Official Committee of Unsecured Creditors of Appalachian Fuels, LLC v. Energy Coal Resources, Inc. (In re Appalachian Fuels, LLC)Official Committee of Unsecured Creditors of Appalachian Fuels, LLC v. Energy Coal Resources, Inc. (In re Appalachian Fuels, LLC)
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
This bankruptcy adversary proceeding comes before the Court on several Defendants’ and Plaintiffs motions to withdraw the reference to the United States Bank
On June 22, 2011, the Committee filed its Complaint, commencing the above-captioned adversary proceeding. (11-1041; Doc. # 1). On August 19, 2011, the Committee filed its First Amended Complaint. (11-1041; Doc. #20). The Amended Complaint asserts 107 separate causes of action against 37 different defendants. (Id.).
This matter is currently before the Court on Defendant Business Aircraft Leasing, Inc.’s (BALI) Motion to Withdraw the Reference (11-128; Doc. # 1), Defendants Bruce Addington, Erik Ad-dington, EBA Development LLC, and Horsepower Leasing, LLC’s Motion to Withdraw the Reference (11-129; Doc. # 1), Defendants Machinery Sales and Service, LLC, John C. Smith, and Jeffrey Muncy’s Motion to Withdraw the Reference (11-130; Doc. # 1), Defendants Energy Coal Resources, Inc. (ECR), Illinois Fuel Company, Inc., and Stephen Adding-ton’s Motion to Withdraw the Reference (11-131; Doc. # 1), Defendants Robert Addington, Frank Bennett, Julie Hudson, David Jones, Mark Garrett Smith, and Gregory Stumbo’s Motion to Withdraw the Reference (11-132; Doc. # 1), Defendants Larry Addington, Addington Aviation, LLC, Addington Land Company, Appalachian Machinery, Inc. (AMI), Big Sandy Properties, LLC, Carbon Fuels Illinois, LLC, Larry Austin Dickerson, Midwestern Biofuels, LLC, Pyramid Island Development, Inc., Kathryn Reid, and Task Trucking, Inc.’s Motion to Withdraw the Reference (11-133; Doc. # 1), Plaintiff Official Committee of Unsecured Creditors’ Conditional Motion to Withdraw the Reference (11-134; Doc. # 1), Defendant Jet Support Services, Inc.’s Motion to Withdraw the Reference (11-135; Doc. # 1), and Defendant Tri-State Airport Authority’s Motion to Withdraw the Reference (11-136; Doc. # 1). The motions have been fully briefed, and oral argument was held on April 11, 2012 in Covington. The matter is now ripe for review. For the reasons stated herein, the moving parties’ motions to withdraw the reference are hereby DENIED.
II. FACTUAL AND PROCEDURAL BACKGROUND
The Committee commenced this adversary proceeding to (1) avoid and recover funds that were allegedly fraudulently or preferentially transferred to the Defen
Defendants ECR, Illinois Fuel, Stephen-Addington, Larry Addington, Addington Land, AMI, Big Sandy, and Task Trucking have each filed proofs of claims against the Debtor’s estate in the underlying bankruptcy action. Plaintiffs final claim in the Amended Complaint is an objection to these proofs of claim. Pursuant to 11 U.S.C. § 502(d), Plaintiff requests that the Court disallow Defendants’ proofs of claim against the Debtor’s estate. The remaining Defendants did not file proofs of claim.
On October 19, 2011, the parties entered into a stipulation to designate which of the claims asserted by the Committee are core and which are non-core.
With the exception of Defendant Mason’s First Set of Interrogatories and Requests for Production of Documents (11-1041; Doc. # 52), discovery has not yet commenced in the adversary proceeding. Currently pending before the Bankruptcy
III. ANALYSIS
District courts have original and exclusive jurisdiction over “all cases under title 11.” 28 U.S.C. § 1334(a). District courts also have original but not exclusive jurisdiction over all civil proceedings “arising under title 11” or “arising in or related to cases under title 11.” § 1334(b). Proceedings that arise in a bankruptcy case or under title 11 are deemed “core proceedings,” while those that are otherwise related to a case under title 11 are considered “non-core proceedings.” Stern v. Marshall, 564 U.S. -,
A party may move to withdraw the reference to the Bankruptcy Court pursuant to 28 U.S.C. § 157(d), which provides that:
The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the 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.
