Mark Allen Hall v. MDC Innovations, LLC ( 2018 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 17-1568
MDC INNOVATIONS, LLC; MDC INVENTIONS, LLC; JASON MCDONALD,
Defendants - Appellants,
v.
MARK ALLEN HALL,
Defendant - Appellee,
JOHN A. NORTHEN, Trustee for C&M Investments of High Point, Inc., C. Wayne
McDonald Contractor, Inc., C. Wayne McDonald and Wendy C. McDonald,
Trustee - Appellee,
and
C. WAYNE MCDONALD; WENDY C. MCDONALD,
Defendants,
CAPITAL BANK, NATIONAL ASSOCIATION; COMMUNITY ONE BANK,
Creditors,
CHARLES MARSHALL IVEY, III,
Trustee,
C AND M INVESTMENTS OF HIGH POINT, INC.,
Debtor.
Appeal from the United States District Court for the Middle District of North Carolina, at
Greensboro. William L. Osteen, Jr., District Judge. (1:16-cv-00643-WO)
Submitted: January 31, 2018 Decided: March 1, 2018
Before KING and KEENAN, Circuit Judges, and HAMILTON, Senior Circuit Judge.
Affirmed in part, vacated and remanded in part by unpublished per curiam opinion.
Rayford K. Adams, III, M. Rebecca Hendrix, SPILMAN, THOMAS & BATTLE, PLLC,
Winston-Salem, North Carolina, for Appellant. Peter J. Juran, Ashley S. Rusher,
BLANCO TACKABERY & MATAMOROS, P.A., Winston-Salem, North Carolina; John
A. Northen, John Paul H. Cournoyer, NORTHEN BLUE, LLP, Chapel Hill, North
Carolina, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
The Trustee in the bankruptcy proceeding of C. Wayne McDonald and related
entities filed an adversary complaint against the Appellants, MDC Innovations, LLC, MDC
Inventions, LLC, and Jason McDonald, and Appellee Mark Allen Hall, seeking to
determine Wayne and Jason McDonald and Hall’s relative ownership interests in the MDC
companies and the ownership of intellectual property held by Jason McDonald. The
complaint sought, inter alia, a declaratory judgment that at the time of the filing of the
bankruptcy petition, Wayne and Jason McDonald each owned 38.75% of the MDC
companies and Hall owned the remaining 22.5%, and that Jason McDonald was obligated
to assign the intellectual property to the MDC companies. The complaint also sought to
avoid a purported transfer of Wayne’s interest in the MDC companies to Jason.
Hall filed several cross-claims against MDC and Jason McDonald, in which he also
sought a determination regarding Jason’s obligation to transfer the intellectual property to
the MDC companies and the parties’ respective ownership interests in the MDC
companies, but further sought a declaration that he was entitled to obtain an additional
10.83% of the companies with an additional monetary investment. Hall also asserted
alternative causes of action for fraud, and unfair and deceptive trade practices with respect
to the assignment of the intellectual property rights and specific performance to require
Jason to transfer that property to the MDC companies. The claims regarding the
intellectual property were based on an oral agreement Jason and Wayne made to Hall to
assign such property to the MDC companies as their capital contributions.
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Before the bankruptcy court, the Appellants averred that the claims in the adversary
complaint were core claims under 28 U.S.C. § 157 (2012), and that the issues asserted in
Hall’s cross-claims were non-core matters. With respect to the non-core claims, the
Appellants declined to consent to the bankruptcy court’s entering a final judgment and
instead demanded a jury trial. See 28 U.S.C. § 157(c). Following the bankruptcy court’s
order disposing of the parties’ respective summary judgment motions in which the court
asserted that it had obtained the Appellants’ consent to enter a final judgment on all matters
as they had failed to object to such in their summary judgment motion and related briefs,
however, the Appellants did not object to that court’s statement or move for withdrawal of
those matters to the district court, but participated in a bench trial before the bankruptcy
court.
Following the trial, the bankruptcy court determined that Wayne and Jason each
owned 38.75% of the MDC companies and Hall owned 22.5% thereof, and ordered Jason
to assign the patents to the MDC companies, based on his oral agreement to Hall that he
would do so. That court determined that any transfer of Wayne’s interest in the companies
to Jason was either fraudulent or otherwise avoidable. The bankruptcy court further
concluded that the cross-claims’ remaining requests for relief were rendered moot by the
court’s determinations on these issues. The Appellants appealed to the district court,
challenging the bankruptcy court’s conclusions on the merits, and objecting to that court’s
entry of a final judgment on Hall’s cross-claims. The Appellants asserted that they never
consented to that court’s entry of a final order on those issues. The district court affirmed
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the bankruptcy court’s order, and determined that the Appellants had consented to that
court’s entry of a final judgment on all the claims.
