The opinion
VePleMmDer □□□ □□□□
Clerk, U.S. Bankruptcy Court
Below is an opinion of the court.
Dawid) Ws Horde
DAVID W. HERCHER
U.S. Bankruptcy Judge
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF OREGON
In re
Consolidated Estate of Former Lead Case No. 19-32600-dwh7
W2W Entities, fka Wall to Wall (Jointly administered with Case
Tile & Stone LLC (Case No. 19- Nos. 19-32599-dwh7 and 19-
32600, Wall to Wall Tile & Stone — 32603-dwh7)
Oregon LLC (Case No. 19-32599),
and Wall to Wall Tile & Stone —
Idaho LLC (Case No. 19-32603),
Debtors.
Saxum Stone LLC, Adv. Proc. No. 20-03085-dwh
Plaintiff, MEMORANDUM DECISION
DISMISSING ACTIONS FOR
V. LACK OF SUBJECT-MATTER
JURISDICTION!
Lennar Multifamily Builders,
LLC, fdba LMC Construction, LLC,
Defendant.
1 This disposition is specific to these actions. It may be cited for whatever
persuasive value it may have.
Page 1 - MEMORANDUM DECISION DISMISSING ACTIONS FOR etc.
Lennar Multifamily Builders, Adv. Proc. No. 20-03109-dwh
LLC,
Plaintiff,
v.
Saxum Stone, LLC,
Defendant.
I. Introduction
This memorandum decision addresses these two adversary proceedings
and will be filed in both actions. The two actions involve the same two
parties: Saxum Stone LLC and Lennar Multifamily Builders, LLC. In No. 20-
03085, Saxum is plaintiff, and Lennar is defendant; in No. 20-03109, the
parties are reversed.
After I received briefing and heard argument on Saxum’s motions for
summary judgment in both actions,2 I questioned whether the court has
subject-matter jurisdiction.3 I asked for and received from both parties
briefing and argument specifically on jurisdiction.4 Saxum argues that there
is jurisdiction over both parties’ claims. Lennar argues that there is
jurisdiction over its claims but not Saxum’s.
For the reasons below, I will dismiss both actions, including
counterclaims, for lack of jurisdiction, with leave to further amend.
2 No. 20-03085 ECF No. 65; No. 20-03109 ECF No. 75.
3 No. 20-03085 ECF No. 91; No. 20-03109 ECF No. 109.
4 No. 20-03085 ECF Nos. 94–98; No. 20-03109 ECF Nos. 111–14.
II. Background
These actions relate to the three jointly administered chapter 7 main
cases of Wall to Wall Tile & Stone LLC, Wall to Wall Tile & Stone –
Oregon LLC, and Wall to Wall Tile & Stone – Idaho LLC.
A. Prepetition contract between debtors and Lennar
Before the petition date, debtors had contracted to install furnishings,
including quartz countertops, for Lennar in a project in Oregon, called the
Glisan project, and one in Washington state, called the Kirkland project.
