Somerset Properties SPE, LLC v. LNR Partners, Inc. et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
SOMERSET PROPERTIES SPE, LLC
DEBTOR
CASE NO.
10-09210-8-SWH
SOMERSET PROPERTIES SPE LLC
Plaintiff
v.
LNR PARTNERS, INC.; MIDLAND LOAN
SERVICES, INC.; CSFB 2001-CP4 BLAND
ROAD, LLC; and CSFB 2001-CP4 FALLS OF
NEUSE, LLC
Defendants;
CSFB 2001-CP4 BLAND ROAD, LLC; and CSFB
2001-CP4, FALLS OF NEUSE, LLC,
Counterclaim-Plaintiffs,
v.
SOMERSET PROPERTIES SPE, LLC, and
KEVIN WILK,
Counterclaim-Defendants.
ADVERSARY PROCEEDING NO.
11-00053-8-SWH-AP
SO ORDERED.
SIGNED this 06 day of September, 2012.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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ORDER
During a preliminary pre-trial conference held in Raleigh, North Carolina, on June 11, 2012,
the parties disagreed on the extent of the bankruptcy court’s ability to enter final orders on the
claims and counterclaims at issue in this adversary proceeding. Pursuant to this court’s directive,
the parties1 filed supplementary statements to the Pre-Conference Report setting forth their positions.
The debtor/plaintiff, Somerset Properties SPE, LLC (“Somerset”), and the counterclaim-defendant,
Kevin Wilk (“Wilk”), contend that this court has jurisdiction to enter final orders on all claims
against the defendants/counterclaim-plaintiffs, CSFB 2001-CP4 Bland Road, LLC (“Bland Road”)
and CSFB 2001-CP4 Falls of Neuse, LLC (“Falls of Neuse”), both of which have filed proofs of
claim.
In response, defendants Midland Loan Services, Inc. (“Midland”), LNR Partners, LLC
(“LNR”), Bland Road, and Falls of Neuse, contend that only the counterclaims asserted by Bland
Road and Falls of Neuse against the debtor, Somerset, qualify as “core” claims pursuant to 28 U.S.C.
§ 157(b)(2), for which final orders can be entered. Thus, the defendants contend that this court can
make only proposed findings of fact and conclusions of law regarding all claims by Somerset against
them, and regarding all claims by them against Wilk.
For the reasons that follow, the court will dismiss the claims asserted by the Lenders against
the counterclaim defendant Wilk. The court will submit proposed findings of fact and conclusions
of law with respect to the claims asserted by Somerset against the Servicers and the breach of
1 The parties are as follows: Somerset Properties SPE, LLC (Debtor/Plaintiff/Counterclaim-
Defendant); Kevin Wilk (Counterclaim-Defendant); LNR Partners, Inc. n/k/a LNR Partners, LLC
(Servicer/Defendant); Midland Loan Services, Inc. (Servicer/Defendant); CSFB 2001-CP4 Bland
Road, LLC (Lender/Defendant/Counterclaim-Plaintiff); and CSFB 2001-CP4, Falls of Neuse, LLC
(Lender/Defendant/Counterclaim-Plaintiff).
2
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contract for failure to fund operating expenses, unfair and deceptive trade practices, and interference
with contract claims asserted by Somerset against the Lenders. The remaining claims, for breach
of the duty of good faith and fair dealing (Count Two) and for a declaratory judgment (Count Five),
will be heard and determined by this court, and are subject to this court’s entry of a final order or
judgment.
BACKGROUND
At issue in this proceeding are two loans, the Somerset Park loan and the Somerset
Center/Place loan (the “Loans”). 	The Loans are secured by property located in Raleigh, North
Carolina, and consisting of 23 acres with a campus of six office buildings and one parking deck.
In June of 2010, all rights, title, and interests in the deeds of trust and other loan documents relating
to the Loans were assigned to Bland Road and to Falls of Neuse, (the “Lenders”), with Midland as
the master servicer of the loans and LNR as the special servicer of the loans (the “Servicers”).
On June 30, 2010, LNR declared the entire balance of the Loans immediately due because
of certain defaults. On September 20, 2010, the debtor, Somerset, filed a complaint against the
Lenders and Servicers in the Superior Court of Wake County, North Carolina (the “state court
case”), asserting five separate claims for relief consisting generally of claims for breach of contract,
unfair and deceptive trade practices, interference with a prospective contract, and a request for a
declaratory judgment suspending foreclosure proceedings. Furthermore, Somerset contended that
Midland, Bland Road, and Falls of Neuse authorized LNR to act on their behalf, thus making them
liable for the actions of LNR.
