The Bank of New York Mellon v. 251 Gotham LLC

          ORDER

          WILLIAM H. STEELE UNITED STATES DISTRICT JUDGE.

         This matter is before the Court on the defendant's motion to dismiss and/or for other relief. (Doc. 17). The parties have filed briefs and other materials in support of their respective positions. (Docs. 17, 23-25). After careful consideration, the Court concludes that subject matter jurisdiction appears to exist under 28 U.S.C. § 1334(b), that this case is thus to be referred to the District's bankruptcy judges, and that the defendant's motion (including the question of jurisdiction under Section 1334), is to be resolved by the Bankruptcy Court, to the extent consistent with Article III of the Constitution.

         BACKGROUND

         According to the amended complaint, (Doc. 12), the plaintiff is the mortgagee of certain real property located in Nassau County, New York ("the Property"). The mortgagors are two individuals (LaFortune and Padilla, collectively, "the Borrowers"). While the mortgage was in effect, recorded and unsatisfied, the Borrowers commenced a joint Chapter 13 bankruptcy case in this District ("the Joint Bankruptcy"), listing an ownership interest in the Property. The Bankruptcy Court entered an order confirming the Borrower's Chapter 13 plan, which provided for surrender of the Property. Padilla later successfully moved for dismissal from the Joint Bankruptcy, while LaFortune completed her Chapter 13 plan and received a discharge. Padilla filed his own Chapter 13 bankruptcy case in this District (“the Padilla Bankruptcy”), in which he never identified any interest in the Property.

         In February 2018, nine months after LaFortune received a discharge and twenty months after the Padilla Bankruptcy was filed, the Borrowers purported to convey the Property by deed to the defendant. The plaintiff filed this declaratory judgment action seeking a declaration that the conveyance is null and void, that the defendant holds no interest in the Property, and that the deed be rescinded as a cloud on title. The amended complaint asserts that the interest of both Borrowers in the Property was irrevocably surrendered upon confirmation of the Chapter 13 plan in the Joint Bankruptcy. The amended complaint further asserts that, to the extent Padilla retained any interest in the Property after his dismissal from the Joint Bankruptcy, his failure to list the Property as an asset in his bankruptcy schedules, and his failure to obtain approval from the Bankruptcy Court to transfer any interest in the Property, precluded any effective conveyance.

         The defendant moves to dismiss on the following grounds: (1) lack of subject matter jurisdiction; (2) lack of personal jurisdiction; (3) improper venue; (4) failure to state a claim on which relief can be granted; and (5) lack of standing. As a last-resort alternative, the defendant seeks a change of venue to the Eastern District of New York.

         DISCUSSION

         As grounds for subject matter jurisdiction, the plaintiff invokes 28 U.S.C. §§ 1331, 1334(b) and 1334(e)(1). (Doc. 12 at 3). With exceptions not relevant here, “the district courts shall have 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(b). The parties focus on the “related to” prong of this provision.

The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of the proceeding could conceivably have an effect on the estate being administered in bankruptcy. The proceeding need not necessarily be against the debtor or 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 re: Toledo, 170 F.3d 1340, 1345 (11^th Cir. 1999) (internal quotes omitted). This test is “liberal” and “extremely broad.” Id. The parties agree with this formulation of the test, (Doc. 17 at 4-5; Doc. 23 at 16-17), but they disagree as to its application here.

         The defendant first suggests that “related to” jurisdiction can only be invoked in the context of an adversary proceeding, not in the context of a separate civil action. (Doc. 17 at 5). The defendant cites no authority for this proposition, which is easily refuted. See, e.g., Carter v. Rodgers, 220 F.3d 1249, 1251-54 (11^thCir. 2000) (the debtor's separate civil action against the trustee triggered “related to” jurisdiction).

         The defendant next posits that “related to” jurisdiction does not exist because Padilla “is no longer the owner of the [P]roperty.” (Doc. 17 at 5). This unamplified ipse dixit is a non sequitur. The return of property that (as the amended complaint alleges) has been wrongfully removed from the estate plainly impacts the handling and administration of the estate, because it increases the assets of the estate. See Carter, 220 F.3d at 1253 (a civil action alleging wrongdoing in the sale of property belonging to the estate “related to” the bankruptcy case, because “[a]ny recovery would reduce the administrative expenses of the sale of the estate property and perforce increase the amount of estate property available to satisfy creditors' claims.”); In re: Toledo, 170 F.3d at 1345-47 (a claim seeking a determination of the extent and priority of liens and other interests in certain estate property supported “related to” jurisdiction, because it could result in “the possible partial satisfaction and consequent downward adjustment of the claim filed against the Estate by” the particular creditor, thereby affecting the estate's interest in the property).

         The defendant's principal argument is that a New York state court in a quiet title action has already entered an adverse decision, binding on the plaintiff, regarding the issue it raises herein. According to the defendant, this means that, “[a]ssuming arguendo that the Plaintiff were to prevail in the instant action, any judgment would be completely moot and invalid” as contrary to the state decision and judgment. (Doc. 17 at 5-7). As phrased, the argument cannot avail, because it presupposes that the plaintiff will prevail in this action and so obtain a federal judgment that the transfer of the Property to the defendant is null and void, thus returning the Property to the estate and increasing its assets and thereby satisfying “related to” jurisdiction as discussed in the preceding paragraph.

         If what the defendant intended to argue is that the plaintiff cannot prevail in this action because the state judgment precludes that result, the question becomes whether the plaintiff “conceivably” could prevail despite the state ...