In re John Richards Homes Bldg. Co., L.L.C.

404 B.R. 220

In re JOHN RICHARDS HOMES BUILDING COMPANY, L.L.C John Richards Homes Building Company, L.L.C., Appellant, v. Kevin Adell, Appellee.

Civil Case No. 06-14356.

Bankr.Case No. 02-54689.

United States District Court, E.D. Michigan, Southern Division.

March 30, 2009.

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ORDER REVERSING THE DECISION OF THE BANKRUPTCY COURT

STEPHEN J. MURPHY, III, District Judge.

INTRODUCTION

The appellant John Richards Homes Building Co., L.L.C ("JRH") has appealed a September 21, 2006 order of the United States Bankruptcy Court for the Eastern District of Michigan. The bankruptcy appeal was referred for a Report and Recommendation ("R & R") to the Honorable Virginia M. Morgan, United States Magistrate Judge. On November 19, 2008, the magistrate judge issued her R & R, recommending that the decision of the bankruptcy court be affirmed on the question of punitive damages, or, in the alternative, that the case be remanded for a decision as to whether sanctions were merited with respect to the appellee Kevin Adell's actions in other courts. At that time, the magistrate judge notified the parties that any objections must be filed within ten days of service. Both the appellant JRH and the appellee Kevin Adell filed objections.

Shortly before the magistrate judge issued her R & R, Adell filed a motion for partial dismissal of the appeal. Since the motion for partial dismissal was related to the underlying issues in the bankruptcy appeal, the motion was referred to the magistrate judge. On March 12, 2009, the magistrate judge issued a second R & R recommending that the motion for partial dismissal be denied. Adell filed objections to this second R & R.

For the reasons stated below, the Court overrules both sets of objections filed by Adell and sustains the set of objections filed by JRH. Accordingly, the Court declines to adopt the R & R, and reverses the decision of the bankruptcy court, remanding this case for a decision on the merits of the request for punitive damages.

STANDARD OF REVIEW

The Court's standard of review for a magistrate judge's Report and Recommendation depends upon whether a party files objections. If a party objects to portions of the Report and Recommendation, the Court reviews those portions de novo. 28 U.S.C. § 636(b)(1) (C); Fed.R.Civ.P. 72(b)(3). De novo review in these circumstances requires at least a review of the evidence before the magistrate judge; the Court may not act solely on the basis of a magistrate judge's Report and Recommendation. See 12 Wright, Miller & Marcus, Federal Practice and Procedure: Civil 2d § 3070.2 (1997); see also Hill v. Duriron Co., 656 F.2d 1208, 1215 (6th Cir.1981). After reviewing the evidence, the Court "may accept, reject, or modify, in whole or in part, the findings or recommendations" of the magistrate judge. 28 U.S.C. § 636(b)(1) (c). Here, the appellant JRH and the appellee Adell have filed objections; accordingly, a de novo review is required.

When a bankruptcy court decision is appealed to the district court, the bankruptcy court's findings of fact are reviewed under a "clearly erroneous" standard, while the bankruptcy court's legal conclusions are reviewed de novo. Investors Credit Corp. v. Howard P. Batie (In re Batie), 995 F.2d 85, 88 (6th Cir.1993).

ANALYSIS

This case involves a lengthy and complicated legal battle between JRH and Kevin Adell which has spanned many years and many jurisdictions. The dispute now before the Court arises out of a June 2002 involuntary bankruptcy petition filed by Adell against JRH in the United States Bankruptcy Court for the Eastern District of Michigan. In that case, based on a series of egregious actions on the part of Adell, the bankruptcy court ruled that Adell had filed the involuntary petition in bad faith. As a result, the bankruptcy court dismissed the involuntary petition. Upon the dismissal of the involuntary petition, the bankruptcy court awarded judgment in JRH's favor and against Adell in the following manner: $4,100,000 in compensatory damages, $2,000,000 in punitive damages, and $313,230.68 in attorney fees and costs. This judgment was later affirmed by the United States District Court for the Eastern District of Michigan and the United States Court of Appeals for the Sixth Circuit.

Following the entry of the judgment, Adell allegedly attempted to avoid payment of the judgment by, among other things, using his Michigan assets to purchase a $2.8 million Florida house, unsuccessfully claiming Florida's homestead exemption, filing for Chapter 11 bankruptcy in a Florida bankruptcy court, and then later converting his Florida Chapter 11 bankruptcy case to a Chapter 7 case. After all of the actions in Florida were dismissed, Adell paid the judgment in full on April 3, 2006.

