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UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF ALASKA

 

MEMORANDUM REGARDING JURISDICTION AND ABSTENTION,

AND THE NEED FOR FURTHER PROCEEDINGS

 

                      Sea Hawk's motion to determine scope of settlement agreement duly came before the court for hearing on October 9, 2001. Kevin Sullivan appeared for Sea Hawk. Mary Ellen Beardsley appeared for the State of Alaska. Rebecca Copeland appeared for the debtor. This court raised the issue of jurisdiction at the hearing. The parties have submitted briefs regarding bankruptcy jurisdiction. In addition, Sea Hawk has moved for dismissal or, alternatively, mandatory abstention pursuant to 28 U.S.C. § 1334(c)(2). I have reviewed the motions, oppositions and replies and considered the arguments made by counsel at the hearing. I have concluded this court does have jurisdiction to determine the scope of the settlement agreement, but that an adversary proceeding must be initiated and a trial held before that decision can be made. An order will be entered consistent with this memorandum.

  

Case Background

 

                      This chapter 11 case has a long history. It was filed in March of 1998, after Sea Hawk obtained a large judgment against the debtor. The events surrounding the filing have been summarized in In re Valdez Fisheries Development Association, 7 ABR 223      Inc., ^1. which is incorporated by reference. Following the chapter 11 filing and after prolonged negotiations, Valdez Fisheries and Sea Hawk entered into a settlement agreement which was approved by this court on March 22, 1999. The debtor's chapter 11 proceeding was dismissed without prejudice on April 16, 1999. Sea Hawk attempted to continue state court litigation with the State of Alaska immediately following dismissal of VFDA's bankruptcy case. As discussed more fully below, this litigation had been stayed during the pendency of the bankruptcy.

 

                      The State contends the settlement agreement approved by this court encompassed all claims that Sea Hawk had against it, as well. Although the State has advanced this argument before the state superior court and the state supreme court, those courts found that the bankruptcy court was the proper forum for resolving any issues regarding the scope of the debtor's settlement with Sea Hawk.

 

                      On July 3, 2001, Sea Hawk filed its motion to reopen the bankruptcy case and determine the scope of the settlement agreement. VFDA's bankruptcy case was reopened and a hearing on Sea Hawk's motion to determine scope of settlement was held. At the request of the court, the parties have submitted briefs regarding jurisdiction. Sea Hawk also filed a motion to dismiss or abstain.

               

Jurisdiction

                        In its motion to dismiss, Sea Hawk characterizes its claim against the State of Alaska as one wholly independent of its judgment against VFDA, and having no connection whatsoever to the bankruptcy. For example, in its reply, Sea Hawk says the issue this court must decide is "whether a state lawsuit by Sea Hawk against the State of Alaska that was never pending before this Court, is barred by the underly- 7 ABR 224      ing Settlement Agreement.” ^2. In fact, Sea Hawk's fraudulent conveyance claim against the State was filed as a supplemental proceeding in the same action in which the judgment against VFDA was entered, Case No. 3AN-95-3500, Sea Hawk v. Valdez Fisheries Dev. Ass'n, Inc. Both the debtor and the State were named as defendants in the supplemental proceeding. Sea Hawk's fraudulent transfer claim was pending at the time VFDA filed bankruptcy, and this court was well aware of the existence of this claim during the entire pendency of the bankruptcy case. Sea Hawk moved for relief from stay so that it could continue to prosecute the fraudulent transfer claim, against both VFDA and the State, just 15 days after the petition was filed. ^3. In that motion, Sea Hawk represented that the State was an "indispensable party” to the fraudulent transfer claim against VFDA. ^4. Sea Hawk's motion for relief from stay was denied. ^5. This court noted that Sea Hawk lacked standing to pursue its claim, even against the State only, because fraudulent transfer claims are assets of the bankruptcy estate which may generally only be pursued by a trustee or debtor-in-possession. ^6.

 

 

 

                      The settlement agreement approved by this court clearly released VFDA from all claims and potential claims which Sea Hawk had asserted or could assert against it in the state court action, including the fraudulent conveyance claim. In accordance with the terms of the settlement, the underlying bankruptcy case was 7 ABR 225      dismissed in April, 1999. In other words, but for the settlement agreement, this case would not have been dismissed. Bankruptcy jurisdiction over the instant dispute, the scope of the settlement agreement, must be examined against this background.

