Opinion
Case No.: 8:18-bk-08436-RCT Adv. No.: 8:19-ap-00127-RCT
09-03-2019
In re STAY IN MY HOME, P.A. fka STOPA LAW FIRM, P.A., Debtor. STEPHEN L. MEININGER, as Chapter 7 Trustee of the bankruptcy estate of STAY IN MY HOME, P.A. fka STOPA LAW FIRM, P.A., Plaintiff, v. WELLS FARGO BANK, N.A., et al., Defendants.
Chapter 7 ORDER ON PENDING MOTIONS TO DISMISS
Before the Court are Motions to Dismiss filed by Wells Fargo Bank N.A. ("Wells Fargo"), Wells Fargo Bank, N.A., on behalf of Registered Holders of Bear Stearns Asset Backed Securities I Trust 2007-AC4, Asset-Backed Certificates, Series 2007-AC4 ("Wells Fargo Trustee"), U.S. Bank, N.A. National Association as Trustee for Merrill Lynch First Franklin Mortgage Loan Trust Mortgage Loan Asset Backed Certificates Series 2007-4 ("U.S. Bank"), Bank of America, N.A. ("BOA"), Bank of New York Mellon ("BNY Mellon"), Deutsche Bank National Trust Company ("Deutsche Bank"), Jason Hebert and Sarah Hebert (the "Heberts"), and Toshiaki and Cleosida Mizutani (the "Mizutanis") (Wells Fargo, Wells Fargo Trustee, U.S. Bank, BOA, BNY Mellon and Deutsche Bank hereinafter referred to collectively as the "Lenders"). The Trustee opposes each Motion to Dismiss (collectively, the "Motion").
Doc. 48.
Doc. 47. The Complaint names Wells Fargo Bank, N.A. as a defendant. Count I of the Complaint refers to Wells Fargo in the context of a foreclosure action against Debtor's former client Prince Morrison. In the state court foreclosure action Wells Fargo Bank acted in its capacity as Trustee on behalf of the Registered Holders of Bear Stearns Asset Backed Securities I Trust 2007-AC4, Asset-Backed Certificates, Series 2007-AC4. Wells Fargo Trustee is a separate legal entity and not currently a party to this proceeding (Doc. 47 at 2 n. 1).
Doc. 55. The Complaint names U.S. Bank, N.A. as a defendant. Count II of the Complaint refers to U.S. Bank in the context of a foreclosure action against Debtor's former clients James F. and Dede M. Buckmaster. In the state court foreclosure action, U.S. Bank acted in its capacity as Trustee for Merrill Lynch First Franklin Mortgage Loan Trust Mortgage Loan Asset Backed Certificates, Series 2007-4. U.S. Bank filed its Motion to Dismiss on behalf of U.S. Bank as Trustee (Doc. 55, at 2 n. 1).
Doc. 14.
Doc. 36.
Doc. 31. The Complaint names Deutsche Bank National Trust Company as a defendant. Count XII of the Complaint refers to Deutsche Bank in the context of a foreclosure action against Debtor's former clients Jason and Sarah Hebert. In the state court foreclosure action, Deutsche Bank acted in its capacity as Trustee for FFMLT Trust 2006-FF13, Mortgage Pass-Through Certificates, Series 2006-FF13. Deutsche Bank filed its Motion to Dismiss on behalf of Deutsche Bank as Trustee (Doc. 31, at 2).
Doc. 34.
Doc. 30. The Trustee's counsel announced at the June 11, 2019 pretrial conference that the Trustee and the Mizutanis settled. Accordingly, the Mizutanis' Motion to Dismiss will be denied as moot.
Each Motion raises the following issues: (1) whether there is an actual controversy between the parties within the meaning of the Declaratory Judgment Act; (2) whether the controversy is within the bankruptcy court's original jurisdiction; (3) whether the Trustee's attorney's fee claim is property of the bankruptcy estate under 11 U.S.C. § 541(a) and thus subject to administration in the Debtor's chapter 7 case; (4) whether the Trustee's attorney's fee claim is subject to the automatic stay under 11 U.S.C. § 362; and (5) whether any Lender's conduct violated the automatic stay. But first, the story behind the Trustee's Complaint.
Doc. 1.
I. FACTUAL AND PROCEDURAL HISTORY
On October 2, 2018 (the "Petition Date"), Stay In My Home, P.A. fka Stopa Law Firm, P.A. ("Debtor") filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. Stephen L. Meininger was appointed and currently serves as the Chapter 7 Trustee (the "Trustee").
Case No. 8:18-bk-08436-RCT (the "Main Case" or "MC").
