JustMed Inc v. Byce

Filing 5

MEMORANDUM DECISION AND ORDER denying 1 Motion to Withdraw Reference. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by cjm)(Emailed to TLM, sh, and ar at the Bankruptcy Court.)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
In re
MICHAEL LEONARD BYCE and
ELIZABETH LEA BYCE,

Case No. 1:11-cv-00378-BLW
MEMORANDUM DECISION AND
ORDER

Debtors
JUSTMED, INC.
Plaintiff,
v.
MICHAEL LEONARD BYCE,
Defendant.

INTRODUCTION
Before the Court is JustMed, Inc.’s motion to withdraw this adversary proceeding
from the bankruptcy court. The Court has determined oral argument would not
significantly assist the decisional process and will therefore consider the motion without a
hearing. For the reasons expressed below, the Court will deny the motion.
BACKGROUND
Michael and Elizabeth Byce filed a chapter 7 bankruptcy petition in September
2010. JustMed filed a proof of claim against the bankruptcy estate based on an existing
judgment against Mr. Byce.
MEMORANDUM DECISION AND ORDER - 1

The facts underlying JustMed’s judgment relate to computer source code Mr. Byce
helped develop for JustMed. Mr. Byce removed the source code from JustMed’s
computers, which prompted JustMed’s suit for various torts, including misappropriation
of trade secrets, conversion, and breach of fiduciary duty. A central dispute in the lawsuit
was who owned the source code.
JustMed prevailed at trial and the district court awarded roughly $48,000 in
damages, which included a $5,000 punitive award. See JustMed, Inc. v. Byce, Case No.
1:05-cv-333-MHW (D. Idaho Jan. 1, 2008) (Amended Judgment, Dkt. 118), reversed in
part, 600 F.3d 1118 (9th Cir. 2010). On appeal, the Ninth Circuit upheld the district
court’s finding that JustMed owned the source code. 600 F. 3d at 1128. It disagreed on
the trade secrets issue, however, concluding that nothing in Byce’s conduct took the
action beyond the realm of a simple conversion. Id. at 1131. The court remanded the
matter to the district court with instructions to determine whether JustMed could recover
damages on the conversion or breach of fiduciary duty claims, and whether an injunction
to prevent future misappropriation is warranted. Id. at 1131.
A few months after the Ninth Circuit issued its opinion, the Byces filed their
bankruptcy petition. As mentioned, JustMed filed a proof of claim based on its
judgment. JustMed also filed this adversary proceeding, seeking a determination that the
judgment debt is nondischargeable.
JustMed’s adversary complaint seems to presume that the bankruptcy court will
resolve the issues the Ninth Circuit remanded to the district court. The complaint
requests a $48,000 judgment “based upon conversion and breach of fiduciary duty.”
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JustMed now seeks to remove this adversary proceeding from the bankruptcy
court based on the Supreme Court’s recent decision in Stern v. Marshall, 131 S. Ct. 2594
(2011). JustMed contends that under Stern, the bankruptcy court has no constitutional
authority to finally decide the “non-core state law issues on remand from the Ninth
Circuit . . . .” Motion to Withdraw Reference, Dkt. 1, at 2.
Analysis
The Court will address JustMed’s interpretation of Stern after laying out the
relevant statutory framework.
1.

The Statutory Framework
District courts have original and exclusive jurisdiction of all bankruptcy cases. 28

U.S.C. § 1334(a). They also have original, but not exclusive, jurisdiction over
proceedings arising under Title 11, or arising in or related to, cases under Title 11. 28
U.S.C. § 1334(b). This Court has referred all bankruptcy cases to its bankruptcy court, as
allowed under 28 U.S.C. § 157. See D. Idaho Third Amended Gen. Order No. 38.
The bankruptcy court’s authority to enter a final order depends on whether the
proceeding at hand is “core.” 28 U.S.C. § 157(b). Bankruptcy courts may hear “core”
proceedings and enter final orders. Id. In non-core proceedings, the bankruptcy court
submits proposed findings of fact and conclusions of law to the district court for review
and issuance of final judgment. 28 U.S.C. § 157(c)(1). Regardless of whether a
proceeding is “core” or “non-core,” the district court may withdraw the reference to the
bankruptcy court at any time under 28 U.S.C. § 157(d).

MEMORANDUM DECISION AND ORDER - 3

2.

