V & M MANAGEMENT, INC.,
HAROLD B. MURPHY, DONALD F. FARRELL, JR., HANIFY & KING, P.C.
(A Law Partnership), and STEPHEN GRAY,
Chapter 11 CaseNo.96-10123-CJK
Adversary Proceeding No. 99-1205
This adversary proceeding having come on for consideration on (1) The Motion of Alphonse Mourad For Recusal And Remand, (2) The Motion of Stephen Gray to Dismiss, and (3) The Motion of Harold B. Murphy, Donald F. Fan-ell, Jr., and Hanify & King, P.C., to Dismiss; and the Court having addressed those motions in a separate Memorandum of Decision issued today,
It is hereby ORDERED and ADJUDGED that
(1) the Motion of Alphonse Mourad for Recusal is DENIED;
(2) the Motion of Alphonse Mourad for Remand of the removed complaint in this
action to the Superior Court Department of the Trial Court of the Commonwealth of Massachusetts is ALLOWED only as to the claim identified in the
Memorandum of Decision as Count 6 against Defendants Harold B. Murphy, Donald F. Farrell, Jr., and Hanify & King, P.C. and DENIED as to all remaining claims set forth in the complaint;
(3) the claim identified in the memorandum of decision as Count 6 against the
Defendants Harold B. Murphy, Donald Farrell, and Hanify & King, P.C. is hereby REMANDED to the Superior Court Department of the Trial Court of the Commonwealth of Massachusetts; and
(4) all counts as to which remand has been denied are hereby DISMISSED on their merits.
cc: Mr. Alphonse Mourad
Harold B. Murphy, Esq., for himself, Donald Farrell, and H&K Paul D. Moore, Esq., for Stephen Gray
|9istnrt nf(iBlassac^usctts ENTERED ON DOCKET - /
Chapter 11 Case No. 96-10123-CJK
V & M MANAGEMENT, INC.,
Adversary Proceeding No. 99-1205
HAROLD H. MURPHY, DONALD F. FARRELL, JR., HANIFY & KING, P.C.
(A Law Partnership), and STEPHEN GRAY,
MEMORANDUM OF DECISION ON
(1) MOTION OF ALPHONSE MOURAD FOR RECUSAL AND REMAND, (2) MOTION OF STEPHEN GRAY TO DISMISS, AND (3) MOTION OF HAROLD B. MURPHY, DONALD F. FARRELL, JR., AND HANIFY & KING. P.C.. TO DISMISS
This adversary proceeding was commenced by the Plaintiff, Alphonse Mourad, in the Superior Court Department of the Trial Court of the Commonwealth of Massachusetts and removed to this Court by Defendant Stephen Gray. Now the Plaintiff moves for the following:
(1) that I recuse myself from this adversary proceeding on the basis of bias and prejudice; and (2) that the adversary proceeding be remanded to the Superior Court. Stephen Gray opposes the motion; the other defendants have filed no response. All Defendants have also moved to dismiss the complaint on grounds of lack of standing, failure to state a claim on which relief can be granted, and claim and issue preclusion. For the reasons set forth below, the Court will deny the
motion for recusal, deny the motion for remand as to all claims but one against the Hanify & King defendants, and dismiss all claims as to which remand is denied.
MOTION FOR RECUSAL
Mr. Mourad contends that I should recuse myself because, he alleges, I am biased and prejudiced against him and incapable of fairly adjudicating the claims in this adversary proceeding. He bases his allegations of bias on my previous rulings against him in this case; on his allegation that I knew of but did nothing about an alleged conflict of interest between Gray and Hanify .& King in this case, which is the subject matter of his complaint in this adversary proceeding; on my exclusion of him from the Bankruptcy Court; and on my allegedly having had him arrested when, in violation of the exclusion order, he came to the court to (he states) inquire about the status of the removed action, as to which he had been unable to get information by telephone.
This is Mr. Mourad's fourth or fifth motion for my recusal. Most of the grounds advanced as cause for recusal in this motion were advanced as cause for recusal in previous motions. (The only new matters are the order excluding him from the Bankruptcy Court and the subsequent enforcement of that order when Mr. Mourad appeared at the Court in violation of the order.) In each instance I denied the motion on the basis that his charges of bias were based entirely on orders I have entered in this bankruptcy case (and I entered lengthy memoranda in the Chapter 11 case on these motions). The same is true here. Mr. Mourad cites no extra-judicial basis for his allegations of bias, and none exist. When bias or prejudice is the basis for recusal, it must ordinarily be grounded in some extrajudicial conduct or source, something outside the proceeding from which recusal is sought. Litekey v. United States. 114 S.Ct. 1147,1156-1157 2
(1994). My previous rulings against Mr. Mourad in this case, including my order excluding him from the Bankruptcy Court and the subsequent enforcement of that order when he violated it, do not establish bias within the meaning of 28 U.S.C. §455(b)(l). I am neither biased against Mr. Mourad nor incapable of adjudicating fairly his claims in this adversary proceeding. For these reasons, I will deny his motion for recusal.
PROCEDURAL HISTORY AND BACKGROUND
The removed complaint, the merits of the arguments for and against remand, and the motions to dismiss are best understood with benefit of the extremely lengthy procedural history of this case. The Plaintiff, Alphonse Mourad, is the president, sole director, and sole shareholder ofV&M Management, Inc. ("V&M" or "the Debtor"). Prior to the effective date of the confirmed plan in this bankruptcy case, V&M's principal asset was a 276-unit low-income apartment complex that, under Massachusetts law, G.L. c. 121 A, constituted an urban renewal project under the supervision and regulation of the Boston Redevelopment Authority (BRA). V&M's business was the ownership and management of this apartment complex. Facing foreclosure on its property by a junior mortgagee, V&M filed a petition for relief under Chapter 11 of the Bankruptcy Code on January 8,1996.
