MCDANIEL et al v. BLUST et al

Filing 22

RECOMMENDED RULING - MAGISTRATE JUDGE signed by MAG/JUDGE P. TREVOR SHARP on 1/8/10 re 14 MOTION to Dismiss filed by WILLIAM STANALAND, III be denied, 11 MOTION to Remand to State Court And Mandatory or Permissive Abstention filed by JAMES MARK MCDANIEL, JR., C. RICHARD EPES be granted as to Defendant Stanaland, and otherwise denied, 9 MOTION to Dismiss filed by EDWIN R. GATTON, DIRK W. SIEGMUND, JOHN M. BLUST, IVEY, MCCLELLAN, GATTON AND TALCOTT, LLP be granted. (Wilson, JoAnne)

IN THE UNITED STATES DISTRICT COURT F O R THE MIDDLE DISTRICT OF NORTH CAROLINA

J A M E S MARK MCDANIEL, JR., a n d DR. C. RICHARD EPES, P l a i n t if fs , v. J O H N M. BLUST, et al., D e f e n d a n t s.

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R E C O M M E N D A T I O N OF UNITED STATES MAGISTRATE JUDGE T h is matter comes before the Court on the motions to dismiss filed by Defendants (D o c k e t Nos. 9, 14), and the motion to remand to state court filed by Plaintiffs (Docket No. 1 1 ). These motions have been fully briefed. For the reasons stated herein, the Court co n clud es that the motion to dismiss filed by Defendants John Blust, Edwin Gatton, Dirk S ieg m u n d , and Ivey, McClellan, Gatton, and Talcott, LLP (IMGT) (Docket No. 9) should b e granted; the motion to dismiss filed by Defendant William Stanaland, III (Docket No. 14) sh o u ld be denied; and that Plaintiffs' motion to remand to state court (Docket No. 11) should b e granted as to claims against Defendant Stanaland and otherwise denied. I . FACTUAL AND PROCEDURAL BACKGROUND P la in tif f s filed this action in the Superior Court of Guilford County. (Docket No. 1.) D e f e n d a n ts removed it to this Court on July 13, 2009. (Id.) Plaintiffs' Complaint asserts s e v e n causes of action. Plaintiffs' First Cause of Action is for civil obstruction of justice and

is stated against Defendants Blust, Gatton, and IMGT. (Docket No. 3, Complaint ("Compl.") a t 9.) Plaintiffs' Second Cause of Action is against Defendants Blust, Gatton, and IMGT for p u n itiv e damages. (Id. at 13.) The Third Cause of Action is for conversion and is stated a g a in s t Defendants Gatton and IMGT. (Id. at 14.) Plaintiffs' Fourth Cause of Action (la b e le d in the Complaint as a second Third Cause of Action) is for invasion of privacy a g a in s t Defendants Siegmund, Stanaland, and IMGT. (Id. at 15.) Plaintiffs' Fifth Cause of A c tio n (labeled as the Fourth Cause of Action) is for breach of fiduciary duty against D e f e n d a n t Stanaland. (Id. at 19.) Plaintiffs' Sixth Cause of Action (labeled as the Fifth C a u se of Action) is for civil conspiracy against Defendants Siegmund, Stanaland, and IMGT. (Id . at 20.) And Plaintiffs' Seventh Cause of Action (labeled as the Sixth Cause of Action) is for punitive damages against Defendants Stanaland, Siegmund, and IMGT. (Id. at 22.) P la in tif f s allege that they are former officers of EBW Laser, Inc., which entered b a n k ru p tc y in 2005 in the Middle District of North Carolina. (Compl. at 1-2.) The case was c o n v e rte d to a Chapter 7 proceeding and a trustee, Charles Ivey, was placed in sole charge o f EBW Laser, Inc. (Id. at 2.) Mr. Ivey is an attorney, and he retained his firm, IMGT, to ac t as his counsel as trustee of EBW Laser, Inc. and to act as counsel in an adversary p ro c e e d in g that the trustee filed against Plaintiffs. (Id.) The adversary proceeding against P la in tif f s is still being litigated. (Docket No. 10, Br. in Supp. of Defs.' Mot. to Dismiss at 3 n.2; Docket No. 12, Br. in Supp. of Pls.' Mot. to Remand at 5.) Defendants Blust, Gatton, a n d Siegmund are all attorneys with the IMGT law firm. During the discovery period of the -2-