11 U.S.C. §§ 101-1532 (the "Code" or "Bankruptcy Code").
Debtor was a law firm that specialized in defending individual homeowners (the "Former Clients") in residential mortgage foreclosure actions throughout the State of Florida. Debtor and its Former Clients had a unique billing arrangement that is described in the form client engagement letter attached to the Complaint (the "Engagement Letter"). Debtor charged a modest annual fee of $2,500 for the representation. Debtor was also entitled to receive as additional compensation any amounts received from a foreclosing lender, whether in the form of a judgment, an award of attorneys' fees or a settlement. This additional compensation is described in paragraph 9 of the Engagement Letter as follows:
Doc. 1 ¶ 16.
Id. ¶ 20, Ex. A. It is alleged that almost all of the Debtor's Former Clients signed an Engagement Letter in the form attached as Ex. A to the Complaint. Id. ¶ 21. Notwithstanding the Lenders' arguments to the contrary, "[i]t is adequate for [the Trustee] to allege that a contract exists, without attaching the contract to the complaint in federal court." Yencarelli v. USAA Cas. Ins. Co., No. 8:17-cv-2029-T-36AEP, 2017 WL 6559999, at *2 (M.D. Fla. Dec. 22, 2017).
Doc. 1, Ex. A.
Id.
In the event we recover monies through the process of defending this lawsuit, be it via entry of a judgment for fees or any payment by the bank then such funds shall belong to the Firm. You agree that because the Firm charges such a low annual fee that any monies recovered shall belong to the firm. Furthermore, you agree that if we are in a position of obtaining fees, then that is likely because we have procured a good result for you (e.g. dismissal,) and that we should be rewarded for such result. Moreover, in the event a result is obtained that enables you to stay in your home, e.g. a loan modification or some other work-out arrangement with a third party, you shall pay the firm $2,500 for that result.(the "Additional Compensation").
Id.
On July 27, 2018, the Florida Supreme Court suspended Debtor's former principal, Mark Stopa ("Stopa"), from the practice of law. Three days later Stopa sold his 100% interest in Debtor to Richard Mockler, Esq. ("Mockler"). Mockler, and other attorneys who worked for Debtor, thereafter continued to defend residential foreclosures until just before the Petition Date.
Id. ¶ 18.
Id. ¶ 17.
Id. ¶ 21.
On the Petition Date, the Trustee estimates that Debtor had roughly 3,600 clients in more than 4,000 active cases throughout the State of Florida. With some exceptions, Debtor withdrew or attempted to withdraw from these representations either on, shortly before or shortly after the Petition Date. After Debtor filed bankruptcy, some Former Clients continued to work with attorneys who had previously worked for Debtor.
Id. ¶ 19.
On October 9, 2018, seven days after the filing, the Trustee moved for a broad and expansive extension of the automatic stay on an emergency basis. The Trustee claimed that he needed an extended stay to allow him to inventory the thousands of cases handled by Debtor, to coordinate with the Florida Bar, and to take any actions necessary to preserve assets of the bankruptcy estate. The Court granted the Trustee's motion pursuant to 11 U.S.C. § 105, but only for a brief period of time (the "105 Stay"). The 105 Stay expired on November 6, 2018. The Court also entered an order making clear that once the 105 Stay expired, the automatic stay arising under 11 U.S.C. § 362 (the "362 Stay") remained in place, except to the extent that the Court specifically granted relief from the 362 Stay by separate order. Indeed, the Court has since entered dozens of orders permitting lenders to complete all aspects of foreclosure actions including sales, appeals, motions for rehearing, and motions to determine entitlement to fees and costs. But these orders generally include a reservation of rights to preserve whatever claims the bankruptcy estate may have for fees in the form of Additional Compensation.
MC Doc. 12.
MC Doc. 32.
Id.
MC Doc. 139.
On March 15, 2019, the Trustee filed a 16 count Complaint for declaratory and related relief against the Lenders and Former Clients. The Complaint alleges that based on the Engagement Letters, the Trustee's claims for Additional Compensation are property of Debtor's bankruptcy estate and therefore subject to the automatic stay. The counts of the Complaint relevant to the pending Motions are:
Counts III, IV, VI, and XIII are claims for declaratory relief. Counts V, VII and XIV are turnover claims pursuant to 11 U.S.C. § 542. Counts VIII and XV are avoidance claims pursuant to 11 U.S.C. §§ 549 and 550. Counts IX and XVI seek damages for violation of the automatic stay pursuant to 11 U.S.C. §§ 362(k) and 105(a). These Counts are not addressed here.
