Weinstein et al v. Kuhl et al

Filing 21

ORDER by Judge Haywood S. Gilliam, Jr. DENYING DEFENDANTS 7 MOTIONS TO WITHDRAW REFERENCE.(ndrS, COURT STAFF) (Filed on 10/9/2018)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 MARLENE G. WEINSTEIN, 7 Plaintiff, 8 v. 9 GREG KUHL, et al., 10 Defendants. 11 United States District Court Northern District of California Case No.18-cv-01351-HSG ORDER DENYING DEFENDANTS’ MOTIONS TO WITHDRAW REFERENCE Re: Dkt. No. 7 12 MARLENE G. WEINSTEIN, 13 Case No.18-cv-01545-HSG Plaintiff, 14 v. 15 GREG KUHL, et al., 16 Defendants. 17 Re: Dkt. No. 6 Pending before the Court are two motions by two sets of defendants to withdraw the 18 19 automatic reference to the United States Bankruptcy Court. See Case No. 18-1351, Dkt. No. 7-1; 20 Case No. 18-1545, Dkt. No. 6. For the reasons set forth below, the Court DENIES the motions. 21 I. BACKGROUND Plaintiff Marlene G. Weinstein is the Chapter 7 Trustee of the Independent Adoption 22 23 Center (“IAC” or “the Debtor”). See Dkt. No. 1-2 (Adversary Proceeding Complaint, or 24 “Compl.”).1 IAC filed a voluntary petition for Chapter 6 relief on February 3, 2017, and a 25 complaint in bankruptcy court on March 21. Id. at 1. 26 27 28 1 Docket references are to Case Number 18-1351 unless otherwise indicated. A. 1 Factual Allegations IAC was a nonprofit public benefit corporation, “formed and organized for the purpose of 2 3 providing adoption services to adopting parents.” Id. ¶¶ 18–19. Generally, IAC would charge 4 prospective adoptive parents an up-front fee in exchange for assistance throughout the adoption 5 process. Id. ¶¶ 32–33. In 2016, “a decline in the availability of birth mothers” and a decline in 6 new contracts with prospective adoptive parents led to a “financial crisis.” See id. ¶¶ 34–37. The 7 crisis resulted in IAC having obligations to “hundreds of adopting parents who had already paid 8 for adoption services,” but had not yet been placed with a child. Id. ¶ 39. IAC, however, 9 “continued to seek and accept upfront fees from” prospective adoptive parents, id. ¶ 41, even though Defendants “knew or should have known that the Debtor could not perform its outstanding 11 United States District Court Northern District of California 10 obligations,” id. ¶ 42. As of January 31, 2017, there were still hundreds of adoptive parents 12 awaiting placement. Id. ¶ 44. 13 B. 14 On March 21, 2017, Plaintiff initiated an Adversary Proceeding in bankruptcy court on Bankruptcy Court Proceedings 15 behalf of IAC against three groups of Defendants: the “Director Defendants” (i.e., Gregory S. 16 Kuhl, Susan Sparling, Alex Kaplan, Nancy Worrell, Dan Ward, William Kinnane, and Christine 17 Zwerling, all of whom were members of the Board of Directors on the day the IAC filed for 18 Chapter 7 relief), the “Officer Defendant” (i.e., Marcia Hodges, who served as interim executive 19 director of the IAC on the day it filed for Chapter 7 relief), and “Navigators” (i.e., Navigators 20 Insurance Company, who issued a Directors & Officers Liability insurance policy during the 21 relevant period). Id. ¶¶ 6–16.2 Plaintiff asserted claims based on breach of fiduciary duty and 22 negligence against the Director and Officer Defendants and Navigators and requested declaratory 23 relief against the Director Defendants and Navigators. See id. ¶¶ 56–87. After Plaintiff filed the Complaint, Navigators appointed counsel to represent the 24 25 Defendants. Dkt. No. 7-1 (Officer Defendant’s Motion to Withdraw Reference, or “Officer’s 26 Mot.”) at 4. On May 30, Defendants answered the complaint, denying liability and the bankruptcy 27 28 2 For purposes of this Order, Director Defendants and Officer Defendants (but not Navigators) will be collectively referred to as “Defendants.” 2 1 court’s jurisdiction and demanding a jury trial. Id. The bankruptcy court stayed the action with 2 respect to Navigators on July 1, 2017. Id. at 5. 