Hillen v. City of Meridian et al

Filing 5

MEMORANDUM DECISION & ORDER Defendants' Motions to Withdraw the Reference (Dkts. 1 & 2 ) are granted in part, and denied, in part, as follows: The Motion is GRANTED to the extent defendants seek withdrawal when the bankruptcy court certifie s that this case is ready for trial. The Motion is DENIED to the extent defendants seek an immediate withdrawal. 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 (jp)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
Case No. 1:15-cv-457-BLW
In re:

MEMORANDUM DECISION AND
ORDER

CVAH, INC.,
Debtor.
NOAH G. HILLEN, solely in his capacity
as Chapter 7 Trustee of the bankruptcy
estate of the above-reference Debtor,
Plaintiff,
v.
CITY OF MERIDIAN, a political
subdivision of the State of Idaho; ADA
COUNTY HIGHWAY DISTRICT; and
DOES 1-5,
Defendants.

INTRODUCTION
Pending before the Court are the City of Meridian’s and Ada County Highway
District’s Motions to Withdraw the Reference (Dkts. 1 & 2). As explained further below,
the Court will grant the motions, but will delay withdrawing the reference until the
bankruptcy court certifies that this case is ready for trial.

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BACKGROUND
In May 2014, CVAH, Inc. filed a Chapter 7 bankruptcy petition. CVAH has
virtually no assets and its only creditors are state and federal taxing authorities.
Roughly one year after CVAH filed its petition, the Trustee initiated
approximately 40 separate adversary proceedings seeking to recover payments CVAH (or
its principal) had previously made to various entities. These payments, taken together,
total around $4 million. The Trustee alleges that these payments were constructively
fraudulent and thus seeks to recover the monies for CVAH’s bankruptcy estate.
In his complaint against the above-named defendants, the Trustee alleges four
claims. In his first claim for relief, the Trustee invokes the federal Fair Debt Collection
Practices Act (FDCPA) in his effort to recover the payments. In his second claim, the
Trustee invokes Idaho’s fraudulent transfer statutes. In a third claim for relief, alleged
against some defendants, the Trustee invokes 11 U.S.C. § 548. The fourth claim is for
“costs, attorney fees, and other relief.”
In August 2015, the bankruptcy court ordered the adversary defendants to either:
(1) consent to entry of judgment by the bankruptcy court; or (2) move to withdraw the
reference. As of this date, a handful of the adversary defendants, including the
defendants here, responded with a motion to withdraw the reference.
ANALYSIS
Federal district courts have original jurisdiction over cases arising under the
Bankruptcy Code. 28 U.S.C. § 1334(a). This Court has exercised its authority under 28
U.S.C. § 157(a) to refer all bankruptcy matters to the district’s bankruptcy judges. See
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Apr. 24, 1995 Third Amended General Order. Nevertheless, under 28 U.S.C. § 157(d),
this reference is subject to mandatory or permissive withdrawal, depending on the
circumstances. See 28 U.S.C. § 157(d). Section 157(d) reads as follows:
The district court may withdraw, in whole or in part, any case or
proceeding referred under this section, on its own motion or on timely
motion of any party, for cause shown. The district court shall, on timely
motion of a party, so 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.
Most of the defendants seeking withdrawal contend that both mandatory and permissive
withdrawal apply.
1.

Mandatory Withdrawal
As the statute specifies, withdrawal is mandatory in cases requiring material

consideration “of both title 11 and other laws of the United States regulating
organizations or activities affecting interstate commerce.” Id.
Preliminarily, the Court is not convinced that withdrawal is mandatory if a
bankruptcy court must consider state law along with bankruptcy law to resolve a claim.
The plain language of the statute refers to federal laws – not state laws. See id. (referring
to “other laws of the United States”) (emphasis added). So the key question is whether
the Trustee is asking the bankruptcy court to consider federal, non-bankruptcy law.
He is. In his first claim for relief, the Trustee invokes the FDCPA. The FDCPA is
indisputably a non-title 11, federal law that affects interstate commerce. See 15 U.S.C.
§ 1692a(6). So if the statutory language were strictly interpreted, this Court must
withdraw the FDCPA claim without further analysis.

