Summary
recognizing concurrent jurisdiction of state courts over malpractice action arising out of bankruptcy litigation
Summary of this case from Calderin v. Quartz Hill Mining, LLCOpinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California, February 21, 2008
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. SA 95-22155-ES, Adv. No. SA 07-01261-ES. Honorable Erithe Smith, Bankruptcy Judge, Presiding.
Before: DUNN, MARKELL, and MONTALI, Bankruptcy Judges.
MEMORANDUM
Chapter 7 debtors filed a malpractice action in state court against attorneys who had represented them during the course of their bankruptcy case. The attorneys removed the state court action to the bankruptcy court. The bankruptcy court, finding that the conduct upon which the malpractice litigation was based appeared to have occurred postpetition and that the outcome would not impact administration of the bankruptcy estate, remanded the matter back to state court. We AFFIRM.
Unless otherwise indicated, all chapter references are to the Bankruptcy Code, § § 101-1330, as enacted and promulgated prior to October 17, 2005, the effective date of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23.
I. FACTS
On October 7, 1994, an arbitration award (" Arbitration Award") was entered against debtor, Larry Marc Gersten (" Gersten"), and four others in the amount of $1,730.989.00. A judgment (" Judgment") confirming the Arbitration Award was entered in the same amount on December 5, 1994. Seeking to levy upon the residence Gersten owned with his wife, Susan Denise Gersten (" Residence"), the Judgment creditor recorded a Notice of Levy Under Writ of Execution on January 6, 1995, but failed to record an abstract of the Judgment. The Gerstens filed a voluntary chapter 7 petition in the Santa Ana Division of the United States Bankruptcy Court for the Central District of California on November 29, 1995.
The Gerstens assert that although Kevin James Lamb (" Lamb") was the attorney of record in their bankruptcy case, Michael Sanford Kogan (" Kogan") was the primary attorney representing their interests concerning the Judgment. Gersten contends he hired Kogan after entry of the Arbitration Award but before entry of the Judgment.
According to the Gerstens, Lamb filed their bankruptcy petition at Kogan's request; Kogan paid Lamb's fees and costs to file the petition from funds the Gerstens had paid to Kogan. Although Kogan later appeared in the bankruptcy case on behalf of the Gerstens, Lamb remained attorney of record.
Kogan disputes that he represented the Gerstens in any way as their general bankruptcy counsel or in connection with the Judgment. He asserts his representation was limited to the role of Special Counsel in connection with the chapter 7 trustee's objection to the Gerstens' claim of exemptions in various pension plan assets. We do not resolve this issue.
At the time the Gerstens filed their bankruptcy case in 1995, the purchase money encumbrance and their homestead exemption on the Residence exceeded its fair market value, such that no non-exempt equity was available in the Residence for the benefit of the Gerstens' unsecured creditors. The Gerstens received their chapter 7 discharge on March 20, 1996.
More than ten years later, the bankruptcy case remained open. In 2006, the chapter 7 trustee in the Gerstens' case successfully objected to the secured claim of the Judgment creditor on the basis that the creditor's lien had not been perfected under California law. Having avoided the Judgment lien against the Residence, the chapter 7 trustee sought to recover from the Gerstens the substantial equity that had accrued as a result of appreciation in the value of the Residence in the years since their bankruptcy petition had been filed. The Gerstens settled the trustee's claim for the postpetition increase in equity by paying $550,000 to their bankruptcy estate. The settlement was approved by the bankruptcy court on May 15, 2007.
On May 18, 2007, the Gerstens sued Kogan and Lamb in the Superior Court of the State of California, County of Orange, for malpractice (" Malpractice Litigation"), based primarily on their failure either to object to the Judgment creditor's claim or to obtain an order requiring the chapter 7 trustee to abandon the Residence.
