Opinion ID: 16535
Heading Depth: 2
Heading Rank: 1

Heading: Southmark's Motion to Abstain

Text: 13 Lurking like a troll beneath a bridge, procedural complexities bedevil a straight path to analysis of this case. That the bankruptcy court has some kind of jurisdiction over this malpractice action against court-appointed professionals is not in doubt. But what the court can do with its jurisdiction depends first on whether the malpractice case is a core bankruptcy matter or one that is related to Southmark's reorganization case. If the suit against Coopers is merely related to bankruptcy, the bankruptcy court was required to abstain from hearing it. 28 U.S.C. § 1334(c)(2). 2 If, however, the controversy lies at the core of the federal bankruptcy power, Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S.Ct. 2858, 2870-71, 73 L.Ed.2d 598 (1982), the bankruptcy law permits but does not require abstention. 28 U.S.C. § 1334(c)(1). 3 The root issue is as simple--and complex--as that. 14 Three procedural obstacles must be cleared before the merits discussion can proceed. First, although this court may review the bankruptcy court's decision not to abstain, our jurisdiction is an historical anomaly. For bankruptcy cases commenced after the 1994 amendments to the bankruptcy law, decisions either to abstain or not to abstain are not, with very limited exceptions, reviewable on appeal. 4 Southmark's case predates this amendment and was filed when decisions not to abstain were reviewable on appeal. 5 The standard on appeal is abuse of discretion. In re Howe, 913 F.2d 1138, 1143 n. 6 (5th Cir.1990). 15 Second, we note, only to reject out of hand, Coopers' assertion that statutory abstention does not apply to cases removed to federal court on the basis of bankruptcy jurisdiction. 28 U.S.C. § 1452. There is no textual support in the statute for this position, only a handful of bankruptcy court opinions support it, and the vast majority of courts hold otherwise. 6 We endorse the majority rule. 16 Third, the bankruptcy court should have decided the jurisdiction/abstention issues before reaching the preclusion issues. Marathon Oil Co. v. Ruhrgas, 145 F.3d 211 (5th Cir.1998) (en banc), cert. granted, --- U.S. ----, 119 S.Ct. 589, 142 L.Ed.2d 532, 67 U.S.L.W. 3273 (1998) Its diffidence may understandably have been related to its uncertainty whether Southmark's claims invoke core or non-core jurisdiction. But no pussy-footing around is allowed on jurisdictional issues. 17 All of that said, the question is how Southmark's claims fit into bankruptcy jurisdiction. The progenitor of the current bankruptcy system is another Marathon case, 7 in which the Supreme Court struck down as constitutionally too far-reaching Congress's assignment of jurisdiction to non-Article III bankruptcy judges under the 1978 Bankruptcy Code. In Marathon, the debtor filed suit on a pre-bankruptcy state-law breach of contract claim. Justice Brennan, writing for the plurality, distinguished between the restructuring of debtor-credit relations, which is at the core of the federal bankruptcy power and the adjudication of state-created private rights, such as the right to recover contract damages that is at issue in this case. 458 U.S. at 71, 102 S.Ct. at 2871. The narrowest construction of Marathon, that placed upon it by Chief Justice Burger's dissenting opinion, is this: 18 a traditional state common law action, not made subject to a federal rule of decision, and related only peripherally to an adjudication of bankruptcy under federal law, must, absent the consent of the litigants, be heard by an Art. III court if it is to be heard by any court or agency of the United States. 19 Id. at 92, 102 S.Ct. at 2882 (Burger, C.J., dissenting). 20 Congress, re-enacting bankruptcy courts' jurisdiction in the wake of Marathon, drew on the core terminology to describe matters or proceedings that are an integral part of the bankruptcy case. For present purposes, such core jurisdiction statutorily includes matters concerning the administration of the estate, 28 U.S.C. § 157(b)(2)(A) and other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor ... relationship.... Id. at § 157(b)(2)(O). The statute also permits bankruptcy courts to hear and determine other matters that are related to bankruptcy but are not core matters, subject to the ultimate authority of the district court. 8 21 In this circuit, Judge Wisdom authored a significant opinion interpreting both Marathon and the post-Marathon jurisdictional amendments. See In re Wood, 825 F.2d 90 (5th Cir.1987). Wood involved a lawsuit filed by a third-party against the debtor over shares of stock acquired by the debtor post-petition. Judge Wisdom distilled the formula for bankruptcy court jurisdiction thus: 22 We hold, therefore, that a proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case. The proceeding before us does not meet this test and, accordingly, is a non-core proceeding. The plaintiff's suit is not based on any right created by the federal bankruptcy law. It is based on state created rights. Moreover, this suit is not a proceeding that could arise only in the context of a bankruptcy. It is simply a state contract action that, had there been no bankruptcy, could have proceeded in state court. 23 Id. at 97 (footnote omitted). 24 Southmark contends that its claims against Coopers do not satisfy the Wood test for core bankruptcy jurisdiction. First, Southmark's claims arise under state, not federal law and involve the company's private rights against Coopers rather than a restructuring of debtor-creditor relations. Second, Southmark contends, the action against Coopers is not a proceeding that, by its nature, could arise only in the context of the bankruptcy case. Id. 25 Although Southmark is correct in focusing attention on Marathon, the post-Marathon jurisdictional provisions, and on Wood, its interpretation of core bankruptcy matters is too narrow. To begin with, the state law origin of Southmark's claims is not dispositive. The jurisdictional statute expressly provides that the applicability of state law to a proceeding is insufficient in itself to render it a non-core proceeding. 28 U.S.C. § 157(b)(3). This provision, as Wood explains, recognizes Justice White's sensible observation in Marathon that many truly bankruptcy issues, like the determination of the basis for creditors' claims, turn on state law. Wood, 825 F.2d at 96. That Southmark's claims against the court-appointed accountant for its examiner arose under state law does not prevent them from involving core jurisdiction. 