880 S. Rohlwing Road, LLC v. T&C Gymnastics, LLC
Filing
19
MEMORANDUM OPINION AND ORDER: Signed by the Honorable Amy J. St. Eve on 1/19/2017. Mailed notice(ks, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
880 S. ROHLWING ROAD, LLC,
Appellant,
v.
T&C GYMNASTICS, LLC,
Appellee.
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No. 16-cv-07650
Bankruptcy Case No. 16-14993
MEMORANDUM OPINION AND ORDER
AMY J. ST. EVE, District Court Judge:
Movant-Appellant 880 S. Rohlwing Road, LLC has appealed from the order of the
bankruptcy court denying its motion to dismiss the Chapter 11 filing of Debtor-Appellee T&C
Gymnastics, LLC as a bad-faith filing. Appellant has also moved the Court to withdraw the
reference of the underlying bankruptcy proceeding. (R.1, R.9). For the reasons set forth below,
the Court declines to exercise jurisdiction over Movant’s interlocutory appeal and denies without
prejudice its motion to withdraw the reference.
PROCEDURAL BACKGROUND
On May 2, 2016, Debtor T&C Gymnastics, LLC filed a voluntary Chapter 11 Bankruptcy
Petition in the United States Bankruptcy Court for the Northern District of Illinois, Eastern
Division, Case No. 16-14993. (R.1-4, Bankruptcy Dkt. at R.1). On May 10, 2016, Movant 880
S. Rohlwing Road, LLC moved to dismiss the case as a bad-faith filing. (Id. at R.13). The
Bankruptcy Court reviewed the briefing and heard oral argument on June 22, 2016, after which it
denied the motion following a discussion of “bad faith” factors pertinent to an 11 U.S.C. §
1112(b) dismissal analysis. (Id. at R.45; R.10; R.12-1, A000011-43 (the “Hearing Transcript”)).
The Bankruptcy Court denied the motion without prejudice, noting, “[i]t may be . . . that this
case was filed in bad faith, but I don’t have the showing that I need to rule on that today.” (Id. at
A000031-33 (“I agree with the movant that there are certainly questions regarding the validity
and treatment of the pre-petition appraisal . . . But right now there’s not enough for me . . . to
simply make what are very deep findings with respect to the nature of these transfers”). The
Bankruptcy Court issued a written order on July 13, 2016, certifying that there was “no just
cause for delay of enforcement or appeal of this ruling.” (R.1-4, Bankruptcy Dkt. at R.53; R.13). On July 28, 2016, 880 S. Rohlwing Road, LLC filed the present appeal. (R.1). On
September 7, 2016, following reassignment pursuant to Local Rule 40.4, 880 S. Rohlwing Road,
LLC filed the present motion to withdraw the reference. (R.9).
FACTUAL BACKGROUND
I.
Pre-Petition History of Debtor and Its Principals
A.
Aerial Gym Stars, Inc.
Debtor’s principal members are Tony and Carol Whitaker, residents of Addison, Illinois.
(R.12-1, A000071-72). In February 2005, the Whitakers filed for Chapter 7 protection and
received a discharge from the bankruptcy court. Prior to receiving this discharge, however, the
Whitakers formed an Illinois corporation called Aerial Gym Stars Enterprises, Inc. (Id. at
A000310-40). In September 2005, their previous corporation—Aerial Gym Stars, Inc.—filed for
bankruptcy, listing no significant real or personal property in its petition. (Id. at A000341-64).
In Movant’s view, “[i]t is entirely possible that the business assets of Aerial Gym Stars were
already being used by the new business under the name of Aerial Gym Stars Enterprises, Inc.”
(R.12, Appellant Br. at 7).
2
B.
Aerial Gym Stars Enterprises, Inc.
In November 2010, Aerial Gym Stars Enterprises, Inc. (hereinafter, “Aerial”) entered into
a commercial lease agreement with Movant, 880 S. Rohlwing Road, LLC. (R.11-1). Aerial
operated a gymnastics school on that property and generated gross revenues of over $1 million in
2013. (R.11-2). In September 2013, however, Aerial began defaulting on its lease payments—
exceeding $20,000 per month—and Movant commenced eviction proceedings. (Id.; R.11-5,
Answer to Compl. ¶¶ 7-8; see also R.7-6 at 461-62). On September 29, 2014, Aerial filed a
voluntary Chapter 11 Bankruptcy Petition in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division, Case No. 14-35241. On December 10, 2014, the
bankruptcy court granted Movant’s request to lift the automatic stay, and to allow the eviction
action to proceed, in light of Aerial’s failure to meet post-petition lease obligations as required
under 11 U.S.C. § 365. (R.12-1, A000367-69). The bankruptcy court thereafter dismissed the
case on motion by the U.S. Trustee. (Case No. 14-35241, R.40). On February 11, 2015, Movant
filed a Verified Complaint for Forcible Entry and Other Relief in the Circuit Court of DuPage
County. (R.12-1, A000103-08). The Circuit Court entered judgment in Movant’s favor in the
amount of 259,590.41 on April 1, 2015 (the “Judgment”). (Id. at A000109).
C.
T&C Gymnastics, LLC
1.
Debtor’s Formation
On March 13, 2015—two weeks before the Judgment—the Whitakers formed Debtor,
T&C Gymnastics, LLC. (R.11-3, Whitaker Aff. ¶ 2). Coincident with its formation, Debtor
purchased the assets of Aerial in exchange for a promissory note in the amount of $29,481.85.
(R.11-4, Promissory Note, Dated Effective March 13, 2015; see also R.12-1, A000278-93, Asset
Purchase and Sale Agreement). These assets included cash, miscellaneous gymnastics
3
equipment, service contracts, and five automobiles. (R.1-4, Bankruptcy Dkt. at R.1; R.12-1,
A000056-59).1 Movant—citing an initial valuation of Aerial’s business by Debtor’s appraiser—
argues that Aerial transferred “valuable assets worth at least $280,000.” (R.15, Appellant Reply
Br. at 15 (citing R.12-1, A000471 (Apr. 17, 2015 E-mail from Appraiser Michael Strelka to
Attorney Michael Polachek (“The value arrived at is $280,000”)). Debtor, however, argues that
“the assets of Aerial had no value[.]” (R.14, Appellee Br. at 6; see also R.11, Response Br. at 2
(“After obtaining an appraisal showing that the assets of Aerial were worthless, Debtor
purchased the assets of Aerial in exchange for a promissory note in the amount of $29,481.85”)).
