Murphy v. Eric Goldfine, of the Self-Employed Ret. Plan & Trust, Nicholas Lanphier, of the Nicholas Lanphier Family Trust, & Whittenton Holdings, LLC (In re Jefferson Dev. Partners, LLC)

575 B.R. 4

IN RE JEFFERSON DEVELOPMENT PARTNERS, LLC, Debtor

Harold B. Murphy, as Chapter 7 Trustee, Plaintiff

v.Eric Goldfine, as Trustee of the Self–Employed Retirement Plan and Trust, Nicholas Lanphier, as Trustee of the Nicholas Lanphier Family Trust, and Whittenton Holdings, LLC, Defendants

Whittenton Holdings, LLC, Third–Party Plaintiff,

v.D. Ethan Jeffrey, Third–Party Defendant

Case No. 14–10129–FJB

Adversary Proceeding No. 16–1171

United States Bankruptcy Court, D. Massachusetts, Eastern Division.

Signed September 1, 2017

Charles R. Bennett, Jr., Donald Ethan Jeffery, Murphy & King, Professional Corporation, Boston, MA, for Plaintiff.

Brian J. Hughes, Brennan, Recupero, Cascione, Scungio & M, Taunton, MA, for Defendants.

MEMORANDUM OF DECISION

Frank J. Bailey, United States Bankruptcy Judge

I. Overview

The matter before the Court is a motion by D. Ethan Jeffrey ("Jeffrey"), who is the third-party defendant and the former chapter 11 trustee of the bankruptcy estate of Jefferson Development Partners, LLC (the "Debtor"), to dismiss a third-party complaint brought by Whittenton Holdings, LLC. ("Whittenton"). Whittenton is the third-party plaintiff as well as one of three defendants named in the underlying complaint in this adversary proceeding, brought by the current chapter 7 trustee of the Debtor's bankruptcy estate, Harold B. Murphy (the "Chapter 7 Trustee"). Whittenton's third-party complaint contains seven counts, all for alleged breaches of Jeffrey's fiduciary duties while he was chapter 11 trustee. Jeffrey has moved to dismiss each of the seven counts on the basis that they fail to state a claim for which relief can be granted and on the basis that Jeffrey is immune from liability for the actions in question under the doctrine of derived judicial immunity. Following a hearing held on August 23, 2017 and for the reasons stated below, Jeffrey's motion to dismiss is allowed as to Counts I, II, III, IV, and V and denied as to Counts VI and VII without prejudice to Jeffrey's filing a renewed motion to dismiss as explained below.

II. Background

Unless otherwise indicated, the following facts are undisputed. The Debtor filed a petition for relief under chapter 11 of the Bankruptcy Code on January 15, 2014. The Debtor's primary asset was the so-called Whittenton Mill (the "Property"), an historic mill complex that included thirty-two buildings and is located on forty-seven acres of land in Taunton, Massachusetts.

Following the petition date, two entities, the Self–Employed Retirement Plan and Trust ("SERPT") and the Nicholas Lanphier Family Trust (the "Lanphier Trust"), each asserted claims of ownership to the same mortgage on the Property. SERPT filed a proof of secured claim in the amount of $2,307,503.62. SERPT and the Lanphier Trust eventually settled this dispute in 2015 and each assigned all rights, title, and interest in the mortgage in question to Whittenton.

On May 1, 2014, the Court ordered the United States Trustee to appoint a chapter 11 trustee. The United States Trustee subsequently appointed Jeffrey as chapter 11 trustee of the Debtor's bankruptcy estate, and the Court approved the United States Trustee's application for and certificate of appointment. On May 16, 2014, Jeffrey filed an expedited motion to abandon the Property and to convert the case to one under chapter 7 of the Bankruptcy Code. In this motion, Jeffrey stated that the Debtor was operating at a loss of approximately $6,000 per week and that there was no reasonable likelihood of rehabilitation for the Debtor. Jeffrey further stated that the Property had little, if any, equity value at the time of the motion. The Court held multiple hearings on Jeffrey's motion, continuing the matter multiple times without ruling on it, as it appeared that Jeffrey was negotiating with SERPT and the Lanphier Trust for a sale of the Property. On July 7, 2014, Jeffrey filed a motion to sell the Property and a motion to approve a stipulation he had reached with SERPT and the Lanphier Trust (the "Stipulation"). According to the Stipulation, Jeffrey agreed to continue operating the chapter 11 estate to facilitate a sale of the Property at public auction. The Stipulation required SERPT and the Lanphier Trust to advance funds to cover any shortfall in the administrative expenses of operating the Debtor's chapter 11 estate through the date of the sale of the Property. These advances were to be repaid from the sale proceeds. The Stipulation also required SERPT and the Lanphier Trust to purchase the Property by credit bid at the auction in the event no third-party buyer purchased the Property. Following a hearing, the Court entered an order approving the Stipulation, and Jeffrey withdrew his motion to abandon the Property. On August 5, 2014, the Court approved Jeffrey's motion for authorization to sell the Property in a public sale in accordance with the terms of the Stipulation.

