IN RE YEAGER (Bankr.S.D.Ohio 10-16-2006)

Case No. 05-24818, Adversary Case No. 05-1281.United States Bankruptcy Court, S.D. Ohio, Western Division.
October 16, 2006

MEMORANDUM OF DECISION ON MOTION TO DISMISS
JEFFERY HOPKINS, Bankruptcy Judge

Presently before the Court is a Motion To Dismiss For Lack Of Jurisdiction And Request For Additional Time To Plead (“Motion”) (Doc. 8), filed by Donald V. Yeager (“Yeager”). By his

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Motion, Yeager seeks dismissal of the entire action based upon his contention that the Court does not possess subject matter jurisdiction over the same.

Bankruptcy jurisdiction is divided into “core” proceedings, over which the bankruptcy courts exercise full jurisdiction, and “non-core” or “otherwise related” proceedings where bankruptcy courts have limited power. Wood v. Wood (In re Wood), 825 F.2d 90, 91 (5th Cir. 1987). Yeager argues that all seven counts asserted in the complaint must be dismissed because they do not even constitute “otherwise related” proceedings. Consequently, the issue presented is whether this Court has subject matter jurisdiction under either the “core proceeding” jurisdictional standard, or the “related to” jurisdictional standard.

Plaintiff, Tuffy Associates Corp. (“Tuffy”) is a Delaware corporation that has its principal place of business in Toledo, Ohio. Yeager, who is also the Debtor, is a resident of Westchester, Ohio, and is president of Defendant Automotive 1, Inc., an Ohio corporation. Yeager is also allegedly named as the contact person, on the filing documents, for Defendant Automotive 1, LLC, an Ohio limited liability company. Tuffy and Yeager entered into a licensing agreement which gave Yeager franchise rights to operate a Tuffy Automotive service center in return for monetary consideration, royalty fees, and advertising fees.

The complaint (Doc. 1) lists seven counts. Counts one and two were brought against Yeager and Automotive 1, Inc. Counts three and six were brought solely against Yeager. Counts four and five were brought against Defendant Automotive 1, Inc. Count seven was brought against Automotive 1, LLC. A joint Answer (Doc. 7) was filed by Yeager, Automotive 1, Inc. and Automotive 1, LLC. Yeager then filed the Motion (Doc. 8).

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“The source of the bankruptcy court’s jurisdiction is 28 U.S.C. §§ 1334 and 157.” Thickstun Bros. Equip. v. Encompass Serv. Co.
(In re Thickstun Bros. Equip.), 344 B.R. 515, 520 (B.A.P. 6th Cir. 2006). Pursuant to § 1334(b) the district courts have jurisdiction over “cases under title 11,” and proceedings “arising under,” “arising in a case under,” or “related to a case under” title 11. Id. (quoting 28 U.S.C. § 1334(b)). District courts typically refer this jurisdictional grant over bankruptcy cases to the bankruptcy courts. See § 157(a).

Bankruptcy Court jurisdiction is further governed by 28 U.S.C. § 157(b)(1) which states: “Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.” The bankruptcy judge rules on whether a particular proceeding is a core proceeding. See § 157(b)(3). The court looks at both the form and the substance of the proceeding in making its determination. Mich. Employment Sec. Comm’n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1144 (6th Cir. 1991).

Additional jurisdiction to hear related claims is granted via 28 U.S.C. § 157(c)(1) which states: “A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.” Thus, whether a claim is classified as core or non-core defines the extent of the Bankruptcy Court’s jurisdiction, and the standard used by the District Court to review the

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Bankruptcy Court’s factual findings. Halper v. Halper, 164 F.3d 830, 836 (3d Cir. 1999).

“Core Proceeding” Legal Standard
To determine the extent of this Court’s jurisdiction each claim must be examined and classified as core, non-core, or wholly unrelated to the bankruptcy case. Id. at 839. As an initial matter this Court will determine whether the Counts alleged by Tuffy are core proceedings. A non-exclusive list of core proceedings is set out in 28 U.S.C. § 157(b)(2).[1] “A core proceeding either

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invokes a substantive right created by federal bankruptcy law or one which could not exist outside of bankruptcy.” Sanders Confectionary Prod. v. Heller Fin., 973 F.2d 474, 483 (6th Cir. 1992). The Counts against Yeager and the non-debtor defendants consist of common law, state law, and federal trademark infringement claims. These claims could exist outside of a bankruptcy proceeding, and no substantive rights created by federal bankruptcy law are invoked. Thus, this Court holds that Counts I-VII are not core proceedings.

