Richard Schultze v. David Chandler, Sr. ( 2014 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
RICHARD K. SCHULTZE; LORENZO V. No. 12-15186
ZUNINO; ROBERT BECCHETTI;
RICHARD QUESTONI, D.C. No.
Appellants, 3:11-cv-04940-
WHA
v.
DAVID N. CHANDLER, SR.; DAVID N. OPINION
CHANDLER, P.C.,
Appellees.
Appeal from the United States District Court
for the Northern District of California
William Alsup, District Judge, Presiding
Argued and Submitted
December 4, 2013—San Francisco, California
Filed July 18, 2014
Before: Stephen S. Trott, Sidney R. Thomas,
and Mary H. Murguia, Circuit Judges.
Opinion by Judge Thomas
2 SCHULTZE V. CHANDLER
SUMMARY*
Bankruptcy
The panel affirmed the district court’s affirmance of the
bankruptcy court’s dismissal of a malpractice action against
an attorney for an unsecured creditors’ committee.
The panel held that the bankruptcy court properly
exercised jurisdiction over the legal malpractice action after
its removal from state court because the action was a core
proceeding. Agreeing with other circuits, the panel held that
a post-petition claim brought against a court-appointed
professional is a core proceeding. The panel held that this
lawsuit fell easily within the definition of a core proceeding
because the attorney’s employment by the committee and
compensation were approved by the bankruptcy court, his
duties pertained solely to the administration of the bankruptcy
estate, and the claim asserted by committee members was
based solely on acts that occurred in the administration of the
estate.
The panel held that the bankruptcy court correctly
dismissed the action on the basis that the attorney represented
only the committee and did not owe an individual duty of
care to the committee members.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
SCHULTZE V. CHANDLER 3
COUNSEL
Paul A. Frassetto (argued), Frassetto Law Offices, San
Francisco, California, for Appellants.
James A. Murphy (argued) and Arthur J. Harris, Murphy,
Pearson, Bradley & Feeney, San Francisco, California, for
Appellees.
OPINION
THOMAS, Circuit Judge:
In this appeal, we consider whether the bankruptcy court
properly exercised jurisdiction over a malpractice action
against an attorney for the unsecured creditors’ committee
and correctly dismissed the claim. We affirm.
I
Plaintiffs Richard Schultze, Lorenzo Zunino, Robert
Becchetti, and Richard Questoni were investors in Colusa
Mushroom, Inc. (“Colusa”), a California company that grew
mushrooms for commercial sale. The business did not
flourish, and the company filed a voluntary petition in
bankruptcy under Chapter 11. The bankruptcy court
appointed an unsecured creditors’ committee (“Committee”)
pursuant to 11 U.S.C. § 1102, consisting of Plaintiffs, two
other individuals, and one business entity. Pursuant to 11
U.S.C. § 1103(a), the Committee filed an application for
permission to employ David Chandler as counsel for the
Committee, and the court issued an order authorizing his
employment.
4 SCHULTZE V. CHANDLER
Eventually, the court approved a plan of reorganization
under which Colusa would sell its business and assets to a
third party, Premier Mushroom, LP (“Premier”). All
unsecured creditors, including Plaintiffs, were to receive pro
rata shares of the sale proceeds. Under the terms of the sale,
Premier paid a down payment and executed a promissory
note for payment of the remainder of the sales price. Premier
was to make three annual payments of $100,000 and a final
balloon payment of $1,022,453.
The note was to be secured by a deed of trust on real
property and a secured interest on personal property, junior to
three other liens. Attorneys for Colusa and Premier, not
Chandler, conducted the closing. Following the closing of
the sale, the court entered a final decree and administratively
closed the bankruptcy.
Premier paid the initial installments as provided by the
terms of the note but defaulted four years later. Plaintiffs
then learned that Colusa’s counsel had failed to file the
financing statements necessary to perfect the estate’s junior
security interest in the personal property. Because the
security interest was not perfected, Premier was able to take
out additional loans on and over-encumber Colusa’s assets.
Thus, the net recovery from the assets as a result of Premier’s
default was significantly less than it would have been had the
security interest been perfected.
Subsequently, Plaintiffs commenced this action against
Chandler and his law firm in state court for legal malpractice,
alleging that Chandler was negligent in the performance of
his duties as counsel to the Committee because he failed to
ensure that Colusa’s attorney properly perfected the security
interest.
SCHULTZE V. CHANDLER 5
The Colusa bankruptcy was reopened on March 31, 2011,
and converted to Chapter 7, which dissolved the Committee.
Chandler then removed the malpractice action to federal
bankruptcy court. Plaintiffs moved to remand the action to
state court, but the bankruptcy court found that it had federal
jurisdiction for the malpractice action and denied the motion.
