Loomis v. Hunter, Humphrey & Yavitz PLC et al

Filing 12

ORDER denying 2 Motion to Withdraw the Reference (Bankruptcy). (See document for full details). Signed by Judge Frederick J Martone on 7/26/12.(LAD)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Plaintiff,
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vs.
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Hunter, Humphrey & Yavitz, PLC, et al.,)
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Defendants.
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Joseph Charles Loomis,
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No. CV-12-0586-PHX-FJM
No. BK-10-1885-RJH
ORDER

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

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

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

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

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

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11).

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

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

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

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

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Proceeding against Hunter Humphrey and individual lawyers, asserting claims of

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

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

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

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(2011), the bankruptcy court lacks final adjudicatory authority over the Adversary

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Proceeding.

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

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

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

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necessarily determine whether a bankruptcy court is constitutionally authorized to finally

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adjudicate the matter.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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,

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

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is required.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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withdrawal. Accordingly, we decline to withdraw the reference at this time.
IT IS ORDERED DENYING defendants’ motion to withdraw the reference (doc.

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2).
DATED this 26th day of July, 2012.

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