a d v e rsa ry proceeding, Plaintiffs allege that Defendant Gatton presented to deponents p u rp o rte d tax returns for EBW Laser, Inc. which Defendant Gatton attributed to Plaintiffs w h e n he knew or should have known that these corporate tax returns could not be properly attrib u ted to Plaintiffs. (Compl. at 2-5.) Defendant Gatton also allegedly allowed expert w itn e ss e s to rely on these corporate tax returns to conclude that Plaintiffs had committed f ra u d as officers of EBW Laser, Inc. (Id. at 5-7.) Defendant Blust allegedly offered a brief to the bankruptcy court to assert that the tax returns originated with Plaintiffs while knowing th a t the tax returns could not be authentic and could not be attributed to Plaintiffs. (Id. at 89 .) Defendants' use of these allegedly false corporate tax returns forms the basis for P l a in tif f s ' allegation of civil obstruction of justice (First Cause of Action) and request for p u n itive damages (Second Cause of Action). P la in tif f s also allege that during this same adversary proceeding, Defendant IMGT t w i c e sought the personal income tax records of Plaintiff James Mark McDaniel, Jr., and tw ic e the bankruptcy court ruled that McDaniel's personal income tax returns were irrelevant a n d denied permission for IMGT to obtain these tax returns. (Compl. at 14.) Nevertheless, D e f en d a n t IMGT allegedly came into the possession of Plaintiff McDaniel's personal tax re tu r n s for the years 1997 through 2001 without the knowledge or permission of Plaintiff M c D a n ie l. (Id.) Plaintiff McDaniel allegedly requested the returns, and Defendant Gatton re f u s e d to return them. (Id.) This alleged refusal to return Plaintiff McDaniel's personal tax re tu rn s forms the basis of Plaintiffs' conversion cause of action. (Id.) -3-

P la in tiffs next allege that Defendant IMGT received Plaintiff McDaniel's personal tax re tu rn s from Defendant Stanaland, a CPA to whom Plaintiff McDaniel had earlier delivered co p ies of these tax returns with the intention of allowing Defendant Stanaland to prepare M c D a n ie l's 2002 tax returns. (Compl. at 15.) Plaintiffs concluded that Defendant IMGT re c e iv e d McDaniel's tax returns from Defendant Stanaland after Plaintiffs' private in v e stig a to r made phone calls to Defendant Stanaland pretending to be Defendant Siegmund a n d to Defendant Siegmund pretending to be Defendant Stanaland. (Id. at 16-17.) Plaintiffs a lle g e that both Defendant Siegmund and Defendant Stanaland confirmed on audiotape that P la in tif f McDaniel's personal tax returns had been transferred from Stanaland to Siegmund a n d that both agreed to keep that fact secret. (Id. at 17.) These allegations form the basis of P lain tiff s' remaining claims for invasion of privacy, breach of fiduciary duty, civil c o n s p ira c y, and punitive damages. (Id. at 15-22.) Defendants Blust, Gatton, Siegmund, and IMGT (the IMGT Defendants) removed this a c tio n based on federal question and bankruptcy case jurisdiction. (Docket No. 1 at 1.) They n o w move to dismiss the action as to them based on the Barton doctrine which they contend re q u ire d Plaintiffs to obtain leave of the bankruptcy court which appointed trustee Ivey b e f o re Plaintiffs filed this action. (Docket No. 10 at 4.) Plaintiffs acknowledge that they h a v e not obtained leave of the bankruptcy court, but argue that the Barton doctrine does not b a r this action because Defendants acted outside of the trustee's official capacity and outside

