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If a party-in-interest believes that a professional person in a bankruptcy case did not perform the job, how (and where) is that dispute resolved? If you said “the bankruptcy court, of course,” you might be correct, but the “of course” requires some careful analysis, and may in fact sometimes be “maybe.” This is the lesson to be learned from McClelland v. Grubb & Ellis Consulting Services Co., et al. (In re McClelland). Prior to filing his Chapter 11 bankruptcy case in December 2003, John McClelland was engaged in owning, managing and operating a diverse portfolio of properties. His property ownership consisted of fractional interests (generally, a one-third interest) in which the co-owners were two brothers. For five years prior to the Chapter 11 filing, McClelland and the brothers were entangled in litigation in state and federal courts involving the ownership of the properties. In June 2004, McClelland and the brothers entered into a comprehensive settlement stipulation that would serve to form the basis of McClelland’s Chapter 11 plan. The stipulation called for the brothers to buy out McClelland’s interest in the jointly owned properties, based on appraisals to be performed by a unit of Grubb & Ellis. To effectuate the buyout, McClelland and the brothers agreed jointly to retain Grubb & Ellis pursuant to a “standard retention letter” to perform the appraisals without interference by any party. Symbolic of the animosity the brothers and McClelland had for each other, the stipulation stated that Grubb & Ellis was to have no contact with any of the parties, except through counsel, and even then only at such times as counsel and the court were present. After the performance of the appraisals, Grubb & Ellis was to file an affidavit attesting to the performance of its appraisals in compliance with the terms of its engagement, and specifically the “no contact” provisions. Once the affidavit was filed, Grubb & Ellis would be subject to no further direct or cross-examination. The results were “binding and conclusive upon the parties.” Moreover, the “standard retention letter” referred to in the stipulation, the terms of which were required to be (and were) agreed to by counsel for McClelland and the brothers, stated that liability in connection with, or in any way related to, the appraisals was limited to the fees paid to Grubb & Ellis. The stipulation was submitted to the bankruptcy court for approval, and thereafter approved by the court. Grubb & Ellis did in fact complete the appraisals, and in accordance with the results, McClelland’s estate received approximately $4 million. This payment allowed McClelland to file a 100 cent plan, which was confirmed in August 2004. Part of that plan had a fairly standard “retention of jurisdiction” provision, calling for the bankruptcy court to have “exclusive jurisdiction over all matters arising out of, and related to, the Chapter 11 Case � including � adversary proceedings, � and contested matters arising out of, under, or related to the Chapter 11 Case.” When Grubb & Ellis filed its fee application for the work it performed on behalf of the estate, McClelland objected, claiming that Grubb & Ellis’ fee should be disallowed based on a methodology error in appraising project of 33 two-family homes, which was one of the many properties owned by jointly McClelland and the brothers. Specifically, McClelland claimed that Grubb & Ellis valued the properties as rental units rather than as individually owned homes. This error, stated McClelland, caused a $3 million error in the appraisal, resulting in a net error to the estate of $1 million. McClelland requested that any fee awarded to Grubb & Ellis be made specifically without prejudice to McClelland’s right to make claims against Grubb & Ellis in state court or, in the alternative, to treat McClelland’s allegations of error as a counterclaim to the fee application and have the bankruptcy court hear both matters at the same time. The bankruptcy court rejected both of McClelland’s invitations. It stated first that since McClelland had not challenged the reasonableness or necessity of the services, Grubb & Ellis’ application would be granted. It further stated that with respect to reviewing the alleged error as a counterclaim, “[t]hat issue is not before the court,” and “[t]he court declines to comment on the debtor’s state court rights against [Grubb & Ellis], if any.” The court concluded, “Grubb & Ellis should be paid for its work performed. That is the extent of my ruling today.” Predictably, McClelland thereafter filed suit against Grubb & Ellis in state court, alleging numerous errors in the appraisal of not only the 33 two-family homes but of a number of other appraised properties. Grubb & Ellis removed the case to the district court and the district court transferred the case to the bankruptcy court. McClelland moved to remand or, in the alternative, to abstain. The bankruptcy court began by considering McClelland’s request to remand. It first set forth the following well-established factors a court should outline in determining whether remand under 28 U.S.C. Section 1452(b) is appropriate: • The effect on the efficient administration of the estate; • The extent to which issues of state law predominate; • The difficulty or unsettled state of the applicable state law; • Comity; • The degree of relatedness; • The existence of a right to jury trial; and • The prejudice to the involuntarily removed party. Addressing each one, the bankruptcy court made the following observations. First, the Chapter 11 case can be closed, despite the existence of a McClelland/Grubb & Ellis dispute; thus remand will not require keeping the Chapter 11 case open for an indefinite amount of time (citing to, among other things, Fed.R.Bankr.P. 3022 and