Omega Consulting v. Osherow

Filing 11

Order on Bankruptcy Appeal Affirming the January 9,2012 Order of the bankruptcy court dismissing the Adversary Proceeding (Adv. P., Doc #3. Signed by Judge David Ezra. (wg)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
§
§
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SPECTOR RED BALL, INC.,
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Debtor.
______________________________ §
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OMEGA CONSULTING, INC.,
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§
Appellant,
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vs.
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RANDOLPH N. OSHEROW, Chapter §
§
7 Trustee for the Estate of TCC
Industries, Inc., and Spector Red Ball, §
§
Inc.,
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§
Appellees.
In re:

Cv. No. SA:12-CV-00423-DAE
Bankr. No. 82-50329-RBK

Adversary No. 11-5184-RBK

ORDER AFFIRMING BANKRUPTCY COURT’S ORDER
DISMISSING ADVERSARY PROCEEDING
On March 28, 2013, the Court heard oral argument on Appellant
Omega Consulting’s appeal of an order of the United States Bankruptcy Court for
the Western District of Texas, San Antonio Division, entered in Adversary
Proceeding No. 11-5184-RBK, styled Omega Consulting, Inc. v. Spector Red Ball,
Inc. and TCC Industries, Inc. (In re Spector Red Ball, Inc.) (the “Adversary
Proceeding” or “Adv. P.”), on January 9, 2012. The Order granted the Chapter 7
Trustee’s motion to dismiss the Adversary Proceeding. (See Adv. P., doc. # 3.)
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Kenneth C. Bell, Esq., appeared on behalf of Appellant Omega Consulting. Steve
P. Turner, Esq., appeared on behalf of Appellee Randolph N. Osherow, Chapter 7
Trustee for the Estate of TCC Industries Inc. and Spector Red Ball Inc. (“the
Trustee”). For the reasons that follow, the Court AFFIRMS the Order of the
bankruptcy court.
STANDARD OF REVIEW
A district court reviews a bankruptcy court’s findings of fact for clear
error. In re Kennard, 970 F.2d 1455, 1457–58 (5th Cir. 1992) (citing In re
Multiponics, Inc., 622 F.2d 709, 713 (5th Cir. 1980)); Fed. R. Bankr. P. 8013.
Conclusions of law are reviewed de novo. Id. at 1458; In re Stembridge, 394 F.3d
383, 385 (5th Cir. 2004). A bankruptcy court’s decision to dismiss a case is
reviewed for abuse of discretion. Peterson v. Atlas Supply Corp. (In re Atlas
Supply Corp.), 857 F.2d 1061, 1063 (5th Cir. 1988).
BACKGROUND
In the 1980s, Defendant-Appellee Spector Red Ball, Inc. (“SRB”) was
the nation’s largest trucking company. (In re Spector Red Ball, Inc., Bk. No.
82-50329-RBK (Bankr. W.D. Tex. 1982) (“SRB Bankr.”), doc. # 3045-6 Ex. 11
at 8.) Defendant-Appellee TCC Industries, Inc. (“TCC”) is a former parent

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company of SRB. (Doc. # 5 at 41; In re TCC Indus., Inc., Bk. No. 00-13535-CAG
(Bankr. W.D. Tex. 2000) (“TCC Bankr.”), doc. # 50 ¶ 2.) Underlying this appeal
are two separate bankruptcy proceedings—SRB’s and, later, TCC’s—and a dispute
over assets that Plaintiff-Appellant Omega Consulting (“Omega”), an assignee of
one of SRB’s creditors, alleges should not have been made part of TCC’s
bankruptcy estate. The Court begins by recounting the relevant history, which
stretches back over twenty years.
I.

SRB and TCC File for Bankruptcy and Their Cases Are Closed
In April of 1982, SRB and certain of its affiliates filed for Chapter 11

bankruptcy in the U.S. Bankruptcy Court for the Western District of Texas, San
Antonio Division. (Doc. # 6 ¶ 1; In re Spector Red Ball, Inc., Bk. No.
82-50329-RBK.) On August 14, 1984, the bankruptcy court entered an Order
confirming the Consolidated Joint Plan of Reorganization filed May 30, 1984 (the
“Plan”). Among other things, the Plan accomplished the substantive consolidation
of the debtors; the sale and transfer of all of SRB’s real estate assets to one of its
affiliates, TPI; the acquisition of all of TPI’s stock by TeleCom Corporation
(“TeleCom”), which later began operating as TCC; and the transfer of
“Distributable Assets” to a Liquidating Trustee. (SRB Bankr., doc. # 3049 ¶ 2,
citing Plan at 3, 6, 8.) The Plan and Confirmation Order also discharged and

1

Except where otherwise noted, citations are to the docket in Cv. No.
SA:12-CV-00423-DAE.
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released SRB from all debts and liabilities except those specifically retained by or
assumed by TPI and the obligation to turn over the Distributable Assets to the
Liquidating Trustee. (SRB Bankr., doc. # 3049, citing Confirmation Order ¶¶ 4,
5.) Further, the Plan and Confirmation Order operated as an injunction against
further collection efforts or enforcement of claims against SRB. (Id. ¶ 5(c).)
SRB’s bankruptcy case was closed on March 23, 1994.
Following the bankruptcy of SRB, which had been TCC’s largest
subsidiary, TCC’s financial condition continued to deteriorate; it filed for
bankruptcy in the Bankruptcy Court for the Western District of Texas, Austin
Division, in December of 2000. (TCC Bankr., doc. # 45 ¶ 1.) That case was
closed on May 25, 2002. (Id.)
II.

