Waleski v. Montgomery, Mccracken, Walker & Rhoads, LLP (In re Tronox)

• Decision Date: 18 July 2019
• Docket Number: Adv. Pro. No. 19-1087 (MEW),Case No. 09-10156 (MEW)
• Citation: 603 B.R. 712
• Parties: IN RE: TRONOX, et al. Debtors. Stanley Waleski, on his own behalf and on behalf of others similarly situated, Plaintiff, v. Montgomery, McCracken, Walker & Rhoads, LLP; Natalie D. Ramsey ; and Leonard A. Busby, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

603 B.R. 712

IN RE: TRONOX, et al. Debtors.Stanley Waleski, on his own behalf and on behalf of others similarly situated, Plaintiff,

v.Montgomery, McCracken, Walker & Rhoads, LLP; Natalie D. Ramsey ; and Leonard A. Busby, Defendants.

Case No. 09-10156 (MEW)

Adv. Pro. No. 19-1087 (MEW)

United States Bankruptcy Court, S.D. New York.

Signed July 18, 2019

OTTERBOURG, P.C., New York, NY, Attorneys for Plaintiff, By: Richard C. Haddad, Esq., Melanie L. Cyganowski, Esq., Gabriela S. Leon, Esq.

THOMPSON HINE, LLP, New York, NY, Attorneys for Defendants, By: Barry M. Kazan, Esq., Robert P. Johnson, Esq.

MEMORANDUM DECISION DENYING PLAINTIFFS' MOTION FOR REMAND OR ABSTENTION

MICHAEL E. WILES, UNITED STATES BANKRUPTCY JUDGE

Before the Court is the motion (the "Remand Motion ") of the plaintiff Stanley Waleski to remand this legal malpractice proceeding to the Court of Common Pleas in Luzerne County, Pennsylvania, which is where the action originally was filed. Waleski asks, in the alternative, that this Court abstain from hearing his claims. The Remand Motion is opposed by defendants Montgomery, McCracken, Walker & Rhoades, LLP (the "Montgomery Firm "), Leonard A. Busby (a current partner of the Montgomery Firm), and Natalie D. Ramsey (a former partner of the Montgomery Firm).

Mr. Waleski alleges that during the bankruptcy cases of Tronox Incorporated and its affiliates the defendants committed legal malpractice in their representation of Mr. Waleski and a class of other persons who had been exposed to chemicals (primarily creosote) emitted from a plant located in Avoca, Pennsylvania (the "Avoca Plaintiffs "). Most of the claims are based on allegations that the defendants should have ensured that the Avoca Plaintiffs' recoveries in the bankruptcy case were not diluted by the allowance of claims filed on behalf of persons who alleged injuries based on creosote emissions from a different Tronox-related plant located in Mississippi. Mr. Waleski also alleges that the defendants should have objected to the settlement of a fraudulent transfer claim, the proceeds of which were used to fund payments to tort victims.

The action filed by Mr. Waleski was removed to federal court and was later transferred to this Court. Mr. Waleski now contends that this Court lacks subject matter jurisdiction over this proceeding. I disagree. The alleged wrongs committed by the defendants involved the performance of bankruptcy-specific tasks and the assertion of bankruptcy-specific objections and rights, and the dispute between the parties did not exist – and could not have existed – outside of the context of the Tronox bankruptcy cases. The dispute also implicates the integrity of the bankruptcy process and in certain respects requires the interpretation of prior orders and rulings of this Court. I therefore find that I have subject matter jurisdiction. I also decline to abstain from hearing Mr. Waleski's claims.

Background

On April 11, 2018, Waleski filed his complaint in the Court of Common Pleas of Luzerne County, Pennsylvania. The following facts are taken from the complaint and are assumed true only for purposes of the motion that is before the Court.

A. The Avoca Plaintiffs' Claims and the Montgomery Firm's Services

The plaintiff, Stanley Waleski, is a resident of Pennsylvania who resides in Luzerne County. He filed this action on behalf of himself and a class of Avoca Plaintiffs that is alleged to have approximately 4,300 members. The Montgomery Firm is a Pennsylvania limited liability partnership, and the individual defendants are citizens of Pennsylvania.

In January 2005, the Avoca Plaintiffs began initiating lawsuits in the Court of Common Pleas in Luzerne County, through attorneys they hired for the state-court litigation. In January 2009, however – before the claims in the Pennsylvania actions were adjudicated – Tronox and various affiliated companies filed voluntary chapter 11 petitions. The Pennsylvania cases were automatically stayed by the bankruptcy filings.

The Avoca Plaintiffs' state-court attorneys retained the Montgomery Firm in January 2009 to represent the interests of the Avoca Plaintiffs in the Tronox bankruptcy case. The terms of the retention were memorialized in a contingent fee agreement. The agreement provided that the Montgomery Firm would "represent the interests of the [Avoca Plaintiffs] in the bankruptcy proceedings of Tronox, Incorporated, and all related entities, now pending in the United States Bankruptcy Court for the Southern District of New York, Case No. 09-10156." See Compl. ¶ 27. According to the plaintiff, one of the particular tasks entrusted to the Montgomery Firm was "to take steps to protect against any intrusion" from "potential claims from property owners in Mississippi who were represented by an aggressive lawyer from that state." See id . ¶ 41.

