Giese v. Community Trust Bank, Inc. et al
Filing
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MEMORANDUM OPINION & ORDER: Accordingly, having determined that this Court has jurisdiction over this case, the Defendant's motion to remand [R. 12] is DENIED and this case shall be REFERRED to the bankruptcy court for further proceedings. The remaining pending motions [R. 19 , 20 will be DISMISSED WITHOUT PREJUDICE and may be re-raised before the bankruptcy court. Signed by Judge Gregory F. VanTatenhove on 03/31/2015.(MRS)cc: COR, Bankruptcy Court Clerk
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
LONDON
TERRY GIESE,
Plaintiff,
v.
COMMUNITY TRUST BANK, INC;
INTERNATIONAL COAL GROUP,
INC.; and LEXINGTON COAL
COMPANY, LLC,
Defendants.
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Civil No. 14-126-GFVT
MEMORANDUM OPINION
&
ORDER
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The underlying dispute in this case centers on the question of who is entitled to
the contents of an account containing royalty payments made on mineral leases. Those
leases provided Leslie Resources the right to mine land that is now owned by Plaintiff
Terry Giese, but was previously owned by the Begley family. Leslie Resources made the
royalty payments that funded the account, and when Leslie Resources went into
bankruptcy, the Defendants bought the disputed account from the bankruptcy estate.
Plaintiff now sues the Defendants for the contents of that account. In so doing, the
Plaintiff both directly and indirectly challenges the propriety of the bankruptcy
proceeding. Presently at issue is the subject matter jurisdiction of this Court. For the
reasons set forth below, jurisdiction exists and so Giese’s motion to remand will be
DENIED.
I
Leslie Resources, Inc. mined coal in Leslie County, Kentucky in the 1990’s. Like
many coal companies, Leslie Resources did not own all the land from which it mined, but
instead leased their mineral rights from other landowners. The heirs of Emitt Begley
(Emitt, himself, died in 1936) owned one of the tracts of land that produced the royalties
in the account that is central to the current dispute. [R. 1-1 at 2.] Proceeds from Leslie
Resources’ mining operations were deposited into this account at Citizens Bank and Trust
in Hazard, Kentucky.1 [R. 1-1 at 5.] In 2000, Leslie Resources distributed some of the
money in the account to landowners but a significant amount of the money remained in
the account. As of May 26, 2006, the account had $334,054.11. [R. 1-1 at 6.]
Leslie Resources and a number of its affiliates filed for Chapter 11 bankruptcy in
November 2002. [R. 1-1 at 6.] The bankruptcies were consolidated into a case styled In
re Horizon Natural Resources Company, Case No. 02-14261 (Bankr. E.D. Ky.) and the
above mentioned escrow account was listed as an asset of the bankruptcy estate. [R. 14
at 3; 14-1.]
Defendants International Coal Group (ICG) and Lexington Coal purchased assets
out of the bankruptcy, including all “cash and cash equivalents” which included such
agreements as Leslie Resources had with the “Emitt Begley Heirs.” [R. 1-1 at 6.]
Defendants’ purchase was approved by the bankruptcy court. [See R. 14-3; R. 14-5.]
Later, the bank attempted to distribute the contents of the account but there was a dispute
amongst the Defendants as to how the money was to be distributed. To resolve this
dispute, the bank filed an adversary proceeding before the bankruptcy court, styled
The title of the account included the word “escrow,” although the Defendants represent it was a
checking account as opposed to an “escrow account.” [R. 14 at FN2.] This distinction is unimportant for
purposes of the motion at hand.
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2
Community Trust Bank, Inc. v. Berman, et. al., Case No. 06-01022 (Bankr. E.D. Ky.).
[R. 14 at 5.] As a part of that proceeding, the Court attempted to provide notice to “E.
Begley” (the name that was on the account documents) through publication in the
newspaper. [Id.] There was no response and, as a result, the bankruptcy court concluded
that no person or entity besides ICG and Lexington Coal had an interest in the Account.
[Id.] The bankruptcy court subsequently entered default judgment against “E. Begley,”
which cut off his claims to any interest in the account. [R. 14-6.] Eventually the
Defendants agreed as to how the money should be distributed amongst themselves and on
December 19, 2006, the bankruptcy court entered an order distributing the funds amongst
Lexington Coal and ICG. [R. 14 at 6.]
