UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
KENNETH G. STEWART and
JUNE W. STEWART CASE NO. 93-60292
KENNETH G. STEWART and
JUNE W. STEWART PLAINTIFFS
V. ADV. NO. 99-5125
KEVIN G. HENRY and
STURGILL, TURNER, BARKER,
& MALONEY, PLLC DEFENDANTS
ORDER REGARDING PLAINTIFFS MOTION TO CLARIFY
AND ORDER FOR HEARING
The plaintiffs, Kenneth and June Stewart (Stewarts), have asked the court to clarify its order of January 6, 2000 (Document # 40).
I. Removed Action
On November 17, 1999 this action was removed by the defendants, Kevin G. Henry and the law firm of Sturgill, Turner, Barker & Maloney, PLLC, from the Fayette Circuit Court (Document # 1). On that same date the defendants filed in this court a motion to dismiss under Rule 12(b)(6), made applicable by Federal Rule of Bankruptcy Procedure 7012(b)(6), for failure to state a claim for relief (Document # 2). The Fayette Circuit Court record consists of the Complaint and a cash receipt; an answer has not been filed (Document # 5).
The essence of the Stewarts Complaint is allegation of professional malpractice by the defendants while the Stewarts and their business, Stewart Fertilizer, Inc. (Stewart Fertilizer), were in bankruptcy. Specifically, the Stewarts assert that during the period of August 5, 1997 to December 29, 1997, the defendants were retained to represent the Stewarts personally in a lender liability action in Rockcastle Circuit Court and that the defendants had a conflict of interest which resulted in negligence, negligence per se, gross negligence, breach of contract, and breach of fiduciary duty to the Stewarts (Attachment to Document # 1).
II. Rockcastle Action
The Stewarts brought their lender liability action against the Bank of Mt. Vernon by counterclaim against the bank in consolidated foreclosure actions, Rockcastle Circuit Court Action No. 91CI-00195-J. The first counterclaim in a series of three actions by the bank against the plaintiffs was filed on October 7, 1991 by their counsel J. Montjoy Trimble of the law firm of Trimble & Bowling. Subsequently, the counterclaims were amended in the consolidated action. (For all counterclaims see Documents # 18 & 19.) As will be explained later in this order, upon the filing of the bankruptcy cases, only those claims which arose after the filing of the bankruptcy cases-- post-petition claims-- belonged to the Stewarts individually, AND only to the extent the defendants were hired by the Stewarts to represent them individually is there an issue of professional malpractice in this adversary proceeding.
III. Bankruptcy Actions
On February 12, 1993 Stewart Fertilizer, Inc. filed for relief under chapter 11 of the U. S. Bankruptcy Code (Code), Case No. 93-60059. Ron Bowling (Bowling) of Trimble & Bowling represented the debtor. In July of that year, July 21, 1993, Mr. and Mrs. Stewart filed their personal bankruptcy case, Case No. 93-60292, also under chapter 11 of the Code. Bowling likewise represented the Stewarts. Because the cases were filed under chapter 11, the Stewarts and Stewart Fertilizer functioned as debtors-in-possession.
On July 20, 1994 orders were entered in the two bankruptcy cases converting them to cases under chapter 7 (Documents # 77 & 49, Stewart Fertilizer and Stewart, respectively). That same day the debtors in both cases filed notice of voluntary conversion (Documents # 78 & 50, Stewart Fertilizer and Stewart, respectively). Upon conversion a trustee was appointed to administer the bankruptcy estates of both debtors. James M. Westenhoefer (Westenhoefer) was duly appointed and qualified (Documents # 79 & 51, Stewart Fertilizer and Stewart, respectively). In March of the following year, March 15 and March 27, 1995, orders were entered in the two cases sustaining applications by the trustee to employ Bowling as attorney for the trustee (Documents # 124 & 87 in Stewart Fertilizer and Stewart, respectively). On November 30, 1995 an order was entered discharging the Stewarts from bankruptcy (Document # 107, Stewart case).
In July of the following year-- July 5 and 9, 1996-- the law firm of Wise & Warnecke made appearance as counsel for Mr. and Mrs. Stewart in their bankruptcy case (Documents # 119 & 121, Stewart case).
In September of 1997, September 10 and 15, agreed orders were entered in both bankruptcy cases substituting the defendant Kevin Henry as counsel for the trustee in the Rockcastle Circuit Court action (Documents # 152 & 141, Stewart Fertilizer and Stewart, respectively).