According to the statute, there are both mandatory and discretionary withdrawals. In the present case, Plaintiff and moving Defendants assert that discretionary withdrawal is appropriate. Thus, the Court may grant discretionary withdrawal of the reference if the motion was “timely,” and the movants have shown “cause.”
A. Timeliness of the Motions
The first issue is whether the motions to withdraw the reference are timely. 28 U.S.C. § 157(d). Timely refers to “as soon as possible after the moving party is aware of grounds for withdrawal of reference” or “at the first reasonable opportunity after the moving party is aware of grounds for withdrawal of reference.” In re Black Diamond Mining Co., LLC, No. 10-84,
B. Cause for Withdrawal of the Reference
A district court may grant discretionary withdrawal of reference “for cause shown.” 28 U.S.C. § 157(d). Although “cause” is not defined in the Bankruptcy Code, most courts consider the following factors to determine whether cause exists: (1) judicial economy; (2) uniformity in bankruptcy administration; (3) reducing forum shopping and confusion; (4) fostering economical use of the debtor’s and creditor’s resources; (5) expediting the bankruptcy process; and (6) the presence of a jury demand. In re Angelucci, No. 09-70,
Furthermore, in considering whether a withdrawal motion should be granted, “whether a proceeding is core or non-core ... is a central question.” In re Black Diamond Min. Co., LLC,
1. Core vs. Non-core
Under 28 U.S.C. § 157(b)(1), bankruptcy judges may hear and enter final judgments in “all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11,” subject to discretionary review by the district court
Several of the moving Defendants argue that the Court should withdraw the reference of the instant adversary proceeding because it involves, for the most part, non-core claims. In support of their argument, Defendants allege that the Supreme Court’s recent opinion in Stern v. Marshall, 564 U.S. -,
In Stem, the Supreme Court found that Congress’ enumeration of core matters in § 157(b)(2) overstepped constitutional boundaries in at least one respect and therefore determined that “identifying a claim as ‘core’ or ‘non-core’ under [§ 157(b)(2) ] does not necessarily determine whether a bankruptcy court is constitutionally empowered to finally adjudicate the matter.” Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP,
The Supreme Court found that although the bankruptcy court had statutory authority, pursuant to § 157(b)(2)(C), to enter a
Statutorily defined core proceedings include “proceedings to determine, avoid, or recover fraudulent conveyances.” 28 U.S.C. § 157(b)(2)(H). A proceeding under 11 U.S.C. § 548, which authorizes a trustee to set aside fraudulent conveyances made within two years of the filing of a bankruptcy petition, is undoubtedly a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H). However, whether a state fraudulent transfer claim is also considered a core proceeding under the statute is less clear. Under 11 U.S.C. § 544, a trustee may bring a state fraudulent conveyance action to set aside a conveyance that an unsecured creditor could have set aside under state law. Based upon the plain language of 28 U.S.C. § 157(b)(2)(H), there is no indication that Congress intended to limit the statute’s application to only federal fraudulent conveyance proceedings. Moreover, the fact that the substantive law applied in a § 544 proceeding would be state law is of no consequence, as “the claim still arises under title 11 because it is the bankruptcy code that transfers the cause of action from the creditor to the trustee.” XL Sports, Ltd. v. Lawler,
The question now becomes whether the holding of Stem renders unconstitutional fraudulent conveyance and preference proceedings statutorily defined by Congress as core. First, it should be noted that there is a disagreement among courts regarding the extent to which Stem will impact the bankruptcy court’s authority to enter final orders and judgments in other core proceedings. Compare In re Safety Harbor Resort & Spa,
Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.