TCC’s Bankruptcy Case Is Reopened
Years later, on June 14, 2010, one of TCC’s creditors filed a Motion

to Reopen TCC’s Chapter 7 case. (TCC Bankr., doc. # 22.) The creditor alleged
that certain newly discovered assets belonged to TCC’s bankruptcy estate:
approximately $430,000.00 in Prudential Financial common stock and dividends
(“the Prudential Stock”) arising from Prudential’s demutualization (that is, its
reorganization from a mutual insurance company to a stock company). (Id. ¶ 3.)
He requested that a Chapter 7 trustee be appointed to recover and administer the
Prudential Stock. (Id.) On August 4, 2010, the Bankruptcy Court for the Western
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District of Texas, Austin Division, reopened TCC’s bankruptcy case (TCC Bankr.,
doc. # 31), and on August 31, 2010, Defendant-Appellee Randolph N. Osherow
(“the Trustee”) was appointed Trustee of TCC’s estate (TCC Bankr., doc. # 40).
On November 12, 2010, the Trustee sought an order authorizing the State of Texas,
which was holding the Prudential Stock as unclaimed property, to turn those assets
over to TCC’s bankruptcy estate (TCC Bankr., doc. # 45); the bankruptcy court
entered an Order to that effect on December 7, 2010 (TCC Bankr., doc. # 48
(“Turnover Order”)).
III.

Omega, Through SRB’s Receiver, Moves to Vacate the Order
Earlier in 2010, prior to the events described in Part II,

Plaintiff-Appellant Omega had purchased a claim against SRB from the estate of
M.C. Benton, who in his lifetime was the CEO of SRB. (TCC Bankr., doc. # 65 at
3.) Shortly thereafter, Omega filed a lawsuit against SRB in Bexar County for
fraud (related to ERISA obligations) and received a default judgment of $424,000.
(Id.) The state court then opened a receivership for SRB and appointed Jerome B.
White Receiver. (Id.)
Two days after the bankruptcy court ordered the State of Texas to turn
over the Prudential Stock to TCC’s bankruptcy estate, the Receiver filed a Motion
to Vacate the Turnover Order. (TCC Bankr., doc. # 50.) The Receiver argued that
SRB, not TCC, was the owner of the Prudential insurance policy—and, therefore,
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the Prudential Stock. (TCC Bankr., doc. # 50 ¶ 4.) TCC, argued the Receiver,
“did not retain any equitable interest in [SRB] when [TCC] exited [SRB’s] Chapter
11 proceeding” because it “transfer[red] ALL capital stock that it held in [SRB]
back to [SRB] via its liquidating trustee.” (Id. ¶ 5.) The Receiver argued that the
stocks and dividends arising from the Prudential insurance policy, because they did
not exist at the time of SRB’s bankruptcy, re-vested in SRB after confirmation of
its Chapter 11 plan; and, accordingly, that the Prudential Stock should not have
been turned over to TCC’s bankruptcy estate. (Id. ¶ 7.)
At the hearing on the Receiver’s motion, the State of Texas disputed
the Receiver’s contention that he was working on behalf of all of SRB’s creditors.
(TCC Bankr., doc. # 65 at 4.) In reality, asserted the State of Texas, the Receiver
was acting only on behalf of one creditor, Omega. (Id.) Accordingly, the State of
Texas argued that turning the Prudential Stock over to the Receiver would violate
§ 74.501(e) of the Texas Property Code, which prohibits the comptroller from
paying a claim against unclaimed property to a “creditor, a judgment creditor, a
lienholder, or an assignee of the reported owner or the owner’s heirs.”
TCC’s Chapter 7 Trustee also urged the bankruptcy court to deny the
Receiver’s motion, arguing that SRB should never been appointed a receiver in the
first place. (Id. at 3.) The Trustee asserted that Omega’s state-court lawsuit was
invalid because it was filed in violation of SRB’s 1984 bankruptcy plan and
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confirmation order, which contained an injunction against “the commencement or
continuation of any action, the employment of process or act to collect, recover or
offset” the debt discharged in the case. (Id.) Alternatively, the Trustee argued that
SRB’s interest in the Prudential life insurance policy was transferred to TCC as
part of the stock-purchase agreement incorporated in SRB’s bankruptcy plan. (Id.)
The bankruptcy court denied the Receiver’s Motion to Vacate the
Turnover Order, finding that he did not have standing to file it. (TCC Bankr.,
doc. # 65 at 6.) First, the court noted that it was “undisputed that SRB owned the
Prudential insurance policy prior to filing its bankruptcy case.” (Id.) Then,
looking to 11 U.S.C. § 541(a)(6) and (7), it acknowledged that the bankruptcy
estate includes “proceeds, product, offspring, rents, or profits of or from property
of the estate” and “any interest in property that the estate acquires after
commencement of the case.” (TCC Bankr., doc. # 65 at 5.) “The definition of
‘proceeds,’” the bankruptcy court continued, “encompasses ‘any conversion in the
form of property of the estate, and anything of value generated by property of the
estate.’” (Id. (citing In re Hanley, 305 B.R. 84, 86–87 (Bankr. M.D. Fla. 2003).)
Because SRB owned the Prudential insurance policy prior to filing its bankruptcy
petition, the bankruptcy court concluded that the disputed assets were “derived
from SRB’s prepetition ownership of the insurance policy” and that “the stock
[was] therefore property of SRB’s bankruptcy estate (if it was not transferred to
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TCC in the stock purchase agreement).” (TCC Bankr., doc. # 65 at 6.) Since the
Receiver claimed to be acting “on behalf of the reorganized SRB” (a confusing
proposition, since it appears that SRB has been defunct since its bankruptcy case
closed in 1984), and since “the reorganized SRB” (as opposed to SRB’s
bankruptcy estate) had no interest in the Prudential Stock, the bankruptcy court
denied the Receiver’s motion for lack of standing. (Id.)
IV.

