IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________________________
No. 98-50865
_______________________________________
IN THE MATTER OF: J.R. CANION, JR.,
Debtor
RANDALL & BLAKE, INC.
Appellant,
versus
CHARLES R. EVANS; MARY E. EVANS; CINDY RICH;
TIMOTHY N. RICH; KATHY HICKS; KENNETH G.
HICKS; EVANS EQUIPMENT, INC.; OTIS FREEMAN;
and OSCAR MACKEY,
Appellees.
____________________________________________
Appeal from the United States District Court
for the Western District of Texas
_____________________________________________
November 19, 1999
Before JONES and WIENER, Circuit Judges, and WALTER, District
Judge.*
WIENER, Circuit Judge:
At the core of this appeal is the issue of federal bankruptcy
jurisdiction under 28 U.S.C. §1334(b). Plaintiff-Appellant Randall
and Blake, Inc. (“R&B”) is a judgment creditor of J.R. Canion, Jr.
(“Canion”). After Canion Filed for bankruptcy, R&B brought suit in
federal district court against several of Canion’s friends,
*
District Judge of the Western District of Louisiana, sitting
by designation.
relatives, business associates, and employees (collectively,
“defendants”),1 alleging that they had conspired to interfere with
R&B’s efforts to collect on its judgment. The district court
referred the case to bankruptcy court pursuant to 28 U.S.C. §157.
At the close of R&B’s case-in-chief, the bankruptcy judge ruled in
favor of the defendants, finding R&B had failed to prove that they
were anything more than unwitting participants in Canion’s scheme
to prevent R&B from collecting on its judgment.
After trial, R&B argued first to the bankruptcy court, then to
the district court, and now to us, that the bankruptcy court lacked
jurisdiction to hear the case and, accordingly, R&B should be
allowed to try its case again but in the district court. We find,
as did the other two courts, that at the time the jurisdiction of
the bankruptcy court was invoked, it was conceivable that R&B’s
suit against the defendants could have an effect on the bankruptcy
estate, and thus conclude that there was “related to” bankruptcy
jurisdiction under 28 U.S.C. §1334(b). On the merits, R&B had the
burden of proving that the defendants intended to impede R&B’s
collection efforts. We find no clear error in the bankruptcy
court’s determination that R&B failed to meet this burden. We
therefore affirm the judgment of the district court.
1
This group includes: Charles and Mary Evans (long-time
friends of Canion); Evans Equipment, Inc. (business owned by
Charles and Mary Evans); Kathy and Kenneth Hicks (daughter and son-
in-law of Canion); Cindy and Timothy Rich (daughter and son-in-law
of Canion); Otis Freeman (employee of ACCO II); and Oscar Mackey
(Shareholder of ACCO II).
-2-
I.
FACTS & PROCEEDINGS
R&B holds a non-discharged judgment against Canion stemming
from an unrelated breach-of-contract action that R&B successfully
brought against Canion in his role as principal of Austin
Construction Company (“ACCO I”), a paving and excavation business.
R&B has repeatedly but unsuccessfully attempted to collect on its
judgment. According to R&B, the defendants, together with Canion
and his ex-wife, conspired to secret Canion’s assets and thereby
thwart R&B’s collection efforts. Allegedly, as part of this
effort, some of the defendants incorporated ACCO Equipment Rental,
Inc. (“ACCO II”) to which Canion transferred assets from ACCO I and
through which Canion continued to operate his business.
Canion filed for protection under Chapter 7 of the Bankruptcy
Code in January, 1992. R&B filed a proof of claim in Canion’s
bankruptcy for $302,977.42, the amount of its judgment, plus
interest. Three months later, R&B instituted the instant
proceeding in federal district court against the defendants and
Canion’s ex-wife, apparently without making Canion a party.2 R&B’s
compliant includes a detailed account of fraud and deception by
Canion, his ex-wife, and the defendants.3 The following causes of
2
Jurisdiction was based on the diversity of the parties. 28
U.S.C. §1332.
