KSB

Judge Somers

13-06072 TMBC, LLC v. McGuire et al (Doc. # 40) - Document Text

SO ORDERED.
SIGNED this 28th day of January, 2014.

 

Designated for online use but not print publication

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:

JAMES TODD MCGUIRE,
DEBTOR.

TMBC, LLC,
PLAINTIFF,

v.
JAMES TODD MCGUIRE; KANSAS
CITY SOUTH PROPERTY GROUP,
LLC; and DAVID TARTER;

DEFENDANTS.

CASE NO. 13-21054
CHAPTER 7

ADV. NO. 13-6072

MEMORANDUM OPINION AND ORDER

GRANTING IN PART AND DENYING IN PART

DAVID TARTER’S MOTION TO DISMISS

This adversary proceeding arises out of a prepetition lease transaction between
Plaintiff TMBC, LLC, and Defendant Kansas City South Property Group, LLC. Defendants


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James Todd McGuire and David Tarter are members of Kansas City South Property Group.
TMBC filed an eleven-count complaint seeking to except its claim against Debtor McGuire
from discharge under § 523(a)(2), (a)(4), and (a)(6), and asserting various tort claims against
all three defendants. Defendant David Tarter moves to dismiss the complaint as to him for
lack of subject matter jurisdiction and questions the Court’s subject matter jurisdiction over
the claims against Defendant Kansas City South Property Group. This court has
jurisdiction to determine the motion to dismiss.1 The Court grants Tarter’s motion to
dismiss in part and denies it in part.

THE ALLEGATIONS OF THE COMPLAINT AND RELEVANT PROCEEDINGS.

Plaintiff TMBC, LLC, a Delaware limited liability company with its principal place
of business in Springfield, Missouri, operates the Tracker Marine Boat Center, subleasing
space in the Bass Pro Outdoor World Store in Independence, Missouri (Bass Pro). TMBC
also subleases space to store its merchandise on Bass Pro’s leased property or chooses to
lease elsewhere, if Bass Pro’s available space is too limited.

In January 2007, Defendant James Todd McQuire (Debtor) began employment with
Bass Pro as the store’s general manager. In late July 2007, Defendant David Tarter (Tarter)

1 A court necessarily has jurisdiction to decide if a case is properly before it. Amoco Pipeline Co.

v. Admiral Crude Oil Corp., 490 F.2d 114, 116 (10th Cir. 1974) (citing United States v. Shipp, 203 U.S.
563, 573 (1906), and United States v. Mine Workers, 330 U.S. 258, 291 (1947)). This Court’s jurisdiction
over the parties and the subject matter derives from 28 U.S.C. §§ 157(a) and 1334(a) and (b), and the
Standing Order of the United States District Court for the District of Kansas that exercised authority
conferred by § 157(a) to refer to the District’s bankruptcy judges all matters under the Bankruptcy Code
and all proceedings arising under the Code or arising in or related to a case under the Code, effective July
10, 1984. Furthermore, this Court may hear and finally adjudicate the portions of the Complaint which
are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(B) and (I). There is no objection to venue or
jurisdiction over the parties.
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began employment as the Bass Pro receiving manager. In January 2010, Debtor and Tarter
formed Defendant Kansas City South Property Group, LLC (KC South), for the purpose of
entering into a commercial lease agreement with TMBC.

In the spring of 2010, Debtor and Tarter, on behalf of KC South, negotiated a lease
agreement dated April 1, 2010, with TMBC, with Debtor having authority to act on behalf of
TMBC, wherein TMBC leased 2.5 acres of real property located on East U.S. 40 Highway
in Blue Springs, Missouri, from KC South to store boats. TMBC alleges that the lease was
pursuant to a scheme of Debtor and Tarter to cause TMBC to lease additional storage away
from the Bass Pro store although no such storage was needed. TMBC further alleges that
Debtor and Turner represented to TMBC that KC South was the title owner of the leased
property, when in fact KC South did not own the property at any time and did not have an
estate or other right in the property at any time sufficient to grant TMBC a leasehold
interest. TMBC has paid approximately $110,000 to KC South, but TMBC alleges that KC
South has failed to perform its obligations under the lease.

On June 13, 2012, TMBC brought suit against KC South, Tarter, and Debtor in the
Circuit Court of Jackson County, Missouri, at Independence.2 The petition is comprised of
eight counts. They are fraud (KC South), fraud (Debtor and Tarter), negligent
misrepresentation (KC South), negligent misrepresentation (Debtor and Tarter), civil
conspiracy (Debtor and Tarter), breach of lease (KC South), unjust enrichment (KC South),
and breach of fiduciary duty (Debtor and Tarter). Debtor and KC South filed a joint answer.

