Faulkner v. Kornman (In re Heritage Org., L.L.C.)

• Decision Date: 03 October 2011
• Docket Number: Adversary No. 06–3377–BJH.,Bankruptcy No. 04–35574–BJH–11.
• Citation: 459 B.R. 911,55 Bankr.Ct.Dec. 151
• Parties: In re the HERITAGE ORGANIZATION, L.L.C., Debtor.Dennis Faulkner, Trustee, Plaintiff, v. Gary M. Kornman, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

459 B.R. 911

55 Bankr.Ct.Dec. 151

In re the HERITAGE ORGANIZATION, L.L.C., Debtor.Dennis Faulkner, Trustee, Plaintiff,

v.Gary M. Kornman, et al., Defendants.

Bankruptcy No. 04–35574–BJH–11.

Adversary No. 06–3377–BJH.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Oct. 3, 2011.

Carol E. Jendrzey, Kinetic Concepts, Inc., Deborah D. Williamson, Cox Smith Matthews Incorporated, San Antonio, TX, M. David Bryant, Jr., Cox Smith Matthews Incorporated, Dallas, TX, for Plaintiff.

Ryan K. McComber, Keith Robert Verges, Raymond E. Walker, Figari & Davenport, LLP, William Lloyd Foreman, Owens, Clary & Aiken, L.L.P., Emil Lippe, Jr., Law Offices of Lippe & Associates, Brian P. Lauten, Sawicki & Lauten, L.L.P., David A. Alexander, Kirkpatrick & Lockhart Preston Gates, Dallas, TX, for Defendant.

MEMORANDUM OPINION AND ORDER DENYING MOTION TO VACATE

BARBARA J. HOUSER, Bankruptcy Judge.

Before the Court is the “Certain Defendants Motion to Vacate Final Judgment Pursuant to Fed.R.Civ.P. 60(b)(4) and Fed. R. Bankr.P. 9024” (the “Motion”) filed by Defendants Gary M. Kornman, Steadfast Investments, L.P., GMK Family Holdings, LLC, Strategic Leasing, L.P., Executive Aircraft Management, L.L.C., Tickchik Investment Partnership, L.P., Executive Air Crews, L.L.C., Financial Marketing Services, Inc., Heritage Properties, L.L.C., Heritage Organization Agency, Inc., Valiant Leasing, L.L.C., Vehicle Leasing, L.L.C., and Ettman Family Trust I (collectively, the “Defendants”). In the Motion and its supporting Memorandum of Law, the Defendants argue that this “Court was without Article III power to enter such Final Judgment, and, thus, the Final Judgment and the Memorandum Opinion containing the findings and conclusions that support it are void,” relying upon the Supreme Court's recent decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).¹ See Memorandum of Law in Support of Defendants' Motion, Docket No. 791 at p. 2.

The Motion is opposed by Dennis S. Faulkner, former Chapter 11 Trustee of The Heritage Organization, L.L.C. (“Heritage”)(which filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code on May 17, 2004), who is now the trustee of a creditor trust established under the terms of the Second Amended Joint Plan of Liquidation (the “Plan”) for Heritage that was confirmed by this Court on September 12, 2007 (the “Trustee”). The Trustee argues that: (1) the Motion is untimely under the applicable rules, (2) the Motion is not meritorious because the Court had subject matter jurisdiction and all of the Defendants expressly consented on several occasions to the entry of a final judgment by this Court, and (3) policy reasons dictate a denial of the Motion.

The Court heard the Motion on September 22, 2011. For the reasons explained more fully below, the Court will deny the Motion, although not for the reasons advanced by the Trustee. In short, this Court concludes that the Defendants' attack on the Final Judgment under Rule 60(b)(4) ² cannot be used as a substitute for their failure to prosecute their timely-filed appeal from what they now contend was this Court's erroneous ruling on its subject matter jurisdiction over the claims asserted against them in the Adversary Proceeding. ³

FACTUAL AND PROCEDURAL BACKGROUND

As noted previously, Heritage filed its Chapter 11 case on May 17, 2004. Dennis S. Faulkner was appointed as Chapter 11 trustee shortly after the case was filed. Prior to its bankruptcy filing, Heritage advised extremely high net worth individuals regarding estate planning, business planning, tax planning and asset planning. The information and strategies about which Heritage advised its clients were enormously complex and individualized. The primary strategy that became the focal point of Heritage's bankruptcy case was a version of an investment transaction involving § 752 of the Internal Revenue Code. Heritage “sold” this strategy to a number of very wealthy clients who: (i) implemented it, (ii) were audited by the Internal Revenue Service, (iii) had the transaction disallowed, and (iv) were determined to owe not only the sheltered tax but penalties and interest on that tax to the United States Treasury. Many of these clients filed very large claims against Heritage in the bankruptcy case claiming, among other things, that they were defrauded by Heritage and, in particular, its principal Gary M. Kornman (“Kornman”).