“Related to” Legal Standard
The issue then becomes whether this court has “related to” jurisdiction under § 157(c)(1). The test for determining “related to” jurisdiction is “whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. In re Dow Corning

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Corp. 86 F.3d 482, 489 (6th Cir. 1996) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)). The proceeding need not necessarily be against the debtor or the debtor’s property Pacor, 743 F.2d at 994. “An 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 which in any way impacts upon the handling and administration of the bankrupt estate.” Id. Whatever test is used, precedent holds that bankruptcy courts lack jurisdiction over proceedings not affecting the debtor. Celotex Corp. v. Edwards, 514 U.S. 300, 308 n. 6 (1995). Jurisdiction over non-bankruptcy issues involving third parties who are “otherwise strangers to the civil proceeding and to the parent bankruptcy does not exist.” Pacor, 743 F.2d at 994.

Jurisdiction as to Donald Yeager
Tuffy alleges four counts against Yeager. Count I alleges trademark infringement and unfair competition. Count II alleges violation of the Ohio Deceptive Trade Practices Act and common law. Count III alleges breach of contract. Count VI alleges breach of a non-compete provision contained in the license agreement.

Tuffy requests monetary damages in Counts I and III. Because the Trustee was able to locate assets in Yeager’s bankruptcy case, a judgment against Yeager would affect the estate. See
Case No. 05-24818 at Doc. 25. Therefore, as to Yeager, Count I and III are related. Tuffy requests injunctive relief on Counts I, II, III and VI. Injunctive relief, if granted, would alter the Debtor’s rights or options, and negatively impact Yeager’s freedom of action. Accordingly, as to Yeager Counts I, II, III, and VI of the Complaint are related to the administration of the bankruptcy estate over which this Court has subject matter jurisdiction.

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Jurisdiction as to Automotive 1, Inc.
Tuffy brings four counts against Automotive 1, Inc. Count I alleges trademark infringement and unfair competition. Count II alleges violation of the Ohio Deceptive Trade Practices Act and common law. Count IV alleges breach of contract on a promissory note. Count V alleges replevin.

A. Count I II Trademark Infringement, Unfair Competition andViolation of Ohio Deceptive Trade Practices Act and Common Law

Tuffy alleges that despite the termination of the license agreement Yeager and Automotive 1, Inc. continued jointly operating the Tuffy Automotive center, and thereby wrongly used Tuffy trademarks and intellectual property. As a result Tuffy is seeking monetary damages from both parties under federal trademark statute. Tuffy also alleges the continued joint use of Tuffy trademarks by Yeager and Automotive 1, Inc. violated Ohio Revised Code §§ 4165.01-4165.04, and that this conduct is unfair competition under Ohio common law. In addition to monetary relief under federal trademark statutes and Ohio Revised Code §§ 4165.02-4165.03, the plaintiff is also seeking injunctive relief.

Both counts hinge on the allegation of joint conduct and the potential for joint liability through contribution. The Sixth Circuit does not require a finding of definite liability of an estate as a condition precedent to holding an action related to a bankruptcy proceeding. In re Salem Mortgage Co., 783 F.2d 626, 635 (6th Cir. 1986). However, the mere presence of common facts between a civil proceeding and a controversy involving the bankruptcy estate does not establish jurisdiction. Pacor, 743 F.2d at 994.

In Dow Corning, the Sixth Circuit Court of Appeals stated: “We find support in the Court of Appeals for the Sixth Circuit and lower courts, which have held that when the plaintiff alleges

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liability resulting from the joint conduct of the debtor and non-debtor defendants, bankruptcy jurisdiction exists over all claims.” In re Dow Corning Corp. 86 F.3d at 492 (citing In re Wood, 825 F.2d at 94); see also Fox v. JJ Towne Pharmacy, Inc., No. 99-17560DWS, 2000 WL 568355, at *7 (Bankr. E.D. Pa. May 5, 2000) (collecting cases supporting the proposition). When filing a complaint against a debtor and third party defendants, for joint conduct, success against any of the defendants will have an effect on the estate. In re Dow Corning Corp. 86 F.3d at 492 (citing In re Wood, 825 F.2d at 94). The degree of liability for the joint conduct placed on third party defendants will necessarily impact the burden, on the estate, for a portion of the judgment. Id.

