Envisage Development Partners, LLC et al v. Patch of Land Lending, LLC et al

Filing 17

ORDER by Judge Charles R. Breyer granting 1 Motion to Withdraw Reference and granting 5 Motion to Compel Arbitration. (crblc1, COURT STAFF) (Filed on 10/11/2017)

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1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 9 ENVISAGE DEVELOPMENT PARTNERS, LLC, ET AL., Plaintiffs, 10 v. United States District Court Northern District of California 11 12 PATCH OF LAND LENDING, LLC, et al., 13 Case No. 17-cv-03971-CRB ORDER GRANTING MOTION TO WITHDRAW REFERENCE AND GRANTING MOTION TO COMPEL ARBITRATION Defendants. This case involves a construction loan intended to produce a luxury property, which 14 15 instead resulted in a bankruptcy and two adversary proceedings between lender and 16 borrower. Two motions are now pending: a motion to withdraw the reference to the 17 district court, see Mot. to Withdraw (dkt. 1), and a motion to compel arbitration, see Mot. 18 to Compel (dkt. 5). Both motions turn in large part on whether the adversary proceeding at 19 issue is a core or non-core proceeding. Because the Court concludes that it is non-core, it 20 will grant both motions. 21 I. 22 BACKGROUND In August of 2015, Plaintiff Envisage Development Partners, LLC (“Envisage”) 23 entered into a construction loan with Defendant Patch of Land (“POL”). Ray Decl. (dkt. 5- 24 1) ¶ 4. The purpose of the loan was to provide funds for the purchase and renovation of a 25 piece of property in Noe Valley: Envisage hoped to transform the property from a multi- 26 family dwelling into a “luxury single family residence.” Id. Three loan documents govern 27 the parties’ relationship. 28 The first is the Promissory Note. The Note provides that Envisage would borrow, 1 and agree to pay to POL, the principal sum of $2,790,000.00, together with interest thereon 2 at the initial interest rate of 11.0% per year. See id. ¶ 5 & Ex. A. The interest rate would 3 be adjusted as provided therein. Id. The Note was payable in monthly installments of 4 accrued unpaid interest, with a final payment of the remaining balance of both unpaid 5 principal and interest due in August of 2016. Id. Upon default, POL could declare all 6 monies payable to be “immediately due and payable,” and increase the interest rate to the 7 lesser of 18% or the maximum allowed by law. Id. The Note also includes an arbitration 8 clause, which provides that “[a]ny dispute involving enforcement or interpretation of this 9 Note shall be decided by binding arbitration under the rules of the American Arbitration 10 Association (“AAA”).” See id. ¶ 6, Ex. A ¶ 29. Second, as security for the loan, Envisage, as trustor, executed a Deed of Trust. Id. United States District Court Northern District of California 11 12 ¶ 7; Ex. B. The Deed of Trust includes an arbitration clause, which provides in part: “. . . 13 any and all disputes, controversies or claims arising out of or relating to this Deed of Trust 14 and other loan documents or transactions contemplated thereby, including, without 15 limitation, the making, performance, or interpretation of this Deed of Trust of other loan 16 documents, shall be resolved by binding arbitration.” Id. ¶ 10, Ex. B ¶ 52.2.1 17 The third loan document is the Guaranty. Plaintiff Mark Rowson executed a 18 Guaranty in which he agreed to pay to POL any of Envisage’s debt, plus interest and costs 19 of collection thereof, including reasonable attorneys’ fees. Ray Decl. ¶¶ 12–13, Ex. C. 20 The Guaranty, too, includes an arbitration clause, stating: “Any dispute involving the 21 enforcement or interpretation of this Agreement shall be decided by binding arbitration 22 under the rules of the American Arbitration Association (“AAA”). . . .” Id. Ex. C ¶ 25. 