In re: John Christopher O Connor

Filing 15

MINUTES IN CHAMBERS ORDER by Judge S. James Otero : ORDER DENYING DEFENDANT'S MOTION TO WITHDRAW THE REFERENCE OF ADVERSARY PROCEEDING PER BANKRUPTCY COURT APPROVED STIPULATION WITH DEFENDANTS 1 , remanding case to the U. S. Bankruptcy Court. This case is hereby remanded to the Bankruptcy Court for all pretrial matters. Case number: 2:14-bk-15018-RN, Adversary number: 2:15-ap-01426-RN. (MD JS-6. Case Terminated). (lc)

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL

DATE: April 29, 2016

CASE NO.: CV 16-01903 SJO
TITLE:

In re John Christopher O'Connor
USBC Central District of California Los Angeles,
2:14-bk-15018-RN; 2:15-ap-01426-RN

========================================================================
PRESENT: THE HONORABLE S. JAMES OTERO, UNITED STATES DISTRICT JUDGE
Victor Paul Cruz
Courtroom Clerk

Not Present
Court Reporter

COUNSEL PRESENT FOR PLAINTIFF:

COUNSEL PRESENT FOR DEFENDANTS:

Not Present

Not Present

========================================================================
PROCEEDINGS (in chambers): ORDER DENYING DEFENDANT'S MOTION TO WITHDRAW
THE REFERENCE OF ADVERSARY PROCEEDING PER BANKRUPTCY COURT APPROVED
STIPULATION WITH DEFENDANTS [Docket No. 1]
This matter is before the Court on Plaintiff John J. Menchaca ("Plaintiff" or "Trustee"), Chapter 7
Trustee of John Christopher O'Connor ("Debtor") Motion to Withdraw the Reference of Adversary
Proceeding Per Bankruptcy Court Approved Stipulation with the Defendants ("Motion"), filed March
20, 2016. None of the defendants named in this action—Katherine L. O'Connor, both individually
("Katherine") and as trustee of the 2009 Three Children Irrevocable Trust ("2009 Trust"), John
Christopher O'Connor, as trustee of the John Christopher O'Connor Declaration of Trust
("Revocable Trust"), or Quinton Holdings, LLC ("LLC") (together, "Defendants")—have opposed
the Motion. Instead, Plaintiff and Defendants filed an oral stipulation ("Stipulation") as part of
adversary proceeding 2:15-ap-01426-RN (the "Adversary Proceeding"), which United States
Bankruptcy Judge Richard M. Neiter approved in an order ("Withdrawal Order") dated November
5, 2015 in light of Defendants' demand for a jury trial and non-consent to trial of the Adversary
Proceeding in the Article I Bankruptcy Court. (See Mot., Ex. 1, ECF No. 1.) In the Withdrawal
Order, Judge Neiter ordered Plaintiff to file "a motion for withdrawal of the reference of the entire
Adversary Proceeding . . . in accordance with 28 U.S.C. § 157(d)" and further ordered that
"matters pertaining to the Adversary Proceeding shall proceed in the District Court unless the
Motion is denied." (Mot., Ex. 1.) Judge Neiter also issued an order ("Mediation Order") appointing
Magistrate Judge Jay C. Gandhi ("Mediator") to mediate the Adversary Proceeding and also
mediate a trailing adversary to revoke the Debtor's discharge. (See Mot., Ex. 2.)
The Court found this matter suitable for disposition without oral argument and vacated the hearing
set for April 25, 2016. See Fed. R. Civ. P. 78(b). For the following reasons, the Court DENIES
Plaintiff's Motion.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL

DATE: April 29, 2016

CASE NO.: CV 16-01903 SJO

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I.

BACKGROUND

On August 10, 2015, Plaintiff filed a Complaint against Defendants asserting causes of action for
(1 & 2) avoidance of fraudulent transfers; (3) recovery of avoided transfers; (4) conspiracy to
defraud; (5) imposition of a constructive trust; (6) accounting; (7) declaratory judgment quieting
title to real properties; (8) turnover; (9) injunctive relief; (10) permission to sell real properties in
which a non-debtor asserts an interest; and (11) substantive consolidation of Defendants with the
Debtor's estate. (See App'x in Supp. Mot. ("App'x"), Ex. B ("Compl."), ECF No. 3-1.) Defendants
filed their respective answers on September 17, 2015, demanding a jury trial. (See generally
App'x, Exs. A, C-F.) Plaintiff filed a Statement of Non-Consent to a Jury Trial Conducted by the
Bankruptcy Court on September 22, 2015. (App'x, Exs. A, G.) None of the Defendants have filed
a Proof of Claim. (App'x, Ex. H.)
II.

DISCUSSION
A.

Legal Standards for Withdrawal

Pursuant to 28 U.S.C. § 157(d) ("Section 157"), a district court has the authority to withdraw
reference to the bankruptcy court. See 28 U.S.C. § 157(d). Section 157(d) provides for both
permissive and mandatory withdrawal, depending on the circumstances of the action. Id. "The
district court may withdraw, in whole or in part, any case or proceeding referred . . . on its own
motion or on timely motion of any party, for cause shown." Id. (emphasis added). The district
court shall withdraw 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." Id. The party seeking withdrawal carries the "burden of persuasion." FTC v. First
Alliance Mortg. Co., 282 B.R. 894, 902 (C.D. Cal. 2001) (citation omitted). It is within a district
court's discretion to grant or deny a motion for permissive withdrawal of reference; that decision
will not be disturbed unless the court abuses its discretion. See In re Cinematronics, Inc., 916
F.2d 1444, 1451 (9th Cir. 1990).
B.