| Count | Relief Requested | Defendant(s) |
|---|---|---|
| Count I | Declaratory Relief | Wells Fargo and Prince Morrison |
| Count II | Declaratory Relief | U.S. Bank and the Buckmasters |
| Count X | Declaratory Relief | BOA and Cameron Foster |
| Count XI | Declaratory Relief | BNY Mellon and David Bowering |
| Count XII | Declaratory Relief | Deutsche Bank and the Heberts |
II. STANDARD OF REVIEW
Defendants seek to dismiss Counts I, II, X, XI and XII of the Complaint pursuant to Fed. R. Civ. P. 12(b)(6), made applicable to this proceeding by Fed. R. Bankr. P. 7012. When ruling on a motion to dismiss, a court must "view the allegations of the complaint in the light most favorable to Plaintiff, consider the allegations of the complaint as true, and accept all reasonable inferences therefrom." Consideration also is limited to the pleadings and exhibits attached thereto.
See Omar ex rel. Cannon v. Lindsey, 334 F.3d 1246, 1247 (11th Cir. 2003).
Id.
Although "a complaint attacked by a Rule 12(b)(6) motion ... does not need detailed factual allegations ... [it] should give the defendant fair notice of what the ... claim is and the grounds upon which it rests." Moreover, a plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Id. at 570.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
III. DISCUSSION
A. Jurisdiction in the Context of Declaratory Judgment
In Counts I, II, X, XI and XII of the Complaint, the Trustee seeks declaratory relief pursuant to the Declaratory Judgment Act (the "Act"). Specifically, the Trustee asks for a declaration that any claims for Additional Compensation are property of Debtor's bankruptcy estate and therefore subject to the automatic stay. The Lenders move to dismiss on the ground that the facts, as pleaded, fail to show the existence of an actual controversy between Debtor and the respective Lender. Rather, the Lenders argue, the Trustee impermissibly seeks "an advisory opinion as to the bankruptcy estate's hypothetical rights, contingent on a set of facts that may or may not occur."
See e.g. Doc. 55 at 3.
The Act provides that a declaratory judgment may be issued only in the case of an "actual controversy." For this reason, Article III federal courts do not render advisory opinions. The issue of whether an actual controversy is presented must be decided on a case-by-case basis. "[T]he question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." The "party seeking a declaratory judgment bears the burden of establishing the existence of an actual case or controversy."
28 U.S.C. § 2201; see Emory v. Peeler, 756 F.2d 1547, 1551-52 (11th Cir. 1985).
Golden v. Zwickler, 394 U.S. 103, 108 (1969).
Hendrix v. Poonai, 662 F.2d 719, 721-22 (11th Cir. 1981).
Maryland Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941).
Cardinal Chem. Co. v. Morton Int'l, Inc., 508 U.S. 83, 95 (1993).
The Act operates solely as a procedural vehicle, providing a form of relief generally unavailable in the federal courts. It is well established that the "Act does not, of itself, confer jurisdiction upon federal courts." The Act mandates that the plaintiff allege facts sufficient to show that the controversy is within the court's original jurisdiction. "If there is an underlying ground for federal court jurisdiction, the Declaratory Judgment Act 'allow[s] parties to precipitate suits that otherwise might need to wait for the declaratory relief defendant to bring a coercive action.'"
Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, 240 (1937).
Fastcase, Inc. v. Lawriter, LLC, 907 F.3d 1335, 1340 (11th Cir. 2018) (quoting Stuart Weitzman, LLC v. Microcomputer Res., Inc., 542 F.3d 859, 861-62 (11th Cir. 2008)).
Household Bank, f.s.b. v. JFS Group, 320 F.3d 1249, 1253 (11th Cir. 2003).
Id. (quoting Gulf States Paper Corp. v. Ingram, 811 F.2d 1464, 1467 (11th Cir. 1987)).
The issues of whether the Trustee's claims for Additional Compensation are property of the estate and whether the automatic stay extends to the Lenders' acts in the foreclosure cases identified in the Complaint are actual controversies. The parties have been at war over these issues for months. The facts alleged in the Complaint are not hypothetical. They represent real and disputed claims that warrant the issuance of a declaratory judgment.
B. Original Jurisdiction in the Bankruptcy Courts
Bankruptcy judges are permitted to "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11." Under 28 U.S.C. § 157, a bankruptcy court's authority to enter a final order or judgment depends on whether a case is considered "core" or "non-core." Bankruptcy courts can enter final orders and judgments in "core proceedings arising under title 11, or arising in a case under title 11." Bankruptcy judges may also hear non-core proceedings that are "otherwise related to a case under title 11," but they may not enter final orders in these related proceedings unless all parties consent. Absent consent of the parties, the bankruptcy court must prepare proposed findings of fact and/or conclusions of law for the district court to review de novo.