3
The factual allegations in R&B’s complaint are that, to avoid
collection of the judgment, Canion, his ex-wife, and the various
defendants engaged in certain bad acts, including: (1) engaging in
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action were pleaded:
(1) tortious interference with judgments;
(2) conspiracy to interfere with judgments;
(3) actual and constructive fraud;
(4) conspiracy to defraud;
(5) fraudulent transfers; and
(6) alter ego liability.
The first four causes of action sound in tort; the last two allege
violations of the Texas Uniform Fraudulent Transfer Act4 and abuse
of the corporate form. R&B’s complaint seeks the following
monetary and injunctive relief: (1) A judgment holding the
defendants personally liable to R&B for the amount of Canion’s
judgment5; (2) an order compelling the defendants to identify
assets, proceeds of assets, and documents relating to assets
belonging to Canion; (3) a decree setting aside the fraudulent
transfers made by Canion to the defendants; and (4) dissolution of
ACCO II.
While the suit by R&B against the defendants was pending in
district court, R&B filed a complaint in Canion’s bankruptcy
fraudulent transfers of real and personal property; (2) forming
ACCO II, a sham corporation, for the purpose of hiding assets; (3)
falsifying financial statements; (4) hiding property from the
federal marshal who attempted to execute a Writ of Seizure; (5)
lying about the ownership and whereabouts of personal property; (6)
setting up a bogus security interest in assets to prevent their
seizure and sale; and (7) Canion and his wife entering into a sham
divorce to create multiple bankruptcy exemptions.
4
See Tex. Bus. & Comm. Code §24.001 et seq.
5
R&B did not seek to impose personal liability on Oscar
Mackey; rather, it sought a judgment canceling the stock Mackey
held in ACCO II.
-4-
proceeding alleging that because of Canion’s fraudulent pre-
bankruptcy activities, his debts should not be discharged. The
court found that Canion had purposefully clouded title to property
on the eve of bankruptcy and therefore denied Canion a discharge
with respect to all creditors under alternative subsections of 11
U.S.C. §727.6
Thereafter, in the district court proceeding between the
defendants and R&B, the defendants moved to (1) join Canion’s
Chapter 7 bankruptcy Trustee as a plaintiff, arguing that she was
a necessary party, and (2) transfer the case to the bankruptcy
court that was adjudicating Canion’s bankruptcy. While the
defendants’ motion was pending, the Trustee filed her own motion
seeking to intervene as plaintiff in R&B’s district court suit
against the defendants, advancing that all of the causes of action
asserted by R&B against the defendants were property of Canion’s
bankruptcy estate. Accordingly, the Trustee argued, she was “the
only proper party Plaintiff in all these causes of action.”
In response, R&B asserted that its “claims include claims
other than for fraudulent conveyances that would be non-core
6
11 U.S.C. §727(a) provides that individual Chapter 7 debtors,
like Canion, shall be granted a discharge for all pre-petition
debts unless they engage in any one of an enumerated list of bad
acts. The bankruptcy court found that “every action taken by the
debtor [Canion] was a direct reaction to action that [R&B] had
taken.” It therefore denied Canion a discharge alternatively under
11 U.S.C. §727(a)(3) (exception to discharge for failure to make
full financial disclosure), (4) (exception to discharge for
“bankruptcy crimes”), and (5) (exception to discharge for failure
adequately to explain a loss or deficiency of assets).
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proceeding[s], but related to the bankruptcy court proceeding,” and
that it had “no objection to the transfer of this entire case to
the bankruptcy court.” The district court allowed the Trustee to
intervene and transferred the proceeding to the bankruptcy court
for trial.
On April 18, 1994, the first day of trial, the bankruptcy
court struck ACCO II’s answers because it failed to comply with
bankruptcy court orders and sanctions. Consequently, the
allegations that ACCO II was Canion’s alter ego were deemed
admitted, the company was liquidated, and its assets (worth
approximately $200,000) were brought into Canion’s bankruptcy
estate.
