Antioch Co. Litigation Trust v. Morgan (In Re Antioch Co.)Antioch Co. Litigation Trust v. Morgan (In Re Antioch Co.)
Decision Denying Motion of Certain Defendants to Stay Adversary Proceeding
I. Introduction
The narrow question presented is whether this adversary proceeding should be stayed until the United States District Court for the Southern District of Ohio (the “District Court”) rules on the moving parties’ motion requesting that the District Court withdraw the reference as to this adversary proceeding. For the reasons discussed below, the court is denying the motion to stay the adversary proceeding.
II. Procedural and Factual Background
On December 23, 2009 W. Timothy Miller as the Trustee of the Antioch Litigation Trust (referred to as the “Litigation Trust,” “Litigation Trustee,” or the “Plaintiff’) filed a complaint against thirty defendants (Doc. 1; the “Complaint”). 1 The Complaint includes a jury demand and fifteen causes of action all concerning events that lead to a 2003 transaction through which the Antioch Company and certain subsidiaries became wholly owned by an employee stock ownership plan (the “ESOP” and the “ESOP Transaction”) and certain other decisions in the aftermath of that transaction by various insiders, officers and directors of the Antioch Company and trustees of the ESOP, as well as certain other institutions. The Complaint alleges in its introduction that “the Defendants placed their own interests ahead of the interests of the Company, its employees, and its creditors. As a result, the Company, once a highly profitable enterprise, filed for bankruptcy protection.” (Doc. 1, ¶ 1).
The Complaint asserts the following non-bankruptcy causes of action: breach of fiduciary duty, aiding and abetting breach of fiduciary duty, professional negligence and tortious interference with business contracts. Two of the causes of action are based on bankruptcy law: an equitable subordination claim and a preference claim. In addition, the final claim for relief seeks attorney fees “[ujnder applicable state and federal law.” (Doc. 1, ¶ 263). Although the non-bankruptcy causes of action concern events surrounding the ESOP transaction and the ESOP is generally governed by other federal law, namely the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Complaint does not assert any ERISA claims. However, the Complaint does raise ERISA law within the Complaint. For example, in paragraph 82 it asserts that “Lee [Morgan], Asha [Moran], and [Chandra] Attiken knew or reasonably should have known that causing Antioch to enter the ESOP transaction violated their obligations as ERISA fiduciaries of the ESOP” and in paragraph 83 it asserts that “[t]he officers and directors knew or reasonably should have known that the 2003 ESOP transaction was a ‘prohibited transaction’ under ERISA Sections 406 and 408, which would result in violations of ERISA....”
On March 22, 2010 nine of the thirty defendants, specifically Lee Morgan, Asha Moran, Chandra Attiken, Marty Moran, Lee Morgan GDOT Trust # 1, Lee Morgan GDOT Trust # 2, Lee Morgan GDOT
The Movants limited their stay request to allow all parties to complete briefing on the various motions to dismiss filed by the defendants. That briefing process has been completed so this limitation is moot. The motion to withdraw the reference also has been briefed and is pending before the District Court.
III. Legal Analysis and Conclusions
A. Jurisdiction
At least unless and until the District Court withdraws the reference as to this adversary proceeding, this court has jurisdiction pursuant to 28 U.S.C. § 1334 and the General Order of Reference of the District Court (General Order No. 05-02). See also Federal Rule of Bankruptcy Procedure (“BR”) 5011(c) discussed below providing that motions seeking a stay pending the determination of withdrawal of the reference and abstention motions are ordinarily to be addressed first to the bankruptcy court. 2
B. Bankruptcy Rule 5011(c)
BR 5011(c) governs whether an adversary proceeding or a case should be stayed by a bankruptcy court pending a motion requesting the district court to withdraw the reference or requesting the bankruptcy court to abstain from a proceeding. BR 5011(c) states:
The filing of a motion for withdrawal of a case or proceeding or for abstention pursuant to 28 U.S.C. § 1334(c) shall not stay the administration of the case or any proceeding therein before the bankruptcy judge except that the bankruptcy judge may stay, on such terms and conditions as are proper, proceedings pending disposition of the motion. A motion for a stay ordinarily shall be presented first to the bankruptcy judge. A motion for stay or relief from a stay filed in the district court shall state why it has not been presented to or obtained from the bankruptcy judge. Relief granted by the district judge shall be on such terms and conditions as the judge deems proper.
