Court: District Court, E.D. Tennessee; August 8, 2013; Federal District Court
Four appeals were filed regarding orders from the United States Bankruptcy Court for the Eastern District of Tennessee, all dated March 30, 2012. These include an order granting the Trustee's motion for contempt, an order dismissing a removed state court action against the Trustee, an order partially granting and partially denying GKH's motion for remand, and an order dismissing a bankruptcy court action against the Trustee. Appellant GKH and Appellees Trustee C. Kenneth Still and deceased Debtor Steve McKenzie submitted briefs but waived oral arguments. After reviewing the arguments, relevant case law, and appeal records, the Court affirmed all four bankruptcy court orders.
The case originated as an involuntary Chapter 7 bankruptcy against McKenzie on November 11, 2008, later converted to a voluntary Chapter 11 and consolidated. On April 22, 2011, GKH sought court permission to file an action against the Trustee and his attorneys due to a prior lawsuit involving multiple parties, including GKH. GKH subsequently filed a state court action and a similar bankruptcy court action on August 5, 2011, without awaiting a ruling on its initial Motion for Leave, which was denied shortly after. In response, the Trustee filed a motion for contempt against GKH for this unauthorized filing and subsequently removed the state court action to bankruptcy court. GKH later sought to alter the court's order and filed a motion for remand, raising jurisdictional concerns.
On September 8, 2011, a hearing was held by the bankruptcy court regarding the Trustee's Motion for Contempt. Subsequently, on September 13, 2011, the court issued a Show Cause Order requiring GKH to appear on October 7, 2011, to explain why it should not be held in contempt. On March 30, 2012, the court granted the Trustee’s Motion for Contempt. Concurrently, a separate litigation thread was ongoing, with the court denying a Motion to Alter or Amend on September 7, 2011. The Trustee also filed motions to dismiss both the removed State Court Action and the Bankruptcy Court Action. GKH responded by filing a motion to strike the Trustee's and the Banks Defendants' responses to a Motion for Remand. The court granted the Trustee’s motions to dismiss concerning the Trustee only and denied GKH’s Motion to Strike and partially denied the Motion for Remand.
GKH has appealed four bankruptcy court orders:
1) The March 30, 2012 Order granting the Trustee’s motion for contempt (1:12-cv-164).
2) The March 30, 2012 Order dismissing the removed State Court Action against the Trustee (1:12-cv-165).
3) The March 30, 2012 Order partially granting and denying GKH’s Motion for Remand (1:12-cv-167).
4) The March 30, 2012 Order dismissing the Bankruptcy Court Action against the Trustee (1:12-cv-172).
The district court holds appellate jurisdiction over these appeals under 28 U.S.C. § 158(a)(1). Factual findings by the bankruptcy court are reviewed for clear error, while legal conclusions undergo de novo review. A finding is clearly erroneous if a reviewing court is firmly convinced that a mistake has occurred. Generally, a bankruptcy court's decision to dismiss a case is reviewed for abuse of discretion. GKH's appeals involve orders dismissing actions under Federal Rule of Civil Procedure 12(b)(6), which also applies in bankruptcy contexts.
In Case No. 1:12-CV-1645, GKH challenges the bankruptcy court's discretion in holding it in contempt for filing the State Court Action against the Trustee without prior approval. GKH claims there was no clear evidence of a directive prohibiting such filing, while the Trustee asserts GKH violated the Barton Doctrine, justifying the contempt ruling.
In a civil contempt proceeding, the movant must prove by clear and convincing evidence that the nonmoving party violated a specific court order with knowledge of that order. The focus here is whether GKH violated such an order. At the time GKH initiated the State Court Action, the bankruptcy court had not prohibited this action explicitly. However, it is established that parties must obtain court approval before suing a trustee for actions taken in their official capacity, as dictated by the Barton Doctrine. The Sixth Circuit has ruled that the trustee's actions, even if contested by GKH as outside his authority, were within the scope of his duties to pursue assets of the estate. GKH failed to prove that the trustee acted outside his authority, thus necessitating court approval for their state court action.
Additionally, the bankruptcy court found GKH in contempt for not dismissing the State Court Action after the court ruled on GKH’s Motion for Leave. GKH filed the State Court Action shortly before the bankruptcy court denied its Motion for Leave, and despite being informed of the bankruptcy court’s decision later that day, GKH did not dismiss the action. GKH contends that there were mitigating factors for its refusal to dismiss the case, but the bankruptcy court's decision to hold GKH in contempt was deemed appropriate.
A respondent in a civil contempt motion can argue that compliance is impossible or that they took reasonable steps to comply with the court's order. GKH claimed jurisdictional issues required its claims to be filed in state court rather than bankruptcy court and that it felt pressured to file due to an impending statute of limitations expiration. GKH argued against being held in contempt for not dismissing the State Court Action. However, the bankruptcy court did not abuse its discretion in holding GKH in contempt, as an order explicitly required GKH to seek court permission before filing the State Court Action due to the applicability of the Barton Doctrine. GKH was expected to comply with this order immediately upon its issuance, which it failed to do, even after filing a Motion to Alter or Amend. Despite GKH's reasons for wanting to file in state court, it was still obligated to follow the bankruptcy court's order, supporting the conclusion of willful contempt.
