McLemore v. Jones

Filing 8

OPINION & ORDER re: 2 Bankruptcy - Report and Recommendation. The Court SUSTAINS the Trustee's objections IN PART, FINDING that the Trustee properly preserved Count I of the original complaint for District Court review, and RECOMMITS this ma tter to the bankruptcy court to address the merits of Count I as pled in the initial complaint and prepare an R&R regarding whether this Court should dismiss that Count. It is so ORDERED. Signed by District Judge Henry C. Morgan, Jr and filed on 9/6/17. Copies distributed to all parties 9/6/17.(ldab, )

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF VIRGINIA
Norfolk Division

JOHN C. MCLEMORE, Chapter 7 Trustee,
Plaintiff,
V.

Civil Action No. 2:17cv428

FARRIS M. JONES,
Defendant.

OPINION & ORDER

This matter comes before the Court on the Report and Recommendation of the

Bankruptcy Judge, Doc. 2 at 167-180, the objections of John C. McLemore, Chapter 7 Trustee
for Bly-Holland Land Company, LLC (the "Trustee"), 14 at 246-69, and the objections of
Defendant Farris M. Jones ("Jones"), Id at 180-84. For the reasons stated herein, the Court

SUSTAINS the Trustee's objections IN PART and RECOMMITS the matter to the bankruptcy
court.

I.

BACKGROUND

Neither Party objects to the recitation of the procedural and factual background of this
case contained in the R«&R, instead only objecting to the legal effect of the background. ^
cenerallv id at 180-84, 246-69.

A limited portion is relevant to the procedural question

presented in the R&R regarding the status of Count I of the complaint, and thus, only that portion
need be recounted here.

On September 2, 2015, Debtor Bly-HoIland Land Company, LLC (the "Debtor") filed a
voluntary petition under Chapter 7 of the Bankruptcy Code. Id at 169. On September 30,2015,
Jones filed a motion seeking relief from the automatic stay to allow him to pursue remedies in

state court against the Debtor's commercial sports facility (the "Property"). Id. at 169-70. On
December 16, 2015, the Trustee requested authority to sell the Property and filed a complaint
initiating an adversary proceeding. Id at 170.

On January 20, 2016, the Parties appeared before the bankruptcy court and represented
their intent to settle the pending motions and adversary proceeding. Id Their proposal involved
allowing the Trustee until February 29, 2016, to sell the Property and distribute the proceeds. Id.
The bankruptcy court approved the compromise at a hearing on February 2, 2016, and in an
Order dated February 9,2016. Id at 171.
Beginning on June 3, 2016, the Parties filed various motions reflecting that the Trustee

had failed to timely sell the Property and that the settlement had failed. Id The bankruptcy

court determined in light of that failure that it should reissue summons for the adversary

proceeding and have the Trustee serve the complaint on Jones. Id at 172. The Trustee served
the summons and complaint on Jones on July 21,2016. Id

On August 15, 2016, Jones moved to dismiss all five (5) counts of the complaint. Id
Once the Motion to Dismiss was ripe, the Court held a hearing on November 15, 2016, and
subsequently dismissed Counts I-III with leave to amend in an Order dated December 5, 2016.
Id. at 172-73; see also id at 11-16 (a copy of the dismissal Order). On Count I, the bankruptcy
court found that the Trustee could not state a claim for constructive trust under Virginia law

because Jones had committed no misconduct and was not unjustly enriched. Id at 13,173.

On December 21, 2016, the Trustee filed an Amended Complaint. Id at 174. Under
Count I, he pled as follows:

This Count has been removed pursuant to the Court's Order entered on December
5,2016 granting Mr. Jones' Rule 12(b)(6) Motion with regard to Count II [sic] of
the Complaint. It is not intended as a waiver of this claim.

Id. at 36 (Am. Compi. ^ 42). He pled similarly for Coum II while adding facts to renew Count
III in the Amended Complaint. Id at 174.

