Lowenbraun v. Canary

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 06a0230p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

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Debtor. -

In re: STANLEY LOWENBRAUN,

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No. 05-6032

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ETHEL LOWENBRAUN, >

Appellant, -

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v.

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THOMAS L. CANARY, JR. and MAPOTHER &

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MAPOTHER, PSC,

Appellees. -

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Appeal from the United States District Court

for the Western District of Kentucky at Louisville.

No. 04-00627—John G. Heyburn II, Chief District Judge.

Argued: May 30, 2006

Decided and Filed: July 6, 2006

Before: GILMAN, SUTTON, and COOK, Circuit judges.

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COUNSEL

ARGUED: Bryan N. Coomer, Louisville, Kentucky, for Appellant. Carl D. Frederick, SEILLER

WATERMAN, Louisville, Kentucky, for Appellees. ON BRIEF: Bryan N. Coomer, Louisville,

Kentucky, for Appellant. Carl D. Frederick, Paul J. Hershberg, SEILLER WATERMAN,

Louisville, Kentucky, for Appellees.

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OPINION

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RONALD LEE GILMAN, Circuit Judge. Ethel Lowenbraun was married to Stanley

Lowenbraun, once a successful oncologist who fell into financial ruin due to a gambling addiction.

Ethel and Stanley legally separated in 1998, and Stanley filed a Chapter 7 bankruptcy petition

shortly thereafter. Thomas Canary, along with his law firm Mapother and Mapother (collectively,

Canary), was hired by the trustee of the bankruptcy estate to investigate whether some of the

transfers made from Stanley to Ethel pursuant to their legal separation constituted an improper

1

No. 05-6032 In re Lowenbraun Page 2

diversion of funds from the bankruptcy estate. In the course of his duties, Canary brought contempt

proceedings against Ethel and Stanley.

Ethel subsequently filed suit in a state trial court in Kentucky, accusing Canary of libel,

slander, abuse of process, wrongful use of civil proceedings, and outrageous conduct. Canary

removed the action to the Bankruptcy Court for the Western District of Kentucky, which decided

to retain jurisdiction over the matter despite Ethel’s motions for mandatory abstention and for

remand to the Kentucky state court. The bankruptcy court held as a matter of law that Canary was

entitled to absolute immunity for his statements and, in the alternative, that Canary was entitled to

summary judgment on the merits of the case. This decision was affirmed by the district court, and

Ethel timely appealed. For the reasons set forth below, we AFFIRM the judgment of the district

court.

I. BACKGROUND

In 1998, Stanley and Ethel legally separated and entered into a Property Settlement

Agreement. Pursuant to the agreement, Stanley transferred to Ethel an Individual Retirement

Account (IRA) worth $1 million and all of his stock in the S. L. Thoroughbreds Corporation, which

was valued at approximately $2.5 million.

Stanley filed for Chapter 7 bankruptcy shortly after these transfers. William Lawrence was

designated as the bankruptcy trustee. Lawrence’s duties as trustee required him to (1) investigate

the acts, conduct, assets, liabilities, and financial condition of Stanley, (2) collect and liquidate the

property of the estate, and (3) make a final report and distribute the net assets to the estate’s

creditors. See 11 U.S.C. § 704. Pursuant to 11 U.S.C. § 327(a), Lawrence hired Canary to act as

counsel in order to assist Lawrence in the administration of the estate.

Lawrence specifically requested that Canary investigate the IRA and stock transfers made

from Stanley to Ethel to determine if the transfers were improper under either the Bankruptcy Code

or Kentucky law. After concluding that the transfers were marked with “badges of fraud,” Canary

filed an adversary proceeding in the bankruptcy court against Stanley and Ethel, alleging that the

Bankruptcy Code and Kentucky law prohibited the transfers. As a result of this adversary

proceeding, the parties reached an Adversary Proceeding Settlement Agreement (APSA) in August

of 2001 in which Ethel agreed to transfer $1.2 million from her IRA to the bankruptcy estate, and

the estate agreed to release its claim to the disputed Thoroughbreds Corporation stock.

