Opinion ID: 3032226
Heading Depth: 3
Heading Rank: 1

Heading: the safeco/adm dispute

Text: Bankruptcy court jurisdiction is governed by 28 U.S.C. §§ 1334 and 157. Section 1334(a) of Title 28 grants original and exclusive jurisdiction of all bankruptcy cases to the district court. Educ. Credit Mgmt. Corp. v. McAlpin (In re McAlpin), 263 B.R. 881, 884 (B.A.P. 8th Cir. 2001) aff’d 278 F.3d 866 (8th Cir. 2002). Subsection (b) of § 1334 provides that “the district court 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. 28 U.S.C. § 1334 (b). Thus, aside from the bankruptcy case itself, a bankruptcy court has jurisdiction in three categories of proceedings: those that “arise under title 11,” those that “arise in cases under title 11,” and those “related to cases under title 11.” Continental Nat’l Bank of Miami v. Sanchez (In re Toledo), 170 F.3d 1340, 1344 (11th Cir. 1999). District courts may refer all cases and any or all proceedings arising under title 11 to the bankruptcy judges for the district. See 28 U.S.C. § 157; Specialty Mills, Inc. v. Citizens, 51 F.3d 770, 773 (8th Cir. 1995). A district court order of reference is in place in the Western District of Missouri. Under Title 28, however, jurisdiction does not equate with the right to finally decide the issues. In response to the Supreme Court’s decision in Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), Congress circumscribed those disputes which a bankruptcy judge could finally decide. Section 157 of Title 28 divides civil proceedings in a bankruptcy case into two categories: (1) core proceedings which may be decided by a bankruptcy judge, and (2) non-core proceedings which must be decided by the district court on review of 13 recommendations from the bankruptcy court. 28 U.S.C. § 157(b) and (c). Core proceedings include, but are not limited to–(A) matters concerning the administration of the estate; . . . (M) orders approving the use . . . of property; . . . [and] (O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims.” 28 U.S.C. § 157(b)(2)(A), (M) and (O). “‘In general, a core proceeding is a legal dispute between parties in interest to a bankruptcy case, one of whom is almost always the debtor.’” Abramowitz v. Palmer, 999 F.2d 1274, 1276 (8th Cir. 1993)(quoting In re Marine Iron & Shipbuilding Co., 104 B.R. 976, 980 (D. Minn. 1989)). “Non-core, related proceedings are those which do not invoke a substantive right created by federal bankruptcy law and could exist outside a bankruptcy, although they may be related to a bankruptcy.” Specialty Mills, 51 F.3d at 773. Stressing the fact that ADM cannot recover against Safeco without establishing that Debtor has breached the Purchase Agreement by not providing Safeco with the required surety bond, Safeco argues that the dispute between it and ADM is not only within the jurisdiction of the bankruptcy court but is a core proceeding. It asserts that the bankruptcy court has jurisdiction to determine the relative rights and obligations of all three parties (principal, surety and obligee) to the ADM bond pursuant to §§ 157(A), (M) and (O) of Title 28. Safeco further contends that its liability will necessarily affect the claims against Debtor and will result in an adjustment of the debtor-creditor relationship between Safeco and Debtor and between ADM and Debtor. In addition, Safeco contends that pursuant to the indemnity agreements, Debtor is contractually bound to Safeco to indemnify it for any loss which it may incur by reason of having issued the ADM bond. Any determination of Debtor’s , and necessarily Safeco’s, liability to ADM as a result of the adjudication of Safeco’s 14 declaratory judgment action will fix and liquidate Safeco’s claim against Debtor’s bankruptcy estate. Even though the surety bond is not considered property of the estate, Safeco asserts that the adjudication of the declaratory judgment action will necessarily affect the administration of the estate, involve the use of Debtor’s property, and affect the adjustment of the relationships of Debtor with its creditors. Alternatively, Safeco argues that its declaratory judgment action against ADM is related to Debtor’s bankruptcy because resolution of that dispute will have an impact on the administration of the bankruptcy estate. Conversely, ADM asserts that there is no relation between the Safeco/ADM dispute over Safeco's actions relating to cancellation of the bond and the Safeco/Debtor dispute over whether Debtor breached the Purchase Agreement by failing to provide ADM with a surety bond. Clearly, the dispute between ADM and Safeco is neither a case arising under nor arising in a case under title 11. It is not a proceeding arising under title 11 because it does not invoke substantive right created by bankruptcy law. See e.g., National City Bank v. Coopers and Lybrand, 802 F. 2d 990, 993 (8th Cir. 1986); Glinka v. Federal Plastics Mf. (In re Housecraft Indus. USA, Inc.), 310 F.3rd 64, 69 (2nd Cir. 2002); Wood v. Wood (Matter of Wood), 825 F.2d 90, 