Batiste v. Sun Kona Finance I, LLC

Filing 24

ORDER ADOPTING THE FINDINGS AND RECOMMENDATIONS TO GRANT DEFENDANT'S MOTION TO REFER CASE TO UNITED STATES BANKRUPTCY COURT 18 - Signed by JUDGE ALAN C KAY on 2/26/2016. "For the foregoing reasons, the Court ADOPTS Magistrate Judge Kevin S.C. Chang's January 16, 2016 Findings and Recommendations to Grant Defendant's Motion to Refer Case to United States Bankruptcy Court. This matter is referred to the bankruptcy court for pretrial matters." (emt, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
)
)
)
)
)
)
) Civ. No. 15-00397 ACK-KSC
)
)
)
)
)
)
)
)
)
)
Plaintiffs,
)
)
vs.
)
)
SUN KONA FINANCE I, LLC; JOHN )
AND JANE DOES 1-15; DOE
)
PARTNERSHIPS 1-15; DOE
)
CORPORATIONS 1-15; and DOE
)
ENTITIES 1-15,
)
)
Defendants.
)
)
WILLIAM BATISTE AND VIRGINIA
BATISTE, AS TRUSTEES OF THE
WILLIAM AND VIRGINIA BATISTE
REVOCABLE TRUST DATED JANUARY
23, 2001; RICHARD L. DVORAK
AND TERESA D. DVORAK, AS
TRUSTEES OF THE RICHARD L.
DVORAK LIVING TRUST, JENNIE
ANN FREIMAN, INDIVIDUALLY AND
AS TRUSTEE OF THE JENNIE ANN
FREIMAN PROFIT SHARING PLAN;
STUART H. MENDEL,
INDIVIDUALLY AND AS TRUSTEE
OF THE JENNIE ANN FREIMAN
PROFIT SHARING PLAN,

ORDER ADOPTING THE FINDINGS AND RECOMMENDATIONS TO GRANT
DEFENDANT’S MOTION TO REFER CASE TO UNITED STATES
BANKRUPTCY COURT
For the reasons set forth below, the Court ADOPTS
Magistrate Judge Kevin S.C. Chang’s January 16, 2016 Findings
and Recommendations to Grant Defendant’s Motion to Refer Case to
United States Bankruptcy Court (for pretrial matters), ECF No.
18.

FACTS AND PROCEDURAL HISTORY
I.

Bankruptcy Proceedings
Plaintiffs William Batiste and Virginia Batiste, as

trustees of the William and Virginia Batiste Revocable Trust
dated January 23, 2001; Richard L. Dvorak and Teresa D. Dvorak,
as trustees of the Richard L. Dvorak Living Trust; Jennie Ann
Freiman, individually and as trustee of the Jennie Ann Freiman
Profit Sharing Plan; and Stuart H. Mendel, individually and as
trustee of the Jennie Ann Freiman Profit Sharing Plan
(collectively, “Plaintiffs”) and Defendant Sun Kona Finance, I,
LLC (“SKFI”) were previously creditors in the Chapter 11
bankruptcy case, In re 1250 Oceanside Partners, Case No. 1300353 (Bankr. D. Haw. 2014).

The bankruptcy case arose in

relation to a real estate development called Hokuliʻa (“the
Project”) on the Island of Hawaii.

Motion to Refer Case to

United States Bankruptcy Court (“Motion”), Ex. H (Bankruptcy
Court’s Memorandum of Decision on Request for Administrative
Expense (“Administrative Expense Decision”1)) at 2, ECF No. 5-10;
Compl. ¶ 8, ECF No. 1-1.

Lyle Anderson, who originally

controlled the Project, borrowed money from the Bank of Scotland
to secure financing for the Project.
1

Motion, Ex. H at 2, ECF

The Administrative Expense Decision is also at In re 1250
Oceanside Partners, 519 B.R. 802 (Bankr. D. Haw. 2014).
2

No. 5-10.

Anderson created 1250 Oceanside Partners (“the

Debtors” or “Oceanside”) to act as the developer of the Project.
Id.; Compl. ¶ 11, ECF No. 1-1.
Hokuliʻa.

Plaintiffs purchased lots at

Motion, Ex. H at 2, ECF No. 5-10; Compl. ¶ 8, ECF No.

1-1.
In 2008, the Bank of Scotland declared default and
SKFI purchased over $600,000,000 in debt from the Bank of
Scotland along with the bank’s security interests in the
Project.

Motion, Ex. H at 2-3, ECF no. 5-10; Compl. ¶ 19, ECF

No. 1-1.

Plaintiffs as well as other lot purchasers filed suit

against the developers in connection with the failed Project.
Motion, Ex. H at 3, ECF No. 5-10; Compl. ¶ 18, ECF No. 1-1.
In 2013, the Debtors commenced Chapter 11 bankruptcy
proceedings.
No. 1-1.
no. 5-10.

Motion, Ex. H at 3, ECF no. 5-10; Compl. ¶ 20, ECF

SKFI was a secured creditor.

Motion, Ex. H at 3, ECF

Plaintiffs were unsecured creditors as a result of

the lawsuit filed against the Debtors.

Compl. ¶ 21.

The Debtors and SKFI proposed a Third Amended Joint
Consolidated Plan of Reorganization (“Reorganization Plan”) on
November 22, 2013.

See Motion, Ex. E (Order Confirming Plan

Proponents’ Third Amended Joint Consolidated Plan of

3

Reorganization (the “Confirmation Order”)) at 21, ECF No. 5-7.2
Under the plan, the unsecured creditors, including Plaintiffs,
would receive a pro rata distribution from a fund of $750,000 to
satisfy claims of over $33,000,000.

Id. at 63, 73; Compl. ¶¶

25-26, ECF No. 1-1.
Plaintiffs raised several objections during the
confirmation process, including contesting the amount of the
unsecured creditors’ fund.

Motion, Ex. H at 4, ECF no. 5-10;

Compl. ¶¶ 26-28, ECF No. 1-1.

Plaintiffs also initiated

litigation against SKFI in relation to the Reorganization Plan.
Motion, Ex. H at 4, ECF no. 5-10; Compl. ¶¶ 29-30, ECF No. 1-1.
Less than thirty minutes prior to the hearing on the
plan confirmation, the parties settled.
No. 5-10; Compl. ¶ 33, ECF No. 1-1.

