Timothy Frazin v. Haynes & Boone, L.L.P. ( 2013 )

Case: 11-10403 Document: 00512439117 Page: 1 Date Filed: 11/13/2013
REVISED November 13, 2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 11-10403 October 1, 2013
Lyle W. Cayce
Clerk
In the Matter of: TIMOTHY MICHAEL FRAZIN,
Debtor
TIMOTHY MICHAEL FRAZIN,
Appellant
v.
HAYNES & BOONE, L.L.P.; NINA CORTELL; WARREN DODSON;
GRIFFITH & NIXON, P.C.; SCOTT GRIFFITH,
Appellees
Appeal from the United States District Court
for the Northern District of Texas
Before REAVLEY, PRADO, and OWEN, Circuit Judges.
EDWARD C. PRADO, Circuit Judge:
Timothy Frazin appeals the judgment of the district court affirming the
final judgment entered by the bankruptcy court on certain state-law
counterclaims that Frazin filed against the Appellees, attorneys who were
authorized by the bankruptcy court to represent Frazin in a separate lawsuit.
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Frazin argues that the bankruptcy court lacked the authority to enter a final
judgment on these claims in light of the Supreme Court’s decision in Stern v.
Marshall, 131 S. Ct. 2594 (2011). Holding that the bankruptcy court lacked
jurisdiction over Frazin’s state-law counterclaim under the Texas Deceptive
Trade Practices Act, we AFFIRM in part and REVERSE in part.
I. BACKGROUND
A. Factual Background
Frazin filed a voluntary petition under Chapter 13 of the Bankruptcy
Code. While the bankruptcy proceedings were pending, Frazin filed suit in state
court against Lamajak, Inc. for breach of contract, promissory estoppel, and
quantum meruit. Frazin filed an application with the bankruptcy court to
employ Appellee Griffith & Nixon, P.C. as special counsel to represent him in his
action against Lamajak. The bankruptcy court authorized Frazin to employ
Griffith & Nixon on a contingency fee basis and provided that the firm would be
paid following a fee application to the court.
On April 18, 2005, the bankruptcy court entered an order discharging
Frazin, but the case remained open pending the outcome of Frazin’s state-court
suit, as the Chapter 13 plan provided that a portion of any potential recovery
would be used to satisfy unsecured claims against the bankruptcy estate.
After a two-week trial on Frazin’s state-law claims against Lamajak, the
jury awarded Frazin three alternative recoveries: (1) $4,000,000 for breach of
contract; (2) $1,400,000 for promissory estoppel; and (3) $1,125,000 in quantum
meruit. The court entered judgment on the $4,000,000 award for breach of
contract, as well as attorneys’ fees and interest, for a total award of
$7,158,383.10 (which was later reduced to $6,360,132.40 because of an error in
the interest calculation). Lamajak appealed.
Frazin filed an application with the bankruptcy court to employ Appellee
Haynes & Boone, LLP as special counsel to represent him in the appeal. The
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bankruptcy court authorized Frazin to employ Haynes & Boone and again
provided that the firm’s fees would be paid upon application to and approval by
the bankruptcy court. The bankruptcy court ordered that any litigation proceeds
awarded to Frazin would be paid to and held in trust by Haynes & Boone to
allow the Chapter 13 trustee to determine the amount necessary to satisfy the
remaining claims against the estate.
On appeal, Lamajak argued that Frazin was not entitled to recovery on
any of his theories. Haynes & Boone responded to Lamajak’s arguments with
briefs on the merits and argued the appeal orally before the Fifth Court of
Appeals of Texas. The court reversed the award for breach of contract, holding
that Frazin had not presented sufficient evidence to find that a contract with
definite terms had been entered into. Lamajak, Inc. v. Frazin, 230 S.W.3d 786,
794 (Tex. App.—Dallas 2007, no pet.). The court awarded Frazin recovery on his
quantum meruit claim, id. at 798, that, along with attorneys’ fees and interest,
resulted in an award of approximately $3.4 million. Lamajak sought an
extension of time to file a petition for review in the Texas Supreme Court,
around which time the parties settled for $3.2 million.
