Opinion
Case No. 02-35608-SAF-11, Adversary No. 04-3388.
October 22, 2004
MEMORANDUM OPINION AND ORDER
Jenkens Gilchrist, a Professional Corporation, moves the court, pursuant to Fed.R.Civ.P. 9(b), 12(b)(6) and 12(e), made applicable by Bankruptcy Rules 7009 and 7012, to dismiss the complaint filed by Network Staffing Services, Inc., Liquidating Trust. The trust opposes the motion. The court held a hearing on the motion on September 13, 2004.
Rule 12(b)(6)
Under Rule 12(b)(6), the court must determine, in the light most favorable to the plaintiff, whether the complaint states any valid claim for relief. Cinel v. Connick, 15 F.3d 1338, 1341 (5th Cir. 1994). A complaint may not be dismissed for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The court must accept as true all well-pleaded allegations contained in the plaintiff's complaint. Albright v. Oliver, 510 U.S. 266, 268 (1994). The facts pled must be specific, however, and not merely conclusory. Guidry v. Bank of LaPlace, 954 F.2d 278, 281 (5th Cir. 1992).
Count Four: Turnover
In count four of the complaint, the trust seeks a turnover and accounting under 11 U.S.C. § 542(a). More specifically, the trust requests the entry of a judgment compelling Jenkens to deliver and make an accounting of funds paid by Network Staffing Services, Inc., the debtor, to Jenkens. Jenkens contends that the trust lacks standing to prosecute that count.
Section 542(a) requires that an entity in possession of property that a bankruptcy trustee may use during a bankruptcy case "shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate." 11 U.S.C. § 542(a). Jenkens argues that the plaintiff trust is not a bankruptcy "trustee" within the meaning of § 542(a) and is not seeking recovery for the benefit of the bankruptcy estate.
The complaint names the trust as the plaintiff. But, in actuality, the trustee of the trust acts for the trust in court. The court will permit the complaint to be amended to name the trustee of the trust as the plaintiff, and proceed accordingly.
On July 1, 2002, Network Staffing Services, Inc., filed its petition for relief under Chapter 11 of the Bankruptcy Code. By order entered December 5, 2003, this court confirmed a plan of reorganization for Network Staffing proposed by its official unsecured creditors committee. The plan established the trust, as the representative of the bankruptcy estate, to liquidate property belonging to the bankruptcy estate and distribute the resulting proceeds to the creditor body. Plan, par. 8.02, 8.07. The Bankruptcy Code provides that a plan may provide for the retention and enforcement of any claim by a representative of the estate. 11 U.S.C. § 1123(b)(3)(B). As the plan provides for the trust to liquidate claims as the representative of the estate, the plan trustee obtains the rights of and stands in the shoes of the bankruptcy trustee.
Nevertheless, § 542(a) does not apply to this litigation. The parties struggle with articulating the Rule 12(b)(6) issue raised by count four. But, as the court reads the motion and the complaint, the court concludes that Jenkens, in effect, asserts that § 542(a) has no application to the relief ultimately sought by the plan trustee. Assuming that the plan trustee proves the allegations of the complaint, the plan trustee will establish a claim under 11 U.S.C. §§ 544(b), 547 and/or 548, with a resulting judgment under § 550. Again, assuming that the plan trustee proves the allegations of the complaint, the plan trustee may establish a claim for professional malpractice, resulting in a money judgment. The plan trustee's invocation of § 542(a) cannot result in a judgment under § 550, which only permits a judgment for transfers avoided under §§ 544, 545, 547, 548, 549, 553(b) or 724(a), or in a money judgment under applicable non-bankruptcy law. The plan trustee does not seek to recover property other than money. Section 542(a) does not provide for the entry of a money judgment. Section 542(a) therefore cannot be invoked to obtain a money judgment against Jenkens. Section 542(a) does not apply to this dispute. The request for an accounting under § 542(a) cannot be used to usurp discovery under the adversary proceeding rules. Consequently, the plan trustee cannot prove a set of facts entitling him to recovery under § 542(a). The motion to dismiss count four will be granted.
Judicial Estoppel
Jenkens next contends that counts six and seven of the complaint must be dismissed because of the application of judicial estoppel. In count six, the plan trustee alleges a claim for professional malpractice. In count seven, the plan trustee alleges a claim for breach of fiduciary duty. The disclosure statement submitted by the committee to support its plan of reorganization did not disclose nor discuss that Network Staffing held claims against Jenkens for professional malpractice or breach of fiduciary duty. Citing In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999), Jenkens contends that the doctrine of judicial estoppel now bars the plan trustee from prosecuting those claims.
Jenkens overstates the reach of the doctrine of judicial estoppel.