2Dkt. 24-1 at 7-17.
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Tarter answered separately and filed a crossclaim against Debtor. Written discovery was
served and answered.

Debtor filed a voluntary petition under Chapter 7 on April 29, 2013. The eleven-
count adversary complaint was filed on July 26, 2013. Although it is similar to the Missouri
state court petition, it differs in material respects. The first three counts are against Debtor
only and seek to except Debtor’s alleged debt to TMBC from discharge under 11 U.S.C.
§ 523(a)(2)(A), (a)(4), and (a)(6). The remaining counts are as follows: Count IV - Fraud
(KC South); Count V - Fraud (Debtor and Tarter); Count VI - Negligent misrepresentation
(KC South); Count VII - Negligent misrepresentation (Tarter); Count VIII - Civil conspiracy
(Tarter); Count IX - Breach of lease (KC South); Count X - Unjust enrichment (KC South);
and Count XI - Breach of fiduciary duty (Debtor and Tarter). Debtor and KC South jointly
answered the complaint on August 29, 2013. They did not question the Court’s jurisdiction.
Tarter’s Motion to Dismiss for Lack of Subject Matter Jurisdiction (Motion) was filed on
September 10, 2013. On October 15, 2013, TMBC voluntarily dismissed the Jackson
County, Missouri action without prejudice.

THE MOTION TO DISMISS, THE RESPONSE, AND THE REPLY.

Defendant Tarter’s Motion is premised upon mandatory abstention, codified in 28

U.S.C. § 1334(c)(2), which provides:
Upon timely motion of a party in a proceeding based
upon a State law claim or State law cause of action, related to a
case under title 11 but not arising under title 11 or arising in a
case under title 11, with respect to which an action could not
have been commenced in a court of the United States absent
jurisdiction under this section, the district court shall abstain

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from hearing such proceeding if an action is commenced, and
can be timely adjudicated, in a State forum of appropriate
jurisdiction.

Tarter contends that the five factors for mandatory abstention are present as to the claims
against Tarter and KC South because: (1) The claims are state law claims or causes of
action; (2) the claims would lack a federal jurisdictional basis absent Debtor’s bankruptcy;

(3) the claims were commenced in the Circuit Court of Jackson County, Missouri; (4) the
claims are capable of timely adjudication in the state court; and (5) the claims are non-core
proceedings.3 TMBC opposes the Motion, asserting that supplemental jurisdiction under 28
U.S.C. § 1367 provides an independent basis for federal jurisdiction of the claims and that
the claims cannot be timely adjudicated in state court because the petition filed in Jackson
County, Missouri, has been dismissed.4 Tarter’s reply raises for the first time the
contentions that the claims against Tarter and KC South are not within the “related to”
jurisdiction of this Court and that if mandatory abstention does not apply, the Court should
abstain under the permissive abstention doctrine codified at 28 U.S.C. § 1334(c)(1).5 Tarter
also argues that the dismissal of the Jackson County litigation does not defeat mandatory
abstention because the factors for abstention should be applied as of the time the adversary
proceeding was filed.
THE BANKRUPTCY COURT HAS JURISDICTION OVER COUNTS I, II, III, V,
AND XI, BUT LACKS JURISDICTION OVER COUNTS IV, VI, VII, VIII, IX, and X.

3 Dkt. 24.
4 Dkt. 30.
5 Dkt. 34.


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Mandatory and permissive abstention are applicable only to claims within the subject
matter jurisdiction of the Court. Analysis of the Motion must therefore start with an
examination of the Court’s jurisdiction over the adversary complaint. This examination
must include the claims against all the parties, including KC South, even though KC South
admitted in its answer that this Court has jurisdiction over the claims against it. The subject
matter jurisdiction of federal courts, and particularly bankruptcy courts, is limited. “[T]o
ensure its . . . power is exercised properly, a federal court must ‘in every case and at every
stage of the proceeding, satisfy itself as to its own jurisdiction.’”6 This principle is codified
in Civil Rule 12(h)(3),7 which provides that “[i]f the court determines at any time that it
lacks subject-matter jurisdiction, the court must dismiss the action.”