B. Chapter 11, conversion to chapter 7, and asset sale to
Saxum
Debtors filed their chapter 11 petitions in July 2019 and converted to
chapter 7 in April 2020. The next month, the chapter 7 trustee’s sale of estate
property to Saxum was approved.5 In the order, the court—
• approved the terms of a proposed asset purchase agreement6 (APA),
• said that—
o the sale would be “free and clear of all liens, claims, and
encumbrances,”7 and
o “Saxum will not have successor liability to any creditor who
holds a claim as of the Closing Date except as specifically
stated in the APA, and all creditors will be forever enjoined
from seeking to enforce or collect any such claim from or
against Saxum.”8 And
5 No. 19-32600 ECF No. 378 at 5 ¶ 3.
6 No. 19-32600 ECF No. 368 Ex. B.
7 No. 19-32600 ECF No. 378 at 5 ¶ 3.
8 No. 19-32600 ECF No. 378 at 5 ¶ 5.
• “retain[ed] jurisdiction to resolve any controversy or claim arising
out of or related to the implementation of this Order or the
transactions contemplated thereby.”9
In the APA, the trustee agreed to sell Saxum “all of the Assets of the
Estate useful in the Business, including . . . accounts receivable [and]
inventory . . ..”10 The APA defines “Assets of the Estate” as all assets of the
three debtors as of the conversion date.11
C. Lennar’s action
1. Lennar’s complaint; removal
In July 2020, Lennar filed its action in the Clark County, Washington,
Superior Court.12 In an amended complaint filed there in August 2020,
Lennar sought judgment for Saxum’s conversion of quartz materials for the
Kirkland project for which Lennar had paid debtors.13
Later in August 2020, Saxum removed Lennar’s action to the bankruptcy
court for the Western District of Washington.14
2. Saxum’s motion to remand
In September 2020, Lennar moved to remand its action to state court on
several grounds, including that there was no bankruptcy jurisdiction over
9 No. 19-32600 ECF No. 378 at 7 ¶ 11.
10 No. 19-32600 ECF No. 368 Ex. B at 1 ¶ 1.1.
11 No. 19-32600 ECF No. 368 Ex. B at 11 ¶ 16.13.1.
12 No. 20-03019 ECF No. 1-1 at PDF 72.
13 No. 20-03109 ECF No. 1-2.
14 No. 20-03109 ECF No. 1.
Lennar’s action because it arose solely under Washington State law and
would not affect the estate’s rights or liabilities.15
In opposition to the remand motion, Saxum argued that the bankruptcy
court has arising-under and arising-in jurisdiction under 1334(b) because
resolution of Lennar’s complaint would require both (1) determining the
nature and extent of the bankruptcy estate, which would be a core
proceeding, and (2) interpreting the sale order, which would be a core
proceeding under 28 U.S.C. § 157(b)(2)(N).16 Saxum also argued that the
court has related-to jurisdiction under 1334(b) over Lennar’s action because
Lennar had filed a proof of claim, and resolution of the conversion claim
would affect the allowed amount of the proof of claim.17
In a reply in support of the remand motion, Lennar argued that there is
no arising-in jurisdiction, because a dispute over whether certain assets were
included in a bankruptcy asset sale could arise even if the sale had not been
from a bankruptcy estate.18 Lennar also argued that there is no related-to
jurisdiction because resolution of the conversion claim could have no
conceivable effect on estate administration.19
The Washington bankruptcy court denied the remand motion, finding
arising-under, arising-in, and related-to jurisdiction under § 1334(b).
15 No. 20-03109 ECF No. 3 at 2:10–20.
16 No. 20-03109 ECF No. 5 at 5:1 – 6:13.
17 No. 20-03109 ECF No. 5:6:14 – 7:4.
18 No. 20-03109 ECF No. 6 at 4:1–17.
19 No. 20-03109 ECF No. 6 at 4:18 – 5:2.
3. Venue change
On November 16, 2020, Lennar’s action was transferred to this district.20
D. Saxum’s action
1. Saxum’s complaint
In August 2020, Saxum filed its complaint in this court. The complaint
included claims for declaratory judgment and for judgment on account. The
requested declarations were that (1) Saxum owns the amount it claims was
due from Lennar to debtors on the Glisan project, which it calls an account
receivable (AR), (2) Lennar gets no reduction in the AR as a result of rejection
of its executory contracts with debtors, (3) the sale order and APA, including
provisions that Saxum bought the assets free and clear of claims and
enjoining Lennar from making any claims, binds Lennar, and (4) Lennar gets
no reduction in the AR because of any damages Lennar allegedly incurred for
in the Kirkland project.21
2. Lennar’s motion to dismiss Saxum’s action
In September 2020, Lennar moved to dismiss Saxum’s complaint for lack
of subject-matter jurisdiction.22 Lennar argued that, even though Saxum
bought assets from the chapter 7 trustee, Saxum’s claim against Lennar does
not arise out of the Bankruptcy Code (title 11 of the U.S. Code), exist
20 No. 20-03109 ECF No. 13.
21 No. 20-03085 ECF No. 1 at 7 ¶ 25.
22 No. 20-03085 ECF No. 6.
independent of the bankruptcy cases, or affect the estate’s rights or
liabilities.23
The next month, I denied that motion.24 I said that resolution of Saxum’s
complaint would require that I determine the effect of 11 U.S.C. § 363 and
the terms of the sale order and the enforceability of the order provision that
Saxum has no successor liability.25
III. Discussion
Below, I address jurisdiction according to the elements of the bankruptcy
jurisdiction statute, 28 U.S.C. § 1334(b), which gives 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.” I discuss each category of
jurisdiction in general before applying it to the claims and counterclaims in
these actions.
