In the Matter of Irma J. Walker, Debtor. Irma J. Walker v. The Cadle Company v. Denise D. Lindsey and Stan Svara D/B/A Sks Enterprises
Docket: 94-30256
Court: Court of Appeals for the Fifth Circuit; May 9, 1995; Federal Appellate Court
Irma J. Walker initiated an adversary proceeding in bankruptcy court against the Cadle Company, alleging violations of the automatic stay under the Bankruptcy Code. In response, the Cadle Company filed third-party claims for contribution and indemnity against Stan Svara and attorney Denise Lindsey. The bankruptcy court ruled that Lindsey bore no liability for the stay violations but found that both Cadle and Svara had violated the stay, awarding Walker damages and attorney's fees. The district court upheld the decision against Cadle but reversed the award against Svara, stating that neither it nor the bankruptcy court had jurisdiction over Cadle's indemnity claims. The Cadle Company appealed this ruling.
Background details reveal that Walker had purchased a mobile home secured by a chattel mortgage, which the Cadle Company acquired after the original lender's insolvency. Following Walker's default on the mortgage, Cadle obtained a default judgment against her. After Walker filed for Chapter 7 bankruptcy, she indicated her intent to surrender the trailer. Cadle filed a proof of claim in the bankruptcy court shortly after being notified of Walker's bankruptcy filing. During this time, Joseph, Cadle's account officer, communicated with Svara about the trailer, despite Walker informing Svara about her bankruptcy and instructing him to contact her attorney. The appeal by the Cadle Company was affirmed by the court, with no errors found in the district court's decisions.
Near August 23, 1991, Lindsey provided May with a voluntary release and surrender form intended for a creditors' meeting. Upon attending the meeting on September 3, Lindsey discovered the form had not been signed and that May had passed away. Lindsey then presented the form to Walker's new attorney, James Moorman, who indicated he would review it and obtain Walker's signature if everything was satisfactory. Walker expressed her intention to vacate the trailer but requested time to remove her belongings. Despite this, Walker did not sign the release form.
On September 4, 1991, Lindsey informed Joseph that Walker would vacate the trailer by September 7, and would surrender it thereafter, pending confirmation from her attorney. Subsequently, the bankruptcy court approved the trustee's petition to abandon the trailer. Following the creditors' meeting, Cadle, through Joseph, initiated negotiations to sell the trailer to Svara. On September 6, Joseph conveyed to Svara that Walker would soon vacate, prompting Svara to inspect the trailer, which he found in poor condition with signs of neglect.
Svara and Joseph agreed on a purchase price of $1,750. However, Lindsey did not authorize Joseph to sell the trailer, noting that Walker's attorney's approval was necessary. Despite this, on September 25, Joseph informed Lindsey that he had sold the trailer and required the Voluntary Surrender Form. Lindsey sent another form to Walker's attorney, and the next day, the trailer was sold to Joni Davis, Svara's fiancée. Svara and his team, upon removing the trailer, left Walker's personal belongings scattered outside, worsening the disarray.
Walker, who had been hospitalized for pneumonia and heart failure, returned to find her trailer missing and her belongings damaged beyond salvage. She subsequently filed an adversary proceeding against Cadle for violating the automatic stay under 11 U.S.C. § 362, seeking damages for her property. Cadle counterclaimed to revoke Walker's bankruptcy discharge, alleging discrepancies in property valuations between her B-2 schedules and her complaint. Walker later amended her complaint to align with her bankruptcy schedules. Additionally, Cadle initiated a third-party demand against Lindsey and Svara for contribution and/or indemnity concerning any damages awarded against Cadle.
In October 1992, the bankruptcy court found that Cadle and Svara violated the automatic stay by selling a trailer, resulting in $2,000 in damages to Walker, who was also awarded attorney's fees. Conversely, Lindsey was found not liable for any violation since she did not control the debtor's property. Following further submissions, the court awarded Walker additional attorney's fees of $4,800 and costs of $361.76, determining Svara was fifty percent responsible for the amounts owed to Walker.
Cadle and Svara appealed to the district court, which ruled that Cadle had no cause of action against Svara under the Bankruptcy Code and that it lacked subject matter jurisdiction over Cadle's third-party claim. The district court affirmed the bankruptcy court's finding of Cadle's violation of the automatic stay and the computations of fees, costs, and damages owed to Walker. Cadle subsequently appealed, arguing various errors by the district court, including affirming the violation finding, dismissing the claim against Lindsey, and denying jurisdiction for the third-party complaint against Svara.
The appellate court reviews bankruptcy court findings of fact for clear error and legal issues de novo. Cadle's argument regarding the existence of a contribution claim under Section 362 of the Bankruptcy Code and federal question jurisdiction over its third-party claim was determined to be incorrect, as no contribution action exists within Section 362.