On February 1,1996, the BRA, together with the City of Boston and the Commissioner of the Massachusetts Department of Revenue, moved for the appointment of a Chapter 11 Trustee in the case; the motion was based on allegations that the Debtor had been grossly mismanaged by its principal, Alphonse Mourad. On February 8, 1996, while this motion was pending, the Debtor's original counsel, Frank Kirby, withdrew for health reasons, and the Debtor filed an application to employ Attorney Harold Murphy and his firm ofHanify & King, P.C. 3
("H&K") as successor counsel. Defendant Donald Farrell is a member of the firm. On February 14, 1996,1 allowed the application. At the time, the Debtor remained a debtor-in-possession. However, on April 1, 1996, after a hearing on the motion for an order to appoint a Chapter 11 trustee, the Court allowed the motion and ordered that a Chapter 11 Trustee be appointed in the case. On April 2, 1996, the United States Trustee appointed Stephen Gray in that capacity, and, upon application of the United States Trustee under Fed.R.Bankr.P. 2007.1, the Court approved his appointment. Upon Mr. Gray's appointment, the Debtor ceased to be a debtor in possession. The Debtor took no appeal from the order allowing the motion to appoint a trustee; Mr. Mourad did appeal from that order in his individual capacity, but his appeal was later dismissed.
Mr. Murphy and H&K represented the Debtor in opposing the motion for an order to appoint a trustee. They continued to represent the Debtor in the case until, on October 10,1996, I allowed the application of Mr. Murphy and the firm to withdraw as Debtor's counsel. Mr. Gray served as Chapter 11 Trustee in this case from April 2, 1996, until the effective date of confirmation of the Joint Plan of Reorganization, which occurred in December, 1997.
No plan of reorganization was filed in this case until six months after H&K's withdrawal, when five competing plans were filed. The Court ruled that the disclosure statements for each of the five plans did not contain adequate information and therefore were not approved. At a hearing on the adequacy of the disclosure statements on June 11, 1997, and in view of these inadequacies and of the lack of a confirmable plan at this late stage in the case, the Court also issued an oral order to show cause why the case should not be dismissed with prejudice.
In response, two further plans were filed: one proposed jointly by Chapter 11 Trustee Stephen Gray, Winter Hill Federal Savings Bank, the Mandela Residents Cooperative Association, and Beacon Residential Properties Limited Partnership (the "Joint Plan"), on June 4
27,1997; and another by Gary Leroy and Mourad, Owens & Associates, filed on July 8, 1997. The Court approved the disclosure statements for both plans and, on September 26,1997, after a hearing on confirmation of the plans, denied confirmation of the Leroy/Mourad Owens plan (because, among other reasons, it was rejected by creditors, 11 U.S.C. § 1129(a)(10)) and confirmed the Joint Plan. Only Gary Leroy appealed from the confirmation order, and he later stipulated to dismissal of his appeal.
In brief, the confirmed plan provided that, upon its effective date, the Debtor's apartment complex would be conveyed to a new entity (the "Buyer") controlled jointly by the Mandela Residents Cooperative Association and Beacon Residential Properties Limited Partnership, who would raise and invest substantial sums in renovating the property for continued use as low and moderate income housing. In exchange for conveyance of the property, creditors have and will receive payments on three dates, all funded principally by the Buyer. On the effective date of confirmation, creditors were to receive a total of $3,379,200. This included a total of $2,779,200 on secured, administrative and priority claims, most of which were compromised, some severely, in order to make this plan possible. It also included an initial payment of $600,000 on unsecured claims, representing an estimated 7.59 percent dividend (assuming $7.9 million of unsecured claims). Subject to certain contingencies, the plan also provides for two further distributions of a further $900,000.00, of which $130,000 would go to unsecured creditors and raise the cumulative dividend to an estimated 9.24 percent. With respect to the Debtor's sole stockholder, Alphonse Mourad, the plan leaves his equity interest unaffected but pays him nothing on account of that interest, and the plan leaves the Debtor itself without assets or income. The effective date of confirmation occurred in December, 1997. In accordance with the above provisions of the plan, the property has been conveyed to the buyer, and the initial distributions have been made to 5
the holders of allowed secured, priority, and general unsecured claims.
As required by 11 U.S.C. § 1129(a)(9)(A), the plan funds the payment of professional fees in this case, including those ofH&K as Debtor's counsel and of Stephen Gray as Chapter 11 Trustee. The amount and allowance of their fees were determined by orders entered on September 19,1997. H&K applied for fees of $146,899.50 and expenses of $7,587.69. By order of September 19,1997, the Court allowed the application in the amounts requested. Gray applied for fees of $279,487 and expenses of $3,887.08; by order of September 19, 1997, the Court allowed fees of $246,087 and expenses in the amount requested. Mr. Mourad objected to the fee applications of Gray and H&K. With respect to H&K, he argued that fees should be denied on the basis of the alleged failings that are reasserted in this proceeding (items (2) through (7) in subsection (b) below). The Court overruled Mr. Mourad's objections as to both Gray and H&K; with respect to H&K, the Court ruled, in a memorandum of decision, that he lacked standing to object and that, putting aside his lack of standing, his objection was "entirely lacking in merit."
On October 31,1997, ten parties holding claims against this estate' moved for (1) revocation of the order confirming the Joint Plan of Reorganization; (2) a stay of the confirmation order pending resolution of the motion to revoke; (3) retroactive removal of Stephen S. Gray as Chapter 11 Trustee in this case; (4) vacatur of the orders approving the fee applications of Stephen S. Gray as Chapter 11 Trustee and of H&K as Debtor's counsel and return of their fees to the estate; (5) dismissal of this case; and (6) return of the Debtor's
' The ten claimants were Victor Aronow, Chardon Financial Services, Matthew Mallen, Gary Leroy, Arthur Goldsmith, Georgette Maalouf, Alphonse and Noha Simon, Edward Mourad, and Habib Mourad. Plaintiff Alphonse Mourad did not join in this motion.
apartment complex to the Debtor. The basis for all this relief was the movants' allegations, based on newly discovered evidence, that while H&K remained counsel to the Debtor in this case, Stephen Gray, while acting as Chapter 11 Trustee in this case, hired H&K to represent him in his capacity as Trustee in another Chapter 11 case; and neither Gray nor the firm disclosed that relationship to the Debtor, the creditors, and the Court in this case. The movants also alleged that the undisclosed relationship created a conflict of interest that tainted the proceedings in this case and resulted in harm to the estate.