Motion, Ex. H at 5, ECF

The settlement was

memorialized in writing as the Amended Batiste/Davis/Sun Kona
Finance I, LLC Binding Settlement Term Sheet (the “Settlement
Term Sheet”) and was signed by attorneys representing SKFI, the
Debtors, Plaintiffs, and the Davis Creditors.3

Motion, Ex. E at

Because this exhibit is composed of the Confirmation Order
as well as other incorporated documents, which are separately
paginated, the page numbers referred to herein (for this
document only) corresponded to the page numbers indicated on the
CM/ECF filing header, i.e., pages 1-133.
2

3

The Davis Creditors were another group of creditors that
agreed to withdraw their objections to the plan confirmation
(continued . . . )
4

128, ECF No. 5-7.

As part of the Settlement Term Sheet,

Plaintiffs agreed to withdraw their objections to the
Reorganization Plan and dismissed adversary proceedings and
claims against the Debtors, SKFI, and related individuals.

Id.

SKFI also agreed to increase the amount of the unsecured
creditors fund from $750,000 to $1,550,5000.

Id.

The

Settlement Term Sheet additionally included the following
provision, at issue in the instant case: “SKFI and the Davis
Creditors will not oppose an administrative expense claim by the
Bays firm in the amount of $250,000 for making a substantial
contribution to the case.”

See id.

The “Bays firm,” i.e. Bays

Lung Rose & Holma, represented Plaintiffs in the bankruptcy
proceedings and represents Plaintiffs in the instant case.
As a result of the Settlement Term Sheet, the plan was
confirmed without a contested case hearing.
ECF No. 5-10.

Motion, Ex. H at 5,

The bankruptcy court entered its Confirmation

Order on June 2, 2014, which incorporated and confirmed the
Reorganization Plan.

Motion, Ex. E at 2, ECF No. 5-7.

The

Confirmation Order approved the Settlement Term Sheet, made it
“binding on the parties,” and “incorporated [it] into the
[Reorganization] Plan.”

Id. at 17.

The Reorganization Plan, as

( . . . continued)
pursuant to the Settlement Term Sheet.
No. 5-10.
5

Motion, Ex. H at 5, ECF

confirmed by the bankruptcy court in it Confirmation Order,
provided that the bankruptcy court would retain jurisdiction as
follows:
11.1 Retention of Jurisdiction
Notwithstanding the entry of the Confirmation
Order or the occurrence of the Effective Date,
the Bankruptcy Court shall retain jurisdiction
over the Chapter 11 Cases and any of the
proceedings related to the Chapter 11 Cases
pursuant to section 1142 of the Bankruptcy Code
and 28 U.S.C. § 1334 to the fullest extent
permitted by the Bankruptcy Code and other
applicable law, including, without limitation,
such jurisdiction as is necessary to ensure that
the purpose and intent of the Plan is carried
out, provided, however, that the Bankruptcy Court
shall not have jurisdiction with respect to Tax
Claims that arise solely after the Effective
Date. Without limiting the generality of the
foregoing, the Bankruptcy Court shall retain
jurisdiction for the following purposes:
. . . .
(g) resolve any cases, controversies, suits or
disputes that may arise in connection with the
consummation, interpretation or enforcement of
the Plan, or the Confirmation Order, including
the release and injunction provisions set forth
in and contemplated by the Plan and the
Confirmation Order or any Person’s rights arising
under or obligations incurred in connection with
the Plan, or the Confirmation Order;
. . . .
(o) enforce all orders, judgments, injunctions,
releases, exculpations, indemnifications and
rulings issued or entered in connection with the
Chapter 11 Case, or the Plan;
. . . .
6

(q) determine any other matters that may arise in
connection with or relate to the Plan, the
Disclosure Statement, the Confirmation Order, or
any contract, instrument, release, indenture or
other agreement or document created in connection
with the Plan, the Disclosure Statement, or the
Confirmation Order, except as otherwise provided
in the Plan;
(r) determine any other matter not inconsistent
with the Bankruptcy Code.
Id. at 91-95.
After the bankruptcy court issued its Confirmation
Order, Plaintiffs “filed a claim for reimbursement of a portion
of their attorneys’ fees and costs as administrative expenses.”
Motion, Ex. H at 5, ECF No. 5-10.
Plaintiffs’ claim.

Id.

The Debtors objected to

In its Administrative Expense Decision,

the bankruptcy court found that Plaintiffs were “entitled to an
administrative expense claim of $55,000.”4

Id. at 16.

On June 22, 2015, the bankruptcy court issued a Final
Decree, which 1) discharged the Debtors, their representatives,
and their appointed professionals from further duties and
responsibilities, 2) approved the Debtors’ Post-Confirmation
Final Reports; 3) directed that all orders and judgments
continue in effect and operation; and 4) closed the case.

4

In its Administrative Expense Decision, the bankruptcy
court noted that “SKFI (but not the debtors)” had previously
“agreed that it would not oppose a request by the Batiste
creditors for reimbursement of up to $250,000 of attorneys’ fees
plus costs.” Id. at 5.
7

Plaintiffs’ Memorandum in Opposition to Defendant Sun Kona
Finance I, LLC’s Motion to Refer Case to United States
Bankruptcy Court (“Opposition”), Ex. A (Final Decree) at 2, ECF
No. 10-2.
II.

District Court Proceedings
On September 1, 2015, Plaintiffs filed a Complaint and

Demand for Jury Trial in the Circuit Court of the First Circuit
of the State of Hawaii alleging that SKFI breached the
Settlement Term Sheet by opposing Plaintiffs’ request for
$250,000 in attorneys’ fees.

Compl. ¶¶ 49-53, ECF No. 1-1.

Plaintiffs also allege that SKFI falsely represented that it
would not oppose Plaintiffs’ application for the fees “[i]n
order to induce the Plaintiff[s] to dismiss the adversary
proceedings filed in the bankruptcy case, withdraw their
objections to the SKF[I] claim against Oceanside in the
bankruptcy proceedings, and withdraw their objections to the
Reorganization Plan.”

