Reding v. Gallagher (In Re Childs)Reding v. Gallagher (In Re Childs)
I. INTRODUCTION
This matter is before the court on a Motion for Mandatory and Permissive Withdrawal of Reference and Transfer of Adversary Proceeding to District Court (Doc. # 1), filed by Defendants Michael Gallagher and the Gallagher, Lewis, Dow-ney & Kim law firm (collectively “Gallagher”) on April 20, 2006. The court entered a “show cause” order and Plaintiffs, Curtis Reding as Chapter 13 Standing Trustee for the Middle District of Alabama and Susan DePaola, as Chapter 7 Trustee for the Estate of Shellwanda Babers (collectively “Trustees”) responded with a brief opposing the motion by Gallagher. Additionally, on May 8, 2006, the court held a hearing on the matter and both Gallagher and the Trustees presented helpful oral arguments to supplement their briefs and assist the court.
For reasons to be discussed, the Motion for Mandatory and Permissive Withdrawal of Reference and Transfer of Adversary Proceeding to District Court is DENIED.
II. FACTS AND PROCEDURAL HISTORY
The underlying dispute is an adversary proceeding in bankruptcy court. On June 26, 2003, the Plaintiff Curtis Reding, the Chapter 13 Trustee for the bankrupt estates of Edward Childs and Charstain Tina Hicks, filed a complaint in bankruptcy court against Morris Bart, A.P.L.C. (“Bart”). That initial complaint was amended on July 28, 2003 to add Defendant Gallagher and amended again to add 58 new debtor’s estates, and Chapter 7 Trustee Susan DePaola.
Both Bart and Gallagher are law firms specializing in mass tort claims, usually brought through class action suits. The core of the Trustees’ complaint is that Bart and Gallagher misappropriated property that belongs to the estates of the bankrupt debtors. Each of the debtors at one time was a member of a several thousand plaintiff class represented by Bart in a Fen/ Phen class action suit. Gallagher was also heavily involved in Fen/Phen litigation. In 2000 Gallagher was busy negotiating a group settlement for Fen/Phen claimants who had opted out of the national class. Lawyers from around the country referred close to 5,000 opt out clients to Gallagher in order to participate in the group settlement. Bart, who is based in New Orleans, referred 30 clients who wished to opt out. Bart and Gallagher entered into a co-counsel agreement, which is now the subject of contract claims between the two. Eventually a settlement was reached and a Special Master was appointed to administer the settlement. Money was distributed to the claimants, and the lawyers took their share for fees and expenses.
The Trustees alleged four overlapping claims against Gallagher and Bart: (1) that both law firms abused the bankruptcy process by failing to have their employment approved by the court pursuant to § 11 U.S.C. 327; (2) that both law firms abused the bankruptcy process because they did not move the court to approve the compromise of the claims, which were property of the estate; (3) that both law firms have taken property of the estate in violation of § 11 U.S.C. 362; and (4) that the bankruptcy court should permanently enjoin both law firms from any future violations of the pertinent bankruptcy code and applicable bankruptcy rules.
Gallagher filed a counterclaim against the Trustees asking for damages created by fraudulent misrepresentation on the part of the bankrupt debtors and sought to establish an entitlement to any attorney’s
Since Gallagher filed their Motion for Withdrawal, Bart has reached a settlement agreement with the Trustees and the bankruptcy court has dismissed the cross claims filed by Gallagher and Bart for want of subject matter jurisdiction. Thus, the only parties remaining in the case are the Trustees and Gallagher.
Trial in the bankruptcy court is set for May 22, 2006.
III. DISCUSSION
A. Withdrawal of Reference
Under 28 U.S.C. § 1334(a) the district court has original jurisdiction over all cases arising under Title 11. Title 28 U.S.C. § 157(a) allows a district court to refer bankruptcy cases to specialized bankruptcy courts. The Middle District of Alabama has adopted a General Order of Reference which refers all cases arising under or related to Title 11 to the bankruptcy courts which are a part of the Middle District. General Order of Reference, April 25, 1985. This statutory scheme ensures that “the judicial power of the United States will be ultimately exercised by an Article III Court.”
In re Parklane/Atlanta Joint Venture,
If a party believes that a particular case should be heard in district court, it may petition the district court to “withdraw the reference” and relieve the bankruptcy court of jurisdiction. 28 U.S.C. § 157(d). Section 157(d) states:
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.
The decision of whether to withdraw the reference belongs solely to the district court judge. Fed. R. Bankr.P. 5011.
B. The Types of Withdrawal
There are two distinct types of withdrawal: (1) Mandatory and (2) Permissive. Mandatory withdrawal is required if the proceeding requires consideration of both title 11 and non-bankruptcy code federal law. The courts that have dealt with mandatory withdrawal have come up with two different ways of interpreting the mandatory withdrawal provisions of § 157(d). A minority of courts have taken a literal interpretation. Courts advocating the “literal theory” conclude that withdrawal is mandatory when the proceeding requires resolution of title 11 and non-bankruptcy code federal law statutes, regardless of the substantiality of the legal questions presented.
In re Kiefer,
The majority of courts have concluded “that withdrawal is mandatory ‘only if the court can make an affirmative determination that resolution of the claims will require substantial and material consideration of those non-Code statutes’ which have more than a de minimis impact on interstate commerce.”
In re TPI Intern Airways,
The second type of withdrawal provided by § 157(d) allows for discretionary or permissive withdrawal upon a showing of cause. Although Congress has not provided a statutory definition of the word “cause,” the Eleventh Circuit has determined that it is not “an empty requirement.”