 

                      Bankruptcy courts are courts of limited jurisdiction. ^7. There are two possible means for the assertion of jurisdiction; if the dispute is a "core” or "related” proceeding, then this court has jurisdiction. 28 U.S.C. § 157(b) provides that bankruptcy judges may "hear and determine all cases under title 11 and all core proceedings arising under title 11.” Core proceedings are defined in 28 U.S.C. § 157(b)(2), and include allowance or disallowance of claims, counterclaims asserted by the estate against creditors, credit orders, preference and fraudulent conveyance proceedings and a number of additional specific proceedings. ^8. There are two catch-all provisions: § 157(b)(2)(A), which includes "matters concerning the administration of the estate,” and § 157(b)(2)(O), which includes “other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship . . . ”

 

                      Arguably, the current proceeding is a matter concerning the administration of the former estate and could affect the adjustment of the debtor's financial relationship with the State of Alaska. The catch-all provisions found in § 157(b)(2)(A) and (O) must be read conservatively, however. A court should avoid characterizing a case as a core proceeding simply because it may fall within these general provisions. ^9. To be encompassed within the bankruptcy court's core juris- 7 ABR 226      diction, the proceeding must constitute “a cause of action created by title 11 or one that only arises in title 11 cases.” ^10. Nothing in the pleadings submitted thus far has established that the instant controversy involves a cause of action created by title 11. Nor is this a proceeding that could only arise in a bankruptcy case. The construction of settlement agreements is not a function unique to bankruptcy courts. Civil actions are routinely settled in state courts, and the state courts frequently resolve disputes arising out of such agreements. Finally, the fact that VFDA and the State have agreed to have this court determine the controversy does not create core jurisdiction. ^11.

 

                      VFDA argues that the interpretation of this court's prior order approving the settlement agreement gives rise to a core proceeding. I respectfully disagree. The order approving the settlement agreement is short and very simple. It merely approves the settlement. There is nothing of substance to “interpret” in that order. No one is attempting to overturn it and no motions to vacate or modify the order have been filed. The debtor was released through that agreement. The State of Alaska is seeking a determination of the scope of the settlement agreement approved by this court. Making that determination is not a core bankruptcy function.

 

                      This is, however, a related proceeding. The Ninth Circuit has endorsed a test formulated by the Third Circuit to determine whether or not a proceeding falls within the related jurisdiction of a bankruptcy court. ^12. The Third Circuit standard requires a party to demonstrate that “the outcome of the proceeding could conceivably 7 ABR 227      have any effect on the estate being administered in bankruptcy.” ^13. The Third Circuit went on to state:

 

Thus, the proceeding need not necessarily be against the debtor or against the debtor's property. 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 bankruptcy estate. ^14.

 

                      If this case were still in chapter 11 and had not been dismissed, Sea Hawk's continued prosecution of its claims against the State, if successful, would negatively alter the debtor's rights and liabilities with the State. This court would undeniably have jurisdiction to review and determine the scope of the settlement agreement if VFDA's bankruptcy were still pending. Sea Hawk contends this court lacks jurisdiction because VFDA's bankruptcy case has been dismissed and the bankruptcy estate no longer exists. Dismissal of the underlying bankruptcy case does not automatically divest the bankruptcy court of jurisdiction over a related case, however. ^15. After dismissal, a bankruptcy court may in its discretion retain jurisdiction of a related proceeding. ^16. In doing so, the court must consider the same factors that federal district courts consider in deciding whether to retain jurisdiction over pendent state claims: judicial economy, convenience, fairness and comity. ^17. Applying these 7 ABR 228      considerations here, I find that retention of jurisdiction is warranted in this case. It would be economical and convenient to resolve this dispute in bankruptcy court. The parties have already briefed and argued their positions at great length. The state superior and supreme courts have refused to hear the controversy until the settlement issues have been resolved. It would be fair to all parties to have the issue addressed in this forum. Finally, because the state courts have refused to decide the issue, considerations of comity would be served by resolving this dispute in a federal forum.

 

                      I conclude that the issue of the scope of the settlement agreement is a related proceeding over which this court has jurisdiction. I further conclude that this court may retain jurisdiction to determine this issue after dismissal of the main bankruptcy case.