the Advisory Note). Second, despite McClelland’s assertion, state law issues do not clearly predominate, since the suit bought by McClelland arises out of a post-petition contract against a professional person employed pursuant to provisions of the Bankruptcy Code and an order of the bankruptcy court relating to work done and paid for by a bankruptcy estate. Addressing the third and fourth factors, the court stated that McClelland’s claims did not require a difficult analysis or an analysis of unsettled state law, and the facts here do not suggest remand on the basis of comity. The bankruptcy court then analyzed one of the fundamental issues raised by the motion � was the McClelland suit against Grubb & Ellis a core proceeding? If so, remand would be less likely; if not, remand was a distinct possibility. McClelland argued that it was not, but the bankruptcy court disagreed. Clearly, stated the court, the suit was “related to” the Chapter 11 case. Indeed, the order confirming the plan clearly reserved to the bankruptcy court exclusive jurisdiction over all matters arising out of and related to the Chapter 11 case and the plan “to the fullest extent of the law.” This was enough, stated the court, to give it “related to” jurisdiction. But the court said more. It stated that the debtor’s suit is against a professional retained by order of the court pertaining to work performed for the estate. Such an action, the court continued, is clearly a matter “concerning the administration of the estate” as that term is used in 28 U.S.C. Section 157(b)(2)(B). “The ‘administration of the estate’ is most often carried out by court-appointed or court-approved professionals, and it follows that the retention of estate professionals is also a core bankruptcy function. If those professionals may be subjected to suit in another forum for the work they performed in connection with a bankruptcy case, the ability of those professionals � to fairly administer the bankruptcy estate may be threatened.” And an “overriding characteristic” of the action is the fact that the appraiser’s work was as an estate professional whose work was fundamental in ending years’ worth of litigation. This, stated the court, gave the claim all the indicia of one “arising in” (as opposed to merely “related to”) the Chapter 11 case, citing with approval cases from the 5th U.S. Circuit Court of Appeals and the U.S. District Court for the District of New Jersey. What of the right to a jury trial? The court stated that this factor, of itself, did not require remand. The issue of whether a party deserves a jury trial and the issue of whether a matter is core or non-core (or should be remanded) are separate, since if a party is entitled to a jury trial, the matter may still be core, but (in the absence of agreement) triable in a district court, not a bankruptcy court. At most, the reference may at some point have to be withdrawn. (Withdrawal of the reference was not before the court.) The right to a jury will not, at least in this case, override the other compelling factors weighing in favor of retaining jurisdiction in the federal courts. Finally, McClelland argued that to not remand would prejudice him, as the attorney retained to handle this claim concentrated on state court litigation. If he were required to maintain the action in bankruptcy court he would not be able to use bankruptcy counsel, as she would be a witness at trial. The bankruptcy court noted that other counsel had appeared in the case for McClelland. The court also noted its intimate familiarity with the case and the facts giving rise to the dispute, all of which cut against a finding of overall prejudice. The court then considered McClelland’s alternative prayer: the court should abstain from hearing the claim “in the interest of justice, or in the interest of comity with state courts or respect of state law.” The bankruptcy court declined the invitation in a succinct manner: “While the claims in this case turn on questions of state law, those claims, and the events they are based on, arose in the context of the Debtor’s bankruptcy case.” The final issue considered by the bankruptcy court was whether its earlier statement that it would not consider the objection as a counterclaim somehow became “law of the case,” leading to the result that the court could not now consider the claim. Under the doctrine of “law of the case,” stated the court, a court should not revisit prior rulings in subsequent stages of the litigation of the same case absent some cogent and compelling reason. It does not constitute a limitation on a court’s power but merely expresses a general practice of refusing to reopen what has been already decided. The court, once again, spoke succinctly: it made no prior ruling on its jurisdiction to rule on the matter; the merely stated that the matter would not be heard in the context of a counterclaim to a fee application. The argument simply was without merit. Two things of note: One, in passing, should the bankruptcy court have concluded that it had “related to” jurisdiction simply because the plan so provided? It is likely that many courts would not make that jump. Second, and more fundamentally, many of the bankruptcy court’s conclusions here seem to have been driven by its own intense involvement in the case and the importance of the appraiser’s work to the outcome of the Chapter 11 case. Perhaps under different circumstances, with slightly different facts, the conclusion �� i.e., would “the bankruptcy court, of course,” would hear this kind of dispute �� may be different. Myron A. Bloom is a shareholder with the firm of Hangley Aronchick Segal & Pudlin. His practice is concentrated in the areas of corporate organization, bankruptcy, commercial workouts and creditors’ rights.

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