Cite as: [Unpublished]
A. Schultz, individually and on behalf of the
partnership, Schrank & Schultz, Plaintiff,
First Wisconsin National Bank of Madison,
Raymond E. Schrank II, Cannon & Dunphy, S.C.,
William M. Cannon and Patrick O. Dunphy, Defendants
(In re Raymond E. Schrank, II, d/b/a Schrank Law Offices,
f/d/b/a Schrank and Schultz, and Barbara A. Schrank, Debtors)
Bankruptcy Case No. 90-03199-7, Adv. Case. No. A91-1036-7
United States Bankruptcy Court
W.D. Wisconsin, Eau Claire Division
July 9, 1992
James W. Gardner and Bruce M. Davey, for the plaintiff.
Robert E. Shumaker, for the First Wisconsin National Bank of Madison.
Thomas G. Cannon, for defendants Cannon & Dunphy, S.C., William M. Cannon and Patrick
O. Dunphy (Cannon & Dunphy).
J. Ric Gass and Leonard G. Leverson, for defendant Raymond E. Schrank II.
Thomas S. Utschig, United States Bankruptcy Judge.
MEMORANDUM OPINION, FINDINGS OF FACT,
AND CONCLUSIONS OF LAW
This matter comes before the Court on a motion by the plaintiff for abstention and
relief from stay. The plaintiff is Bruce A. Schultz and he is represented by James W.
Gardner and Bruce M. Davey. First Wisconsin National Bank of Madison is an involuntary
plaintiff in this matter; it is represented by Robert E. Shumaker. The defendants are
Cannon & Dunphy, S.C., William M. Cannon and Patrick O. Dunphy (Cannon & Dunphy),
all represented by Thomas G. Cannon; and Raymond E. Schrank, II, represented by J. Ric
Gass and Leonard G. Leverson. The debtors in the underlying bankruptcy proceeding are
Raymond E. and Barbara A. Schrank.
This matter essentially involves a dispute between former law partners over contingency
fees in various personal injury cases. Plaintiff Bruce Schultz (plaintiff) and defendant
Raymond Schrank II were law partners from August of 1988 to February of 1990. At some
point in late 1990, defendant Schrank accepted employment at the law firm of Cannon &
Dunphy, S.C. As noted, this law firm and two of its partners, William M. Cannon and
Patrick O. Dunphy, are also defendants in this action.
The plaintiff raises numerous claims against the defendants collectively and
individually. Against defendant Schrank, the plaintiff alleges breach of fiduciary duty of
a managing partner, breach of fiduciary duty in conversion of partnership assets, breach
of settlement agreement, fraud in the inducement of formation of the partnership, and
providing false financial statements to Bank One. Against defendants Schrank and Cannon
& Dunphy collectively, the plaintiff alleges injury to business in violation of
Wisconsin Statute § 134.01 and civil conspiracy.(1)
Against defendant Cannon & Dunphy, plaintiff alleges tortious interference with
contractual relations. The plaintiff has also attached various citations to
nondischargeability provisions of the bankruptcy code to several of the aforementioned
state law claims, thus alleging violations of these provisions as well. These cited
provisions include 11 U.S.C. §§ 523(a)(2(a), (a)(4), and (a)(6).
Aside from involving a variety of claims based on state and federal law,(2)
this case also has a lengthy procedural history and has already generated voluminous
documents, exhibits, motions and memoranda. It was originally filed in the United States
Bankruptcy Court for the Western District of Wisconsin.(3)
The federal RICO claim precipitated the withdrawal of reference to the bankruptcy court.
The district court subsequently dismissed the RICO claim and referred the matter back to
this Court. The plaintiff filed a motion to reconsider which was denied by the district
court on March 12, 1989. See Schultz v. Schrank, No. 91-C-0202-C (W.D. Wis.
March 12, 1992). Numerous motions remain outstanding in this matter. These include a
motion to dismiss various counts of plaintiff's amended complaint and a motion for summary
judgment filed by Cannon & Dunphy, the same two motions filed separately by defendant
Schrank, a motion to compel discovery filed by the plaintiff, and the plaintiff's motion
to abstain. Given the preliminary nature of this last motion, the Court will limit its
decision to the abstention issue.