Chandler filed a 12(b)(6) motion to dismiss on the basis that,
inter alia, he owed no duty to Plaintiffs individually because
he represented the committee as a whole, not its individual
members. The bankruptcy court granted Chandler’s motion,
concluding that Chandler did not owe a duty to Plaintiffs
individually. The bankruptcy court issued an order approving
a settlement on Premier’s obligations and negating any future
payments on Plaintiffs’ claims.
Plaintiffs appealed the bankruptcy court’s dismissal to the
district court. The district court affirmed. This timely appeal
followed.
II
The district court properly concluded that the bankruptcy
court had jurisdiction over the removed legal malpractice
action because it was a core proceeding.1 A bankruptcy court
has jurisdiction over “all civil proceedings arising under title
11, or arising in or related to cases under title 11.” 28 U.S.C.
§ 1334(b); see also id. at § 157(b)(1).
1
Because the action was a core proceeding, the bankruptcy court’s
jurisdiction is not affected by either Executive Benefits Insurance Agency
v. Arkison (In re Bellingham Ins. Agency, Inc.), 134 S. Ct. 2165 (2014),
or Stern v. Marshall, 131 S. Ct. 2594 (2011). “If a matter is core, the
statute empowers the bankruptcy judge to enter final judgment on the
claim, subject to appellate review by the district court.” Exec. Benefits
Ins. Agency, 134 S. Ct. at 2172.
6 SCHULTZE V. CHANDLER
“[C]laims that arise under or in Title 11 are deemed to be
‘core’ proceedings, while claims that are related to Title 11
are ‘noncore’ proceedings.” Maitland v. Mitchell (In re
Harris Pine Mills), 44 F.3d 1431, 1435 (9th Cir. 1995). A
nonexhaustive list of core proceedings is set out in 28 U.S.C.
§ 157, which includes “matters concerning the administration
of the estate.” Id. at § 157(b)(2)(A). The list also includes
“other proceedings affecting the liquidation of the assets of
the estate or the adjustment of the debtor-creditor or the
equity security holder relationship, except personal injury tort
or wrongful death claims.” Id. at § 157(b)(2)(O).
Core proceedings arising in title 11 are matters “that are
not based on any right expressly created by title 11, but
nevertheless, would have no existence outside of the
bankruptcy.” Harris Pine Mills, 44 F.3d at 1435 (quoting
Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir. 1987)).
In Harris Pine Mills, we held that a post-petition state-law
claim against a bankruptcy trustee arising out of the sale of
estate property was a core proceeding. Id. at 1438. Similarly,
in Walsh v. Northwestern National Insurance Co. of
Milwaukee, Wisconsin (In re Ferrante), 51 F.3d 1473, 1476
(9th Cir. 1995), we held that a post-petition breach of
fiduciary claim against a trustee was a core proceeding.
In contrast, where the post-petition proceeding involves
rights unconnected to the bankruptcy, we have declared the
proceeding noncore. See, e.g., Eastport Assocs. v. City of
L.A. (In re Eastport Assocs.), 935 F.2d 1071, 1076 (9th Cir.
1991) (noncore proceeding where developer debtor brought
post-petition claim for declaratory relief against city
concerning the effect of state law on subdivision proposal);
Christensen v. Tucson Estates, Inc. (In re Tucson Estates,
Inc.), 912 F.2d 1162, 1168 (9th Cir. 1990) (noncore
SCHULTZE V. CHANDLER 7
proceeding where mobile home park residents brought pre-
petition class action suit against debtor).
Where a post-petition claim was brought against a court-
appointed professional, we have held the suit to be a core
proceeding. Ferrante, 51 F.3d at 1476 (core proceeding
where successor trustee brought breach of fiduciary duty
claim against predecessor trustee); Harris Pine Mills, 44 F.3d
at 1438 (core proceeding where state-law claim was brought
against trustee). All of our sister circuits are in accord.
Baker v. Simpson, 613 F.3d 346, 350 (2d Cir. 2010) (core
proceeding where debtor brought malpractice claim against
bankruptcy counsel); Grausz v. Englander, 321 F.3d 467, 471
(4th Cir. 2003) (same); Southmark Corp. v. Coopers &
Lybrand (In re Southmark Corp.), 163 F.3d 925, 932 (5th Cir.
1999) (core proceeding where debtor brought state-law claim
against court-appointed accountant for its examiner); Billing
v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242, 1244 (3d
Cir. 1994) (core proceeding where debtor brought malpractice
claim against bankruptcy counsel); Sanders Confectionery
Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 483 n.4 (6th
Cir. 1992) (where debtor brought claim against trustee and
lender, core proceeding against trustee but not against lender).