On appeal to this court, the Appellants argue for the first time that the bankruptcy
court lacked subject matter jurisdiction over Hall’s claims regarding the ownership of the
MDC companies and the claims asserting that Jason McDonald had promised to assign the
intellectual property to the MDC companies. The Appellants also challenge the district
court’s conclusion that they consented to entry of a final judgment on the ownership issues
by the bankruptcy court. The Appellants assert that, without such consent, the bankruptcy
court could only have issued proposed findings of fact and conclusions of law that the
district court should have reviewed de novo, rather than applying the traditional appellate
review standards that the district court applied. For the reasons that follow, we affirm in
part and vacate and remand in part.
“Where, as here, a district court acts as a bankruptcy appellate court, our review of
its decision is plenary.” SG Homes Assoc. v. Marinucci, 718 F.3d 327, 333 (4th Cir. 2013)
(internal quotation marks and alteration omitted). We review the bankruptcy court’s
decision independently, reviewing the court’s factual findings for clear error and legal
conclusions de novo. Id.District courts have exclusive jurisdiction of all cases arising under Title 11, and
original, but not exclusive, jurisdiction over civil proceedings arising under Title 11 and
arising in or related to cases under Title 11. 28 U.S.C. § 1334(a), (b) (2012); see also Stern
v. Marshall, 564 U.S. 462, 473 (2011) (“Congress has divided bankruptcy proceedings into
three categories: those that ‘arise under title 11’; those that ‘arise in’ a Title 11 case; and
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those that are ‘related to a case under title 11.’”) (quoting 28 U.S.C. § 157(a)). District
courts may refer any or all of such proceedings to the bankruptcy court. 28 U.S.C. § 157(a).
With respect to matters that have been so referred, bankruptcy courts have the
statutory authority to adjudicate and enter final judgments in “core proceedings” under
Title 11, 28 U.S.C. § 157(b)(1); proceedings that “arise under” Title 11 or “arise in” Title
11 cases are core proceedings. Stern, 564 U.S. at 474-75. In addition, the statute provides
a non-exhaustive list of matters that constitute core proceedings. 28 U.S.C. § 157(b)(2)(A)-
(P). Once the bankruptcy court has issued a final order in a core proceeding, a party may
appeal that order to the district court, which is obliged to review the bankruptcy court’s
order under traditional appellate standards, reviewing factual findings for clear error and
legal conclusions de novo. Stern, 564 U.S. at 474-75.
“A claim arises under Title 11 if it is a cause of action created by the Bankruptcy
Code, and which lacks existence outside the context of bankruptcy.” Educ. Credit Mgmt.
Corp. v. Kirkland, (In re Kirkland), 600 F.3d 310, 316 (4th Cir. 2010) (internal quotation
marks omitted). In addition, “[a] proceeding or claim ‘arising in’ Title 11 is one that is
‘not based on any right expressly created by Title 11, but nevertheless, would have no
existence outside of the bankruptcy.’” Valley Historic Ltd. P’ship v. Bank of N.Y., 486
F.3d 831, 835 (4th Cir. 2007) (citation omitted). Such claims “would have no practical
existence but for the bankruptcy.” Id. (internal quotation marks and citation omitted).
The bankruptcy court may also hear a proceeding that is not a core proceeding, but
is “related to” a case under Title 11. 28 U.S.C. § 157(c)(1). However, the bankruptcy court
does not possess the statutory authority to enter a final judgment in non-core proceedings;
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that court, rather, must submit proposed findings of fact and conclusions of law to the
district court. Id. The district court reviews de novo the portions of the proposed findings
and conclusions to which any party has objected and enters a final order or judgment in
those proceedings. Id. The statute permits an exception to this procedure, however, where
all of the parties consent to the bankruptcy court’s final adjudication of non-core
proceedings, subject to review by the district court under traditional appellate standards.
28 U.S.C. § 157(c)(2).
We have “adopted the test articulated by the Third Circuit in Pacor, Inc. v. Higgins,
743 F.2d 984, 994 (3d Cir. 1984), for determining ‘related to’ jurisdiction.” Valley
Historic, 486 F.3d at 836. “In short, the test for determining whether a civil proceeding is
related to bankruptcy is whether the outcome of that proceeding could conceivably have
any effect on the estate being administered in bankruptcy.” Id. (internal quotation marks,
citation, and emphasis omitted). This is the case “if the outcome could alter the debtor’s
rights, liabilities, options[,] or freedom of action (either positively or negatively) and it in
any way impacts upon the handling and administration of the bankruptcy estate.” Id.(internal quotation marks omitted); see also Owens-Ill., Inc. v. Rapid Am. Corp. (In re
Celotex Corp.), 124 F.3d 619, 626 (4th Cir. 1997) (focus is on the potential of the outcome
to alter the debtor’s rights or liabilities as the possibility of such is enough to confer
jurisdiction). “The ‘related to’ category of cases is quite broad” and should be “broadly
interpreted.” Bergstrom v. Dalkon Shield Claimants Tr. (In re A.H. Robins Co.), 86 F.3d
364, 372 (4th Cir. 1996) (citations omitted). Thus, under related-to jurisdiction, bankruptcy
courts possess “jurisdiction over more than simple proceedings involving the property of
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the debtor or the estate.” Celotex Corp. v. Edwards, 514 U.S. 300, 307-08 (1995); see also
New Horizon of N.Y., LLC v. Jacobs, 231 F.3d 143, 151 (4th Cir. 2000) (a related to case
need not be against a debtor or his property and may be a civil suit between third parties
that has an effect on the bankruptcy estate).
