ROBERT L. JONES, Bankruptcy Judge.
This "adversary proceeding" is a lawsuit that was recently filed in Potter County, Texas, and then removed here. The parties to this suit first met during the chapter 11 bankruptcy case of American Housing Foundation (
Defendant Walter O'Cheskey, Trustee of the AHF Liquidating Trust (
Now, five years later, the Templeton Group has sued the Trustee and Focus in state court, which suit was promptly removed by the Trustee and Focus to this Court, the home of the AHF bankruptcy case. The Templeton Group says this suit has nothing to do with the AHF bankruptcy case and thus must be sent back to Potter County, Texas. The Trustee and Focus contend it has everything to do with the AHF bankruptcy case and thus was properly removed to and should remain with this Court. The Court concludes that the suit implicates "core" bankruptcy jurisdiction and thus denies the Templeton Group's request to remand the suit to Potter County.
The Templeton Group filed its original petition in the 108th District Court of Potter County, Texas, asserting that the state court had both personal and subject matter jurisdiction over the Trustee and Focus. The Templeton Group seeks damages that "include monetary relief in excess of $1,000,000.00." Plaintiffs' Original Petition, Doc. No. 1, Ex. A. ¶ 5.
Bringing state-law causes of action in (or into) the bankruptcy court oftentimes raises challenging "jurisdictional" issues. See, e.g., Stern v. Marshall, 131 S.Ct. 2594, 2604, 2620 (2011) (Court held that, in light of the framework of the bankruptcy system, the bankruptcy court had statutory authority but not constitutional authority to decide a state-law based counterclaim by a debtor against a claims-filing creditor). This suit is no exception: issues abound, issues of jurisdiction under both state law and federal law, with overlapping and redundant questions of abstention (mandatory or discretionary), removal, and remand. But the ultimate issue to decide is a basic one: must or should this action be sent back to state court?
Referring to the bankruptcy court's jurisdiction is a bit of a misnomer. Jurisdiction of all bankruptcy cases and associated proceedings is conferred upon the federal district courts. See 28 U.S.C. § 1334(a), (b). Then, by local order, all such cases and proceedings are referred to the bankruptcy courts. See 28 U.S.C. § 157. The statute then sets out the "division of labor"
The framework of the bankruptcy system drives the analysis of the issues raised here. As a threshold matter, determining whether the state court actions here are fundamentally core or related-to is determinative of whether this action must go back to state court. If it is core, there is no compelling reason to send it back. The Court heard the bankruptcy case and the almost endless array of suits and disputes that have come out of the AHF bankruptcy case. If the action here is deemed to be a non-core proceeding, the Court must likely abstain and thus remand it back to state court. The jurisdictional statute, § 1334, addresses mandatory abstention, stating as follows:
28 U.S.C. § 1334(c)(2). The motion here is timely; the suit is based exclusively on state-law based causes; jurisdiction would not lie in federal court but for the AHF bankruptcy; and, assuming no procedural problems, it was first brought in a state forum of appropriate jurisdiction.
Defining a matter as related to a bankruptcy case satisfies the minimal jurisdictional standard and thus invokes the circumscribed involvement of the bankruptcy court. At first blush, it appears that the causes of action here are at least related to the AHF bankruptcy case. After all, this is a suit by asserted creditors of AHF against the former chapter 11 trustee of AHF for his actions during the pending AHF bankruptcy case. But do the alleged actions go to the very heart of the AHF bankruptcy case and thus "stem" from it, thereby making this a core proceeding?
The Trustee and Focus argue that the suit here is core as it is both a "matter[] concerning the administration of the estate," 28 U.S.C. § 157(b)(2)(A), and a "proceeding[] affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor . . . relationship . . .," 28 U.S.C. § 157(b)(2)(O). The Templeton Group submits that the suit cannot constitute a core proceeding as it raises state law claims only and, given it was brought well after confirmation of the AHF plan, it cannot, by definition, concern a bankruptcy trustee, creditors of AHF, or property of the estate. "A suit, such as the present one, against a trustee for post-confirmation conduct does not involve implementation of the Plan, affect liquidation of the bankruptcy estate, or adjust the debtor-creditor relationship." Brief in Support of Plaintiffs' Motion for Remand or Abstention, Doc. No. 14, ¶ 13. Indeed, the Templeton Group submits that the bankruptcy court (or, really, the district court) has no jurisdiction in light of this suit's clear post-confirmation status.
Determining the nature of the action here first requires a review of the allegations made by the Templeton Group. The Court, as the forum for the AHF bankruptcy case, will provide the context for certain factual allegations.
The Templeton Group's factual statement continues, beginning at paragraphs 8-10, with a description of the "AHF Collapse," "Sterquell's Death," and the "AHF Bankruptcy." As stated, the AHF bankruptcy saga began with an involuntary chapter 11 petition filed against AHF on April 21, 2009; though not mentioned in the state court petition here, the petitioning parties were Robert L. Templeton, Don Storseth as Trustee of the Storseth Family Trust, Dennis Dougherty, Paul King, Robert L. Templeton as Trustee of the Frances Maddox Estate, Robert L. Templeton as President of Heron Land Company, David N. Miller, Susan S. Miller, and Clay Storseth [No. 09-20232, Doc. No. 1].
