Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Karl Johnson, Hellmuth & Johnson, PLLC
BAP__Ay_McDonald_Industries__Inc__v__McDonald.pdf
In AY McDonald Industries, Inc. v. McDonald (In re McDonald), 590 B.R. 506 (B.A.P. 8th Cir. 2018)The BAP vacated the bankruptcy court’s order denying plaintiff’s claims for injunctive relief and declaratory judgment and remanded with instructions to dismiss the same because the bankruptcy court lacked both “arising in” and “related to” jurisdiction.
The debtor entered into a prepetition restitution agreement with the plaintiff under which the debtor granted the plaintiff power of attorney to collect distributions the debtor had been receiving from two spendthrift trusts and use the funds toward the restitution. Under the restitution agreement, the plaintiff agreed to cease collection activities as long as the debtor was in compliance with the agreement.
On the same day he filed his voluntary petition under chapter 7, the debtor executed a revocation of the power of attorney. The plaintiff filed a complaint to commence an adversary proceeding under §§ 523(a)(4) and (a)(6) and also sought injunctive and declaratory relief asking the bankruptcy court to declare the power of attorney irrevocable and enjoin the debtor from attempting to revoke the power of attorney in the future. The bankruptcy court excepted the restitution claim from the debtor’s discharge under § 523(a)(4), but denied injunctive and declaratory relief on a theory that the proper remedy was a release of the obligation to cease collection activities.
When the plaintiff appealed the denial of declaratory and injunctive relief, the BAP sua sponte examined the jurisdiction of both the bankruptcy court and the BAP. The claims relating to the power of attorney clearly did not arise under title 11 or in a case under title 11 because the claims were neither created nor determined under statutory provisions of title 11 and the claims would exist outside of the bankruptcy case.
The BAP restated that “related to” jurisdiction is determined using a “conceivable effect” test. Because the outcome of the claims for injunctive and declaratory relief could have no conceivable effect on the debtor or the bankruptcy estate and because the claims concerned distributions from spendthrift trusts, which are not property of the estate, the bankruptcy court lacked “related to” jurisdiction.
Finally, the BAP determined that because the bankruptcy court lacked subject matter jurisdiction, the BAP had no jurisdiction over the merits and was limited to correcting the lower court’s error in even entertaining the claim. Therefore, the BAP vacated the denial and remanded with instructions to dismiss the claims.