In Chapter 13 proceedings, Case No. 2-07-bk-00697-CGC, Adv. No. 2-07-ap-00360-CGC.United States Bankruptcy Court, D. Arizona.
March 14, 2008
ORDER RE: SECOND MOTION TO AMEND COMPLAINT, ORDER TO SHOW CAUSE AND LODGED ORDER OF DISMISSAL
CHARLES CASE II, Bankruptcy Judge
I. Introduction
At issue is the Second Motion to Amend Complaint filed by Debtor Lori Forte (“Forte”), an Order to Show Cause issued at the request of Victor Kirkland (“Victor”) and a lodged order of dismissal by Forte.
II. Background
Facing a sale of her residence arising out of divorce proceedings, Forte filed this Chapter 13 case on February 21, 2007.[1] The previous day, February 20, 2007, she had filed a “special
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action”[2] in Maricopa County superior court (LC 2007-000114-001 DT) seeking to clear title to the house by removing a deed of trust recorded against the property by Charles Saint George Kirkland (“Charles”), Victor Kirkland (“Victor”) and/or Ivy Properties (“Ivy”).[3] The special action sought the removal of the lien as well as treble damages and attorneys fees under A.R.S. § 33-420(A) and requested the issuance of an order to show cause.
In the complaint, Forte alleged that she had engaged Charles as a mortgage broker to obtain refinancing on her home and that he had failed to perform. She acknowledges that Charles advanced $11,000 to stave off foreclosure but claimed that no note had been executed to document that loan. As a result, she alleged, the recording by Charles of a “naked” deed of trust purporting to secure the non-existent note was wrongful and had impaired her ability to obtain refinancing from a third party source.
On March 20, 2007, the superior court held a return hearing and established dates for briefs of the parties and set a hearing for June 15. This hearing was subsequently vacated, apparently in response to the withdrawal of Charles’ counsel. By this time, Charles had filed a motion to dismiss; Forte filed a response and Charles a reply. After argument, the court denied the motion on August 6, 2007. Apparently, Charles did not file an answer thereafter; the court therefore set a default hearing for December 17, 2007. Forte obtained leave from the superior court to serve Victor by publication.
Meanwhile, this adversary proceeding was filed on June 15, 2007 by Forte against Charles, Victor and Ivy,[4] alleging virtually identical facts, and seeking a declaration that the deed of trust was invalid either because of the lack of an underlying promissory note or as a fraudulent conveyance
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(under the theory that, in the absence of a note, no value had been given to support the purported lien).
While the complaint names Victor and Ivy as well as Charles, the only specific factual allegations involved Charles. Answers were filed pro se by Victor and Charles on July 18, 2007, denying liability. Thereafter, Forte sought and received leave to file an amended complaint. The amended complaint added a quiet title count against Victor and one new factual allegation — that Charles had “surreptitiously” inserted Victor’s name as beneficiary on the deed of trust. The Court set a Rule 16(b) scheduling conference for September 12, 2007, the same day as a hearing was set in superior court.
The explanation given at the hearing by Whiting why this adversary proceeding was filed when there was already pending a special action in superior court is that Forte could not obtain service on Victor in Omaha and that the bankruptcy rules make nationwide service available to a plaintiff. Victor disputed any difficulty with service and put his home address in Omaha (where he avowed he had lived for over twenty years) on the record. The Court invited Mr. Whiting to serve Victor by first class mail at the address specified. After considerable discussion, including Mr. Whiting’s avowal that he was content to have the matter resolved in this court, the Court declined the invitation of Mr. Whiting to continue the matter until after the superior court had completed service and instead set a schedule for initial disclosures, filing of an answer and motions for summary judgment. Whiting represented to the Court that the matter to be decided was the simple issue of whether there was a note; the Court noted to Whiting that the real issue was whether a note was necessary where the debtor acknowledged that consideration had been given. Whiting further noted that no relief was sought against Charles or, for that matter, Victor, other than removal of the lien and/or quiet title and attorneys’ fees if appropriate.
At the Court’s suggestion, Charles filed a motion to dismiss to which no response was filed. The Court granted the motion at the continued Rule 16(b) scheduling conference held on October 31, 2007. Also at that hearing, a disturbing pattern began to emerge. Whiting complained once again that he could not obtain service on Victor and demanded that Victor put his address on the
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record, apparently either forgetting or choosing to ignore that Victor had already done so six weeks earlier. Further, lack of service is a hollow claim given that the record reflects that Victor filed an answer to the amended complaint on October 1, fewer than three weeks after leave to file the amended complaint had been granted, thereby mooting any issue of personal jurisdiction.