Indeed, e-mail correspondence reflects that—after Debtor’s counsel questioned the appraiser’s
underlying rent assumptions and associated computations, including a future rent projection, and
after additional review throughout April and May 2015—Debtor’s counsel asked the appraiser to
“[p]lease go ahead and issue your findings that Aerial has a zero value.” (R.12-1, A000468-71;
see also R.7-7 at 534 (“I estimate that the value of [Aerial] would be –0– under either the income
method of valuation, or under the net asset method of valuation”)). Aerial “shut down” in March
2015. (R.12-1, A000392 (Whitaker Dep. Tr. at 22)).
Apart from the Promissory Note, Debtor gave no other consideration in exchange for the
transfer of Aerial’s assets. (Id. at A000402 (Whitaker Dep. Tr. at 32 (“[Q]. Was there anything
other than the promissory note which to this date . . . has not been paid? [A]. None that I know
of”)). The Promissory Note, moreover, is not payable until the balance remaining on a
preexisting promissory note held by Tony Whitaker’s father (the “Whitaker Note”) is less than
$25,000. (11-4, Promissory Note). According to Debtor, Tony Whitaker’s father “had loaned
various amounts of money to Aerial for the original purchase of its gymnastics equipment and…
1
Debtor does not dispute Movant’s contention that it received such property from Aerial. (R.12, Appellant Br. at 89; see also R.11-5, Answer to Compl. ¶ 50).
4
held an existing UCC lien on substantially all of the assets of Aerial.” (R.11, Response Br. at 2).
Under the terms of the Asset Purchase and Sale Agreement, Debtor assumed Aerial’s liability on
the Whitaker Note. (R.12-1, A000279 at § 1.5 (“No liabilities of Seller shall be assumed by
Purchaser except (i) the obligation to pay to William and Janice Whitaker pursuant to the terms
of a Demand Promissory Note and Security Agreement dated April 17, 2014 secured by the
gymnastics equipment of Seller perfected with UCC lien number 019395081 . . . .”)).
According to Movant, between Debtor’s formation and its bankruptcy filing, Tony
Whitaker provided “damaging testimony in a citation examination” arising from the Judgment,
which, in turn, “led to the filing of an alter ego complaint” against Debtor. (R.12, Appellant Br.
at 19 (citing A000167-74 (testimony concerning the personal use of Aerial funds)). In particular,
Movant filed a lawsuit in the Circuit Court of DuPage County against Aerial, Debtor, and the
Whitakers, alleging that Debtor was a successor to Aerial and that the Whitakers were mere alter
egos of Aerial (the “Successor Liability Litigation”). (R.11-5, Answer to Compl; see also R.7-9
at 641-54 (same)). According to Tony Whitaker, Movant conducted discovery throughout 20152016 and rejected several offers to resolve the Successor Liability Litigation. Because “Debtor
could not continue to pay substantial legal costs in defending the case” while also paying its
creditors and employees, Debtor filed the present bankruptcy case. (R.11-3, Whitaker Aff. ¶¶ 48; R.7-7 at 520-21 (same); R.12-1, A000395 (Whitaker Dep. Tr. at 25 (“We also have a business
loan [from] Direct Capital that we were trying to pay and we could not”)).
2.
Debtor’s Business
T&C Gymnastics “operates a gymnastics school in Itasca, Illinois and services day cares
and park districts throughout the Chicagoland area.” (R.11-3, Whitaker Aff. ¶ 2; see also R.7-6
at 462-63). It has over 20 employees, plus the Whitakers. (Id.). Debtor has operated at a profit
5
since its formation, earning net income of $40,987 for the year 2015 and net income of
$33,012.54 for the first five months of 2016. (Id. ¶ 3; R.7-6 at 453-56). As of June 2016, Tony
Whitaker expected Debtor to generate $800,000 in gross revenue for 2016. (R.12-1, A000387
(Whitaker Dep. Tr. at 17)). In Debtor’s view, part of its profitability stems from the
“reasonableness” of its commercial lease with its Itasca landlord, West Suburban Industrial
SDCO, Inc., pursuant to which it pays less than $14,000 per month in rent. (R.14, Appellee Br.
at 7; R.7-2 at 85-125)).
II.
Debtor’s Bankruptcy
On May 2, 2016, Debtor filed for Chapter 11 protection. On June 10, 2016, Debtor filed
its Plan of Reorganization (“Plan”) and Disclosure Statement. (R.11-7, R.11-8; see also R.7-7 at
539-69). The Plan lists seven classes of creditors, including: (1) William Whitaker; (2) Direct
Capital Corporation; (3) Mercedes Benz Financial Services; (4) Internal Revenue Service;2 (5)
“Unsecured Claim” of Aerial; (6) “Unsecured Claims of Attorneys;” and (7) “Contingent,
Unliquidated and Disputed Claim” of Movant. With respect to payments, the Plan proposes to
pay Movant “monthly payments of $432.65 for a period of 60 months for a total distribution of
10% of its alleged claim,” while paying Debtor’s secured creditors in full and paying its general
unsecured creditors “100% of their allowed claims.” (R.11-7, Plan at 3-5 (“Rohlwing does not
have a judgment against the Debtor and the Debtor disputes the claim”)).3 Secured creditor
Direct Capital Corporation—which holds a security interest in Debtor’s assets pursuant to a UCC
lien—has agreed to vote in favor of the Plan. (R.11-9; see also R.7-8 at 597 (same)). On
September 7, 2016, the bankruptcy court compelled Debtor to assume its lease with West
2
According to the filing, Debtor owes no amount to the Internal Revenue Service. (R.11-7).
3
Movant disputes the characterization of its claim as “unsecured,” contending that it “is a secured creditor with
liens on all of Debtor’s assets pursuant to the service of the citation of assets served on Debtor prior to its
bankruptcy case.” (R.12, Appellant Br. at 13).
6
Suburban Industrial SDCO, Inc. (R.11-11, Order Compelling Debtor to Assume Unexpired
Lease).
During the June 2, 2016 creditor meeting held pursuant to 11 U.S.C. § 341, Tony
Whitaker confirmed that he and four other family members have drawn a salary or wage from
Debtor since its formation, in addition to other benefits, such as health insurance, dental
insurance, the personal use of one automobile, and a timeshare in Florida. (R.12-1, A000377-80,
A000396-400 (Whitaker Dep. Tr. at 7-10, 26-30)). Whitaker was not able to confirm the “exact
total” of such compensation. (Id. at A000397-98). During the creditors’ meeting, counsel for
Movant also confronted Whitaker with documents—produced in the Successor Liability
Litigation—suggesting an overlap between Aerial, Debtor, and the Whitakers. (Id. at A00040306 (Whitaker Dep. Tr. at 33-37)). Whitaker disclaimed knowledge of such documents and
pressed the separateness of Debtor and Aerial. (Id. (“[Q]. And that was negotiated between T&C
and Aerial; is that correct? [A]. Yes. [Q]. Were they two different companies? [A]. Yes”)).
