Binford et al v. First Magnus Financial Corporation et al, No. 4:2008cv00135 - Document 34 (D. Ariz. 2009)
Court Description: AMENDED ORDER- (AMENDING CAPTION CASE NUMBER ONLY); 33 ORDER that the Bankruptcy Court's 2/6/08 Order Dismissing Appellants' Adversary Proceeding, 1/10/08 Order Denying Class Certification, 2/6/08 Order Granting FMCI's Motion to Dismiss and 6/20/88 Order Denying Administrative Claim Status of "WARN Act" Employees are AFFIRMED. Clerk of the Court to close the file in this matter.. Signed by Judge Cindy K Jorgenson on 04/03/09. (LMF, )
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Binford et al v. First Magnus Financial Corporation et al 1 Doc. 34 WO 2 3 4 5 6 7 IN THE UNITED STATES DISTRICT COURT 8 FOR THE DISTRICT OF ARIZONA 9 IN THE MATTER OF: 10 11 12 13 14 15 16 17 18 19 ) ) FIRST MAGNUS FINANCIAL ) CORPORATION, ) ) Debtor, ) ) ) ) BINFORD et al., ) ) Appellants, ) ) vs. ) ) FIRST MAGNUS FINANCIAL ) CORPORATION and FIRST MAGNUS ) CAPITAL, INC., ) ) Appellees. ) ) No. CIV 08-135-TUC-CKJ AMENDED ORDER (Amending Caption Case Number Only) 20 Pending before this Court is Appellant’s appeal from the Bankruptcy Court’s Orders 21 in Bankr. Case No. 04-bk-01578 (JMM), Adv. No. 07-ap-00060 (JMM) dismissing the 22 adversary proceeding, denying class certification, denying administrative priority status of 23 Appellants’ WARN Act claims and dismissing the non-debtor First Magnus Capital, Inc. 24 (FMCI) for lack of jurisdiction.1 25 26 27 28 1 The Court finds this case suitable for decision without oral argument. See Fed. R. App. P. 34(a)(2). “The facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument.” Fed. R. App. P. 34(a)(2)(C). Dockets.Justia.com 1 2 I. FACTUAL BACKGROUND 3 First Magnus was one of the largest privately held mortgage companies in the United 4 States. Headquartered in Tucson, Arizona, First Magnus employed over 5,500 individuals 5 and maintained 335 branches throughout the United States. Its business encompassed 6 originating, purchasing and selling mortgage loans secured by one to four unit residences. 7 As the mortgage industry began suffering the unprecedented liquidity crisis that continues 8 today, First Magnus became unable to secure financing for its continued operations. On 9 August 16, 2007, First Magnus terminated the majority of its 5,500 employees and closed 10 many of its retail and wholesale offices. Subsequently, on August 21, 2007, First Magnus 11 sought the protection of the Bankruptcy Court and filed its voluntary petition for relief under 12 Chapter 11 of the Bankruptcy Code. 13 Appellants in this cause of action were among the approximately 1,000 similarly 14 situated employees who were terminated by First Magnus on August 16, 2007. None of First 15 Magnus’s employees received sixty (60) days advance written notice of their terminations. 16 As a result, on August 29, 2007, Appellants filed a complaint for damages pursuant to the 17 Worker Adjustment and Retraining Notification Act (“WARN Act”), 29 U.S.C. § 2101 et 18 seq. in the Bankruptcy Court. Appellants amended this complaint the following day, August 19 30, 2007. 20 On October 31, 2007, First Magnus filed a motion to dismiss Appellants’ complaint 21 in the Bankruptcy Court. The following month, on November 30, 2007, Appellants filed a 22 motion in the Bankruptcy Court seeking class certification of their complaint. This motion 23 was denied by the Bankruptcy Court on January 10, 2008. Appellants timely filed a Notice 24 of Appeal and filed their Motion for Leave to Appeal with this Court on January 22, 2008, 25 seeking an interlocutory appeal of the order denying class certification. 26 On February 6, 2008, the Bankruptcy Court entered a final order granting First 27 Magnus’s Motion to Dismiss Appellants’ Adversary Proceeding Complaint and FMCI’s 28 Motion to Dismiss for Lack of Subject Matter Jurisdiction. Appellants filed a Notice of -2- 1 Appeal seeking relief from the final order of the Bankruptcy Court. On March 31, 2008, 2 Appellants filed their Motion on Behalf of Certain Former Employees of Debtor for 3 Allowance and Immediate Payment of Administrative Expense Portion of WARN Act Wages 4 and Benefits Pursuant to 11 U.S.C. § 503(b)(1)(A)(ii). Objections to this motion were filed 5 in the Bankruptcy Court by various interested parties including the debtor, First Magnus. On 6 June 20, 2008, the Bankruptcy Court denied Appellants’ administrative expense status 7 motion. 