Omega Moves to Reopen SRB’s Bankruptcy Case
Omega did not move the bankruptcy court to reconsider its Order

denying the Receiver’s Motion to Vacate the Turnover Order; nor did it appeal that
Order or move to stay it. Instead, on December 20, 2011, Omega filed a motion in
SRB’s bankruptcy case seeking to reopen SRB’s Chapter 11 proceeding. (SRB
Bankr., doc. # 3045.) In that motion, Omega stated that “while it may be feasible
to appeal the judgment of [TCC’s] current bankruptcy court, it seems appropriate
and more diligent, reasonable, and deferential in this matter to simply obtain an
order from this Court clarifying [SRB’s] post-bankruptcy rights . . . .” (Id. ¶ 15.)
Omega again insisted that TCC “did not retain any interest in [SRB]” because it
had “transfer[red] ALL capital stock that it held in [SRB] back to [SRB] via its
liquidating trustee.” (SRB Bankr., doc. # 3045 ¶ 13.) Specifically, Omega argued
that TCC had, as part of a settlement with SRB, “purchas[ed] a viable subsidiary of
[SRB] and then explicitly and affirmatively relinquish[ed] equitable and legal title
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to the capital stock [that it had] held in [SRB].” (Id. ¶ 14.) Accordingly, Omega
argued that TCC was “attempting to obtain possession and control of property in
which it has absolutely no interest . . . .” (Id. ¶ 12.)
In opposition to Omega’s motion, the United States Trustee (“UST”)
argued that Omega was merely seeking to collaterally attack the Turnover Order,
which was a “final[,] non-appealable Order,” when “the proper procedure would
have been to file a Notice of an Appeal.” (SRB Bankr., doc. # 3049 ¶ 5.) The
UST pointed out that the State of Texas had already complied with the Order and
that granting the relief Omega requested would subject the State of Texas to
“inconsistent and contrary orders” from different courts. (Id. ¶ 7.) Finally, the
UST argued that “a simple review of the Plan and Confirmation Order supports the
conclusion [that] any assets not transferred to TCC were not retained by SRB in
some sort of post-bankruptcy vacuum . . . .” (Id.) Instead, any assets not
transferred “became ‘Distributable Assets’ belonging only to the post-confirmation
Liquidating Trustee.” (Id. (citing SRB’s Chapter 11 Plan at 3 ¶ (E)).)
On January 4, 2012, the bankruptcy court heard Omega’s Motion to
Reopen. At the conclusion of the hearing, the court, interpreting the Stock
Purchase Agreement attached to SRB’s Chapter 11 plan, made the following
findings of fact and/or conclusions of law:
[I]t appears to me that ‘other miscellaneous shares,’ under Schedule A-4,
that it went—all assets of TPI and other miscellaneous shares went to
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TeleCom, which is now TCC. So, Mr. Osherow can administer it in Austin
in that [i.e., TCC’s] Chapter 7 case, and I don’t think I need to reopen this
one.
...
And, so, whatever Prudential rights were there went either to TCC or to the
liquidating trustee. And I would say they went to TCC, so I think TCC
should administer it.
...
So . . . I’ll deny the motion. We’re not going to reopen the case . . . .
(Doc. # 6 ¶ 8 (quoting Tr. at 102, line 24, through 103, line 5; 105, lines 14–17,
22–25).) Accordingly, on January 5, 2012, the bankruptcy court entered an order
denying Omega’s Motion to Reopen SRB’s bankruptcy case. (SRB Bankr.,
doc. # 3052.) Omega did not appeal or move for reconsideration of that Order.
V.