Id. at ¶¶ 55-56.5

In support of these

claims, Plaintiffs allege that “Oceanside - which was under the
control of SKF[I] - filed an opposition to Plaintiffs’
application to recover the attorneys’ fees” and that SKFI’s
attorney “submitted a declaration in opposition” to the

5

Plaintiffs’ Complaint also includes a count for punitive
damages in relation to SKFI’s conduct. Compl. ¶¶ 60-63.
8

application for fees and “appeared at the hearing [on the
application for fees] on behalf of SKF[I], and argued in
opposition to the Plaintiffs’ request.”

Id. ¶¶ 44-47.

SKFI removed the case to this district court on
October 5, 2015.

Notice of Removal, ECF No. 1.

On October 5,

2015, SKFI also filed a Motion to Refer Case to United States
Bankruptcy Court, which Plaintiffs opposed, claiming that the
bankruptcy court lacks jurisdiction.
Opposition, ECF No. 10.
ECF No. 14.

Motion, ECF No. 5;

SKFI filed a Reply on November 6, 2015.

Magistrate Judge Kevin Chang held a hearing on the

Motion on January 12, 2016.

On January 16, 2016, Magistrate

Judge Chang issued Findings and Recommendations to Grant
Defendant’s Motion to Refer Case to United States Bankruptcy
Court (the “F&R”).

ECF No. 18.

The F&R recommends that the

case be referred to the bankruptcy court for pretrial matters
based on Magistrate Judge Chang’s determination that the
bankruptcy court has both statutory and ancillary jurisdiction
over Plaintiffs’ claims.

Id. at 5-19.

On January 29, 2016, Plaintiffs filed Objections to
the F&R (“Obj.”).

ECF No. 21.

Response to Obj. (“Response”).

On February 12, SKFI filed its
ECF No. 23.

STANDARD OF REVIEW
The standard of review applied to a magistrate judge’s
decision depends on whether the decision involves a
9

nondispositive or dispositive matter.

Nondispositive matters

are “pretrial matter[s] not dispositive of a party’s claim or
defense.”

Fed. R. Civ. P. 72(a).

“[A] dispositive matter

involves the determination of the merits of the case or is
critical in shaping the nature of the litigation.”

JJCO, Inc.

v. Isuzu Motors Am., Inc., No. CV 08-00419 SOM/LEK, 2009 WL
3818247, at *2 (D. Haw. Nov. 12, 2009).
Under Local Rule 74.1, any party may appeal from a
magistrate judge’s order determining a non-dispositive pretrial
matter.

The district judge shall consider the appeal and shall

set aside any portion of the magistrate judge’s order found to
be clearly erroneous or contrary to law.

See Local Rule 74.1;

see also Fed. R. Civ. P. 72(a); 28 U.S.C. § 636(b)(1)(A).

Under

the “clearly erroneous” standard, such a ruling must be accepted
unless, after reviewing the entire record, the Court is “left
with the definite and firm conviction that a mistake has been
committed.”

Ass’n of Apartment Owners of Imperial Plaza v.

Fireman’s Fund Ins. Co., Civ. No. 11-00758 ACK-KSC, 2013 WL
2156469, at *2 (D. Haw. May 16, 2013) (quoting United States v.
Hinkson, 585 F.3d 1247, 1260 (9th Cir. 2009)).
Where the magistrate judge’s order, findings, and/or
recommendations involve a dispositive matter, however, the Court
must review de novo those portions to which objections are made
and “may accept, reject, or modify, in whole or in part, the
10

findings or recommendations made by the magistrate judge.”

28

U.S.C. § 636(b)(1)(C); see also Local Rule 74.2; Fed. R. Civ. P.
72(b).

Under a de novo standard, the Court reviews “the matter

anew, the same as if it had not been heard before, and as if no
decision previously had been rendered.”

Freeman v. DirecTV,

Inc., 457 F.3d 1001, 1004 (9th Cir. 2006).
The parties disagree as to which standard of review
applies.

Plaintiffs maintain that the F&R should be reviewed de

novo, while Defendant argues that because SKFI’s Motion is not
dispositive, the Court should employ the “clearly erroneous”
standard.

Obj. at 5, ECF No. 21; Response at 2-3, ECF No. 23.

In support of its claim that the Motion is nondispositive, SKFI
cites to Kiep v. Turner, 80 B.R. 521, 524 (D. Haw. 1987), in
which this district court determined that a motion to withdraw
reference to the bankruptcy court was nondispositive because it
“merely concern[ed] which court/judge [would] hear the
[plaintiffs’] state court causes of action.”

The court noted

that “[t]he motion has no bearing on the merits of the claims,
nor on the parties, nor on the applicable law.”

Id.

SKFI

maintains that its Motion is the “‘flip side’ of a motion to
withdraw reference.”

Response at 2, ECF no. 23.

While a motion to withdraw reference to the bankruptcy
court and a motion to refer to bankruptcy court are analogous,
Kiep did not appear to require that the magistrate judge make a
11

determination as to the bankruptcy court’s ultimate jurisdiction
over the matter.

80 B.R. at 524.

Kiep is also distinguishable

in that the magistrate judge issued an order denying withdrawal
of reference, whereas here, Magistrate Judge Chang determined
that his decision should be findings and recommendations instead
of an order.

See id. at 523.

Moreover, since Kiep was decided,

this district court and the Ninth Circuit have determined that a
motion to remand to state court, which also only determines
which “court/judge” will hear an action, is a dispositive matter
subject to de novo review.

See, e.g., Flam v. Flam, 788 F.3d

1043, 1047 (9th Cir. 2015); Eggs ‘N Things Int’l Holdings Pte.
Ltd. v. ENT Holdings LLC, No. CIV. 11-00626LEK-KSC, 2012 WL
665038, at *1 (D. Haw. Feb. 29, 2012).

Of course, a

determination as to whether the claims will be heard in state
court or federal court arguably “shap[es] the nature of the
litigation,” JJCO, Inc., No. CV 08-00419 SOM/LEK, 2009 WL
3818247, at *2, more so than a determination as to whether the
claims will proceed in bankruptcy court or federal district
court.
The court need not resolve the question of which
standard of review is applicable here.

