Sheehan v. Warner et al

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
MARTIN P. SHEEHAN, Trustee of
Bankruptcy Estate of Benjamin
F. Warner, Sr.,
Plaintiff,
v. 	// 	CIVIL ACTION NO. 1:11CV193
(Judge Keeley)
KARL K. WARNER, ELIZABETH ANN
WARNER, KRISTIAN E. WARNER, Sr.,
ANDREW M. WARNER, MONROE P. WARNER,
and GEORGE B. WARNER, Sr.,
Defendants.
MEMORANDUM OPINION AND ORDER DENYING MOTION TO DISMISS [DKT. NO.
13], DENYING MOTION 	FOR SANCTIONS [DKT. NO. 25], AND DENYING
AS MOOT MOTION TO DISMISS MOTION FOR SANCTIONS [DKT. NO. 26]
Before 	the 	Court 	are 	the 	motions 	to 	dismiss 	for 	lack 	of
jurisdiction 	(dkt. 	no. 	13) 	and 	to 	impose 	sanctions 	(dkt. 	no. 	25)
filed 	by 	the 	defendants, 	Karl 	K. 	Warner, 	Elizabeth 	Ann 	Warner,
Kristian 	E. 	Warner, 	Sr., 	Andrew 	M. 	Warner, 	Monroe 	P. 	Warner, 	and
George 	B. 	Warner, 	Sr. 	(collectively 	“the 	defendants”), 	and 	the
motion to dismiss the motion for sanctions (dkt. no. 26) filed by
the plaintiff, Martin P. Sheehan, trustee of the Bankruptcy Estate
of 	Benjamin 	F. 	Warner, 	Sr. 	(“Sheehan” 	or 	“the 	trustee”). 	For 	the
reasons discussed below, the Court DENIES the defendants’ motion to
dismiss and motion for sanctions and DENIES AS MOOT the plaintiff’s
motion to dismiss the motion for sanctions.
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SHEEHAN V. WARNER, ET AL. 	1:11CV193
MEMORANDUM OPINION AND ORDER
I.
This case has its genesis in an adversary proceeding commenced
in 	bankruptcy 	court. 	On 	April 	22, 	2010, 	Benjamin 	F. 	Warner 	(“the
debtor”) filed a Chapter 7 bankruptcy petition in the United States
Bankruptcy 	Court 	for 	the 	Northern 	District 	of 	West 	Virginia.
Sheehan 	was 	subsequently 	appointed 	as 	the 	bankruptcy 	estate’s
trustee 	and, 	on 	July 	30, 	2010, 	he 	filed 	an 	adversary 	proceeding
against Karl K. Warner in bankruptcy court. That proceeding, which
largely 	concerned the debtor’s interest in a West Virginia limited
liability 	company 	known 	as 	McCoy 	Farms, 	LLC 	(“McCoy 	Farms”),
concluded 	with 	a 	determination 	that 	the 	debtor 	“held 	a 	one-sixth
membership 	interest 	in 	McCoy 	Farms,” 	which 	is 	“property 	of 	the
Debtor’s 	bankruptcy 	estate.” 	Sheehan 	v. 	Warner, 	No. 	1:10AP100,
(Dkt. No. 57 at 4) (Nov. 29, 2011). The adversary proceeding closed
on December 19, 2011.
The 	trustee 	filed 	the 	instant 	case 	on 	December 	2, 	2011,
invoking this Court’s jurisdiction over bankruptcy-related matters
pursuant to 28 U.S.C. § 1334. The complaint seeks a declaration of
the 	rights 	of 	the 	bankruptcy 	estate 	under 	the 	relevant 	Operating
Agreement for McCoy Farms, the dissolution of that entity, and the
liquidation and distribution of its assets. The defendants, all of
whom 	hold 	an 	interest 	in 	McCoy 	Farms, 	moved 	to 	dismiss 	this 	case
2
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SHEEHAN V. WARNER, ET AL. 	1:11CV193
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and to sanction the trustee. Sheehan responded by moving to dismiss
the 	defendants’ 	motion 	for 	sanctions. 	These 	motions 	are 	now 	ripe
for the Court’s review.
II.
The 	threshold 	question 	is 	whether 	the 	Court 	has 	federal
subject 	matter 	jurisdiction 	in 	this 	case. 	Accordingly, 	it 	turns
first to the defendants’ motion to dismiss.