In re Parklane/Atlanta Joint Venture,
There is nothing before the court to indicate that issues of non-bankruptcy federal law are at issue in this proceeding, therefore this case must be analyzed as a permissive withdrawal request.
Gallagher’s primary argument for withdrawal of the reference is that it has a right to a jury trial and does not consent to a jury trial before the bankruptcy court. 28 U.S.C. 157(e). In other words, Gallagher is arguing that his Seventh Amendment right to a jury trial is the “cause” for withdrawal mentioned in § 157(d).
The Trustees argue that, even if the court assumes that Gallagher has a right to a jury trial, 1 that right was waived by not filing the Motion for Withdrawal of Reference in a timely manner. 2
C. The Timeliness of the Motion for Withdrawal
Before any inquiry can be made concerning “cause” the court must first
Gallagher argues that them Motion for Withdrawal is timely because it was not ripe for withdrawal until their motion for summary judgment was denied. It is Gallagher’s contention that since they are asking for withdrawal based on their right to a jury trial, they could not seek to remove the case until they knew for sure that a trial was going to occur, and that only happened recently when its motion for summary judgment was denied.
The Trustees contend that Gallagher’s Motion for Withdrawal is untimely. They point out that this litigation has been on going in the bankruptcy court for close to three years. During that time the parties have fiercely litigated several motions, including motions to dismiss and summary judgment, have completed discovery, conducted 19 depositions, and participated in numerous scheduling and pre-trial status conferences. The current trial date of May 22, 2006 was set by written order on Sept, 29, 2005 so there is no dispute that the parties will have had nearly eight months notice and time to prepare. Additionally, the Trustees contend that Gallagher is engaged in forum shopping, which the timeliness requirement is designed to prevent. They argue that Gallagher is unhappy because the bankruptcy court recently denied their Motion for Summary Judgement, and Gallagher is attempting to find a more favorable audience in district court.
Gallagher’s argument is unavailing. To accept their argument is to assume that bankruptcy cases exist in a vacuum, when they clearly do not. When evaluating a Motion for Withdrawal, the court is required to examine the circumstances of the underlying bankruptcy proceeding. In this case, Gallagher has been a vigorous and seemingly willing participant in nearly
In support of its argument Gallagher relies heavily on the case of
City Fire Equipment Co., Inc. v. Ansul Fire Protection Wormald U.S., Inc.,
Allowing Gallagher to withdraw under these circumstances would give future parties “an incentive not to move to withdraw the reference until long after trials are scheduled, and then to wait to the eve of trial, effectively causing adversary proceedings to languish in the bankruptcy court and preventing the firm scheduling of trial dates.”
HA 2003 Liquidating Trust v. J.P. Morgan Partners (In re HALO Industries, Inc.),
The court cannot conclude with certainty that the real purpose of Gallagher’s Motion for Withdrawal is forum shopping, but does note that this premise is bolstered when one considers the briefs that Gallagher has placed before the court. Gallagher expends considerable time attempting to reargue issues which have already been ruled on by the bankruptcy court. For example, they attempt to persuade the court to withdraw the reference by arguing at length that the bankruptcy court’s denial of summary judgement is inconsistent with controlling case law, and that the bankruptcy judge has refused to hear defenses set forth by Gallagher. See Gallagher’s Motion for Withdrawal, at 17-23 and 31-32. These arguments are inappropriate and irrelevant to the determination of whether or not the reference should be withdrawn.
In sum, Gallagher was obligated to file a motion to withdraw the reference as soon as grounds for withdrawal were known.
United States v. Kaplan,
D. Consequences of an Untimely Motion
On August 28, 2003 Gallagher answered the Trustees’ amended complaint and demanded a jury trial, meeting the minimum requirements of Fed.R.Civ.P. 38(d). In the bankruptcy context, it is clear that Gallagher needed to take additional steps to protect their right to a jury trial in the district court and failed to do so.
A party may waive its right to a jury trial by failing to move timely to withdraw the reference.
Stainer v. Latimer (In re Latimer),
This court agrees that for a party to be entitled to a jury trial in the district court, the party must not only move to withdraw the reference to the bankruptcy court in addition to making a proper jury demand, but that the motion to withdraw must be timely made. To hold otherwise would be unduly disruptive to orderly procedure and would allow a party to gamble on the outcome of proceedings in the bankruptcy court and, when disappointed, try at the last minute to start all over again before another court.
In sum, because Gallagher’s Motion for Withdrawal is untimely, they have waived their right to a withdrawal for a jury trial. Therefore, there is no need to examine whether or not they actually had a right to a jury trial on the particular claims in issue.
IV. CONCLUSION
For the reasons discussed above, Gallagher’s Motion for Mandatory and Permissive Withdrawal of Reference and Transfer of Adversary Proceeding to District Court is DENIED.
Notes
. The issue of whether Gallagher actually has a right to a jury trial is debatable. In denying Gallagher's Motion to Stay Proceedings, the bankruptcy court found that Gallagher had no Seventh Amendment right to trial in this case because the issues between Gallagher and the Trustees were founded in equity and not law.
See Granfinanciera, S.A. v. Nordberg,
. The Trustees also argue that Gallagher waived their right to a jury trial when they filed a counterclaim against the Trustees. In view of the court's holding that the motion is untimely, the court does not need to address that argument.
. The old axiom, "Hope for the best, but plan for the worst” is appropriate in this case.