It also became clear that Whiting had not filed the motion for summary judgment that he had both agreed and been ordered to do on the “simple” issue of whether a note was necessary for the deed of trust to be valid. When pressed, he stated that the drafting had been assigned to Spence’s paralegal[5] and that Spence had not authorized the paralegal to proceed because Spence now wanted to resolve the case in superior court by default where, apparently, service by publication had been effected. Whiting had no answer when asked by the Court what Spence’s views had to do with his professional obligation to file a motion he had agreed and had been ordered to file. At this point, he opted instead to ask for ten more days to file the motion. The court allowed five days.
This court notes that the “default for failure to respond to service by publication” strategy apparently adopted by both counsel for Forte is particularly distasteful given that Victor, on the phone from Omaha, stated repeatedly that he had been in contact with Spence by phone and email numerous times[6] and in fact had answered the amended complaint in bankruptcy court.
In short, despite the clear direction from the Court at the September 12 hearing that the matter could and would be resolved on the merits in the bankruptcy court (the jurisdiction of which, it should be noted, had been invoked by Forte and her counsel Whiting), Whiting and Spence continued with their whipsaw tactics of seeking a non-merits determination in whichever court could be convinced to give it to them, despite the active participation of Victor in, at least, the bankruptcy
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case. In an effort to stop this tawdry course of events, this court set an accelerated schedule on a motion for summary judgment and directed Whiting to advise Spence not to proceed further with default or any other remedy in the superior court pending resolution of the case in this court. In effect, the Court ordered Whiting to “shut down” the superior court case so that the case could be concluded in bankruptcy court. Whiting agreed to do so and volunteered to file a notice to that effect with the superior court and this court, accepting his offer, ordered him to do so. Further, under very direct inquiry by the court, Whiting agreed concretely that the only issue to be resolved in the summary judgment motion was whether the deed of trust was invalid for lack of a note, even though consideration had been paid.
What happened next is more disturbing still. Both parties filed summary judgment motions; while Victor’s motion addressed the issue previously identified, Whiting, in a stunning aboutface, conceded the point[7] but instead argued that the entire transaction was a fraudulent scheme by the Kirklands to seize control of Forte’s house from her.[8] Notwithstanding the fact that the “fraudulent scheme” theory had not been pled and was outside the bounds of the issue to be decided, Whiting asked the court to grant Forte summary judgment on this basis. Understandably, Victor objected vehemently. In a written decision (docket 41), the Court granted Victor’s motion and denied Forte’s. A day after this memorandum decision, Whiting filed a motion for summary disposition of Victor’s claim and a motion to strike what Victor had filed. The Court entered an order denying both as moot, stating that the appropriate procedure would be to file a motion for leave to amend the complaint; the order provided that Whiting had twenty days to file such a motion or the adversary proceeding would be dismissed.
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Whiting[9] decided that this was a convenient time to exit the bankruptcy court, where his one attempt to resolve the issue on the merits had failed,[10] and to return to superior court where winning by default beckoned. This was made crystal clear at a hearing on February 13, 2008 where Whiting acknowledged that he and Spence had purposely decided not to amend within the stated twenty day period so that dismissal of this proceeding would follow. Whiting stated that Spence now believed that there was fraud but needed more discovery on that point and that there was also a new, mysterious theory that would be dispositive but which he declined to reveal because it would give the Kirklands the opportunity to cure the allegedly fatal defect. Therefore, he asked either for dismissal without prejudice to proceeding in state court or leave of court to proceed with discovery in order to be able to file an amended complaint. In a pleading filed the day before the hearing,[11] Whiting explicitly revealed that it was Forte’s intent to proceed with what he called “non-core” issues in the superior court after this case was dismissed. Notwithstanding the Court’s clear direction in earlier hearings, and, not insignificantly, Whiting’s agreement with those directions, Whiting also took the position (in the February 12 pleading and at the February 13 hearing) that he believed this court’s December 14th order meant that, following dismissal, the matter could proceed
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in superior court.
The Court finds this construction of its order, in light of all that has happened in this case, to be totally disingenuous. The meaning of the December 14 order was clear: either seek leave to amend within the time period stated or the case would be dismissed and the matter resolved. In other words, the Court told Whiting: “You have lost on the theories you initially presented. If you believe there are other theories, seek leave to amend the complaint to state them within the time period set and we’ll see where that goes. Otherwise, your case against these parties is over.” It is a total misconstrual of the order to suggest that the thrust of the order was to allow the case here to be dismissed so that the case in superior court could continue and indeed be broadened far beyond its original parameters.
