Official Committee of Unsecured Creditors v. Shapiro

190 F.R.D. 352, 2000 WL 29522
CourtDistrict Court, E.D. Pennsylvania
DecidedJanuary 7, 2000
DocketNo. Civ.A. 99-526
StatusPublished
Cited by32 cases

This text of 190 F.R.D. 352 (Official Committee of Unsecured Creditors v. Shapiro) is published on Counsel Stack Legal Research, covering District Court, E.D. Pennsylvania primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Official Committee of Unsecured Creditors v. Shapiro, 190 F.R.D. 352, 2000 WL 29522 (E.D. Pa. 2000).

Opinion

MEMORANDUM

LUDWIG, District Judge.

By order of November 2, 1999, the parties were directed sua sponte to show cause why the claims against defendants Cogen, Sklar, L.L.P. and R.F. Lafferty & Co., Inc. should not be severed from plaintiffs remaining claims. Plaintiffs claims against Cogen, Sklar, L.L.P. and R.F. Lafferty & Co., Inc. had been dismissed for reasons inapplicable to the other defendants. Order, Sept. 8, 1999. In addition to moving for reconsideration of the dismissal, plaintiff moved, in the alternative, that the order of dismissal be certified for appeal under Fed.R.Civ.P. 54(b). The motion was denied. Order, Nov. 2, 1999. In the meantime, on October 4, 1999, the other defendants2 filed a third-party complaint against Cogen, Sklar3 under Fed. R.Civ.P. 14(a).4

To simplify this litigation and in the interests of judicial economy, plaintiffs dismissed claims against Cogen, Sklar and Lafferty will be severed and transferred to a separate, new action. Fed.R.Civ.P. 21. Defendants’ [354]*354third-party claim will remain in the original action.

Background

The facts of this case are set forth in prior opinions. See mem., Sept. 8,1999, at 2. The Shapiros and the other defendants are alleged to have operated Equipment Leasing Company of America, Inc. (ELCOA) and Walnut Leasing Company, Inc. (Walnut) as a “de facto Ponzi scheme.” Compl. 1166. The issuance of a large amount of debt certificates ultimately resulted in Walnut and EL-COA obtaining Chapter 11 bankruptcy protection on August 8,1997.5

On August 21, 1997, an Official Committee of Unsecured Creditors was appointed by the United States Trustee. On January 19, 1999 Bankruptcy Judge Sigmund approved a stipulation between the debtors and the Committee authorizing the Committee to file suit on behalf of the two bankrupt debtor corporations. See In re Walnut Leasing Company, Inc. and Equipment Leasing Company of America, Inc., Bankr.No. 97-19699 (Bankr. E.D.Pa.) (order, Jan. 19,1999). According to the complaint that followed, the corporations’ officers and directors, led by the Shapiro defendants, were responsible for the debtors’ fraudulent issuance of debt certificates “past the point of insolvency and thus without the ability to repay their obligations to investors.” Compl. H 53. Prior to filing for bankruptcy protection, the debtors owed principal balances on debt certificates in excess of $51,317,000. See Baker v. Summit Bank, Civ.A. No. 99-2010 (E.D.Pa.) (compl. at 15).

The Committee also sued the debtors’ auditor — Cogen, Sklar, L.L.P. — and their underwriter — R.F. Lafferty & Co. — as professionals who had facilitated the fraudulent scheme. However, on Rule 12 motions, these defendants were dismissed from the complaint based on the doctrine of in pari delic-to. “Since it is pleaded that the debtors, acting through the Shapiros, perpetrated the Ponzi scheme with the assistance of Cogen, Sklar and Lafferty, the doctrine of in pari delicto ... bars plaintiff from suing these defendants for claims arising out of the fraud.” Order, Sept. 8, 1999, at 11. The dismissal motion of the other defendants was denied. Id.

Analysis

Two types of severances or separations of claims are contemplated by the Federal Rules of Civil Procedure — one within the action itself, the other resulting in a second, or new, action. Under Fed.R.Civ.P. 21: “Parties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just. Any claim against a party may be severed and proceeded with separately.” Under Fed.R.Civ.P. 42(b):

The court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition and economy, may order a separate trial of any claim, cross-claim, counterclaim, or third-party claim, or of any separate issue or of any number of claims, cross-claims, counterclaims, third-party claims, or issues, always preserving inviolate the right of trial by jury as declared by the Seventh Amendment to the Constitution or as given by a statute of the United States.

Under Rule 42(b), there may simply be a separate trial or trials. Under Rule 21, there may be a separate action. See 8 James Wm. Moore et ah, Moore’s Federal Practice § 42.20(2) (3d ed. 1999) (“The creation of new cases provides the key distinction between Rule 42(b) bifurcation and Rule 21 severance.”). Determinations of claims that are severed pursuant to Rule 21 are final and appealable without the need for certification under Rule 54(b) — unlike claims that are bifurcated under Rule 42(b). See U.S. ex rel. LaCorte v. SmithKline Beecham, 149 F.3d 227, 231 (3d Cir.1998) (“severed claim proceeds as a discrete suit and results in its own final judgment from which appeal may be taken”); Sidag Aktiengesellschaft v. Smoked Foods Prods. Co., 813 F.2d 81, 84 [355]*355(5th Cir.1987) (“[T]he ... severed claim becomes an entirely separate judicial unit, so that a final adjudication of it is appealable, notwithstanding that there remain unresolved claims pending in the original action from which the severance was granted and that no Rule 54(b) certificate has been issued.”); United States v. O’Neil, 709 F.2d 361, 368 (5th Cir.1983) (“Where a single claim is severed out of a suit, it proceeds as a discrete, independent action, and a court may render final, appealable judgment in either one of the resulting two actions notwithstanding the existence of unresolved claims in the other.”); 4 James Wm. Moore et al., Moore’s Federal Practice § 21.06(1) (3d ed.1999).

Rule 21 is titled “Misjoinder and Non-Joinder of Parties.” However, it may be used to organize problematical issues other than joinder problems. 4 Moore’s Federal Practice § 21.02(1) (“The courts have properly concluded that they may issue orders under Rule 21 even in the absence of misjoinder and non-joinder of parties, to construct a case for the efficient administration of justice.”). In addition, the Rule explicitly provides authority to sever parties sua sponte “on such terms as are just.” Fed.R.Civ.P. 21; see Stark v. Indep. Sch. Distr. No. 640, 163 F.R.D. 557, 564 (D.Minn.1995) (“the underlying purpose of Rules 19, 20 and 21 is to allow the district court itself to exercise its power to align the parties and the issues presented in a single lawsuit in a way that will foster judicial efficiency, while protecting parties against prejudice.”).

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Bluebook (online)
190 F.R.D. 352, 2000 WL 29522, Counsel Stack Legal Research, https://law.counselstack.com/opinion/official-committee-of-unsecured-creditors-v-shapiro-paed-2000.