On November 8, 2010, Somerset filed a petition for relief under chapter 11 of the Bankruptcy
Code. On December 17, 2010, defendants removed the state court case to the district court pursuant
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to 29 U.S.C. § 1452(a) and the case was referred to this court. On December 20, 2012, the Lenders,
Bland Road and Falls of Neuse each filed a proof of claim for money loaned to Somerset under the
loan documents.2 The claims together totaled $31,177,885.86. Somerset filed objections to these
claims based on the issues to be litigated in the state court case. After Somerset’s state court case
was removed to this bankruptcy court, a hearing was held on March 24, 2011, and the parties
consented to having the debtor’s objections to the Lenders’ claims heard in this adversary
proceeding. However, in light of the Supreme Court’s recent decision in Stern v. Marshall, 131 S.
Ct. 2594 (2011), the parties now disagree on the authority of the bankruptcy court to enter final
orders regarding the claims asserted in this adversary proceeding.
DISCUSSION
I. 	Authority and Jurisdiction of the Bankruptcy Court to Enter Final Orders
District courts “have original and exclusive jurisdiction of all cases under title 11" and
“original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in
or related to cases under title 11.” 28 U.S.C. §§ 1334(a), (b). Furthermore, the district courts may
refer “any or all cases under title 11 and any or all proceedings arising under title 11 or arising in
or related to a case under title 11” to the bankruptcy judges for that district. 28 U.S.C. § 157(a).
Bankruptcy judges may hear and determine issues, ultimately entering “appropriate orders and
judgments,” or proposing findings of fact and conclusions of law, which the district court reviews
2 The documents include the Deed of Trust and Security Agreement, Assignment of Leases,
Cash Management Agreement, UCC Financing Statements, Hazardous Substances Indemnity
Agreement, and Indemnity and Guaranty Agreement for both Somerset Park Loan and Somerset
Center and Somerset Place Loan (hereafter, the “Loan Documents”).
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de novo. 28 U.S.C. §§ 157(b)(1), (c)(1). However, bankruptcy courts have “no jurisdiction over
proceedings that have no effect on the estate of the debtor” and are not related to a case under title
11. Yellow Sign, Inc. v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.), 466 B.R.
750, 766 (Bankr. M.D.N.C. 2012) (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6
(1995)). At issue in this proceeding is whether the bankruptcy court has the authority to enter final
orders on the claims and counterclaims filed by each party.
A. 	Core vs. Non-Core Proceeding Determination
In general, the authority of the bankruptcy court to enter a final order “hinges on whether the
bankruptcy proceeding is ‘core’ or ‘non-core.’” Burns v. Dennis (In re Southeastern Materials,
Inc.), 467 B.R. 337, 345 (Bankr. M.D.N.C. 2012) (citing 28 U.S.C. § 157). If a matter is “related
to” a case under title 11 then it is non-core, and a bankruptcy judge may hear the matter and “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.” 28 U.S.C. § 157(c)(1); Stern, 131 S.Ct. at 2604;
see also Yellow Sign, 466 B.R. at 766; In re Salander O’Reilly Galleries, 453 B.R. 106, 114 (Bankr.
S.D.N.Y. 2011) (aff’d, ___ B.R. ___ 2012 WL 2878122 (S.D.N.Y. 2012).
A civil proceeding is “related to” bankruptcy when the proceeding does not invoke a
substantive right created by bankruptcy law, but “the outcome of that proceeding could conceivably
have [an] effect on the estate being administered in bankruptcy.” Valley Historic Ltd. P’ship v.
Bank of N.Y., 486 F.3d 831, 836 (4th Cir. 2007) (citing Owens Ill., Inc. v. Rapid Am. Corp. (In re
Celotex Corp.), 124 F.3d 619, 625 (4th Cir. 1997)); see also Schmidt v. Klein Bank (In re Schmidt),
453 B.R. 346, 350 (8th Cir. B.A.P. 2011); In re Salander O’Reilly Galleries, 453 B.R. at 114.
Additionally, if all parties to a non-core proceeding provide consent, then the bankruptcy court may
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enter a final order in the proceeding. 28 U.S.C. § 157(c)(2); Stern, 131 S. Ct. at 2607; Yellow Sign,
466 B.R. at 770-71.
In contrast to non-core proceedings, the bankruptcy court has authority to “hear and
determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case
under title 11 . . . and may enter appropriate orders and judgments.” 28 U.S.C. § 157(b)(1); Stern,
131 S. Ct. at 2603; Yellow Sign, 466 B.R. at 765. 	Therefore, if a proceeding is core, then the
bankruptcy court may enter a final order in the matter.
