In re McClelland

• Decision Date: 26 October 2007
• Docket Number: Bankruptcy No. 03-37997 (CGM).,Adversary No. 07-9014.
• Citation: 377 B.R. 446
• Parties: In re JOHN S. McCLELLAND, Debtor. John S. McClelland, Plaintiff, v. Grubb & Ellis Consulting Services Company, Grubb & Ellis Valuation And Advisory Group and Grubb & Ellis New York, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

377 B.R. 446

In re JOHN S. McCLELLAND, Debtor John S. McClelland, Plaintiff, v. Grubb & Ellis Consulting Services Company, Grubb & Ellis Valuation And Advisory Group and Grubb & Ellis New York, Inc., Defendants.

Bankruptcy No. 03-37997 (CGM).

Adversary No. 07-9014.

United States Bankruptcy Court, S.D. New York, Poughkeepsie Division.

October 26, 2007.

COPYRIGHT MATERIAL OMITTED

Anne J. Penachio, Esq., Eastchester, NY, for the Plaintiff.

Lance Portman, Esq., McCabe & Mack LLP, Poughkeepsie, NY, for the Defendants.

MEMORANDUM DECISION DENYING MOTION TO REMAND OR ABSTAIN

CECELIA G. MORRIS, Bankruptcy Judge.

The Debtor commenced this action in New York State Supreme Court, Ulster County, against the Defendants (collectively, "Grubb & Ellis" or "G & E"), alleging damages of $1 million arising from an appraisal that Grubb & Ellis prepared while retained by this Court as a professional of the bankruptcy estate.

The Defendants removed the case to the United States District Court, alleging that the case is a core proceeding within the meaning of 28 U.S.C. § 157(b) "because, among other things, it is inextricably and intimately related to the administration of the estate in the Bankruptcy Case." Notice of Removal (ECF Docket No. 1), p. 2.¹ The Debtor disputes that this action is a core proceeding. (ECF Docket No. 5). The case was transferred to this Court from the District Court, by stipulation of the parties. (ECF Docket No. 2).

The Debtor has now moved to remand the case to New York State Supreme Court pursuant to 28 U.S.C. § 1452 or, in the alternative, for abstention pursuant to 28 U.S.C. § 1334(c)(1) and (2). (ECF Docket Nos. 6, 7 and 14; the "Motion"). The Defendants oppose the Motion (ECF Docket Nos. 10, 16).

For the reasons set forth in this memorandum decision, the Motion is denied. Where an estate professional is retained and paid by order of the Bankruptcy Court to perform work that is vital to the bankruptcy estate and the debtor's plan of reorganization, a subsequent claim against that professional arising from the work performed on behalf of the estate is a "core proceeding" pursuant to 28 U.S.C. § 157(b).

BACKGROUND

The Debtor filed this Chapter 11 case on December 19, 2003. For the past 20 years, the Debtor was engaged in management and operation of real estate in Ulster County, New York. Debtor's Affidavit Pursuant to Local Bankruptcy Rule 1007-2 (Case No. 03-37997, ECF Docket No. 5). The Debtor managed real estate through corporations in which he was either the sole shareholder or the holder of a one-third interest. With respect to the properties in which the Debtor held a fractional ownership, the remaining two-thirds was held in equal shares by brothers Anthony and Frank Longhitano (the "Longhitanos"). Id. at ¶ 2. For the five years prior to the bankruptcy filing, the Debtor was engaged in "protracted and contentious litigation with the Longhitanos involving essentially the ownership of numerous properties in Ulster and Westchester County." Id. at ¶ 3. At the time of the bankruptcy filing, litigation was pending in New York State Supreme Court, Ulster County, New York State Supreme Court, Westchester County, and the United States District Court for the Southern District of New York. The litigation between the Debtor and the Longhitanos is described in detail in the Settlement Order (defined below) in paragraphs 15 through, 31. The litigation between those parties in this bankruptcy proceeding is also described in the Settlement Order in paragraphs 33 through 47.

The Debtor and the Longhitanos entered into a 39-page stipulation of settlement, dated June 16; 2004 (Case No. 03-37997, ECF Docket No. 139; the "Stipulation of Settlement"), approved by the Court by order dated July 27, 2004 (Case No. 03-37997, ECF Docket No. 155; the "Settlement Order"). According to the Debtor, the Stipulation of Settlement "essentially resolved all of the disputes among the parties and many of the disputes among Third Parties." (ECF Docket No. 6, ¶ 12). A key element in the Stipulation of Settlement was payment by the Longhitanos to the Debtor of his one-third net equity interest in the jointly owned real property. According to the Settlement Order, the parties acknowledged differing beliefs as to the valuation of the properties and devised a mechanism for resolving the dispute:

The Debtor sand the Longhitanos have demonstrated that the compromise set forth in the Stipulation provides substantial benefits to the Debtor, his estate and his creditors which include, but are not limited to, the cessation of all litigation with the Longhitanos (which has been ongoing for almost six years), the waiver of the Longhitano Claims, the release by the Longhitano of administrative claims, the payment to the estate of the current fair market value of the property being transferred by the Debtor to the Longhitanos which is believed by the Longhitanos to be approximately $3,100,000.00 and which is believed by McClelland to be no less $3,100,000.00, provided, however, that regardless of such beliefs, the fair market value is to be independently determined by an independent appraiser to be retained jointly by the Longhitanos and the Debtor.

