In re Sizzler Restaurants Intern., Inc.

• Decision Date: 13 March 2001
• Docket Number: Bankruptcy No. SV 96-16075-AG. Adversary No. 98-1720-AG.
• Citation: 262 BR 811
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re SIZZLER RESTAURANTS INTERNATIONAL, INC., Debtor. XX Affects all Debtors. Sizzler USA Restaurants, Inc., Plaintiff, v. Belair & Evans LLP, Defendant. Belair & Evans LLP, Counterclaimant, v. Sizzler USA Restaurants, Inc.; Kathryn T. McGuigan; National Union Fire Insurance Co., Counterclaim Defendants.

262 B.R. 811 (2001)

In re SIZZLER RESTAURANTS INTERNATIONAL, INC., Debtor.

XX Affects all Debtors.

Sizzler USA Restaurants, Inc., Plaintiff, v. Belair & Evans LLP, Defendant.

Belair & Evans LLP, Counterclaimant, v. Sizzler USA Restaurants, Inc.; Kathryn T. McGuigan; National Union Fire Insurance Co., Counterclaim Defendants.

Bankruptcy No. SV 96-16075-AG. Adversary No. 98-1720-AG.

United States Bankruptcy Court, C.D. California.

March 13, 2001.

COPYRIGHT MATERIAL OMITTED

Richard M. Pachulski, Debra Grassgreen, Iain A.W. Nasatir, Pachulski, Stang, Ziehl & Young P.C., Los Angeles, CA, for Sizzler.

Jason Wallach, Kenneth Ingber, Herman & Wallach, Los Angeles, CA, for Defendant.

Maryanne Wilsbacher, Los Angeles, CA, Office of the U.S. Trustee.

MEMORANDUM DISPOSITION RE COUNTER-CLAIMANT'S MOTION TO APPROVE VOLUNTARY DISMISSAL OF ADVERSARY PROCEEDING; OR ALTERNATIVELY FOR PERMISSIVE ABSTENTION

ARTHUR M. GREENWALD, Bankruptcy Judge.

Counter-claimant Belair and Evans, LLP ("Belair"), attorneys at law, seeks court approval of the voluntary dismissal of its counter-claim against counterclaim defendant, Kathryn T. McGuigan ("McGuigan"), pursuant to Fed.R.Civ.P. 41(a)(2), or, alternatively, requests that the court abstain from hearing the counter-claim, pursuant to 28 U.S.C. § 1334(c)(1).

This motion came on for hearing on August 27, 1999. Following supplemental briefing from the parties regarding whether the court has subject matter jurisdiction over the counter-claim, the motion was argued further and submitted on October 22, 1999.

STATEMENT

In June, 1996, Sizzler Restaurants International, Inc. ("Sizzler") filed a Chapter 11 petition in bankruptcy. The estate was administered by Sizzler as the debtor-in-possession. Sizzler's Plan of Reorganization was confirmed in August, 1997.

Beginning in 1992, Belair represented Sizzler in numerous personal injury matters in New York and New Jersey. In September, 1998, Sizzler filed a complaint against Belair for declaratory and injunctive relief and for turnover pursuant to 11 U.S.C. § 542, seeking to prevent Belair from filing additional proofs of claim for pre-petition legal services.¹ In response, Belair filed counter-claims against Sizzler, McGuigan, and National Union First Insurance Company ("National"), Sizzler's insurer. At the time, McGuigan was employed as Sizzler's Director of Risk Management and Vice President of Human Resources.

In its counter-claim, Belair alleged that, both prior to and after filing for bankruptcy protection, Sizzler, through McGuigan, promised that it would pay Belair's outstanding fees incurred both pre-petition and post-petition without Belair having to file a proof of claim for those fees. Belair alleged that, in reliance on these assurances, it continued to perform legal services for Sizzler. Belair further alleged that it had not been paid the outstanding fees and that, inasmuch as it continued to be attorney of record for a number of personal injury cases in which Sizzler was a defendant, there existed the possibility of having to provide additional legal services for Sizzler without the likelihood that it would be paid for performing those services.

Based on these allegations, Belair sued Sizzler and National for damages on theories of contract, quantum meruit and unjust enrichment, and for declaratory relief. Belair also sued Sizzler and McGuigan for damages arising from fraud and negligent misrepresentation. In addition to declaratory relief, Belair prayed for damages against Sizzler, McGuigan and National, jointly and severally, in the amount of approximately $91,000.

In its counter-claim, Belair made three allegations against McGuigan directly:

1) that McGuigan had assured Belair that the firm would continue to be retained and that the firm would continue to be paid notwithstanding Sizzler\'s bankruptcy petition, and that, in reliance on these assurances, Belair agreed to continue to perform services for Sizzler post-petition;

2) that McGuigan promised Belair that Sizzler would request that the bankruptcy court authorize Belair to continue to represent Sizzler and to be paid for such services, and that, based on McGuigan\'s request and assurances, Belair advised local counsel that pre- and post-bankruptcy fees would be paid; and

3) that, after confirmation of Sizzler\'s Chapter 11 plan, McGuigan assured Belair that all of its bills would be paid by National; requested Belair to continue performing services on pending cases; and assured Belair that she would intervene and obtain payment from National and would get Sizzler\'s bankruptcy counsel, Pachulski, Stang, Ziehl & Young, to intervene with National, so that Belair would not have to sue National for payment.

