Opinion
Bankruptcy Case No. 93-05609-H11, Adversary Case No. 05-90348-H11.
July 19, 2006
MEMORANDUM DECISION
Jack Wireman and Ronald Thompson ("plaintif") move to dismiss the second amended third and fourth counterclaims (the "counterclaims") of Joseph V. Caracciolo ("debtorll or "defendant") pursuant to Federal Rule Civil Procedure ("FRCP") 12(b) (1) and (6).
At issue is 1) whether this Court has subject matter jurisdiction over defendant's counterclaims and 2) whether the counterclaims should be dismissed because they are based upon avoid reaffirmation agreement.
This Court has jurisdiction to determine this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(l) and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157 (b) (2) (A) and (I)
I. BACKGROUND
A. THE UNDERLYING BANKRUPTCY CASE
Debtor filed his voluntary chapter 11 bankruptcy petition on May 25, 1993. The deadline to file a dischargeability complaint was August 24, 1993. The claims bar date was December 31, 1993. Debtor admits in his answer to this adversary proceeding that plaintiffs were not scheduled as creditors and that the alleged debt owed to them was not scheduled as a claim. It is undisputed that plaintiffs were neither scheduled as creditors nor did they file a proof of claim.
In November 1994, debtor's reorganization plan was confirmed. On January 7, 1995, this Court entered a Notice of Entry of Confirmation of Plan and Discharge which provides that the discharge voids any judgment based on a discharged debt against debtor and enjoins the commencement or continuation of any action to collect on a claim against debtor that arose prior to the entry of the Confirmation Order. A final decree and order closing the case was entered on September 20, 2001.
B. THE MALICIOUS PROSECUTION LAWSUIT
Well over a year after debtor's plan was confirmed, the plaintiffs filed a lawsuit in the San Diego Superior Court against various parties, including but not limited to, the debtor and Rolling Hills Estates, Ltd. ("RHE"), a limited partnership, seeking damages for malicious prosecution (the "MPL"). The MPL arose from a previous lawsuit filed by various defendants in the MPL (with the exception of debtor) against plaintiffs alleging that plaintiffs conspired with the Rainbow Municipal Water District to deny sewer services to defendants properties and, in doing so, violated their civil rights (the "SLAPP lawsuit"). The SLAPP lawsuit was terminated in plaintiffs favor on or about October 1992, and a judgment entered on or about April 15, 1993, prior to debtor's bankruptcy filing. The judgment and subsequent award of costs was upheld by the court of appeal. [see docket #32, RJN Exh. P, Statement of Decision issued by the San Diego Superior Court dated July 23, 19971.
The appellate court evidently did not render a decision until March 1995 after the debtor's plan had been confirmed. [ see RJN, Exh. K and L].
Debtor filed an answer in the MPL and as a twentieth and separate affirmative defense, he claimed that plaintiffs were barred from recovering from him since all obligations owing to them were discharged in his bankruptcy. [Id. at Exh. N, 8:15-23). On July 21, 1997, the MPL came on for trial "as to the remaining defendant Joseph Caracciolo" as all other defendants had either settled or were defaulted. The superior court found that debtor was a general partner in RHE, and even though he was not a named plaintiff in the SLAPP lawsuit, "he controlled RHE and was one of the key principals controlling the prior action. The evidence is unrefuted that Caracciolo was fully responsible on behalf of RHE in retaining counsel and pursuing the litigation." [Id. Exh. PI 2:15-211. The superior court further found that the SLAPP lawsuit "was commenced at the direction of Caracciolo, was terminated in plaintiffs favor, and was brought without probable cause." [Id. at 3:l-21. The court rejected debtor's alleged defenses and awarded plaintiffs damages. On August 18, 1997, judgment was entered in favor of plaintiffs in the amount of $1,045,303.31 with an offset for the prior settlements in the amount of $825,000 leaving the total amount awarded against several parties, including debtor, at $266,270.35.
C. THE ADVERSARY COMPLAINT
Plaintiffs filed this adversary complaint against defendant on August 11, 2005, alleging that the judgment received in the MPL was nondischargeable under 11 U.S.C. S 523 (a) (3) and (6). Plaintiffs amended their complaint on September 16, 2005. Defendant answered on September 26, 2005, and then filed an Answer and Amended Counterclaim on January 1, 2006. Thereafter, defendant filed a Second Amended Answer and Counterclaims. The third and fourth counterclaims are at issue in this motion and are as follows:
THIRD COUNTERCLAIM: In the third counterclaim for relief, the defendant seeks a judgment for contempt damages arising out of an alleged oral binding contract, entered into between defendant and plaintiffs, that plaintiffs would not seek to enforce or collect the malicious prosecution judgment against defendant. As a result of this breach, defendant seeks an amount not less than $177,788.39.