A.
Dismissal is appropriate under Fed. R. Civ. P. 12(b)(1) where
the Court lacks jurisdiction over the subject matter of a lawsuit.
When 	a 	defendant 	challenges 	the 	existence 	of 	subject 	matter
jurisdiction, the Court is “free to weigh the evidence and satisfy
itself as to the existence of its power to hear the case.” Williams
v. 	United 	States, 	50 	F.3d 	299, 	304 	(4th 	Cir. 	1995) 	(internal
quotation 	marks 	and 	citations 	omitted). 	The 	Court 	may 	consider
evidence 	outside 	of 	the 	pleadings, 	whether 	by 	affidavit,
deposition, or live testimony, without converting the motion into
one 	for 	summary 	judgment. 	Id. 	The 	burden 	is 	on 	the 	plaintiff 	to
prove 	that 	subject 	matter 	jurisdiction 	exists. 	Evans 	v. 	B.F.
Perkins 	Co., 	166 	F.3d 	642, 	647 	(4th 	Cir. 	1999); 	see 	also 	United
States ex rel. Vuyyuru v. Jadhav, 555 F.3d 337, 347 (4th Cir. 2009)
3
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(plaintiff must prove jurisdictional facts “by a preponderance of
the evidence”).
B.
Federal 	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). 	Federal 	jurisdiction 	over 	proceedings 	brought
pursuant 	to 	28 	U.S.C. 	§ 	1334 	can 	thus 	be 	divided 	into 	three
categories: 	“[1] 	those 	that 	‘aris[e] 	under 	title 	11’; 	[2] 	those
that ‘aris[e] in’ a Title 11 case; and [3] those that are ‘related
to a case under title 11.’” Stern v. Marshall, --- U.S. ----, 131
S.Ct. 2594, 2603 (2011) (quoting 28 U.S.C. § 157(a)); see also In
re Jones, 397 B.R. 775, 780 (S. D. W. Va. 2008). The trustee argues
that “this litigation is within the ‘related to’ jurisdiction of 28
U.S.C. § 1334.” (Dkt. No. 16 at 3).
Federal jurisdiction in bankruptcy matters is “comprehensive,”
so that courts “‘might deal efficiently and expeditiously with all
matters 	connected 	to 	the 	bankruptcy 	estate.’” 	Celotex 	Corp. 	v.
Edwards, 514 U.S. 300, 308 (1995) (quoting Pacor, Inc. v. Higgins,
743 	F.2d 	984 	(3d 	Cir. 	1984)). 	Accordingly, 	“[t]he 	‘related 	to’
language 	of 	§ 	1334(b) 	must 	be 	read 	to 	give 	district 	courts 	. 	. 	.
4
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jurisdiction 	over 	more 	than 	simple 	proceedings 	involving 	the
property 	of 	the 	debtor 	of 	the 	estate.” 	Id. 	A 	civil 	proceeding 	is
“related to” a case under Title 11 when
the outcome of that proceeding could conceivably have any
effect 	on 	the 	estate 	being 	administered 	in 	bankruptcy.
Therefore, 	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 [it] in any way impacts upon the handling
and administration of the bankruptcy estate.
Valley Historic Ltd. P’ship v. Bank of New York, 486 F.3d 831, 835
(4th Cir. 2007) (internal quotation marks and citations omitted);
see 	also 	A.H. 	Robins 	Co., 	Inc. 	v. 	Piccinin, 	788 	F.2d 	994, 	1002,
n.11 (4th Cir. 1986) (citing Pacor 743 F.2d at 994).
Here, 	the 	trustee 	seeks 	a 	declaration 	of 	the 	rights 	of 	the
debtor’s bankruptcy estate under the operating agreement of McCoy
Farms, as well as the liquidation and distribution of that entity’s
assets. 	This 	suit 	impacts 	“the 	rights, 	liabilities, 	options 	or
freedom of action” of the trustee (and consequently, the debtor) to
the assets of McCoy Farms. Valley Historic Ltd. P’ship, 486 F.3d at
835. 	Moreover, 	the 	outcome 	of 	this 	case 	may 	have 	a 	substantial
impact on the assets available for distribution to creditors of the
bankruptcy 	estate. 	See 	In 	re 	Jones, 	397 	B.R. 	at 	782 	(finding
“related to” jurisdiction where a civil action could “conceivably
impact[] 	. 	. 	. 	the 	bankruptcy 	estate 	if 	[it] 	reduced 	the 	assets
5
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available for distribution to creditors of the estate”); cf. In re
NWFX, Inc., 881 F.2d 530, 532 (8th Cir. 1989) (finding “related to”
jurisdiction 	where 	the 	action 	would 	“impact 	the 	assets 	of 	the
bankruptcy 	estate 	and 	the 	funds 	available 	for 	distribution”).