After five days of testimony, R&B concluded its case in chief,
and, sua sponte, the court entered a take nothing judgment in favor
of the defendants, pursuant to Rule 52 of the Federal Rules of
Civil Procedure.7 Specifically, the court found that the
defendants “were being used as . . . tools unwittingly and
unknowingly by [Canion] and [that] they were duped like everybody
else.”
After the trial, the bankruptcy court inquired into the effect
of our recent decision in In re Educators Group Health Trust.8 In
7
The court did not rule on the plaintiffs’ (R&B’s and the
Trustee’s) claims against Geneva Canion. These matters later
settled and are not before us on appeal.
8
25 F.3d 1281, 1284 (5th Cir 1994).
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response to this inquiry, R&B for the first time argued that the
bankruptcy court lacked jurisdiction over all causes of action that
it had brought against the defendants. R&B urged that these
“claims are not core or ‘related to’ (noncore) proceedings because
they are personal claims against nondebtors [seeking] relief for
the direct injuries to R&B,” and, therefore, the district court’s
reference of those claims to the bankruptcy court was improper.9
R&B requested in the alternative that the bankruptcy court reverse
its substantive finding that R&B failed to meet its burden of
proof.
The court denied R&B’s motion as being wholly without merit.
R&B then filed a motion in the district court, making the same
jurisdictional and substantive arguments. On the magistrate
judge’s recommendation, the district court denied R&B’s motion,
holding:
9
In Educators, we were faced with competing claims of
ownership of causes of action against third party nondebtors by the
bankruptcy trustee on one hand and individual creditors on the
other. We held that the nature of the injury for which relief is
sought determines who owns a given claim: If the complaint alleges
injury to the debtor that, in turn, injures all creditors
indirectly, then the claim belongs to the estate and is properly
asserted by the trustee; by contrast, if the complaint alleges
direct (as opposed to derivative) injury to a creditor, the claim
belongs to the creditor. See 25 F.3d at 1284.
In its post-trial motion requesting that the bankruptcy court
find that it was without jurisdiction, R&B asserted that “[I]n
light of [Educators], [R&B’s] claims against nondebtors belong to
[R&B] so they are not within the jurisdiction of this Bankruptcy
Court.” As R&B had, from the very beginning, asserted that it
owned all the claims against the defendants, it is difficult to see
how Educators led R&B to the revelation that bankruptcy
jurisdiction was lacking.
-7-
The fraudulent conveyance clauses of action are “core”
claims, 28 U.S.C. §157(b)(2)(H), and obviously belong to
the Trustee. [R&B] contends its causes of action against
the Evans for (i) tortious interference with judgment,
(ii) conspiracy to interfere with judgments, (iii) fraud,
(iv) conspiracy to defraud, and (v) receipt of fraudulent
conveyances are outside the subject matter of the
bankruptcy court. Despite [R&B]’s protestations to the
contrary, each of these causes of action, even assuming
they belong solely to R&B, “relate to” the Canion
bankruptcy. . . .
Further proceedings in the bankruptcy court followed,10 after which
R&B again appealed the adverse rulings of the bankruptcy court,
raising the same issues. The district court rejected R&B’s
arguments a second time and this appeal followed.
II.
ANALYSIS
A. Standard of Review
Federal courts must be assured of their subject matter
jurisdiction at all times.11 Both the bankruptcy and district
courts’ finding that they had subject matter jurisdiction is a
10
Subsequent to R&B’s first appeal to the district court, the
bankruptcy court issued an order regarding ownership of the causes
of action first brought by R&B: In response to the Trustee’s motion
to abandon as burdensome property (i.e., the causes of action over
which both R&B and the Trustee had claimed ownership) the
bankruptcy court ruled that (1) as the allegations that ACCO II was
Canion’s alter ego had been deemed admitted and the company
liquidated and (2) as the fraudulent conveyance suit had settled,
the question of the Trustee’s right to abandon these two causes of
action was moot. The court further held that R&B owned the
remaining causes of action so they were not subject to abandonment
by the Trustee.
