In re: J.T. Thorpe, Inc., Thorpe Insulation Company

ORDER AFFIRMING THE BANKRUPTCY COURT'S ORDERS AND JUDGMENT by Judge Virginia A. Phillips. (See document for specifics.)

Central District of California, cacd-2:2014-cv-03883

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7 Page ID #:3541 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 IN RE: J.T. THORPE, INC.) Case No. CV 14-03883-VAP & THORPE INSULATION) USBC Case No. 12 COMPANY, DEBTORS) 2:02-BK-14216-BB) ADVERSARY Case No. 13) 2:12-AP-02182-BB) 14) ORDER AFFIRMING THE) BANKRUPTCY COURT'S ORDERS 15) AND JUDGMENT) 16) [Appeal from Bankruptcy ________________________) Court] 17 18 Appellants Michael J. Mandelbrot and The Mandelbrot 19 Law Firm challenge the bankruptcy court's refusal to 20 countenance their withdrawal from a stipulation that 21 limits their ability to present claims against Appellees 22 J.T. Thorpe Settlement Trust and Thorpe Insulation Co. 23 Asbestos Settlement Trust on behalf of clients allegedly 24 injured by exposure to asbestos. This matter is 25 appropriate for resolution without hearing. See Fed. R. 26 Civ. P. 78; L.R. 7-15. For the reasons discussed below, 27 the Court affirms the bankruptcy court's orders and 28 judgment. 7 Page ID #:3542 1 I. BACKGROUND 2 Appellees are statutory trusts created under 11 3 U.S.C. § 524(g). They are charged with assuming the 4 liability for thousands of present and future 5 mass-asbestos claims against two unrelated insolvent 6 companies, J.T. Thorpe, Inc. ("JTT") and Thorpe 7 Insulation Co. ("Thorpe"). JTT and Thorpe had installed 8 and distributed asbestos insulation in various commercial 9 and industrial settings, including shipyards and U.S. 10 Navy ships. Appellees were established by the companies' 11 Chapter 11 bankruptcy plan confirmation orders and 12 affirmed by California Central District Judges Otero and 13 Fischer. 14 15 Given the expiration of the deadlines to file an 16 appeal, the affirmances by Judges Otero and Fischer have 17 become final. SER Tabs A-E. Under these orders, 18 Appellees remain under the bankruptcy court's post- 19 confirmation supervision. SER Tab A at 20 § K (JTT); SER 20 Tab C at 381 ¶ 16 (Thorpe). Appellees' court-approved 21 trust distribution procedures ("TDPs") authorize them to 22 reject the claims filed by attorneys found to be 23 unreliable and to engage in a pattern or practice of 24 submitting unreliable evidence in support of their 25 claims. See SER Tab L at 1122-23 § 5.7; SER Tab M at 26 1156-57 § 5.7. 27 28 2 7 Page ID #:3543 1 Appellants are a lawyer and his law firm who filed 2 claims with Appellees on behalf of asbestos victims. ER 3 Tab 10 at 694 ¶¶ 15, 17. In the wake of an 4 investigation, Appellees withdrew Appellants' claim- 5 filing privileges because they were unreliable and had 6 engaged in a pattern or practice of submitting unreliable 7 evidence. See SER Tab F at 465-68. The audit revealed 8 hundreds of filings on behalf of claimants not likely to 9 have encountered the insolvent companies' asbestos and 10 supported by declarations and answers to interrogatories 11 from persons not likely to have personal knowledge 12 regarding the exposures (e.g., children not yet born and 13 spouses not yet married). SER Tab J at 700-03 ¶ 48-54. 14 15 In many cases, Appellants simply refused to cooperate 16 with the investigation or provide the alleged victims' 17 prior deposition testimony. SER Tab J at 703-05 ¶¶ 18 55-61; SER Tab F at 469-81. Instead, Appellants accused 19 Appellees of misconduct and threatened to sue if they did 20 not stop the audit. In response, Appellees filed 21 adversary proceedings to confirm the reasonableness of 22 their decision to investigate Appellants. ER Tab 1 at 12 23 ¶¶ 9-10; ER Tab 8 at 658-59 ¶¶ 7-9; see ER Tab 12 at 24 748-49 ¶¶ 4-7. After they concluded the audit, Appellees 25 also requested instructions to confirm that their 26 findings and remedy were reasonable and authorized under 27 the TDPs. ER Tab 8 at 660 ¶ 12; SER Tab G. 28 3 7 Page ID #:3544 1 Following comprehensive discovery, the bankruptcy 2 court set these matters for trial. The parties submitted 3 affirmative trial evidence through declarations and 4 exhibits. During the presentation of their 5 case-in-chief, Appellants cross-examined six Appellee 6 witnesses, including their Executive Director, Managing 7 Trustee, and Futures Representative. Appellants also 8 cross-examined Senior Supervising Paralegal Laura Paul, 9 who first raised the problems with their claims and 10 selected 200 of the claims for the audit. Paul testified 11 extensively regarding the implausibilities in the claims. 