Omega Initiates the Adversary Proceeding
On the same day that Omega filed the Motion to Reopen, it also filed

a Complaint for Declaratory and Injunctive Relief against SRB and TCC, initiating
the adversary proceeding whose dismissal is the subject of this appeal—Adversary
Proceeding No. 11-5184-RBK (Bankr. W.D. Tex. 2011) (the “Adversary
Proceeding” or “Adv. P.”) (Adv. P., doc. # 1). Once again, Omega asserted that
“[t]he underlying and incontrovertible facts of this matter show that [TCC] . . .
filed a chapter 7 bankruptcy . . . long after having divested itself of its shareholder
interest in [SRB].” (Id. ¶ 7.) Moreover, “[SRB’s] interest in the Unclaimed
Property was not created until the time the mutual insurance company . . .
demutualized,” so “the bankruptcy estate never held a right or claim in the
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Unclaimed Property.” (Id. ¶¶ 31–32.) Accordingly, Omega asserted that “the
ruling that the Austin Bankruptcy Court issued on November 3, 2011[,] [was]
erroneous as a matter of law . . . [and] [a]s such, the original turnover order and
that court’s November 4th order should be set aside without further unnecessary
delay.” (Id. ¶ 16.) Specifically, Omega sought (1) a declaration that the Prudential
Stock “[does] not constitute property of the Bankruptcy Estate of [SRB] nor of the
Bankruptcy Estate of [TCC], and that all named Defendants have no valid claim
thereto or that their interest therein is junior and subordinate to the interest of the
Plaintiff” (id. ¶ 36); (2) an order directing the Comptroller of Public Accounts for
the State of Texas to turn over the Prudential Stock to the Receiver (id.); and (3) an
injunction preventing TCC and the Trustee from asserting any claims against said
property (id.).
On January 9, 2012, five days after the bankruptcy court denied
Omega’s Motion to Reopen SRB’s bankruptcy case, the Trustee filed a Motion to
Dismiss Adversary Proceeding. (Adv. P., doc. # 2.) The Trustee argued that, “[a]s
a result of the Court’s ruling [denying Omega’s Motion to Reopen], there is no
pending bankruptcy case, and this adversary proceeding should be dismissed.”
(Id. ¶ 3.) The bankruptcy court granted the Trustee’s Motion on the same day,
though it did not state its reasons for doing so. (Adv. P., doc. # 3.)

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Because the bankruptcy court did not state the grounds on which it
decided to dismiss the adversary proceeding, Omega, on January 19, 2012, filed a
Motion for Clarifying Order requesting that the bankruptcy court clarify “whether
its dismissal of the adversarial complaint is based on the failure to issue a subpoena
to [TCC’s] Trustee or whether it is based on the fact that the bankruptcy case for
[SRB] remains closed.” (Adv. P., doc. # 5.) The bankruptcy court denied
Omega’s Motion for Clarifying Order on January 25, 2012, saying only:
On this day came on to be considered the Plaintiff’s Motion for Clarifying
Order (Court document #5), and the Court is of the opinion that the Motion
should be denied. The case has been closed, and this adversary proceeding
was dismissed on January 9, 2012. The Motion to Reopen Case was denied
because all the remaining assets have been passed to TCC Industries, Inc.
It is, therefore, ORDERED, ADJUDGED, AND DECREED that the
above-referenced Motion for Clarifying Order is hereby DENIED.
(Adv. P., doc. # 8.)
On the same day that Omega filed its Motion for Clarifying Order, it
also filed a Notice of Appeal. (Adv. P., doc. # 6.) The Notice explained that
Omega was appealing “the order and decree of the bankruptcy judge dismissing
the adversarial complaint . . . .” (Id.) That appeal is now before this Court.
QUESTION PRESENTED ON APPEAL
It is important, at the outset, to make clear what is and is not the
subject of the instant appeal. Omega has not appealed any of the Orders entered by
the Bankruptcy Court for the Western District of Texas, Austin Division, in TCC’s
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bankruptcy case, Bk. No. 00-13535-CAG. Nor has Omega appealed the Order
entered by the Bankruptcy Court for the Western District of Texas, San Antonio
Division, in SRB’s bankruptcy case, Bk. No. 82-50329-RBK, denying Omega’s
Motion to Reopen SRB’s bankruptcy case (SRB Bankr., doc. # 3052). Instead,
Omega has appealed only the Order entered by the Bankruptcy Court for the
Western District of Texas, San Antonio Division, dismissing the Adversary
Proceeding, Bk. No. 11-5184-RBK (Adv. P., doc. # 3). Accordingly, Omega
frames the question presented for appeal as:
Whether the bankruptcy court erred in dismissing this adversary proceeding,
brought to obtain a determination of rights in certain funds owed to the
bankrupt as a result of a demutualization of an insurance company
subsequent to the closing of the bankruptcy, which funds are currently held
by the state of Texas as unclaimed property.
(Doc. # 5 at 3.) Omega acknowledges that “[a] bankruptcy court’s decision to
dismiss a case is reviewed for abuse of discretion.” (Id. at 6.)
Appellant, the Trustee, “does not dispute that this, in general terms, is
the issue presented.” (Doc. # 6 at 8.) However, the Trustee asserts that the issue is
“[m]ore precisely” characterized as:
Whether the Bankruptcy Court abused its discretion in dismissing the
Adversary Proceeding after that Court had expressly found that the funds in
question in the Adversary Proceeding were the property of TCC Industries,
Inc.’s bankruptcy estate, and based on that finding had decided, by final,
non-appealable order, that the Spector Red Ball bankruptcy case (the
“Bankruptcy Case”) should not be reopened.

