New York Bankruptcy Court Finds No Post-Confirmation Jurisdiction Exists to Support Reorganized Debtor's Case Against Penthouse Magazine Founder
The case of Penthouse Media Group v. Guccione (In re General Media, Inc.), 2005 WL 3529148 (Bankr. S.D.N.Y., 12/27/05), involves an adversary proceeding filed by the reorganized debtor against Bob Guccione, the debtor's former Chairman and CEO. Mr. Guccione is best known for having founded Penthouse Magazine, as well as such quality, trend-setting publications as Spin Magazine and Omni Magazine. Unquestionably, however, his absolutely worst legacy shall always be the movie Caligula, which cost a whopping $20 million in 1979 and is often cited, to this day, as possibly the worst film ever made.
For me, the case has special sentimental value because 25 years ago, while cooling my heels in New York City between college and law school, I spent two hours a week as private tutor to Mr. Guccione's youngest son at Mr. Guccione's very posh E. 67th Street townhouse (reportedly NY's largest residence), which was at the heart of the dispute in this case.
Anyway, in this case, the reorganized debtor filed a five count complaint against Mr. Guccione. The first three counts sought turnover of certain intellectual property, as well as 10 unnamed items of property still in the townhouse, which he was now renting from a third-party owner. The final two counts alleged conversion and breach of fiduciary duty for a certain transaction involving possible self-dealing. [NB: In fact, the 10 items likely were imported statutes and other antiques or antiquities of immense weight and value, as to which there were pre-confirmation disputes over whether the items were fixtures of personal property under applicable non-bankruptcy law. Imagine, though, what fun David Letterman would have with this "top ten" list!]
Guccione moved to dismiss for lack of subject matter jurisdiction and for failure to state a claim on which relief can be granted. The Court summarized the positions of the parties on these issues as follows:
Guccione argues, in the main, that the Court lacks subject matter jurisdiction. In addition, he contends that a turnover action will not lie post-confirmation because there is no trustee and no estate. Next, he maintains that the Plan released him from liability based on pre-petition conduct other than conduct that was fraudulent, willful or grossly negligent. Finally, he asserts that the plaintiff should be estopped from asserting the claims because they were not raised during the bankruptcy case or disclosed to the creditors, and the plaintiff procured Guccione's support for confirmation without disclosing its intention to bring this action.
The plaintiff counters that (1) the Court retained jurisdiction over these claims in the Plan, (2) the plaintiff acquired the right to pursue these claims as consideration for PET's funding of the Plan, and (3) the turnover claims were preserved under the Plan. Furthermore, the Townhouse Property was the subject of a prior Court order, which the First Cause of Action seeks to enforce. Lastly, some of the damage claims are clearly within the statute of limitations, and the release defense, which excludes intentional wrongs, cannot be decided on a motion to dismiss.
In dismissing the action based on lack of subject matter jurisdiction, the Court noted that "a party invoking the bankruptcy court's post-confirmation jurisdiction must satisfy two requirements":
First, the matter must have a "close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution, or administration of the confirmed plan or incorporated litigation trust agreement." [Citations omitted.] [FN7] Second, the plan must provide for the retention of jurisdiction over the dispute. [Citations omitted.] [FN8][FN7] In Boston Regional Med. Ctr. v. Reynolds (In re Boston Regional Med. Ctr.), 410 F.3d 100 (1st Cir. 2005), the Court ruled that post-confirmation jurisdiction in a liquidating chapter 11 case is greater because the debtor is winding up, there is no prospect of endless bankruptcy jurisdiction and "[a]ny litigation involving such a debtor thus relates much more directly to a proceeding under title 11." Id. at 106-07. The General Media plan was not a liquidating plan, and the reorganized debtors have continued their businesses.
[FN8] ... The Court did not discuss the bankruptcy court's jurisdiction under 28 U.S.C. § 1334, presumably because the plan provisions made it unnecessary. But the federal courts are courts of limited jurisdiction, and "neither the bankruptcy court nor the parties can write their own jurisdictional ticket." [In re] Resorts Int'l, [Inc.], 372 F.3d  at 161 [3d Cir. 2004]; accord Poplar Run Five Ltd. P'ship v. Virginia Elec. & Power Co. (In re Poplar Run Five Ltd. P'ship ), 192 B.R. 848, 859 (Bankr. E.D. Va. 1995) (a plan provision cannot grant jurisdiction over a proceeding beyond the jurisdiction granted by statute); ... 8 ALAN N. RESNICK & HENRY J. SOMMER, COLLIER ON BANKRUPTCY � 1142.04, at 1142-7 (15th ed. rev. 2005) (the plan does not confer jurisdiction; confirmation does not change the basic jurisdictional analysis).
