Collins v. Sidharthan (In Re KSRP) ( 2015 )

Case: 14-41226 Document: 00513308908 Page: 1 Date Filed: 12/15/2015
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 14-41226 United States Court of Appeals
Fifth Circuit
FILED
In the Matter of : KSRP, LIMITED, December 15, 2015
Lyle W. Cayce
Clerk
Debtor
--------------------------------------
ROBERT L. COLLINS,
Appellant
v.
A. S. SIDHARTHAN,
Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before JOLLY, HAYNES, and COSTA, Circuit Judges.
HAYNES, Circuit Judge:
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Robert L. Collins appeals the district court’s order and judgment
dismissing his claims against A.S. Sidharthan, in which the district court
adopted the report and recommendation of the bankruptcy court. Collins
argues that the bankruptcy and district courts lacked “related to” jurisdiction
over this case under 28 U.S.C. § 1334 because Sidharthan’s cross-claims for
indemnity and contribution against the debtor in bankruptcy, KSRP, Limited
(“KSRP”), had no possibility of succeeding. For the reasons that follow, we
AFFIRM. 1
I. 2
This case arises out of an alleged power of attorney agreement between
Collins and KSRP, which was signed by Sidharthan. Sidharthan is an officer
and 50% owner of PYK Investments, LLC (“PYK”), and PYK is the general
partner of the debtor, KSRP. KSRP owns and operates the Best Western
Fiesta Isles hotel in South Padre Island, Texas, which maintains insurance
against storm damage. Collins represents parties in making and litigating
storm damage claims against insurance companies. In April 2008, Collins was
contacted by the management of the Best Western Fiesta Isles hotel regarding
1 The district court granted summary judgment for Collins on his defamation claim
against Sidharthan and otherwise dismissed all of Collins’s and Sidharthan’s claims against
each other. Before this court, the parties solely challenge whether the lower federal courts
had jurisdiction over this case. We conclude the parties have abandoned any challenge to the
dismissal of their claims on any basis other than jurisdiction. See Brinkmann v. Dall. Cty.
Deputy Sheriff Abner, 813 F.2d 744, 748 (5th Cir. 1987); FED. R. APP. P. 28(a)(8). We also
note that this appeal raises only the issue of the federal courts’ subject matter jurisdiction
over this case. It does not involve whether the bankruptcy judge had the constitutional
authority to adjudicate the claims to a final decision under Stern v. Marshall, 131 S. Ct. 2594
(2011), and Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015). The bankruptcy
judge explicitly found that the parties did not consent to have a non-Article III judge render
a final decision and accordingly rendered only a report and recommendation, which the
district court adopted.
2 The facts in this section are drawn from the parties’ pleadings and the bankruptcy
court’s findings in the report and recommendation it issued following a bench trial. Although
the parties challenge the bankruptcy court’s jurisdiction, they do not challenge its factual
findings or description of events. We will therefore rely on this description as background.
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an agreement to represent the hotel on any future insurance claims. The
management informed Collins that Sidharthan had the authority to sign such
an agreement, so Collins drafted the agreement and the hotel management
forwarded it to Sidharthan. Later that month, Sidharthan signed the
contingency-fee contract and sent it to Collins.
Collins performed under the contract, directing various professionals to
make pre-loss inspections of the hotel’s conditions. After Hurricane Dolly
damaged the hotel in July 2008, Collins had the hotel inspected for damage
attributable to the hurricane. Collins then attempted to pursue the claim with
KSRP’s insurers, but Collins discovered that Sidharthan contested his
representation. Sidharthan had faxed a letter to KSRP’s insurer asserting that
Collins was not, in fact, a representative of KSRP. Collins attempted to contact
Sidharthan to no avail, until August 2008, when Sidharthan’s attorney sent
Collins a letter requesting that he cease attempting to represent KSRP.
Collins sued Sidharthan and KSRP in state court for breach of contract,
tortious interference with contract, punitive damages, and legal fees, among
other claims. On January 11, 2010, the court granted a nonsuit as to KSRP,
and only the claims between Collins and Sidharthan remained before the court.
KSRP filed for bankruptcy on January 20, 2010. That same day, Sidharthan
removed the case to the bankruptcy court. In his notice of removal, Sidharthan
asserted for the first time a cross-claim of indemnity against KSRP.