Stem,
Despite the Supreme Court’s intention to limit the application of its holding, several courts have expressed uncertainty about Stem’s effect on the bankruptcy court’s authority to enter final orders and judgments in other statutorily defined core proceedings. See e.g., In re Appleseed’s Intermediate Holdings, LLC, No. 11-807,
However, despite the reliance on Gran-financiera in Stem, the fact still remains that the sole issue in Granfinanciera was whether defendants who had not filed a proof of claim against the bankruptcy estate had a Seventh Amendment jury trial
Taking the specific facts and issues in Stem and Granfinanciera into consideration, in addition to the Supreme Court’s deliberate attempt to limit the scope of its holdings in both cases, this Court cannot extend the holding of Stem to fraudulent conveyance and preference actions. The statutorily core claim examined in Stem was a counterclaim based on state tort law and was “in no way derived from or dependent upon bankruptcy law.” See Stern,
Next, Defendants ECR, Illinois Fuel, and Stephen Addington argue that despite the fact that they have all filed proofs of claim against the Debtor’s estate, it would be unconstitutional for the Bankruptcy Court to enter final orders and judgments against them. Katchen v. Landy,
Defendants are in essence asking the Court to consider the entire constitutionality of 28 U.S.C. § 157 and whether bankruptcy judges have the authority to not only adjudicate some but all bankruptcy matters. Unless and until the Supreme Court rules that § 157 is unconstitutional, this Court will continue to adhere to its principles. Since Defendants Larry Ad-dington, Stephen Addington, Addington Land, AMI, Big Sandy, ECR, Illinois Fuel, and Task Trucking have all filed proofs of claim against the bankruptcy estate, Plaintiffs fraudulent conveyance and preferential transfer claims arise out of the claims allowance process, and therefore the Bankruptcy Court has authority to enter final orders and judgments on such claims. See In re Washington Mfg. Co.,
Finally, Defendant BB & T, who has filed a response in opposition to Plaintiffs and moving Defendants’ motions to withdraw, argues that Stem has created a “no-man’s land” of statutorily defined core claims that cannot be tried at all in the federal court system absent some other jurisdictional basis, because the Bankruptcy Court is not statutorily empowered to treat a core claim in the same manner as a claim falling within 28 U.S.C. § 157(c)(1), i.e., a non-core claim. Thus, BB & T argues that if the Court does not sever the core claims against BB & T and allow them to remain in the Bankruptcy Court, the Court must dismiss these claims against BB & T for lack of jurisdiction as part of a withdrawal of the remainder of the case.
This Court’s jurisdiction over bankruptcy matters stems from 28 U.S.C. § 1334, not § 157. Pursuant to § 1334, the Court has original jurisdiction over bankruptcy cases and all civil proceedings “arising under title 11, or arising in or related to cases under title 11.” § 157(a) then allows this Court to refer actions within its bankruptcy jurisdiction to the bankruptcy judges of this district. Thus, BB & T’s argument that the core claims against it must remain in Bankruptcy Court or be dismissed from this Court for lack of jurisdiction is wholly incorrect. If this Court does not have jurisdiction over this proceeding pursuant to § 1334, then the
BB & T’s argument also raises an issue that has recently been addressed in several bankruptcy cases post-Síerre, namely that if there are statutorily defined core claims that the bankruptcy courts cannot finally adjudicate, there is no statutory authority to allow them to submit proposed findings of fact and conclusions of law to the district court on such claims. This argument is unpersuasive and has been repeatedly rejected by numerous bankruptcy and district courts.
In Stem, the Supreme Court specifically stated that the “removal of counterclaims such as [debtor’s] from core bankruptcy jurisdiction [does not] meaningfully changet ] the division of labor in [§ 157].” Stern,
One final matter deserves brief comment. In the present case, a majority of the parties entered into a stipulation designating the numerous claims against each Defendant as either core or non-core, and the stipulation was thereafter filed by the Bankruptcy Court. (11-1041; Doc. #20). Defendant Frost Brown Todd did not participate in the stipulation. Moreover, each Defendant took no position as to whether any other Defendant’s designation of claims as core or non-core was correct. Indeed, in Defendants Horsepower Leasing, EBA Development, Bruce Addington, and Erik Addington’s Reply to the Response filed by BB & T and in further support of their Motion to Withdraw the
In conclusion, the Court finds that the holding of Stem does not apply to the fraudulent transfer and preference claims in Plaintiff’s Amended Complaint. Therefore, core claims predominate in this case, and this factor weighs in favor of denying the motions to withdraw. However, even if the Supreme Court subsequently found that it was unconstitutional for bankruptcy judges to enter final orders and judgments on fraudulent transfer and preference proceedings, they would still have the authority to submit proposed findings of fact and conclusions of law to the district court on these matters.