In 28 U.S.C. § 1334(b), Congress granted the district courts “original but not
exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to
cases under title 11.” Authority to refer such matters to the bankruptcy courts is found in 28

U.S.C. § 157(a). Matters which arise under title 11 are those created by title 11.8
Exceptions to discharge are created by title 11 and therefore are within the “arising under”
jurisdiction. This Court therefore has jurisdiction of Counts I through III of the complaint.
“Arising in” proceedings are administrative matters which arise only in bankruptcy cases.9
6 Mires v. United States, 466 F.3d 1208, 1211 (10th Cir. 2006) (quoting Citizens Concerned for
Separation of Church and State v. City and County of Denver, 628 F.2d 1289, 1301 (10th Cir. 1980)).
7 Fed. R. Civ. Pro. 12(h)(3), made applicable here by Fed. R. Bankr. P. 7012(b).
81 Collier on Bankruptcy ¶ 3.01[3][e][i] at 3-14 (Alan N. Resnick & Henry J. Sommer, eds.-inchief,
16th ed. 2013).
9 Id., ¶ 3.01[e][iv] at 3-20 to 3-21.
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None of the claims in the complaint are within the “arising in” jurisdiction.

Counts IV through XI of the complaint are state law claims which are within the
bankruptcy court’s jurisdiction only if they are “related to” the bankruptcy case. “[A] civil
proceeding is related to a bankruptcy case when ‘the outcome of that proceeding could
conceivably have any effect on the estate being administered in bankruptcy.’”10 Count V,
fraud against Debtor and Tarter jointly, and Count XI, breach of fiduciary duty against
Debtor and Tarter jointly, may have an effect on the bankruptcy case, since a judgment
against Debtor would constitute a claim against the estate. They are therefore within the
“related to” jurisdiction of the Court.

However, TMBC does not argue that the claims asserted solely against KC South
(Counts IV, VI, IX, and X) or the claims asserted solely against Tarter (Counts VII and
VIII) are related to the bankruptcy case. This is clearly correct, since resolution of these
claims will not have any effect on Debtor’s bankruptcy proceeding.

TMBC argues that these claims are nevertheless within the jurisdiction of this Court
under 28 U.S.C. § 1367, “Supplemental Jurisdiction.” In any civil case of which a district
court has original jurisdiction, § 1367 grants the district court supplemental jurisdiction
“over all other claims that are so related to claims in the action within such original
jurisdiction that they form part of the same case or controversy under Article III of the
United States Constitution.”11 The statute only grants such supplemental jurisdiction to

10 Id., ¶ 3.01[3][e][ii] at 3-16 (quoting Pacor, Inc., v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)).

11 28 U.S.C. § 1367.

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district courts, and there is no reference to bankruptcy courts. Also, it applies only to “civil
cases,” without mentioning bankruptcy cases or proceedings. There is no Tenth Circuit
Court of Appeals case on the question whether a bankruptcy court may exercise
supplemental jurisdiction, but the majority of courts have held that a bankruptcy court, being
a court whose jurisdiction is more limited than that of a district court, does not have such
authority.12 A holding that a bankruptcy court has supplemental jurisdiction would in
essence expand the “related to” jurisdiction of the bankruptcy court “to encompass
proceedings that share a factual or logical ‘nexus’ with a core bankruptcy proceeding, even
if the outcome will not affect the bankruptcy estate.”13 Those courts finding that bankruptcy
courts do not have supplemental jurisdiction are influenced by the rules that jurisdictional
statutes are to be read narrowly and that bankruptcy courts cannot exceed their “related to”
jurisdiction.14 The Supreme Court’s decision in Stern v. Marshall persuasively supports this
view. As one commentator has stated, “The Ninth and Second Circuit’s view that
bankruptcy courts may exercise supplemental jurisdiction is precisely what Stern disavows.
By exercising supplemental jurisdiction pursuant to § 1367(a), bankruptcy judges would
exercise the Article III judicial power to determine state claims affecting third parties that do

12 Eric C. Surette, Annotation, Exercise of Supplemental Jurisdiction by Bankruptcy Courts
Pursuant to 28 U.S.C.A. § 1367, 52 A.L.R. Fed.2d 243, § 2 (2011), available on Westlaw at 52 A.L.R.
Fed.2d 243.

13 Scully v. Danzig (In re Valley Food Services, Inc.), 400 B.R. 724, 728-29 (Bankr. W.D. Mo.
2008).

14 See id. at 729-30.

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not impact the bankruptcy estate.”15 The Court predicts that the Tenth Circuit would follow
the majority consensus and hold that a bankruptcy court cannot exercise supplemental
jurisdiction, particularly in light of Stern v. Marshall.

The Court therefore dismisses Counts IV, VI, IX, and X against KC South and
Counts VII and VIII against Tarter for lack of subject matter jurisdiction. The Court
recognizes that this ruling means that if TMBC wishes to pursue the dismissed claims while
simultaneously pursuing the objection to discharge, it will need to litigate the same facts and
similar claims in two courts. The judicial structure dictates this somewhat unfortunate
result.
THE ELEMENTS FOR MANDATORY ABSTENTION ARE NOT PRESENT AS TO
COUNTS I, II, III, V, AND XI.