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(Id.) Essentially, the Trustee insists that any determination regarding whether the
bankruptcy court abused its discretion by dismissing the adversary proceeding
must be made in light of the fact that the bankruptcy court had already determined
that the underlying bankruptcy case should not be reopened.
DISCUSSION
I.

The Parties’ Arguments
A. Plaintiff-Appellant Omega’s Arguments
Omega asserts that the bankruptcy court dismissed the Adversary

Proceeding because it misunderstood its own jurisdiction: “The bankruptcy court[]
[held] that, because the Red Ball bankruptcy case had been closed[,] there was no
bankruptcy proceeding pending that was purportedly a [jurisdictional] prerequisite
to an adversary proceeding.” (Doc. # 5 at 7.) “This holding is wrong,” insists
Omega, because “[t]here is no need to have a pending bankruptcy proceeding.”
(Id.) In other words, Omega appears to argue that the bankruptcy court dismissed
the Adversary Proceeding because it believed—incorrectly, in Omega’s view—that
it did not have subject-matter jurisdiction over the Adversary Proceeding after it
denied Omega’s Motion to Reopen SRB’s bankruptcy case. (Id.) “It is settled
law,” insists Omega, “that ‘if jurisdiction exists at the time an action is
commenced, such jurisdiction may not be divested by subsequent events.’”
(Doc. # 7 at 3 (quoting Doddy v. Oxy USA, Inc., 101 F.3d 448, 456 (5th Cir.
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1996).) Accordingly, Omega claims, since the Trustee concedes that the
bankruptcy court had jurisdiction at the outset, he is wrong to conclude “that
somehow jurisdiction evaporated when [the bankruptcy court] denied the motion to
reopen the case.” (Id. at 4.)
Citing Querner v. Querner (In re Querner), 7 F.3d 1199 (5th Cir.
1993), Omega insists that “the decision to retain jurisdiction over related
proceedings rests within the sound discretion of the bankruptcy court.” (Id. at 8
(citing In re Querner, 7 F.3d at 1201).) Omega concedes that, “because a court’s
jurisdiction over related proceedings depends on the nexus between the underlying
bankruptcy case and the related proceeding, the dismissal or closing of a
bankruptcy case will, ordinarily, result in the dismissal of related proceedings.”
(Id. at 7–8.) However, while dismissal of related proceedings is the “general rule,”
Omega asserts that this case presents an exception—an instance in which it was an
abuse of discretion for the bankruptcy court to dismiss the related proceedings.
(Id. at 8.) Instead, “[t]he proper disposition would have been to resolve the
adversary proceeding on the merits” and “to determine whether the property at
issue constituted property of the estate, by way of the schedules, and, therefore,
revested in the debtor.” (Doc. # 7 at 4.)

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B. Defendant-Appellee the Chapter 7 Trustee’s Arguments
The Trustee agrees with Omega that the “general rule” is that the
“dismissal or closing or a bankruptcy case should result in the dismissal of related
proceedings.” (Doc. # 6 at 14, quoting In re Querner, 7 F.3d at 1199.) Unlike
Omega, however, he argues that the general rule should apply in this case and that
it was not an abuse of discretion for the bankruptcy court to dismiss the Adversary
Proceeding. Central to the Trustee’s argument are two assertions: (1) that the
grounds for dismissal were especially strong because the Adversary Proceeding
“was not even ‘related to’ the [SRB] Bankruptcy Case” (doc. # 6 at 14); and (2)
that Omega is barred by issue preclusion from contesting the bankruptcy court’s
findings that the Prudential Stock belongs to TCC (id. at 16).
First, the Trustee argues that “[a] matter is ‘related to’ a case under
Title 11 if the outcome ‘could conceivably have any effect on the estate being
administered in bankruptcy.’” (Id. at 14 (quoting In re Wood, 825 F.2d at 93).)
“Under this test,” asserts the Trustee, “the Adversary Proceeding was not even
‘related to’ the Bankruptcy Case,” since the bankruptcy court had already
interpreted the Plan and concluded that the Prudential Stock belonged to TCC and
“that Spector Red Ball, its estate, and the liquidating trustee under its Plan have no
rights in, or claims to, that property.” (Id. at 14–15.) Citing to the transcript of the
hearing on Omega’s Motion to Reopen SRB’s Bankruptcy Case, the Trustee insists
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that the bankruptcy court expressly found that neither SRB nor its bankruptcy
estate existed anymore. (Id. at 15.) Said the bankruptcy court:
My point is, this is not a revested debtor . . . . This is not where the assets
came in prepetition, into the debtor-in-possession, and then were revested in
the reorganized debtor . . . . At confirmation, they went out, and there’s no
reorganized debtor or revested debtor . . . so, there’s no – there’s no property
of the estate left.
(Id. at 15 (quoting Tr. at 79, lines 22–25; 80, lines 1–7).) Accordingly, while the
bankruptcy court “clearly had subject matter jurisdiction” over the Adversary
Proceeding when it was filed—since it “sought a determination of whether certain
property was property of the debtor’s estate”—the Trustee argues that the court
“lost” jurisdiction over the Adversary Proceeding once it determined that SRB did
not have an interest in the property at issue. (Id. at 16.) As the Trustee puts it:
[A]fter (1) the Bankruptcy Court found that the property at issue was
property of TCC Industries, Inc., and not of Spector Red Ball, its bankruptcy
estate or the liquidating trust created under its Plan[;] (2) the Court entered
an order, necessarily based on those findings, that denied Omega’s request to
reopen the Spector Bankruptcy Case[;] and (3) that order became final and
non-appealable, it was clear that the factual basis for the most likely grounds
for Bankruptcy Court jurisdiction—that a determination of whether property
of the estate was involved—was in fact absent.
(Id.) While the Trustee argues in terms of jurisdiction, however, he does not assert
that the bankruptcy court was required to dismiss the Adversary Proceeding after it
refused to reopen SRB’s bankruptcy case. “[A]lthough the Bankruptcy Court’s
decision to dismiss the Adversary Proceeding was based on facts that typically
would be determinative of subject matter jurisdiction,” states the Trustee, “it did
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not find a lack of jurisdiction as the basis for that dismissal.” (Id. at 10.) “[T]he
Court considered those facts not as determinative of jurisdiction but rather as
factors to weigh in determining whether to exercise its discretion to dismiss the
Adversary Proceeding.” (Doc. # 6 at 10.)
Second, the Trustee argues that “under principles of collateral
estoppel or issue preclusion, the Bankruptcy Court and the parties were bound by
the Court’s prior findings and conclusions on the Motion to Reopen . . . .” (Id.)
“[I]n both the Adversary Proceeding and the Motion to Reopen,” says the Trustee,
“the Bankruptcy Court was asked to analyze, and it did analyze at the Motion to
Reopen Hearing, the parties’ rights and claims under the Confirmation Order, the
Plan and the Stock Purchase Agreement.” (Id. at 17.) Moreover, “the same
persons as were parties to the Adversary Proceeding appeared and were heard on
the Motion to Reopen. (Id.) And finally, “the determination at the Motion to
Reopen Hearing that the [Prudential Stock was] property of TCC Industries, Inc.,
was a necessary part of the order denying the Motion to Reopen.” (Id.) Not only
is Omega “estopped to deny that TCC Industries, Inc. is the owner of the
[Prudential Stock]” and “barred . . . from asserting that the Bankruptcy Court
should not have dismissed the Adversary Proceeding,” therefore, but the fact that it
is so estopped also weighs in favor of a finding that the bankruptcy court did not
abuse its discretion in dismissing the Adversary Proceeding. (Id. at 18.)
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II.

