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In re Harris

August 21, 2007


The opinion of the court was delivered by: Hayes, Judge


Bankruptcy No. 99-32841-B7

Bankruptcy Adversary No. 06-90289

The matter before the Court is the appeal of the Bankruptcy Court's dismissal of a breach-of-contract action originally filed in state court by Appellant Jean Leonard Harris.

I. Background

On July 26, 1999, Appellant Jean Leonard Harris filed a voluntary Petition for Bankruptcy under Chapter 7 of the United States Bankruptcy Code in United States Bankruptcy Court, Southern District of California, Case No. 99-32841-B7 ("Bankruptcy Case"). (Record on Appeal ("ROA") 779-80.) The Bankruptcy Case created an estate (the "Bankruptcy Estate") consisting of, among other things, all claims and causes of action against third parties. See 11 U.S.C. § 541.

Appellee Sandra Wittman was appointed Chapter 7 Interim Trustee on July 29, 1999. (ROA 782.) On March 21, 2000, Wittman filed a "Complaint for Turnover of Property; Avoidance of Fraudulent Conveyances; Avoidance of Liens; Avoidance of Preferential Transfers; Avoidance of Post-Petition Transfer; Conspiracy; Declaratory Relief; and Injunctive Relief" in Adversary Proceeding No. 00-90157 (the "Adversary Proceeding"). (ROA 821-46.) Among the Defendants in the Adversary Proceeding were Harris and his wife, Sandra Harris. (ROA 821-46, 898.) In the Adversary Proceeding Complaint, Wittman alleged that the transfer from Harris to his wife of, among other assets, Quatre Corporation stock,*fn1 and a business and related property known as "Alpine Personal Storage" (the "Alpine property"), was voidable and recoverable by the Bankruptcy Estate as a fraudulent transfer of property. (ROA 821-46.)

In July 2000, Wittman and Appellee Jack Swain, a creditor of the Bankruptcy Estate,*fn2 entered into an "Agreement for Use and Assignment of Interests and Prosecution of Claims" (the "Swain Agreement"). (ROA 852-69.) Under the Swain Agreement, Swain was to prosecute the Adversary Proceeding as the Special Representative of the Bankruptcy Estate, in exchange for which he would receive reimbursement of his costs and expenses, and would retain a percentage of the net recovery from the Adversary Proceeding. (ROA 855-56.) On July 14, 2000, Wittman filed a Motion of the Trustee to Assign Claims to Jack Swain as Special Representative. On November 6, 2000, the Court entered an order approving the assignment. (ROA 848-69.)

On November 19, 2002, the Bankruptcy Court advised the parties that it was granting Swain's motion for summary judgment. (ROA 895.) After the Court's ruling, the parties reached a settlement of the entire Adversary Proceeding. (ROA 897-907.) Appellees Pyle Sims Duncan & Stevenson, Peter Duncan, Grant & Zeko and Miles Grant signed the Stipulation for Settlement as the attorneys for Swain. (ROA 900.) The Stipulation for Settlement and the Settlement Agreement were approved by the Bankruptcy Court on January 8, 2003. (ROA 923-26.) Under the Stipulation for Settlement, Sandra Harris and/or Harris were required to transfer, inter alia, all outstanding shares of the Quatre Corporation, all outstanding shares of the Unicus Corporation, title to the Alpine property and a 1957 Mercedes-Benz automobile to the Bankruptcy Estate. (ROA at 901, 903.)

On May 2, 2003, Wittman filed a Motion for Sale of Personal Property under 11 U.S.C. Section 363(b), seeking Bankruptcy Court approval for the sale of the certain assets of the Bankruptcy Estate to Swain, including stock of Unicus Corporation and the 1957 Mercedes-Benz.*fn3 (ROA 938-49.) In an affidavit in support of the Motion, Wittman stated that it would be in the best interest of the Bankruptcy Estate to sell certain assets, including the Unicus Corporation stock and the Mercedes, to Swain in exchange for a waiver of claims and cash consideration. (ROA 951-56.) On May 16, 2006, Harris filed an opposition brief, arguing that the Motion "is forbidden by the clear terms of the November 19, 2002, Settlement Agreement," and the "Motion is a sham transaction wherein Swain has concocted imaginary consideration to steal away the assets of the bankruptcy estate." (ROA 961, 966.) On June 30, 2003, the Bankruptcy Court issued an Order Approving Trustee's Motion for Sale of Personal Property under 11 U.S.C. Section 363(b) (the "June 30 Order"). In the June 30 Order, the Bankruptcy Court approved the sale of the stock of Unicus Corporation to Swain, finding that Swain was a buyer in good faith pursuant to 11 U.S.C. § 363(m) and that the sale of the Unicus Corporation stock is retroactive, such that the Unicus stock was never part of the Bankruptcy Estate within the meaning of 11 U.S.C. § 541. (ROA 968-77.)

