Opinion
Bankruptcy Case No. 05-60002, Adversary No. 06-1026 (Consolidated with Adversary Proceeding No. 06-1023).
December 12, 2007
James N. Lawlor, Esquire, Wollmuth Maher Deutsch LLP, Newark, New Jersey, Attorney for KI Liquidating Trust, Successor-in-Interest to KI Liquidation, Inc. f/k/a Kullman Industries, Inc.
Adam J. Sklar, Esquire, Cole, Schotz, Meisel, Forman Leonard, P.A., Court Plaza North, Hackensack, New Jersey, Attorney for Robert Kullman.
Joel Glucksman, Esquire, Scarinci Hollenbeck, LLC, Lyndhurst, New Jersey, Attorney for Interchange Bank.
Steven R. Weinstein, Esquire, Becker Meisel LLC Eisenhower Plaza II, Livingston, New Jersey, Attorney for Coronation Sheet Metal Co., Inc.
Michael Stafford, Esquire, Nord DeMaio, Turnpike Metroplex, East Brunswick, New Jersey, Attorney for Cooper Electric Supply Co. And Turtle Hughes, Inc.
MEMORANDUM OPINION
Coronation Sheet Metal, Inc. ("Coronation"), Cooper Electric Supply Co. ("Cooper"), and Turtle Hughes, Inc. ("Turtle") (collectively, "Plaintiffs"), filed these motions for summary judgment on their complaint against KI Liquidation, Inc. ("KI"), Robert Kullman ("Mr. Kullman"), and Interchange Bank ("Interchange" or "the Bank") (collectively, "Defendants"). The Defendants filed opposition and cross motions for summary judgment, in some instances seeking dismissal. The court took oral argument on October 15, 2007 and reserved decision.
This adversary proceeding is the result of the consolidation of two proceedings. Coronation and York filed the first complaint seeking a declaratory judgment against the Defendants. The complaint asserted that the Plaintiffs retain a superior interest in certain prepetition funds received by Debtor, that such funds were never the property of the estate, and that any security interest or liens asserted by Interchange in those funds were invalid and unperfected in whole or in part. Cooper and Turtle filed a complaint against the same defendants making the same allegations. After filing the complaint, York was acquired by another company that chose not to pursue the complaint and voluntarily dismissed. The consolidated complaints implicate factually and legally complex construction litigation issues.
FACTUAL BACKGROUND
In December 2001, the State Department ("Government" or "United States") awarded KI Phase I of a project to build a United State Embassy in Tajikistan (the "Project" or "Contract"). The contract called for payment of $1,040,520, payable in installments tied to certain performance benchmarks, involving surveys, initial design, cost estimates, and scheduling. Pursuant to the agreement between KI and the State Department, KI was required to submit with each progress report a FAR clause 52.232-5 and a Section G.5 Contract Clause. The clauses certified (among other things) that KI had made payments to subcontractors and suppliers from previous payment received under the contract and that timely payments would be continued to be made. The court can take judicial notice that these requirements are fairly common in government construction contracts. Less common is that prior to the commencement of the Contract, the Government agreed to waive the "bonding requirements" typically put in place to ensure payment and performance. KI next submitted a proposal for Phase II of the project. In May 2003, the State Department awarded Phase II of the contract to KI for $62.7 million. Also, in 2003, Coronation entered into three contracts with KI involving the fabrication and installation of HVAC ductwork in Tajikistan. Although Cooper and Turtle did not submit a Statement of Facts with their briefs, the records show that they entered into agreements with KI at about the same time.
After commencing work on the Project, KI realized that the soil on the site was inadequate for the construction of buildings contemplated. KI claims that it notified the State Department of additional costs required to remediate the ground conditions. KI did begin work on the Project, but there is some dispute as to how or whether the issue of the additional costs was resolved. KI claims that it spent at least $55,651,660 in out-of-pocket costs plus un-reimbursed overhead of approximately $12 million. KI also alleges that the Government first opposed KI's equitable adjustment for the work on the ground after 94% of the project was complete and after KI and its subcontractors had already completed the remediation work. According to KI, it was then that the Government terminated the contract and withheld more than $2 million due to KI. KI maintains that it used all its proceeds from the Project for costs associated with the Project. However, KI was unable to pay all of it subcontractors and suppliers when it was not paid fully by the State Department. The Government stopped paying KI on the contract after June 2005. The two parties are now in litigation in the Federal Court of Claims.