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But the Court concludes that a more searching inquiry is necessary. The problem
with strictly interpreting the statute is that withdrawing disputes requiring even the most
basic consideration of non-bankruptcy law “would force district courts to withdraw
matters in which [Bankruptcy] Code questions overwhelmingly predominate and
consideration of non-Code statutes would be de minimus.” In re White Motor Corp., 42
B.R. 693, 703 (N.D. Ohio 1984). The alternative, more favored, interpretation requires
that the consideration of non-bankruptcy law be “substantial and material” before
withdrawal is mandatory. See, e.g., Holmes v. Grubman, 315 F. Supp. 2d 1376, 1379
(M.D. Ga. 2004). According to this view, “the ‘resolution of non-bankruptcy law must be
essential to the dispute.’” Id. (citation omitted). The Ninth Circuit has not indicated
which standard courts should apply, but has approved the “substantial and material”
standard in dicta. Sec. Farms v. Int’l Brotherhood of Teamsters, 124 F.3d 999, 1008 n.4
(9th Cir. 1997). This Court will therefore adopt that standard in examining the FDCPA
claim at issue here. Accord Hawaiian Airlines, Inc. v. Mesa Air Grp., Inc., 355 B.R. 214,
222 (D. Haw. 2006).
In his FDCPA claim, the Trustee seeks to avoid transfers made to defendants using
his strong-arm powers, found in 11 U.S.C. § 544(b)(1), along with 28 U.S.C. § 3304 of
the FDCPA. Under § 544(b)(1), a trustee may avoid “any transfer ... or any obligation
incurred by the debtor that is voidable under applicable law” by a creditor holding an
unsecured claim that is allowable under 11 U.S.C. § 502. See 11 U.S.C. § 544(b)(1)
(emphasis added). The Trustee relies on the FDCPA as “applicable law” in his effort to
take advantage of the FDCPA’s six-year reach-back period to set aside payments made to
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defendants. See 28 U.S.C. § 3306(b). (Idaho’s fraudulent transfer laws have a four-year
reach-back period. See Idaho Code § 55-918 (1) and (2)).
Several adversary defendants dispute the use of the FDCPA as “applicable law”
within the meaning of Section 544(b). To resolve the Trustee’s claims, the reviewing
court must therefore determine whether the trustee can step into the shoes of a federal
creditor and use the FDCPA as “applicable law” under § 544(b)(1). The Ninth Circuit
has not confronted this issue, and there is a split of authority among the courts that have
decided the issue. See Gordon v. Harrison (In re Alpha Protective Servs., Inc.), 531 B.R.
889, 905 (Bankr. M.D. Ga. 2015) (discussing the split and citing cases).
Under these circumstances, the Court concludes that resolving the Trustee’s
FDCPA claim extends beyond applying well-settled, federal, non-bankruptcy law.
Therefore, the Court will withdraw the reference as to Count I of the Trustee’s complaint
in this action. But the Court will not withdraw the reference at this stage for at least three
reasons.
First, just because withdrawal is mandated does not mean the Court must
immediately withdraw the reference. Rather, the Court concludes that it may delay
withdrawing the reference until the bankruptcy court certifies that the case is trial-ready.
Accord Beck v. Ally Fin., Inc., Case No. 13-mc-16, 2013 WL 5676232, at *1 (S.D. Ala.
Oct. 18, 2013) (district court granted motion for withdrawal after determining mandatory
withdrawal applied, but nevertheless “delay[ed] the withdrawal until the Bankruptcy
Court certifies that the case is ready for trial”); cf. 1 Collier on Bankruptcy ¶ 3.04[2]
(16th ed. 2015) (observing that even when withdrawal is mandatory, district courts have
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permitted bankruptcy courts to conduct pretrial proceedings, citing PBGC v. Pan Am
Corp. (In re Pan Am Corp.), 133 B.R. 700, 701 (S.D.N.Y. 1991) (although withdrawal
was mandatory, the district court remanded the case to the bankruptcy court to submit
proposed findings of fact and conclusions of law)).
Second, the defendant has indicated that it is content to have the bankruptcy court
preside over pretrial proceedings. See Mtn. Mem., Dkt. 1-1, at 5 (requesting withdrawal
“at the appropriate time prior to trial”); Reply, Dkt. 3, at 5 (“The bankruptcy court can be
assigned or referred the pre-trial procedures, and this District Court can then convene the
jury for trial”).
Third, as detailed below, this Court is not persuaded that an immediate
withdrawal would best serve the parties or the courts. See infra ¶ 2.
In sum, this Court concludes that although it must eventually withdraw the
reference of the Trustee’s first claim for relief, it will not do so now.
2.

