Duncan v. Stokes (In re Stokes)

Decision Date08 February 2013
Docket NumberCase No. 09-60265-7,Adv No. 12-00052
PartiesIn re JOHN PATRICK STOKES, Debtor. GREGORY DUNCAN and KATHLEEN M. GLOVER, Plaintiffs. v. JOHN PATRICK STOKES, Defendant.
CourtU.S. Bankruptcy Court — District of Montana
MEMORANDUM OF DECISION

At Butte in said District this 8th day of February, 2013.

Pending in this adversary proceeding seeking a declaratory judgment are: Plaintiffs' motion for summary judgment (Docket No. 11); and Defendant's objection thereto and motion to dismiss for lack of subject matter jurisdiction (Dkt. 18). Trial is scheduled to begin on March 7, 2013. The parties have submitted their respective statements of uncontroverted facts and issues, and supporting briefs, which have been reviewed by the Court together with applicable law. These matters are ready for decision. For the reasons set forth below, Defendant's objection is overruled and Defendant's motion to dismiss for lack of jurisdiction is denied; Plaintiffs' motion for summary judgment is granted and a separate Judgment shall be entered against the Defendant John Patrick Stokes ("Stokes") declaring that Stokes' state law claims for relief against the Plaintiffs in Cause No. CDV 2012-156 in the Montana First Judicial District Court, Lewis andClark County, were assets of Stokes' bankruptcy estate which were sold to the Plaintiff Gregory Duncan by the bankruptcy trustee in a sale approved by the Court after notice.

This Court concludes that it has jurisdiction of the above-captioned adversary proceeding under 28 U.S.C. § 1334(b) as related to the above-captioned bankruptcy case. Further, the Court concludes that Plaintiffs' petition for declaratory judgment is a core proceeding under 28 U.S.C. § 157(b)(2)(A) & (2)(O) concerning the administration of Debtor's estate or other proceeding affecting the liquidation of assets of the estate. This Memorandum includes the Court's findings of fact and conclusions of law under F.R.B.P. 7052 (applying Rule 52, FED. R. CIV. P. in adversary proceedings).

FACTS & PROCEDURAL HISTORY

Plaintiffs filed a Statement of Uncontroverted Facts on December 17, 2012 (Dkt. 13) setting forth the following:

1. In February 2009, Mr. Stokes retained Mr. Duncan as his attorney to help him petition for Chapter 11 bankruptcy relief. (Adv. Pro. No. 12-00052, Dkt. No. 1, Ex. A.)
2. On March 4, 2009, Mr. Stokes commenced the above-entitled bankruptcy case, by filing a Voluntary Petition for relief under Chapter 11 in this Honorable Court ("Bankruptcy Court"). (Bankr. Case No. 09-60265-7, Dkt. No. 1.)
3. On June 5, 2009, Mr. Duncan petitioned the Bankruptcy Court to withdraw as Mr. Stokes's counsel. (Bankr. Case No. 09-60265-7, Dkt. No. 48.)
4. On June 18, 2009, Mr. Duncan's motion to withdraw was granted. (Bankr. Case No. 09-60265-7, Dkt. No. 55.)
5. On September 21, 2009, Mr. Richard J. Samson was appointed to serve as the Trustee of the bankruptcy case. (Bankr. Case No. 09-60265-7, Dkt. No. 101.)
6. On the same date, September 21, 2009, on Mr. Samson's motion, Mr. Stokes's bankruptcy case was converted to a Chapter 7 proceeding. (Bankr. Case No. 09-60265-7, Dkt. No. 98.)
7. On February 28, 2012, Mr. Stokes filed a complaint in Montana's First Judicial District Court, Cause No. CDV 2012-156, against Mr. Duncan alleging specific monetary damages for legal malpractice (Count I), breach of contract (Count II), and breach of fiduciary duty (Count III). (Adv. Pro. No. 12-00052, Dkt. No. 1, Ex. A.)
8. On April 26, 2012, Mr. Samson intervened and moved to stay the state court proceeding because the Bankruptcy Court had exclusive jurisdiction to determine the property of the estate. (Adv. Pro. No. 12-00052, Dkt. No. 1, Ex. B.)
9. On May 30, 2012, the Honorable Kathy Seeley granted Mr. Samson's motion to stay its proceedings "until a final determination as to what property qualifies as property of the estate is made by the Bankruptcy Court, Case # 09-60265." (Adv. Pro. No. 12-00052, Dkt. No. 1, Ex. D.)
10. On July 26, 2012, the Bankruptcy Court entered an order authorizing Mr. Samson to sell the bankruptcy estate's interest in Mr. Stokes's state claims at issue, if any, through a bid procedure with the purpose of maximizing the value of the estate. (Bankr. Case No. 09-60265-7, Dkt. No. 408.)
11. On July 27, 2012, Mr. Samson filed a Notice of Intent to Sell the estate property interest in Mr. Stokes's state causes of action against Mr. Duncan through an auction sale. (Bankr. Case No. 09-60265-7, Dkt. No. 409.)
12. On August 14, 2012, Mr. Samson amended his July 31, 2012 motion for the bankruptcy court to approve the compromise under Rule 9019, F.R.B.P. (Bankr. Case No. 09-60265-7, Dkt. No. 420.)
13. On August 14, 2012, "[u]pon review[ing] the Trustee's Notice of Intent to Sell Estate Property at Auction Sale . . . and no objections or requests for hearing as to the proposed sale hav[ing] been filed or requested with the Court," the Bankruptcy Court entered an Order authorizing the Trustee to sell the bankruptcy estate's interest, if any, in the "pending proceeding filed in the Montana First Judicial District Court, Lewis & Clark County, Cause No. CDV 2012-156 and styled as John Patrick Stokes, Plaintiff vs. Greg W. Duncan and Kathleen M. Glover, Defendants." (Bankr. Case No. 09-60265-7, Dkt. No. 419.)
14. On August 16, 2012, Mr. Samson filed a notice of the pendingcompromise, giving any party an opportunity to file an objection by August 30, 2012. (Bankr. Case No. 09-60265-7, Dkt. No. 423.) No objection was ever made.
15. On August 22, 2012, Mr. Samson sold to Mr. Duncan the bankruptcy estate's interest in the malpractice action, and thereafter filed a Report of Sale with the Bankruptcy Court demonstrating the sale to Mr. Duncan. (Bankr. Case No. 09-60265-7, Dkt. No. 434.)
16. On September 6, 2012, the Bankruptcy Court issued its order to approve the compromise under Rule 9019, F.R.B.P. (Bankr. Case No. 09-60265-7, Dkt. No. 435.)