A. “Arising under title 11”
As the Ninth Circuit held in its 2010 decision in In re Ray, “[a] matter
‘arises under’ the Bankruptcy Code if its existence depends on a substantive
provision of bankruptcy law, that is, if it involves a cause of action created or
determined by a statutory provision of the Bankruptcy Code.”26
The arising-under provision of 1334 is similar to 28 U.S.C. § 1331, which
confers jurisdiction over “all civil actions arising under the Constitution,
23 No. 20-03085 ECF No. 6 at 2:11–18.
24 No. 20-03085 ECF No. 16.
25 No. 20-03085 ECF No. 99 at 5:17 – 6:4.
26 624 F.3d 1124, 1131 (9th Cir. 2010).
laws, or treaties of the United States.” Courts therefore “draw freely from
authorities discussing the circumstances under which a case ‘arises under’
federal law within the meaning of § 1331.”27
One of the rules that courts have extrapolated from 1331 to 1334 arising-
under jurisdiction is the “well-pleaded complaint” rule.28 Under that rule, as
described in the Supreme Court’s 1983 decision in Franchise Tax Board of
State of California v. Construction Laborers Vacation Trust for Southern
California—
a federal court does not have original jurisdiction over a case in
which the complaint presents a state-law cause of action, but
also asserts that federal law deprives the defendant of a defense
he may raise . . ., or that a federal defense the defendant may
raise is not sufficient to defeat the claim . . ..29
When a complaint requests a declaratory judgment, the court must apply
the well-pleaded-complaint rule not to declaratory relief, but to a hypothetical
complaint for coercive relief that would have been filed in the absence of a
declaratory-judgment statute.30 That is the case whether the declaratory-
judgment procedure the plaintiff invokes is state or federal.31
1. Saxum’s action
Lennar does not contend that there is jurisdiction over Saxum’s action.
27 In re Miles, 430 F.3d 1083, 1088 (9th Cir. 2005).
28 Id.
29 463 U.S. 1, 10 (1983) (internal citations omitted).
30 Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671–72 (1950).
31 Franchise Tax Bd., 463 U.S. at 18.
(a) Saxum’s arguments for arising-under
jurisdiction over its action
(1) Federal defenses
Saxum argues that there is arising-under jurisdiction over its action.
Specifically, it argues that—
Outside of bankruptcy law and a bankruptcy case, there are no
legally recognizable state law claims for an account receivable
where the executory subcontract was rejected under 11 USC
§ 365, where the subcontract was not assumed by the trustee
and assigned to the account purchaser and where the account
receivable was sold at a 11 USC § 363 (b) & (f) sale “free and
clear” of all claims arising under the subcontract, as occurred in
the instant case.32
Although it’s true that state law does not furnish a claim defined in that
way, asking that question is not the right level of analysis. The significance,
if any, of 363 and 365 is that they might create defenses, not that they
support the claim itself—a simple state-law contract claim.
Saxum then identifies many allegations in its complaint that relate to the
bankruptcy cases and that would not have been necessary to state a claim
under state law. But those allegations are not essential to the claims that
Saxum is asserting. Saxum is correct that it could have pleaded its claims
more simply, by alleging only the existence of the Glisan contract and
Lennar’s failure to pay (and, presumably, Saxum’s purchase of debtors’ right
to collect the debt). That Saxum chose to include other allegations that were
not essential to its claims, but were included to refute anticipated defenses,
32 No. 20-03085 ECF No. 97 at 1–2.
does not create federal jurisdiction. The point of the well-pleaded-complaint
rule is that a plaintiff cannot create federal jurisdiction by including
inessential allegations in a complaint. Those allegations must be disregarded
when determining subject-matter jurisdiction.
(2) Sale-order enforcement
Saxum also suggests that its complaint seeks to “enforce” the sale order,
citing the Second Circuit’s 2016 decision in In Matter of Motors Liquidation
Co.33 In Motors, the bankruptcy court exercised jurisdiction over an action
seeking to enjoin claimants from asserting against an asset purchaser claims
that were allegedly barred by a sale order.34 Similarly, the Supreme Court in
its 2009 decision in Travelers Indemnity Co. v. Bailey approved exercise of a
bankruptcy court’s jurisdiction to enter a supplement injunction clarifying
the scope of an earlier injunction.35
Here, Saxum has not asked for an injunction prohibiting Lennar from
doing anything, nor has Saxum moved for supplemental or clarifying main-
case relief in connection with the sale order. For those reasons, Motors and
Travelers are not on point.