It should also be noted that the distinction between core and non-core jurisdiction may not be particularly relevant after confirmation. Although the cases generally focus on "related to" post-confirmation jurisdiction, the scope of the post-confirmation jurisdiction mapped out by the case law usually meets the definition of a core proceeding. Broadly speaking, the proceeding must affect some aspect of the plan--its meaning, its implementation or its consummation--to come within the Court's post-confirmation jurisdiction. By definition, plan-related matters arise only in the context of a chapter 11 bankruptcy case. See TJN, Inc. v. Superior Container Corp. (In re TJN, Inc.), 207 B.R. 502, 508-09 (Bankr. D.S.C. 1996)(post-confirmation state law-based litigation arising in connection with pre-confirmation sale and affecting implementation of plan was core). But even if the proceeding is core, its outcome must still affect the Plan.
In addition, and unless the plan says something different, confirmation vests the property of the estate in the reorganized debtor. 11 U.S.C. § 1141(b). The estate comes to an end, and ceases to exist. [Citations omitted.] Accordingly, the outcome of a post-confirmation proceeding cannot affect the estate. Resorts Int'l, 372 F.3d at 165.
In applying the law cited above to the facts of the case, the Court ruled against the plaintiff and dismissed the complaint for lack of subject matter jurisdiction, stating:
Here, the plaintiff's lawsuit lacks a "close nexus" to the Plan, and the claims fall outside of the Court's limited post-confirmation jurisdiction. None of the claims arise under the Plan or require the Court to interpret it. In addition, the property of the various estates vested in the respective reorganized debtors on the Effective Date, (Plan, § 9.1(1)), and the estate ceased to exist. Thus, any recovery will inure solely to the benefit of the plaintiff.
None of the proceeds, in this regard, will be paid by the plaintiff to the unsecured creditors. The unsecured class, Class 3A, received cash and notes under the Plan. (Id., § 4.3.1(ii).) The notes paid interest only until maturity, matured in seven years, but could be prepaid without penalty. (See id., § 5.2.) Counsel for the plaintiff advised us at oral argument that the debt evidenced by the notes has been refinanced. The unsecured creditors have presumably been paid from the proceeds of the new loan and will receive nothing further. Bankruptcy courts plainly lack subject matter jurisdiction over post-confirmation litigation where the case has been fully administered and all of the recovery will go to the reorganized debtor rather than to the creditors. [Citations omitted.]
Even if the notes remain unpaid, and a successful outcome to this litigation would make it easier to pay them, the Court nonetheless lacks subject matter jurisdiction. Plans frequently call for future payments to creditors funded through future operations. A bankruptcy court cannot hear a post-confirmation dispute simply because it might conceivably increase the recovery to creditors, because the rationale could "endlessly stretch a bankruptcy court's jurisdiction." [Citations omitted.]
In addition, and to the extent it matters, all of the claims arise under state law, and are typically non-core. The Fourth and Fifth Causes of Action seek damages based upon common law claims sounding in conversion and breach of fiduciary duty. While some of the improper NTS offsets, which began pre-petition, continued after the commencement of the case, the timing did not convert them into core proceedings. [Citation omitted.] These causes of action do not invoke rights under title 11. Nor are they the type that could only arise in a bankruptcy case, a fact made plain by the pre-petition onset of the claim.
The three turnover claims, asserted under 11 U.S.C. § 542(a), are also non-core.... Initially, § 542(a) is inapplicable on its face. Once confirmation occurs, there is no longer a trustee (i.e., the debtor in possession) to whom property can be delivered, or an estate that can benefit. Furthermore, § 363 does not apply to a reorganized debtor. Consequently, a turnover proceeding under § 542 will not lie following confirmation. [Citations omitted.]
In any event, the plaintiff's invocation of § 542(a) of the Bankruptcy Code does not transform the nature of the claims. [Citations omitted.] Section 542(a) does not apply if title is disputed. [Citations omitted.] If an ownership dispute must be resolved before any relief can be ordered, the proceeding is a non-core replevin action under state law rather than a § 542(a) turnover proceeding. [Citation omitted.]
The questionable nature of the plaintiff's title to the three assets at issue forecloses the use of § 542(a). In each case, Guccione refused, despite demand, to deliver the property to the plaintiff. This implies that he disputes the plaintiff's title, and the plaintiff has not come forward with any contrary proof....
In conclusion, the Court lacks subject matter jurisdiction over this adversary proceeding, and grants Guccione's motion to dismiss under Fed. R. Civ. P. 12(b)(1). In light of this disposition, I do not reach the other arguments offered in support of the motion. The plaintiff is directed to settle a final order dismissing the Complaint.
© Steve Jakubowski 2005