Analysis
A. The Bankruptcy Court Did Have “Related To” Jurisdiction Over the
Adversary Proceeding
The jurisdiction of the bankruptcy courts, like that of other federal

courts, is grounded in and limited by statute. Celotex Corp. v. Edwards, 514 U.S.
300 (1995). Section 1334 of Title 28 provides that district courts—and, by
referral, bankruptcy courts—have subject-matter jurisdiction over all “civil
proceedings arising under title 11, or arising in or related to cases under title 11.”
28 U.S.C. § 1334(b). The Fifth Circuit has held that, for the purpose of
determining whether a particular matter falls within bankruptcy jurisdiction, it is
not necessary to distinguish between proceedings “arising under,” “arising in
a case under,” or “related to a case under” Title 11, since these prongs operate
conjunctively to define the scope of jurisdiction. In re Canion, 196 F.3d 579, 584
(5th Cir. 1999). “Instead, to ascertain whether jurisdiction exists, it is necessary
only to determine whether a matter is at least ‘related to’ the bankruptcy.” In re
Walker, 51 F.3d 562, 569 (5th Cir. 1995) (internal quotations omitted).
An adversary proceeding falls within the bankruptcy court’s “related
to” jurisdiction if “the outcome of that proceeding could conceivably have any
effect on the estate being administered in bankruptcy.” In re Wood, 825 F.2d at 93
(citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)). The possibility
19