Whether the F&R are

reviewed de novo or under the clearly erroneous standard, the
Court would reach the same result as Magistrate Judge Chang, for
the reasons discussed below.
12

DISCUSSION
SKFI’s Motion was brought pursuant to Local Rule
1070.1(a), which provides that “all cases under Title 11 and all
civil proceedings arising under Title 11 or arising in or
related to a case under Title 11 are referred to the bankruptcy
judges of this district, except as provided in LR1070.1(b).”6
Plaintiffs maintain that because the bankruptcy court does not
have jurisdiction over their claims, referral would be
inappropriate.

Obj. at 3, ECF No. 21.

In the F&R, Magistrate Judge Chang recommended that
the case be referred to the bankruptcy court for pretrial
matters,7 because the bankruptcy court has jurisdiction over the

6

Local Rule 1070.1(a) further provides that “[a] party may
request that reference of a particular matter be withdrawn by
filing a motion with the clerk of the bankruptcy court, who will
promptly transmit the motion to the clerk of the
district court.”
Local Rule 1070.1(b) is inapplicable here. It provides in
relevant part that “[a]ny civil proceeding arising in or related
to a case under Title 11 that is pending in the district court
on the date the Title 11 case is filed shall be referred to a
bankruptcy judge only upon order of the district judge before
whom the proceeding is pending.”
7

The Court notes that Plaintiffs’ jury demand does not
preclude referral to the bankruptcy court. See, e.g., In re
Healthcentral.com, 504 F.3d 775, 788 (9th Cir. 2007) (“[A]
Seventh Amendment jury trial in the district court does not mean
the bankruptcy court must instantly give up jurisdiction and
that the action must be transferred to the district court.
Instead, we hold, the bankruptcy court may retain jurisdiction
over the action for pre-trial matters.”); Field v. Levin, No.
ADV. 11-AD-90032, 2011 WL 3477101, at *4 (D. Haw. Aug. 8, 2011)
(continued . . . )
13

claims at issue.

Specifically, Magistrate Judge Chang found

there is a close nexus between the instant case and the
bankruptcy case, In re 1250 Oceanside.

Magistrate Judge Chang

also determined that the bankruptcy court has ancillary
jurisdiction over Plaintiffs’ claims.

The Court ADOPTS

Magistrate Judge Chang’s recommendation, for the reasons
discussed herein.

The bankruptcy court’s “related to” and

ancillary jurisdiction over Plaintiffs’ claims are addressed in
turn.
I.

The Bankruptcy Court Has “Related To” Jurisdiction Over
Plaintiffs’ Claims
Pursuant to 28 U.S.C. § 1334(b), bankruptcy courts

have jurisdiction over “all civil proceedings arising under
title 11, or arising in or related to cases under title 11.”
“Proceedings ‘arising in’ bankruptcy cases are generally
referred to as ‘core’ proceedings, and essentially are
proceedings that would not exist outside of bankruptcy, such as
‘matters concerning the administration of the estate,’ ‘orders
to turn over property of the estate,’ and ‘proceedings to
determine, avoid, or recover preferences.’”

In re Pegasus Gold

( . . . continued)
(“Should a jury trial ultimately be warranted and necessary,
Defendants may again seek to withdraw the action to this court
after all pretrial matters have been resolved in the bankruptcy
court.”). Plaintiffs do not argue otherwise.

14

Corp., 394 F.3d 1189, 1193 (9th Cir. 2005) (quoting U.S.C.
§ 157(b)(2)).
The bankruptcy court’s “related to” jurisdiction, at
issue here, is more expansive.

As stated by the Ninth Circuit,

“[a] bankruptcy court’s ‘related to’ jurisdiction is very broad,
including nearly every matter directly or indirectly related to
the bankruptcy.”

In re Wilshire Courtyard, 729 F.3d 1279, 1287

(9th Cir. 2013) (citation omitted); see also Pegasus, 394 F.3d
at 1193 (“The bankruptcy court also has jurisdiction over a much
broader set of cases: those proceedings that are ‘related to’ a
bankruptcy case.”).

The test for determining whether the

bankruptcy court has “related to” jurisdiction depends on
whether the bankruptcy proceedings are in the pre-confirmation
or post-confirmation stage.

For pre-confirmation cases,

jurisdiction is based on whether “the outcome of the proceeding
could conceivably have any effect on the estate being
administered in bankruptcy.”

Pegasus, 394 F.3d at 1193

(emphasis omitted) (quoting In re Fietz, 852 F.2d 455, 457 (9th
Cir. 1988)).
In Pegasus, the Ninth Circuit adopted the Third
Circuit’s test for post-confirmation “related to” jurisdiction,
referred to as the “close nexus” test.
at 1287.

See Wilshire, 729 F.3d

Whether a bankruptcy court has jurisdiction in the

post-confirmation context rests on “whether there is a close
15

nexus to the bankruptcy plan or proceeding sufficient to uphold
bankruptcy court jurisdiction over the matter.”

Pegasus, 394

F.3d at 1194 (quoting In re Resorts Int’l, Inc., 372 F.3d 154,
166–67 (3d Cir. 2004)).

“[M]atters affecting ‘the

interpretation, implementation, consummation, execution, or
administration of the confirmed plan will typically have the
requisite close nexus.’”

Id. (quoting Resort’s Int’l, 372 F.3d

at 167).
In Wilshire, the Ninth Circuit reaffirmed the “close
nexus” standard set forth in Pegasus, despite arguments that the
standard had been narrowed by cases decided post-Pegasus.
Wilshire, 729 F.3d at 1288-89.

The court provided additional

guidance regarding the test, noting that “[t]he Pegasus Gold
‘close nexus’ test requires particularized consideration of the
facts and posture of each case, as the test contemplates a broad
set of sufficient conditions and ‘retains a certain
flexibility.’”

Id. at 1289 (quoting Pegasus, 394 F.3d at 1194).

Moreover, the court cautioned that “[s]uch a test can only be
properly applied by looking at the whole picture.”

Id.

As recognized by another district court in the Ninth
Circuit, in examining the “whole picture” to determine whether
“related to” jurisdiction exists post-confirmation, the Ninth
Circuit has considered various factors, but has not provided
explicit guidance as to which factors should be considered nor
16

“the relative importance to ascribe to each factor.”