Mandatory abstention applies only to “a State law claim or State law cause of action,
related to a case under title 11 but not arising under title 11 or arising in a case under title
11.”16 Counts I through III arise under title 11 and are not subject to mandatory abstention.
The only two claims within the “related to” jurisdiction, and therefore possibly within the
mandatory abstention statute, are Counts V and XI against Debtor and Tarter jointly for
fraud and breach of fiduciary duty. But as to these claims, mandatory abstention does not
apply since there is no parallel state court action in which they are asserted and can be
timely adjudicated.

15 Natallie J. Santana, A Statutory and Constitutional Analysis of Whether Bankruptcy Courts May
Exercise Supplemental Jurisdiction Pursuant to 28 U.S.C.A. § 1367, 22 Norton J. Bankr. L & Prac. 1,
Art. 5 (2013), available on Westlaw 22 JBKRLP 1 Art. 5.

16 28 U.S.C. § 1334(c)(2).

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The Court rejects Tarter’s argument that for purposes of mandatory abstention, the
pendency of the state court action must be determined as of the date of filing of the
adversary complaint, which in this case was before the dismissal of the Jackson County,
Missouri proceeding. Tarter is correct that subject matter jurisdiction, such as that based
upon diversity of citizenship, “‘ordinarily depends on the facts as they exist when the
complaint is filed,’”17 and is determined as of the date of filing. “But like most rules, ‘this
one is susceptible to exceptions.’”18 Although the parties have not cited and the Court has
not found any cases applying an exception in connection with mandatory abstention, the
plain meaning of abstention compels this result. The foundation of mandatory abstention is
the existence of a parallel action in state court which can timely adjudicate the issues
pending in the bankruptcy court. Congress’s intent when enacting the mandatory abstention
provision was the striking of “a balance between the competing interests of bankruptcy and
state courts.”19 Abstaining because of a state court interest that existed as of the
commencement of the bankruptcy proceeding but not at the time of the exercise of
abstention would not effectuate a balance of interests.

In this case, there is currently no pending state court proceeding and therefore no
competing state court interest. TMBC has elected to dismiss the state court proceeding. If

17 Mires, 466 F.3d at 1212 (quoting Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 830
(1989)).


18 Id.

19 Christo v. Padgett, 223 F.3d 1324, 1331 (11th Cir. 2000) (citing 130 Cong, Rec. S8, 8889
(daily ed. June 29, 1984) (statement of Sen. Dole)).


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this Court were to abstain, there would be no pending claims against KC South and the
number of claims pending against Tarter would be significantly reduced. Mandatory
abstention was not designed to compel a plaintiff to litigate matters which are within the
bankruptcy court’s jurisdiction in state court. Mandatory abstention gives precedence to the
state court litigation of state-law “related to” matters only when the state court litigation is
pending and abstention will result in a timely adjudication in state court. The conditions for
mandatory abstention are not present.

THE COURT DECLINES TO ABSTAIN FROM RULING ON COUNTS V AND XI.

Tarter suggests that even if the conditions for mandatory abstention are not present,
the Court should decline to hear the claims against Tarter under the permissive abstention
provision of 28 U.S.C. § 1334(c)(1). It permits the Court, “in the interest of justice, or in the
interest of comity with State courts or respect for State law [to abstain] from hearing a
particular proceeding arising in title 11 or arising in or related to a case under title 11.”

The Court finds no basis for abstention in this case. This Court is uniquely qualified
to determine dischargeability. Resolution of the claims of TMBC against Debtor is
necessary to determine whether in fact Debtor has liability to TMBC and, if so, the amount
of that liability. Severance of the claim and dischargeability litigation would result in
wasteful multiple proceedings. The state law issues of fraud and breach of fiduciary duty
are not complex. There is no parallel state court proceeding to which this Court could defer.

CONCLUSION.

The Court lacks subject matter jurisdiction over Counts IV, VI, VII, VIII, IX, and X,

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which are hereby dismissed. The Court has jurisdiction over Counts I, II, III, V, and XI.
The Court shall not abstain from hearing these counts under either mandatory abstention or
permissive abstention.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052
of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the Federal Rules
of Civil Procedure applicable to this proceeding. A judgment based upon this ruling,
dismissing Counts IV, VI, VII, VIII, IX, and X, will be entered on a separate document.

IT IS SO ORDERED.
# # #


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