Valley Historic Ltd v. Bank of New York ( 2007 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
VALLEY HISTORIC LIMITED 
PARTNERSHIP,
Plaintiff-Appellant,
v.  No. 06-1571
THE BANK OF NEW YORK,
Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Gerald Bruce Lee, District Judge.
(1:05-cv-01268-GBL-LO; BK-05-01362)
Argued: March 13, 2007
Decided: May 17, 2007
Before SHEDD and DUNCAN, Circuit Judges, and
Samuel G. WILSON, United States District Judge for the
Western District of Virginia, sitting by designation.
Affirmed in part, vacated in part, and remanded with instructions by
published opinion. Judge Wilson wrote the opinion, in which Judge
Shedd and Judge Duncan joined.
COUNSEL
ARGUED: Steven Bret Ramsdell, TYLER, BARTL, GORMAN &
RAMSDELL, P.L.C., Alexandria, Virginia, for Appellant. Benjamin
C. Ackerly, Sr., HUNTON & WILLIAMS, Richmond, Virginia, for
2 VALLEY HISTORIC v. BANK OF NEW YORK
Appellee. ON BRIEF: Thomas P. Gorman, TYLER, BARTL, GOR-
MAN & RAMSDELL, P.L.C., Alexandria, Virginia, for Appellant.
Michael C. Shepherd, HUNTON & WILLIAMS, Richmond, Vir-
ginia, for Appellee.
OPINION
WILSON, District Judge:
This is an appeal by appellant, Chapter 11 debtor, Valley Historic
Limited Partnership ("Debtor"), from the district court’s determina-
tion that the bankruptcy court lacked jurisdiction over the Debtor’s
post-confirmation adversary proceeding against appellee, the Bank of
New York ("Bank"), for breach of contract and for tortious interfer-
ence. We affirm the district court’s determination that the bankruptcy
court lacked jurisdiction.
I.
In May 1992, Valley Historic Properties, Inc. ("Borrower")
acquired two office buildings in downtown Staunton, Virginia. The
Borrower financed the acquisition and renovation of the buildings
through the issuance of economic development bonds. First Vantage
Bank, First Virginia Bank, Inc., and First Bank & Trust Co. owned
the beneficial interest in the bonds. The bonds were payable solely
from revenues derived from payments under a loan agreement and
promissory note, which were ultimately assigned to the Bank as suc-
cessor indenture trustee. The loan agreement, which was secured by
a first priority lien on the property and an assignment of leases, rents,
and profits, called for scheduled payments over a ten-year period,
with all payments to have been completed by May 2002. Lease pay-
ments, under a ten-year lease of the property by a single tenant, Val-
ley Community Services Board, provided the Borrower the source of
funds to make the monthly payments to the Bank that the loan agree-
ment required. Following the execution of the loan agreement and the
issuance of the bonds, the Borrower conveyed its interest in the prop-
erty to the Debtor.
VALLEY HISTORIC v. BANK OF NEW YORK 3
In mid-2001, the Bank apprised the Debtor that the loan agreement
required the Debtor to increase its monthly payments nearly tenfold
to $100,000 per month for the period of May 2001 through May 2002
so that the loan would be paid fully, rather than simply mature, in
May 2002. The Debtor disagreed and continued to pay at the same
rate it had in the past. Consequently, in February 2002 the Bank
issued a notice of default, and the Debtor responded by filing its
Chapter 11 bankruptcy petition that same month.
The Debtor filed a plan of reorganization ("Plan") on September
20, 2002. The Bank objected to the Plan and filed a proof of claim
in the amount of $1,051,866.43, to which the Debtor objected. The
bankruptcy court ultimately confirmed the Plan on December 30,
2003, granting the Bank an allowed secured claim in the amount of
$967,148.17. The Plan provided, in part, that the court would fix and
liquidate the amount of the Bank’s claim "subject to the Debtor’s
claims, setoffs, etc. which [would] be liquidated at another date via
an adversary proceeding" and that the bankruptcy court would "retain
jurisdiction" over the "adversary proceeding filed by the Debtor
against [the Bank]." The Plan did not provide for the use of any
recovery from the adversary proceeding but instead provided for the
satisfaction of the Debtor’s obligations "entirely from the post-
petition rents and earnings of the Debtor through the operation of its
real estate."