12 Her testimony showed that Appellants had a practice of 13 submitting unreliable evidence. See SER Tab J at 697-99 14 ¶¶ 40-44. 15 16 On the third day of trial, after Appellants had 17 presented the majority of their case-in-chief, but before 18 Mandelbrot took the stand, the parties read into the 19 record a detailed stipulation endorsed by Appellants and 20 their counsel. ER Tab 7 at 630-50, ER Tab 8 at 654-57 ¶ 21 3. It provided that Appellants would withdraw their 22 objections and defenses and agree that: (1) Appellees 23 acted reasonably in conducting an investigation, 24 confirming that their evidence was unreliable, and 25 imposing a remedy; and (2) Appellants would promptly 26 transfer the claims of current clients to other counsel 27 and not file new claims against Appellees and the two 28 4 7 Page ID #:3545 1 other § 524(g) trusts sharing their claim-processing 2 facilities. 4 ER Tab 8 at 654-57 ¶ 3. In reliance on 3 the stipulation, the bankruptcy court terminated the 4 trial. ER Tab 4 at 71:20-72:20; ER Tab 7; ER Tab 8 at 5 653. 6 7 In its Findings of Fact, the bankruptcy court decided 8 that the trusts had reasonably determined Appellants to 9 follow "a pattern and practice of filing unreliable 10 evidence in support of claims[.]" See ER Tab 1 at 12 ¶ 11 9. Later, the bankruptcy court commented that the 12 subjects of the stipulation were "factual findings which 13 I would have made on my own, based on the record as the 14 state that it was ... factual findings that weren't 15 simply because of the stipulations between the parties, 16 but also consistent with the evidence that I had heard." 17 SER Tab R at 1233. 18 19 Appellants subsequently attempted to renege on the 20 stipulation. The bankruptcy court rejected their efforts 21 and, upon Appellees' motion, issued three orders: (1) the 22 Order Granting Motion to Enforce January 23, 2014 23 Stipulated Agreement, ER Tab 1 at 3-8 ("Enforcement 24 Order"); (2) the Order Following Trial on Adversary 25 Complaints and Motion for Instructions, ER Tab 1 at 9-14 26 ("Order Following Trial"); and (3) the Judgment in 27 Adversary Proceedings, ER Tab 1 at 15-16 ("Judgment") 28 5 7 Page ID #:3546 1 (collectively, "Orders"). This appeal attacks the Orders 2 by challenging the validity of the stipulation. ER Tab 1 3 at 1-2. 4 5 II. LEGAL STANDARD 6 A federal district court has jurisdiction to 7 entertain an appeal from the Bankruptcy Court under 28 8 U.S.C. § 158(a), which provides: "The district courts of 9 the United States shall have jurisdiction to hear appeals 10 ... from final judgments, orders, and decrees." 11 12 A district court reviews a bankruptcy court's 13 conclusions of law de novo, and the bankruptcy court's 14 factual findings for clear error. In re Greene, 583 F.3d 15 614, 618 (9th Cir. 2009) (citing In re Raintree 16 Healthcare Corp., 431 F.3d 685, 687 (9th Cir. 2005); In 17 re Salazar, 430 F.3d 992, 994 (9th Cir. 2005)); In re 18 Coleman, 560 F.3d 1000, 1003 (9th Cir. 2009) (citing In 19 re Tucson Estates, Inc., 912 F.2d 1162, 1166 (9th Cir. 20 1990)). "Mixed questions of law and fact are reviewed de 21 novo." In re Chang, 163 F.3d 1138, 1140 (9th Cir. 1998), 22 cert. denied, 526 U.S. 1149, 119 S. Ct. 2029, 143 L. Ed. 23 2d 1039 (1999) (citing In re Bammer, 131 F.3d 788, 792 24 (9th Cir. 1997) (en banc)); see also Fed. R. Bank. Pro. 25 8013. 