The Ohnmachts, having completed their Chapter 11 plan and received a discharge, sent a demand letter to Commercial Credit Group demanding that the judgment against them be cancelled. When CCG declined, they re-opened their bankruptcy and brought an adversary proceeding asserting breach of contract, violation of N.C. Gen. Stat. § 1-239 and § 75-1.1 et seq, intentional and negligent infliction of emotional distress, negligence and seeking relief under the Federal Declaratory Judgment Act (“FDJA”), 28 U.S.C. § 2201(a). They also included in a Motion for Contempt and Sanctions for alleged violation of provisions the preference judgment, the plan, confirmation order, and the discharge injunction.
CCG moved to dismiss the seven non-bankruptcy causes of action, asserting that the bankruptcy court lacked subject matter jurisdiction to determine such.
The Ohnmachts first contention was that their Confirmed Plan retained subject matter jurisdiction. The bankruptcy court rejected this holding that “retention of jurisdiction provisions … are superfluous and do not confer the court with subject matter jurisdiction” that it would not otherwise have.
Next the Ohnmachts asserted that under either the law of the case doctrine or judicial estoppel that CCG should be precluded from asserting that the bankruptcy court lacked subject matter jurisdiction. The law of the case doctrine dictates that “when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 816 (1988) (quoting Arizona v. California, 460 U.S. 605, 618 (1983) (emphasis added in this opinion)). This does not, however, apply to subject matter jurisdiction as Rule 12(h)(3) requires that “[i]f the court determines at any time that it lacks subject matter jurisdiction, the court must dismiss the action.” Fed. R. Civ. P 12(h)(3) (emphasis added in this opinion). That CCG asserted, in a separate third-party action that the bankruptcy court had subject matter jurisdiction “to the same extent” as in the Ohnmacht’s adversary proceeding, did not constitute judicial estoppel, which applies only to facts and not the law or legal theories.
Turning then to whether it had subject matter jurisdiction over the non-bankruptcy causes of action raised by the Ohnmachts, the bankruptcy court held that none “arose under” the Bankruptcy Code, but were either state law based or sought declaratory relief under the FDJA, which only applies if a court has jurisdiction. Similarly, jurisdiction for proceedings “arising in” the bankruptcy case did not apply, as such claims must have “no existence outside of the bankruptcy.” See Bergstrom v. Dalkon Shield Claimants Trust (In re A.H. Robins Co.), 86 F.3d 364, 372 (4th Cir. 1996) and Gupta v. Quincy Med. Ctr., 858 F.3d 657 (1st Cir. 2017). The bankruptcy court held that the breach of contract claim does not extend “arising in” jurisdiction. The FDJA claim had no independent “arising in” jurisdiction. The other causes of action “can and do exist” outside the bankruptcy case. Lastly, the bankruptcy court held that it did not have “related to” jurisdiction, as the outcome of this adversary proceeding would have no effect on a completed Chapter 11 plan.
The bankruptcy court did find, nonetheless, that it had jurisdiction over the Contempt Motion.
Since, following Houck v. Lifestore, the federal district court may have had original, subject matter jurisdiction to hear the discharge violation, it would seem that it would then have been able to decide the other seven causes of actions, making the lawsuit their a better option. (In Houck, the 4th Circuit held the district court had jurisdiction over stay violations under 11 U.S.C. §362(k), which provides a specific cause of action, whereas discharge violations proceed more generally from 11 U.S.C. §105 and/or the inherent authority of a court to enforce its own orders. That may limit the underlying jurisdiction for a district court.)
The bankruptcy court commented in Footnote 4 that “[t]his entire matter could have been avoided if [CCG] had engaged outside counsel sooner or attempted to work to fashion a remedy to the issues raised in the Demand Letter. Competent corporate counsel should know when to engage professionals who have knowledge and experience in a specific discipline.” This does not bode well for CCG on the Contempt Motion. Stay tuned.
For a copy of the opinion, please see: