Halloum v. Katzen & Schuricht
15-02091
Bankr. E.D. Cal.Aug 27, 2015Background
- Debtors Yousif and Iman Halloum sued their former counsel (Hilton Ryder/McCormick Barstow), opposing counsel (Katzen & Schuricht), Chapter 7 trustee Michael Kasolas, and others in state court for damages arising from how their 2012 bankruptcy case was handled; the suit was removed and transferred to the Eastern District bankruptcy court as an adversary proceeding.
- The Halloums alleged legal malpractice, breach of contract, civil conspiracy (two conspiracy counts), and intentional interference with prospective economic advantage.
- The Bankruptcy Appellate Panel vacated and remanded the court’s earlier fee-order for Ryder/McCormick Barstow, so the evidentiary hearing addressed both the remanded fee contest (a contested matter under Rule 9014) and the adversary claims.
- The court held an evidentiary (nonjury) hearing under Rule 52(c); Yousif testified, Ryder testified, no other witnesses were presented, and the Halloums identified minimal discovery needs (a subpoena to the FDIC which the court rejected as irrelevant/cumulative).
- The court concluded (1) trustee Kasolas was sued only for acts within his trustee role and dismissal required because suing a trustee requires leave of the appointing court; (2) the Halloums’ state-law claims arising from conduct in the bankruptcy case are completely preempted by the Bankruptcy Code and thus federal bankruptcy jurisdiction applies; and (3) on the merits the court ruled against the plaintiffs on all five causes of action and, alternatively, granted summary judgment for defendants.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether trustee Kasolas can be sued in state court/individually without leave | Kasolas acted improperly and can be sued individually for his conduct | A trustee may only be sued with leave of the appointing court; claims relate to trustee duties | Dismissed: claims against Kasolas as individual are a sham; no leave granted, action against trustee dismissed (Barton rule) |
| Whether state-law claims based on conduct during bankruptcy are cognizable (preemption) | State-law tort/contract remedies available for alleged misconduct by counsel/parties/trustee | Bankruptcy Code and federal jurisdiction preempt state remedies for matters tied to bankruptcy administration | Preempted: claims arising from management of the bankruptcy estate are completely preempted by the Bankruptcy Code (MSR and progeny) |
| Legal malpractice and breach of contract against debtor's counsel (Ryder) | Ryder breached duties, had a fixed-fee promise, conspired with creditors, and is liable for malpractice/breach | Ryder was retained hourly; fee applications were reasonable; no breach, loyalty or malpractice; fee contest addressed in remand, preclusive effect | Found for defendants: no breach or malpractice; fee application affirmed on remand and res judicata bars malpractice claim |
| Civil conspiracy and intentional interference claims | Defendants conspired to "loot" the estate and sabotaged financing/purchase efforts | No credible evidence of an agreement; interactions were at arm's length; lender paperwork showed insufficient family funds; debtor's intransigence impeded resolution | Found for defendants: no credible evidence of conspiracy or intentional interference; plaintiffs fully heard and claims rejected |
Key Cases Cited
- Barton v. Barbour, 104 U.S. 126 (establishing that a trustee may be sued only with leave of the appointing court)
- Langenkamp v. Culp, 498 U.S. 42 (a bankruptcy filing can waive jury-trial rights)
- MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910 (bankruptcy matters preempt state-law claims arising from administration of the estate)
- Beck v. Ft. James Corp. (In re Crown Vantage, Inc.), 421 F.3d 963 (discussing limitations on suits against trustees and bankruptcy-related preemption issues)
- Miles v. Okun (In re Miles), 430 F.3d 1083 (finding complete preemption of certain state-law torts by bankruptcy law)
- Gonzales v. Parks, 830 F.2d 1033 (same)
- Potter v. Pierce, 342 P.3d 54 (N.M. 2015) (discussing preclusive effect of bankruptcy fee decisions on malpractice claims)