In re Earned Capital Corp.

• Decision Date: 02 September 2005
• Docket Number: Bankruptcy No. 86-21474.,Adversary No. 04-3236.
• Citation: In re Earned Capital Corp., 331 B.R. 208 (Bankr. W.D. Pa. 2005)
• Parties: In re EARNED CAPITAL CORPORATION, Debtor. Mary Geruschat, Dolores Speney, Antoinette Morocco, Donna Morocco Buxton, et al., Plaintiffs, v. Ernst & Young, LLP and Charles Modispacher, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

331 B.R. 208

In re EARNED CAPITAL CORPORATION, Debtor Mary Geruschat, Dolores Speney, Antoinette Morocco, Donna Morocco Buxton, et al., Plaintiffs, v. Ernst & Young, LLP and Charles Modispacher, Defendants.

Bankruptcy No. 86-21474.

Adversary No. 04-3236.

United States Bankruptcy Court, W.D. Pennsylvania.

September 2, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Christopher P. Schuller, Pittsburgh, PA, for Defendants.

Victor H. Pribonic, White Oak, PA, for Plaintiffs.

OPINION

WARREN W. BENTZ, Bankruptcy Judge.

I. Introduction

The within Adversary Complaint was commenced when the Defendants in a state court action removed the pending Complaint to this Court and then filed a Motion to Dismiss the Complaint. The Plaintiffs contest this Court's jurisdiction and have filed Motion to Remand to the state court.

We have considered the numerous pleadings and briefs filed by the parties and have heard the argument of counsel on both the Motion to Remand and the Motion to Dismiss and find that the matters are ripe for decision.

II. Pleadings

A. Notice of Removal

The Defendants, Ernst & Young, LLP ("E & Y") and Charles Modispacher ("Modispacher") or ("E & Y and Modispacher", collectively the "Defendants") commenced this Adversary by filing a Notice of Removal of State Court Action to Bankruptcy Court ("Notice of Removal") on November 5, 2004. Defendants removed an action that was pending in the Court of Common Pleas of Butler County, Pennsylvania ("State Court") at Civil Action No. AD04-11170 ("State Court Action").

B. Complaint

Mary Geruschat, Dolores Speney, Antoinette Morocco and Donna Morocco Buxton (collectively, "Plaintiffs")¹ filed a three count Complaint in which they assert causes of action for: CountI — Professional Negligence; Count II — Fraud and Deceit; and Count III — Negligent Misrepresentation.

Plaintiffs allege that while serving as accountants in the bankruptcy case of the predecessor entities to Seven Fields Development Corporation ("Seven Fields"), the Defendants, during the course of the bankruptcy proceedings, made false and erroneous statements concerning the solvency of the Debtor entities when the accountants improperly characterized certain amounts of equity as debt. The Plaintiffs assert that the accountants' actions caused the successor entity, Seven Fields, to liquidate its assets in a manner calculated to liquidate the assets as soon as possible rather than judicially manage and develop the assets in a way to maximize the return to the Plaintiffs (and other shareholders) and that as a result of such actions, Plaintiffs and the class that they purport to represent have suffered significant damage.

C. Jury Demand

In response to the Notice of Removal, Plaintiffs filed a Demand for Trial by Jury.

D. Plaintiffs' Statement

On November 22, 2004, Plaintiffs filed PLAINTIFFS' STATEMENT PURSUANT TO BANKRUPTCY RULE 9027(e)(3) ("Statement"). In the Statement, Plaintiffs deny Defendants' allegation that the within Complaint involves a "core" matter and assert that the action is "non-core." The Plaintiffs further state that they do not consent to the entry of final orders on judgments by the bankruptcy judge and that "neither the bankruptcy court nor the federal court has jurisdiction" over the pending cause of action.

E. Defendants' Response to Plaintiffs' Statement

In response to the Plaintiffs' Statement, Defendants reassert that this is a core matter and further assert that the Plaintiffs waived the right to challenge the Defendants' allegation that the Adversary proceeding is a core proceeding by failing to file the Statement Pursuant to Fed.R.Bankr.P. 9027(e)(3) within ten days after the Defendants filed the Notice of Removal.

F. Motion to Remand

PLAINTIFFS' MOTION TO REMAND CASE TO STATE COURT ("Motion to Remand") is also before the Court. The Plaintiffs assert that Removal is improper because the State Court Action is not related to and has no "close nexus" to the bankruptcy case and therefore, this Court lacks subject matter jurisdiction over the proceeding; that the matter is not a "core" proceeding under 28 U.S.C. § 157(b)(1) and, therefore, the Court must necessarily abstain from exercising jurisdiction under 28 U.S.C. § 1334(c)(2); that even if the matter could be considered a core proceeding, the Court should abstain from asserting jurisdiction under § 1334(c)(1); and finally that remand to the State Court is required as the Notice of Removal was incorrectly filed in the Bankruptcy Court rather than in the United States District Court.²

G. Motion to Strike

PLAINTIFFS' MOTION TO STRIKE DEFENDANTS' NOTICE OF REMOVAL ("Motion to Strike") was filed on December 20, 2004. Plaintiffs assert that the Court must strike the Defendants' Notice of Removal because a party may not remove a state court action to bankruptcy court where the underlying bankruptcy case to which the state court action is being removed was closed prior to the existence of the state court action and because Defendants failed to reopen the case prior to filing the Notice of Removal.