The Supreme Court has established that a right to contribution can arise either from an explicit congressional action or through federal common law crafted by federal courts. In the context of the Bankruptcy Code, specifically Section 362, there is no explicit right to contribution, as confirmed by various cases. The lack of express provision for contribution in the Bankruptcy Code leads to the conclusion that any such right, if it exists, must be implied. To determine congressional intent regarding implied rights, factors such as legislative history, the class benefitting from the statute, and the overall legislative scheme are considered. Cadle failed to provide legislative history supporting an intent to create a contribution cause of action. Conversely, the legislative history surrounding Section 362 demonstrates that its purpose is to protect debtors from creditors, not to provide benefits to creditors who disregard the automatic stay. The combination of the absence of legislative intent for contribution and the protective nature of Section 362 indicates that Congress did not intend to create a contribution cause of action within the Bankruptcy Code. This aligns with the Supreme Court's precedent that absence of reference to contribution in legislative history negates the need for further analysis of other factors. Thus, no implied right of contribution exists under the Bankruptcy Code.
A right to contribution, if not established by statute, may only arise through federal common law. The Supreme Court has cautioned against broadly creating common-law remedies, permitting such actions only when necessary to protect uniquely federal interests or if Congress explicitly allows courts to develop substantive law. The authority to formulate federal common law is limited, primarily to areas involving the rights of the United States, disputes between states or with foreign nations, and admiralty cases. Bankruptcy does not fall within these areas of discretion for creating new causes of action. In the context of the Bankruptcy Code, Congress has implemented a comprehensive legislative framework that does not provide for a right to contribution, as supported by lower court rulings. The presumption against omitted remedies is strongest in comprehensive statutes. Furthermore, while the Supreme Court recognized a cause of action for contribution under the Securities Exchange Act, this case is distinct because the courts have been given the responsibility to elaborate on the Rule 10b-5 right, which is not the case for violations of the automatic stay provisions in bankruptcy. Cadle has not demonstrated any congressional intent to empower courts to create a cause of action for such violations.
The Court in Employers Insurance highlighted the importance of contribution rights in federal securities law, asserting that these provisions necessitate a similar contribution rule under Rule 10b-5. However, Cadle failed to cite any bankruptcy provisions that would recognize a third-party right of contribution, which means Employers Insurance does not support such a cause of action under Section 362 of the Bankruptcy Code.
Cadle's claim of bankruptcy jurisdiction over its third-party claim against Svara was found to be erroneous. Bankruptcy jurisdiction is governed by 28 U.S.C. § 1334, which establishes that district courts have original and exclusive jurisdiction over all cases under Title 11, with certain exceptions outlined in § 1334(b). This subsection permits district courts to have original, but not exclusive, jurisdiction over civil proceedings related to Title 11.
The district courts and their bankruptcy units are authorized to hear cases related to bankruptcy petitions. The Supreme Court clarified that the jurisdiction of bankruptcy courts extends beyond property of the estate but is not unlimited. To determine jurisdiction under § 1334(b), it is sufficient to establish that a matter is at least "related to" the bankruptcy case, as the terms "arising under," "arising in," and "related to" operate conjunctively to define the scope of jurisdiction.
The Bankruptcy Code does not define "related matters," but in In re Wood, it was established that a matter is considered related under Section 1334 if its outcome could potentially impact the bankruptcy estate. Specifically, a matter is related if it could alter the debtor's rights or options and affect the administration of the estate. Conversely, bankruptcy courts lack jurisdiction over matters that do not affect the debtor. Most courts have found that "related to" jurisdiction is often absent in third-party complaints. In the current case, Cadle's third-party claim against Svara does not relate to the bankruptcy action, as it has no conceivable effect on the estate or the debtor's rights. Cadle's claim against Svara concerns responsibility for damages to a third party's property, which would not affect the administration of the estate. Additionally, Cadle's assertion that Section 157 of the Bankruptcy Code grants jurisdiction over its claim is incorrect; Section 157 only allows for the delegation of jurisdiction from district courts to bankruptcy courts without expanding the jurisdictional reach. Consequently, since there is no federal jurisdiction over Cadle's claim, the district court correctly declined to assert that the bankruptcy court had jurisdiction under Section 157.
Cadle contends that the bankruptcy court has jurisdiction to hear a third-party claim against Svara based on supplemental jurisdiction principles, combining authority from Sections 1334 (bankruptcy jurisdiction) and 1367 (supplemental jurisdiction). Notably, Cadle does not claim that the district court should exercise this supplemental jurisdiction. The document refrains from exploring whether a district court can address claims supplemental to its bankruptcy jurisdiction, referencing an academic critique of such practices. It concludes that even if a district court could consider a third-party claim under supplemental jurisdiction, bankruptcy courts lack the authority to do so.
Several bankruptcy courts have found that they possess supplemental jurisdiction. For instance, in *In re Eads*, the court recognized its supplemental jurisdiction without delving deeply into the relationship between Sections 157 and 1334, allowing third-party claims based on ancillary and pendent jurisdiction due to a close relationship with the main claims. However, this court explicitly limited its findings to the district court's subject-matter jurisdiction and did not determine whether a bankruptcy judge could oversee the trial.
In contrast, the bankruptcy court in *Jones v. Woody* determined that under Section 1367, it could exercise supplemental jurisdiction over claims related to the same case or controversy, noting that bankruptcy courts operate as units of district courts. Other cases also support the idea of bankruptcy courts having ancillary jurisdiction over certain claims. However, in light of precedents like *Finley v. United States* and the interpretation of statutory authority, the document ultimately concludes that bankruptcy courts are not permitted to exercise supplemental jurisdiction.
