In Re: Steven Carl Lewis, 10-10117
| Decision Date | 29 September 2010 |
| Docket Number | No. 10-10117,Adversary No. 10-5098,10-10117 |
| Parties | In re: STEVEN CARL LEWIS, KIMBERLY LYNNE LEWIS, Debtors. and LINDA S. PARKS, TRUSTEE, Plaintiff, v. CONSUMER LAW ASSOCIATES, LLC. and DAVID HERRON, Defendants. |
| Court | U.S. Bankruptcy Court — District of Kansas |
OPINION DESIGNATED FOR ON-LINE PUBLICATION BUT NOT PRINT PUBLICATION
REPORT AND RECOMMENDATION
ON DEFENDANTS' MOTION TO WITHDRAW THE REFERENCE
AND FOR TRANSFER TO THE DISTRICT COURT
The Court has carefully reviewed the defendants' motion to withdraw the reference of this adversary proceeding from the bankruptcy court for "cause"1 and makes the following recommendation to the United States District Court for the District of Kansas.2
Defendants Consumer Law Associates, L.L.C. ("CLA") and David Herron ("Herron") each provided pre-petition services to the debtors in this case, Stephen and Kimberley Lewis. CLA and Herron contracted with the debtors in 2008 to provide them with "consumer debt resolution" services. When their efforts to resolve their debt outside bankruptcy failed, debtors cancelled their contract with CLA and Herron and retained the legal services of Wichita attorney Sheila Maksimowicz who filed this bankruptcy case for debtors on January 20, 2010. On Schedule F, debtors listed some $210,000 in unsecured, non-priority debt, of which over $170,000 comprised credit card debt.3
The Trustee filed this adversary proceeding on May 4, 2010. Styling her adversary complaint as a "Complaint for Recovery of Money," she seeks to avoid and recover fees in excess of $4,800 charged and collected by CLA and Herron from debtors in connection with the consumer debt resolution services as fraudulent transfers, preferences, and as disgorgement of professional fees. The Trustee also alleges that defendants committed deceptive and unconscionable acts thatare violations of the Kansas Consumer Protection Act (KCPA).4 Finally, the Trustee alleges that the defendants committed professional malpractice and have breached their fiduciary duties to the debtors. A copy of the Trustee's complaint is attached for the convenience of the District Court.
Defendants timely demanded a jury trial on the Trustee's claims and have withheld their consent to the Bankruptcy Court conducting that trial.5 Defendants assert that the Trustee's non-core claims predominate her complaint and that their right to a jury trial on those claims is "cause" to withdraw the reference and to transfer this adversary proceeding to the District Court. As is this Court's custom, it has directed the parties to proceed in discovery pending the outcome of this motion.
28 U.S.C. §157(d) governs both permissive and mandatory withdrawal of the reference to bankruptcy court and provides:
The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce. [Emphasis added.].
CLA and Herron seek permissive withdrawal for cause.6 The statute further addresses instances where the right to a jury trial is implicated in the referred proceedings:
If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially designated to exercise such jurisdiction by the district court and with the express consent of all the parties.7
Here, CLA and Herron have made demand for a jury trial on the Trustee's claims and have withheld their consent for the bankruptcy court to conduct a jury trial. In addition, Tenth Circuit precedent holds that this bankruptcy court has no authority to conduct a jury trial.8 The case law recognizes that a right to a jury trial may constitute cause for withdrawal of the reference.9 Accordingly, this Court must consider the reach of its jurisdiction by first determining whether the Trustee's claims are "core" or "non-core," and then determining whether defendants are entitled to a trial by jury on those claims.
