Reed v. Linehan (In re Soporex, Inc.)

• Citation: 463 B.R. 344
• Decision Date: 28 November 2011
• Docket Number: Adversary No. 11–3306–BJH.,Bankruptcy No. 08–34174–BJH–7.
• Parties: In re SOPOREX, INC., et al., Debtor.Diane G. Reed, as Chapter 7 Trustee of Soporex, Inc., Soporex Respiratory, Inc., d/b/a Independence Home Pharmacy, Soporex Respiratory II, Inc., d/b/a Independence Home Pharmacy II, and Winmar Diagnostics North Central, Inc., Plaintiff, v. Stephen D. Linehan, Richard J. Sabolik, Scott D. Smith, John Dudinsky, Jr., Ronald G. Geary, Thomas Hansen, Mickey Letson, and Doyle Privett, Defendants.
• Court: United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Northern District of Texas

463 B.R. 344

In re SOPOREX, INC., et al., Debtor.Diane G. Reed, as Chapter 7 Trustee of Soporex, Inc., Soporex Respiratory, Inc., d/b/a Independence Home Pharmacy, Soporex Respiratory II, Inc., d/b/a Independence Home Pharmacy II, and Winmar Diagnostics North Central, Inc., Plaintiff,
v.
Stephen D. Linehan, Richard J. Sabolik, Scott D. Smith, John Dudinsky, Jr., Ronald G. Geary, Thomas Hansen, Mickey Letson, and Doyle Privett, Defendants.

Bankruptcy No. 08–34174–BJH–7.

Adversary No. 11–3306–BJH.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Nov. 28, 2011.

[463 B.R. 360]

David W. Elmquist, Reed & Elmquist, P.C., Waxahachie, TX, for Plaintiff.

Ann Wrege Ferebee, Thomas Samuel Richey, Bryan Cave, L.L.P., Atlanta, GA, Keith Miles Aurzada, Bryan Cave, Jeffrey R. Seckel, McGuire, Craddock & Strother, P.C., Hirtzan Joseph Acosta, Micheal Wayne Bishop, Scott B. Aston, Looper Reed & McGraw P.C., Dallas, TX, for Defendants.PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW BARBARA J. HOUSER, Bankruptcy Judge.

Before the Court are several motions to dismiss the second amended complaint (the “Complaint”) filed by Diane G. Reed as chapter 7 trustee (the “Trustee”) of the estates of four related chapter 7 debtors (the “Debtors”). The Debtors, together with other affiliates, filed voluntary petitions for relief under chapter 7 on August 22, 2008. The four debtors on whose behalf the Trustee filed the Complaint are Soporex, Inc. (“Inc.”), Soporex Respiratory, Inc. (“SRI”), Soporex Respiratory II, Inc. (“SRI 2”), and Winmar Diagnostics North Central, Inc. (“Winmar”).¹ They are collectively defined in the Complaint as the “Soporex Debtors,” and the latter three are further defined as the “Operating Subsidiaries.” The defendants are eight individuals (collectively, the “Defendants”), each of whom held various director and/or officer positions with one of the Soporex Debtors. Stephen D. Linehan (“Linehan”), Richard J. Sabolik (“Sabolik”), and Scott D. Smith (“Smith”) (collectively, the “Officers”) were officers of Inc. during the times relevant to the allegations in the Complaint; Linehan was also chairman of Inc.'s board of directors (the “Board”). John Dudinsky, Jr. (“Dudinsky”), Ronald G. Geary (“Geary”), Thomas Hansen (“Hansen”), Mickey Letson (“Letson”) and Doyle Privett (“Privett”) (collectively, the “Outside Directors”) were not officers of any of the Soporex Debtors, but served on the Board.

I. PROCEDURAL BACKGROUND

In very broad brush, the Complaint alleges the following claims: Count 1, against only Linehan, alleges breaches of the fiduciary duties of loyalty and due care. Count 2 alleges that same claim against Sabolik. Count 3, against Smith and Sabolik, alleges a claim for corporate waste. Count 4, against the Outside Directors, alleges breaches of the duties of loyalty and due care. Count 5 alleges that same claim against Letson. Count 6 constitutes

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an objection to proofs of claim filed in the Inc. case by Sabolik and Smith, which proofs of claim assert amounts allegedly owed for unpaid compensation for services rendered or unpaid benefits. Count 7 asserts that the Trustee is entitled to an award of attorneys' fees, expenses, and costs incurred by the Trustee in the prosecution of this adversary proceeding “to the extent allowed by applicable law.” Compl., ¶ 216.

Four of the Outside Directors have filed a motion to dismiss Count 4, which is the only claim asserted against them.² The fifth outside director, Letson, is separately represented and has filed his own motion to dismiss the Complaint, directed to Counts 4 and 5, which are the two claims asserted against him. Letson also joins in the motion filed by the other Outside Directors as to Count 4, and further asserts as to Count 4 that the Trustee, who specifically excludes Letson from some of the factual allegations in support of Count 4, fails to exclude Letson from other factual allegations, some of which complain of acts or omissions that occurred after Letson resigned his position on the Board, and Count 4 should be dismissed as against Letson for this additional reason. The Officers have filed a motion to dismiss as to Count 1 against Linehan, Count 2 against Sabolik, and Count 3 against Sabolik and Smith. These three motions to dismiss will be collectively referred to herein as the “Motions.”