Pursuant to the procedure ordered by the bankruptcy court, Lamajak
wired $3.2 million to a Haynes & Boone trust account. Haynes & Boone filed a
motion seeking guidance from the bankruptcy court on disbursement of the
proceeds; it also filed a request for an expedited hearing on this motion. Both
Haynes & Boone and Griffith & Nixon (collectively, the “Attorneys”) filed
applications with the bankruptcy court requesting approval of their fees. Frazin
filed objections to the fee applications filed by each firm.
B. Procedural Background
In response to the Attorneys’ request for fees, Frazin filed state-law
counterclaims against them for negligence, violations of the Texas Deceptive
Trade Practices Act (“DTPA”), and breach of fiduciary duty. The case was tried
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over six days before the bankruptcy court. The bankruptcy court ruled against
Frazin on the merits of his negligence and DTPA claims. The bankruptcy court
determined that Frazin had shown a breach of fiduciary duty, but since he failed
to prove damages as a result of the breach, the court ruled against him on this
claim as well. The bankruptcy court also concluded that the Attorneys’ breaches
of duty were not clear and serious enough to warrant fee forfeiture. Finally, the
bankruptcy court overruled Frazin’s objections to the Attorneys’ fee applications
and awarded the Attorneys the amount requested in their original fee
applications.
The district court affirmed the judgment in all respects in a brief order.
Frazin timely appealed.
II. JURISDICTION AND STANDARD OF REVIEW
The district court’s final judgment in this case gives us jurisdiction under
28 U.S.C. § 1291. “We review a district court’s affirmance of a bankruptcy court
decision by applying the same standard of review to the bankruptcy court
decision that the district court applied.” Stettner v. Smith (In re IFS Fin. Corp.),
669 F.3d 255, 260 (5th Cir. 2012) (citation omitted) (internal quotation marks
omitted). We thus review factual findings for clear error and legal conclusions
de novo. Id. “When the district court has affirmed the bankruptcy court’s
findings, [the clear error] standard is strictly applied, and reversal is appropriate
only when there is a firm conviction that error has been committed.” Id. at
260–61 (citation omitted) (alteration in original, internal quotation marks
omitted).
III. DISCUSSION
A. Stern v. Marshall
Frazin argues that Stern v. Marshall compels the conclusion that the
bankruptcy court lacked the authority to enter a final judgment on his state-law
counterclaims. Stern involved litigation over the estate of J. Howard. 131 S.
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Ct. at 2601. Howard’s wife at the time of his death, Vickie Marshall (also known
by her stage name Anna Nicole Smith), was not included in his will, and before
Howard’s death, she filed suit in Texas state probate court, arguing that
Howard’s son Pierce had fraudulently induced Howard to sign a living trust that
did not include her. Id. The probate court upheld the trust and Howard’s will.
Marshall v. Marshall, 547 U.S. 293, 302 (2006). Following Howard’s death,
Vickie filed a petition for bankruptcy in the Central District of California. Stern,
131 S. Ct. at 2601. Pierce filed a complaint in the bankruptcy proceedings,
contending that Vickie had defamed him through media coverage of her
fraudulent inducement claim; he also filed a proof of claim for that action,
seeking to recover his claimed damages from Vickie’s bankrupt estate. Id.
Vickie counterclaimed for tortious interference with the gift she had expected
from Howard, a claim which was similar in substance to the fraudulent
inducement claim she had earlier lost in Texas probate court. Id. After the
bankruptcy court ruled in Vickie’s favor, Pierce argued that the bankruptcy
court had lacked jurisdiction over Vickie’s counterclaim because it was not a
“core proceeding.” Id.
The Supreme Court held that Vickie’s counterclaim was a core proceeding
under the plain text of 28 U.S.C. § 157(b)(2)(C),1 which states that
1
The full text of 28 U.S.C. § 157(b)(1)–(2) is as follows:
(1) Bankruptcy judges may hear and determine all cases under title 11 and all
core proceedings arising under title 11, or arising in a case under title 11,
referred under subsection (a) of this section, and may enter appropriate orders
and judgments, subject to review under section 158 of this title.
