Land Ventures for 2, LLC v. Fritz

• Decision Date: 09 October 2015
• Docket Number: CASE NO. 2:12-CV-240-WKW [WO]
• Parties: LAND VENTURES FOR 2, LLC, Plaintiff, v. MICHAEL A. FRITZ, SR., et al., Defendants.
• Court: U.S. District Court — Middle District of Alabama

LAND VENTURES FOR 2, LLC, Plaintiff, v. MICHAEL A. FRITZ, SR., et al., Defendants.

CASE NO. 2:12-CV-240-WKW [WO]

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF ALABAMA NORTHERN DIVISION

October 9, 2015

MEMORANDUM OPINION AND ORDER

I. INTRODUCTION

Plaintiff Land Ventures for 2, LLC ("Land Ventures"), commenced this legal malpractice action against its former bankruptcy attorney, Michael Fritz, and his law firm (collectively, "Fritz"), invoking the court's diversity jurisdiction, see 28 U.S.C. § 1332(a). Chief Magistrate Judge Susan Russ Walker has been presiding over this action pursuant to the parties' consent and a general order of the court regarding the primary assignment of a percentage of specified civil cases to the magistrate judges. See 28 U.S.C. § 636(c)(1); In re: Assignment of "Regular Civil Cases" to United States Magistrate Judges, General Order No. 3156 (M.D. Ala. Aug. 29, 2003), as amended. But that consent and assignment do not stand on solid legal ground. As this opinion explains, because this malpractice action is "otherwise related to a case under title 11," the authority to enter a final judgmentresides solely in "the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1). Additionally, this court has in place a general order that precludes the referral and primary assignment of bankruptcy cases to the magistrate judges. See General Order 3156 (excluding bankruptcy cases from its provisions governing primary assignment of civil cases to the magistrate judge). For these reasons, which constitute good cause, the primary assignment of this matter to Judge Walker is VACATED sua sponte pursuant to 28 U.S.C. § 636(c)(4).¹

II. PROCEDURAL HISTORY

When Land Ventures filed this malpractice action in March 2012, it was in the midst of a bankruptcy proceeding in this district. See In re Land Ventures for 2, LLC, No. 10-30651 (M.D. Ala. Bankr. Mar. 16, 2010). Because the propriety of the primary assignment of this case to the magistrate judge and the parties' ensuing consent to the jurisdiction of the magistrate judge hinges upon whether the proceedings before this court are related to the bankruptcy proceeding, it is helpfulto begin with a summary of the pertinent procedural history in the bankruptcy proceeding.

A. The Bankruptcy Case

Michael A. Fritz, an attorney, filed a Chapter 11 voluntary petition on behalf of Land Ventures in March 2010.² By September 2011, the attorney-client relationship had soured, however, and Mr. Fritz moved to withdraw as counsel. The day prior to moving to withdraw, Mr. Fritz also filed an application for attorney's fees. (See B. Ct. Doc. # 234 (Fritz's 8/31/11 application for compensation)). Mr. Windham T. Pittman - Land Ventures' manager, 99% owner,³ and an unsecured creditor of the estate - filed a pro se objection to Mr. Fritz's application, contending that Mr. Fritz had "not progressed on this matter as a reasonable competent attorney would proceed," and the bankruptcy judge conducted a hearing on the application in November 2011. (B. Ct. Doc. # 308 (Pittman's 11/7/11 objection).)

A month after the hearing, Nicholas Wooten, Esq., filed a notice of appearance on behalf of Land Ventures in the bankruptcy case. (B. Ct. Doc. # 334 (Wooten's 12/16/11 notice of appearance).) On the same date, Mr. Wooten alsofiled a notice advising the bankruptcy court of a potential malpractice claim against Mr. Fritz and his firm and requested that the trustee abandon the claim. Ultimately, after learning of the debtor's potential lawsuit against Mr. Fritz and his law firm for malpractice, the bankruptcy judge permitted Mr. Fritz to withdraw in December 2011.⁴ (B. Ct. Doc. # 345 (12/20/11 order granting Fritz's motion to withdraw).)