23 24 25 26 27 28 1 Preceding the arbitration clause in the Deed of Trust is a “waiver of right to jury trial” clause in which, “to the extent permitted by applicable law,” both parties “agree to waive their respective rights to a jury trial of any claim or cause of action based on or arising from this Deed of Trust.” See Ray Decl. Ex. B ¶ 52.1. The arbitration clause begins, “To the extent a predispute waiver of the right to trial by jury is not enforceable under applicable law . . .” See id. ¶ 52.2. The Ninth Circuit, applying California law, recently found that a contractual jury trial waiver was unenforceable, see In re County of Orange, 784 F.3d 520, 524 (9th Cir. 2015), and so the parties here rightly skip over the “jury trial waiver” clause in the Deed of Trust to get to the arbitration clause. 2 The parties provide little detail in the pending motions about what went wrong in 1 2 their business relationship, aside from saying that POL demanded payment under the 3 Guaranty, “but no part of said balance has been paid.” See Ray Decl. ¶ 14.2 In February of 2017, POL initiated litigation against Mark Rowson, Michelle 4 5 Rowson, Envisage, and 25 Alta EVP LLC in California Superior Court, Los Angeles 6 County. See generally Order Granting Motion to Remand (dkt. 17) at 2 in Patch of Land 7 Lending, LLC v. Rowson et al., Case No. 17-3030-HLB (Bankr. N.D. Cal. 2017) 8 (referencing Patch of Land Lending, LLC v. 25 Alta EVP, LLC, et al., Case No. SC127062 9 (Cal. Sup. Ct.)). Shortly thereafter, Envisage filed a voluntary petition for relief under Chapter 11, which was assigned to U.S. Bankruptcy Judge Hannah L. Blumenstiel of the 11 United States District Court Northern District of California 10 Northern District of California. See id. (referencing In re Envisage Development Partners, 12 LLC, Case No. 17-30396-HLB). Envisage then filed a notice of removal, which removed 13 the Los Angeles County case to the bankruptcy court and commenced a related adversary 14 proceeding (Case No. 17-3030-HLB). Id. POL subsequently dismissed Envisage as a 15 defendant in that adversary proceeding, and filed a motion to remand the case to state 16 court. Id. Judge Blumenstiel granted that motion, see generally id., and Rowson has 17 appealed that order to this Court in a related case, see Bankruptcy Appeal (dkt. 1) in 18 Envisage Development Partners, LLC v. Patch of Land Lending, LLC, Case No. 17-3969- 19 CRB. That bankruptcy appeal is not at issue in the pending motions. At issue in the pending motions is a second adversary proceeding, which Envisage 20 21 and the Rowsons filed in June of 2017 in the Envisage bankruptcy case (Case No. 17- 22 30396-HLB) against POL and its asset manager, Michael Ray. See generally Ray Decl. 23 Ex. D (Compl. (dkt.1) in Envisage Development Partners, LLC v. Patch of Land, LLC, 24 Case No. 17-3040 (Bankr. N.D. Cal. 2017)). The adversary proceeding complaint asserts: 25 (1) violation of the Racketeer Influenced & Corrupt Organizations Act (“RICO”), 18 26 27 28 2 The adversary proceeding complaints do detail the dispute. See, e.g., Ray Decl. Ex. D (Complaint in Envisage Development Partners, LLC v. Patch of Land, LLC, Case No. 17-3040 (Bankr. N.D. Cal. 2017)). 3 1 U.S.C. §§ 1961–1968; (2) breach of contract; (3) breach of the implied covenant of good 2 faith and fair dealing; (4) tortious breach of fiduciary duty; (5) fraud; (6) duress; (7) 3 interference with advantageous contractual/business relations; (8) intentional infliction of 4 emotional distress; (9) conversion; (10) restitution/unjust enrichment; (11) accounting; 5 (12) constructive trust; (13) specific performance; and (14) declaratory relief. Id. POL has 6 now moved to withdraw the reference of the adversary proceeding to the district court, and 7 moved to compel arbitration of the claims therein. See generally Mot. to Withdraw; Mot. 8 to Compel. 9 II. DISCUSSION This Order addresses both pending motions. 