ANALYSIS
I.
Jurisdiction over Movant’s Appeal
A.
General Principles
As a threshold matter, the Court must determine whether it has jurisdiction to hear this
appeal. Movant’s brief contends that the Court has jurisdiction “under 28 U.S.C. § 158(d)(1),”
while its Notice of Appeal references “ 28 U.S.C. § 158(a)(1).” (R.1; R.12, Appellant Br. at 4).
Neither provision, however, authorizes the present appeal. The former provision vests appellate
jurisdiction in the “courts of appeals” over “all final decisions, judgments, orders, and decrees
entered under subsections (a) and (b) of this section.” See 28 U.S.C. § 158(d)(1); see also Smith
v. Capital One Bank (USA), N.A., --- F.3d ---, No. 16-1422, 2016 WL 7404760, at *2 (7th Cir.
7
Dec. 22, 2016) (“This Court has jurisdiction over appeals from final district court decisions. 28
U.S.C. § 158(d)(1). In the bankruptcy context, both the bankruptcy court decision and the
district court decision must be final”). The district court, thus, does not have appellate
jurisdiction through 28 U.S.C. § 158(d)(1). The latter provision—28 U.S.C. § 158(a)(1)—
provides that district courts have jurisdiction over appeals “from final judgments, orders, and
decrees” of the bankruptcy judge. See 28 U.S.C. § 158(a)(1). Although the concept of “flexible
finality” exists within bankruptcy jurisprudence, see In re McKinney, 610 F.3d 399, 402 (7th Cir.
2010), “denials of motions to dismiss are generally not final orders, even in the bankruptcy
context.” See In re Jartran, Inc., 886 F.2d 859, 863-64 (7th Cir. 1989); see also In re Vlasek,
325 F.3d 955, 961 (7th Cir. 2003) (“we will not treat as ‘final’ the bankruptcy court’s April 30,
1999 decision to deny Vlasek’s motion to dismiss his bankruptcy petition and, thus, hold that an
appeal of that decision as of right under 28 U.S.C. § 158(a) was not available”). In this case,
when asked whether his order was a “final order,” or “if it’s not final, if [the parties] can have it
note the ‘[no] reason to delay enforcement language,’” the bankruptcy judge responded, “[w]ell,
your appellate rights with respect to an order denying a request to dismiss are whatever they
are[.]” (R.10, Transcript at 31). Here, Movant’s appellate rights are not absolute. See In re
Salem, 465 F.3d 767, 774 (7th Cir. 2006) (“a party does not have an absolute right to take an
interlocutory appeal from the bankruptcy court . . . Instead, the party must seek the leave of the
district court”); In re Jartran, 886 F.2d at 866 (“certification by the bankruptcy court is not
required”).
The Court, accordingly, must determine whether to grant leave to appeal the bankruptcy
court’s order as an interlocutory appeal. See 28 U.S.C. § 158(a)(3). Movant’s failure to file a
motion for leave is not fatal to its appeal, as the district court may “treat the notice of appeal as a
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motion for leave and either grant or deny it.” Fed. R. Bankr. P. 8004(d). In determining whether
to grant an interlocutory appeal under 28 U.S.C. § 158(a)(3), district courts typically look to the
“three-part test of 28 U.S.C. § 1292(b), which is the framework that guides the circuit court of
appeals in exercising its discretion over interlocutory appeals from district courts.” See Dempsey
v. McCarthy, No. 09 C 7949, 2010 WL 918083, at *2 (N.D. Ill. Mar. 10, 2010). Under this test,
“an appeal is allowable when it (1) involves a controlling question of law; (2) over which there is
substantial ground for difference of opinion; and (3) an immediate appeal from the order may
speed up the litigation.” Id. (citing 28 U.S.C. § 1292(b)). In other words, “there must be a
question of law, it must be controlling, it must be contestable, and its resolution must promise to
speed up the litigation.” In re Kmart Corp., No. 04 C 4978, 2004 WL 2222265, at *1 (N.D. Ill.
Oct. 1, 2004) (citing Ahrenholz v. Bd. of Trustees of Univ. of Illinois, 219 F.3d 674, 675 (7th Cir.
2000)). The party seeking leave to appeal must demonstrate these factors. See id.; see also In re
Auto. Professionals, Inc., 379 B.R. 746, 751 (N.D. Ill. 2007).
B.
Analysis
Interlocutory review is generally reserved for “pure” questions of law – that is, “abstract
issue[s] of law . . . suitable for determination by an appellate court without a trial record.” See
Ahrenholz, 219 F.3d at 676-77. According to Movant, this appeal raises two issues: (1) whether
the bankruptcy court has jurisdiction to preside over a bankruptcy proceeding “involving a twoparty dispute in which the alleged debtor was the recipient of fraudulently transferred assets for a
failed Chapter 11 debtor for the purpose of avoiding state court collection proceedings[;]” and
(2) whether the bankruptcy court should have dismissed Debtor’s Chapter 11 case—in which the
Debtor is the alleged successor-in-interest to a failed Chapter 11 debtor—as a bad-faith filing.
(R.7, Statement of Issues; R.12, Appellant Br. at 5). The Court discerns two legal questions
9
here: (1) whether the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 462 (2011)
precludes the assertion of successor liability and alter ego claims within the context of Debtor’s
Chapter 11 case; and (2) whether the bankruptcy judge applied an “incorrect test for determining
whether the bankruptcy case was subject to dismissal.” (R.12, Appellant Br. at 2-4). Neither,
however, constitutes a controlling, contested issue of law, the resolution of which will expedite
the proceedings. See Ahrenholz, 219 F.3d at 675.
1.