Section 157(b)(2) contains a list of sample core proceedings, and these proceedings include,
but are not limited to, the “allowance or disallowance of claims against the estate” along with
“counterclaims by the estate against persons filing claims against the estate.” 28 U.S.C. § 157(b)(2);
Stern, 131 S. Ct. at 2604; Yellow Sign, 466 B.R. at 765-66. Although some courts consider claims
that arise in pre-petition litigation and are used to challenge a creditor’s proof of claim to be
examples of core proceedings under § 157(b)(2), other courts have found that “[p]re-petition
common law actions for a claim requiring adjudication of factual disputes unrelated to bankruptcy
are not core claims. These claims are private rights because they are ‘state law action[s] independent
of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor’s proof of
claim in bankruptcy.’” In re Fairfield Sentry Litigation, 458 B.R. 665, 688 (S.D.N.Y. Sept. 19,
2011) (quoting Stern, 131 S. Ct. at 2611); see also Burns, 467 B.R. at 362-63 (citing Granfinanciera
v. Nordberg, 492 U.S. 33, 56 (1989)) (holding that “common-law actions to augment the size of the
estate involving disputed facts to be determined by a jury are not core”); Yellow Sign, 466 B.R. at
767 n.19 (noting authority to the effect that common law actions independent of federal bankruptcy
law are not necessarily resolvable by a ruling on the creditor’s proof of claim in bankruptcy).
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Pursuant to § 157(b)(1), core proceedings can “arise under” title 11 when based on federal
bankruptcy law, and core proceedings can “arise in” a bankruptcy case when the proceedings are
not based on a particular right afforded under bankruptcy law, but would not otherwise exist outside
of the bankruptcy. S. Community Bank & Trust v. Goldston (In re 3G Props., LLC), 2010 WL
4027770 at *2 (Bankr. E.D.N.C. Oct. 14, 2010) (citing Bergstrom v. Dalkon Shield (In re A.H.
Robins Co.), 86 F.3d 364, 372 (4th Cir. 1996)).3 Section 157(b)(2) provides a sample list of core
proceedings. However, after the Stern decision, a bankruptcy court cannot simply look to § 157(b)
to determine whether it has the authority to enter a final order in a core proceeding.
B. 	Ramifications of Stern v. Marshall on Bankruptcy Courts’ Authority to Enter
Final Orders in Core Proceedings
In the recent case of Stern v. Marshall, the Supreme Court found that in certain instances,
bankruptcy courts cannot constitutionally render final orders on proceedings deemed core under
§ 157(b)(2). Stern, 131 S.Ct. at 2608; Yellow Sign, 466 B.R. at 767. More specifically, the Court
found that while bankruptcy courts have the statutory authority to enter final judgments on a
debtor’s counterclaims against persons filing claims against the estate pursuant to the plain language
of § 157(b)(2)(C), bankruptcy courts may not constitutionally enter final orders in non-bankruptcy
matters that are based in common law or state law, or that would not necessarily be resolved in the
3 See also Valley Historic, 486 F.3d at 836 (explaining that a claim, such as a breach of
contract claim that predated the filing of a chapter 11 case, cannot be said to be “arising in” the
bankruptcy and that if the breach of contract claim would exist outside of the bankruptcy, then it
does not fall within the bankruptcy court’s “arising in” jurisdiction); Salander O’Reilly Galleries,
453 B.R. at 114-15 (citing 28 U.S.C. § 157(b)(3)) (explaining that matters “arising under” the
Bankruptcy Code are those matters that arise by virtue of a provision in the Bankruptcy Code, and
that matters “arising in” a case under the Bankruptcy Code are those which are based on a right
created by the Bankruptcy Code and can only be brought in a case under Title 11; noting also that
the determination that something is not core “shall not be made solely on the basis that its resolution
may be affected by State law”).
