SAUNDRA BROWN ARMSTRONG, District Judge.
This case arises out of Howrey LLP's ("Howrey") dissolution and the movement of Howrey's partners to new law firms. Allan B. Diamond, the Chapter 11 bankruptcy trustee for Howrey ("the Trustee"), has filed multiple adversary proceedings against numerous law firms to recover profits from unfinished business that Howrey's partners brought with them to their new law firms under the theory that the profits were fraudulent transfers ("Unfinished Business Claims"). The Trustee has also sued numerous former partners of Howrey seeking to recover improper distributions from Howrey under various theories, including the theory that the distributions were fraudulent transfers ("Clawback Claims").
Appellant Haynes and Boone, LLC ("H&B"), one of the law firms sued by the Trustee, appeals an order issued by the bankruptcy court finding that the automatic stay under 11 U.S.C. § 362
Howrey was an international law firm with offices in, among other places, Washington D.C., California, and Europe. Howrey dissolved effective March 15, 2011. On April 11, 2011, an involuntary Chapter 7 bankruptcy was commenced when certain creditors of Howrey filed a petition with the bankruptcy court. On June 11, 2011, the bankruptcy court converted Howrey's bankruptcy into a Chapter 11 bankruptcy case. On October 12, 2011, the bankruptcy court entered an order approving the appointment of the Trustee.
In response to the Trustee threatening to file an adversary proceeding against it, H&B filed a Motion for Order Confirming That The Automatic Stay Is Inapplicable, Or In The Alternative, Granting Relief From The Automatic Stay ("motion for relief from stay"). H&B's motion sought confirmation from the bankruptcy court that the filing of a "completely defensive" declaratory relief action against the Trustee in the District of Columbia, which would seek a determination that former Howrey partners had no duty to account to Howrey for unfinished business on hourly rate matters brought to their new firms,
Shortly after H&B filed its motion for relief from the automatic stay, the Trustee commenced an adversary proceeding against H&B, alleging, among other things, that Howrey's waiver
Following a hearing, the bankruptcy court denied H&B's motion for relief from stay. In denying the motion, the bankruptcy court concluded that the Trustee's Unfinished Business Claim against H&B is property of the bankruptcy estate "protected" by the automatic stay under § 362(a)(3). The bankruptcy court determined that H&B's prosecution of its proposed declaratory relief action "would essentially be a defense more properly asserted and adjudicated in the Trustee's adversary proceeding against [H&B]," and that "prosecution elsewhere would be the exercise of control over property of the estate." In reaching its conclusion, the bankruptcy court reasoned that "splitting the Trustee's causes of action so that they are asserted [in the bankruptcy case] but defended elsewhere interferes with and amounts to control of those causes of action." According to the bankruptcy court, H&B's attempt to assert a potentially case-dispositive defense to the Trustee's Unfinished Business Claim in another forum would be "an affirmative step to thwart the Trustee's claims," amounting to "impermissible control" over property of the bankruptcy estate.
H&B timely appealed the bankruptcy court's order denying its motion for relief from stay. The Court now considers H&B's appeal.
This Court has jurisdiction over the instant appeal under 28 U.S.C. § 158(a)(1). Section 158(a) provides, in relevant part: "The district courts of the United States shall have jurisdiction to hear appeals . . . from final judgments, orders, and decrees." 28 U.S.C. § 158(a);
The court reviews the bankruptcy court's legal conclusions de novo and findings of fact for clear error.
H&B frames the issue on appeal as follows: "Did the Bankruptcy Court err in concluding that the filing of a completely defensive declaratory judgment action by [H&B] in a nonbankruptcy court would constitute an exercise of control over property of the debtor's estate within the meaning of 11 U.S.C. § 362(a)(3)?"
When a bankruptcy petition is filed, an estate is automatically created that comprises essentially all of the property owned by the debtor.
In conjunction with the creation of the bankruptcy estate, a stay is automatically imposed against, among other things, "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate."
Aside from the limited exceptions set forth in § 362(b), "[t]he stay of section 362 is extremely broad in scope and . . . should apply to almost any type of formal or informal action against the debtor or property of the estate."
H&B contends that the bankruptcy court erred in concluding that the prosecution of its proposed declaratory relief action would violate the automatic stay. H&B argues that the bankruptcy court's determination "was error" for two independent reasons: "(1) the filing of a completely defensive declaratory action by a noncreditor in a nonbankruptcy forum is not an exercise of control over property of the estate within the meaning of section 362(a)(3), and (2) a noncreditor's action that merely has an effect on the bankruptcy estate does not exercise control over property of the estate." According to H&B, "although [the Trustee's] causes of action are assets of the estate and the subject matter of [its proposed declaratory relief action] could be relevant to one of [the Trustee's] causes of action, the [declaratory relief action] does not satisfy the terms of section 362(a)(3)."
Here, because H&B does not dispute that the Trustee's Unfinished Business Claim against it is the property of the bankruptcy estate, the issue is whether H&B's proposed declaratory relief action constitutes an "act . . . to exercise control over property of the estate" within the meaning of § 362(a)(3). The Court concurs with the bankruptcy court's determination that the declaratory relief action proposed by H&B would violate the automatic stay under § 362(a)(3). H&B's proposed action would challenge the right of the Trustee to recover the profits earned by H&B from Howrey's unfinished business that was brought to the firm by a former Howrey partner. H&B seeks to file an action in another forum requesting a declaratory judgment regarding the merits of the Trustee's Unfinished Business Claim. The issues H&B seeks to raise in its proposed declaratory relief action can be raised defensively in response to the Trustee's adversary proceeding. By proposing to file an action in another forum that would, if successful, amount to a case-dispositive defense to the Trustee's Unfinished Business Claim, H&B is attempting to exercise control over property of the bankruptcy estate.
H&B, for its part, has not cited any authority demonstrating that the bankruptcy court erred by concluding that H&B's proposed declaratory relief action is subject to the automatic stay under § 362(a)(3). The Court has reviewed the authority cited by H&B and is not persuaded that reversal of the bankruptcy court's order is warranted. This Court, like the bankruptcy court, is persuaded by the reasoning of the bankruptcy court's decision in
For the reasons stated above, IT IS HEREBY ORDERED THAT:
1. The Court AFFIRMS the bankruptcy court's order denying H&B's motion for relief from stay.
2. This Order terminates the instant action. The Clerk shall close the file and terminate all pending matters.