Stern v. Marshall
The Court examines the first question—the import of Stern v. Marshall—below, in
connection with the motion to withdraw the reference. This aspect of Movant’s appeal, however,
does not “involve a contestable question of law, i.e. a question of law where there is substantial
ground for difference of opinion.” See In re Livemercial Aviation Holding, LLC, No. 10-20051,
2014 WL 3611348, at *2 (N.D. Ind. July 21, 2014); see also In re Kmart, 2004 WL 2222265 at
*2. To the contrary, Supreme Court precedent is clear: Stern does not completely divest
bankruptcy courts of authority to hear so-called “Stern claims.” See Exec. Benefits Ins. Agency
v. Arkison, 134 S. Ct. 2165, 2173 (2014) (“If the claim satisfies the criteria of § 157(c)(1), the
bankruptcy court simply treats the claims as non-core: The bankruptcy court should hear the
proceeding and submit proposed findings of fact and conclusions of law to the district court for
de novo review and entry of judgment”); Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932,
1940 (2015) (“[Congress] gave bankruptcy courts more limited authority in non-core
proceedings . . . Absent consent, bankruptcy courts in non-core proceedings may only submit
proposed findings of fact and conclusions of law, which the district courts review de novo”)
(citing 28 U.S.C. § 157(c)(1) and discussing Stern)). In other words, while Stern precludes the
final adjudication of “Stern claims” by bankruptcy courts absent consent, it does not broadly
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strip bankruptcy courts of jurisdiction where such claims are asserted. In light of authorities such
as Executive Benefits and Wellness, Movant has failed to demonstrate the contestability of this
legal issue.
2.
In re Madison Hotel Associates
With respect to the second question, Movant argues that the bankruptcy court “ignored
the affirmative good faith requirement set forth in the Seventh Circuit’s ruling in In re Madison
Hotel Associates, 749 F.2d 410, 426 (7th Cir. 1984) and instead relied on an overly difficult and
confusing set of factors from a bankruptcy case called In re Tekena US, LLC, 419 B.R. 341, 346
(Bankr. N.D. Ill. 2009).” (R.12, Appellant Br. at 10). During his oral ruling, the bankruptcy
court noted: “the Seventh Circuit has recognized that bad faith is cause for dismissal under [11
U.S.C. § 1112] in the matter of the Madison Associates Hotels case. The Tekena factors, in fact,
are I think a guideline for determining whether or not bad faith exists.” (R.10, Transcript at 1314). He then noted:
I’ve been through the factors, and frankly some of the factors weigh in favor of
the debtor and some don’t. As I said, this is not exactly a clear case. The factors
that I think frankly weigh in favor of the debtor -- and let’s be clear what I mean
by weigh in favor of the debtor. When I say weigh in favor of the debtor, it does
not mean that if this factor exists, the debtor has filed a case in good faith; it
means that the factor as it provides does not, as it exists -- does not allow the
Court to make a finding of fact, okay. So if it’s neutral, frankly, it weighs in favor
of the debtor is what I meant to say, because that means it will not help me in
reaching a conclusion that the case was filed in bad faith.
(Id. at 16). Under Movant’s interpretation of these words, the bankruptcy court’s “inability . . .
to find affirmative bad faith” runs counter to the Seventh Circuit’s observation that “‘good faith’
is a threshold prerequisite to securing Chapter 11 relief.” See Madison Hotel, 749 F.2d at 426.
After reviewing the entire hearing transcript and applicable case law, however, the Court
disagrees that the bankruptcy court applied “the incorrect standard for bad faith filings.” (R.12,
11
Appellant Br. at 3). Contrary to Movant’s suggestion, the Seventh Circuit in Madison Hotel did
not interpret “good faith” under Section 1112 or set forth a defined legal standard. See 749 F.2d
at 426 (“the lack of such good faith constitutes ‘cause,’ sufficient for dismissal under 11 U.S.C. §
1112(b)”).4 Many courts in this District, accordingly, “have enumerated several non-exclusive
factors that are relevant to determining whether a debtor has failed to file a bankruptcy petition in
good faith.” See, e.g., In re S. Beach Sec., Inc., 341 B.R. 853, 856 (N.D. Ill. 2006) (citing
Madison Hotel). Many of these factors, in turn, overlap with those set forth in the Tekena case
on which the bankruptcy judge relied. See In re Tekena, 419 B.R. at 346. In addition, they
overlap with some of the factors commonly discussed in the context of the “new debtor
syndrome.” See, e.g., Matter of Little Creek Dev. Co., 779 F.2d 1068, 1072-73 (5th Cir. 1986)
(“The ‘new debtor syndrome,’ in which a one-asset entity has been created or revitalized on the
eve of foreclosure to isolate the insolvent property and its creditors, exemplifies, although it does
not uniquely categorize, bad faith cases”); In re Duvar Apt., Inc., 205 B.R. 196, 200 (B.A.P. 9th
Cir. 1996) (outlining “[i]ndicia of the new debtor syndrome”).5 As the bankruptcy judge made
clear, such factors are “guidelines,” not rigid standards. (R.10, Transcript at 13). See also e.g.,
4
Movant appears to recognize this reality, acknowledging that—in seeking dismissal—it “asserted several other
factors that are not cited by Tekena” that courts treat as relevant to the “bad faith” inquiry. (R.12, Appellant Br. at
25-26).
5
By way of example, “[i]ndicia of the new debtor syndrome include: (1) transfer of distressed property into a newly
created corporation; (2) transfer occurring within a close proximity to the bankruptcy filing; (3) transfer for no
consideration; (4) the debtor has no assets other than the recently transferred property; (5) the debtor has no or
minimal unsecured debt; (6) the debtor has no employees and no ongoing business; and (7) the debtor has no means,
other than the transferred property, to service the debt on the property.” In re Duvar, 205 B.R. at 200. The Tekena
factors, meanwhile, include: “1. The debtor has few or no unsecured creditors; 2. There has been a previous
bankruptcy petition by the debtor or a related entity; 3. The pre-petition conduct of the debtor has been improper; 4.
The petition effectively allows the debtor to evade court orders; 5. There are few debts to non-moving creditors; 6.
The petition was filed on the eve of foreclosure; 7. The foreclosed property is the sole or major asset of the debtor;
8. The debtor has no ongoing business or employees; 9. There is no possibility of reorganization; 10. The debtor’s
income is not sufficient to operate; 11. There was no pressure from non-moving creditors; 12. Reorganization
essentially involves the resolution of a two-party dispute; 13. A corporate debtor was formed and received title to its
major assets immediately before the petition; and 14. The debtor filed solely to create the automatic stay.” See In re
Tekena, 419 B.R. at 346.
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In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899, 905 (Bankr. N.D. Ill.
2016) (Barnes, J.) (“The so-called ‘Tekena factors’ are . . . neither exhaustive nor mandatory.
The court will, nonetheless, consider them in the totality of this case”); In re Bartle, 560 F.3d
724, 730 (7th Cir. 2009) (“The decision to dismiss a Chapter 11 proceeding pursuant to section
1112(b) is one committed to the court’s discretion”). Even assuming that the “central question”
is “whether a reorganization plan is possible[,]” see In re Bovino, 496 B.R. 492, 500 (Bankr.