(2) Core proceedings include, but are not limited to—
(A) matters concerning the administration of the estate;
(B) allowance or disallowance of claims against the estate or exemptions
from property of the estate, and estimation of claims or interests for the
purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but
not the liquidation or estimation of contingent or unliquidated personal
injury tort or wrongful death claims against the estate for purposes of
distribution in a case under title 11;
(C) counterclaims by the estate against persons filing claims against the
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“counterclaims by the estate against persons filing claims against the estate” are
“core proceedings.” Id. at 2604–05 (internal quotation marks omitted).
However, the Court went on to hold that § 157(b)(2)(C) is unconstitutional
insofar as it allows bankruptcy courts to enter final judgments in state-law
counterclaims that would not necessarily be resolved in the process of ruling on
a creditor’s proof of claim. Id. at 2620.
Although the Court stated that its decision was “narrow,” id., its reasoning
was sweeping. In explaining its holding, the Court discussed the importance of
Article III in maintaining separation of powers among the branches of the
federal government, safeguarding the independence of the judicial branch, and
protecting litigants. Id. at 2608–09. The Court stated that “[w]hen a suit is
made of the stuff of the traditional actions at common law tried by the courts at
Westminster in 1789, and is brought within the bounds of federal jurisdiction,
the responsibility for deciding that suit rests with Article III judges in Article III
courts.” Id. at 2609 (citation and internal quotation marks omitted). The Court
estate;
(D) orders in respect to obtaining credit;
(E) orders to turn over property of the estate;
(F) proceedings to determine, avoid, or recover preferences;
(G) motions to terminate, annul, or modify the automatic stay;
(H) proceedings to determine, avoid, or recover fraudulent conveyances;
(I) determinations as to the dischargeability of particular debts;
(J) objections to discharges;
(K) determinations of the validity, extent, or priority of liens;
(L) confirmations of plans;
(M) orders approving the use or lease of property, including the use of
cash collateral;
(N) orders approving the sale of property other than property resulting
from claims brought by the estate against persons who have not filed
claims against the estate;
(O) 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; and
(P) recognition of foreign proceedings and other matters under chapter
15 of title 11.
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concluded with a holding that was notable for its repetition throughout the
opinion: bankruptcy courts “lack[] the constitutional authority to enter a final
judgment on a state law counterclaim that is not resolved in the process of ruling
on a creditor’s proof of claim.” Id. at 2620.
We must determine whether, and to what extent, Stern affects the
propriety of the bankruptcy court’s entry of final judgment on Frazin’s claims.
Frazin brought state-law counterclaims against the Attorneys, which, like the
counterclaim brought by Vickie in Stern, are defined by § 157(b)(2)(C) as “core
proceedings.” A previous panel of this court has held that bankruptcy courts
have the authority to enter final judgments in all proceedings defined as “core”
by § 157(b). Blackburn-Bliss Trust v. Hudson Shipbuilders, Inc. (In re Hudson
Shipbuilders, Inc.), 794 F.2d 1051, 1054–55 (5th Cir. 1986).
Because a previous panel has already resolved this issue, we cannot
overturn its decision “absent an intervening change in the law, such as by a
statutory amendment, or the Supreme Court or by our en banc court.” Technical
Automation Servs. Corp. v. Liberty Surplus Ins. Corp., 673 F.3d 399, 405 (5th
Cir. 2012) (internal quotation marks omitted). “[F]or a Supreme Court decision
to change our Circuit’s law, it ‘must be more than merely illuminating with
respect to the case before [the court]’ and must ‘unequivocally’ overrule prior
precedent.” Id. (alteration in original) (quoting Martin v. Medtronic, Inc., 254
F.3d 573, 577 (5th Cir. 2001)). Thus, we must decide whether Stern
unequivocally sub silentio overruled Hudson.
Hudson’s holding that bankruptcy courts can enter final judgments in all
core proceedings is clearly inconsistent with Stern’s holding that bankruptcy
courts cannot enter final judgments in one type of core proceeding, namely,
state-law counterclaims that are not necessarily resolved in the claims-allowance
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process. We therefore conclude that Stern has unequivocally sub silentio
overruled Hudson as to that type of core proceeding.