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th e attorneys' duties.1 (Docket No. 12 at 2.) Plaintiffs ask that this Court remand this action to state court or abstain from hearing the case. (Id. at 5-12.) D e f e n d a n t Stanaland also seeks dismissal of this action as to the claims against him u n d e r the Barton doctrine and pursuant to arguments that certain of Plaintiffs' claims fail to s ta te a claim upon which relief may be granted under Fed. R. Civ. P. 12(b)(6). (Docket No. 1 5 .) The remaining Defendants make similar arguments with regard to Plaintiffs' causes of ac tio n for punitive damages, conversion, and invasion of privacy. (Docket No. 10.) II. DISCUSSION T h e Barton doctrine "prohibits a party from suing a trustee in a non-appointing court f o r acts done in the official capacity of the trustee and within the trustee's authority as an o f f ic e r of the court." Gordon v. Nick, No. 96-1858, 1998 WL 559734, slip op. at *2 (4th Cir. S e p t. 2, 1998) (unpublished); accord Lawrence v. Goldberg, 573 F.3d 1265, 1269 (11th Cir. 2 0 0 9 ); see generally Barton v. Barbour, 104 U.S. 126 (1881). A court lacks jurisdiction to h e a r the case absent leave of the court by which the trustee was appointed. Lawrence, 573 F .3 d at 1269. The doctrine applies also to the trustee's counsel. Gordon, 1998 WL 559734 a t *2 ("The Barton doctrine protects not only the trustee, but also other court-appointed o f f ice rs who represent the bankruptcy estate, including the attorney of the trustee."); accord L a w r e n c e, 573 F.3d at 1270-71.

There is a statutory exception to the Barton doctrine, 28 U.S.C. § 959(a), but Plaintiffs do not argue that this exception applies to Defendants' actions. -5-

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In determining whether the act complained of was done within the trustee's "official c a p ac ity" and within the trustee's "authority as an officer of the court," courts look to the n a tu re of the function being performed by the trustee or trustee's counsel at the time the tru stee committed the allegedly improper act. In In re Triple S Rests., Inc., 519 F.3d 575, 578 (6 th Cir. 2008), the plaintiff sued the bankruptcy trustee in state court for intentional in f lictio n of emotional distress. The trustee removed the case to federal bankruptcy court, a n d on appeal the Sixth Circuit discussed the scope of the Barton doctrine in the context of th e jurisdiction of the bankruptcy court. Id. The trustee had earlier sought to obtain from the p la in tif f , through the bankruptcy court, money from a life insurance policy which the trustee c o n te n d e d belonged to the bankruptcy estate. Id. In the settlement negotiations the trustee a lle g e d ly threatened to report the plaintiff to the United States Attorney for criminal charges if he did not pay a certain amount in settlement. Id. The Sixth Circuit rejected the plaintiff's a rg u m e n t that the trustee was not acting in his official capacity when he made the alleged t h r e a t. Id. In doing so, the circuit court focused on the fact that the "negotiations were w ith in the context of recovering assets for the estate." Id. In In re Weisser Eyecare, Inc., 245 B.R. 844 (Bankr. N.D. Ill. 2000), the debtor's f o rm e r officer sought leave in the bankruptcy court to sue the former trustee in a nonb a n k ru p tc y court for his failure to give notice to creditors of a sharing-of-proceeds a rra n g e m e n t made by the trustee. The bankruptcy court noted that "[c]ourts which have held tru ste e s personally liable for actions taken outside the scope of their authority, have mainly -6-

d o n e so in matters involving a trustee's mistaken seizure of property not property of the e s ta te , or other similar actions." 2 Id. at 851. The bankruptcy court looked at the function th e trustee was performing at the time he arguably failed to meet the statutory procedural re q u ire m e n ts for giving notice. The trustee was at the time attempting to act pursuant to his a u th o rity to sell property of the estate. Id. It could not "be said that such a failure rendered h i s actions ultra vires." Id. Therefore, the bankruptcy court denied the motion for leave to s u e the trustee. Id. at 852. Moreover, the Sixth Circuit has found that a presumption applies under the Barton d o c trin e that acts "were a part of the trustee's duties unless Plaintiff initially alleges at the o u ts e t facts demonstrating otherwise." Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 3 1 4 , 322 (6th Cir. 2006) (internal quotations omitted).