11 United States District Court Northern District of California 10 A. 12 13 14 15 16 17 18 19 20 Motion to Withdraw the Reference POL asks the Court to withdraw the reference on two grounds. First, it argues that the Court must withdraw the reference under 28 U.S.C. § 157 because (1) Envisage’s adverse action requires adjudication of federal claims, and (2) the bankruptcy court lacks jurisdiction to hold a jury trial without the consent of both parties. Second, POL argues that the Court should exercise its discretion to withdraw the reference under § 157 because Envisage brings only non-core claims—meaning that the district court would be required to conduct de novo review of the bankruptcy court’s factual and legal findings. The Court disagrees that withdrawal of the reference is mandatory here, but agrees that discretionary (or “permissive”) withdrawal is warranted. 21 22 23 24 25 26 1. Mandatory Withdrawal Section 157(d) provides the standard for mandatory withdrawal: The district court shall, on timely motion of a party . . . 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. 27 28 U.S.C. § 157(d). Withdrawal is only mandatory where the case involves “substantial 28 and material questions of federal law.” Sec. Farms v. Int’l Bhd. of Teamsters, 124 F.3d 4 999, 1008 (9th Cir. 1997). The Ninth Circuit has not interpreted the “substantial and 2 material question” standard in any reported case. However, the Seventh Circuit considered 3 the standard for mandatory withdrawal in depth in a case that this Court previously cited 4 favorably. In re Vicars Ins. Agency, Inc., 96 F.3d 949 (7th Cir. 1996) (cited in Greenspan 5 v. Paul Hastings Janofsky & Walker LLP, No. C 12-01148 CRB, 2012 WL 3283516, at *4 6 (N.D. Cal. Aug. 10, 2012)). The Vicars court rejected a literal reading of the mandatory 7 withdrawal provision, noting that reading the statute to require withdrawal of every 8 proceeding that involves interpretation of federal law outside title 11 would “eviscerate 9 much of the work of the bankruptcy court.” 96 F.3d at 952. Instead, it held that § 157(d) 10 calls for withdrawal only when the federal issues “require the interpretation, as opposed to 11 United States District Court Northern District of California 1 mere application, of the non-title 11 statute, or when the court must undertake analysis of 12 significant open and unresolved issues regarding the non-title 11 law.” Id. at 954. This is 13 a reasonable interpretation of the statutory language, and the Court will follow it here. 14 POL argues that withdrawal is mandatory here because Envisage’s state-law claims 15 implicate the Federal Arbitration Act (“FAA”). Mot. to Withdraw at 4. However, POL 16 does not assert that the FAA-related issues “involve more than mere application of existing 17 law to new facts.” See Vicars, 96 F.3d at 954. Accordingly, withdrawal of the reference 18 in the adversary proceeding is not mandatory. 19 POL next argues that the bankruptcy court lacks jurisdiction over the claims in the 20 adverse proceeding because the Seventh Amendment entitles POL to a jury trial on 21 Envisage’s state-law contract claims, citing Daewoo Motor Am., Inc. v. Gulf Ins. Co., 302 22 B.R. 308, 315 (Bankr. C.D. Cal. 2003). However, the Ninth Circuit has squarely rejected 23 this argument. In re Healthcentral.com, 504 F.3d 775, 786–88 (9th Cir. 2007). In In re 24 Healthcentral.com, the court held that “a Seventh Amendment jury trial right does not 25 mean the bankruptcy court must instantly give up jurisdiction and that the case must be 26 transferred to the district court.” Id. at 787. Instead, the court held that “the bankruptcy 27 court is permitted to retain jurisdiction over the action for pre-trial matters.” Id. (emphasis 28 added). Accordingly, the Seventh Amendment does not require withdrawal here. 5 1 2 2. Permissive Withdrawal Section 157(d) also provides the basis for permissive withdrawal. That provision 3 allows the district court to “withdraw, in whole or in part, any case or proceeding referred 4 under this section, on its own motion or on timely motion of any party, for cause shown.” 