N.D. Ill. 2013), the bankruptcy court found evidence on this point, favoring Debtor. See also,
e.g., In re Meier, No. 14-AP-237, 2014 WL 5426763, at *2 (Bankr. N.D. Ill. Oct. 21, 2014); cf.
Matter of Woodbrook Assocs., 19 F.3d 312, 316 (7th Cir. 1994) (affirming dismissal where
debtor “would not be able to effectuate the proposed plan because it improperly classified
unsecured claims in separate classes, violated the absolute priority rule, and did not meet the new
value exception”). Although Movant takes issue with the bankruptcy judge’s fact finding on this
“reorganization” point, such argument “attacks the merits of the decision and does not present a
question of debatable controlling law.” Progressive Land Developers, Inc. v. Muhammad
Mosque No. 2, Inc., No. 87 C 6583, 1987 WL 20155, at *2 (N.D. Ill. Nov. 16, 1987).6
In brief, the fact that the Seventh Circuit has not expressly adopted the Tekena test does
not render such test the “incorrect standard.” Given the precedent discussed above, Movant has
not demonstrated “substantial conflicting decisions regarding the claimed controlling issue of
law.” See Kmart, 2004 WL 2222265 at *2; see also In re MCK Millennium Ctr. Parking, LLC,
No. 12 B 24676, 2015 WL 2004887, at *4 (N.D. Ill. Apr. 29, 2015). In addition, although
decrying the lack of an evidentiary hearing, Movant does not represent that it actually requested
6
Indeed, the bankruptcy court acknowledged that the Plan “may be defective” in light of Movant’s alter ego
theories, and denied the motion without prejudice. (R.10, Transcript at 18, 20 (“frankly, I don’t at this point have
enough for me to simply rule off the cuff that the debtor is the alter ego of Aerial”)). Given this disposition, and
given that the Plan must ultimately satisfy a good faith requirement, see 11 U.S.C. § 1129(a)(3), “the issue of bad
faith has not been permanently laid to rest[.]” See Progressive, 1987 WL 20155 at *3.
13
such a hearing on its motion to dismiss. See In re Bartle, 560 F.3d at 729 (“A hearing is of
course not required when no one demands it . . . The parties are entitled to an opportunity to be
heard, not to a particular type of hearing”). In this case, the bankruptcy court reviewed the
parties’ submissions, heard oral argument, and ruled, “I don’t have the showing that I need to
rule on [bad faith] today . . . Because it is a totality of the circumstances [inquiry], frankly, the
movant can make the argument it’s already made and then augment them with additional
argument, and then I look at them and maybe I agree . . . So while I am concerned . . . I just don’t
have enough at the moment.” (R.10, Tr. at 21-23). It is evident, thus, that the bankruptcy court
made a good-faith finding on consideration of the available record, without prejudice to
Movant’s ability to renew its motion and to offer additional argument or evidence.
In view of the above-discussed precedent and the bankruptcy court’s disposition, the
Court declines to find that the bankruptcy judge applied the “incorrect standard,” warranting
interlocutory review. See In re Archdiocese of Milwaukee, 482 B.R. 792, 799 (E.D. Wis. 2012),
aff’d on other grounds sub nom. Archdiocese of Milwaukee v. Doe, 743 F.3d 1101 (7th Cir.
2014) (“Accordingly, the bankruptcy court did not apply the wrong legal standard when it denied
the Archdiocese’s motion for summary judgment … This is not the proper subject for an
interlocutory appeal”).
3.
In re Tekena
Movant further argues that the bankruptcy court “incorrectly applied” the Tekena factors.
(R.12, Appellant Br. at 15-26; R.15, Reply Br. at 8-11). “If a mere disagreement in how the law
is applied to the facts of a particular case was all that was needed for an interlocutory appeal,”
however, “every single denial of a motion to dismiss would present grounds for interlocutory
appeal.” In re Livemercial, 2014 WL 3611348 at *2; see also In re Barfield, No. 15-3131, 2015
14
WL 4254028, at *4 (C.D. Ill. July 14, 2015) (“Essentially, the Successor Trustee argues that the
Bankruptcy Court failed to consider relevant facts and misapplied the facts to the law.
Therefore, the Successor Trustee has failed to show a controlling question of law that would
warrant an interlocutory appeal”). While it may be that “[t]he primary event demonstrating bad
faith was the pre-bankruptcy wholesale transfer of assets for no consideration by Debtor’s
principals to avoid the impact” of the Judgment, (R.15, Appellant Reply Br. at 5), the Court is
not the proper forum to make such a factual finding. (R.10, Transcript at 23 (right now there’s
not enough for me to rule . . . to simply make what are very deep findings with respect to the
nature of these transfers”)). Movant’s fact-based challenge, in short, does not warrant
interlocutory review. See In re Woltman, No. 06-2088, 2006 WL 2052078, at *3 (C.D. Ill. May
24, 2006) (“This court concludes that Woltman is actually challenging [the underlying] fact
finding and wants this court to review the facts and come to a different conclusion . . . This type
of review would not involve what the Seventh Circuit has identified as a ‘pure’ question of
law”); Progressive, 1987 WL 20155 at *2 (denying leave to appeal where “the question of law
which ‘controls’ the bankruptcy court’s decision below is simply whether the debtor filed in bad
faith . . . The standard is fact-based and requires a case-by-case determination”).
Ultimately, after reviewing the parties’ briefing, the Court concludes that neither issue on
appeal presents a “pure question of law, something the [reviewing court] could decide quickly
and cleanly without having to study the record[.]” Ahrenholz, 219 F.3d at 677. Even narrowing
the scope of the appeal to the two legal questions discussed above, Movant has failed to
demonstrate the contestability of such questions. See id. at 676 (“The criteria are conjunctive,
not disjunctive”). In addition, “the issue of bad faith has not been permanently laid to rest” in the
underlying bankruptcy proceeding. See Progressive, 1987 WL 20155 at *3. For these reasons,
15
the Court denies Movant leave to appeal. See In re Kmart, 2004 WL 2222265 at *1 (“A court
will not grant leave to appeal an interlocutory order absent exceptional circumstances”) (citation
and quotation omitted); Custom Companies v. Official Comm. of Unsecured Creditors, No. 00 C
1161, 2000 WL 765090, at *2 (N.D. Ill. June 12, 2000) (“Interlocutory appeals should not be
granted where it would merely encourage needless delay and piecemeal litigation”). The fact
that the bankruptcy court “certified” this appeal, and that Debtor does not oppose appellate
review,7 does not change the Court’s jurisdictional analysis. The Court, in other words, must
determine for itself whether appellate jurisdiction exists under 28 U.S.C. § 158. See HSBC Bank
USA, N.A. v. Townsend, 793 F.3d 771, 778 (7th Cir. 2015); Tradesman Int’l, Inc. v. Black, 724
F.3d 1004, 1010 (7th Cir. 2013) (“the parties cannot consent to this court’s jurisdiction; we must
satisfy ourselves that appellate jurisdiction is secure”); United States v. $304,980.00 in U.S.