Paragraph 11 of the petition notes that in April 2010, one year after the bankruptcy was first filed, Walter O'Cheskey was appointed as the chapter 11 trustee. Doc No. 1, Ex. A ¶ 11. This occurred on the motion of Texas Capital Bank (
The remaining factual allegations, paragraphs 12 through 23, describe two related events upon which the charges are principally based. First, at paragraph 12, the Templeton Group alleges that in December 2010, McCartin, O'Cheskey, and Alan Weiner, an employee of defendant Focus, met with agents of the Internal Revenue Service "for the purpose of discussing the business of AHF." Id. ¶ 12. It then alleges the following:
An additional factual allegation is made that did not occur at the 2010 meeting. The Templeton Group states that O'Cheskey, "[a]s late as 2012," falsely stated that plaintiff Templeton "had been audited by the IRS and was under criminal investigation." Id. The petition does not specify to whom this was stated.
The second, and related, event is alleged at paragraph 20 and concerns the so-called "TEFRA Audit." The TEFRA Audit is, according to the petition, "[t]he final IRS Tax Equity and Fiscal Responsibility Act (`TEFRA') audit decision in April 2013 [that] found that LIHTC Walden II Development, Ltd. (`Walden II') was a 9.9% partner of AHF Development." Id. ¶ 20. The Templeton Group states that the audit was done upon the request of Alan Weiner and O'Cheskey and that the 9.9% ownership finding was incorrect. They then catalog certain facts that culminate in their allegation that
Their final factual allegation is made at paragraph 23 and states that "[i]f Plaintiffs knew of the [incorrect audit], they could and would have contested the findings, which would almost certainly have resulted in the finding that Walden II was never a partner in AHF Development." Id. ¶ 23.
Paragraphs 13 through 17 simply recite factual matters that establish the Templeton Group's standing to bring this suit—confirmation of the AHF chapter 11 plan on December 8, 2010, its creation of a liquidating trust with a trust agreement for the purpose of liquidating the estate assets and making distributions to valid creditors of AHF, and the naming of O'Cheskey as the liquidating trustee. It then states that the plaintiffs are "Trust Beneficiaries" of the liquidating trust. Id. Paragraph 18 states that as a liquidating trustee, O'Cheskey had certain duties under the trust agreement, including a duty to exercise ordinary care and diligence, and fiduciary duties to act in good faith, to deal fairly, and to remain loyal. Expanding on such duties, the Templeton Group states that "O'Cheskey . . . has the fiduciary duty to keep the Trust Beneficiaries fully informed of his dealings regarding the Trust, and he has a duty to disclose relevant information to the beneficiaries." Id. ¶ 18. Then, at paragraph 19, the Templeton Group states that "
Part VI of the petition addresses the titled causes of action and thus the legal theories upon which the claims are based. The causes are set forth at paragraphs 24 and continuing through paragraph 42. As previously stated, the Templeton Group's legal theories are breach of duty of ordinary care and diligence, improper delegation of trustee's duties and failure to supervise, breach of fiduciary duties, and negligence and gross negligence; the Templeton Group also seeks an accounting.
The Templeton Group submits that the Trustee and Focus breached their respective duties of ordinary care and diligence by failing to give notice of the TEFRA Audit and that, in doing so,
Paragraphs 28 through 32 concern allegations of the Trustee's improper delegation of trust duties and his failure to sufficiently supervise his agents. The Templeton Group adds an additional factual item: they state that, "[s]ince the effective date of the Liquidating Trust, O'Cheskey has distributed over $17.4 million in administrative payments from the Liquidating Trust, including over eight million dollars in attorneys' fees." Id. ¶ 31. They then state that "Gardere filed 114 separate law suits or adversary actions on behalf of the Liquidating Trust." Id. ¶ 32. These filings, they contend, "
A generous reading of the Templeton Group's allegations of the Trustee's breaches of fiduciary duties is as follows:
Paragraphs 36 through 38 allege that the Trustee was negligent (or grossly negligent) by "failing to supervise the administration of the Liquidating Trust, including the actions of his counsel, and neglecting to attend to obligations . . . requiring the exercise of discretion." Id. ¶ 38.
The specific damage allegations, paragraphs 40 through 42, state that each of the Templeton Group members was injured by the additional tax liabilities resulting from the TEFRA Audit and by the Trustee's incurrence of "unnecessary and excessive expenses." Id. ¶ 40. The damages include "any loss or depreciation in value of the trust estate" and the loss of profit "that would have accrued to the trust estate if there had been no breach of trust." Id. ¶ 40.
The Templeton Group submits that it is entitled to exemplary damages because of the Trustee's "intentional, reckless or wanton" breaches, as well as for gross negligence. Id. ¶ 41. They also seek an accounting and a forfeiture of all fees collected by the Trustee, both in accordance with the Texas Property Code.