By orders dated November 21,1997 and December 23,1998, and after preliminary and evidentiary hearings on the motion, the Court denied the motion in all respects.2 In so ruling, the Court made the following findings:
After Mr. Gray's appointment as Chapter 11 Trustee and before Mr. Murphy and his firm withdrew as Debtor's counsel, Stephen Gray, in his capacity as Chapter 11 Trustee in another case, retained Harold Murphy and his firm, H&K, to serve as trustee's counsel, and that this arrangement was never disclosed (in this case) to the Court, the Debtor, or the creditors. More specifically, on June 11,1996, Mr. Gray was appointed trustee in the Chapter 11 case of American Shipyard Corporation, which was filed and pending in the United States Bankruptcy Court for the District of Rhode Island. On June 14,1996, Mr. Gray filed an application in that case to employ Harold Murphy and H&K as trustee's counsel, and on July 15,1996, the court (Votolato, J.) allowed the application. The movants contend that Murphy never disclosed this arrangement (his employment by Gray in the Rhode Island case) to Alphonse Mourad, the Debtor's principal, but I have no evidence to support that allegation. I find no evidence that Gray's hiring of H&K in the Rhode Island case had anything to do with Gray's and H&K's respective interests and responsibilities in the present case. All evidence indicates that both parties treated the
2 The lengthy memoranda of decision issued in support of those orders were issued on December 8,1997 and December 23,1998 respectively. I incorporate them by reference into this memorandum. The movants appealed from the first order but later withdrew their appeal;
and they took no appeal from the latter order.
two cases as entirely separate matters. Neither used their relationship in the Rhode Island case as leverage or an opportunity to influence the other's actions in this case. Gray articulated perfectly legitimate reasons for hiring H&K in the Rhode Island case, and his testimony is entirely credible. The movants do not suggest, and I have no evidence, that the American Shipyard estate had any claim or interest in the V&M Management estate or vice-versa.
The relationship between Gray and H&K in the American Shipyard case commenced after Gray became Trustee in this case. A similar relationship existed between Gray and H&K in the case ofNeponset River Paper Company, a/k/a Patriot Paper, Case No. 93-12482-CJK, Bankr.D.Mass) that predated Gray's appointment as Chapter 11 Trustee in the present case. In May, 1994, upon his appointment as Chapter 7 Trustee in the Patriot Paper case, Gray hired H&K to serve as Trustee counsel in that case, and the firm still continues to represent him in that case. I have no evidence that H&K failed to disclose this relationship to Alphonse Mourad, as the Debtor's principal. As with the American Shipyard case, I have no evidence whatsoever that either Gray or H&K used their relationship in Patriot Paper to influence the other's actions in this case. The movants do not suggest, and I have no evidence, that the Patriot Paper estate had any claim or interest in the V&M Management estate or vice-versa.
Mr. Gray never disclosed in this case--in the case in general, in offering his first plan of reorganization, in opposing other plans, or in orchestrating the now-confirmed Joint Plan--that he had retained Mr. Murphy and his firm in the Rhode Island case or in the Patriot Paper case.
On the basis of these and other findings, the Court held that Gray should have disclosed his above-described connections to H&K in the bankruptcy case, but also that he had not withheld the information with intent to deceive, that the connections would not have disqualified him from acting as Chapter 11 Trustee in this case, and that the movants had adduced no evidence whatsoever that Gray had breached his duty to the estate or any of its constituencies, either on account of the undisclosed connections or otherwise. With respect to H&K, the Court ruled that the firm had had no obligation to disclose the above-described connections in the case
(i.e., to the Court and creditors); that the movants had adduced no evidence that the firm had failed to disclose the connections to the Debtor and Mr. Mourad; that H&K's connections to Gray were sufficiently indirect and attenuated that they would not have disqualified the firm from continuing to represent the Debtor after Gray became Trustee in this case; and that the movants had failed to demonstrate that, in refusing, despite Mr. Mourad's instructions, to appeal from the Court's order to appoint a Chapter 11 Trustee, that the firm had breached its fiduciary obligation to the Debtor (much less the estate).
Mr. Mourad did not file a proof of claim in this case, but the Debtor listed Mr. Mourad in its schedules as holding an unsecured claim in the amount of $127,888.64 (with no indication that the claim was disputed, unliquidated, or contingent). See F.R.BANKR.P. 3002(a), 3003(b)(l), 3003(c)(2). On November 14,1997, the Trustee objected to Mr. Mourad's claim on the following grounds: (1) that the Debtor's books and records do not establish that any amount was owed by the Debtor to Mr. Mourad as of the petition date; and (2) that the Debtor has claims against Mr. Mourad substantially in excess of $127,888.64. Mr. Mourad did not respond to the objection, and on February 12,1998, the Court sustained the Trustee's objection to the claim and disallowed the claim in its entirety.
