Liddle & Robinson, L.L.P. v. Daley (In Re Daley)Liddle & Robinson, L.L.P. v. Daley (In Re Daley)
DECISION ON MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION
Two creditors of the debtor, both law firms in which a fellow named Paul Shoemaker was or is a partner, are sparring in this adversary proceeding over the payment of one by William Daley, the debtor, to the detriment of the other. Liddle & Robinson (“L & R”), Shoemaker’s former firm, charges that Shoemaker and his current law firm, Greenfield, Stein & Senior, L.L.P. (“GSS”), took money from Daley which he had promised to them. Shoemaker & GSS, on the grounds of lack of subject matter jurisdiction, move to dismiss so much of the complaint as alleges claims against them.
The relevant factual background can be found at
Greenfield, Stein & Senior, L.L.P. v. William Stewart Daley (In re William Stewart Daley),
I.
Shoemaker was a partner at the firm now called L & R until February 1995. While there, he represented Daley in an employment action against Daley’s former employer and, for a time, represented Daley in a matrimonial action as well. For these services, L & R says that Daley owes it $88,348.43. It is L & R’s contention that Daley promised he would pay the firm from the proceeds of any recovery in the employment litigation before paying fees owed to any other attorneys. When Shoemaker left L & R for GSS, he allegedly offered to collect for L & R the fees owed it, including any sums relating to the employment litigation.
Daley was awarded $144,630.43 in November 1995 in the employment litigation (the “Proceeds”), which he paid to GSS, which was also owed fees. See id. at 45. L & R claims that Daley deliberately concealed this payment until he was examined this past January at the first meeting of creditors held pursuant to § 341 of the Bankruptcy Code. Learning of what it believes was Daley’s duplicity, L & R sued Daley, Shoemaker and GSS to object to the former’s discharge and to recover from the latter two its fees. The four causes of action relating to Daley’s right to discharge his debt are not the subject of this motion; the remaining three are. The third cause of action alleges an actual fraudulent conveyance of the Proceeds by Daley to GSS, which Shoemaker and GSS are said to have aided and abetted. The other two causes of action allege unjust enrichment and breach of fiduciary duty solely against Shoemaker and GSS.
Jurisdiction to determine the claims asserted against GSS and Shoemaker is pinned to 28 U.S.C. § 1334(b) and Fed.R.Bankr.P. 7020 which incorporates the permissive join-der provisions of Fed.R.Civ.P. 20.
1
Chal
II.
GSS asserts that I do not have jurisdiction over L & R’s claims for unjust enrichment, fraud and breach of fiduciary duty because they do not arise under Title 11, or arise in or relate to a case under Title 11, the only predicates for bankruptcy jurisdiction. The lack of “related to” jurisdiction is keyed to the contention that resolution of these claims would have no effect on the debtor’s estate. In the alternative, GSS maintains that if I were to find that I have “related to” jurisdiction, I must abstain from adjudicating these claims pursuant to 28 U.S.C. § 1384(c)(2) because they can be timely adjudicated in pending proceedings in a State forum of appropriate jurisdiction. GSS notes that, absent related to jurisdiction, these claims were not susceptible to litigation in a federal court.
L & R argues that, not only do I have jurisdiction, but that my jurisdiction is “core,” that is, its claims against GSS and Shoemaker arise under Title 11 or arise in a case under Title 11. Specifically, L & R urges that its claims qualify as “matters concerning the administration of the estate,” “proceedings to determine, avoid, or recover fraudulent conveyances,” and “proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor ... relationship” pursuant to 28 U.S.C. § 157(b)(2)(A), (H) & (O). L & R anchors its contention that there is core jurisdiction on its fraudulent conveyance claim. See 11 U.S.C. § 157(b)(2)(H). Although L & R concedes that only a trustee may bring such an action, it requests in a footnote to its supplemental memorandum of law that I grant it leave to sue GSS in the trustee’s place. L & R does not address how the unjust enrichment and breach of fiduciary duty claims arise under or arise in this bankruptcy proceeding but nonetheless argues that, at a minimum, I have non-core jurisdiction to hear these claims because they are related to the administration of the debtor’s estate and the resolution of those claims could alter the debtor’s rights and/or liabilities. To the request for abstention, L & R suggests that its claims cannot be timely adjudicated in the state forum and notes that the pending litigation does not, in any event, raise the fraud ■issues.
III.