From December 2004 to June 2005, KI made requests totaling $5,138,877 and received from the Government $5,002,456. This shortfall created the crisis that led to KI's bankruptcy filing.
Until December of 2004, Coronation's monthly receipts show that KI paid Coronation in full as amounts became due. According to Coronation, KI historically made these payments within 30 to 45 days after KI received payment from the Government. In December 2004, Coronation stopped receiving full payments. It claims it received only 65% of the invoice amount for December 2004 and 23% of the invoice amount for January 2005. Coronation alleges that it has not been paid for the work done from February 2005 through June 2005. Coronation billed KI $778,000 for that time period. KI ordered all subcontractors off the embassy site on June 14, 2005, three days before the Government sent a letter to KI terminating the contract. Coronation believes that KI billed the Government for all of the work performed by Coronation on the Project until KI was terminated but KI did not pass the appropriate funds onto Coronation. Coronation points to KI's billing records and KI's invoices to the Government. It also relies on KI's statement to the Government that the relevant work was entirely complete by May 31, 2004. The Government paid KI based on progress reports it received in December 4, 2003, December 8, 2003, January 13, 2004, February 10, 2004, March 9, 2004, May 18, 2004, June 10, 2004, June 29, 2004, and March 29, 2005. It asserts that KI utilized funds that should have been passed through to subcontractors because the funds were given to KI to hold in a constructive trust.
Coronation further asserts that Robert Kullman is liable because he was intimately involved in the entire decision-making process. Mr. Kullman replies that he only became an active participant after other officers and managers were unable to solve the monetary crisis caused by termination of the Project. As a general rule, he claims he oversaw the operation of the entire company but was not involved in the daily operations of KI's individual business units. Mr. Kullman was personally liable on the three Bank loans made by Interchange Bank to KI. In total, Interchange Bank lent $5.3 million to KI. Interchange approved term loans in the amount of $3.5 million and $300,000.00 and also provided KI with a $1.5 million line of credit. The loans and line of credit were secured by the assets of KI. In addition, two of Mr. Kullman's wholly owned companies, Kullman Associates, Inc. and CTS Capital Corp., served as guarantors of the loans. The Bank issued a notice of default on October 6, 2005. Coronation alleges that the Bank knew and had access to information showing that Coronation and other subcontractors from the Project had not been paid. Coronation also states that the Bank did not consider any other creditor of KI when it swept KI accounts at the Bank taking approximately $1.3 million. It does not cite the basis for any such duty. According to the Bank's records, at the time it disbursed funds to Mr. Kullman, he had a net worth of $16,794,000, had an income of $4,711,000, of which $505,000 were wages. However, the Bank has never issued a formal release of Mr. Kullman from his liabilities. Robert Kullman points to the fact that the Bankruptcy court approved termination of the Interchange loans Mr. Kullman also certifies that he had no knowledge that the Bank would sweep the accounts while they were still in the midst of workout discussions.
Coronation charges that Mr. Kullman used the funds that should have been rightfully paid to Coronation to pay down the Bank loans instead and that the Bank accepted the funds knowing that others had a superior claim to the funds. Coronation claims that of the funds KI paid to other entities, $778,000 did not belong to KI, but was held in trust for Coronation for the work it did on the embassy project. Coronation makes three primary arguments based on what it claims are undisputed facts. First, it claims that payments received by KI from the Government on account of the work performed by Coronation on the Tajikistan Project are subject to a constructive or equitable trust. Coronation also charges Robert Kullman as being personally liable for the breach of the Trust. Finally, Coronation alleges that Interchange Bank took funds that it knew belonged to subcontractors on the Project for itself and must now disgorge the funds to Coronation.
Cooper and Turtle join Coronation's motion and also move for a partial summary judgment against the Defendants pursuant to Bankruptcy Code § 105(a), Rule 7056 of Bankruptcy Procedure, and Local Bankruptcy Rule 9013-1, alleging that Plaintiffs are beneficiaries of the Trust Funds and that Defendants are liable to Plaintiffs for all such Trust Funds that Defendants acquired, misappropriated, and wrongfully retained. Cooper's motion for summary judgment differs from that of Coronation's in that it does not set forth a separate allegation against Mr. Kullman. Thus, Cooper is not seeking summary judgment against Mr. Kullman, but is seeking summary judgment against Interchange Bank and KI.
