Diamond Mortg. Corp. of Illinois v. Sugar
| Decision Date | 21 November 1990 |
| Docket Number | Nos. 89-2804,s. 89-2804 |
| Parties | , 23 Collier Bankr.Cas.2d 1275, 20 Bankr.Ct.Dec. 1669, Bankr. L. Rep. P 73,624 DIAMOND MORTGAGE CORPORATION OF ILLINOIS, Debtor-in-Possession and A.J. Obie & Associates, Incorporated, Debtor-in-Possession, Plaintiffs-Appellants, v. Peter SUGAR, David D. Warner, Jaffe, Snider, Raitt & Heuer, P.C., Ronald M. Barron, Ronald M. Barron and Associates, P.C., Barron & Knoppow, P.C., Barron & Linden, P.C., Barron, Linden & Fagan, P.C., and Ronald M. Barron, P.C., Defendants-Appellees. & 89-3003. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Ronald R. Peterson, C. Steven Tomashefsky, Russ M. Strobel, Jenner & Block, Chicago, Ill., for plaintiffs-appellants.
Francis D. Morrissey, Stephen R. Ayres, Baker & McKenzie, John T. Wardrope, Purcell & Wardrope, Chicago, Ill., Morton Collins, Noreen L. Slank, Collins, Einhorn & Farrell, Southfield, Mich., Thomas J. Tallerico, Jaffe, Snider, Raitt & Heuer, Detroit, Mich., Robert J. Riley, Bruce M. Bieneman, Cholette, Perkins & Buchanan, Grand Rapids, Mich., for defendants-appellees.
Before WOOD, Jr., CUDAHY and POSNER, Circuit Judges.
Jurisdictional questions can be thorny, particularly when their resolution depends upon the application of different sets of procedural rules. The paramount question presented in this case is whether, in "non-core" bankruptcy proceedings involving disputed questions of state law, federal district courts should consult the Bankruptcy Rules or state long-arm statutes in determining if they may exercise personal jurisdiction over defendants.
Diamond Mortgage Corporation of Illinois ("Diamond"), a mortgage banker licensed and incorporated in Illinois, originated mortgage loans to Illinois borrowers. Diamond sold these loans to Illinois investors through its sister corporation, A.J. Obie & Associates, Inc. ("Obie"), which was also licensed and incorporated in Illinois. Diamond and Obie filed Chapter 11 bankruptcy petitions in August 1986, and their cases currently are pending before the United States Bankruptcy Court for the Northern District of Illinois. The combined total insolvency of Diamond and Obie is approximately $11.5 million.
From 1981 through 1986, two sets of attorneys represented Diamond and Obie at various times. The first set, the Barron Attorneys, 1 a Michigan attorney and five Michigan law firms of which he was the principal, served as general counsel for Diamond and Obie. The Barron Attorneys' responsibilities included drafting closing documents, reviewing questions of Illinois law, revising disclosure forms and examining offering circulars. To perform these duties, the Barron Attorneys traveled to Chicago, placed business phone calls and sent business letters to Diamond and Obie in Illinois. Similar duties were performed by the Jaffe Attorneys, 2 also citizens of Michigan, who served primarily as securities counsel for Diamond and Obie, and who reviewed, drafted and revised documents for them. The Jaffe Attorneys also traveled to Illinois, placed business phone calls and sent business letters to Diamond and Obie. Each set of attorneys characterizes its contacts with Illinois as minimal.
Diamond and Obie charge that the Barron Attorneys and the Jaffe Attorneys committed legal malpractice and breached their fiduciary duties in representing them in the following respects:
(1) they simultaneously represented several corporations that were engaged in transactions with Diamond and Obie; (2) they failed properly to advise Diamond and Obie as to the conflict of interest created by that simultaneous representation; (3) they failed to withdraw from their conflicting representation when they should have done so; and (4) they failed properly to advise Diamond and Obie regarding Diamond's and Obie's fundamentally unsafe and unsound business practices.
Appellants' Brief at 10. The lower court never reached the substance of these claims, however. After Diamond and Obie leveled these charges in their complaint, the Barron and Jaffe Attorneys filed motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(2) for lack of personal jurisdiction. They claimed that they were neither citizens nor residents of Illinois and that the legal services they rendered had been performed in Michigan; thus, they asserted that the district court could not exercise its jurisdiction over their persons. Naturally, Diamond and Obie disagreed, maintaining that their former attorneys were amenable to nationwide service of process pursuant to Bankruptcy Rule 7004(d) and, in the alternative, that the attorneys had established sufficient minimum contacts with Illinois to justify the exercise of federal jurisdiction through the Illinois long-arm statute.
