A debtor operated a boat-sharing business that ultimately went bankrupt. Beforehand, some creditors had loaned the debtor upwards of $2.9 million, with the debtor using the boats as collateral. At that time, the debtor promised the creditors that it would obtain a proper loan from a bank and pay the creditors back using the loan from the bank. The debtor received $3.9 million from the bank, and also used the boats as collateral for that loan. However, when the debtor received the money from the bank, it failed to pay off the creditors. The creditors brought a suit against the debtor, which was stayed when the debtor filed a Chapter 11 bankruptcy case. In the bankruptcy proceedings, the bank transferred its interest in the boats to a revocable trust. Ultimately, the bankruptcy proceedings resulted in a plan that included a settlement, and an asset purchase agreement. Under the plan, the trust would purchase all the debtor’s assets, and as a condition of that purchase, any claims of the debtor or the creditors would be released against the trust and the bank. The debtor and the creditors agreed to this settlement. However, the original secured creditors then brought a third-party claim against the trust in an attempt to recover the collateral. This claim included three causes of action: (1) an avoidance action under the Utah Uniform Voidable Transactions Act (“Avoidance Action”); (2) a declaratory judgment action regarding the creditor’s interest in the boats (“Declaratory Judgment Action”); and (3) a negligence claim against the bank (“Negligence Action”).
In Inland Boat Club, LLC v. Lee (In re Inland Boat Club, LLC), No. 22-21879, 2024 WL 1337044, 2024 Bankr. LEXIS 769 (Bankr. Utah Mar. 28, 2024) (opinion not yet released for publication), the court dismissed both the Avoidance Action and Declaratory Judgment Action with prejudice and dismissed the Negligence Action without prejudice. In beginning its analysis, the bankruptcy court first considered whether it has subject matter jurisdiction to review the causes of action. A bankruptcy court will have jurisdiction over proceedings that “arise under,” “arise in,” or are “related to” a bankruptcy proceeding. Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995). The court determined that both the Avoidance Action and the Declaratory Judgment Action “arise under” the bankruptcy code because they both involve interpretation of the settlement plan, asset purchase agreement, and the confirmation order. In addition, the bankruptcy court has subject matter jurisdiction over its own rulings in a bankruptcy case. However, the court determined it does not have jurisdiction over the negligence claim because the cause of action was not “created by the bankruptcy code,” but rather it involved “a dispute that existed outside of the [d]ebtor’s bankruptcy case,” and will not impact the debtor’s bankruptcy case. Next, the court analyzed the Avoidance Action and Declaratory Judgment Action. It reasoned that both actions should be dismissed because the creditors and the debtor released all claims against the bank and trust as part of the settlement agreement. Thus, the first two causes of action were dismissed due to the settlement agreement, and the third is dismissed without prejudice for lack of proper jurisdiction.
By Maycee Redfearn: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]