In re: E.C. Morris Corp.

Filing

OPINION filed : AFFIRMED, decision fully precedential pursuant to local BAP rule 8013-1(b). Marian F. Harrison (authoring judge), Guy R. Humphrey and Joan A. Lloyd, Bankruptcy Appellate Panel Judges.

Case: 14-8016

Document: 17-1

Filed: 12/10/2014

Page: 1

ELECTRONIC CITATION: 14 FED App.0010P (6th Cir.)
File Name: 14b0010p.06

BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: E.C. MORRIS CORP.,
Debtor.
______________________________________

)
)
)
)

No. 14-8016

Appeal from the United States Bankruptcy Court
for the Northern District of Ohio at Akron
No. 12-50982
Decided and Filed: December 10, 2014

Before: HARRISON, HUMPHREY, and LLOYD, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ON BRIEF: Ronald N. Towne, LEIBY, HANNA, RASNICK, TOWNE, EVANCHAN,
PALMISANO & HOBSON, LLC, Akron, Ohio, for Appellants. Rodd A. Sanders, RODERICK
LINTON BELFANCE, LLP, Akron, Ohio, Matthew R. Duncan, BUCKINGHAM DOOLITTLE &
BURROUGHS, LLC, Akron, Ohio, for Appellees.
____________________
OPINION
____________________
MARIAN F. HARRISON, Bankruptcy Appellate Panel Judge.
ECM Chemicals, LLC, and Edward C. Morris (“Appellants”) appeal the order of the United
States Bankruptcy Court for the Northern District of Ohio (“Bankruptcy Court”) denying their
Motion to Enforce Order Approving Compromise of Claims. Specifically, the Appellants seek to

Case: 14-8016

Document: 17-1

Filed: 12/10/2014

Page: 2

stop Ergon Refining, Inc., and Rentwear, Inc. (“Appellees”)1 from pursuing successor liability claims
against them based on the Chapter 7 Trustee’s compromise of the estate’s claims against the
Appellants. For the reasons that follow, the Panel AFFIRMS the Bankruptcy Court’s denial of the
Appellants’ motion.

I. ISSUE ON APPEAL
The issue in this case is whether the Bankruptcy Court correctly denied the Appellants’
motion for lack of jurisdiction.

II. JURISDICTION AND STANDARD OF REVIEW
The United States District Court for the Northern District of Ohio has authorized appeals to
the Panel, and no party has timely elected to have this appeal heard by the district court. 28 U.S.C.
§ 158(b)(6), (c)(1).

A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C.
§ 158(a)(1). For purposes of appeal, a final order “ends the litigation on the merits and leaves
nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489
U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citation omitted). “‘[T]he concept of finality applied
to appeals in bankruptcy is broader and more flexible than the concept applied in ordinary civil
litigation.’” Millers Cove Energy Co., Inc. v. Moore (In re Millers Cove Energy Co., Inc.), 128 F.3d
449, 451 (6th Cir. 1997) (citations omitted). “This finality requirement is considered ‘in a more
pragmatic and less technical way in bankruptcy cases than in other situations . . . . In bankruptcy
cases, a ‘functional’ and ‘practical’ application [of Section 158] is to be the rule.’” Lindsey v.
O’Brien, Tanski, Tanzer & Young Health Care Providers of Connecticut (In re Dow Corning Corp.),
86 F.3d 482, 488 (6th Cir. 1996) (citations omitted).

1

On August 26, 2014, the Appellants filed a notice of settlement with Rentwear, Inc.
Accordingly, the only remaining appellee is Ergon Refining, Inc.
2

Case: 14-8016

Document: 17-1

Filed: 12/10/2014

Page: 3

The Appellees make the argument that the Bankruptcy Appellate Panel lacks jurisdiction
because the order dismissing the adversary proceeding was “without prejudice.” However, the
Appellants are not appealing the order dismissing the adversary. Instead, the Appellants are
appealing the Bankruptcy Court’s denial of their “Motion to Enforce Order Approving Compromise
of Claims” based on a lack of subject matter jurisdiction, and the denial of a motion for lack of
jurisdiction constitutes a final order and may be appealed as of right. See Thickstun Bros. Equip.
Co., Inc. v. Encompass Servs. Corp. (In re Thickstun Bros. Equip. Co., Inc.), 344 B.R. 515, 517
(B.A.P. 6th Cir. 2006) (citation omitted).2

