AY McDonald Industries Inc. v. Michael B. McDonald ( 2018 )

United States Bankruptcy Appellate Panel
For the Eighth Circuit
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No. 18-6017
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In re: Michael B. McDonald
lllllllllllllllllllllDebtor
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AY McDonald Industries, Inc.
lllllllllllllllllllllPlaintiff - Appellant
v.
Michael B. McDonald
lllllllllllllllllllllDefendant - Appellee
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Appeal from United States Bankruptcy Court
for the Northern District of Iowa
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Submitted: August 28, 2018
Filed: October 3, 2018
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Before SALADINO, Chief Judge, NAIL and SANBERG, Bankruptcy Judges.
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SANBERG, Bankruptcy Judge.
AY McDonald Industries, Inc. (“AY” or “Appellant”), appeals the April 20,
2018, order of the Bankruptcy Court denying its request for injunctive and
declaratory relief. Because we hold that the Bankruptcy Court lacked jurisdiction,
we have jurisdiction for the sole purpose of correcting the Bankruptcy Court’s
error in entertaining the claim for injunctive or declaratory relief. In re AFY, 734
F.3d 810, 816 (8th Cir. 2013) (citing Steel Co. v. Citizens for a Better Env’t, 523
U.S. 83, 95) (1998)). For the reasons stated below, we vacate the portion of the
Bankruptcy Court’s decision concerning injunctive and declaratory relief.
CONCLUSION
We vacate the Bankruptcy Court’s ruling as to AY’s claim for injunctive
and declaratory relief and remand with instructions to dismiss the same.
BACKGROUND
The facts of this case are not in dispute. Michael B. McDonald (“Debtor” or
“Appellee”) was formerly a member of the board of directors and an officer of AY,
as well as an employee of a subsidiary. Debtor was fired or resigned after it was
discovered that he had used his position as senior vice president to misappropriate
funds. Debtor agreed to pay restitution to AY by executing a restitution agreement
and a promissory note. The restitution agreement required Debtor to liquidate
certain property to make payments on the note, which he failed to do.
Subsequently, Debtor and AY executed an amendment to the restitution
agreement. The amendment required Debtor to sign a power of attorney. Under
the power of attorney, the appointed attorney-in-fact would collect distributions
Debtor had been receiving from two spendthrift trusts and turn the funds over to
AY. In turn under the amendment to the restitution agreement, AY agreed to cease
its collection activities as long as Debtor was in compliance.
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Debtor filed for Chapter 7 relief on May 10, 2017. On the same day, Debtor
signed a document purporting to revoke the power of attorney. Debtor’s attorney
sent a copy of the purported revocation to AY on May 31, 2017.
AY filed two adversary proceedings 1 requesting the Bankruptcy Court
determine that its debt was nondischargeable under 11 U.S.C. § 523(a)(4) and 11
U.S.C. § 523(a)(6). In addition, AY sought injunctive and declaratory relief,
asking the Bankruptcy Court declare Debtor’s revocation of the power of attorney
invalid, enjoin him from attempting to revoke it in the future, and declare that the
power of attorney was irrevocable.
After a hearing on summary judgment, the Bankruptcy Court held that the
debt to AY was not dischargeable under Section 523(a)(4) due to Debtor’s fraud
and defalcation while he was a director at AY.
The Bankruptcy Court, however, denied AY’s request for injunctive and
declaratory relief. The Bankruptcy Court stated that the proper remedy for
Debtor’s revocation would be a release of AY’s obligation to cease collection
activities, rather than a declaration that the power of attorney was irrevocable. As
the Bankruptcy Court noted, AY’s request for relief involves a purely contractual
dispute.
AY timely filed this appeal.
ISSUE ON APPEAL
On appeal, AY argues that the Bankruptcy Court erred in denying its request
for injunctive and declaratory relief.
1
AY filed the first adversary proceeding on May 22, 2017 and the second on
June 6, 2017 (after receiving the revocation document). The Bankruptcy Court
consolidated AY’s two adversary proceedings into the present action on July 31,
2017.
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STANDARD OF REVIEW
We review the Bankruptcy Court’s conclusions of law de novo. Mello v.
Wojciechowski (In re Wojciechowski), 568 B.R. 682, 684 (B.A.P. 8th Cir. 2017).
Here, as stated above, there is no dispute as to the material facts of the case.
Further, there was no appeal of the portion of the decision determining that the
debt was nondischargeable pursuant to 11 U.S.C. § 523(a)(4). Thus, the only issue
for review is the legal determination that AY was not entitled to injunctive or
declaratory relief.
DISCUSSION
Before reaching the issue of whether the Bankruptcy Court’s conclusions of
law were correct, we have an independent obligation to examine our jurisdiction
and that of the Bankruptcy Court. 2 McDougall v. Ag. Country Farm Credit Servs.
(In re McDougall), 587 B.R. 87, 88–89 (B.A.P. 8th Cir. 2018).