                       

Abstention

 

                      As an alternative to dismissal, Sea Hawk has moved for mandatory abstention under 28 U.S.C. § 1334(c)(2), which provides:

 

Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.

 

I feel that mandatory abstention is inapplicable here. While it is true that Sea Hawk's underlying fraudulent conveyance action could not have been commenced in federal court absent the jurisdiction of 28 U.S.C. § 1334, the state court has declined to adjudicate the settlement agreement issues and will not hear the fraudulent transfer issues until the settlement issues have been resolved by this court. The mandatory 7 ABR 229      provisions of § 1334(c)(2) are not met, and Sea Hawk's request for abstention will be denied.

 

Further Proceedings are Necessary

 

(c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected. ^18.

 

                      Because this is a related proceeding, this court must submit proposed findings and conclusions to the district court for entry of a final order. The present record is insufficient for this purpose. At the hearing on motion to approve settlement, no evidence was received by the court. Although the parties did submit affidavits and exhibits in conjunction with their motions, oppositions and replies, the hearing consisted primarily of the arguments of counsel. Such a record will not withstand the scrutiny of the district court or any appellate court. Moreover, the nature of the pleadings submitted thus far on the issue of the scope of the settlement agreement leave much to be desired.

 

                      At its core, this is a proceeding to recover money or property or an action to obtain a declaratory judgment. Such proceedings are governed by Fed. R. Bankr. P. 7001. As such, Sea Hawk must initiate an adversary proceeding in this bankruptcy case by filing and serving an appropriate complaint against the State and VFDA. The State and VFDA should file answers and any counter or cross-claims they may have. Further, because this court's determination of the scope of the 7 ABR 230      settlement agreement will require extensive factual findings regarding both legal and equitable issues, this matter must proceed to trial and no summary judgment will be granted. It is vital that this court be provided sufficient evidence to determine the intent of the parties and the credibility of witnesses. An adequate record must be made so that this court can submit detailed findings of fact to the district court for review.

 

Conclusion

 

                        The scope of the settlement agreement approved by this court is a related proceeding over which this court has jurisdiction. The provisions of 28 U.S.C. § 1334(c)(2), regarding mandatory abstention, are inapplicable to this controversy. Sea Hawk's motion to dismiss and for abstention will be denied. Its motion to determine scope of settlement agreement will also be denied, without prejudice. An adversary proceeding must be initiated to resolve the issues which have been presented here and, as a related proceeding, this court will be submitting proposed findings of fact and conclusions of law to the district court as required by 28 U.S.C. § 157(c)(1).

 

                        DATED: January 30, 2002.

                                                                             BY THE COURT

 

 

                                                                                   DONALD MacDONALD IV

                                                                                   United States Bankruptcy Judge

 

N O T E S:

1.      5 A.B.R. 406 (Bankr. D. Alaska 1998).

2.      See Sea Hawk's Reply Mem., filed Nov. 15, 2001 [Docket No. 260] at pp. 4-5.

3.      See Sea Hawk's Mot. for Relief From Stay, filed April 7, 1998 [Docket No. 13].

4.      Id. at p. 4.

5.      See Ord. Denying Mot. for Relief From Stay, entered May 13, 1998 [Docket No. 59].

6.      Id. at p. 2.

7.      Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).

8.      28 U.S.C. § 157(b)(2)(B) through (N).

9.      In re Castlerock Prop., 781 F.2d 159, 162 (9th Cir. 1986).

10.      In re Eastport Assoc., 935 F.2d 1071, 1077 (9th Cir. 1991).

11.      Holly's Inc. v. City of Kentwood (In the Matter of Holly's, Inc.), 172 B.R. 545, 555 (Bankr. W.D. Mich. 1994).

12.      Fietz v. Great Western Savings, (In re Fietz), 852 F.2d 455, 457 (9th Cir. 1988).

13.      Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984) [citations omitted; emphasis in original].

14.      Id. at 994.

15.      Carraher v. Morgan Elec., Inc. (In re Carraher), 971 F.2d 327, 328 (9th Cir. 1992) [bankruptcy court retained jurisdiction over a removed state law fraud dispute “as a related case” even after the underlying bankruptcy case had been dismissed].

16.      Id.

17.      Id.

18.      28 U.S.C. § 157(c)(1).