5 28 U.S.C. § 157(d). In determining whether cause exists, district courts consider (1) “the 6 efficient use of judicial resources,” (2) “delay and costs to the parties,” (3) “uniformity of 7 bankruptcy administration,” (4) “the prevention of forum shopping,” and (5) “other related 8 factors.” Sec. Farms, 124 F.3d at 1008. Determining whether it would be more efficient to withdraw the reference requires 10 an analysis of the constitutional backdrop to Congress’s creation of the bankruptcy courts. 11 United States District Court Northern District of California 9 Bankruptcy courts lack jurisdiction “to make final determinations in matters that could 12 have been brought in a district court or a state court.” In re Castlerock Props., 781 F.2d 13 159, 162 (9th Cir. 1986); see also Northern Pipeline Constr. Co. v. Marathon Pipe Line 14 Co., 458 U.S. 50 (1982) (“Marathon”). Such matters are “non-core” proceedings over 15 which bankruptcy courts lack jurisdiction, as a matter of statutory as well as constitutional 16 interpretation. See 28 U.S.C. § 157(b)(2) (enumerating “core” proceedings over which 17 bankruptcy judges have jurisdiction). However, initial proceedings in “non-core” matters 18 may be held before a non-Article III court, subject to de novo review by the district court 19 of both factual and legal findings. Castlerock, 781 F.2d at 162. 20 In its adversary complaint, Envisage brings one claim under RICO, 18 U.S.C. §§ 21 1961–68, and several contract and tort claims arising out of POL’s alleged contract breach. 22 Envisage’s state-law claims are non-core matters over which the bankruptcy court lacks 23 the authority to enter final judgment. See Thomas v. Union Carbide Agric. Prods. Co., 473 24 U.S. 568, 584 (1985) (bankruptcy courts lack power to enter final judgment in state-law 25 contract claims); Stern v. Marshall, 564 U.S. 462, 469 (2011) (same with respect to tort 26 claims); see also Castlerock, 781 F.2d at 162 (bankruptcy code would be unconstitutional 27 if it allowed bankruptcy courts to enter final judgment in state-law contract claims). 28 Envisage’s arguments to the contrary are unavailing. Meanwhile, Envisage does not argue 6 1 that its RICO claim is a core proceeding. Accordingly, Envisage’s adversary complaint 2 consists entirely of non-core claims. 3 Envisage argues that it would be more efficient to litigate the adversary proceeding 4 in bankruptcy court. However, it is difficult to see how this could be so, given that none of 5 the claims in that proceeding involves a core bankruptcy matter. Any decision made by 6 the bankruptcy court would be subject to de novo review by this Court as to both factual 7 findings and legal conclusions. While Envisage argues that the adversary proceeding is 8 inextricably entwined with the title 11 proceeding, this is not so: the issue of rights and 9 liabilities under the loan agreement is conceptually distinct from the issue of how Envisage’s liabilities should be discharged in bankruptcy. Envisage argues that the 11 United States District Court Northern District of California 10 bankruptcy court has already spent considerable time grappling with the issues raised in 12 the adversary proceeding, but this is not so, either. The bankruptcy court has not evaluated 13 the merits of either the claims in the adversary proceeding, or the contract-related claims 14 brought by POL that have since been remanded to state court. Accordingly, judicial 15 efficiency would be best served by withdrawing the reference. None of the other factors 16 for permissive withdrawal weigh in favor of leaving the proceeding in bankruptcy court. 17 The Court thus exercises its discretion to withdraw the reference. 18 19 20 B. Motion to Compel Arbitration The second pending motion is POL’s Motion to Compel Arbitration. See generally Mot. to Compel. 