Vieira v. Simpson et al

Filing 130

ORDER referring proceeding to Bankruptcy Court. Signed by Honorable David C Norton on September 21, 2016. (rweh, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
CHARLESTON DIVISION
MICHELLE L. VIEIRA, as Ch. 7
bankruptcy trustee for debtors Ken C.
Goss and Gretchen G. Goss,
Plaintiff,
v.
MARK SIMPSON, CHRISTY A.
SIMPSON, SIMPSON FAMILY
HOLDINGS INC., AARON L.
SILVERMAN, and JONES SIMPSON &
NEWTON PA,
Defendants.

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No. 2:13-cv-2610-DCN

ORDER

This matter is before the court on a motion to alter or amend judgment filed by
plaintiff Michelle L. Vieira, as bankruptcy trustee for debtors Ken and Gretchen Goss
(“Vieira”). Vieira seeks reconsideration of the court’s March 28, 2016 order (“March
2016 Order”) in which the court reconsidered its July 23, 2015 order (“July 2015
Order”)1 and granted defendants Mark Simpson (“Mark”) and Jones, Simpson & Newton,
P.A.’s (“JS&N,” together with Mark, the “JS&N defendants”) motion for summary
judgment as to Vieira’s claims for legal malpractice and equitable subordination. For the

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The July 2015 Order was itself a reconsideration of the court’s original ruling on
defendants’ motion for summary judgment on March 23, 2015 (“SJ Order”). Thus, issues
relating to defendants’ motion for summary judgment have been the subject of three prior
orders: (i) the SJ Order granting summary judgment; (ii) the July 2015 Order
reconsidering the SJ Order and denying summary judgment with respect to Vieira’s claim
for legal malpractice against the JS&N defendants and holding Vieira’s claim for
equitable subordination against the JS&N defendants in abeyance, and (iii) the March
2016 Order reconsidering the July 2015 Order and granting—for the second time—the
JS&N defendants’ motion for summary judgment as to Vieira’s claims for legal
malpractice and equitable subordination.
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following reasons, the court refers the instant motion and the remainder of this action to
the United States Bankruptcy Court for the District of South Carolina (the “Bankruptcy
Court”).
I. BACKGROUND2
This case arises out of a loan transaction between Ken and Gretchen Goss (“Ken”
and “Gretchen,” together “the Gosses”) and Simpson Family Holdings, Inc. (“SFH”). In
June 2007, Ken, a residential home builder, contacted Mark, an attorney who had
performed a number of real estate closings for Ken in the past, to ask whether Mark knew
of any investors willing to make a loan that would allow the Gosses to finish a
remodeling project on Hilton Head Island, South Carolina. Sometime later, Mark
informed Ken that he had found an investor willing to make such a loan. Mark instructed
the Gosses to meet with him and the lender at the law offices of JS&N, where Mark is a
partner. Once they arrived at JS&N’s offices, the Gosses learned that the prospective
lender was SFH, a corporation owned by Mark’s wife, defendant Christy Simpson
(“Christy”).3 Mark was SFH’s vice president, though he did not disclose this fact at the
time and did not advise the Gosses to seek independent legal counsel.
The terms of the loan were set out in a note which the Gosses signed on June 29,
2007 (the “Note”). ECF No. 62-2.4 The Gosses consented to JS&N representing both
parties to the transaction. ECF No. 62-10. The Note was modified either four or five

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Unless otherwise specified, the following facts are taken from this court’s March
2016 Order, July 2015 Order, and SJ Order.
3
Mark claims that Christy inherited SFH from her father and that he had no
ownership interest in the company. ECF No. 62-7, Mark Simpson Dep. 17:24-20:17.
4
Given the substantial amount of briefing implicated by the instant motion, the
court has cited to materials in the record by ECF number, except for the parties’ briefs on
the instant motion.
2

