Posted By: Scott B. Riddle, Esq.
Hospitality Ventures/Lavista v. Heartwood II, LLC, et al (In re Hospitality Ventures/Lavista), Adv. No. 03-06596, 2007 Bankr. LEXIS 39 (Bankr. N.D. Ga. January 3, 2007)(Bonapfel) (click caption for opinion).
I will briefly review the facts and conclusions, but I recommend reading the full opinion as the issues are complicated and Judge Bonapfel’s opinion thoroughly explains each step of the analysis. Also see the end of the post for links to additional pleadings.
The Debtor, a general partnership, owned a hotel in DeKalb County, Georgia. After filing for Chapter 11, the Debtor filed an adversary proceeding pursuant to pre-BAPCPA §505(a) against Heartwood, which purchased an ad valorem tax fi. fa from DeKalb County. The Debtor objected to the valuation of the hotel property and sought to reduce the amount of the tax obligation. [Note: The BAPCPA no longer allows such challenges under §505(a)]
Heartwood then filed a third-party claim against DeKalb County, seeking alternative relief from the County if Heartwood suffered a loss as a result of the Debtor’s claims. There is no dispute that Heartwood’s claims against DeKalb County do not arise under the Bankruptcy Code and are not "related to" the Bankruptcy Case.
Debtor and Heartwood resolved the claims against Heartwood, resulting in a lower ad valorem tax. In a January 10, 2006 Order, the Court approved the compromise without objection by DeKalb County, and entered judgment in favor of Heartwood against DeKalb County for the amount by which the tax liability was reduced. DeKalb County appealed and the District Court entered an Order vacating the Judgment and remanding the case, finding that the Bankruptcy Court had not made a true factual finding of the hotel’s value and questioning the existence of subject matter jurisdiction.
The Court stated that the issue of subject matter jurisdiction over the third-party claim required consideration of two questions. One, does the District Court have subject matter jurisdiction of the claim by operation of 28 U.S.C. §1367? Second, if so, may the District Court refer it to a Bankruptcy judge pursuant to 28 U.S.C. §157(a) to hear, but not determine, as a non-core matter under 28 U.S.C. §157(c)?
1. Jurisdiction over the third-party claim.
The claims asserted by Heartwood against DeKalb County did not "arise under" the Code or "arise in" the Debtor’s Bankruptcy case, and were not "related to" the case under the test of Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)(the outcome could not conceivably have any affect on the Debtor’s estate). However, the District Court could exercise ancillary jurisdiction pursuant to 11 U.S.C. §1367 –
Except as provided in subsections (b) and (c) or as expressly provided otherwise by Federal statute, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties.
Judge Bonapfel described ancillary jurisdiction –
The Eleventh Circuit explained the principles of ancillary jurisdiction in a nonbankruptcy context in Eagerton v. Valuations, Inc., 698 F.2d 1115, 1118-19 (11th Cir. 1983)<!—-> (footnotes omitted):
Ancillary jurisdiction developed as an equitable doctrine during the nineteenth century. See Freeman v. Howe, 65 U.S. (24 How.) 450, 16 L.Ed. 749 (1861)<!–
16 L. Ed. 749
–>. Under the doctrine, a federal court, otherwise a court of limited jurisdiction, is empowered to adjudicate ancillary claims involving state law without an independent basis of jurisdiction. See generally 13 C. Wright & A. Miller. Federal Practice & Procedure P 3523 (1975 & Supp. 1980). Implicit in the doctrine is the idea that a court "acquires jurisdiction of a case or controversy in its entirety, and, as an incident to the disposition of the matter properly before it, it may decide other matters raised by the case . . . ." Id. at 56; see also [Warren G. Kleban Engineering Corp. v.] Caldwell, 490 F.2d 800, 802 (5th Cir. 1974)<!—->.
Ancillary jurisdiction originally was applied in proceedings where non-diverse claimants sought to intervene in federal actions to protect interests in assets within the control of a federal court, or in proceedings to protect and enforce the judgments of federal courts. Modern practice has seen the expansion of its application; however, ancillary jurisdiction may only operate "when there is a tight nexus with a subject matter properly in federal court." Caldwell, 490 F.2d at 802<!—->; see also Amco Construction Co. v. Mississippi State Building Commission, 602 F.2d 730, 733 (5th Cir. 1979)<!—->; Florida Medical Association v. HEW, 601 F.2d 199, 202 (5th Cir. 1979)<!—->. This nexus or logical relationship between the main federal claim and the incidental state claim arises (1) when the same aggregate of operative facts serves as the basis for both claims or (2) when the core of facts supporting the original claim activates legal rights in favor of a party defendant that would otherwise remain dormant. Revere Copper & Brass, Inc. v. Aetna Casualty & Surety Co., 426 F.2d 709, 715 (5th Cir. 1970)<!—->.