Sometime later, the Montgomery Firm also undertook to represent Michael E. Carroll, one of the Avoca Plaintiffs who served as a member of the official creditors' committee. The complaint alleges that in the course of that representation, while "[a]cting in [their] official capacity as bankruptcy court-approved counsel for [ ] Carroll," the defendants "took responsibility for drafting trust documents." See id. ¶ 53. The purpose of the trust was to compensate victims of exposure to various contaminants and to satisfy various environmental liabilities. The trust documents established separate sub-funds for various types of claims and contemplated that the assets in each sub-fund would be distributed pro rata to the claimants who held the designated types of claims. More particularly:

• Fund A was established for the benefit of Allowed Asbestos Claims, Allowed Future Tort Claims, and Allowed Unaccounted-for Tort Claims;

• Fund B was established for the benefit of Allowed Indirect Environmental Claims;

• Fund C was established for the benefit of Allowed Property Damage Claims; and

• Fund D was established for the benefit of Allowed Non-Asbestos Toxic Exposure Claims.

The Avoca Plaintiffs, as victims of creosote exposure, held claims that fell into category D.

The trust documents also included Trust Distribution Procedures that outlined the process by which claims could be made against the trust and the ways in which allowed claim amounts would be calculated. See generally Ex. D, Form of the Tort Claims Trust Distribution Procedures, Plan Supplement [Dkt. 2343] at 63. The trust documents, including the Trust Distribution Procedures, were incorporated into the confirmed plan of reorganization (the "Plan ") in the Tronox cases and were approved by Judge Gropper of this Court in November 2011. See Confirmation Order [Dkt. No. 2567] ¶ 85. Both the Plan and the Confirmation Order provided that this Court retained jurisdiction over all matters arising out of the Tronox bankruptcy case, including the jurisdiction to "hear and determine disputes arising in connection with the interpretation, implementation or enforcement of the Plan or the Confirmation Order, including disputes arising under agreements, documents or instruments executed in connection with the Plan." Plan, Article XI; see also Confirmation Order ¶ 159.

The complaint alleges that the defendants sought to charge the Tronox estate for the services they provided in connection with the drafting of the trust documents and the Trust Distribution Procedures. See Compl. ¶ 54. The confirmed Plan explicitly acknowledged the role of both Carroll and the Defendants in the case and approved an award of compensation in the amount of $200,000. Subparagraph E of Article XII of the Plan noted the following:

Tronox recognizes that Creditors' Committee member Michael E. Carroll contributed substantially to the formulation and development of the Plan and in connection with the support of Holders of Tort Claims for the Plan. Accordingly, Tronox agrees that, on the Effective Date, subject to supporting documentation being provided to counsel to each of Tronox, the Backstop Parties and the Creditors' Committee, Tronox shall pay all reasonable fees and expenses of Mr. Carroll's counsel, Montgomery, McCracken, Walker & Rhoads, LLP, for services rendered and to be rendered in connection therewith up to a maximum of $200,000.

Plan, Art. XII (E); see also Confirmation Order [Dkt. No. 2567] ¶ 145.

B. Subsequent Events

The defendants purported to end their representation of the Avoca Plaintiffs shortly after the confirmation of the Plan, though the complaint alleges that the Avoca Plaintiffs and their state-court attorneys did not consent to that termination. See Compl. ¶ 57. At that time, there were strong doubts as to whether there would be significant distributions from the trust to tort claimants. This is because the trust was to be funded mainly by a share of proceeds from a pending fraudulent transfer litigation, and that litigation had not yet been resolved.

A few years later, the fate of the trust – and that of the tort claimants – significantly brightened. In November 2014, the District Court approved a settlement payment of $5.15 billion into the Tronox estate. That settlement followed a lengthy trial of certain fraudulent transfer claims in the Bankruptcy Court. See Tronox Inc. v. Kerr-McGee (In re Tronox Inc.) , 503 B.R. 239, 248–49 (Bankr. S.D.N.Y. 2013). The confirmed Plan provided that 12% of the litigation proceeds would be allocated to the tort victim trust, and so the trust received approximately $599 million of the settlement proceeds. Most of the trust assets (84.53%) ultimately were allocated to Fund D for the benefit of holders of Allowed Non-Asbestos Toxic Exposure Claims.

One term of the settlement of the fraudulent transfer claims was a requirement that the District Court issue a permanent injunction that would bar tort claimants from asserting claims against Tronox-related entities (the "Injunction "), thereby effectively requiring them to look to the trust for compensation. See Tronox Inc. v. Anadarko Petroleum Corp. (In...