Bankruptcy Court Jurisdiction
Bankruptcy courts have subject matter jurisdiction over civil proceedings
“arising under title 11, or arising in or related to cases under title 11.” In re
McDougall, 587 B.R. at 90 (quoting 28 U.S.C. § 1334(b)) (citing 28 U.S.C. §
157(a)). Such proceedings are either core proceedings or non-core, related to
proceedings. Id.
A core proceeding is one that arises under title 11 or arises in a case under
title 11 and involves rights established by federal bankruptcy law. 28 U.S.C. §
2
We note that parties to a civil proceeding cannot consent to or acquiesce to
federal subject matter jurisdiction. See Faricy Law Firm, P.A. v. A.P.I., Inc.
Asbestos Settlement Tr. (In re A.P.I., Inc.), 537 B.R. 902, 909 (Bankr. D. Minn.
2015). This is because federal courts’ limited jurisdiction is creature of statute—a
federal court either has jurisdiction under a statute or not. Holmes v. Deutsche
Bank Nat’l Tr. Co. (In re Holmes), 387 B.R. 591, 597 (Bankr. D. Minn. 2008).
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157(b)(1); In re McDougall, 587 B.R. at 90 (citing Specialty Mills, Inc. v. Citizens
State Bank, 51 F.3d 770, 773 (8th Cir. 1995)). Claims that arise under title 11
involve causes of action created or determined by a statutory provision of title 11.
In re McDougall, 587 B.R. at 90 (citation omitted). Claims that arise in title 11
“are those that are not based on any right expressly created by title 11, but
nevertheless, would have no existence outside of the bankruptcy.” Id. (citation
omitted).
AY’s claim for injunctive and declaratory relief is not a core proceeding. It
does not “arise under” title 11 as it does not “involve a cause of action created or
determined by a statutory provision of title 11.” In re McDougall, 587 B.R. at 90
(citation omitted). Nor does it “arise in” title 11, as AY’s claim against Debtor can
arise outside the context of a bankruptcy proceeding. Id. (citation omitted).
Rather, AY’s claim seeking injunctive and declaratory relief for an alleged breach
of contract is based on state law.
A non-core, “related to” proceeding over which the Bankruptcy Court has
jurisdiction, is one which has some effect on the administration of bankruptcy
estate, but does not invoke a substantive right created by bankruptcy law; it could
exist outside of a bankruptcy case. Sears v. Sears (In re AFY, Inc.), 571 B.R. 825,
833 (B.A.P. 8th Cir. 2017). Although “related to” jurisdiction is broad, it has its
limits and bankruptcy courts “have no jurisdiction over proceedings that have no
effect on the estate of the debtor.” Id. at 91 (citing Celotex Corp. v. Edwards, 514
U.S. 300, 308 n.6 (1995)).
In evaluating whether a proceeding is related to the bankruptcy case
sufficient to confer subject matter jurisdiction, the Eighth Circuit uses a
“conceivable effect” test to determine whether there is “related to” jurisdiction.
Under this test, if the outcome of a civil proceeding could conceivably have any
effect on the handling and administration of the bankruptcy estate, then there is
related to jurisdiction. In re McDougall, 587 B.R. at 90–91 (citing Dogpatch
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Props., Inc. v. Dogpatch U.S.A., Inc. (In re Dogpatch U.S.A., Inc.), 810 F.2d 782,
786 (8th Cir. 1987)).
Here, the outcome of AY’s claim for injunctive and declaratory relief can
have no conceivable effect on the Debtor or the bankruptcy estate. The relief for
the contract claim only affects AY. Further, the claim involves distributions from
two spendthrift trusts, which are not property of the estate. Thus, the Bankruptcy
Court had no related to jurisdiction.
We conclude, therefore, that the contract claims for injunctive and
declaratory relief were neither core proceedings nor non-core related to
proceedings. Thus the Bankruptcy Court lacked jurisdiction to hear AY’s claim
for injunctive and declaratory relief.
Appellate Jurisdiction
Next, we must determine whether we as an appellate court have subject
matter jurisdiction. When a lower federal court lacks jurisdiction, a court of
appeals has jurisdiction not on the merits, but for purposes of correcting the lower
court’s error in entertaining a suit or claim. In re AFY, 734 F.3d at 816 (citing
Steel Co., 523 U.S. at 95). Thus, we may not consider the merits of a matter for
which there would not have been jurisdiction in the Bankruptcy Court. See id. at
91. We do have jurisdiction, however, to correct the Bankruptcy Court’s error in
entertaining AY’s claim for injunctive and declaratory relief.
Here, because the Bankruptcy Court lacked subject matter jurisdiction, we,
as an appellate court, have no jurisdiction over the merits of this appeal. However,
we correct the Bankruptcy Court’s error by vacating that portion of the Bankruptcy
Court’s decision concerning the injunctive and declaratory relief.
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CONCLUSION
We vacate the Bankruptcy Court’s ruling as to AY’s claim for injunctive and
declaratory relief and remand with instructions to dismiss the same.
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