times between June 29, 2007 and August 25, 2009.5 ECF Nos. 62-13–62-15; ECF No.
72-9 at 5. Each modification extended the maturity date of the loan and adjusted the
premium due at maturity. ECF Nos. 62-13–62-15; ECF No. 72-9 at 5. Mark signed the
modifications as vice president of SFH. ECF Nos. 62-13–62-15; ECF No. 72-9 at 5.
On August 3, 2009, SFH sued the Gosses in the South Carolina Court of Common
Pleas for nonpayment of the Note. ECF No. 62-16. The case settled, resulting in the
final modification of the Note, which extended the maturity date to August 30, 2010.
ECF No. 62-1 at 4; see also ECF No. 62-17, Final Modification. In connection with this
final modification, the Gosses signed a document titled “Collateral Assignment of
Limited Partnership Interest” (the “GFLP Assignment”), which assigned the Gosses’
right to receive payments from their interest in the Goss Family Limited Partnership
(“GFLP”) to SFH in the event the Gosses defaulted on the loan. ECF No. 62-18. After a
series of subsequent assignments, the parties eventually held the following relative
interests in the note, mortgage, and the GFLP Assignment: defendant Aaron L.
Silverman (“Silverman”) held 36.01%, SFH held 30.86%, Mark and Christy held
18.52%, PENSCO A held 7.41%, and PENSCO B6 held 7.20%.7 ECF No. 72 at 3.
On January 25, 2012, the Gosses filed for Chapter 7 bankruptcy. On April 22,
2013, Vieira filed this action in the bankruptcy court alleging the following causes of
action: fraud, negligence, and breach of fiduciary duty against Mark; malpractice against
Mark and JS&N; breach of fiduciary duty against JS&N; violation of the Fair Debt
Collection Practices Act (“FDCPA”) against SFH, Mark, and Christy; and civil
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The exact number of modifications is not essential to the court’s analysis.
PENSCO A and PENSCO B refer to assignments to PENSCO Trust Company
for the benefit of Mark and Christy’s respective IRAs.
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The accuracy of these percentages is not essential to the court’s analysis.
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conspiracy/joint enterprise, disgorgement of ill-gotten gain, and equitable subordination
against all defendants. ECF No. 1-1, Compl. ¶¶ 64–119. On September 6, 2013, Mark
and JS&N moved for an order withdrawing reference of this proceeding from the
Bankruptcy Court. ECF No. 1. The matter was transferred to this court on September
25, 2013. On July 24, 2014, the JS&N defendants moved for summary judgment. ECF
No. 62. The court granted the JS&N defendants’ motion for summary judgment on
March 23, 2015,8 ECF No. 102, but on July 23, 2015, the court reconsidered its decision
and denied summary judgment to the extent Vieira alleged that the JS&N defendants
committed legal malpractice with respect to the GFLP Assignment. ECF No. 116. The
July 2015 Order also held Viera’s equitable subordination claim against the JS&N
Defendants in abeyance. Id. at 4. On March 28, 2016, the court reconsidered its July
2015 Order and once again granted the JS&N defendants’ motion for summary judgment
on all claims. ECF No. 123. The court reasoned that, even if the JS&N defendants
breached a duty owed to the Gosses, there was no evidence that this breach caused the
Gosses any damages. Id. at 4–7.
Vieira filed the instant motion on April 25, 2016, arguing that the court’s most
recent order—the March 2016 Order—incorrectly granted the JS&N defendants
summary judgment on Vieira’s equitable subordination claim. The JS&N defendants
filed a response on May 12, 2016. The court held a hearing on July 15, 2016. The matter
is now ripe for the court’s review.

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The SJ Order also granted motions for summary judgment by Christy, SFH, and
Silverman.
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II. DISCUSSION
Though the court could address the merits of the underlying motion for summary
judgment for a fourth time—or emphasize the impropriety of raising new arguments on a
Rule 59(e) motion—it strikes the court that the only remaining issues in this action
pertain to a claim that arises under 11 U.S.C. § 510(c) of the Bankruptcy Code. The
original reasons for withdrawing this action’s reference to the Bankruptcy Court no
longer apply. In these circumstances, the court finds it appropriate to exercise its
discretion to refer this matter back to the Bankruptcy Court.
Pursuant to 28 U.S.C. § 157(a), district courts are authorized “to refer bankruptcy
matters at their discretion to bankruptcy courts.” In re Grewe, 4 F.3d 299, 304 (4th Cir.
1993). This grant of authority extends to “any or all cases under title 11 and any or all
proceedings arising under title 11 or arising in or related to a case under title 11.” 28
U.S.C. § 157(a). Though courts rarely provide any analysis when exercising their
authority under § 157(a),9 this court’s decision is guided by decisions in this circuit
referring cases to the Bankruptcy Court in the first instance.
In Vieira v. AGM, II, LLC, another court in this district addressed a motion to
refer a bankruptcy trustee’s action against a creditor to the Bankruptcy Court. 363 B.R.
746 (D.S.C. 2007). The trustee alleged that the defendant had effectively inserted certain
individuals into the debtor’s business who made decisions that benefited the creditor and
harmed the debtor. Id. at 749. The debtor was forced into bankruptcy under Chapter 7 of
the Bankruptcy Code, and the trustee brought claims for breach of fiduciary duty to
9

