In re: High Performance Real Estate, Inc.
Filing
9
ORDER denying 2 Defendants Motion to Withdraw the Reference; and This action is hereby REFERRED to the United States Bankruptcy Court for theDistrict of Colorado for all further proceedings, by Judge William J. Martinez on /25/2013.(ervsl, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 13-cv-0663-WJM-MJW
IN RE: HIGH PERFORMANCE REAL ESTATE, INC.,
DAVID E. LEWIS, Trustee,
Plaintiff,
v.
E. CLARK RILEY, and
JUDITH A. RILEY,
Defendants.
ORDER DENYING MOTION TO WITHDRAW THE REFERENCE
This matter is before the Court on a Motion to Withdraw the Reference of the
Adversary Proceeding (“Motion”) filed by Defendants E. Clark Riley and Judith A. Riley
(collectively “Defendants”). (ECF No. 2.) Defendants ask the Court to withdraw the
referral of this action to the United States Bankruptcy Court for the District of Colorado
(“Bankruptcy Court”), and move the action to this Court. For the following reasons,
Defendants’ Motion is DENIED.
I. BACKGROUND
On August 21, 2009, High Performance Real Estate, Inc., filed a voluntary
petition for Chapter 7 bankruptcy protection in the Bankruptcy Court. (Bankr. D. Colo.
Case No. 09-27266, Adv. Pro. No. 11-1577, ECF No. 1 (“Compl.”) ¶ 5.)1 Charles S.
1
The action was automatically referred to the Bankruptcy Court pursuant to
D.C.COLO.LCivR Rule 84.1.A.
Riley, Defendants’ son, was the president and sole shareholder of High Performance
Real Estate. (Id. ¶¶ 4, 6.) There is no indication that Defendants filed any proof of
claim in the bankruptcy case. (See id. ¶¶ 4-15.)
On August 20, 2011, David E. Lewis (“Trustee”), who had been appointed as
chapter 7 trustee in the bankruptcy case, filed a related adversary proceeding in the
Bankruptcy Court against Defendants. (Compl. ¶ 3.) The Complaint in the adversary
proceeding alleged that the entirety of the business operations of High Performance
Real Estate was a fraudulent scheme, and that Charles Riley used Defendants—his
parents—as knowing and willing participants in the fraud by regularly transferring
substantial sums of money to Defendants to obscure fraudulent real estate
transactions. (Id. ¶¶ 8-20.) The Trustee brought claims against Defendants for
fraudulent transfer under 11 U.S.C. §§ 548(a)(1)(B) and 544, and preference under 11
U.S.C. § 547, seeking to avoid the transfers made to Defendants. (Id. ¶¶ 16-25.)
On February 15, 2013, Defendants filed the instant Motion. (ECF No. 2.) The
Trustee filed an Objection on February 27, 2013. (ECF No. 4.) Defendants filed no
Reply. On March 12, 2013, the Bankruptcy Court referred the Motion to this Court
pursuant to D.C.COLO.LCivR Rule 84.1. (ECF No. 6.)
II. LEGAL STANDARD
Bankruptcy courts have statutory authority to enter final orders and judgments in
“core proceedings.” See 28 U.S.C. § 157(b)(1) (“[b]ankruptcy judges may hear and
determine all cases under title 11 and all core proceedings arising under title 11, or
arising in a case under title 11 . . . and may enter appropriate orders and judgments”);
2
Plotner v. AT&T Corp., 224 F.3d 1161, 1172 (10th Cir. 2000) (“bankruptcy courts have
plenary jurisdiction over ‘core’ bankruptcy proceedings”). A party filing a responsive
pleading in an adversary proceeding must “admit or deny an allegation that the
proceeding is core or non-core. If the response is that the proceeding is non-core, [the
responsive pleading] shall include a statement that the party does or does not consent
to entry of final orders or judgment by the bankruptcy judge.” Fed. R. Bankr. P.
7012(b). Although a court is not bound by the parties’ agreement that an action is a
core proceeding, Teton Exp. Drilling, Inc. v. Bokum Res. Corp., 818 F.2d 1521, 1524-25
(10th Cir. 1987), “an allegation that the proceeding is core serves as an express
consent for the bankruptcy court to treat that proceeding as core and enter a final order
in that proceeding.” In re C.W. Mining Co., 2009 WL 4906702, at *2 (D. Utah Dec. 11,
2009).
In a series of cases culminating in 2011, the Supreme Court confirmed that a
Bankruptcy Court’s final authority is restricted not only by statute, but also by
constitutional requirements that limit the jurisdiction of a non-Article III Court such as a
Bankruptcy Court to certain types of claims. See Stern v. Marshall, 131 S. Ct. 2594
(2011) (holding that the Bankruptcy Court did not have the constitutional authority to
enter a final judgment on a state law counterclaim that would not be resolved in the
process of ruling on a creditor’s proof of claim); Langenkamp v. Culp, 498 U.S. 42
(1990) (holding that where a creditor files a proof of claim against a bankruptcy estate,
that creditor is not entitled to a jury trial on a trustee’s preference claim against it);
Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) (holding that an entity that has
3
not filed a proof of claim against a bankruptcy estate has a right to a jury trial on a
trustee’s fraudulent transfer claim against it); Katchen v. Landy, 382 U.S. 232 (1966)
(holding that the Bankruptcy Court has jurisdiction over a trustee’s voidable preference
claim against a creditor only where a determination of the voidable preference issue
was necessary to determine whether to allow the creditor’s claim).