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claims allowance process in bankruptcy. Stern. 131 S. Ct. At at 2609, 2620; Yellow Sign, 466 B.R.
at 767; Oxford Expositions, LLC v. Questex Media Group, LLC (In re Oxford Expositions, LLC),
466 B.R. 818, 829 (Bankr. N.D. Miss. 2011). However, the ruling in Stern does not prohibit the
estate from bringing core counterclaims based in state law so long as the resolution of the
counterclaim is necessary to the determination of whether a creditor’s claim should be allowed in
a bankruptcy case. Spanish Palms Mktg, LLC v. Kingston (In re Kingston), 2012 WL 632398 at *2
(Bankr. D. Idaho Feb. 27, 2012); see also City of Sioux City v. Civic Partners Sioux City, LLC (In
re Civic Partners Sioux City, LLC), 2012 WL 761361 at *8-10 (Bankr. N.D. Iowa Mar. 8, 2012)
(explaining that Stern did not completely eliminate state-law counterclaims by the estate from being
a core proceeding, but rather provided guidance on how broadly these counterclaims could reach
without exceeding constitutional limitations).
In order to determine whether it can enter a final order, then, a bankruptcy court looks to the
two-prong test derived from the Court’s decision in Stern. The first prong asks whether the action
at issue stems from the bankruptcy itself, and the second asks whether the issue would “necessarily
be resolved in” the claims allowance process. Id. at 2618; Yellow Sign, 466 B.R. at 768. If either
of the prongs in the Stern test are met, then the bankruptcy court can enter a final order or judgment.
Id.; Burns, 467 B.R. at 348; Yellow Sign, 466 B.R. at 768. It logically follows that if no prongs are
met, then the bankruptcy court may not enter a final order or judgment, but may submit proposed
findings of facts and conclusions of law for the district court to review de novo.4
4 Statutory core proceedings (as opposed to constitutional core proceedings) as to which a
bankruptcy court may not enter a final judgment receive the same treatment as non-core proceedings
under 28 U.S.C. § 157(c)(1), in that the bankruptcy court exercises its authority to enter proposed
findings and make recommendations to the district court. Yellow Sign, 466 B.R. at 774; see also
Official Comm. of Unsecured Creditors v. Nat’l Patent Dev. Corp. (In re TMG Liquidation Co.),
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Overall, the bankruptcy court must decide whether the issue at hand is core or non-core. If
the issue is non-core, then the court may only submit proposed findings of fact and conclusions of
law unless all parties provide their consent for the court to issue a final order. 28 U.S.C. § 157(c)(2).
If the issue is statutorily core and meets one of the prongs of the Stern test, then the court may enter
a final order on the issue.
II. 	The Lenders’ Claims Against Wilk
The Lenders assert four different claims for relief against counterclaim-defendant Wilk.
First, they assert that Wilk, as a manager for Somerset, breached his guarantee obligations by
misapplying Somerset’s rents because he failed to pay the rents to the Lenders. Second, they assert
that Wilk breached his obligations by causing Somerset to waive its lease rejection damage claim
in the chapter 11 case of Stock Building Supply. Third, the Lenders assert that Wilk breached the
duty of good faith and fair dealing vis-à-vis the Lenders by ensuring that the Lenders did not receive
the benefits of the Loan Documents. Finally, the Lenders ask the court to determine whether Wilk
is liable for damages and, if so, in what amount.
2012 WL 1986526 at *2 (D.S.C. June 4, 2012); Joe Gibson’s Auto World, Inc. v. Zurich Am. Ins.
Co. (In re Joe Gibson’s Auto World, Inc.), 2012 WL 1107763 at *2-3 (D.S.C. Apr. 2, 2012)
(explaining that Stern did not eliminate the authority of bankruptcy courts to submit proposed
findings of fact and conclusions of law to the district court regarding matters that it cannot
constitutionally hear); D&B Swine Farms, Inc. v. Murphy-Brown, LLC (In re D&B Swine Farms,
Inc.), 2011 WL 6013218 at *2 (Bankr. E.D.N.C. Dec. 2, 2011) (rejecting argument that the
bankruptcy court has no statutory authority to render proposed findings and conclusions after Stern);
Field v. Lindell (In re Mortgage Store, Inc.), 464 B.R. 421, 426-28 (D. Hawaii Oct. 5, 2011)
(explaining that Congress’s intent under 28 U.S.C. § 157 clearly was that bankruptcy courts, to the
extent possible, should adjudicate cases relating to Title 11, and that Congress intended for core
proceedings found to be unconstitutional under Stern to fall within 28 U.S.C. § 157(c)(1), granting
bankruptcy courts permission to submit proposed findings and recommendations).
