UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
SP LIQUIDATING COMPANY, INC.
f/k/a The Sanymetal
Products Company, Inc.
DEBTOR CHAPTER 11
SP LIQUIDATING COMPANY, INC.
and CONTINENTAL METAL
SPECIALTY, INC. PLAINTIFFS
VS. ADV. NO. 93-1002
NORDSON CORPORATION DEFENDANT
G. LISSY & ASSOCIATES, INC. DEFENDANT and THIRD-PARTY
UNIBILT, a Division of Jervis
B. Webb Company; BARON-BLAKESLEE,
a Division of Allied Signal, Inc. THIRD-PARTY DEFENDANTS
This matter is before the Court on the Motion to Dismiss of third-party defendant Unibilt. This matter is also the subject of Motions to Withdraw the Reference filed by each of the defendants. To date these Motions have not been ruled on by the United States District Court for the Eastern District of Kentucky. The Complaint herein alleges that this Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b) and that this is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(A)(B)(C) & (O).
This matter was initiated by the filing of the plaintiffs' Complaint on April 12, 1993. Plaintiff SP Liquidating Company, Inc. ("SPL") is the debtor in this case, and plaintiff Continental Metal Specialty, Inc. ("CMS") is the liquidating agent for the debtor under the Plan of Liquidation confirmed January 7, 1993. Defendant Nordson Corporation ("Nordson") filed its Answer on June 15, 1993, and a Motion to Withdraw the Reference on June 16, 1993. Defendant G. Lissy & Associates ("GLA") filed its Answer, Counterclaim and Third-Party Complaint on June 18, 1993, and a Motion to Withdraw the Reference on June 28, 1993.
Unibilt filed its Motion to Dismiss Third-Party Complaint on July 12, 1993. GLA filed a Motion for Limited Stay and Response to Motion to Dismiss on August 2, 1993. Unibilt filed its Reply to GLA's Response to Motion to Dismiss and Response to GLA's Motion for Limited Stay on August 4, 1993. At a hearing conducted on August 5, 1993, Unibilt's Motion to Dismiss was submitted for decision and GLA's Motion for Limited Stay was overruled. An order in regard to these rulings was entered on August 9, 1993.
Pursuant to the above-referenced Plan of Liquidation, the only asset left to the debtor was the so-called Paint Line Claim ("the Claim"). It is defined in the Plan as "the Claim that the debtor holds against G. Lissy & Associates (aka GLA) and Nordson Corporation as the result of their defective manufacture and installation of the GLA Nordson Finishing System the debtor used in its manufacturing operation." Under the Plan the Claim was assigned to CMS, whose responsibility it is to prosecute the Claim and bear the costs related thereto. If this effort is successful, allowed Class 5 claims will receive 30% of the net recovery directly from CMS.
The Complaint filed herein was intended to prosecute this Claim. The Third-Party Complaint seeks indemnification and contribution from the third-party defendants as suppliers of component parts of the industrial paint line finishing system. Unibilt's Motion to Dismiss Third-Party Complaint is based on two alternative premises: that this Court does not have subject matter jurisdiction and so should dismiss the action, or that the action should be dismissed or stayed pursuant to the Federal Arbitration Act, 9 U.S.C.'1, et seq.. Unibilt is not a creditor of the debtor, nor does it have any relationship with the debtor or with the bankruptcy estate.
Unibilt contends that this Court is without subject matter jurisdiction to hear a dispute between non-debtor parties which has no impact on the estate. Unibilt cites In re Wolverine Radio Co., 930 F.2d 1132 (6th Cir. 1991) as authority for its position. The Wolverine court held that "the bankruptcy court's jurisdiction over a case involving nondebtors [is] to be determined solely by 28 U.S.C.'1334(b)." Id., at 1140. The court quoted from In re Pacor, 743 F.2d 984, 994 (3rd Cir. 1984), in its discussion of "related to" jurisdiction under '1334(b):
'The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus the proceeding need not necessarily be against the debtor or against the debtor's property. 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.'
In articulating its decision in Wolverine, the court went on to discuss factors in the case that supported a finding of subject matter (or "related to") jurisdiction. The debtor had agreed to indemnify the third party whose interest was affected by the action for which jurisdiction was sought. In addition, the party arguing lack of jurisdiction had filed a claim and had status as a creditor. The court found that it could not conclude that resolution of the dispute would have "no conceivable effect" on the debtor, and so found that it had jurisdiction to hear the matter. Id., at 1143.