In 1998 the lender liability lawsuit was settled. On May 1, 1998 motions to compromise the counterclaims were filed by the trustee in the Stewart Fertilizer and Stewart bankruptcy cases (Documents # 153 & 144, Stewart Fertilizer and Stewart, respectively). Mr. and Mrs. Stewart, represented by Tracey N. Wise, filed objection to the motions (Documents # 154 & 145, Stewart Fertilizer and Stewart, respectively) as did the Bank of Mt. Vernon (Documents # 155 & 146, Stewart Fertilizer and Stewart, respectively). On July 9, 1998 agreed orders approving the settlement were entered in the record of both bankruptcy cases (Documents # 161 & 154, Stewart Fertilizer and Stewart, respectively).
IV. Order of 1/6/00
By orders of November 22 and December 1, 1999 (Documents # 6 & 10), the court scheduled a hearing for January 5, 2000 on the defendants motion to dismiss the case (Document # 2), the plaintiffs motion to remand the case to Fayette Circuit Court (Document # 7), and the plaintiffs motion to alter, amend, or vacate the courts order scheduling a hearing on the defendants motion to dismiss or, in the alternative, to hold the motion to dismiss in abeyance (Document # 9).
The motion to remand was denied (Document # 22), under the broad net of jurisdictional grant provided for in the 6th Circuits Dow Corning case, Dow Corning Corp., 86 F.3d 482 (6th Cir. 1996), as recognized in Travel Professionals International of Scott County, Inc., 213 B.R. 669, 672 (Bankr. E.D. Ky. 1997), the
grant of comprehensive jurisdiction discussed in Celotex Corp. v. Edwards, 115 S.Ct. 1493, 1499 (1995).
Having before it the defendants motion to dismiss the complaint for failure to state a claim under Rule 12(b)(6), the court determined that the pivotal issue is whether the defendants were retained to represent the plaintiffs personally in the lender liability counterclaims. Therefore, in conformity with its comments at the hearing on January 5, 2000, by order of January 6, 2000 the court scheduled an evidentiary hearing on the single issue of whether the defendants were hired to represent the Stewarts personally in the consolidated cases filed in Rockcastle Circuit Court known as No. 91CI-00195-J. The parties were ordered to submit direct testimony by way of affidavit, to make those witnesses available for cross-examination at the hearing, and to file any supplemental briefs on the motion to dismiss, all within the two months prior to hearing scheduled for March 1, 2000 (Document # 21). It is this order about which counsel for the plaintiffs complains.
Plaintiffs protest Defendants representation of the trustee, Westenhoefer-- in other words representation of the bankruptcy estates-- in the Stewart Fertilizer and Stewart chapter 7 cases. In their claim of conflict of interest, Mr. and Mrs. Stewart assert the defendants represented both the trustee/ the bankruptcy estates and them personally in the lender liability action in Rockcastle Circuit Court to their personal detriment.
The commencement of a bankruptcy case creates an estate consisting of all legal or equitable interest of the debtor in property. 11 U.S.C. d 541(a)(1). Upon the filing of a voluntary petition for relief under chapter 11, reorganization, the debtor becomes a debtor in possession. 11 U.S.C. d 1101. The debtor in possession, sometimes referred to as DIP, retains possession and control of the estate while undergoing reorganization under chapter 11. 11 U.S.C. dd 1107 & 1108. The DIP performs many of the functions that a trustee performs under a chapter 7 case, 11 U.S.C. d 1107(a), and remains a debtor in possession until or unless certain events occur. One of these events is conversion of the case to one under chapter 7, liquidation (sometimes referred to as straight bankruptcy). 11 U.S.C. d 348.
Upon conversion of the case to one under chapter 7, a trustee is appointed to administer the case and liquidate the assets of the estate, 11 U.S.C. d 704, that is, assets which have not been exempted by the debtor (excepted/ permitted to be withdrawn from the estate), 11 U.S.C. d 522, or abandoned by the trustee (excluded from the estate/ given up), 11 U.S.C. d 554. The primary role of the chapter 7 trustee is to gather and liquidate assets of the bankruptcy estate. That role includes pursuing and/ or settling any causes of action/ lawsuits which belonged to the debtor at the commencement of the case, that is prepetition claims. Any property belonging to the debtor at the commencement of the bankruptcy case becomes property of the bankruptcy estate and is therefore under control of the chapter 7 trustee unless the trustee abandons any of the estate property, thus the change of reference from debtor in possession under chapter 11 to debtor under chapter 7.