that a suit may ultimately have no effect on the estate is not enough to conclude
that there would be no conceivable effect. Id. “Certainty or even likelihood of
such an effect is not a requirement.” Arnold v. Garlock, 278 F.3d 426, 434 (5th
Cir. 2001) (citing Randall & Blake, Inc. v. Evans (In re Canion), 196 F.3d 579, 588
(5th Cir. 1999)).
As described above, Omega argues that the bankruptcy court
dismissed the Adversary Proceeding because it believed it did not have
subject-matter jurisdiction. While the Trustee argues in terms of jurisdiction,
however, he does not assert that the bankruptcy court was required to dismiss the
Adversary Proceeding after it refused to reopen SRB’s bankruptcy case; he argues
only that the bankruptcy court’s decision not to reopen SRB’s bankruptcy case—
the fact that there was no open bankruptcy case to which the Adversary Proceeding
could “relate”—“weigh[s] in favor of the Bankruptcy Court’s exercise of its
discretion to dismiss the Adversary Proceeding . . . .” (Id. (emphasis added).)
First, the Court finds that the Adversary Proceeding did, indeed,
“relate to” the SRB bankruptcy case within the meaning of 11 U.S.C. § 1334.
Again, an adversary proceeding falls within the bankruptcy court’s “related to”
jurisdiction if “the outcome of that proceeding could conceivably have any effect
on the estate being administered in bankruptcy.” In re Wood, 825 F.2d at 93. The
Adversary Proceeding, even after the bankruptcy court denied Omega’s Motion to
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Reopen SRB’s bankruptcy case, surely meets this standard. As the Trustee
concedes, “[a]t the time the Adversary Proceeding was filed, the Bankruptcy Court
clearly had subject matter jurisdiction over (and the authority to enter a final order
in) the suit, as a proceeding that on its face sought a determination of whether
certain property was property of the debtor’s estate.” (Doc. # 6 at 15.) That
characterization of the Adversary Proceeding was no less accurate after the
bankruptcy court denied Omega’s Motion to Reopen SRB’s bankruptcy case. The
contents of Omega’s Complaint remained unchanged; it was still seeking a
determination of whether the Prudential Stock belonged to SRB’s bankruptcy
estate, TCC’s bankruptcy estate, to the “reorganized” SRB, or to another party.
Such a proceeding could “conceivably” affect SRB’s bankruptcy estate. To
describe only one possibility, the bankruptcy court could have retained jurisdiction
over the Adversary Proceeding, been convinced by Omega’s arguments regarding
abandonment of assets, and then decided that it should reconsider its decision not
to open SRB’s bankruptcy case. It seems plain, then, that the Adversary
Proceeding was “related to” SRB’s bankruptcy and that the bankruptcy court
could, in its discretion, exercise jurisdiction over it.
This, however, is a moot point; for the Court can find nothing in the
record to suggest that the bankruptcy court believed that it was constrained to
dismiss the adversary proceeding due to a lack of subject-matter jurisdiction.
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While the bankruptcy court’s Order Dismissing Adversary Proceeding did not state
its reasoning (see Adv. P., doc. # 3), the language of both the Motion to Dismiss
Adversary Proceeding (Adv. P., doc. # 2) and the Order Dismissing Adversary
Proceeding (Adv. P., doc. # 3) suggests that the bankruptcy court realized it had
the discretion to decide whether it should dismiss the Adversary Proceeding.
In the Motion to Dismiss, the Trustee argued that “there is no pending
bankruptcy case, and this adversary proceeding should be dismissed.” (Adv. P.,
doc. # 2 ¶ 3 (emphasis added).) The Trustee did not use mandatory language; he
did not insist that the case “must” be dismissed for lack of jurisdiction. Similarly,
in the Order Dismissing Adversary Proceeding, the bankruptcy court stated that it
had “determined that the motion [to dismiss] [was] meritorious and should be
granted.” (Adv. P., doc. # 3 at 1 (emphasis added).) Again, the bankruptcy court
gave no indication that it believed it was required to dismiss the case because it did
not have subject-matter jurisdiction.
As a general rule, absent evidence to the contrary, a reviewing court
assumes that the court below knew the law and was aware of its own discretion.
See, e.g., United States v. Morales-Castillo, 314 F.3d 561, 564 (11th Cir. 2002)
(rejecting the defendant’s contention that the district court failed to recognize that
it had discretion “because there is no evidence in the record that the district court
believed it was required to [decide as it did]”); United States v. Pinnick, 47 F.3d
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434, 439 (D.C. Cir. 1995) (holding that when “[w]e do not know why the district
court refused to depart, . . . we assume that the district court knew and applied the
law correctly,” rather than that it erroneously thought itself without discretion
(citing United States v. Garcia-Garcia, 927 F.2d 489, 491 (9th Cir. 1991))).
Accordingly, absent some indication that the bankruptcy court was unaware that it
had the discretion to retain jurisdiction over related proceedings—in appropriate
circumstances—even after the underlying bankruptcy was closed, the Court
assumes that it was aware of its own discretion.
B. The Bankruptcy Court Did Not Abuse Its Discretion By Dismissing the
Adversary Case Even Though It Had “Related To” Jurisdiction Over It
The Fifth Circuit has explained that “as a general rule the dismissal or
closing of a bankruptcy case should result in the dismissal of related proceedings.”
Matter of Querner, 7 F.3d 1199, 1201 (5th Cir. 1993). “The general rule favors
dismissal because the court’s jurisdiction over the related proceedings depends
upon the nexus between the underlying bankruptcy case and the related
proceeding.” Id. (citing Smith, 866 F.2d at 580). When the underlying bankruptcy
case has been dismissed, therefore, it is likely that the nexus between it and the
related proceeding—and, accordingly, the bankruptcy court’s claim to
jurisdiction—is weakened.