3 In July or August 2017, another insurer—Landmark American Insurance Company 4 (“Landmark”)—agreed to fund the defenses of Defendants, out of a Directors and Officers 5 Liability Policy. Id. In August 2017, Navigators withdrew its defense of Director Defendants and 6 Officer Defendant, leaving them without counsel. Id. While this was happening, Plaintiff 7 continued litigating the case, sending a First Amended Initial Disclosure on July 28, and serving 8 Requests for Production after the Scheduling Conference on August 1. Id. On September 15, 2017, Landmark moved for an order authorizing it to pay for 10 Defendants’ defense costs out of the liability policy—or, in the alternative, for relief from the 11 United States District Court Northern District of California 9 automatic stay to pay defense costs. Id. Landmark represented it was bringing the motion in an 12 abundance of caution, due to the possibility that the liability policy was an asset of IAC’s 13 bankruptcy estate. Id. Plaintiff opposed the motion, which the bankruptcy court denied without 14 prejudice. Id. Plaintiff continued serving requests for documents and admissions during this time. 15 See id. at 6. Landmark renewed its motion to lift the bankruptcy stay and retain counsel for 16 Defendants using its liability policy in December 2017. Id. Plaintiff again opposed the motion 17 while continuing to serve document requests. Id. 18 On January 16, 2018, Plaintiff filed a First Amended Complaint (“FAC”). Id. On January 19 24, 2018, the court allowed Landmark to put $100,000 from the liability policy toward 20 Defendants’ defense, subject to further advances upon request. Id. 21 On January 25, 2018, a substitution of counsel was filed with respect to Officer Defendant. 22 Id. On February 5, 2018, a notice of appearance as new counsel was filed with respect to Director 23 Defendants. Id.; No. 18-1545, Dkt. No. 6 (Director Defendants’ Motion to Withdraw or 24 “Directors’ Mot.”) at 3. New counsel for Officer Defendant subsequently met and conferred with 25 Plaintiff’s counsel and produced several thousand documents in discovery. Officer’s Mot. at 7. 26 Officer Defendant answered the FAC on February 15, id. at 7, and Director Defendants answered 27 the FAC on February 23, Directors’ Mot. at 3. 28 3 C. 1 Motions to Withdraw Reference Officer Defendant filed a motion to withdraw the reference on March 28, 2018. See 2 3 Officer’s Mot. Director Defendants filed a separate motion to withdraw the reference that same 4 day. See Directors’ Mot. Plaintiff filed a single opposition to both motions on May 29, 2018. See 5 18-1351, Dkt. No. 15 (“Opp.”); 18-1545, Dkt. No. 10. Officer Defendant filed an amended reply 6 on June 20, 2018, Dkt. No. 17 (“Officer’s Reply”), and Director Defendants replied on June 12, 7 2018, No. 18-1545, Dkt. No. 11 (“Directors’ Reply”). 8 II. LEGAL STANDARD District courts have “original but not exclusive jurisdiction” over all bankruptcy 10 proceedings. See 28 U.S.C. § 1334(b). Such proceedings fall into one of two categories: “core 11 United States District Court Northern District of California 9 proceedings, in which the bankruptcy court may enter appropriate orders and judgment,” and 12 “non-core proceedings, which the bankruptcy court may hear but for which it may only submit 13 proposed findings of fact and conclusions of law to the district court for de novo review.” Sec. 14 Farms v. Int’l Brotherhood of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 15 1008 (9th Cir. 1997) (quoting 28 U.S.C. § 157) (internal quotation marks omitted). In the Northern District of California, all bankruptcy cases are automatically referred to 16 17 bankruptcy court. See 28 U.S.C. § 157(a) (permitting district courts to refer bankruptcy cases to 18 the district’s bankruptcy court); B.L.R. 5011-1(a) (referring all bankruptcy cases in the Northern 19 District of California to its bankruptcy court). The district court, however, “may withdraw, in 20 whole or in part, any case or proceeding referred under this section, on its own motion or on 21 timely motion of any party, for cause shown.” 28 U.S.C. 157(d)3; see also B.L.R. 5011-2. To 22 determine whether a motion to withdraw the reference is timely, courts consider whether it “was 23 made as promptly as possible in light of the developments in the bankruptcy proceeding.” Sec. 24 Farms, 124 F.3d at 1007 n.3 (quoting In re Baldwin-United Corp., 57 B.R. 751, 754 (S.D. Ohio 25 1985)). And, in considering whether a party has shown cause to withdraw the reference, “a 26 27 28 3 This provision governs permissive withdrawal of the reference. See Sec. Farms, 124 F.3d at 1088. Mandatory withdrawal of the reference is also governed by Section 157(d), but the Defendants concede that withdrawal here is not mandatory. See Officer’s Mot. at 8; Directors’ Mot. at 3. 