Ward v. Cross Keys Bank ( 2022 )

Case: 21-30649 Document: 00516463222 Page: 1 Date Filed: 09/07/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
September 7, 2022
No. 21-30649
Lyle W. Cayce
Clerk
In the Matter of: Karcredit, LLC,
Debtor,
Ronnie D. Ward; Sharon Denise Albritton Ward,
Appellants,
versus
Cross Keys Bank; Caldwell Bank; Trust Company,
Appellees.
Appeal from the United States District Court
for the Western District of Louisiana
USDC No. 3:21-cv-1629
Before Smith, Duncan, and Oldham, Circuit Judges.
Per Curiam:*
Cross Keys Bank loaned Karcredit money. Karcredit defaulted. A
bankruptcy court issued a final judgment against Karcredit and its guarantors
*
Pursuant to 5th Circuit Rule 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5th Circuit Rule 47.5.4.
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on a state-law adversary proceeding, and the district court affirmed. Two of
the guarantors, Ronnie and Sharon Ward, appeal that affirmance. We reject
their arguments and affirm.
I.
Ronnie Ward sold used cars. One of his companies was Karcredit,
LLC (“Karcredit”). Karcredit borrowed about $3.5 million from Cross Keys
Bank (“Cross Keys”) in 2012. When it did so, it gave Cross Keys a security
interest in most of its assets. Ronnie Ward and his wife Sharon Ward
(collectively, the “Wards”) signed on as guarantors of that loan.
Karcredit defaulted in 2019, with over $3 million still outstanding.
Cross Keys then called the loans and sued Karcredit and its guarantors in
Louisiana state court. We refer to that litigation as the “adversary
proceeding.” In essence, the adversary proceeding had two aims: first, to
hold Karcredit and Karcredit’s guarantors liable for Cross Keys’ loan to
Karcredit; second, to secure a declaratory judgment regarding Cross Keys’
security interests in various property. In July of 2020, pursuant to a separate
state-court action, Cross Keys forced a sheriff’s sale of most of Karcredit’s
assets. Cross Keys then bought those assets for $700.
Two days after the sheriff’s sale, Cross Keys filed an involuntary
bankruptcy petition, thereby forcing Karcredit into bankruptcy. We refer to
that as the “main proceeding” or the “bankruptcy proceeding.” As a part of
that proceeding, Cross Keys filed schedules listing Karcredit’s assets.
Despite the sheriff’s sale, those schedules included some assets, one of which
was a fraudulent-conveyance claim the estate had against Ronnie Ward.
Cross Keys then removed the existing adversary proceeding from
state court to federal court. See 28 U.S.C. § 1452 (allowing removal of some
proceedings, provided the bankruptcy court has jurisdiction); 28 U.S.C.
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§ 1334 (the relevant jurisdictional provision). From that point on, the
bankruptcy court administered the two proceedings in parallel.
Cross Keys moved for summary judgment on its adversary-
proceeding claims. The Wards opposed that motion. The bankruptcy court
granted partial summary judgment in Cross Keys’ favor. This final judgment
was a nearly complete victory for Cross Keys: The judgment held Karcredit
and its guarantors (including the Wards) liable for over $3 million (plus
interest), and it recognized Cross Keys’ security interests in various assets.
The bankruptcy court then had second thoughts about its power to
enter a final judgment—as opposed to merely submitting recommended
findings of fact and conclusions of law to the district court. See 28 U.S.C.
§ 157(c)(1). So on its own motion, it set a hearing to consider the issue. The
next day, the court issued a memorandum opinion holding that it did indeed
have power to enter a final judgment in the adversary proceeding. It entered
that judgment accordingly.
The Wards appealed that judgment to the district court. They raised
the same three arguments they raise in this court, which we describe below.
The district court reviewed the bankruptcy court’s judgment as a court of
appeal and rejected each of those arguments. See 28 U.S.C. § 158(a); AT&T
Univ. Car Servs. v. Mercer (In re Mercer), 246 F.3d 391, 402 (5th Cir. 2001).
The district court then affirmed the bankruptcy court’s judgment. The
Wards timely appealed that affirmance to this court. We have jurisdiction to
review the district court’s final order under 28 U.S.C. § 158(d).
II.
We (A) hold the bankruptcy court had jurisdiction to decide Cross
Keys’ adversary claims. Then we (B) hold the Wards consented to the
bankruptcy court’s issuance of a final judgment. And finally, we (C) hold that
because the district court didn’t abuse its discretion by holding the Wards’
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bad-faith-filing argument forfeited, that argument remains forfeited on
appeal.