2. Other Factors for the Court to Consider
As discussed above, courts should consider the following factors when determining whether cause exists for permissive withdrawal of the reference: (1) judicial economy; (2) 20 uniformity in bankruptcy administration; (3) reducing forum shopping and confusion; (4) fostering economical use of the debtor’s and creditor’s resources; (5) expediting the bankruptcy process; and (6) the presence of a jury demand. In re Angelucci,
i. Judicial Economy and Uniformity in Bankruptcy Administration
Given that bankruptcy cases are regularly handled by bankruptcy judges and that they have special expertise in handling these particular cases, withdrawing the reference would not promote judicial economy or uniformity in bankruptcy administration. The claims against Defendants are, for the most part, quintessential core bankruptcy claims, including claims to recover preferences and fraudulent transfers under 28 U.S.C. § 157(b)(2)(F), (H). Of the 107 counts asserted by Plaintiff, the majority are for avoidance and/or recovery of fraudulent transfers and are premised on Sections 544, 548 and 550 of the Bankruptcy Code.
The Court finds that the judicial economy and uniformity in bankruptcy administration factors weigh in favor of denying the moving parties’ motions to withdraw.
Furthermore, since a majority of the claims are core, the bankruptcy judge has the authority to enter final orders and judgments on these claims. As for the non-core claims, even though the bankruptcy judge may only issue proposed findings of fact and conclusions of law, these recommendations “will narrow the issues to be resolved by this Court.” In re Extended Stay, Inc.,
ii. Costs to the Parties
The moving parties argue that handling all claims in one venue would be an economical use of all parties’ resources. Moreover, since discovery has not commenced, they assert that withdrawal of the reference will not cause any additional undue burden, delay or cost to the parties. Given the considerations above concerning judicial economy and uniformity in the administration of bankruptcy, the Court finds this argument unpersuasive. Even if this Court is ultimately needed to adjudicate or preside over a jury trial on certain claims, it is not clear that this would cause unnecessary delay and costs, especially considering the efficiency of having the Bankruptcy Court handle all pre-trial matters in the first instance. Furthermore, Judge Scott’s upcoming retirement in October 2012, while certainly relevant to the Court’s consideration, is not dispositive of the Court’s adjudication of the motions to withdraw the reference.
iii. Jury Trial Demand
Also relevant to the inquiry is whether Defendants are entitled to a jury trial and, if so, whether the trial is likely and whether the Bankruptcy Court has the power to hold such a jury trial. In re Orion Pictures Corp.,
In the present matter, it is undisputed that several Defendants are entitled to a jury trial. A creditor who has not filed a proof of claim in the underlying debtor’s bankruptcy proceedings has a Seventh Amendment right to a jury trial when the trustee of the bankruptcy estate sues the creditor in district court to recover monies for an actual or constructive fraudulent conveyance under 11 U.S.C. § 548(a). Granfinanciera,
Following Granfinanciera, the Supreme Court reiterated its ruling that defendants who had filed proofs of claim in the underlying bankruptcy action were not entitled to a jury trial in a preference action. Langenkamp v. Culp,
As stated above, most of the Defendants in this proceeding have not filed proofs of claim against the bankruptcy estate. Accordingly, these Defendants are entitled to a jury trial on the fraudulent conveyance and preferential transfer claims. However, Defendants BCR, Illinois Fuel, Stephen Addington, Larry Addington, Ad-dington Land, AM I, Big Sandy, and Task Trucking have all filed proofs of claim in the underlying bankruptcy action and are therefore not entitled to a jury trial on such claims.
Several of the moving Defendants argue that their right to a jury trial weighs heavily in favor of withdrawal of the reference. Because these Defendants did not consent to a jury trial in the Bankruptcy Court, they contend the Bankruptcy Court lacks jurisdiction to conduct the trial and therefore the case should be withdrawn to the district court. While the Defendants are correct that the Bankruptcy Court lacks the authority to conduct a jury trial without the consent of all of the parties, the Court disagrees that this factor compels withdrawal of the reference at this juncture. The parties’ right to a jury trial does not remove the bankruptcy judge’s authority to enter final orders and judgments when necessary in core proceedings. See In re Petters Co., Inc.,
In In re Healthcentral.com,
First, allowing the bankruptcy court to retain jurisdiction over pre-trial matters, does not abridge a party’s Seventh Amendment right to a jury trial.... A bankruptcy court’s pre-trial management will likely include matters of “discovery,” “pre-trial conferences,” and routine “motions,” which obviously do not diminish a party’s right to a jury trial.... Moreover, even if a bankruptcy court were to rule on a dispositive motion, it would not affect a party’s Seventh Amendment right to a jury trial, as these motions merely address whether trial is necessary at all.