Many district courts, including this one, have exercised their authority under
§ 157(a) by imposing standing orders referring all applicable matters to the bankruptcy
courts. See, e.g., Local Civ. R. 83.IX.01. Thus, most matters are referred to the
bankruptcy courts without any analysis.
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creditors, breach of fiduciary duty to the debtor, constructive trust, and accounting in the
district court. Id.
The AGM, II court applied the framework originally set forth in Travelers Ins.
Co. v. Goldberg, 135 B.R. 788 (D. Md. 1992), which provides as follows:
In deciding whether to refer this case, the Court must first determine
(1) whether this action is sufficiently “related to” the bankruptcy cases to
permit a referral under § 157(a), and (2) whether and to what extent a
referral is permissible at all in light of the plaintiffs’ jury demand. If, after
these issues are resolved, the Court finds that it has the discretion to grant
defendants’ motion [to refer the case], it must still decide whether a
referral would be of practical benefit to the administration of the action.
AGM, II, LLC, 363 B.R. at 749 (alterations in original) (quoting Travelers Insurance Co.,
135 B.R. at 790).
A.

“Related to” Requirement of § 157(a)

As noted above, § 157(a) provides the district courts with authority to refer “any
or all cases under title 11 and any or all proceedings arising under title 11 or arising in or
related to a case under title 11” to the bankruptcy judges for the district. 28 U.S.C.
§ 157(a). An action is
related to a case in bankruptcy if the outcome in the civil case “could
conceivably have any effect on the estate being administered in
bankruptcy . . . if the out-come would alter the debtor’s rights, liabilities,
options, or freedom of action (positively or negatively) and which in any
way impacts upon the handling and administration of the bankrupt estate.”
New Horizon of NY LLC v. Jacobs, 231 F.3d 143, 151 (4th Cir. 2000) (alterations in
original) (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1995)).
The instant action unquestionably meets this requirement. Viera’s equitable
subordination claim directly affects the priority of the creditors’ claims, and therefore,
directly affects the administration of the Gosses’ estate. See ECF No. 1-1, Compl. ¶ 118
(asking court to “subordinate the purported claims of any of the named [d]efendants to all
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other creditors in the estate” and “transfer any lien acquired by any defendant to the
estate for the benefit of all creditors”). This is sufficient to satisfy the first prong of the
Travelers Insurance test. See AGM, II, LLC, 363 B.R. at 750 (noting that “related to”
jurisdiction is interpreted broadly and finding that trustee’s claims against creditor
satisfied the “related to” test because “[a]t the minimum, [such claims] could alter the
ultimate distribution of property among creditors”). Moreover, to the extent this prong of
the test simply reflects the statutory requirements of § 157(a), the court notes that §
157(a) also provides authority to refer actions that “aris[e] under title 11[,] or aris[e]
in . . . a case under title 11.” Thus, there are multiple ways an action or proceeding might
fall within the scope of § 157(a). An action “arises under” chapter 11 when the
complaint establishes “either that federal [bankruptcy] law creates the cause of action or
that the plaintiff’s right to relief necessarily depends on resolution of a substantial
question of federal [bankruptcy] law.” In re Poplar Run Five Ltd. P’ship, 192 B.R. 848,
855 (Bankr. E.D. Va. 1995) (alterations in original) (Franchise Tax Bd. v. Construction
Laborers Vacation Trust, 463 U.S. 1, 27–28 (1983)).
An equitable subordination claim is clearly governed by 11 U.S.C. § 510(c). See
In re Se. Materials, Inc., 467 B.R. 337, 361 (Bankr. M.D.N.C. 2012) (finding that a claim
for equitable subordination “stems from Section 510(c) of the Bankruptcy Code.”). Viera
even invokes that provision in her complaint. Compl. ¶ 118 (seeking equitable
subordination “pursuant to 11 U.S.C. § 510(c)”). Thus, Viera’s equitable subordination
claim does not simply “relate[] to a case under title 11”; it also “aris[es] under title 11.”
Therefore, the court finds that this action satisfies the first prong of the Travelers
Insurance test.