Heritage's bankruptcy case was an exceedingly difficult one, made more difficult by the conduct of Kornman and those persons and entities under his direction and control, including some of the Defendants.⁴ Ultimately, the Chapter 11 Trustee proposed and obtained confirmation of the Plan (over the vehement objection of Kornman), pursuant to which the claims in this Adversary Proceeding that underlie the Final Judgment were transferred to the Creditors Trust for continued prosecution by Faulkner as the trustee of that trust. Within days of confirmation, the Trustee, Kornman and certain Kornman family members and entities he controlled (the “Kornman Parties”) reached an agreement whereby the Kornman Parties agreed (1) to make a payment of $30,000 to the Trustee, (2) not to appeal the confirmation order, and (3) to file certain certifications regarding turnover of Heritage's assets to the Trustee. In return the Trustee agreed, if those things were done, to withdraw a motion pending in Heritage's bankruptcy case for contempt and sanctions against Heritage and GMK Family Holdings, Inc. See Docket Nos. 1285, 1288 and 1291 in Case No. 04–35574–BJH–11. Kornman did not appeal the order confirming the Plan, and on October 4, 2007, the Trustee withdrew the pending motion for contempt and sanctions. See Docket No. 1305 in Case No. 04–35574–BJH–11. The Plan went “effective” on September 25, 2007. See Docket No. 1298 in Case No. 04–35574–BJH–11.

As the earlier reference to the sanctions motion in the Heritage bankruptcy case suggests, the Adversary Proceeding did not proceed smoothly or expeditiously. Kornman and the other Defendants were obstreperous, refusing to comply with discovery requests. The Trustee, over the course of years, filed no fewer than 8 motions to compel discovery or for sanctions, all of which were contested, against Kornman or various other Defendants affiliated with him. See Docket Nos. 81, 95, 194, 230, 299, 301, 302 and 460. Kornman or his affiliates sought to stay the Adversary Proceeding, and sought multiple continuances of various hearings or trial. See Docket Nos. 108, 200, 213, 348, 513, 598. Kornman and/or his affiliates changed counsel several times prior to trial.⁵ After numerous continuances and an admonition by the Court that the Adversary Proceeding would proceed to trial in September, 2008, on June 13, 2008 Kornman filed his “Motion for Trial by Jury and, Subject Thereto, Motion for Leave to Withdraw Claim Against Debtor and Motion for Continuance of Trial Date and Extension of Pre–Trial Deadlines, and Brief in Support,” Docket No. 200, which was joined by the other Defendants. Docket Nos. 201, 239 (together, the “Motion for Jury Trial”). On June 30, 2008, Kornman filed a Supplement to his Motion for Jury Trial and sought to withdraw his proof of claim unconditionally. Docket No. 226.

On July 2, 2008, this Court held a hearing on the Motion for Jury Trial. At that hearing, the Court expressed its concerns about the impact on the bankruptcy system generally if proofs of claim were allowed to be withdrawn shortly before trial in connection with a jury demand in order to prevent a bankruptcy court from conducting that trial. Specifically, this Court stated:

My issue is over-arching. It's one that concerns me in the context of every other bankruptcy cases I have, or may have in the future. The policy implications of that are fairly significant to allow substantial gamesmanship with the bankruptcy process. And that's troubling to me from a policy perspective.

Docket No. 267, p. 23:18–24. At the conclusion of the hearing, the Court took the Motion for Jury Trial under advisement because the Defendants indicated that they would be filing a motion to withdraw the reference and the Court wanted to consider those issues together.

On July 3, 2008, the Defendants filed their Motion to Withdraw the Reference from the Bankruptcy Court and a brief in support of that motion. Docket Nos. 233 and 235. In that brief the Defendants stated:

[w]hile the Trustee's fraudulent transfer claims may technically be classified as “core” under 28 U.S.C. § 157(b)(2)(H), they have certain non-core characteristics (such as being predicated in whole or in part on state law) that would raise Marathon⁶ concerns if they were submitted to the adjudicatory jurisdiction of the bankruptcy court over the objection of [Defendants].

Docket No. 235 at ¶ 14. As it is required to do under Local Rule 5011–1, this Court scheduled a status conference on the Motion to Withdraw the Reference for July 31, 2008 so that it could make the required report and recommendation to the District Court with respect to that motion.

On July 30, 2008, all of the Defendants filed Notices of Withdrawal of their Motion for Jury Trial. Docket Nos. 292, 293, 294, and 295. At the scheduled status conference the next day, counsel for the Defendants unequivocally consented to this Court conducting the trial of the Adversary Proceeding and entering a final judgment at the conclusion of that trial—on both core and non-core claims. Specifically, the transcript of that status conference reflects the following exchange:

Court: Well, so let me—let me see what the defendants' positions are. You've withdrawn the request for a jury trial, so you're waiving your right to a jury trial.

Mr Forshey: That's what I'm instructed, yes. Mr. Kornman—

Court: On behalf of—who are you speaking? I take it, just Mr. Kornman and GMK?

Mr. Forshey: Well, there's a list of all of the people on there on the...