Kogan removed the Malpractice Litigation to the bankruptcy court pursuant to Fed.R.Bankr.P. 9027(a)(3)(A), asserting that the Malpractice Litigation was a civil action which related to the administration of the bankruptcy estate, that the claims contained in the complaint (" Complaint") concerned title 11 issues and related to property of the bankruptcy estate, and that the claims contained in the Complaint were inseparable from the chapter 7 bankruptcy case. The Gerstens promptly moved to remand the Malpractice Litigation back to state court, contending that the actions complained of occurred postpetition and did not impact administration of the bankruptcy estate. The bankruptcy court granted the motion to remand, and this appeal followed.
II. JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 1452(b). We have jurisdiction to determine whether remand was appropriate pursuant to 28 U.S.C. § § 1452(b) and 158.
III. ISSUE
Whether the bankruptcy court abused its discretion in granting the Gerstens' motion to remand.
IV. STANDARDS FOR REVIEW
" Decisions to remand under 28 U.S.C. § 1452(b) are committed to the sound discretion of the bankruptcy judge and are reviewed for abuse of discretion." McCarthy v. Prince (In re McCarthy), 230 B.R. 414, 416 (9th Cir. BAP 1999).
A bankruptcy court abuses its discretion if it bases its decision on a clearly erroneous view of the facts. Khachikyan v. Hahn (In re Khachikyan), 335 B.R. 121, 125 (9th Cir. BAP 2005). A finding of fact is not clearly erroneous if a permissible view of the evidence of record supports the finding. SEC v. Rubera, 350 F.3d 1084, 1094 (9th Cir. 2003). Clear error exists when, after examining the evidence, the reviewing court is left with a definite and firm conviction that a mistake has been committed. Granite States Ins. Co. v. Smart Modular Techs., Inc., 76 F.3d 1023, 1028 (9th Cir. 1996).
V. DISCUSSION
As relevant to the matter before us, 28 U.S.C. § 1452(a) provides:
A party may remove any claim or cause of action in a civil action . . . to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title.
28 U.S.C. § 1452(a) (emphasis added).
28 U.S.C. § 1334 speaks to the bankruptcy jurisdiction of the district courts over bankruptcy cases and proceedings. 28 U.S.C. § 157(a) authorizes each district court to refer " any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 . . . to the bankruptcy judges for the district." The District Court for the Central District of California has a standing order of reference in place under 28 U.S.C. § 157(a). Accordingly, the jurisdiction of the bankruptcy court is synonymous with the bankruptcy jurisdiction of the district court for purposes of the analysis set forth in this Memorandum.
The parties concede that bankruptcy jurisdiction over the Malpractice Litigation existed under 28 U.S.C. § 1334. We observe that exclusive jurisdiction over the Malpractice Litigation does not exist in the bankruptcy court when Congress has not preempted the field of state law malpractice claims brought by debtors against their bankruptcy attorneys. See generally Miles v. Okun (In re Miles), 430 F.3d 1083 (9th Cir. 2005); MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910 (1996); Gonzales v. Parks, 830 F.2d 1033 (9th Cir. 1987). In fact, Kogan conceded at oral argument that the state court had concurrent jurisdiction over the Malpractice Litigation. Ultimately, we are not asked to decide whether the bankruptcy court had jurisdiction over the Malpractice Litigation. We are asked only whether the bankruptcy court erred in granting the motion to remand.
28 U.S.C. § 1452(b) provides that the bankruptcy court to which a claim or cause of action has been removed " may remand such claim or cause of action on any equitable ground." The " 'any equitable ground' remand standard is an unusually broad grant of authority." McCarthy, 230 B.R. at 417.
Kogan asserts that in granting the motion to remand, the bankruptcy court failed to articulate a legal theory based upon the facts. We disagree. The findings of the bankruptcy court constitute " equitable grounds" within the contemplation of 28 U.S.C. § 1452(b) and are clearly stated on the record:
When I look at it, it seems to me that, A, it's post-petition conduct and therefore not property of the estate. Two even if it is property of the estate, the Trustee has not expressed any interest in pursuing it and has even stood in court today and said that.
Three, the Trustee has filed a formal report in the case, you know, for the wind-up of the administration. Four, under these circumstances, it appears that this litigation is not going to have any impact on the administration of the bankruptcy estate.