III. ANALYSIS
Defendants’ Motion, based upon Stern v. Marshall, argues that: (1) the
Bankruptcy Court does not have the constitutional authority to enter final orders and
judgment on Plaintiffs’ claims in the adversary proceeding; (2) Defendants do not
consent to the Bankruptcy Court’s authority to do so; and (3) the referral of this action to
the Bankruptcy Court should therefore be withdrawn and the action should be moved to
this Court. (ECF No. 2 at 1-3.) In response, the Trustee contends that Stern does not
invalidate the Bankruptcy Court’s authority to adjudicate preference and fraudulent
transfer claims, and in any event, Defendants expressly consented to the Bankruptcy
Court’s authority, and waived any objection to it by not timely filing their Motion. (ECF
No. 4 at 4-7.)
Regarding the parties’ constitutional arguments, there is no binding authority in
the Tenth Circuit applying Stern to preference and fraudulent transfer adversary
proceedings, and the other circuits’ interpretations of Stern in similar cases have not
been uniform. See, e.g., Technical Automation Servs. Corp. v. Liberty Surplus Ins.
Corp., 673 F.3d 399, 401 (5th Cir. 2012); Waldman v. Stone, 698 F.3d 910, 921 (6th
Cir. 2012); Pearson Educ., Inc. v. Almgren, 685 F.3d 691, 695 (8th Cir. 2012); In re
4
Bellingham Ins. Agency, Inc., 702 F.3d 553, 568-69 (9th Cir. 2012)2. Thus, just as this
Court ruled in Mercury Companies, Inc. v. FNF Security Acquisition, Inc., 460 B.R. 778
(D. Colo. 2011), “[t]here is some question in this case as to whether the Bankruptcy
Court would have had the authority, absent the parties’ consent, to enter orders and
judgment in the Adversary Proceeding.” Mercury, 460 B.R. at 780 (citing Stern, 131 S.
Ct. 2594; Langenkamp, 498 U.S. 42; Granfinanciera, 492 U.S. 33).
However, the Court need not decide the constitutional question here, because
just as in Mercury, both parties here have consented to the Bankruptcy Court’s authority
to enter orders and judgment. See Mercury, 460 B.R. at 781; see also In re Kingston,
2012 WL 632398, at *3 (Bankr. D. Idaho 2012) (“Even if the Court did not have
constitutional power to enter a final judgment as to any of the claims raised by the
parties in this adversary proceeding, the parties, in their submissions, have expressly
consented to the Court’s entry of such judgments.”).
First, Defendants admitted in their Answer to the Complaint that the Bankruptcy
Court had jurisdiction over the action and that the action was a core proceeding under
28 U.S.C. § 157. (See Bankr. D. Colo. Case No. 09-27266, Adv. Pro. No. 11-1577,
ECF No. 4 (“Answer”) ¶ 1 (admitting the jurisdictional allegations in ¶ 1 of the
Complaint).) The Trustee’s Complaint specifically alleged that the Bankruptcy Court
had jurisdiction over the adversary proceeding under 11 U.S.C. §§ 544, 574, and 548,
and 28 U.S.C. §§ 157 and 1334, and that the adversary proceeding was a core
2
Notably, on June 24, 2013, one day prior to the entry of the instant Order on
Defendants’ Motion, the Supreme Court granted certiorari in In re Bellingham, further
highlighting the instability of the law in this arena. 570 U.S. __, 2013 WL 3155257 (U.S. June
24, 2013).
5
proceeding under 28 U.S.C. §§ 157(b)(2)(F), (H), and (O). (Compl. ¶ 1.) In admitting
the jurisdictional allegations in their Answer to the Complaint, Defendants not only
agreed that the proceeding was core, but also expressly consented to the authority of
the Bankruptcy Court to enter orders and judgment in the proceeding. (Answer ¶ 1);
see also Citizens Concerned for Separation of Church & State v. City & County of
Denver, 628 F.2d 1289, 1293 (10th Cir. 1980) (where an answer fails to deny
jurisdictional allegations, the allegations are properly deemed admitted) (citing Fed. R.
Civ. P. 8(d)); In re Bellingham, 702 F.3d at 568-69 (noting that Fed. R. Bankr. P. 7008
and 7012 require a statement in both a complaint and responsive pleading as to
whether the matter is core, and if non-core, whether “the pleader does or does not
consent to entry of final orders or judgment by the bankruptcy judge,” and such
acquiescence to the bankruptcy judge’s authority is considered express consent
permitting authority over non-core matters).
