Proceedings: PLAINTIFF’S MOTION TO WITHDRAW REFERENCE OF ADVERSARY PROCEEDING (Dkt. No. 1, filed March 2, 2015)
I. INTRODUCTION
On June 18, 2014, defendant Brian Presley (“Presley”) filed a voluntary petition for Chapter 7 bankruptcy relief in the United States Bankruptcy Court for the
II. FACTUAL BACKGROUND
The adversary complaint alleges that Presley is a fifty percent owner and managing member of Freedom Films, LLC (“Freedom Films”), a company that is itself a debtor in a separate pending bankruptcy case. Adv. Compl. ¶¶ 4, 6. Freedom Films and related entities were in the business of making movies. Id. ¶ 10. At some point, Presley solicited and obtained financing from a private equity firm called Palo Verde Fund, L.P. (“Palo Verde”). Id. ¶¶ 12-13. In or around July 2010, Presley helped establish an entity called FF Arabian, LLC (“FF Arabian”) to produce a movie project called Arabian Nights, in which Palo Verde invested. Id. ¶ 14.
Longhorn contends that Presley’s movie projects have been commercial failures, and that in order to continue attracting investors, Presley diverted money intended for Arabian Nights to pay returns to Palo Verde investors on a different film, creating the false impression that the other film was a commercial success. Id. ¶ 15. Longhorn alleges that Anthony Stacy (“Stacy”) and Paul Ross (“Ross”) of Palo Verde knew of and facilitated this Ponzi scheme. Id. Longhorn also submits that millions of dollars intended to finance Arabian Nights were instead channeled through Freedom Films entities for various other non-FF Arabian expenses, leaving FF Arabian severely undercapitalized. Id. ¶ 16-17. Longhorn contends that Presley continued to spend lavishly on various film projects despite this undercapital-ization. Id. ¶¶ 34-35, 38-39.
Longhorn alleges that Palo Verde eventually demanded the return of some of its previously invested capital, and that Presley agreed to return a portion disguised as a “loan.” Id. ¶¶ 18-19. Longhorn contends that only part of this return was actually effectuated, in a further effort to disguise FF Arabian’s poor financial condition. Id. ¶ 24. Subsequently, Presley and Palo Verde sought more investors in FF Arabian, including Longhorn, which invested $500,000 in FF Arabian in mid-2011. Id. ¶¶ 27-28, 31. Longhorn alleges that Presley, Stacy, and Ross purposefully withheld relevant information from Longhorn as it was deciding whether to make its investment, and made affirmatively misleading representations. Id. ¶¶ 29-30, 36-37.
Longhorn further alleges that Presley caused Freedom Films to agree to repurchase Longhorn’s membership interest in FF Arabian for $625,000, then breached that agreement by failing‘to pay for any portion of Longhorn’s interest. Id. ¶¶ 41-42. On September 12, 2013, Longhorn and other investors in FF Arabian, including Palo Verde, filed in Texas state court an action asserting breach of contract claims related to Freedom Films’ failure to repurchase membership interests in FF Arabian as agreed. That lawsuit was stayed when Freedom Films filed for bankruptcy, and Longhorn alleges that it subsequently discovered Palo Verde’s role in the misconduct described above. Palo Verde has failed and' is currently being liquidated. Id. ¶ 43.
The bankruptcy court docket reflects that the adversary complaint was filed on February 23, 2015, and that Presley filed a motion to dismiss on March 26, 2015. On March 23, 2015, Longhorn filed a separate action in the United States District Court for the Eastern District of Texas against Ross, Stacy, and David Presley (defendant Presley’s father). See Dkt. No. 15 Ex. 1. This lawsuit, which the Court subsequently refers to as the “Texas Federal Action,” involves the same underlying facts as does the adversary complaint. See generally id. In the Texas Federal Action, Longhorn brings claims for violations of Rule 10b-5, violations of Texas securities laws, and common law fraud. Id. ¶¶ 74-108.
III. LEGAL STANDARD
Withdrawal of the reference of an adversary proceeding from bankruptcy court is governed by 28 U.S.C. § 157(d), which provides:
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.