After confirmation, the tenant vacated the Debtor’s property, and
the Debtor sold that property on March 1, 2005, and used the pro-
ceeds to pay all of its creditors, including the Bank. Approximately
three months later, the Debtor filed an adversary proceeding raising
two claims against the Bank. In Count I, the Debtor alleged that the
Bank breached the loan agreement when it increased the monthly
lease payments and declared the Debtor to be in default. In Count II,
the Debtor alleged that the Bank and the three beneficial owners of
the bonds tortiously interfered with the Debtor’s contractual relation-
ship with its tenant in December 2002 by meeting with the tenant and
offering to sell the property to the tenant below fair market value.
The Bank moved to dismiss on the grounds that the bankruptcy
court lacked subject matter jurisdiction, that the proceeding was not
a core proceeding, and that the Debtor’s complaint failed to state a
4 VALLEY HISTORIC v. BANK OF NEW YORK
claim upon which relief could be granted. The bankruptcy court held
that it had jurisdiction, that the proceeding was a core proceeding, and
that the Debtor’s complaint stated valid claims. The Bank took an
interlocutory appeal pursuant to 28 U.S.C. § 158(a)(3), and the district
court reversed. The district court found no "related to" jurisdiction
over Count I, the pre-petition contract claim, because the Debtor’s
plan of reorganization had been confirmed and substantially consum-
mated by the time the Debtor filed the complaint. It found no "arising
in" jurisdiction over Count II, the post-petition tortious interference
claim, because, according to our precedent, "proceedings or claims
arising 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.’" Grausz v. Englander, 321 F.3d 467, 471 (4th Cir.
2003) (quoting Bergstrom v. Dalkon Shield Claimants Trust (In re A.
H. Robins Co.), 86 F.3d 364, 372 (4th Cir. 1996)). It also found that
neither Count I nor Count II was a core proceeding and that because
there was no privity between the Debtor and the Bank, Count I failed
to state a claim upon which relief could be granted.
II.
Because the district court sits as an appellate court in bankruptcy,
our review of the district court’s decision is plenary. See Bowers v.
Atlanta Motor Speedway, Inc. (In re Se. Hotel Props. Ltd.), 99 F.3d
151, 154 (4th Cir. 1996). Therefore, we review the district court’s
decision "by applying the same standard of review that it applied to
the bankruptcy court’s decision. That is, we review findings of fact
for clear error and conclusions of law de novo." Kielisch v. Educ.
Credit Mgmt. Corp. (In re Kielisch), 258 F.3d 315, 319 (4th Cir.
2001) (citations omitted).
III.
The bankruptcy court derives its jurisdiction from the district court.
See 28 U.S.C. § 157(a), (b)(1). District courts have "original and
exclusive jurisdiction of all cases under title 11," and "original but not
exclusive jurisdiction of all civil proceedings arising under title 11, or
arising in or related to cases under title 11." 28 U.S.C. § 1334(a), (b).
The Debtor maintains that the bankruptcy court had both "arising in"
and "related to" jurisdiction over its post-confirmation adversary pro-
VALLEY HISTORIC v. BANK OF NEW YORK 5
ceeding against the Bank as well as jurisdiction to adjudicate its
claims under 28 U.S.C. § 1334(e), which gives the district court in a
case under Title 11 exclusive jurisdiction over a debtor’s property "as
of the commencement" of the case and "of property of the estate."
Additionally, it maintains that the confirmation order, which reserved
jurisdiction over the Debtor’s adversary proceeding, is preclusive and
bars the Bank from relitigating the bankruptcy court’s jurisdiction.
We conclude, however, as did the district court, that the bankruptcy
court did not have post-confirmation jurisdiction to adjudicate the
Debtor’s claims.
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.’" Grausz v.
Englander, 321 F.3d 467, 471 (4th Cir. 2003) (quoting Bergstrom v.
Dalkon Shield Claimants Trust (In re A.H. Robins Co.), 86 F.3d 364,
372 (4th Cir. 1996)). Therefore, a "‘controversy arises in Title 11’
when ‘it would have no practical existence but for the bankruptcy.’"
Id. (quoting Bergstrom, 86 F.3d at 372). The Debtor argues that there
is "arising in" jurisdiction under § 1334(b) because the breach of con-
tract caused its bankruptcy and the tortious interference complicated
the administration of the bankruptcy case. We do not find the argu-
ment persuasive.
