In Re: Velocita Corp ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
2-16-2006
In Re: Velocita Corp
Precedential or Non-Precedential: Non-Precedential
Docket No. 05-1709
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 05-1709
IN RE: VELOCITA CORP, et al.,
Debtor
CONSTRUCTION MANAGEMENT & INSPECTION, INC.,
Appellant
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 04-cv-03661)
District Judge: Honorable William J. Martini
Argued January 18, 2006
Before: ROTH, FUENTES, and BECKER, Circuit Judges.
(Filed: February 16, 2006)
JAMES A. SCARPONE (Argued)
Scarpone Staiano & Savage
744 Broad Street
Suite 1901
Newark, NJ 07102
Attorney for Appellant
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GARY T. HOLTZER (Argued)
Weil, Gotshal & Manges
767 Fifth Avenue
27th Floor
New York, NY 10153
Attorney for Appellee
OPINION OF THE COURT
BECKER, Circuit Judge.
Construction Management & Inspection, Inc. (“CMI”) appeals from the District
Court’s order affirming the Bankruptcy Court’s dismissal of a negligent misrepresentation
claim against Weil, Gotshal & Manges LLP (“Weil, Gotshal”). According to the
complaint, Weil, Gotshal, which represented Velocita Corporation and its affiliates (“the
Debtors”) in a Chapter 11 bankruptcy proceeding, stated that the Debtors would continue
to pay CMI for services. CMI alleges that the Debtors broke this promise, and seeks to
hold Weil, Gotshal liable.
We reject CMI’s challenge to the subject matter jurisdiction of the District Court
and the Bankruptcy Court, holding that “related to” jurisdiction exists because CMI’s
action could have affected the Chapter 11 proceedings. We further hold that the District
Court correctly dismissed the case under Federal Rule of Civil Procedure 12(b)(6)
because CMI’s claim involves a promise of future conduct, not a misrepresentation of
existing fact. Finally, we conclude that the District Court properly denied CMI’s motion
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to withdraw the reference of the case to the Bankruptcy Court. We therefore affirm the
order of the District Court.
I.
On May 30, 2002, Velocita Corporation and its affiliates (“the Debtors”) filed
Chapter 11 petitions in the United States District Court for the District of New Jersey (the
“Chapter 11 proceeding”). In this proceeding, the Debtors were represented by Weil,
Gotshal and another law firm.
At the time the bankruptcy petitions were filed, CMI was engaged in construction
inspection for some of the Debtors’ projects. Later, Velocita notified CMI that it planned
to discontinue one of these projects, and CMI sought assurances from Weil, Gotshal that
it would be paid for its post-bankruptcy petition work on other projects. In response,
Weil, Gotshal wrote to CMI as follows:
Pursuant to our discussions and in response to your letter dated August 22,
2002 regarding Construction Management & Inspection, Inc. (“CMI”), the
Debtors will no longer require the services of CMI on the [discontinued
project]. To the extent CMI provides the Debtors with inspection services
on other projects, the Debtors request that CMI continue to provide such
services. The Debtors will continue to pay undisputed invoices for post-
petition services provided by CMI.
(emphasis added.)
CMI claims that it continued to perform services for the Debtors, relying on
the assurances in the letter. CMI further alleges that when it asked to be paid,
Weil, Gotshal responded that the Debtors would no longer compensate CMI for
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post-petition services.1
Weil, Gotshal applied for attorneys’ fees in the Chapter 11 proceedings. On
December 2, 2002, CMI objected to Weil, Gotshal’s fee application, arguing that
Weil, Gotshal should be denied compensation because of the allegedly false
assurances contained in the letter to CMI. CMI later objected to another Weil,
Gotshal fee application, reasserting its prior arguments. On February 10, 2003, the
Bankruptcy Court granted Weil, Gotshal’s fee applications and treated CMI’s
objection as an ongoing objection to further fee requests.
On June 18, 2003, CMI filed in Texas state court the action that is currently
before us, alleging, as in its objections to the fee applications, that Weil, Gotshal
negligently misrepresented the financial status of the Debtors, causing CMI to
perform services for which it was not fully paid. On June 26, 2003, Weil, Gotshal
removed the current action to the District Court for the Northern District of Texas.