The alleged oral contract arose sometime after June 12, 1997. Defendant contends that he accepted plaintiffs' proposed specific terms of a settlement regarding the MPL that amounted to a covenant not to execute on the judgment. The terms were that plaintiffs would dismiss their punitive damages claims and limit execution of any judgment received to certain "litigation assets", including rights to certain insurance policies and claims against third parties. These assets were not available to any other creditors of the Estate and this resolution would ensure that the actions of plaintiffs would not damage the estate. In exchange for these promises, defendant allegedly agreed to conduct a limited defense at trial and cooperate with collection against certain "litigation assets" consisting of insurance policies and claims against third parties that would not adversely affect the bankruptcy estate in full satisfaction of the judgment. According to defendant, at plaintiffs' insistence, the covenant not to execute was not reduced to writing. Defendant also alleges that in December 2003, plaintiffs breached the alleged covenant not to execute. See Second Amended Answer and Counterclaims 15: ¶¶ 10, 14.
FOURTH COUNTERCLAIM: Under the fourth counterclaim, defendant contends that plaintiffs are estopped from collecting the judgment due to the oral contract.
II. DISCUSSION
A. STANDARDS FOR DISMISSAL UNDER FRCP 12 (b) (1)
"[I]n passing on a motion to dismiss, whether on the ground of lack of jurisdiction over the subject matter or for failure to state a cause of action, the allegations of the complaint should be construed favorably to the pleader." City of Las Vecras, Nevada v. Clark County Nevada, 755 F.2d 697, 700 (9th Cir. 1985) (citation omitted); Don Bricker Construction, Inc. v. Duffy (In re Eads), 135 B.R. 387, 391 (Bankr. E.D. Cal. 1991) ("The factual allegations are construed favorably to the pleader and are accepted as true, unless denied or controverted by the movant.) (citation omitted) . "In most cases, [a] complaint may be dismissed on jurisdictional grounds only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Premium of Amer. v. Sanchez (In re Premium Escrow Serv., Inc.), 342 B.R. 390 (Bankr. D. C. 2006) (treating arguments under 12(b)(1) in the same way as it would an argument raised in a rule 12(b)(6)) (citation omitted). "The burden of proof is on the party asserting jurisdiction." Eads, 135 B.R. at 391 (citations omitted).
1. SUBJECT MATTER JURISDICTION: ARGUMENTS OF THE PARTIES
Plaintiffs, relying on In re Castlerock Properties, 781 F.2d 159 (9th Cir. 1986), argue that the Court does not have jurisdiction over the third and fourth counterclaims since they are nothing more than breach of contract claims under state law. Plaintiffs next contend the counterclaims are not within the Court's related to jurisdiction and cite In re Fietz, 852 F.2d 455 (9th Cir. 1988). According to plaintiffs, since debtor brings these counterclaims twelve years after his plan was confirmed and five years after the case was closed, the outcome cannot "conceivably have any effect on the estate being administered." Any recovery by the debtor will have absolutely no impact on the plan or any creditors.
Defendant responds that because the alleged oral agreement, or covenant not to execute, was an agreement by the parties to resolve their disputes regarding the interpretation and enforcement of both the discharge and the injunction ordered by this Court and the dischargeability of a claim, disputes regarding the covenant not to execute are within this Court's core jurisdiction. In the alternative, defendant relies onPegasus Gold Corp. v. Coldin (In re Pegasus Gold Corp.),
394 F. 3d 1189, 1194-95 (9th Cir. 2005) and argues that this Court has supplemental jurisdiction over the claims since they are related to the core claims.
In reply, plaintiffs contend that defendant's own allegation describing the oral agreement makes no mention of dischargeability, the plan of reorganization, or any other bankruptcy related issue. Plaintiffs also argue that this Court does not have supplemental jurisdiction since defendant's state law counterclaims arise from the verbal agreement that occurred in June 1997, and the conduct breaching said agreement in 2001. Conversely, plaintiffs' dischargeability complaint arises from the fact that before 1993, defendant maliciously prosecuted a lawsuit against the plaintiffs and should have provided plaintiffs with actual notice of his bankruptcy proceeding. Thus, plaintiffs contend that the state and federal claims do not arise from a common nucleus of operative facts.