Wortley v. Bakst, 844 F.3d 1313, 1318 (11th Cir. 2017) (citing 28 U.S.C. § 157(b)-(c)).
28 U.S.C. § 157(c)(1)-(2); see also Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1941-42 (2015) (holding that, under Article III, litigants may validly consent to adjudication by bankruptcy courts over claims governed by Stern v. Marshall, 564 U.S. 462, 503 (2011), i.e., "claim[s] designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way as a constitutional matter") (citation and internal quotation marks omitted).
"Core proceedings are narrow in scope, and include only those cases that implicate the property of the bankruptcy estate and either invoke substantive rights created by federal bankruptcy law or that exist exclusively in the bankruptcy context." Related non-core proceedings include matters that "could conceivably have an effect on the estate being administered in bankruptcy," even if they are not proceedings "against the debtor or against the debtor's property."
Wortley, 844 F.3d at 1318 (citing Cont'l Natl. Bank v. Sanchez (In re Toledo), 170 F.3d 1340, 1347-48 (11th Cir. 1999)).
Id. (citing Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.), 910 F.2d 784, 788 (11th Cir. 1990)).
The Trustee's request for a declaratory judgment regarding application of the automatic stay is a core bankruptcy matter. It arises under Title 11, specifically 11 U.S.C. § 362(a). The requested declaration also implicates administration of the bankruptcy estate within the meaning of 28 U.S.C. § 157(b)(2)(A).
The Trustee's request for a declaratory judgment that any claims for Additional Compensation are property of Debtor's bankruptcy estate likewise falls within this court's core jurisdiction. Identifying property of the estate is a critical part of administering the estate. Although the existence, nature and extent of a debtor's interest in property is determined by applicable non-bankruptcy law, whether that interest qualifies as "property of the estate" is determined by bankruptcy law, specifically 11 U.S.C. §§ 541(a)(1)-(7). Accordingly, this Court has core jurisdiction to determine what is property of Debtor's chapter 7 bankruptcy estate.
Butner v. United States, 440 U.S. 48, 55 (1979) ("Property interests are created and defined by state law.").
Although this court's core jurisdiction extends to defining the property to be administered in Debtor's chapter 7 bankruptcy, core jurisdiction does not extend to the Trustee's pursuit and recovery of Additional Compensation under state law. See Whiting-Turner Contracting Co. v. Elec. Mach. Enter., Inc. (In re Elec. Mach. Enter., Inc.), 479 F.3d 791, 798 (11th Cir. 2007) (holding that debtor's claim against defendant for money owed pursuant to their contractual agreement does not involve a right created by federal bankruptcy law, and is not a proceeding that would arise only in bankruptcy and therefore only "related to" debtor's bankruptcy).
C. The Trustee's Claims for Addition Compensation Are Property of the Debtor's Bankruptcy Estate and Subject to the Automatic Stay
Lenders argue that their prosecution of residential foreclosures against Debtor's Former Clients does not involve either Debtor or property of the bankruptcy estate. Thus, the Lenders conclude that the automatic stay cannot be implicated in or violated by their state court foreclosure proceedings. To a large extent, the Lenders are correct. The real property at issue in the residential foreclosures is not part of this bankruptcy estate. The Lenders and Former Clients are not debtors in this bankruptcy case. But the Trustee does not dispute any of this. Rather, the Trustee argues that his only interest is in claims for Additional Compensation. It is therefore necessary to determine whether these claims are property of the estate and thus subject to administration in the Debtor's chapter 7 case. In this analysis, the Court distinguishes between the Trustee's claim or cause of action for Additional Compensation, on the one hand, and a property right (ownership or security interest) in actual funds generated in the foreclosure cases, on the other.
Section 541 of the Code broadly defines property of the estate to include "all legal and equitable interests of the debtor in property as of the commencement of the case." This provision is broad enough to include a debtor's property rights in a cause of action that has yet to evolve into a fully matured claim, particularly if the basis of the cause of action is rooted in the debtor's prepetition activities. Indeed, § 541(a)(1) has been interpreted to extend to "every conceivable interest of the debtor, future, nonpossessory, contingent, speculative and derivative...." The Trustee's claims for Additional Compensation therefore come within the broad scope of "property of the estate." But this is not the same thing as concluding that the Trustee can prevail on any specific claim for Additional Compensation.
See Johnson, Blakely, Pope, Bokor, Ruppel & Burns, P.A. v. Alvarez (In re Alvarez), 224 F.3d 1273, 1279 (11th Cir. 2000).
