Case Information
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Before BSC commenced its bankruptcy case, a number of title companies learned that BSC failed to record a large number of mortgages for a significant lender. BSC and its officers and directors assured the title companies that BSC would solve this problem promptly. (FAC ¶ 46). However, by early January 2004, one of the title companies discovered that hundreds of mortgages were still unrecorded and that BSC’s files and records were extremely disorganized. (FAC ¶ 48). On or about January 9, 2004, BSC declared itself operationally insolvent. (FAC ¶ 49). Plaintiff Trustee was appointed and, after conducting an investigation of Defendants, allegedly discovered the following: (1) Defendants’ failure to record mortgages, deeds of trust, and releases of liens in conformance with industry standards and/or the title companies’ policies and procedures; (2) failure to properly issue title insurance in conformance with industry standards and the title companies’ policies; (3) failure to adequately perform property title searches; (4) failure to comply with all statutes and governmental rules; (5) failure to maintain adequate records regarding escrow and closing funds; (6) improperly retained and failure to disburse millions of dollars in escrowed funds to the appropriate lenders and property sellers; and *3 (7) improperly transferred millions of dollars to BSI and BST by BSC. (FAC ¶ 51).
After Plaintiff filed his original adversary complaint in the Bankruptcy Court on January 12, 2005, nineteen of the Individual Defendants filed a joint motion for a determination of the parties’ right to a jury trial (the “Jury Trial Motion”) in the Bankruptcy Court on April 5, 2005. That motion sought to determine whether (1) a jury trial timely was demanded; (2) the parties are entitled to a jury trial; and (3) the parties would consent to a jury trial before the Bankruptcy Court. (Defendants’ Motion, at 2). The Bankruptcy Court held several hearings on the Jury Trial Motion, which remains pending. Defendants filed several requests to expedite hearing on April, 5, 2005, June 7, 2005, and September 30, 2005. Plaintiff filed a First Amended Complaint on August 5, 2005, which included a demand for a jury trial. Various defendants moved to dismiss the First Amended Complaint, and several defendants declined to consent to the entry of any final order or judgment by the Bankruptcy Court. (Seifert Decl. ¶2). On October 24, 2005, Defendants Bruce Dunlevie, Nanda Kishore, Mark Stevens, Mark Evans, and Siva Kumar filed the instant motion seeking withdrawal of the reference of the adversary proceeding to the Bankruptcy Court. The motion was joined by BSI and BST on January 18, 2006. Plaintiff Trustee opposes the motion.
II. LEGAL STANDARD The District Court’s authority for withdrawal of reference is governed by section (d) of 28 U.S.C. § 157:
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) (emphasis added).
This provision mandates withdrawal of reference from the Bankruptcy Court where resolution of adversary proceeding involves “substantial and material consideration of non- bankruptcy federal statutes.” Burger King Corp. v. B-K of Kansas, Inc. , 64 B.R. 728, 731 (D. *4 Kan. 1986) (interpreting 28 U.S.C. § 157(d)). The provision also provides for permissive withdrawal if a good cause is shown. Determination of good cause for permissive withdrawal depends on several factors: (1) whether the claim or proceeding is core or non-core; (2) whether it is legal or equitable; (3) considerations of efficiency; (4) prevention of forum shopping; (5) uniformity of bankruptcy administration; and (6) the presence of a jury demand. See Security Farms v. Int’l Bhd. of Teamsters, Chauffers, Warehousemen & Helpers , 124 F.3d 999, 1008 (9th Cir. 1997); In re Orion Pictures Corp. , 4 F.3d 1095, 1101 (2d Cir. 1993).
III. Discussion The Moving Defendants move to withdraw the adversary proceeding on three grounds. First, they assert that this motion is timely under 28 U.S.C. § 157(d), because it was made at the “first reasonable opportunity.” Second, they suggest that ample cause exists for permissive withdrawal, because none of the claims asserted in the adversary complaint are core to the bankruptcy proceeding and the Moving Defendants do not consent to a jury trial or entry of final judgments by the Bankruptcy Court. Third, the Moving Defendants assert that Plaintiff’s RICO claim requires mandatory withdrawal. Plaintiff opposes the motion to withdraw, asserting that the District Court should permit the Bankruptcy Court to manage the case until trial or the case is resolved. Second, Plaintiff asserts that he has alleged a core claim, and that the Bankruptcy Court could act as an adjunct to the District Court if an issue is non-core. Finally, Plaintiff asserts that it has not been determined whether the RICO claim should be dismissed.
A. Timeliness
“There is no specific time limit for applications under 28 U.S.C. § 157 to withdraw a reference to the bankruptcy court.” However, “delay for tactical reasons, prejudicial to the adversary or to the administration of justice, can be grounds for denying such an application.” In re New York Trap Rock Corp. , 158 B.R. 574 (S.D.N.Y. 1993). Here, Plaintiff filed his original adversary complaint on January 12, 2005. Defendants filed their Jury Trial Motion on April 5, 2005. The Bankruptcy Court denied defense’s motion to expedite hearings on their Jury Trial *5 Motion, and has continued that motion as well as motions to dismiss the adversary proceeding until February 21, 2006. Under these circumstances, the Court concludes that the Moving Defendants did not delay unduly in bringing the instant motion and that Plaintiff would not be prejudiced.