KI has filed a cross motion for summary judgement motion in response to Plaintiffs' motions. KI argues that Coronation has no claim against the estate and as such, the dispute is between two non-debtors and does not belong in this Court. It does not make the same argument for Cooper but submits that the undisputed facts preclude both Coronation and Cooper from proving the existence of a trust in favor of the subcontractors and their suppliers. Robert Kullman has filed a motion for summary judgment claiming that there are no facts that allow the conclusion that the funds paid by the Government to KI constituted a trust fund. Kullman further argues that even if a trust existed, there was no breach of that trust. Lastly, Kullman argues that even if the trust existed and it was breached, Robert Kullman still cannot be held personally liable on such a breach. Interchange also responds to Coronation's charges by arguing that Plaintiffs cannot prove the existence of a trust relationship under New Jersey law. Further, the Bank alleges that even pursuant to federal common law, no trust relationship exists. Finally, the Bank argues that even if the Plaintiffs could establish a trust relationship, Plaintiffs cannot prevail because they cannot trace the funds that Plaintiffs claim were held in trust.
SUMMARY JUDGMENT STANDARDS
The relief sought in both the motion and cross motions is for summary judgment. The standards on such motions are well established. "[S]ummary judgment is appropriate only when there is no genuine issue of material fact and when the moving party is entitled to judgment as a matter of law." Fed.R.Civ.Pro. 56(C). The party moving for summary judgment has the burden of establishing the nonexistence of any "genuine issues of material fact." Celotex Corp. v. Catrett, 477 U.S. 317 (1986). Summary judgment should not be granted if a reasonable jury based on that evidence could return a verdict for the nonmoving party. In re CitX Corp., Inc., 448 F.3d 672 (3d Cir. 2006); Tran v. Metropolitan Life Ins. Co., 408 F.3d 130, 135 (3d Cir. 2005). Whenever there is even the "slightest doubt regarding the facts of a case, summary judgment should not be granted." Tomalewski v. State Farm Life Ins, Co., 494 F.2d 882, 884 (3d Cir. 1984).
While the moving party bears the burden of proving that there is no issue of material fact, once shown, that burden switches to the nonmoving party. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). Where the nonmoving party bears the ultimate burden of persuasion on a dispositive issue at trial, the nonmoving party must `go beyond the pleadings' and, by way of affidavits, depositions, answers to interrogatories, or admissions on file "designate specific facts showing that there is a genuine issue for trial." Celotex, 477 U.S. at 323. The evidence that the nonmoving party produces to show the existence of a genuine issue must be of sufficient quantum and quality to allow a rational and fair-minded fact finder to return a verdict in favor of the non-movant, bearing in mind the applicable standard of proof that would apply at trial on the merits. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). A dispute of fact exists when a reasonable jury could find for the nonmoving party. Id. at 248-49. Facts that could alter the outcome are material and disputes are genuine if evidence exists from which a rational person could conclude that the position of the person with the burden of proof on the disputed issue is correct. Horowitz v. Federal Kemper Life Assurance Co., 57 F.3d 300, 302 n. 1 (Fed. Cir. 1995).
These standards apply to each of the motions presently before the court.
Coronation's Motion/Interchange Banks Cross Motion for Summary Judgment
Coronation seeks summary judgment against Interchange Bank on the theory that the Government made payments to Kullman Industries in reliance upon Kullman Industries's representation that it was paying its subcontractors and that Kullman was therefore holding those funds in a constructive or equitable trust for the benefit of the subcontractors. Coronation relies onUniversal Bonding Insurance Company v. Gittens and Sprinkle Enterprises, Inc., 960 F.2d 366 (3d Cir. 1992) and an analogy to the New Jersey Trust Fund Act, N.J.S A. 2A:44-148.
"In order to establish such a right as trust beneficiary, a claimant must make two showings: first, the claimant must prove the existence and legal source of a trust relationship; second, the claimant must identify the trust fund or property and, where the trust fund has been commingled with general property of the bankrupt, sufficiently trace the property or funds-the res."Conn. Gen. Life Ins. Co. v. Universal Ins. Co., 838 F.2d 612, 618 (1st Cir 1988). It is the responsibility of the party asserting the existence of a trust to establish each of the requisite elements. Columbia Gas Syst Inc., 997 F.2d 1039, 1063 (3d Cir. 1993) cert. den. 510 U.S. 1110 (1994). The first element is evaluated pursuant to state law while the second, pursuant to federal law. Id. Therefore, New Jersey law governs whether a trust was established between KI and the Plaintiffs.