21 22 1. Legal Standard 23 Contracts “evidencing a transaction involving commerce” are subject to the Federal 24 Arbitration Act (“FAA”). See Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 25 1130 (9th Cir. 2000) (citing 9 U.S.C. § 2). The FAA provides that an agreement to submit 26 to arbitration is “valid, irrevocable, and enforceable, save upon such grounds as exist at 27 law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA places 28 arbitration agreements on “an equal footing with other contracts, and requires courts to 7 1 enforce them according to their terms.” Rent-A-Ctr. West, Inc. v. Jackson, 561 U.S. 63, 67 2 (2010) (internal citations omitted). A party may petition a court to compel “arbitration [to] 3 proceed in the manner provided for in such agreement.” 9 U.S.C. § 4. Generally, “a party cannot be required to submit to arbitration any dispute [that] he 5 has not agreed so to submit.” AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 6 643, 648 (1986). However, courts have developed a “liberal federal policy favoring 7 arbitration.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011). The district 8 court’s role under the FAA is limited to determining “(1) whether a valid agreement to 9 arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue. 10 If the response is affirmative on both counts, then the Act requires the court to enforce the 11 United States District Court Northern District of California 4 arbitration agreement in accordance with its terms.” Chiron Corp., 207 F.3d at 1130. Arbitration agreements are “a matter of contract” and “may be invalidated by 12 13 ‘generally applicable contract defenses, such as fraud, duress and unconscionability.’” 14 Rent-A-Ctr., 561 U.S. at 67–68. Parties may “agree to limit the issues subject to 15 arbitration” and “to arbitrate according to specific rules.” Concepcion, 563 U.S. at 344. In 16 determining whether the arbitration clause encompasses the claims at issue, “all doubts are 17 to be resolved in favor of arbitrability.” See Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 18 721 (9th Cir. 1999). “[T]he party resisting arbitration bears the burden of proving that the 19 claims at issue are unsuitable for arbitration.” Green Tree Fin. Corp.-Alabama v. 20 Randolph, 531 U.S. 79, 81 (2000). 21 2. 22 23 24 25 Analysis of Motion to Compel Arbitration POL moves to compel arbitration of the claims in the adversary proceeding. See generally Mot. to Compel. Importantly, the Motion to Compel Arbitration is brought by POL only and not by Michael Ray, who does not appear to be a party to the loan documents.3 The Court will grant POL’s motion. 26 27 28 3 The claims against Ray—there are several: all but the two contract claims are brought against “All Defendants,” see Ray Decl. Ex. D ¶¶ 59–79; 85–149—thus remain in this Court regardless of the Court’s ruling on the arbitration motion. See AT&T Techs., Inc., 475 U.S. at 648 (“a party 8 1 a. Enforceable Arbitration Agreements 2 POL asserts that it entered into valid written agreements to arbitrate with Envisage 3 and the Rowsons, and that the claims in the adversary proceeding fall within the scope of 4 the arbitration clauses. See Mot. to Compel at 5–7; see also Chiron Corp., 207 F.3d at 5 1130 (district court’s role under the FAA is limited to determining “(1) whether a valid 6 agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the 7 dispute at issue.”). Both assertions are correct. Whether the parties in the present case entered into a valid and enforceable 9 arbitration agreement is determined by California contract law. See Circuit City Stores, 10 Inc. v. Najd, 294 F.3d 1104, 1108 (9th Cir. 2002). In California, a valid contract exists if 11 United States District Court Northern District of California 8 (1) the parties are “capable of contracting”; (2) they manifested “[t]heir consent” to be 12 bound; (3) there was a “lawful object”; and (4) there was “sufficient cause or 13 consideration.” Cal. Civ. Code § 1550; United States ex. rel. Oliver v. The Parsons Co., 14 195 F.3d 457, 462 (9th Cir. 1999). The Court concludes that POL, Envisage, and the 15 Rowsons are capable of contracting, that they consented to the three loan documents that 16 contain the arbitration clauses, that they had the lawful object of establishing a loan, and 17 that there was sufficient consideration. See Ray Decl. Exs. A ¶ 29, B ¶ 52.2, C ¶ 25. 