Permissive Withdrawal
The next question is whether the “cause” factors associated with permissive

withdrawal weigh in favor of an immediate withdrawal. Withdrawal is permissive in any
case or proceeding referred to a bankruptcy court upon the district court’s own motion, or
on a party’s timely motion for “cause shown.” 28 U.S.C. § 157(d). The statute does not
specify what is necessary to show “cause,” but courts have identified a variety of factors
that may be considered, including: (1) the efficient use of judicial resources; (2) delay
and costs to the parties; (3) uniformity of bankruptcy administration, (4) prevention of
forum shopping; and (5) other related factors. Sec. Farms, 124 F.3d at 1008. “Other
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related factors” might include whether the issues are core or non-core proceedings, as
well as the right to a jury trial. See Rosenberg v. Harvey A. Brookstein, 479 B.R. 584,
587 (D. Nev. 2012) (citation omitted).
A. Seventh Amendment Jury-Trial Right
The Court begins by observing that the fraudulent conveyance claims at issue in
this case are statutorily defined as “core” proceedings. See 28 U.S.C. § 157(b)(2)(H).
Congress has empowered bankruptcy courts to enter a final judgment on such claims.
See 28 U.S.C. § 157(b)(1). But in the wake of the Supreme Court’s landmark decision in
Stern v. Marshall, 131 S. Ct. 2594 (2011), the Ninth Circuit held that bankruptcy courts
lack the constitutional authority to enter final judgments on fraudulent conveyance
claims. See In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012), aff’d, 134
S. Ct. 2165 (2014) (“fraudulent conveyance claims . . . cannot be adjudicated by nonArticle III judges.”). The Trustee, for his part, has not meaningfully challenged
defendants’ assertions that they have a right to a jury trial in district court on the
fraudulent conveyance claims. Thus, if the fraudulent conveyance claims leveled against
the defendant proceeds to trial, an Article III judge will preside. See 28 U.S.C. § 157(e); 1
In re Dyer, 322 F.3d 1178, 1194 (9th Cir. 2003) (“[T]he bankruptcy court is unable to
preside over a jury trial absent explicit consent from the parties and the district court.”);

1

In full, 28 U.S.C. § 157(e) provides:
If the right to a jury trial applies in a proceeding that may be heard under this section
by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially
designated to exercise such jurisdiction by the district court and with the express
consent of all the parties.

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In re Cinematronics, Inc., 916 F.2d 1444, 1451 (9th Cir. 1990) (agreeing with “several
courts [that] have concluded that where a jury trial is required and the parties refuse to
consent to bankruptcy jurisdiction, withdrawal of the case to the district court is
appropriate”) (internal citations omitted)).
But this does not mean the Court must immediately withdraw the reference.
Rather, it is permissible for the bankruptcy court to handle all preliminary matters up to
the point of trial. See Sigma Micro Corp. v. Healthcentral.com (In re Healthcentral.com),
504 F.3d 775, 787 (9th Cir. 2007) (“a Seventh Amendment jury trial right does not mean
the bankruptcy court must instantly give up jurisdiction” and transfer the case to district
court). In fact, the Supreme Court recently clarified that so-called “Stern claims” – which
include the fraudulent transfer claims at issue here – may comfortably proceed under the
procedure set forth in 28 U.S.C. § 157(c)(1). See Executive Benefits Ins. Agency v.
Arkison, 134 S. Ct. 2165, 2174 (2014). Section 157(c)(1) provides as follows:
A bankruptcy judge may hear a proceeding that is not a core
proceeding but that is otherwise related to a case under title 11. In such
proceeding, the bankruptcy judge shall submit proposed findings of
fact and conclusions of law to the district court, and any final order or
judgment shall be entered by the district judge after considering the
bankruptcy judge’s proposed findings and conclusions and after
reviewing de novo those matters to which any party has timely and
specifically objected.
Thus, in this case, the bankruptcy court may “hear” the Trustee’s fraudulent
transfer claims, and submit proposed findings of fact and conclusions of law to the
district court. Id. Further, if either party files a dispositive motion, the bankruptcy court
may entertain that motion and submit proposed findings of fact, conclusions of law, and a