Plaintiff, Terry Giese, acquired real property from the heirs of Emmit Begley in
the late spring and summer of 2009 and then again in July 2013. [R. 1-1 at 3-4.] Giese
believes that in purchasing the land, he also acquired rights to royalties from the Leslie
Resources leases. He filed suit in Leslie Circuit Court to collect those royalties, alleging
state law claims for conversion, breach of fiduciary duty, negligence, fraudulent and
negligent misrepresentation, breach of contract, and unjust enrichment.
[R. 1-1.]
Because the principal question before this Court is how closely related these claims are to
the former bankruptcy action, it is worth going into a little more detail about these causes
of action.
In count one (collection of royalties), Giese asserts he is “legally entitled to the
proceeds that were in the Escrow Account,” which contains pre-petition royalties and was
purchased by the Defendants through the bankruptcy.
[R. 1-1 at 8.]
Count two
(conversion) asserts that the above account was taken without the consent of the Begleys.
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[Id. at 9.] Count three (breach of fiduciary duty) asserts that the Defendants owed a duty
to the Begleys and breached that duty when they failed to effectively notify them of their
ownership interest in the account.
[Id.]
Count four (negligence) and count five
(negligent misrepresentation) charge the Defendants with being negligent in searching for
and ensuring that the royalty proceeds were paid to the owners of the account. [Id. at 1011.] Count six (breach of contract) asserts that the Defendants, as heirs, successors, or
assigns of Leslie Resources, breached lease contracts by failing to pay mineral royalties.
[Id. at 11-12.] Count seven (unjust enrichment) alleges that the Defendants “inequitably
retained the benefit of the escrow account funds without payment for their value.” [Id. at
13.]
The Defendants timely removed the case to Federal Court on the basis that this
case is related to the earlier bankruptcy proceeding, and that jurisdiction is proper in
accordance with 28 U.S.C. § 1334(b). Giese argues it must be remanded because the
issues raised are not sufficiently related to the bankruptcy.
II
A
“A party may remove any claim or cause of action in a civil action…to the district
court for the district where such civil action is pending, if such district court has
jurisdiction of such claim or cause of action under section 1334 of this title.” 28 U.S.C. §
1452. The Defendants assert that jurisdiction arises out of Section 1334 which provides
that “district courts shall have original but not exclusive jurisdiction of all civil
proceedings arising under title 11, or arising in or related to cases under title 11.” 28
U.S.C. § 1334(b). This section addresses four categories of cases “over which the district
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court has jurisdiction: (1) “cases under title 11,” (2) “proceedings arising under title 11,”
(3) proceedings “arising in” a case under title 11, and (4) proceedings “related to” a case
under title 11.” In re Wolverine Radio Co., 930 F.2d 1132, 1141 (6th Cir. 1991).
Because the first category (“cases under title 11”) only refers to the actual bankruptcy
proceeding initiated with the filing of a bankruptcy petition, see id., the Court need only
consider whether jurisdiction exists per one of the latter three categories.
The “second, third, and fourth categories (proceedings “arising under,” “arising
in,” and “related to” a case under title 11)... operate conjunctively to define the scope of
jurisdiction.” Id. (citing In re Wood, 825 F.2d 90, 92 (5th Cir. 1987); see also In re
Stewart, 62 F. App'x 610, 613 (6th Cir. 2003).2
As such, the real question when
considering whether § 1334(b) jurisdiction exists is “whether a matter is at least ‘related
to’ the bankruptcy.” Id. (citing In re Wood, 825 F.2d at 93.) This inquiry has been well
explained by the Sixth Circuit:
The definition of a “related” proceeding under Section 1334(b) was first
articulated by the Third Circuit in Pacor. As stated in that case, the “usual
articulation of the 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.” Pacor, 743 F.2d at 994. An action is “related to bankruptcy
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. A proceeding “need not necessarily be against the debtor or
against the debtor's property” to satisfy the requirements for “related to”
jurisdiction. Id. However, “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
[1334(b)].” Id. (stating also that “[j]udicial economy itself does not justify
federal jurisdiction”). Instead, “there must be some nexus between the
‘related’ civil proceeding and the title 11 case.” Id.