It seems self-evident that a claim, like the Debtor’s breach of con-
tract claim, that pre-dates the filing of the Chapter 11 case cannot be
said to have arisen within that case, and whether it caused the bank-
ruptcy is immaterial. Indeed, if causation were a sufficient touchstone,
then any debt would confer "arising in" jurisdiction. However, the
very purpose of bankruptcy is to discharge or restructure the debt that
has caused the bankruptcy. Nor is it sufficient to establish "arising in"
jurisdiction that a claim, like the Debtor’s tortious interference claim,
arises during the pendency of the Chapter 11. Here, the Debtor’s
claims bear only a coincidental relationship to the Debtor’s bank-
ruptcy case. They would have existed whether or not the Debtor filed
bankruptcy. It follows that because the Debtor’s breach of contract
claim and tortious interference claim would have existence outside of
the bankruptcy, they were not within the bankruptcy court’s "arising
in" jurisdiction.
6 VALLEY HISTORIC v. BANK OF NEW YORK
The Debtor also asserts that the bankruptcy court had subject mat-
ter jurisdiction because his claims are "related to" a case under Title
11. This Court, like the majority of the other circuits, has 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.
See A. H. Robins Co. v. Piccinin, 788 F.2d 994, 1002 n.11 (4th Cir.
1986).1 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.’" Owens-Ill., Inc. v. Rapid Am. Corp. (In re Celotex
Corp.), 124 F.3d 619, 625 (4th Cir. 1997) (quoting Pacor, 743 F.2d
at 994). Therefore, "[a]n 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 [it] in any way impacts upon the
handling and administration of the bankruptcy estate." Id. at 625-26;
see also Spartan Mills v. Bank of Am. Ill., 112 F.3d 1251, 1255-56
(4th Cir. 1997).
Pacor was decided in a pre-confirmation context, however, and the
Third Circuit has since examined "related to" jurisdiction from a
somewhat different analytical perspective, in a post-confirmation con-
text. Recognizing that "[c]ourts have applied varying standards to
determine whether ‘related to’ jurisdiction should be upheld post-
confirmation," it endeavored to distill the "essential inquiry" or com-
mon thread throughout the decisions, including our decision in Bergs-
trom. Binder v. Price Waterhouse & Co. (In re Resorts Int’l, Inc.),
372 F.3d 154, 166 (3d Cir. 2004). In its view, "the essential inquiry
appears to be whether there is a close nexus to the bankruptcy plan
or proceeding sufficient to uphold bankruptcy court jurisdiction over
the matter." Id. at 166-67. According to the court, for "related to"
jurisdiction to exist at "the post-confirmation stage, the claim must
affect an integral aspect of the bankruptcy process — there must be
a close nexus to the bankruptcy plan or proceeding." Id. at 167. Prac-
tically speaking, under this inquiry "[m]atters that affect the interpre-
1
Although the Supreme Court has overturned Pacor in part, see Things
Remembered, Inc. v. Petrarca, 516 U.S. 124 (1995) (overruling Pacor’s
holding that the prohibition against review of a remand order in 28
U.S.C. § 1447(d) is not applicable in a bankruptcy case), the Court has
not disturbed Pacor’s "related to" jurisdictional test.
VALLEY HISTORIC v. BANK OF NEW YORK 7
tation, implementation, consummation, execution, or administration
of the confirmed plan will typically have the requisite close nexus."
Id.
We find the Third Circuit’s "close nexus" requirement to be a logi-
cal corollary of "related to" jurisdiction. Analytically, it insures that
the proceeding serves a bankruptcy administration purpose on the
date the bankruptcy court exercises that jurisdiction. Without such a
purpose, "related to" jurisdiction would extend beyond the limited
jurisdiction conferred upon bankruptcy courts in the post-
confirmation context. See In re Resorts Int’l, Inc., 372 F.3d at 164-69.
Moreover, although we agree with the Third Circuit that under this
inquiry that "[m]atters that affect the interpretation, implementation,
consummation, execution, or administration of the confirmed plan
will typically have the requisite close nexus," we do not find the facts
and circumstances here to be typical. We find no conceivable bank-
ruptcy administration purpose to be served by the Debtor’s adversary
proceeding because the Plan made no provision for the use of any
recovery from the adversary proceeding but instead provided for the
satisfaction of the Debtor’s obligations "entirely from the post-
petition rents and earnings of the Debtor through the operation of its
real estate." Here, the Debtor had paid all its creditors, including the
Bank before instituting the adversary proceeding, and the Plan was
substantially consummated.