H. Defendants' Response to Motion to Strike

Defendants respond that an open bankruptcy case is not required for bankruptcy court jurisdiction; that if the case need be reopened, the Court can act sua sponte; that the Notice of Removal should be treated as a Motion to Reopen; or, if reopening is required, Defendants request leave to file an appropriate motion.

I. Motion to Dismiss

Three days after the filing of the Notice of Removal, DEFENDANTS' MOTION TO DISMISS PLAINTIFFS' COMPLAINT ("Motion to Dismiss") was docketed. Defendants assert that the Complaint must be dismissed for various reasons which, inter alia, include:

1. Plaintiffs' claims are shareholder derivative claims which they have inappropriately commenced in their individual capacities and prior to making a demand that the corporate entity itself pursue the claims.

2. Plaintiffs' claims are barred by the Statute of Limitations.

3. Plaintiffs' claims are barred by the doctrines of res judicata, collateral estoppel and/or judicial estoppel.

4. The Defendants have immunity for the statements made during judicial proceedings.

5. The professional negligence claim must be dismissed for the reason of lack of privity between the Defendants and the Plaintiffs.

J. Plaintiffs' Response to Motion to Dismiss

The Plaintiffs oppose the Motion to Dismiss. Plaintiffs assert that:

1. Defendants lack standing to challenge Plaintiffs' claims on the basis that the claims are derivative.

2. Defendants' reliance on items outside the record to challenge the specific date on which the Plaintiffs discovered their cause of action is not appropriately presented in a Motion to Dismiss.

3. The Defendants are themselves precluded from raising the defenses of res judicata, collateral estoppel and judicial estoppel as a basis to dismiss the Complaint because the State Court has previously decided such issues to their detriment. For this same reason, Plaintiffs oppose the remainder of Defendants' Motion to Dismiss wherein they assert that Plaintiffs have failed to state claims for professional negligence, fraud, negligent misrepresentation, and that Defendants are "immune" from liability.

III. Factual Background

On June 3, 1986, Earned Capital Corporation, Managed Properties, Inc., Canterbury Village, Inc. and Eastern Arabian, Inc. (collectively, the "Debtors") filed separate voluntary Petitions under Chapter 11 of the Bankruptcy Code. By Order dated June 5, 1986, the Court ordered that the separate cases be jointly administered under the case entitled Earned Capital Corporation at Case No. 86-21474 (the "Bankruptcy Case").

The Debtors were engaged in the business of selling shares of investment in various property where investors were promised a certain annual return on investment. Shares were oversold when Debtors had to continue the selling program in order to maintain the payments to investors.

Debtors' financial affairs were in disarray and the affairs of each of the Debtors were substantially intertwined. E & Y was engaged as accountants for the Debtors in the Bankruptcy Case. The Debtor had minimal debt to ordinary trade creditors and some $6,000,000 in debt to creditors holding secured claims against Debtors' property. The vast majority of Debtors' obligations, which totaled over $60,000,000, were owed to those thousands of individuals who had made investments in the Debtors ("Investors")³. In exchange for depositing monies with the Debtors, the Investors had received various documents entitled "Agreement of Sale" for fractional interests in real estate, various agreements to document the purchase of fractional interests in horses, documents entitled "Lease and Breeding Management Agreement" and "Bond and Warrant." The exact status of the Investors was unknown, i.e., whether they were investors, bondholders, or some other form of general creditor. They were all referred to as the investor class or the Investors and were treated as the only creditors in the Bankruptcy Case who were impaired and at risk. Many of the Investors, including Plaintiffs Antoinette Morocco and Donna Morocco Buxton, filed proofs of claim as unsecured creditors.

The Investors were appointed to and represented by the Official Committee of Unsecured Creditors in the Bankruptcy Case ("Committee"). The Committee was represented by legal counsel and took a very active role in the Bankruptcy Case.

The Debtors and the Committee filed competing plans of reorganization. Both plans contemplated substantive consolidation of the assets and liabilities into one surviving reorganized corporation. The Amended Plan of Reorganization of Committee of Unsecured Creditors (the "Plan") was confirmed by the Court on October 21, 1987 after an evidentiary hearing to consider whether substantive consolidation was appropriate. This Court found that each of the Debtors was insolvent and that substantive consolidation...