The final issue we need to decide is whether the claims brought by Frazin
fall within the scope of the Stern opinion. Despite the narrowing language at the
end of the Court’s opinion, Stern clearly grounded its reasoning in principles that
are broad in scope. The Court’s concern for separation of powers and the
independence of the judiciary is equally as sharp with respect to the state-law
counterclaims brought by Frazin as it was with the counterclaim brought by
Vickie in Stern. Based on the reasoning in the opinion, we see no basis for
treating Frazin’s state-law counterclaims for malpractice, breach of fiduciary
duty, and violations of the DTPA any differently than the Court treated Vickie’s
counterclaim for tortious interference with a gift.2 Thus, we must apply the test
from Stern to determine whether any of these counterclaims would necessarily
have been resolved in the claims-allowance process.3
2
We do not decide today whether the Stern’s holding extends to other core proceedings
under § 157(b)(2). Our holding simply applies the Stern test to state-law counterclaims under
§ 157(b)(2)(C). Future cases must determine whether Stern applies to other core proceedings.
This court has only begun the task of interpreting the scope of Stern. See In re Renaissance
Hosp. Grand Prairie Inc., 713 F.3d 285, 294 n.12 (5th Cir. 2013)(declining to extend Stern to
proceedings under § 157(b)(2)(K) in light of “Stern’s express instruction that its holding applied
only in one isolated respect” (quotation marks omitted)); Technical Automation, 673 F.3d at
406 (interpreting Stern as holding that “the jurisdiction of the bankruptcy courts did not
extend to most counterclaims based on common law”).
3
The Attorneys argue that Frazin consented to the jurisdiction of the bankruptcy court
and waived any objection to the contrary by filing his claims there and failing to object.
However, when “separation of powers] is implicated in a given case, the parties cannot by
consent cure the constitutional difficulty . . . . When these Article III limitations are at issue,
notions of consent and waiver cannot be dispositive because the limitations serve institutional
interests that the parties cannot be expected to protect.” C.F.T.C. v. Schor, 478 U.S. 833,
850–51 (1986). As discussed above, Stern makes clear that the practice of bankruptcy courts
entering final judgments in certain state-law counterclaims “compromise[s] the integrity of
the system of separated powers and the role of the Judiciary in that system.” 131 S. Ct. at
2620. Thus, structural concerns cannot be ameliorated by Frazin’s consent or waiver.
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1. Malpractice
We turn first to Frazin’s claim for malpractice. In his complaint in the
bankruptcy court, Frazin alleged that the Attorneys were negligent in the
prosecution of the underlying Lamajak trial and appeal. Frazin alleged the
same acts of negligence in the objections that he filed to the Attorneys’ fee
applications. Notwithstanding Frazin’s objections and his counterclaim, the
bankruptcy court awarded the Attorneys’ fees as requested.
Bankruptcy courts are permitted to award fees to professionals by 11
U.S.C. § 330. That section also contains guidelines to direct a bankruptcy court’s
discretion in making such fee awards. It states that a bankruptcy court may
award “reasonable compensation” to a Chapter 13 debtor’s attorney “based on
a consideration of the benefit and necessity” of the services rendered to the
debtor, as well as the “nature, the extent, and the value of such services.” 11
U.S.C. § 330(a)(3), (a)(4)(B). Thus, in awarding fees, the bankruptcy court
determined that the benefit and value of the Attorneys’ services was sufficient
to warrant payment in the amount requested. Accordingly, the bankruptcy court
necessarily rejected the claims of malpractice contained within Frazin’s fee
objections, objections on which it had to rule as part of the claims-allowance
process. The separate action for malpractice alleged the exact same conduct as
the objections that were rejected. The bankruptcy court made this clear in its
opinion, stating that Frazin’s objections to the fee applications were overruled
for the “same reasons” that the bankruptcy court ruled against Frazin on the
merits of his malpractice claim.
This court has previously considered the degree to which a bankruptcy
court’s award of fees to a professional is interrelated with a claim of malpractice
against that professional. In Osherow v. Ernst & Young, L.L.P. (In re Intelogic
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Trace, Inc.), 200 F.3d 382 (5th Cir. 2000), the bankruptcy court approved the
debtor’s employment of Ernst & Young to provide accounting services during the
bankruptcy proceedings. Id. at 384. Although the debtor suspected that Ernst
& Young’s services were deficient, it did not oppose Ernst & Young’s fee
application, and the bankruptcy court accordingly awarded the requested fees.