Pursuant to 28 U.S.C.A. section 636(b)(1) (West Supp.1990), the district court referred the matter to Magistrate James T. Balog, who recommended that the suit be dismissed for lack of personal jurisdiction. Magistrate Balog reasoned that Report & Recommendation at 2 . Further, he concluded that the Jaffe and Barron Attorneys had not established minimum contacts sufficient to justify the exercise of federal jurisdiction under the Illinois long-arm statute. Hence, he recommended that the district court grant the attorneys' motions to dismiss for lack of personal jurisdiction. The district court adopted the Report & Recommendation, conceding nonetheless that Diamond and Obie's position on nationwide service of process had "superficial logic." Order at 2 (N.D.Ill. July 19, 1989).
As a result of the district court's decision, Diamond and Obie filed a motion for reconsideration and clarification; they charged, among other things, that the district judge and magistrate had relied upon a superseded version of the Bankruptcy Rules (and cases decided under this version) to reach their conclusions. While acknowledging that the newly amended Bankruptcy Rules substantially undermined the magistrate's analysis, the district court denied the motion, reasoning that the Bankruptcy Rules--and particularly Rule 7004(d)--apply only to "core" proceedings under the Bankruptcy Code. Diamond and Obie filed a timely notice of appeal. Since we believe that the district court may exercise its jurisdiction over the Barron and Jaffe Attorneys' persons, we reverse and remand.
Whether the Federal Rules of Civil Procedure or the Bankruptcy Rules should be applied in this proceeding is implicated, in large measure, by fundamental changes in the entire structure of the bankruptcy system. A brief review of these changes--which have occurred over the last century--is necessary before we turn to the problem immediately at hand.
The present bankruptcy structure is the culmination of substantial congressional amendment to the federal bankruptcy laws in response to recent Supreme Court decisions. Until 1978, federal district courts acted as bankruptcy courts, but often referred cases to "referees" (later designated "judges") who could issue final orders directly appealable to the district court. A referee's jurisdiction extended only as far as the district in which the district court was located. See, e.g., 2A Collier on Bankruptcy p 38.02 (14th ed. 1978).
Dissatisfaction with the dual role of bankruptcy referees--who wielded tremendous power to decide cases while retaining extensive supervisory responsibility to conduct the continuing administration of the bankruptcies--was, among other factors, the reason Congress embarked upon a comprehensive examination of the bankruptcy laws. G. Treister, J. Trost, L. Forman, K. Klee & R. Levin, Fundamentals of Bankruptcy Law Sec. 1.01 (2d ed. 1988). At the conclusion of this study, Congress enacted the Bankruptcy Act of 1978, which eliminated the referee system and established, in its place, "in each judicial district, as an adjunct to the district court for such district, a bankruptcy court which shall be a court of record known as the United States Bankruptcy Court for the district." 28 U.S.C. Sec. 151(a) (Supp. II 1978). "Adjuncts" in name alone, these new bankruptcy courts operated virtually independent of the district courts. Despite their status as Article I judges, these bankruptcy judges were authorized by Congress to hear proceedings "arising under title 11 or arising in or related to cases under title 11." 28 U.S.C. Sec. 1471(b), (c) (Supp. II 1978) (emphasis supplied). As such, they could hear claims based upon federal and state law.
The Bankruptcy Act of 1978, however, was short-lived; in 1982, the Supreme Court decided Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), in which the Court invalidated Congress's grant of jurisdiction to the bankruptcy courts. Justice Brennan, writing for a plurality of four Justices, concluded that the Bankruptcy Act's sweeping grant of jurisdiction to bankruptcy judges (who served without Article III salary and tenure protections)--including the power to decide matters "related to those arising under the bankruptcy laws"--violated the provisions of Article III of the Constitution. Marathon, 458 U.S. at 76, 102 S.Ct. at 2874 (plurality). Further, a majority of the Court refused to confine its strictures to that portion of the jurisdictional grant that violated Article III--an approach that would have left the bankruptcy courts free to hear "core" 3 proceedings [W]e cannot conclude that if Congress were aware that the grant of...
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