4 1 district court should consider the efficient use of judicial resources, delay and costs to the parties, 2 uniformity of bankruptcy administration, the prevention of forum shopping, and other related 3 factors.” Sec. Farms, 124 F.3d at 1008 (citing In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d 4 Cir. 1993)). 5 Finally, “[t]he party seeking withdrawal of the reference bears the burden of showing that 6 the reference should be withdrawn.” In re Heller Ehrman LLP, 464 B.R. 348, 351–52 (N.D. Cal. 7 2011) (citing In re Larry’s Apartment, LLC, 210 B.R. 469, 472 (Bankr. D. Ariz. 1997)). 8 III. 9 10 DISCUSSION A. Defendants’ Motions to Withdraw Are Not Timely “A motion to withdraw is timely if it was made as promptly as possible in light of the United States District Court Northern District of California 11 developments in the bankruptcy proceeding.” Sec. Farms, 124 F.3d at 1007 n. 3. In essence, this 12 means the “first reasonable opportunity as evaluated within the specific factual context presented.” 13 Hupp v. Educ. Credit Mgmt. Corp., No. 07CV1232WQH(NLS), 2007 WL 2703151, at *2 (S.D. 14 Cal. Sept. 13, 2007) (internal quotation omitted). A motion may be untimely “when a significant 15 amount of time has passed since the moving party had notice of the grounds for withdrawing the 16 reference or where withdrawal would have an adverse effect on judicial economy.” In re Grace 17 Miles, No. C 10-0940 SBA, 2010 WL 3719174, at *2 (N.D. Cal. Sept. 17, 2010) (quoting Hupp, 18 2007 WL 2703151, at *3). 19 Defendants moved to withdraw on March 28, 2018, just over a year after the Complaint 20 was filed. Officer Defendant attributes that delay to the dispute over the funding of her defense, 21 asserting that she “lacked meaningful representation until January 24, 2018,” when her new 22 counsel appeared in the case after the court authorized Landmark to fund her defense. See 23 Officer’s Mot. at 16–17. Director Defendants contend that they “were not represented in the 24 [underlying] adversarial proceeding—despite efforts from Landmark—between the time they filed 25 an answer (or possibly before then) and February 5, 2018,” when they obtained counsel. See 26 Directors’ Mot. at 7. Somewhat inconsistently, Officer Defendant claims that she was not 27 “actively defended” after August 2017, Officer’s Mot. at 1, and Director Defendants represent that 28 their “insurance coverage” was “in a state of flux since early summer 2017,” Directors’ Mot. at 7. 5 Even taking at face value Defendants’ assertions that they were left without representation 1 beginning at some point during the summer of 2017, they have failed to carry their burden to 3 prove that their motion is timely. Defendants answered the Complaint—with assistance of 4 counsel—on May 30, 2017. See 18-1545, Dkt. No. 1-3 at 1–4, 7 (ECF pagination). Defendants 5 have not demonstrated why the first reasonable opportunity to move to withdraw was not at the 6 same time they filed their answer or shortly thereafter, when they had counsel. Moreover, 7 Defendants’ motions do not rely upon any new allegations or developments in the action that 8 would give rise to a new reason to withdraw the reference. All that seems to have changed is that 9 they have new counsel, who chose to pursue a new strategy. And at this juncture, when the 10 bankruptcy court has been presiding over the case for over a year, withdrawing the reference 11 United States District Court Northern District of California 2 would likely have an adverse effect on judicial economy. See In re Grace Miles, 2010 WL 12 3719174, at *2. 13 Defendants’ motions to withdraw are untimely and thus must be denied. 14 B. 15 Moreover, even if the Court found the motions to be timely, it would deny them on the Judicial Efficiency is Best Served by Denying the Motions to Withdraw 16 independent ground that withdrawing the reference at this stage would be inefficient. Deciding 17 whether to grant a motion for permissive withdrawal requires a district court to “consider the 18 efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy 19 administration, the prevention of forum shopping, and other related factors.” Sec. Farms, 124 20 F.3d at 1008. The court “should first evaluate whether the claim is core or non-core, since it is 21 upon this issue that questions of efficiency and uniformity will turn.” Hjelmeset v. Cheng Hung, 22 No. 17-CV-05697-BLF, 2018 WL 558917, at *3 (N.D. Cal. Jan. 25, 2018) (quoting In re Orion 23 Pictures Corp., 4 F.3d 1095, 1101 (2d Cir. 1993)). “The determination of whether claims are core 24 or non-core is not dispositive of a motion to withdraw a reference, but characterization of the 25 claims as core or non-core is useful before considering the other factors.” Hjelmeset, 2018 WL 26 558917, at *3 (quoting Hawaiian Airlines, Inc. v. Mesa Air Grp., Inc., 355 B.R. 214, 223 (D. Haw. 27 2006)). 