Shead v. Kelley

Filing 89

Opinion on Dismissal.(Signed by Judge Lynn N. Hughes) Parties notified.(ccarnew, )

U NITED S TATES D ISTRICT C OURT

S OUTHERN D ISTRICT OF T EXAS

G eo rg e Martin Shead, P lain tiff, versu s F r an c is J. Kelley, D efen d an t.

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C IVIL ACTION H-08-497

O pin ion on Dismissal
1. In tr o d u c tio n . In October of 2007, an adversary proceeding was filed in the bankruptcy court because debtor G eo rg e M. Shead had committed fraud in filing a Chapter 13 bankruptcy petition. In April of 2008, the core bankruptcy proceeding was withdrawn to this court; it was dismissed in May. The three rem ain in g issues are: (a) a malicious prosecution claim stemming from Shead's bankruptcy filing, (b) S h ead 's misapplication of partnership funds, and (c) attorney fees from the original bankruptcy claim.

B ecau s e this court does not have exclusive jurisdiction over the matters arising from the original b an k ru p tcy proceeding and because uniformity of bankruptcy law will not be disrupted, the malicious p ro secu tio n and misapplication of partnership funds issues are dismissed with prejudice unless the cla im s are re-filed in state court by January 8, 2010. Because the attorney fee payment violated only a bankruptcy rule, the issue will be decided at a hearing in this court.

2.

M a lic io u s Prosecution. A state malicious prosecution claim is not preempted by federal bankruptcy just because the

cla im arose out of the filing of an adversary action in a bankruptcy proceeding. Graber v. Fuqua, 279 S .W .3 d 608 (Tex. 2009). Here, the original bankruptcy action was followed by an adversary proceeding because the d e b to r failed to disclose a partnership. A final decree was entered in the bankruptcy case in January of 2 0 0 9 . The parties now disagree about whether a malicious prosecution claim stemming from the ban krup tcy action must be brought in federal court. Because the state law claim for wrongful conduct in pursuing the federal bankruptcy case is not necessarily preempted by the earlier federal bankruptcy, th is action is dismissed.

3.

M isa pp lic a tion of Funds. T h e second issue in this case is the misapplication of partnership funds by Shead. Although

fed eral district courts have original, exclusive jurisdiction over all cases arising under Title 11 of the U nited States Code, they do not have exclusive jurisdiction of all civil proceedings related to cases under T itle 11. 28 U.S.C. 1334(a)-(b). Shead has been accused of using partnership assets for personal reasons, as well as failing to co llect rents and distribute them to Kelley. In addition, Kelley has claimed that Shead was unable to sho w how loan proceeds were allocated to properties that serve as collateral for loans. K elle y argues that a federal district court can exercise jurisdiction over pendent claims, pendent p arties, and ancillary claims when they are so related to the claims in the suit that they are part of the s am e case or controversy. That is not the case here. The original federal claim has been disposed of an d the remaining matters are merely related to the original bankruptcy. For that reason, this court d o es not have exclusive jurisdiction and the misapplication of funds matter will be dismissed.

4.

A ttorn ey Fees. T h e final issue is the fact that Shead paid his attorney $5,000 from partnership funds, violating

the Federal Rules of Bankruptcy Procedure. An attorney for a debtor must file a statement that 2

in clu d es whether she shared compensation with an entity. FED. R. BANKR. P. 2016(b). The court may determ ine whether a payment of funds by the debtor to the attorney after the entry of an order for relief is excessive. FED. R. BANKR. P. 2017(b). District courts have original jurisdiction of all cases under Title 11. 28 U.S.C. 1334(a). The o n ly reason Shead could not have paid his attorney from the partnership funds was because of the pen ding bankruptcy. Because the payment violated only a bankruptcy rule, the state court cannot hear th e attorney fee issue. Attorney fees will be determined at a hearing in this court.

5.

C o n c lu s io n . T h e court may direct the entry of final judgment as to one or more claims in a multiple-claim

su it when there is no just reason for delay. FED. R. CIV. P. 54(b). The abuse of process and m is ap p lic atio n of funds issues related to the original bankruptcy proceeding are not preempted by arisin g out of the federal bankruptcy claim. They are dismissed with prejudice unless Kelley re-files the cla im s in state court by January 8, 2010. The partnership funds will be held in the registry of this court pending the outcome of the h e a rin g .

Signed on December 7, 2009, at Houston, Texas.

Lynn N. Hughes United States District Judge

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