"Judicial estoppel is 'a common law doctrine by which a party who has assumed one position in his pleadings may be estopped from assuming an inconsistent position[.]'" In re Coastal Plains, Inc., 179 F.3d 197, 205 (5th Cir. 1999) (quoting Brandon v. Interfirst Corp., 858 F.2d 266, 268 (5th Cir. 1988)). "The purpose of the doctrine is 'to protect the integrity of the judicial process', by 'prevent[ing] parties from playing fast and loose with the courts to suit the exigencies of self interest[.]'" Id. (quoting Brandon, 858 F.2d at 268).
Judicial estoppel is applied when two requirements are met: the position of the party to be estopped is clearly inconsistent with its previous one, and the party convinced the court to accept the previous position. See id. at 206. In Coastal Plains the Fifth Circuit at least implicitly recognized the additional requirement that the party to be estopped must have acted intentionally rather than inadvertently. See id. at 206 (noting that many courts impose such a requirement) and 210-13 (without expressly adopting the requirement, addressing on the merits plaintiffs' contention that they had acted unintentionally and inadvertently); In re West Delta Oil Co. v. Hof, 2002 WL 1963317, at *4 (E.D. La. Aug. 21, 2002) (holding that Coastal Plains "did not blanketly adopt other circuits' requirement of intent or bad faith in order for judicial estoppel to apply," but applied elements of "inadvertence defense" "[w]ithout explicitly adopting or rejecting the possibility of an 'inadvertence defense' to judicial estoppel generally"). The Coastal Plains panel held that, "in considering judicial estoppel for bankruptcy cases, the debtor's failure to satisfy its statutory disclosure duty is 'inadvertent' only when, in general, the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment." Coastal Plains 179 F.3d at 210 (footnote omitted).
In re Wakefield, 312 B.R. 333, 336 (Bankr. N.D.Tex. 2004).
The court takes judicial notice of the following from the public record of the underlying bankruptcy case. Network Staffing did not draft the disclosure statement, did not propose the plan, and did not advocate the adoption of either. Indeed, Network Staffing had been stripped of its fiduciary functions as a debtor in possession when the court appointed a Chapter 11 trustee. The unsecured creditors committee decided that creditor distributions could be maximized by a plan of reorganization (liquidation) rather than by liquidation of assets by a Chapter 7 trustee. But the committee itself suffered a tortured history, resulting in a succession of attorneys, until its third counsel successfully steered a plan to confirmation.
The committee-drafted disclosure statement describes that a liquidating trust will be established to take and liquidate property of the Network Staffing bankruptcy estate. The disclosure statement references the transfer of debtor property to fund shareholder litigation, which forms part of the premises for counts six and seven. Disclosure statement, p. 15. While the committee knew of Network Staffing's factoring arrangement, the committee acknowledged in the disclosure statement that it had not yet completed its analysis of potential causes of action belonging to Network Staffing. The disclosure statement alerts parties in interest that the committee and the liquidating trust reserved the right to complete that analysis and pursue any causes of action identified. Disclosure statement, p. 15.
The shareholder litigation underpinning of the claim had been disclosed. The court cannot conclude on a Rule 12(b)(6) motion that the committee cannot prove that it lacked knowledge of a basis for a professional malpractice or fiduciary duty claim deriving from Network Staffing's factoring arrangement.
On this Rule 12(b)(6) motion, the court has no basis to find that the committee had a motive to conceal a professional malpractice or breach of fiduciary duty claim against Jenkens. InCoastal Plains, the Fifth Circuit observed that a debtor cannot "[c]onceal [its] claims; get rid of [its] creditors on the cheap, and start over with a bundle of [undisclosed, pre-bankruptcy] rights." Coastal Plains, 179 F.3d at 213. That so-called windfall scenario has no application in this case. The plan trustee, pursuant to the plan, seeks a recovery to be distributed to the unpaid Network Staffing creditors. This constitutes the antithesis of the Coastal Plains concern.
Also, on this Rule 12(b)(6) motion, the court has no basis to find that the committee intentionally induced the court to accept a position inconsistent with the prosecution of these claims. The committee requested that the court approve the disclosure statement. By doing so, the committee requested that the court make the finding required by 11 U.S.C. § 1125 concerning the adequacy of the information in the disclosure statement. The court had to determine whether the disclosure statement contained sufficient information "that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan." 11 U.S.C. § 1125(a)(1). The court has no basis to find that a hypothetical investor typical of a claim holder in any class in the plan would consider whether or not to support the plan based on the prospect of a malpractice claim against a law firm. The court cannot conclude that the committee is taking a position at all inconsistent with its earlier request that the court make the § 1125 finding.
Finally, the court cannot find on this Rule 12(b)(6) motion that Jenkens has suffered or encountered any prejudice.