96 (5th Cir.1987). Safeco’s cause of action is also not a “proceeding arising in a case under title 11 because it is not an action that “would have no existence outside of the bankruptcy.” See e.g., Grausz v. Englander, 321 F.3d 467, 471 (4th Cir. 2003); Frelin v. Oakwood Homes Corp., 292 B.R. 369, 376 (Bankr. E.D. Ark. 2003). The sole question is whether it is related to a case under title 11. The authority on which most courts rely in determining whether a non-core proceeding is sufficiently related to the bankruptcy to confer jurisdiction on the bankruptcy court is Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984), overruled on other grounds by Things Remembered, Inc. v. Petrarca, 516 U.S. 124 15 (1995). In Pacor the Third Circuit held that a dispute between an injured party and Pacor, the supplier of an asbestos related product, was not sufficiently related to the asbestos manufacturer’s bankruptcy case to sustain federal bankruptcy court jurisdiction. In so ruling, the court articulated a test that has come to be adopted by numerous other circuits. See New Horizon of NY LLC. v. Jacobs, 231 F.3d 143, 151 n.18 (4th Cir. 2000). The Eighth Circuit adopted the Pacor “conceivable effect” test in National City Bank v. Coopers & Lybrand, 802 F.2d 990, 994 (8th Cir. 1986) and applied it again in Dogpatch Properties, Inc. v. Dogpatch U.S.A., Inc. (In re Dogpatch U.S.A., Inc.), 810 F.2d 782 (8th Cir. 1987): [T]he test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. . . . An action is related to bankruptcy if the outcome 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 bankrupt estate. Dogpatch, 810 F.2d at 786 (citing Pacor, 743 F.2d at 994). “On the other hand, 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 scope of section 1471(b) [the predecessor to § 1334]. Judicial economy itself does not justify federal jurisdiction.” Pacor, 743 F.2d at 994 “‘Jurisdiction over nonbankruptcy controversies with third parties who are otherwise strangers to the civil proceeding and to the parent bankruptcy does not exist.’ In re Asbestos Litigation, 271 B.R. 118, 121 (S.D.W. Va. 2001)(quoting In re Haug, 19 B.R. 223, 224-25 (Bankr. D. Ore. 1982)). In National City Bank, the debtor’s note holders had been paid most of their claims in the debtor’s reorganization plan, but had specifically reserved their rights 16 against the debtor’s professionals. The note holders then sued the debtor’s accounting firm alleging negligence and other claims under state law. The circuit court affirmed the district court’s determination that it did not have jurisdiction over the action because the action neither arose in or under the bankruptcy case and was not related to it. In doing so the court referenced the Pacor conceivable effect test and noted its agreement with the Pacor analysis. National City Bank, 802 F.2d at 994. Shortly thereafter the Eighth Circuit decided Dogpatch. Dogpatch involved the fallout from a bankruptcy court approved sale gone bad. When the purchaser of the debtor’s mortgaged property sued the debtor, the mortgagees and the guarantors on the mortgage, the mortgagee filed a counterclaim against the purchaser and a third party claim against the guarantors on the mortgage debt. The Eighth Circuit, reciting the Pacor conceivable effect test, affirmed the district court’s determination that it had jurisdiction, not only of the dispute with the Debtor, but also of the dispute between the purchaser, the mortgagee and the guarantors because their liability, lack thereof, or inability to pay could trigger the debtor’s liability and duty to pay, thus possibly disrupting the debtor’s reorganization. Dogpatch, 810 F.2d at 786. Eighth Circuit jurisprudence on this jurisdictional issue was further developed in National Union Fire Insurance Company of Pittsburgh Pa v. Titan Energy, Inc., 837 F.2d 325 (8th Cir. 1988). In Titan Energy, the court held that a dispute between the debtor and its insurer involving the insurer’s claim that the products liability insurance policies written by National Union to protect purchasers of the debtor’s plants against claims should be rescinded were related to the bankruptcy case, making clear once again that the bankruptcy court’s jurisdiction is broad. The Eighth Circuit further held that although “[i]t remains to be seen whether, and to what extent, National Union's action will affect Titan's estate . . . even a proceeding which portends a mere contingent or tangential effect on a debtor's estate meets the broad jurisdictional test articulated in Pacor.” Titan Energy, 837 F.2d at 330. 