Mandelbrot v. J.T. Thorpe Settlement Trust (In Re J.T. Thorpe, Inc.)
2017 U.S. App. LEXIS 17924
9th Cir.2017Background
- Michael Mandelbrot, a California attorney, was investigated by J.T. Thorpe, Thorpe Insulation, and Western asbestos trusts and was found to have submitted unreliable evidence; trusts debarred him from submitting further claims.
- Trusts filed for a judicial declaration that their debarment was authorized by their Trust Distribution Procedures (TDPs); a bench trial began in bankruptcy court in January 2014.
- After two days of testimony, Mandelbrot stipulated in open court that the trusts acted reasonably and agreed to a permanent bar from submitting claims to four asbestos trusts; in exchange trusts agreed not to seek damages and to dismiss equitable claims.
- Mandelbrot repudiated the settlement days later, claiming the debarment provision violated California Business & Professions Code § 16600 and Cal. Rule of Professional Conduct 1-500.
- Bankruptcy court enforced the settlement and entered permanent debarment; the district court affirmed, applying California law and rejecting Mandelbrot’s challenges.
- Ninth Circuit panel (Owens, J.) vacated and remanded so the district court can decide whether federal or state law governs and what effect Golden v. California Emergency Physicians has, noting parties and the district court did not adequately address federal-law choice issues.
Issues
| Issue | Mandelbrot's Argument | Trusts' Argument | Held |
|---|---|---|---|
| Whether the debarment provision in the settlement is invalid under California law (§ 16600 / Rule 1-500) | § 16600 and Rule 1-500 prohibit contractual restraints on professional practice; the stipulation is void | The restraint is reasonable, aimed at protecting trust beneficiaries from misconduct, and permitted; Rule 1-500 and § 16600 do not bar this settlement | Remanded: court did not decide on merits; directed district court to determine applicable law and apply Golden where appropriate |
| Choice of law — whether federal law governs practice before asbestos trusts or California/Nevada law applies | California law governs because agreement was made/performed in California | Federal interests in bankruptcy supervision of trusts (and/or Nevada law as trusts’ domicile) should displace California law | Remanded for district court to decide whether federal or state law governs and whether federal argument was waived |
| Applicability/impact of Golden v. California Emergency Physicians on this settlement | Golden suggests § 16600 broadly prohibits restraints on professional practice and may void the stipulation | Golden is distinguishable (scope, facts); trusts argued Golden does not aid Mandelbrot | Remanded for district court to address Golden’s application in the first instance |
| Whether enforcement of the settlement implicates uniquely federal interests that could preempt state law | State law should govern settlement validity; California public policy favors § 16600 protection | Practice before court-supervised asbestos trusts implicates federal bankruptcy policy and attorney-discipline powers, so federal interests may displace state rule | Remanded to decide if federal interests require applying federal law rather than California law; panel emphasized substantial federal interests but left final call to district court |
Key Cases Cited
- Golden v. California Emergency Physicians Med. Grp., 782 F.3d 1083 (9th Cir. 2015) (state-law analysis of § 16600’s reach to contractual restraints on professional practice)
- Winterrowd v. American Gen. Annuity Ins. Co., 556 F.3d 815 (9th Cir. 2009) (practice before federal courts and federal admission rules are distinct from state regulation)
- Boyle v. United Techs. Corp., 487 U.S. 500 (U.S. 1988) (federal interests may displace state law where uniquely federal concerns exist)
- Chambers v. NASCO, Inc., 501 U.S. 32 (U.S. 1991) (federal courts’ inherent power to regulate litigation and discipline attorneys)
- Sperry v. Florida ex rel. Florida Bar, 373 U.S. 379 (U.S. 1963) (state cannot enforce licensing rules that intrude on practice before federal instrumentalities)