Accordingly, because this claim “relates to” a Title 11 case, the
Court concludes that it has subject matter jurisdiction pursuant to
28 U.S.C. § 1334 and DENIES the defendants’ motion to dismiss.
III.
The 	defendants 	also 	filed 	a 	motion 	for 	Fed. 	R. 	Civ. 	P. 	11
sanctions against Sheehan, arguing that sanctions are appropriate
because 	the 	Court 	does 	not 	have 	subject 	matter 	jurisdiction 	over
this 	case 	and 	the 	plaintiff’s 	legal 	claims 	have 	no 	basis 	in 	law.
(Dkt. No. 25 at 3). The trustee responded by moving to dismiss the
motion, 	noting 	that 	the 	defendants 	had 	not 	complied 	with 	the
procedural prerequisites for seeking sanctions. (Dkt. No. 26 at 1-
2). The defendants, without further elaboration, characterized this
argument as “indefinable.” (Dkt. No. 28 at 2).
Fed. R. Civ. P. 11 states in pertinent part:
A motion for sanctions must be made separately from any
other motion and must describe the specific conduct that
allegedly violates Rule 11(b). The motion must be served
under Rule 5, but it must not be filed or be presented to
the 	court 	if 	the 	challenged 	paper, 	claim, 	defense,
contention, 	or 	denial 	is 	withdrawn 	or 	appropriately
corrected within 21 days after service or within another
6
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time the court sets. If warranted, the court may award to
the prevailing party the reasonable expenses, including
attorney’s fees, incurred for the motion.
The 	requirements 	of 	this 	rule 	are 	straightforward: 	“The 	party
seeking 	sanctions 	must 	serve 	the 	Rule 	11 	motion 	on 	the 	opposing
party 	at 	least 	twenty-one 	days 	before 	filing 	the 	motion 	with 	the
district court, and sanctions may be sought only if the challenged
pleading is not withdrawn or corrected within twenty-one days after
service 	of 	the 	motion.” 	Brickwood 	Contractors, 	Inc. 	v. 	Datanet
Engineering, 	Inc., 	369 	F.3d 	385, 	389 	(4th 	Cir. 	2004). 	These
obligations 	are 	mandatory, 	such 	that 	“failure 	to 	comply 	with 	the
procedural requirements precludes the imposition of the requested
sanctions.” 	Id. 	(citations 	omitted). 	Furthermore, 	it 	is 	beyond
peradventure that the defendants did not comply with this Rule.
As 	the 	defendants’ 	motion 	for 	sanctions 	is 	substantively
frivolous as well as procedurally defective, the Court DENIES their
motion 	and 	consequently 	DENIES 	AS 	MOOT 	the 	plaintiff’s 	motion 	to
dismiss the motion for sanctions. *
* Notably, a motion to dismiss is an improper vehicle for opposing
the defendants’ motion; a Fed. R. Civ. P. 12(b) motion to dismiss
applies only to a claim for relief in a “pleading,” and the motion
for sanctions is, manifestly, not a pleading.
7
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IV.
In conclusion, for the reasons discussed, the Court DENIES the
defendants’ 	motion 	to 	dismiss 	for 	lack 	of 	jurisdiction 	(dkt. 	no.
13); DENIES the defendants’ motion for sanctions (dkt. no. 25); and
DENIES 	AS 	MOOT 	the 	plaintiff’s 	motion 	to 	dismiss 	motion 	for
sanctions (dkt. no. 26).
It is so ORDERED.
The Court directs the Clerk to transmit copies of this Order
to counsel of record.
DATED: April 23, 2012.
/s/ Irene M. Keeley
IRENE M. KEELEY
UNITED STATES DISTRICT JUDGE
8
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