In re Johnson, 548 B.R. 770, 790 (Bankr. S.D. Ohio 2016) (quotations and citations omitted).
The next question is whether the Trustee's claims for Additional Compensation are protected by the automatic stay. Section 362(a)(3) of the Bankruptcy Code provides that any act to obtain possession of property of the estate or to exercise control over property of the estate after a bankruptcy petition is automatically stayed. Can a Lender's action against a Former Client constitute an exercise of control over the Trustee's claim for Additional Compensation and thus implicate the automatic stay? The answer is yes. Section 362(a)(3) has frequently been interpreted to prohibit actions against non-debtors that have an adverse impact on property of the estate.
Id. (citing cases).
D. Whether the Trustee Can Prevail on a Cause of Action For Additional Compensation is a Matter of State Law
Having determined that the Trustee's claims for Additional Compensation are protected by the automatic stay, the next and larger issue is whether the Trustee can recover on any of his claims for Additional Compensation, or as framed by the Trustee in this proceeding, whether he has standing to intervene in the state court foreclosure actions to assert his claims to the funds generated in the foreclosure litigation. While § 541(a) defines what interests become property of the estate, state law determines the existence and scope of Debtor's interest in a particular asset as of the petition date. Thus, Florida law governs the property rights of the Trustee, who stands in the shoes of the Debtor, in any Additional Compensation.
Butner, 440 U.S. at 55.
Generally, to assert a property interest in funds generated in a foreclosure proceeding, Florida law requires that the attorney asserting the interest have a valid charging lien. Florida common law defines a charging lien as "an equitable right to have costs and fees due an attorney for services in the suit secured to him in the judgment or recovery in that particular suit."
See, e.g., CK Regalia, LLC v. Thornton, 159 So.3d 358 (Fla. Dist. Ct. App. 2015).
Sinclair, Louis, Siegel, Heath, Nussbaum & Zavertnik, P.A. v. Baucom, 428 So.2d 1383, 1384 (Fla. 1983).
To impose a charging lien under Florida law, an attorney must show: "(1) an express or implied contract between attorney and client; (2) an express or implied understanding for payment of attorney's fees out of the recovery; (3) either an avoidance of payment or a dispute as to the amount of fees; and (4) timely notice." Timely notice is required to perfect a charging lien, and the preferred method of enforcing an attorney's charging lien is a summary proceeding in the original action.
Daniel Mones, P.A. v. Smith, 486 So.2d 559, 561 (Fla. 1986).
Sinclair, 428 So.2d at 1385.
Daniel Mones, P.A., 486 So.2d at 561.
Without a valid charging lien, the Trustee generally would have no property interest in funds generated in the foreclosure cases. He only would have a potential unsecured claim against the Debtor's Former Clients. But instead of asserting rights under a charging lien, or an independent right to assert a claim for attorneys' fees or settlement proceeds, the Trustee argues that the Engagement Letter itself operates as an assignment of any rights that a Former Client may have against Lenders for attorneys' fees and settlement recoveries. To support this argument, the Trustee relies on Tubbs v. Mechanik Nuccio Hearne & Wester, P.A. Although Tubbs acknowledges that an assignment of an attorney fee claim is a possibility, it provides no support or guidance as to whether a valid assignment has occurred here.
Benitez v. Eddy Leal, P.A., 272 So.3d 506, 510 (Fla. Dist. Ct. App. 2019).
125 So.3d 1034 (Fla. Dist. Ct. App. 2013).
An assignment is a transfer of property or some other right which confers a "complete and present right in the subject matter" to the assignee. In construing an assignment, a court must determine exactly what has been assigned and whether a valid assignment has been made.
3A Fla. Jur.2d Assignments § 1.
Univ. Creek Assoc. II, Ltd. v. Boston Am. Fin. Grp., Inc., 100 F. Supp. 2d 1337, 1339 (S.D. Fla. 1998).
To suggest that the Engagement Letter created an absolute assignment of potential fees or settlement recoveries is at odds with the very purpose of the Engagement Letter. An absolute assignment would mean that Debtor could have withdrawn the day after the Former Client signed the letter and thereafter lay claim to any fees or settlement that the Former Client, or a new attorney, recovered. It appears even the Trustee is unwilling to take this position. Despite the allegations in paragraph 23 of the Complaint, at oral argument, the Trustee acknowledged that Debtor must have substantially completed its work for a Former Client to trigger the contingency for the Additional Compensation and the purported assignment. So, no, the Engagement Letter itself is not an absolute assignment that the Trustee might use to intervene in the foreclosure actions.
