Case 2:14-cv-00933-JTM-MBN Document 24 Filed 12/22/14 Page 1 of 9
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`UNITED STATES DISTRICT COURT
`EASTERN DISTRICT OF LOUISIANA
`
`IN RE: GEORGE JOSEPH
`PORTER, JR. ET AL.
`
`CIVIL ACTION
`
`NO. 14-933
`
`SECTION "H"(3)
`
`ORDER AND REASONS
`The issue before this Court is whether it can refer this matter back to the
`bankruptcy court for findings of fact and conclusions of law on the debtors'
`remaining claims against a non-creditor. This Court holds that it can, and
`accordingly, the remaining claims in this case are REFERRED to the bankruptcy
`court to issue findings of fact and conclusions of law. This case is STAYED and
`ADMINISTRATIVELY CLOSED. Further, the status conference currently set
`in this matter for December 22, 2014 is CANCELED.
`
`BACKGROUND
`This issue is before this Court on the appeal of a partial final judgment.
`New Orleans musicians George Porter, Brian Stoltz, and Russell Batiste
`
`1
`
`
`
`UNITED STATES DISTRICT COURT
`EASTERN DISTRICT OF LOUISIANA
`
`IN RE: GEORGE JOSEPH
`PORTER, JR. ET AL.
`
`CIVIL ACTION
`
`NO. 14-933
`
`SECTION "H"(3)
`
`ORDER AND REASONS
`The issue before this Court is whether it can refer this matter back to the
`bankruptcy court for findings of fact and conclusions of law on the debtors'
`remaining claims against a non-creditor. This Court holds that it can, and
`accordingly, the remaining claims in this case are REFERRED to the bankruptcy
`court to issue findings of fact and conclusions of law. This case is STAYED and
`ADMINISTRATIVELY CLOSED. Further, the status conference currently set
`in this matter for December 22, 2014 is CANCELED.
`
`BACKGROUND
`This issue is before this Court on the appeal of a partial final judgment.
`New Orleans musicians George Porter, Brian Stoltz, and Russell Batiste
`
`1
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`
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`Case 2:14-cv-00933-JTM-MBN Document 24 Filed 12/22/14 Page 2 of 9
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`performed together in a band called Porter Batiste Stoltz ("PBS"). PBS entered
`into a management agreement with Highsteppin' Productions, LLC ("HSP"). In
`2009, HSP filed suit in federal court in Massachusetts against PBS and its
`members to recover amounts it believed it was owed under the management
`agreement (the "Massachusetts Suit"). Each of the individual members of
`PBS—Porter, Stoltz, and Bastite (collectively the "Debtors")—subsequently filed
`a Chapter 7 bankruptcy petition in the Eastern District of Louisiana, listing
`HSP as a creditor. Due to the pending bankruptcy proceedings, the
`Massachusetts Suit was removed to the Eastern District of Louisiana and
`referred to the bankruptcy court pursuant to this Court's local rules.
`Debtors eventually answered the Massachusetts Suit and asserted
`counterclaims against HSP and a claim against Phillip Stepanian—the sole
`member of HSP—seeking to pierce the corporate veil. This matter was tried
`before the bankruptcy court on July 13 through July 22 and September 13
`through September 28, 2012. The court issued a partial final judgment on
`August 16, 2013. In a 107-page opinion, the bankruptcy court denied HSP's
`claims for breach of contract in full, granted Debtors' counterclaims for breach
`of contract, breach of fiduciary duty, negligence, and violations of the
`Massachusetts Unfair Trade Practices Act ("MUTPA") but denied their copyright
`infringement claim. Neither party was awarded damages because the court held
`that their claims were offsetting. The opinion did not address Debtors'
`third-party claim against Stepanian.
`In addition, the bankruptcy court specifically reserved for later
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`determination the quantum of attorney's fees recoverable by Debtors under the
`MUTPA. After a later hearing, the court ordered HSP to pay Debtors' counsel
`approximately $1.8 million.
`HSP and Stepanian (collectively "Appellants") timely appealed these
`judgments to this Court on February 28, 2014. On March 5, Appellants moved
`the bankruptcy court to stay execution of the bankruptcy court judgment
`pending appeal. The bankruptcy court granted the motion in a 44-page opinion
`on June 24, 2014. In its order, the bankruptcy court acknowledged its failure to
`decide Debtors' claims against Stepanian, stating that "[a]lthough claims were
`brought against Stepanian, this Court did not believe it had constitutional
`authority over Stepanian under the present status of the law, namely, the
`Supreme Court's holding in Stern v. Marshall.1 "[T]his Court originally
`concluded that it could not resolve the issues against Stepanian."2 The court
`goes on to say, however, that "[t]he recent ruling by the Supreme Court in
`Executive Benefits changes this conclusion."3
`The Supreme Court decided Executive Benefits Insurance Agency v.
