a trust in which Nathan’s bankruptcy estate has rights and because the plaintiffs were trying to satisfy the judgment in this case from Nathan’s bankruptcy estate, the district court did not err by concluding that this matter could have a conceivable effect on Nathan’s bankruptcy. See, e.g., In re Titan Energy, 837 F.2d at 330 (“It remains to be seen whether, and to what extent, -8- [this] action will affect [the debtor’s] estate. Yet, even a proceeding which portends a mere contingent or tangential effect on a debtor’s estate meets the broad jurisdictional test . . . .”); Buffets, 732 F.3d at 894 (“We think the court was correct that if [a party to the action] has an enforceable indemnification claim against [the debtor], then its claim conceivably could affect the bankruptcy.”). As a result, referring this proceeding to the bankruptcy court was permitted by 28 U.S.C. § 157(a).
Kathleen raises two objections to the award of actual and punitive damages against Vertical Group. A district court’s determination of damages in connection with a default judgment is reviewed for clear error. Stephenson v. Batrawi, 524 F.3d 907, 915-16 (8th Cir. 2008). The necessity of an evidentiary hearing to determine a plaintiff’s damages is committed to the sound discretion of the district court. Id. at 916. Kathleen asserts that the district court clearly erred in awarding damages because Vertical Group is not responsible for the plaintiffs’ damages. Kathleen theorizes that the evidence from Nathan’s bankruptcy case “suggests” that the complained-of misconduct is solely chargeable to a partnership between Nathan and Daryl Brown that is “independent” from Vertical Group. See In re Reuter, 686 F.3d at 517 (“[I]t was not clear error for the bankruptcy court to conclude that a partnership existed between Reuter and Brown.”). This argument requires us to examine the distinction between facts that relate to liability and facts that relate to the amount of damages. Once a default has been entered on a claim for an indefinite or uncertain amount of damages, “facts alleged in the complaint are taken as true, except facts relating to the amount of damages, which must be proved in a supplemental hearing or proceeding.” Everyday Learning Corp. v. Larson, 242 F.3d 815, 818 (8th Cir. 2001); see also 10A Charles A. Wright et al., Federal Practice & Procedure § 2688 (3d ed. 1998). A defaulted claim thus precludes a party from contesting the facts in the -9- complaint that establish liability. The facts that relate to the amount of the plaintiff’s damages, by contrast, are fair game. Kathleen does her best to frame her argument in terms of the amount of the plaintiffs’ damages. However, by contending that a separate partnership between Nathan and Brown committed the complained-of misconduct, she is contesting Vertical Group’s liability—i.e., whether Vertical Group engaged in misconduct in the first place. Because Vertical Group failed to defend against this action, Kathleen cannot now argue that Vertical Group never should have been a defendant. This defense has been lost. See Wehrs v. Wells, 688 F.3d 886, 893 (7th Cir. 2012) (“To permit [the defendant] to argue that [the plaintiff] should have . . . mitigate[d] his damages would allow [the defendant] to contest his liability, rather than the extent of the damages suffered from the injuries pled. This he may not do; a defaulting party ‘has no right to dispute the issue of liability.’” (quoting 10 James W. Moore et al., Moore’s Federal Practice § 55.32(1)(a) (3d. ed. 2012)); see also Stephenson, 524 F.3d at 915 n.9. Because Kathleen is impermissibly contesting Vertical Group’s liability, the court did not clearly err by rejecting her argument that a separate partnership is at fault.3 Kathleen next argues that an evidentiary hearing was necessary to determine the amount of the plaintiffs’ damages. We discern no abuse of discretion in the decision to award actual damages without an evidentiary hearing. In connection with their 3 For the first time in her reply brief, Kathleen asserts that the plaintiffs failed to plead that Vertical Group committed the misconduct alleged in the complaint. This argument implicates an unsettled area of the law in our circuit. See Everyday Learning Corp., 242 F.3d at 818 (describing as a “debatable proposition” whether “a default judgment conclusively establishes liability, as opposed to establishing the fact allegations in the complaint”). This provides all the more reason for us to enforce our general rule that we do not consider an argument raised for the first time in a reply brief. See Union Pacific R.R. Co. v. Progress Rail Servs. Corp., 778 F.3d 704, 711 n.5 (8th Cir. 2015). -10- motion for damages, the plaintiffs submitted affidavits and documentary proof evincing how much they invested in the complained-of scheme. Neither Kathleen nor Nathan challenged the accuracy of this evidence. Because the amount of the plaintiffs’ investments was readily discernable on the basis of undisputed evidence in the record, it was not an abuse of discretion to award actual damages without an evidentiary hearing. See Taylor v. City of Ballwin, 859 F.2d 1330, 1333 (8th Cir. 1988). Whether an evidentiary hearing was necessary before awarding punitive damages requires closer examination. We agree with Kathleen’s contention that “[a]s a general proposition, punitive damages cannot be awarded simply on the basis of the pleadings, but must instead be established at an evidentiary hearing held pursuant to Fed. R. Civ. P. 55(b)(2) because they clearly are not liquidated or computable.” Comdyne I, Inc. v. Corbin, 908 F.2d 1142, 1152 (3d Cir. 1990). However, we think this rule is subject to at least one exception. In James v. Frame, 6 F.3d 307 (5th Cir. 1993), the Fifth Circuit affirmed an award of punitive damages without an evidentiary hearing because of the district court’s longstanding familiarity with the matter. Id. at 310-11 (“The district judge, himself, has maintained a long and close familiarity with the issues in this matter.”); see also Action S.A. v. Marc Rich & Co., Inc., 951 F.2d 504, 508-09 (2d Cir. 1991). In such a situation, we agree that a court “should be trusted when [it] elects not to seek more evidence on matters with which [it] is already familiar.” James, 6 F.3d at 311. The district court referred this matter to the bankruptcy court because it was handling Nathan’s bankruptcy. Not only was this referral permitted, see 28 U.S.C. § 157(a), but having the bankruptcy court initially consider this matter made sense from the perspective of judicial economy. At that point, the bankruptcy court had been handling Nathan’s bankruptcy for more than five years. More relevant here, the bankruptcy court had conducted a trial concerning Nathan’s liability to the plaintiffs. Consequently, when the bankruptcy court recommended awarding punitive damages -11- against Vertical Group without first having an evidentiary hearing, the court was well acquainted with the facts and the issues at stake. Indeed, the bankruptcy court already had awarded actual and punitive damages against Nathan in the same amount that it ultimately recommended awarding against Vertical Group. When Kathleen filed objections with the district court regarding the recommended award of punitive damages, she did not raise the need for an evidentiary hearing. Instead, she merely asserted, as she does here, that the evidence from the bankruptcy adversary proceeding against Nathan was insufficient to justify the imposition of punitive damages against Vertical Group. Kathleen therefore appeared to recognize, as we do here, that the bankruptcy court’s adjudication of the plaintiffs’ adversary proceeding provided the bankruptcy court with a basis to consider whether punitive damages were justified and in what amount. See James, 6 F.3d at 310-11. We thus find no abuse of discretion in awarding punitive damages without an evidentiary hearing.