Loveridge v. Hall (In re Renewable Energy Dev. Corp.)

• Decision Date: 10 July 2015
• Docket Number: No. 14–4001.,14–4001.
• Citation: 792 F.3d 1274
• Parties: In re RENEWABLE ENERGY DEVELOPMENT CORPORATION, Debtor. Elizabeth R. Loveridge, Chapter 7 Trustee, Plaintiff, v. Tony Hall; Ellis–Hall Consultants, LLC ; Summit Wind Power, LLC; SSP, a trust, Scott Rasmussen –Trustee; Clay R. Christiansen; Diane E. Christiansen; Richard D. Francom; Stephen K. Meyer ; Bonnie G. Meyer; Does I–X; Defendants, and Summit Wind Power, LLC; Kimberly Ceruti, an individual, Third Party Plaintiffs–Appellants, v. Parsons Kinghorn Harris, a professional corporation; George B. Hofmann; Matthew M. Boley; Kimberley L. Hansen; Victor E. Copeland; Lisa R. Peterson; Melyssa Davidson, individuals, Third Party Defendants–Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

792 F.3d 1274

In re RENEWABLE ENERGY DEVELOPMENT CORPORATION, Debtor.

Elizabeth R. Loveridge, Chapter 7 Trustee, Plaintiff

v.Tony Hall;

Ellis–Hall Consultants, LLC ;

Summit Wind Power, LLC;

SSP, a trust, Scott Rasmussen –Trustee;

Clay R. Christiansen;

Diane E. Christiansen;

Richard D. Francom;

Stephen K. Meyer ;

Bonnie G. Meyer;

Does I–X;

Defendants

and

Summit Wind Power, LLC;

Kimberly Ceruti, an individual, Third Party Plaintiffs–Appellantsv.Parsons Kinghorn Harris, a professional corporation;

George B. Hofmann;

Matthew M. Boley;

Kimberley L. Hansen;

Victor E. Copeland;

Lisa R. Peterson;

Melyssa Davidson, individuals, Third Party Defendants–Appellees.

No. 14–4001.

United States Court of Appeals, Tenth Circuit.

July 10, 2015.

As Amended on Denial of Rehearing July 28, 2015 Nunc Pro Tunc July 10, 2015.

Stephen Q. Wood (Mary Anne Q. Wood with him on the briefs) of Wood Balmforth LLC, Salt Lake City, UT, for Third Party Plaintiffs–Appellants.

Stuart H. Schultz of Strong & Hanni, Salt Lake City, UT, for Third Party Defendants–Appellees.

Before TYMKOVICH, GORSUCH, and PHILLIPS, Circuit Judges.

Opinion

GORSUCH, Circuit Judge.

This case has but little to do with bankruptcy. Neither the debtor nor the creditors, not even the bankruptcy trustee, are parties to it. True, the plaintiffs claim they once enjoyed an attorney-client relationship with a former bankruptcy trustee. True, they now allege the former trustee breached professional duties due them because of conflicting obligations he owed the bankruptcy estate. But the plaintiffs seek recovery only under state law and none of their claims will be necessarily resolved in the bankruptcy claims allowance process. And to know that much is to know this case cannot be resolved in bankruptcy court. The bankruptcy court may offer a report and recommendation. It may even decide the dispute if the parties consent. But the parties are entitled by the Constitution to have an Article III judge make the final call. So the district court's ruling otherwise—its decision to send the dispute to an Article I bankruptcy court for final resolution without their consent—violates the Constitution's commands and must be corrected.

Conflicts of interest often spell trouble for lawyers. The rules are complex and missteps happen. And at least as the complaint in this case tells it, a misstep happened here. When Renewable Energy Development Corporation (REDCO) found itself facing Chapter 7 proceedings, the bankruptcy court appointed attorney George Hofmann to serve as trustee for the estate. REDCO was in the wind business and its assets included lease options with private property owners who agreed to allow wind farms on their lands. As trustee, Mr. Hofmann was eager to ascertain the value of REDCO's leases so he consulted another client of his with expertise in the field—Kimberly Ceruti, the owner of Summit Wind Power, LLC. The pair eventually discovered that REDCO had failed to pay some property owners the consideration it owed them. As a result, Mr. Hofmann allegedly concluded that REDCO's options were unenforceable and even encouraged Summit to pursue its own leases with the same individuals. Which it promptly did.

What started off sounding like a good idea and maybe even a win-win for REDCO and Summit soon yielded a rat's nest of conflicts. On further study, Mr. Hofmann came to the view that the property owners couldn't cancel their leases with REDCO in favor of Summit without first giving REDCO a chance to cure its nonpayment. And, in Mr. Hofmann's estimation, the chance to cure was a valuable opportunity for REDCO and its creditors. So he asked Summit to forgo its new leases in favor of REDCO's old ones. Summit refused. Things got so testy that Mr. Hofmann, yes, brought an adversarial proceeding in bankruptcy court against one client (Summit) on behalf of another (the REDCO estate). Unsurprisingly, Summit responded with state law claims against Mr. Hofmann and his law firm, alleging legal malpractice, breaches of fiduciary duties, and a good many other things besides. Mr. Hofmann, by now irredeemably conflicted, was replaced as trustee.