A.
Because Cross Keys removed this adversary proceeding from state to
federal court, 28 U.S.C. § 1452 governs jurisdiction. With exceptions not
relevant here, that provision allows removal of “any claim or cause of action”
from state court to federal district court—provided that the district court has
jurisdiction under 28 U.S.C. § 1334. Section 1334, in turn, gives district
courts “original and exclusive jurisdiction of all cases under title 11”—that
is, bankruptcy proceedings themselves. It also gives district courts “original
but not exclusive jurisdiction of all civil proceedings arising under title 11, or
arising in or related to cases under title 11.” Id. § 1334(b) (emphasis added).
As usual, we assess jurisdiction based on the facts as they stood at the time of
removal. See, e.g., Louisiana v. Am. Nat’l Prop. & Cas. Co., 746 F.3d 633, 639
(5th Cir. 2014) (calling this rule “well[-]entrenched”).
For 28 U.S.C. § 1334 purposes, a “proceeding is ‘related to’ a
bankruptcy if the outcome of that proceeding could conceivably have any
effect on the estate being administered in bankruptcy.” Bass v. Denney (In re
Bass), 171 F.3d 1016, 1022 (5th Cir. 1999) (quotation omitted). More
specifically: “For jurisdiction to attach, the anticipated outcome of the action
must both (1) alter the rights, obligations, and choices of action of the debtor,
and (2) have an effect on the administration of the estate.” Id. “A conceivable
effect in this context is any that could alter the debtor’s rights, liabilities,
options, or freedom of action (either positively or negatively) and which in
any way impacts upon the handling and administration of the bankrupt
estate.” Fire Eagle LLC v. Bischoff (In re Spillman Dev. Grp.), 710 F.3d 299,
304 (5th Cir. 2013) (quotation omitted); see also Arnold v. Garlock, Inc., 278
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F.3d 426, 434 (5th Cir. 2001) (“Certainty, or even likelihood[,] of such an
effect is not a requirement.”).
It is undisputed that the adversary proceeding before us—in
contradistinction to the main bankruptcy proceeding itself—is not a “case[]
under title 11” within the meaning of 28 U.S.C. § 1334(a). Thus, the parties
correctly agree that the only path to jurisdiction is 28 U.S.C. § 1334(b)’s
“related to” jurisdiction.
The adversary proceeding is Cross Keys’ attempt to enforce its state-
law rights. When Cross Keys filed this proceeding in state court, it sought a
judgment of over $3 million against both Karcredit and Karcredit’s
guarantors.
Our analysis is controlled by Fire Eagle LLC v. Bischoff (In re Spillman
Dev. Grp.), 710 F.3d 299 (5th Cir. 2013). There, after a voluntary bankruptcy
petition, some of the debtor’s guarantors filed an adversary action in
bankruptcy court. They sought “a declaratory judgment that . . . the
[g]uarantors should be released from their obligations under the guaranty
agreements,” among other things. Id. at 303. The relevant creditor argued
that the bankruptcy court lacked 28 U.S.C. § 1334 “related to” jurisdiction
over that claim. Id. at 304. This court disagreed: “If [the creditor] were to
succeed on the merits of this suit and proceed to recover against the
guarantees . . . such a recovery would presumably diminish [the creditor’s]
deficiency claim against the bankruptcy estate, conceivably allowing a greater
recovery for other unsecured creditors against the estate. . . .” Id. at 305 (emphasis
added). Accordingly, it held “that the bankruptcy court’s jurisdiction
extended to these matters.” Ibid.So too here. In Spillman, the adversary proceeding was the guarantors’
attempt to avoid their guaranty obligations. Id. at 303. This case is the mirror
image: The adversary proceeding is the creditor’s attempt to enforce the
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guarantors’ obligations. But the stakes are exactly the same. The adversary
proceeding is therefore “related to” the main bankruptcy case. See id. at 305;
Bass, 171 F.3d at 1022.