17 This broad view of jurisdiction was recently utilized by the Supreme Court in Celotex Corp. v. Edwards, 514 U.S. 300 (1996). In Celotex the Supreme Court held that a bankruptcy court had jurisdiction to issue an injunction against plaintiffs who had obtained a judgment against the debtor and were seeking to execute on a supersedeas bond the debtor had filed while appealing from the adverse ruling. Celotex, 514 U.S. at 305. The dispute was one between nonparties to the bankruptcy case, the plaintiffs in the products action and the surety on the supersedeas bond. The bond and its proceeds were manifestly not property of the bankruptcy estate. The debtor’s collateral which secured payment of the supersedeas bond was, however, both property of the estate and in jeopardy of foreclosure if the plaintiffs were able to collect from the surety. The Supreme Court held that under these circumstances, and using the Pacor conceivable effect test, the bankruptcy court had jurisdiction to issue the injunction because the status of the bonds was an issue related to Celotex’s bankruptcy. Id. at 308. While the execution on the bonds did not directly involve Celotex, the court nonetheless held the arrangement between Celotex and the surety provided a sufficient basis for jurisdiction. The court noted that loss of the assets securing the bond would have “a direct and substantial adverse effect on Celotex’s ability to undergo a successful reorganization” and noted that the fact that Celotex had filed for reorganization under Chapter 11, rather than liquidation, made jurisdiction more likely because “jurisdiction of bankruptcy courts may extend more broadly in [a Chapter 11 case] than in [a Chapter 7] case.” Id. at 309. [T]he decision expands the bankruptcy court's power, asserting that a proceeding against a non-debtor insurance company is sufficiently related to the debtor's bankruptcy to come within the court's limited jurisdictional grant. The Court upheld the injunction in Celotex even though the party opposing the injunction argued that the surety's funds to pay the judgment were not property of the bankruptcy estate. The evolution of bankruptcy jurisdiction can be viewed on a continuum from 18 the early days of bankruptcy law, where possession or consent of the property was a prerequisite for jurisdiction, to Celotex, where possession and consent are not required as long as the debtor can articulate a threat to the administration of the bankruptcy estate. Daniel McCloskey, Celotex Corp. v. Edwards: The Supreme Court Expands the Jurisdiction of Bankruptcy Courts by Barring Collateral Attacks Against Their Injunctions, But Some Questions Remain Unanswered, 24 PEPP. L. REV. 1039, 107071 (1997); see also, New Horizon, supra, 231 F.3d at 150 (under Celotex the language of Section 1334 (b) must be read to give district courts(and bankruptcy courts under Section 157 (a)) jurisdiction over more than simply proceedings involving the property of the debtor or the estate, the case need not be against the debtor or his property). In this case, Debtor has articulated the requisite threat to the administration of the bankruptcy estate. The dispute between ADM and Safeco is not merely one in which ADM is seeking to obtain the amount of the bond from the surety. Here, it was Debtor’s obligation, not that of ADM, to provide a suitable bond in the proper amount. Safeco’s only obligation was to pay under the terms of the bond it issued. The dispute between Safeco and ADM necessarily implicates Debtor since ADM cannot recover from Safeco without establishing that Debtor breached its obligations under the Purchase Agreement and while Debtor, not being a party to the Illinois District Court proceedings, may not be bound by decisions made there, that litigation will necessarily trigger ADM’s rights to file a claim in the bankruptcy case for the penal sum of five million dollars, a significant sum in any bankruptcy case. If Safeco does so and successfully establishes a right to an administrative expense, Debtor’s opportunity to reorganize may be threatened and other creditors will recover less in the case. For all of these reasons, it is clear to us that the resolution of the dispute between ADM and Safeco meets the jurisdictional threshold test of having a conceivable effect on the bankruptcy case. We disagree with the Appellee’s argument that there is no jurisdiction because the claim is merely contingent or 19 subject to further suit. Titan Energy very much suggests otherwise. See also Lindsey v. O’Brien, Tanski, Tanzer and Young Health Care Prov. (In re Dow Corning Corp.), 86 F.3d 482, 494 (6th Cir. 1996)(“The potential for [the debtor] being held liable to the nondebtors in claims for contribution and indemnification, or vice versa, suffices to establish a conceivable impact on the estate in bankruptcy”). We think Celotex dictates this result and that the bankruptcy court too narrowly distinguished it. The fact that, in Celotex, the insurer held security upon which it could levy if the supersedeas bond was paid was important to the Supreme Court’s decision. Here too, while not exactly comparable, Safeco has a direct claim against Debtor should it be forced to pay the penal amount of the bond and, because of the special facts here, Safeco will likely have an administrative expense claim in the case. We further believe the facts of this case to be closer to those in Dogpatch and Titan Energy