The APSA provided a particular method for accomplishing the $1.2 million transfer:

(1) Ethel was to transfer funds from her IRA to an IRA established in Stanley’s name alone, (2)

those funds were to be immediately transferred from Stanley’s IRA to the estate, and (3) all transfers

were to be supervised by a representative of Merrill Lynch. Once the transfers were completed, the

trustee agreed to release Ethel from the estate’s claims and to dismiss the adversary proceeding. In

a Supplemental Property Settlement Agreement (SPSA) entered into in August of 2001, Ethel agreed

to accept $6,000 per month from Stanley’s disability proceeds in order to compensate her for the

$1.2 million transfer.

Ethel transferred the $1.2 million on October 8, 2001. But the parties dispute whether the

transaction complied with their agreement and whether Canary knew of the transfer when it was

made. Ethel contends that her transfer of the $1.2 million to a “newly-established Merrill Lynch

IRA account solely in Stanley’s name” fully satisfied “all of her obligations under the said

Agreement.” She claims that, upon the transfer, the funds immediately were under the control of

the bankruptcy estate and that Canary did nothing to protect the funds even though he had actual

knowledge of the transaction.

No. 05-6032 In re Lowenbraun Page 3

To prove that Canary had actual knowledge of the October transfer, Ethel relies on a letter

sent by Jan Morris, Stanley’s attorney, to Canary. Morris instructed Canary in the letter to

safeguard the funds at Merrill Lynch while they remained in Stanley’s account. Specifically, Ethel

emphasizes that Morris and Canary entered into a side agreement in which they agreed to delay the

transfer of the funds from Stanley’s IRA to the bankruptcy estate until February of 2002 in order to

avoid the 10% early withdrawal penalty—suggesting that Canary had actual knowledge that Ethel

had transferred the funds. Canary also sent a letter to Morris in which he praised “Dr. [Stanley]

Lowenbraun’s willingness to hold on to the funds for this additional time.” Ethel asserts that these

documents, taken together, indicate that Canary knew of the transfer.

Canary contends, however, that the documents referred to by Ethel do not conclusively

establish his knowledge of the transfer. He offers as proof a letter that he sent to Morris on

October 11, 2001—three days after the transfer—in which he stated that to his knowledge the

transfer had not yet occurred. Canary also highlights language from a draft motion to delay the

funding of the settlement that was attached to his letter sent to Morris. In this letter, Canary writes

that “the source of the funding of the Trustee’s settlement is an IRA account to be transferred from

Ethel Lowenbraun to Stanley Lowenbraun.” (Emphasis in original.) The draft motion also provided

that Ethel and Stanley should prepare “all papers necessary to transfer these funds to the estate

effective February 17, 2002.” Canary argues that the use of the future tense in the draft motion

circulated on November 21, 2001 indicates that he was not aware of the October transfer.

In January of 2002, without the knowledge or consent of the other interested parties and

before Canary claims that he knew of the transfer, Stanley withdrew the $1.2 million from the IRA

and presumably squandered the funds. Canary, on behalf of the trustee, then brought a contempt

proceeding against Stanley and Ethel, alleging that they took the funds in contravention of the

APSA. In conjunction with the proceeding, Canary filed an Emergency Motion for Stanley and

Ethel Lowenbraun to Pay Over Settlement Funds or to Show Cause Why They Should Not Be Held

in Contempt (the Contempt Motion). The Contempt Motion requested that Stanley and Ethel

account for the funds or, in the alternative, be held in contempt of court. Canary also faxed a letter

to the trustee and to the estate’s creditors informing them that the $1.2 million was not accounted

for.

Andrew Wolfson, a reporter for the Louisville Courier-Journal, who was following these

proceedings, interviewed Canary in conjunction with two articles that were published in the

newspaper. Wolfson’s articles suggested that Ethel and Stanley had committed bankruptcy fraud,

and that Canary was going to refer them to the federal authorities for prosecution.

