Drexel Highlander Ltd. v. Edelman (In re Edelman), CASE NO. 13-31182-BJH

CourtUnited States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas
PartiesIN RE: ROBERT MARC EDELMAN, DEBTOR. DREXEL HIGHLANDER LIMITED PARTNERSHIP, DGP, LLC, and R. GLENN WIGGINS, PLAINTIFFS, v. ROBERT MARC EDELMAN AND DIANA EDELMAN, DEFENDANTS.
Decision Date06 May 2014
Docket NumberCASE NO. 13-31182-BJH,C/w Adv. Proc. No. 13-03126-BJH,ADV. PROC. NO. 13-03078-BJH

IN RE: ROBERT MARC EDELMAN, DEBTOR.
DREXEL HIGHLANDER LIMITED PARTNERSHIP, DGP, LLC, and R. GLENN WIGGINS, PLAINTIFFS,
v.
ROBERT MARC EDELMAN AND DIANA EDELMAN, DEFENDANTS.

CASE NO. 13-31182-BJH
ADV. PROC.
NO. 13-03078-BJH
C/w Adv. Proc.
No. 13-03126-BJH

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

Signed: May 6, 2014


The following constitutes the ruling of the court and has the force and effect therein described.

__________
United States Bankruptcy Judge

(Chapter 11)

MEMORANDUM OPINION

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The Court held a trial in this consolidated adversary proceeding on March 10-11, 2014. At the conclusion of the trial, the Court directed briefing on several issues raised at trial. The last of the post-trial briefs was submitted on March 24, 2014, following which the Court took the matter under advisement. This Memorandum Opinion contains the Court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014.

I. JURISDICTION; VENUE; STATUTORY AND CONSTITUTIONAL AUTHORITY

The U.S. District Court for the Northern District of Texas has subject matter jurisdiction over this proceeding under to 28 U.S.C. § 1334. Although bankruptcy courts do not have independent subject matter jurisdiction over bankruptcy cases and proceedings, 28 U.S.C. § 151 grants bankruptcy courts the power to exercise certain "authority conferred" upon the district courts by title 28. Under 28 U.S.C. § 157, the district courts may refer bankruptcy cases and proceedings to the bankruptcy courts for either entry of a final judgment (core proceedings) or proposed findings and conclusions (noncore, related-to proceedings). So, as relevant here, this Court exercises authority over Edelman's underlying Chapter 11 bankruptcy case and this adversary proceeding pursuant to the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc adopted in this district on August 3, 1984 (the "Standing Order of Reference"). Venue is proper with this Court under 28 U.S.C. § 1409.

The Plaintiffs ask this Court to liquidate their claims against the Edelman bankruptcy estate, as reflected in the Plaintiffs' Amended Petition [Dkt. No. 54], and then determine whether any resulting judgment is dischargeable in bankruptcy. Accordingly, this Court has statutory authority to hear and finally determine this core proceeding under 28 U.S.C. § 157(b)(2)(B), (I), and (O). The Court's determination of its authority to hear this proceeding, however, does not end here.

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In Stern v. Marshall, 131 S. Ct. 2594 (2011), the U.S. Supreme Court held that, notwithstanding the bankruptcy court's statutory authority under 28 U.S.C. § 157(b)(2)(C) to adjudicate an estate's counterclaim against a creditor, the bankruptcy court lacked constitutional authority to enter a final judgment on the state-law counterclaim because such claim would "not [be] resolved in the process of ruling on a creditor's proof of claim." Id. at 2620; see also BP RE, L.P. v. RML Waxahachie Dodge, L.L.C., et al., 735 F.3d 279, 286 (5th Cir. 2013) ("Thus, 'Congress may not bypass Article III simply because a proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.'") (citing Stern, 131 S. Ct. at 2618); Frazin v. Haynes & Boone, LLP (In re Frazin), 732 F.3d 313, 317-20 (5th Cir. 2013) (concluding that two of three counterclaims would necessarily be resolved in bankruptcy court's award of attorneys' fees and were therefore within the bankruptcy court's constitutional authority under Stern).

