Battle Ground Plaza, LLC v. Ray (In re Ray)

Summarized by Jon Powers , White and Williams LLP
15 years 4 months ago

Citation:

(9th Circuit, Dec 31,1969)

Tag(s):

9th Circuit

Ruling:

Overturning the B.A.P., the Ninth Circuit held the bankruptcy court lacked jurisdiction to hear a collateral attack on a Section 363 Sale Order in a confirmed and closed Chapter 11 case when the attack, initiated in state court, was based on a state law breach of contract theory. First, the court held the bankruptcy court did not have “arising in” or “arising under” jurisdiction pursuant to 28 U.S.C. 1334(b). The court reasoned the underlying basis for the collateral attack on the bankruptcy court’s Section 363 Sale Order was a state law breach of contract claim related to allegations that the Debtor and another party violated a contractual right of first refusal. While this right of first refusal was contained in a separate contract that was recognized as part of the Debtor’s confirmed Chapter 11 Plan, deciding its breach did not involve a matter unique to the bankruptcy process. In fact, the court reasoned the state law action was not brough as a direct action for enforcement of a bankruptcy court order, the claims presented were not brought under the Bankruptcy Code at all, and the issues presented could be brought and properly heard in state court. Quoting its recent decision in In re Harris, 590 F.3d 730, 737 (9th Cir. 2009), the Court held, “[a] civil proceeding ‘arises in’ a Title 11 case when it is not created or determined by the bankruptcy code, but where it would have no existence outside of a bankruptcy case.” Unlike the agreement reached during the course of the bankruptcy proceedings in Harris and expressly approved by the bankruptcy court, the Ray court reasoned the right of first refusal involved in Ray was wholly a creature of state law (it was not expressly approved by the bankruptcy court). The Ray panel also held the bankruptcy court lacked “related to” jurisdiction under 28 U.S.C. 1334(b). The court began by recognizing that “related to” jurisdiction narrows post-confirmation, but is still broader than “arising under” jurisdiction. Nonetheless, the court found there was no close nexus to the underlying bankruptcy. The court recognized that a successful collateral attack on the sale order could undermine the bankruptcy court’s prior “well reasoned determination,” but nonetheless found a close nexus lacking, stating that second courts often decide matters such as issue and claim preclusion. Ultimately, the bankruptcy court did not have “related to” jurisdiction because the case could have existed wholly outside of bankruptcy law and “did not necessarily depend on resolution of a substantial question of bankruptcy law.” Finally, the Ray court determined the bankruptcy court lacked ancillary jurisdiction. The court recognized ancillary jurisdiction allows a court to “vindicate its authority and effectuate its decrees” but denied ancillary jurisdiction, relying primarily on its prior decision in In re Valdez Fisheries Deve. Ass’n, Inc., 439 F.3d 545 (9th Cir. 1996), which in turn relied on Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375 (1994). The court found that hearing a breach of contract claim based on an allegation that new evidence came to light after a bankruptcy case has closed, creditors paid, and the debtor discharged, “stretches the limits of ancillary jurisdiction too far, going beyond what is necessary for the bankruptcy court to ‘effectuate its decrees.’” The court concluded by stating reopening a bankruptcy case should be rare and only done “when necessary to resolve bankruptcy issues, not to adjudicate state law claims that can be adjudicated in state court.” Notably, in a footnote, the court expressly rejected the idea that inclusion of a retention of jurisdiction clause in a confirmed Plan can provide the court with jursidiction, a concept "which is consitutionally limited." The court also seemed concerned that the Debtor could not provide "any limiting principle that would ever cut off the bankruptcy court's jurisdiction to re-visit its previous decisions in closed cases." Unlike the B.A.P., the Ninth Circuit did not address the Debtor's arguments based on FRCP 59 and 60.

Procedural context:

Appeal to the Ninth Circuit from a B.A.P. jurisdictional ruling after the bankruptcy court found jurisdiction and reopened a bankruptcy case upon referral by a state court of an action collaterally attacking a Section 363 sale Order on state law grounds.

Facts:

The Debtor, Douglas Ray, an individual, filed for chapter 11 bankruptcy protection in August 2000. At the time of the filing, Debtor co-owned a shopping center called “BG Plaza” with an individual named Jessen. Jessen did not file bankruptcy. In December 2000, Debtor and Jessen entered into a purchase and sale agreement to sell BG Plaza to “Purchaser 1.” As part of this deal, Purchaser 1 was granted a right of first refusal to purchase a vacant ½ acre parcel adjacent to BG Plaza, also co-owned by Debtor and Jessen. In March 2002, Debtor confirmed a bankruptcy plan (the "Plan"). The Plan referenced the sale of BG Plaza to Purchaser 1, but noted the sale had not yet closed due to environmental issues surrounding the property. The Plan also set forth Debtor’s intent to sell the adjacent ½ acre parcel either to Purchaser 1 or some other party. In May 2005, Debtor and Jessen entered into an agreement to sell the 1/2 acre parcel with “Purchaser 2." Purchaser 2’s purchase was contingent upon review of any cross-parking agreements (i.e., an agreement that would allow the ½ acre parcel to use BG Plaza’s parking lot). The sellers notified Purchaser 1 of the terms of the sale of the ½ acre parcel to Purchaser 2, but Purchaser 1 declined to exercise its right of first refusal. In July 2005, the bankruptcy court approved the sale of the ½ acre parcel to Purchaser 2 under Section 363 of the Bankruptcy Code (the “First Sale Order”)—but the deal did not close at this time (apparently because there was no cross parking easement agreement in place or some other problem existed). In August 2005, Jessen’s attorney circulated an easement agreement to Debtor and Purchaser 2 that would give the ½ acre parcel cross parking rights to use BG Plaza’s parking lot, but the document was not signed at this time. Purchaser 1 was not concurrently advised of the existence of this proposed cross parking easement. Prior to the closing on the ½ acre parcel, Purchaser 2 discovered a sewer line that needed removal. As a concession, Debtor and Jessen agreed to lower the sale price on the 1/2 acre parcel. This required notification of Purchaser 1 of the new terms and a second opportunity to exercise its right of first refusal. Purchaser 1 gave notice of intent to exercise and gave a deposit. The Debtor subsequently moved the bankruptcy court to approve the sale to Purchaser 2. Purchaser 1 objected to the terms of the sale, arguing it violated its right of first refusal. Purchaser 1 also requested copies of any parking agreements. The bankruptcy court rejected Purchaser 1’s objection to the sale and issued its “Second Sale Order” in November 2005. In so doing, the court found the terms of Purchaser 1’s offer did not mirror the terms of Purchaser 2’s because it extended the closing date. The Second Sale Order, like the terms of the First Sale Order, approved the sale free and clear of all liens, encumbrances, and interests, including Purchaser 1’s right of first refusal. After entry of the Second Sale Order, Purchaser 1 moved to alter or amend the judgment under FRCP 59(e) and Rule 9023 (which the Ninth Circuit classified as a motion for reconsideration), which the bankruptcy court rejected. However, Purchaser 1 did not appeal the Second Sale Order or seek a stay to prevent mootness under Section 363(m). After entry of the Second Sale Order, Purchaser 2 executed the cross-parking easement with the Debtor and Jessen and received the ½ acre parcel via warranty deed. The proceeds of the sale allowed Debtor to pay remaining creditors under the Plan and the bankruptcy court issued a final decree closing the bankruptcy case. Six months later, Purchaser 2 sought city approval to build on the six acre parcel. This resulted in Purchaser 1 obtaining a copy of the cross parking easement (it claimed for the first time). Purchaser 1 then filed a lawsuit in state court against the Debtor, Jessen, and Purchaser 2, claiming breach of its right of first refusal—seeking both specific performance and damages (the “State Court Action”). Purchaser 1 specifically alleged that the Debtor and Jessen failed to comply with the terms of the right of first refusal by failing to disclose the existence and terms of the cross parking easement. The defendants in the State Court Action filed a motion to dismiss for lack of subject matter jurisdiction. In response, the state court issued an “order of remand” referring Purchaser 1’s claims to the bankruptcy court for further proceedings. The state court's order reasoned that action by the state court would require interpretation of prior bankruptcy court rulings (the Sale Orders) and that there was a close nexus between the bankruptcy and the State Court Action. While the state court recognized the bankruptcy court may decide it lacked jurisdiction, it appeared to believe the bankruptcy court should address the jurisdictional issue in the first instance. See Docket # 329 (Case # 00-36568, United States Bankruptcy Court, Western District of Washington). Debtor subsequently moved to reopen the bankruptcy case and Purchaser 1 objected on jurisdictional grounds. The bankruptcy court reopened the case and, after briefing, issued an order retaining jurisdiction. See Docket # 346. Ultimately, the bankruptcy court issued an order granting summary judgment finding that its prior sale order could not be collaterally attacked by way of the State Court Action and remanded the action back to the state court for further proceedings. See Docket # 387. Purchaser 1 then moved the bankruptcy court to alter or amend the judgment under FRCP 59(e), and Bankruptcy Rule 9023, arguing, among other things, that its State Court Action should be construed as an independent action under FRCP 60(b), (d). The bankruptcy court denied this motion and Purchaser 1 appealed to the Ninth Circuit Bankruptcy Appellate Panel. The BAP found the bankruptcy court had both “arising under” and “ancillary” jurisdiction and properly entered summary judgment against Purchaser 1. The BAP first addressed ancillary jurisdiction, finding that ancillary jurisdiction gave the bankruptcy court power to interpret and enforce its prior sale orders. With respect to “arising under” jurisdiction, the BAP found resolution of Purchaser 1’s specific performance claim involved a substantial question of bankruptcy law, “i.e., the impact of the bankruptcy court’s November 2005 Sale Order, arising under section 363(b), that authorized the now consummated sale of the Debtor’s interest in the ½ Acre Parcel to [Purchaser 2] free and clear of [Purchaser 1’s right of first refusal].” See Memorandum Decision issued December 31, 2008, Ninth Circuit BAP No. WW-08-1104-KaJuPa. The BAP further found that the appropriate method to attack a 363 Sale Order is through a motion to vacate the sale under FRCP 60(b) or an appeal. In this, the BAP found that Purchaser 1 failed to properly raise its Rule 60 issues in the bankruptcy court prior to filing the State Court Action. Lastly, the BAP denied the appeal on the merits, finding Purchaser 1 had not properly exercised its rights of first refusal and the cross parking agreement did not change the terms of the sale, but merely satisfied a condition precedent.

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