Mandatory Withdrawal
JustMed’s primary argument is that under Stern v. Marshall, 131 S. Ct. 2594

(2011), the bankruptcy court lacks the constitutional authority to decide the state law
issues present in this adversary proceeding. The Court rejects this overly broad
interpretation of Stern.
In Stern, Pierce Marshall filed a defamation complaint and proof of claim in
Vickie Marshall’s bankruptcy proceeding. Id. at 2601. Publicly known as Anna Nicole
Smith, Vickie married Pierce’s father, J. Howard Marshall, who died about a year later
and did not include Vickie in his will. Id. In his defamation complaint, Pierce contended
Vickie had falsely accused him of manipulating his father’s estate to prevent her from
receiving an inheritance. Id. Vickie responded with a counterclaim for tortious
interference with the inheritance she expected from J. Howard. Id. The bankruptcy court
determined that Vickie’s counterclaim was a “core” proceeding and entered a final
judgment in the case. Id.
The Supreme Court held that although Congress has expressly defined creditors’
counterclaims against the bankruptcy estate as “core,”1 the bankruptcy court nonetheless
lacked constitutional authority to enter final judgment on state law counterclaims such as
Vickie’s. Id. at 2618. By Justice Scalia’s count, the Court offered “at least seven
different reasons” for its holding, prompting him to observe that “[t]he sheer surfeit of
factors that the Court was required to consider in this case should arouse suspicion that
1

Congress defines core proceedings to include 16 different types of matters, including
“counterclaims by the estate against persons filing claims against the estate.” 11 U.S.C.
§157(b)(2)(C).
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something is seriously amiss with our jurisprudence in this area.” Id. at 2621 (Scalia, J.,
concurring). The basic thrust of the Court’s opinion, however, is that Article III courts
must determine a debtor’s state-law counterclaim if that counterclaim will not be finally
resolved in the process of allowing or disallowing the creditor’s proof of claim. Id. at
2611.
Stern repeatedly emphasized that its holding was a narrow one that “does not
change all that much . . . .” Id. at 2620. Indeed, Stern ultimately holds that Congress, in
just “one isolated respect” exceeded the constitutional requirement that federal judicial
power be vested in Article III courts. Id.
Stern’s narrow holding is easily distinguishable from facts presented here. First –
and most obviously – JustMed is not asserting a counterclaim against a creditor. JustMed
is itself a creditor and it has filed a proof of claim in these proceedings. JustMed’s claims
against the debtor – breach of fiduciary duty and conversion – are based on state law.
But when JustMed filed a proof of claim, it triggered the process of “‘allowance and
disallowance of claims,’” thereby subjecting itself to the bankruptcy court’s equitable
power.” Langenkamp v. Culp, 498 U.S. 42, 43 (1990) (per curiam) (citations omitted).
The bankruptcy court thus has the constitutional authority to finally determine JustMed’s
claim – including state-law issues that arise within that claim. Stern did not hold that the
bankruptcy court may not rule on state law issues when determining a proof of claim.
Accord In re Salander O’Reilly Galleries, 435 B.R.106, 117 (Bankr. S.D.N.Y. 2011).
Moreover, JustMed’s request for a withdrawal is contrary to two earlier Supreme
Court decisions – Katchen v. Landy, 382 U.S. 323 (1966) and Langenkamp v. Culp, 498
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U.S. 42, 43 (1990) (per curiam).
In Katchen, the Court permitted a bankruptcy referee acting under the Bankruptcy
Acts of 1898 and 19382 to adjudicate the trustee’s voidable preference action against a
creditor who had filed a proof of claim. Although the creditor argued that the preference
issue should be resolved through a “plenary suit” in an Article III court, Katchen held that
the referee could decide the matter because it was impossible for the referee to rule on the
creditor’s proof of claim without first resolving the voidable preference issue. 382 U.S.
at 329-330, 332-34. The Court observed that “he who invokes the aid of the bankruptcy
court by offering a proof of claim and demanding its allowance must abide the
consequences of that procedure.” Id. at 333 n.9.
In Langenkamp, the Court reaffirmed Katchen, holding that a preferential transfer
claim can be heard in bankruptcy court “when the allegedly favored creditor has filed a
claim because then ‘the ensuing preference action by the trustee become[s] integral to the
restructuring of the debtor-creditor relationship.” Stern, 131 S. Ct. at 2617 (quoting
Langenkamp, 498 U.S. at 44).
Stern did not call these earlier cases into doubt, nor did it otherwise question the
bankruptcy court’s quintessential power to finally decide claims against the bankruptcy
estate. See generally 9 Am. Jur. 2d Bankruptcy § 778 (“The resolution and ranking of
claims is at the core of the bankruptcy process.”); In re Bigler, 458 B.R. 345, 370 n.24
(Bankr. S.D. Tex. 2011) (“In simpler terms, if a bankruptcy court can enter a final