The court cannot conclude that the committee cannot establish a set of facts that would make the doctrine of judicial estoppel inapplicable. The court will deny the motion to dismiss counts six and seven based on judicial estoppel.
Assignment of Count Six
In count six, the plan trustee alleges a claim for professional malpractice against Jenkens. Jenkens moves to dismiss the claim on the grounds that Texas public policy does not permit the assignment of a professional malpractice claim. Under Texas law, a client may not assign a legal malpractice claim. In re C-Power Products, Inc., 230 B.R. 800, 802 (Bankr. N.D. Tex. 1998). However, Network Staffing's malpractice claim against Jenkens became property of the bankruptcy estate. 11 U.S.C. § 541. As discussed above, the confirmed Chapter 11 plan transferred all causes of action to the liquidating plan-created trust. The trust was properly organized pursuant to the Bankruptcy Code to liquidate the causes of action, necessarily including the malpractice claim. The trust became the representative of the estate. The plan did not provide for the sale of the claim. Rather, the plan established a representative of the estate, pursuant to the Code, to liquidate the claim, which was property of the bankruptcy estate, for the benefit of creditors. Under the Supremacy Clause of the United States Constitution, Howlett By and Through Howlett v. Rose, 496 U.S. 356 (1990), federal law governs. The plan trustee may therefore prosecute this claim.C-Power, 230 B.R. at 802-803, citing Jewel Recovery, L.P. v. Skadden, Arps, Slate, Meagher Flom (In re Zale), 1996 Bankr LEXIS 1933 at *10-12 (September 9, 1996), attached to the C-Power opinion. The court will deny Jenkens' motion to dismiss count six.
Count Seven as Restatement of Count Six
In count seven the plan trustee alleges that Jenkens breached its fiduciary duty to Network Staffing in the manner that Jenkens performed its legal services. Jenkens moves to dismiss this count under Rule 12(b)(6), contending that it merely restates the count six professional malpractice claim. Assuming the plan trustee proves all the allegations of the complaint, the trustee will establish a malpractice claim, not a fiduciary duty claim. The plan trustee argues that it has "implicitly" stated a fiduciary duty claim within the context of the malpractice allegations. The court disagrees. The court cannot read a set of facts into the allegations that would implicitly or impliedly transform them into a fiduciary duty claim. The court will grant Jenkens' motion to dismiss count seven.
Count Six: Limitations
Jenkens moves to dismiss the count six malpractice claim as having been filed after the running of the statute of limitations. Under Texas law, the claim must be filed within two years of the accrual of the claim. Tex. Civ. Prac. Rem. Code § 16.003 (2002). Jenkens observes that the complaint contends that Jenkens' activity occurred before January 1, 2000. But the complaint also alleges that the legal representation was continuing after certain 1999 dates. The trust filed the instant complaint on June 30, 2004. Network Staffing filed its bankruptcy petition on July 1, 2002. Under the Bankruptcy Code, if limitations had not run before the filing of the bankruptcy case, limitations is extended to the end of its period or two years after the bankruptcy order for relief, whichever is later. 11 U.S.C. § 108(a). The two years would have run July 1, 2004. The complaint was filed June 30, 2004. The court cannot conclude that the plan trustee cannot prove a set of facts bringing matters within the limitations period as extended by the Bankruptcy Code. The motion to dismiss on limitations grounds will be denied.
Rule 9(b)Jenkens moves to dismiss counts one and two, alleging Texas and federal fraudulent transfer avoidance claims, for failure to plead with particularity under Rule 9(b). The plan trust has not alleged claims based on an intent to defraud. As described below, the complaint alleges sufficient particularity for a constructive fraudulent transfer claim. The motion to dismiss under Rule 9(b) will be denied.
Rule 12(e)As an alternative to its motion to dismiss, Jenkens requests that the court order the plan trustee to file an amended complaint with a more definite statement, pursuant to Rule 12(e), of the constructive fraud and malpractice claims. Under Fed.R.Civ.P. 8(a), made applicable by Bankruptcy Rule 7008, the complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." The complaint meets that standard.
Jenkens knows when it received payments on its fees. The complaint alleges that on the dates of transfer of fee payments Network Staffing was not solvent or was or would become unable to pay its debts as they became due. The complaint provides sufficient notice asserting that Jenkens did not provide reasonably equivalent value for the transfers. For malpractice, the complaint provides sufficient notice. Jenkens may pursue particulars through discovery. The court will deny the Rule 12(e) motion.
Order
Based on the foregoing,
IT IS ORDERED that the motion by Jenkens Gilchrist, a Professional Corporation, to dismiss is GRANTED IN PART and DENIED IN PART. IT IS FURTHER ORDERED that counts four and seven of the complaint are DISMISSED.