18 The claims in the adversary proceeding “arise[] from Defendants’ breaches of the 19 implied covenants and duties of good faith and fair dealing and for other self-dealing, 20 tortious conduct, including intentional misrepresentation, that constitute de facto 21 commercial predatory lending.” See Ray Decl. Ex. D at 2 (adversary proceeding 22 complaint). The complaint alleges that POL breached the loan documents and committed 23 a variety of tortious acts (and a RICO violation) in preventing Envisage and the Rowsons 24 from receiving the benefit of their bargain. See, e.g., id. ¶ 101(d) (“Plaintiffs reasonably 25 but sadly relied on the representations of POL’s representatives at and during the 26 origination of the . . . Loans . . . at all times believing that the POL workout policies . . . 27 28 cannot be required to submit to arbitration any dispute [that] he has not agreed so to submit.”). 9 1 would be followed by POL, which in fact POL neither followed nor intended to follow but 2 instead acted as an archetypal Dickensian rapacious creditor.”); id. ¶ 116 (“When 3 Defendants engaged in the above-described conduct, particularly in their repeated 4 indifference and/or rejection of Mr. Rowson’s requests and inquiries into Defendants’ 5 refusal to honor their obligations to fund the Alta and Envisage Projects . . . Defendants 6 did so deliberately and intentionally in order to cause Mr. and Mrs. Rowson and their 7 family severe emotional distress.”). Given the sweeping language in the arbitration 8 agreements, see Ray Decl. Ex. A ¶ 29 (“Any dispute involving the enforcement or 9 interpretation of this Note . . . ”); id. Ex. B ¶ 52.2 (“any and all disputes, controversies or claims arising out of or relating to this Deed of Trust and other loan documents or 11 United States District Court Northern District of California 10 transactions contemplated thereby, including, without limitation, the making, performance, 12 or interpretation of this Deed of Trust or other loan documents . . .”); id. Ex. C ¶ 25 (“Any 13 dispute involving the enforcement or interpretation of this Agreement . . .”), such claims 14 fall within their scope. 15 Envisage and the Rowsons, who bear “the burden of proving that the claims at issue 16 are unsuitable for arbitration,” see Green Tree Fin. Corp.-Alabama, 531 U.S. at 81, do not 17 dispute, or address, any of this, see generally Opp’n to Mot. to Compel (dkt. 8). They do 18 not dispute that the FAA applies. See id. They do not raise any of the defenses the Court 19 typically sees in arbitration motions, such as assertions of procedural or substantive 20 unconscionability. Instead, they make two arguments: first, that the adversary proceeding 21 is a core proceeding, and second, that the disputes between the parties should be 22 centralized in bankruptcy court. See id. at 3–8. Neither has merit. 23 24 25 26 27 b. Core vs. Non-Core Claims Envisage and the Rowsons argue that the adversary proceeding “is a core proceeding,” but do not explain how the distinction between core and non-core impacts the Court’s arbitration decision. See id. at 3–4. A review of the relevant case law yields an explanation: bankruptcy courts can sometimes deny a motion to compel arbitration when 28 10 1 the claim at issue is core, and rarely if ever do so when it is non-core. The Ninth Circuit explained in In re Thorpe Insulation Co., that, notwithstanding 2 3 the FAA’s liberal policy favoring arbitration, “’the Arbitration Act’s mandate may be 4 overridden by a contrary congressional command.’” 