Currency, 732 F.3d 812, 817 (7th Cir. 2013) (“the federal courts are under an independent
obligation to examine their own jurisdiction”) (citation and quotation omitted). Here, where
jurisdiction is not available under 28 U.S.C. § 158(a)(1) and jurisdiction is not warranted under
28 U.S.C. § 158(a)(3), the Court does not have jurisdiction over Movant’s appeal.
II.
Motion to Withdraw the Reference
A.
Applicable Legal Principles
While district courts have original jurisdiction over Title 11 cases and related
proceedings, see 28 U.S.C. § 1334(a) and (b), a district court may refer such matters to the
bankruptcy court. See 28 U.S.C. § 157(a) (“Each district court may provide that any or all cases
under title 11 and any or all proceedings arising under title 11 or arising in or related to a case
under title 11 shall be referred to the bankruptcy judges for the district”); see also Wellness, 135
7
Debtor, like Movant, contends that the bankruptcy judge entered a “final order” warranting review under 28
U.S.C. § 158(a)(1). (R.14, Appellee Br. at 4).
16
S. Ct. at 1939. Internal Operating Procedure 15(a) establishes this referral practice in the
Northern District of Illinois.8 Such referrals do not completely divest the district court of
original jurisdiction, however, insofar as it may withdraw the reference. See 28 U.S.C. § 157(d)
(“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”);9 see also Matter
of Powelson, 878 F.2d 976, 979 (7th Cir. 1989) (noting the same); Pro-Pac, Inc. v. WOW
Logistics Co., 721 F.3d 781, 788 (7th Cir. 2013) (“the district court can withdraw the reference
and resolve the issues itself”).
As Section 157(d) does not define “cause shown” with respect to permissive withdrawal,
district courts generally consider several factors, including whether the referred proceeding is
core or non-core. See, e.g., In re K & R Express Sys., Inc., 382 B.R. 443, 446 (N.D. Ill. 2007)
(“the most important factor is whether a proceeding is core or non-core, as efficiency, uniformity
and judicial economy concerns are largely subsumed within it”); Brandt v. Leasing One Corp.,
No. 14 C 979, 2014 WL 1797651, at *2 (N.D. Ill. May 6, 2014) (same); In re Emerald Casino,
Inc., 467 B.R. 128, 135 (N.D. Ill. 2012) (same). “Core proceedings are proceedings under
bankruptcy law; non-core proceedings are proceedings that relate to a bankruptcy but arise under
some other body of law.” In re Tolomeo, 832 F.3d 815, 817 (7th Cir. 2016), reh’g denied (Sept.
13, 2016); see also In re K&R, 382 B.R. at 446-47 (“[A] proceeding is core . . . if it invokes a
substantive right provided by Chapter 11 or if it is a proceeding that, by its nature, could arise
8
See http://www.ilnd.uscourts.gov/_assets/_documents/_rules/intops03.pdf.
9
Section 157(d) further provides for mandatory (as opposed to permissive) withdrawal, directing that a 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.” See 28 U.S.C. § 157(d). Movant has not suggested that mandatory
withdrawal is required here.
17
only in the context of a bankruptcy case . . . Non-core proceedings are those only marginally
related to the bankruptcy, which often are state law causes of action”) (citations omitted).
There also exists, however, “a narrow category of claims, called ‘Stern’ claims . . . that
[S]ection 157 authorizes bankruptcy courts to hear, but that the Constitution prevents them from
ruling on.” Official Comm. of Unsecured Creditors of Country Stone Holdings, Inc. v. First
Midwest Bank & Ronald Bjustrom, No. 4:15-CV-04063-SLD, 2016 WL 1259378, at *2 (C.D. Ill.
Mar. 30, 2016) (discussing Stern); see also Fed. Deposit Ins., Corp. v. Veluchamy, No. 12-CV7496, 2014 WL 5420177, at *3 (N.D. Ill. Oct. 21, 2014) (“[I]n Stern v. Marshall, the Supreme
Court held that certain claims can be ‘core’ within the meaning of federal law and yet not be
ones over which bankruptcy judges have Article III authority to enter final judgments”).
Accordingly, some courts “now distinguish among ‘typical core proceedings,’ Stern claims, and
non-core claims” in connection with permissive withdrawal motions. See Veluchamy, 2014 WL
5420177 at *3. Post-Stern courts nevertheless continue to consider other factors—including (i)
the promotion of judicial economy, (ii) the conservation of debtor and creditor resources, and
(iii) the request for a jury trial—in considering a request for withdrawal. See id. at *3-5; see also
STC, Inc. v. Glob. Traffic Techs., LLC, No. 15-CV-0037-SMY, 2015 WL 1042431, at *4-5 (S.D.
Ill. Mar. 6, 2015) (“It is therefore not an efficient use of judicial resources to withdraw the
reference at this time”); First Midwest Bank, 2016 WL 1259378 at *3 (“This litigation is at the
very earliest phases; if it appears that a jury trial will indeed occur, the parties may move again to
withdraw the reference on that basis”).
As the party seeking relief, Movant has the burden of establishing that cause for
withdrawal exists. See Equip. Acquisition Res., Inc. v. U.S. IRS, No. 10 C 4565, 2010 WL
18
3273060, at *2 (N.D. Ill. Aug. 13, 2010). The Court has broad discretion in determining whether
to grant or deny such relief. Id.
B.
Analysis
“Permissive withdrawal of reference to a bankruptcy court can involve withdrawal of an
entire bankruptcy case, an entire bankruptcy proceeding, a portion of a bankruptcy proceeding,
an entire adversary proceeding, or a portion of an adversary proceeding.” See Abrams v. DLA
Piper (US) LLP, No. 2:12-CV-19-TLS, 2012 WL 1714591, at *3 (N.D. Ind. May 15, 2012)
(citing 1 Norton Bankr.L. & Prac.3d § 8:1)). In this case, Movant urges the Court to withdraw
the reference over Debtor’s bankruptcy proceeding because—in Movant’s view—the proceeding
consists of a two-party dispute involving successor liability and alter ego claims over which the
bankruptcy court lacks jurisdiction. Debtor disagrees with Movant’s characterization, noting
Movant’s lack of legal support concerning withdrawal over an entire Chapter 11 case. (R.11,
Response Br. at 4-7 (“Rohlwing has cited no cases which have allowed withdrawal of an entire
bankruptcy proceeding where the Debtor has filed a plan of reorganization and is prepared to
move forward with confirmation of the plan”)). Under either view, however, the Court finds that
withdrawal is not appropriate here.
