Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_12-cv-00586/USCOURTS-azd-2_12-cv-00586-0/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 28:0157 Motion for Withdrawal of Reference

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Joseph Charles Loomis, 

Plaintiff, 

vs.

Hunter, Humphrey & Yavitz, PLC, et al.,

Defendants. 

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No. CV-12-0586-PHX-FJM

No. BK-10-1885-RJH

ORDER

The court has before it defendants’ motion to withdraw the reference related to the

adversary proceeding captioned Complaint Against Hunter, Humphrey & Yavitz, PLC,

Candess J. Hunter, Isabel M. Humphrey and Randall S. Yavitz For Damages and Objection

to Claim of Hunter, Humphrey & Yavitz, PLC (“Adversary Proceeding”) (doc. 2), plaintiff’s

objection (doc. 6), and Hunter, Humphrey & Yavitz, PLC’s reply (“Hunter Humphrey”) (doc.

11).

Defendant Hunter Humphrey filed a proof of claim in debtor’s bankruptcy case for

$95,000 in legal fees incurred in representing debtor in litigation pending in the United States

District Court for the Eastern District of Virginia (“Virginia Action”). Debtor filed

objections to the proof of claim, as well as a complaint commencing the Adversary

Proceeding against Hunter Humphrey and individual lawyers, asserting claims of

professional negligence, breach of contract, breach of fiduciary duty, demanding a jury trial,

and seeking damages in excess of $4 million. Defendants now seek to have the reference to

the bankruptcy court withdrawn, arguing that, under Stern v. Marshall, 131 S. Ct. 2594

Case 2:12-cv-00586-FJM Document 12 Filed 07/27/12 Page 1 of 3
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(2011), the bankruptcy court lacks final adjudicatory authority over the Adversary

Proceeding. 

28 U.S.C. § 157(b)(1) authorizes bankruptcy courts to enter final judgments in “all

core proceedings arising under title 11, or arising in a case under title 11.” However, in

Stern, the Supreme Court held that identifying a claim as “core” or “non-core” does not

necessarily determine whether a bankruptcy court is constitutionally authorized to finally

adjudicate the matter. 

Stern first found that a counterclaim filed by the debtor against a creditor who had

filed a proof of claim was a core proceeding under 28 U.S.C. § 157(b)(2)(C) (“counterclaims

by the estate against persons filing claims against the estate” are core proceedings). Stern,

131 S. Ct. at 2604. Therefore, the bankruptcy court had authority under § 157(b)(1) to enter

final judgment on the counterclaim. Id. at 2605. However, after examining Article III

restrictions on Congress’ ability to redefine judicial authority, the Court held that, while the

bankruptcy court had statutory authority to enter final judgment on the counterclaim, it

lacked constitutional authority to do so. Id. at 2608-09 (citing Murray’s Lessee v. Hoboken

Land & Improvement Co., 59 U.S. 272, 284 (1855)) (holding that pursuant to Article III,

Congress may not “withdraw from judicial cognizance any matter which, from its nature, is

the subject of a suit at the common law, or in equity, or admiralty”). Stern concluded that

Congress had improperly vested judicial power in a non-Article III court when it authorized

bankruptcy courts to “enter a final judgment on a state law counterclaim that is not resolved

in the process of ruling on a creditor’s proof of claim.” Stern, 131 S. Ct. at 2620.

Post-Stern, the power of the bankruptcy court to enter final adjudications depends not

on whether the matters are core or non-core, but on whether the counterclaim would be fully

resolved by adjudication of the creditor’s proof of claim. 

The parties dispute whether Stern applies in the instant case. Debtor contends that

Stern is inapplicable because the resolution of Hunter Humphrey’s proof of claim will

necessarily require a resolution of the malpractice allegations asserted in the Adversary

Proceeding. Defendants disagree, arguing that the legal malpractice claim for damages in

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excess of $4 million, and against individual lawyers who have filed no proof of claim,

involves issues far beyond those presented by the proof of claim, and therefore withdrawal

is required. 

Here, as in Stern, debtor’s claims asserted in the Adversary Proceeding are state law

causes of action involving only private rights that will not necessarily be resolved in ruling

on Hunter Humphrey’s proof of claim. The Adversary Proceeding involves much more than

a setoff against the law firm’s proof of claim. It also involves additional affirmative claims

for substantial damages. Moreover, three of the four defendants named in the Adversary

Proceeding, specifically the individual lawyers, did not file proofs of claim and therefore

have not subjected themselves to the jurisdiction of the bankruptcy court. As to these three

defendants, the Adversary Proceeding is not a counterclaim within the bankruptcy court’s

core jurisdiction. Because the Adversary Proceeding involves private rights that will not be

fully resolved by adjudication of the proof of claim, we conclude that the bankruptcy court

does not have authority to enter final judgment over the counterclaim.

Nevertheless, we are not persuaded that withdrawal of the reference is appropriate at

this stage. Stern does not prohibit a bankruptcy court from issuing proposed findings of fact

and conclusions of law on claims that ultimately must be decided by an Article III judge.

Stern, 131 S. Ct. at 2604. Judicial economy is best served by allowing the bankruptcy judge,

who is familiar with this case as well as the Virginia Action, to oversee pretrial matters,

initially adjudicate dispositive motions, and issue a report and recommendation prior to

withdrawal. Accordingly, we decline to withdraw the reference at this time.

IT IS ORDERED DENYING defendants’ motion to withdraw the reference (doc.

2). 

DATED this 26th day of July, 2012.

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