28 U.S.C. § 157(d). This statute “contains two distinct provisions: the first sentence allows permissive withdrawal, while the second sentence requires mandatory withdrawal in certain situations.” In re Coe-Truman Techs., Inc.,
IV. ANALYSIS
Longhorn argues alternatively that withdrawal is mandatory, and that permissive withdrawal is appropriate. The Court addresses each standard in turn.
A. Mandatory Withdrawal
Withdrawal is mandatory if “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). The Ninth Circuit has suggested in dicta that mandatory withdrawal hinges “on the presence of substantial and material questions of federal law.” Sec. Farms v. Int’l Bhd. of Teamsters, Chauffers, Warehousemen & Helpers,
Longhorn offers three bases for mandatory withdrawal. First, Longhorn argues that this case will require consideration of federal securities laws. It is true that one of the three claims for relief in the adversary complaint cites federal securities laws along with California and Texas securities laws. Adv. Compl. ¶¶ 59, 60. But as stated above, the mere fact that federal non-bankruptcy law may need to be applied does not make withdrawal mandatory. Longhorn has not, in its briefing or at oral argument, specifically identified any issue of federal securities law that will require significant interpretation, merely stating without elaboration that “substantial and material analysis” will be required. Therefore, Longhorn has failed to establish that withdrawal is mandatory because' of any need to interpret the federal securities laws in adjudicating this case. See In re Vicars Ins. Agency,
Longhorn also argues that withdrawal is mandatory because resolving the adversary complaint will require substantial and material consideration of Texas securities laws. But the plain language of the withdrawal statute makes withdrawal mandatory only where a case requires substantial consideration of non-bankruptcy federal law. See 28 U.S.C. § 157(d) (“The district court shall ... 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.”). Courts within this circuit have consistently held that “ [consideration of state laws does not give rise to mandatory withdrawal.” In re Don’s Making Money, LLP, No. CV 07-319-PHX-MHM,
Finally, Longhorn argues that withdrawal is mandatory because under 11 U.S.C. § 523(a)(19), “a determination of securities fraud liability must be made by a non-bankruptcy court prior to a determination of non-dischargeability.” Mot. at 4. As amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), this section provides that a discharge under certain sections of the bankruptcy code does not discharge an individual debtor from any debt that
(A) is for—
(i) the violation of any of the Federal securities laws (as that
term is defined in section 3(a)(47) of the Securities Exchange Act of 1934), any of the State securities laws, or any regulation or order issued under such Federal or State securities laws; or
(ii) common law fraud, deceit, or manipulation in connection
with the purchase or sale of any security; and
(B) results, before, on, or after the date on which the petition was filed, from—
(i) any judgment, order, consent order, or decree entered in any
Federal or State judicial or administrative proceeding;
(ii) any settlement agreement entered into by the debtor; or
(iii) any court or administrative order for any damages, fine,
penalty, citation, restitutionary payment, disgorgement
payment, attorney fee, cost, or other payment owed by the debtor
11 U.S.C. § 523(a)(19).
Longhorn relies on In re Jafari,
This Court concludes that withdrawal of the reference is not mandated by the presence of the § 523(a)(19) claim. First, the statute’s reference to “any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding,” and the fact that the statute was amended to remove a previous condition that the judgment or order be entered pre-petition, suggest that the bankruptcy court can make the liability determination itself. 11 U.S.C. § 523(a)(19)(B)(i) (emphasis added); see In re Jensen-Ames,
placing a limitation on bankruptcy court jurisdiction would be disruptive.... How would exceptions to discharge for common law fraud (§ 523(a)(2)), fraud or defalcation of a fiduciary ((a)(4)), and willful and malicious injury ((a)(6)) — so often coupled with those of (a)(19) but subject to exclusive bankruptcy jurisdiction — be adjudicated? Congress could not have intended to create the procedural mishmash which limited bankruptcy court jurisdiction engenders.
In re Hill,
B. Permissive Withdrawal
Withdrawal is permissive “for cause shown.” 28 U.S.C. § 157(d); Sec. Farms,
1. Core or Non-Core
Pursuant to statute, “[b]ank-ruptcy judges may hear and enter final judgments in ‘all core proceedings arising under title 11, or arising in a case under title 11.’” Stern v. Marshall, — U.S.