1.
Withdrawal of Reference over Debtor’s Bankruptcy Case
Construing its request broadly, Movant asks the Court to withdraw the reference over
Debtor’s entire Chapter 11 case. As courts have recognized, “[a] motion seeking a withdrawal of
an entire bankruptcy case, as opposed to merely a proceeding within the case, is an extreme
request.” See In re FMG, Inc., No. 91 C 6018, 1991 WL 247595, at *1 (N.D. Ill. Nov. 14, 1991);
In re Persaud, No. 11-CV-6391 DLI, 2012 WL 3544732, at *2 (E.D.N.Y. Aug. 16, 2012) (“By
19
asking the court to withdraw the reference for entire bankruptcy case, the Trustee invites this
court to take the drastic step of overseeing the disposition of Debtor’s entire estate”).
Here, Movant does not dispute that certain issues related to the confirmation of Debtor’s
Plan, including the allowance of claims and the determination of lien validity, are “core”
proceedings within the meaning of 28 U.S.C. § 157(b)(2).10 In addition, Movant does not
dispute that the bankruptcy court has already decided numerous motions in the underlying case,
including a motion to assume Debtor’s lease and a motion to authorize the use of cash collateral.
Instead, Movant questions the overall legitimacy of Debtor’s bankruptcy filing, including the
legitimacy of its seven creditor classes, arguing that the “sole reason” for Debtor’s filing was to
avoid Movant’s collection efforts on the Judgment. (R.13, Reply Br. at 3-4 (“The Debtor’s
fraudulent scheme is the lynchpin upon which the Debtor’s bad faith Chapter 11 case rests”)).
Granting Movant’s present request to “withdraw the reference over the Debtor’s Chapter
11 proceeding and promptly dismiss the case as a bad-faith filing,” however, would require the
Court to review and overturn the non-final, factual findings of the bankruptcy court. Even
assuming—without deciding—that the standard for withdrawal under 28 U.S.C. § 157(d) is
lower than the standard for leave to appeal under 28 U.S.C. § 158(a)(3), see In re Beale, 410
B.R. 613, 616 (N.D. Ill. 2009), the record does not permit the Court to reach a bad-faith finding
at this juncture. In particular, although the timing of Debtor’s formation and the circumstances
of the Promissory Note are suspicious—particularly in light of the Whitakers’ successive
bankruptcy filings—the Court cannot yet determine that the March 13, 2015 transfer was, in fact,
fraudulent. Apart from the e-mail exchange between Debtor’s appraiser and its counsel, Movant
offers no documentary evidence or testimony on this point. Movant likewise does not challenge
the contents of the appraiser’s final report. Absent such a showing, the Court cannot evaluate the
10
The Court addresses Movant’s Stern objection below.
20
adequacy of the underlying consideration, the legitimacy of the debt owed under either the
Promissory Note or the Whitaker Note, the propriety of listing such debt on Debtor’s Chapter 11
schedule, or whether—disregarding such debt—this bankruptcy proceeding is actually a twoparty dispute. Relatedly, Movant has not offered sufficient evidence that Debtor—an entity with
ongoing business and at least 15 employees unrelated to the Whitakers—is, in fact, an “alter
ego” of Aerial. The Court, accordingly, cannot evaluate the import of Movant’s citation lien or
the classification of its claim in the Plan. In short, the Court cannot rule that Debtor does not
belong in bankruptcy court. See In re Local Union 722 Int'l Bhd. of Teamsters, 414 B.R. 443,
448 (Bankr. N.D. Ill. 2009) (“Bad faith is not found solely because the debtor has one or a small
body of creditors since filing a chapter 11 case after falling on the wrong side of a judgment is
not uncommon. However, there must be a realistic intention of financial rehabilitation”).
Considerations of judicial economy militate in favor of leaving this matter within the bankruptcy
court’s jurisdiction for further factual consideration.
Ultimately, given the “core” nature of the ongoing proceedings—and given the
bankruptcy court’s familiarity with such matters—the Court declines to withdraw the reference
of Debtor’s Chapter 11 case. See In re Emerald Casino, 467 B.R. at 135 (“Withdrawal is
traditionally the exception, rather than the rule, as bankruptcy jurisdiction is designed to provide
a single forum for dealing with all claims to the bankrupt’s assets”) (citation omitted); see also
Equipment Acquisition, 2010 WL 3273060 at *1 (“Under the Bankruptcy Code, Congress
intended for bankruptcy judges to determine complex Title 11 issues to the greatest extent
possible”) (citation omitted).
21
2.
Withdrawal of Reference over Movant’s Adversary Claims
Construing its request narrowly, Movant asks the Court to withdraw the reference of its
successor liability and alter ego claims against Debtor. Although it is not clear that Movant has
actually asserted such claims in the underlying bankruptcy proceeding, the bankruptcy court
acknowledged such claims, observing: “The successor liability [and] alter ego claims are, of
course, state causes of action. They can [be] brought by adversary proceeding if the movant
wants to pursue those and frankly under the facts may want to pursue them.” (R.10, Transcript at
21). Movant now argues that, “[r]egardless of whether this case is a two-party dispute, the
bankruptcy court lacks jurisdiction without Movant’s consent to decide the State law successor
liability and alter ego causes of action which determine whether Debtor is entitled to confirm its
Chapter 11 plan.” (R.13, Reply Br. at 5).
As the Supreme Court has observed with respect to statutory authorization under 28
U.S.C. § 157:
If a matter is core, the statute empowers the bankruptcy judge to enter final judgment on
the claim, subject to appellate review by the district court. If a matter is non-core, and the
parties have not consented to final adjudication by the bankruptcy court, the bankruptcy
judge must propose findings of fact and conclusions of law. Then, the district court must
review the proceeding de novo and enter final judgment.
Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2172 (2014). Constitutional authority,
however, is a different inquiry. In Stern, for example, the Supreme Court held that bankruptcy
courts lack “the constitutional authority to enter a final judgment on a state law counterclaim that
is not resolved in the process of ruling on a creditor’s proof of claim[,]” thus removing such
counterclaims “from core bankruptcy jurisdiction[.]” See 564 U.S. at 502-03; see also Fifth
Third Mortg. Co. v. Blouin, No. 15-CV-00366, 2015 WL 3623630, at *2 (N.D. Ill. June 9, 2015)
(discussing Stern). The Supreme Court later characterized so-called “Stern claims” as those
“designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited
22
from proceeding in that way as a constitutional matter.” Executive Benefits, 134 S. Ct. at 2170.