Harris appealed the June 30 Order to this Court. On October 22, 2003, this Court (Huff, Judge) dismissed the appeal, finding that Harris' appeal was moot because Harris had failed to seek a stay of the June 30 Order as required by 11 U.S.C. § 363(m). (ROA 995-98.) Harris argued that the sale of the Unicus stock was invalid and outside the protection of § 363(m) because Swain was not a good faith purchaser, specifically arguing that Swain did not pay value for the stock, and Swain and the trustee colluded to perpetrate a fraud on the Estate and the other creditors. (Id.) Judge Huff affirmed the Bankruptcy Court's factual findings that the sale was entered into without collusion, that the sale was in the best interest of the Estate, and that Swain was a good faith purchaser. (Id.) On February 28, 2005, the Ninth Circuit affirmed Judge Huff's dismissal of Harris' appeal of the June 30 Order. (ROA 1016-18.)

On May 2, 2006, Harris filed a complaint in the Superior Court for the County of San Diego, State of California (the "Complaint"), naming all Appellees as defendants. (ROA 47-63.) The Complaint included claims for relief for breach of contract, breach of fiduciary duty, fraud, negligent misrepresentation and constructive fraud. (Id.) Harris did not seek or obtain the permission of the Bankruptcy Court prior to filing the Complaint or at any time thereafter. (ROA 1247.) In the Complaint, Harris alleged: "Because the allegations herein are ultra vires to the duties of these Defendants to Plaintiff's bankruptcy Estate, not capable of being authorized by the bankruptcy court, and beyond the jurisdiction of the bankruptcy court to adjudicate, no prior approval of the bankruptcy court is needed to bring these allegations against these Defendants in this Court." (ROA 48.)

On May 15, 2006, Wittman removed the case from state court to the Bankruptcy Court as adversary proceeding No. 06-90289-PB7. (ROA 385-86.) On June 7, 2006, Harris filed a motion for remand. (ROA 106-16.) The Bankruptcy Court denied the motion on July 17, 2006. (ROA 1080.)

On June 12, 2006, Harris had filed a motion to withdraw the reference with this Court, seeking an order withdrawing the referral of the case to the Bankruptcy Court. On August 16, 2006, this Court (Moskowitz, Judge) ruled that federal subject matter jurisdiction existed, and denied Harris's motion for withdrawal of the reference. (ROA 1477-81.)

All Appellees filed motions to dismiss the Complaint under Federal Rule of Civil Procedure 12(b)(6), on the grounds that, inter alia: (1) the Complaint is barred due to the failure of Harris to seek approval of the Bankruptcy Court prior to filing it; and (2) each Appellee is entitled to derived quasi-judicial immunity as a result of the entry of the June 30 Order. (ROA 150-218, 1337-1356.)

On July 21, 2006, while the motions to dismiss were pending, Plaintiff filed a First Amended Complaint ("FAC"), which dismissed all claims for relief except for the breach of contract claim. (ROA 8-44.) The breach of contract claim remained unchanged from that in the original Complaint. Specifically, the FAC alleges that the Appellees breached the Settlement Agreement and the Stipulation for Settlement by "contriving" claims for fees and costs, and Appellees "then transferred the Alpine Property [i.e., the Unicus stock] to themselves, as consideration for assuming their contrived claims against [the Bankruptcy] Estate, and did so nunc pro tunc such that [the Bankruptcy] Estate never received any income from the Alpine property or any benefit from the settlement agreement." (ROA 13.)

Following oral argument on the motions to dismiss, the Bankruptcy Court issued orders dismissing the action with respect to each of the Appellees. In granting Wittman's Motion to Dismiss, the Bankruptcy Court made the following written conclusions of law:

1. This adversary proceeding is a core proceeding pursuant to 28 U.S.C. Section 157(b)(2)(A)(N) and (O). The statutory predicates for the relief requested in the Motion are Federal Rules of Bankruptcy Procedure ...

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