2

The bankruptcy referee under these earlier acts is “akin to a bankruptcy court today.”
Stern, 131 S. Ct. at 2616.
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judgment on anything, it would be a final order resolving a dispute as to who gets a slice
of the pie and how big that slice is.”). In fact, Stern implicitly reaffirmed that power by
repeatedly emphasizing it was concerned with state law counterclaims that are not
necessarily resolved in the claims allowance process. See, e.g., 131 S. Ct. at 2611
(“Vickie’s claim is a state law action independent of the federal bankruptcy law and not
necessarily resolvable by a ruling on the creditor’s proof of claim in bankruptcy.”); see
also 28 U.S.C. § 152(b)(2)(B) (defining “allowance or disallowance of claims against the
estate” as core).
This action further contrasts with Stern because JustMed’s adversary proceeding is
brought directly under the Bankruptcy Code to determine the dischargeability of a debt,
rather than being independent of bankruptcy law. Actions to determine the
dischargeability of a debt are included in the 16 separately listed items Congress defines
as core. See 28 U.S.C. § 157(b)(2)(I).
Granted, creditors’ “counterclaims” against the bankruptcy estate are included in
that same list, 28 U.S.C. § 157(b)(2)(C), and Stern nonetheless held that the bankruptcy
courts could not finally decide the counterclaim at issue there. But the concerns that led
to the decision in Stern are absent here. Most fundamentally, generic state-law
counterclaims such as Vickie Marshall’s are not created by bankruptcy law, while a
nondischargeability action is. Again, it was not the mere presence of state law issues that
drove the Stern decision; it was that the state-law claim had no other connection to the
bankruptcy matter and would not be resolved in the claims allowance process. Here, the
bankruptcy court will necessarily decide the amount of the alleged debt in determining
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whether that debt is nondischargeable, as JustMed alleges. See In re Boricich, __ B.R.
__, 2011 WL 5579062, at *1 (Bankr. N.D. Ill. Nov. 15, 2011) (bankruptcy court may
properly reference state law in determining the amount of a debt asserted to be
nondischargeable). And, even more compelling, the bankruptcy court must resolve these
same state law issues in deciding JustMed’s proof of claim.
Mandatory withdrawal is thus not required under Stern. The bankruptcy court has
the statutory and constitutional power to finally decide this core matter.3 This Court will
therefore deny JustMed’s motion to withdraw the reference.
The Court will address permissive withdrawal in Paragraph 3 below. Before
doing so, however, the Court will provide some direction as to how it believes
bankruptcy courts should proceed when facing a matter enumerated as a “core” in 28
U.S.C. § 157(b)(2), but which must be finally decided by an Article III court. In other
words, what should a bankruptcy court do when faced with a bona fide Stern issue?4
If the bankruptcy court determines it is faced with an “unconstitutional core”
3

This Court recognizes that the bankruptcy court is charged with determining whether
any particular matter is core or non-core. See 28 U.S.C. § 157(b)(3) (“The bankruptcy judge
shall determine . . . whether a proceeding is a core proceeding . . . .”). Nonetheless, the district
court must determine whether to withdraw the reference, Fed. R. Bankr. P. 5011(a), and the
withdrawal motion raises the issue of whether this adversary proceeding is core or non-core. As
noted, this Court believes JustMed’s adversary proceeding is a core matter. That said, the Court
does not mean to preempt the bankruptcy court’s authority to make that determination in the first
place, or to limit its analysis of the issue. If the bankruptcy court believes this to be a non-core
matter, it may proceed accordingly, by entering proposed findings and recommendations, as set
out in 28 U.S.C. § 157(c)(1).
4

To be clear, the Court sees no such issue here for the reasons already discussed. The
remaining paragraphs of this section are dicta, and should be recognized as such. Of course, the
Court generally does not issue advisory opinions. It does so here only because Stern created
such an uproar by not directly answering this question, and because the question will inevitably
arise in bankruptcy cases in this district.
MEMORANDUM DECISION AND ORDER - 8