11
See Bass v. Denney (In re Bass), 171 F.3d 1016, 1021 (5th
Cir. 1999).
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legal determination that we review de novo.12 With regard to the
substantive elements of the appeal, bankruptcy court rulings and
decisions are reviewed by this court under the same standards
employed by the district court hearing an appeal from bankruptcy
court, i.e., conclusions of law are reviewed de novo and findings
of fact are reviewed for clear error.13 Mixed questions of fact and
law are reviewed de novo.14
B. Bankruptcy Court Jurisdiction
Federal courts are courts of limited jurisdiction, and
bankruptcy courts are no exception. Their jurisdiction is “wholly
‘grounded in and limited by statute.’”15 28 U.S.C. §1334 lists the
following four types of bankruptcy matters over which district
courts have jurisdiction:
(1) “cases under title 11";
(2) “proceedings arising under title 11";
(3) proceedings “arising in” a case under title 11; and
(4) proceedings “related to” a case under title 11.
12
Id. (citing Calhoun County v. United States, 132 F.3d 1100,
1103 (5th Cir. 1998)).
13
Id. (citing Shurley v. Texas Commerce bank (In re Shurley),
115 F.2d 333, 336 (5th Cir. 1997)).
14
Id. (citing Southmark Corp. v. Marley (In re Southmark
Corp.), 62 F.2d 104, 106 (5th Cir. 1995), cert. denied 516 U.S.
1093, 116 S.Ct. 815, 133 L.Ed.2d 760 (1996); United States v.
Blakeman, 997 U.S. 1042, 114 S.Ct. 687, 126 L.Ed.2d 654 (1994)).
15
See Bass v. Denney (In re Bass), 171 F.3d 1016, 1022 (5th
Cir. 1999) (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 307,
115 S.Ct. 1493, 131 L.Ed.2d 403 (1995)).
-9-
The first category refers to the bankruptcy petition itself.16 The
second, third, and fourth categories “operate conjunctively to
define the scope of jurisdiction. Therefore, it is necessary only
to determine whether a matter is at least ‘related to’ the
bankruptcy.”17 28 U.S.C. §157 empowers district courts to refer
such proceedings to the bankruptcy court; thus, if R&B’s claims
against the defendants are at least “related to” Canion’s
bankruptcy, the district court’s referral of the proceeding to the
bankruptcy court was proper.18
“Related to” is a term of art. As we recently explained in In
re Bass: “A proceeding is ‘related to’ a bankruptcy ‘if the outcome
16
See Wood v. Wood (In re Wood), 825 F.2d 90, 92 (5th Cir.
1987).
17
Bass v. Denney, 171 F.3d at 1022 (quoting Walker v. Cadle Co.
(In re Walker), 51 F.3d 562, 569 (5th Cir. 1995) (quoting In re
Wood, 825 F.2d at 93))).
18
28 U.S.C. §157 grants bankruptcy judges authority to “hear
and determine” (1) core proceedings and (2) non-core proceedings if
all parties consent. See §157(b)(1), (c)(2). In non-core “related
to” proceedings, however, if all of the parties do not consent to
the referral, the district court may refer the case to the
bankruptcy court for hearings only. In such cases, “the bankruptcy
judge shall 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 . . . .” §157(c)(1).
Here, all of the parties consented to the reference; thus if
there was “related to” jurisdiction, the bankruptcy court had the
power both to hear the case and enter orders and judgments even if
the case is a non-core proceeding. See §157(c)(2); FDIC v.
Majestic Energy Corp. (In re Majestic Energy), 835 F.2d 87, 90 (5th
Cir. 1998) (“In this case, the parties consented to the matter
being determined by the bankruptcy judge. Consequently, even if
the matter is a non-core proceeding, a determination by the
bankruptcy judge was proper as long as the matter was at least
related to the bankruptcy case.”).
