Opinion
Case No 01-31687-T, Adv. Pro. No. 01-3115-T
December 19, 2001
MEMORANDUM OPINION AND ORDER
Hearing was held on October 9, 2001, on plaintiff's motion to dismiss counterclaim. At the conclusion of hearing, the court took plaintiffs motion under advisement and advised the parties to submit proposed findings of fact and conclusions of law.
After consideration of the argument made at the October 9, 2001, hearing and review of the proposed findings of fact and conclusions of law, the court will deny plaintiff's motion to dismiss counterclaim.
Procedural History and Facts .
Debtors filed their chapter 7 petition on March 21, 2001, and were discharged on July 5, 2001. Debtors listed Tempay as a secured creditor on their Schedule F in the amount of $186,000.00 for business payroll services. On June 25, Tempay filed adversary proceeding, number 01-3115-T, seeking a determination of non-dischargeability of this debt under 11 U.S.C. § 523(aX2)(A).
Trial on this matter was initially scheduled for December 11, 2001, but has been continued to March 19, 2001.
Debtors are President, Vice President, and sole shareholders of Staffing Advantage, a Virginia company that provided temporary employees to companies. Staffing Advantage was terminated by operation of law effective March 31, 1999, for failure to pay its registration fee. Debtors continued to operate the company personally without the benefit of the corporate shield.
Tempay is an Ohio corporation that provided billing and financing services to Staffing Advantage based on a 1997 funding agreement between the parties. Pursuant to the 1997 agreement, Staffing Advantage provided temporary employees to client, JK Cross, a company whose president and sole shareholder is debtors' son. Tempay sent invoices to JK Cross in Staffing Advantage's name and instructed JK Cross that payments were to be sent to Tempay on a weekly basis. Tempay was to then provide weekly profit checks to Staffing Advantage after deducting payroll costs and its fees. There was a time period that passed in which Staffing Advantage had to pay its employees prior to receiving money from its customer, JK Cross. Tempay provided the funds needed during this gap by paying Staffing Advantage's employees who "temped "for JK Cross.
The 1997 funding agreement provided that Staffing Advantage assigned and granted a security interest to Tempay in all of Staffing Advantage's Accounts Receivable and that Tempay is an assignee of all of Staffing Advantage's causes of action against JK Cross for non-payment. On delinquent accounts, Tempay could demand payment directly from Staffing Advantage. Obligations of Staffing Advantage were unconditionally guaranteed by debtors. Tempay claims that JK Cross currently owes Tempay $102,658.00 for these services and that JK Cross, Staffing Advantage and debtors refuse to pay.
On July 25, 2001, debtors filed an answer and counterclaim against Tempay. In the counterclaim, debtors assert that: 1) Tempay acquired confidential, proprietary information about Staffing Advantage's business, including names and identifications of clients and employees, 2) Tempay intentionally interfered in the contractual relations between Staffing Advantage and its clients and employees by encouraging and funding two of Staffing Advantage's employees to set up a competing business to solicit Staffing Advantage's clients and employees, and 3) breach of contractual relations and business expectancies. Debtors seek damages of $100,000.00 to cover lost profits and expense of time and money on lawsuits with former employees and Premier Staffing.
The name of the competing business is Premier Staffing.
On August 15, 2001, Tempay filed a motion to dismiss the counterclaim asserting that: 1) debtors did not pay the required filing fee under Local Rule 7013-1, 2) the counterclaim is not compulsory or permissive as debtors are not real parties in interest concerning matters in the counterclaim, 3) the court does not have subject matter jurisdiction over the counterclaim as it involves purely state law matters in dispute between non-debtor parties, and 4) the ownership of the Staffing Advantage stock has passed to the chapter 7 trustee.
On August 29, 2001, debtors filed a response to the motion to dismiss counterclaim stating that 1) 28 U.S.C. § 1930 does not mandate a filing fee for a counterclaim in an adversary proceeding, 2) debtors were carrying on the normal business of the company as an implied partnership during the two year interim between the formal termination of Staffing Advantage and the creation of Premier Staffing as debtors continued to operate as Staffing Advantage without benefit of the corporate shield, and 3) even if debtors cannot bring the counterclaim in a representative capacity, debtors are entitled to relief in a personal capacity.
Pursuant to the case administrator procedure manual, no filing fee is necessary for counterclaims filed where the debtor is the counter-plaintiff; therefore, no filing fee was due in this matter.
Discussion and Conclusions of Law .
A claim is considered compulsory if it is "ancillary to the main action and need[s] no independent jurisdictional basis." In re Yagow, 53 B.R. 737, 739 (Bankr. D. N.D. 1985). In the instant case, Tempay filed a complaint against debtors asserting that their debt to Tempay is nondischargeable under 11 U.S.C. § 523(a)(4) and (a)(2)(A). Debtors' counterclaim seeks damages for intentional interference with contractual relations and breach of contract on an unrelated matter. Because debtors' counterclaim has virtually no relation to Tempay's complaint, it cannot be considered compulsory.
A claim is considered permissive if it has a nature independent of the main action and has "grounds for jurisdiction independent of that on which the main case is based." Id. (citing By-Products Corp. v. Armen-Berry Co., 668 F.2d 956 (th Cir. 1982)). As mentioned above, debtors' counterclaim is unrelated to the main action. In order to be considered a permissive counterclaim it is now necessary to determine whether this court has independent grounds for jurisdiction under 28 U.S.C. § 157(a): 1) proceedings arising under title 11, 2) proceedings arising in cases under title 11, and 3) proceedings related to cases under title 11. Id. (citing 28 U.S.C. § 157(a)).
