In re Kaiser Group Intern., Inc.

Decision Date09 November 2009
Docket NumberBankruptcy No. 00-2283.,Bankruptcy No. 00-2293.,Bankruptcy No. 00-2264.,Bankruptcy No. 00-2291.,Bankruptcy No. 00-2287.,Bankruptcy No. 00-2290.,Bankruptcy No. 00-2266.,Bankruptcy No. 00-2294.,Bankruptcy No. 00-2273.,Bankruptcy No. 00-2268.,Bankruptcy No. 00-2288.,Bankruptcy No. 00-2271.,Bankruptcy No. 00-2276.,Bankruptcy No. 00-2296.,Bankruptcy No. 00-2265.,Bankruptcy No. 00-2285.,Bankruptcy No. 00-2267.,Bankruptcy No. 00-2278.,Bankruptcy No. 00-2299.,Bankruptcy No. 00-2295.,Bankruptcy No. 00-2263.,Bankruptcy No. 00-2284.,Bankruptcy No. 00-2298.,Bankruptcy No. 00-2292.,Bankruptcy No. 00-2286.,Bankruptcy No. 00-2279.,Bankruptcy No. 00-2289.,Bankruptcy No. 00-2275.,Bankruptcy No. 00-2269.,Bankruptcy No. 00-2280.,Bankruptcy No. 00-2300.,Bankruptcy No. 00-2282.,Bankruptcy No. 00-2277.,Bankruptcy No. 00-2281.,Bankruptcy No. 00-2272.,Bankruptcy No. 00-2297.,Adversary No. 08-10020.,Bankruptcy No. 00-2301(GMS).,Bankruptcy No. 00-2270.
CourtUnited States Bankruptcy Courts. District of Columbia Circuit
PartiesIn re KAISER GROUP INTERNATIONAL, INC., et al., Debtors. Kaiser Group Holdings, Inc., et al., Plaintiffs, v. Squire Sanders & Dempsey LLP, Defendant.

Marc D. Loud, pro se.

MEMORANDUM DECISION

S. MARTIN TEEL, Jr., Bankruptcy Judge.

The plaintiffs ("Plaintiffs") commenced this matter as a civil action for alleged attorney malpractice in the Superior Court of the District of Columbia, and the defendant Squire Sanders & Dempsey LLP ("Squire Sanders") removed the matter to this court. Squire Sanders has filed a motion (Docket Entry ("DE") No. 7) for a change of venue and inter-district transfer, and Plaintiffs have filed a motion for remand or, in the alternative, abstention (DE No. 23).1 In accordance with the following analysis, an order will follow, denying Plaintiffs' motion, and granting Squire Sanders' motion for a change of venue to the United States Bankruptcy Court for the District of Delaware.

I FACTS

Plaintiff Kaiser Group International, Inc. ("Old Kaiser"), a Delaware corporation, hired Squire Sanders to represent it in corporate and litigation matters. (DE No. 6, Compl. ¶ 10.) Old Kaiser subsequently filed a petition commencing its bankruptcy case under chapter 11 of the Bankruptcy Code (11 U.S.C.) in the United States Bankruptcy Court for the District of Delaware on June 9, 2000,2 and, as a debtor in possession under 11 U.S.C. § 1101(1) exercising the powers of a trustee under 11 U.S.C. § 1107(a) sought and was authorized by that court to retain Squire Sanders as its legal counsel in its bankruptcy proceedings. (Id., Compl. ¶ 18.)

Prior to that bankruptcy filing, ICT Spectrum Constructors, Inc. ("Spectrum") was merged into a subsidiary of Old Kaiser through a merger agreement. (Id., Compl. ¶ 21.) Under the agreement, Spectrum shareholders would receive 8.519 shares of Old Kaiser stock for each stock they held in Spectrum. (Id.) A separate "fill-up" provision of the merger agreement provided that if Old Kaiser stock was trading for less than $5.36 per share on March 1, 2001, former-Spectrum shareholders would receive additional shares or cash in the amount the shares were below $5.36. (Id., Compl. ¶ 22.) Squire Sanders was responsible for advising Old Kaiser concerning and negotiating this agreement. (Id., Compl. ¶ 23.)

Approximately a year after this merger agreement, on March 24, 1999, a former Spectrum shareholder filed a class action lawsuit in federal court in Idaho, asserting a claim that Old Kaiser misrepresented its finances and omitted relevant information during the time of the merger agreement. (Id., Compl. ¶ 24.) That claim and a claim for enforcement of the fill-up provision was asserted by way of a proof of claim (the "Spectrum Class Claim") in the bankruptcy case. Squire Sanders represented to Old Kaiser's board and the Tennenbaum Plaintiffs3 that the Spectrum Class Claim was without merit and would not result in any financial harm to Plaintiffs. (Id., Compl. ¶ 27.)

Squire Sanders was the principal drafter of the Second Amended Plan of Reorganization in the bankruptcy case. (Id., Compl. ¶ 28.) The bankruptcy court approved the Second Amended Plan on December 5, 2000, and New Kaiser emerged from bankruptcy under that plan. (Id.) As of August 28, 2008, the bankruptcy estate had been administered with the exception of "a single claim objection and an unrelated [to the present malpractice claims] matter on appeal." (DE No. 25, p. 16) (citing the Affidavit of Douglas W. McMinn, CEO of Kaiser Group Holdings, Inc., Exhibit 2, pp. 1-2).