At best, the Trustee may argue that the assignment is contingent and, as such, represents contingent compensation. Thus, even if the Trustee establishes a contingent assignment, the Trustee cannot rely on the Engagement Letter to step into the shoes of a Former Client until he can demonstrate (or obtain a declaration) that all contingencies are fully realized. Here, at a minimum, the requisite contingencies are (i) Debtor has a valid claim to Additional Compensation, and (ii) attorneys' fees or settlement proceeds have been realized in a particular foreclosure action. Until these contingencies are established, the Trustee has no right to intervene as the real party in interest in any foreclosure action by waiving the Engagement Letter.
The practical problem is that, by the time these contingencies occur or are established, it will be too late to assert a direct claim against any Lender. Indeed, that is the very purpose and function of a charging lien to create an equitable interest for a former attorney in a prospective recovery. Thus, for all practical purposes, with merely a contingent assignment and without a charging lien, the Trustee can only assert an unsecured claim for Additional Compensation against Former Clients.
There are other problems with the Trustee's contingent assignment theory. Obviously, it is not clearly pled in the Complaint. Second, the Complaint essentially admits that Debtor breached its Engagement Letters, either before or after the Petition Date, by withdrawing from the representations without good cause. Indeed, to the extent that the Engagement Letters were executory contracts when Debtor filed bankruptcy, they are now deemed rejected and thus breached. Nothing in the language of the Engagement Letter suggests that a right to Additional Compensation survives Debtor's breach of the contract to represent a Former Client.
In chapter 7, an executory contract is deemed rejected if the trustee does not assume it within 60 days. 11 U.S.C. § 365(d)(1). The effect of a rejection is that the contract is deemed breached as of the day before the petition date. § 365(g).
Defendants also point to Faro v. Romani to argue that the Trustee has no valid claim for Additional Compensation as a matter of law because Debtor voluntarily withdrew from all of the foreclosure cases when this chapter 7 case was filed. In Faro, the court ruled that an attorney engaged on a contingency fee basis forfeited all fees if he voluntarily withdrew from the case before the contingency occurred. Faro excepts from this general rule circumstances where the attorney's continued performance would have been legally impossible or unethical or due the client's conduct. This really is just a variation on the theme that Debtor's withdrawal without good cause or rejection of the Engagement Letter was a breach.
The Lenders argue generally that Debtor's withdrawal was prompted by Stopa's suspension, but this also is not quite accurate. According to the Complaint, Stopa's suspension prompted the sale of the Debtor to Richard Mockler on or around July 30, 2018. Debtor continued to represent foreclosure clients through Mr. Mockler and other attorneys at the firm. Indeed, pursuant to paragraph 8 of the Engagement Letter, the Former Clients "authorize[d] and approve[d] any attorneys employed by the firm or otherwise associated with it to work on your case at the hourly rate set forth herein ...." The withdrawals were prompted by Debtor's liquidation under Chapter 7 of the Code (see Doc. 1 ¶ 50). It is axiomatic that a law firm cannot operate in a Chapter 7.
Faro, 641 So.2d 69.
Id.
No doubt, Faro v. Romani, or breach of contract, may be potential defenses to enforcement of a charging lien or any separate action against Former Clients, but they do not bear directly on the main question raised in this adversary proceeding, namely whether the Trustee's cause of action is property of the estate and thus protected by the automatic stay. Nor do they arise with respect to the Trustee's claim of a property interest in any funds generated in the foreclosure cases until the Trustee alleges the existence of a charging lien or, at a minimum, the existence of a fully matured contingent assignment. Such facts will necessarily be case specific.
With this in mind, we turn to the Motions.
E. Wells Fargo and Wells Fargo Trustee's Motions to Dismiss Count I of the Complaint (Docs. 48 and 47)
Wells Fargo and non-party Wells Fargo Trustee filed Motions to Dismiss Count I of the Complaint which involves a mortgage foreclosure complaint filed by Wells Fargo Trustee against Former Client Prince Morrison. Debtor represented Mr. Morrison in the foreclosure action and obtained an involuntary dismissal on May 19, 2017. On June 19, 2017, over one year before the Petition Date, Debtor filed a motion to tax costs. Debtor moved to withdraw as counsel on September 18, 2018. Shortly before the Petition Date, on September 28, 2018, the court held a hearing on the fee motion. No one appeared for Mr. Morrison. On November 21, 2018, after the 105 Stay expired, the state court entered an order denying the fee motion because no one appeared at the September 28th hearing. Mr. Morrison has defaulted in this adversary proceeding.
Doc. 1 ¶ 28.
Id. ¶ 29.
Id. ¶ 30.
Id. ¶ 33.
Id. ¶ 34.