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of that proceeding could conceivably have any effect on the estate
being administered in bankruptcy.’”19 R&B admits that this
proceeding shares common facts with core proceedings in Canion’s
bankruptcy, but correctly points out that common facts alone are
insufficient to confer “related to” jurisdiction.20
The defendants argue that, as R&B consented to the
jurisdiction of the bankruptcy court at the time the case was
referred there by the district court, it cannot now claim that
jurisdiction is lacking. It is well settled, however, that the
subject matter jurisdiction of a federal court can be challenged at
any stage of the litigation (including for the first time on
appeal), even by the party who first invoked it.21 Furthermore,
parties cannot confer subject matter jurisdiction on federal
courts.22 Consequently, R&B’s consent to the district court’s
19
Bass v. Denney (In re Bass), 171 F.3d 1016, 1022 (5th Cir.
1999) (quoting In re Walker, 51 F.3d 562, 569)). This test was
adopted from Third Circuit’s decision in Pacor, Inc. v. Higgins (In
re Pacor), 743 F.2d 984, 994 (3d Cir. 1984). See In re Wood, 825
F.2d at 93.
20
See, e.g., Feld v. Zale Corp., 62 F.3d 746, 753 (5th Cir.
1995) (“Shared facts between the third-party action and the debtor-
creditor conflict do not in and of themselves suffice to make a
third-party action ‘related to’ the bankruptcy.”) (citing cases)).
21
See American Fire & Cas. Co. v. Finn, 341 U.S. 6, 71 S.Ct
534, 95 L.Ed. 702 (1951); Veldhoen v. U.S. Coast Guard, 35 F.3d
222, 225 (5th Cir. 1994); Charles Alan Wright, Arthur R. Miller &
Edward H. Cooper, Federal Practice & Procedure §3522 at 67-69 (2d.
ed. 1984).
22
See Sosna v. Iowa, 419 U.S. 393, 95 S.Ct. 553, 42 L.Ed.2d 532
(1975).
-11-
referral of this case to the bankruptcy court did not establish
bankruptcy “related to” jurisdiction.
R&B’s argument contesting jurisdiction is that if it
successfully prosecutes its claims against the defendants, its
judgment against Canion will not be extinguished; instead, the
judgment will persist in favor of the defendants who will stand in
R&B’s shoes as a judgment creditor of Canion. This is so,
according to R&B, because if it successfully collects Canion’s debt
from the defendants, they will be legally subrogated to R&B’s
rights against Canion. It follows, R&B insists, that whatever
might be the outcome of R&B’s suit against the defendants, Canion
will still owe the same sum, the only possible difference being to
whom the sum is owed.
There is a flaw in R&B’s argument regarding the application of
legal subrogation to the instant facts: Although Texas courts
liberally apply the doctrine of legal subrogation23 in instances
when one person involuntarily pays the debt for which another
23
In Argonaut Ins. Co. v. Allstate Ins. Co., 869 S.W.2d 537,
541 (Tex. App. 1993) the court explained the process of legal
subrogation as follows:
Subrogation is the substitution of one person in the
place of another, whether as creditor or as the possessor
of some lawful claim, so that he who is substituted
succeeds to the rights of the other in relation to the
debt or claim. By subrogation, a court of equity, for
the purpose of doing exact justice between parties in a
given transaction, places one of them, to whom a legal
right does not belong, in the position of a party to whom
the right does belong. McBroom Bannett Plumbing, Inc. v.
Villa France, Inc., 515 S.W.2d 32, 36 (Tex. App. 1974).
-12-
person is primarily liable,24 legal subrogation —— like all
equitable remedies —— is sometimes denied to litigants who come to
court with unclean hands.25 To prevail against the defendants, R&B
would have to prove that they engaged in intentionally tortious or
fraudulent conduct —— exactly the type of conduct that has led
Texas courts to deny a remedy lying in equity, including legal
subrogation.26
Assuming that R&B should successfully collect from the
defendants the judgment it holds against Canion, and assuming that
the defendants’ fraudulent conduct would preclude legal
subrogation, the total amounts due on claims against Canion’s
bankruptcy estate would be decreased. This decrease would inure to
the benefit all other unsecured creditors, each of whom would then
share in the disbursement that would otherwise have been paid to
24
Id. at 542.
