The claims were salacious. The resulting ruling … not so much.
Faced with “unusual allegations” of impropriety involving a bankruptcy judge, his fiance-attorney and a disbanded law firm, the U.S. Court of Appeals for the Eleventh Circuit played it by the book, then by the phrase, sentence, and each and every word.
In an issue of first impression, the court examined whether circuit courts have jurisdiction to hear direct appeals of unauthorized bankruptcy court orders that had not been reviewed by a district court. It found a bankruptcy court’s decision in a noncore, or “related-to,” proceeding that had not been reviewed by the district court carried no adjudicative authority and was not appealable.
Its methodical 19-page ruling probed the tenets of bankruptcy court jurisdiction, quoted Oxford English Dictionary definitions, dissected the first sentence of a subsection in a federal statute, distinguished core from noncore proceedings and discussed appellate adjudicative authority — all before ultimately undoing a bankruptcy judge’s dismissal and returning the case to district court.
“Before we can reach the merits of the appeal we must address our jurisdiction, even though the parties have not questioned it,” Judge Adalberto Jordan wrote in a unanimous Jan. 5 ruling with Eleventh Circuit Judge Stanley Marcus and Second Circuit Judge John Walker, sitting by special designation.
The case involves allegations against U.S. Bankruptcy Judge John Olson, accused of showing favoritism to a law firm that hired his fiance, who relocated from Orlando to South Florida, where Olson presides. It stemmed from adversary proceedings in the bankruptcy of Pennsylvania-based Trafford Distribution Center.
Trafford became insolvent in 2008, and sole shareholder Barbara Wortley filed for Chapter 7 bankruptcy protection. The case was assigned to Olson, who appointed a bankruptcy trustee. That trustee hired West Palm Beach attorney Michael Bakst, formerly with Ruden McClosky, to bring three cases against Wortley and other debtors. While Bakst was litigating these cases before Olson, his firm hired bankruptcy and commercial litigator George Steven Fender, who was engaged to Olson and later married the judge. Five months after Fender joined Ruden McClosky, Olson tried the three Trafford cases together in a bench trial.
“The proceedings ended badly for the Wortley parties,” Jordan wrote. “Judge Olson ordered them to pay over $2.5 million to Trafford’s bankruptcy estate.”
The debtors moved for Olson’s recusal, but the judge refused, stating his spouse did not benefit financially from the case. After a status conference in which the district court raised concerns about a potential appearance of impropriety, Olson stepped down on his own motion, and the case was reassigned to Judge A. Jay Cristol.
Cristol denied motions to set aside his predecessor’s rulings. The debtors’ motion for sanctions and reconsideration remain pending before him.
Meanwhile, Wortley and the other debtors sued in state court in 2011 against Fender and Bakst, the head of Ruden McClosky’s bankruptcy group, on claims the law firm unethically sought to win the judge’s favor. Ruden McClosky filed the same year for Chapter 11 protection, citing losses from the housing market collapse, and later sold its assets to Greenspoon Marder.
The Wortley debtors alleged fraudulent corruption of the judicial process by the Ruden attorneys and conspiracy to obstruct the due operation of law to deprive the plaintiffs of their right to a fair trial. They later removed the case from state court to federal bankruptcy court, where Cristol dismissed it and certified his decision for direct appeal to the Eleventh Circuit.
That court accepted the case but ruled this month it had no jurisdiction to consider the merits of the debtors’ claims — and as it turns out, neither did Cristol.
Under federal law, bankruptcy judges administering estates may handle two types of proceedings: core and noncore. They have authority to issue final judgments without the parties’ consent in core proceedings — cases that turn on rights created by federal bankruptcy law — but not in noncore, or related, proceedings like divorces, contract disputes, torts and other litigation that impact bankruptcy estates.
In weighing the allegations involving Olson, the appellate judges said they first needed to determine whether Wortley’s suit against the attorneys constituted a core proceeding over which Cristol had jurisdiction.
“This case does not fit the bill,” they found, ruling the suit asserted torts under only state law and involved no rights under federal bankruptcy law.
That finding meant Cristol could not enter final judgment without the parties’ consent, which led the appellate court to treat his dismissal as a report with “proposed conclusions of law.”
“And that creates a jurisdictional problem,” Jordan wrote, because the federal law under which Cristol certified the appeal allows challenges only to bankruptcy “judgments, orders or decrees” that have “adjudicative consequences.”
“For want of appellate jurisdiction,” the Eleventh Circuit transferred the direct bankruptcy appeal to the district court in a ruling that nullifies Cristol’s decision and leaves it to the district court to determine how, or if, the case will proceed.
Fender did not respond to requests for comment by deadline, and rules of judicial conduct prevent Olson from commenting on pending litigation. Bakst and the lawyers’ attorney, Paul Steven Singerman of Berger Singerman in Miami, declined comment.
The debtors plan to continue their claims and efforts to recover legal fees spent seeking Olson’s recusal.
“We’re going to wait for the district court to rule,” said Wortley’s attorney, Robert Sweetapple of Sweetapple Broeker & Varkas in Boca Raton, who has handled the litigation for nearly nine years. “My client intends to pursue this case to its conclusion.”