Opinion
Civil Action No. 02-2273, Bankruptcy Number 91-11695, Adversary Proceeding #01-01372, SECTION: E/2
October 8, 2002
ORDER AND REASONS
This matter is before the Court on appeal from the United States Bankruptcy Court for the Eastern District of Louisiana. Plaintiffs are the Slater Law Firm, W. Malcolm Stevenson, of counsel to that firm, and Kevin M. Wheeler, an attorney employed by that firm (hereinafter collectively referred to as "Slater"). Defendants are S. Parish Oil Co., Inc., (hereinafter "S. Parish" or "Debtor"), and I.G. Petroleum, LLC, ("IG"). All parties have filed briefs. The Court, concluding that oral argument is not necessary, considered the matter on the briefs and the record.
BACKGROUND
As aptly characterized by the Bankruptcy Court in its Memorandum Opinion on appeal, the underlying bankruptcy case of the Debtor has had a long and tortuous history which involved, among other sub-plots, an ongoing dispute over the ownership of the Debtor during the administration of the bankruptcy estate. This Court will only recite those incidents which are directly pertinent to this appeal.
On November 25, 1995, the Debtor's Second Amended Plan of Reorganization was confirmed by the Bankruptcy Court. At that time, James Ingersoll was the purported owner of the Debtor, and the Debtor was represented in the bankruptcy proceedings by Edward Heller. In the following years, during the administration of the confirmed plan, a dispute arose between Ingersoll and Donald Muller over the ownership of the Debtor. In January of 1998, a consent judgment was entered in the 24th Judicial District Court for Jefferson Parish, which purported to transfer the stock of the Debtor to West Delta Oil Company ("West Delta"), which subsequently transferred the stock to Muller. Mr. Heller then withdrew as counsel for the Debtor and on behalf of Debtor, Muller apparently hired W. Malcolm Stevenson ("Stevenson") of the Slater Law Firm. The Bankruptcy Court entered an Order granting Stevenson's Motion to Enroll as Debtor's counsel.
On March 2, 1998, Ingersoll's Motion to be Recognized as Legal Representative of the Debtor was dismissed without prejudice. Ingersoll then filed a state court action against West Delta seeking to annul the consent judgment transferring the Debtor's stock to West Delta. In January 1999, that action was stayed by West Delta's bankruptcy filing. Eighteen months later, the Bankruptcy Court confirmed a Plan of Reorganization filed by IG, a creditor of West Delta. Also in July, 2000, IG acquired stock in the Debtor from the purported "true owner", Ingersoll.
On February 15, 2001, the state court entered a judgment in Ingersoll's suit annulling the 1998 transfer of the Debtor's stock to West Delta. Subsequently, another Consent Judgment was entered in state court recognizing IG as the owner of all stock of the Debtor. In April of 2001, David Wagespack, who previously represented IG, also began representing the Debtor. The Debtor's Plan of Confirmation is still under administration by the Bankruptcy Court.
Under new ownership, Debtor and IG filed a malpractice suit in Civil District Court for Orleans Parish against Slater. The malpractice suit alleged negligence and various acts of malpractice during Slater's representation of Debtor for the period from February 1998 through April 2001, during the pendency of the bankruptcy proceeding. The allegations include a claim that Slater was improperly paid over $98,000.00 in legal fees from Debtor's escrowed funds for legal services rendered during the administration of the Debtor's confirmed plan.
Instead of removing the state action, Slater filed an adversary proceeding in the Bankruptcy Court for a declaration that the actions taken and legal services performed during the administration of the Debtor's estate were valid and proper, including the receipt of the legal fees paid for those legal services rendered. Defendants in the adversary proceeding, S. Parish and IG, filed a motion to dismiss, or alternatively, to stay the declaratory judgment action. Meanwhile, the state court malpractice action was dismissed with prejudice for lack of jurisdiction. The Bankruptcy Court granted S. Parish and IG's motion to dismiss, and Slater appealed that dismissal to this Court.
ANALYSIS
The Bankruptcy Court's Memorandum Opinion first cited Travelers Insurance Company v. Louisiana Farm Bureau Federation, Inc., 996 F.2d 774, 776 n. 7 (5th Cir. 1993) in support of its dismissal of the declaratory judgment action. At note 7, the Fifth Circuit cautioned that use of a declaratory judgment action to race to res judicata or to change forums is inconsistent with the purposes of the Declaratory Judgment Act. Id. The Bankruptcy Court further found that it was improper for the plaintiffs in the declaratory judgment action to ask that Court to "revisit the actions" taken by that Court in the course of the Debtor's case. Finally, citing In re Craig's Stores of Texas, Inc., 266 F.3d 388 (5th Cir. 2001), the Bankruptcy Court decided that it did not have jurisdiction over the declaratory judgment action. This Court disagrees.