The Templeton Group argues that jurisdiction, either core or non-core, cannot apply here because this suit concerns the Trustee's "post-confirmation conduct [and thus] does not involve implementation of the [AHF] Plan, affect liquidation of the bankruptcy estate, or adjust the debtor-creditor relationship." Brief in Support of Plaintiffs' Motion for Remand or Abstention, Doc. No. 14, ¶ 13. They submit, therefore, that the wholly post-confirmation status means this suit cannot concern a bankruptcy trustee, a bankruptcy estate, or bankruptcy professionals. This contention is conveniently made as they filed this action well after confirmation of the AHF plan and seek recovery against parties, O'Cheskey and Focus, that are no longer serving as professionals of the AHF bankruptcy case. But characterizing this suit as one based on post-confirmation conduct is simply misleading. As pleaded, the actionable conduct of the Trustee and Focus is rooted in the pre-confirmation past.
The factual allegations concern conduct that falls into two categories: first, conduct that the Trustee engaged in that was intended to bolster the claims he had, as the chapter 11 trustee, against AHF investors, including, obviously, certain members of the Templeton Group; second, the alleged failure, whether intentional or not, by the Trustee to perform the duties and obligations imposed on him as the bankruptcy trustee and then as the liquidating trustee. The Trustee's conduct at the December 2010 meeting with the IRS that led to the TEFRA Audit two years later and the subsequent failure to take certain actions in connection with the audit fall within the first category. The factual allegations that fall under the second category concern the charge that the Trustee in effect allowed the Gardere firm, and in particular, lead counsel Steve McCartin, to serve as a "de facto" trustee from the outset of the Trustee's appointment, and, relatedly, the charge that the Trustee failed to properly manage and supervise his attorneys thereby allowing the Gardere firm to file over 100 adversary proceedings against "innocent" investors. The resulting administrative expenses thus diminished the estate and its profits that could have gone to the investors. The Templeton Group contends that the Trustee's misdeeds in both categories may have been negligent, grossly negligent, reckless, or even wanton.
For the Templeton Group's first cause of action for breach of duties of ordinary care and diligence, specific mention is made of the Trustee's failure to provide notice of the TEFRA Audit and that such failure resulted from either indifference or an intentional desire to do harm. The Templeton Group's second cause of action for improper delegation of duties and failure to supervise refers to the Trustee having paid over $17 million in administrative fees and $8 million in attorneys' fees caused by actions of and decisions made by the Gardere firm, specifically the filing of 114 lawsuits. The third cause of action for the Trustee's breach of fiduciary duties makes specific reference to the Trustee's failure to preserve assets, to disclose material facts, and to properly manage or supervise those working for him; the Trustee's failure to safeguard trust assets; and the Trustee engaging in a scheme to prompt the TEFRA Audit and then failing to provide notice of the audit. An additional fact is alleged in the petition under the cause for breach of fiduciary duties that references a failure to disclose relationships between counsel and related parties. The petition does not provide further explanation for this factual allegation, however. The fourth cause of action for negligence or gross negligence makes specific reference to the Trustee's failure to supervise.
Though the factual allegations made here are mostly conclusory, similar charges resonated throughout the pendency of the AHF bankruptcy case. Templeton and others of the Templeton Group opposed the appointment of a chapter 11 trustee and, upon such appointment, opposed the employment of the Gardere firm as counsel for the Trustee; they then opposed the Trustee's efforts in presenting a chapter 11 plan; they objected to fee applications of Gardere and the Trustee; and they sought a revocation of the confirmed plan. In each instance, many of their objections are the same as those that form the basis of the suit here. And, in the same vein, they also accuse the Trustee of intentionally targeting them, particularly Templeton, whom the Trustee had sued during the pendency of the bankruptcy case.
AHF was a non-profit corporation created in 1989 by its principal, Steve Sterquell, for the ostensible purpose of providing affordable housing for working families and individuals. Despite its non-profit status, AHF engaged in various financing arrangements; this included raising capital from investors on terms that were absurdly favorable to the investors. As described by the Templeton Group here, the AHF enterprise grew to the point that it owned and operated, through affiliated entities, sixty-six housing apartment communities with over 13,400 units in nine states, including Texas. Then, upon Sterquell's death in April 2009, reportedly by suicide, suspicions of AHF's financial demise (and, in particular, concerns about the status of over $25 million in company-owned life insurance (on Sterquell's life)) triggered the involuntary filing against AHF on April 21, 2009 [No. 09-20232, Doc. No. 1]. AHF filed a voluntary petition for relief under chapter 11 on June 11, 2009 [No. 09-20373]. The Court consolidated the voluntary case into the involuntary case on July 17, 2009 [No. 09-20232, Doc. No. 88].
The confirmation of the AHF chapter 11 case on December 8, 2010, was the culminating event in the case. The confirmed plan and its provisions are implicated by this suit. The plan provided for an orderly liquidation of the assets of AHF. It accomplished this by maintaining a "Reorganized AHF" and creating the Liquidating Trust. See Second Amended Joint Chapter 11 Plan filed by the Chapter 11 Trustee and the Official Committee of Unsecured Creditors [No. 09-20232, Doc. No. 1909] (the
O'Cheskey was appointed as the Liquidating Trustee and had the responsibility of administering the Liquidating Trust in accordance with the Plan and the Liquidating Trust Agreement.