(bold emphasis added). The Court concluded that supplemental jurisdiction over Heartwood’s claim was appropriate –
Subject to these exceptions, 28 U.S.C. 1367 applies, by its terms, unless "expressly provided otherwise by Federal statute;" so long as the claims otherwise outside the court’s original jurisdiction "form part of the same case or controversy" as those within its original jurisdiction. Notably, 28 U.S.C. 1367 contains no exception to a district court’s supplemental jurisdiction when its bankruptcy jurisdiction under §1334 is the source of its original jurisdiction and § 1334 itself does not expressly exclude the exercise of supplemental jurisdiction. Thus, a district court with bankruptcy jurisdiction of claims under 28 U.S.C. 1334 has supplemental jurisdiction of claims otherwise outside that jurisdiction if the latter claims are part of the same case or controversy.
Courts have generally recognized that district courts have supplemental jurisdiction in bankruptcy matters…The Debtor’s claim arising under the Bankruptcy Code is within the District Court’s jurisdiction under 28 U.S.C. 1334. The same core of operative facts (primarily, the value of the hotel serves as the basis for both the Debtor’s claim against Heartwood and Heartwood’s third-party claim against DeKalb County, and the core of facts supporting the Debtor’s claim (alleged overvaluation of the hotel) activates legal rights in favor of Heartwood against DeKalb County that would otherwise remain dormant. As such, the third-party claim has the required jurisdictional nexus with the Debtor’s claim and is part of the same case or controversy as the original claim under the principles explained in Eagerton v. Valuations, Inc., 698 F.2d 1115 (11th Cir. 1983). Consequently, the District Court has jurisdiction of Heartwood’s third-party claim by operation of 28 U.S.C. 1367.
2. Referral to a Bankruptcy Judge.
Judge Bonapfel noted that courts are split on whether referral to a Bankruptcy Judge is appropriate where the basis of jurisdiction is § 1367, and the Eleventh Circuit has not yet ruled on the issue. After a thorough analysis (please read the opinion), Judge Bonapfel concluded –
Nothing indicates that Congress intended the supplemental jurisdiction statute to affect the outcome under the bankruptcy jurisdiction statutes. The purposes of § 1367<!—-> were to codify long-standing doctrines of ancillary and pending jurisdiction and to expand pendent party jurisdiction, the latter in response to Supreme Court decisions, including Finley v. United States, 490 U.S. 545, 109 S. Ct. 2003, 104 L. Ed. 2d 593 (1989)<!–
109 S. Ct. 2003
104 L. Ed. 2d 593–>, that had restricted it. In this regard, § 1367<!—-> codified various doctrines of supplemental jurisdiction, including the ancillary jurisdiction principles discussed herein, as they existed prior to Finley. See H.R. Rep. No. 101-734 (1990); 13 CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE § 3523.1 at 224-25 (Supp. 2006); 16 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE PP 106.02, 106.04 (3d ed. 2006). Neither the legislative history that accompanied § 1367<!—->, nor the report of a Congressionally appointed study committee whose non-controversial recommendations the statute adopted, nor the concerns and events that prompted its enactment, mention bankruptcy jurisdiction, as the authorities just cited make clear. Given the absence of any indication that § 1367<!—-> had anything to do with bankruptcy, it would be anomalous to conclude that Congress intended the enactment of § 1367<!—->, which generally expands federal jurisdiction, to restrict either the bankruptcy jurisdiction of the district courts under § 1334(b)<!—-> or the referral under § 157(a)<!—-> to bankruptcy judges of matters within § 1334(b)<!—->, as supplemented by established principles of ancillary jurisdiction.
For all of the reasons set forth above, § 157(a)<!—-> authorizes a district court to refer to its bankruptcy judges a claim, asserted in a core proceeding arising under the Bankruptcy Code, that does not meet the "conceivable effect" test but is within its bankruptcy jurisdiction under § 1334(b)<!—->, as supplemented by § 1367<!—->. The Ninth Circuit reached this result in Sasson v. Sokoloff (In re Sasson), 424 F.3d 864 (9th Cir. 2005),<!—-> cert. denied, U.S. , 126 S.Ct. 2890, 165 L. Ed. 2d 917 (2006)<!–165 L. Ed. 2d 917
–>. The court ruled, "[A]t present, the bankruptcy court’s ‘related to’ jurisdiction also includes the district court’s supplemental jurisdiction pursuant to 28 U.S.C. § 1367<!—-> ‘over all other claims that are so related to claims in the action within [the court’s] original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.’" Id. at 869<!—-> (quoting 28 U.S.C. § 1367<!—-> and citing Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189, 1195 (9th Cir. 2005))<!—->. The Second Circuit has stated the same principle, Klein v. Civale & Trovato, Inc. (In re The Lionel Corp.), 29 F.3d 88, 92 (2d Cir. 1994)<!—->, as have several other courts, including one in this District. Goger v. Merchants Bank of Atlanta (In re Feifer Industries), 141 B.R. 450, 452 (Bankr. N.D. Ga. 1991)<!—-> (Cotton, B.J.).