Later, on November 20,1998, Mr. Mourad filed a motion seeking revocation of the order of confirmation, return of the Debtor's property to the Debtor, and disgorgement of fees awarded in this case to the law firm ofHanify & King in its capacity as counsel to the Debtor, and to Stephen Gray in his capacity as Chapter 11 Trustee in this case. The basis for this motion was certain alleged failings that are reasserted in this proceeding (enumerated below as claims 8 and 9 against H&K and claims 1 through 4 against Stephen Gray). On December 4,1998, the Court denied the motion on the basis that Mr. Mourad lacked standing to bring it. In a separate 9
memorandum of decision on the motion, the Court explained:
By virtue of the confirmed plan of reorganization and the order confirming it, Mr. Mourad's equity interest in the Debtor was quantified as having no value, and, accordingly, the plan awarded him nothing on account of his equity interest in the Debtor. That order is final and preclusive for purposes of this motion on the issue of the value and extent of Mr. Mourad's equity interest. Also, Mr. Mourad is not a creditor of this estate. He is entitled to no distribution whatsoever from its assets, and nothing in this motion would change that. For these reasons, he has no stake in the outcome of this motion and no standing to bring it.
Mr. Mourad later appealed from that order, but the Bankruptcy Appellate Panel dismissed the appeal as late.
On December 23,1998, the Court allowed the amended motion of Stephen Gray, as Creditors' Trustee, for approval of final decree and, by that order, closed the case "except only as to (1) matters presently under appeal and (2) the recently-decided motion [the Creditors' Joint Motion for Retroactive Removal of Trustee and Vacatur of Fee Orders] as to which the appeal period has not lapsed." The Court further ordered that "the final decree will enter only upon resolution of the matters that, under this order, are excepted from closure." Mr. Mourad appealed from the order allowing the motion for final decree; on March 12,1999, the Bankruptcy Appellate Panel (BAP) dismissed this appeal for lack of standing, stating that, because Mr. Mourad has no right to a distribution on account of his equity interest in the Debtor, he was not "aggrieved" by the Bankruptcy Court order from which he appealed and therefore lacked standing to appeal.
As of this writing, one appeal remains pending in this case: an appeal by Alphonse Mourad to the Bankruptcy Appellate Panel from this Court's orders of November 16,1998, denying his Motion to Allow Administrative Claim Late and Motion to Compel the Trustee to
Pay Federal Taxes and Penalties Assessed Against V & M Management, Inc. Because this one appeal remains pending, the Court cannot enter the final decree.
Acting pro se, Mr. Mourad filed the present complaint in the Superior Court on March 31,1999. The complaint is thirty-four pages in length and not separated into distinct counts or demands; it concludes with a single general demand of judgment against the four defendants, jointly and severally, in the amount of $20 million. The complaint includes a demand for jury trial on all issues. Gray removed the action to this Court on May 5,1999, before any defendant had filed an answer. Gray has filed a motion to dismiss the complaint, and the H&K defendants have jointly filed another, so answers have neither been filed nor come due.
CLAIMS AGAINST STEPHEN GRAY
As against Stephen Gray, Mr. Mourad's complaint states the following claims:
1. that he violated F.R.BANKR.P. 2007.1 and committed perjury and fraud on the court by failing to disclose his connections to H&K and by twice representing under oath that he had no connection to Debtor's counsel (^f 108-116);
2. that, because of his undisclosed connections, Gray was not "disinterested" within the meaning of 11 U.S.C. §§ 101(14) or 1104 and therefore should not have been appointed trustee and should not have accepted that appointment (^ 119-120);
3. that "his 'interested' activities throughout this case cast a dark cloud over these proceedings," (^ 120); and
4. that he conspired with Murphy to deprive Mourad of his investment in V&M and his right to a successful reorganization of the Debtor that left his sole equity interest intact and the Debtor free of secured debt and certain taxes (^f 1,107). 11
Though no answer has been filed to date. Gray's motion to dismiss sets forth at least some of his defenses: that because he was not aggrieved by the conduct complained of, Mr. Mourad lacks standing to bring this complaint; that the complaint fails to state a claim on which relief can be granted; and that Mr. Mourad's claims against Gray are barred by the doctrines of collateral estoppel and res judicata, having been already adjudicated in this case.
a. Motion for Remand as to Claims Asserted Against Gray
Mr. Mourad moves for remand of the adversary proceeding to the Superior Court for the following reasons: (1) the Debtor is not a party to this action; (2) the Debtor's bankruptcy case is closed with respect to new matters; (3) Mr. Mourad is barred from entering the Bankruptcy Court and therefore could not appear to litigate this matter if it were tried here; (4) his claims in this adversary proceeding are based entirely on state law; (5) Defendant Gray removed this action as a forum-shopping tactic; (6) the state court can adequately address the anticipated defenses of res judicata and issue preclusion; (7) the Bankruptcy Court's jurisdiction is questionable at best (he does not explain why); and (8) Mr. Mourad has made a jury-trial claim and does not consent to trial of that claim in the Bankruptcy Court except by jury. In his opposition to remand, Defendant Stephen Gray disputes the various reasons advanced for removal and argues that he would be prejudiced by remand.
The removal of actions from state courts to the bankruptcy court is governed by 28 U.S.C. §§ 1452 (removal of claims related to bankruptcy cases) and 1447 (procedure after removal). In relevant part, these provide that "a party may remove any claim or cause of action in a civil action ... to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title." 12
28 U.S.C. § 1452(a). "The court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground." 28 U.S.C. § 1452(b). "If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded." 28 U.S.C. § 1447(c). In short, with respect to any given claim or cause of action, the Court may remand on any equitable ground and must remand if the court lacks subject matter jurisdiction.
The Court begins with subject matter jurisdiction. Without elaboration or supporting arguments, Mr. Mourad questions the Bankruptcy Court's subject matter jurisdiction over the removed compliant. Gray responds that the claims against him constitute core proceedings, such that this Court has full authority under 28 U.S.C. § 157(a) and (b) to hear and decide the claims and to enter appropriate orders and judgment on them.