33 829 F.3d 135 (2d Cir. 2016).
34 Id. at 152.
35 557 U.S. 137 (2009).
(b) Analysis of claims and counterclaims in
Saxum’s action
(1) Saxum’s claim 1: declaratory relief
In Saxum’s claim 1, Saxum seeks a declaration that (1) it owns the Glisan
AR, (2) Lennar is not entitled to a reduction of the AR for rejection damages,
(3) the sale order and APA, including the free-and-clear provision, bind
Lennar, and (4) Lennar has no right to any reduction in the AR for damages
related to Kirkland.
Because Saxum’s claim 1 requests declaratory relief, jurisdiction depends
on the hypothetical claim for coercive relief that would have existed in the
absence of a declaratory-judgment statute. The claim is framed as a rebuttal,
based on federal law, to a state-law defense that Lennar might assert against
a state-law claim by Saxum. So in the absence of a declaratory-judgment
statute, the coercive claim that would have been brought is a state-law
contract claim by Saxum. If Saxum had filed a state-law contract claim “but
also assert[ed] that federal law deprives [Lennar] of a defense [it] may raise,”
this court would lack jurisdiction.36
There is no arising-under jurisdiction over Saxum’s claim 1.
(2) Saxum’s claim 2: judgment on account
In Saxum’s claim 2, Saxum seeks a judgment on account for the Glisan
AR. This claim is the contract claim that is the coercive counterpart to
Saxum’s claim 1 for declaratory-judgment relief. As with Saxum’s claim 1,
36 Franchise Tax Bd., 463 U.S. at 10.
the only federal issue is Saxum’s argument that, in the words of Franchise
Tax Board, “federal law deprives the defendant of a defense he may raise.”37
The court lacks arising-under jurisdiction over Saxum’s claim 2.
(3) Saxum’s claim 3: quantum meruit
In Saxum’s claim 3, as an alternative to Saxum’s claim 2, Saxum seeks
damages for quantum meruit and unjust enrichment—purely state-law
theories.
The court lacks arising-under jurisdiction over Saxum’s claim 3.
(4) Lennar’s counterclaim 1: conversion
In Lennar’s counterclaim 1, Lennar seeks damages for conversion of
quartz for the Glisan project for which Lennar had paid.
Although the narration of this claim in Lennar’s answer refers to the
bankruptcy cases and the sale to Saxum, it does so only incidentally in
allegations not essential to the claim. The claim arises purely under state
law; it does not depend on bankruptcy law.
There is no arising-under jurisdiction over Lennar’s counterclaim 1.
(5) Lennar’s counterclaim 2: unjust
enrichment
In Lennar’s counterclaim 2, Lennar seeks judgment for unjust enrichment
on the same facts as the Lennar’s counterclaim 1. Lennar’s counterclaim 2 is
also a state-law claim.
There is no arising-under jurisdiction over Lennar’s counterclaim 2.
37 Id.
2. Lennar’s action
Both parties argue that there is arising-under jurisdiction over Lennar’s
action.
(a) Lennar’s general argument for arising-under
jurisdiction over its action
Lennar argues that the court has arising-under jurisdiction over Lennar’s
action because resolution of that action requires interpretation of the court’s
sale order. According to Lennar, interpretation of the sale order is necessary
to determine (1) whether Saxum bought from the trustee the quartz
materials that Lennar claims to own and (2) whether Saxum violated
paragraph 6 of the sale order and Washington State law by refusing to
cooperate with Lennar and provide it possession of the quartz.38
(b) Lennar’s claims against Saxum
(1) Lennar’s claim 1: Conversion
In Lennar’s claim 1, Lennar seeks damages for conversion of the Kirkland
quartz. This claim parallels Lennar’s counterclaim 1 in the Saxum action for
conversion of the Glisan quartz. Lennar’s claim 1 is pleaded as a pure state-
law claim. The complaint does not refer to bankruptcy law. The only
bankruptcy-law connection is a possible bankruptcy defense, which is not
even anticipated in this claim.
There is no arising-under jurisdiction over Lennar’s claim 1.