and not at all comparable, as Appellee’s urge, to National City Bank. This is not a case such as National City Bank where the nonparties to the dispute had specifically reserved their rights to litigate remaining liability in a nonbankruptcy forum. As was the case in Dogpatch, the resolution of the Safeco/ADM dispute will necessarily involve a determination of Debtor’s liability to ADM and will trigger Debtor’s liability to Safeco for indemnity, as a consequence of which there is a conceivable affect on the bankruptcy reorganization. Given the developments in the law, we also conclude that the bankruptcy court’s near complete reliance on Foley Co. v. Aetna Casualty & Surety Co. (In re S & M Const., Inc.), 144 B.R. 855 (Bankr. W.D. Mo. 1992), was misguided. ADM asserts that we should be guided by the Third Circuit’s decision in In re Federal-Mogul Global, Inc., 300 F.3d 368 (3rd Cir. 2002). In Federal-Mogul the court ruled that a district court had not acted improperly in denying a motion to transfer thousands of asbestos related claims by injured parties against suppliers to 20 the bankruptcy court where the manufacturer’s bankruptcy was pending nor in remanding such actions to the state courts in which they were originally filed. Appellees point to language in the decision where the court states that “[the ]test articulated in Pacor for whether a lawsuit could ‘conceivably have an effect on the bankruptcy proceeding inquires whether the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit.'” FederalMogul, 300 F.3d at 382. According to ADM, since Safeco will not be able to establish its indemnity claim against Debtor without a separate lawsuit, the ADM/Safeco lawsuit is necessarily not related to the bankruptcy case. ADM's reliance on Federal-Mogul is misplaced for several reasons. First, it should be noted that, and as the court itself pointed out, the decision in FederalMogul is directly at odds with the Sixth Circuit’s decision in Dow Corning where the court ruled that similar pending lawsuits against that debtor should be allowed to proceed in bankruptcy court even though the contribution claims had to be litigated at a later time. Dow Corning, 86 F.3d at 494. Second, and most importantly, while the Third Circuit discussed the Pacor ruling at length and gave every indication that it would make the same ruling if the matter came before it, the court specifically did not decide the jurisdictional issue.4 The discussion of Pacor was, therefore, dicta, strong though it was. Moreover, we have difficulty squaring the dicta in FederalMogul with the Eighth Circuit’s decisions on this subject. Third, the case is contrary to a number of other decisions on the same issue. See In re WorldCom, Inc. Securities Litigation, 293 B.R. 308, 320 (S.D.N.Y. 2003)(“jurisdiction over a third party action exists where a claim for indemnification or contribution arising from that litigation has a conceivable effect on a bankruptcy proceeding.”); Michigan 4 The court in Federal-Mogul stated that “[w]e, however, remain a step away from reaching the merits of whether the District Court has ‘related to’ jurisdiction. Instead, because our appellate jurisdiction is at issue, we review the District Court's denial of Defendants' transfer motion in the context of deciding whether to grant a writ of mandamus.” Federal-Mogul, 300 F.3d at 384. 21 Employment Sec. Comm’n v. Wolverine Radio Co., Inc.(In re Wolverine Radio Co.), 930 F.2d 1132, 1143 (6th Cir. 1991)(holding that a contractual indemnification provision supported jurisdiction even though the debtor would not be affected until and unless [the third party] invoked the indemnification provision); Arnold v. Garlock, Inc., 278 F.3d 426, 440 (5th Cir. 2001) (generally approving of related to jurisdiction for contribution claims in the mass tort context, but declining to enter stay of the remand of third-party actions where the removing defendant had not shown a likelihood of success on any contribution claim); Randall & Blake, Inc. v. Evans (In re Canion), 196 F.3d 579, 586-87 (5th Cir. 1999) (third party litigation that might decrease the claims against the estate is related to bankruptcy); A.H. Robins v. Piccinin, 788 F.2d 994, 1001 (4th Cir. 1986) (actions are related to bankruptcy when brought against officers of debtor who may be entitled to indemnification under debtor's insurance policy). And finally, the defendants in Federal-Mogul (as did the Defendant in Pacor) had claims for contribution that had to be the subject of separate litigation between them and the debtor manufacturer. The initial suits between the claimants and the suppliers would not necessarily bring into question factual issues regarding the liability of the manufacturer. Nor did the claimants, like Safeco, have the immediate right to make a claim for an administrative expense in the bankruptcy case should they be found liable in the underlying lawsuits. For all these reasons, we decline to follow the court's reasoning in Federal Mogul.