As implied above, we can make short shrift of the § 544(b) fraudulent conveyance cause of action. The claim is that Daley, after misrepresenting his intentions to L & R, transferred to GSS or Shoemaker, with the intent to defraud L & R, the Proceeds which he had promised to L & R. The requested relief is an interesting pastiche: L & R asks that the fraudulently transferred Proceeds be returned to the estate; notwithstanding that the estate would in that event recover all the monies said to have been transferred, L & R also asks that it be granted judgment against GSS and Shoemaker in the amount of its unpaid fees as well as punitive damages. Putting aside the hoped-for. entitlement to two recoveries for the same wrong, what L & R ignores is that pursuant to 11 U.S.C. § 544(b), only the trustee has standing to bring a fraudulent conveyance action to avoid the debtor’s
IV.
Challenges to a federal court’s subject matter jurisdiction come in two forms, known as “facial” or “factual” attacks.
See 2
D. Coquillette,
Moore’s Federal Practice 3d,
§ 12.30[4] at 12-38 (Matthew Bender 3d ed.1998);
Garcia v. Copenhaver, Bell &
As
sociates, M.D.’s, P.A,
Pursuant to 28 U.S.C. § 1334, bankruptcy courts have subject matter jurisdiction “of all civil proceedings arising under Title 11, or arising in or related to a case under Title 11.” 28 U.S.C. § 1334(b). “Arising under” jurisdiction covers any cause of action created by Title 11,
see Glinka,
A. Core Jurisdiction
. Having concluded that I must dismiss L & R’s § 544(b) cause of action, which would have been a core proceeding to determine, avoid, or recover a fraudulent conveyance pursuant to 28 U.S.C. § 157(b)(2)(H), the only remaining bases for core jurisdiction suggested by L & R are the catchall provisions of 28 U.S.C. § 157(b)(2)(A), that is, matters affecting the administration of the estate, and 28 U.S.C. § 157(b)(2)(0), other proceedings affecting the liquidation of the assets of the estate.
L & R has filed a proof of claim in the amount of $88,348.43 against the estate for attorneys’ fees owed to it on account of work performed for the debtor before Shoemaker left to join GSS. This adversary proceeding is an attempt to recover from GSS those same fees as damages for GSS’ asserted unjust enrichment, fraud and breach of fiduciary duty to L & R. 3 L & R alleges that it had an agreement with Daley that L & R would be paid first out of the Proceeds and an agreement with Shoemaker that he would liquidate any sums received on behalf of L & R and forward them to L & R. What L & R wants is for GSS to turn over the $88,348.43 L & R claims should have been transferred to it in the first place in accordance with the two agreements.
More than likely, there will be nothing here for the estate, in view of the amount of the Proceeds and of Daley’s former wife’s claim.
See Daley I,
It has long been the law that where a creditor files a claim as unsecured, he waives the right to subsequently assert that claim as secured.
See In re Burr Mfg. & Supply Co.,
Absent a priority battle over the possible residue, core jurisdiction could only be furnished by 28 U.S.C. §§ 157(b)(2)(A) and (0). The language of the catchall provisions is admittedly broad enough to encompass just about anything within its sweep; however, the Second Circuit has cautioned that although the “language of that sub-section could be construed to include almost any matter ^elating to bankruptcy, ... the structure of the statute as a whole does not permit such a construction. Matters that merely concern the administration of the bankrupt estate tangentially are related, non-core proceedings.”
Ben Cooper, Inc. v. The Insurance Company of the State of Pennsylvania (In re Ben Cooper, Inc.),
From
Ben Cooper
we glean that claims whose genesis is unrelated to the bankruptcy case, that is, those which are rooted in the pre-bankruptcy past and are brought under non-bankruptcy law, do not arise under Title 11 or in a case under Title 11, but are at best non-core and, then, only if there is a basis for the assertion of “related to” jurisdiction.
See 610 W. U2 Oumers,
Since GSS and L & R are both unsecured non-priority creditors, they are entitled to share, pro rata, with all other similarly-situated creditors. Neither firm’s unsecured claim has rights higher than the other’s. Accordingly, there is no priority dispute to adjudicate with respect to a particular res held by the estate. Whereas I plainly have core jurisdiction to determine the bona fides of the unsecured proofs of claim, that is, for example, whether Daley’s estate is liable for the fees billed to him, I do not have core jurisdiction with respect to the claims that L & R is asserting against GSS. So we proceed to determine whether I have “related to” jurisdiction.
B. “Related To” Jurisdiction
Causes of action owned by the debtor prior to its bankruptcy and which become property of the debtor’s estate as well as suits between third parties which have an effect on the bankruptcy estate are bases for related to jurisdiction.