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B.

Jury Demand

The court next examines “whether and to what extent a referral is permissible at
all in light of the [defendants’] jury demand.” AGM, II, LLC, 363 B.R. at 749 (quoting
Travelers Insurance Co., 135 B.R. at 790). Section 157(e) of the Bankruptcy Code
provides that
[i]f the right to a jury trial applies in a proceeding that may be heard under
this section by a bankruptcy judge, the bankruptcy judge may conduct the
jury trial if specially designated to exercise such jurisdiction by the district
court and with the express consent of all the parties.
28 U.S.C. § 157(e) (emphasis added).
The JS&N Defendants have demanded a jury trial in this action, but recognize
that they have no right to a jury trial on the equitable subordination claim. See ECF No.
1-20, Jury Demand ¶ 2 (stating that “[t]he Complaint involves one core and eight noncore claims. The Defendants have a right to a trial by jury on the eight non-core
claims.”).10 Given that the equitable subordination claim is the only remaining claim in
this action, it appears undisputed that the JS&N Defendants’ jury trial demand is now
moot.
However, to the extent there is any dispute on this issue, the court briefly
addresses the JS&N Defendants’ right to a jury under the Seventh Amendment.11 The
Supreme Court has consistently interpreted the Seventh Amendment right to a jury trial
to extend to “suits in which legal rights were to be ascertained and determined, in
10

To the extent the JS&N Defendants were unclear about which of Viera’s
original nine claims they regarded as a core claim in their jury demand, they explicitly
recognized that the equitable subordination claim is a core proceeding in their motion to
withdraw reference of this action to the Bankruptcy Court. ECF No. 1 at 8–10.
11
The JS&N Defendants do not appear to rest their jury demand on any authority
other than the Seventh Amendment. See ECF No. 1 at 12 (discussing Seventh
Amendment right to a jury trial).
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contradistinction to those where equitable rights alone were recognized, and equitable
remedies were administered.” Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41 (1989)
(emphasis in original) (quoting Parsons v. Bedford, 7 L.Ed. 732 (1830)).
As the name would suggest, equitable subordination is an equitable doctrine. See
United States v. Noland, 517 U.S. 535, 538–41 (1996) (discussing § 510(c)’s origins in
the “judge-made doctrine of equitable subordination”). Even if equitable subordination
could somehow be construed as a legal claim, it is well established that when a creditor
files a proof of claim against the bankruptcy estate—as the JS&N Defendants have done
here—“[the] creditor ‘triggers the process of allowance and disallowance of claims,
thereby subjecting himself to the bankruptcy court’s equitable power.” In re Stansbury
Poplar Place, Inc., 13 F.3d 122, 125 (4th Cir. 1993) (quoting Langenkamp v. Culp, 498
U.S. 42, 44 (1990)). Consequently, when the trustee then files an action against the
creditor that “becomes part of the claims-allowance process, ‘integral to the restructuring
of the debtor-creditor relationship through the bankruptcy court’s equity jurisdiction,’”
the creditor has no right to a jury trial. Id. at 126 (quoting Langenkamp, 498 U.S. at 44).
Viera’s equitable subordination claim is quite clearly integral to the restructuring of the
debtor-creditor relationship because it will affect the priority of the JS&N Defendants’
claims.
Therefore, the court finds that the JS&N Defendants’ do not have a right to a jury
trial on the remaining claim in this action, and § 157(e) does not prohibit the Bankruptcy
Court from trying this action.

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C.