25
See Lazy M Ranch, Ltd. v. TXI Operations, LP, 978 S.W.2d 678,
683 (Tex. App. 1998) (“Under the doctrine of unclean hands, a court
may refuse to grant equitable relief to a plaintiff who has been
guilty of unlawful or inequitable conduct regarding the issue in
dispute.”); Schenk v. Halliday Real Estate, Inc., 803 S.W.2d 361,
366 (Tex. App. 1990) (“It is well settled that a party seeking
equity cannot come into a court with unclean hands.”).
26
See Rotge v. Dunlap, 91 S.W.2d 905, 908 (Tex. App. 1936)
(“The findings show fraud on [the part of the party seeking legal
subrogation]. He does not come into court with clean hands, and is
therefore not in a position to invoke the equitable principles upon
which legal subrogation rests.”); Christian v. Manning, 59 S.W.2d
234, 237 (Tex. App. 1933) (applying to legal subrogation the maxim
that “one who seeks equity must come into court with clean hands”);
Bell v. Franklin, 230 S.W.2d 181, 185 (Tex. App. 1921) (same).
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R&B.27
Courts in other circuits that have faced this question have
held that a claim between two non-debtors that will potentially
reduce the bankruptcy estate’s liabilities produces an effect on
the estate sufficient to confer “related to” jurisdiction.28 We
note that at the time that the district court referred this
proceeding to the bankruptcy court,29 the sequence of events that
27
If, at the time of R&B’s suit against Canion, his bankruptcy
estate had already been administered by the trustee —— i.e., if all
property of the estate were collected, liquidated, and the proceeds
distributed to creditors —— then presumably R&B’s potential damage
recovery against the defendants would have been limited to the
amount of the outstanding judgment (that part of the judgment not
paid through bankruptcy), and no effect on the estate would have
been possible. In this case, however, at the time of the district
court’s reference, the estate had not been fully administered. In
fact, after the case was referred to the bankruptcy court, the
trustee recovered and distributed over $200,000 to the creditors of
Canion’s estate, including distributions to R&B that would not have
been made if its judgment against Canion —— and therefore its claim
against his estate —— had already been satisfied by the defendants.
28
See Owens Illinois, Inc. v. Rapid American Corp (In re
Celotex Corp.), 124 F.3d 619, 626 (4th Cir. 1997) (finding “related
to” jurisdiction when a creditor’s claim against a non-debtor would
reduce its claim in bankruptcy); Kaonohi Ohana, Ltd. v. Sutherland
(In re Sutherland), 873 F.2d 1302, 1306-07 (9th Cir. 1989)
(upholding “related to” jurisdiction over third-party action as
specific performance remedy in third-party action would reduce
damages in breach of contract claim against bankruptcy estate);
National Union finre Ins. Co. v. Titan Energy, Inc., 837 F.2d 325,
329 (8th Cir. 1988) (holding that a coverage dispute between the
debtor’s insurance company and a creditor was “related to” the
bankruptcy as a finding of coverage would reduce the claims against
the estate); Carr v. Michigan Real Estate Ins. Trust (In re
Michigan Real Estate Trust), 87 B.R. 447 (Bankr. E.D. Mich. 1988).