New Jersey law mandates that Courts identifying a trust must find a "wrongful act" and that the recipient will be "unjustly enriched" if the property is not returned. Thompson v. City of Atlantic, 901 A.2d 428, 438 (N.J.Super. App. Div. 2006) ("A constructive trust is a remedial device through which the `conscience of equity' is expressed . . . In imposing a constructive trust, a court must find that a `wrongful act' caused the property to come into the hands of the recipient and that the recipient will be `unjustly enriched' if it is not returned."). The undisputed facts do not persuade the Court the Defendants engaged in wrongful conduct. Coronation argues that Mr. Kullman and KI acted wrongfully when they allowed monies to be paid to sources other than subcontractors on the Project. Coronation acknowledges that Kullman Industries placed the funds into KI's general operating account. Coronation has not pointed to any contractual or statutory provision that precluded KI from paying its general operating expenses from its general operating funds. Thus, payment of operating expenses other than subcontractor expenses cannot be held as a "wrongful act." There must be some act other than the use of the monies in the disputed trust to qualify as the predicate wrongful act. Id. It is neither unusual nor wrongful that Mr. Kullman paid some vendors and not others in keeping his business alive.
Even more tellingly, Coronation presents no evidence that the funds they claim were held in trust were segregated or traceable. In order for Coronation to succeed, it must also show that the trust funds are clearly traceable and identifiable, especially in the case of commingled funds. Id. When commingling funds prevents tracing the trust funds, "[the] lowest intermediate balance test," is used. In re Columbia Gas Systems Inc., 997 F.2d at 1054. "This principle assumes that money held in trust is withdrawn last from a commingled account. Once trust money is withdrawn, however, it is not replenished by subsequent deposits. Therefore, a beneficiary is entitled only to the lowest intermediate cash balance in a commingled account." Id. The problem for Coronation here is that KI deposited the payment it received from the Government for the Project into accounts other than those at Interchange. Monies were then transferred to Interchange and the funds transferred varied in amount from the deposits made by KI in the other banks after receiving payment from the Project. While Interchange was sweeping Debtor's Bank accounts during the last months prior to KI filing for bankruptcy, KI was still writing checks to other vendors. Further, there were additional deposits to KI's accounts at Interchange for large sums of money that had nothing to do with the Project. All this makes it essentially impossible to trace the Project funds. When added to the fact that Interchange's monthly sweep of the accounts brought the balance to zero, under the lowest intermediate balance test, the maximum amount of the funds held in trust is zero.
Coronation cites to the case Universal Bonding. Universal Bonding, a surety company attempted to retrieve funds that it believed it was entitled to based on being bond provider. Ultimately, the Universal Bonding court found in favor of Universal Bonding because the funds held by the State were placed in a constructive trust for an entity with a titled interest, i.e. a surety. Critically, the undisputed facts do not even suggest that Coronation enjoyed surety status.
Since under the undisputed facts Coronation cannot establish that Kullman Industries held the disputed funds in trust; Because it cannot establish a wrongful predicate act, traceable funds, or a superior interest in the funds, summary judgment must be granted in favor of Interchange Bank on all counts directly or indirectly dependent on a trust theory. That includes Counts Two, Three, Four, Five, Six and Seven of the Amended Complaint.
Coronation Motion for Summary Judgment Against Robert Kullman
Coronation charges that Robert Kullman owed Coronation a fiduciary duty to assure that the monies KI received from the Project were paid to those subcontractors on the Project. Coronation contends that Mr. Kullman breached his trust obligation with regards to the funds KI received for the work Coronation did on the Project.
In bankruptcy, a debtor-creditor relationship, without more, is generally not considered a fiduciary relationship. Goldberg v. New Jersey Lawyers' Fund for Client Protection, 932 F.2d 273, 278 (3d Cir. 1991). "[T]he definition of `fiduciary' for purposes of discharge [must] be narrowly construed to preclude `commercial debtor-creditor transactions in which the debtor merely violated the terms of his agreement with the creditor[.]'" Id. (citing In re Gans, 75 B.R. 474, 489 (Bankr. S.D.N.Y. 1987). "[T]he general meaning of fiduciary as a person representing confidence, trust, and good faith is "far too broad for the purposes of bankruptcy law." Id. (citing In re Rausch, 49 B.R. 562, 564 (Bankr. D.N.J. 1985). "A trust is defined in Restatement (Second) of Trusts § 2 (1959) as: [A] fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it." In re Penn Central Transp. Co., 486 F.2d 519, 524 (3d Cir. 1973).
