Frazin v. Haynes (In re Frazin)

• Decision Date: 01 October 2013
• Docket Number: No. 11–10403.,11–10403.
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: In the Matter of Timothy Michael FRAZIN, Debtor. Timothy Michael Frazin, Appellant v. Haynes & Boone, L.L.P.; Nina Cortell; Warren Dodson; Griffith & Nixon, P.C.; Scott Griffith, Appellees.

732 F.3d 313

In the Matter of Timothy Michael FRAZIN, Debtor.Timothy Michael Frazin, Appellant

v.Haynes & Boone, L.L.P.; Nina Cortell; Warren Dodson; Griffith & Nixon, P.C.; Scott Griffith, Appellees.

No. 11–10403.

United States Court of Appeals, Fifth Circuit.

Oct. 1, 2013.

Gary N. Schepps (argued), Schepps Law Offices, Dallas, TX, for Appellant.

Heather Bailey New, Esq., Bell, Nunnally & Martin, L.L.P., Scott William Everett, Jeremy Daniel Kernodle (argued), Robin Eric Phelan (argued), Haynes & Boone, L.L.P., Dallas, TX, for Appellees, Haynes & Boone, L.L.P.; Nina Cortell; Warren Dodson.

Anthony Patrick Jach, Esq., Scott Griffith, Jeffery Harold Rusthoven, Esq., Griffith Davison & Shurtleff, P.C., Nicole T. LeBoeuf, Esq., Shackelford, Melton & McKinley, L.L.P., Dallas, TX, Dylan Owen Drummond, Esq., Griffith Nixon Davison, P.C., Austin, TX, for Appellees, Griffith & Nixon, P.C.; Scott Griffith.

Appeal from the United States District Court for the Northern District of Texas.

Before REAVLEY, PRADO, and OWEN, Circuit Judges.

EDWARD C. PRADO, Circuit Judge:

Timothy Frazin appeals the judgment of the district court affirming the final judgment entered by the bankruptcy court on certain state-law counterclaims that Frazin filed against the Appellees, attorneys who were authorized by the bankruptcy court to represent Frazin in a separate lawsuit. Frazin argues that the bankruptcy court lacked the authority to enter a final judgment on these claims in light of the Supreme Court's decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Holding that the bankruptcy court lacked jurisdiction over Frazin's state-law counterclaim under the Texas Deceptive Trade Practices Act, we AFFIRM in part and REVERSE in part.

I. BACKGROUND

A. Factual Background

Frazin filed a voluntary petition under Chapter 13 of the Bankruptcy Code. While the bankruptcy proceedings were pending, Frazin filed suit in state court against Lamajak, Inc. for breach of contract, promissory estoppel, and quantum meruit. Frazin filed an application with the bankruptcy court to employ Appellee Griffith & Nixon, P.C. as special counsel to represent him in his action against Lamajak. The bankruptcy court authorized Frazin to employ Griffith & Nixon on a contingency fee basis and provided that the firm would be paid following a fee application to the court.

On April 18, 2005, the bankruptcy court entered an order discharging Frazin, but the case remained open pending the outcome of Frazin's state-court suit, as the Chapter 13 plan provided that a portion of any potential recovery would be used to satisfy unsecured claims against the bankruptcy estate.

After a two-week trial on Frazin's state-law claims against Lamajak, the jury awarded Frazin three alternative recoveries: (1) $4,000,000 for breach of contract; (2) $1,400,000 for promissory estoppel; and (3) $1,125,000 in quantum meruit. The court entered judgment on the $4,000,000 award for breach of contract, as well as attorneys' fees and interest, for a total award of $7,158,383.10 (which was later reduced to $6,360,132.40 because of an error in the interest calculation). Lamajak appealed.

Frazin filed an application with the bankruptcy court to employ Appellee Haynes & Boone, LLP as special counsel to represent him in the appeal. The bankruptcy court authorized Frazin to employ Haynes & Boone and again provided that the firm's fees would be paid upon application to and approval by the bankruptcy court. The bankruptcy court ordered that any litigation proceeds awarded to Frazin would be paid to and held in trust by Haynes & Boone to allow the Chapter 13 trustee to determine the amount necessary to satisfy the remaining claims against the estate.

On appeal, Lamajak argued that Frazin was not entitled to recovery on any of his theories. Haynes & Boone responded to Lamajak's arguments with briefs on the merits and argued the appeal orally before the Fifth Court of Appeals of Texas. The court reversed the award for breach of contract, holding that Frazin had not presented sufficient evidence to find that a contract with definite terms had been entered into. Lamajak, Inc. v. Frazin, 230 S.W.3d 786, 794 (Tex.App.-Dallas 2007, no pet.). The court awarded Frazin recovery on his quantum meruit claim, id. at 798, that, along with attorneys' fees and interest, resulted in an award of approximately $3.4 million. Lamajak sought an extension of time to file a petition for review in the Texas Supreme Court, around which time the parties settled for $3.2 million.