The bankruptcy court determined that it had “related to” jurisdiction
because, due to Sidharthan’s indemnity claims, any damages awarded to
Collins could potentially have been collected against KSRP’s estate. But since
the bankruptcy judge did not have the parties’ consent to render a final
judgment in the “related” proceeding as required by Stern v. Marshall, a report
and recommendation was issued to the district court. In that report, the
bankruptcy court founded its “related to” jurisdiction on Sidharthan’s cross-
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claims for indemnity and contribution. Based on evidence presented at a two-
day trial, the bankruptcy court declined to grant Sidharthan’s indemnity and
other cross-claims. The bankruptcy court found that Sidharthan was not a
general or limited partner of KSRP and Collins had not relied on any
representations to that effect, so the contract for Collins to represent the hotel
bound only KSRP, and not Sidharthan personally. Because KSRP had been
dismissed from the state court suit and Collins had not filed a claim against
KSRP in bankruptcy court, Sidharthan’s indemnity claims were considered
“moot.” The district court adopted the bankruptcy court’s report and
recommendation. Collins timely appealed from that order and judgment.
II.
We review whether a district or bankruptcy court possessed subject
matter jurisdiction over a bankruptcy case de novo. Lone Star Fund V (U.S.),
L.P. v. Barclays Bank PLC, 594 F.3d 383, 386 (5th Cir. 2010). By statute,
district courts have original jurisdiction over bankruptcy cases. See In re
Stonebridge Techs., Inc., 430 F.3d 260, 266 (5th Cir. 2005); 28 U.S.C. §§ 157,
1334. It is well established that “[f]ederal courts have ‘related to’ subject
matter jurisdiction over litigation arising from a bankruptcy case if the
‘proceeding could conceivably affect the estate being administered in
bankruptcy.’” Lone Star Fund V, 594 F.3d at 386 (quoting In re TXNB Internal
Case, 483 F.3d 292, 298 (5th Cir. 2007)). “‘Related to’ jurisdiction includes any
litigation where the outcome could alter, positively or negatively, the debtor’s
rights, liabilities, options, or freedom of action or could influence the
administration of the bankrupt estate.” Id. (citation omitted).
Collins challenges the bankruptcy court’s jurisdiction because he claims
it was based on illusory indemnity and contribution claims. In analyzing
jurisdiction over cases that are purportedly “related to” a bankruptcy case, we
apply a broad “conceivable effect” test. See Fire Eagle L.L.C. v. Bischoff (In re
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Spillman), 710 F.3d 299, 304–05 (5th Cir. 2013). Collins’s assertions raise a
unique issue regarding how the conceivable effect test should be applied.
Collins does not challenge whether the claims would have any conceivable
effect on the bankruptcy estate if they succeeded; rather, he argues the claims
could not possibly have any conceivable effect because they lacked merit and
had no chance of succeeding. Thus, he sets up a dichotomy between potentially
meritorious claims, over which there would be “related to” jurisdiction, and
meritless claims, over which there would be no such jurisdiction.
We reject this dichotomy. Both the Supreme Court and this court have
gravitated away from conflating jurisdiction and merits, and Collins’s proposed
standard results in exactly that conflation. See, e.g., Arbaugh v. Y & H Corp.,
546 U.S. 500, 510–11, 515 (2006); Smith v. Reg’l Transit Auth., 756 F.3d 340,
346 (5th Cir. 2014) (citing Arbaugh, 546 U.S. at 515); ACS Recovery Servs., Inc.
v. Griffin, 723 F.3d 518, 522–23 (5th Cir. 2013) (en banc). Generally, courts
should analyze their own authority to hear a case as a separate matter from
whether that case involves a viable claim. See generally Carter v. Homeward
Residential, Inc., 794 F.3d 806, 807, 809 (7th Cir. 2015) (reasoning that “a
complaint that fails to invoke federal jurisdiction is to be dismissed for want of
jurisdiction [as ‘nonjusticiable’], while a complaint that invokes federal
jurisdiction but pleads itself out of court (for example by making a claim
expressly rejected in a Supreme Court decision) should be dismissed by the
district court on the merits [as ‘groundless’]”); Smith, 756 F.3d at 346–47
(remanding for consideration through “the proper procedural vehicle” of a Rule
12(b)(6) or 56 motion, rather than a Rule 12(b)(1) motion).