Outside of a bankruptcy court’s statutory authority to enter final orders in certain
proceedings, however, the court must still possess the constitutional authority to do so.
Stern, 564 U.S. at 482-83. The Supreme Court has noted that Congress may not in a statute
bypass the requirement of Article III, § 1 of the Constitution that the judicial power of the
United States must be vested in the Supreme Court and inferior federal courts that Congress
establishes “simply because a proceeding may have some bearing on a bankruptcy case.”
Id. at 482-99 (emphasis in original). Therefore, in order for a bankruptcy court to possess
constitutional authority to enter a final order in a core proceeding, “the action at issue
[must] stem[] from the bankruptcy itself or [must] necessarily be resolved in the claims
allowance process.” Id. at 499. In core proceedings that are not resolved in the process of
ruling on a creditor’s proof of claim, i.e. Stern claims, the bankruptcy court may not enter
a final order absent the consent of the parties. Id. at 482-99; see Wellness Int’l Network
Ltd. v. Sharif, 135 S. Ct. 1932 (2015).
However, “[n]othing in the Constitution requires that consent to adjudication by a
bankruptcy court be express.” Wellness, 135 S. Ct. at 1947. The Supreme Court in
Wellness adopted the consent standard from Roell v. Withrow, 538 U.S. 580 (2003), dealing
with consent to proceed before a magistrate judge; thus a litigant’s consent, whether
express or implied, must be knowing and voluntary. 135 S. Ct. at 1948. The “key inquiry”
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under this standard is “whether the litigant or counsel was made aware of the need for
consent and the right to refuse it, and still voluntarily appeared to try the case before the
non-Article III adjudicator.” Id. (internal quotation marks omitted). With respect to the
Appellants’ assertion that they did not consent to the bankruptcy court’s final adjudication
of the ownership claims, we have thoroughly reviewed the record and the relevant legal
authorities and conclude that the bankruptcy court and the district court correctly concluded
that the Appellants impliedly consented to the bankruptcy court’s entering a final judgment
on all the issues raised by the parties. We therefore conclude that the district court applied
the correct standard of review to the bankruptcy court’s judgment.
With respect to the Appellants’ argument that the bankruptcy court lacked
jurisdiction to adjudicate some of the claims asserted by Hall, “[a]lthough [the Appellants]
failed to raise the issue of subject matter jurisdiction in the bankruptcy court, we can always
consider whether subject matter jurisdiction exists.” Kirkland, 600 F.3d at 314. “Lack of
subject matter jurisdiction may be raised at any time by the parties or by the court,” New
Horizon, 231 F.3d at 150, and subject matter jurisdiction cannot be forfeited or waived.
Kirkland, 600 F.3d at 314. Moreover, a court is required to satisfy itself of its subject
matter jurisdiction even if the parties do not raise the issue. See Liberty Mut. Ins. Co. v.
Wetzel, 424 U.S. 737, 740 (1976).
Here, it is not clear that, particularly with respect to the claims regarding Jason
McDonald’s assignment of the intellectual property to the MDC companies, the challenged
issues involved either core or non-core matters. However, not only did the Appellants not
raise this issue before either the bankruptcy court or the district court, they affirmatively
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stated before the bankruptcy court that the issues raised in the adversary complaint were
core and the issues raised in Hall’s cross-claims were non-core. In either instance, the
bankruptcy court would have had the statutory authority and subject matter jurisdiction to
adjudicate the matters and issue either a final judgment or recommended findings to the
district court. Under these circumstances, we think it appropriate to have the bankruptcy
court consider its subject matter jurisdiction in the first instance. We therefore vacate and
remand that issue to the district court with instructions to remand to the bankruptcy court
to determine its jurisdiction over the claims regarding the assignment of intellectual
property to the MDC companies.
We dispense with oral argument because the facts and legal conclusions are
adequately presented in the materials before this court and argument would not aid in the
decisional process.
AFFIRMED IN PART,
VACATED AND REMANDED IN PART
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