Id. at 384–85. At a later date, the trustee filed suit against Ernst & Young in
state court, alleging causes of action including negligence. Id. at 385. Ernst &
Young removed the case to the bankruptcy court and moved for summary
judgment, arguing among other things that res judicata barred the trustee’s
claims. Id. at 385–86 (citation and internal quotation marks omitted). The bulk
of our opinion focused on the fourth prong of res judicata, whether the two
actions were based on “the same nucleus of operative facts.” Id. at 386–88. We
held that “an award of fees for professionals . . . employed by a bankruptcy estate
represents a determination of ‘the nature, the extent, and the value of such
services.’” Id. at 387 (quoting 11 U.S.C. § 330(a)(3)). We also held that “[b]y
granting Ernst & Young’s fee application, the bankruptcy court implied a finding
of quality and value in Ernst & Young’s services.” Id. We noted that the
trustee’s state-law claims arose from alleged negligence in the very same
services that the bankruptcy court had considered when it awarded fees. Id.
Thus, we held that the award of professional fees and the malpractice claims
arose from a common nucleus of operative fact and that the malpractice claims
were barred by res judicata. Id. at 388–91.
The Intelogic court relied on a discussion of the interconnectedness of fee
applications and malpractice claims in Southmark Corp. v. Coopers & Lybrand
(In re Southmark Corp.), 163 F.3d 925 (5th Cir. 1999). The issue in Southmark
was whether a state-law claim for malpractice filed by a debtor against an
appointed accounting firm was a “core proceeding” under 28 U.S.C. § 157 or
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merely a “related matter” from which the bankruptcy court was required to
abstain under 28 U.S.C. § 1334(c)(2). Id. at 928–30. In holding that the claim
was a core proceeding within the bankruptcy court’s jurisdiction, this court
discussed the relatedness of fee applications and malpractice claims as follows:
In this case, the professional malpractice claims
alleged . . . are inseparable from the bankruptcy context. A sine qua
non in restructuring the debtor-creditor relationship is the court’s
ability to police the fiduciaries . . . . The bankruptcy court must be
able to assure itself 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. . . . Award of the
professionals’ fees and enforcement of the appropriate standards of
conduct are inseparably related functions of bankruptcy courts.
Supervising the court-appointed professionals also bears
directly on the distribution of the debtor’s estate. If the estate is not
marshaled and liquidated or reorganized expeditiously, there will be
far less money available to pay creditors’ claims. Excessive
professional fees or fees charged for mediocre or, worse, phantom
work also cause the estate and the creditors to suffer. . . . A
malpractice claim like the present one inevitably involves the
nature of the services performed for the debtor’s estate and the fees
awarded under superintendence of the bankruptcy court; it cannot
stand alone.
Id. at 931.
Based on this case law, we conclude that Frazin’s claim for malpractice
was necessarily decided by the bankruptcy court in the process of ruling on the
Attorneys’ fee applications and thus fell constitutionally within the bankruptcy
court’s jurisdiction. As in Intelogic, the bankruptcy court’s award of fees to the
Attorneys carried with it an implicit finding of quality and value in the services
provided by the Attorneys. Southmark makes clear that this award of fees was
“inseparably related” to enforcement of the appropriate standards of conduct,
and so Frazin’s malpractice claim for those services “cannot stand alone” from
the determination of quality the bankruptcy court made in awarding fees.
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Southmark’s reasoning reinforces our conclusion regarding the constitutional
inquiry: the bankruptcy court, in awarding the Attorneys’ fees, necessarily
considered and rejected Frazin’s malpractice claim as well as his objections
grounded in the same allegations.
Unlike Vickie’s claim in Stern, the malpractice claim was not “independent
of the federal bankruptcy law” but was “necessarily resolvable” by a ruling on
the Attorneys’ fee applications. Stern, 131 S. Ct. at 2611. The fee application
proceedings had more than “some bearing” on these claims. Id. at 2618. Rather,
the resolution of the fee application proceedings necessarily resolved the
malpractice counterclaim. Therefore, under Stern, the bankruptcy court had
the authority to enter a final judgment rejecting Frazin’s malpractice claim on
its merits.
