The Cadle Company v. Moore (In the Matter of Moore)

Summarized by Ryan Richmond , Sternberg, Naccari & White, LLC
12 years 1 month ago

Citation:

No. 13-10325, 2014 U.S. App. LEXIS 470 (5th Cir. Jan. 9, 2014)

Tag(s):

Ruling:

The Fifth Circuit reversed the District Court, vacated the order of dismissal and remanded to the Bankruptcy Court because the evidence was insufficient to warrant dismissal for abuse of judicial process. The Fifth Circuit reasoned that neither imputed bad faith nor suspicion alone justifies invocation of inherent powers. Thus, the defendants did not establish bad faith or willful misconduct to justify dismissal by clear and convincing evidence. However, the Fifth Circuit refused to reverse the lower courts on two other grounds. First, the Fifth Circuit held that the Bankruptcy Court did not lack constitutional authority to enter a final judgment in an avoidance action that involved state-law theories of fraudulent conveyance, constructive trust and reverse veil piercing. Second, mandatory abstention was improper because (i) the first suggestion of abstention was made some five years after the suggesting party removed the avoidance action to the Bankruptcy Court, (ii) the suggesting party had represented that the avoidance action was a "core" proceeding when the action was removed, and (iii) the change in the claims' ownership has no bearing on the proceeding's "core" status (i.e., claims remain "core" even after the trustee sells claims to a creditor).

Procedural context:

Appeal from the United States Bankruptcy Court for the Northern District of Texas dismissing an adversary proceeding based upon the Court's inherent power to sanction for abuse of process. Dismissal had been affirmed by the United States District Court for the Northern District of Texas.

Facts:

The Cadle Company (Cadle) was the largest creditor of the estate of James Moore (Moore). Pre-bankruptcy, Cadle sued Moore, his spouse, Brunswick Homes and JHM Properties in Texas state court, asserting state-law theories of fraudulent conveyance, constructive trust and reverse veil piercing. Bell Nunnally & Martin (BNM) represented Cadle in state court. After Moore filed for bankruptcy, Cadle removed the action to the Bankruptcy Court and allowed the Trustee to prosecute the avoidance action. The Trustee engaged BNM to serve as special counsel. BNM agreed to represent the Trustee on a contingency basis. Yet soon thereafter, in November 2006, BNM sent a letter to Cadle confirming that Cadle would pay BNM's fees for representing the Trustee. This fee arrangement was apparently not disclosed to the Trustee. At the same time, BNM began representing Cadle in an objection to Moore's discharge under section 727. Toward the end of the objection to discharge, BNM moved to withdraw as the Trustee's special counsel in the avoidance action. BNM claimed Cadle had refused to pay for an expert forensic accountant. The Bankruptcy Court denied BNM's motion, but was concerned about BNM's representation of both the Trustee and Cadle. Six months later, the Trustee announced a settlement of the avoidance action. The defendants agreed to pay the estate $37,500. However, Cadle (now represented by a non-BNM attorney) objected, claiming it would pay $50,000 for the avoidance action. At this time, the Trustee and Cadle became adverse. The Trustee also claimed to be "shocked" that Cadle had paid BNM some $60,000 to this point. The Bankruptcy Court approved the settlement over Cadle's objection. While the District Court affirmed, the Fifth Circuit reversed because the Bankruptcy Court had not considered Cadle's offer to purchase the avoidance action. On remand, Cadle purchased the avoidance action at auction for $41,500. At the sale order hearing, the Bankruptcy Court renewed its concerns of BNM's representations. The Bankruptcy Court approved the sale to Cadle, but ordered a separate hearing to address the apparent conflict of interest. At a subsequent hearing, a Cadle employee testified that Cadle had paid BNM's for one year after the Trustee and Cadle became adverse. Cadle stopped payments to BNM in February 2009. Thereafter, Moore and Brunswick moved to dismiss on the grounds of abuse of judicial process. They also alleged that BNM might have taken a "dive" by allowing a first-year associate to argue on the Trustee's behalf at oral argument in the settlement appeal. After a three-day evidentiary hearing, the Bankruptcy Court dismissed the avoidance action based on its inherent power to sanction a party for abuse of judicial process. The District Court affirmed. The Fifth Circuit first dealt with the "Stern" and abstention arguments. The Fifth Circuit held that the Bankruptcy Court had constitutional authority to enter a final judgment in the avoidance action. The Fifth Circuit reasoned that Cadle's state-law claims would necessarily involve the claims allowance process. The Fifth Circuit observed that Cadle was a creditor, who had filed a proof of claim for debts owed by the debtor, and resolving Cadle's state-law claims was necessary to adjudicating its proof of claim. The Fifth Circuit reasoned that such claims by creditors against debtors are the very reason the claims allowance process exists. Thus, while Cadle's claims rested on Texas state law and were originally brought in state court, the Bankruptcy Court had constitutional authority under Stern because the Bankruptcy Code governed the avoidance action. The Fifth Circuit then dealt with Cadle's mandatory abstention argument. The Fifth Circuit observed that Cadle was the party who had removed the avoidance action from state court and that Cadle did not suggest mandatory abstention was appropriate until some five years had passed since removal. Moreover, the Fifth Circuit concluded that the sale of the claims from the Trustee to Cadle did not render the claims non-core. Thus, mandatory abstention was not warranted. Lastly, the Fifth Circuit addressed the issue of dismissal for abuse of judicial process. According to the Fifth Circuit, the record was insufficient to establish abuse of judicial process by clear and convincing evidence. The Fifth Circuit noted that BNM's conduct, while warranting scrutiny, was not alone clear and convincing of Cadle's bad faith or willful misconduct - either before or after Cadle became adverse to the Trustee. According to the Fifth Circuit, Cadle's employees testified candidly about fee payments to BNM. Moreover, Cadle's refusal to pay for an expert forensic accountant suggested a disagreement regarding litigation strategy and expense allocation - not clear and convincing evidence of bad faith. The Fifth Circuit also concluded that even after Cadle and the Trustee became adverse on the settlement issue and Cadle continued to pay BNM there was no evidence that Cadle unduly influenced BNM or reaped any benefits. In fact, the Fifth Circuit observed that Cadle lost on the settlement issue at the District and Bankruptcy Courts. Moreover, the first-year associate's performance did not suggest any sabotage of the settlement issue. Rather, Moore and Brunswick had claimed that oral argument was unnecessary.

Judge(s):

Hon. Emilio M. Garza, Hon. W. Eugene Davis and Hon. James L. Dennis

ABI Membership is required to access the full summary. Please Sign In using your ABI Member credentials. Not a Member yet? Join ABI now - it is absolutely worth it!