Rodriguez v. Four Dominion Drive, LLC (In re Boyd), BANKR. CASE No. 11-51797
| Decision Date | 22 October 2012 |
| Docket Number | ADV. No. 12-05107,BANKR. CASE No. 11-51797 |
| Parties | In re STEPHEN W. BOYD Debtor JOSE C. RODRIGUEZ, TRUSTEE Plaintiff, v. FOUR DOMINION DRIVE, LLC Defendant. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas |
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LEIF M. CLARK
UNITED STATES BANKRUPTCY JUDGE
MEMORANDUM DECISION DENYING MOTION TO DISMISS IN PART AND GRANTINGMOTION TO DISMISS IN PART
The Defendant, Four Dominion Drive, LLC ("FDD"), seeks to dismiss this adversary complaint pursuant to Rules 12(b)(1) & 12(b)(6) of the Federal Rules of Civil Procedure and Rule 7012 of the Federal Rules of Bankruptcy. The Complaint, filed on August 10, 2012, objects to the Claim of FDD andseeks to avoid and/or void the assignment of debt from The Law Office of Stephen W. Boyd & Associates, PLLC ("the Law Firm") to FDD.
The underlying relevant alleged facts are as follows:
The Debtor, Stephen W. Boyd ("Boyd) filed for chapter 7 on May 24, 2011. The Law Office of Stephen W. Boyd & Associates, PLLC ("the Law Firm") is entirely owned and operated by Boyd, but has not filed for bankruptcy protection.
Much of this case revolves around the actions Boyd allegedly took to divert funds from Elbee Investments, Inc. ("Elbee") and Leo Block to a variety of Boyd's personal accounts or into companies Boyd owned or operated, such as Medlaw Services LLC and the Law Firm. Worth noting are several transactions which pertain to the relationship between Boyd and the Law Firm. Boyd is accused of authorizing Elbee to extend a two million dollar line of credit to Medlaw, which was then used to finance unrelated cases being handled by the Law Firm. There are also allegations of funneling money directly from Elbee to Medlaw and to the Law firm. The Trustee's complaint also alleged a heavy comingling of funds between Boyd and the Law Firm, with Boyd writing checks from the Law Firm to his ex-wife, to personal bank accounts, to personal bankruptcy lawyers, and and to his current wife, all for apparently personal expenses.
Elbee and Erma Block, acting as the independent executrix for the estate of Leo L. Block ("Block") sued Boyd, and Medlaw Services, LLC, in state court for breach of fiduciary duty, conspiracy, fraud, conversion, disgorgement, and exemplary damages. Eventually, after removal, remands, and a mistrial, a jury returned a verdict against Boyd for fraud, breach of fiduciary duty as an attorney, breach of fiduciary duty as a corporate director, fraud in a real estate or stock transaction, and misapplication of fiduciary property. The verdict resulted in a judgment in excess of 9.4 million dollars in July 2012.
Since April 6, 2009, FDD (the defendant in this case) had leased office space to the Law Firm for $9,500 a month. Boyd had guaranteed this lease obligation. The Law Firm was behind on its rent. On February 3, 2011, just nine days after trial had commenced in state court against Boyd, the Law Firm (acting through Boyd) assigned to FDD an interest in a contingent fee arising from the Law Firm's representation of the plaintiff in American Medical Associations v. United Health Care (Cause No. 00-CV-2800 in the United States District Court for the Southern District of Texas.) The assignment was "in an amount equal to the unpaid rent along with late fees and/or interest [that might be due] as of the date the Assignor receives his fee from the settlement proceeds of the case." The Law Firm was, by this assignment, permitted to stay in the office space until the United Health Care case concluded.
Following Boyd's bankruptcy, FDD filed a proof of claim for $866,221.28, subsequently reduced following re-letting and mitigation to $456,307.20. Following the settlement of the American Medical Associations v. United Health Care lawsuit, the Law Firm was slated to receive $400,772.64 in fees. FDD claimed entitlement to these fees per the aforementioned assignment two months following the bankruptcy filing. On August 10, 2012, the Chapter 7 Trustee filed this adversary proceeding for declaratory relief and to void the assignment as a fraudulent transfer. The Trustee also claimed that the fee should be turned over as property of the Boyd bankruptcy estate. Concurrently, the Trustee filed a sister adversary proceeding seeking substantive consolidation of the Law Firm (which is not in bankruptcy) with the Boyd estate. The Trustee there argues that the assignment of the contingent fee was part of a larger attempt by Boyd to move money otherwise fraudulently obtained beyond the reach of his creditors. The Trustee also points out that the contingent fee was the Law Firm's last asset, so that the assignment of the fee rendered the Law Firm insolvent.