2
This consolidated analysis must be broken back up if the Court is considering the question of
abstention. At this juncture, however, the inquiry is consolidated as described above.
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In re Dow Corning Corp., 86 F.3d 482, 489 (6th Cir. 1996) (emphasis added).
Federal courts are courts of limited jurisdiction, so normally any doubts regarding
federal jurisdiction are construed in favor of remanding the case to state court. Shamrock
Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108–109 (1941); Cole v. Great Atlantic &
Pacific Tea Co., 728 F.Supp. 1305, 1307 (E.D.Ky. 1990) (citations omitted). However,
when considering whether jurisdiction exists in the context of bankruptcy, Courts
approach jurisdiction differently, by broadly construing what it means to be “related.” In
re Wolverine Radio Co., 930 F.2d at 1141. Congress intended such an expansive reading
so that bankruptcy courts “‘might deal efficiently and expeditiously with all matters
connected with the bankruptcy estate.’” In re Dow Corning Corp., 86 F.3d at 489
(quoting Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995)). The language used in the
test makes this intention clear:
A key word in [the] test is “conceivable.” Certainty, or even likelihood, is
not a requirement. Bankruptcy jurisdiction will exist so long as it is
possible that a proceeding may impact on “the debtor's rights, liabilities,
options, or freedom of action” or the “handling and administration of the
bankrupt estate.”
In re Dow Corning Corp., 86 F.3d at 491 (citing In re Marcus Hook Dev. Park Inc., 943
F.2d 261, 264 (3d Cir.1991) (citation omitted)); see also In re Stewart, 62 F. App'x at
613. Such “related” proceedings might include “suits between third parties which have
an effect on the bankruptcy estate.” Id. (quoting Celotex Corp., 514 U.S. at n. 5.)
However, if there is only “an extremely tenuous connection to the estate [, it] would not
satisfy the jurisdictional requirement.” Robinson v. Michigan Consol. Gas Co. Inc., 918
F.2d 579, 583 (6th Cir. 1990).
The question for this Court is whether this action could conceivably “alter the
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debtor's rights, liabilities, options, or freedom of action (either positively or negatively)”
or could otherwise impact “the handling and administration of the bankrupt estate.” In re
Dow Corning Corp., 86 F.3d 482, 489 (6th Cir. 1996) (quoting Pacor, 743 F.2d at 994)
(quotations marks omitted). Because the answer to this question is “yes,” the case will
not be remanded.
B
According to Giese, “[t]he only real connection [between the bankruptcy case and
this action] is that ICG and Lexington Coal purchased assets and liabilities of Leslie
Resources during the liquidation of Leslie Resources’ parent company.” [R. 12-1 at 5-6.]
He asserts this connection between his complaint and the bankruptcy case is too tenuous
to trigger federal jurisdiction but Giese’s claim that this proceeding “will not affect any
debtor” because “there are no claims against Horizon, Leslie Resources, or their related
entities” oversimplifies the inquiry. [R. 16 at 2.] The fact that no claim exists against a
debtor is not necessarily determinative of whether jurisdiction exists. See In re Dow
Corning Corp., 86 F.3d at 489 (quoting Pacor, 743 F.2d at 994.) (“A proceeding ‘need
not necessarily be against the debtor or against the debtor's property’ to satisfy the
requirements for ‘related to’ jurisdiction.”)
The Defendants spend considerable time explaining why jurisdiction exists under
each of the three respective prongs and these distinctions are important for purposes of
determining whether abstention is appropriate. At this juncture, however, the Court’s
analysis will be focused on the singular question of whether this “matter is at least
‘related to’ the bankruptcy.” In re Wolverine Radio Co., 930 F.2d at 1141 (citing In re
Wood, 825 F.2d at 93.) Because the Court is convinced for a number of reasons that this
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case is related to the bankruptcy proceeding, it will not be remanded but will be referred
to the bankruptcy court for further proceedings.
