R. Galaz v. L. Galaz (In the Matter of L. Galaz)

Case No. 13-50781 c/w 13-50783 (5th Cir. August 25, 2014)
VACATED and REMANDED by 5th Circuit. Subject matter jurisdiction is reviewed de novo. Held that Debtor's claim was indeed "related to" the bankruptcy case because it could increase the estate but the bankruptcy court did not have the constitutional authority to enter a final judgment. In non-core proceedings, bankruptcy courts should submit findings of fact and conclusions of law to district courts or enter judgment with the parties' consent. However, when a debtor pleads a state law claim as an action that augments the estate but not necessarily resolved in the claims allowance process, the bankruptcy court is constitutionally prohibited from entering final judgment. Instead the bankruptcy court's judgment was vacated and remanded for de novo review of its decision as recommended findings and conclusions. As for the third party's judgment on his counterclaim, the bankruptcy court erred because his claims are not "related to" the bankruptcy case and will have no effect on Debtor's estate and therefore, no subject matter jurisdiction exists and the judgment must be vacated.
Procedural context:
Debtor was awarded $500,000 in adversary trial against her ex-husband and a company he and his father set up for fraudulent transfer of her economic interest in a company that owned rights to Ohio Players' music catalog. Unrelated third party awarded $1,000,000 on counterclaim against ex-husband and company for fraudulent transfer of his interest also. District court affirmed judgment in both case and ex-husband and company appealed challenging bankruptcy courts' jurisdiction to enter judgment to 5th Circuit. Issue was jurisdiction to entertain Debtor and third party's claims and the district court's role in reviewing bankruptcy court's determinations.
In her pre-bankruptcy divorce, Debtor Lisa Galaz received a 25% economic interest in ARF which owned the rights to the Ohio Players' music catalog. She filed for Chapter 13 and brought suit against her ex-husband for his post-divorce fraudulent transfer of Debtor's 25% economic interest in ARF. Debtor's ex-husband also transferred the rights of Julian, the other member in ARF to an unincorporated entity that later was incorporated by the ex-husband and his father into Segundo Suenos LLC. Segundo Suenos made gross revenue of over $1,000,000. Debtor Galaz sought recovery in the adversary because her claim, if successful, would increase the size of her bankruptcy estate and was related to the bankruptcy case. Defendants filed suit against the other member of ARF and he (Julian) counterclaimed for breach of fiduciary duty and conversion of his interest in ARF which was assigned to Segundo Suenos without his consent. The Court entered judgment for Debtor and third-party against ex-husband and company and the ex-husband and company appealed.
Higginbotham, Jones, and Prado, Circuit Judges

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