29
Federal subject matter jurisdiction is tested when the
jurisdiction of the federal court is invoked. See Freeport-
McMoRAN, Inc. v. K N Energy, Inc., 498 U.S. 426, 111 S.Ct. 858, 112
L.Ed.2d 951 (1991); St. Paul Mercury Indemnity Co. v. Red Cab Co.,
-14-
would reduce the claims against Canion’s bankruptcy estate was not
certain to occur; however, the law is well established in this
Circuit, as in others, that, when testing “related to”
jurisdiction, an effect is not required to a certainty. Rather,
jurisdiction will attach on a finding of any conceivable effect.30
303 U.S. 283, 58 S.Ct. 586, 82 L.Ed. 845 (1938). Generally,
subsequent changes will not divest jurisdiction. Id. This case is
unusual in that the jurisdiction of two separate federal courts
were invoked, and the basis for subject matter jurisdiction in each
court was different —— the jurisdiction of the district court was
based on diversity under §1332, and the jurisdiction of the
bankruptcy court was based on bankruptcy “related to” jurisdiction
under §§1334(b), 157. It was appropriate to test the district
court’s jurisdiction when the claim was brought, and the bankruptcy
court’s jurisdiction at the time of the reference. See Continental
National Bank of Miami v. Sanchez (In re Toledo), 170 F.3d 1340,
1346 n.8 (11th Cir. 1999) (“The presence or absence of jurisdiction
must be evaluated based on the state of affairs existing at the
time the adversary complaint was filed . . . not at some later time
when, for example, it was ultimately determined here that the
Estate had no interest in the [matter].”); Miller v. Kemira, Inc.
(In re Lemco Gypsum, Inc.), 910 F.2d 784, 788-89 & n.20; Cf. Smith
v. Commercial Banking Corp. (In re Smith), 866 F.2d 576, 579-80 (3d
Cir. 1989).
30
See In re Wood, 825 F.2d at 94 (“Although we acknowledge the
possibility that this suit may ultimately have no effect on the
bankruptcy, we cannot conclude, on the facts before us, that it
will have no conceivable effect.”) (emphasis in original); Copelin
v. Spirco, Inc., 1999 WL 445643 (3d. Cir. July 1, 1999) (“[T]he key
word is ‘conceivable.’ Certainty, or even likelihood [of effect on
the estate being administered in bankruptcy] is not a requirement.”
(internal quotation marks and citation omitted; alteration in
original)); In re Titan Energy, 837 F.2d at 325, 330 (8th Cir.
1988) (“[E]ven a proceeding which portends a mere contingent to
tangential effect on a debtor’s estate meets the broad
jurisdictional test [for “related to” jurisdiction].”); 1 Lawrence
P. King, COLLIER ON BANKRUPTCY §3.01[4][c] at 3-26 (15th ed. 1998)
(“‘[A]utomatic’ liability of the estate is not the sine qua non for
related to jurisdiction; all that is necessary is that there could
‘conceivably’ be some effect upon the estate as a consequence of
the litigation in question.”).
-15-
We find that at the time the district court referred the case
to the bankruptcy court (which is the time its jurisdiction is
tested), the outcome of this proceeding could have affected
Canion’s bankruptcy estate. We conclude, therefore, that the test
for “related to” jurisdiction has been met.
C. Factual sufficiency
R&B urges that if we find (as we have) that the bankruptcy
court had jurisdiction to try this case, we should nevertheless
reverse on the grounds that it clearly erred in its ruling on the
merits. We decline to do so.
To prevail on its causes of action against the defendants, R&B
had to prove intentional misconduct on their part.31 The bankruptcy
court, after hearing the live testimony of the witnesses and
observing their demeanor, determined that the defendants were
unknowing participants in Canion’s plot to avoid collection on the
judgment. The court further concluded that R&B could have, but did
not, seize assets belonging to Canion, choosing instead to pursue
31
R&B repeatedly cites to us the Texas Supreme Court case of
Castleberry v. Banscum, 721 S.W.2d 270 (Tex. 1986) as standing for
the proposition that constructive fraud, which does not require
intent, was sufficient grounds for a court to disregard the
corporate form thereby extending liability to the shareholders ——
in that case some of the defendants. Castleberry was statutorily
overruled. In 1989, in response to Castleberry the Texas
legislature amended the Texas Business Corporation Act. Now, a
shareholder cannot be held liable for corporate obligations unless
actual fraud is shown. See Tex. Bus. Corp. Act art 2.21(B); Puri
v. Mansukhani, 973 S.W.2d 701, 713 (Tex. App. 1998).