First, there is a very real question as to whether the Plaintiff is permitted to bring
this suit or is enjoined from doing so. In a September 16, 2004 Sale Order, the
bankruptcy Court transferred the disputed assets to the Defendants without liabilities or
encumbrances and then enjoined future suits. See R. 14-2 (Sale Order). Relevant
passages from that Order are reprinted below:
M. Upon the Closing of each Agreement, the sale and transfer of the relevant
Purchased Assets to the applicable Purchaser shall be a legal, valid and effective
transfer of such Purchased Assets to such Purchaser, and shall vest in such
Purchaser all right, title and interest in the applicable Purchased Assets in
accordance with the terms and conditions of the relevant Agreement free and clear
of any Encumbrances, under sections 105(a), 363(f) and 365 of the Bankruptcy
Code.
N. Except as expressly set forth in Section 2.3 of each Agreement, none of the
Purchasers shall have any liability for any (i) obligation of the Debtors, or (ii) any
Claim against the Debtors related to the applicable Purchased Assets by reason of
the transfer of such Purchased Assets to such Purchaser. None of the Purchasers
shall be deemed, as a result of any action taken in connection with the purchase of
the applicable Purchased Assets or otherwise, to: (1) be a successor to the Debtors
(other than with respect to the applicable Assumed Liabilities and any obligations
arising under the relevant Assumed Agreements from and after the applicable
Closing); or (2) have, de facto or otherwise, merged with or into the Debtors.
None of the Purchasers is acquiring or assuming any liability, warranty or other
obligation of the Debtors, except as expressly set forth in the relevant Agreement
and any of the relevant Assumed Agreements.
[Id. at 6-7 (Sale Order).] Furthermore, the Sale Order contained the following language
enjoining future actions:
[A]ll persons and entities are forever prohibited and enjoined from commencing
… any action … against the relevant Purchaser, its successors and assigns, or the
relevant Purchased Assets, with respect to any (a) Encumbrance arising under, out
of, in connection with or in any way relating to the Debtors, the applicable
Purchased Assets, the operation of such Purchased Assets prior to the Closing of
the sale of such Purchased Assets…
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[R. 14-2 at 14 (Sale Order).] See also R. 14-4 at 17-18 (Confirmation Order).
Second, the Bankruptcy Court’s Order explicitly “retain[ed] jurisdiction over the
transactions contemplated in the Agreements for purposes of enforcing the provisions of
this Order and the Agreements.” [R. 14-2 at 23 (Sales Order).] It is well established that
a Bankruptcy Court has continuing jurisdiction to interpret and enforce its own prior
orders. Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009).
Third, legal issues relating to the bankruptcy court’s orders and the propriety of its
proceedings will inevitably be central to this case. As Defendants contend, the Plaintiffs’
claims will be “determined by a statutory provision of title 11” because Plaintiffs claims
challenge actions that were authorized by Title 11 and the bankruptcy Court. [Id. at 14
(citing In re Wolverine Radio Co., 930 F.2d at 1144)(emphasis added).] Notably, the
Court that hears this case will have to consider the validity and enforceability of the
Bankruptcy Court’s sale and confirmation orders. The Defendants make this point in
their briefing. They suggest that Giese will have to prove errors occurred during the
bankruptcy proceedings if he is to prevail, and provide the following examples. [See R.
14 at 13-17.] Count two charges the Defendants with converting the contents of the
escrow account belonging to the Begleys, but the Defendants only came to own that
account because they purchased it out of the bankruptcy estate. To attack the propriety of
the Defendants’ ownership interest in that account, the Plaintiff has no option but to
challenge the very mechanism that gave Defendants that ownership interest. Again, in
count four, Giese asserts that the Defendants’ search to determine the owner of the
property was not diligent and that the published notice to “E. Begley” was unreasonable.
These processes were all overseen by the bankruptcy court and the Defendants had no
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interest in the account until they acquired it through the bankruptcy court’s previously
discussed Sale Order. [R. 14 at 16-17.]