Each of Mr. Mourad's claims against Stephen Gray alleges malfeasance by Gray as Chapter 11 Trustee. Mr. Mourad does not claim to have been injured by Gray except in his (Mourad's) capacity as holder of an equity interest in, or an unsecured claim against, the bankruptcy estate. The complaint alleges, in essence, that Gray harmed Mourad by concealing his connections to H&K and by serving as Trustee despite disqualifying connections. In so doing, Gray is alleged to have violated F.R.BANKR.P. 2007.1 and committed fraud on the court. The complaint also alleges that Gray conspired with the H&K defendants to deprive him of his property and rights in the Debtor, which was accomplished through confirmation of the Joint Plan of Reorganization.
I hold that these claims relate directly to Gray's administration of the bankruptcy estate, to the performance of his duties under the Bankruptcy Code as Chapter 11 Trustee, and to the standards and process for confirming a Chapter 11 plan. For these reasons, the claims against 13
Gray arise under the Bankruptcy Code (11 U.S.C.) and therefore fall within the jurisdiction of the United States District Court under 28 U.S.C. § 13343 ("The district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.") and constitute core proceedings within the meaning of 28 U.S.C. § 157(b). See especially 28 U.S.C. § 157(b)(2)(A) ("Core proceedings include ... matters concerning the administration of the estate."). Therefore, this Court has full authority to hear and determine these claims and to enter appropriate orders and judgments on them.
I find no merit in the other grounds that Mr. Mourad has advanced for remand. First, he claims that remand is appropriate because the Debtor is not a party, but this argument ignores (1) that the Trustee is a party and (2) that Mourad's claims against him are derivative of his claim against and interest in the Debtor. Second, he states that the bankruptcy case is closed to new business; this is true, but the Court can reopen the case for the limited purpose of adjudicating these claims (which, in any case, are not new business but simply a rehashing of issues already fully adjudicated in this case). Third, Mr. Mourad states that he cannot litigate this matter in the Bankruptcy Court because he is barred from entering the premises. This is not cause to remand because, as and when necessary, the Court can modify the order to the limited extent necessary for Mr. Mourad to litigate this matter. (But the Court does not hereby modify the exclusion order.) Fourth, Mourad contends that his claims in this adversary proceeding are based entirely on state law, but this is simply false: the claims against Gray arise entirely under federal bankruptcy law. Fifth, he alleges that Gray removed this action as a forum-shopping tactic; I
3 Pursuant to 28 U.S.C. § 157(a), the United States District Court for this district has referred any and all cases and proceedings within its bankruptcy jurisdiction to the judges of the Bankruptcy Court for the District of Massachusetts. See Local Rule 201 (D.Mass).
give this no weight because it is entirely appropriate for a Chapter 11 Trustee to litigate issues related to his status as a Trustee in the Bankruptcy Court-particularly where, as here, the Bankruptcy Court has already held lengthy hearing and ruled on precisely these issues. Sixth, Mourad contends that the state court can adequately address the anticipated defenses of res judicata and issue preclusion. I do not doubt that the state court can adequately address these defenses, but, given the complexity, subject matter, and lengthy history of this case, this Court is better positioned to address not only defenses of claim and issue preclusion but also the claims as a whole. Lastly, Mr. Mourad has made a jury-trial claim and does not consent to trial of that claim in the Bankruptcy Court except by jury. This is not cause to remand because the claims against Gray are entirely equitable (not legal) in nature, and there is no right to a jury trial on such matters. For these reasons, I conclude that Mr. Mourad has not stated equitable cause for remand.
Rather, for the following reasons, remand should be denied as to the claims against Stephen Gray. First, the subject matter of the complaint--breach of the Trustee's duties in this case (over which this court has exclusive jurisdiction, 28 U.S.C. § 1334(a)), fraud on this court, and impropriety in the plan confirmation process--falls squarely within this Court's core jurisdiction. Second, the allegations go to the heart of the reorganization process and are in no sense peripheral to the bankruptcy case. Third, to a large extent, the complaint concerns issues that have already been fully and finally adjudicated in this case. And fourth, the adjudication of this complaint requires, or would at least be greatly facilitated by, familiarity with the lengthy history of this case and expertise in Chapter 11 reorganization law. For these reasons, the Court will deny remand as to Stephen Gray.
b. Motion of Stephen Gray to Dismiss 1. Standing
Stephen Gray moves to dismiss the claims against him on three grounds, but I need address only two. The first is that Mr. Mourad has not been aggrieved by the acts of which he now complains and, therefore, lacks standing to seek relief against Gray. Gray states that Mr. Mourad alleges no harm to himself that is not derivative of his status as an equity security holder in the Debtor. And Gray further contends that previous rulings by this Court, the Bankruptcy Appellate Panel, and the United States District Court have preclusively established that, for lack of a valid interest in or claim against the Debtor or its estate, Mr. Mourad cannot be aggrieved by, and therefore lacks standing to complain about, actions that are alleged to have harmed him by harming the Debtor or its bankruptcy estate. In response, Mr. Mourad contends that he has standing because (1) his complaint seeks redress for injury to himself, not to the Debtor; and (2) he can demonstrate at trial that his equity interest in the Debtor had value. He does not deny that this Court, the Bankruptcy Appellate Panel, and the District Court have held that he lacks standing to complain about actions that are alleged to have harmed him by harming the Debtor or its bankruptcy estate.
The Court agrees with Gray that Mr. Mourad alleges no harm to himself that is not derivative of his (Mr. Mourad's) status as an equity security holder of the Debtor. Specifically, Mr. Mourad alleges that Gray, as Trustee, proposed and obtained confirmation of a plan that transferred the Debtor's principal asset to a third party and reduced his equity interest in the Debtor to no value. All the wrong that Gray is alleged to have committed is harm to Mr. Mourad as an equity security holder of the Debtor.