`Arkison on June 9, 2014, several months after the bankruptcy court rendered its
`decision in this case. The Court held that when a bankruptcy court lacks
`constitutional authority to enter final judgment on a claim pursuant to Stern, it
`is still permitted to issue proposed findings of fact and conclusions of law to be
`reviewed de novo by the district court. Accordingly, the bankruptcy court stated
`
`1 Stern v. Marshall, 131 S. Ct. 2594, 2611 (2011).
`2 In re Porter, 511 B.R. 785, 810 (Bankr. E.D. La. 2014).
`3 Id.
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`3
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`that "under Executive Benefit's holding, it appears this Court could be available
`to the District Court for a trial on the merits of claims against Stepanian."4
`Immediately following the issuance of the bankruptcy court's stay order,
`Debtors moved this Court to suspend or extend the appellate briefing schedule
`and requested a status conference to discuss the effect of Executive Benefits on
`this case. The Court ordered that both parties brief the issue of whether the
`claim by Debtors against Stepanian can be referred to the bankruptcy court for
`findings of fact and conclusions of law.
`
`LAW AND ANALYSIS
`The bankruptcy court below, both parties, and this Court agree that
`Debtors' claim against Stepanian is a Stern claim.5 A Stern claim is a claim that
`is a "core" proceeding under 28 U.S.C. § 157(b) but that cannot constitutionally
`be adjudicated by the bankruptcy court. In Stern v. Marshall, the Supreme
`Court held that it was unconstitutional for the bankruptcy court to decide the
`debtor's counterclaim against her creditor because it was a state, common law
`claim between two private parties, which did not flow from a federal statutory
`scheme, was not a matter of public right, and would not necessarily be resolved
`by the bankruptcy claim allowance process.6 The Fifth Circuit has noted that
`the dispositive issue under Stern in deciding whether a bankruptcy court may
`
`4 Id. at 811.
`5 Id. at 810 ("[T]he claims brought against Stepanian by Debtors fall squarely within
`the holding of Granfincanciera and Stern as they are an atempt to augment the estate through
`a cause of action against a noncreditor.").
`6 Stern, 131 S. Ct. at 2611.
`
`4
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`enter final judgment on a counterclaim is whether the claim would "necessarily
`have been resolved in the claims-allowance process."7 Debtors' state law, veil-
`piercing claim against a non-creditor would not necessarily have been decided
`in the claims allowance process and fits squarely within the definition of Stern.8
`Accordingly, the bankruptcy court did not have the constitutional authority to
`enter final judgment on the Debtors' claim against Stepanian.
`In Executive Benefits, the Supreme Court stated that when, under Stern,
`the bankruptcy court is prohibited from entering a final judgment on a claim, the
`claim should be treated in accordance with 28 U.S.C. § 157(c)(1), which states
`that:
`
`A bankruptcy judge may hear a proceeding that is not a core
`proceeding but that is otherwise related to a case under title 11. In
`such proceeding, the bankruptcy judge shall submit proposed
`findings of fact and conclusions of law to the district court, and any
`final order or judgment shall be entered by the district judge after
`considering the bankruptcy
`judge's proposed findings and
`conclusions and after reviewing de novo those matters to which any
`party has timely and specifically objected.9
`Accordingly, if a Stern claim is "related to a case under title 11," the bankruptcy
`court is authorized by § 157(c)(1) to hear the claim and issue proposed findings
`of fact and conclusions of law. Therefore, in order to determine whether it would
`
`7 In re Frazin, 732 F.3d 313, 320 (5th Cir. 2013).
`8 See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 58 (1989) ("Because petitioners
`here, like the petitioner in Schoenthal, have not filed claims against the estate, respondent's
`fraudulent conveyance action does not arise 'as part of the process of allowance and
`disallowance of claims.' Nor is that action integral to the restructuring of debtor-creditor
`relations.").
`9 28 U.S.C. § 157 (West 2014).
`
`5
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`be appropriate to remand Debtors' remaining claim against Stepanian to the
`bankruptcy court for findings of fact and conclusions of law, this Court must
`determine whether the claim is "related to" the bankruptcy matter.
`A matter is "related to" the bankruptcy if "the outcome of that proceeding
`could conceivably have any effect on the estate being administered in
`bankruptcy."10 The Fifth Circuit has indicated that this definition should be
`interpreted broadly. "[A]n effect is not required to [be] a certainty. Rather,
`jurisdiction will attach on a finding of any conceivable effect."11 The Fifth
`Circuit has stated that even when there is a "possibility that [a] suit may
`ultimately have no effect on the bankruptcy, [the court] cannot conclude . . . that
`it will have no conceivable effect.12 Moreover, "an action is related to bankruptcy
`if the outcome could alter the debtor's rights, liabilities, options, or freedom of
`action (either positively or negatively) and in any way impacts upon the
`handling and administration of the bankrupt estate."13
`Debtors and Appellants disagree over whether Debtors' claims against
`Stepanian are sufficiently "related to" the underlying bankruptcy matter to fall
`within the bankruptcy court's "related to" jurisdiction. Appellants argue that
`because the only judgment against HSP is an award of attorneys' fees and costs
`
`10 In re TMT Procurement Corp., 764 F.3d 512, 523 (5th Cir. 2014); Matter of Wood, 825
`F.2d 90, 93 (5th Cir. 1987).