Finally, the outcome of this suit could conceivably “alter [Leslie Resource’s]
rights, liabilities, options, or freedom of action” or at least impact “the handling and
administration of the bankrupt estate.” In re Dow Corning Corp., 86 F.3d at 489 (quoting
Pacor, 743 F.2d at 994) (quotations marks omitted). First, as Defendants argue, if Giese
convinced a Court that the Bankruptcy sales did not effectively transfer the account, the
funds would have to be returned to the estate and then re-administered. [R. 14 at 21.]
Second, if Giese won, then the Defendants would have reason to seek compensation from
the debtor/bankruptcy estate as they purchased the account but would be left without it.
[R. 14 at 21.] Both of these scenarios are “conceivable.”
In his reply, Giese cites to two instances where district courts have remanded
cases because they could have no conceivable impact on the debtor. Those cases are
both distinguishable. In Richland Manor House, the Court considered whether a
factually distinct case should be remanded to the State Court where it was originally
filed. 2014 WL 809208 (N.D. Ohio Feb. 21, 2014). The Court concluded that the “state
law claims clearly existed outside of bankruptcy” because the suit arose prior to the
bankruptcy. Id. at *3. That circumstance does not exist here. In Spradlin v. Pikeville
Energy Group, LLC, the Plaintiff filed a second amended complaint, and the bankruptcy
court determined that it lacked subject matter jurisdiction over the amended complaint.
2012 WL 6706188 (E.D. Ky. 2012). The Plaintiff appealed that decision, but the district
court determined that the bankruptcy court was correct--- the Plaintiff had been hoist, not
by its own petard, but, by its own amendment. Id. at *1. If anything can be taken from
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Spradlin, another factually dissimilar case, it is that this case belongs in the hands of the
Federal Courts. In Spradlin, one of the primary reasons that no jurisdiction existed was
because the estate had “nothing to lose” since the prosecution of the state-law claims in
that case “would not expose the Estate to any potential liabilities.” Id. at *8. The Court
explicitly noted that none of the defendants had plausible counterclaims against the Estate
that could create jurisdiction. Id. In this case, such counterclaims and cross-claims do
potentially exist. Defendants have made it clear that if a judgment was entered against
them, then they would promptly turn around and sue the estate. [See R. 14 at FN 10
(“ICG and Lexington Coal would have a claim against the estate for breach of the
purchase agreement due to the failure of a material term.”)]
This conclusion is also consistent with the bankruptcy statutes’ policy
considerations that weigh in favor of maintaining jurisdiction in this circumstance.
Allowing this case to proceed in State Court could potentially deal a serious blow to the
finality that is so critical to bankruptcy proceedings. It was Congress’ intention that
federal bankruptcy jurisdiction be broadly construed so as to ensure that bankruptcy
courts “‘might deal efficiently and expeditiously with all matters connected with the
bankruptcy estate.’” In re Dow Corning Corp., 86 F.3d at 489 (quoting Celotex Corp.,
514 U.S. at 308). Allowing this case to proceed in state court would also encourage
creditors who miss their opportunity to state a claim to assets during the bankruptcy
proceeding to take a second bite at the apple, despite the intended finality.
III
Having determined that this Court does have subject matter jurisdiction, the Court
will refer this case to the bankruptcy court who is better equipped to confront the pending
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arguments on abstention and to address all further issues as consistent with the referral
power in 28 U.S.C. § 157. See McKinstry v. Sergent, 442 B.R. 567, 572 (E.D. Ky. 2011)
(After determining that jurisdiction existed, Court referred case to bankruptcy court to
consider “the plaintiff's non-jurisdictional argument that the Court must abstain under 28
U.S.C. § 1334(c)(2) from hearing the state law claims.”); see also Robinson, 918 F.2d at
584 (“Mandatory abstention under section 1334(c)(2) is not jurisdictional[.]”); Fed. R.
Bankr.P. 5011, Comment (b) (“The bankruptcy judge ordinarily will be in the best
position to evaluate the grounds asserted for abstention.”).
Accordingly, having determined that this Court has jurisdiction over this case, the
Defendant’s motion to remand [R. 12] is DENIED and this case shall be REFERRED to
the bankruptcy court for further proceedings. The remaining pending motions [R. 19, 20]
will be DISMISSED WITHOUT PREJUDICE and may be re-raised before the
bankruptcy court.
This 31st Day of March, 2015.
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