Jeffrey conducted an auction of the Property on October 9, 2014. No third-party buyer bid for the Property at the auction. The parties dispute whether Jeffrey, SERPT, or the Lanphier Trust breached their respective obligations under the Stipulation. This adversary proceeding, brought by the Chapter 7 Trustee against SERPT, the Lanphier Trust, and Whittenton, concerns the breach of this agreement. For present purposes, it suffices to note that, despite the fact that no third-party buyer bid for the Property at the auction, SERPT and the Lanphier Trust did not purchase the Property.

Following the failed auction, Jeffrey negotiated a potential sale of the Property to the Debtor's principal, David Murphy ("Murphy"). On January 5, 2015, the Court approved Jeffrey's motion to sell the Property to Murphy. This sale never closed. Jeffrey then negotiated a potential sale of the Property to a private buyer. On April 21, 2015, Jeffrey filed a motion for approval of this potential sale. Following a hearing, the Court denied this third sale motion on May 18, 2015. On May 27, 2015, Jeffrey filed a motion to abandon the Property and to convert the case to one under chapter 7. On June 29, 2015, the Court allowed Jeffrey's motion to abandon the Property and converted the case to one under chapter 7 of the Bankruptcy Code. The Chapter 7 Trustee was subsequently appointed. Following conversion to chapter 7, SERPT transferred its secured claim to Whittenton.

On October 7, 2016, the Chapter 7 Trustee filed the underlying complaint commencing this adversary proceeding, naming as defendants SERPT, the Lanphier Trust, and Whittenton. The complaint states counts for breach of contract and violation of MASS. GEN. LAWS ch. 93A against SERPT and the Lanphier Trust related to their failure to purchase the Property at the auction in October 2014. The complaint also states a count objecting to Whittenton's proof of claim. All three defendants answered the Chapter 7 Trustee's complaint, and Whittenton brought the third-party complaint against Jeffrey. Jeffrey subsequently filed the instant motion to dismiss the third party complaint. The Court held a hearing on this motion on August 23, 2017.

III. Jurisdiction

The matters before the Court in the underlying adversary proceeding are (1) claims brought by the Chapter 7 Trustee against SERPT and the Lanphier Trust that arose in the administration of the Debtor's chapter 11 estate and (2) the Chapter 7 Trustee's objection to Whittenton's proof of claim. They arose in a bankruptcy case and therefore fall within the jurisdiction given the district court in 28 U.S.C. § 1334(b) and, by a standing order of reference (codified in the district court's local rules at L.R. 201, D. Mass.), referred to the bankruptcy court pursuant to 28 U.S.C. § 157(a). They are core proceedings within the meaning of 28 U.S.C. § 157(b)(1). See 28 U.S.C. § 157(b)(2)(B) and (O) (core proceedings include allowance or disallowance of claims against the estate and other proceedings affecting the liquidation of the assets of the estate). The bankruptcy court accordingly has authority to enter final judgment on the underlying complaint in this adversary proceeding.

The matter before the Court in the third-party complaint is Whittenton's claim against Jeffrey for breach of his fiduciary duties to the bankruptcy estate. It arose in a bankruptcy case and therefore falls within the jurisdiction given the district court in 28 U.S.C. § 1334(b) and, by a standing order of reference (codified in the district court's local rules at L.R. 201, D. Mass.), referred to the bankruptcy court pursuant to 28 U.S.C. § 157(a). It is also a core proceeding within the meaning of 28 U.S.C. § 157(b)(1). See 28 U.S.C. § 157(b)(2)(0) (core proceedings affecting the liquidation of the assets of the estate).

IV. Discussion

A. Standard for a Motion to Dismiss a Complaint

Under Fed. R. Civ. P. 12(b)(6), as made applicable in adversary proceedings by Bankruptcy Rule 7012(b), a court must dismiss a complaint if it fails to state a claim upon which relief can be granted. In Ashcroft v. Iqbal , the United States Supreme Court explained:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." [ Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ]. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Id. at 556, 127 S.Ct. 1955 [...] The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that a defendant has acted unlawfully. Ibid. Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of ‘entitlement to relief.’ " Id. at 557, 127 S.Ct. 1955 [...]

Ashcroft v. Iqbal , 556 U.S. 662, 678–79, 129 S.Ct. 1937, 173 L.Ed.2d...