671 F.3d 1011, 1020 (9th Cir. 2012) 5 (quoting Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987)). If 6 Congress intended to limit the waiver of a judicial forum, it would evidence such intent in 7 “the statute’s text or legislative history, or from an inherent conflict between arbitration 8 and the statute’s underlying purposes.” Id. There is no such intent evident in the 9 Bankruptcy Code’s text or legislative history. Id. Accordingly, courts look to “whether there is an inherent conflict between arbitration and the underlying purposes of the 11 United States District Court Northern District of California 10 Bankruptcy Code.” Id. A threshold matter is whether the proceedings are core or non- 12 core. Id. “In non-core proceedings, the bankruptcy court generally does not have 13 discretion to deny enforcement of a valid prepetition arbitration agreement.” Id. at 1021. 14 This is because “non-core proceedings ‘are unlikely to present a conflict sufficient to 15 override by implication the presumption in favor of arbitration.’” Id. (quoting In re U.S. 16 Lines, 197 F.3d 631, 640 (2d Cir. 1999)); cf. Security Farms, 124 F.3d at 1008 (“[a]ctions 17 that do not depend on the bankruptcy courts for their existence and that could proceed in 18 another court are considered ‘non-core.’”).4 As discussed above, the adversary proceeding at issue here is a non-core 19 20 proceeding.5 21 22 23 4 24 25 26 27 28 The core/non-core distinction is “not alone dispositive” because “even in a core proceeding . . . a bankruptcy court has discretion to decline to enforce an otherwise applicable arbitration provision only if arbitration would conflict with the underlying purposes of the Bankruptcy Code.” See In re Eber, 687 F.3d 1123 (9th Cir. 2012) (quoting In re Thorpe Insulation Co., 671 F.3d at 1021). 5 Envisage and the Rowsons argue that “Whether the entire contact creating the debt—and the related guarantee [sic]—was induced by fraud is a core issue that lies with the Bankruptcy Court for determination.” Opp’n to Mot. to Compel at 7. They cite to no authority for this point, see id., and it appears that just the opposite is true, see Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445–46 (2006) (“unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.”). 11 1 2 c. Centralization of Disputes in Bankruptcy Court Finally, Envisage and the Rowsons argue that the disputes between the parties should be centralized in bankruptcy court—an argument that reads too much into In re 4 Thorpe Insulation Co. See Opp’n to Mot. to Compel at 5–8. That case involved a 5 creditor’s claim to “disputed or affected assets in [a] § 524(g) trust,” the purpose of which 6 “is to consolidate a debtor’s asbestos-related assets and liabilities into a single trust.” See 7 In re Thorpe Insulation Co., 671 F.3d at 1021–22. The Ninth Circuit held that “[b]ecause 8 Congress intended that the bankruptcy court oversee all aspects of a § 524(g) 9 reorganization, only the bankruptcy court should decide whether the debtor’s conduct in 10 the bankruptcy gives rise to a claim for breach of contract.” Id. at 1022. The court went 11 United States District Court Northern District of California 3 on to opine that, even apart from section 524(g), the purpose of the Bankruptcy Code is to 12 centralize disputes about a debtor’s legal obligations, and that “[t]he general need in any 13 bankruptcy proceeding for centralization is heightened in a § 524(g) proceeding involving 14 multiple insurers and numerous asbestos claimants.” Id. at 1023. 15 It is indisputable that a goal of the Bankruptcy Code is to centralize disputes, but 16 Envisage and the Rowsons would treat that goal as an exception that swallows the rule. In 17 every case, litigation would be simpler and the bankruptcy court could maintain greater 18 control if it denied a motion to compel arbitration and kept all disputes to itself. But the 19 goal of centralizing disputes does not alone override the FAA, as In Re Thorpe Insulation 20 Co. recognizes. See id. at 1021 (recognizing that in non-core proceedings, bankruptcy 21 court usually cannot deny enforcement of a “valid prepetition arbitration agreement”). The 22 Ninth Circuit in In re Thorpe Insulation Co. even noted that if the creditor in that case “had 23 presented a standalone claim . . . limited and isolated to prepetition matters independent of 24 the bankruptcy,” that claim “likely should have been arbitrated.” Id. at 1023 n.10. At 25 issue here are just such pre-petition claims. 