As is common with chapter 11 plans, the AHF Plan, at Article XII, provided for the retention of bankruptcy jurisdiction and the continued exercise of such jurisdiction by the Court. The Plan states that the "Bankruptcy Court . . . retain[s] the fullest and most extensive jurisdiction as is legally permissible . . ., including, without limitation, under sections 105(a) and 1142 of the Bankruptcy Code, including that which is necessary to ensure that the purpose and intent of the Plan are carried out. . . ." Plan § 12.01. Additional provisions provide that this Court, the bankruptcy court, retains jurisdiction after the confirmation date to determine causes of action on all disputes, "whether or not subject to any pending action, as of the Confirmation Date, for the Debtor, the Reorganized Debtor, or the Liquidating Trustee to recover assets pursuant to the provisions of the Bankruptcy Code." Id. § 12.03. The Plan provides that the Bankruptcy Court shall consider and decide applications for fees and expenses that are brought in accordance with the Bankruptcy Code; hear and decide all causes of action "arising during the period from the [p]etition [d]ate through the Effective Date and in any way related to the Plan or the transactions contemplated hereby and against" the debtor AHF, the AHF estate, the chapter 11 trustee, and their officers, attorneys, financial advisors, and agents; "hear and determine any litigation" or action against AHF, its estate, the Plan proponents, the reorganized debtor, or the liquidating trustee; and hear and determine any disputes or litigation regarding the Liquidating Trust Agreement. Id. § 12.04.
The Plan contained many provisions reserving jurisdiction for certain types of disputes. Many of these provisions were negotiated by the OUCC with the intent that the Court continue its supervisory role during the post-confirmation period. As a starting point, the Plan provides that the Liquidating Trustee derives his powers and duties from, and is governed by, both the Plan and the Liquidating Trust Agreement. Id. § 7.05. In addition to the Plan's Retention of Jurisdiction provisions at Article XII, the Plan reserved the Court's jurisdiction to hear and determine the following matters:
The Plan also provided for the following: § 6.04 (approval of subsequent members of the Reorganized AHF Board), § 6.06 (approval of successor president of Reorganized AHF), § 6.07(a)(1) (authority to decide the terms of Focus's engagement with the Reorganized AHF if Focus and the Board cannot agree on the terms), § 6.07(a)(3) (authority to decide the terms of Gardere's engagement with the Reorganized AHF if Gardere and the Board cannot agree on the terms), § 6.17 (authority to decide when and if the Reorganized AHF should be dissolved if the President and Board cannot decide).
The Plan also required the Liquidating Trustee and the President of Reorganized AHF to keep the Court informed of the status of the liquidation by providing for the following:
Furthermore, the Liquidating Trust Agreement
Id. § 10.1 (emphasis added).
Both the Plan and the attached Liquidating Trust Agreement contain provisions that indemnify the Trustee and are likely applicable in light of the claims made here.
Section 9.09 of the Plan provides for indemnification of the Chapter 11 Trustee and his professionals:
Plan § 9.09.
Section 8.7 of the Liquidating Trust Agreement provides for indemnification of the Liquidating Trustee:
Liquidating Trust Agreement § 8.7. Article IV of the Liquidating Trust Agreement provides further indemnification:
Id. § 4.1.
Section 6.07 of the Plan provides for indemnification of Alan Weiner as the president of Reorganized AHF:
Plan § 6.07.
Members of the Templeton Group were claims-filing claimants in the AHF bankruptcy case. Their claims, however, have been effectively subordinated to allowed claimants upon objections and trials before the Court.
Templeton filed an original proof of claim on October 5, 2009, designated as Claim No. 76-1 on the Bankruptcy Clerk's claims register in Case No. 09-20232; his amended claim [Claim No. 76-5] was filed on October 7, 2011, in the amount of $4,746,520.11, and is based on five separate investments made by Templeton. The Trustee initiated a complaint against Templeton seeking to, among other things, subordinate his claim to the allowed claims of "legitimate general unsecured creditors." Adv. No. 10-02016, Doc. No. 52 ¶ 62. After conducting a trial on the complaint, the Court subordinated Templeton's claim to all allowed general unsecured claims pursuant to the provisions of 11 U.S.C. § 510(b). Judgment [Adv. No. 10-02016, Doc. No. 303].
The Frances Maddox Estate filed an original proof of claim on October 6, 2009, designated as Claim No. 84-1 on the Bankruptcy Clerk's claims register in Case No. 09-20232; an amended claim [Claim No. 84-2] was filed on November 19, 2010, in the amount of $1,022,875.71. Heron Land Company filed an original proof of claim on October 5, 2009, designated as Claim No. 77-1; an amended claim [Claim No. 77-3] was filed on November 18, 2010, in the amount of $706,448.06. Paul King filed an original proof of claim on October 5, 2009, designated as Claim No. 78-1; an amended claim [Claim No. 78-3] was filed on November 18, 2010, in the amount of $302,765.86. The Trustee initiated a complaint against the Maddox Estate, Heron Land Company, and King seeking to, among other things, subordinate their claims
The remaining members of the Templeton Group, Linda Cunyus and Luanne Boyd, did not file proofs of claim in the AHF bankruptcy case.