8 Additionally, FMCI filed a voluntary petition for relief under Chapter 11 of the 9 Bankruptcy Code on February 19, 2008. On May 29, 2008, FMCI filed its Plan of 10 Reorganization and a Disclosure Statement in support of the plan. FMCI’s Disclosure 11 Statement was subsequently amended, and approved by the Bankruptcy Court on July 28, 12 2008. On September 12, 2008, FMCI submitted its “First Amended Plan of Reorganization 13 Dated September 12, 2008.” The Bankruptcy Court entered its order confirming the 14 Amended Plan on September 25, 2008. 15 On September 26, 2008, this Court entered its Order denying Appellants’ Motion for 16 Leave to Appeal regarding the class action certification and granting Appellees’ Motion to 17 Dismiss on the grounds that Appellants’ arguments were moot as a result of the dismissal of 18 their adversary proceeding in the Bankruptcy Court. Appellants now appeal the Bankruptcy 19 Court’s Orders dismissing the adversary proceeding, denying class certification, denying 20 administrative priority status of Appellants’ WARN Act claims and dismissing the non- 21 debtor FMCI for lack of jurisdiction. 22 23 II. STANDARD OF REVIEW 24 This Court has jurisdiction pursuant to 28 U.S.C. § 158(a), and reviews the 25 bankruptcy court’s findings under the same standard that the court of appeals would review 26 a district court’s findings in a civil matter. 28 U.S.C. § 158(c)(2). Therefore, this Court 27 reviews the bankruptcy court’s factual findings under a clearly erroneous standard, and 28 -3- 1 conclusions of law de novo. In re: Jastrem, 253 F.3d 438 (9th Cir. 2001); See also Fed. R. 2 Bankr. P. 8013. 3 4 III. ANALYSIS 5 A. Dismissal of Adversary Proceeding 6 Appellants argue that the Bankruptcy Court erred in its dismissal of the Adversary 7 Proceeding pursuant to Rule 41(b), Federal Rules of Civil Procedure. Appellants further 8 assert that the dismissal should be reversed because “a claimant under the WARN Act has 9 the right to file a class action adversary proceeding seeking relief for a class of similarly 10 situated former employees independent of the individual claims process.” [Appellants’ 11 Opening Br. at 8-9.] This Court “will not reverse unless we have the definite and firm 12 conviction that the [bankruptcy] court committed a clear error of judgment.” Lewis v. 13 Telephone Employees Credit Union, 87 F.3d 1537, 1557 (9th Cir. 1996) (internal quotations 14 and citations omitted). 15 “Courts are invested with inherent powers that are governed not by rule or statute but 16 by the control necessarily vested in courts to manage their own affairs so as to achieve the 17 orderly and expeditious disposition of cases.” Id. (internal quotations and citations omitted). 18 This principle is well established, and allows judges to exercise substantial discretion in 19 controlling their dockets and to manage their cases and courtrooms effectively. U.S. v. W.R. 20 Grace, 526 F.3d 499, 509 (9th Cir. 2008). Furthermore, bankruptcy courts have “an inherent 21 duty and the power to dismiss a case sua sponte to preserve its integrity, to ensure that the 22 legislation administered by the court will accomplish its legislative purpose, or to control its 23 docket.” In re Wells, 71 B.R. 554, 557 (N.D. Ohio 1987) (citations omitted). This “power 24 is based upon the court’s inherent duty to ensure the orderly administration of the debtors’ 25 estates.” Id. As the Bankruptcy Code unequivocally provides: 26 27 The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any 28 -4- 1 determination necessary or appropriate to enforce or implement court orders or rules or to prevent an abuse of process. 2 11 U.S.C. § 105(a). As such, “[t]he bankruptcy court may dismiss cases sua sponte where 3 to do so perpetuates the proper use of the bankruptcy mechanism.” In re Ray, 46 B.R. 424, 4 426 (S.D. Ga. 1984). 5 Moreover, “a trial court ‘has broad discretion in deciding whether to allow 6 maintenance of a class action.’” In re First Alliance Mortgage Co., 269 F.R. 428, 441 (C.D. 7 Cal. 2001) (quoting 7B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal 8 Practice and Procedure § 1785, at 119 (2d ed. 1986)). The cases relied on by Appellants 9 universally recognize that an adversary proceeding is duplicative of the normal bankruptcy 10 claims process. Based on the particular facts of those cases, the adversarial process was 11 allowed to proceed. See In re Protected Vehicles, Inc., 392 B.R. 633 (D. S.C. 2008) (finding 12 “under the present circumstances, this adversary proceeding should not be dismissed at least 13 at