The burden of proof of the subject matter jurisdiction is on the party invoking that jurisdiction and is by a preponderance of the evidence. In re General American Communications Corp. 130 B.R. 136 (Bankr.S.D.N.Y. 1991). Further, if this Court finds that it lacks subject matter jurisdiction in this matter because the claim is not "related to" the bankruptcy proceeding, it may enter a final order dismissing the third party action as to movant. See footnote 6 to In re Almarc Corporation, 94 B.R. 361 (Bankr.E.D.Pa. 1988).
This Court's task then is to decide whether the third party action herein could have any conceivable effect on the bankruptcy estate. The factors that existed in Wolverine are not present here. Unibilt argues that no relief has been requested from the estate; that if GLA is successful, the estate will realize no gain, and if GLA ia unsuccessful, the estate will incur no damages or liability.
GLA, in its response, does not appear to be convinced that the third party action is related to the bankruptcy, as it argues that if the District Court withdraws the reference (as GLA has requested), then this Court must not have jurisdiction to hear this entire matter. However, GLA continues, if the District Court does not withdraw the reference, this Court must have jurisdiction over the third party action. While this approach certainly covers all the bases, it does not take a consistent position on whether or not the third party action is related to the bankruptcy.
GLA reasons that this third party action is related to the bankruptcy because it does not involve a "simple indemnity claim", but includes claims of negligence and strict liability. Kentucky law will be applied, GLA argues, and apportionment of liability will be required pursuant to KRS 411.182. If some portion of liability is assessed against Unibilt, the reasoning goes, this could "'affect the amount of property available for distribution or the allocation of property among creditors'". In re Spaulding & Co., 131 B.R. 84, 88 (N.D.Ill. 1990), quoting Home Ins. Co. v. Cooper & Cooper, Ltd., 889 F.2d 746, 749 (7th Cir. 1989).
The Spaulding court used the above-quoted criterion to determine whether a controversy was related to a bankruptcy. The court went on to discuss how the third party indemnification claim it was considering might affect the bankruptcy estate or the apportionment of its assets among its creditors. If the debtor failed in its adversary action against the defendant, the defendant would have no third-party claim for indemnification. Thus the third-party claim could only have an effect if the adversary proceeding were successful.
If the debtor prevailed, the defendant would either fail or succeed in his third-party indemnification claim. If the third-party claim failed there would be no effect on the size or allocation of the bankruptcy estate. If the third-party claim were successful, there would be some effect on the allocation of the debtor's assets, but not on the size of the estate. The size would remain the same because, as a result of the successful third-party action, the defendant would receive indemnification for any losses he incurred. One remote contingency could affect the allocation of the estate among its creditors--if the third-party defendant filed a claim against the debtor for the cost of indemnifying the defendant. The court did not consider this possibility sufficient to establish "related to" jurisdiction. In re Spaulding & Co., at 89.
This Court believes that this kind of analysis is valid herein, certainly as it applies to GLA's indemnification claim against Unibilt, and that it should also be applied to GLA's argument concerning apportionment of liability. That argument is based on the premise that Kentucky law will be applied to all claims in this proceeding, including the third-party claim. Unibilt disputes this premise, as the only "Kentucky connection" in this matter is the fact that the action was commenced in Kentucky. As Unibilt points out, there was no injury to person or property and no accident occurring in Kentucky. GLA and Unibilt are not Kentucky corporations and have no places of business in Kentucky. Finally, their Distributorship Agreement contains a choice of law provision that specifies Michigan law.
This Court agrees that GLA's assumption that Kentucky law will be applied to the third-party claim is not well-founded, and GLA has made no further argument concerning the effect of the third-party claim on the bankruptcy. GLA has not made the case for "related to" jurisdiction. As demonstrated by the analysis set out above, a successful indemnification action will have no appreciable effect on the size or allocation of bankruptcy assets. Even if GLA were to be successful in a liability or negligence action, it has not demonstrated how, absent the assumption of apportionment, such an outcome would affect the bankruptcy.
In consideration of all the foregoing, it is therefore the opinion of this Court that the third-party claim should be dismissed as to Unibilt. In light of this conclusion, it is unnecessary for the Court to reach the arbitration question. An order in conformity with this opinion will be entered separately.
By the Court -
A. Scott Coburn, Esq.
Robert J. Diehl, Esq.
Gregory C. Shields, Esq.
Frank F. Chuppe, Esq.
James Park, Jr., Esq.
Tracy Wise, Esq.
Robert F. Duncan, Esq.