28 To begin, all of Plaintiff’s claims are non-core. “[A]n action is non-core when there is not 6 1 a cause of action created by title 11 or one that only arises in title 11 cases, even if the action will 2 affect the administration of the estate.” Everett v. Art Brand Studios, LLC, 556 B.R. 437, 443 3 (N.D. Cal. 2016) (quoting In re Eastport Assocs., 935 F.2d 1071, 1077 (9th Cir. 1991)) (internal 4 quotation marks omitted). Plaintiff’s negligence and breach of fiduciary duty claims are state law 5 causes of action that are neither created by federal bankruptcy law nor arise solely in federal 6 bankruptcy cases. Plaintiff’s claim for declaratory judgment seeks the Court’s interpretation of 7 Navigators’ insurance policy and is likewise a non-core claim. See In re Temecula Bancorp, 523 8 B.R. 210, 223 (C.D. Cal. 2014) (claim for declaratory relief “arising from a pre-petition contract is 9 a non-core proceeding even if the debtor is a party to the contract at issue”) (internal citation 10 United States District Court Northern District of California 11 omitted). However, even considering the non-core nature of Plaintiff’s claims, judicial efficiency is 12 best served by denying withdrawal of the reference here. Defendants argue that withdrawal is 13 more efficient because the bankruptcy court will not be able to conduct the jury trial they have 14 demanded and because de novo review of the bankruptcy court’s orders by this Court will increase 15 their costs. Officer’s Mot. at 11–13; Directors’ Mot. at 6. But “bankruptcy courts are not divested 16 of pre-trial jurisdiction over matters which they ultimately may be unable to decide.” In re Cedar 17 Funding, Inc., 419 B.R. 807, 819 (B.A.P. 9th Cir. 2009) (citing In re Healthcentral.com, 504 F.3d 18 775, 787 (9th Cir. 2007)). In contrast, “requiring that an action be immediately transferred to 19 district court simply because of a jury trial right would run counter to our bankruptcy system.” In 20 re Healthcentral.com, 504 F.3d at 787. And it is the bankruptcy court that must decide in the first 21 instance whether Defendants have a right to a jury trial. See Hjelmest, 2018 WL 558917, at *3; 22 Bankruptcy L.R. 9015-2(a). Finally, it is more efficient for the bankruptcy court—which is 23 already familiar with the law and facts—to continue adjudicating the case, rather than this Court 24 essentially starting from scratch. See Hjelmeset, 2018 WL 558917, at *4 (denying motion to 25 withdraw because it “would result in this court losing the benefit of the bankruptcy court’s 26 experience in both the law and facts, resulting in an inefficient allocation of judicial resources”). 27 28 The remaining Security Farms factors do not weigh in favor of withdrawing the reference. As discussed above, it will ultimately be more efficient for the judiciary—and for the parties—to 7 1 continue to litigate this case in the bankruptcy court. There is no concern about forum shopping or 2 the uniformity of bankruptcy administration, because all the claims are non-core and thus “this 3 Court would have to conduct de novo review to the extent that the losing party had any 4 objections.” Everett v. Art Brand Studios, LLC, 556 B.R. 437, 445–46 (N.D. Cal. 2016). 5 Defendants have not satisfied their burden of demonstrating cause for permissive 6 withdrawal and therefore the Court declines to exercise its discretion to withdraw the reference. 7 IV. 8 9 10 United States District Court Northern District of California 11 CONCLUSION For the foregoing reasons, the Court DENIES Defendants’ motions for withdrawal of the reference. IT IS SO ORDERED. Dated: 10/9/2018 12 13 HAYWOOD S. GILLIAM, JR. United States District Judge 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8

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