Stern v. Marshall Considerations

Before addressing the final prong of the Travelers Insurance framework, the court
pauses to observe that Travelers Insurance and AGM, II were both decided before the
Supreme Court’s landscape altering decision in Stern v. Marshall, 564 U.S. 462 (2011).
The court finds it appropriate to address that case and its effect on this action.
In Stern, the Court found that while 28 U.S.C. § 157(b) authorizes bankruptcy
courts to enter final judgments in “core”—as opposed to “non-core”—proceedings,
Article III places constitutional limits on the bankruptcy courts’ authority to enter final
orders in certain proceedings that qualify as “core” under § 157(b). Id. at 482, 487.
Courts apply a two-prong test to determine whether a bankruptcy court may
constitutionally resolve a claim in accordance with Stern. See Dang v. Bank of Am.
N.A., 2013 WL 1683820, at *11 (D. Md. Apr. 17, 2013), aff’d sub nom. 544 F. App’x
194 (4th Cir. 2013), and aff'd sub nom. 544 F. App’x 205 (4th Cir. 2013) (recognizing
and applying two-prong test); In re Se. Materials, Inc., 467 B.R. 337, 348 (Bankr.
M.D.N.C. 2012) (same); In re TP, Inc., 479 B.R. 373, 384 (Bankr. E.D.N.C. 2012)
(same).
The test asks (1) “whether the action at issue stems from the bankruptcy itself” or
(2) if the action “would necessarily be resolved in the claims allowance process.” Stern,
564 U.S. at 499. “If either prong of the test is met, then the bankruptcy court has
constitutional authority to enter a final order.” Southeastern Materials, 467 B.R. at 348.
The court has little trouble holding that Viera’s equitable subordination satisfies both
prongs of this test. It “satisfies the first prong of the Stern test because a claim for
equitable subordination stems from Section 510(c) of the Bankruptcy Code.” Id. at 361.

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It satisfies the second prong of the test because it directly affects the priority in which the
defendants’ claims will be allowed.
Therefore, the court finds that Stern presents no obstacle to referral.
D.

Practical Benefits of Referral

Finally, the court considers the practical benefits of referral. The JS&N
Defendants addressed many of the considerations that affect this issue in their motion to
withdraw reference to the Bankruptcy Court. ECF No. 1. In support of that motion, the
JS&N Defendants argued that if the action remained with the Bankruptcy Court, this
court would be forced to review proposed findings of fact and conclusions of law because
many of Viera’s claims were “non-core” under § 157(b). Id. at 10–11. Thus, the JS&N
Defendants argued, it would be more efficient for the court to simply review and resolve
those claims without involving the bankruptcy court. Id.
This argument is now moot. “Bankruptcy judges may hear and enter final
judgments in ‘all core proceedings arising under title 11, or arising in a case under title
11.’” Stern, 564 U.S. at 474 (quoting 28 U.S.C.A. § 157(b)(1)). Section 157(b)(2) of the
Bankruptcy Code sets forth a nonexclusive list of “core proceedings.” Though Viera’s
equitable subordination claim may qualify as a core proceeding under multiple
provisions, it is clearly a core proceeding under § 157(b)(2)(K), which lists
“determinations of the validity, extent, or priority of liens” as core proceedings. The
JS&N Defendants even admit—as they must—that the equitable subordination claim is a
core proceeding under § 157(b). ECF No. 1 at 9–10 (recognizing equitable subordination
claim as a core proceeding). Thus, the only issues remaining in this action relate to a
core proceeding, which the Bankruptcy Court has the statutory authority to fully resolve.

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Because the Bankruptcy Court can fully resolve the remaining issues in this action, the
court finds there is no judicial efficiency advantage to resolving this action in district
court.
The court also finds that referring this action will promote the uniform
administration of bankruptcy proceedings. This action now involves a single issue of
bankruptcy law. The Bankruptcy Court’s expertise will aid in resolving this issue. The
Bankruptcy Court also has a longer, more extensive history with this bankruptcy, and is
therefore better positioned to weigh the equitable considerations that affect Viera’s
equitable subordination claim.
Therefore, the court finds that judicial efficiency and the uniform application of
the law are best served by referring this action to the Bankruptcy Court.
III. CONCLUSION
For the foregoing reasons, the court refers this action to the Bankruptcy Court.
AND IT IS SO ORDERED.

DAVID C. NORTON
UNITED STATES DISTRICT JUDGE
September 21, 2016
Charleston, South Carolina

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