Questions of subject matter jurisdiction are reviewed de novo. Todd v. Weltman, Weinberg
& Reis Co., L.P.A.,434 F.3d 432, 435 (6th Cir. 2006) (citation omitted). “Under a de novo standard
of review, the reviewing court decides an issue independently of, and without deference to, the trial
court’s determination.” Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798,
800 (B.A.P. 6th Cir. 2007) (citation omitted). Essentially, the reviewing court decides the issue “as
if it had not been heard before.” Mktg. & Creative Solutions, Inc. v. Scripps Howard Broad. Co. (In
re Mktg. & Creative Solutions, Inc.), 338 B.R. 300, 302 (B.A.P. 6th Cir. 2006) (citation omitted).

III. FACTS
In 2009, the Debtor’s financial problems were significant. To address the issue, Appellant
Edward C. Morris (“Mr. Morris”), principal of the Debtor, formed Appellant ECM Chemicals, LLC
(“ECM Chemicals”), on January 1, 2010. Next, Mr. Morris had the Debtor grant him a security
interest in its assets and recorded the financing statement with the Secretary of State on January 5,
2010. On January 10, 2010, Mr. Morris executed a bill of sale and assignment transferring his
security interest in the Debtor’s assets to ECM Chemicals. The Debtor continued to operate at a
loss, and on July 27, 2010, the Debtor, through Mr. Morris, voluntarily surrendered its assets to ECM

2

At the hearing, the Bankruptcy Court and the parties discussed the fact that the order
dismissing the adversary was without prejudice. At the end of the discussion, the Bankruptcy Court
stated “[b]ut right now I’ve gone way – way too far into the weeds. This matter came before me on
a motion to, quote, enforce order approving compromise of claims. . . .”
3

Case: 14-8016

Document: 17-1

Filed: 12/10/2014

Page: 4

Chemicals and was dissolved on January 4, 2011. Prior to bankruptcy, the Appellees filed state court
actions against the Debtor and the Appellants, as well as unnamed John Does, alleging successor
liability, fraudulent transfer, fraud, and breach of fiduciary duty, all under state law. The Debtor filed
a voluntary Chapter 7 petition on March 26, 2012.

During the bankruptcy, the Chapter 7 Trustee filed an adversary proceeding against the
Appellants and another defendant, Edwin L. Nowlan (“Mr. Nowlan”), a lien holder against the
Debtor, to avoid fraudulent transfers. The Chapter 7 Trustee settled with the Appellants and
Mr. Nowlan, and after evidentiary hearings, the Bankruptcy Court approved the settlement. The
order approving the compromise “authorized, empowered, and directed” the Chapter 7 Trustee to
cause a dismissal of the adversary proceeding with prejudice. The Chapter 7 Trustee then submitted,
and the Bankruptcy Court entered, an order dismissing the adversary “without prejudice.” The
adversary was then closed on July 9, 2013. The Chapter 7 Trustee filed his Final Account and
Distribution Report on November 4, 2013. The Debtor, as a corporation, did not receive a discharge.

After the bankruptcy proceedings were completed, the Appellees reactivated their respective
state court litigation against the Appellants.3 On January 9, 2014, the Appellants filed a Motion to
Enforce Order Approving Compromise of Claims, asking the Bankruptcy Court to enjoin the
Appellees from pursuing their state law claims against the Appellants because such claims were
barred by res judicata. The Appellants asserted that the Bankruptcy Court had jurisdiction to provide
the relief requested pursuant to 11 U.S.C. § 105. In addition, the Appellants argued that Stern v.
Marshall, ___ U.S. ___, 131 S. Ct. 2594 (2011), did not prevent the relief sought because the state
law claims deal directly with the Debtor’s assets and because the Bankruptcy Court had jurisdiction
to take the necessary action to ensure that such claims do not undermine the Bankruptcy Court’s
order and the integrity of the bankruptcy process.