……In summary, Congress enacted a bankruptcy jurisdiction system that vests broad bankruptcy jurisdiction in the district courts under § 1334(b)<!—-> and provides for referral of everything in it to the bankruptcy judges under § 157(a)<!—->. Under traditional principles of ancillary jurisdiction, a district court’s jurisdiction and authority to refer all bankruptcy matters to the bankruptcy judges extends to a claim lacking an independent jurisdictional basis but which has a nexus with a primary claim arising under the Bankruptcy Code within the district court’s jurisdiction – a claim that this Opinion has referred to as a "core-related supplemental claim." The enactment of § 1367<!—-> that codifies those principles and says nothing about bankruptcy jurisdiction or its referral to bankruptcy judges does not displace those principles. Rather, § 1367<!—-> simply substitutes the statutory basis of supplemental jurisdiction for the traditional doctrine [*53] of ancillary jurisdiction, with the same result. Thus, although a core-related supplemental claim does not have a "conceivable effect" on the bankruptcy case under the usual test set forth in Pacor and Lemco Gypsum, it is nevertheless "related to" the bankruptcy case because of its nexus with a core matter within the bankruptcy jurisdiction that establishes the district court’s bankruptcy jurisdiction of it under § 1334(b)<!—->, as extended by § 1367<!—->. Accordingly, § 157(a)<!—-> authorizes this bankruptcy judge to hear Heartwood’s Rule 14<!—-> third-party claim that meets those criteria.
3. Exercise of Discretion
Because the District Court has jurisdiction of Heartwood’s third-party claim by operation of § 1367<!—->, it is necessary to consider whether it is appropriate to decline to exercise that jurisdiction under § 1367(c)<!—->. Two of the conditions in § 1367(c)<!—-> that permit a district court to decline to exercise supplemental jurisdiction arguably exist here. The third-party claim may raise a novel or complex issue of state law, § 1367(c)(1)<!—->, and the original claim giving rise to bankruptcy jurisdiction has been settled. § 1367(c)(3)<!—->. Even if one of these requirements is met, however, the District Court has discretion to exercise supplemental jurisdiction. E.g., Palmer v. Hospital Auth. of Randolph County, 22 F.3d 1559, 1569 (11th Cir. 1994)<!—->. The considerations articulated in United Mine Workers v. Gibbs, 383 U.S. 715, 725-27, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966)<!–
86 S. Ct. 1130
16 L. Ed. 2d 218–>, including judicial economy, convenience, fairness to the parties, and whether the parties would expect all the claims to be tried together, properly guide the exercise of such discretion. Palmer, 22 F.3d at 1569<!—->. In instances where district courts have dismissed claims within their original jurisdiction, the Eleventh Circuit has encouraged them to decline to exercise supplemental jurisdiction over remaining state claims. E.g., Raney v. Allstate Ins. Co., 370 F.3d 1086, 1089 (11th Cir. 2004)<!—->.
If DeKalb County had requested that supplemental jurisdiction be declined, or even brought the attention of this bankruptcy judge to the subject matter jurisdiction issue, at the beginning of this proceeding, a strong argument for declining to exercise supplemental jurisdiction might have been made. The exercise of discretion at that time would have required a balancing of the interests of Heartwood in having all of its rights heard in one proceeding and in avoiding possibly inconsistent results with the interests of the Debtor in having this bankruptcy judge concentrate on bankruptcy issues raised by its primary claim and the interests of DeKalb County in having state law issues resolved in a state court.