In re

Consol. Meridian Funds, 511 B.R. 140, 147 (W.D. Wash. 2014).
Notwithstanding, it appears clear that where the dispute at
issue would involve enforcement or interpretation of a provision
within a confirmed bankruptcy plan, a sufficiently close nexus
exists.

See In re Nobel Grp., Inc., 529 B.R. 284, 291-92

(Bankr. N.D. Cal. 2015).
Thus, in Pegasus, the court found a close nexus where
the complaint included allegations that the appellants in the
case had 1) breached both the bankruptcy plan and a settlement
agreement approved by the bankruptcy court prior to confirmation
of the plan; 2) breached “the covenant of good faith and fair
dealing with respect to these agreements”; and 3) “committed
fraud in the inducement at the time it entered into” the
agreements.

394 F.3d at 1194.

The court determined that

“[r]esolution of these claims will likely require interpretation
of the [settlement] Agreement and the Plan,” id., contrasting
the case with Resorts Int’l, in which the Third Circuit found
the bankruptcy court lacked jurisdiction where the claim at
issue did not require that a court “interpret or construe the
Plan or the incorporated Litigation Trust Agreement,” id.
(quoting Resorts Int’l, 372 F.3d at 170).

The court

acknowledged that “the majority” of the claims in the complaint
involved only “post-confirmation conduct,” but did not view
17

these claims as barring the bankruptcy court’s “related to”
jurisdiction.

Id.

Similarly, in Wilshire, the Ninth Circuit determined
there was a close nexus where “the ultimate merits question
depend[ed] in part on the interpretation of the confirmed Plan.”
729 F.3d at 1289.

Although the court acknowledged that the

“Plan itself [was] ambiguous” as to a key issue raised in the
relevant litigation and “ma[de] no mention of state tax
consequences,” also at issue, the court held that resolution of
these issues would “require[] a close look at the economics of
the transaction [at issue] as detailed in the Plan and
Confirmation Order.”

Id.

More recently, in In re Valley Health

System, 584 Fed. App’x. 477, 479 (9th Cir. 2014), the Ninth
Circuit cited affirmatively to Wilshire in determining that
“related to” jurisdiction existed post-confirmation where
resolution of the mandamus petition at issue required
interpretation of the bankruptcy plan and the bankruptcy court’s
confirmation order.
Here, as in Pegasus, Wilshire, and Valley Health,
resolution of Plaintiffs’ claims requires interpretation of a
provision in the bankruptcy plan, i.e. the Reorganization Plan.
Plaintiffs’ claims primarily rest on the interpretation of one
specific provision of the Settlement Term Sheet—SKFI’s alleged
promise not to oppose the Bays firm’s request for fees—which as
18

set forth in the bankruptcy court’s Confirmation Order was
“binding on the parties,” and “incorporated into the Plan.”
Motion, Ex. E at 17, ECF No. 5-7.

Moreover, the allegations

raised in the Complaint involve conduct that occurred during the
bankruptcy proceedings, and the claims would not exist but for
the bankruptcy proceedings.

In this respect, the bankruptcy

court’s “related to” jurisdiction is more clear than in Pegasus,
in which only certain of the claims raised involved
interpretation of the bankruptcy plan and the “majority of the
claims” implicated only “post-confirmation” conduct.
at 1194.8

394 F.3d

Moreover, while in Wilshire, 729 F.3d at 128, the

court found a close nexus despite the fact that the bankruptcy
plan did not specifically mention an issue raised postconfirmation, here Plaintiffs’ Complaint rests primarily on a
determination as to the meaning of a provision explicitly

8

Notably, two of the claims that led to “related to”
jurisdiction in Pegasus, i.e. breach of the settlement agreement
and the plan and fraud in the inducement in relation to the
settlement agreement and plan, 394 F.3d at 1194, are similar to
the claims raised in Plaintiffs’ Complaint. Plaintiffs’
Complaint raises two substantive counts: 1) breach of contract
based on Plaintiffs’ allegation that SKFI breached the
Settlement Term Sheet by opposing their claim for $250,000 in
attorneys’ fees; and 2) fraud, based on the allegation that SKFI
“induce[d]” Plaintiffs to “dismiss the adversary proceedings
filed in the bankruptcy case, withdraw their objections to the
SKF[I] claim against Oceanside in the bankruptcy proceedings,
and withdraw their objections to the Reorganization Plan” by
falsely representing that they would not oppose the request for
fees. Compl. ¶¶ 49-59, ECF No. 1-1.
19

mentioned in the Reorganization Plan (via the Settlement Term
Sheet).

Under these circumstances, the Court agrees with

Magistrate Judge Chang’s determination that there is a close
nexus between the bankruptcy case and the instant action.
Plaintiffs maintain that Magistrate Judge Chang’s
finding of “related to” jurisdiction “is contrary to well
established Ninth Circuit law,” citing two cases: In re Valdez
Fisheries Dev. Ass’n, Inc., 439 F.3d 545 (9th Cir. 2006), and In
re Ray, 624 F.3d 1124 (9th Cir. 2010).

Obj. at 6-8, ECF No. 21.

The Court agrees with Magistrate Judge Chang that these cases
are distinguishable.

See F&R at 10-11, 12 n.2, ECF No. 18.

In Valdez, the Ninth Circuit considered whether the
bankruptcy court had jurisdiction to interpret a settlement
agreement it had approved, which led to the dismissal of the
bankruptcy case.

439 F.3d at 546.

Prior to the initiation of

the bankruptcy proceedings, Sea Hawk Seafoods, Inc. (“Sea
Hawk”), the owners of a seafood processing plant in Alaska,
filed a lawsuit against Valdez Fisheries Development Association
(“VFDA”) for breach of contract in relation to the sale of the
processing plant.

Id.

Sea Hawk prevailed in state court with a

judgment “against VFDA for over $2 million.”

Id.

The State of

Alaska, through the “Alaska Division of Investments then called
VFDA’s loans aggregating in excess of $7 million.”

20

Id.

VFDA

proceeded to provide the State with $1.65 million and a separate
amount for “accounts receivable.”

Id.

Sea Hawk then raised claims against the State in state
court alleging that the transaction between VFDA and the State
were void under state fraudulent conveyance law.

Id.

The state

action was not resolved, and VFDA later filed for Chapter 11
bankruptcy protection.

Id.

