531 B.R. 546
Bankr. E.D. Pa.2015Background
- Joseph Grasso filed Chapter 11; Paul Winterhalter and his law firm were approved as debtor-in-possession counsel under 11 U.S.C. § 327(a).
- Trustee Christine Shubert alleges the Firm breached fiduciary duties and aided Grasso in concealing assets and transferring >$488,000 for personal expenses; also alleges the Firm was involved in an undisclosed purchase of a creditor claim (the WSFS claim).
- The Firm filed a fee application; Madison Capital objected and sought disgorgement under §§ 328(c) and 330(a)(5); Shubert joined the objection.
- Bankruptcy Court denied the Firm’s fee application and ordered disgorgement and referral for discipline; this Court vacated and remanded that decision on appeal.
- Shubert later filed a separate adversary complaint asserting breach of fiduciary duty, negligence, aiding and abetting, fraudulent concealment, and conspiracy; the Firm moved to withdraw the reference to the district court.
- The Bankruptcy Court denied dismissal for lack of jurisdiction; this Court now denies the Firm’s motion to withdraw the reference.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the adversary proceeding is core | Claims arise from post-petition conduct by court-appointed professionals and affect estate administration | Claims are state-law and thus non-core | Core: claims concern administration of the estate (Seven Fields controlling) |
| Whether Stern v. Marshall bars the Bankruptcy Court from entering final judgment | Trustee: claims arise from the bankruptcy and may be resolved in claims allowance process | Firm: Stern limits bankruptcy courts’ Article III authority for certain state-law claims | Stern does not deprive the Bankruptcy Court of constitutional authority here; claims stem from the bankruptcy and relate to estate supervision |
| Whether Defendants retained a Seventh Amendment right to jury trial | Trustee: the Firm’s fee application submits them to equitable jurisdiction, forfeiting jury right | Firm: did not file a proof of claim and therefore retains jury right | No jury right: filing the fee application is analogous to a proof of claim and, given close connection to objections, subjects them to equitable jurisdiction (Billing) |
| Whether discretionary factors warrant withdrawal of the reference | Trustee: consolidation in bankruptcy court promotes uniformity, economy, and familiarity with the record | Firm: district court should hear case to avoid de novo review and to conduct a jury trial | Denied: bankruptcy court can enter final judgment; no jury right; discretionary factors (uniformity, timing, familiarity) weigh against withdrawal |
Key Cases Cited
- Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011) (Article III limits on bankruptcy courts entering final judgment in certain state-law counterclaims)
- Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (U.S. 1989) (Seventh Amendment jury right in bankruptcy context: legal claims require jury)
- In re Seven Fields Dev. Corp., 505 F.3d 237 (3d Cir. 2007) (state-law malpractice claims against bankruptcy-appointed professionals are core because they affect estate administration)
- Billing v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242 (3d Cir. 1994) (fee applicants who seek payment from the estate submit to equitable jurisdiction and may forfeit jury rights)
- Langenkamp v. Culp, 498 U.S. 42 (U.S. 1990) (filing a proof of claim submits a creditor to the bankruptcy court’s equitable power, forfeiting jury trial on related matters)
- Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (U.S. 2014) (clarifies allocation of jurisdiction between bankruptcy and district courts post-Stern)