See Celotex v. Edwards,
[t]he usual articulation of the test of whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.... Thus, the proceeding need not necessarily be against the debtor or the debtor’s estate. An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively), and which in any way impacts upon the handling of the estate.
“Related to” jurisdiction is broad, but not limitless.
See Celotex,
Suppose A, B, and C claim interests in a pool of oil. If A is a bankrupt, the bankruptcy court could determine the interests of all three in the property under 28 U.S.C. § 157(b)(2) or § 157(c)(1), because only after identifying the “property” of the estate may the court apportion that property among creditors. But if the estate should disclaim any interest in the pool, only the dispute between B and C would remain. The resolution of that dispute would not affect the creditors of the bankrupt, and there would be no source of jurisdiction. That B and C might also be creditors of the bankrupt would not enlarge the court’s power; there is no jurisdiction to resolve all disputes among creditors of a bankrupt. There is jurisdiction under § 157(c)(1) only when the dispute is “related to” the bankruptcy — meaning that it affects the amount of property available for distribution or the allocation of property among creditors.... The bankruptcy jurisdiction is designed to provide a single forum for dealing with all claims to the bankrupt’s assets. It extends no farther than its purpose. That two creditors have an internecine conflict is of no moment, once all disputes about their stakes in the bankrupt’s property have been resolved.
In re Xonics,
This case is very similar to Xonics to the extent that most of the Proceeds, if not all, are earmarked for Daley’s former wife and the law firms have waived whatever entitlement to security (that is, the Proceeds), if any, which they may have had. The “disputes about their stakes in the bankrupt’s property” having been fully resolved, the only question remaining, as in Xonics, is whether if L & R recovers its fees from GSS and Shoemaker under its claims for unjust enrichment, fraud and breach of fiduciary duty, the other creditors will be affected.
If L & R is paid by GSS or Shoemaker, L & R’s unsecured claim against the estate will be satisfied. Assuming, without deciding, that GSS and Shoemaker would not succeed to L & R’s claim, this would reduce the total unsecured claims asserted against the estate. Remember, though, that Daley’s trustee has filed a “no-asset” report. If the trustee be correct that the estate has no assets, then reduction of the unsecured debt would have no effect upon the estate. The only possible source of estate assets available for distribution to creditoi’s (which the trustee may or may not have considered) would be the residue of the Proceeds, if any there be. L & R, as the plaintiff, has the burden of showing that there is subject matter jurisdiction. From the record as it exists, it is impossible to tell whether there will be anything left fi’om the Proceeds after the debtor’s former
Conclusion
L & R is to submit any additional evidence no later than 10 days following the date of this decision. GSS and Shoemaker may respond within 10 days thereafter. In the event that L & R does not submit any additional evidence by the time allotted, because it will not have met its burden of proving jurisdiction, GSS or Shoemaker may settle an order dismissing for lack of subject matter jurisdiction the claims asserted against them. If L & R does timely supplement the record, it is to schedule a further hearing on this motion to allow the court to rule on the supplemented record. In any event, GSS and Shoemaker may immediately settle an order dismissing the fraudulent transfer claim for lack of standing. The request for sanctions is denied.
Notes
. Fed.R.Civ.P. 20(a) provides in pertinent part:
All persons ... may be joined in one action as defendants if there is asserted against them jointly, severally, or in the alternative, any right to relief in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all defendants will arise in the action.
Fed.R.Civ.P. 20(a). Given that the claims against GSS do arise out of the same transactions and occurrences as do the claims against Daley and that there are common issues of law and fact, permissive joinder is allowed at the court's sound discretion as long as joinder "will comport with the principles of fundamental fairness.”
Shaw v. Munford,
. I discussed in Daley I that the Appellate Division of the New York Supreme Court, in a judgment now final, determined that Daley’s former wife had the first claim to the Proceeds. There remained a question, after the Appellate Division ruled, whether the charging liens asserted by L & R and GSS had any vitality vis-a-vis the Proceeds after satisfaction of the former wife’s debt. As will become clear from the remainder of the opinion on this motion to dismiss, it is unlikely that after satisfaction of her claim that there will be much money left out of the Proceeds for collection by Daley’s estate. Indeed, probably recognizing this, Daley’s trustee has filed a report indicating that the estate has no assets. Accordingly, even were L & R to properly move for leave to avoid the transfer, its ability to show that the trustee unjustifiably failed to bring suit would be slim at best.
. L & R also seeks the imposition of punitive damages against GSS on the fraud claim.