Hopkins v. Chemical Design, Inc

Filing 4

MEMORANDUM DECISION AND ORDER Defendant's Motion to Withdraw the Reference (Dkt. 1 ) is granted in part and denied in part. 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. 4:15-cv-395-BLW
In re:

MEMORANDUM DECISION AND
ORDER

HOKU CORPORATION,
Debtor.
R. SAM HOPKINS, Chapter 7 Trustee,
Plaintiff,
v.
CHEMICAL DESIGN, INC., a New York
Corporation, and John Does 1 through 10,
Defendants.

INTRODUCTION
Pending before the Court is defendant Chemical Design, Inc.’s Motion to
Withdraw the Reference (Dkt. 1). The Court will grant the motion to the extent
defendant asks the Court to withdraw the reference when this case is ready for trial, but
will deny the motion to the extent defendant seeks an immediate withdrawal.
BACKGROUND
This adversary proceeding traces its roots to the planned construction of a

MEMORANDUM DECISION & ORDER - 1

polysilicon manufacturing plant in Pocatello, Idaho. Defendants say that in 2007, the
debtor, Hoku Corporation, began working with its wholly owned subsidiary, Hoku
Materials, Inc., to construct the plant.
For reasons not relevant here, the plant was not completed, and in July 2013, Hoku
Materials and Hoku Corporation filed separate bankruptcy cases. In the summer of 2015
– roughly two years after these bankruptcy cases were filed – Hoku Corporation’s
Chapter 7 Trustee initiated approximately 175 adversary proceedings against various
contractors and suppliers involved in the construction. These contractors and suppliers
had previously received full or partial payment for goods and services delivered. The
Trustee contends that these payments constitute fraudulent transfers. He therefore seeks
to have these monies returned to Hoku Corporation’s bankruptcy estate.
The Trustee’s theory is that the contractors and suppliers were allegedly paid by
Hoku Corporation, but they performed work for Hoku Materials. More precisely, the
Trustee says that Hoku Corporation never had any legal or equitable title in the
polysilicon plant and thus has no liability for Hoku Materials’ polysilicon plant
construction costs or Hoku Materials’ debts.
With some exceptions, the Trustee’s complaints against the contractors and
suppliers follow the same formula. 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 (but not all) of the contractors and suppliers, the
Trustee invokes 11 U.S.C. § 548.
MEMORANDUM DECISION & ORDER - 2

In bankruptcy court, three of these adversary defendants – JH Kelly, LLC,
Industrial Piping, Inc., and Bannock County – moved the bankruptcy court to
substantively consolidate Hoku Corporation’s and Hoku Materials’ bankruptcy estates.
See July 28, 2015 Motion for Substantive Consolidation & Request for Case Management
Conference, In re Hoku Materials, Case No. 13-40837-JDP, Bankr. Dkt. 336. These
defendants say that if the bankruptcy court grants the motion, most of the adversary
proceedings against the contractors and suppliers would be eliminated. Numerous
defendants joined this motion.
After the substantive consolidation motion was filed, the bankruptcy court ordered
the contractor/supplier defendants in the adversary proceedings to either: (1) consent to
entry of judgment by the bankruptcy court; or (2) move to withdraw the reference. As of
this date, roughly half of the adversary defendants, including the defendant in the abovecaptioned action, 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
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
MEMORANDUM DECISION & ORDER - 3

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.
A.

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.
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

MEMORANDUM DECISION & ORDER - 4

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
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
MEMORANDUM DECISION & ORDER - 5

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
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)).
MEMORANDUM DECISION & ORDER - 6

Second, the vast majority of the adversary defendants who have filed a withdrawal
motion are not asking for an immediate withdrawal. For example, dozens of defendants
say this in their moving papers:
Defendant does not request that the withdrawal be immediate because a
certain Motion for Substantive Consolidation . . . is under consideration
by the Bankruptcy Court. Rather, this Motion to Withdraw Reference is
filed to meet the timeliness duty imposed by the Bankruptcy Court but it
could simply be stayed at this time.
See, e.g., Hopkins v. Chem. Design, Inc., Case No. 4:15-cv-395-BLW, Motion to
Withdraw, Dkt. 1, at 2. These same defendants also simply ask the Court to “withdraw
the reference of this Adversary Proceeding from the Bankruptcy Court at the appropriate
time prior to trial.” Id., Dkt. 1-1, at 6 (emphasis added).
Other defendants say they “understand[] that this Court may decide to have the
Bankruptcy Court handle the preliminary matters, [to] which the Defendant has no
objection provided that there is no waiver of the Defendant’s right to a jury trial before
this Court and no consent to entry of final orders or judgments by the Bankruptcy Court.”
Reply Br. in Hopkins v. SetPoint Integrated Solutions, Inc., Case No. 4:15-cv-391-BLW,
Dkt. 3, at 8 n.3; see also Praxair Servs., Inc.’s Reply Br., Case No. 4:15-cv-412-BLW,
Dkt. 3 at 4 (“Withdrawal would not cause inefficient use of judicial resources because the
Bankruptcy Court can be assigned or referred the pre-trial procedure, and this 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.

MEMORANDUM DECISION & ORDER - 7

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
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
MEMORANDUM DECISION & ORDER - 8

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.”);
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

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.

MEMORANDUM DECISION & ORDER - 9

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
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

MEMORANDUM DECISION & ORDER - 10

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
two years 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, although some defendants suggest that conducting
pretrial proceedings in one court, and then moving to another for trial, will cause
inefficiencies, 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
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 Hoku Corporation bankruptcy likely will be more
uniformly administered if all of the “contractor/supplier” 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 defendant has engaged in a blatant forum shopping. These
MEMORANDUM DECISION & ORDER - 11

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 on the fraudulent transfer claims until the bankruptcy
court certifies that such claims are ready for trial.
ORDER
For all the foregoing reasons, IT IS ORDERED that:
1) Defendant’s Motion to Withdraw the Reference (Dkt. 1) is granted in part, and
denied in part, as follows:
2) The Motion is GRANTED to the extent defendant seeks a withdrawal when
the bankruptcy court certifies that this case is ready for trial.
3) The Motion is DENIED to the extent defendant seeks 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 either 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.

MEMORANDUM DECISION & ORDER - 12

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: October 7, 2015

_________________________
B. Lynn Winmill
Chief Judge
United States District Court

MEMORANDUM DECISION & ORDER - 13