Id.
Id. ¶ 35.
Doc. 72.
Although the 105 Stay expired, the 362 Stay was still in place when the state court entered its order denying the fee motion. Under the facts asserted here, which are assumed to be true, the Trustee arguably states a claim that the 362 Stay was violated which could render the order denying the fee motion void.
In the Eleventh Circuit, actions taken in violation of the automatic stay are void ab initio and therefore without effect. United States v. White, 466 F.3d 1241, 1244 (11th Cir. 2006) (citing Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir. 1982)). This includes orders entered by state courts. In re Clarke, 373 B.R. 769, 771 (Bankr. S.D. Fla. 2006) (citing In re Albany Partners, Ltd., 749 F.2d 670, 675 (11th Cir. 1984)).
Nevertheless, the Court agrees with Wells Fargo that it is not the correct party to this action and grants its Motion to Dismiss on that basis without prejudice to the Trustee amending the Complaint within 14 days of the entry of this Order.
Because Wells Fargo Trustee filed a Motion to Dismiss even though it is not yet a party to this adversary proceeding, the Court denies its Motion to Dismiss, but again without prejudice to raise the same issues if it is named as a party in any amended complaint.
F. U.S. Bank's Motion to Dismiss Count II of the Complaint (Doc. 55)
U.S. Bank filed a Motion to Dismiss Count II of the Complaint which involves a mortgage foreclosure complaint filed by U.S. Bank against Former Clients James F. and Dede M. Buckmaster. Debtor represented the Buckmasters in the foreclosure action from March 2016 until the Petition Date when the state court, apparently sua sponte, entered an order withdrawing Debtor as counsel of record.
Doc. 1 ¶ 48.
Id. ¶¶ 49-50.
On November 13, 2018, the state court entered an order scheduling a case management conference for November 30, 2018. On November 30, 2018, the court entered an order of dismissal without prejudice because no one appeared at the hearing. A few days later, U.S. Bank moved to vacate the dismissal order. On December 19, 2018, new counsel appeared on behalf of the Buckmasters. On January 9, 2019, the Trustee filed a motion to intervene in the state court case for the limited purposes of pursuing an award of attorney's fees and costs on behalf of the estate, and opposing U.S. Bank's motion to vacate the dismissal order. U.S. Bank opposed the Trustee's intervention arguing that he does not have standing to participate in the foreclosure action. On February 8, 2019, the state court entered an order continuing U.S. Bank's motion to vacate the dismissal order "until such a time that Plaintiff convinces or otherwise shows this Court that it has jurisdiction to grant the relief sought in the Motion, notwithstanding the automatic bankruptcy stay imposed by 11 U.S.C. § 362 relating to the Bankruptcy Case, or obtains relief from the automatic stay from the Bankruptcy Court." The Buckmasters have defaulted in this adversary proceeding.
Id. ¶ 51.
Id.
Id. ¶ 52.
Id. ¶ 53.
Id. ¶ 54.
Id. ¶ 55.
Id. ¶ 56.
Docs. 74-75.
The Complaint does not allege that U.S. Bank violated the automatic stay. Instead, the Trustee seeks a declaration that his claim for Additional Compensation is property of the estate and that he has a right to intervene in the foreclosure case to protect that right.
The Trustee's cause of action for Additional Compensation is property of Debtor's chapter 7 bankruptcy case and is protected by the automatic stay. But the Trustee's right to intervene in the foreclosure action to assert his claim directly against U.S. Bank (as opposed to asserting an unsecured claim against a Former Client in a separate proceeding) depends on whether a valid charging lien was asserted in the foreclosure action or whether the Trustee can allege a fully matured contingent assignment.
Accordingly, U.S. Bank's Motion to Dismiss is granted without prejudice to the Trustee amending the Complaint within 14 days of the entry of this Order.
G. BOA's Motion to Dismiss Count X of the Complaint (Doc. 14)
BOA filed a Motion to Dismiss Count X of the Complaint which involves a mortgage foreclosure complaint filed by BOA against Former Client Cameron Foster. While Debtor was still engaged as counsel for Mr. Foster, the state trial court dismissed the foreclosure action which arguably gives rise to a claim for Additional Compensation. BOA appealed to the state appellate court and that appeal remains pending. Mr. Foster has defaulted in this adversary proceeding.
Doc. 1 ¶ 127.
Id. ¶ 129.
Id.
Doc. 92.
Again, the Complaint does not allege that BOA violated the automatic stay. Rather, the Trustee seeks a declaration that any claim for Additional Compensation is property of the bankruptcy estate. As discussed above, the Trustee's cause of action for Additional Compensation is property of the estate. But if BOA has obtained stay relief, as currently pled, the Complaint does not state a claim for any relief against BOA.