Here, the Plaintiffs are each a creditor of the Edelman estate who timely filed a Proof of Claim that attaches a copy of Plaintiffs' Amended Petition to it. See Northern District of Texas Claims Register, Case No. 13-31183-BJH-11, Claim No. 4-1 filed by Drexel Highlander Limited Partnership, Claim No. 5-1 filed by DGP, LLC, and Claim No. 6-1 filed by R. Glenn Wiggins (individually, a "Proof of Claim" and, collectively, the "Proofs of Claim").1 Although the Plaintiffs' claims (other than those related to dischargeability) are all based upon state law, resolving these state-law claims is necessary to adjudicate both this adversary and the allowability of the claims asserted in the Proofs of Claim. "Such claims by creditors against debtors are the very reason the claims allowance process exists." The Cadle Co. v. Moore (In re

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Moore), 739 F.3d 724, 728 (5th Cir. 2014);2 see, e.g., Jacobsen v. Sramek, 2013 WL 694045, at *4 (E.D. Tex. Feb. 26, 2013) (holding in the context of a dischargeability proceeding that "[p]ursuant to In re Morrison, [555 F.3d 473, 479 (5th Cir. 2009)], the bankruptcy court had the authority to liquidate the Srameks' allowed claim before entering final judgment even though the merits of the claim would need to be determined by application of state law."); Farooqi v. Carroll (In re Carroll), 464 B.R. 293, 312-13 (Bankr. N.D. Tex. 2011) ("Stern does not hold, directly or indirectly, that an Article I tribunal is without Constitutional authority to liquidate a creditor's claim against a debtor through entry of a final dollar judgment and then determine whether that judgment is dischargeable in the debtor's bankruptcy case.").

Finally, as recently explained by the Seventh Circuit in Wellness International Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. 2013):

[W]hether to grant or deny discharge is central to the restructuring of the debtor-creditor relationship. Although it is debatable whether such restructuring falls under the rubric of public rights, see Stern, 131 S. Ct. at 2614 n.7; Granfinanciera, 492 U.S. at 56 n.11, 109 S. Ct. 2782; but cf. N. Pipeline, 458 U.S. at 71, 102 S. Ct. 2858 (plurality opinion) ("[T]he restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, must be distinguished from the adjudication of state-created private rights, such as the right to recover contract damages.... The former may well be a 'public right,' but the latter obviously is not."), it is clear that WIN's objections to discharge differ

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markedly from the state-law claims at issue in Stern, Granfinanciera, Northern Pipeline, and Ortiz. The Supreme Court has not come close to holding that an Article III judge must decide claims for which the Bankruptcy Code itself provides the rule of decision, and we will not do so here, where the parties concede that the bankruptcy judge had authority.

Id. at 773. Thus, this Court concludes that it has the constitutional authority to both liquidate the Plaintiffs' state-law claims and to determine whether any resulting judgment is dischargeable in the debtor's bankruptcy case.

II. FACTUAL AND PROCEDURAL HISTORY

This adversary proceeding arises from the prepetition business relationship between Plaintiff R. Glenn Wiggins ("Wiggins") and debtor Robert Marc Edelman ("Edelman"). Edelman and Wiggins directly and indirectly owned and/or managed various companies that collectively planned, constructed, operated, and ultimately leased or sold multi-family housing units. As discussed in more detail in Section II.B, below, the business entities relevant to this proceeding are plaintiff Drexel Highlander Limited Partnership ("DHLP"), who owned the condominium complex at issue here (the "Drexel Highlander"), plaintiff DGP, LLC ("DGP"), who was DHLP's general partner, and non-party Drexel Development Company, LLC ("DDC"), who served as a construction management company for the condominium project. Wiggins, who had no significant prior real estate experience, provided financial support and personal guarantees to the project, while Edelman, who had prior real estate experience, managed the project on a day-to-day basis.

The parties' business relationship began to materially deteriorate in the fall of 2010 when Wiggins learned of allegations of improper dealings against Edelman in relation to a project that was separate from the Drexel Highlander and subject to a different ownership structure. Wiggins inquired whether it was true that Edelman had put up several hundred thousand dollars to settle the allegations, which struck Wiggins as contrary to Edelman's alleged prior statements that he

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had no money. In relation to this conversation, Edelman disclosed that approximately $400,000 had been transferred from DDC, a company Edelman jointly owned with Wiggins, to the separate project to satisfy real estate taxes. When Edelman inquired whether that amount would be repaid to DDC, Edelman answered no, the other project had no ability to repay DDC. Wiggins then retained counsel and took steps to remove Edelman from his position of control over the companies.

A. The Consolidated Adversary Proceeding

DHLP, DGP, and Wiggins (the "Plaintiffs") filed suit against Edelman and his wife Diana Edelman ("Diana")3 on May 10, 2011 in the District Court of Dallas County, Texas 162nd Judicial District, commencing Case No. DC-411-00769-1 (the "State Court Lawsuit").4 The Plaintiffs, either individually or collectively, asserted various state-law claims against Edelman, including: (1) trespass, (2) breach of fiduciary duty, (3) violation of the Texas Theft Liability Act, (4)...

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