Second, Defendants’ actions in this case demonstrate their consent to the
Bankruptcy Court’s authority. The record shows that after the Complaint was filed on
August 20, 2011, Defendants proceeded under the authority of the Bankruptcy Court
without complaint for 17 months, filed witness and exhibit lists for trial, and raised the
question of the Bankruptcy Court’s authority only at the pretrial conference—less than
four weeks before trial was scheduled to take place. (See ECF No. 4 at 2-3; Bankr. D.
Colo. Case No. 09-27266, Adv. Pro. No. 11-1577, ECF Nos. 17, 19.) The instant
Motion was not filed until February 15, 2013, the day trial was originally scheduled to
begin. (ECF No. 2.) This course of action is sufficient to support a finding that
Defendants waived their right to bring such a challenge. See Mercury, 460 B.R. at 782
6
(finding implied consent to Bankruptcy Court’s authority to enter final orders and
judgment where the defendants waited 19 months to challenge that authority, and
meanwhile filed witness and exhibit lists, expert disclosures, deposition notices,
dispositive motions, and a motion in limine).
In arguing that they did not consent to the Bankruptcy Court’s authority,
Defendants attempt to distinguish the course of action indicating consent in Stern,
contending that because in this case the issue was raised before trial, no depositions
were taken, and discovery was minimal, no consent had occurred. (ECF No. 4 at 4.)
Defendants also cite In re Bellingham, in which the Ninth Circuit found that the parties
had waived the argument challenging the Bankruptcy Court’s authority by failing to raise
it until the case reached the Court of Appeals, pointing out that the instant case is
distinguishable because trial has not yet occurred. (Id.)
The Court finds Defendants’ argument unconvincing. The allegedly limited
nature of the discovery sought in the instant case belies the advanced stage of the
litigation before the Bankruptcy Court, evidenced by the fact that Defendants raised this
issue for the first time at the final pretrial conference and filed the instant Motion on the
date trial was scheduled to begin. (See ECF Nos. 2, 4.) The ability of a defendant to
impliedly consent to the Bankruptcy Court’s authority through failure to challenge that
authority is well supported in case law. See, e.g., In re Millenium Seacarriers, Inc., 419
F.3d 83, 96 (2d Cir. 2005) (“lienors, by litigating their maritime liens before the
bankruptcy court, consented to the bankruptcy court’s equitable jurisdiction to
adjudicate and extinguish their liens”); In re Kaiser Steel Corp., 95 B.R. 782, 788
7
(Bankr. D. Colo. 1989) (“[C]onsent under [28 U.S.C. §] 157(c)(2) . . . may be implied
from a timely failure to object to the Bankruptcy Court’s jurisdiction; or it may be implied
from any act which indicates a willingness to have the Bankruptcy Court determine a
claim or interest.”).
Further, the Ninth Circuit made clear in Bellingham that it was evaluating the
litigants’ actions to determine implied consent to the Bankruptcy Court’s authority in a
context where no express consent was present. See In re Bellingham, 702 F.3d at 56869. The Bellingham Court compared such implied consent in a core proceeding with
the requirement in the Federal Rules of Bankruptcy Procedure that “only express
consent in the pleadings or otherwise is effective” to concede the Bankruptcy Court’s
authority in a non-core proceeding. Id. at 568 (citing Advisory Comm. Note to Fed. R.
Bankr. P. 7008). In contrast, this case not only involves a core proceeding, but it also
contains an indication of express consent.
Thus, even if Defendants’ actions in the instant case were insufficient to
establish implied consent on their own, Defendants’ express consent in their pleadings
to the Trustee’s jurisdictional allegations forecloses any successful argument that
Defendants never agreed to the Bankruptcy Court’s authority to enter a final order or
judgment. See Stern, 131 S. Ct. at 2606-08 (holding that “[i]f [the defendant] believed
that the Bankruptcy Court lacked the authority to decide his claim for defamation, then
he should have said so—and said so promptly.”); see also In re Wash. Coast I, L.L.C.,
485 B.R. 393, 407 (B.A.P. 9th Cir. 2012) (collecting cases and agreeing that “Stern
does not affect the parties’ ability to consent to the authority (constitutional or
8
otherwise) of the bankruptcy court to enter a final judgment in this adversary proceeding.”).
Accordingly, given Defendants’ express consent to the Bankruptcy Court’s
authority, as well as consent implied through their actions, the Court finds that
Defendants agreed to submit to the authority of the Bankruptcy Court in this case.
Therefore, the Court refuses to withdraw the reference at this late stage of that
proceeding.
IV. CONCLUSION
For the foregoing reasons, it is hereby ORDERED that:
1.
Defendants’ Motion to Withdraw the Reference (ECF No. 2) is DENIED; and
2.
This action is hereby REFERRED to the United States Bankruptcy Court for the
District of Colorado for all further proceedings.
Dated this 25th day of June, 2013.
BY THE COURT:
_______________________
William J. Martínez
United States District Judge
9
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?