Under 28 U.S.C. § 1334(c)(2), the mandatory abstention provision, the Court is required to abstain if (1) the action is non-core, (2) there is no independent basis for federal jurisdiction other than § 1334(b), and (3) the action was commenced and can be timely adjudicated in the state forum. Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195, 1206 (5th Cir. 1996). Even if the matter is core, the Court may abstain under § 1334(c)(1) if doing so is in the "interest of justice, or in the interest of comity with State courts or respect for State law." Id. (citing Wood v. Wood (In re Wood), 825 F.2d 90, 93 (5th Cir. 1987)). The Court may also remand the action on any equitable ground, or must remand the action if "at any time before final judgment it appears that the [Court] lacks subject matter jurisdiction." 28 U.S.C. §§ 1447(c); 1452(b).
In addition to their argument that there is no bankruptcy jurisdiction here, the Templeton Group submits alternatively that if jurisdiction does lie, it is, at most, related-to (non-core) jurisdiction that requires mandatory abstention; and, again alternatively, if core jurisdiction does exist, permissive abstention and remand are needed.
To reiterate, jurisdiction over bankruptcy cases and proceedings is conferred on federal district courts under 28 U.S.C. § 1334. Wood, 825 F.2d at 92; U.S. Brass Corp. v. Travelers Ins. Grp., Inc. (In re U.S. Brass Corp.), 301 F.3d 296, 303 (5th Cir. 2002); Coho Oil & Gas, Inc. v. Finley Resources, Inc. (In re Coho Energy, Inc.), 309 B.R. 217, 220 (Bankr. N.D. Tex. 2004). Section 1334(b) gives district courts "original but not exclusive jurisdiction" over "arising" and "related to" civil proceedings under title 11. 28 U.S.C. § 1334(b). Such proceedings are then assigned to bankruptcy courts under § 157. 28 U.S.C. § 157. As jurisdiction extends to "arising" and "related to" matters, "it is necessary only to determine whether a matter is at least `related to' the bankruptcy." U.S. Brass, 301 F.3d at 304 (quoting Wood, 825 F.2d at 93)). A proceeding is "related to" the bankruptcy case when its outcome "could conceivably have any effect on the estate being administered in bankruptcy." Id. (emphasis in original). The Court, as the bankruptcy court, has the responsibility to determine whether a matter before it is core or non-core. Exec. Benefits Ins. Agency v. Arkison, 134 S.Ct. 2165, 2171 (2014).
Bankruptcy jurisdiction, as exercised by the bankruptcy court as proxy for the district court, is more limited after the confirmation of a chapter 11 plan. It is widely recognized that while the bankruptcy case is pending, the bankruptcy court has broad authority over matters that affect the bankruptcy estate. See U.S. Brass, 301 F.3d at 304; Bank of La. v. Craig's Stores of Tex., Inc. (In re Craig's Stores of Tex., Inc.), 266 F.3d 388, 390 (5th Cir. 2001). But once a plan is 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." Craig Stores, 266 F.3d at 390 (citing In re Fairfield Comtys., Inc., 142 F.3d 1093, 1095 (8th Cir. 1998); In re Johns-Manville Corp., 7 F.3d 32, 34 (2d Cir. 1993)); Binder v. Price Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 164-65 (3d Cir. 2004) ("After confirmation of a reorganization plan, retention of bankruptcy jurisdiction may be problematic." (citations omitted)).
The analysis of post-confirmation jurisdiction begins with the Craig's Stores decision. 266 F.3d 388. In Craig's Stores, the debtor sued its collection agent in the bankruptcy court for breach of contract over conduct that occurred post-confirmation. Id. at 389. The court held that the bankruptcy court improperly exercised post-confirmation jurisdiction; it noted that though the contract at issue "existed throughout the reorganization and was, by implication, assumed as part of the plan [was] of no special significance." Id. at 391. The court noted that "[t]here was no antagonism or claim pending between the parties as of the date of the reorganization." Id.
A year after rejecting post-confirmation jurisdiction in Craig's Stores, the Fifth Circuit found that post-confirmation jurisdiction existed in U.S. Brass. 301 F.3d at 304-05. In U.S. Brass, a confirmed chapter 11 plan required that the claims of certain creditors be resolved by litigation "in a court of competent jurisdiction and determined by settlement or final judgment." Id. at 302 (footnote omitted). The debtor later filed a motion seeking approval of an "agreement" that provided for the liquidation of certain claims by binding arbitration. An objection was lodged on the basis that the agreement was an improper modification of a substantially consummated plan. Id. at 302, 305. The bankruptcy court agreed and denied the motion; it held that the settlement did not really settle anything and that it improperly altered the plan. Id. at 302-03. On appeal before the Fifth Circuit, the Circuit reviewed the issue of the bankruptcy court's jurisdiction of the matter. The court held that post-confirmation jurisdiction existed because "[b]ankruptcy law will ultimately determine this dispute, and the outcome could affect the parties' post-confirmation rights and responsibilities." Id. at 305. The court added that such proceeding will impact compliance with or completion of the reorganization plan. Id.