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Lenders assert that these claims against Wilk are not core, but instead are “related to”
proceedings, and the court may issue only proposed findings of fact and conclusions of law
regarding them. Mr. Wilk consents to the jurisdiction of the bankruptcy court for the purpose of
resolving the claims asserted against him, but Lenders do not consent to the court entering a final
judgment on these claims. The court concludes that it may not hear the Lenders’ claims against
Wilk at all because it lacks jurisdiction to do so. The claims are not “related to” matters under 28
U.S.C. § 1334(b).
Because Wilk is a third party to the bankruptcy proceeding, the applicable test by which to
determine whether the court has jurisdiction is the test adopted by the Fourth Circuit and set forth
in Pacor, which asks if the outcome of the proceeding “could alter the debtor’s rights, liabilities,
options, or freedom of action (either positively or negatively)” and impact the handling or
administration of the estate. Owens-Illinois, Inc. v. Rapid Am. Corp. (In re Celotex Corp.), 124 F.3d
619, 625 (4th Cir. 1997) (discussing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)). In
this case, a ruling on the state law claims against Wilk would not have an impact on the bankruptcy
estate or alter Somerset’s rights, abilities, liabilities, options, or freedom. Although the Pacor test
is construed broadly by the Fourth Circuit, in this particular situation there is no possibility that a
ruling regarding the claims against Wilk would impact the bankruptcy estate. See Titus v. Smith,
2012 WL 2255498 at *4 (N.D.W. Va. June 15, 2012) (construing Blanton v. IMN Fin. Corp., 260
B.R. 257, 261 (M.D.N.C. 2001)). 	Because there is no possible impact or alteration of the
bankruptcy estate, the claims against Wilk do not satisfy the standards to be deemed a “related to”
proceeding and the court does not have jurisdiction to decide these claims. Yellow Sign, 466 B.R.
at 766 (citing Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1995)).
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III. 	The Lenders’ Claims Against Somerset
The Lenders assert three different claims for relief against Somerset: 1) breach of the
Somerset Park loan documents; 2) breach of the Somerset Center/Place loan documents; and
3) breach of the duty of good faith and fair dealing. The Lenders contend that these are core claims
and that the court has the authority to enter a final judgment. Somerset agrees. The court likewise
agrees with the parties that these claims are core and can be fully adjudicated by the bankruptcy
court.
Under § 157(b)(2), a claim for relief against Somerset would be a claim against the
bankruptcy estate, which is a core proceeding. 28 U.S.C. § 157(b)(2)(B). Therefore, each of the
three claims asserted by Lenders against Somerset are core and the court may issue final rulings in
these matters. 28 U.S.C. § 157(b)(1); Stern, 131 S.Ct. at 2603-04; Yellow Sign, 466 B.R. at 765.
IV. 	Somerset’s Claims Against the Lenders and Servicers
Somerset, as plaintiff, asserts five different claims for relief against the Lenders and the
Servicers, contending generally that Midland, Bland Road, and Falls of Neuse acted through their
special servicer, LNR, and are for that reason liable for the actions of LNR. First, Somerset asserts
that LNR breached its contractual obligations to Somerset to fund operating expenses, for which all
defendants are liable. Second, Somerset asserts that LNR breached its contractual obligations by
exercising its discretion in a manner inconsistent with the covenant of good faith and fair dealing,
for which all defendants are liable. Third, Somerset asserts that LNR practiced unfair and deceptive
trade practices, for which all defendants are liable. Fourth, Somerset asserts that LNR intentionally
interfered with a prospective contract for Somerset with DunnWell. Finally, Somerset asks the court
to determine that Somerset is not in material breach of the Loan Documents, and seeks a declaratory
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judgment awarding money damages against all four defendants based on all four of the claims just
listed. 5
A. 	Somerset’s Claims Against Midland and LNR (“the Servicers”)
All parties agree that Somerset’s claims against the Servicers are not core proceedings and
Somerset explains, in its brief, that the claims cannot be core because the Servicers have not filed
proofs of claim in the bankruptcy proceeding. The court agrees with the parties that Somerset’s
claims against the Servicers are not core claims.