3

At the hearings in the Bankruptcy Court and in the pleadings filed with the B.A.P., the
Appellees have maintained that they are only pursuing the successor liability claims in the state court
litigation.
4

Case: 14-8016

Document: 17-1

Filed: 12/10/2014

Page: 5

The Bankruptcy Court held a hearing on the Motion to Enforce, adjourning to give the parties
the opportunity to brief the jurisdictional issues. At a second hearing, the Bankruptcy Court denied
the Motion to Enforce, stating:
With respect to the relief sought in the motion to enforce, I find that the Court
is not authorized to enter final judgment. Among the factual findings that I make in
support of this are that this was a Chapter 7 case of a corporate entity in which no
discharge was entered. The agreement between the Trustee and the movants today
did not include the respondents. The respondents’ litigation was pending prior to the
bankruptcy filing. And the – that litigation raises state law claims over which there
would not have been federal – any federal jurisdiction absent a bankruptcy case.
Under these circumstances, based both on the Stern case and, unfortunately
for [the movants’ counsel], the Law case, which was decided just yesterday and
addressed the scope of Section 105 in bankruptcy proceedings, I do not believe this
Court to have jurisdiction to enter a final judgment on this motion.
....
Based on the foregoing, the Court determines that the motion before me today
should be denied.
The Appellants appealed the Bankruptcy Court’s denial of the Motion to Enforce.

IV. DISCUSSION
A. “RELATED TO” JURISDICTION
Bankruptcy courts have subject matter jurisdiction over proceedings “arising under title 11,
or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). The most expansive of these
categories is “related to” jurisdiction. Therefore, only a determination of whether the matter is
“related to” the bankruptcy is necessary in assessing 28 U.S.C. § 1334(b) jurisdiction. Michigan
Emp’t Sec. Comm’n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1141 (6th
Cir. 1991) (citation omitted).

A civil proceeding is “related to” a bankruptcy case where “the outcome of that proceeding
could conceivably have any effect on the estate being administered in bankruptcy.” In re Dow

5

Case: 14-8016

Document: 17-1

Filed: 12/10/2014

Page: 6

Corning Corp., 86 F.3d at 489 (citation and internal quotation marks omitted). A claim is “related
to” the bankruptcy proceeding “if the outcome could alter the debtor's rights, liabilities, options, or
freedom of action (either positively or negatively) and which in any way impacts upon the handling
and administration of the bankrupt estate.” Id. See also Celotex Corp. v. Edwards, 514 U.S. 300,
308 n.6, 115 S. Ct. 1493, 1499 (1995) (“[C]ases make clear that bankruptcy courts have no
jurisdiction over proceedings that have no effect on the estate of the debtor.”).

In the present case, the pending pre-petition state lawsuits against the non-debtor Appellants
for successor liability are not directed at the Debtor or the Debtor’s estate, and most importantly, will
have no impact on the bankruptcy estate. The Debtor’s bankruptcy has been fully administered by
the Chapter 7 Trustee, who has filed a Zero Bank Statement/Final Account indicating that there are
no estate assets remaining. Accordingly, the Bankruptcy Court correctly held that it did not have
subject matter jurisdiction. 4

The Court notes that the Chapter 7 Trustee might have pursued these state court lawsuits as
property of the estate or through his rights and powers under 11 U.S.C. § 544 while the bankruptcy
case was pending. See Hatchett v. United States, 330 F.3d 875, 886 (6th Cir. 2003) (“[T]he trustee
has the exclusive right to bring an action for fraudulent conveyance during the pendency of the
bankruptcy proceedings”); Rieser v. Hayslip (In re Canyon Sys. Corp.), 343 B.R. 615, 659 (Bankr.
S.D. Ohio 2006) (“Allowing a bankruptcy trustee to pursue general creditor claims ‘ensures that the
estate will not be wholly or partially consumed for the benefit of one creditor, or even a small
number of creditors.’” (citation omitted)). However, once the bankruptcy case was closed, these
lawsuits were no longer the Chapter 7 Trustee’s to pursue or administer. Hatchett, 330 F.3d at 886
(citations omitted) (Once the bankruptcy proceedings are over, an individual creditor may pursue
state law claims for fraudulent conveyance.). The Chapter 7 Trustee either settled and thus,

4

There is no need to determine whether this is a core or non-core proceeding under 28 U.S.C.
§ 157 because “§ 157 only comes into play if the court first determines it has jurisdiction under
§ 1334. Section 157 does not create jurisdiction when it does not exist under § 1334.” Johnston v.
City of Middletown (In re Johnston), 484 B.R. 698, 713 (Bankr. S.D. Ohio 2012).
6

