Carroll v. Farooqi

• Decision Date: 19 February 2013
• Docket Number: Civil Action No. 3:12–CV–804–L.
• Parties: Michael CARROLL, Appellant, v. Anjum FAROOQI, Appellee.
• Court: U.S. District Court — Northern District of Texas

486 B.R. 718

Michael CARROLL, Appellant,

v.Anjum FAROOQI, Appellee.

Civil Action No. 3:12–CV–804–L.

United States District Court,

N.D. Texas,

Dallas Division.

Feb. 19, 2013.

Joyce W. Lindauer, Law Office of Joyce W. Lindauer, Jonathan Alexander Gitlin, John J. Gitlin Attorney at Law, Dallas, TX, for Appellant.

Eliot D. Shavin, SMU Legal Clinic, Dallas, TX, for Appellee.

MEMORANDUM OPINION AND ORDER

SAM A. LINDSAY, District Judge.

Before the court is the appeal of Michael D. Carroll, filed March 16, 2012. After consideration of the briefs, reply, record on appeal, and the applicable law, the court affirms the judgment of the bankruptcy court entered on January 3, 2012.

I. Background

This case arises out of the unsuccessful sale of a Salad Bowl Franchise by Michael David Carroll (“Carroll” or “Appellant”) to Anjum A. Farooqi (“Farooqi” or “Appellee”). At the relevant times, Carroll was chairman, chief executive officer, president and chief financial officer of the Salad Bowl Franchise Corporation and an owner and officer of its parent company, The Salad Bowl, Inc. Bankr. Mem. Op. 2. In late summer 2009, Farooqi began negotiations with Carroll regarding the possibility of either obtaining a Salad Bowl Franchise to open a new store or purchasing a currently operating Salad Bowl store. Id. at 3. As part of the negotiations, Farooqi was asked to sign a 30–day option-to-purchase agreement with The Salad Bowl, Inc. and pay $25,000, which would represent the franchise fee and ultimately be applied towards the $150,000 purchase price. Id. at 3–4. During the 30–day window, Farooqiwas to obtain financing for the purchase of The Salad Bowl franchise. See id. at 4. Ultimately, Farooqi was unable to obtain financing, and negotiations between the two fell through. Id. at 10. Farooqi demanded a refund of the $25,000 franchise fee. Id.

After almost a year of asking Carroll for a refund without receiving it, Farooqi filed a lawsuit in state court against Carroll. Id. at 12. Once Carroll filed for protection under Chapter 13 of the Bankruptcy Code, Farooqi filed the adversary proceeding in the bankruptcy court below. Id. Farooqi did not file a formal proof of claim in Appellant's bankruptcy case; however, he filed an adversary proceeding against Appellant seeking monetary damages against Carroll for fraudulent inducement, fraud, and violations of the Texas Deceptive Trade Practices Act (“DTPA”) from the bankruptcy estate. Id. at 18–19. Farooqi's case was tried before the bankruptcy court, and the court found in his favor. Id. at 55. Specifically, the court found that Farooqi had proved his claims against The Salad Bowl, Inc. for fraudulent inducement and violations of the DTPA, that Carroll was personally liable for his damages, and awarded him actual and exemplary damages in the amount of $88,500. Id. at 55. Further, the court held that Farooqi's claims against Carroll for fraudulent inducement and Carroll's violation of section 17.56(b)(12) of the DTPA were nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code. Id. Judgment was entered on January 3, 2012. Carroll timely filed his notice of appeal on January 17, 2012.

On March 22,2012, Appellee filed a motion to dismiss this appeal for failure to comply with Federal Rule of Bankruptcy Procedure 8006. The court denied the motion to dismiss on January 22, 2013.

II. Relevant Legal Standard

In a bankruptcy appeal, district courts review bankruptcy court rulings and decisions under the same standards employed by federal courts of appeal: a bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law de novo, Robertson v. Dennis (In re Dennis), 330 F.3d 696, 701 (5th Cir.2003); Century Indem. Co. v. Nat'l Gypsum Co. Settlement Trust (In re National Gypsum Co.), 208 F.3d 498, 504 (5th Cir.), cert. denied,531 U.S. 871, 121 S.Ct. 172, 148 L.Ed.2d 117 (2000).

A bankruptcy court's “findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous.” Fed. R. Bankr.P. 8013. A finding is clearly erroneous and reversible only if, based on the entire evidence, the reviewing court is left “with the definite and firm conviction that a mistake has been made.” In re Dennis, 330 F.3d at 701 (citation omitted). In conducting this review, the court must give due regard to the opportunity of the bankruptcy judge to determine the credibility of the witnesses. Id.; see also Young v. Nat'l Union Fire Ins. Co. (In re Young), 995 F.2d 547, 548 (5th Cir.1993) (quoting Fed. R. Bankr.P. 8013).