The parties eventually negotiated a settlement, which was memorialized in the Order

Amending Agreed Judgment Resolving Motion to Hold Stanley Lowenbraun and Ethel Lowenbraun

in Contempt of Court (Amended Order). In the Amended Order, Ethel agreed to accept a reduced

amount of $5,000 per month from Stanley’s disability insurance proceeds to compensate her for

Stanley’s defalcation. Ethel had previously been entitled to $6,000 per month. The estate agreed

to accept, among other things, $1 million of the $2 million in life insurance proceeds that will be due

upon Stanley’s death.

In 2003, Ethel brought suit in a Kentucky state court, alleging that Canary’s actions

constituted libel, slander, abuse of process, wrongful use of civil proceedings, and the tort of

outrage. Ethel relied on allegations made by Canary in both the Contempt Motion and in the

Courier-Journal articles as the basis for her state-law tort claims. Canary removed the case to the

bankruptcy court. Ethel responded by requesting the bankruptcy court to abstain from hearing the

case and to send the matter back to the Kentucky state court. The bankruptcy court denied Ethel’s

motion.

No. 05-6032 In re Lowenbraun Page 4

It held that Canary was entitled to litigation-related immunity from Ethel’s state-law claims

and, in the alternative, granted summary judgment to Canary on the merits of the case. The district

court affirmed. On appeal, Ethel argues that the bankruptcy court erred in denying her motion for

mandatory abstention, in failing to remand the case to the Kentucky state court, in granting

immunity to Canary for his judicial and extrajudicial statements, and in granting summary judgment

to Canary on Ethel’s state-law claims.

II. ANALYSIS

A. Standard of review

In an appeal from the bankruptcy court, we directly review the decision of that court rather

than the intermediate decision of the district court. In re M.J. Waterman & Associates, Inc., 227

F.3d 604, 607 (6th Cir. 2000) (holding that “this court is in as good a position to review the

bankruptcy court’s decision as is the district court”) (citation and quotation marks omitted). The

bankruptcy court’s legal conclusions are subject to de novo review, and its factual findings are

reviewed under the clearly erroneous standard. Id.

B. Jurisdiction of the bankruptcy court and the Kentucky state court to hear

Ethel’s claims

Ethel argues that the bankruptcy court erred in failing to abstain from hearing her state-law

claims and in concluding that the state court lacked jurisdiction over those claims pursuant to the

Barton doctrine. We will first address Ethel’s abstention argument and then discuss the

implications of the Barton doctrine on the Kentucky state court’s jurisdiction.

1. Jurisdiction of the bankruptcy court

Depending upon the legal and factual circumstances, a bankruptcy court either must abstain

from hearing a state-law claim (mandatory abstention), 28 U.S.C. § 1334(c)(2), or may abstain

(permissive abstention), 28 U.S.C. § 1334(c)(1). The mandatory abstention provision states as

follows:

Upon timely motion of a party in a proceeding based upon a State law claim or State

law cause of action, related to a case under [the Bankruptcy Code] but not arising

under [the Bankruptcy Code] or arising in a case under [the Bankruptcy Code], with

respect to which an action could not have been commenced in a court of the United

States absent jurisdiction under this section, the district court shall abstain from

hearing such proceeding if an action is commenced, and can be timely adjudicated,

in a State forum of appropriate jurisdiction.

Id. § 1334(c)(2). Interpreting this provision, this court held in In re Dow Corning Corp., 86 F.3d

482, 497 (6th Cir. 1996), that

[f]or mandatory abstention to apply, a proceeding must: (1) be based on a state law

claim or cause of action; (2) lack a federal jurisdictional basis absent the bankruptcy;

(3) be commenced in a state forum of appropriate jurisdiction; (4) be capable of

timely adjudication; and (5) be a non-core proceeding.

Id. The parties agree that Ethel’s action satisfies the first four requirements of In re Dow Corning.