By the 1997 order confirming the Joint Plan of Reorganization, the Court has already adjudicated that Mr. Mourad's equity interest in the Debtor is of no value. In relevant part, the Plan provided that Mr. Mourad would retain his equity interest in the Debtor but also that, because the Debtor was insolvent, he would receive no distribution on account of his interest. Mr. Mourad was a party to and active participant in the Plan confirmation process; this matter was actually litigated; the quantification of Mr. Mourad's interest was necessary for confirmation of the Plan; and the confirmation order is a valid final judgment. By the doctrine ofres judicata (also known as claim preclusion),4 Mr. Mourad is bound by the confirmation order and precluded from relitigating its disposition of his interest. And by the doctrine of collateral estoppel,5 he is
4 The essential elements of claim preclusion are: (1) a final judgment on the merits in an earlier action; (2) an identity of parties or privies in the two suits; and (3) an identity of the cause of action in both suits.... Once these elements are established, claim preclusion also bars the relitigation of any issue that was, or might have been, raised in respect to the subject matter of the prior litigation.
Grella v. Salem Five Cents Savings Bank, 42 F.3d 26, 30 (1st Cir. 1994).
5 The principle of collateral estoppel, or issue preclusion, bars
relitigation of any factual or legal issue that was actually decided in previous litigation "between the parties, whether on the same or a different claim."... When there is an identity of the parties in subsequent actions, a party must establish four essential elements for a successful application of issue preclusion to the later action:
(1) the issue sought to be precluded must be the same as that involved in the prior action; (2) the issue must have been actually litigated; (3) the issue must have been determined by a valid and binding final judgment; and (4) the determination of the issue must have been essential to the judgment.... An issue may be "actually" decided even if it is not explicitly decided, for it may have constituted, logically or practically, a necessary component of the decision reached in the prior litigation.
Grella v. Salem Five Cents Savings Bank, 42 F.3d 26, 30-31 (1st Cir. 1994). 17
now precluded from contending that his equity interest had (or could have had) such value as would give him standing in the present matter.
Likewise, it has also been established that Mr. Mourad holds no unsecured claim against the estate. The Trustee objected to Mr. Mourad's unsecured claim, the matter was actually litigated, the Court disallowed the claim in its entirety, and Mr. Mourad took no appeal from that order. The order is a valid final judgment. By the doctrine ofres judicata, Mr. Mourad is bound by the order and precluded from relitigating its disposition of his claim. And by the doctrine of collateral estoppel, he is now precluded from contending that his unsecured claim is valid and thus gives him standing in the present matter.
By virtue of these earlier rulings, Mr. Mourad has no valid interest in the estate and therefore no standing to seek the relief he now seeks against Gray as its Trustee. For this reason, his claims against Gray must be dismissed.
2. Res Judicata/Collateral Estoppel
The second basis on which Gray seeks dismissal is claim and issue preclusion. He argues that the claims now being asserted by Mr. Mourad were fully litigated between these same parties in earlier proceedings in this case, and that Mr. Mourad is bound by the Court's earlier orders and precluded by them from collaterally attacking such orders. The Court agrees, both with respect to standing and on the merits. The Court has already ruled that, by virtue of earlier orders in this case, Mr. Mourad is now precluded from contending that he has any interest in this estate as an equity interest holder. Beyond that, however, the present claims have also been preclusively adjudicated. The present claims were first raised, and fully litigated in the context of, the motion filed by ten creditors on October 31,1997. After an evidentiary hearing, the Court 18
ruled, by order dated December 23,1998, that Gray should have disclosed his connections to H&K in the bankruptcy case, but also that he had not withheld the information with intent to deceive, that the connections would not have disqualified him from acting as Chapter 11 Trustee in this case, and that the movants had adduced no evidence whatsoever that Gray had breached his duty to the estate or any of its constituencies, either on account of the undisclosed connections or otherwise.
Mr. Mourad was not a party to that motion (so, absent privity between Mr. Mourad and the creditors who brought that motion, it is not preclusive as to him), but almost one year ago, he raised these same issues in a motion of his own: his motion of November 20,1998, entitled "Motion ofAlphonse Mourad To Retroactively Remove Trustee Gray, Revoke Beacon Residential Property's Reorganization Plan, To Request Hanify & King and Trustee Gray's Fees Be Returned, and to Retroactively Return The Mandela Apartments to the Debtor, V & M Management, Inc., and it's Sole Stockholder, Alphonse Mourad." On December 4,1998, the Court denied that motion for lack of standing, and the Bankruptcy Appellate Panel dismissed Mr. Mourad's appeal from the order. This order is valid and final and, by resjudicata, precludes Mr. Mourad from raising these issues anew.
For these reasons, the Court will allow the motion of Stephen Gray to dismiss the claims against him.
CLAIMS AGAINST H&K DEFENDANTS
As against the Harold Murphy, Donald Farrell, and the firm of Hanify & King, P.C., Mr. Mourad's complaint states the following nine causes of action (which shall henceforth be referred to as Counts 1 through 9):
1. that, by misrepresenting his ability to obtain successful results in this case,
Murphy induced Mourad to hire H&K as Debtor's counsel in the case ffl 77-78, 102);
2. that, as counsel to the Debtor (both before and after appointment of the Trustee), they wrongfully failed to challenge and avoid the secured claim of a creditor whose pending foreclosure drove the Debtor to seek bankruptcy relief, and that this failure, in turn, prevented the Debtor from extricating itself from the bankruptcy case ffl 79-84);
3. that, because of their negligence in opposing the motion for appointment of a
Chapter 11 Trustee, the Court allowed the motion; and because they negligently or wrongfully (out of loyalty to Stephen Gray, to whom they had undisclosed connections) failed to appeal from and/or seek reconsideration of that order, Trustee Gray remained in possession of the Debtor thereafter (^ 85-92);
4. that they negligently failed to advise him as to how properly to appeal from the order to appoint a trustee; and they improperly drafted a notice of appeal for him to sign in his individual capacity, resulting in dismissal of the appeal for lack of standing and because a corporation cannot appear except by counsel (H93);
5. that they violated rules of professional conduct by withdrawing from representing the Debtor before taking reasonable steps to avoid foreseeable prejudice to their client's rights (H96);
6. that they negligently advised Mourad not to file a proof of claim in the case,
thereby depriving him of standing as a creditor to participate in the case (^ 98, 123);
7. that Murphy and H&K filed an excessive fee application in the case for negligent representation of the Debtor that provided no benefit to the Debtor ffl 100-101);
8. that Murphy and H&K failed to disclose to Mourad, the United States Trustee,
and the Court their representation of Gray in the American Shipyard and Neponset River Paper cases and thereby committed fraud on the court and violated F.R.BANKR.P. 2007.1(^ 103, 117); and
9. that Murphy, Farrell, and H&K conspired with Trustee Stephen Gray to deprive Mourad of his investment in V&M and his right to a successful reorganization of the Debtor that left his sole equity interest intact and the Debtor free of secured debt and certain taxes (UK 1,107).