26 Southmark also disputes that its claims could arise only in the context of a bankruptcy case, inasmuch as Southmark could have sued any accounting firm that worked for it on similar grounds of disloyalty, non-disclosure and malpractice. It is somewhat disingenuous for Southmark to attempt to pry these claims out of their bankruptcy setting. Southmark's petition alleges inter alia claims for breaches of fiduciary duty and of the contract whose terms were approved by the bankruptcy court. Southmark prays for actual damages including return of the entire $4 million fee it paid Coopers from money belonging to the debtor's estate. The fee award was both approved by the bankruptcy court and subjected to the bankruptcy court's later disgorgement order. 27 In this case, the professional malpractice claims alleged against Coopers are inseparable from the bankruptcy context. A sine qua non in restructuring the debtor-creditor relationship is the court's ability to police the fiduciaries, whether trustees or debtors-in-possession and other court-appointed professionals, who are responsible for managing the debtor's estate in the best interest of creditors. The bankruptcy court must be able to assure itself and the creditors who rely on the process that court-approved managers of the debtor's estate are performing their work, conscientiously and cost-effectively. Bankruptcy Code provisions describe the basis for compensation, appointment and removal of court-appointed professionals, their conflict-of-interest standards, and the duties they must perform. See generally 11 U.S.C. §§ 321, 322, 324, 326-331. Although standards for the conduct of court-appointed professionals, the breach of which may constitute bankruptcy malpractice, are not comprehensively expressed in the statute, the Code need not duplicate relevant, also-applicable state law. It is evident that a court-appointed professional's dereliction of duty could transgress both explicit Code responsibilities and applicable professional malpractice standards. For instance, in Billing v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242 (3d Cir.1994), the professional malpractice allegations included the attorneys' failure to comply with court orders and to submit a plan of reorganization to the bankruptcy court. Award of the professionals' fees and enforcement of the appropriate standards of conduct are inseparably related functions of bankruptcy courts. 28 Supervising the court-appointed professionals also bears directly on the distribution of the debtor's estate. If the estate is not marshaled and liquidated or reorganized expeditiously, there will be far less money available to pay creditors' claims. Excessive professional fees or fees charged for mediocre or, worse, phantom work also cause the estate and the creditors to suffer. Southlend might retort that this concern for the general well-being of the debtor's estate is over-played--technically, the liquidation of any claim that the debtor holds against third parties would enhance the debtor's estate as much as collection on a malpractice claim against court-appointed professionals. Marathon held, in fact, that a debtor's contract claim against a third party (which had not filed a claim in bankruptcy) was not within the bankruptcy court jurisdiction, even though successful prosecution of the action would enrich the debtor's estate. And in Wood, a dispute over shares of stock acquired by the debtor postpetition fell only within the related-to jurisdiction but not core bankruptcy jurisdiction. These cases are, however, distinguishable from a malpractice claim involving court-appointed professionals. In the Marathon and Wood situations, the claims that were being prosecuted could stand alone from the bankruptcy case. A malpractice claim like the present one inevitably involves the nature of the services performed for the debtor's estate and the fees awarded under superintendence of the bankruptcy court; it cannot stand alone. 29 Even more significant, the claim against Coopers is not just for malpractice, but for the value of the asset which Coopers was to assist Southmark in recovering. If Coopers had done the job for which it was retained, according to Southmark's allegations, Southmark would have filed a claim in the Drexel bankruptcy and recovered a substantial sum for creditors. The claim against Coopers may therefore be viewed as one to recover an asset of Southmark's estate that Coopers let slip away. 30 From yet another perspective, this is not just a malpractice case like any other professional malpractice litigation Southmark might pursue. Instead, Coopers has filed administrative claims to obtain its fees in the bankruptcy court, and the debtor's action is similar to a counterclaim against Coopers. Unlike essential parties in Marathon or Wood, Coopers is not a stranger to the bankruptcy case, and this malpractice claim may invoke the bankruptcy court's core jurisdiction to adjudicate and determine the extent of claims by and against Southmark's estate. See 28 U.S.C. § 157(2)(B); see generally Billing, 22 F.3d 1242. 31 Although surprisingly few court of appeals cases have explored the boundaries of bankruptcy courts' core jurisdiction in the wake of Marathon, at least three decisions are premised on the understanding that professional malpractice claims against court-appointed professionals are indeed core matters. See Billing, 22 F.3d 1242; Walsh v. Northwestern Nat'l Ins. Co., 51 F.3d 1473, 1476 (9th Cir.1995); Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 483 n. 4 (6th Cir.1992). No appeals court decision has held otherwise. In one case against a bankruptcy trustee to recover property that did not belong to the debtors' estate, the court rejected subject matter jurisdiction founded on either core or related-to-bankruptcy jurisdiction. In re Guild and Gallery Plus, Inc., 72 F.3d 1171, 1173 (3d Cir.1996). 32 Southmark's lawsuit draws into question Coopers' performance of its duties under court order, and it seeks in part to recover on the claim Southmark would have had against Drexel. For these and other reasons just discussed, we conclude that Southmark's case against Coopers is a core proceeding in bankruptcy. Because this is a core proceeding, the bankruptcy court had discretion whether to abstain from hearing it. We hold that the court did not abuse his discretion in declining to abstain.