In analyzing whether this court may exercise jurisdiction over debtor's counterclaim, the court must first determine whether debtors' counterclaim is considered a core or non-core proceeding. Core proceedings either "arise under title 11 "or "arise in a case under title 11" and are "those proceedings which would not exist in absence of the Bankruptcy Code." Id: see also In re Landbank Equity Corp., 77 B.R. 44, 47 (E.D. Va. 1987). A proceeding "`arising under' title 11 involves a cause of action created or determined by a statutory provision of title 11." In re Green, 241 B.R. 550, 559 (Bankr. N.D. 111. 1999) (citations omitted). Proceedings "arising in" a case under title 11 "although not dependent upon the Bankruptcy Code for a legal basis, would not have existed but for the fact that a bankruptcy case was filed."In re Yagow, 53 B.R. at 739-40; see also In re Marshall, 264 B.R. 609, 627 (C.D. Cal. 2001), In re Green, 241 B.R. at 559.
28 U.S.C. § 157(b)(2) specifically delineates certain items non-exhaustively that are considered core matters, including "counterclaims by the estate against persons filing claims against the estate" and the catch-all "other proceedings affecting the liquidation of the assets of the estate. . . ." 28 U.S.C. § 157(b)(2)(C) (O). While this list could be read expansively, this would seem to violate the limitations set forth by the United States Supreme Court in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), as well as render the requirement of an independent jurisdictional basis meaningless.
The Supreme Court has held that "non-Article III bankruptcy judges could not enter dispositive orders in matters primarily involving non-bankruptcy issues." In re Sturm, 66 B.R. 325, 328 (N.D. Ill. 1986) (referring to Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. at 83-84). Further, the justification for core treatment of counterclaims is to assist in judicial economy and efficiency and recognize that adjudication of a counterclaim that is closely related to a claim "will almost merge into allowance or disallowance of the claim itself." In re Marshall 264 B.R. at 630 (quoting In re Castlerock Properties, 781 F.2d 159, 162 n. 16 (9th Cir. 1986)).
In the instant case, debtors' counterclaim is not a core proceeding as: 1) it is not dependent upon the bankruptcy code, 2) it is not specifically identified as a core proceeding under § 157(b)(2)(B), 3) it existed prior to the filing of the bankruptcy case, 4) it would continue to exist independent of the provisions of title 11, 5) the parties' rights and obligations are not significantly affected as a result of the filing of the bankruptcy case, and 6) the combination of claims will not assist judicial efficiency. In re Seven Springs, Inc., 148 B.R. 815, 817 (Bankr. E.D. Va. 1992).
Lastly, the court must examine whether debtors' counterclaim could be considered a "non-core, otherwise related proceeding" under 28 U.S.C. § 157(c) by determining whether there is "`a reasonable nexus or logical connection between the civil proceeding for which jurisdiction is sought and the parent bankruptcy proceeding.'" In re Yagow, 53 B.R. at 740 (quoting Heagle v. Haug, 19 B.R. 223 (Bankr. D. Ore. 1982)). Non-core, related matters are "those civil proceedings that, in the absence of a petition in bankruptcy, could have been brought in a district or state court." Id. (quoting Matter of Co. Energy Supply. Inc. 728 F.2d 1283 (10th Cir. 1984)); see also In re Sturm, 66 B.R. at 328. "Related to" jurisdiction is broad and covers "any matter that `conceivably' could have an impact on the estate or the administration of it. In re Marshall, 264 B.R. at 626 (quotingIn re Wood, 825 F.2d 90, 93 (5th Cir. 1987)); see also In re Green 241 B.R. at 560 (citations omitted). Regarding matters that are based solely on state law, though tangentially related to a pending bankruptcy proceeding, there must also be an independent basis for federal jurisdiction.
The Fourth Circuit has addressed the issue of core versus non-core proceedings, and appears to follow the strict, less broad view of Northern Pipeline to limit the ability for bankruptcy judges to adjudicate non-core proceedings. The Fourth circuit has determined that "`related proceedings' are those which 1) involve causes of action owned by the debtor that become property of the estate under § 541, and 2) suits between third parties that in one way or another affect the administration of the title 11 case." In re Landbank, 77 B.R. at 48.
It appears that debtors' counterclaim is based solely on state law and exists independently of their bankruptcy case. It could be resolved in a state court according to state law, rather than in bankruptcy court according to bankruptcy or federal law. However, the federal court may exercise jurisdiction over this matter as the parties are from two different states and the amount in controversy exceeds $75,000.00. 28 U.S.C.A § 1332(a) (West 1993 Supp. 2001)
Thus, this court has jurisdiction to hear debtors' counterclaim under 28 U.S.C. § 157(c) as a non-core, otherwise related matter. However, absent the parties' consent to the bankruptcy court exercising jurisdiction over a related proceeding, the court will be limited to submitting proposed findings of fact and conclusions of law for a de novo review by the District Court. 28 U.S.C. § 157(cVn: In re Scialdone. No. 87-02338-N. 1988 U.S. Dist. LEXIS 18645. at *17 (E.D. Va. June 9. 1988): In re Sturm. 66 B.R. at 328 . Alternatively, the District Court, with the consent of the parties, could refer the case back to the Bankruptcy Court for final disposition, subject to appeal. 28 U.S.C. § 157(c)(2) (2001).
The court notes that debtors' counterclaim cause of action may be an asset of the estate that should be prosecuted by the chapter 7 trustee.
Accordingly, IT IS ORDERED that plaintiffs motion to dismiss debtor's counterclaim is denied.