Galaz v. Galaz (In Re Galaz)
765 F.3d 426
| 5th Cir. | 2014Background
- Raul Galaz (former ARF manager) transferred ARF’s music-rights to Segundo Suenos in June 2005 without consent; the rights thereafter generated substantial royalties and Lisa (his ex-wife) and Julian (co-founder/producer) received nothing.
- Lisa held a 25% economic interest in ARF (no management rights) by virtue of a divorce assignment; Segundo Suenos later became a Texas LLC and collected ~ $1M in royalties.
- Lisa filed Chapter 13 and an adversary complaint alleging fraudulent transfer (TUFTA) and related claims against Raul, Alfredo, and Segundo Suenos; Julian asserted counterclaims against defendants in the bankruptcy proceeding.
- The bankruptcy court found the transfer fraudulent, entered judgment for Lisa ($241,309.10 actual; $250,000 exemplary) and for Julian ($479,216.95 actual; $500,000 exemplary); district court affirmed liability but remanded damages; on appeal, this court reviewed jurisdictional issues.
- The Fifth Circuit concluded the bankruptcy court lacked jurisdiction to enter final judgment on Julian’s unrelated third-party counterclaims and held Lisa’s TUFTA claim must be treated as a non-core related matter requiring de novo district-court review (proposed findings), vacating and remanding accordingly.
Issues
| Issue | Plaintiff's Argument (Galaz/Lisa) | Defendant's Argument (Raul/Segundo) | Held |
|---|---|---|---|
| 1) Bankruptcy court subject-matter jurisdiction over Lisa’s TUFTA claim | Lisa: claim is "related to" bankruptcy because a judgment could increase the estate for creditors | Raul: claim is independent state-law tort not affecting the estate | Held: Statutorily "related to" jurisdiction exists, but constitutionally the claim is non-core and must be submitted as proposed findings for de novo district review (cannot be finally adjudicated by bankruptcy court) |
| 2) Bankruptcy court jurisdiction over Julian’s counterclaims | Julian: (asserted counterclaims in bankruptcy proceeding) | Raul: bankruptcy court had jurisdiction because claims arose from same facts | Held: Lacked jurisdiction — third-party/counterclaims were not "related to" Lisa’s bankruptcy; judgment for Julian must be dismissed |
| 3) Whether parties’ consent cured constitutional defect (allowing final bankruptcy judgment) | Lisa: implied consent by defendants allowed final adjudication in bankruptcy court | Raul: consent sufficient under §157(c)(2) and rules | Held: Circuit precedent (Stern line) rejects consent as cure here; consent cannot overcome Article III limits — claims must proceed as non-core proposed findings |
| 4) Applicability of ARF Operating Agreement arbitration clause to Lisa | Raul/Segundo: arbitration clause in Operating Agreement requires arbitration of disputes | Lisa: not a party/member to Operating Agreement; only an economic interest holder | Held: Lisa not bound by arbitration provision; referral to arbitration improper |
Key Cases Cited
- In re Frazin, 732 F.3d 313 (5th Cir. 2013) (consent cannot cure Article III defect after Stern)
- In re IFS Fin. Corp., 669 F.3d 255 (5th Cir. 2012) (standard of appellate review for bankruptcy decisions)
- In re OCA, Inc., 551 F.3d 359 (5th Cir. 2008) (scope of bankruptcy jurisdiction review)
- Matter of Walker, 51 F.3d 562 (5th Cir. 1995) (definition of "related to" jurisdiction)
- In re BP RE, L.P., 735 F.3d 279 (5th Cir. 2013) (limits on bankruptcy court final adjudication and related-to jurisdiction)
- Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012) (bankruptcy courts may lack jurisdiction over third-party counterclaims; Stern implications)
- Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (U.S. 2014) (bankruptcy courts may submit proposed findings on related non-core matters)
- Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011) (Article III limits on bankruptcy courts’ power to enter final judgments)