26 That the claims at issue here existed pre-petition, and continue to exist independent 27 of Envisage’s bankruptcy, is also why In re Eber is distinguishable. Envisage and the 28 Rowsons cite to In re Eber as an example of the Ninth Circuit refusing to compel 12 1 arbitration of a creditor’s claims because doing so would “conflict with the underlying 2 purposes of the Bankruptcy Code,” and specifically centralization, Opp’n to Mot. to 3 Compel at 8 (citing In re Eber, 687 F.3d at 1129–31). In re Eber, however, involved an 4 adversary action that “in actuality [sought] to arbitrate dischargeability under § 523(a)(2), 5 (4) and (6), a core bankruptcy issue.” Id. at 1130. It is not an example of a court refusing 6 to compel arbitration of non-core claims in the name of centralization. Relatedly, Envisage and the Rowsons cite to both Moses v. CashCall, Inc., 781 F.3d 7 63 (4th Cir. 2015) and In re Gandy, 299 F.3d 489 (5th Cir. 2002), for the general 9 propositions that the Bankruptcy Code is concerned with efficiency, and that sending 10 claims to arbitration can sometimes create a conflict with the Bankruptcy Code. See 11 United States District Court Northern District of California 8 Opp’n to Mot. to Compel at 6–7. But Moses held that, where there were core and non-core 12 claims, sending the core claim “to arbitration would pose an inherent conflict with the 13 Bankruptcy Code.” 781 F.3d at 66, 72. And In re Gandy held that, where there are both 14 core and non-core claims and “the bankruptcy causes of action predominate,” sending 15 some claims to arbitration and keeping some claims in bankruptcy court would be 16 “wasteful and inefficient.” 299 F.3d at 497–99. Neither addressed the circumstances here, 17 where the adversary proceeding involves only non-core claims. While efficiency might 18 well be a “legitimate consideration[]” in determining whether arbitration would conflict 19 with the Bankruptcy Code, see In re Nat’l Gypsum Co., 118 F.3d 1056, 1070 n.21 (5th Cir. 20 1997), there is no evidence that arbitration of the non-core claims at issue here would be 21 inefficient. Envisage and the Rowsons cite to more out-of-circuit authority in urging that “the 22 23 additional litigation costs to litigate claims before two tribunals will harm [Envisage’s] 24 creditors by reducing the income” available to pay them. Opp’n to Mot. to Compel at 7. 25 But they cite no Ninth Circuit case expressing this concern, and no evidence that litigation 26 before an arbitrator would be any more costly than litigation before this Court.6 Moreover, 27 6 28 After all, given the Court’s withdrawal of the reference, the options are this Court or an arbitrator, not bankruptcy court or an arbitrator. 13 1 their concern rings hollow, as Envisage and the Rowsons chose to file their own adversary 2 action rather than cross-claims in either the state court action or, once Envisage filed for 3 Chapter 11, the other adversary action (Case No. 17-3030-HLB), which Judge Blumenstiel 4 has remanded to state court. See generally Order Granting Motion to Remand in Patch of 5 Land Lending, LLC v. Rowson et al., Case No. 17-3030-HLB (Bankr. N.D. Cal. 2017). 6 There will be multiple tribunals either way. 7 Although centralization of disputes is a recognized purpose of the Bankruptcy 8 Code, it does not alone justify overriding the FAA, or the parties’ contractual agreement to 9 arbitrate their pre-petition, non-core claims. The Court therefore enforces the arbitration agreements as to the claims against POL. 11 United States District Court Northern District of California 10 III. 12 13 CONCLUSION For the foregoing reasons, the Court GRANTS the motion to withdraw the reference and GRANTS the motion to compel arbitration of the claims against POL. 14 IT IS SO ORDERED. 15 Dated: October 11, 2017 CHARLES R. BREYER United States District Judge 16 17 18 19 20 21 22 23 24 25 26 27 28 14

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