Mr. Mourad contends that these various actions constituted fraud, deceit, breaches of contract, and breaches of professional, ethical, and fiduciary duty, resulting in loss to Mourad of his $20 million investment in V&M, and causing stress, pain, and damages to Mourad and his family (^ 104-106, 124). Though no answers have been filed to date, the joint motion to dismiss of the H&K defendants' sets forth three of their defenses: that because he was not aggrieved by the conduct complained of, Mr. Mourad lacks standing to bring this complaint; that the complaint fails to state a claim on which relief can be granted; and that Mr. Mourad's claims against them have already been adjudicated in this case and therefore are barred by the doctrines of collateral estoppel and res judicata.
a. Motion for Remand as to Claims Asserted Against the H&K Defendants
Mr. Mourad seeks remand of his claims against the H&K defendants for the same eight reasons (enumerated above) that he asserted with respect to the claims against Stephen Gray. 21
The H&K defendants did not remove the complaint and have filed no opposition to the motion for remand, but neither have they assented to it or moved for remand, so I proceed to consider the merits of the motion for remand. As I stated above, with respect to any given claim or cause of action, the Court may remand on any equitable ground and must remand if the court lacks subject matter jurisdiction. In determining whether these claims should be remanded, I will address them in four groups.
Counts 1 through 5:
The first group is comprised of counts 1 through 5 (as enumerated above). Count 1 states that by misrepresenting his ability to obtain successful results in this case. Defendant Harold Murphy induced Mr. Mourad to hire H&K as Debtor's counsel in the case. This conduct occurred entirely before the appointment of the Trustee, while the Debtor remained in possession of the estate property. Counts 2 through 5 each allege that the H&K defendants breached a duty of care to the Debtor in their representation of the Debtor in this case. In each of these counts, the principal harm was to the Debtor (or, while the Debtor remained a debtor-in-possession, to the bankruptcy estate), and Mr. Mourad was harmed by the tortious conduct only insofar as he held an equity interest in or valid claim against the Debtor or the estate.
The claims in this first group are uniformly "matters concerning the administration of the bankruptcy estate" and, as such, are core proceedings. 28 U.S.C. § 157(b)(2)(A) (core proceedings include matters concerning the administration of the estate). The fact that the counts may involve causes of action under state law is not dispositive. 28 U.S.C. § 157(b)(3) ("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."). In this case, the alleged breaches of duty 22
under state law occurred while the H&K defendants were representing the Debtor, both before and after appointment of the Trustee, and (in Count 1) while they were being hired to represent the Debtor. They concern the litigation of the motion to appoint a trustee; the litigation of a secured claim whose alleged negligent mishandling (Mr. Mourad contends) prevented the Debtor from extricating itself from this case; and the hiring and withdrawal of Debtor's counsel. All clearly concern the administration of the estate.
In fact, Mr. Mourad asserted the facts constituting Counts 2 through 5 as objections to the fee application of H&K. Consequently, this Court is familiar with these allegations and, after holding lengthy and complete hearings, has already adjudicated them. Moreover, this Court is already familiar with the case as a whole and with the bankruptcy law needed to understand and evaluate these allegations. It would be unfair to the Defendants (and indeed to the state court) to require them to undertake the enormous task of bringing the state court up to speed on these matters. Therefore, I conclude that these counts should not be remanded.
In Count 6, Mr. Mourad alleges that Murphy and Farrell negligently advised Mourad not to file a proof of claim in the case, and that, by following this advise, he deprived himself of standing as a creditor to participate in, and file motions in, the case ffl 98,123).6 In this count,
6 This claim is based on the assumption that Mr. Mourad was deemed to lack standing as a creditor because he did not file a proof of claim. In fact, the Debtor listed Mr. Mourad as having an unsecured, nonpriority claim in the amount of $127,888.64. Consequently, it was unnecessary for Mr. Mourad to file a claim (unless he was claiming more or seeking priority). See F.R.BANKR.P. 3003(b)(l) and (c)(2). Rather, Mr. Mourad was deemed to lack standing as a creditor because his claim was unsupported and subject to overwhelming counterclaims. His claim was disallowed for these reasons (when the Trustee objected to the claim and Mr. Mourad filed no response to the objection), and a disallowed claim gives its holder no standing to
the allegation is that Murphy and Farrell were negligent in giving legal advice not to the Debtor but to Mourad himself as a creditor of the estate. The alleged harm is not that Mr. Mourad recovered nothing as a creditor but that he was deprived of the standing that he might otherwise have had to participate and have a voice in the case. (He does not indicate in the complaint how and whether this affected the outcome of the case and his interests and rights in the matter; nor does he allege the existence of an attorney/client relationship between himself and H&K.)