Plaintiffs filed with their Statement of Uncontroverted Facts a supporting brief contending that Stokes' legal malpractice claim arose in his bankruptcy case and is a core proceeding, so this Court has jurisdiction and may enter a declaratory judgment that Stokes' state law claims for legal malpractice are property of the estate and remained property of the estate after the case was converted to Chapter 7. Plaintiffs ask for declaratory judgment that Stokes' state law claims are barred by the claim preclusive effect of this Court's approval of the Trustee's sale of the claims to Plaintiffs.

In response, Defendant filed on January 4, 2013, a Statement of Genuine Issues asserting the following:

1. Plaintiffs' uncontroverted fact no. 6 is wrong in that it states that the Chapter 7 Trustee filed a motion to convert this case to chapter 7. That motion was filed by the U.S. Trustee's office. Docket no. 24 in 09-60625.
2. Plaintiffs' uncontroverted fact no. 12 fails to state that the notice given by the Trustee was to sell the estate's interest, if any, in the malpractice claim, and that there was no warranty that the estate had an interest in the claim. Docket no. 409 in 09-60265.
3. Plaintiffs' uncontroverted fact no. 15 fails to state that the Trustee sold the claim, "if any," to Greg Duncan, that it was sold "as is" and without any representation or warranty that the estate had an interest in the claim. Exhibit F to Plaintiffs' complaint.
4. Plaintiffs' uncontroverted facts nos. 12, 14, and 15 concern a dispute between the estate and Wade Dahood and those facts and underlying documents have no discernable relationship to the matters at issue in this proceeding.

Stokes complains that Plaintiffs' statement of uncontroverted facts is unsupported by any affidavit in support, although he admits that "there probably is not a dispute as to material facts in this case ...." Also on January 4, 2013, Stokes filed a motion to dismiss this adversary proceeding for lack of subject matter jurisdiction, and a supporting brief in opposition to summary judgment and in support of his motion to dismiss. Stokes argues that his state law claims did not come into existence until after the date the case was converted to Chapter 7 and so are not property of the estate because of the provisions of 11 U.S.C. § 1306 and 11 U.S.C. § 348(f), which he argues controls 11 U.S.C. § 1115, and because his damages did not occur until after the case was converted to Chapter 7. Stokes further argues that this Court no longer has jurisdiction to determine whether the estate owned the claim because any jurisdiction this Court had was lost when the claims were sold, and now the state court must resolve the ownership question.

Plaintiffs filed a reply brief repeating that this Court has jurisdiction to enforce its Order approving the sale of the estate's claims to Plaintiffs, and that Stokes' state law claims against them were at all times considered property of the estate. Plaintiffs point out that Stokes submitted a bid to purchase the estate's state law claims, and should be barred by judicial estoppel from asserting that they are not property of the estate.

DISCUSSION

The Court begins by noting that the petition for declaratory judgment, in essence, asks this Court to enforce its Order approving the sale of Stokes' state law claims to Plaintiff Greg W.Duncan ("Duncan"), when he outbid Stokes at auction. Stokes did not seek reconsideration of the Order approving the sale, and did not file a notice of appeal. Stokes argues that this Court lacks jurisdiction to enforce its own order approving the sale of the estate's claims to Duncan. Pursuant to § 105(a), the bankruptcy court is authorized to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." In re Reinertson, 241 B.R. 451, 455 (9th Cir. BAP 1999). This Court has long recognized its powers to enforce its orders under the last sentence of § 105(a): "No provision of this title proving for the raising of an issue by a party in...

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