38 No. 20-03109 ECF No. 114 at 3.
(2) Lennar’s claim 2: Unfair business
practices under Revised Code of
Washington § 19.86.090
Lennar’s claim 2, based on the same allegations supporting claim 1, seeks
damages for violating Revised Code of Washington § 19.86.090, which creates
a civil action for damages for unfair business practices. There is no
corresponding Lennar counterclaim in Saxum’s action.
Lennar’s claim 2 does include the statement that “Saxum violated and
continues to violate 11 USC § 363(b) because it was not sold the LMB
[Lennar] Quartz Materials but claims publicly to have purchased them
despite the fact that LMB fully paid, in fact had overpaid, WTW [debtors] for
the materials.”39 But Lennar does not attempt to assert a claim under 363.
The relationship of the quoted statement to the Washington unfair-business-
practice claim is unclear. Regardless of the meaning of the reference to 363,
the claim is one under the state statute, not under 363 or any other provision
of bankruptcy law.
Lennar argues that its claim 2 arises under title 11, even though the
claim is expressly predicated on an identified Washington statute, because (it
says) an interpretation of 11 U.S.C. § 541, which defines estate property, is
essential to resolution of the claim. Lennar’s claim 2, Lennar reasons,
depends on the assertion that Saxum has wrongly asserted ownership of
property that, according to Lennar, Saxum did not actually acquire in the
39 No. 20-03109 ECF No. 71 at 11 ¶ 49.
sale. Because Saxum bought estate property, Lennar argues that reference to
541 is required to understand what Saxum bought and whether Saxum
committed the unfair business practice of which Lennar accuses it.
When a claim is grounded in state law, the claim can be said to arise
under federal law only if it raises a federal issue that is (among other things)
“actually disputed” and “substantial.”40 The supposed federal issue on which
Lennar relies—the need to refer to 541 to understand what Saxum bought—
is insufficiently substantial to transform Lennar’s explicitly state-law-based
unfair-business-practice claim into one claim arising under federal law. The
dispute over whether Saxum acquired the quartz materials does not turn on
541. There is no dispute that the bankruptcy estates included whatever
assets belonged to debtors before conversion and excluded any assets that did
not belong to debtors before bankruptcy. The point of contention is whether
debtors owned the Kirkland quartz materials, and resolution of that issue
does not turn on bankruptcy law.
The same is true of Lennar’s allegation in the complaint that Saxum
“violated” 363 by falsely claiming to have bought the quartz materials.
Lennar does not assert that 363 itself forbids Saxum from making those
statements. What Lennar appears to mean is that Saxum’s assertions are
wrongful because (according to Lennar) Saxum did not really buy the quartz
materials.
40 Gunn v. Minton, 568 U.S. 251, 258 (2013).
There is no actual and substantial dispute about 541 or 363 that can shed
any light on whether Saxum violated Washington’s unfair-business-practice
statute.
There is no arising-under jurisdiction over Lennar’s claim 2.
(3) Lennar’s claim 3: unjust enrichment
In Lennar’s claim 3, Lennar seeks damages for unjust enrichment based
on the facts supporting Lennar’s claim 1, conversion of the Kirkland quartz.
Lennar’s claim 3 parallels Lennar’s counterclaim 2 in Saxum’s action; that
claim is for unjust enrichment for conversion of the Glisan quartz. Lennar’s
claim 3 is solely a state-law claim and does not even anticipate a federal-law
defense.
There is no arising-under jurisdiction over Lennar’s claim 3.
(c) Saxum’s counterclaims against Lennar
(1) Saxum’s counterclaim 1: declaratory
relief
In Saxum’s counterclaim 1, Saxum seeks three declarations: (1) it owns
the Kirkland AR; (2) Lennar has no right to any reduction in the Kirkland AR
for rejection damages; and (3) Lennar has no right to any reduction in the
Kirkland AR for Saxum’s continued possession of the Kirkland quartz that is
the subject of Lennar’s conversion claim. This counterclaim parallels Saxum’s
claim 1 in its action; in that claim, Saxum seeks similar declarations about
the Glisan AR.
Like claim 1 in Saxum’s action, Saxum’s counterclaim 1 is a request for
declaratory relief based on federal-law arguments that are intended to rebut
defenses to what is ultimately a state-law claim.
There is no related-to jurisdiction over Saxum’s counterclaim 1.