The court in In re WRT Energy Corp. construed the post-confirmation, jurisdictional standard set forth in Craig's Stores as measuring "whether the matter bears a close nexus to the confirmed plan." 402 B.R. 717, 724 (Bankr. W.D. La. 2007). To make this jurisdictional determination, the WRT court weighed the following factors: (1) when the claim arose; (2) what provisions in the confirmed plan exist for resolving disputes and whether there are provisions in the plan retaining jurisdiction for these suits; (3) whether the plan has been substantially consummated; (4) the nature of the parties involved; (5) whether state or bankruptcy law applies; (6) whether the claims require the interpretation of the plan or the court's orders; and (7) evidence of forum shopping. Id. (citing In re Encompass Servs. Corp., 337 B.R. 864, 873 (Bankr. S.D. Tex. 2006); Avado Brands, 358 B.R. at 878); see also Resorts Int'l, 372 F.3d at 168-69 ("[W]here there is a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement, retention of post-confirmation bankruptcy court jurisdiction is normally appropriate."). Considering the WRT factors, the nexus test favors bankruptcy jurisdiction.
The Templeton Group argues that bankruptcy jurisdiction fails here because the causes concern post-confirmation conduct. The Trustee and Focus obviously disagree, noting that the suit is based, in part, on pre-confirmation conduct; invokes the Plan, which is not fully consummated; attacks several orders of the Court; and involves parties that were, and still are, integrally associated with the Plan and the Liquidating Trust created under the Plan.
As described at III A above, the conduct complained of is rooted in the timeframe prior to plan confirmation. The charge that Gardere (through McCartin) was, in effect, a "de facto trustee" goes to the heart of the Trustee's alleged abdication of his duties and obligations. And this all occurred "from the start and throughout the proceedings." Doc. No. 1, Ex. A. ¶ 11. The alleged scheme to prompt a TEFRA audit by the IRS against creditors cannot have started post-confirmation, as the December 2010 secret meeting between the defendants and the IRS agents took place prior to the effective date of the Plan. And using such meeting to discredit investors had to have been part of a plan hatched well prior to December 2010. Among the breaches complained of by the Templeton Group is the failure to supervise and delegate duties. The Templeton Group notes that Gardere filed over 120 actions post-confirmation, yet it fails to mention that prior to confirmation, Gardere, then representing O'Cheskey in his role as bankruptcy trustee, filed similar actions, including, notably, the action against Templeton. No. 09-20232, Doc. Nos. 1544, 1546, 1573, 1603. Though the suit here was recently filed and though it raises state law counts only, the alleged conduct that, as pleaded, supports the actions brought here is the same as the alleged conduct complained of from the appointment of O'Cheskey as the chapter 11 trustee in April 2010.
The Templeton Group cannot isolate the events by drawing a bright line on the date of confirmation and contend that the focus lies on the post-confirmation events. At best, conduct complained of by the Templeton Group began during the AHF bankruptcy proceedings and was ultimately effected after confirmation. Drafting the pleading to sue O'Cheskey in his role as Liquidating Trustee of the Liquidating Trust does not change this fact. The Liquidating Trust was created as a means to carry-out the administration and orderly liquidation of the bankruptcy estate assets. The facts as alleged emerge from pre-confirmation conduct. This factor favors bankruptcy jurisdiction.
As stated at the outset, the parties first met during the AHF bankruptcy; they cannot be said to be strangers to the underlying bankruptcy case and its related proceedings. Members of the Templeton Group were claimants in the AHF bankruptcy case; the Trustee and Focus were estate fiduciaries. Templeton participated from the outset of the case and in various roles—as a petitioning party creditor, an asserted investor and unsecured creditor, as a member and chairman of the OUCC, and as attorney for King. O'Cheskey was bankruptcy trustee, the Plan proponent (with the OUCC), and later, Liquidating Trustee under the Liquidating Trust created by the Plan. Focus was involved from the beginning, well prior to confirmation, as a court appointed professional. This factor favors jurisdiction.
This factor clearly supports bankruptcy jurisdiction. As catalogued above, the Plan contains extensive provisions for the resolution of disputes and specifically provides that suits against creditors and suits against the Trustee or other fiduciaries must be brought before the Court. And beyond the resolution of discrete disputes or suits, the Plan provides for the ongoing oversight and supervision of the Trustee and the Liquidating Trust. From a larger perspective, the very concept of the Plan supports jurisdiction. As explained, the Plan provides for an orderly liquidation of the AHF estate, with all causes of action—in particular, chapter 5 (of the Bankruptcy Code) actions asserting fraudulent transfers, preferences, and subordination of claims—preserved and pursued in the bankruptcy court. In this regard, the Plan is not a "reorganization" plan; instead, as a liquidating plan, it established a mechanism and procedures for the orderly liquidation. And, importantly, the Plan was a joint plan between the Trustee and the OUCC, with which the Templeton Group was aligned at the time.
The Templeton Group contends that the inclusion of jurisdiction-retention provisions in the Plan cannot expand the Court's jurisdiction. The Court agrees; such provisions neither create nor enlarge jurisdiction at the expense of the express provisions of 28 U.S.C. § 1334(b). Resorts Int'l, 372 F.3d at 161 ("[N]either the bankruptcy court nor the parties can write their own jurisdictional ticket."); U.S. Brass, 301 F.3d at 303. But the existence of such provisions, coupled with the fact that such provisions were critical parts of the Plan negotiation process, is telling of the parties' intent to keep those matters within the purview of the bankruptcy court. See Fruehauf Trailer, 369 B.R. at 827. As such, it is a factor that favors jurisdiction.