The bankruptcy court cited Leonard v. Vrooman, 383 F.2d 556 (9th Cir. 1967), for this proposition. Weisser Eyecare, 245 B.R. at 851. Plaintiffs in the present action also rely upon Leonard in their argument that Defendants acted outside of their official capacities. (Docket No. 16 at 5.) In Leonard, the bankruptcy trustee sought an order from the bankruptcy court restraining prosecution of a state court action against him. It was clear in Leonard that the trustee, who was being sued by a third-party not related to the bankruptcy proceeding, had seized the plaintiff's property while the property was not part of the bankruptcy estate. This was among the facts found by the bankruptcy court. On these facts, the Ninth Circuit made its limited holding that "a trustee wrongfully possessing property which is not an asset of the estate may be sued for damages arising out of his illegal occupation in a state court without leave of his appointing court." Leonard, 383 F.2d at 560. This Court agrees with the Weisser Eyecare court's construction of the holding of Leonard as being limited to the specific facts of that case involving a trustee's mistaken seizure of property not property of the estate. Weisser Eyecare, 245 B.R. at 851. Therefore, Leonard is not persuasive in the present action not involving a trustee's mistaken seizure of property not property of the estate. -7-

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A.

T h e IMGT Defendants D e f e n d a n ts Blust, Gatton, and Siegmund are attorneys at the IMGT law firm. (Compl.

a t 1.) Because trustee Ivey employed that law firm as his counsel, the individual Defendants a n d the law firm itself are persons or entities to which the Barton doctrine may apply. See G o r d o n , 1998 WL 559734. I t was within the context of the adversary proceeding which the trustee filed against P la in tif f s, and for which the IMGT firm and its attorneys were hired to represent the trustee, th a t the allegedly false corporate tax returns of EBW Laser, Inc. were presented and im p ro p e rly relied upon to implicate Plaintiffs in alleged wrongdoing. See Compl. ¶ 4 (d e p o sitio n of Dianne Atta taken in adversary proceeding); ¶ 12 (IMGT Defendants furnished ta x returns to expert witnesses to be relied upon in "assessing the case against McDaniel and E p e s." ) The allegedly false statements to the bankruptcy court regarding these corporate tax re tu rn s were also made in connection with the adversary proceeding against Plaintiffs. See D o ck et No. 12, Ex. 9 (Reply brief signed by Defendant Blust). T h e prosecution of the trustee's adversary proceeding was a function properly within th e scope of duties of the trustee's counsel. The IMGT Defendants were therefore acting w ith in the scope of their official capacity and within their authority as officers of the court in deposing witnesses, presenting expert reports, and presenting both written and oral

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a rg u m e n t to the court in the adversary proceeding.3 Accordingly, the Barton doctrine applies to these allegedly improper acts of the IMGT Defendants. Plaintiffs' First and Second C au ses of Action should be dismissed for lack of jurisdiction. See Gordon, 1988 WL 559734. T h e remaining allegedly improper acts of the IMGT Defendants pertain to the receipt a n d possession of Plaintiff McDaniel's personal income tax returns for the years 1997 th ro u g h 2001. Plaintiffs allege that Defendant Stanaland improperly gave these returns to th e IMGT Defendants in the Spring of 2006. (Compl. ¶¶ 31-37.) Plaintiffs allege that A tto rn e y Siegmund received the returns from CPA Stanaland. (Id. ¶ 37.) Attorney

S ie g m u n d ' s motive according to Plaintiffs was to establish tax fraud by Plaintiff McDaniel to bolster the trustee's contention that Plaintiff McDaniel had created and engaged in the f ra u d u le n t scheme outlined in the complaint in the adversary proceeding. (Id.) Therefore, th e allegedly improper receipt and possession of Plaintiff McDaniel's personal tax returns w e re accomplished in the context of proving the adversary action against Plaintiffs. Proving th e adversary action was a function within the scope of duties of the trustee's counsel.