Abstention is governed by 28 U.S.C. § 1334(c) which provides
(c)(1) Nothing in this section prevents a
district court in the interest of justice, or in the interest of comity with State courts
or respect for State law, from abstaining from hearing a particular proceeding arising
under title 11 or arising in or related to a case under title 11.
(2) 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 title 11 but not arising under title 11 or arising in a case under title 11, 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. Any decision to abstain or not to abstain made under this
subsection is not reviewable by appeal or otherwise by the court of appeals under section
158(d), 1291, or 1292 of this title or by the Supreme Court of the United States under
section 1254 of this title. This subsection shall not be construed to limit the
applicability of the stay provided for by section 362 of title 11, United States Code, as
such section applies to an action affecting the property of the estate in bankruptcy.
28 U.S.C. § 1334(c) (West 1992). Characteristic for this case, the
defendants submitted lengthy memoranda containing numerous arguments against the
plaintiff's motion to abstain.
Briefly summarized, defendant Schrank characterizes this action as above all else a
nondischargeability action with various state law claims tacked on to it. He then notes
that bankruptcy courts have exclusive jurisdiction over nondischargeability actions
involving the code sections under which the plaintiff is proceeding -- 11 U.S.C. §§
523(a)(2), (a)(4) and (a)(6). Schrank then asserts that it would be inefficient and a
waste of judicial resources to try this case in state court and then later return to this
Court for a second trial. He further cites numerous examples of how the elements necessary
to establish a claim may differ between state law and the relevant nondischargeability
provisions of the bankruptcy code. Finally, Schrank notes that it has been two years since
he first sought bankruptcy protection(4) and laments the
inevitable delay that will result in trying this matter in state court.
Defendant Cannon & Dunphy in its brief notes that it originally sought to have this
matter tried in state court, which the plaintiff "vigorously opposed." Cannon
& Dunphy believed that the plaintiff should pursue his claim for attorney's liens in
the underlying state court personal injury actions. It then argues at length that
plaintiff's "motion to abstain" is actually a motion for voluntary dismissal and
the court should treat it as such. In support of this assertion, Cannon & Dunphy note
that a formal determination of jurisdiction has not been made by this Court. The fact that
plaintiff moved for abstention in the absence of such a determination, the argument
continues, must mean that he is really seeking a voluntary dismissal. Cannon & Dunphy
further cites case law for the proposition that mandatory abstention is only permissible
where, among other things, the plaintiff has already filed an action in state court. Since
no such action has been filed here, the argument concludes, abstention is inappropriate.
Cannon & Dunphy then asserts that the plaintiff engaged in forum shopping when he
filed his case in federal court and he therefore should not be allowed to now return to
state court. It further argues that, since plaintiff's motion is really one for voluntary
dismissal, it is entitled to its reasonable attorney fees and costs. Cannon & Dunphy
then bemoans that it has spent significant time and expense in preparing the pending
motions still outstanding in this case. It accuses the plaintiff of delaying his motion to
abstain until he lost his forum-shopping game. Finally, Cannon & Dunphy notes that
even if the Court took plaintiff's motion as one to abstain, it still is not entitled to
such because of his forum shopping and the fact that no state court action is pending.