(2) Saxum’s counterclaim 2: declaratory
relief
In Saxum’s counterclaim 2, Saxum seeks three declarations: (1) Lennar
did not pay in full for debtors’ Kirkland work and materials that Saxum
possesses, (2) any Kirkland material that existed in debtor’s possession at the
time of the sale to Saxum was estate property sold to Saxum, and (3) Saxum
has the right to possess the Kirkland materials in its possession free and
clear of any claim of Lennar.
Saxum’s counterclaim 2 is a request for declaratory judgment that Saxum
is entitled to remain in possession of the Kirkland materials that Saxum
possesses. The corresponding coercive claim is not hypothetical; it is the
actual claim for conversion that Lennar has asserted. It is a purely state-law
claim.
There is no arising-under jurisdiction over Saxum’s counterclaim 2.
(3) Saxum’s counterclaim 3: judgment on
account
In Saxum’s counterclaim 3, Saxum seeks judgment on account for the
entire Kirkland AR. This counterclaim parallels Saxum’s claim 2 in its action
for judgment on account for the Glisan AR.
There is no arising-under jurisdiction over Saxum’s counterclaim 3.
(4) Saxum’s counterclaim 4: quantum
meruit
In Saxum’s counterclaim 4, as an alternative to Saxum’s counterclaim 3,
Saxum seeks judgment for the Kirkland AR on theories of quantum meruit or
unjust enrichment. This counterclaim parallels Saxum’s claim 3 in its action,
where Saxum seeks an award of the Glisan AR.
There is no arising-under jurisdiction over Saxum’s counterclaim 4 in
Lennar’s action.
B. “Arising in . . . cases under title 11”
In Ray, the Ninth Circuit held that—
A proceeding “arises in” a case under the Bankruptcy Code if it
is an administrative matter unique to the bankruptcy process
that has no independent existence outside of bankruptcy and
could not be brought in another forum, but whose cause of action
is not expressly rooted in the Bankruptcy Code.41
Courts interpret “arising in” fairly strictly. It’s not enough that a
proceeding springs out of a transaction that happened to occur in a
bankruptcy case. Rather, the proceeding must be of such a nature that it
could not happen other than in a bankruptcy case. For example, in 2013, the
Ninth Circuit held in In re Wilshire Courtyard42 that there was no arising-in
jurisdiction over a dispute between nondebtors about the tax consequences of
a transaction—even though the transaction had been approved as part of a
41 Ray, 624 F.3d at 1131.
42 729 F.3d 1279 (9th Cir. 2013),
chapter 11 plan.43 “Had [the debtor] negotiated a similar deal with its
creditors outside of bankruptcy, the same dispute with [the taxing agency]
over whether to categorize the income as cancellation of debt income or
capital gains may have arisen.”44
Although the Wilshire court then found jurisdiction for a different
reason—which I address below—the decision illustrates the strictness with
which the “arising in” jurisdiction is construed. Even though the transaction
as to which the legal consequences were disputed had actually occurred in a
chapter 11 case, the fact that it could have occurred outside of bankruptcy
meant that there was no arising-in jurisdiction.
Another example is Ray, in which the debtor filed an action seeking to
determine the preclusive effect of a sale order on postbankruptcy litigation in
a state court. The state-court action was filed by a plaintiff that had held a
first-refusal right in property sold in the bankruptcy case. In state court, the
plaintiff argued that the debtor, the buyer, and others had violated the
plaintiff’s first-refusal right by failing to disclose one of the terms of the sale.
The state court “remanded” to the bankruptcy court the issue of whether the
sale order barred the claims asserted in the state-court action. The Ninth
Circuit concluded that the bankruptcy court had neither arising-in
jurisdiction nor any other jurisdiction. That’s because the state-court breach
43 Id. at 1286–87.
44 Id.
of contract claim did “not depend on an administrative matter unique to the
bankruptcy process that has no independent existence outside of the
bankruptcy court and could not be brought in another forum.”45
Although on a broader reading of “arising in” the claims in Saxum’s and
Lennar’s actions probably could be said to have arisen in the bankruptcy
cases, they do not satisfy the narrow test that the Ninth Circuit has adopted.
The claims literally “arose” in the bankruptcy cases in that Saxum bought the
claims that it now asserts from the estates. But they are not claims that, by
their nature, could only exist in a bankruptcy case. As in Ray and Wilshire,
Saxum’s purchase could equally have occurred outside of bankruptcy. It’s
true that some of the disputed issues in these actions—including Saxum’s
contention that that free-and-clear-sale and no-successor-liability provisions
limit Lennar’s ability to defend against Saxum’s claims—are connected to the
bankruptcy-specific nature of a bankruptcy sale. But that was equally true in
Ray, where the bankruptcy court’s sale order was said to bar the plaintiff’s
claims, yet the Ninth Circuit found no arising-under jurisdiction there.