Although this count is related to the bankruptcy case, it is not clear whether it constitutes a core proceeding. On the one hand, it seeks redress for alleged harm to Mr. Mourad as a claimant in the bankruptcy case; and its allegations concern the integrity of the judicial process in this case. On the other hand, the alleged harm is to a single creditor, not to the estate or to the Debtor or Debtor in Possession; and the redress that Mr. Mourad seeks is not against the estate and would not affect the estate. Because core subject matter jurisdiction is uncertain as to this count, the Court will, pursuant to 28 U.S.C. § 1334(c)(l), abstain from adjudicating it and remand the count to the Superior Court.
In Count 7, Mr. Mourad seeks redress against Harold Murphy and H&K for filing an excessive fee application. By this claim, Mr. Mourad seeks to readjudicate the application of Harold Murphy and the firm of H&K for fees and expenses incurred as counsel to the Debtor in this case. When a debtor's counsel applies for fees and expenses for services rendered during the case and asks that such fees and expenses be paid by the estate as administrative expenses, the
participate in the case.
resultant proceeding is a core proceeding and squarely within this Court's subject matter jurisdiction. 28 U.S.C. § 157(b)(2)(A) ("Core proceedings include ... matters concerning the administration of the estate."). Mr. Mourad's revisiting of that fee application is appropriately addressed to the court in which the case was administered. This Court has more familiarity with the case than the state court and, in fact, has already adjudicated the fee application and two motions to vacate the same, including one by Mr. Mourad. The Court's orders on those fees are final orders.
Counts 8 and 9:
The Court will also retain the claims enumerated 8 and 9 above: that the H&K defendants failed to disclose to Mourad, the United States Trustee, and the Court their representation of Gray in the American Shipyard and Neponset River Paper cases and thereby committed fraud on the court and violated F.R.BANKR.P. 2007. Iffl 103,117); and that they conspired with Trustee Gray to deprive Mourad of his investment in V&M and his right to a successful reorganization of the Debtor that left his sole equity interest intact and the Debtor free of secured debt and certain taxes (^ 1,107). Both claims concern the integrity of the plan confirmation process and therefore constitute core proceeding. 28 U.S.C. § 157(b)(2)(A) and (L). Moreover, insofar as these counts allege fraud on the court, perpetrated by attorneys who practice before it, they constitute the unique concern of this Court and should properly be adjudicated here.
In summary, the Court will remand Count 6 and deny remand as to the remaining counts against the H&K defendants.
b. Motion ofH&K Defendants to Dismiss
The H&K defendants jointly seek dismissal of the counts against them on three grounds:
(1) that Mr. Mourad lacks standing to bring them; (2) that they fail to state claims on which relief can be granted; and (3) that the claims are barred by the doctrines of collateral estoppel and res judicata. Again, I need only address the first and third of these.
1. Lack of Standing
The H&K defendants first contend that Mr. Mourad lacks standing to prosecute the counts against them because he alleges no harm to himself other than in his capacity as an equity security holder in the Debtor. The Court agrees that, with the exception of the one remanded count (where the harm is based on his alleged status as a creditor of the Debtor), this fairly characterizes the counts asserted against the H&K defendants. For the reasons I set forth above with respect to the parallel argument by Stephen Gray, Mr. Mourad is now precluded by previous decisions of this Court from contending that his equity interest in the Debtor has (or could have had) such value as would give him standing to assert the claims he now seeks to assert against the H&K defendants.
2. Res Judicata/Collateral Estoppel
The H&K defendants argue that each of the claims asserted against them in this proceeding has already been adjudicated in this case, either in the context of H&K's fee application or in the context of Mr. Mourad's later motion for disgorgement of the allowed fees, and that, by the doctrines of res judicata and collateral estoppel, these adjudications now preclude him asserting the present claims against the H&K defendants. The Court has already ruled that, 26
by collateral estoppel, earlier orders of this Court now preclude Mr. Mourad from contending that he has the standing necessary to assert Counts 1-5 and 7-9. Now the Court also rules that Counts 7, 8 and 9 are barred by the doctrine ofres judicata.
Res Judicata-Count 7: In Count 7, Mr. Mourad contends that Mr. Murphy and H&K filed an excessive fee application in the case for negligent representation of the Debtor that provided no benefit to the Debtor ffl 100-101). By this count, he seeks to relitigate the amount of the fee that Mr. Murphy and H&K should receive from the estate for its service as counsel to the Debtor in this case. Mr. Murphy and H&K filed a fee application in this case, Mr. Mourad objected to the application, and the Court, after hearing, overruled the objection and allowed the claim in the amount requested. No appeal was taken from the fee order, and that order is final and valid. By the doctrine of res judicata, Mr. Mourad is now barred from relitigating the amount of the fee.
Res Judicata-Counts 8 and 9: After this Court allowed the fee application of H&K, Mr. Mourad filed a motion seeking, among other things, disgorgement of the fees awarded in this case to Hanify & King as counsel to the Debtor. The basis for this motion was the alleged failings that are reasserted in this proceeding as claims 8 and 9 against the H&K defendants. On December 4,1998, the Court denied the motion on the basis that Mr. Mourad lacked standing to bring it. The Bankruptcy Appellate Panel dismissed Mr. Mourad's appeal from this order as late. The order is final and, by the doctrine of. res judicata, bars Mr. Mourad from relitigating claims 8 and 9.
For these reasons, the Court will allow the motion of the H&K defendants to dismiss with respect to the counts as to which remand is denied.
Carol J. Kenner / United States Bankrup/cy Judge
cc: Alphonse Mourad
Harold B. Murphy, Esq., for himself, Donald Fan-ell, and H&K Paul D. Moore, Esq., for Stephen Gray
For the reasons set forth above, the Court will, by separate and final orders, reopen this bankruptcy case only to adjudicate the present motions, deny the motion ofAlphonse Mourad for recusal, deny his motion for remand with respect to all claims against Stephen Gray and with respect to the Counts 1 through 5 and 7 through 9 against the H&K defendants, remand Count 8 against the H&K defendants, and allow the Defendants' motions to dismiss as to all claims not remanded.