Waldman v. Stone

Summarized by Daniel Waxman , KEWA Financial Inc.
13 years 4 months ago

Citation:

Waldman v. Stone (In re Stone), --- F.3d --- 2012 WL 5275241 (6th Cir. Oct. 26, 2012)

Tag(s):

Ruling:

(1) Claim for disallowance / discharge of secured claim obtained by fraud and affirmative recovery for state law fraud are within the jurisdiction of the bankruptcy court. (2) Creditor can forfeit / waive objection that bankruptcy court acted beyond its statutory authority in entering final judgment, but cannot forfeit / waive objection that bankruptcy court acted beyond its constitutional authority. (3) Bankruptcy Court had constitutional authority, under the circumstances of this case to disallow / discharge secured creditor's claim on basis of fraud, even though creditor had not yet filed proof of claim. (4) Bankruptcy Court did not have constitutional authority under Stern to enter final judgment on state law fraud claim against secured creditor; case is remanded for Bankruptcy Court to convert final judgment to proposed findings on this issue.

Procedural context:

Stone, an individual Chapter 11 debtor, filed an AP against Waldman, his principal secured creditor, alleging that Waldman had obtained Stone's business assets and acquired a secured lien against his property by means of fraud. Waldman counter-claimed for judgment on the underlying debt. The Bankruptcy Court entered a final judgment disallowing and discharging Waldman's claim and granting Stone an affirmative judgment in the amount of more than $3,000,000. The District Court affirmed the Bankruptcy Court in all respects. Stone appealed on the primary basis that the Bankruptcy Court did not have either the jurisdiction or the statutory or constitutional authority to enter a final judgment.

Facts:

Stone (the debtor) owned and operated Stone Tool & Machine (STM). STM borrowed more than $1,000,000 from Fifth Third Bank, secured by liens on STM's asset's and Stone's personal residence. Stone / STM could not make the requisite loan payments to Fifth Third and approached his counsel, Atherton, about potential restructuring options. Atherton introduced Stone to a potential investor, Waldman, who was interested in acquiring STM. Atherton filed a Chapter 11 bankruptcy petition for STM in order to "buy time" for STM to complete the deal with Waldman. In actual fact, Waldman and Atherton (who has since been disbarred for his conduct in this case) devised a scheme to defraud Stone out of his ownership interest in STM. Waldman and Atherton promised Stone that Waldman would purchase all of the assets of STM in exchange for satisfaction of the Fifth Third Debt and a 40% ownership interest in the reorganized company. In actual fact, Waldman purchased the Fifth Third debt (encumbering the STM assets in the process) and no ownership interest was ever included in the transaction documents. When Stone discovered the fraud, Waldman sought to collect on the Fifth Third debt, including initiating a foreclosure action against Stone's personal residence. [This could occur, notwithstanding STM's bankruptcy, because Atherton had allowed the automatic stay to terminate and had generally neglected the case]. In response, Stone filed an individual Chapter 11 case and initiated the adversary proceeding that is the subject of this appeal.

Judge(s):

KETHLEDGE and STRANCH Circuit Judges; GWIN, District Judge

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