26 27 28 6 7 Page ID #:3547 1 When conducting a "de novo review, the appellate 2 [(i.e., district)] court accords no deference to the 3 trial [(i.e., bankruptcy)] court, but rather determines 4 for itself whether the ... decision should be reversed on 5 the ground that it is arbitrary, capricious, an abuse of 6 discretion, or contrary to law. Harman v. Apfel, 211 7 F.3d 1172, 1175 (9th Cir. 2000) (citing Lake Mohave Boat 8 Owners Ass'n v. Nat. Park Serv., 138 F.3d 759, 762 (9th 9 Cir. 1998)). In other words, the court does not afford 10 "deference to the [bankruptcy] court's conclusion." 11 Voigt v. Savell, 70 F.3d 1552, 1564 (9th Cir. 1995) 12 (citing Kayes v. Pac. Lumber Co., 51 F.3d 1449, 1454 (9th 13 Cir. 1995)). 14 15 Under the clearly erroneous standard, however, "the 16 court must accept the bankruptcy court's findings of fact 17 unless, upon review, the court is 'left with the definite 18 and firm conviction that a mistake has been committed' by 19 the bankruptcy judge." In re Greene, 583 F.3d at 618 20 (citing Latman v. Burdette, 366 F.3d 774, 781 (9th Cir. 21 2004) (quoting United States v. United States Gypsum Co., 22 333 U.S. 364, 395, 68 S. Ct. 525, 92 L. Ed. 746 (1948)). 23 24 III. DISCUSSION 25 Whether the bankruptcy court abused its discretion by 26 enforcing the parties' stipulation depends on three 27 issues: 28 7 7 Page ID #:3548 1 A. Whether the Bankruptcy Court's limited post- 2 confirmation and post-consummation jurisdiction 3 constitutionally extends to third parties such as 4 Appellants 5 1. Appellants waived their Stern claim. 6 First, Appellants cite Stern v. Marshall, __ U.S. __, 7 131 S. Ct. 2594, 180 L. Ed.2d 475 (2011), to argue that 8 the bankruptcy court exceeded its jurisdiction. The 9 Stern court held that, "although the Bankruptcy Court had 10 the statutory authority to enter judgment on [a] 11 counterclaim [against the estate], it lacked the 12 constitutional authority to do so." Id. at 2601. 13 Appellants claim to be "two steps further removed from 14 the estate" than the counter-claimant in Stern because 15 they "represented injury claimants and made no claims on 16 behalf of themselves," and because the claims "were not 17 filed against the estate, but against the Trust which 18 contractually assumed liability on the claims." Opening 19 Br. at 5 (Doc. No. 17). 20 21 Appellants waived their Stern claim by stipulating 22 that "the only appropriate jurisdiction [to enforce the 23 stipulation] is the supervising bankruptcy court that 24 appointed the Trust fiduciaries." ER Tab 7 at 636-37, 25 643-44. The "right to a hearing in an Article III court 26 ... is waivable" for both core and non-core matters. In 27 re Bellingham Ins. Agency, 702 F.3d 553, 566-67 (9th Cir. 28 8 7 Page ID #:3549 1 2013), aff'd on other grounds sub nom. Exec. Benefits 2 Ins. Agency v. Arkison, __ U.S. __, 134 S. Ct. 2165, 189 3 L. Ed. 2d 83 (2014). Thus, "a bankruptcy court may 4 constitutionally enter final judgment on a Stern claim 5 against a nonclaimant to the bankruptcy estate with the 6 consent of the parties." Mastro v. Rigby, 764 F.3d 1090, 7 1095 (9th Cir. 2014). 8 9 2. The Orders' alleged non-core status makes no 10 difference. 11 Further, Appellants contend that "[i]ntervention by 12 [Appellees] and the Courts in the professional 13 contractual relationship between [Appellants] and [their] 14 clients is not a 'core proceeding[.]'" Reply Br. at 5 15 (Doc. No. 28). Although it is indeed "the sole province 16 of Article III judges" to enter final judgment in 17 non-core proceedings under 28 U.S.C. § 157(c)(1), In re 18 Bellingham, 702 F.3d at 558, Appellants' decision to 19 enter the stipulation makes the core/non-core distinction 20 irrelevant. "Article III's guarantee of an impartial and 21 independent federal adjudication is subject to waiver. 22 And in fact, § 157(c)(2) expressly provides that 23 bankruptcy courts may enter final judgments in non-core 24 proceedings 'with the consent of all the parties to the 25 proceeding.'" Id. at 567 (citations omitted). 26 27 28 9 7 Page ID #:3550 1 3. The Orders fall within the bankruptcy court's 2 post-confirmation jurisdiction. 3 Next, Appellants claim that the Orders