matter, the question is how would Congress intend for the bankruptcy court to handle the
matter in light of Stern. The two possibilities are that “unconstitutional core” matters
default to the procedure used for non-core matters, (i.e., proposed findings and
recommendations under 28 U.S.C. § 157(c)) or, alternatively, that such matters should be
entirely removed from the bankruptcy courts. See In re Mortgage Stores, Inc., 2011 WL
5056990, at *5 (discussing these two possibilities). A majority of district courts
considering the issue hold that the bankruptcy courts retain the power to enter proposed
findings and recommendations. See McCarthy v. Wells Fargo Bank (In re El-Atari),
2011 WL 5828013, at *4 (E.D. Va. Nov. 18, 2011) (citing cases); Field v. Lindell (In re
Mortgage Store, Inc.), 2011 WL 5056990, at *5; (D. Haw. Oct. 5, 2011); Kelley v.
JPMorgan Chase & Co., 2011 WL 4403289, at *6 (D. Minn. Sept. 21, 2011); Paloian v.
American Express Co. (In re Canopy Fin., Inc.), 2011 WL 3911082, at *2, 4 (N.D. Ill.
Sept. 1, 2011); see also Gugino v. Canyon County (In re Bujak), 2011 WL 5326038, at *4
(Bankr. D. Idaho Nov. 3, 2011). But see Samson v. Blixseth (In re Blixseth), 2011 WL
3274042, at *11-12 (Bankr. D. Mont. Aug. 1, 2011) (concluding that the bankruptcy
court had no authority to hear fraudulent conveyance action as a non-core proceeding).
This Court agrees with the majority view for several reasons. First, in enacting §
157(b), Congress intended to expand bankruptcy courts’ powers to their constitutional
limit. As the Ninth Circuit observed in In re Mankin, 823 F.2d 1296, 1301 (9th Cir.
1987), “Nothing in the legislative history of § 157(b) suggests that Congress enumerated
examples of core proceedings in § 157(b)(2) with anything but a view toward expanding
the bankruptcy court’s jurisdiction to its constitutional limit.” More generally, in Celotex
MEMORANDUM DECISION AND ORDER - 9

v. Edwards, 514 U.S. 300, 308 (1995), the Supreme Court stated that “‘Congress
intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might
deal efficiently and expeditiously with all matters connected with the bankruptcy
estate, . . .’” (quoting Pacor Inc. v. Higgins, 743 F.2d 984, 994 (1984)).
Second, allowing the bankruptcy courts to hear (but not finally decide)
“unconstitutional core” matters is consistent with Stern. Stern described its holding as
limiting the bankruptcy court’s authority “to enter final judgments.” Stern, 131 S. Ct. at
2619. Additionally, the Court’s explanation as to why it believed its decision to be so
“narrow” is illuminating:
[T]he current bankruptcy system also requires the district court to review
de novo and enter final judgment on any matters that are “related to” the
bankruptcy proceedings, § 157(c)(1) . . . . Pierce has not argued that the
bankruptcy courts “are barred from ‘hearing’ all counterclaims” or
proposing findings of fact and conclusions of law on those matters, but
rather that it must be the district court that “finally decide[s]” them. We do
not think the removal of counterclaims . . . from core bankruptcy
jurisdiction meaningfully changes the division of labor in the current
statute; we agree with the United States that the question presented here is a
“narrow” one.
Id. at 2620 (internal citations omitted). Based on this passage, it appears that the
Supreme Court intended for unconstitutional core matters to default to the § 157(c)(1)
procedure, rather than to be wholly removed from the bankruptcy court. Consequently,
even assuming the bankruptcy court is faced with a Stern-type matter, the bankruptcy
court may enter proposed findings of fact and conclusions of law and submit them to this
Court for de novo review.

MEMORANDUM DECISION AND ORDER - 10

3.

Permissive Withdrawal
In opposing JustMed’s withdrawal motion, the debtors focused on the district

court’s traditional, discretionary authority to withdraw a reference from the bankruptcy
court under 28 U.S.C. § 157(d) (This Court “may withdraw, in whole or in part, any case
or proceeding referred under this section, . . . on timely motion of any party, for cause
shown.”). JustMed did not respond to these arguments, nor did it raise or discuss the
specific factors relevant to permissive withdrawal in its motion. Rather, JustMed’s
motion is based entirely on its “reluctant” conclusion that Stern mandates a withdrawal.
Mot., at 1-2 (“This motion is made reluctantly but necessarily because of a recent opinion
issued by the United States Supreme Court.”).
Under these circumstances, the Court will not engage in a point-by-point
discussion of whether permissive withdrawal is appropriate. Suffice it to say that the
Court finds no grounds for such a withdrawal. The Court will deny JustMed’s motion.
ORDER
JustMed’s Motion to Withdraw Reference to Bankruptcy Court for Adversary
Proceeding (Dkt. 1), is DENIED.

DATED: December 14, 2011

_________________________
B. Lynn Winmill
Chief Judge
United States District Court

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