Accordingly, BOA's Motion to Dismiss is granted without prejudice to the Trustee amending the Complaint within 14 days of the entry of this Order.
H. BNY Mellon's Motion to Dismiss Count XI of the Complaint (Doc. 36)
BNY Mellon filed a Motion to Dismiss Count XI of the Complaint which involves a mortgage foreclosure complaint filed by BNY Mellon against Former Client David Bowering. Debtor began representing Mr. Bowering in 2015 and obtained an involuntary dismissal on March 13, 2018. BNY Mellon appealed to the state appellate court and that appeal remains pending. Mr. Bowering has been represented by new counsel since the Petition Date. To date, neither the trial nor appellate court has considered whether attorney's fees are recoverable based on the involuntary dismissal.
Id. ¶ 139.
Id. ¶ 140-141.
Id. ¶ 141.
BNY Mellon argues that until fees are awarded, the Complaint fails to assert a justiciable controversy and therefore the Court lacks jurisdiction. As discussed above, the automatic stay protects the Trustee's claim for Additional Compensation. But without an allegation that BNY Mellon's appeal of the involuntary dismissal violated the 362 Stay, the Complaint does not state a claim against BNY Mellon. Moreover, to the extent that the Complaint seeks to establish a property interest against BNY Mellon for Additional Compensation, it also fails to state a claim.
Accordingly, BNY Mellon's Motion to Dismiss is granted without prejudice to the Trustee amending the Complaint within 14 days of the entry of this Order.
I. Deutsche Bank and Heberts' Motions to Dismiss Count XII of the Complaint (Docs. 31 and 34)
The Heberts hired Debtor in 2014 to defend them in a residential foreclosure action filed by Deutsche Bank. On September 18, 2018, Debtor withdrew as counsel of record. Since the Petition Date, the Heberts have been represented by new counsel, a former associate of Debtor.
Doc. 1 ¶¶ 151-152.
Id. ¶ 153.
In Count XII, the Trustee alleges that Deutsche Bank and the Heberts have negotiated a settlement. Both Deutsche Bank and the Heberts deny that any settlement has been reached, but for purposes of a motion to dismiss the Court assumes that the alleged facts are true. The Trustee seeks a declaration that the settlement funds "whether in the hands of a Stopa client or one of the Foreclosure Plaintiffs, are property of the Debtor's bankruptcy estate." As pled, the Complaint is insufficient to support a claim for this declaration. The Complaint fails to allege facts necessary to establish a property interest in the funds.
Id. ¶ 154.
Accordingly, Deutsche Bank and the Heberts' Motions to Dismiss are granted without prejudice to the Trustee amending the Complaint within 14 days of the entry of this Order.
IV. CONCLUSION
For the reasons set forth above, it is
ORDERED:
1. Wells Fargo's Motion to Dismiss (Doc. 48) is GRANTED. The Trustee's Complaint against Wells Fargo is DISMISSED, without prejudice.
2. Wells Fargo Trustee's Motion to Dismiss (Doc. 47) is DENIED, without prejudice.
3. U.S. Bank's Motion to Dismiss (Doc. 55) is GRANTED. The Trustee's Complaint against U.S. Bank is DISMISSED, without prejudice.
4. BOA's Motion to Dismiss (Doc. 14) is GRANTED. The Trustee's Complaint against BOA is DISMISSED, without prejudice.
5. BNY Mellon's Motion to Dismiss (Doc. 36) is GRANTED. The Trustee's Complaint against BNY Mellon is DISMISSED, without prejudice.
6. Deutsche Bank's Motion to Dismiss (Doc. 31) is GRANTED. The Trustee's Complaint against Deutsche Bank is DISMISSED, without prejudice.
7. The Heberts' Motion to Dismiss (Doc. 34) is GRANTED. The Trustee's Complaint against the Heberts is DISMISSED, without prejudice.
8. The Mizutanis' Motion to Dismiss (Doc. 30) is DENIED as moot.
9. The Trustee is GRANTED leave to amend the Complaint within 14 days of the entry of this Order.
ORDERED.
Dated: September 03, 2019
/s/_________
Roberta A. Colton
United States Bankruptcy Judge Michael A. Friedman, Esq. is directed to serve a copy of this Order on all interested parties who are non-CM/ECF users who have specifically elected to receive notice in this action, pursuant to the Order Granting Chapter 7 Trustee's Expedited Motion to Limit Notice and Modify Service Procedures (Doc. 11), and to file a proof of service within 3 days of entry of this Order.