In The Matter of: George Joseph Porter, Jr. et al

Filing 24

ORDER AND REASONS that the remaining claims in this case are REFERRED to the bankruptcy court. This case is STAYED and ADMINISTRATIVELY CLOSED. Further, the status conference currently set in this matter for December 22, 2014 is CANCELED. Signed by Judge Jane Triche Milazzo. (cc: USBC, EDLA) (Attachments: # 1 Letter)(ecm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
IN RE: GEORGE JOSEPH
PORTER, JR. ET AL.

CIVIL ACTION
NO. 14-933
SECTION "H"(3)

ORDER AND REASONS
The issue before this Court is whether it can refer this matter back to the
bankruptcy court for findings of fact and conclusions of law on the debtors'
remaining claims against a non-creditor. This Court holds that it can, and
accordingly, the remaining claims in this case are REFERRED to the bankruptcy
court to issue findings of fact and conclusions of law. This case is STAYED and
ADMINISTRATIVELY CLOSED. Further, the status conference currently set
in this matter for December 22, 2014 is CANCELED.
BACKGROUND
This issue is before this Court on the appeal of a partial final judgment.
New Orleans musicians George Porter, Brian Stoltz, and Russell Batiste
1

performed together in a band called Porter Batiste Stoltz ("PBS"). PBS entered
into a management agreement with Highsteppin' Productions, LLC ("HSP"). In
2009, HSP filed suit in federal court in Massachusetts against PBS and its
members to recover amounts it believed it was owed under the management
agreement (the "Massachusetts Suit"). Each of the individual members of
PBS—Porter, Stoltz, and Bastite (collectively the "Debtors")—subsequently filed
a Chapter 7 bankruptcy petition in the Eastern District of Louisiana, listing
HSP as a creditor.

Due to the pending bankruptcy proceedings, the

Massachusetts Suit was removed to the Eastern District of Louisiana and
referred to the bankruptcy court pursuant to this Court's local rules.
Debtors eventually answered the Massachusetts Suit and asserted
counterclaims against HSP and a claim against Phillip Stepanian—the sole
member of HSP—seeking to pierce the corporate veil. This matter was tried
before the bankruptcy court on July 13 through July 22 and September 13
through September 28, 2012. The court issued a partial final judgment on
August 16, 2013. In a 107-page opinion, the bankruptcy court denied HSP's
claims for breach of contract in full, granted Debtors' counterclaims for breach
of contract, breach of fiduciary duty, negligence, and violations of the
Massachusetts Unfair Trade Practices Act ("MUTPA") but denied their copyright
infringement claim. Neither party was awarded damages because the court held
that their claims were offsetting.

The opinion did not address Debtors'

third-party claim against Stepanian.
In addition, the bankruptcy court specifically reserved for later
2

determination the quantum of attorney's fees recoverable by Debtors under the
MUTPA. After a later hearing, the court ordered HSP to pay Debtors' counsel
approximately $1.8 million.
HSP and Stepanian (collectively "Appellants") timely appealed these
judgments to this Court on February 28, 2014. On March 5, Appellants moved
the bankruptcy court to stay execution of the bankruptcy court judgment
pending appeal. The bankruptcy court granted the motion in a 44-page opinion
on June 24, 2014. In its order, the bankruptcy court acknowledged its failure to
decide Debtors' claims against Stepanian, stating that "[a]lthough claims were
brought against Stepanian, this Court did not believe it had constitutional
authority over Stepanian under the present status of the law, namely, the
Supreme Court's holding in Stern v. Marshall.1

"[T]his Court originally

concluded that it could not resolve the issues against Stepanian."2 The court
goes on to say, however, that "[t]he recent ruling by the Supreme Court in
Executive Benefits changes this conclusion."3
The Supreme Court decided Executive Benefits Insurance Agency v.
Arkison on June 9, 2014, several months after the bankruptcy court rendered its
decision in this case. The Court held that when a bankruptcy court lacks
constitutional authority to enter final judgment on a claim pursuant to Stern, it
is still permitted to issue proposed findings of fact and conclusions of law to be
reviewed de novo by the district court. Accordingly, the bankruptcy court stated
1

Stern v. Marshall, 131 S. Ct. 2594, 2611 (2011).

2

In re Porter, 511 B.R. 785, 810 (Bankr. E.D. La. 2014).

3

Id.