The Court has considered the arguments of both defendants as well as the plaintiff's
response to them. Having done so, the Court finds the defendants' assertions unpersuasive
and decides to grant the plaintiff's motion to abstain as to the claims against defendant
Cannon & Dunphy. In addition, the Court on its own motion decides to abstain as to the
claims against debtor-defendant Schrank as well. The Court reaches this result for
Most importantly, case-law precedent addressing abstention by bankruptcy courts
supports this result. Numerous courts list the following factors as ones which courts
should consider when deciding whether to abstain:
(1) the effect or lack thereof on the efficient administration of the
estate if a Court recommends abstention, (2) the extent to which state law issues
predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the
applicable law, (4) the presence of a related proceeding commenced in state court or other
nonbankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334,
(6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case,
(7) the substance rather than form of an asserted "core" proceeding, (8) the
feasibility of severing state law claims from core bankruptcy matters to allow judgments
to be entered in state court with enforcement left to the bankruptcy court, (9) the burden
of [the bankruptcy court's] docket, (10) the likelihood that the commencement of the
proceeding in bankruptcy court involves forum shopping by one of the parties, (11) the
existence of a right to a jury trial, and (12) the presence in the proceeding of nondebtor
See, e.g., Christensen v. Tucson Estates, Inc. (In re
Tucson Estates, Inc.), 912 F.2d 1162, 1167 (9th Cir. 1990) citing with approval
Republic Reader's Service, Inc. v. Magazine Service Bureau, Inc. (In re Republic
Reader's Service, Inc.), 81 B.R. 422, 429 (Bankr. S.D. Tex. 1987); All American
Laundry Service v. Ascher (In re Ascher), 128 B.R. 639, 646 (Bankr. N.D. Ill.
1991). Most of these factors weigh in favor of the Court's abstention in this case. First,
in spite of defendant Schrank's assertion to the contrary, this case is not mainly a
nondischargeability action. Rather it is a case in which state law issues clearly
predominate. Even those causes of action in which plaintiff has included one or more of
the nondischargeability provisions of 11 U.S.C. § 523 are essentially fraud claims under
state law.(5) Defendant Schrank implicitly argues this
point as to several of plaintiff's claims when he correctly notes in his brief that the
fiduciary duty requirement under 11 U.S.C. § 523(a)(4) has consistently been interpreted
very narrowly to mean an express trust relationship. The characterization of what are in
reality state law fraud claims as nondischargeability actions is stretching the parameters
of those provisions of the bankruptcy code. This analysis establishes the existence of a
second factor from the aforementioned list -- the substance rather than the form of an
asserted "core" proceeding. As noted by the court in In re Republic Reader's
Service, Inc., "often a proceeding, cast in the language of a core proceeding,
merely shrouds state law actions under the guise of a bankruptcy issue." 81 B.R. 422,
427 (Bankr. S.D. Tex. 1987). This is the case here -- what is in reality a garden variety
of state law fraud claims is labeled as a garden variety of nondischargeability claims
under the bankruptcy code.
The Court is aware that "[t]he mere presence of state law issues is not enough to
warrant abstention since 'virtually every issue which arises within the context of a
bankruptcy case involves state law to at least some degree.'" In re Ascher,
128 B.R. 639, 647 (Bankr. N.D. Ill. 1991) citing with approval In re Republic
Reader's Service, Inc., 81 B.R. 422, 427 (Bankr. S.D. Tex 1987). Nevertheless, the
presence of many of the other aforementioned factors in addition to the presence of state
law issues warrants abstention in this case.
A third factor weighing in favor of abstention is the nature of the state law claims
involved here. Causes of action involving civil conspiracy, breach of settlement
agreements, tortious interference with contractual relations, injury to business, and
breach of fiduciary duty in the context of a partnership are not the types of claims which
this Court routinely adjudicates. In addition, several of the causes of action are
grounded on relatively novel or unsettled issues of state law -- namely the tortious
interference and civil conspiracy claims. As noted by the plaintiff, the defendants have
raised defenses involving the ethical duties of an attorney pursuant to the rules of
professional responsibility. Conflicts between a lawyer's fiduciary duty to a partner and
that lawyer's ethical responsibility to a client involve unsettled issues of state law
about which little or no statutory or common law precedent exists. A state court would be
better suited to address such issues and render judgment consistent with state law and
state court precedent. "State courts afford the best forum for deciding issues whose
resolution turns on interpretation of state law . . . ." In re Republic Reader's
Service, Inc., 81 B.R. 422, 427 (Bankr. S.D. Tex 1987).
