Schultze et al v. Chandler et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
COLUSA MUSHROOM, INC., 	No. 05-12180
Debtor(s).
______________________________________/
RICHARD K. SCHULTZE, et al.,
Plaintiff(s),
v. 	A.P. No. 11-1118
DAVID N. CHANDLER, SR., et al.,
Defendant(s).
_______________________________________/
Memorandum re Jurisdiction
_________________
Defendant David N. Chandler, Sr., was the attorney for the Official Creditors Committee in the
Chapter 11 proceedings commenced by debtor Colusa Mushroom, Inc., in 2005. Chandler’s
employment was approved by the court pursuant to § 1103(a) of the Bankruptcy Code.
Plaintiffs Richard K. Schultze, et al., were members of the Official Creditors Committee. They
commenced action against Chandler and his professional corporation in state court for malpractice.
They allege that Colusa’s plan of reorganization called for the sale of its business to a third party with
the bankruptcy estate taking back a note for part of the purchase price. The note was to be secured by
the business. They allege that Chandler had a duty to make sure the security interest was properly
perfected, that he failed to do so, and as a result the note was rendered worthless. 	Chandler has
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Entered on Docket
June 09, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 11-01118 Doc# 8 Filed: 06/09/11 Entered: 06/09/11 15:20:28 Page 1 of 2

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removed the action to this court.
Plaintiffs have filed a lengthy brief objecting to the jurisdiction of the court. Mixed into their
argument are issues as to core or non-core status, abstention, and the merits of possible defenses
Chandler may have. The court now only addresses the jurisdiction and core status issues.
Plaintiff’s central position, that the federal courts have no jurisdiction over this matter, is
without any basis in the law. If a malpractice action is directed against a professional appointed by a
bankruptcy court, there is federal jurisdiction over the matter and it is treated as a core proceeding.
Walsh v. Northwestern National Ins. Co., 51 F.3d 1473, 1476 (9th Cir. 1995); 	Baker v. Simpson, 613
F.3d 346, 350 (2nd Cir. 2010); Matter of Southmark Corp., 163 F.3d 925, 932 (5th Cir.1999). In re Com
21, 2005 WL 1606357*7 (N.D. Cal. 2005)[“the court concludes that the malpractice action by the
trustee against bankruptcy counsel for the debtor-in-possession is a core proceeding and subject to the
jurisdiction of the bankruptcy court with respect to both disgorgement and damages.”] In such cases,
the malpractice claims are inseparable from the bankruptcy context. Southmark, 163 F.3d at 931.
The Official Creditors Committee is strictly a creation of a federal statute. The liability of
court-appointed counsel to the committee or its members is an issue which, by its very nature, can only
arise in a bankruptcy context. The federal courts have a compelling interest in insuring that counsel
are not discouraged from representing creditors committees for fear of unreasonable liability,
especially when their compensation has already been subject to federal adjudication. Accordingly,
plaintiffs’ motion to remand for lack of jurisdiction will be denied. The court will consider abstention
only after all federal issues of law have been resolved.
Counsel for defendants shall submit an appropriate form of order.
Dated: June 9, 2011
SAlan Jaroslovsky
U.S. Bankruptcy Judge
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Case: 11-01118 Doc# 8 Filed: 06/09/11 Entered: 06/09/11 15:20:28 Page 2 of 2