III. Discussion

Carroll asserts five issues on appeal. First, he argues that the bankruptcy court unconstitutionally exercised the judicial power of the United States by purporting to adjudicate and try to a final judgment state law causes of actions between two private parties that had no relationship to the bankruptcy estate whatsoever. Second, Carroll contends that the bankruptcy court erroneously allowed trial to proceed when Farooqi's Second Amended Complaint (“Complaint”) did not meet the basic pleading standards of Federal Rule of Civil Procedure 9 with respect to allegations of fraud. Third, Carroll asserts that the bankruptcy court sua sponte awarded Farooqi relief not requested in the adversary proceeding and committed error by (1) failing to give Carroll proper notice that such claim was on trial, (2) awarding such relief in the wrong forum, and (3) not giving notice to any other creditors or the Chapter 13 trustee, which would be required to award such relief. Fourth, the bankruptcy court, Carroll argues, erroneously concluded that Farooqi had standing to sue under the DTPA. Finally, Carroll contends that the bankruptcy court committed error by allowing Farooqi to proceed to trial on faulty pleadings and on causes of actions that were pleaded beyond the limitations deadline.

A. Whether the Bankruptcy Court Unconstitutionally Exercised the Judicial Power of the United States

Carroll argues that, under the United States Supreme Court's recent decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), the bankruptcy court's order liquidating Farooqi's Texas state law claims is void. He argues that a bankruptcy court, being an Article I court, cannot issue a final order or judgment in matters that are within the exclusive authority of Article III courts, unless the claims at issue fall within the “public rights” exception. Here, Carroll contends that the bankruptcy court purported to liquidate and enter final judgment on three claims: (1) Farooqi's state law common law fraudulent inducement claim, (2) a state law DTPA claim based on section 17.46(b)(12) of the Texas Business and Commerce Code, and (3) a state law DTPA claim based on section 17.46(b)(24) of the Texas Business and Commerce Code. None of these claims, Carroll argues, is so intertwined with bankruptcy matters that the filing of the bankruptcy petition transforms the character of the dispute from a typical private rights dispute to a public rights dispute. Accordingly, he contends, the bankruptcy court improperly exercised jurisdiction to hear and enter final judgment on Farooqi's claims.

The Supreme Court in Stern held that Article I bankruptcy courts lacked constitutional authority to enter final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim. 131 S.Ct. at 2620. Carroll contends that Farooqi's claims are not resolvable by ruling on a proof of claim because there is no proof of claim to rule on, as Farooqi never filed a proof of claim. As the bankruptcy court determined, although Farooqi did not file a formal proof of claim in Carroll's bankruptcy case, his filing of the adversary proceeding constitutes an informal proof of claim. The Fifth Circuit has stated:

[T]o qualify as an informal proof of claim: (1) the claim must be in writing; (2) the writing must contain a demand by the creditor on the debtor's estate; (3) the writing must evidence an intent to hold the debtor liable for such debt; (4) the writing must be filed with the bankruptcy court; and (5) based upon the facts of the case, allowance of the claim must be equitable under the circumstances.

Nikoloutsos v. Nikoloutsos, 199 F.3d 233, 236 (5th Cir.2000). The court determines that each of the requirements has been met here: Farooqi's adversary complaint is in writing; it contains a demand by Farooqi on Carroll and his estate; it evidences an intent to hold Carroll liable for such debts; the writing was filed with the bankruptcy court; and the equities do not weigh against treating the adversary complaint as an informal proof of claim. Contrary to what Carroll asserts, it is not inequitable to allow the claim under these circumstances. Mere failure to file timely a formal proof of claim is not enough to weigh against treating an adversary complaint as an informal proof of claim. See Nikoloutsos, 199 F.3d at 236 (“Fourth, though the district court was right to conclude that Mrs. Nikoloutsos did not follow bankruptcy law's ‘complicated procedures,’ that is true every time a creditor relies on an informal proof of claim as opposed to a formal one. And that is what the rules of equity require, being flexible with regard to form when justices requires.”). Moreover, in the adversary proceeding, Farooqi was, and continues to be, represented by student attorneys under the supervision of an attorney in the Southern Methodist University School of Law Civil Clinic. The court is unwilling to find the failure of the student attorneys or the supervising attorney to follow “bankruptcy law's complicated procedures” and file a formal proof of claim weighs against allowance of Farooqi's claim.

Furthermore, Stern is distinguishable from the present case. Stern, as the Fifth Circuit has noted, has a “very limited application.” Technical Automation Servs. Corp. v. Liberty Surplus Ins. Corp., 673 F.3d 399, 407 (5th...