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Nevertheless, the mere fact that a bankruptcy case has been dismissed
does not require a bankruptcy court to dismiss pending adversary proceedings. In
re Querner, 7 F.3d at 1201; In re Johnson, 575 F.3d 1079, 1083 (10th Cir. 2009).
Instead, as stated above, the decision to retain jurisdiction over an adversary
proceeding following dismissal of the bankruptcy case is up to the discretion of the
court and is reviewed for abuse of discretion. In re Querner, 7 F.3d at 1201; see
also In re Carraher, 971 F.2d 327, 328 (9th Cir. 1992) (holding that bankruptcy
court did not abuse its discretion by retaining jurisdiction where adversary
proceeding had been pending for several years); In re Morris, 950 F.2d 1531, 1534
(11th Cir. 1992) (bankruptcy court did not, upon dismissal of Chapter 11 case,
abuse its discretion in retaining subject-matter jurisdiction over debtor adversary
proceeding where adversary proceeding had been pending for over four years and
was ready for trial). For the reasons that follow, the Court concludes that, in the
instant case, the bankruptcy court did not abuse its discretion when it dismissed the
Adversary Proceeding.
Omega’s primary purpose in initiating the Adversary Proceeding was
to obtain a “declaration and determination . . . that the [Prudential Stock] [did] not
constitute property of the Bankruptcy Estate of [SRB] nor of the Bankruptcy Estate
of [TCC].” (Adv. P., doc. # 1 ¶ 36) In other words, Omega wanted the bankruptcy
court to declare that the Prudential Stock belonged to SRB and “should be directly
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turned over to the Receiver . . . .” (Id.) However, by the time the bankruptcy court
considered the Trustee’s Motion to Dismiss the Adversary Proceeding, it had
already concluded—when it decided not to reopen SRB’s bankruptcy case—that
the disputed assets did not belong to SRB; they had gone “either to TCC or the
liquidating trustee.” (Doc. # 6 at 12 (quoting the transcript of the Hearing on the
Motion to Reopen at 105, lines 14–17).) It was for that reason that the bankruptcy
court denied Omega’s Motion to Reopen SRB’s bankruptcy case. (See doc. # 8 at
1 (“The Motion to Reopen Case was denied because all the remaining assets have
been passed to TCC Industries, Inc.”).) Omega had not moved the bankruptcy
court to reconsider this Order; nor had Omega filed a notice of appeal. It was not
illogical, therefore, for the bankruptcy court to conclude that hearing the Adversary
Proceeding—which was an attempt to re-litigate the issue of ownership of the
Prudential Stock—would be a waste of judicial resources.
Not only would hearing the Adversary Proceeding have required the
bankruptcy court to re-decide issues that it had already decided, it would have
required the bankruptcy court to re-decide issues that its sister court in Austin had
already decided—potentially subjecting interested parties to inconsistent
obligations. As detailed above, the Bankruptcy Court for the Western District of
Texas, Austin Division, determined in 2010 that the Prudential Stock belonged to
TCC’s bankruptcy estate; that is why it reopened TCC’s bankruptcy case and
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ordered the State of Texas to turn over the Prudential Stock to TCC’s bankruptcy
estate. (See supra at 4–5.) It rejected the argument of the Receiver (who was
purportedly working on Omega’s behalf) that the Prudential Stock was an
abandoned asset that reverted to SRB—precisely the same argument that Omega
made in the Adversary Proceeding complaint. (See Adv. P., doc. # 1 ¶ 22.)
Allowing the Adversary Proceeding to go forward would, in effect, have allowed
Omega to collaterally attack the Austin bankruptcy court’s orders. Indeed, it is
clear from the face of the Complaint that this is precisely what Omega wanted: It
insisted that “the ruling that the Austin Bankruptcy Court issued on November 3,
2011[,] is erroneous as a matter of law” and urged the bankruptcy court to “set
aside” that Order “without further unnecessary delay.” (Adv. P., doc. # 1 ¶ 16.)
Granting the relief that Omega sought would have subjected the State of Texas,
which had already complied with the Austin court’s order (SRB Bankr.,
doc. # 3049 ¶ 7), to inconsistent and contrary orders. Moreover, it would have
rewarded Omega for forum shopping and gamesmanship—for failing to appeal the
Austin court’s decision and instead attempting to collaterally attack it in a different
court. (See SRB Bankr., doc. # 3045 ¶ 15, in which Omega states that “while it
may be feasible to appeal the judgment of [TCC’s] current bankruptcy court, it
seems appropriate and more diligent, reasonable, and deferential in this matter to

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simply obtain an order from this Court clarifying [SRB’s] post-bankruptcy rights
. . . .”)
In light of the fact that hearing the Adversary Proceeding would have
both (1) required the bankruptcy court to re-litigate issues it had already
determined when it decided the Motion to Reopen SRB’s bankruptcy estate and (2)
required the bankruptcy court to re-litigate issues its sister court had already
decided, raising the risk that interested parties (including the State of Texas) would
be subjected to inconsistent orders, the Court cannot conclude that it was an abuse
of discretion for the bankruptcy court to dismiss the Adversary Proceeding.
Again, the Court does not address whether the bankruptcy court erred
when it determined that the Prudential Stock belonged to TCC’s bankruptcy estate
and that the SRB bankruptcy case should not be reopened; Omega did not appeal
that Order, and it is not before the Court. The only question before the Court is
whether the bankruptcy court abused its discretion when, after it determined that
SRB’s bankruptcy case should not be reopened, and in light of the fact that Omega
did not appeal that decision, it determined that the Adversary Proceeding should be
dismissed. For the reasons given, the Court concludes that the bankruptcy court
did not abuse its discretion.

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CONCLUSION
For the reasons given, the Court hereby AFFIRMS the January 9,
2012 Order of the bankruptcy court dismissing the Adversary Proceeding (Adv. P.,
doc. # 3).
IT IS SO ORDERED.
DATED: San Antonio, Texas, March 29, 2013.

_____________________________
David Alan Ezra
Senior United States District Judge

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