But DeKalb County raised the issue of subject matter jurisdiction in only one sentence of a seven page answer that included 18 affirmative defenses. Although DeKalb County, like Heartwood, filed a motion to abstain under § 505<!—->, neither motion questioned subject-matter jurisdiction or suggested that jurisdiction be declined under § 1367(c)<!—->. Notably, the Court can find not a single word in DeKalb County’s or Heartwood’s motions for abstention or for summary judgment, their responses to motions for summary judgment, or their briefs with regard to those motions, about the District Court’s lack of jurisdiction under § 1334(b)<!—-> or the authority of a bankruptcy judge to hear it under § 157(a)<!—->. Some 60 docket entries, 18 months, hundreds of pages, and millions of words after the filing of DeKalb County’s answer, the issue was explicitly raised not by DeKalb County, but by the Debtor. By the time the Debtor asserted the jurisdictional issue, discovery was concluded. Legal issues have now been briefed and this bankruptcy judge has addressed them. Settlement of the primary claim did not occur until the trial was scheduled. Thus, substantial judicial resources have been devoted to resolving the third-party claim against DeKalb County. At this point, only one factual issue remains for determination, the value of the hotel in 1998. The valuation issue is not complex or difficult to try. In these circumstances, considerations of judicial economy, convenience, and fairness to the parties do not support discretionary dismissal of the third-party claim. To the contrary, those considerations support the final resolution of the matter in this proceeding. Finally, the Court notes that the parties would ordinarily expect to try all of these issues in one proceeding, as evidenced by the fact that, after the hearing on September 20, 2005, the Debtor’s complaint and Heartwood’s third-party claim were set for trial at the same time. (Order entered October 13, 2005 [105]).Because the District Court has jurisdiction of Heartwood’s third-party claim by operation of § 1367<!—->, it is necessary to consider whether it is appropriate to decline to exercise that jurisdiction under § 1367(c)<!—->. Two of the conditions in § 1367(c)<!—-> that permit a district court to decline to exercise supplemental jurisdiction arguably exist here. The third-party claim may raise a novel or complex issue of state law, § 1367(c)(1)<!—->, and the original claim giving rise to bankruptcy jurisdiction has been settled. § 1367(c)(3)<!—->. Even if one of these requirements is met, however, the District Court has discretion to exercise supplemental jurisdiction. E.g., Palmer v. Hospital Auth. of Randolph County, 22 F.3d 1559, 1569 (11th Cir. 1994)<!—->. The considerations articulated in United Mine Workers v. Gibbs, 383 U.S. 715, 725-27, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966)<!–
86 S. Ct. 1130
16 L. Ed. 2d 218–>, including judicial economy, convenience, fairness to the parties, and whether the parties would expect all the claims to be tried together, properly guide the exercise of such discretion. Palmer, 22 F.3d at 1569<!—->. In instances where district courts have dismissed claims within their original jurisdiction, the Eleventh Circuit has encouraged them to decline to exercise supplemental jurisdiction over remaining state claims. E.g., Raney v. Allstate Ins. Co., 370 F.3d 1086, 1089 (11th Cir. 2004)<!—->.
If DeKalb County had requested that supplemental jurisdiction be declined, or even brought the attention of this bankruptcy judge to the subject matter jurisdiction issue, at the beginning of this proceeding, a strong argument for declining to exercise supplemental jurisdiction might have been made. The exercise of discretion at that time would have required a balancing of the interests of Heartwood in having all of its rights heard in one proceeding and in avoiding possibly inconsistent results with the interests of the Debtor in having this bankruptcy judge concentrate on bankruptcy issues raised by its primary claim and the interests of DeKalb County in having state law issues resolved in a state court.
But DeKalb County raised the issue of subject matter jurisdiction in only one sentence of a seven page answer that included 18 affirmative defenses. Although DeKalb County, like Heartwood, filed a motion to abstain under § 505<!—->, neither motion questioned subject-matter jurisdiction or suggested that jurisdiction be declined under § 1367(c)<!—->. Notably, the Court can find not a single word in DeKalb County’s or Heartwood’s motions for abstention or for summary judgment, their responses to motions for summary judgment, or their briefs with regard to those motions, about the District Court’s lack of jurisdiction under § 1334(b)<!—-> or the authority of a bankruptcy judge to hear it under § 157(a)<!—->. Some 60 docket entries, 18 months, hundreds of pages, and millions of words after the filing of DeKalb County’s answer, the issue was explicitly raised not by DeKalb County, but by the Debtor. By the time the Debtor asserted the jurisdictional issue, discovery was concluded. Legal issues have now been briefed and this bankruptcy judge has addressed them. Settlement of the primary claim did not occur until the trial was scheduled. Thus, substantial judicial resources have been devoted to resolving the third-party claim against DeKalb County. At this point, only one factual issue remains for determination, the value of the hotel in 1998. The valuation issue is not complex or difficult to try. In these circumstances, considerations of judicial economy, convenience, and fairness to the parties do not support discretionary dismissal of the third-party claim. To the contrary, those considerations support the final resolution of the matter in this proceeding. Finally, the Court notes that the parties would ordinarily expect to try all of these issues in one proceeding, as evidenced by the fact that, after the hearing on September 20, 2005, the Debtor’s complaint and Heartwood’s third-party claim were set for trial at the same time. (Order entered October 13, 2005 [105]).
Additional Pleadings –
1. Order Vacating January 10, 2006 Order; Opinion on Motions for Summary Judgment Relating to Issues in Third-Party Complaint; and Order and Notice of Trial, entered on January 3, 2007. This order addresses the substantive issues remanded by the District Court.
2. Brief in Support of Motion for Reconsideration filed by DeKalb County on January 12, 2007.
3. Response to Motion for Reconsideration filed by Heartland on January 19, 2007.