3

that "under Executive Benefit's holding, it appears this Court could be available
to the District Court for a trial on the merits of claims against Stepanian."4
Immediately following the issuance of the bankruptcy court's stay order,
Debtors moved this Court to suspend or extend the appellate briefing schedule
and requested a status conference to discuss the effect of Executive Benefits on
this case. The Court ordered that both parties brief the issue of whether the
claim by Debtors against Stepanian can be referred to the bankruptcy court for
findings of fact and conclusions of law.
LAW AND ANALYSIS
The bankruptcy court below, both parties, and this Court agree that
Debtors' claim against Stepanian is a Stern claim.5 A Stern claim is a claim that
is a "core" proceeding under 28 U.S.C. § 157(b) but that cannot constitutionally
be adjudicated by the bankruptcy court. In Stern v. Marshall, the Supreme
Court held that it was unconstitutional for the bankruptcy court to decide the
debtor's counterclaim against her creditor because it was a state, common law
claim between two private parties, which did not flow from a federal statutory
scheme, was not a matter of public right, and would not necessarily be resolved
by the bankruptcy claim allowance process.6 The Fifth Circuit has noted that
the dispositive issue under Stern in deciding whether a bankruptcy court may
4

Id. at 811.

5

Id. at 810 ("[T]he claims brought against Stepanian by Debtors fall squarely within
the holding of Granfincanciera and Stern as they are an atempt to augment the estate through
a cause of action against a noncreditor.").
6

Stern, 131 S. Ct. at 2611.

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enter final judgment on a counterclaim is whether the claim would "necessarily
have been resolved in the claims-allowance process."7 Debtors' state law, veilpiercing claim against a non-creditor would not necessarily have been decided
in the claims allowance process and fits squarely within the definition of Stern.8
Accordingly, the bankruptcy court did not have the constitutional authority to
enter final judgment on the Debtors' claim against Stepanian.
In Executive Benefits, the Supreme Court stated that when, under Stern,
the bankruptcy court is prohibited from entering a final judgment on a claim, the
claim should be treated in accordance with 28 U.S.C. § 157(c)(1), which states
that:
A bankruptcy judge may hear a proceeding that is not a core
proceeding but that is otherwise related to a case under title 11. In
such proceeding, the bankruptcy judge shall submit proposed
findings of fact and conclusions of law to the district court, and any
final order or judgment shall be entered by the district judge after
considering the bankruptcy judge's proposed findings and
conclusions and after reviewing de novo those matters to which any
party has timely and specifically objected.9
Accordingly, if a Stern claim is "related to a case under title 11," the bankruptcy
court is authorized by § 157(c)(1) to hear the claim and issue proposed findings
of fact and conclusions of law. Therefore, in order to determine whether it would
7

In re Frazin, 732 F.3d 313, 320 (5th Cir. 2013).

8

See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 58 (1989) ("Because petitioners
here, like the petitioner in Schoenthal, have not filed claims against the estate, respondent's
fraudulent conveyance action does not arise 'as part of the process of allowance and
disallowance of claims.' Nor is that action integral to the restructuring of debtor-creditor
relations.").
9

28 U.S.C. § 157 (West 2014).

5

be appropriate to remand Debtors' remaining claim against Stepanian to the
bankruptcy court for findings of fact and conclusions of law, this Court must
determine whether the claim is "related to" the bankruptcy matter.
A matter is "related to" the bankruptcy if "the outcome of that proceeding
could conceivably have any effect on the estate being administered in
bankruptcy."10 The Fifth Circuit has indicated that this definition should be
interpreted broadly. "[A]n effect is not required to [be] a certainty. Rather,
jurisdiction will attach on a finding of any conceivable effect."11

The Fifth

Circuit has stated that even when there is a "possibility that [a] suit may
ultimately have no effect on the bankruptcy, [the court] cannot conclude . . . that
it will have no conceivable effect.12 Moreover, "an action is related to bankruptcy
if the outcome could alter the debtor's rights, liabilities, options, or freedom of
action (either positively or negatively) and in any way impacts upon the
handling and administration of the bankrupt estate."13
Debtors and Appellants disagree over whether Debtors' claims against
Stepanian are sufficiently "related to" the underlying bankruptcy matter to fall
within the bankruptcy court's "related to" jurisdiction. Appellants argue that
because the only judgment against HSP is an award of attorneys' fees and costs
10

In re TMT Procurement Corp., 764 F.3d 512, 523 (5th Cir. 2014); Matter of Wood, 825
F.2d 90, 93 (5th Cir. 1987).
11

In re Canion, 196 F.3d 579, 587 (5th Cir. 1999).