Eventually, Sea Hawk and VFDA

reached a settlement which dismissed the “pending litigation
between” Sea Hawk and VFDA and allowed for “continued
jurisdiction over . . . the interpretation . . . of th[e]
Settlement Agreement.”

Id. at 547 (alterations in original).

Notably, the State was not a party to the settlement agreement.
Id.

The bankruptcy court approved the settlement agreement and

dismissed the bankruptcy case.

Id.

Following dismissal of the

bankruptcy proceedings, Sea Hawk sought resolution in state
court of its fraudulent conveyance claim against the State.

Id.

The State maintained that the settlement agreement in the
bankruptcy court “protected it as well as VFDA.”

Id.

The Ninth

Circuit determined that there was no close nexus between the
fraudulent conveyance claim and the bankruptcy case because
there was no confirmed bankruptcy plan, the dispute between Sea
Hawk and the State would have no effect on the bankruptcy
estate, and the bankruptcy court was only “fortuitously”
involved based on the “settlement agreement approved by the
21

court as a precondition of the dismissal of VFDA’s bankruptcy.”
Id. at 548.
Despite Plaintiffs’ arguments to the contrary, the
circumstances that led to the court’s conclusion in Valdez are
markedly distinct from the instant case.

First, as determined

in the F&R and argued by SKFI, because the settlement agreement
in Valdez led to the dismissal of the bankruptcy proceeding,
there was no confirmed bankruptcy plan in Valdez.
10, ECF No. 18; Response at 9, ECF No. 23.

See F&R at

Thus, interpretation

of the settlement agreement in Valdez did not require an
interpretation of a bankruptcy plan, as no confirmed plan
existed.

Here, the Settlement Term Sheet was explicitly

incorporated into the Reorganization Plan, as provided in the
Confirmation Order.

As a result, interpretation of the

Settlement Term Sheet—which is at the center of Plaintiffs’
claims—necessarily involves interpretation of the Reorganization
Plan.
Second, as previously noted, the claims raised by
Plaintiffs here involve conduct that arose during the bankruptcy
proceedings.

In contrast, in Valdez, the allegations that led

to the fraudulent conveyance claim arose prior to the VFDA’s
filing for Chapter 11 protection, resulting in a more attenuated
relationship between the claim and the bankruptcy proceedings.
See Valdez, 439 F.3d at 546.
22

Third, in Valdez, Sea Hawk’s fraudulent conveyance
claim was brought against the State, which was not a party to
the settlement agreement that disposed of the bankruptcy case.
Id. at 547.

Here, Plaintiffs’ claims are against SKFI, a party

to the Settlement Term Sheet.
Ray is similarly distinguishable.

In Ray, the Ninth

Circuit considered whether a bankruptcy court had jurisdiction
over a state breach of contract claim amounting to a collateral
attack on a sale order previously approved by the bankruptcy
court.

624 F.3d at 1127.

The debtor and another individual co-

owned a shopping center referred to as Battle Ground Plaza
Shopping Mall.

Id.

In December 2000, the debtor and the co-

owner of the property entered into an agreement to sell the mall
to Battle Ground Plaza LLC (“BG Plaza”).

Id.

The agreement

allowed BG Plaza “a right of first refusal for an undeveloped,
one-half acre adjoining parcel,” which the debtor and his coowner also owned.

Id.

The debtor initiated bankruptcy proceedings and on
March 7, 2002, the bankruptcy plan was confirmed.

Id. at 1128.

The plan referenced the sale agreement between the debtor and BG
Plaza “but noted the sale had yet to close due to discovery of
‘adverse environmental conditions.’”

Id.

The bankruptcy plan

additionally “expressed the Debtor’s intention to sell his
interest in the 1/2-Acre Parcel, either to BG Plaza pursuant to
23

its first refusal rights, to his [co-owner], or to another party
altogether.”

Id.

Following confirmation of the bankruptcy plan, issues
arose regarding the sale of the 1/2 Acre Parcel.

Id.

Eventually, BG Plaza attempted to exercise its first refusal
rights to purchase the parcel.

Id.

The debtor requested that

the bankruptcy court approve the sale of the parcel to a third
party.

Id.

The bankruptcy court approved the sale and issued a

sale order, determining that BG Plaza’s rights of first refusal
had not been violated given the circumstances of the sale.
at 1128-29.

Id.

BG Plaza later initiated a state court lawsuit

alleging, inter alia, that its first refusal rights had been
breached.

Id. at 1129.
The court determined that “the bankruptcy court did

not retain ‘related to’ jurisdiction for this breach of contract
action that could have existed entirely apart from the
bankruptcy proceeding and did not necessarily depend upon
resolution of a substantial question of bankruptcy law.”
1135.

Id. at

As the F&R points out, however, “[t]he only relationship

between the breach of first refusal rights claim . . . in In re
Ray and the bankruptcy proceeding was approval by the bankruptcy
court of a sale order concerning real property.”
n.2, ECF No. 18.

F&R at 12,

Moreover, “the sales order was never made a

part of the plan of reorganization.”
24

Id.

Here, the claims

raised by Plaintiffs bear a much closer nexus to the bankruptcy
proceedings, as the breach of contract claim rests on an
interpretation of a specific provision of the Settlement Term
Sheet, which was incorporated in to the Reorganization Plan.

In

addition, whereas in Ray, the breach of contract claim “could
have existed entirely apart from the bankruptcy proceeding,” 624
F.3d at 1135; here, the breach of contract and fraud claims
involve only conduct that occurred during the bankruptcy
proceedings.
Plaintiffs claim that contrary to the F&R, “the sale
at issue [in Ray] was an integral part of and expressly
contemplated by the confirmed reorganization plan.”
ECF No. 21.

Obj. at 8,

Plaintiffs cite to the statement in Ray that the

plan “expressed the Debtor’s intention to sell his interest in
the 1/2-Acre Parcel, either to BG Plaza pursuant to its first
refusal rights, to his [co-owner], or to another party
altogether.”

Ray, 624 F.3d at 1128.

However, the fact that the

plan mentioned the issue of the sale of the property and BG
Plaza’s first refusal rights does not support Plaintiffs’ claim
that the sale was “integral” to the plan.

To the contrary, at

the time of the confirmation plan, the sale had not yet closed,
and accordingly, could not have played a pivotal role in the
plan’s confirmation.