The burden on such a motion rests with the party seeking the stay to establish that a stay under the circumstances would be appropriate.
Miller v. Vigilant Ins. Co. (In re Eagle Enters.), Inc.,
Although BR 5011(c) provides little guidance as to the circumstances under which a bankruptcy court should stay a proceeding, it is clear from the plain language of the Rule that the granting of a stay should be the exception — not the general rule. The Rule states that such a motion “shall not stay the administration of the case or any proceeding therein before the bankruptcy judge except that the
While the term “may” in the Rule appears to grant the bankruptcy court broad discretion in determining such a motion, the case law applying the Rule has limited the circumstances under which a stay may be granted to essentially the circumstances under which a preliminary injunction would be appropriate under Federal Rule of Civil Procedure 65. Thus, a stay should be granted only if the moving party can show (1) the likelihood that the pending motion to withdraw will be granted (i.e. likelihood of success on the merits); (2) that the movant will suffer irreparable harm if the stay is denied; (3) that the non-movants will not be substantially harmed by the stay; and (4) the public interest will be served by granting the stay.
Eagle Enters.,
C. Application of the Four-Part Test to the Facts of this Adversary Proceeding Establishes that a Stay is Not Warranted
1. Likelihood of Success on the Merits: The Court Determines that the District Court Will Likely Not Find Under 28 U.S.C. § 157(d) that Mandatory Withdrawal of the Reference is Required or that Permissive Withdrawal of the Reference is Appropriate
The court determines that the Movants have not demonstrated that the District Court will likely find that mandatory withdrawal of the reference pursuant to 28 U.S.C. § 157(d) is required or that permissive withdrawal of the reference is appropriate.
A motion to withdraw the reference is mandatory if the District Court determines “that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.” 28 U.S.C. § 157(d). In some instances, this language has been applied quite literally.
See, e.g. Laborers’ Pension Trust Fund-Detroit v. Kiefer (In re Kiefer),
The ERISA preemption issue is not presented to this court on an empty canvas. Multiple decisions of the Sixth Circuit address ERISA preemption and this court would be applying the legal principles of those decisions to the facts in this litigation.
See, e.g., Smith v. Provident Bank,
Although the Movants are undoubtedly correct that the District Court addresses preemption issues more often than this court, the District Court has not set this standard as determinative. Rather, the question is whether this court will be addressing novel issues of law and not “mere application of existing law to new facts.”
Vicars Ins. Agency,
Nevertheless, the Movants argue that the ERISA issues which the court could address reach beyond the preemption question and present “a consideration of ERISA [that] will be material and continuous.” (Doc. 198, p. 3). Specifically, the
The court also determines that the District Court will likely find that permissive withdrawal of the reference is not appropriate. The Movants argue alternatively that withdrawal will likely be granted by the District Court under the permissive withdrawal of the reference standard for “cause.” This court disagrees. While the result of any permissive withdrawal of the reference motion is uncertain, the burden lies with the Movants and this court cannot find a likelihood the District Court will grant the Motion based on “cause.”
In determining cause, a district court can consider “promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering the economic use of the debtors’ and creditors’ resources, and expediting the bankruptcy process.”
Holland,
The Movants have raised with the District Court three arguments for permissive withdrawal: (1) the Plaintiff has made a jury demand; (2) most of the causes of action in the Complaint, and specifically against the Movants, are non-core within the meaning of 28 U.S.C. § 157(b)(2); and (3) judicial economy. The court finds, particularly at this pre-trial stage of the adversary proceeding, none of these arguments have a likelihood of success with the District Court.