Case: 14-8016

Document: 17-1

Filed: 12/10/2014

Page: 7

administered the claims in these state lawsuits, or he abandoned them. Either way, the bankruptcy
case is closed, there are no assets to administer, including these pre-petition state court lawsuits, and
therefore, the Bankruptcy Court no longer has jurisdiction. See Travers v. Bank of Am., N.A. (In re
Travers), 507 B.R. 62, 72 (Bankr. D.R.I. 2014) (citation omitted) (“Jurisdiction of bankruptcy courts
being temporal, the ‘related to’ jurisdiction of this Court over . . . claims evaporated upon the
Trustee's abandonment of the claims, the Debtor's discharge, and the closure of the case.”); SG &
Co. Ne., LLC v. Good, 461 B.R. 532, 539-40 (Bankr. N.D. Ill. 2011) (jurisdiction lapses when
property is transferred out of the estate).

B. 11 U.S.C. § 105(a)
Nor could the Bankruptcy Court rely on 11 U.S.C. § 105(a) as a basis for jurisdiction to
enforce its order approving the compromise and settlement between the Chapter 7 Trustee and the
Appellants. The Chapter 7 Trustee did not raise issues of state law successor liability in the
adversary, and the Appellees were not parties to the adversary. In In re Wolverine Radio, the Sixth
Circuit rejected the proposition that a provision of the Bankruptcy Code could serve as an additional
grant of jurisdiction, stating that “even were we to view this case solely as a proceeding to obtain an
order pursuant to section 105(a), the power of the bankruptcy and district courts to hear this case is
limited to the grant of jurisdiction in 28 U.S.C. § 1334.” 930 F.2d at 1140 n.13. Here, the
Appellants have paid the Chapter 7 Trustee $25,000 in settlement, the Chapter 7 Trustee has
distributed all available assets, and there is nothing left for the Bankruptcy Court to enforce. With
nothing to enforce, 11 U.S.C. § 105(a) does not create jurisdiction. See Law v. Siegel, ___ U.S. ___,
134 S. Ct. 1188, 1194 (2014) (“[W]hatever equitable powers remain in the bankruptcy courts must
and can only be exercised within the confines of the Bankruptcy Code.” (internal quotations and
citations omitted)).

C. ANTI-INJUNCTION ACT
Finally, the Bankruptcy Court correctly denied the Appellants’ request to enjoin the state
court proceedings. Pursuant to the Anti-Injunction Act, “[a] court of the United States may not grant
an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress,
7

Case: 14-8016

Document: 17-1

Filed: 12/10/2014

Page: 8

or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” 28 U.S.C.
§ 2283. The core message of the Anti-Injunction Act is one of respect for state courts. The Act
broadly directs “that state courts shall remain free from interference by federal courts. . . .” Atl. Coast
Line R.R. Co. v. Bhd. Locomotive Eng’rs, 398 U.S. 281, 282, 90 S. Ct. 1739 (1970). The
exceptions, designed for important purposes, “are narrow and are ‘not [to] be enlarged by loose
statutory construction.’” Choo v. Exxon Corp., 486 U.S. 140, 146, 108 S. Ct. 1684, 1689 (1988)
(citation omitted). “Any doubts as to the propriety of a federal injunction against state court
proceedings should be resolved in favor of permitting the state courts to proceed. . . .” Atl. Coast
Line, 398 U.S. at 297.

The relitigation exception to the Anti-Injunction Act is designed to apply the concepts of
claim or issue preclusion. Choo, 486 U.S. at 147. This exception is to be strictly and narrowly
construed since “[d]eciding whether and how prior litigation has preclusive effect is usually the
bailiwick of the second court,” which is the state court in this instance. See Smith v. Bayer Corp.,
___ U.S. ___, 131 S. Ct. 2368, 2375 (2011) (citation omitted) (emphasis in original). “For that
reason, every benefit of the doubt goes toward the state court; an injunction can issue only if
preclusion is clear beyond peradventure.” Id. at 2376 (internal citation omitted). In the present case,
there is no reason the state court should not determine the preclusive effect of the Bankruptcy
Court’s order upon the state law claims, just as bankruptcy courts are regularly called upon to
determine the preclusive effect of state court judgments in bankruptcy. Accordingly, injunctive relief
is not appropriate in this case.

V. CONCLUSION
For the reasons stated, the Bankruptcy Court’s order denying the Appellants’ Motion to
Enforce Order Approving Compromise of Claims is AFFIRMED.

8