Despite there being no conceivable bankruptcy administration pur-
pose in providing a forum for this dispute, the Debtor essentially
argues that it was proper for the bankruptcy court to exercise jurisdic-
tion pursuant to the Plan’s retention of jurisdiction provision. How-
ever, neither the parties nor the bankruptcy court can create § 1334
jurisdiction by simply inserting a retention of jurisdiction provision in
a plan of reorganization if jurisdiction otherwise is lacking, as it is
here. See New Horizon of N.Y., L.L.C. v. Jacobs, 231 F.3d 143, 155
(4th Cir. 2000) ("The plan cannot confer jurisdiction upon a bank-
ruptcy court or a federal district court . . ., rather 28 U.S.C. § 1334
governs jurisdiction.") (citations omitted); Zerand-Bernal Group, Inc.
v. Cox, 23 F.3d 159, 164 (7th Cir. 1994) (concluding that the bank-
ruptcy court lacked jurisdiction post-confirmation to adjudicate an
adversary proceeding concerning a bankruptcy sale, notwithstanding
inclusion of language purporting to retain jurisdiction in the order
8 VALLEY HISTORIC v. BANK OF NEW YORK
confirming the sale and in the plan of reorganization). Simply put, the
Debtor cannot "write its own jurisdictional ticket." Id.
The Debtor also argues that even if this court does not have "aris-
ing in" or "related to" jurisdiction under § 1334(b), it has subject mat-
ter jurisdiction to hear the Debtor’s adversary proceeding under
§ 1334(e), which gives the district court in a case under Title 11
exclusive jurisdiction over a debtor’s property "as of the commence-
ment" of the case and over "property of the estate." We disagree.
The Debtor is viewing two conceptually distinct jurisdictional
grants as if they are the same and ignoring the effect of confirmation.
28 U.S.C. § 1334(b) invests district courts with original but not exclu-
sive jurisdiction over "civil proceedings." In contrast, § 1334(e) is a
broad grant of exclusive jurisdiction over a debtor’s property; it does
not invest district courts with jurisdiction to conduct civil proceed-
ings. Instead, in the context of a Chapter 11 proceeding in connection
with other provisions of Title 11, it creates exclusive jurisdiction over
"property" for a limited period of time — until confirmation and the
property vests in the reorganized debtor. 11 U.S.C. § 1141(b)
("Except as otherwise provided in the plan or the order confirming the
plan, the confirmation of a plan vests all of the property of the estate
in the debtor.").
Here, neither the Plan nor the order confirming the Plan provided
that the breach of contract claim or the tortious interference claim
would remain property of the bankruptcy estate following the confir-
mation of the Plan. Consequently, upon Plan confirmation, the claims
vested in the reorganized Debtor and could no longer be considered
"property of the estate" under § 1334(e). See Still v. Rossville Bank
(In re Chattanooga Wholesale Antiques, Inc.), 930 F.2d 458, 462 (6th
Cir. 1991); Carter v. Peoples Bank & Trust Co. (In re BNW, Inc.),
201 B.R. 838, 848-49 (Bankr. S.D. Ala. 1996) (noting that "upon con-
firmation, all property of the estate vests in the Debtor (the reorga-
nized one) ‘except as otherwise provided in the plan or order
confirming the plan’ . . . [so that] the property is no longer ‘property
of the estate’ which is subject to bankruptcy jurisdiction") (citations
omitted). However, even if the contract and tortious interference
claims had remained in the bankruptcy estate post-confirmation, the
Debtor would still have had to establish jurisdiction under § 1334(b),
VALLEY HISTORIC v. BANK OF NEW YORK 9
since § 1334(e) does not by itself create jurisdiction to conduct civil
proceedings. Therefore, finding no jurisdiction under § 1334(b), the
court finds no federal jurisdiction over the Debtor’s adversary proceed-
ing.2
IV.
The Debtor also argues that the Plan’s retention of jurisdiction pro-
vision, which purportedly contemplates the Debtor’s adversary pro-
ceeding for breach of contract and tortious interference, is preclusive,
barring the bank from relitigating the bankruptcy court’s jurisdiction
over the contemplated adversary proceeding. We again disagree.
"A bankruptcy court’s order of confirmation is treated as a final
judgment with res judicata effect," binding the parties by its terms
and precluding them "from raising claims or issues that they could
have or should have raised before confirmation." First Union Com-
mercial Corp. v. Nelson, Mullins, Riley & Scarborough (In re Varat
Enters., Inc.), 81 F.3d 1310, 1315 (4th Cir. 1996). With those princi-
ples in mind this Court has held that res judicata precluded a Chapter
11 creditor from lodging post-confirmation objections to claims by a
debtor’s law firm provided for by the confirmed plan. Id. at 1315-17.
We do not find that these principles and our precedent, however, can
be read or extended to preclude the bankruptcy court from exercising
its unflagging obligation to examine its subject matter jurisdiction at
every stage of the proceedings. Here, the Bank’s challenge is not an
impermissible collateral attack on the bankruptcy court’s subject mat-
ter jurisdiction, but rather a permissible direct challenge to its then
current exercise of jurisdiction.
