Alderwood Group, Inc., et al v. Garcia, et al., No. 10-14726 (11th Cir. May 30, 2012) (click here for .pdf of opinion). 

The Creditor/Plaintiffs asserted class action tort claims in 2008 against the Debtor/Defendants in Florida state court for damages due to Debtors’ operation of a cemetery known as Graceland.  The claims included inadequate record keeping and inability to locate upon request the grave sites of family members or close relatives buried in Graceland.  Liability was based on the common law theories of tortious interference with dead bodies, intentional or reckless infliction of emotional distress, and gross negligence. (Click here for more on allegations).

Debtors alleged that the claims were discharged in a prior 1999 Chapter 11 case filed in the Bankruptcy Court in Delaware.  In that case, a Bar Date was established, which was advertised in the Wall Street Journal, New York Times and USA Today.  Debtors’ Plan of Reorganization was confirmed on December 5, 2001. The Confirmation Order discharged all claims against Debtors, including unknown claims such as Creditors state court claims, that arose on or before the Effective Date and provided that the Bankruptcy Court retained jurisdiction over the reorganization after the Effective Date.

On April 7, 2008, Debtors filed a complaint against Creditors in the Bankruptcy Court for the Southern District of Florida seeking a declaration that the claims Creditors were attempting to litigate were discharged in the Chapter 11 case and seeking an order enjoining the Creditors from pursuing the state court case. Creditors argued that the notice in the Chapter 11 case was constitutionally inadequate and, therefore, their claims were not discharged.  The Florida Bankruptcy Court granted summary judgment in favor of the Creditors, and the District Court affirmed.

The Eleventh Circuit affirmed and transferred the case to Delaware (discussion after the jump).

The panel first concluded that the Debtors’ action was an impermissible pursuit of a successive injunction:

Once Debtors were served with Creditors’ complaint in the State Court case, they had four options to challenge Creditors’ prosecution of that case.  Debtors could (1) assert the discharge provided by the Confirmation Order as an affirmative defense in the State Court case; (2) remove the case to United States District Court for the Southern District of Florida under 28 U.S.C. § 1452(a); (3) move the Delaware Bankruptcy Court to reopen the Chapter 11 Case pursuant to 11 U.S.C. § 350(b); or (4) initiate a proceeding in the Delaware Bankruptcy Court for the enforcement of the statutory injunction provided by 11 U.S.C. § 524(a)(2), as reflected in the Confirmation Order…  Debtors eschewed the first three options and chose the  fourth, except that it initiated the proceeding by filing a complaint for declaratory and injunctive relief in the Florida Bankruptcy Court instead of petitioning the Delaware Bankruptcy Court to enforce the discharge injunction…

The party seeking to enforce an injunction cannot, however, obtain a successive injunction—i.e., an injunction ordering compliance with an existing injunction…In this case,Debtors seeks to prevent Creditors from pursuing in State Court claims purportedly discharged in the Chapter 11 Case.  If the claims were discharged, Creditors may be in contempt of the discharge injunction for maintaining the State Court action… But Debtors, in drafting their complaint for declaratory relief, did not frame the pleading as a motion for an order to show cause why Creditors should not be held in contempt for violating the discharge injunction.  Instead,Debtors moved the court to declare that Creditors’ claims had been discharged in the Chapter 11 Case pursuant to § 1141 of the Bankruptcy Code…and to enjoin Creditors “from continuing the [State Court action], pursuant to § 524 of the Bankruptcy Code.”  Id. at 5-6.  Debtors requested relief is either a misguided attempt to have the court sanction Creditors purported contempt of the Chapter 11 Case’s discharge provision by enjoining Creditors from prosecuting their State Court action … or it is an impermissible pursuit of a successive injunction…

The Court then held that only the Delaware Bankruptcy Court had jurisdiction to enforce the discharge injunction, and transferred the case to the District Court in Delaware:

Thus, the court that issued the injunctive order alone possesses the power to enforce compliance with and punish contempt of that order.In the case at hand, it is apparent that if Creditors’ filing of the State Court action indeed violated the discharge injunction contained in the Confirmation Order, then it was the Delaware Bankruptcy Court’s injunction to enforce—not the Florida Bankruptcy Court’s.  The Chapter 11 Case was administered by the Delaware Bankruptcy Court; that court confirmed Debtors’ reorganization plan and entered the order discharging Debtors’ preconfirmation liabilities.  As the court that controlled the res of Debtors’ estate, the Delaware Bankruptcy Court retained jurisdiction to effectuate and enforce the discharge injunction.  This is even more apparent considering that the Confirmation Order explicitly enjoined suits to collect on discharged debts and vested continuing jurisdiction in the Delaware Bankruptcy Court to enforce violations of the discharge injunction…If Creditors’ claims were discharged, then the Delaware Bankruptcy Court alone had the power to sanction Creditors’ alleged contempt for prosecuting discharged claims in violation of the injunction… Thus, regardless of how Debtors framed the allegations of the complaint they filed in the Florida Bankruptcy Court—as seeking the sanctioning of Creditors’ alleged contempt, an injunction against further violation of the discharge injunction, or an order enjoining the State Court case from proceeding further—the Florida Bankruptcy Court lacked jurisdiction to entertain the complaint because the discharge injunction was never its to enforce…

Because the Bankruptcy Court has exclusive jurisdiction over the debtor’s estate, 28 U.S.C. § 1334(e), the published notice gives potential creditors sufficient “contact” with the debtor’s estate such that the court may properly enjoin those who are not present within the court’s federal district consistent with Fifth Amendment due process.  That court, then, may properly sanction those without the district when their conduct violates or frustrates the court’s injunctive orders.  So, too, could the Delaware Bankruptcy Court adjudicate the rights of Creditors and the members of their class, notwithstanding that Creditors and those similarly situated may or may not have independent jurisdictional ties to the District of Delaware.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.