The claims against the Servicers do not fit into any of the sample proceedings listed under
§ 157(b)(2), including allowance of claims or counterclaims by the estate against persons filing
claims against the estate, because the Servicers have not filed proofs of claim in this bankruptcy
proceeding. 	Additionally, the claims against the Servicers were filed in state court and existed
outside of the bankruptcy proceeding, so these claims cannot said to be “arising under” Title 11 nor
can they be said to be “arising in” a case under Title 11.
Somerset’s claims against the Servicers are, however, “related to” the bankruptcy because
the disposition of the claims conceivably could have an effect on the estate. Specifically, a ruling
in favor of Somerset could significantly augment the size of the estate and the ability to provide for
unsecured creditors. Therefore, the court will submit proposed findings of fact and conclusions of
law to the district court for its de novo review. 28 U.S.C. §§ 1334(b), 157(c)(1).
5 In the Fifth Claim, which requests entry of a declaratory judgment, Somerset requests entry
of monetary awards against all defendants based on all claims, including the Fourth Claim. In its
Complaint, however, Somerset does not, in the Fourth Claim, allege joint and several liability on
the part of all defendants.
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B. 	Somerset’s Claim against Bland Road and Falls of Neuse (“the Lenders”)
Leaving aside the Fourth Claim, Somerset asserts four separate claims for relief against the
Lenders: breach of contract for failure to fund operating expenses (First Claim); breach of the duty
of good faith and fair dealing (Second Claim); unfair and deceptive trade practices (Third Claim);
and a request for a declaratory judgment that Somerset is not in material breach of the Loan
Documents (Fifth Claim). Lenders contend these are not core claims because they arose outside of
bankruptcy in a state court proceeding. 	Somerset, however, asserts that these claims are core
proceedings because they pertain to the allowance or disallowance of claims.
Some courts have found that although an action was initiated by a complaint rather than a
traditional counterclaim, “such actions are in the nature of a counterclaim when asserted against
parties who have filed proofs of claim in the bankruptcy case.” Shaia v. Taylor (In re Connelly), ___
B.R. ___, 2012 WL 1098431 at *5 (Bankr. E.D. Va. Mar. 30, 2012) (quoting Fort v. Suntrust Bank
(In re Int’l Payment Grp., Inc.), 2011 WL 5330783 at *2 (Bankr. D.S.C. Nov. 3, 2011)); see also
Blackshire v. Litton Loan Servicing, L.P., 2009 WL 426130 at *3 (S.D.W. Va. Feb. 13, 2009)
(explaining that plaintiff’s claims based in state law were core proceedings because the claims were
essentially counterclaims against creditors who had filed proofs of claim in the bankruptcy
proceeding; furthermore, because the plaintiff’s claims for relief arose from the same transaction
upon which the creditor’s claims against the estate were based, the adversary proceeding constituted
a counterclaim under § 157(b)(2)(C)). This court agrees that Somerset’s claims against the Lenders
are statutory core claims under § 157(b)(2) because they are counterclaims by the estate against
persons filing claims against the estate. These claims were filed in state court prior to initiation of
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this bankruptcy proceeding, but they now function as counterclaims to the claims filed by the
Lenders against the estate.
Specifically, on December 20, 2010, the Lenders each filed proofs of claim in the bankruptcy
proceeding. 	Bland Road filed a proof of claim in the amount of $14,957,489.91 based on the
Somerset Park loan. Falls of Neuse filed a proof of claim for $16,220,395.95 based on the Somerset
Center/Place loan. Now, as a defense to the claims filed by Lenders, Somerset asserts these claims
regarding breaches of contract, which arise out of the same set of Loan Documents as the Lenders’
claims. 	Overall, because the Lenders have filed proofs of claim in this proceeding, Somerset’s
claims 	constitute 	counterclaims 	by 	the 	estate 	and 	are 	statutory 	core 	proceedings 	under
§ 157(b)(2)(C). Because these counterclaims by Somerset are based in North Carolina state law,
though, the court still must apply the Stern analysis to determine whether it may constitutionally
enter a final order on these matters.
1. Breach of Contract for Failure to Fund Operating Expenses (First Claim)
Somerset’s first claim for relief asserts that Lenders breached their contract with Somerset
by failing to fund operating expenses. This claim does not stem from the bankruptcy itself because
it first arose in state court and is based on state law, and thus does not satisfy the first prong of Stern.