The Wards have two objections. First, they argue that the estate really
has no assets at all. Pointing out that Cross Keys acquired almost all of
Karcredit’s property in a sheriff’s sale just before it forced Karcredit into
bankruptcy, the Wards argue that there is simply nothing left. And, it is
impossible for the adversary proceeding to have any effect on the
administration of an empty estate. See ibid.But the estate is not empty. At the very least, the bankruptcy
schedules confirm that the Karcredit estate contained a fraudulent-
conveyance claim against Ronnie Ward at the time of removal. See In re
Positive Health Mgm’t, 769 F.3d 899, 903 (5th Cir. 2014) (explaining that a
fraudulent-conveyance claim, if successful, claws assets back into the estate
that never should have left in the first place). And “[i]t is well established
that a claim for fraudulent conveyance is included within estate property.”
Cadle Co. v. Mims (In re Moore), 608 F.3d 253, 261 (5th Cir. 2010) (quotation
omitted). The Wards insist that, if this claim were really worth anything,
Cross Keys would have pursued it by now in state court. But again, the
relevant facts for jurisdictional purposes are the facts as of the moment of
removal. See Am. Nat’l Prop. & Cas. Co., 746 F.3d at 639. What Cross Keys
does or does not do afterward is irrelevant.
Second, the Wards try to differentiate this case from Spillman by
suggesting Cross Keys was the only creditor at the time of filing. See 710 F.3d
at 305 (relying on the adversary proceeding’s conceivable effect on other
creditors). This argument fails because the Wards conceded in bankruptcy
court that there were multiple creditors. “Although parties may not consent
to jurisdiction, a party may stipulate or admit to facts underlying jurisdiction.”
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Durbois v. Deutsche Bank Nat’l Trust Co., 37 F.4th 1053, 1060 (5th Cir. 2022)
(citing Ry. Co. v. Ramsey, 89 U.S. (22 Wall.) 322, 327 (1874)).
B.
The Wards say the bankruptcy court lacked jurisdiction to enter a final
judgment in the adversary proceeding. They contend the court had the power
only to submit recommended findings of fact and conclusions of law to the
district court. We disagree.
Bankruptcy courts have statutory jurisdiction to issue final judgments
over “core proceedings.” 28 U.S.C. § 157(b). As for non-core proceedings,
bankruptcy courts may only “submit proposed findings of fact and
conclusions of law to the district court.” Id. § 157(c)(1). And as the Supreme
Court explained in Stern v. Marshall, 564 U.S. 462 (2011), Article III does not
allow Congress to “withdraw from judicial cognizance any matter which,
from its nature, is the subject of a suit at the common law, or in equity, or in
admiralty.” Id. at 485 (quotation omitted).
Nevertheless, according to the Supreme Court, “litigants may validly
consent to adjudication by bankruptcy courts.” Wellness Int’l Network, Ltd.
v. Sharif, 575 U.S. 665, 674 (2015). Consent can ameliorate both statutory-
jurisdiction defects and constitutional defects. See Sharif, 575 U.S. at 671
(majority) (statutory defects); id. at 679 (constitutional defects); see also 28
U.S.C. § 157(c)(2) (allowing bankruptcy courts to enter final judgments on
non-core claims by consent). And “waiver based on actions rather than
words” may suffice. Sharif, 575 U.S. at 684 (quotation omitted). “[T]he key
inquiry” 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. at 685 (quotation omitted).
Here, the district court found the Wards had impliedly consented to
the bankruptcy court’s issuance of a final judgment. That was a factual
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finding, and it wasn’t clearly erroneous. See Saenz v. Gomez (In re Saenz), 899
F.3d 384, 391 (5th Cir. 2018) (reviewing a bankruptcy court’s implied-
consent finding for clear error); see also Sharif, 575 U.S. at 685 (noting the
question of implied consent “require[s] a deeply factbound analysis”). Mere
days after Cross Keys removed the proceeding to bankruptcy court, the
Wards received notice that they should file a statement giving a yes-or-no
answer to whether they consented to judgment by the bankruptcy court. And
the Wards had notice that the relevant bankruptcy rules required them to give
the same yes-or-no answer in their answer to Cross Keys’ complaint. But the
Wards failed to say one way or another. Instead, after they had notice, they
continued to file and amend pleadings and otherwise participated in the
adversary proceeding. In other words, after receiving relevant notice, they
“still voluntarily appeared to try the case before the non-Article III
adjudicator.” Sharif, 575 U.S. at 685 (quotation omitted). We conclude the
district court’s consent determination was not clear error.