On January 6, 2017, Jones filed a Renewed Motion to Dismiss the Amended Complaint.
Id.: see also id at 83-93 (a copy of the motion). The Renewed Motion to Dismiss did not

address Counts I and II, instead discussing only Counts III-V. Id at 174-75. It statedas follows
regarding Counts I and II:

Final disposition of the non-re-pled legal theories of constructive trust (Count I)
and equitable subordination (Count II) remains subject to this Court's report and
recommendation to the district court, the submission objections and supporting
statements by the parties, and entry of a final order.
Id. at 86 (Renewed Motion to Dismiss H10). At a pretrial conference on January 31, 2017, the
Trustee indicated that he would voluntarily dismiss Counts II-V of the Amended Complaint, and

the bankruptcy court dismissed those Counts with consent of the Parties. Id at 175. Because of

the dismissal of all but one (1) of the Counts, the bankruptcy court ORDERED further briefing
on Count I and set a hearing for March 7, 2017, on whether to dismiss that Count. See id at
100-03.

At the hearing on March 7, 2017, the bankruptcy court sua sponte raised the issue of the

procedural status of Count I in light of the procedural history of the case and Young v. City of
Mount Ranier. 238 F.3d 567 (4th Cir. 2001). Id at 103-05. The bankruptcy court asked the
Parties to brief the issue and issued an Order on March 9, 2017, setting briefing deadlines

regarding the procedural status of Count I. Id After reviewing the briefs, the bankruptcy court
issued an R&R RECOMMENDING that this Court GRANT the Renewed Motion to Dismiss as

to Count I pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. Id at
179. On August 8, 2017, Jones filed an objection. Id at 180-84, and the Trustee filed objections,
id at 246-69. On August 22, 2017, Jones responded to the Trustee's objections. Doc. 5, and the

Trustee responded to Jones's objection. Doc. 6.
II.

LEGAL STANDARD

District courts have "original and exclusive jurisdiction of all cases under title 11" and

"original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in
or related to cases under title 11." 28 U.S.C. § 1334(a)-(b) (2017).

Each district court may

refer such proceedings to bankruptcy judges for the district. Id. § 157(a). Bankruptcy judges
may enter final judgments in "all core proceedings arising under title 11, or arising in a case
under title 11

" Id § 157(b). "In non-core proceedings, by contrast, a bankruptcy judge may

only 'submit proposed findings of fact and conclusions of law to the district court.'" Stem v.
Marshall. 131 S. Ct. 2594, 2596 (2011) (quoting 28 U.S.C. § 157(c)(1)). The district court
reviews de novo any portion of the report and recommendation to which a party objected. 28

U.S.C. § 157(c)(1) (2017); Fed. R. Bankr. P. 9033. Failure to timely object waives the right to

appeal the district court's adoptionof the reportand recommendation. In re Nantahala Vill.. Inc..
976 F.2d 876, 880 (4th Cir. 1992).
III.

ANALYSIS

The Trustee raises two (2) objections to the R&R, and Jones raises one (1) "protective"
objection. The Trustee (1) objects to treating the reservation of rights language in the Amended
Complaint as an amendment of the substance of Count I and (2) objects to using the Renewed
Motion to Dismiss as the vehicle to address Count I because that motion did not seek dismissal

of Count I. Id at 246-48. He also argues that this Court may reach the merits of Count I under
its authority to "modify" the R&R. Id at 264 (citing Fed. R. Bankr. P. 9033). Jones objects to

the bankruptcy court's failure to reach the merits in order to preserve his right to address the
issue in this Court. See id. at 181.

The Fourth Circuit has never addressed what a plaintiff must do to preserve a dismissed

claim when granted leave to amend. "As a general rule, 'an amended pleading ordinarily
supersedes the original and renders it of no legal effect.'" Young v. Citv of Mount Ranier. 238
F.3d 567, 572 (4th Cir. 2001). The Fourth Circuit has also stated that a rule requiring repleading of claims dismissed without leave to amend would be "needlessly formalistic." Id at

572. It expressed no view on whether claims dismissed with leave to amend must be re-pled. Id
at 573 n. 4.

While this Circuit has no rule on point, at least (2) other circuits have addressed

essentially the same issue.' The Fifth Circuit holds that "'[A] plaintiff, by filing an amended
complaint after a dismissal with leave to amend, [is] not barred from raising on appeal the
correctness of the dismissal order.'" Williams v. Wvnne. 533 F.3d 360, 365 (5th Cir. 2008)