A fourth factor relevant in this case is the "feasibility of severing state law
claims from core bankruptcy matters to allow judgment to be entered in state court with
enforcement left to the bankruptcy court." Here it is very feasible to sever the
state law claims from the core bankruptcy matters. As already noted, even those claims
labeled as core nondischargeability claims are rooted in state law fraud provisions.
Allowing such claims to be first adjudicated to final judgment in a state court and then
returned to the bankruptcy forum is a common occurrence among bankruptcy courts. As noted
by one such court, "[s]ection 1334 supports the duality of allowing a claim to be
adjudicated to final judgment in state court while preserving the issues of the status and
enforceability of the claim in the bankruptcy court." In re Tucson Estates, Inc.,
912 F.2d 1162, 1167 (9th Cir. 1990) citing with approval In re Republic Reader's
Service, Inc., 810 B.R. 422, 427 (Bankr. S.D. Tex. 1987). See also In re
Comer, 723 F.2d 737 (9th Cir. 1984); Osai v. Tabuena (In re Ozai), 34
B.R. 764 (Bankr. 9th Cir. 1983). See generally 1 Collier on Bankruptcy ¶
3.01 at 3-74 (15th ed. 1982). It is therefore appropriate that the Court allow the
numerous state law claims at issue here to be adjudicated to final judgment in state court
and then returned to this Court for a nondischargeability determination if necessary.
Both defendants, moreover, have filed summary judgment motions and make repeated
assertions that most, if not all of the plaintiff's claims are baseless. If this is indeed
the case, then no state court judgment will ultimately result, and the matter will end
there; further adjudication by this Court will be unnecessary. It is therefore quite
possible that the Court's decision to abstain at this juncture could result in a more
efficient administration of this matter -- another of the factors listed by the Tucson
Estates court. Even if state court judgments do result as to some of the issues, the
subsequent hearing in this Court would not need to involve a retrial as to all of the
issues heard in state court. The elements for establishing a claim under §§
523(a)(2)(A), (a)(4), or (a)(6) are relatively narrow and well defined. Such matters are
dealt with expeditiously by this Court and do not usually necessitate protracted hearings.
Recent Supreme Court and lower court decisions, moreover, indicate support for a more
liberal application of collateral estoppel where prior judgments for fraud have already
been obtained. See, e.g., Grogan v. Garner, 112 L. Ed. 2d 755, 767 (1992). See
also Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50
(1982); United States Life Title Ins. Co. v. Dohm, 19 B.R. 134 (N.D. Ill. 1982); Elmore
v. Davis (In re Davis), 23 B.R. 639 (Bankr. W.D. Ky. 1982).
Yet another factor supports the notion that abstention will likely result in a more
efficient administration of this matter. The plaintiff here has requested a jury trial. He
has not filed a claim in the debtor's bankruptcy case, thus he has not waived his right to
one. See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). Whether and
under what circumstances a bankruptcy court can conduct a jury trial is currently a hotly
debated question throughout the country. See generally Gibson, Jury Trials and
Core Proceedings: The Bankruptcy Judge's Uncertain Authority, 65 Am. Bankr. L.J. 143
(1991); Shelton & Harris, Bankruptcy Jurisdiction and Jury Trials: The
Constitutional Nightmare Continues, 8 Bankr. Dev. J. 469 (1991). Retention of this
case in federal court would undoubtedly necessitate yet another return to the district
court to answer the jury trial question. Given the history of this case, whichever way
that court would decide, its decision would likely be appealed to the Seventh Circuit and
possibly further. The defendants make much of the delay that has already occurred in this
matter. Given the jury issue, however, retaining this case in federal court would likely
result in even greater delay than would occur in allowing a state court to adjudicate it.
The jury issue raises another of the aforementioned factors in deciding whether to
abstain -- the right to a jury trial. The plaintiff here has requested a jury trial and he
may well have a right to one. An additional factor present in this case is the presence of
a nondebtor party. One of the defendants, Cannon & Dunphy, is such a party. Finally,
the presence of a nondebtor party in this proceeding makes yet another factor relevant --
the degree of relatedness or remoteness of the proceeding to the main bankruptcy case.