`11 In re Canion, 196 F.3d 579, 587 (5th Cir. 1999).
`12 Matter of Wood, 825 F.2d at 94.
`13 Matter of Zale Corp., 62 F.3d 746, 752 (5th Cir. 1995) (internal quotation marks and
`alterations omitted).
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`to Debtors' counsel, a judgment piercing the corporate veil to hold Stepanian
`liable for that amount will have no effect on the bankruptcy estate. Indeed, the
`bankruptcy court's order of attorneys' fees awards the amounts directly to
`Debtors' counsel personally.
`Debtors rebut that an amount of the award of attorneys' fees and costs will
`serve to reimburse Debtors for amounts that they advanced during litigation,
`which will necessarily inure to the estate. Debtors also argue that they have
`alleged sufficient facts to impose liability against Stepanian both under a veil-
`piercing theory and personally under Massachusetts's business tort law
`regarding the violative conduct of LLC members. Indeed, under Massachusetts
`law, "there are circumstances in which a member of a limited liability company
`may be personally liable to third parties for his own actions."14
`This Court agrees with Debtors' arguments that its claims against
`Stepanian could conceivably have an effect on the bankruptcy estate. For
`instance, if HSP is unable to pay the attorneys' fee judgment that the
`bankruptcy court rendered against it and Debtors are successful in piercing the
`corporate veil to hold Stepanian personally liable for this amount, Debtors will
`be able to collect that amount directly from Stepanian. Although much of the
`attorneys' fee award will benefit Debtors' attorneys and not the estate, some of
`the award will serve to reimburse Debtors' estates for amounts previously
`advanced to cover attorneys' fees and costs. Additionally, it is conceivable that
`Debtors could be successful in holding Stepanian personally liable under
`
`14 14A MASSACHUSETTS PRACTICE SERIES, SUMMARY OF BASIC LAW § 6.154 (4th ed.).
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`Massachusetts business tort law, and the award would serve to augment the
`estate.
`It is, of course, possible that Debtors' claim against Stepanian will have no
`effect on the Debtors' estate, but this Court is not prepared to say that it is not
`conceivable that a successful claim could serve to augment the estate.
`Accordingly, this Court holds that Debtors' claims against Stepanian fall within
`the bankruptcy court's "related to" jurisdiction. Therefore, pursuant to Executive
`Benefits and § 157(c)(1), the bankruptcy court is authorized to hear Debtors'
`remaining claims against Stepanian and issue findings of fact and conclusions
`of law to be reviewed de novo by this Court.
`This Court also notes that referral of this matter to the bankruptcy court
`would promote efficiency and conserve judicial resources. The bankruptcy court
`is intimately familiar with the factual and procedural background of this case,
`having presided over 19 days of trial and decided countless pre- and post-trial
`motions. Accordingly, the bankruptcy court is in the best position to decide this
`singular, remaining issue. After receipt of the bankruptcy court's findings of
`facts and conclusions of law on Debtors' claims against Stepanian, this Court
`will be able to review the entire case on appeal, rather than reviewing the case
`piecemeal. "[F]ederal law expresses the policy against piecemeal appeals."15
`Indeeed, "related to" jurisdiction, is intended to "avoid the inefficiencies of
`piecemeal adjudication and promote judicial economy by aiding in the efficient
`
`15 Switzerland Cheese Ass'n, Inc. v. E. Horne's Mkt., Inc., 385 U.S. 23, 24 (1966); see 28
`U.S.C. § 1291 (West 2014).
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`and expeditious resolution of all matters connected to the debtor's estate."16
`Accordingly, this Court elects to refer this matter to the bankruptcy court for
`findings of fact and conclusions of law.
`
`CONCLUSION
`
`For the foregoing reasons, this case is REFERRED to the bankruptcy court
`for findings of fact and conclusions of law on Debtors' remaining claims against
`non-creditor, Phillip Stepanian. This
`case
`is STAYED and
`ADMINISTRATIVELY CLOSED. Further, the status conference currently set
`in this matter for December 22, 2014 is CANCELED.
`
`New Orleans, Louisiana, this 19th day of December, 2014.
`
` ___________________________________
` JANE TRICHE MILAZZO
` UNITED STATES DISTRICT JUDGE
`
`16 Matter of Zale Corp., 62 F.3d at 752.
`9
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