Each of the Motions is asserted under Fed.R.Civ.P. 12(b)(6), made applicable here by Fed. R. Bankr.P. 7012. All of the Defendants contend that the Complaint fails to state a claim upon which relief can be granted with regard to the Counts 1–5.³

II. LEGAL ANALYSISA. Threshold Issue of Authority to Finally Determine the Trustee's Claims.

Although no party has raised an issue with respect to this Court's ability to hear

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and finally determine the claims asserted by the Trustee in the Complaint, and in fact the Trustee alleges that all of her claims against the Defendants are “core” claims, in light of the Supreme Court's recent decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this Court must consider whether it has the constitutional authority to finally determine the Trustee's claims as an Article I tribunal. A brief discussion of Stern is necessary.

Stern concerned a bankruptcy court's authority to hear and finally determine a debtor's common-law counterclaim to a proof of claim filed against the bankruptcy estate. The Supreme Court held that a bankruptcy court, as an Article I tribunal, may not constitutionally enter a final judgment over a debtor's counterclaim that would not necessarily be resolved by the resolution of the debtor's objection to the claimant's proof of claim.⁴ Id. at 2618. According to the Supreme Court, although “public rights” disputes may be decided by non- Article III tribunals, public rights disputes must involve rights “integrally related to a particular federal government action.” Id. at 2613. The debtor's counterclaim in Stern did not constitute a “public rights” dispute. Id. at 2614. Thus, according to the Supreme Court, entering a final judgment with respect to the debtor's counterclaim, which would not have been decided by the allowance of the claimant's proof of claim, would be an impermissible exercise of the judicial power of the United States by a non- Article III tribunal. Id. at 2615. This was so notwithstanding the fact that (i) the relevant statute— 28 U.S.C. § 157(b)(1)—expressly authorized the bankruptcy judge to “hear and determine ... all core proceedings ... arising in a case under title 11,” that were referred to it by the district court under 28 U.S.C. § 157(a), and (ii) “counterclaims by the estate against persons filing claims against the estate” are expressly defined to be a “core proceeding.” 28 U.S.C. § 157(b)(2)(C). While Chief Justice Roberts stated in his majority opinion that the Stern holding was quite narrow and would have a limited practical impact,⁵ many lower courts and commentators

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are struggling to understand its broader implications, if any. See, e.g., Jonathan Azoff and Thomas Szaniawski, Stern v. Marshall and the Limits of Consent, 30 Am. Bankr. L. J. 28 (2011); Ralph Brubaker, Article III's Bleak House (Part II): The Constitutional Limits of Bankruptcy Judges' Core Jurisdiction, 31 No. 9 Bankr. L. Letter 1 (2011); In re Extended Stay, Inc., No. 09–13764–JMP, 2011 WL 5532258 (S.D.N.Y. Nov. 10, 2011); In re Davis, No. 05–15794–GWE, 2011 WL 5429095 (Bankr.W.D.Tenn. Oct. 5, 2011); In re Teleservices Group, Inc., 456 B.R. 318 (Bankr.W.D.Mich.2011).

As relevant here and as noted previously, two of the Defendants— i.e., Sabolik and Smith, filed proofs of claim in the Inc. case for amounts allegedly owed to them for unpaid compensation and benefits. Count 6 of the Complaint is the Trustee's objection to those proofs of claim. However, the Trustee is also asserting affirmative state law claims against them and is seeking to recover significant monetary damages from them. Specifically, and as noted previously, Count 2 of the Complaint contains a claim against Sabolik for breach of the fiduciary duties of due care and loyalty, while Count 3, against Smith and Sabolik, alleges a claim for corporate waste. In deciding whether Smith and Sabolik are owed unpaid compensation and benefits by Inc. as asserted in their proofs of claim, this Court will not be called upon to decide the Trustee's state law claims against them as pled in Counts 2 and 3. Thus, at least with respect to the Trustee's claims against Smith and Sabolik, Stern is directly implicated and, according to the Supreme Court, this Court lacks constitutional authority to finally determine the Count 2 and 3 claims as pled in the Complaint.

So, the question becomes, if this Court lacks constitutional authority to determine the Trustee's counterclaims against Smith and Sabolik,⁶ what, if anything, can this Court do with respect to the Count 2 and 3 claims? The starting point in answering this question must be the statute itself. Of course, and as noted previously, Congress expressly provided in 28 U.S.C. § 157(a) that bankruptcy courts could hear and finally determine all core proceedings and then Congress statutorily defined as core proceedings “counterclaims by the estate against persons filing claims against the estate.” The Stern court found this statutory grant of authority unconstitutional. Congress also expressly provided in 28 U.S.C. § 157(c)(1) that bankruptcy courts could “hear a proceeding that is not a core proceeding but that is otherwise related to ⁷ a case under title 11,” and thereafter submit “proposed findings of fact and conclusions of law to the district court,” which would then enter any final order or judgment “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.” Finally, Congress expressly provided in 28 U.S.C. § 157(c)...