Both parties submitted supplemental briefs which emphasized points they had made in their prior pleadings.
a. CORE JURISDICTION
A bankruptcy court has 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). A case "arises under" Title 11 and is within the core jurisdiction of the court when the cause of action is based on a right or remedy expressly provided in the Bankruptcy Code, such as "order to turn over property of the estate," and "proceedings to determine, avoid, or recover preferences." Peqasus Gold, 394 F.3d at 1193. Defendant argues that the third and fourth counterclaims are with this Court's core jurisdiction because the alleged covenant not to execute was an agreement by the parties to resolve their disputes regarding the § 524 injunction and dischargeability of a claim. Defendant pleads in the third counterclaim that the covenant not to execute "is a binding oral contract between Plaintiffs and Caracciolo with regard to enforcement of the discharge granted by the Court." [See para. 21 of Second Amended Answer]. The fourth counterclaim also relates to this alleged oral agreement. Although the Court would analyze the alleged agreement according to state contract law, accepting the defendant's allegations as true, the central purpose of the agreement is directly related to the debtor's discharge and the discharge injunction, both of which arise under Title 11. Therefore, arguably, the counterclaims are within this Court's core jurisdiction. Moreover, as set forth below, if the alleged agreement involved a previously discharged debt, this Court's core jurisdiction is implicated because of the requirements for reaffirmation agreements under 11 U.S.C. § 524(c).
See Rains v. Flinn (In re Rains), 428 F.3d 893, 901 (9th Cir. 2005) (finding that California law applied to the validity of settlement regarding debtor's discharge) (citations omitted).
b. "RELATED TO" JURISDICTION
"The bankruptcy court also has jurisdiction over a much broader set of cases: those proceedings that are `related to' a bankruptcy case." Peqasus Gold, 394 F.3d at 1193. "The Ninth Circuit has adopted the `Pacor test' for determining the scope of `related to' jurisdiction. Id. (citation omitted) .
The Pacor test is whether:
the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. . . . 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. (citation omitted) .
In the post-confirmation context, however, the Ninth Circuit noted that "the Pacor formulation may be somewhat overbroad."Id. at 1194. Therefore, the Ninth Circuit adopted the "close nexus" test for post-confirmation "related to" jurisdiction, "because it recognizes the limited nature of post-confirmation jurisdiction but retains a certain flexibility. . . ." Id. Under the "close nexus" test, a bankruptcy court would have post-confirmation "related to" jurisdiction if there is a close nexus to the bankruptcy plan or proceeding "sufficient to uphold bankruptcy jurisdiction over the matter." Id. at 1194. Further, by way of example, matters affecting the interpretation, implementation, consummation, execution, or administration of the confirmed plan will typically have the requisite close nexus.Id. (citation omitted) .
In Pegasus, the court easily found the "close nexus" test satisfied because the majority of the claims, even though they asserted state tort and contract claims involving post-confirmation conduct, would require the court to interpret the plan and a settlement agreement that was approved by the bankruptcy court in order to resolve the claims. Here, it's undisputed that the alleged agreement was not approved by this Court. However, it's possible that this Court may have to interpret the plan regarding the scope of the discharge vis-a-vis parties in the plaintiffs' position.
Nonetheless, even though there may not be a "close nexus" to the bankruptcy plan, there is at minimum a "close nexus" with the bankruptcy proceeding. Although the bankruptcy was filed as a chapter 11, at this juncture of the case, the only issue concerns the debtor's discharge under § 727(a) since he is an individual. The Ninth Circuit has stated that "[a] bankruptcy court's "related to" jurisdiction is very broad, `including nearly every matter directly or indirectly related to the bankruptcy.'"Sasson, 424 F. 3d at 868 (citation omitted) . Another court noted that "there may also be matters related to the debtor's fresh start which could be `related to' proceedings." Evans Assoc., CPAs, Inc. v. Macnichol (In re Macnichol), 240 B.R. 731 (Bankr. S.D. Ohio 1999). Further, even under Pegasus Gold, the Court had noted that the "close nexus" test retains a certain flexibility thereby implying that post-confirmation matters, concerning the discharge of an individual who filed a chapter 11, would fall within the scope of this Court's "related tow jurisdiction. Construing the allegations of the counterclaims favorably towards defendant, this Court finds that it has "related to" jurisdiction over defendant's third and fourth counterclaims.
"As subject-matter jurisdiction can be reconsidered and second-guessed at any point in the litigation, including on appeal, consideration of the alternative theory of jurisdiction — supplemental jurisdiction — is warranted." Eads, 135 B.R. at 392.