Pursuant to the procedure ordered by the bankruptcy court, Lamajak wired $3.2 million to a Haynes & Boone trust account. Haynes & Boone filed a motion seeking guidance from the bankruptcy court on disbursement of the proceeds; it also filed a request for an expedited hearing on this motion. Both Haynes & Boone and Griffith & Nixon (collectively, the “Attorneys”) filed applications with the bankruptcy court requesting approval of their fees. Frazin filed objections to the fee applications filed by each firm.

B. Procedural Background

In response to the Attorneys' request for fees, Frazin filed state-law counterclaims against them for negligence, violations of the Texas Deceptive Trade Practices Act (“DTPA”), and breach of fiduciary duty. The case was tried over six days before the bankruptcy court. The bankruptcy court ruled against Frazin on the merits of his negligence and DTPA claims. The bankruptcy court determined that Frazin had shown a breach of fiduciary duty, but since he failed to prove damages as a result of the breach, the court ruled against him on this claim as well. The bankruptcy court also concluded that the Attorneys' breaches of duty were not clear and serious enough to warrant fee forfeiture. Finally, the bankruptcy court overruled Frazin's objections to the Attorneys' fee applications and awarded the Attorneys the amount requested in their original fee applications.

The district court affirmed the judgment in all respects in a brief order. Frazin timely appealed.

II. JURISDICTION AND STANDARD OF REVIEW

The district court's final judgment in this case gives us jurisdiction under 28 U.S.C. § 1291. “We review a district court's affirmance of a bankruptcy court decision by applying the same standard of review to the bankruptcy court decision that the district court applied.” Stettner v. Smith (In re IFS Fin. Corp.), 669 F.3d 255, 260 (5th Cir.2012) (citation omitted) (internal quotation marks omitted). We thus review factual findings for clear error and legal conclusions de novo. Id. “When the district court has affirmed the bankruptcy court's findings, [the clear error] standard is strictly applied, and reversal is appropriate only when there is a firm conviction that error has been committed.” Id. at 260–61 (citation omitted) (alteration in original, internal quotation marks omitted).

III. DISCUSSION

A. Stern v. Marshall

Frazin argues that Stern v. Marshall compels the conclusion that the bankruptcy court lacked the authority to enter a final judgment on his state-law counterclaims. Stern involved litigation over the estate of J. Howard. 131 S.Ct. at 2601. Howard's wife at the time of his death, Vickie Marshall (also known by her stage name Anna Nicole Smith), was not included in his will, and before Howard's death, she filed suit in Texas state probate court, arguing that Howard's son Pierce had fraudulently induced Howard to sign a living trust that did not include her. Id. The probate court upheld the trust and Howard's will. Marshall v. Marshall, 547 U.S. 293, 302, 126 S.Ct. 1735, 164 L.Ed.2d 480 (2006). Following Howard's death, Vickie filed a petition for bankruptcy in the Central District of California. Stern, 131 S.Ct. at 2601. Pierce filed a complaint in the bankruptcy proceedings, contending that Vickie had defamed him through media coverage of her fraudulent inducement claim; he also filed a proof of claim for that action, seeking to recover his claimed damages from Vickie's bankrupt estate. Id. Vickie counterclaimed for tortious interference with the gift she had expected from Howard, a claim which was similar in substance to the fraudulent inducement claim she had earlier lost in Texas probate court. Id. After the bankruptcy court ruled in Vickie's favor, Pierce argued that the bankruptcy court had lacked jurisdiction over Vickie's counterclaim because it was not a “core proceeding.” Id.

The Supreme Court held that Vickie's counterclaim was a core proceeding under the plain text of 28 U.S.C. § 157(b)(2)(C),¹ which states that “counterclaims by the estate against persons filing claims against the estate” are “core proceedings.” Id. at 2604–05 (internal quotation marks omitted). However, the Court went on to hold that § 157(b)(2)(C) is unconstitutional insofar as it allows bankruptcy courts to enter final judgments in state-law counterclaims that would not necessarily be resolved in the process of ruling on a creditor's proof of claim. Id. at 2620.

Although the Court stated that its decision was “narrow,” id., its reasoning was sweeping. In explaining its holding, the Court discussed the importance of Article III in maintaining separation of powers among the branches of the federal government, safeguarding the independence of the judicial branch, and protecting litigants. Id. at 2608–09. The Court stated that “[w]hen a suit is made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789, and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts.” Id. at 2609 (citation and internal quotation marks omitted). The Court concluded with a holding that was notable for its repetition throughout the opinion: bankruptcy courts “lack [ ] the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a...