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recommended disposition of the claim to this Court. See Bellingham Ins. Agency, 702
F.3d at 565 (bankruptcy courts have the statutory power “to hear fraudulent conveyance
cases and to submit reports and recommendations to district courts”).
In light of this authority, the Court is not persuaded that defendants’ jury-trial right
requires a withdrawal at this stage. Rather, at this point in the proceedings, the Court’s
central concern is how it can best help the parties achieve a just, speedy, and inexpensive
resolution of their claims. Cf. Fed. R. Civ. P. 1. Many of the other “cause” factors
relevant to permissive withdrawal – including efficiency, cost, and delay – speak to this
concern.
B. Efficiency; Cost; Delay; Uniformity
This case is in its beginning stages, so it would seem that the case would move
along at the same speed in either district court or bankruptcy court. But that is not true
here because the bankruptcy court has expended significant time and effort over the past
18 months becoming familiar with the underlying bankruptcy proceeding. That
knowledge will almost surely enable the bankruptcy court to move this case along more
quickly than this Court could. Further, there is a very real possibility that this case – like
most cases – will resolve before trial.
Granted, if a case does proceed to trial, there will be judicial efficiency losses
because a second court will have to familiarize itself with the case. Further, this Court
may be required to conduct a de novo review of proposed findings and conclusions on
dispositive motions. Such a procedure could increase costs to the parties and cause some
delay. But these possible inefficiencies, delays, and costs do not overcome the weight
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this Court has placed on the familiarity the bankruptcy court has with the debtor, the
bankruptcy estate, and the various other adversary proceedings pending in this
bankruptcy case.
The Court also finds that the underlying bankruptcy likely will be more uniformly
administered if all of the adversary cases remain before the same court for pretrial
proceedings.
C. Prevention of Forum Shopping.
Lastly, regarding the forum-shopping factor, the Court is unpersuaded by the
Trustee’s assertion that the defendants engaged in forum shopping. These motions were
made early in the proceedings, largely in response to the bankruptcy court’s order that
such motions be made within a fourteen-day period. This factor is therefore neutral.
CONCLUSION
After having considered all of the above factors, the Court concludes that neither
permissive nor mandatory withdrawal is warranted at this time. The Court will instead
delay withdrawing the reference until the bankruptcy court certifies that this adversary
proceeding is ready for trial.
ORDER
For all the foregoing reasons, IT IS ORDERED that:
1) Defendants’ Motions to Withdraw the Reference (Dkts. 1 & 2) are granted in
part, and denied, in part, as follows:
2) The Motion is GRANTED to the extent defendants seek withdrawal when the
bankruptcy court certifies that this case is ready for trial.
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3) The Motion is DENIED to the extent defendants seek an immediate
withdrawal.
4) The bankruptcy court will preside over all pretrial matters in this case,
including discovery and pretrial conferences, and will resolve routine and
dispositive motions. If any party files a dispositive motion, the bankruptcy
court will entertain that motion and submit proposed findings of fact,
conclusions of law, and a recommendation for disposition to this Court.
5) If and when it becomes clear that a jury trial will be necessary, and the case is
prepared and ready for trial to begin, the bankruptcy court shall so certify to
this Court and the reference will be withdrawn at that time.
6) Until the bankruptcy court certifies that this case is ready for trial, the parties
shall file all motions, pleadings, and other papers in the adversary proceeding
in bankruptcy court.

DATED: November 10, 2015

_________________________
B. Lynn Winmill
Chief Judge
United States District Court

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