Even though the debtor is a codefendant, the presence of a nondebtor law firm and certain
of its principals as defendants renders this matter more remote from the main bankruptcy
case than would be the case if the debtor were the sole defendant. Only four of the
plaintiff's eight claims, moreover, are alleged to be causes of action grounded in the
bankruptcy code; and as already shown, even those are essentially state law fraud actions.
In summary then, eight of the twelve factors identified by the court in In re
Republic Reader's Service, Inc. weigh in favor of abstention. Although certain of the
other factors admittedly may weigh in favor of retention of this matter -- such as the
possibility that the plaintiff engaged in forum shopping -- the balance tilts decisively
in favor of abstention.
The Court therefore decides to grant the plaintiff's motion to abstain as to the issues
against the nondebtor defendant Cannon & Dunphy. It then becomes clear that a decision
sua sponte to abstain as to the remaining issues against the debtor-defendant is warranted
as well. The claims against both defendants are closely interrelated and the factual bases
which underlie those claims are in many respects the same. Concerns of judicial economy
and efficiency mandate that this matter be heard in one forum. On the basis of the
preceding analysis of relevant factors -- especially the fact that the claims against the
debtor are essentially state law fraud claims -- it is clear that the appropriate single
forum is a Wisconsin state court.
One final consideration is worthy of note. The defendants lament the fact that a great
deal of work has been invested in preparing the documents and memoranda underlying the
various motions currently outstanding in this matter. The implication is that abstaining
in this matter would necessitate a "reinvention of the wheel" -- all of this
work would have to be performed again in state court. If this is indeed the implication,
then it is in error. The parties will merely need to refile the relevant documents and
memoranda in state court. The underlying argument and analysis remains the same whether
presented in a state or federal forum.
The Court therefore abstains on the basis of 28 U.S.C. § 1334(c)(1) as to all issues
presented by this matter. Accordingly, relief from stay is granted to the plaintiff to
proceed against the debtor-defendant in state court as to the claims presented. The
enforcement of any ultimate judgment against the debtor-defendant is stayed pending
further order of this Court. Finally, all costs in this matter are denied pending further
This decision shall constitute findings of fact and conclusions of law pursuant to
Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
1. An additional cause of action -- that the defendants violated the
federal Racketeer Influenced and Corrupt Organizations Act (RICO) and the Wisconsin
counterpart thereof, the Wisconsin Organized Crime Control Act (WOCCA) -- was dismissed by
the U.S. District Court for the Western District of Wisconsin on January 3, 1992. The
basis for the dismissal was failure to state a claim upon which relief can be granted. See
Schultz v. Schrank, 91-C-0202-C (W.D. Wis. Jan. 2, 1992). The district court
further found that count 9 of the plaintiff's complaint -- providing false financial
statements to Bank One -- has no federal basis but is rather a state-law fraud claim. See
2. The district court in its decision of January 3, 1992, referred
to the "[m]iasma of bankruptcy, bankruptcy fraud, and state law issues of this
case." See Schultz v. Schrank, No. 91-C-0202-C at 22 (W.D. Wis. June 2,
1992). The Random House dictionary defines "miasma" as "noxious exhalations
from putrescent organic matter; poisonous effluvia or germs infecting the
atmosphere." Random House Dictionary 843 (Revised edition 1982).
3. In re Raymond E. Schrank II, d/b/a Schrank Law Offices f/d/b/a
Schrank & Schultz and Barbara A. Schrank, Case No. MM7-90-03199.
4. Schrank first filed a petition under Chapter 11 on March 26,
1990. This case was dismissed on application on August 22, 1990. The debtor-defendant then
filed a petition under Chapter 7 shortly thereafter -- on November 15, 1990.
5. The district court recognized as much as to one of the claims --
that defendant Schrank provided false financial statements to Bank One. The court noted
that this is a "private cause of action . . . for fraud, a state law claim." Schultz
v. Schrank, No. 91-C-0202-C at 21 (W.D. Wis. Jan. 2, 1992).