On July 3, 2008, Plaintiffs commenced this matter as a civil action against Squire Sanders in the Superior Court of the District of Columbia. Squire Sanders removed the matter to this court on July 31, 2008. In their complaint, Plaintiffs allege Squire Sanders committed professional negligence, and breached its fiduciary duty in representing them in the bankruptcy case. (DE No. 6, Compl. ¶¶ 66-73, 74-78.) Plaintiffs' claims are based primarily on the following alleged conduct:

• Squire Sanders drafted and endorsed the Disclosure Statement and the Second Amended Plan of Reorganization in a manner that was not in compliance with Bankruptcy Code, failing to disclose potential risks posed by the Spectrum Class Claim and failing to provide a separate classification for that class (Id., ¶¶ 29-42);

• Squire Sanders failed to adequately disclose and explain the risks to Plaintiffs inherent in the various legal positions Squire Sanders took regarding the Spectrum Class Claim (both in drafting the plan and in litigation in the bankruptcy court, and in appeals therefrom, concerning the interpretation of the confirmed plan's treatment of that claim) (Id., ¶¶ 27, 31, 44, 51); and

• Squire Sanders needlessly increased legal fees through an aggressive protracted legal strategy (regarding the treatment of the Spectrum Class Claim), pursuing a position which was legally and factually inaccurate (Id., ¶¶ 44, 48-59).

Based upon these claims, Plaintiffs seek damages, as follows:

• compensatory damages for the fees Plaintiffs paid to subsequent legal counsel to complete bankruptcy matters and related issues after Squire Sanders was terminated;

• restitution of all legal fees and costs paid to Squire Sanders for representing Plaintiffs in the bankruptcy proceedings and in connection with the Spectrum Class Claim;

• compensatory damages to the Tennenbaum Plaintiffs as shareholders for the dilution of value of their shares due to the distribution of stock to the Spectrum Class; and

• attorney's fees and costs.

(Id., Compl. p. 26).

The issues pending here are Plaintiffs' motion for remand or abstention, and Squire Sanders' motion for a transfer of venue. (DE Nos. 7, 23). To address these motions, it must first be decided whether federal jurisdiction exists here.

II JURISDICTION

For reasons discussed below, I conclude (in part A) that this proceeding, arising out of representation of a debtor in a case, generally fits within this court's "arising in" jurisdiction under 28 U.S.C. § 1334(b), and I conclude (in part B) that, in the circumstances of this case, this "arising in" jurisdiction even extends to the alleged malpractice that occurred pre-petition and that occurred post-confirmation.

A. General Analysis

If jurisdiction exists here, it rests on the jurisdiction of the district court which by local rule under 28 U.S.C. § 157 has referred this proceeding to this court. Squire Sanders asserts that the district court has jurisdiction via federal question jurisdiction, pursuant to 28 U.S.C. § 1331; and, bankruptcy jurisdiction, pursuant to 28 U.S.C. § 1334(b). (DE No. 6, pp. 3-4.)

Section 1331 provides "[t]he district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." Section 1334(b) provides "district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." These statutes break down into three jurisdictional inquiries: whether this civil action (1) arises under title 11,4 (2) arises in a case under title 11, or (3) is otherwise related to a case under title 11.5 Because it is clear the district court has "arising in" jurisdiction over Plaintiffs' claims, only that inquiry need be addressed. See Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.) ("Seven Fields"), 505 F.3d 237, 260 (3d Cir.2007) ("While courts may choose to rely on `related to' jurisdiction because it is the broadest category of federal bankruptcy jurisdiction when examining their own jurisdiction, it certainly is not incumbent upon them to do so, because, as occurred here, a party may argue and a court may decide that a proceeding falls within one of the narrower categories of jurisdiction, such as "arising in" jurisdiction....")

Claims "arising in" a case under title 11 "are limited to administrative matters that arise only in bankruptcy cases and have no existence outside of the bankruptcy proceedings." In re U.S. Office Prods. Co. Sec. Litig., 313 B.R. 73, 79 (D.D.C.2004). These "administrative matters" include a bankruptcy court's appointment, supervision, enforcement of appropriate standards of conduct, and approval of fees of professionals conducting themselves in a bankruptcy case. See In re Akl, 397 B.R. 546, 554 (Bankr.D.D.C.2008) (citing In re Southmark Corp., 163 F.3d 925, 931 (5th Cir.1999), cert. denied, 527 U.S. 1004, 119 S.Ct. 2339, 144 L.Ed.2d 236 (1999)); see also, Seven Fields, 505 F.3d at 260-61. Thus, claims based upon the conduct of court-appointed attorneys often fall within the "administrative matters" leading to "arising in" jurisdiction. See, e.g., Capitol Hill Group v. Pillsbury Winthrop Shaw Pittman, LLP, 569 F.3d 485, 489-90 (D.C.Cir.2009), aff'g 2008 WL 2690731, *4 (...

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