The Templeton Group submits that the Trustee's improper delegation of his duties and his failure to supervise his agents (presumably the Gardere firm) caused the Trust to expend in excess of $17 million for administrative expenses. This concerns, in large part, the professional fees incurred and paid by the Liquidating Trust. And it implicates the various orders of the Court that approved professional and other administrative fees. As provided for in the Plan, the Court continued to pass on the propriety of professional fees for services incurred after confirmation. In addition, the Court did not finally approve professional fees for services incurred during the AHF bankruptcy case until well after confirmation. This was done as a way to accommodate the Fifth Circuit's then hindsight test for evaluating professional fees in a bankruptcy case.
The Plan and its provisions are clearly relevant to and implicated by the charges made here. The Trust and its Trustee are products of the Plan; so, too, was the appointment of O'Cheskey as the Liquidating Trustee. By the Plan terms, O'Cheskey was authorized as Liquidating Trustee to exercise the powers of a bankruptcy trustee. The Bankruptcy Code provides both the authority in the Trustee and the source of the causes of action asserted by the Trustee in the 100+ adversary proceedings complained of by the Templeton Group. This factor supports a finding of post-confirmation jurisdiction.
The Plan has been substantially consummated; but bankruptcy jurisdiction does not necessarily end so long as the Plan is not fully consummated. See U.S. Brass, 301 F.3d at 305. This factor weighs against bankruptcy jurisdiction. The complaint also raises state law causes of action, which weighs against, but is not dispositive of, post-confirmation jurisdiction. See Compton v. Walker (In re Coral Petroleum, Inc.), 249 B.R. 721, 727-28 (Bankr. S.D. Tex. 2000) ("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)." (quoting Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925, 930 (5th Cir. 1999))).
The charges raised here by the Templeton Group against the Trustee echo those previously made during the pendency of the AHF bankruptcy case. And they argue now, in support of remand, that "forum shopping by the Trustee is extremely likely given the fact the Trustee was appointed by this Court as the Chapter 11 Trustee coupled with the implicit belief that the Court will act in a manner to justify its appointment of the Chapter 11 Trustee, who now serves as the Liquidating Trustee." Brief in Support of Plaintiffs' Motion for Remand or Abstention [Doc. No. 14] ¶ 46. Reurging items that this Court has previously heard and in some instances considered on the merits, and then suggesting that the Court would consider this suit as, in effect, a collateral attack on prior decisions of the Court, is a clear indication that the Templeton Group is forum shopping, both by bringing and filing this suit in state court and then seeking remand back to state court.
Concluding that jurisdiction lies here does not end the inquiry, for, in this matter, a determination of mandatory abstention rests on whether the proceeding is core. "Whether a particular proceeding is core represents a question wholly separate from that of subject-matter jurisdiction." Resorts, 372 F.3d at 163 (quoting In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 266 (3d. Cir. 1991)).
A proceeding is core under the statute when it "arise[s] in a bankruptcy case or under Title 11." Stern v. Marshall, 131 S.Ct. 2594, 2605 (2011); Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir. 1987) ("[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."). Even when a proceeding is core under the statute, § 157, it must also pass constitutional muster. Stern, 131 S. Ct. at 2618.
The Trustee and Focus argue that the proceeding here is core because it regards a "matter[] concerning the administration of the estate," "confirmation[] of [a] plan[]," and "other proceedings affecting the liquidation of the assets of the estate." 28 U.S.C. § 157(b)(2)(A), (L), (O). The Templeton Group contends that this proceeding is not core because the claims are based on state law and exist outside of the AHF bankruptcy.
Finding core jurisdiction in a proceeding that, in essence, raises malpractice claims against a liquidating trustee is not new. In Southmark, the Fifth Circuit addressed bankruptcy jurisdiction in this context. The accountant to a court-appointed examiner was sued by the debtor, Southmark, for failing to appropriately investigate potential causes of action against a third party, which happened to be one of the accountant's biggest clients. Southmark, 163 F.3d at 927. Southmark sued the accountant in state court for breach of fiduciary duty and fraud, seeking to recover on the claim it would have had against the third party. Id. at 928. The accountant answered the petition and removed the case to the bankruptcy court where the main bankruptcy proceeding was conducted. Id. Southmark moved for abstention and remand. Id. The bankruptcy court granted a summary judgment motion filed by the accountant and then denied Southmark's motion as moot. On appeal, the district court affirmed the bankruptcy court. On appeal to the Fifth Circuit, the court said the bankruptcy court had erred by not addressing the question of jurisdiction raised by Southmark's motion for abstention and remand, particularly whether the nature of the suit implicated core or non-core jurisdiction. Id. If it was non-core, then mandatory abstention under 28 U.S.C. § 1334(c) applied. Id.
In determining that the proceeding was core, the Fifth Circuit began its analysis by noting that the claims against the court-appointed examiner's accountant were "inseparable from the bankruptcy context." Id. at 931. The Fifth Circuit reasoned as follows:
Id. Next, the court stated that "[s]upervising the court-appointed professionals also bears directly on the distribution of the debtor's estate." Id. The court was careful to qualify this statement to exclude claims that could stand alone from the bankruptcy. See id. The court noted that the claims at issue could not stand alone from the bankruptcy because they involved "the nature of the services performed for the debtor's estate and the fees awarded under superintendence of the bankruptcy court." Id.