The malpractice action in state court was a collateral attack on the administration of the plan of reorganization during the pendency of the bankruptcy proceeding. The Debtor's claims against Slater in the state action clearly challenge the bankruptcy court's decisions relating to the administration of the Debtor's confirmed plan, including its orders authorizing payment of Slater's fees from the Debtor's escrowed funds. Filing that action in state court was an attempt at forum shopping to avoid litigating in the federal bankruptcy court Debtor's claims that its confirmed reorganization plan was negligently administered. However, since the state court action has been dismissed, there is no race to the courthouse, and the federal forum is an appropriate forum for the declaratory judgment action.
Defendants' opposition points out that the state court's decision dismissing their malpractice action is on appeal and may be reversed. However, because this Court decides that the matter is within the exclusive jurisdiction of the bankruptcy court, that issue is moot.
More important, the Bankruptcy Court's reading of In re Craig's Stores is overly broad. Craig's Stores had done business with the Bank of Louisiana since 1989, using the Bank to administer Craig's credit cards, and for other arrangements. The parties complex contractual arrangement continued during the pendency of Craig's Stores' Chapter 11 proceeding filed in 1993, and their contract was assumed as part of the debtor's confirmed reorganization plan. When post confirmation contractual disputes arose between the parties, Craig's Stores sued the Bank in Bankruptcy Court alleging state law breach of contract claims.
Affirming the District Court's dismissal of the action for lack of jurisdiction, the Fifth Circuit held that "[a]fter a debtor's reorganization plan has been confirmed, the debtor's estate, and thus bankruptcy jurisdiction, ceases to exist, other than for matters pertaining to the implementation or execution of the plan." Id. at 390. The Court reasoned that "the state law causes of action asserted by Craig's against the Bank do not bear on the interpretation or execution of the debtor's plan and therefore do not fall within the bankruptcy court's post-confirmation jurisdiction." Id. at 391, citing 11 U.S.C. § 1142(b).
The Fifth Circuit's holding does not bar all post confirmation actions from the bankruptcy court's post-confirmation jurisdiction, just those that have no bearing on the "interpretation or execution" of the debtor's reorganization plan. In the state court malpractice action, Debtor, now under new ownership and control, collaterally attacked the interpretation and execution of the Debtor's confirmed plan by attacking the actions and legal services performed by the Debtor's court authorized attorneys, and the fees paid to those attorneys by Debtor for those services. All matters complained of were performed pursuant to the interpretation and execution of the Debtor's confirmed plan with apparently no objection from the Trustee, and with approval of the Bankruptcy Court. Debtor now seeks to have Slater disgorge the fees collected from Debtor and pay other damages to Debtor. That result would obviously enrich Debtor's estate and affect the continuing distribution of Debtor's assets. it clearly bears on the interpretation and execution of the Debtor's confirmed plan. It is therefore a core proceeding within the exclusive jurisdiction of the bankruptcy court.
See Matter of Case, 937 F.2d 1014, 1019-20 (5th Cir. 1991) (Addressing whether an adversary proceeding is a "core proceeding" for purposes of § 157, the Court quated In re Manville Forest Products Corp., 896 F.2d 1384, 1389 (2nd Cir. 1990) (citing Matter of Wood, 825 F.2d 90 (5th Cir. 1987)) as follows: "The relevant inquiry is whether the nature of the adversary proceeding, rather than the state or federal basis for the claim, falls within the core of bankruptcy power.")
Accordingly,
IT IS ORDERED that the ORDER of the Bankruptcy Court dismissing the Adversary Proceeding #01-1372 consisting of plaintiffs' Declaratory Judgment action, dated June 21, 2002, be and is hereby REVERSED. IT IS FURTHER ORDERED that this matter be and is hereby REMANDED to Section "B" of Bankruptcy Court for further proceedings.
A careful review of plaintiffs' Notice of Appeal revealed that the Assignment of Error/Issue Presented for Review included "(3) Whether the Bankruptcy Court erred in refusing to award plaintiffs compensation, for work they performed and costs they incurred in representing S. Parish in its bankruptcy proceeding as reflected in their Final Application for Compensation of Fees and Costs filed therein on October 9, 2000 . . . ." This issue was not briefed, and therefore was not addressed by the District Court.