See id.

Moreover, the fact that the sale

25

was “contemplated” in the plan does not take away from fact that
the sale order was not addressed or incorporated into the plan.
Plaintiffs additionally contend that the F&R
incorrectly considered that “adjudication” of the instant case
may involve “the parties’ attendant conduct,” claiming that
“‘[a]ttendant’ conduct is not an element Ninth Circuit case law
considers in determining whether a ‘close nexus exists.’”
at 8, ECF No. 21 (quoting F&R at 11, ECF No. 18).

Obj.

However,

contrary to Plaintiffs’ assertion and as discussed above, the
Ninth Circuit has considered party conduct insofar as evaluating
the timing of the conduct at issue (either pre- or postconfirmation) to analyze whether a close nexus exists.

See,

e.g., Pegasus Gold, 394 F.3d at 1194 (finding a close nexus
where although most of the claims at issue were based on “postconfirmation” conduct, some of the claims involved
interpretation of a settlement agreement related to the
bankruptcy proceedings and the bankruptcy plan, and involved
conduct that allegedly occurred pre-confirmation).

Moreover, as

provided in Wilshire, the “‘close nexus’ test requires
particularized consideration of the facts and posture of each
case” and “can only be properly applied by looking at the whole
picture.”

729 F.3d at 1279.

In any event, the primary basis

for the F&R’s conclusion that “related to” jurisdiction exists,
is that resolution of Plaintiffs’ claims involve “the
26

implementation, consummation, execution, or administration of
the confirmed plan.”

Id. at 1289 (quoting Pegasus, 394 F.3d at

1194).
In sum, under the circumstances here, it cannot be
said that the bankruptcy court was only “fortuitously” involved
in the Settlement Term Sheet and, accordingly, in the claims
raised by Plaintiffs.

See Valdez, 439 F.3d at 548.

To the

contrary, unlike in Valdez and Ray, the allegations raised in
Plaintiffs’ Complaint involve conduct that occurred exclusively
during the bankruptcy proceedings.

Indeed, the claims would not

exist but for the bankruptcy proceeding.

Moreover, resolution

of the claims will involve interpretation of the Settlement Term
Sheet, which was 1) incorporated into the Reorganization Plan;
and 2) approved and made binding on the parties through the
Confirmation Order.
Accordingly, the Court agrees with Magistrate Judge
Chang’s determination that a close nexus exists between this
action and In re 1250 Oceanside.9

Before Magistrate Judge Chang, Plaintiffs also argued that
even if “related to” jurisdiction exists, the case should not be
referred to prevent the waste of judicial resources. Opposition
at 11-12, ECF No. 10. Plaintiffs do not raise this issue in
their Objections. The Court notes, however, its agreement with
Magistrate Judge Chang’s determination that referral would serve
and not impede judicial economy. F&R at 14 n.3, ECF No. 18.
9

27

II.

The Bankruptcy Court’s Jurisdiction Is Further Supported By
the Theory of Ancillary Jurisdiction
Having found that there is “related to” jurisdiction,

the Court need not determine whether ancillary jurisdiction also
applies in order to adopt Magistrate Judge Chang’s
recommendation to refer the case to the bankruptcy court.
Notwithstanding, the Court finds that Magistrate Judge Chang’s
determination that the bankruptcy court has ancillary
jurisdiction in this matter was not in error.
In the first instance, the Court rejects Plaintiffs’
suggestion that they were “denied an opportunity to present
argument” on the issue of ancillary jurisdiction because SKFI
did not “allege ancillary jurisdiction.”

Obj. at 9, ECF no. 21.

As argued by SKFI, the issue of ancillary jurisdiction was
raised before Magistrate Judge Chang in SKFI’s Motion and its
Reply.

Response at 15-16, ECF No. 23; Memorandum in Support of

Motion at 13-14, ECF No. 5-1; Reply at 8, ECF No. 14.

Although

ancillary jurisdiction was not the crux of SKFI’s argument,
Plaintiffs’ contention that ancillary jurisdiction was not
alleged is simply incorrect.
Turning to the merits, the F&R found that the
bankruptcy court has ancillary jurisdiction over Plaintiffs’
Complaint on the basis that a court can “vindicate its authority
and effectuate its decrees.”

F&R at 14, ECF No. 18 (quoting
28

Ray, 624 F.3d at 1135).

Indeed, as the Ninth Circuit stated in

Wilshire, ancillary jurisdiction—which is a “close cousin to
‘related to’ jurisdiction”—provides “that a bankruptcy court has
the power to interpret and enforce its own orders.”
1289.

729 F.3d at

On this basis, the Supreme Court in Travelers Indem. Co.

v. Bailey, 550 U.S. 137, 151 (2009), held that the bankruptcy
court correctly exercised its jurisdiction by entering a
“Clarifying Order” in 2004, determining that claims brought by
certain parties were barred by an injunction contained in the
court’s 1986 order confirming the bankruptcy plan.

The Supreme

Court stated that “the Bankruptcy Court plainly had jurisdiction
to interpret and enforce its own prior orders” and emphasized
that in the court’s 1986 orders “it explicitly retained
jurisdiction to enforce its injunctions.”

Id.

In its discussion of Travelers, the Wilshire court
additionally noted “that ancillary jurisdiction exists where
necessary to preserve a benefit the parties initially bargained
for.”

Wilshire, 729 F.3d at 1290.

Thus, according to the

Wilshire court,
[t]he bankruptcy court in Travelers had ancillary
jurisdiction to enter the Clarifying Order
interpreting the original plan and incorporated
injunction precisely because the injunction was
critical to the plan’s approval. The [Bankruptcy
Appellate Panel] identified in its analysis that
which we find exactly relevant to the present
appeal: “the record clearly indicates that the
essential parties (the debtor and the insurance
29

companies) would not have agreed to plan
confirmation without the settlement agreement and
injunction. . . . The Clarifying Order related to
an injunction that had been negotiated and
considered an essential part of the plan of
reorganization.”
Id. (quoting In re Wilshire Courtyard, 459 B.R. 416, 433 (B.A.P.
9th Cir. 2011)).
Pursuant to Travelers and Wilshire, the F&R correctly
concluded that ancillary jurisdiction exists.