this early stage.” Id. at 641.); In re First NLC Financial Services, LLC, 2008 WL 3471673 14 (Bkrtcy. S.D.Fla. 2008) (noting “in this matter the Court finds that resolution of the WARN 15 Act claims will be expedited and handled more efficiently in a class adversary proceeding 16 . . . .” Id. at 3.); In re Quantegy, Inc. 343 B.R. 689 (M.D. Ala. 2006) (noting “the court is of 17 the opinion that this adversary proceeding should not be dismissed on that ground 18 [duplication of the claims process].” Id. at 693.). Further, “the analysis necessarily focuses 19 on the individual circumstances of the case.” In re First Alliance Mortgage Co., 269 B.R. 20 at 445 (emphasis added). 21 In the instant case, the Bankruptcy Court additionally relied upon its inherent powers 22 pursuant to 11 U.S.C. § 105 in dismissing the adversary proceeding. Mem. Decision at 3, 23 Feb. 6, 2008. Moreover, based on the circumstances presented below, the Bankruptcy Court 24 found that the adversarial process was duplicative of the normal bankruptcy claims 25 procedure. Order at 1, Jan. 10, 2008. At the time of dismissal of the class action 26 certification, approximately 5300 of the 5500 potential claims had already been filed. See 27 Hr’g Tr. on Mot. to Approve Class Cert. at 17:9-18, Jan. 9, 2008. The Bankruptcy Court 28 -5- 1 concluded that the normal bankruptcy claims procedure was adequate to handle the claims 2 of the WARN Act Claimants. The Bankruptcy Court was in the best position to assess the 3 propriety of the normal claims process versus an adversarial proceeding. The high number 4 of claims filed indicates that any concerns regarding persons holding small claims not 5 seeking to prosecute them absent class procedures are unfounded. See In re Charter Co., 876 6 F.2d 866, 871 (11th Cir. 1989). Moreover, there is no legal prohibition to the Bankruptcy 7 Court’s decision. As such, this Court finds that the Bankruptcy Court’s decision was not 8 clearly erroneous, and upholds its decision to dismiss the adversarial proceeding in this 9 matter. 10 11 B. Denial of Class Certification 12 Because the Court finds that the Bankruptcy Court’s dismissal of the adversary 13 proceeding was not in error, it declines to address the Bankruptcy Court’s denial of class 14 certification. As noted, supra, “a trial court ‘has broad discretion in deciding whether to 15 allow maintenance of a class action.’” In re First Alliance Mortgage Co., 269 F.R. at 441 16 (quotations omitted). Further, Appellants have not cited any legal reason mandating class 17 certification. As such, the Bankruptcy Court’s order denying class certification is upheld. 18 19 C. Denial of Administrative Priority Status 20 Appellants seek administrative priority status for the WARN Act damages. In doing 21 so, they argue that 11 U.S.C. § 503(b)(1)(A)(ii) authorizes such action. Section 503 states 22 in relevant part: 23 After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including – 24 25 (1)(A) the actual, necessary costs and expenses of preserving the estate including – 26 (i) wages, salaries, and commissions for services rendered after the commencement of the case; and 27 28 (ii) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations -6- 1 Board as back pay attributable to any period of time occurring after commencement of the case under this title, as a result of a violation of Federal or State law by the debtor, without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered, if the court determines that payment of wages and benefits by reason of the operation of this clause will not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the case under this title[.] 2 3 4 5 6 11 U.S.C. § 503(b)(1)(A). Since the enactment of the Bankruptcy Abuse Prevention and 7 Consumer Protection Act (BAPCPA) in 2005, only two courts have considered the question 8 of WARN Act damages warranting administrative priority status. See In re First Magnus 9 Financial Corp., 390 B.R. 667 (D. Ariz. 2008); In re Powermate Holding Corp., 394 B.R. 10 765 (D. Del. 2008). Both courts concluded that § 503 does not mandate administrative 11 priority status for WARN damages. 