How do these unfortunate but hardly uncommon (and still unproven and only alleged) facts yield a dispute of constitutional magnitude? Summit filed suit in federal court against Mr. Hofmann alleging diversity jurisdiction and the right to have the case resolved in an Article III court. Mr. Hofmann replied that the case belonged in and should be resolved by an Article I bankruptcy court. Ultimately, the district court sided with Mr. Hofmann even as it acknowledged some uncertainty about this much and certified its decision for an immediate appeal.

The Constitution assigns “[t]he judicial Power” to decide cases and controversies to an independent branch of government populated by judges who serve without fixed terms and whose salaries may not be diminished. U.S. Const. art. III, § 1. This constitutional design is all about ensuring “clear heads ... and honest hearts,” the essential ingredients of “good judges.” 1 Works of James Wilson 363 (J. Andrews ed., 1896) (alteration omitted), quoted in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2609, 180 L.Ed.2d 475 (2011). After all, the framers lived in an age when judges had to curry favor with the crown in order to secure their tenure and salary and their decisions not infrequently followed their interests. Indeed, the framers cited this problem as among the leading reasons for their declaration of independence. The Declaration of Independence ¶ 11; Stern, 131 S.Ct. at 2609. And later they crafted Article III as the cure for their complaint, promising there that the federal government will never be allowed to take the people's lives, liberties, or property without a decisionmaker insulated from the pressures other branches may try to bring to bear. Stern, 131 S.Ct. at 2609. To this day, one of the surest proofs any nation enjoys an independent judiciary must be that the government can and does lose in litigation before its “own” courts like anyone else.

Despite the Constitution's general rule, over time the Supreme Court has recognized three “narrow” situations in which persons otherwise entitled to a federal forum may wind up having their dispute resolved by someone other than an Article III judge. Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 64, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (plurality opinion). Cases arising in the territories or the armed forces or those involving “public rights” may be sent to Article I tribunals of Congress's creation even if decisionmakers there do not enjoy the same insulation and independence as Article III judges. Id. at 63–72, 102 S.Ct. 2858. Bankruptcy courts are, of course, legislative creations of just this sort. And because they don't have a thing to do with the territories or armed forces, the Supreme Court has suggested that their lawful charter depends on and is limited by public rights doctrine.

As developed to date, public rights doctrine has something of “a potluck quality” to it. Waldman v. Stone, 698 F.3d 910, 918 (6th Cir.2012) (Kethledge, J.). The original idea appears to have been that certain rights belong to individuals inalienably—things like the rights to life, liberty, and property—and they may not be deprived except by an Article III judge. Meanwhile, additional legal interests may be generated by positive law and belong to the people as a civic community and disputes about their scope and application may be resolved through other means, including legislation or executive decision.See Stern, 131 S.Ct. at 2612 ; Caleb Nelson, Adjudication in the Political Branches, 107 Colum. L.Rev. 559, 566–72 (2007). But the boundary between private and public rights has proven anything but easy to draw and some say it's become only more misshapen in recent years thanks to seesawing battles between competing structuralist and functionalist schools of thought. Compare, e.g., Northern Pipeline, 458 U.S. 50, 102 S.Ct. 2858, and Stern, 131 S.Ct. 2594, with Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986), and Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015). Indeed, the Court itself has acknowledged, its treatment of the doctrine “has not been entirely consistent.” Stern, 131 S.Ct. at 2611 ; see also S. Elizabeth Gibson, Jury Trials and Core Proceedings: The Bankruptcy Judge's Uncertain Authority, 65 Am. Bankr. L.J. 143, 168–175 (1991) (“How a majority of the Court could have embraced these opposing views of article III within the span of less than a decade is difficult to understand,” id. at 174 ).

Bankruptcy courts bear the misfortune of possessing ideal terrain for testing the limits of public rights doctrine and they have provided the site for many such battles. See Northern Pipeline, 458 U.S. 50, 102 S.Ct. 2858 ; Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) ; Stern, 131 S.Ct. 2594. Even today, it's pretty hard to say what the upshot is. Through it all, the Supreme Court has suggested that certain aspects of the bankruptcy process may implicate public rights and thus lawfully find resolution in Article I courts. See, e.g., Northern Pipeline, 458 U.S. at 71, 102 S.Ct. 2858 (plurality opinion); Granfinanciera, 492 U.S. at 56 n. 11, 109 S.Ct. 2782 ; Stern, 131 S.Ct. at 2614 n. 7. But the Court has also emphasized time and again that not every “proceeding [that] may have some bearing on a bankruptcy case” implicates a public right amenable to resolution in an Article I tribunal. Stern, 131 S.Ct. at 2618.

That much, of course, hardly decides cases. What most everyone wants to know is which aspects of typical bankruptcy proceedings do and don't implicate public rights. Yet even Stern, perhaps the Court's most comprehensive tangle with the question, offered no comprehensive rule for application across all cases. Instead, it invoked...