Opinion
No. 1 CA-CV 13-0123
02-04-2014
ERIC M. HALEY, Chapter 7 Trustee for PEC-Professional Engineering and Consulting, Inc., an Arizona corporation Plaintiff-In-Intervention/Appellee, v. MICHAEL MEDHAT NAKHLA aka MEDHAT S. NAKHLA, individually and as Trustee of the MEDHAT S. NAKHLA REVOCABLE FAMILY TRUST DATED MARCH 1, 2002, Defendants/Appellants.
Mark T. Guerra, Tempe By Mark T. Guerra Counsel for Plaintiff-In-Intervention/Appellee Teresa H. Foster, PLLC, Phoenix By Teresa H. Foster Counsel for Defendants/Appellants
NOTICE: NOT FOR PUBLICATION.
UNDER ARIZ. R. SUP. CT. 111(c), THIS DECISION DOES NOT CREATE LEGAL PRECEDENT
AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.
Appeal from the Superior Court in Maricopa County
No. CV2010-093629
The Honorable David M. Talamante, Judge
AFFIRMED
COUNSEL
Mark T. Guerra, Tempe
By Mark T. Guerra
Counsel for Plaintiff-In-Intervention/Appellee
Teresa H. Foster, PLLC, Phoenix
By Teresa H. Foster
Counsel for Defendants/Appellants
MEMORANDUM DECISION
Presiding Judge Lawrence F. Winthrop delivered the decision of the Court, in which Judge Margaret H. Downie and Judge Diane M. Johnsen joined. WINTHROP, Presiding Judge:
¶1 Michael Medhat Nakhla and the Medhat S. Nakhla Revocable Family Trust Dated March 1, 2002 ("Appellants") appeal the judgment of the trial court in favor of Eric M. Haley, challenging the jurisdiction of a state court to hear state law claims brought by a federal bankruptcy trustee against in-state defendants. For the following reasons, we affirm.
Appellants do not otherwise challenge the judgment of the trial court.
FACTS AND PROCEDURAL HISTORY
¶2 Appellant Nakhla was an officer and sole shareholder of Professional Engineering and Consulting, Inc. ("PEC"), a fire sprinkler contractor and designer. The Medhat S. Nakhla Revocable Family Trust Dated March 1, 2002 is Nakhla's family trust. Beginning in November 2009, Nakhla transferred cash, property, and assets from PEC to himself and the trust. In May 2010, Sun State Builders, Inc. ("Sun State"), a creditor of PEC from a previous civil judgment, filed a complaint in Maricopa County Superior Court against Nakhla, his trust, and PEC, alleging state law claims of fraudulent transfer and violation of the corporate trust fund doctrine.
¶3 In November 2011, one week before trial, PEC filed a petition for Chapter 7 bankruptcy in federal court. The bankruptcy petition resulted in an automatic stay of the state court proceedings. Eric M. Haley ("Trustee") was appointed case trustee for the bankruptcy estate of PEC by the United States Bankruptcy Court for the District of Arizona. In January 2012, the bankruptcy court authorized Trustee to employ Sun State's attorney as special counsel to assist the estate with prosecuting the estate's claims against Appellants. After Trustee obtained leave from the state trial court to file a complaint-in-intervention, Sun State and PEC were dismissed as parties.
¶4 The complaint-in-intervention included state law claims for fraudulent transfer, unjust enrichment, and violation of the corporate trust fund doctrine and federal claims for avoidance of fraudulent transfer and avoidance of preferential transfers to an insider. Appellants filed a motion to dismiss, challenging the jurisdiction of the state court to hear the case because the bankruptcy court had original and exclusive jurisdiction over the proceeding. Trustee then voluntarily dismissed his federal claims, leaving only state law claims, and the trial court denied the motion to dismiss.
¶5 After a bench trial, the court entered judgment in favor of Trustee. Appellant then filed a timely notice of appeal. We have appellate jurisdiction pursuant to the Arizona Constitution, Article 6, Section 9 and Arizona Revised Statutes ("A.R.S.") section 12-2101(A)(1) (West 2014).
We cite the current Westlaw version of the applicable statutes and amendments because no revisions material to this decision have since occurred.
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ANALYSIS
¶6 Appellants argue that the Maricopa County Superior Court lacked jurisdiction to hear this case. We disagree.
¶7 Here, a trustee of an estate in federal bankruptcy court has pursued state law claims in state court against an in-state defendant. Nothing in our state law or constitution precludes the state court from exercising jurisdiction over such a case. Appellant relies, instead, on federal law for the erroneous proposition that because "[t]he Bankruptcy Court has original and exclusive jurisdiction to determine core proceedings such as this nondischargeability proceeding under 28 U.S.C. 157(b)," the state court cannot hear Trustee's state law claims.