(quoting Wilson v. First Houston Inv. Corp.. 566 F.2d 1235, 1238 (5th Cir. 1978), vacated on
other grounds. 444 U.S. 959 (1979)). That court has explained that requiring a plaintiff to re-

plead a claim dismissed on the merits would violate the court's interest in judicial efficiency.
Lincoln Gen. Ins. Co. v. U.S. Auto Ins. Servs.. Inc.. 787 F.3d 716, 724 (5th Cir. 2015). The
Seventh Circuit reached the same conclusion about a dismissal with leave to amend, stating that

"[i]t is not waiver—it is prudence and economy—for parties not to reassert a position that the
trial judge has rejected." Bastian v. Petren Res. Corp.. 892 F.2d 680, 683 (7th Cir. 1990).
The bankruptcy court does not address the waiver issue, instead construing the
reservation of rights language in the Amended Complaint as the substance of Count I. S^ Doc.

2 at 176-78 & n. 10. It apparently reached this conclusion by applying the general Fourth
Circuit rule that an amended pleading supersedes the original. Sm id Only the Ninth Circuit

' An R&R to a district court and an appeal to a circuit court are not exactly the same procedural posture, but the
reasoning behind pleading standards on appeal applies equally to pleading standards on R&R because both standards
address what claims are preserved for review.

ever applied that general rule without exception, and it has since abandoned that approach. See
Lacev v. Maricopa County. 693 F.3d 896, 927 (9th Cir. 2012) (en banc). The R&R does not

indicate why the bankruptcy court believes that the Fourth Circuit would rigidly apply the rule
here.

This Court disagrees with the bankruptcy court's prediction of how the Fourth Circuit

would address this pleading issue. The Fourth Circuit's holding in Young is an exception to the
rigid general rule regarding amended pleadings, sm 238 F.3d at 573, which indicates that the
court is amenable to the less rigid approach used in other circuits. Furthermore, it appears that
several circuits treat reservation of rights language as a valid way of preserving a dismissed

claim for review. ^

U.S. ex rel. Atkinson v. PA. Shipbuilding Co.. 473 F.3d 506, 517 (3d Cir.

2007) (citing Smith v. Nat'l Health Care Servs. of Peoria. 934 F,2d 95, 98 (7th Cir. 1991)) ("We

do not adopt a rigid requirement as to what a plaintiff must do to stand on a dismissed complaint.
Adding a section to an amended pleading specifically preserving the claim certainly suffices.")
This Court believes that the Fourth Circuit would followed the approach of the Third, Fifth, and
Seventh Circuits outlined herein and treat the reservation of rights language as preserving Count

I in the original complaint for review, not as an amendment eviscerating the substance of Count
I. Accordingly, this Court FINDS that the Trustee properly preserved Count I of the original
complaint for District Court review and SUSTAINS the Trustee's objection on that issue.
Because sustaining that objection undermines the recommendation of the R&R, the Court need

not further address the remaining objections.
Both Parties also invite this Court to address the merits of Count I as originally pled. ^
Doc. 2 at 183,264. This Court does not have the full merits briefing in the record on review, see

generalIv id., and would have to reconstruct the record from the objection briefing in order to

reach the merits.

It is also unclear that this Court has the authority to perform such a

reconstruction, as using de novo review of the R&R or the power to modify the R&R to
essentially re-write it would be quite an expansive reading of this Court's power under 28 U.S.C.
§ 157(c)( I) and Rule 9033, and neither Party has cited any authority in support of such a reading.

Furthermore, the better approach would be to allow the bankruptcy court to fully address the
merits in the first instance because it undoubtedly has extensive familiarity with the record in this

multi-year case. Thus, the Court RECOMMITS this matter to the bankruptcy court to address

the merits of Count 1as pled in the initial complaint and to prepare an R&R regarding whether
this Court should dismiss that Count.
IV.

CONCLUSION

For the reasons stated above, the Court SUSTAINS the Trustee's objections IN PART,

FINDING that the Trustee properly preserved Count I of the original complaint for District
Court review, and RECOMMITS this matter to the bankruptcy court to address the merits of

Count I as pled in the initial complaint and prepare an R&R regarding whetherthis Court should
dismiss that Count.

The Clerk is REQUESTED to send a copy of this Opinion & Order to all counsel of
record,

It is so ORDERED.

/s/

IIcnr\- Coke Morgan, Jr.
Senior United States District Judge

HENRY COKE MORGAN, JRk^'y^
SENIOR UNITED STATES DISTRICT lUDGE
Norfolk, Virginia
September
, 2017