Core proceedings are those that have no existence outside of bankruptcy.10 28 U.S.C. § 157(b)(1) provides that bankruptcy judges may hear all core proceedings arising under title 11 or arising in a title 11 case. Among the proceedings that are core and enumerated in § 157(b)(2) are: turnover proceedings, 11 proceedings to avoid and recover preferences, 12 proceedings to avoid andrecover fraudulent conveyances, 13 and other proceedings "affecting the liquidation of the estate" except for personal injury tort or wrongful death claims.14 A bankruptcy court may also exercise "related to" jurisdiction over non-core claims.15 "Related proceedings" are civil proceedings that, in the absence of a bankruptcy filing, could have been brought in federal or state court.16 So-called "related-to" jurisdiction may be exercised if the outcome of the civil proceeding could conceivably have any effect on the estate being administered in bankruptcy.17
At present, it appears to the Court that the complaint is a mixture of core and non-core claims. The Trustee's claim to avoid and recover alleged preferential payments under 11 U.S.C. § 547 is clearly core, as is her claim to avoid and recover alleged fraudulent transfers (transfers for which debtors did not receive reasonably equivalent value) under 11 U.S.C. § 548. To the extent the Trustee seeks an accounting and asserts a claim for turnover under 11 U.S.C. § 542, it is core. The balance of the Trustee's claims (KCPA violations, legal malpractice, breach of fiduciary duty, and disgorgement of unreasonable fees) might conceivably be deemed "other proceedings" under the catch-all provision of 28 U.S.C. § 157(b)(2)(O) but are more likely to be non-core claims that do not depend on bankruptcy laws for their existence and could be brought in another forum.18 Evenif this Court concludes that the balance of the claims are non-core, this Court may exercise related-to jurisdiction over them if their outcome may have an effect on the administration of debtors' bankruptcy estate.19 The claims of the Trustee here are based upon facts that pre-date the filing of the bankruptcy case and involve dealings between the debtors and CLA and Herron. As such, the claims are property of the estate under 11 U.S.C. § 541.20 Arguably, a recovery of fees and damages from defendants could increase the value of the estate to be administered by the Trustee and affect distribution to unsecured creditors.21 Even if this Court were to conclude that the remaining claims noted above are non-core and that it could exercise related to jurisdiction over them, the Court must consider whether it is precluded from doing so because of the defendants' jury trial demand.22
To analyze the impact of the request for a jury trial on this Court's jurisdiction, the Court must first determine whether CLA and Herron are entitled to a jury trial on the Trustee's claims. Whether defendants are entitled to jury trial on the Trustee's claims is determined by the legal or equitable nature of similar claims at the time the Seventh Amendment was ratified.23 If the claims pled by the Trustee would have been legal claims at ratification, CLA and Herron will have made a case for withdrawal of the reference. The Court therefore examines the causes of action pled by the Trustee to determine whether they are legal or equitable in nature. If the nature of the relief sought by the Trustee is the recovery of money, the cause of action is ordinarily characterized as legal, rather than equitable.24
With respect to the Trustee's fraudulent transfer claim under § 548 of the Bankruptcy Code, the Supreme Court has held that defendants have a right to a jury trial if the defendants have not subjected themselves to the equitable jurisdiction of the bankruptcy court by filing a claim in the bankruptcy case, even though the claim is core.25 A similar conclusion must obtain with respect to the Trustee's preference claim under § 547.26 The accounting and turnover claim are more equitablein nature for which no right to a jury trial exists.27 Even if the right of the Trustee to seek a disgorgement from the debtor's lawyer is somehow jury trial fare, this court's § 542 power to enforce the turnover of estate property is likely not.28 The Court next considers the state common law and statutory causes of action. The cause of action alleged for breach of fiduciary duty is a legal claim for which there is a right to a jury trial.29 Likewise, the common law malpractice claim is clearly an action at law and CLA and Herron are entitled to a jury trial.30 The nature of the Trustee's statutory cause of action under the KCPA is mixed, depending upon whether the claim is based upon alleged deceptive acts or unconscionable acts.31 As to the Trustee's claim of unconscionability, Kan. Stat. Ann. § 50-627(b) expressly makes the question of whether a defendant has actedunconscionably a question of law by providing that "[t]he unconscionability of an act or practice is a question for the court."32 But whether defendants committed a deceptive act in violation of Kan. Stat. Ann. § 50-626(b) is a question for the jury.33
In summary then, the Trustee has asserted both legal and equitable claims against CLA and Herron. Defendants are entitled to a jury trial on the following causes of action: the § 548 fraudulent transfer, the § 547 preference, breach of fiduciary duty, malpractice, and the KCPA claim for commission of a deceptive act. CLA and Herron are not entitled to a jury trial on the accounting and turnover claim, the disgorgement claim, or the unconscionability...
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