-16-
collection from the defendants because they constituted a “deep
pocket.”
The bankruptcy court based these conclusions on its
determination of the credibility of the witnesses —— specifically,
the trial court found credible the testimony of the defendants
denying that they had acted with the intent to impede R&B’s
collection efforts. “The burden of showing that the findings of a
trial court are clearly erroneous is heavier if credibility of
witnesses is a factor in the [] court’s determination.”32 Only
rarely will we depart from the trial court’s assessment of the
credibility of the witnesses.33 Our review of the record satisfies
us that the findings of the trial judge in this respect are not
clearly erroneous.
III.
CONCLUSION
R&B’s challenge to the bankruptcy court’s jurisdiction assumes
that eventual success against the defendants would automatically
lead them to be legally subrogated to R&B’s judgment against
Canion. As we have demonstrated, however, even though this outcome
would be possible, it is not inevitable. Another possibility is
32
Theriot v. Parish of Jefferson, 1999 WL 624026 (5th Cir. Aug.
17, 1999); Fed. R. Civ. Proc. 52(a) (“due regard shall be given to
the opportunity of the trial court to judge of the credibility of
the witnesses.”).
33
Id.; Travelers Indem. Co. v. Calvert Fire Ins. Co., 798 F2d
826, 836 (5th Cir. 1986).
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that R&B’s judgment against Canion would be satisfied by the
defendants and R&B’s claim against Canion’s bankruptcy estate would
evaporate, thereby reducing the liabilities of the estate and
producing an effect sufficient to confer “related to” jurisdiction.
On the merits, the bankruptcy court’s determination that R&B failed
to establish the fraudulent intent necessary to hold the defendants
(or any of them) liable under any of the asserted causes of action
was not clearly erroneous. For the forgoing reasons the judgment
of the bankruptcy court is, in all respects,
AFFIRMED.
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JONES, Circuit Judge, concurring:
I concur in Judge Wiener’s careful and comprehensive
opinion. I write separately to point out a possible procedural
flaw that crept into this case and, while not material to its
resolution, applies to district courts’ responsibility for
bankruptcy cases. RBI, as part of its attack on the adverse
bankruptcy court decision against the nondebtor defendants, moved
the district court to withdraw the reference of the adversary
proceeding. 28 U.S.C. § 157(d). The district court referred this
motion to a magistrate judge who wrote a detailed memorandum
recommending denial. The district court then issued its own
opinion, stating that it had reviewed the motion de novo, and
denied RBI’s request. Referral of this motion to the magistrate
judge not only cost time and duplicated judicial resources, but it
is also questionable procedurally.
This court has held that magistrate judges may not rule
on appeals from decisions of bankruptcy courts. Minerex Erdoel,
Inc. V. Sena, Inc., 838 F.2d 781 (5th Cir.) cert. denied, 488 U.S.
817 (1988). See also Allstate Ins. V. Foreman, 906 F.2d 123, 125
(5th Cir. 1990). Those decisions are predicated on 11 U.S.C. §
158, which governs bankruptcy appeals, whereas this case was
presented as a motion to withdraw reference from the bankruptcy
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court to the district court and was referred to the magistrate
judge pursuant to 28 U.S.C. § 636(b). It is not at all clear,
however, that § 636(b) authorizes a “reference” to the magistrate
judge of what is essentially a motion challenging the propriety of
the “reference” of a case to a bankruptcy judge. 28 U.S.C. §
157(a). Magistrate judges and bankruptcy judges enjoy equal status
to each other, and both are subject to the district court’s
control. The effect of reference to the magistrate judge was to
seek a proposed ruling by one adjunct of the district court
concerning an action of another adjunct of the district court.
Prudence, at least, would suggest that the district court should
decide on its own whether a continued reference to its adjunct
court is appropriate.
Without detracting from the conscientious work of the
courts here, I lay it on the hearts of our lower courts to be
careful of their prescribed boundaries.
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