Right to Jury Trial in Fraudulent Conveyance Actions

In the page-long argument section of his Motion, Plaintiff contends that "[t]he withdrawal of the
reference as to the Adversary Proceeding is appropriate" because the Complaint filed in the
Adversary Proceeding alleges in part that Defendants received fraudulent transfers from the
Debtor, and that actions to avoid fraudulent transfers require a jury trial by an Article III court.
(See generally Mot. 4-5.)
The Court does not write on a blank slate. In Granfinanciera, S.A. v. Nordberg, the United States
Supreme Court held that the Seventh Amendment confers upon persons who have not submitted
a claim against a bankruptcy estate a right to a jury trial when sued by the trustee in bankruptcy
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL

DATE: April 29, 2016

CASE NO.: CV 16-01903 SJO

to recover an allegedly fraudulent money transfer, notwithstanding Congress's designation of
fraudulent conveyance actions as "core proceedings" in Section 157(b)(2)(H) which a non-Article
III bankruptcy judge may adjudicate. 492 U.S. 33, 36 (1989). The Supreme Court in
Granfinanciera expressly declined to consider, however, whether bankruptcy courts may
constitutionally conduct such jury trials. Id. at 50.
The Ninth Circuit confronted this issue head-on in In re Healthcentral.com, ruling that the
defendant in that action was entitled to a Seventh Amendment jury trial in the district court. 504
F.3d 775, 786 (9th Cir. 2007). The Ninth Circuit also held, however, that "[a] valid right to a
Seventh Amendment jury trial in the district court does not mean the bankruptcy court must
instantly give up jurisdiction and that the action must be transferred to the district court. Instead,
we hold, the bankruptcy court may retain jurisdiction over the action for pre-trial matters." Id. at
788.
The Ninth Circuit elaborated on its decision in In re Healthcentral.com in In re Bellingham
Insurance Agency, Inc., unequivocally holding that "fraudulent conveyance claims, because they
do not fall within the public rights exception, cannot be adjudicated by non-Article III judges." 702
F.3d 553, 561 (9th Cir. 2012). The Ninth Circuit further held, however, that "§ 157(b)(1) provides
bankruptcy courts the power to hear fraudulent conveyance cases and to submit reports and
recommendations to the district courts. Such cases remain in the core, and the § 157(b)(1) power
to 'hear and determine' them authorizes the bankruptcy courts to issue proposed findings of fact
and conclusions of law. Only the power to enter final judgment is abrogated." Id. at 565-66
(emphasis added). Later in the opinion, however, the Ninth Circuit noted that "§ 157(e) permits
bankruptcy judges to conduct jury trials 'with the express consent of all the parties'." Id. at 569
(emphasis in original).
Thus, although bankruptcy courts may not, absent express consent being given by all parties,
conduct jury trials or enter final judgments. Bankruptcy courts may, however, hear fraudulent
conveyance cases and submit reports and recommendations containing proposed findings of fact
and conclusions of law to district courts.
B.

Permissive Withdrawal

Having determined that withdrawal is not required in order to satisfy the requirements of the
Seventh Amendment, the Court now analyzes whether this case presents one of the "limited
number of circumstances" in which permissive withdrawal should be permitted. Hawaiian Airlines,
Inc. v. Mesa Air Grp., Inc., 355 B.R. 214, 223 (D. Haw. 2006) (citations omitted). The Ninth Circuit
has held that "[i]n determining whether cause exists, a district court should consider the efficient
use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration,
the prevention of forum shopping, and other related factors." Sec. Farms v. Int'l Bd. of Teamsters,
Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir. 1997).
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL

DATE: April 29, 2016

CASE NO.: CV 16-01903 SJO

Although Plaintiff does not address any of these factors in its Motion, the Court finds that
withdrawal should not be permitted in this case. Although there is no evidence of forum shopping
on the part of either Plaintiff or Defendants, the remaining factors all weigh in favor of denying the
Motion.
First, with respect to efficiency, the Court concludes that "hearing core matters in a district court
could be an inefficient allocation of judicial resources given that the bankruptcy court generally will
be more familiar with the facts and issues." In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir.
1993); accord In re Molina, 2010 WL 3516107, at *2 (N.D. Cal. Sept. 8, 2010); In re Woldrich, No.
10-1245, 2010 WL 3087487, at *1 (D. Ariz. Aug. 6, 2010). Having the bankruptcy court submit
proposed findings of fact and conclusions of law in fraudulent conveyance cases "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." In re Healthcentral.com, 504 F.3d at 787-88. Although
the Adversary Proceeding has not been pending for a significant amount of time, given the
bankruptcy court's familiarity with the parties and the legal issues, the Court finds that it would be
more efficient for the bankruptcy court to make decisions in the first instance even though these
findings may be subject to de novo review. Any inefficiencies, including delays and costs, are
outweighed by efficiencies gained in leaving the proceeding in bankruptcy court.
The Court also finds that the uniformity of bankruptcy administration favors denying the Motion.
The claims presented in the Complaint seek to avoid and recover fraudulent transfers undertaken
as party of a conspiracy to "defraud the Creditors of the Debtor." (Compl. ¶¶ 43, 45.) Therefore,
these fraudulent conveyance claims arise under federal bankruptcy law and would not exist absent
the bankruptcy proceeding. See 11 U.S.C. §§ 544 & 548.
On balance, the Court finds that permissive withdrawal is not appropriate in this case, and
accordingly DENIES the Motion and remands this case back to the Bankruptcy Court for all pretrial
matters.
III.

RULING

For the foregoing reasons, the Court DENIES Plaintiff's Motion to Withdraw the Reference of
Adversary Proceeding Per Bankruptcy Court Approved Stipulation with the Defendants. This case
is hereby remanded to the Bankruptcy Court for all pretrial matters.

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