Meanwhile, in the Chapter 11 proceedings, CMI withdrew an objection to the
liquidation plan on July 10, 2003. This objection resembled both the fee
objections and CMI’s allegations in this case, in that CMI focused on the allegedly
false letter from Weil, Gotshal. With the objection withdrawn, the New Jersey
Bankruptcy Court confirmed the plan on July 21, 2003. Under the plan, CMI
1
On July 16, 2002, in the Chapter 11 proceedings, the Bankruptcy Court issued a Final
Order Authorizing the Use of Lenders’ Cash Collateral, which provided that after September 15,
2002, the Debtors would have to obtain the approval of the Lenders for additional loans.
Apparently, the Debtors were unable to pay CMI because the lenders did not approve such loans.
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received half of what the Debtors owed, meaning that CMI did not receive
compensation for $342,747.48 in post-petition services.
Returning to the current action, on July 16, 2003, the Bankruptcy Court for
the Northern District of Texas found that core bankruptcy jurisdiction existed and
granted Weil, Gotshal’s motion to transfer the case to the District Court for the
District of New Jersey. On September 16, 2003, CMI moved the New Jersey
District Court to remand the case to Texas state court or to withdraw the reference
of the case to the New Jersey Bankruptcy Court (the forum of the Chapter 11
proceedings). The District Court denied the motions.
The New Jersey Bankruptcy Court concluded that it possessed core
jurisdiction over the case and dismissed CMI’s claim against Weil, Gotshal for
failure to state a claim. CMI filed an appeal in the District Court, asserting, inter
alia, that the Bankruptcy Court erred in finding subject matter jurisdiction and in
dismissing the complaint and that the District Court should withdraw the reference
of the case to the Bankruptcy Court. The District Court affirmed the Bankruptcy
Court’s order and denied CMI’s motion to withdraw the reference.
II.
Weil, Gotshal first contends that the Bankruptcy Court and District Court
lacked subject matter jurisdiction over this action. “Bankruptcy court jurisdiction
potentially extends to four types of title 11 matters, pending referral from the
district court: (1) cases under title 11, (2) proceeding arising under title 11, (3)
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proceedings arising in a case under title 11, and (4) proceedings related to a case
under title 11.” In re Resorts Intl’l., Inc., 372 F.3d 154, 162 (3d Cir. 2004)
(citations and quotations omitted); 28 U.S.C. § 157 (b)(1). The first three types of
jurisdiction are categorized as “core” jurisdiction, while the remaining form of
jurisdiction is referred to as “related to” jurisdiction. Resorts Intl’l., 372 F.3d at
162.
The first two types of jurisdiction do not apply since CMI’s cause of action
does not arise under Title 11. Rather, Weil, Gotshal contends that the District
Court and Bankruptcy Court had “arising in” jurisdiction (a type of core
jurisdiction) and “related to” jurisdiction.
“Arising in” jurisdiction is lacking under Stoe v. Flaherty, No. 04-3947,
2006 U.S. App. LEXIS 1580 (3d Cir. Jan. 23, 2006), which was decided after we
heard oral argument in this case. We held in Stoe that “claims that ‘arise in’ a
bankruptcy case are claims that by their nature, not their particular factual
circumstance, could only arise in the context of a bankruptcy case.” Id. at *21
(emphasis added) (citations omitted). While there are some factual connections
between CMI’s claim and the Chapter 11 proceedings, Stoe directs us to ignore
these connections, and therefore view CMI’s suit as a generic negligent
misrepresentation action. Because negligent misrepresentation claims certainly
can occur outside the context of bankruptcy, “arising in” jurisdiction does not exist
here.
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The seminal case on “related to” jurisdiction is In re Pacor, Inc., 743 F.2d
984 (3d Cir. 1984), overruled on other grounds by Things Remembered, Inc. v.
Petrarca, 516 U.S. 124 (1995). In Pacor, we stated: “The usual articulation of 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. at 994 (citations omitted).
Weil, Gotshal argues that “related to” jurisdiction exists under Pacor
because this action could have affected the Chapter 11 proceeding. When CMI
filed its complaint in this case, its objections to plan confirmation and to Weil,
Gotshal’s fee applications were pending in the Chapter 11 proceeding. Like the
allegations in this case, these objections involved Weil, Gotshal’s assurances that
the Debtors would pay CMI. Specifically, Weil, Gotshal contends that if CMI
prevailed in the current action, CMI’s objections to Weil, Gotshal’s fees might
have been granted. Thus, the Debtors might have retained more funds with which
to pay other creditors. Weil, Gotshal further contends that CMI’s suit might have
affected plan confirmation.