¶8 Contrary to Appellants' contention, a bankruptcy court does not have "exclusive and original jurisdiction to determine core proceedings such as this nondischargeability proceeding." First, because bankruptcy proceedings are a creature of statute, a distinction must be made between the scope of the grant of jurisdiction for federal district courts and their bankruptcy counterparts. A federal district court has "original and exclusive jurisdiction over all cases under title 11" and "original but not exclusive jurisdiction of all civil proceedings arising under title 11." See 28 U.S.C. § 1334(a), (b). Consistent with that jurisdiction,
(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.28 U.S.C. § 157(a), (b)(1) (emphasis added). Therefore, the jurisdiction of a bankruptcy court is necessarily limited.
. . . .
(b)(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.
¶9 Second, Appellants mischaracterize the type of proceeding at issue. The state court did not conduct a "non-dischargeability proceeding," such as a hearing pursuant to 11 U.S.C. § 524. See 11 U.S.C. § 524 ("[W]hen the court has determined whether to grant or not to grant a discharge . . . the court may hold a hearing at which the debtor shall appear in person. At any such hearing, the court shall inform the debtor that a discharge has been granted or the reason why a discharge has not been granted."). After Trustee voluntarily dismissed the federal claims, the state court only heard a civil suit based on state law.
¶10 Under federal law, a bankruptcy trustee "has capacity to sue and be sued." 11 U.S.C. § 323(b); see also Fed. R. Bankr. P. 6009 ("With or without court approval, the trustee or debtor in possession may prosecute or may enter an appearance and defend any pending action or proceeding by or against the debtor, or commence and prosecute any action or proceeding in behalf of the estate before any tribunal."). Nothing in federal law per se precludes a bankruptcy trustee from pursuing a claim on behalf of the estate in state court.
A bankruptcy trustee who by choice or by necessity resorts to a state court for the prosecution of a claim is of course bound by the adjudication made in the state proceeding. The state court has full control over the litigation. But even as an incident thereto, it may not take action which involvesBrown v. Gerdes, 321 U.S. 178, 185-86 (1944) (citations omitted); see also In re H. S. Dorf & Co., 387 F.2d 365, 365 (2d Cir. 1967) ("[T]he trustee is bound by the result in the state court action to which he made himself a party, with the consent of the bankruptcy court, by voluntary intervention."); Dunn v. Menassen, 913 S.W.2d 621, 623-24 (Tex. App. 1995) (citations omitted) ("In order to preclude a State court's jurisdiction, the state claim must interfere with the jurisdiction of the Bankruptcy Court. A bankruptcy trustee . . . may commence and prosecute any action on behalf of the bankruptcy estate.").
the performance of functions which Congress has entrusted to the bankruptcy court.
¶11 We must therefore determine whether the state law claims at issue have interfered with the jurisdiction of the bankruptcy court. Pursuant to 28 U.S.C. § 157(b)(1), "[b]ankruptcy judges may hear and determine . . . all core proceedings arising under title 11, or arising in a case under title 11." Appellant contends that the present case involves one of the enumerated core proceedings: "proceedings to determine, avoid, or recover fraudulent conveyances." 28 U.S.C. § 157(b)(2)(H). However, it is unclear whether a bankruptcy court has jurisdiction to hear the state law claims presented here. See In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 558 (9th Cir. 2012) cert. granted, 133 S. Ct. 2880 (2013) (holding that bankruptcy courts no longer have constitutional authority to enter final judgment on state law fraudulent conveyance claims after Stern v. Marshall, ___ U.S. ___, 131 S. Ct. 2594 (2011)). Furthermore, abstention for a case such as this is specifically contemplated in the federal grant of jurisdiction. 28 U.S.C. § 1334(c)(1) ("[N]othing in [the statutory grant of jurisdiction] prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.").
¶12 In the present case, the bankruptcy court permitted Trustee "to employ [Sun State's] attorney as Special Counsel to assist the Estate, solely with reference to the prosecution of the Estate's claims against Nakhla and collection from Nakhla, an asset of this estate." We presume that permission was granted to pursue the estate's claims in the venue of Trustee's choice, consistent with 11 U.S.C. § 323(b) and recent federal jurisprudence. As a result, the state trial court's exercise of jurisdiction over state law claims brought by the bankruptcy trustee against in-state defendants does not interfere with the jurisdiction of the bankruptcy court.
CONCLUSION
¶13 Because the state law claims brought in state court by the bankruptcy trustee against in-state defendants do not interfere with the jurisdiction of the bankruptcy court, we affirm. Pending compliance with Rule 21, ARCAP, we also award Trustee his reasonable attorneys' fees and costs on appeal.