12 In the instant case, the Bankruptcy Court first looked to the plain meaning of the 13 statute. It is “[t]he cornerstone principle of statutory construction . . . that, ‘where . . . the 14 statute’s language is plain, the sole function of the courts is to enforce it according to its 15 terms.’” In re First Magnus, 390 B.R. at 675-76 (quoting United States v. Ron Pair Enters., 16 Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989)). Thus, "when a 17 statute speaks with clarity to an issue judicial inquiry into the statute's meaning, in all but the 18 most extraordinary circumstance is finished." Estate of Cowart v. Nicklos Drilling Co., 505 19 U.S. 469, 475, 112 S.Ct. 2589, 2594 (1992). Parsing the language of § 503(b)(1)(A), the 20 Bankruptcy Court noted the connector “and” between sections (i) and (ii), correctly 21 concluding that this language “would require that both parts of the subsections must exist in 22 order for a claimant to be entitled to an administrative expense.” In re First Magnus, 390 23 B.R. at 677. Additionally, “[s]uch an interpretation would be consistent with longstanding 24 law that only debts that arise postpetition can be treated as administrative expenses.” Id. 25 (citations omitted). 26 Although the Powermate court differed in its reasoning, it too determined that WARN 27 Act damages, such as those claimed by Appellants here, are not entitled to administrative 28 -7- 1 priority status. The Powermate court found the conjunction “and” between sections (i) and 2 (ii) to indicate that these are merely “categories within a particular subset of allowable 3 administrative expenses[.]” In re Powermate, 394 B.R. at 774. Construing WARN Act 4 damages as a form of severance pay, the court considered when such damages would vest. 5 Id. at 776-77. “In terms of priority, a claim for severance pay will only have administrative 6 priority to the extent that it is based on post-petition services.” Id. at 775. Moreover, “the 7 rights of workers discharged in violation of the WARN Act accrue in their entirety upon their 8 termination.” Id. at 776. Because the plaintiff was terminated pre-petition, his WARN Act 9 damages vested pre-petition, and therefore were not administrative expense claims. Id. 10 Finally, the Powermate court declined to view the BAPCPA as a “sea change” to the 11 bankruptcy process. In re Powermate, 394 B.R. at 777. Pre-BAPCPA courts “consistently 12 held that WARN Act damages based on pre-petition terminations only received fourth or 13 fifth level priority status. . . . The rationale for these decisions was that administrative 14 expense status could only be extended to wages for services rendered post-petition.” Id. As 15 such, Section 503(b)(1)(A) does not mandate administrative priority status to employees 16 terminated pre-petition. 17 This Court agrees that WARN Act damages should not be awarded administrative 18 priority status. Section 503(b)(1)(A) unequivocally states it applies to “the actual, necessary 19 costs and expenses of preserving the estate.” Appellants’ WARN damages are not necessary 20 to maintain the debtor as a going concern, nor are they necessary to preserve the bankruptcy 21 estate during the liquidation process. Accepting Appellants’ argument would be inconsistent 22 with the meaning and purpose of the bankruptcy framework. “The enormous increase in the 23 value of wage claims if the law is interpreted according to the [Appellants’] view is so 24 extreme that it would effectively cripple the debtors’ efforts for an equitable reorganization 25 or liquidation.” In re Powermate, 394 B.R. at 777. The Bankruptcy Court’s thorough and 26 well-reasoned opinion below is affirmed. 27 ... 28 ... -8- 1 D. Dismissal of First Magnus Capital, Inc. for Lack of Jurisdiction 2 Appellants argue that the Bankruptcy Court erred in dismissing the non-debtor FMCI 3 for lack of jurisdiction. Appellants’ arguments are based on their assertion that the non- 4 debtor FMCI is the parent company of First Magnus, and as such the two represent a “single 5 employer” for purposes of WARN Act damages. This relationship, Appellants assert, is 6 sufficient to confer “related to” jurisdiction of the Bankruptcy Court over FMCI. 7 Bankruptcy courts have jurisdiction over “all civil proceedings arising under title 11, 8 or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). The Ninth Circuit 9 described proceedings “arising in” bankruptcy as “core” proceedings and defined them as: 10 11 [P]roceedings that would not exist outside of bankruptcy, such as “matters concerning the administration of the estate,” “orders to turn over property of the estate,” and “proceedings to determine, avoid, or recover preferences.” 12 In re Pegasus Gold Corp., 394 F.3d 1189, 1193 (9th Cir. 2005) (citing 28 U.S.C. § 157(b)(2)). 