Longhorn argues that the “crux” of the adversary complaint involves state and federal securities claims and common law fraud, which do not depend on bankruptcy law. However, Congress has expressly defined as core “determinations as to the dischargeability of particular debts.” 28 U.S.C. § 157(b)(2)(I). Each of the adversary complaint’s claims seeks the non-dischargeability of a debt. Moreover, “[bankruptcy courts have exclusive jurisdiction over nondischargeability actions brought pursuant to 11 U.S.C. § 523(a)(2) [and] (4).” Rein v. Providian Fin. Corp.,
2. Other Factors
“The determination of whether claims are core .or non-core is not dispositive of a motion to withdraw a reference.” Hawaiian Airlines, Inc. v. Mesa Air Grp., Inc.,
Longhorn argues that judicial economy and the avoidance of unnecessary delay and cost counsel withdrawal because the bankruptcy court’s decision would be subject to later review by the district court, and because there have not yet been substantive proceedings on the adversary complaint in the bankruptcy court. Moreover, Longhorn argues, withdrawal would be the most efficient course because it can then file motions to transfer and consolidate the adversary complaint proceedings with the Texas Federal Action. Longhorn contends that withdrawal (and subsequent transfer and consolidation) would advance the public policy in favor of allowing actions for securities fraud to take place in the forum where the victims reside and were targeted, and allow Longhorn to return to the forum in which it first joined in litigation against Presley. See In re Triton Ltd. Secs. Litig.,
The Court is not persuaded. The crux of Longhorn’s argument turns on the assumptions that, after withdrawal of the reference, this Court will grant a yet-to-be-filed motion for discretionary transfer .so that Longhorn can seek to consolidate this proceeding with a later-filed lawsuit, and that a district court in Texas will order such consolidation. Whatever the merits of these hypothetical procedural motions, they are not presently before the Court. Some of Longhorn’s arguments also appear to depend on the contention, rejected above, that non-core claims predominate. Moreover, in addition to the § 523(a)(19) claim on which.Longhorn focuses, the adversary complaint raises § 523(a)(2) and (a)(4) claims, which are committed to the exclusive jurisdiction of the bankruptcy court. Rein,
Longhorn also argues that the fact that it has demanded a jury trial favors withdrawal. Congress has authorized bankruptcy courts to conduct jury trials “if specially designated to exercise such jurisdiction by the district court and with the express consent of all the parties.” 28 U.S.C. § 157(e). The Bankruptcy Court for the Central District of California is authorized to conduct jury trials. C.D. Cal. General Order 13-05. However, the Ninth Circuit has held that “bankruptcy courts cannot conduct jury trials on noncore matters, where the parties have not consented,” because to do so would create a conflict between the -Seventh Amendment and the 28 U.S.C. § 157(c)(1). In re Cinematronics,
The Supreme Court has stated that “if a statutory cause of action is legal in nature, the question whether the Seventh Amendment permits Congress to assign its adjudication to a tribunal that does not employ juries as factfinders requires the same answer as the question of whether Article III allows Congress to assign adjudication of that cause of action to a non-Article III tribunal.” Granfinanciera, S.A. v. Nordberg,
This Court’s conclusion that Longhorn has not shown that a jury trial is required finds further support in a decision of the Bankruptcy Appellate Panel of the Ninth Circuit, which has held that there is “no right to jury trial on the issue of liability and damages” in nondischargeability proceedings. In re Locke,
In sum, the adversary complaint raises core nondischargeability claims, and Longhorn has not carried its burden of showing that permissive withdrawal is warranted under the circumstances.
V. CONCLUSION
Because Longhorn has not shown that withdrawal is mandatory or warranted in the Court’s discretion, the motion to withdraw the bankruptcy reference is DENIED.
IT IS SO ORDERED.
Notes
. The Court acknowledges Longhorn’s argument that here, unlike in In re Sato and In re Jensen-Ames, the alleged victim of securities fraud does not wish to litigate in the bankruptcy court. However, the Court does not find that distinction significant to its interpretation of what § 523(a)(19) permits a bankruptcy court to adjudicate.
. Nevertheless, “as a constitutional matter, some claims labeled by Congress as ‘core’ may not be adjudicated by a bankruptcy court to final judgment. [Citation] These claims are called 'Stern claims.’ ” Mastro v. Rugby,
. Even where there is a Seventh Amendment right to a jury trial in the district court, the bankruptcy court may retain jurisdiction over