c. SUPPLEMENTAL JURISDICTION
This Court may exercise its supplemental jurisdiction over the counterclaims if they involve a common nucleus of operative facts and would ordinarily be expected to be resolved in one proceeding. In Pegasus, there were some claims that had only a tangential relationship to the underlying proceeding. With the remaining claims, the Ninth Circuit noted that a bankruptcy court may exercise its supplemental jurisdiction under 28 U.S.C. § 1367 over bankruptcy claims, even when subject matter jurisdiction is based on "related to" bankruptcy jurisdiction."Id. at 1995. Thus, even though claims may have a tangential relationship to the underlying proceeding, if they involve a "common nucleus of operative facts and would ordinarily be expected to be resolved in one proceeding," the bankruptcy court could exercise its supplemental jurisdiction. See also Sasson v. Sokoloff (In re Sasson), 424 F.3d 864, 868-69 (9th Cir. 2005) (noting that the bankruptcy court's related to jurisdiction "also includes the district court's supplemental jurisdiction . . .' over all other claims that are so related to claims in the action with [the court's] original jurisdiction that they form part of the same case or controversy. . . .") (citation omitted). 28 U.S.C. section 1367(a) states in relevant part:
The Court notes that the Fietz case was decided before Congress enacted 28 U.S.C. § 1367(a) codifying the principles of ancillary and pendent jurisdiction, now called "supplemental jurisdiction." "Ancillary jurisdiction implements the doctrine that a court with jurisdiction over a case may entertain subject matter over which it would otherwise lack jurisdiction whenever the matter must be considered to do full justice of the case."Eads, 135 B.R. at 393 (citation omitted). Under ancillary jurisdiction, "the nonfederal claim must be logically related to the primary lawsuit." Id. at 394. "Pendent jurisdiction is premised on the existence of a relationship between the federal claim and the state claim that, under the facts of the case, `permits the conclusion that the entire action before the court comprises but one constitutional `case.'" Id.
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.
A federal claim and a state law claim form part of the same Article III case or controversy if the two claims "derive from a common nucleus of operative fact' such that `the relationship between [the federal] claim and the state claim permits the conclusion that the entire action before the court comprises but one constitutional `case." Chicaso v. Int'l Coll. of Surgeons, 522 U.S. 156, 164-165, 118 S.Ct. 523, 139 L.Ed.2d 525 (1997) (quoting United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966)) (alteration in original).
Plaintiffs' first amended complaint demonstrates that their claims against defendant, and defendant's third and fourth counterclaims against plaintiffs, revolve around the same fact pattern. Plaintiffs allege that the MPL judgment is nondischargeable, while defendant alleges that the so-called covenant not to execute was a "settlement" of the MPL. The Court acknowledges that the plaintiffs' claims and the defendant's counterclaims arise out of two separate events. Nonetheless, construing the facts alleged in defendant's favor, because his discharge is directly implicated by the existence and/or validity of the alleged agreement, the testimony underlying the plaintiffs' claims will undoubtedly overlap with the defendant's. This Court has exclusive jurisdiction over plaintiffs' dischargeability complaint and because defendant's counterclaims arise out of some of the same operative facts, the parties claims would ordinarily be tried in one judicial proceeding. Therefore, defendant's counterclaims not only fall within the scope of this Court's "related to" jurisdiction, but its supplemental jurisdiction as well. Finally, the purpose behind exercising supplemental jurisdiction — to resolve all related claims in one action — is evident here.
B. STANDARDS FOR DISMISSAL UNDER FRCP 12(b) (6)
The standards for dismissal under 12(b)(6) are essentially the same as those for 12(b) (1). In resolving a 12(b) (6) motion, the court must (1) construe the complaint in the light most favorable to the plaintiff; (2) accept all well-pleaded factual allegations as true; and (3) determine whether plaintiff can prove any set of facts to support a claim that would merit relief. See Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337-338 (9th Cir. 1996). Any purported defect alleged by the moving party must be apparent on the face of the complaint. Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1483 (9th Cir. 1991).
1. VOID REAFFIRMATION AGREEMENT: ARGUMENTS OF THE PARTIES
Plaintiffs contend that even if this Court does not dismiss the counterclaims under 12(b) (I), this Court must dismiss them under 12(b)(6) since the purported covenant not to execute is nothing more than a reaffirmation agreement and is void. Plaintiffs contend that none of the requirements for a valid reaffirmation agreement are met pursuant to 11 U.S.C. § 524(c). Plaintiffs maintain that the allegations in the counterclaims confirm that the agreement was an improper reaffirmation since defendant's allegations in paragraphs 10 and 14 demonstrate that the consideration for the purported covenant not to execute is in whole, or in part, the judgment which is allegedly dischargeable.
Defendant argues that it is premature for this Court to dismiss the counterclaims under 12(b)(6) because the Court has yet to determine whether the debt is dischargeable or not.
a. ANALYSIS
The Court agrees that it is premature to dismiss the counterclaims under 12(b)(6) at this juncture. Reaffirmation agreements only pertain to discharged debts. That issue has not yet been decided. Thus, plaintiffs' motion to dismiss the counterclaims on this theory are premature.
III. CONCLUSION
The Court denies plaintiffs' motion to dismiss under FRCP 12 (b) (1) or 12 (b) (6) for the reasons stated above.
This Memorandum Decision constitutes findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. The defendant is directed to file with this Court an order in conformance with this Memorandum Decision within ten (10) days from the date of entry hereof.