There is no arising-in jurisdiction over the claims or counterclaims in
these actions.
C. “Related to a case under title 11”
The test for related-to jurisdiction (other than over litigation after plan
confirmation, which is not at issue here) is whether a proceeding could
45 Ray, 624 F.3d at 1131.
“conceivably have any effect on the estate being administered in
bankruptcy.”46
Saxum argues that there is related-to jurisdiction over both actions.
Lennar argues that there is no related-to jurisdiction over Saxum’s action.47
Lennar concedes that there is no related-to jurisdiction over its action.48
1. Parties’ arguments for and against related-to
jurisdiction
(a) Saxum’s arguments for related-to jurisdiction
over its action
Saxum argues that “any ruling in [Saxum’s action] on setoff and
recoupment will affect [Lennar’s] general unsecured claim and therefore
affect the amount of distributions to all unsecured creditors.”49
The recoupment to which Saxum refers was raised by Lennar as an
affirmative defense. Lennar wants to recoup from any amount it owes Saxum
“overpayments [Lennar made] to [debtors]” and “any [other] rights and
affirmative defenses [Lennar] has against [debtors] (now [Saxum]) based
upon” Lennar’s performance of both the Glisan and Kirkland subcontract
agreements.50 Lennar does not quantify any overpayment. Lennar also refers
to its “rights to setoff,” although not in a separate affirmative defense.51
46 Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984) (quoted in In re
Pegasus Gold Corp., 394 F.3d 1189, 1193 (9th Cir. 2005)).
47 No. 20-03085 ECF No. 98 at 7:20–22.
48 No. 20-03109 ECF No. 113 at 7.
49 No. 20-03085 ECF No. 94 at 10:1–4.
50 No. 20-03085 ECF No. 62 at 5 ¶ 23.
51 No. 20-03085 ECF No. 62 at 3:11–12.
Lennar has the general unsecured claim to which Saxum refers because
Lennar filed a proof of claim for $1,385,000.52 Saxum has described that proof
of claim as being both “for what appears to be ‘Balance To Finish’
cover/rejection damages”53 and “for rejection damages associated with the
Glisan Apartments Project and the Kirkland Apartments Project,” without
quantifying the amounts attributable to each project.54
Implicitly, Saxum argues that, if Lennar prevails in Saxum’s action, even
in part, the result could be a recovery by Lennar from Saxum, either directly
from Saxum or by setoff or recoupment against the amount Lennar otherwise
owes Saxum, requiring Lennar to credit the recovery against the amount of
the proof of claim.
(b) Lennar’s arguments against related-to
jurisdiction over Saxum’s action
Lennar argues that “any setoff or recoupment rights would only diminish
the alleged amount owed to” Saxum.55
In Lennar’s opening brief on jurisdiction, it also says that “it is clear from
the record in the main case that the chapter 7 trustee does not expect to
make distributions to general unsecured creditors.”56 Lennar cites the
52 No. 19-032600 proof of claim 47-1.
53 No. 20-03085 ECF No. 10 at 6:24–26, referring to part 4, page 32, or PDF
p. 270, of the proof of claim.
54 No. 20-03085 ECF No. 94 at 9:28 – 10:2.
55 No. 20-03085 ECF No. 98 at 7:20–21.
56 No. 20-03085 ECF No. 96 at 6 n.2; see also No. 20-03085 ECF No. 98
at 7:17–18.
trustee’s first interim report filed on March 8, 2022, where the trustee said
that “it is extremely unlikely that there would be funds to pay even priority
claims of trade creditors.”57 Saxum’s reply brief did not address the likelihood
that the trustee will make any distributions to general unsecured creditors.