We agree with Weil, Gotshal, and conclude that the current action “could
conceivably have [an] effect on the estate being administered in bankruptcy,” id. at
994. The potential effect is far greater than in Pacor, where we found that “related
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to” jurisdiction did not exist.2 Here, because the subject matter of CMI’s current
suit (the letter from Weil, Gotshal) resembles the subject matter of CMI’s plan and
fee objections, the potential effect on estate administration is substantial. Fee
applications, which can be very substantial,3 and plan disputes—the very matters
that the current action might affect—lie at the heart of estate administration and
the work of a Bankruptcy Court. In fact, the substance of the current claims was
before the Bankruptcy Court in CMI’s fee and plan objections (although the plan
objection was later withdrawn). Therefore, we hold that the Bankruptcy Court and
the District Court had “related to” jurisdiction over CMI’s claim, and we reject
CMI’s contention that the case should have been dismissed for lack of subject
matter jurisdiction.4
III.
2
In Pacor, the plaintiffs filed suit against Philadelphia Asbestos Co. (“Pacor”) in
Pennsylvania state court for asbestos-related injuries. Id. at 986. Pacor filed a third party
complaint against Johns-Manville, an asbestos producer, which, Pacor claimed, manufactured
the asbestos in question. Johns-Manville filed a chapter 11 petition. Id. Pacor then attempted to
remove the case to Bankruptcy Court. Id. We found that the plaintiffs’ suit against Pacor was
“[a]t best . . . a mere precursor to the potential third party claim for indemnification by Pacor
against [Johns-Manville].” Id. at 995.
3
In granting one of the fee applications, the District Court awarded nearly one million
dollars to Weil, Gotshal in fees and expenses.
4
In a letter submitted after oral argument, CMI contends that the Bankruptcy Court was
required to abstain under 28 U.S.C. § 1334(c)(2), which provides for mandatory abstention in
certain cases where only “related to” jurisdiction exists. Although CMI asserted before the
District Court that the Bankruptcy Court should have abstained, CMI did not pursue the
contention in its briefs before this Court. The argument is therefore waived. See United States v.
Geevers, 226 F.3d 186, 196 (3d Cir. 2000) (stating that even “[a] reply brief is generally too late
to raise a new issue under our jurisprudence”).
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We turn to the dismissal of CMI’s complaint under Federal Rule of Civil
Procedure 12(b)(6). The District Court and the Bankruptcy Court found the
complaint deficient in several respects. We will affirm on the ground that the tort
of negligent misrepresentation requires a misrepresentation of existing fact, as
opposed future conduct. See Swank v. Sverdlin, 121 S.W.3d 785, 802 (Tex. App.
2003) (“To establish negligent misrepresentation, the plaintiff must . . . prove that
the defendant misrepresented an ‘existing’ fact in the course of the defendant’s
business rather than a promise of future conduct.”). Because Weil, Gotshal’s
statement involved the Debtors’ future payments, CMI has failed to state a claim
for negligent misrepresentation.
CMI argues that an unfulfilled promise can be actionable if it is made with
the intent to deceive. See Airborne Freight Corp., Inc. v. C.R. Lee Enters., Inc.,
847 S.W.2d 289, 294 (Tex. App. 1992) (stating that a promise is actionable fraud
“only when made with the intention, design and purpose of deceiving, and with no
intention of performing the act”). However, CMI did not allege that the promise
was made with the present intent to deceive, and thus failed to differentiate it from
a garden-variety broken promise.
IV.
Finally, CMI contends that the District Court improperly declined to
withdraw the reference of the case to the Bankruptcy Court. Section 157(d) of
Title 28 enables a District Court to withdraw the reference “for cause shown.”
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Relevant factors include “the goals of promoting uniformity in bankruptcy
administration, reducing forum shopping and confusion, fostering the economical
use of the debtors’ and creditors’ resources, and expediting the bankruptcy
process.” In re Pruitt, 910 F.2d 1160, 1168 (3d Cir. 1990) (citations omitted). In
light of these factors, it was logical for the Bankruptcy Court to hear CMI’s suit:
The claim resembled CMI’s objections in the Chapter 11 proceeding, which was
before the Bankruptcy Court. Therefore, we hold that the District Court did not err
in declining to withdraw the reference.
To summarize, “related to” jurisdiction exists here because the outcome of
the current action could have affected Weil, Gotshal’s fee applications and the
confirmation of the plan. The District Court correctly affirmed the Bankruptcy
Court’s dismissal of CMI’s complaint because Weil, Gotshal’s alleged
misrepresentations involved only promises of future conduct. Finally, the District
Court properly refused to withdraw the reference to the Bankruptcy Court. We
therefore affirm the order of the District Court.
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