The Templeton Group contends that Southmark is not applicable to this case because it involved purely pre-confirmation conduct, whereas the conduct alleged here occurred after confirmation. In effect, they argue that once the Plan was confirmed the estate ceased to exist and core jurisdiction under § 157(b) is unattainable. Doc. No. 14 ¶¶ 15-16. This argument is misplaced; the conduct alleged here by the Templeton Group is rooted in, and thus stems from, the AHF bankruptcy.
That the alleged facts supporting this action arguably spillover or culminate in the period after confirmation does not destroy bankruptcy jurisdiction. In Coral Petroleum, the court found Southmark applicable to a malpractice action arising from the liquidating trustee's post-confirmation conduct. Coral Petroleum, 249 B.R. at 728-30. A liquidating trustee pursued breach of fiduciary duties, gross negligence, and fraud claims against the predecessor liquidating trustee for post-confirmation misconduct. Id. at 726. The liquidating trust was established under the plan and consisted of all assets of the bankruptcy estate. Id. at 723 and n.5. Like the Templeton Group argues here, the parties that opposed core jurisdiction in Coral Petroleum argued that Southmark did not apply to post-confirmation conduct. Id. at 729. Relying on Southmark, the court held that "a bankruptcy court's core jurisdiction extends to professionals and others whom the bankruptcy court appoints." Id. at 728 (citing Southmark, 163 F.3d at 931). The court addressed the pre- and post-confirmation distinction, noting that a federal court should have authority to "protect the integrity of the judicial process" and that "timing" of the conduct giving rise to the causes should not be a dispositive limitation. Id. at 728. The court further noted that "[t]he critical element is that property, which was property of the estate immediately before being turned over to [the liquidating trustee], was turned over to him for distribution to creditors." Id. at 730.
Apart from the asserted timing of the actionable conduct, the suit here, as pleaded, is otherwise strikingly similar to Southmark. The Southmark suit was originally filed in state court, five years after the bankruptcy case was filed and after its completion. Southmark raised state-law causes of action and, apparently, issues of collateral estoppel and res judicata. Southmark, 163 F.3d at 928. The line-drawing and labelling by the Templeton Group does not dictate the analysis. As stated by the Coral Petroleum court, "the gravamen of the Southmark decision is that the bankruptcy court has core jurisdiction over matters that are so central to the operation of the bankruptcy case that creditors reasonably rely on the integrity of the federal judicial process to protect them." Coral Petroleum, 249 B.R. at 729 (emphasis in original).
The Templeton Group asserts causes for breach of fiduciary duties and negligence as part of a larger scheme on the Trustee's part to discredit Templeton and the others; and they allege that the Trustee prompted or allowed the filing of frivolous lawsuits, resulting in exorbitant fees and expenses, all of which damaged and diminished the bankruptcy estate. As in Southmark, the claims at issue here are "inseparable from the bankruptcy context." See Southmark, 163 F.3d at 931. Neither party disputes that O'Cheskey was a fiduciary of the Court prior to the confirmation of the Plan. The Plan, as effectively a joint plan among the parties here, provided for extensive judicial oversight after confirmation. By submitting to the oversight and authority of the Court, O'Cheskey remained a bona fide bankruptcy fiduciary post-confirmation. See Coral Petroleum, 249 B.R. at 730.
The Templeton Group relies on the WRT and Resorts International decisions. But these cases are distinguishable. In WRT, a trustee was sued for causes including breach of contract, breach of fiduciary duties, and gross negligence. WRT, 402 B.R. at 721. Unlike the present case, the trust at issue in WRT had already terminated prior to the time of the suit against the trustee, and the claims arose from purely post-confirmation conduct. Id. at 721, 727. Similarly, the claims in Resorts International also arose post-confirmation and concerned a more limited litigation trust for the benefit of certain creditors. Resorts Int'l, 372 F.3d at 157, 163. More important, neither of these decisions implicated the integrity of the bankruptcy process.
The nature of the allegations made against the Trustee and Focus does implicate the integrity of the bankruptcy process; they characterize the Trustee, from the onset of his appointment, as, at best, passive and ineffectual, and, at worst, scheming and vindictive. This proceeding arises in the bankruptcy because it concerns alleged misconduct of fiduciaries whose appointments were approved by this Court. The claims do not stand apart from the bankruptcy. See Southmark, 163 F.3d at 931. The conduct complained of here, if true, began upon the Trustee's first involvement in the AHF bankruptcy case. The conduct of bankruptcy professionals—whether they properly exercised their duties and obligations—goes to the very heart of a bankruptcy case.
This suit can potentially have a profound effect on the allowed creditors of AHF, now trust beneficiaries. The Liquidating Trust has by no means been fully administered; the process of making distributions to allowed claimants is far from complete. This suit will further delay this process. And, given the indemnity provisions of the AHF Plan and the Liquidating Trust Agreement, the remaining estate could be materially less.
These matters are core matters. The Court will therefore deny the Templeton Group's motion for remand. Contrary to their contention, this ruling does not prejudice the Templeton Group's jury trial right. They retain their Seventh Amendment right to a jury trial (the Court is not here assessing such right); the Court, as a bankruptcy court, cannot conduct a jury trial without consent of all parties. See 28 U.S.C. § 157(e).