On April 13, 2006, JRH filed a "Motion for Assessment of Additional Punitive Damages" in the Michigan bankruptcy court seeking additional punitive damages for Adell's conduct occurring after the dismissal and judgment in the original involuntary petition. The bankruptcy court denied the motion, stating:

The Court declines to sanction Adell, either pursuant to any inherent power it may have or pursuant to § 105. Contrary to JRH's assertion, the Court did not order Adell to pay JRH $6,413 million. The Court entered a judgment for that amount. A money judgment is not a court order. To the extent that Adell's conduct in the various courts warrants sanctions, JRH is free to seek redress in those courts.

In re John Richards Building, Co., L.L.C., No. 02-54689-R, 2006 WL 3230009, at *2 (E.D.Mich. Sept. 21, 2006). The appellant JRH appealed that decision, arguing that the bankruptcy court erred when it ruled that it did not have the authority to sanction Adell. In her R & R, the magistrate judge found that the bankruptcy court had declined to sanction Adell as a matter of discretion and not as a matter of law, that there was no abuse of discretion here, and thus, the bankruptcy court decision should be affirmed. JRH filed objections to this portion of the magistrate judge's R & R. The magistrate judge also made an alternative ruling, holding that if the bankruptcy court did not sanction Adell as a matter of discretion but because it thought it had no authority to do so, the bankruptcy decision should be partially reversed and remanded for a decision on the merits with respect to Adell's actions in other courts. Adell filed objections to this particular ruling of the magistrate judge, arguing that the bankruptcy court does not have jurisdiction to consider a request for punitive damages made after the dismissal of the involuntary petition and after satisfaction of the judgment and that the Florida bankruptcy court decision denying punitive damages has a preclusive effect.

The Court has conducted a de novo review of the record, including the extensive briefings submitted by the parties. Upon this review of the record and of the relevant case law, the Court finds that Adell's objections are without value and that JRH's objections have merit, as explained below.

As a preliminary matter, the Court finds that, contrary to Adell's position, the bankruptcy court has jurisdiction to consider a request for punitive damages even after the dismissal of the involuntary petition and payment of the judgment. The consideration of sanctions is a core proceeding arising in a case under title 11, as described by 28 U.S.C. § 157, as it is inextricably intertwined with the bankruptcy case itself, which is undoubtedly a core proceeding. Also, "bankruptcy courts retain jurisdiction over core proceedings beyond the dismissal or closure of the underlying bankruptcy case." In re Williams, 256 B.R. 885, 892 (8th Cir. BAP 2001). Adell's argument that a bankruptcy court loses jurisdiction to consider sanctions once dismissal of the underlying case occurs or once satisfaction of the judgment occurs is entirely unpersuasive, and in the Court's opinion, contrary to the relevant case law as cited in the magistrate judge's first R & R.

Satisfied that the bankruptcy court has jurisdiction to consider a request for punitive damages after the dismissal and satisfaction of the judgment of an involuntary petition, the Court now turns to the merits of the bankruptcy appeal. As mentioned above, when the bankruptcy court declined to sanction Adell, the bankruptcy court gave the following reason for its denial:

Contrary to JRH's assertion, the Court did not order Adell to pay JRH $6,413 million. The Court entered a judgment for that amount. A money judgment is not a court order. To the extent that Adell's conduct in the various courts warrants sanctions, JRH is free to seek redress in those courts.

In re John Richards Building, Co., L.L.C., 2006 WL 3230009, at *2. From this language, the magistrate judge concluded that the bankruptcy court had exercised its discretion in deciding not to issue sanctions. The Court disagrees with the magistrate judge's interpretation and instead concludes that the bankruptcy court believed that it could not award sanctions as a matter of law.

It is important to remember that JRH has alleged in its motion for punitive damages that Adell unlawfully and fraudulently attempted to avoid satisfying the legally-binding judgment. When giving its reasons for the denial of sanctions, the bankruptcy court stated that the judgment was not an order. The Court concludes that the most natural interpretation of this language is that the bankruptcy court believed that since Adell's allegedly egregious conduct was a violation of a judgment, and thus not literally a violation of a court's order, sanctions against Adell were improper. This interpretation of the bankruptcy court's belief is confirmed by the bankruptcy court's suggestion to JRH to seek redress elsewhere. Moreover, as JRH persuasively notes in its objections, the bankruptcy court neglected to conduct an evidentiary hearing or to issue any...