12

Matter of Wood, 825 F.2d at 94.

13

Matter of Zale Corp., 62 F.3d 746, 752 (5th Cir. 1995) (internal quotation marks and
alterations omitted).

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to Debtors' counsel, a judgment piercing the corporate veil to hold Stepanian
liable for that amount will have no effect on the bankruptcy estate. Indeed, the
bankruptcy court's order of attorneys' fees awards the amounts directly to
Debtors' counsel personally.
Debtors rebut that an amount of the award of attorneys' fees and costs will
serve to reimburse Debtors for amounts that they advanced during litigation,
which will necessarily inure to the estate. Debtors also argue that they have
alleged sufficient facts to impose liability against Stepanian both under a veilpiercing theory and personally under Massachusetts's business tort law
regarding the violative conduct of LLC members. Indeed, under Massachusetts
law, "there are circumstances in which a member of a limited liability company
may be personally liable to third parties for his own actions."14
This Court agrees with Debtors' arguments that its claims against
Stepanian could conceivably have an effect on the bankruptcy estate. For
instance, if HSP is unable to pay the attorneys' fee judgment that the
bankruptcy court rendered against it and Debtors are successful in piercing the
corporate veil to hold Stepanian personally liable for this amount, Debtors will
be able to collect that amount directly from Stepanian. Although much of the
attorneys' fee award will benefit Debtors' attorneys and not the estate, some of
the award will serve to reimburse Debtors' estates for amounts previously
advanced to cover attorneys' fees and costs. Additionally, it is conceivable that
Debtors could be successful in holding Stepanian personally liable under
14

14A MASSACHUSETTS PRACTICE SERIES, SUMMARY OF BASIC LAW § 6.154 (4th ed.).

7

Massachusetts business tort law, and the award would serve to augment the
estate.
It is, of course, possible that Debtors' claim against Stepanian will have no
effect on the Debtors' estate, but this Court is not prepared to say that it is not
conceivable that a successful claim could serve to augment the estate.
Accordingly, this Court holds that Debtors' claims against Stepanian fall within
the bankruptcy court's "related to" jurisdiction. Therefore, pursuant to Executive
Benefits and § 157(c)(1), the bankruptcy court is authorized to hear Debtors'
remaining claims against Stepanian and issue findings of fact and conclusions
of law to be reviewed de novo by this Court.
This Court also notes that referral of this matter to the bankruptcy court
would promote efficiency and conserve judicial resources. The bankruptcy court
is intimately familiar with the factual and procedural background of this case,
having presided over 19 days of trial and decided countless pre- and post-trial
motions. Accordingly, the bankruptcy court is in the best position to decide this
singular, remaining issue. After receipt of the bankruptcy court's findings of
facts and conclusions of law on Debtors' claims against Stepanian, this Court
will be able to review the entire case on appeal, rather than reviewing the case
piecemeal. "[F]ederal law expresses the policy against piecemeal appeals."15
Indeeed, "related to" jurisdiction, is intended to "avoid the inefficiencies of
piecemeal adjudication and promote judicial economy by aiding in the efficient

15

Switzerland Cheese Ass'n, Inc. v. E. Horne's Mkt., Inc., 385 U.S. 23, 24 (1966); see 28
U.S.C. § 1291 (West 2014).

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and expeditious resolution of all matters connected to the debtor's estate."16
Accordingly, this Court elects to refer this matter to the bankruptcy court for
findings of fact and conclusions of law.
CONCLUSION
For the foregoing reasons, this case is REFERRED to the bankruptcy court
for findings of fact and conclusions of law on Debtors' remaining claims against
non-creditor,

Phillip

Stepanian.

This

case

is

STAYED

and

ADMINISTRATIVELY CLOSED. Further, the status conference currently set
in this matter for December 22, 2014 is CANCELED.

New Orleans, Louisiana, this 19th day of December, 2014.

___________________________________
JANE TRICHE MILAZZO
UNITED STATES DISTRICT JUDGE

16

Matter of Zale Corp., 62 F.3d at 752.

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