Tuffy’s allegations of joint conduct and request for monetary damages indicates there is a conceivable effect on the bankruptcy estate. The degree of liability attributable to each party must be determined by this Court. The two claims could alter Yeager’s liabilities and the handling of the estate. Thus, this Court has “related to” jurisdiction over Counts I and II.

B. Count IV Breach of Contract (Promissory Note)

Tuffy alleges that Automotive 1, Inc. failed to pay scheduled payments as required by a promissory note (“Note”). Automotive 1, Inc. allegedly executed the Note, and the corporation was obligated to pay $128,646.18. Yeager is not alleged to have signed the Note in a personal capacity. The Note is secured by an agreement that gives Tuffy an interest in the assets of Automotive 1, Inc. Tuffy requests monetary relief from Automotive 1, Inc. in the amount of the Note. Plaintiff also seeks a declaratory judgment against Automotive 1, Inc. allowing Tuffy to execute on the security agreement.

The issue is whether there is sufficient relation to Yeager’s bankruptcy to give this Court jurisdiction to hear Count IV. Because Tuffy did not allege that Yeager personally guaranteed the

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Note there is no conceivable effect on the bankruptcy estate. A judgment against Automotive 1, Inc. for breach of contract will not alter the “debtor’s rights, liabilities, options, or freedom of action,” or impact the administration of the bankrupt estate Pacor, 743 F.2d at 994.

Additionally, there is no allegation of joint conduct, or existence of an indemnification agreement, which have both been deemed to confer “related to” jurisdiction. See In re Dow Corning Corp. 86 F.3d at 492. Thus, Count IV is not related to Yeager’s bankruptcy case and this Court does not have jurisdiction.

C. Count V Replevin

Plaintiff claims that the security agreement entered by Automotive 1, Inc. gives Tuffy the right to enter the premises of Automotive 1, Inc. and remove collateral. Tuffy seeks a declaratory judgment that Automotive 1, Inc. is in default on the Note and the security agreement. Tuffy also requests a court order allowing entry to defendant corporation’s premises and leave to seize collateral per the terms of the security agreement.

Tuffy does not claim that Yeager guaranteed the Note or the security agreement. No allegation of joint conduct was made, and Count V is brought solely against Automotive 1, Inc. A judgment against Automotive 1, Inc. will not alter the “debtor’s rights, liabilities, options, or freedom of action,” or impact the administration of the bankrupt estate. Pacor, 743 F.2d at 994. Thus, Count V is not related, and this Court does not have jurisdiction.

Jurisdiction as to Automotive 1, LLC A. Count VII Injunctive Relief

Tuffy claims that Yeager jointly with Automotive 1, LLC, has continued to operate a Tuffy Automotive service center despite termination of the license agreement. Tuffy alleges that Yeager

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is a partner or officer of Automotive 1, LLC, and is listed as the contact person on the formation documents. However, despite the allegation of joint conduct, Tuffy has brought Count VII solely against Automotive 1, LLC. Tuffy requests injunctive relief against Automotive 1, LLC, a declaratory judgment that Automotive 1, LLC, is in violation of the license agreement, and reasonable attorney’s fees.

Because Tuffy is seeking injunctive relief solely against Automotive 1, LLC there is no conceivable effect on the bankruptcy estate. A grant of injunctive relief against Automotive 1, LLC will not alter the “debtor’s rights, liabilities, options, or freedom of action,” or impact the administration of the bankrupt estate. Pacor, 743 F.2d at 994. Thus, Count VII is not related and this Court does not have jurisdiction over the claim.

Conclusion
In conclusion, the Court holds that it possesses “related to” subject matter jurisdiction over Counts I, II, III and VI of the Complaint. The Court further concludes that it does not possess “related to” jurisdiction over Counts IV, V and VII. For the foregoing reasons Plaintiff’s Motion will be GRANTED IN PART ANDDENIED IN PART. An order consistent with this memorandum will be entered.

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