Whether her state-law action was properly characterized by the bankruptcy court as a core

proceeding is therefore the issue in dispute.

No. 05-6032 In re Lowenbraun Page 5

Core proceedings are described in 28 U.S.C. § 157. According to that provision, core

proceedings include but are not limited to “matters concerning the administration of the estate.” Id.

§ 157(b)(2) (setting forth a nonexhaustive list of proceedings considered “core.”). Section 157

additionally provides that “[a] determination that a proceeding is not a core proceeding shall not be

made solely on the basis that its resolution may be affected by State law.” Id. § 157 (b)(3).

Interpreting § 157(b)(2), this court has held that “[a] core proceeding either invokes a

substantive right created by federal bankruptcy law or one which could not exist outside of the

bankruptcy.” Sanders Confectionary Prods., Inc. v. Heller Financial, Inc., 973 F.2d 474, 482 (6th

Cir. 1992) (holding that an action was a core proceeding where “a successful action on the []

plaintiffs’ part could have affected the outcome of the bankruptcy proceeding”); see also In re

DeLorean Motor Co., 155 B.R. 521, 525 (B.A.P. 9th Cir. 1993) (holding that even if a claim fits

within the literal language of § 157(b)(2), it will not be considered a core proceeding “if it is a state

law claim that could exist outside of bankruptcy and is not inextricably bound to . . . a right created

by the Bankruptcy Code.”) (interpreting Northern Pipeline Constr. Co. v. Marathon Pipe Line Co.,

458 U.S. 50 (1982)).

Ethel contends that her state-law action was not a core proceeding and that the bankruptcy

court therefore erred in failing to abstain. In support of this proposition, she argues that (1) her

transfer of the $1.2 million in October of 2001 made her “irrelevant to estate matters” before the

adversary proceeding was filed, and (2) her tort claims would have no conceivable effect on estate

administration. A review of the facts and the relevant caselaw, however, indicates otherwise.

Even if Ethel fully satisfied her obligation by transferring the $1.2 million, which is disputed

by the parties, that would not be dispositive in determining whether her state-law action was a core

proceeding. In In re Douglas L. Heinsohn, 247 B.R. 237, 242-44 (E. D. Tenn. 2000), the bankruptcy

court held that the plaintiff’s state-law action was a core proceeding even though the bankruptcy

estate was closed before the plaintiff initiated his suit. Id. (holding that “[t]here is no bright-line

rule dictating that once an estate has been fully administered a trustee cannot avail himself of the

federal court’s bankruptcy jurisdiction”) (alteration in original) (citation and quotation marks

omitted).

Ethel’s argument that her lawsuit would have no effect on the administration of the

bankruptcy estate similarly fails because the genesis of her state-law action was the bankruptcy

proceeding. She transferred the $1.2 million as a result of the APSA, and Canary’s actions to

investigate the transfer and to recover the missing funds were performed in accordance with his

duties as the trustee’s counsel. The $1.2 million transferred by Ethel and subsequently squandered

by Stanley belonged to the estate pursuant to the APSA. If Ethel had complied with the terms of the

APSA, which required the transfer to be supervised by a representative of Merrill Lynch, moreover,

Canary would not have had to investigate what had happened to the missing funds. Canary’s filing

of the Contempt Motion, upon which Ethel’s state-law action was based, was thus inextricably

bound to the bankruptcy proceeding.

This conclusion gains support from the relevant caselaw. In In re Heinsohn, 247 B.R. at 244,

for example, the court characterized the plaintiff’s malicious prosecution and defamation claims

against a bankruptcy trustee as a core proceeding because the conduct about which the plaintiff

complained “would not have arisen but for Defendant’s obligations and conduct as a trustee.”

Similarly, in In re DeLorean, 155 B.R. at 525, the bankruptcy court classified a state-law action as

a core proceeding because “[t]he action arises from the efforts of officers of the estate to administer

the estate and collect its assets and therefore impacts the handling and administration of the estate.”