Here, resolution

of Plaintiffs’ claims will require interpretation and/or
enforcement of the Settlement Term Sheet, which was approved by
the bankruptcy court in its Confirmation Order; made “binding on
the parties”; and incorporated into the Reorganization Plan.
Motion, Ex. E at 17, ECF No. 5-7.

Moreover, as in Traveler’s,

(and as noted in the F&R), the bankruptcy court “explicitly
retained jurisdiction,” 550 U.S. at 151, to “resolve any cases,
controversies, suits or disputes that may arise in connection
with the consummation, interpretation or enforcement of the
Plan”; “enforce all orders . . . and rulings issued or entered
in connection with the Chapter 11 Case, or the Plan”; “determine
any other matters that may arise in connection with or relate to
the Plan . . . the Confirmation Order, or any contract,
instrument, release, indenture or other agreement or document
created in connection with the Plan . . . or the Confirmation
Order”; and “determine any matter not inconsistent with the
30

Bankruptcy Code.”10

Motion, Ex. E at 95, ECF No. 5-7.

Finally,

as per the discussion in Wilshire quoted above, the Settlement
Term Sheet here was “bargained for” by essential parties during
the bankruptcy proceeding, and by Plaintiffs’ own admission, the
provision at issue in the Settlement Term Sheet was integral in
leading the parties to agree on the Reorganization Plan.

See

Compl. ¶ 38, ECF No. 1-1 (“The Plaintiffs would not have entered
into the Settlement Agreement and withdrawn their objections to
the Reorganization Plan without the agreement that SKF[I] would
not object to their application to recover $250,000 of the
attorneys’ fees they incurred in the underlying litigation.”).
Plaintiffs argue that there is no ancillary
jurisdiction in the instant case because Valdez stands for the
proposition that the court’s jurisdiction “to ‘vindicate its
authority or effectuate its decrees’ is only valid over a
settlement agreement when the agreement is explicitly stated in
the final decree.”

Obj. at 9, ECF No. 21.

In support of this

argument, Plaintiffs cite to the determination in Valdez that,
“[w]here a settlement agreement led to the dismissal of a case,
a court has jurisdiction to vindicate its authority or
effectuate its decree if the court’s dismissal order explicitly
10

The retention of jurisdiction provisions were part of the
Reorganization Plan, which was confirmed in the bankruptcy
court’s Confirmation Order and incorporated into the order. See
Motion, Ex. E at 3, ECF No. 5-7.
31

retained jurisdiction or incorporated the terms of the
settlement agreement.”

Id. (alteration in original) (quoting

Valdez, 439 F.3d at 549).

Plaintiffs maintain that here, the

court’s Final Decree is equivalent to the “dismissal order” in
Valdez, and argue that the Final Decree did not incorporate or
reference the Settlement Term Sheet or retain jurisdiction over
the Settlement Term Sheet.

Id.

Plaintiffs’ claim is

unavailing.
In the first instance, the Valdez quotation cited to
by Plaintiffs is inapposite.

In Valdez, as discussed above, the

settlement led to complete dismissal of the bankruptcy case, and
accordingly, there was no confirmed bankruptcy plan or a
confirmation order.

Here, “a settlement agreement [did not

lead] to the dismissal of a case.”

Valdez, 439 F.3d at 549.

To the contrary, the Settlement Term Sheet was a part of the
confirmed Reorganization Plan, approved and made binding on the
parties in the bankruptcy court’s Confirmation Order.

Moreover,

even if the Court were to accept the premise of Plaintiffs’
argument, the Final Decree in the instant case did retain
jurisdiction over the Settlement Term Sheet (by way of the
Confirmation Order) insofar as the Final Decree provided that

32

all orders and judgments would continue in effect and operation
after closing of the case.

Obj., Ex. B at 2, ECF No. 21-2.11

For these reasons, the Court agrees with Magistrate
Judge Chang’s determination that the bankruptcy court has
ancillary jurisdiction over the instant case.

11

In the F&R, Magistrate Judge Chang also noted that Ray and
Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375 (1994),
in which the Ninth Circuit and the Supreme court, respectively,
determined that there was no ancillary jurisdiction, are
distinguishable. F&R at 18 n. 4, ECF No. 18. Plaintiffs do not
cite to either case in support of their claim that ancillary
jurisdiction is lacking. The Court agrees, however, with the
F&R’s conclusion that these cases do not preclude a finding of
ancillary jurisdiction here.
As noted in the F&R, in Ray, the court determined that
ancillary jurisdiction was inapplicable where the “breach of
contract claim [at issue was] predicated on evidence that came
to light after a bankruptcy case had closed, its creditors paid,
and the debtor discharged.” Ray, 624 F.3d at 1136. Here,
Plaintiffs’ claims are based on issues that arose during the
bankruptcy proceeding and prior to the closing of the case.
Kokkonen is distinguishable, because, as noted in the
F&R, it
involved a post-dismissal motion to enforce a
settlement agreement. Kokkonen, 511 U.S. at 377.
The underlying case had been dismissed pursuant
to a Federal Rule of Civil Procedure 41(a)(1)(ii)
stipulation and order of dismissal that did not
retain jurisdiction over the settlement agreement
or incorporate the terms of the settlement
agreement in the dismissal order. Id. at 381
(acknowledging that “the situation would be quite
different if the parties’ obligation to comply
with the terms of the settlement agreement had
been made part of the order of dismissal,” either
by a retention of jurisdiction provision or
incorporation of the terms of the settlement in
the order).
F&R at 19 n. 4, ECF No. 18.
33

CONCLUSION
For the foregoing reasons, the Court ADOPTS Magistrate
Judge Kevin S.C. Chang’s January 16, 2016 Findings and
Recommendations to Grant Defendant’s Motion to Refer Case to
United States Bankruptcy Court.

This matter is referred to the

bankruptcy court for pretrial matters.
IT IS SO ORDERED.
DATED:

Honolulu, Hawaii, February 26, 2016.

________________________________
Alan C. Kay
Sr. United States District Judge

Batiste et al. v. SKFI et al., Civ. No. 15-00397 ACK-KSC, Order Adopting the
Findings and Recommendations to Grant Defendant’s Motion to Refer Case to
United States Bankruptcy Court.

34