Mr. Kullman did not have a fiduciary duty to the subcontractors on the Project. KI's relationship with Coronation was that of debtor-creditor while Mr. Kullman merely was an officer. Coronation cites to Reliance Insurance Co. v. Lott Group, Inc., 370 N.J. Super. 563 (App.Div.), cert. denied, 182 N.J. 149 (2004), to establish that Mr. Kullman breached his trust obligation. Yet the court has already concluded that there was no trust. Since there was no trust created, Mr. Kullman did not breach any trust obligations. The facts before this court differ from those inReliance in few but significant ways. First, that case, like the cases above, involved a surety, and the surety issued both payment and performance bonds on behalf of the general contractor. In addition, the case involved the surety filing suit against the general contractor and a consultant who had been hired by the general contractor to help with the growing financial difficulties. More importantly, even in Reliance, the Court acknowledged that "once funds had intermingled in the account, they had lost their trust character." Reliance, 370 N.J. at 574. Finally, the Court in Reliance held the consultant accountable for breach of a trust obligation because the funds in that case were purely from public works. The account in question was not a general bank account and the funds diverted from it were done so with an intention to avoid paying the sub-contractors. There is no evidence of such intention here, only that Coronation was paying whatever it had to pay to continue its operation. Coronation has not shown why Mr. Kullman as an individual had any special duty or should be held liable. Accordingly, summary judgment will be granted in favor of Robert Kullman on Count Eight of the Amended Complaint.
Cooper Electric and Turtle Hughes' Motion for Summary Judgment
Cooper and Turtle argue in their papers that they are trust fund beneficiaries and additionally, the Defendants (KI, Mr. Kullman, and Interchange) are responsible for misappropriating funds that were supposed to be paid to the Plaintiffs. At oral argument, Cooper and Turtle emphasized that their argument that a trust had been created hinged on the fact that this was a public job. Additionally, they argued that the lowest intermediate balance test was not a mandatory test and should not be applied.
Cooper points to two clauses (Federal Acquisition Regulation ["FAR"] and Contract clause) in the agreement between KI and the Government mandating that KI pay its subcontractors and suppliers every time KI received a payment under the contract. The clauses also provided that KI must make timely payments to it subcontractors. KI responds by arguing that the subcontractors had waived bonding requirements (performance and payment bonds) in their agreement with KI since the subcontracts and purchase orders were expressly subject to the terms of the Tajikistan Contract. In addition, outside of the waivers in the contract, a letter from John Lefkus of Kullman Industries to Ralph Sutherland of the Department of State shows that after final negotiations, performance and payment bonds for the contract were waived. (Cooper Brief Ex. A.)
The Miller Act requires a general contractor on a federal project exceeding $100,000 to post a performance bond and a labor and material payment bond. 40 U.S.C.A. § 3131 (2002). The FAR (which implements the Prompt Payment Act) provides an alternative to payment bonds for contracts over $25,000 and less than $100,000. Id. at § 3132. The Miller Act also provides that these bonds may be waived "for work under a contract that is to be performed in a foreign country if the officer finds that it is impracticable for the contractor to furnish the bonds." Id. at § 3131. The work to be performed under this Contract was indisputably in a foreign country. Cooper and Turtle cannot, as they do in their argument, rely on FAR because the amount of the contract between KI and the suppliers was a combined value of $583,000. Plaintiffs admit that they did not review the contracts to ascertain whether the FAR requirements had been waived. Cooper and Turtle also admit to having worked with KI on past projects where bonding requirements have been waived. As a result, KI points out correctly that such waivers were "the undisputed course of conduct" among the parties. (KI Brief pg 23.) Therefore, the Court cannot find that Cooper and Turtle are due any payment under these statutes.
Cooper and Turtle also rely on case law, primarily on Universal Bonding and Reliance, to establish that a trust obligation was imposed on KI and that the account at Interchange was a trust. They argue that even though those cases deal with sureties, a surety has the same rights that a subcontractor does. Therefore, they argue, a surety can only acquire what rights a sub-contractor or in this case, a supplier already possesses. Again, the facts of Universal Bonding and Reliance differ from the facts in this case. In Reliance, the surety specifically issued payment and performance bonds on behalf of the general contractor. A surety acquires the rights it does only because it covers the financial obligation of the general contractor and therefore, then has the right to recover from the general contractor. A surety has the right to recover from a general contractor because of the contract entered into by the two parties, and not because the surety stands in the shoes of the sub-contractor.