155 B.R. at 525.

No. 05-6032 In re Lowenbraun Page 6

Canary’s status as counsel to the trustee, rather than as a trustee himself, does not alter our

analysis. This court held in Allard v. Weitzman, 991 F.2d 1236, 1241 (6th Cir. 1993), that so long

as “they act at the direction of the trustee and for the purpose of administering the estate or

protecting its assets,” counsel and other court-appointed officers who represent the estate “are the

functional equivalent of [the] trustee.” Because Ethel’s claims would not exist but for the

bankruptcy proceeding, and because Canary filed the Contempt Motion to assist in the

administration of the estate, Ethel’s state-law action was a core proceeding, thus precluding

mandatory abstention. We therefore find no error in the bankruptcy court’s denial of Ethel’s motion

to abstain.

2. The jurisdiction of the Kentucky state court

According to this court’s decision in Allard, “[i]t is well-settled that leave of the

[bankruptcy] forum must be obtained by any party wishing to institute an action in a [state] forum

against a trustee, for acts done in the trustee’s official capacity and within the trustee’s authority as

an officer of the court.” 991 F.2d at 1240 (emphasis added). This doctrine, known as the Barton

doctrine, applies to trustees’ counsel as well as to trustees themselves, and its purpose is to “enable[]

the Bankruptcy Court to maintain better control over the administration of the estate.” Id. at 1241.

In the present case, Ethel filed her complaint against Canary in the Kentucky state court without first

obtaining leave from the bankruptcy court. The bankruptcy court held, and Canary now argues, that

her failure to obtain leave constituted a clear violation of the Barton doctrine, thus depriving the

Kentucky state court of jurisdiction.

Ethel contends, however, that Canary’s actions about which she complains were outside the

scope of Canary’s authority. In support of this proposition, Ethel emphasizes that she and Stanley

were legally separated and that she had satisfied her obligation to transfer the $1.2 million months

before Canary began his investigation of the missing funds. Ethel claims that these facts indicate

that Canary was acting outside of his authority when he named her in the Contempt Motion and

when he discussed the missing funds with the reporter for the Courier-Journal. In fact, because

Ethel alleges that Canary knew of the transfer, she suggests that Canary “intentionally concoct[ed]

false allegations against Ethel to hide his own negligence in failing to safeguard the [missing

funds].” Ethel thus claims that the Barton doctrine is inapplicable and that the Kentucky state court

retained jurisdiction.

When faced with a similar question, the bankruptcy court in In re Heinsohn “presume[d that]

acts were a part of the trustee’s duties unless Plaintiff initially alleges at the outset facts

demonstrating otherwise.” 247 B.R. at 246. This presumption strikes us as persuasive. Congress

intended for the Bankruptcy Code to be comprehensive and for the federal courts to have exclusive

jurisdiction over bankruptcy matters. Pertuso v. Ford Motor Credit, 233 F.3d 417, 426 (6th Cir.

2000) (discussing the “pervasive nature of Congress’ bankruptcy regulation” and the “exclusively

federal nature of bankruptcy proceedings”). A presumption in favor of the trustee, counsel, or other

bankruptcy official that they were acting within the scope of their duties prevents a plaintiff like

Ethel from making unsupported allegations in an attempt to defeat Congress’s goal of providing

exclusive federal jurisdiction over bankruptcy matters.

We adopt the approach of In re Heinsohn and conclude that Ethel’s failure to offer evidence

supporting her allegation that Canary’s actions were prompted by improper motives is insufficient

to undermine the application of the Barton doctrine. The bankruptcy court thus committed no error

when it denied Ethel’s motion to remand the case to Kentucky state court.

C. Canary is entitled to immunity for his litigation-related comments

After the bankruptcy court properly determined that it had jurisdiction to hear Ethel’s state-

law claims, it held that the doctrine of immunity barred her action. This legal determination is

No. 05-6032 In re Lowenbraun Page 7

subject to de novo review. In re M.J. Waterman, 227 F.3d at 607. Ethel argues on appeal that

Canary forfeited any claim to immunity because his conduct was outside the scope of his authority

and was irrelevant to the issue before the bankruptcy court.