To assess the latter half of the Stern test, courts generally look to see if a “common nucleus
of law and fact” exists to inextricably intertwine the claims and counterclaims. McElwee v. Scarff
Bros., Inc. (In re McElwee), 469 B.R. 566, 576-77 (Bankr. M.D. Pa. 2012); see also Tolliver v. Bank
of Am. (In re Tolliver), 464 B.R. 720, 736 (Bankr. E.D. Ky. 2012) (explaining that the court in Stern
looked at not only the “factual overlap of the claim resolution and the counterclaim, but also the
legal elements which must be determined to resolve the claim and the counterclaim and the remedies
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sought by the counterclaim and the impact on the claims allowance process”). Furthermore, for a
counterclaim to be necessarily resolved in ruling on the proof of claim, the relationship must be such
that resolution of the counterclaim would alter the amount sought by the claimant. See In re Olde
Prairie Block Owner, 457 B.R. 692, 698-99 (Bankr. N.D. Ill. 2011) (finding that two counterclaims
for breach of contract had to be resolved in ruling on the proof of claim because one sought
‘recession’ based on economic duress and the other sought damages for a breach of good faith and
fair dealing, which would reduce the amount claimed by debtor).
Moreover, a counterclaim that seeks to reduce the amount that debtors owe to a claimant
should be contrasted with the situation where a bankruptcy estate is seeking affirmative monetary
relief from a claimant to augment the bankruptcy estate. McElwee, 469 B.R. at 576. In other words,
a counterclaim by the estate based in state law must seek to directly reduce or recoup the amount
claimed in order to be resolved in ruling on the proof of claim. 	Applying this type of test, a
counterclaim by the bankruptcy estate that seeks affirmative monetary relief to augment the estate
but does not directly modify the amount claimed would not qualify as a claim to be resolved in
ruling on the proof of claim. Finally, because this type of counterclaim would not be resolved in the
claims allowance process, the claim would fail the second prong of Stern and be deemed a non-core
proceeding.
In this first claim, Somerset asserts that the Lenders breached contractual obligations under
the Loan Documents by failing to release funds for operating expenses. 	Specifically, Somerset
claims that LNR, acting on behalf of all the Lenders, did not comply with the requirement to release
funds from the Operating Account within five days of a proper request under Section 2.11 of the
Cash Management Agreements. The Lenders, in contrast, support both of their proofs of claim,
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valued at $14,957,489.91 and $16,220,395.95, by use of the same Cash Management Agreements
referenced in the Somerset claims. 	Both Lenders accelerated the amount due under the Loans
because of numerous accused defaults by Somerset, including Somerset’s failure to pay under the
same Cash Management Agreements.
Even though the claims arise out of the same documents, the court does not believe these
alleged breaches of the Cash Management Agreements are inextricably intertwined with, and would
necessarily be resolved in, the claims allowance process. Although it is difficult for courts to predict
the nature of the claims in the adversary proceeding, the court does not believe this claim for breach
is capable of relieving Somerset’s obligations under the contract. Because Somerset would not be
relieved of its obligations under state law, the Lenders’ claims would not be directly altered and this
counterclaim would not necessarily be resolved in the claims allowance process.
The court views this claim as an example of the bankruptcy estate asking for affirmative
monetary relief in order to augment the size of the estate, as opposed to asking for a direct reduction
or rescission of the amount claimed by Lenders (though that also would indirectly augment the
estate). This counterclaim is not inextricably intertwined with the Lenders’ proofs of claim and
would not necessarily be resolved in the claims allowance process. Because this claim does not pass
the second prong of the Stern test, it will be treated as a non-core proceeding. The court will submit
proposed findings of fact and conclusions of law to the district court regarding this claim.
2. 	Breach of the Duty of Good Faith and Fair Dealing (Second Claim)
In its second claim for relief, Somerset asserts that Lenders breached their duty of good faith
and fair dealing through at least three different failures of LNR to fund or approve various
transactions for Somerset, and with regard to funds held in lock boxes. Lenders contend that this
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issue is not core and the court cannot enter a final judgment on this claim. Somerset counters that
this issue is core, that it passes muster under Stern, and that the court can enter a final judgment.
Applying the first prong of Stern, this claim does not stem from the bankruptcy itself because
this claim first arose in state court and is based on North Carolina state law. The question remaining
for the court under the Stern test is whether this claim would be resolved in the claims allowance
process. Here, in order for the court to determine the accurate amount owed under the proof of
claim, the court will have to ascertain the correct totals for the two separate lock box accounts.
Somerset asks for damages in the form of affirmative monetary relief, but also directly attacks the
amount Lenders set forth in the proofs of claim.