In the context of federal question jurisdiction, the Supreme Court in
Arbaugh expressed a caveat to the general rule that courts should avoid merits
analyses in determining jurisdiction. The Court observed that a claim that
invokes federal jurisdiction may nonetheless be “dismissed for want of subject-
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matter jurisdiction if it is not colorable, i.e., if it is ‘immaterial and made solely
for the purpose of obtaining jurisdiction’ or is ‘wholly insubstantial and
frivolous.’” Arbaugh, 546 U.S. at 513 n.10 (quoting Bell v. Hood, 327 U.S. 678,
682–83 (1946), and Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89
(1998)); see also Smith, 756 F.3d at 346.
To the extent the caveat from Arbaugh applies here in determining
whether an indemnity claim against KSRP may conceivably effect KSRP’s
bankruptcy estate, we conclude Sidharthan’s contractual indemnity cross-
claim passes muster. Texas law allows for a principal to contractually
indemnify its agent, including for the agent’s negligent acts. See generally
Quorum Health Res., L.L.C. v. Maverick Cty. Hosp. Dist., 308 F.3d 451, 454,
458–59, 463–64 (5th Cir. 2002) (discussing Texas law regarding contractual
indemnification provisions); cf. Enserch Corp. v. Parker, 794 S.W.2d 2, 4, 6–9
(Tex. 1990) (holding that a contractor had to indemnify the owner of a natural
gas pipeline based on contractual indemnity provisions). In turn, it is well
established that “contractual indemnification rights may give rise to ‘related
to’ jurisdiction.” Lone Star Fund V, 594 F.3d at 387. Sidharthan’s allegations
in his notice of removal and the facts alleged in Collins’s pleadings in state
court sufficiently show that Sidharthan’s contractual indemnity claim against
KSRP was not “immaterial and made solely for the purpose of obtaining
jurisdiction” or “wholly insubstantial and frivolous.” Arbaugh, 546 U.S. at 513
n.10. Therefore, these pleadings are sufficient to support “related to”
jurisdiction. 3
3 During oral argument, we questioned whether the state court pleadings sufficiently
evinced bankruptcy jurisdiction at the time of removal, given that Sidharthan did not plead
his cross-claim against KSRP until after removal. As an initial matter, the well-pleaded
complaint rule does not apply in determining whether a bankruptcy court has “related to”
jurisdiction over a removed case. See generally In re Enron Corp. Sec., Derivative & “ERISA”
Litig., 511 F. Supp. 2d 742, 764 (S.D. Tex. 2005); In re Brook Mays Music Co., 363 B.R. 801,
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Sidharthan alleged in his notice of removal that he was “asserting an
indemnity claim against Debtor [KSRP] which if proven will result in a
substantial claim against Debtor [KSRP].” Later, in his cross-claims against
KSRP, Sidharthan averred that he was entitled to, among other things,
contractual indemnity from KSRP. At the time of removal, Collins’s second
amended petition in state court claimed that Sidharthan held himself out to
Collins as having the personal authority to bind KSRP to agreements, and that
his “status as an agent or a principal of KSRP was material to his agreement
with [Collins],” including his purported authority to execute the contract with
Collins as a general partner who could be held personally liable. Likewise,
when Sidharthan filed his cross-claim in bankruptcy court, he claimed he “was
acting on behalf of [KSRP]” at all times relevant to Collins’s claims, that “the
purported contract from which the Lawsuit arises refers to [Sidharthan] as
‘representing [KSRP],’” and that “[Sidharthan] is a Member of the Limited
Liability Company that serves as the General Partner of [KSRP].”
814–16 (Bankr. N.D. Tex. 2007). The state court pleadings on which a notice of removal relies
need only raise the facts necessary for a court to determine that a suit between third parties
may conceivably have an effect on a bankruptcy estate. For example, in this case, Sidharthan
need not have pleaded his cross-claim against KSRP in state court before removal—indeed,
it is doubtful he could have done so after KSRP was nonsuited from the state case and filed
for bankruptcy. Instead, as we find herein, Collins made sufficient factual allegations about
Sidharthan’s role at KSRP, Sidharthan’s role in signing the contract, and Sidharthan’s
actions in allegedly converting insurance proceeds that should have gone to either KSRP or
Collins. As such, Sidharthan’s indemnity claim on removal was not immaterial, made solely
for the purpose of obtaining jurisdiction, or wholly insubstantial and frivolous. See Arbaugh,
546 U.S. at 513 n.10. Even unfiled but potential indemnity claims are sufficient to show a
conceivable effect on a bankruptcy case and give rise to “related to” jurisdiction. See, e.g.,
Refinery Holding Co. v. TRMI Holdings, Inc. (In re El Paso Refinery, LP), 302 F.3d 343, 349
(5th Cir. 2002) (finding “related to” jurisdiction because a third party could have sought
contribution from another party, who could have sought contractual indemnification from the
debtor, although none of these claims had been filed at the time of removal); N. Nat. Gas Co.