The Movants have not shown any likelihood that a jury demand would lead to the District Court withdrawing the reference in the early stages of this adversary proceeding. Bankruptcy courts cannot conduct a jury trial without the consent of all the parties. 28 U.S.C. § 157(e); Bankruptcy Rule 9015(b). However, if a party is entitled to a jury and makes a jury demand, courts have frequently denied requests to withdraw the reference until the action is ready for trial.
See, e.g. Kenai
The court also finds that the fact that most of the Plaintiffs claims may be non-core claims will not lead the District Court to conclude that permissive withdrawal is appropriate. The Movants assert that the District Court is likely to withdraw the reference because thirteen of the fifteen causes of action are non-core. The Plaintiff states in the Complaint that “[t]his matter is a core proceeding pursuant to 11 U.S.C. §§ 157(b)(2)(A), (E), (F), (H) and (O)” (Doc. 1, ¶ 3); however, this position is not explained in the Litigation Trustee’s response to the Motion. The Plaintiff has not provided a count-by-count analysis as to which claims may be core and which claims may be non-core, but his Complaint states that this court has “pendent jurisdiction with respect to state law causes of action.” Doc. 1, ¶ 2. While this court preliminarily agrees that thirteen of the Plaintiffs claims appear to be non-core, the court disagrees with the Movants’ conclusion that a non-core determination as to those claims warrants permissive withdrawal of the reference.
The distinction between core and non-core proceedings was a response to the Supreme Court’s decision in
Northern Pipeline Construction Co. v. Marathon Pipe Line Co.,
The determination of whether a proceeding is core is left for the bankruptcy courts to determine. 28 U.S.C. § 157(b)(3) (“The bankruptcy court shall determine, on the judge’s own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11.”). However, there is
The Sixth Circuit has defined a core proceeding “as matters created by, or determined by, a statutory provision of the Bankruptcy Code.”
Dayton Title,
Based upon the Sixth Circuit’s interpretation of what core proceedings and non-core proceedings are, the court makes preliminary findings that: a) the preference and equitable subordination claims present core proceedings or claims under 28 U.S.C. § 157(b)(2)(F) and (O); and b) because the thirteen non-bankruptcy law claims could exist outside the bankruptcy court’s jurisdiction and do not involve substantive rights created by bankruptcy law, those claims are non-core proceedings or claims. However, since the parties to this adversary proceeding have not thoroughly briefed or argued the core versus non-core issues, the court is not making a final determination as to those issues in connection with any of the claims asserted in the Complaint at this time and will provide for separate briefing prior to making any final determination as to those issues.
Accordingly, assuming that most of the Plaintiffs claims are non-core, is the District Court likely to withdraw the reference at this pre-trial stage of the litigation? This court thinks that it is not. Even though it cannot render final judgment as to the non-core claims absent consent of the parties, this court, as a unit of the District Court, still has jurisdiction over non-core proceedings “related to” Title 11. 18 U.S.C. § 157(b)(1). Even in cases in which non-core issues have been paramount, courts have delayed withdrawing the reference until the time of trial.