Since the briefing closed, the trustee filed a second interim report on June 22,
2023, repeating the “extremely unlike” statement from the first report.58
(c) Saxum’s argument for related-to jurisdiction
over Lennar’s action
Saxum argues that there is related-to jurisdiction over Lennar’s action
because Lennar’s proof of claim is based, in part, on the amount that Lennar
claims to be owed by debtors for “the same quartz materials it is claiming
Saxum converted.”59 Saxum also contends that Lennar’s claim “will be
directly affected by the outcome of its conversion claim against Saxum.”60
Saxum has characterized Lennar’s proof of claim several ways in Lennar’s
action, some of which overlap how Saxum characterized the claim in Saxum’s
action, as described in part III.C.1(a) above. In Saxum’s notice of removal, it
characterized the proof of claim as being partially based on “the partial pre-
petition material deposit it had paid [debtors] for $109,035.15.”61 In Saxum’s
opposition to Lennar’s motion to remand, Saxum characterized the proof of
57 No. 19-32600 ECF No. 482 ¶ 6.
58 No. 19-32600 ECF No. 552 ¶ 6.
59 No. 20-03109 ECF No. 111 at 7:18–19.
60 No. 20-03109 ECF No. 111 at 7:20–22.
61 No. 20-03109 ECF No. 1 at 2: 9–11.
claim as being “for the cost of the raw materials it is claiming Saxum
converted.”62 In Saxum’s opposition to Lennar’s October 2020 motion to
dismiss for lack of jurisdiction, Saxum characterized the proof of claim as
“including a claim for ‘Balance to Finish’ cover/rejection damages.”63
The conversion claim to which Saxum refers is Lennar’s first claim for
relief in its action against Saxum, which seeks damages for conversion of the
remaining Kirkland quartz materials.64
Implicitly, Saxum argues that, if Lennar prevails in Lennar’s action, even
in part, the result could be a recovery by Lennar from Saxum, either directly
from Saxum or by setoff or recoupment against the amount Lennar otherwise
owes Saxum, requiring Lennar to credit the recovery against the amount of
the proof of claim.
2. Analysis of related-to jurisdiction
It’s unclear from the face of Lennar’s proof of claim that it has anything to
do with the conversion claim. The proof of claim refers only to a contract
claim, although it’s possible that there is some relationship.
Even if Lennar’s claim were based on debtors’ alleged conversion of the
quartz materials, I cannot conclude that the disposition of the conversion
claim against Saxum would affect the disposition of Lennar’s claim against
the estate. The conversion claim against Saxum is based on Lennar’s
62 No. 20-03109 ECF No. 5 at 1:23–25.
63 No. 20-03109 ECF No. 6 at 2:7–10.
64 No. 20-03109 ECF No. 71 at 10 ¶¶ 41-45.
allegation that Saxum retained possession of quartz materials that belonged
to Lennar—and did so after the bankruptcy sale. Assuming that Lennar has
asserted a conversion claim against the debtor, it could only possibly relate to
debtors’ possession of the quartz materials before the petition date. So the
claims, although similar, do not overlap, and the resolution of the claim
against Saxum could not affect Lennar’s claim against the estates.
Even if resolution of claims by and against Lennar could affect the
allowed amount of its claim, the record gives me no reason to expect that any
change would affect distributions to other general unsecured creditors. As the
party asserting the existence of jurisdiction, Saxum has the burden of
demonstrating the factual basis for jurisdiction. Saxum has not given me no
reason to disagree with the trustee’s forecast that distributions even to
priority trade creditors are “extremely unlikely.” In the absence of expected
distributions to general unsecured creditors, any change in the amount of
Lennar’s claim cannot affect estate administration, which removes the
factual basis for related-to jurisdiction.
IV. Conclusion
I will dismiss the claims and counterclaims in both actions.
I acknowledge that my decision differs from the October 2020 decisions
finding bankruptcy jurisdiction by the Washington bankruptcy judge in
Lennar’s action and by me in Saxum’s action. I have a continuing duty to
satisfy myself that the court has jurisdiction over an action, and this
memorandum reflects what I now understand to be a correct application of
the law.
In accordance with Federal Rule of Civil Procedure (Civil Rule) 15(a)(2), I
will grant both parties leave to file amended complaints within 14 days after
entry of the dismissal order. If Saxum does not timely file an amended
complaint, I will enter judgment dismissing its action, including Lennar’s
counterclaims. If Lennar does not timely file an amended complaint, I will
remand its action.
Under Civil Rule 15(a)(3), an answer to any timely filed amended
complaint will due 14 days after service of the amended complaint. In
accordance with Civil Rule 12(a)(1)(B), I will shorten the deadline to answer
any counterclaim to 14 days after service of the counterclaim.
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