Subsequently, on February 15, 2012, the trustee filed notice of her intent to abandon the malpractice claim. On March 15, 2012, the bankruptcy judge entered an order approving the trustee's abandonment of the claim. On May 31, 2012, concluding that "the attorneys for the debtor are entitled to a reasonable fee for their services," the bankruptcy judge entered an order granting Mr. Fritz's application and awarding fees in the amount of $16,272.00 and expenses in the amount of $3,255.22. (B. Ct. Doc. # 309 (11/8/11 order setting hearing); B. Ct. Doc. # 333 (transcript of 11/15/11 hearing); B. Ct. Doc. # 335 (Land Ventures' 12/16/11 notice of potential malpractice claim against Fritz and request for abandonment); B. Ct. Doc. # 338 (Fritz's 12/19/11 motion to withdraw); B. Ct. Doc. # 355 (trustee's notice of intent to abandon the malpractice claim against Fritz); B. Ct. Doc. # 360 (3/15/12 order approving trustee's abandonment ofmalpractice claim); B. Ct. Doc. # 378 (5/31/12 order awarding fee).) Several months later, on September 13, 2012, Land Ventures successfully moved the bankruptcy court to vacate the order awarding fees to Mr. Fritz. (B. Ct. Docs. # 403-08). However, the fee already had been paid to Mr. Fritz, and the order of the bankruptcy court did not order disgorgement.

In July 2013, the bankruptcy case was closed, and the trustee was discharged. (B. Ct. Doc. # 452.) The bankruptcy court retains the authority, however, to reopen the bankruptcy case to resolve the fee petition, if necessary. See 11 U.S.C. § 350(b) ("A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause."); § 554(d) ("Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate.").

B. The District Court Malpractice Action

On March 15, 2012, the same date that the bankruptcy court had approved the trustee's abandonment of the malpractice claim, Land Ventures commenced the present action in the district court as a regular civil case within the court's diversity jurisdiction. See 28 U.S.C. § 1332(a). This action was assigned to Judge Walker pursuant to General Order No. 3156, which provides that the magistrate judges shall be given primary assignment of a specified percentage of regular civil cases.The order defines "regular civil cases" as "civil cases which are not pro se or bankruptcy cases" and "primary assignment" as "presumptive assignment of a case to a Magistrate judge for all purposes including entry of judgment unless a party declines consent." General Order No. 3156, at 2. Thereafter, the parties consented to have a magistrate judge conduct all proceedings including the trial and entry of judgment.

On July 25, 2012, which was during the pendency of the bankruptcy court's short-lived Order awarding Mr. Fritz attorney's fees, Mr. Fritz moved for summary judgment on the malpractice claim, arguing that the claim was "barred under the doctrines of res judicata and collateral estoppel due [to] the final order issued by the bankruptcy court concerning the quality, nature and extent of the legal services provided by the Defendants to [Land Ventures]." (D. Ct. Doc. # 19, at 1; D. Ct. Doc. # 18.) The magistrate judge denied the summary judgment motion without prejudice based upon the pendency of Land Ventures' pending motion in the bankruptcy court to vacate the order awarding Mr. Fritz attorney's fees, and, as indicated above, the bankruptcy court ultimately granted Land Ventures' motion and vacated the order awarding attorney's fees.

Land Ventures also sought an order from the magistrate judge withdrawing the reference of Mr. Fritz's application for compensation from the bankruptcy court. Land Ventures argued that permissive withdrawal of the "admittedly core"fee petition from the bankruptcy court was appropriate because it was "related to this attorney malpractice action." Land Ventures contended that an order resolving Mr. Fritz's fee petition "might affect the debtor's rights in the . . . malpractice matter" and that the bankruptcy court lacked jurisdiction over the malpractice action because it had been "abandoned by the Bankruptcy Estate." (D. Ct. Doc. # 26, at 1, 5; D. Ct. Doc. # 27.) On February 14, 2013, the magistrate judge denied the motion for permissive withdrawal and referred the malpractice action to the bankruptcy court pursuant to 28 U.S.C. § 157 for pretrial proceedings, "including entry of any required orders and/or proposed findings of fact and conclusions of law, as appropriate."⁵ (D. Ct. Doc. # 28.) The magistrate judge also directed the bankruptcy court to refrain from ruling on Mr. Fritz's pending fee petition until the malpractice claim was resolved, noting that "disposition of the malpractice claims may inform the Bankruptcy Judge's decision on the defendant's pending application for compensation." (D. Ct. Doc. # 28.)

Discovery proceeded, and the parties filed cross-motions for summary judgment. The bankruptcy court has entered a Recommendation on the pending motions for summary judgment, recommending that Mr. Fritz's summary judgment motion be granted, that Land Ventures' summary judgment motion be denied, and that this malpractice action be dismissed with prejudice. ThatRecommendation, to which Land Ventures objected, remains pending and will be addressed in a separate Order.

III. DISCUSSION

Part III addresses three issues. The first two issues - whether the malpractice action relates to the bankruptcy case and whether the district court must enter judgment in the malpractice action - reveal why the primary assignment of this malpractice action to the magistrate judge and the parties' ensuing consent to the jurisdiction of the magistrate judge cannot stand. The third issue addresses and confirms that the referral of this action to the bankruptcy court for a recommendation was proper.

A. Whether the District Court Malpractice Action Relates to Title 11

The first issue is whether the malpractice action relates to...