Furthermore, GKH questioned the bankruptcy court's jurisdiction to hold an October 7, 2011 hearing after it filed an interlocutory appeal of a prior order. This argument was deemed meritless, as the court dismissed the appeal, ruling the prior order was not final or appealable and that no extraordinary circumstances warranted an interlocutory appeal. The bankruptcy court aimed for judicial efficiency by addressing all contempt-related issues simultaneously. GKH did not provide specific examples of due process violations, leading to the conclusion that the bankruptcy court acted within its authority. Consequently, the March 30, 2012 Order granting the Trustee’s motion for contempt was affirmed.
In Case No. 1:12-CV-1657, GKH appeals the bankruptcy court's decision to grant the Trustee’s motion to dismiss its complaint, which arose from the Bradley County Action where the Trustee alleged GKH committed breach of fiduciary duty, negligence, fraud, civil conspiracy, and legal malpractice regarding property owned by Cleveland Auto Mall, LLC. GKH's appeal centers on whether the Trustee is entitled to immunity for filing the Bradley County Action, which GKH argues was outside his authority, constituting an ultra vires act, as the property was not part of the bankruptcy estate. GKH contends that the Trustee needed court approval to invoke immunity and that the bankruptcy court should have allowed discovery before dismissing the State Court Action. The court notes that GKH's arguments largely mirror those from prior appeals, which were affirmed by the Sixth Circuit in In re McKenzie. The court emphasizes that a bankruptcy trustee typically enjoys quasi-judicial immunity for actions taken in official capacity without needing prior court approval, as established by the Sixth Circuit. GKH's claims regarding the Trustee's alleged ultra vires actions are also referenced in the context of the McKenzie decision, where similar claims were evaluated.
The Sixth Circuit ruled that the Trustee's pursuit of actual and punitive damages against GKH for alleged breach of fiduciary duty regarding property transfer was valid, despite GKH's claims that the Trustee acted beyond his authority after a prior order from Bankruptcy Judge John Cook stated the property did not belong to the bankruptcy estate. The court clarified that neither a dismissal on the merits nor allegations of ulterior motives invalidate the Trustee's authority to assert claims for the estate. It determined the Trustee’s actions were within his duties under 11 U.S.C. § 704 and entitled him to quasi-judicial immunity. The bankruptcy court's decision to dismiss the removed State Court Action was upheld as it had thoroughly considered GKH's arguments, leading to consistent conclusions.
In Case No. 1:12-CV-172, which involved a nearly identical complaint initially filed in bankruptcy court, the court referenced its prior discussion from Case No. 12-cv-165 and concluded there was no error in dismissing the Bankruptcy Court Action as well.
In Case No. 1:12-CV-167, GKH challenged the bankruptcy court's denial of its Motion to Strike, arguing the Appellees' late response violated local rules. Although the response was indeed late, the bankruptcy court exercised its discretion to consider it and found no prejudice to GKH, as it allowed GKH to submit a reply. Thus, the court affirmed that the bankruptcy court did not err in denying the Motion to Strike.
GKH contends that the bankruptcy court erred in partially denying its Motion for Remand, arguing that the court lacked both “core” and “related to/non-core” jurisdiction over its State Court Action involving claims of malicious prosecution and abuse of process. GKH asserts that these claims do not invoke substantive rights under federal bankruptcy law and could exist outside of bankruptcy. Under 28 U.S.C. § 157, bankruptcy courts can adjudicate core proceedings related to bankruptcy cases. The bankruptcy court, referencing In re Heinsohn, determined that GKH's claims were core matters since they involved the administration of the estate and the Trustee's statutory duties. The court concluded it had jurisdiction as the Trustee's actions were pertinent to the Bradley County Action, affirming that there was no error in denying GKH’s Motion for Remand. Consequently, the court affirmed the bankruptcy orders involved in the appeals and directed the closure of the cases, noting that the Bradley County Action included claims of breach of fiduciary duty, negligence, fraud, civil conspiracy, and legal malpractice, which were ultimately dismissed.
The bankruptcy court previously denied GKH's motion for leave to file a state court action against the Trustee and his attorneys for malicious prosecution and abuse of process, citing the applicability of the Barton Doctrine. This denial was based on the context of a prior adversary complaint filed by GKH in response to the Trustee's action for document turnover, which was later dismissed. As a result, GKH had been informed of potential outcomes for future motions. The Court notes that GKH's current arguments mirror those made in earlier cases, specifically Case No. 11-cv-258, prompting reliance on prior analyses regarding immunity and discovery requests. GKH presented two alternative arguments: first, that the court should have abstained under 28 U.S.C. 1334(c)(2), which was dismissed because the matter was a "core" issue; second, that remand should have occurred under permissive abstention or equitable remand, which the bankruptcy court refuted in its memorandum. The Court agrees with the bankruptcy court's rationale against remand, deeming it well-reasoned.