2
Citing Humboldt Express Inc. v. Wise Co. (In re Apex Express Corp.),
190 F.3d 624, 630-33 (4th Cir. 1999), the Debtor also argues that the
Bank consented to bankruptcy court jurisdiction by filing a proof of
claim with the bankruptcy court. This is of course true in one sense.
"[B]y filing a claim against a bankruptcy estate the creditor triggers the
process of ‘allowance and disallowance of claims,’ thereby subjecting
himself to the bankruptcy court’s equitable power." Langenkamp v. Culp,
498 U.S. 42, 44 (1990) (quoting Granfinanciera, S.A. v. Nordberg, 492
U.S. 33, 58-59 (1989)). However, there still must be jurisdiction over the
proceeding under 28 U.S.C. § 1334.
10 VALLEY HISTORIC v. BANK OF NEW YORK
A bankruptcy court "has the authority to pass upon its own jurisdic-
tion and its decree sustaining jurisdiction against attack, while open
to direct review, is res judicata in a collateral action." Chicot Co.
Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 377 (1940). "The
rule applies with equal force to suits in which jurisdiction has been
expressly determined and those in which resolution of the jurisdic-
tional question is merely implicit." Cooper v. Productive Transp.
Servs., Inc. (In re Bulldog Trucking, Inc.), 147 F.3d 347, 352 (4th Cir.
1998). But it does not follow that because an order of confirmation
is treated as a final judgment for res judicata purposes that the Bank
is precluded from challenging the bankruptcy court’s jurisdiction over
the Debtor’s adversary proceeding. Jurisdictionally speaking, the
bankruptcy court’s confirmation order could resolve only its then cur-
rent authority to enter a confirmation order. It could not bootstrap
future jurisdiction over an unfiled adversary proceeding, as a bank-
ruptcy court always has an obligation to examine its jurisdiction to
hear post-confirmation adversary proceedings. Compare U.S. Home
Corp. v. Los Prados Cmty. Assoc. (In re U.S.H. Corp. of N.Y.), 280
B.R. 330, 334-35 (Bankr. S.D.N.Y. 2002) (explaining that a bank-
ruptcy court must always determine that subject matter jurisdiction is
proper over an adversary proceeding even if a plan of reorganization
provides for retention of jurisdiction), with Finova Capitol Corp. v.
Larson Pharmacy Inc. (In re Optical Techs., Inc.), 425 F.3d 1294,
1306-08 (11th Cir. 2005) (explaining that the bankruptcy court could
not collaterally reexamine its subject matter jurisdiction to have
entered a confirmation order modifying leases).
V.
The district court correctly found that the bankruptcy court lacked
jurisdiction over the Debtor’s adversary proceeding. The district court
also decided that the breach of contract claim failed to state a claim
upon which relief could be granted and that neither the breach of con-
tract claim nor the tortious interference claim was a "core" proceed-
ing. Without subject matter jurisdiction over the adversary
proceeding, however, neither the bankruptcy court nor the district
court had jurisdiction to determine these additional issues.3
3
Whether a bankruptcy court may exercise subject matter jurisdiction
over a proceeding is determined by reference to 28 U.S.C. § 1334. Only
VALLEY HISTORIC v. BANK OF NEW YORK 11
Accordingly, we affirm the district court’s decision that the bank-
ruptcy court does not have jurisdiction over the Debtor’s adversary
proceeding but vacate its additional determinations. We therefore
remand to the district court with instructions to dismiss for lack of
subject matter jurisdiction.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED WITH INSTRUCTIONS
after jurisdiction is established pursuant to § 1334 is resort made to 28
U.S.C. § 157 to determine whether the proceeding is "core" or "non-
core." Bankruptcy courts are authorized to enter appropriate judgments
and orders in core proceedings, 28 U.S.C. § 157(b)(1), and may enter
final orders in non-core related proceedings with the consent of all the
parties. 28 U.S.C. §157(c)(2). The determination that a claim is core or
non-core is one that should not be reached, however, if subject matter
jurisdiction does not exist. See Abner v. Mate Creek Loading, Inc. (In re
Mid-Atl. Res. Corp.), 283 B.R. 176, 186 (S.D.W.Va. 2002) ("[A]n asser-
tion that the action is a core or non-core proceeding is not an allegation
of federal jurisdiction; rather, it relates to the power of the bankruptcy
court to resolve the issues brought before it after jurisdiction is estab-
lished.").