In this case, the prepetition counterclaims became property of the bankruptcy estates upon filing of the Stewart Fertilizer and Stewart petitions. 11 U.S.C. d 541(a)(1). Upon conversion of those cases to cases under chapter 7, the counterclaims, as property of the bankruptcy estates, were under the control and direction of the trustee. 11 U.S.C. dd 348 & 323. Therefore, in the adversary proceeding before this court, Mr. and Mrs. Stewart are challenging conduct of counsel appointed by the bankruptcy court to represent the trustee in bankruptcy during pursuit and settlement of a case involving property of the bankruptcy estates, the Rockcastle action. Once in chapter 7, until the amount recovered exceeded the sum of all debts, the Stewarts had no authority or legal standing regarding prosecution and settlement of prepetition claims, only post-petition claims, and then only if these defendants were their attorneys in that lawsuit. In other words, to the extent there were any post-petition claims, and then only if the defendants were hired to be their attorneys, is there any potential issue in this adversary proceeding.
A Rule 12(b)(6) motion is the only motion under Rule 12 which may consider material in addition to the complaint. In re Equidyne Properties, Inc., 60 B.R. 245 (Bankr. SDNY 1986). Required under the rule is reasonable opportunity to present all material made pertinent to such a motion by Rule 56. Rule 7012(b)(6), Federal Rules of Bankruptcy Procedure.
Since it is well-settled that a complaint should not be dismissed on a 12(b)(6) motion unless it appears beyond a doubt that the plaintiff cannot prove a set of facts in support of his or her claim that would entitle the plaintiff to relief, it is appropriate this court consider whatever evidence the plaintiffs and defendants can offer on the single issue of whether the defendants were hired to represent the plaintiffs personally on their counterclaims of lender liability in the Rockcastle consolidated action, that is, any post-petition claims which belonged to them personally.
Although no answer has been filed in this case, the defendants do not protest the courts order of January 6, 2000. In fact, they have filed a response to the plaintiffs motion for clarification of the order in which they ask that the motion be overruled (Document # 41). Cases on point regarding consideration of evidence under 12(b)(6)-- conversion of the motion to one under Rule 56, made applicable by Federal Rule of Bankruptcy Procedure 7056-- are clear that such a step should be taken cautiously. Such caution appears to be for protection of the defendant who has not yet answered the complaint. Wilt v. The Town of Arietta, 1999 WL 1138591, *3 (N. D. N.Y. 1999); Peckmann v. Thompson, 966 F.2d 295, 298 (7th Cir. 1992).
The parties herein were given approximately two months in which to file affidavits on the single issue presented and supplemental briefs before hearing on the motion to dismiss. The defendants are not protesting. Now, as a result of the hearing on March 1, 2000, time for presentation of evidence and supplemental briefs was suspended in order to address a discovery dispute. (Documents # 61 & 62) That dispute is expected to be resolved soon.
Therefore, IT IS HEREBY ORDERED:
1. An evidentiary hearing is scheduled for Monday, April 17, 2000, at 1:30 p.m., in the U. S. Bankruptcy Courtroom, 3rd Floor, Community Trust Bank Building, 100 E. Vine Street, Lexington, Kentucky. The hearing shall be on the issue of whether the defendants were hired to represent the Stewarts personally in the consolidated cases filed in Rockcastle Circuit Court known as No. 91CI-00195-J.
2. The parties hereto shall submit their direct testimony by way of affidavit which, if not already filed in the record and served upon opposing parties, shall be filed and served by April 3, 2000 (close of business).
3. Each such witness shall be made available and present in court for purposes of cross-examination.
4. Each party shall be permitted to present such rebuttal evidence as shall be appropriate.
5. Failure to make available any witness for cross-examination shall disqualify any tendered affidavit of that witness for admission into evidence in the within case.
IT IS FURTHER ORDERED:
1. Defendants motion to dismiss this adversary proceeding shall be considered at conclusion of the evidentiary hearing.
2. To the extent not already briefed, the parties may file supplemental briefs on the motion and on any issues which have arisen subsequent to the hearing of January 5, 2000. Said supplemental briefs shall be filed with the court and served on opposing parties by April 10, 2000 (close of business).
3. Any briefs filed after this date will not be considered by the court in ruling on the motion to dismiss or any issues raised subsequent to the January 5, 2000 hearing.
By the court --
JOSEPH M. SCOTT, JR.
U. S. BANKRUPTCY JUDGE
Steven H. Keeney, Esq.
Robert S. Ryan, Esq.