2. Breach of Fiduciary Duty
Likewise Frazin’s claim that all of the Attorneys’ fees be forfeited under
Texas fiduciary duty law is a claim that the bankruptcy court must have and did
resolve in deciding whether to grant the Attorneys’ fee applications the
appropriate amount of any fee award.
Frazin brought a fee-forfeiture action based on breach of fiduciary duty.
As the Memorandum Opinion correctly observed in its discussion of Frazin’s
breach of fiduciary duty claim, Frazin’s complaint “does not allege that the
Defendants’ breaches of fiduciary duty were a proximate cause of any damage
to him. Rather, Frazin seeks to impose a complete fee forfeiture because,
according to Frazin, of the seriousness of the Defendants’ breaches of fiduciary
duty.” Throughout these proceedings, Frazin has consistently maintained that
his breach of fiduciary duty claim was a fee-forfeiture claim, not an affirmative
claim for damages. As the Texas Supreme Court held in its seminal case,
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Burrow v. Acre, 997 S.W.2d 229 (Tex. 1999), even if a client suffers no actual
damages, fee forfeiture in some cases is an appropriate remedy for breach of
fiduciary duty by an attorney. Id. at 240. The fee-foreiture remedy “must fit the
circumstances presented” and is limited only to “clear and serious” violations of
the duty owed to a client. Id. at 241. Because the sole purpose of Frazin’s
breach of fiduciary duty action was to defeat the Attorneys’ fee applications in
bankruptcy court, the bankruptcy court necessarily had to resolve every aspect
of his breach of fiduciary duty claim to rule on the Attorneys’ fee applications.
This present claim is precisely the type of claim that the Supreme Court
in Stern envisioned that a bankruptcy court has jurisdiction to hear and upon
which the bankruptcy court is empowered to render a final judgment, Article III
of the Constitution notwithstanding. While in Stern there was “there was never
any reason to believe that the process of adjudicating [the stepson’s] proof of
claim would necessarily resolve [the widow/debtor’s] counterclaim,” in this case,
the bankruptcy court could not adjudicate the Attorneys’ fee application without
resolving Frazin’s fee-forfeiture cause of action. See Stern, 131 S. Ct. at 2617.
The instant case is also analogous to Katchen v. Landy, 382 U.S. 323 (1966),
which the Supreme Court cited in Stern as an example of a case where the
bankruptcy court could reach the creditor’s proof of claim without violating the
Constitution. In Katchen, the “plenary proceeding [in an Article III court that]
the creditor sought [as to whether this creditor had been preferred] could be
brought into the bankruptcy court because ‘the same issue [arose] as part of the
process of allowance and disallowance of claims.’” Id. (third alteration in
original) (quoting Katchen, 382 U.S. at 336). The same is true in the present
case. Frazin’s fee-forfeiture action arose as part of the Attorneys’ fee application,
and the bankruptcy court could not rule on the Attorneys’ fee applications
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without resolving Frazin’s fee-forfeiture claim. Thus, the bankruptcy court had
jurisdiction to resolve Frazin’s fiduciary duty claim.
3. Deceptive Trade Practices Act
The other counterclaim on which the bankruptcy court entered a final
judgment was for violations of the DTPA. There are three elements to a DTPA
claim: “(1) the plaintiff is a consumer; (2) the defendant engaged in false,
misleading, or deceptive acts; and (3) these acts constituted a producing cause
of the consumer’s damages.” Hugh Symons Grp., plc v. Motorola, Inc., 292 F.3d
466, 468 (5th Cir. 2002) (citing Doe v. Boys Club of Greater Dall. Inc., 907 S.W.2d
472, 478 (Tex. 1995)) (additional citation omitted). To rule on the merits of this
claim, the bankruptcy court “was required to and did make several . . . legal
determinations that were not ‘disposed of in passing on objections’” to the
Attorneys’ fee applications, which is the precise problem that the Stern Court
found when the bankruptcy court there ruled on Vickie’s counterclaim. 131 S.
Ct. at 2617 (quoting Katchen, 382 U.S. at 323, 332 n.9). In the present case,
although the bankruptcy court necessarily had to resolve most, if not all, of
Frazin’s factual allegations that supported his DTPA claims in the course of
addressing claims that were otherwise within the court’s jurisdiction, the
bankruptcy court was not required to resolve the legal effect flowing from those
factual allegations in the context of a DTPA claim.