B. Permissive Withdrawal of the Reference
Assuming arguendo that mandatory withdrawal is not required, good cause supports permissive withdrawal of the reference. A district court’s determination whether to withdraw the reference turns on whether the claim is core or non-core. In re Orion Pictures Corp ., 4 F.3d at 1101. A bankruptcy judge may issue final judgments with respect to those proceedings which are “core” to the bankruptcy case under 28 U.S.C. § 157(b)(2). In addition, the bankruptcy judge may hear proceedings which are not “core” but are “otherwise related to a case under title 11.” An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action and which in any way impacts upon the handling and administration of the bankrupt estate . Fietz v. Great Western Savings, 852 F.2d 455, 457 (9th Cir. 1988) . The bankruptcy judge may issue final orders in such matters with the consent of the parties. If the parties do not consent, the bankruptcy judge may submit proposed findings to the district court for de novo review; the district court must issue the final order and judgment. 28 U.S.C. § 157(c)(1).
The Court concludes that the adversary proceeding is a non-core related proceeding. Plaintiff’s state law claims, including breach of fiduciary duty, negligent misrepresentation, breach of contract, negligence, claim on financial bond, declaratory relief, and deepening insolvency, did not “arise under or in a case under title 11.” These claims do not fall within one of the enumerated core proceedings in 28 U.S.C. § 157(b)(2)(B)-(N). Plaintiff Trustee asserts that “Defendants’ failure to discharge their obligations and perform the most elemental duties” are matters concerning the “administration of the estate.” (Plaintiff Opp., at 9). This arguably falls under the “catch-all” provision in § 157(b)(2)(A). However, state law claims that arguably fit within the literal wording of the catch-all provision have been held to be non-core related *6 proceedings. In re Castlerock Properties ; 781 F.2d 159, 162 (9th Cir. 1986).
The Moving Defendants explicitly declined to consent to the Bankruptcy Court’s entry of final judgment in a declaration filed on October 24, 2005. Plaintiff argues that the Bankruptcy Court could act as an adjunct to the District Court. Because Bankruptcy Court’s determinations in non-core proceedings are subject to de novo review, In re Daniels-Head & Associates , 819 F.2d 914, 918 (9th Cir. 1987) (“The district court ... [reviews] the bankruptcy court’s findings of fact under the clearly erroneous standard and its conclusions of law de novo”), a single proceeding in the District Court would promote efficiency and judicial economy.
Similarly, the Moving Defendants explicitly declined to consent to a jury trial before the Bankruptcy Court. “The bankruptcy court is unable to preside over a jury trial absent explicit consent from the parties and the district court.” 28 U.S.C. § 157(e); In re Dyer , 322 F.3d 1178, 1194 (9th Cir. 2003). Accordingly, if a jury trial is required, it must be conducted in the District Court absent the Moving Defendants’ consent. Under these circumstances, permissive withdrawal of the reference appears to be warranted.
C. Mandatory Withdrawal of the Reference
Mandatory withdrawal is warranted if the resolution of the adversary proceeding involves “substantial and material consideration” of both title 11 and other non-bankruptcy federal laws. 28 U.S.C.A. § 157(d). Here, Plaintiff has alleged a RICO claim, and explicitly claimed in his First Amended Claim that “Defendants are (or were) employed by an enterprise engaged in, or the activities of which affect, ‘ interstate or foreign commerce’ ” under 18 U.S.C. § 1962(a), (b), or (c). (FAC ¶ 96). Accordingly, mandatory withdrawal appears to be required.
IV. ORDER
Good cause therefore appearing, IT IS HEREBY ORDERED that the motion for withdrawal of reference to the Bankruptcy Court is GRANTED.
IT IS SO ORDERED.
DATED: 1/31/06
__________________________________ JEREMY FOGEL United States District Judge *8 Copies of Order mailed on ___________________ to:
Christopher H. Doyle chd@msandr.com, lak@msandr.com
Patrick Edward Gibbs patrick.gibbs@lw.com, zoila.aurora@lw.com Amy Matthew AM@MSANDR.COM, KLW@MSANDR.COM Mark Jeremy Seifert mark.seifert@lw.com,
Stephen Chew Seto scs@msandr.com,
Michael Lloyd Smith mls@mmker.com
James A. Tiemstra jat@msandr.com,
Kirk Wagner kwagner@nheh.com,
USBC Manager-San Jose US Bankruptcy Court 280 South First Street Room 3035 San Jose, CA 95113
Lisa Omori Noland Hamerly Etienne and Hoss 333 Salinas Street Salinas, CA 93901
Phillip K. Wang Law Offices of Gordon and Rees 275 Battery Street #2000 San Francisco, CA 94111