v. Sheerin, No. SA-03-CA-304-RF, 2003 WL 22594457, at *4–6 (W.D. Tex. Oct. 20, 2003)
(holding that a third party’s “possible, but as yet not asserted, claims for indemnity,
contribution or D & O insurance” from a debtor gave rise to “related to” jurisdiction under
the conceivable effect test).
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These allegations correspond with Sidharthan’s attempt to prove
contractual indemnity for any liability before the bankruptcy court based on
provisions in the Limited Partnership Agreement of KSRP, which indemnify
KSRP’s General Partner for good faith acts or omissions. Collins attempted to
prove that Sidharthan was either KSRP’s general partner or a partner by
estoppel who should be held personally liable because of grossly negligent,
willful, or fraudulent conduct. Collins also made a direct claim against KSRP
in the bankruptcy court, which was dismissed because Collins had not timely
filed a proof of claim in KSRP’s bankruptcy case.
After receiving evidence and hearing argument during a two-day bench
trial, the bankruptcy court found that Collins could not recover from
Sidharthan. The court found that Sidharthan was “an officer of KSRP’s
general partner, PYK,” and “an agent of KSRP” who had authority to bind
KSRP and who signed the contract on behalf of KSRP’s general partner. Yet,
the court held that Sidharthan was not KSRP’s general partner and that
Collins did not rely on any ambiguous representations to the contrary in
signing the contract with KSRP. Therefore, for these and other reasons, the
bankruptcy court held Sidharthan was not personally liable to Collins on the
contract.
Although we examine whether the bankruptcy court had “related to”
jurisdiction at the time of removal, the bankruptcy court’s detailed analysis
and findings after a two-day bench trial bolster our conclusion that
Sidharthan’s cross-claims were not wholly insubstantial or frivolous. The facts
contained in the state-court pleadings and Sidharthan’s notice of removal are
sufficient to surpass the low bar set by the Arbaugh caveat, assuming arguendo
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that applies here. 4 Cf. In re Spillman, 710 F.3d at 304–05; Refinery Holding
Co. v. TRMI Holdings, Inc. (In re El Paso Refinery, LP), 302 F.3d 343, 349 (5th
Cir. 2002).
We hold that the bankruptcy court and district court possessed “related
to” jurisdiction over this case and therefore AFFIRM the district court’s
judgment.
4 In addition to his contractual indemnity claim, the pleadings at the time of removal
and thereafter indicated another reason why Collins’s suit against Sidharthan might have a
conceivable effect on KSRP’s estate. Namely, Collins claimed that Sidharthan had deprived
Collins of his contingency fee for the insurance work by breaching the contract between
Collins and KSRP and failing to pay Collins that contingency fee when the insurance
proceeds passed through Sidharthan’s hands on their way to KSRP. Specifically, Collins
alleged that the contract between Collins and KSRP provided Collins “ownership of a portion
of the claim to assure payment of his [contingency] fees,” but that Sidharthan “converted
such interest in the claim and sums to his own use.” Collins averred that Sidharthan “had
and received funds, including funds from insurers received in connection with the claims
made subject of the Contract, and such received funds included money to which [Collins] was
entitled,” which Collins argued Sidharthan and his attorneys should have to hold in trust for
Collins. At the time of removal, these facts in the pleadings provided another reason to think
that Collins’s suit might affect KSRP’s bankruptcy estate. Ultimately, the bankruptcy court
found that Collins failed to “prove that Sidharthan ever ‘exercised dominion and control’ over
the insurance proceeds,” which it found were paid to KSRP. It further found that the
insurance proceeds were “property of KSRP or of KSRP’s bankruptcy estate” such that Collins
could not access them because he had failed to file a timely proof of claim against KSRP.
9