Second, requiring that an action be immediately transferred to district court simply because of a jury trial right would run counter to our bankruptcy system.... Under our current systemCongress has empowered the bankruptcy courts to “hear” Title 11 actions, and in most cases enter relevant “orders.” As has been explained before, this system promotes judicial economy and efficiency by making use of the bankruptcy court’s unique knowledge of Title 11 and familiarity with the actions before them.... Accordingly, if we were to require an action’s immediate transfer to district court simply because there is a jury trial right we would effectively subvert this system. Only by allowing the bankruptcy court to retain jurisdiction over the action until trial is actually ready do we ensure that our bankruptcy system is carried out.
Id. at 787-88 (internal citations omitted). Thus, even if withdrawal of the reference is ultimately necessary for a jury trial, the court need not withdraw the reference immediately.
IV. CONCLUSION
Withdrawal of the reference is the exception to the general rule that bankruptcy matters should be adjudicated in the bankruptcy court. Container Recycling Alliance v. Lassman,
Notes
. On January 23, 2012, the Bankruptcy Court entered an Order substituting The Liquidating Trustee of App Fuels Creditors Trust as Plaintiff in the adversary proceeding. (11-01041; Doc. # 160).
. The cases being jointly administered with Appalachian Fuels, LLC, Case No. 09-10343 include: Appalachian Holding Company, Inc., Case No. 09-10372; Appalachian Premium Fuels, LLC, Case No. 09-10373; Appalachian Environmental, LLC, Case No. 09-10374; Kanawha Development Corporation, Case No. 09-10375; Appalachian Coal Holdings, Inc., Case No. 09-10405; and Southern Eagle Energy, LLC, Case No. 09-10406.
. The Committee alleges it has standing to pursue the claims asserted in the Amended Complaint pursuant to (a) the Order Conferring Standing on the Official Committee of Unsecured Creditors of Appalachian Fuels, LLC to Pursue Related Party Claims on Behalf of the Estates, dated February 12, 2010 (09-10343; Doc. # 907); (b) the Unopposed Order Concerning Related Party Claims, dated March 4, 2010 (09-10343; Doc. # 933); and/or (c) the Agreed Order Conferring Standing on the Official Committee of Unsecured Creditors of Appalachian Fuels, LLC to Pursue Recovery Actions on Behalf of the Estates, dated April 11, 2011. (11-1041; Doc. # 20, ¶ 13). None of the Defendants refute that the Committee has standing to bring this adversary proceeding.
. Defendant Frost Brown Todd declined to enter into the stipulation because it objects to Branch Banking & Trust's (BB & T) characterization of its own claims as 'core.” Although the stipulation states that Defendant Gregory "Bernie” Mason participated in the designation of claims, Mason states in his response in opposition to the motions to withdraw the reference that he did not participate in the stipulation of the designation of claims.
. As stated previously, Defendants Larry Ad-dington, Stephen Addington, Addington Land, AMI, Big Sandy, ECR, Illinois Fuel, and Task Trucking have all filed proofs of claim in the underlying bankruptcy proceeding. These Defendants' arguments will be addressed in turn.
. The issue in Granfinanciera was whether the Seventh Amendment grants certain defendants a right to a jury trial in an action by a trustee to avoid fraudulent transfers. The Court stated that defendants were entitled to a jury trial on the fraudulent conveyance proceeding unless the claim fell within the public rights doctrine. Granfinanciera,
. Defendant BB & T asserts that the claims against it are "core” based on the stipulation entered by the Bankruptcy Court (11-01041; Doc. # 50).
. Although the moving parties assert that the non-core claims predominate from a monetary perspective, those claims seek to recover damages for various state law theories of liability. Because the alleged damages which flow from the non-core claims are based on a
. The Court also finds that the expediting the bankruptcy process factor coincides with the Court’s analysis of the judicial economy and uniformity in bankruptcy administration factors.
. For the same reason, the upcoming retirement of Judge Scott in October 2012 does not compel the granting of the motions to withdraw the reference.