In cases where determination of the issues in a claim are so intricately melded with deciding
the amount of a claim, the court has constitutional authority under Stern to enter a final order.
Spanish Palms, 2012 WL 632398 at *8; Oxford Expositions, 466 B.R. at 829; see also Salander
O’Reilly Galleries, 453 B.R. at 116-17. The court must decide whether LNR wrongly withdrew
funds from the lock box accounts in order to determine the amount owing per the Lenders’ proofs
of claim, meaning the counterclaim and proof of claim are intertwined. This counterclaim passes
the second prong of the Stern test and the court will hear and enter a final ruling on whether Lenders
violated the duty of good faith and fair dealing vis-à-vis Somerset.
3. 	Unfair and Deceptive Trade Practices (Third Claim)
As to this claim, the court reiterates the reasoning set out above with respect to the First
Claim for breach of contract. The unfair and deceptive trade practices claim first arose in state court,
is based on state law, will not affect the calculation of the amount of the Lenders’ proofs of claim
and therefore does not satisfy either the first or the second prong of Stern. It will be treated as a non-
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core proceeding, and the court will submit proposed findings of fact and conclusions of law to the
district court.
4. 	Interference with Prospective Contract (Fourth Claim)
The complaint does not allege joint and several liability with regard to this claim within the
Fourth Claim itself, and instead sets forth allegations only with respect to LNR. (As noted earlier,
Somerset nonetheless seeks in the Fifth Claim to recover monetary damages from all defendants
based on the allegations in the Fourth Claim, and the omission of an allegation of joint and several
liability in this claim is probably inadvertent. 	The court’s reasoning would not be different if
Somerset had included an allegation of joint and several liability in the Fourth Claim.)
As to this claim as well, the court reiterates the reasoning set out above with respect to the
First Claim for breach of contract. The interference with prospective contract claim first arose in
state court, is based on state law, will not affect the calculation of the amount of the Lenders’ proofs
of claim, and therefore does not satisfy either the first or the second prong of Stern. It will be treated
as a non-core proceeding, and the court will submit proposed findings of fact and conclusions of law
to the district court.
5. 	Claim for Declaratory Judgment (Fifth Claim)
In the final claim against the Lenders, Somerset asks the court for a declaratory judgment
that Somerset is not in material breach of the Loan Documents. Somerset contends that this claim
is core, and relates to whether the Lenders’ claims should be allowed and, if so, in what amount.
Lenders disagree.
Again, applying the first prong of Stern, this claim does not stem from the bankruptcy itself
because it first arose in state court and is based on North Carolina state law. The court therefore
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turns to the second prong of the Stern test. This claim directly attacks the amount Lenders seek in
their proofs of claim and asks the court to rule that Somerset is not in breach of the Loans. The court
agrees that whether Somerset defaulted on the loan documents must be decided in order to determine
whether to award the amounts claimed by Lenders, who claim amounts that include interest charged
per the default interest rate. If the court were to decide that Somerset was not in material breach,
then the amount claimed by Lenders could be reduced or rescinded. 	As such, this claim will
necessarily be resolved in the claims allowance process and passes the second prong of Stern. As
a core proceeding, the court will issue a final ruling on whether Somerset was in material breach of
the loan documents.
CONCLUSION
Based upon the foregoing, the claims asserted by the Lenders against the counterclaim-
defendant Wilk are DISMISSED on grounds that the court lacks subject matter jurisdiction to hear
them.
The Lenders’ three claims against the debtor, Somerset, are core claims which this court has
the authority to hear and determine, and as to which the court may enter a final judgment. The
claims asserted by Somerset against the Servicers are not core claims, but for the reasons set out
above, the court will enter proposed findings of fact and conclusions of law with respect to those
claims.
Somerset’s claims against the Lenders, Bland Road and Falls of the Neuse are statutory core
claims but will, as outlined above, receive differing treatment from the court. Because the claims
for breach of the duty of good faith and fair dealing and for a declaratory judgment also pass the
second prong of the Stern test, the court may hear and determine those claims and issue a final
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ruling. The claims for breach of contract for failure to fund operating expenses, unfair and deceptive
trade practices, and the interference with contract, because they fail the first and second prongs of
the Stern test, will be treated as non-core and the court will, after hearing that claim, submit
proposed findings of fact and conclusions of law to the district court.
SO ORDERED.
END OF DOCUMENT
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