FDD asserts a number of arguments in support of dismissal.
FDD first maintains that the bankruptcy court lacks the judicial authority to hear this dispute, such that the action against FDD should be dismissed under Rule 12(b)(1) (lack of jurisdiction). FDD argues that the claims asserted are non-core under 28 U.S.C. § 157(b)(3) and that the Supreme Court's decision in Stern v. Marshall limits this court's authority to hear such claims, as they "concern FDD's rights and related obligations owned by the non-debtor Law Firm, and assets of the non-debtor Law Firm, not part of the Boyd bankruptcy estate." This argument appears to be an assertion that the court lacks subject matter jurisdiction to hear the dispute, in addition to lacking the judicial power to adjudicate the dispute.
Second, FDD argues the case should be dismissed for lack of standing because the contingent fee was the sole property of the Law Firm (not Boyd or the bankruptcy estate), and as a non-debtor, it was free to assign its property to anyone without concern regarding potential liability to creditors of Boyd. Even if Boyd's creditors would have standing to bring the action against the Law Firm and its assignee, FDD, that way should be barred because those creditors have already received a final judgment and they failed to alleged a fraudulent transfer claim in their state court proceedings. Further, because the Trustee previously acquiesced to the bankruptcy court's lift of stay to allow the commencement of the state court trial, the Trustee's standing should be held to be foreclosed.
Third, FDD asserts the Trustee's claims must be dismissed for failure to state a claim upon which relief may be granted because the assignment occurred on February 3, 2011, more than 90 days outside of Boyd's Chapter 7 filing date, May 24, 2011 (i.e., outside the preference lookback period). Further, theassignment transferred only nominal "value" as of the date of the transfer, because no one could know of a certainty that the underlying contingent fee would actually be worth anything at that point. The value that the fee had when the lawsuit settled cannot be attributed back in time. Finally, the transfer is not avoidable, says FDD, because it provided new value in the form of future rent and the right of the law firm to occupy premises after the date of the Assignment.
Fourth, FDD maintains the Trustee has an irreconcilable conflict barring the right to assert a claim on behalf of the Boyd estate against FDD, as the Trustee has possession and control over the stock or membership interest in the Law Firm. Thus , it is alleged that the Trustee owes duties and responsibilities to the creditors of the Law Firm that would be violated were the Trustee to continue to pursue its claim to the fee from the settled lawsuit, without satisfying the claims of creditors of the Law Firm first.
Finally, FDD alleges the Trustee's claims are barred under the principle of in pari delicto, as the Trustee may not bring a case standing in Boyd's shoes, when Boyd was the initiating facilitator of the alleged wrongful acts and the perpetrator of wrongful conduct as alleged within the Complaint. The Trustee stands in the shoes of the debtor, who would himself be barred by this equitable doctrine were he to initiate this action in his own name outside of bankruptcy.
In the alternative, FDD asserts the Complaint is vague and ambiguous and moves for a more definite statement.
Bankruptcy jurisdiction "is grounded in, and limited by, statute." Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995); In re Wilborn, 609 F.3d 748 (5th Cir. 2010). Federal district courts "have original jurisdiction but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). There are thus three types of bankruptcy jurisdiction: "arising under," "arising in," and "related to" jurisdiction. See Stern v. Marshall, 131 S. Ct. 2594, 2620, 180 L.Ed.2d 475 (2011). "Arising under" jurisdiction encompasses claims created by Title 11, such as an avoidance claim under 11 U.S.C. § 544(b). See, e.g., Carlton v. BAWW, Inc., 751 F.2d 781 (5th Cir. 1985). "Arising in" jurisdiction pertains to matters that could only arise in a case under Title 11. In re Wilborn, 609 F.3d 748, 752 (5th Cir. 2010). "Related to" jurisdiction exists when "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." In reWood, 825 F.2d 90, 93 (5th Cir. 1987) (citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)).1 Section 157(a) of title 28 permits a district court to refer "any and all proceedings arising under title 11 or arising in or related to a case under title 11" to the bankruptcy judges within the district. Section 157(a) distinguishes core and non-core cases, providing that bankruptcy courts may 'hear and determine' core cases, but noting that bankruptcy courts may only submit findings of fact and conclusions of law to the district court in non-core cases. See 28 U.S.C. § 157(b), (c).
FDD asserts that the Supreme Court's decision in Stern...
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