The Wards respond by invoking policy considerations. But policy is
not law. They also point out that, a couple of times during the litigation, the
bankruptcy court indicated it planned merely to submit recommended
findings of fact and conclusions of law to the district court, rather than
entering its own final judgment. This argument, however, overlooks the
uncontested sequence of events. As the district court explained, the Wards
were notified of these issues a mere six days after Cross Keys removed the
case. After that notification, in November 2020, the Wards filed an amended
answer to Cross Keys’ complaint. And they otherwise continued litigating
the adversary proceeding without saying anything about final judgments one
way or the other. Ronnie Ward went so far as to affirmatively invoke the
bankruptcy court’s jurisdiction by asking it to enter a consent judgment on a
related claim. And, though the Wards are correct that the bankruptcy court
indicated plans not to enter a final judgment, those indications did not come
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until the spring of 2021—after the Wards’ sustained participation in the
lawsuit.
C.
Finally, the Wards say Cross Keys forced Karcredit into bankruptcy
in bad faith. See Krueger v. Torres (In re Krueger), 812 F.3d 365, 370–73 (5th
Cir. 2016) (bad-faith filing is cause for dismissal of a bankruptcy proceeding).
But the Wards forfeited this argument by failing to properly present it below.
The Wards attempted to argue the bad-faith issue in a motion to
dismiss the main proceeding in bankruptcy court. After giving the Wards
many opportunities to remedy various procedural defects with the motion,
the bankruptcy court denied it. The Wards appealed that denial to the district
court, but the district court held the denial was a mere interlocutory order
not fit for review.
After the bankruptcy court entered its final judgment in the adversary
proceeding (the subject of this appeal), the Wards again appealed. And they
again argued the bad-faith issue. The district court held that, because the
Wards had not properly raised the bad-faith issue in the main proceeding in
bankruptcy court, they had forfeited it.
When a district court holds that a party forfeited an issue by failing to
properly raise it, our review is for abuse of discretion. Cf. Seed Co. v.
Westerman, Hattori, Daniels & Adrian, LLP, 961 F.3d 1190, 1195 (D.C. Cir.
2020). Here, it is undisputed that, despite repeated warnings from the
bankruptcy court, the Wards failed to raise the bad-faith issue in a
procedurally adequate manner. And the whole thrust of forfeiture doctrine is
that parties must present issues in a procedurally adequate manner in order
to preserve them. Cf. Rollins v. Home Depot USA, Inc., 8 F.4th 393, 397 (5th
Cir. 2021) (“A party forfeits an argument by failing to raise it in the first
instance in the district court—thus raising it for the first time on appeal—or
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by failing to adequately brief the argument on appeal.”). The district court’s
forfeiture holding was a straightforward application of that basic principle.
All but one of the Wards’ counterarguments rely on the incorrect
assumption that this court can review forfeiture de novo. The Wards’ failure
even to contend that the district court abused its discretion is fatal to these
arguments.
The remaining counterargument is that bad-faith filing is a
jurisdictional issue that cannot be forfeited at all. True, this court has at least
suggested that bad-faith filing is jurisdictional in the Chapter 11 context. In re
Little Creek Dev. Co., 779 F.2d 1068, 1071 n.1 (5th Cir. 1986) (“The parties
agree that the bankruptcy court has the power to raise the issue of good faith
sua sponte as an inquiry into its jurisdiction, and former Bankruptcy Act
precedent in this circuit confirms their position.”). That might make sense
because the statutory provision that governs bad-faith filing in Chapter 11
cases uses mandatory terms. See 11 U.S.C. § 1112(b)(1) (requiring, with
exceptions, that “the court shall convert a case under this chapter to a case
under chapter 7 or dismiss a case under this chapter” if there is “cause” to
do so (emphasis added)); Krueger, 812 F.3d at 373 (explaining that bad-faith
filing can be “cause” in a Chapter 11 case).
But the same is not true in the Chapter 7 context. The statutory
provision that governs bad-faith filing in Chapter 7 cases is permissive. See 11
U.S.C. § 707(a) (“The court may dismiss a case under this chapter only after
notice and a hearing and only for cause” (emphasis added)); Krueger, 812
F.3d at 370–73 (holding bad faith filing counts as “cause” in Chapter 7 cases).
Some mandatory provisions are jurisdictional, and some mandatory
provisions are not. Gonzalez v. Thaler, 565 U.S. 134, 142, 146 (2012)
(discussing one of each). But to our knowledge, no permissive provision is
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jurisdictional. We decline to hold that 11 U.S.C. § 707(a) is jurisdictional.
The district court’s forfeiture holding stands.
AFFIRMED.
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