Whiting stated repeatedly at the February 13th hearing that he would need discovery in order to file a second amended complaint, in effect admitting that he did not yet have a Rule 9011 basis for alleging his new fraudulent scheme theories. Yet, notwithstanding these repeated assertions, he filed his second motion to amend (docket 55), together with a proposed second amended complaint alleging just such causes of action, five days later on February 18, 2008, without the benefit of any additional factual development.
At the end of the February 13th hearing, the Court explicitly stated and ordered that all of the parties over which this court has jurisdiction, including Forte, Victor and Charles, were precluded from taking any further action in the superior court pending further order of this court. This order included any actions of a substantive nature against Charles, including, without limitation, proceeding with a default hearing.
III Analysis and Discussion
In this case, Forte, through her counsel Whiting, affirmatively invoked the jurisdiction of the bankruptcy court to resolve the lien dispute at issue. In the early stages of the case, this court directly confronted the issue of how best to address and resolve the question given the pendency of
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parallel proceedings in two courts. After full discussion with counsel and the other parties, the Court decided, with the concurrence of Whiting, that the issue would be resolved in bankruptcy court. After ascertaining that no factual disputes on the purportedly dispositive issue existed, the Court set a brisk schedule for submitting and briefing summary judgment motions. As noted above, for thoroughly inadequate reasons, Whiting did not comply with the established schedule. Nevertheless, the Court granted Whiting a second bite at the apple. When the motion was actually filed, it became apparent that Whiting had no good faith legal basis for proceeding on the “lack of a note” theory and he attempted to change course. Once again, the Court gave Whiting the opportunity to do so consistently with the rules. Once again, he failed to comply with the order, apparently believing that the resulting dismissal would give him a free pass back to state court.
Whiting argues that proceeding in state court is necessary because some of his claims may be non-core and that his client may have a right to jury trial. This is a red herring. Whiting does not argue that federal jurisdiction is lacking; indeed, as the plaintiff is the debtor and the lien affects property of the estate, the claims are all comfortably within the scope of 28 U.S.C. § 1334. If, as Whiting suggests, some claims may be non-core, they are at the least within the “related to” jurisdiction of Section 1334. And, of course, jurisdiction primarily lies with the district court, subject to the referral to bankruptcy court under 28 U.S.C. § 157(a). The Ninth Circuit has recently held in Sigma Micro Corp. v. Healthcentral.com (In re Healthcentral.com), 504 F.3d 775 (9th Cir. 2007) that a Seventh Amendment jury trial right does not require the immediate transfer of the case to the district court but rather the bankruptcy court can retain the case for all pre-trial matters. Thus, under the December 14th order, Whiting clearly had the alternative to plead all causes of actions he thought appropriate, whether core or non-core, reserving the right to seek withdrawal of the reference at an appropriate time for a trial by jury.[12]
Therefore, the Court will enforce its prior order and deny the motion to amend and will dismiss this adversary proceeding. The remaining question is whether that dismissal will be with
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or without prejudice.
Based on the procedural history detailed above, the Court finds that Whiting has abused the litigation process and knowingly acted in a manner inconsistent with Court orders. It is fundamentally unfair to attempt to manipulate two simultaneous court proceedings in a manner designed to avoid a decision on the merits while at the same time attempting to obtain a favorable result on the underlying issues on a non-merits basis. It is further fundamentally unfair to consent to the disposition of a matter in one tribunal while at the same time attempting to obtain substantive relief in another tribunal. Finally, it is unprofessional and inconsistent with a lawyer’s ethical responsibilities repeatedly to refuse to abide by court orders.
11 U.S.C. § 105(a) provides, in effect, that the Court, sua sponte, may take any action or make any determination necessary or appropriate to “enforce or implement court orders or rules, or to prevent an abuse of process.” Under Section 105(a), a bankruptcy court has “the inherent power to sanction vexatious conduct presented before the court.” In re Rainbow Magazine Inc., 77. F.3d 278, 284 (9th Cir. 1996) (applying the holding o Chambers v. NASCO, Inc., 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991) in the context of 105(a)). This situation requires the Court to take such action. It would be a mockery of the orders issued in this case were Forte able to leave bankruptcy court unscathed and return to superior court to litigate these new theories. The opportunity existed here to litigate these issues, the process for taking advantage of it was clearly outlined, yet it was flatly eschewed by Whiting. The result must be that the complaint is dismissed with prejudice. It is the Court’s intention with this order, lest there be any doubt, that the dismissal of this complaint with prejudice is intended to be a full and final adjudication of all claims that were or could have been brought by Forte against these three defendants, to the full extent allowed under the doctrine of res judicata or claim preclusion.
The Order to Show Cause is vacated as moot.
The Court will prepare and enter a separate judgment.
So ordered.
to determine that positions taken by him in pleadings he files have a good faith basis in law and fact.
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