Under all of those circumstances, I think it's appropriate to grant the motion.
Hearing Transcript, August 23, 2007, pp. 6:16-7:3.
As the bankruptcy court correctly recognized, whether the Malpractice Litigation would impact the administration of the Gerstens' bankruptcy estate depends on whether it constitutes property of the bankruptcy estate under § 541 of the Bankruptcy Code. Section 541(a)(1) provides that " [t]he commencement of a case under section 301, 302, or 303 of this title creates an estate . . . comprised of all legal or equitable interests of the debtor in property as of the commencement of the case." The Complaint asserts no cause of action for negligence occurring before the bankruptcy petition was filed, but rather asserts that the cause of action stems from actions Kogan or Lamb failed to take while the bankruptcy case was pending. Accordingly, the Malpractice Litigation could not have been property of the estate at the time the estate was created.
Property acquired after the commencement of the case becomes property of the estate only if it is acquired by the estate itself. 11 U.S.C. § 541(a)(7). The only injury alleged in the Complaint is the injury to the Gerstens in the form of the loss of postpetition appreciation in the value of the Residence. Under no set of circumstances could the estate assert an injury where it was, in effect, the beneficiary of the alleged malpractice. Therefore the causes of action which form the basis for the Malpractice Litigation belong to the Gerstens.
In fact the chapter 7 trustee, who was present in the courtroom on other matters, participated in the hearing on the motion to remand at the request of the bankruptcy court and disclaimed any interest in the Malpractice Litigation.
Kogan also asserts that the bankruptcy court abused its discretion in granting the motion to remand because there were insufficient facts in evidence to support remand. Again we disagree. The bankruptcy court considered the causes of action stated in the Complaint, their relation to bankruptcy generally and the Gerstens' bankruptcy estate in particular, and received a report from the chapter 7 trustee on the status of administration of the case. The decision of the bankruptcy court was made on a fully-informed basis. That the bankruptcy court did not consider issues that relate to the merits of the Malpractice Litigation does not constitute error.
At oral argument Kogan complained that it was inappropriate for the court to discuss with the trustee, who happened to be in the courtroom on another matter, whether he was interested in prosecuting the Malpractice Litigation, and then use the trustee's lack of interest in doing so as informing the court's conclusions about whether the Malpractice Litigation was property of the estate and whether to remand. The bankruptcy court committed no error by conducting its colloquy with the trustee.
Finally, Kogan and Lamb contend that the Malpractice Litigation is best heard by the bankruptcy court, because the bankruptcy court is the court with expertise in the operation of the Bankruptcy Code and application of its provisions; because no cause of action for malpractice would exist but for their alleged inaction in their representation of the Gerstens during the case; and because the bankruptcy court had familiarity with the facts of the Gerstens' bankruptcy case. The record reflects that the bankruptcy judge who presided over the case for a substantial period of the time frame at issue has since retired. Further, it is uncertain whether the bankruptcy court would be the trier of fact in the Malpractice Litigation even if the motion to remand had not been granted. Either party could demand a jury trial. Additionally, the Gerstens arguably could object to the bankruptcy court entering a final judgment in the Malpractice Litigation. See 28 U.S.C. § 157(c).
Most importantly, Kogan has conceded that the bankruptcy court did not have exclusive jurisdiction over the Malpractice Litigation. As we stated in McCarthy, " [t]here is nothing wrong with letting a state court decide a matter over which it has concurrent jurisdiction." McCarthy, 230 B.R. at 418. It was not an abuse of discretion for the bankruptcy court to do so here.
VI. CONCLUSION
The state court had concurrent jurisdiction over the Malpractice Litigation when it was based on postpetition representation of chapter 7 debtors, did not constitute property of the debtors' bankruptcy estate, and could not conceivably impact the administration of the debtors' bankruptcy estate. The bankruptcy court did not abuse its discretion in granting the Gerstens' motion to remand the Malpractice Litigation to state court. We AFFIRM.