13 The Ninth Circuit has adopted the “Pacor test” for determining the scope of “related to” 14 jurisdiction. In re Fietz, 852 F.2d 455, 457 (9th Cir. 1988). The Ninth Circuit’s adoption 15 defined the Pacor test as follows: 16 17 18 [W]hether a civil proceeding is related to bankruptcy is whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. . . . 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. 19 In re Fietz, 852 F.2d at 457 (citations omitted). 20 Appellants rely on a bankruptcy court slip opinion from the Southern District of 21 Florida to establish “related to” jurisdiction. In re First NLC Financial Services, LLC, 2008 22 WL 3471673 (Bkrtcy.S.D.Fla. Aug. 11, 2008). In that case, terminated employees filed a 23 class action adversary complaint against the debtor First NLC and its parent company, 24 Friedman, Billings & Ramsey Group, Inc. (FBR) alleging WARN Act violations. Id. at 1. 25 The court denied FBR’s motion to dismiss for lack of subject matter jurisdiction because the 26 plaintiffs alleged that First NLC and FBR were a single employer, and because Fifth Circuit 27 precedent conferred “related to” jurisdiction where joint and several liability existed. 28 -9- 1 It is well-established that “a bankruptcy court’s ‘related to’ jurisdiction cannot be 2 limitless.” Celotex Corp. v. Edwards, 514 U.S. 300, 308, 115 S.Ct. 1493, 1499, 131 L.Ed.2d 3 403 (1995) (citations omitted). Furthermore, the Ninth Circuit has rejected the argument 4 “that jurisdiction lies because the action could conceivably increase the recovery to the 5 creditors. As the other circuits have noted, such a rationale could endlessly stretch a 6 bankruptcy court’s jurisdiction.” In re Pegasus, 394 F.3d at 1194 n.1 (citations omitted). 7 Here, the Bankruptcy Court acknowledged that “joint and several liability may 8 arguably exist between FMCI and the Debtor[;]” however, this was “not a legally sufficient 9 nexus to confer otherwise non-existent jurisdiction upon [the] court.” Mem. Decision at 2, 10 Feb. 6, 2008. At the time of the Bankruptcy Court’s order, the class action had been 11 dismissed, as well as the adversary proceeding. Appellants’ claims were moving through the 12 bankruptcy claims process. As such, the Bankruptcy Court properly dismissed Appellants’ 13 claims against FMCI for lack of jurisdiction. 14 Even if Appellants’ arguments were correct, the issue before this Court is now moot. 15 As this Court has previously recognized, it is well-established law that “a federal court has 16 no authority ‘to give opinions upon moot questions or abstract propositions, or to declare 17 principles or rules of law which cannot affect the matter in issue in the case before it.’” 18 Church of Scientology or California v. U.S., 506 U.S. 9, 12, 113 S.Ct. 447, 449, 121 L.Ed.2d 19 313 (1992) (citations omitted). Moreover, “if an event occurs while a case is pending on 20 appeal that makes it impossible for the court to grant ‘any effectual relief whatever’ to a 21 prevailing party, the appeal must be dismissed.” Id. (citations omitted). This constitutional 22 doctrine of 23 practical affect. In re: McLean Square Associates, G.P., 200 B.R. 128, 131 (E.D. Va. 1996). 24 Appellants’ adversary proceeding has been dismissed by the Bankruptcy Court and 25 a final order entered. This Court upholds that dismissal, as well as the Bankruptcy Court’s 26 denial of class certification. Furthermore, FMCI has filed for bankruptcy protection and a 27 plan has been confirmed. Appellants had the opportunity to appear in those proceedings, but 28 elected not to. Thus, if this Court found that the Bankruptcy Court had “related to” subject mootness prevents courts from making determinations that would not have any - 10 - 1 matter jurisdiction over FMCI regarding Appellants’ WARN Act claims, there is no effectual 2 relief that could be granted. As such, Appellants’ claims as to FMCI are moot. 3 4 In light of the foregoing, IT IS HEREBY ORDERED that: 5 1. 6 The Bankruptcy Court's February 6, 2008 Order Dismissing Appellants’ Adversary Proceeding is AFFIRMED; 7 2. 8 is AFFIRMED; 9 3. 10 11 12 13 The Bankruptcy Court's January 10, 2008 Order Denying Class Certification The Bankruptcy Court's February 6, 2008 Order Granting FMCI’s Motion to Dismiss is AFFIRMED; 4. The Bankruptcy Court's June 20, 2008 Order Denying Administrative Claim Status of “WARN Act” Employees is AFFIRMED; and 5. The Clerk of the Court is directed to close its file in this matter. 14 15 DATED this 3rd day of April, 2009. 16 17 18 19 20 21 22 23 24 25 26 27 28 - 11 -
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