William D. Mundinger Trust v. Lamson & Sessions Co.,
Finally, the Movants’ argument that judicial economy supports permissive withdrawal of the reference is also unavailing. While it is true the District Court is presiding over a lawsuit brought by the Litigation Trust against the law firm of McDermott, Will & Emery, the District Court is unlikely to find judicial economy is promoted at the pre-trial stage of this litigation by withdrawing the reference
2. The Movants Will Not Suffer Irreparable Harm if the Stay is Not Granted
The Movants will not suffer irreparable harm if this court denies the requested stay. The Movants’ argument that they will be irreparably harmed if this proceeding is not stayed pending the District Court’s determination of the Motion because this court might overstep its jurisdictional and constitutional authority if it proceeds with adjudicating the adversary proceeding is without merit. First, the Movants are free to seek a stay from the District Court after the entry of this court’s order on this decision. Second, the District Court can withdraw the reference at any time it chooses. 7 Third, it is not likely — based on the court’s analysis of the decisions within this district and other districts — that the District Court will withdraw the reference at this early stage of this litigation. Finally, a decision to stay this litigation cannot be premised on the mere possibility this court might interpret its jurisdiction in too broad a fashion. If Congress intended for the bankruptcy courts to stay proceedings upon the filing of a motion to withdraw the reference or to abstain, it would have so provided. Mov-ants’ argument regarding the risk of the Bankruptcy Court overstepping its jurisdictional and constitutional authority would not only remove the discretion accorded the bankruptcy courts under BR 5011(e), but also would flip the apparent presumption in favor of not staying such proceedings that arises out of the plain language of the Rule.
3. The Non-Moving Parties Will Be Prejudiced by a Stay
The third factor, whether a stay will harm the non-moving parties, also militates against the issuance of a stay. The Movants argue that the non-moving parties will benefit from a stay because they will be able to reduce, or perhaps eliminate, any substantial expenses during the interim of a stay. However, a stay would not likely eliminate such costs, but more probably just delay these costs being incurred. Further, the postponement of this litigation stalls the Litigation Trust’s attempt to collect funds on behalf of the Class 5 creditors and Class 7 equity interest holders under the Plan. Those creditors and ESOP equity holders are entitled to determinations and bankruptcy courts have a particular responsibility to resolve litigation in a focused manner for the collective good of the many creditors and parties in interest affected by its decisions. The stay delays this process and at least one defendant in this litigation has argued
4. The Public Interest Does Not Support the Issuance of a Stay
Finally, the Movants have not convinced this court that the stay of this adversary proceeding serves the public interest. Instead, this court will proceed to administer this adversary proceeding unless and until the District Court withdraws the reference or stays it. The only public interest in this litigation is to resolve it for all parties, including the potential beneficiaries of the Litigation Trust, in the most focused and expedient manner possible. While it is possible the District Court might withdraw the reference based in part on the public interest, the court does not find this factor would persuade the District Court to withdraw the reference at this stage of the litigation.
IV. Conclusion
For the reasons stated, the Motion of Certain Defendants for Limited Stay Pending a Decision by the District Court on their Motion to Partially Withdraw the Reference to the Bankruptcy Court (Doc. 146) is denied. The court will enter a separate order consistent with this decision.
IT IS SO ORDERED.
Notes
. The Litigation Trust was formed through provisions of the Second Amended Plan of Reorganization (Doc. 270) that was confirmed through an order entered on January 27, 2009 (Doc. 319).
. The court is contemporaneously issuing a separate decision on Defendant GreatBanc Trust Company’s Motion for Abstention (Doc. 156) requesting that the court abstain from this adversary proceeding.
. In reaching this decision, the court, of course, expresses no view on the appropriate standard to withdraw the reference, a role exclusively preserved for the District Court.
. Although the Movants assert the preemption question presents "novel issues or issues of first impression” (Doc. 198, Exhibit, p. 5) such as "whether non-ERISA fiduciaries are protected by ERISA preemption,” "whether ERISA is implicated as a matter of law where Antioch ... is a 100% percent ESOP,” and whether "state law tort claims unrelated to fiduciary duty are subject to ERISA preemption,” this court, recognizing these issues may be quite complex, is unconvinced that these legal issues cannot be readily determined within the rubric of Sixth Circuit precedent.
Chao v. Holman (In re Holman),
.
On prohibited transactions under ERISA generally,
see Chao v. Hall Holding Co.,
. A district court can refer "related to” matters to a bankruptcy court for final determination, but only with the consent of all the parties. 28 U.S.C. § 157(c)(2).
. Any written decision or decisions on the various motions to dismiss will not be issued until after all parties are afforded the opportunity for oral argument, which will be scheduled in a separate order.