For example, the bankruptcy court observed that under Texas law, “a
plaintiff may not fracture what is essentially a negligence claim into claims for
DTPA violations, breach of fiduciary duty or other claims.” Similarly, the
bankruptcy court recognized that “[w]here the gravamen of a plaintiff’s
complaint is that the lawyer inadequately represented the plaintiff in some
fashion, the DTPA will not apply.” The bankruptcy court then “conclude[d] that
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the DTPA claims, to the extent premised upon the conduct alleged in paragraphs
7, 8, 11, 12 and 13 of the Complaint[,] are simply re-stated negligence claims
which violate Texas’s common law rule against the ‘fracturing’ of claims, and are
thus not cognizable under the DTPA.” The bankruptcy court was not required
to decide whether a state court or an Article III court would find that the
allegations were “simply re-stated negligence claims” under Texas law in order
to rule on the fee applications.
By contrast, it was necessary for the bankruptcy court to decide whether
the factual allegations were true and if so, the impact on the fee applications,
regardless of whether the factual allegations could form an element of one or
more state-law causes of action outside of the court’s jurisdiction. The
bankruptcy court carefully scrutinized each of Frazin’s factual allegations and
the evidence, made factual determinations, and resolved the impact on the fee
applications. The analysis of the claims that Frazin alleged were DTPA
violations consumes twenty-six pages of the bankruptcy court’s Memorandum
Opinion. The testimony and other evidence are examined in minute detail. In
sum, the factual resolutions were part and parcel of the adjudication of the fee
applications, so they must survive reversal.
Because it was not necessary to decide the DTPA claim to rule on the
Attorneys’ fee applications, we conclude that the bankruptcy court lacked the
authority to enter a final judgment as to that claim. Nevertheless, we hold that
all factual determinations made in the course of analyzing Frazin’s DTPA claim
were within the court’s constitutional authority because they were necessarily
resolved in the process of adjudicating the fee applications.
B. Merits of Malpractice & Breach of Fiduciary Duty Claims
Based on the foregoing discussion, the only claims that are properly before
us are the malpractice and breach of fiduciary duty claims, over which the
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bankruptcy court had authority to enter a final judgment. We now turn to the
merits of this issue.
The bankruptcy court held that Frazin had failed to establish malpractice
in part because he failed to show causation, which requires a showing that “but
for the attorney’s negligence the client would have prevailed on appeal.”
Millhouse v. Wiesenthal, 775 S.W.2d 626, 627 (Tex. 1989). In its order affirming
the judgment of the bankruptcy court, the district court stated that it would
have ruled against Frazin’s malpractice claim on the same grounds, but that
Frazin had waived this issue. We agree that Frazin has waived this issue. In
his brief to the district court, Frazin mentioned the legal standard for causation,
but failed to apply it by making and substantiating the argument that he would
have prevailed on appeal but for the Attorneys’ malpractice. He also failed to
identify that issue as a proposed basis for deciding the case. In order to preserve
an argument for appeal, “the litigant must press and not merely intimate the
argument during the proceedings before the district court. If an argument is not
raised to such a degree that the district court has an opportunity to rule on it,
we will not address it on appeal.” FDIC v. Mijalis, 15 F.3d 1314, 1327 (5th Cir.
1994).
The bankruptcy court’s findings of fact as to Frazin’s breach of fiduciary
duty allegations are supported by the evidence, and the bankruptcy court’s
conclusions of law were sound. The bankruptcy court found that some of
Frazin’s contentions regarding breach of fiduciary duty were valid, but concluded
that though there had been breaches of fiduciary duty to some extent, they did
not warrant fee forfeiture. We affirm the district court’s judgment affirming the
bankruptcy court’s judgment as to the breach of fiduciary duty claim.
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No. 11-10403
IV. CONCLUSION
We conclude that the bankruptcy court was within its authority to enter
a final judgment on Frazin’s state-law counterclaims for malpractice and breach
of fiduciary duty, as these claims were necessarily resolved in the course of
ruling on the Attorneys’ fee applications. We also agree with the bankruptcy
court that these claims fail on their merits. Most of all, we uphold the final
judgment on the fee applications. However, we hold that the bankruptcy court
erred in entering a final judgment on Frazin’s DTPA state-law counterclaim
because it was not necessary to resolve it in the course of ruling on the
Attorneys’ fee applications. For this reason, the judgment of the district court
affirming the bankruptcy court must be REVERSED in part and AFFIRMED in
part.