Plaintiffs also rely upon Hall v. Perry (In re Cochise College Park, Inc.), 703 F.2d 1339 (9th Cir. 1983), for the proposition that the trustee may be liable for misrepresentations made to creditors concerning property of the bankrupt. (Docket No. 16 at 7.) However, Hall is not persuasive because the proceeding there was in bankruptcy court. There was, therefore, no need to determine whether leave of the bankruptcy court was required under the Barton doctrine to consider the claims against the trustee. Id. at 1346. Hall also did not present the situation, as in Leonard, where the bankruptcy court was being asked to restrain a state court proceeding based on the Barton doctrine. -9-

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A c c o rd in g ly, the Barton doctrine also applies to these allegedly improper acts of the IMGT D e f e n d a n ts. Therefore, Plaintiffs' remaining causes of action against the IMGT Defendants (c o n v e rs io n , invasion of privacy, civil conspiracy, and punitive damages) should be d is m is s e d for lack of jurisdiction. See Gordon, 1998 WL 559734. B. D e fe n d a n t Stanaland D e f e n d a n t Stanaland does not claim to be an officer of the bankruptcy court or claim th a t he was connected to the EBW Laser, Inc. bankruptcy proceedings.4 (Docket No. 15 at 8 -9 .) Defendant Stanaland claims that the Barton doctrine applies to him solely because tax re tu rn s allegedly provided by him to Defendant Siegmund "were provided for use in the B a n k ru p tc y Court proceedings." (Id. at 9.) Defendant Stanaland does not provide any a u th o rity for giving such a broad reach to the Barton doctrine. (Id.) The Court has not found a n y case applying the Barton doctrine to an individual based on his providing documents to a trustee which were subsequently used in the bankruptcy proceeding. Because Defendant S ta n a la n d is not a trustee, the attorney for the trustee, or any other type of court-appointed o f f ic e r representing the bankruptcy estate, or an equivalent thereof, the Barton doctrine does n o t apply to him. See Gordon, 1998 WL 559734; see also Lawrence, 573 F.3d at 1270. T h e allegations against Defendant Stanaland are all state law tort claims: Third Cause o f Action for invasion of privacy; Fourth Cause of Action for breach of fiduciary duty; Fifth Apparently Defendant Stanaland had done some work for EBW Laser, Inc., and this is what led the IMGT Defendants to him. See Docket No. 12, Ex. 5 at 3 (deposition excerpt of Dirk Siegmund stating that he went to talk to Defendant Stanaland about his role as EBW accountant.) -104

C a u s e of Action for civil conspiracy; and Sixth Cause of Action for punitive damages. (See C o m p l.) The recommended dismissal of all claims against the IMGT Defendants and the d e c is io n that the Barton doctrine does not apply to Defendant Stanaland, leaves this Court w ith no basis to assert original jurisdiction over the claims against Defendant Stanaland. P u r s u a n t to 28 U.S.C. § 1367(c)(3), this Court should decline to exercise supplemental ju ris d ic tio n over these claims and remand them to the Guilford County Superior Court. Conclusion F o r the foregoing reasons, IT IS RECOMMENDED that the motion to dismiss filed b y Defendants John Blust, Edwin Gatton, Dirk Siegmund, and Ivey, McClellan, Gatton, and T a lc o tt, LLP, (Docket No. 9) be granted; the motion to dismiss filed by Defendant William S tana land III (Docket No. 14) be denied; and that Plaintiffs' motion to remand to state court (D o c k e t No. 11) be granted as to Defendant Stanaland, and otherwise denied.5

/s/ P. Trevor Sharp United States Magistrate Judge

D a te : January 8, 2010

Plaintiffs' motion to remand as to all claims against all Defendants should be denied because the action filed by Plaintiffs in state court was properly removable on grounds that Plaintiffs' claims are closely related to the bankruptcy proceeding pending in this district. See 28 U.S.C. § 1334(b); Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 403 (4th Cir. 1992) ("Courts have adopted an expansive definition of what is a related proceeding."). -11-

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