The Supreme Court's ruling in *Finley v. United States* clarified the requirements for establishing jurisdiction in federal courts, emphasizing that both constitutional authority and congressional enactment are necessary for jurisdiction to exist. The Court specifically stated that pendent-party jurisdiction cannot be assumed to be authorized unless expressly permitted by Congress, indicating that it does not extend broadly. Subsequent interpretations of *Finley* have concluded that pendent-party jurisdiction is essentially nonexistent unless Congress explicitly allows it.
In 1990, Congress enacted the Judicial Improvements Act, which provided district courts with broad supplemental jurisdiction over related claims, including those involving additional parties. This act aimed to align jurisdictional authority with constitutional limits as understood in prior cases. However, while this statute clarified the jurisdictional power of district courts, it did not extend similar authority to bankruptcy courts. Thus, without a congressional statute granting bankruptcy courts the ability to exercise supplemental jurisdiction, the district court correctly determined that the bankruptcy court lacked the authority to hear Cadle's contribution claim against Svara.
The case law regarding bankruptcy jurisdiction and supplemental jurisdiction is limited but indicates that district courts possess authority under 28 U.S.C. § 1334(b) and § 1367 to approve settlements related to bankruptcy cases. The Second Circuit in *In re Cuyahoga Equip. Corp.* concluded that such jurisdiction permits district courts to handle matters integral to the bankruptcy case, but did not extend this power to bankruptcy courts. Similarly, in *Wieboldt Stores, Inc. v. Schottenstein*, the district court recognized ancillary jurisdiction for claims intertwined with a bankruptcy trustee's fraudulent conveyance claims, emphasizing the absence of legal authority restricting its jurisdiction. However, this court also did not suggest that bankruptcy courts have supplemental jurisdiction. Contrarily, *Southtrust Bank v. Alpha Steel Co.* implied that bankruptcy courts lack such authority.
The statutory language of the bankruptcy jurisdiction statute suggests limits on bankruptcy court powers, as indicated by various courts. It is argued that the "relate to" and "arising in" components of § 1334(b) already encompass all logically related supplemental claims intended by Congress. Additionally, 28 U.S.C. § 157 outlines the referral of cases to bankruptcy courts but does not mention cases arising solely from supplemental jurisdiction. The statute distinguishes between core and non-core proceedings, allowing bankruptcy courts to "hear and determine" core cases while limiting them to submitting findings on non-core cases. Notably, the statute does not provide bankruptcy courts with the authority to handle claims that are not core or related to a Title 11 case, leaving supplemental jurisdiction unaddressed.
A district court lacks the authority to refer cases to a bankruptcy court under supplemental jurisdiction, as jurisdictional statutes do not provide for this action. Congress has specifically delineated the types of proceedings that bankruptcy courts can handle, and allowing ancillary jurisdiction could undermine the established 'relate to' and 'arising in' jurisdictions. The bankruptcy court's ability to exercise supplemental jurisdiction is limited and could inadvertently broaden its authority to include claims that only tangentially relate to the main case, which Congress likely did not intend. Additionally, this interpretation conflicts with the Supreme Court's guidance against broad readings of jurisdictional statutes. Consequently, the district court correctly ruled that the bankruptcy court could not exercise supplemental jurisdiction over Cadle's third-party claim. Cadle's remaining claims are also deemed meritless; the bankruptcy court's findings of violation of the automatic stay, responsibility for damages to Walker, and the amount of those damages are affirmed. The decision of the district court is upheld. Cadle's references to cases regarding stay violations do not support a private right of action but rather pertain to civil contempt proceedings.
In Cusanno v. Fidelity Bank, the court awarded damages for violations of the automatic stay, emphasizing that such actions would not be permitted. Under 28 U.S.C. § 157(a), district courts can refer bankruptcy cases to bankruptcy judges, who can hear core proceedings and issue orders (28 U.S.C. § 157(b)(1)). For non-core but related proceedings, bankruptcy judges must submit proposed findings to the district court, which then enters final judgments after reviewing objections (28 U.S.C. § 157(c)(1)). With party consent, district courts may allow bankruptcy judges to handle certain non-core proceedings (28 U.S.C. § 157(c)(2)). Cadle's argument suggests the district court erred by ruling the bankruptcy court could not hear Cadle's state law third-party claim under supplemental jurisdiction, although the court refrained from commenting on the recognition of such a claim under Louisiana law. The concept of pendent claim jurisdiction allows federal courts to adjudicate state claims attached to federal claims if they arise from the same factual background (Rodriguez v. Pacificare of Texas). This jurisdiction has evolved to include pendent party jurisdiction, allowing federal courts to hear state claims against non-diverse defendants intertwined with federal claims. The Second Circuit noted that the district court's approval of a settlement did not rely solely on supplemental jurisdiction but also on CERCLA's jurisdictional grant. The district court implicitly affirmed the dismissal of the cause of action against Lindsey, with no errors found in that conclusion.