In July, 1999, the court approved a settlement between Belair, Sizzler and National, whereby Belair was paid $60,000 for its claimed fees. The settlement also included an exchange of releases, with Belair dismissing its counter-claim against Sizzler and National with prejudice. During the process, Belair had offered to dismiss McGuigan as well, either with prejudice, along with the exchange of mutual releases, or without prejudice, without releases. McGuigan rejected this offer.

On July 29, 1999, Belair filed the instant motion, requesting voluntary dismissal of the counter-claim without prejudice, stating that it did not wish to pursue the matter against McGuigan "at this time." Alternatively, Belair requested that the court permissively abstain from hearing the counter-claim. McGuigan opposed Belair's motion, desiring to have the matter either litigated or dismissed with prejudice. Alternatively, McGuigan asked for attorney's fees and costs, in the event that the court approved the dismissal of the counter-claim without prejudice.

On July 30, 1999, McGuigan requested the court to grant summary judgment regarding Belair's counter-claim. In addition, on September 2, 1999, McGuigan filed a motion for leave to file a third party complaint against Sizzler. These motions are pending.

DISCUSSION

1. The counterclaim filed by Belair against McGuigan is a core proceeding.

"Jurisdiction is determined as of the commencement of the action." Linkway Investment Co., Inc. v. Olsen (In re Casamont, Ltd.), 196 B.R. 517, 521 (9th Cir. BAP 1996), citing Fietz v. Great Western Savings (In re Fietz), 852 F.2d 455, 457 n. 2 (9th Cir.1988). "The federal district court has original and exclusive jurisdiction of all cases under title 11. 28 U.S.C. § 1334(a). The district court has original jurisdiction of all civil proceedings arising under title 11. 28 U.S.C. § 1334(b). Furthermore, a bankruptcy judge may hear and determine all cases arising under the Bankruptcy Code and all core proceedings arising in a bankruptcy case. 28 U.S.C. § 157(b)(1). Accordingly, for subject matter jurisdiction to exist there must be at least some relationship between the proceeding and the title 11 case." Mangun v. Bartlett (In re Balboa Improvements, Ltd.), 99 B.R. 966, 969 (9th Cir. BAP 1989). "Put another way, claims that arise under or in Title 11 are deemed to be `core proceedings,' while claims that are related to Title 11 are `noncore' proceedings.'" Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431, 1435 (9th Cir.1995). "As a general rule a bankruptcy court does not have jurisdiction in controversies between third parties not involving the debtor or property of the estate. If, however, such controversies are `related to' the underlying bankruptcy case, the court has jurisdiction pursuant to 28 U.S.C. § 1334(b)." Casamont, 196 B.R. at 521 (internal citations omitted).

At the outset this court had subject matter jurisdiction over Belair's counter-claim as the counter-claim constituted a core proceeding. See Harris Pine Mills, 44 F.3d 1431. In the Harris Pine Mills case, an action was filed in state court against the Chapter 11 trustee and the trustee's agents. The debtor was not named in the suit. The suit alleged fraud, negligence, and negligent misrepresentation surrounding the trustee's sale of assets of the estate. The trustee removed the case to the district court, whereupon the district court referred the case to the bankruptcy court as a core matter.

On appeal to the Ninth Circuit, the Harris Pine Mills plaintiffs disputed the district court's characterization of the matter as a core proceeding, contending that the district court erred in refusing to remand their action to state court. Id. at 1433-1434. The Ninth Circuit upheld the district court's assertion of subject matter jurisdiction under 28 U.S.C. § 157(b)(2)(A) and (b)(2)(O),² id. at 1437, affirming the district court's determination that the suit against the trustee was a core proceeding, inasmuch as the claims were based upon post-petition conduct by the trustee and his agents which was "inextricably intertwined with the trustee's sale of property belonging to the bankruptcy estate." Id. at 1438. In affirming the district court, the Court of Appeals additionally noted that a state law claim not falling under § 157(b)(2) could nevertheless qualify as a noncore, related proceeding. Id. at 1436-1437 and n. 8, citing Piombo Corp. v. Castlerock Properties (In re Castlerock), 781 F.2d 159 (9th Cir.1986). Cf. Bethlahmy, IRA v. Kuhlman (In re ACI-HDT Supply Co.), 205 B.R. 231, 237 (9th Cir. BAP 1997) (distinguishing Harris Pine Mills on the basis that the trustee's conduct occurred post-petition).

Further, the core nature of the counterclaim was not altered by Belair's dismissal of Sizzler. See Honigman, Miller, Schwartz & Cohn v. Weitzman (In re DeLorean Motor Co.), 155 B.R. 521 (9th Cir. BAP 1993). In the DeLorean case, debtor's counsel filed a state court malicious prosecution action against the Chapter 7 trustee, counsel for the trustee, and the chairman of the debtor's creditors' committee. The suit was based on the conclusion of a lawsuit in the debtor's counsel's favor, wherein the trustee had alleged that the...