Southmark Corp. explained the rationale:
A sine qua non in restructuring the
debtor-creditor relationship is the court’s
ability to police the fiduciaries, whether
trustees or debtors-in-possession and other
court-appointed professionals, who are
responsible for managing the debtor’s estate
in the best interest of creditors. The
bankruptcy court must be able to assure itself
8 SCHULTZE V. CHANDLER
and the creditors who rely on the process that
court-approved managers of the debtor’s
estate are performing their work,
conscientiously and cost-effectively.
Bankruptcy Code provisions describe the
basis for compensation, appointment and
removal of court-appointed professionals,
their conflict-of-interest standards, and the
duties they must perform. See generally
11 U.S.C. §§ 321, 322, 324, 326–331.
163 F.3d at 931.
In this case, the employment of Chandler by the
Committee was approved by the bankruptcy court and
governed by 11 U.S.C. § 1103. Chandler’s compensation was
also approved by the court and governed by 11 U.S.C.
§§ 328, 330, 331. His duties pertained solely to the
administration of the bankruptcy estate. The claim asserted
by Plaintiffs was based solely on acts that occurred in the
administration of the estate. Therefore, the lawsuit falls
easily within the definition of a core proceeding.
Plaintiffs argue that their action cannot be a core
proceeding because it is predicated on state law. However,
the governing statute clearly states that “[a] determination
that a proceeding is not a core proceeding shall not be made
solely on the basis that its resolution may be affected by State
law.” 28 U.S.C. § 157(b)(3).
Plaintiffs also argue that their claim does not invoke any
right created by federal bankruptcy law and it does not affect,
or even involve, the administration of Colusa’s estate.
However, “arising in” jurisdiction does not require that the
SCHULTZE V. CHANDLER 9
matter be “based on any right expressly created by title 11.”
Marshall v. Stern (In re Marshall), 600 F.3d 1037, 1055 (9th
Cir. 2010) (internal quotation marks omitted). Instead, the
matter must “have no existence outside of the bankruptcy”
case. Id. (internal quotation marks omitted). That is the case
here. The basis for the claim occurred within the
administration of the estate. Any alleged duties arose from
obligations created under bankruptcy law. The claims have
effectively called into question the administration of the
estate. Thus, this particular legal malpractice claim is
inseparable from the bankruptcy case.
Plaintiffs argue that the claim will not affect estate
administration. But the key inquiry is not whether the claim
will affect the administration of the bankruptcy, but instead
whether the claim arose in a case under title 11. Baker,
613 F.3d at 350. Additionally, courts have been less
concerned with the identity of the party bringing the claim
and more concerned with the identity and function of the
party against whom the claim is brought. Southmark Corp.,
163 F.3d at 931.
For these reasons, we conclude that the district court
correctly determined that the bankruptcy court had
jurisdiction over the lawsuit as a core proceeding and that the
bankruptcy court did not err in denying the remand motion.2
2
Plaintiffs argue in the alternative that the bankruptcy court should have
abstained from hearing the case under the permissive abstention statute,
28 U.S.C. § 1334(c)(1). However, we lack jurisdiction to review that
decision. Id. at § 1334(d) (“Any decision to abstain or not to abstain made
under subsection (c) (other than a decision not to abstain in a proceeding
described in subsection (c)(2)) is not reviewable by appeal or otherwise by
the court of appeals under section 158(d), 1291, or 1292 of this title
. . . .”); Baker, 613 F.3d at 352.
10 SCHULTZE V. CHANDLER
III
The district court correctly concluded that the bankruptcy
court did not err in dismissing the complaint because
Chandler did not owe an individual duty of care.
In bankruptcy, “[a] professional retained by a committee
represents the committee and only the committee, and the
professional’s fiduciary duty runs solely to the committee.”
7 Collier on Bankruptcy 1103.03[7] (16th ed.). Here,
Chandler was appointed by the bankruptcy court to represent
the Committee, the written agreement was between Chandler
and the Committee, and he was paid for his role as counsel
for the Committee. In short, Chandler was not acting as
attorney for Plaintiffs. Moreover, the Committee was not
involved in the negotiated sale. In his capacity as counsel for
the Committee, Chandler was not charged with the duty of
recording the financing statement, nor was it his right to do
so; that duty fell to Colusa’s attorney.
It is true that in California, privity of contract is not
required to maintain a legal malpractice action. Donald v.
Garry, 97 Cal. Rptr. 191, 192 (Ct. App. 1971). The
determination of liability involves the balancing of various
factors. Biakanja v. Irving, 320 P.2d 16, 19 (Cal. 1958). The
bankruptcy court balanced those factors, and we find no error
in the bankruptcy court’s analysis.
SCHULTZE V. CHANDLER 11
IV
The district court properly concluded that the bankruptcy
court properly exercised jurisdiction over the malpractice
claim and correctly dismissed the case on the merits.
AFFIRMED.