With regard to the Contempt Motion, Kentucky law has long provided that “statements in

pleadings filed in judicial proceedings are absolutely privileged when material, pertinent, and

relevant to the subject under inquiry.” Heavrin v. Nelson, 384 F.3d 199, 202 (6th Cir. 2004)

(interpreting Kentucky law) (citation and quotation marks omitted). But cf. Stringer v. Wal-Mart

Stores, Inc., 151 S.W.3d 781, 797 (Ky. 2004) (holding that any privilege is forfeited if the

“defendant steps outside the scope of the privilege, or abuses the occasion”). This absolute privilege

applies even if, as is the case here, the plaintiff alleges that the statements were false. Gen. Elec. Co.

v. Sargent & Lundy, 916 F.2d 1119, 1127 (6th Cir. 1990) (interpreting Kentucky law to hold that

statements made preliminary to a judicial proceeding were privileged). Unlike a qualified privilege,

the absolute privilege “renders the speaker’s motives and intent irrelevant in light of the public

policy favoring freedom to speak freely and without fear of civil suit and financial hazard.” Id. at

1128-29. Kentucky law therefore makes clear that Canary’s statements in the Contempt Motion are

absolutely privileged so long as they were “material, pertinent, and relevant to the inquiry.”

Heavrin, 384 F.3d at 202.

Ethel argues that Canary’s judicial statements were not privileged because they were made

outside the scope of his authority and because Ethel’s actions were irrelevant to the bankruptcy

proceeding by the time Canary filed the Contempt Motion. The linchpin of Ethel’s claim is that she

had fully satisfied her obligation to the bankruptcy estate when she transferred the $1.2 million in

October of 2001. As discussed above, however, Canary’s role as counsel for the trustee permitted

him to investigate Ethel’s transfer and to recover assets properly belonging to the bankruptcy estate.

Canary’s actions, moreover, benefitted the estate. Due to the Contempt Motion and resulting

settlement, Ethel agreed to accept $5,000 per month from Stanley’s disability proceeds rather than

the $6,000 to which she was previously entitled —leaving the remaining $1,000 per month to benefit

the estate. Any statements made in the course of Canary’s investigation and recovery effort were

thus within the privilege. Canary is therefore entitled to immunity for his judicial statements.

Whether Canary is entitled to immunity for his extrajudicial statements (i.e., those to the

reporter for the Courier-Journal) presents a different question. Kentucky law provides that

statements protected by an absolute privilege do not lose their privilege simply because they are

reported in the newspaper. Massengale v. Lester, 403 S.W.2d 701, 702 (Ky. 1966) (holding that the

“very purpose of the privilege would be lost” if the privilege were revoked upon republication). In

the present case, the record is unclear as to whether the Courier-Journal articles merely repeated

information available in the pleadings and discussed at the emergency hearing, or whether Canary

provided additional information to the reporter. Ethel nevertheless concedes that Canary’s

communications to the reporter would have been privileged if the information was disseminated in

good faith and served a proper public purpose. See also Weissman v. Hassett, 47 B.R. 462, 466

(S.D.N.Y. 1985) (holding that a bankruptcy trustee was immune from liability for a report that he

had prepared and distributed to the media because the dissemination served the important purpose

of exposing fraud and preventing similar frauds).

Beyond bare allegations, Ethel has offered no evidence to suggest that Canary was acting

in bad faith when he spoke to the Courier-Journal reporter. Canary’s interview with the Courier-

Journal regarding the missing funds, moreover, served a proper public purpose in that it exposed

possible fraud. We therefore hold that Canary is entitled to immunity for both his judicial and extra-

judicial statements. Because Canary is immune from liability, we need not address Ethel’s state-law

claims on the merits.

No. 05-6032 In re Lowenbraun Page 8

III. CONCLUSION

For all of the reasons set forth above, we AFFIRM the judgment of the district court.