Furthermore, we REMAND this case to the district court for further
proceedings consistent with this opinion. We note (though we do not express an
opinion) that although the bankruptcy court did not have jurisdiction to make
a final judgment on the DTPA claim, the district court may have that authority.
See Stern, 131 S. Ct. at 2619–20 (discussing district court authority under 28
U.S.C. §§ 157(c)–(d), 1334(c)); see also Wellness Int’l Network, Ltd. v. Sharif, No.
12-1349, 2013 WL 4441926, at *20–21 (7th Cir. Aug. 21, 2013); Exec. Benefits
Ins. Agency v. Arkinson (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553,
565–66 (9th Cir. 2012), cert. granted 133 S. Ct. 2880 (2013); Waldman v. Stone,
698 F.3d 910, 921–22 (6th Cir. 2012), cert. denied 133 S. Ct. 1604 (2013).
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OWEN, Circuit Judge, concurring.
I fully join the majority opinion. I write separately only to emphasize that
the Supreme Court’s opinion in Stern v. Marshall1 does not affect the ability of
a bankruptcy court to resolve discrete issues that a core bankruptcy proceeding
and a state-law cause of action share in common. The bankruptcy court properly
recognized that many, if not all, of the facts Frazin alleged in support of his
Texas Deceptive Trade Practices Act (DTPA) claims related to the quality, value
and reasonableness of the professional services that the Appellees rendered.
Though a bankruptcy court cannot issue a final judgment disposing of
certain claims in cases like the present one, this does not mean that bankruptcy
courts are neutered in adjudicating core proceedings under 28 U.S.C. § 157(b)(2).
A bankruptcy court should examine and resolve all challenges to a fee
application, even if the challenges could or do constitute one or more elements
of state-law or other causes of action that must be finally resolved by an Article
III or state court. A bankruptcy court has jurisdiction to resolve discrete factual
issues that necessarily must be decided in adjudicating claims for professional
fees under § 330. Bankruptcy courts should not shy away from the task of
resolving all issues that pertain to a fee application, even if those issues also
form the basis, in whole or in part, of a potential state-law cause of action.
When a fee application is filed under § 330, a party to the bankruptcy
proceedings who has standing to challenge that application must assert all
grounds for denying or reducing the claim for fees. A party cannot reserve those
grounds for litigation in another forum simply because the grounds also may be
at issue in state-law causes of action. The fact that there are many issues
common to a proceeding under § 330 and to state-law causes of action does not
insulate those common grounds from the requirement that they be raised in the
1
131 S. Ct. 2594 (2011).
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bankruptcy court. The issues necessary to adjudicate a fee application should
be decided by the bankruptcy court. If and when a party who objected to the fee
application files suit on state-law or other nonbankruptcy claims, the court in
which that suit is filed can apply issue preclusion principles to prevent wasteful
and unnecessary relitigation of factual and legal issues.2
2
See Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925,
932 (5th Cir. 1999).
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REAVLEY, Circuit Judge, concurring in part and dissenting in part.
I would affirm the judgment. We affirm the bankruptcy court’s
distribution of estate funds, and that is all I see before us.
The two law firms had obtained a large recovery in the lawsuit against
Lamajak, Inc., enough to satisfy all creditor claims, and then the court had only
to distribute what was left. The firms filed fee applications, to which the debtor
Frazin objected and then filed numerous claims against them, including
negligence and malpractice and even deceptive trade practice, all directed at the
conduct of the lawyers related to the lawsuit against Lamajak, Inc. There was
no use of the word counterclaim and no pleading meeting Rule 8 requirements,
as a counterclaim must do.
I need not spell out my objections to this court’s judgment because no harm
is done, at least in this case, and the district court will no doubt simply dismiss
whatever has been remanded. However, if it were necessary, I would hold that
a bankruptcy court does not lose jurisdiction in deciding the administration of
the estate when that has some collateral effect not easily avoided.
20