Settlement Order, ¶ 52. According to paragraph 11 and 12 of the Stipulation of Settlement:

11. Appraiser. The parties hereby agree to the appointment of Grubb-Ellis [sic], as the appraiser to perform and furnish appraisals of the properties on Schedule B (the "Appraiser"). Subject to the acceptance by Grubb-Ellis of its retention as contemplated hereby and the execution of a standard Grubb-Ellis retention letter which the parties agree shall be executed by them, Grubb-Ellis shall execute the appraisal. The Appraiser shall perform and furnish the appraisals as hereinafter provided. The Longhitanos shall be responsible for two-thirds (2/3), and McClelland will be responsible for one-third (1/3), of the Appraiser's fees and expenses incurred in performing the appraisals hereunder. The Appraiser's engagement shall be a joint engagement for the equal and mutual benefit of the Parties. The Appraiser shall be an independent third party, shall have no ex parte communications with the Longhitanos, the Receiver or his agents or representatives, including Nick Russo, the managing agent, the Debtor or their respective counsel. The Appraiser shall only have contact with the Parties and the Receiver through their counsel and only at such times as bankruptcy counsel for all Parties are present....

12. Appraisal. Subject to the Appraiser's ability to do so, on or before forty-five (45) days following entry of the Settlement and Transfer Order, the Appraiser will complete and furnish to each of the Parties and to the Bankruptcy Judge's Chambers, a written appraisal (the "Appraisal") of the current fair market value as to each of the parcels of real property, including all structures and improvements erected thereon, identified in Schedule B annexed [to the Stipulation of Settlement] (the "Appraised Properties") as of the date the Appraisal is performed. Upon completion of the Appraisal, the Appraiser shall file an affidavit in form and substance agreed to by the parties with the Bankruptcy Court, and the Appraiser shall proffer such affidavit as his sworn testimony attesting to the fact that the Appraisal was or was not completed in accordance with the terms of this Stipulation and that the Appraiser had no contact with the Parties directly, had no ex parte contact with counsel for the Parties and only had contact with bankruptcy counsel for the Parties with bankruptcy counsel for all Parties presents. The Appraiser will not be subject to further direct or any cross-examination. The Appraisal shall be binding and conclusive upon the Parties ....

Grubb & Ellis, specifically, "Valuation and Advisory Group, Grubb & Ellis Consulting Services Company," was retained as an estate professional in the Debtor's Chapter 11 bankruptcy case, on the Debtor's application dated September 14, 2004 (Case No. 03-37997, ECF Docket No. 165). Annexed to the Debtor's application to retain Grubb & Ellis is a September 10, 2004 engagement letter signed by the Debtor's bankruptcy attorney. The engagement letter provides:

In the event that a party entitled to do so, makes a claim against Grubb & Ellis or any of its affiliates or any of their respective officers or employees in connection with or in any way relating to this engagement of the Appraisal, the maximum damages recoverable from Grubb & Ellis or any of its parent companies or their respective officers or employees other than for fraud or intentionally wrongful acts shall be the amount of the monies actually collected by [Grubb & Ellis] for this assignment and under no circumstances shall any claim for consequential damages be made.

On September 28, 2004, the Court signed an order retaining Grubb & Ellis as an estate professional pursuant to 11 U.S.C. § 327. (Case No. 03-37997, ECF Docket No. 170).

Grubb & Ellis completed the appraisals contemplated in the Stipulation of Settlement. Based upon the appraisals, the Debtor received approximately $4 million cash. (ECF Docket No. 6, ¶ 20). The Debtor's second amended plan of reorganization, which was predicated on the appraisals conducted by Grubb & Ellis, was confirmed by order dated August 24, 2005 and provided for payment of 100% of unsecured creditors' claims. (Case No. 03-37997, ECF Docket No. 266). Article XI of the Plan, titled RETENTION OF JURISDICTION states, in relevant part:

[T]he court shall retain exclusive jurisdiction over all matters arising out of, and related to, the Chapter 11 Case and this Plan to the fullest extent permitted by law, including, among other things, jurisdiction to: ... (e) hear and determine any and all adversary proceedings, motions, applications and contested or litigated matters arising out of, under, or related to, the Chapter 11 Case; ... (l) enforce all orders, judgments,...