In Reliance, the Court found a consultant hired by the general contractor to be in violation of the New Jersey Construction Trust Fund Act because the consultant knowingly and purposely diverted funds received solely from the public works project into another account. These funds never mixed with other monies and even then, the Court did not hold the Bank that swept those accounts in breach of a trust obligation. While a Bank may be held liable to trust beneficiaries if it participated in diverting funds, there is no evidence that Interchange did anything of that sort. Additionally, there is no indication that KI or Mr. Kullman did anything other than pay vendors as it could to keep KI alive. As with Coronation, the undisputed facts relating to Cooper and Turtles fall well short of the elements required to establish a trust. Summary judgment must be denied as to all counts directly or indirectly dependent on the trust theory, again Counts Two, Three, Four, Five, Six and Seven of the Amended Complaint.
KI Motion for Summary Judgment or Dismissal
KI presents as a threshold argument that the court should dismiss the complaint because the court lacks jurisdiction. KI notes that Coronation is not seeking remunerative relief against KI, only the turnover of books and records. Therefore, it claims the resolution of what is essentially a dispute between two non-debtors can have no impact on the estate.
"Federal bankruptcy jurisdiction is defined by 28 U.S.C. § 1334. Section 1334(b) confers upon the district courts `original and exclusive jurisdiction of all cases under title 11,' and `original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.'" In re Combustion Eng'g Inc., 391 F.3d 190, 225 (3d Cir. 2004). "This broad jurisdictional grant allows bankruptcy courts to `deal efficiently and expeditiously with all matters connected with the bankruptcy estate.' Id. (citing Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995)). Proceedings in a Bankruptcy Court can be core or non-core with core proceedings arising under Title 11 and non-core proceedings are related to Title 11. Id "[A]nything that occurs within a case is a proceeding[.]" Id. (citing 1 Collier on Bankruptcy ¶ 3.01[4][b] at 3-19 (15th ed. rev. 2003)).
"Proceedings `related to' a title 11 case include causes of action owned by the debtor that become property of the bankruptcy estate under 11 U.S.C. § 541(a), as well as suits between third parties that conceivably may have an effect on the bankruptcy estate." Id. (citing Celotex Corp. V. Edwards, 514 U.S. 300, 308n. 5 (1995)). In addition, a proceeding having an effect on the bankruptcy estate is also considered as being "related" to a Title 11 case. Id. However, where there is no jurisdiction, it cannot be created simply by consent of the parties. The test for determining jurisdictional boundaries in "related to" proceedings have been set forth in Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984). "[T]here must be some nexus between the `related' civil proceeding and the title 11 case." Id. The test to be applied is whether the "outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." Id. In Pacor, the Court found that the case between two non-debtors was not sufficiently related to the bankruptcy case because the outcome of that proceeding would in no way affect the debtor's rights or liabilities and nor would it affect the estate. Id. However, "where it is clear that the action [seeks] to affect property of the estate, or . . . rearrange the standing of creditors . . . [is] . . . `related to' bankruptcy. Id. at 996n. 15.
The proceeding at hand clearly seeks to rearrange the standing of the creditors and thus, is related to the Title 11 case. Plaintiffs are essentially claiming that Interchange received payment before the Plaintiffs and therefore, violated the order in which creditors should have been paid. Although Plaintiff's dispute with Interchange is between two non-debtors, the outcome still affects the estate and the proceedings arise from the same facts and the same transaction. In addition, Plaintiffs only have the right to the funds that were part of the Debtors property. Plaintiffs have not withdrawn their proofs of claim and therefore, have not waived their claims against the Debtor. The parties have standing and this Court has jurisdiction over the matter. The Motion to Dismiss for Lack of Jurisdiction is denied.
Which leaves the court able to rule on the merits of the motion for summary judgment. The only remaining count, Count One, alleges that the funds at issue were not Property of the Estate because they were trust funds to be held for the benefit of Coronation. As explained previously, the Plaintiffs cannot prove the existence of a trust because the undisputed facts do not support several of the critical elements. Therefore, the court will grant summary judgment in favor of KI on Count One. Counsel for Interchange to submit a form of order reflecting each of the rulings in this opinion.