Under Seventh Circuit precedent, “a state-law claim between private parties that is wholly
independent of federal bankruptcy law and is not resolved in the claims-allowance process” is
one such claim. See Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751, 775-76 (7th Cir. 2013),
rev’d, 135 S. Ct. 1932, 191 L. Ed. 2d 911 (2015).11
As an initial matter, the Court is not convinced that Movant’s proposed claims are, in
fact, “Stern claims.” See Stern, 564 U.S. at 499 (“the question is whether the action at issue
stems from the bankruptcy itself or would necessarily be resolved in the claims allowance
process”). It is not clear, for example, that Movant’s fraudulent transfer theory against Debtor
would not “necessarily be resolved in the claims allowance process.” See In re 1701 Commerce,
LLC, 511 B.R. 812, 816 n.10 (Bankr. N.D. Tex. 2014) (“This matter involves the unusual
situation where the bankrupt received, rather than the made, the transfer. Thus, although
requiring the court to determine a fraudulent transfer, the [claim objection] is necessarily
resolved in the claims allowance process”) (distinguishing Stern); see also In re Boricich, 464
B.R. 335, 337 (Bankr. N.D. Ill. 2011) (“Stern left intact the authority of a bankruptcy judge to
fully adjudge a creditor’s claim”); Fifth Third Mortgage, 2015 WL 3623630 at *3-4 (noting the
same).12 Given Stern’s caution that it applies to a “narrow” category of claims, see 564 U.S. at
502—and given Movant’s failure to identify factually analogous case law—it is not clear that
Stern broadly precludes bankruptcy courts from ever entering final judgments on “state law
11
The Supreme Court in Wellness did not address the contention that the Seventh Circuit had erred in concluding
that the “alter ego” claim at issue was, in fact, a “Stern claim.” See Wellness, 135 S. Ct. at 1942 n.7.
12
On the other hand, to the extent Movant desires to file an “alter ego” claim against the Whitakers within the
context of Debtor’s bankruptcy proceeding, such a claim appears to implicate Stern concerns. See Wellness, 727
F.3d at 774-75.
23
issues concerning successor liability and alter ego claims involving [ ] fraudulently transferred
assets.” (R.13, Reply Br. at 3-4).
Moreover, even construing Movant’s successor liability and alter ego claims as “Stern
claims”—or as “non-core” claims within the meaning of 28 U.S.C. § 157(c)(1)13—the
bankruptcy court has jurisdiction to “hear the proceeding and submit proposed findings of fact
and conclusions of law to the district court for de novo review and entry of judgment.” See
Executive Benefits, 134 S. Ct. at 2173; Wellness, 135 S. Ct. at 1940 (“Absent consent,
bankruptcy courts in non-core proceedings may only ‘submit proposed findings of fact and
conclusions of law,’ which the district courts review de novo”) (citing 28 U.S.C. § 157(c)(1)).14
As other district courts have recognized, the bankruptcy court’s inability to enter final judgment
on non-core claims does not, standing alone, constitute “cause” for the early withdrawal of a
reference. To the contrary, the bankruptcy court’s ability to handle pre-trial matters and to issue,
as necessary, proposed findings of fact and conclusions of law promotes judicial economy and
weighs against early withdrawal. See In re Emerald, 467 B.R. at 134 (“Of those courts that have
reached the question . . . the overwhelming majority have declined, post-Stern, to withdraw the
reference, recognizing the value of the bankruptcy judge’s familiarity with relevant law and the
facts of the cases before them”); Mason v. Klarchek, No. 12-CV-9971, 2013 WL 1869098, at *3
(N.D. Ill. May 2, 2013) (“If . . . the bankruptcy judge determines a jury trial is necessary, or he
13
That provision reads: “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.” See 28 U.S.C. § 157(c)(1). Movant’s successor
liability and alter ego claims likely fall within the category of “related to” jurisdiction. See Celotex Corp. v.
Edwards, 514 U.S. 300, 307 n.5 (1995) (“Proceedings ‘related to’ the bankruptcy include . . . suits between third
parties which have an effect on the bankruptcy estate”); Executive Benefits, 134 S. Ct. at 2174 (noting the same).
14
Contrary to Movant’s argument on appeal, thus, the bankruptcy court’s purported “invitation” to commence an
adversary proceeding was not an unauthorized “attempt to expand the judicial power of Article I bankruptcy courts
to usurp a state court proceeding.” (R.12, Appellant Br. 3).
24
otherwise lacks the authority to fully adjudicate the Adversary Proceeding, the Movants may
renew their motion when all pre-trial matters have been resolved”); Gecker v. Marathon Fin. Ins.
Co., RRG, 391 B.R. 613, 616 (N.D. Ill. 2008) (“courts frequently deny motions to withdraw the
reference without prejudice to take advantage of the judicial economy that comes with the
bankruptcy judge’s familiarity with the parties and the issues”); First Midwest Bank, 2016 WL
1259378 at *3 (“And even if, as the Committee contends, four of its claims . . . are non-core
claims, and two are ‘arguably’ Stern claims, the Committee makes no argument as to what loss
of judicial economy there is in permitting the bankruptcy court to submit a report of
recommended findings of fact and conclusions of law to this Court”); STC, 2015 WL 1042431 at
*4 (“A party’s refusal to consent to final adjudication by a bankruptcy court and the assertion of
a Seventh Amendment right to a jury trial . . . is insufficient for permissive withdrawal”); Kemp
v. Nelson, No. 16-CV-1546-JPS, 2016 WL 7177508, at *2-3 (E.D. Wis. Dec. 9, 2016) (“The
Court finds that the wiser exercise of discretion and use of its limited resources is to permit the
bankruptcy court to hear all pretrial matters arising in the adversary proceeding. At this early
stage in the litigation, the long-distant prospect of a jury trial is not enough to warrant
withdrawal of the reference”). The Court agrees with the reasoning set forth in these cases and
concludes that withdrawal is not appropriate at this juncture, especially considering that Debtor
alone—not Movant—requested a jury trial with respect to the Successor Liability Litigation.
(R.11-12, Jury Demand).
The Court, accordingly, denies the motion to withdraw the reference without prejudice to
later renewal.
25
CONCLUSION
For the foregoing reasons, the Court declines to exercise jurisdiction over Movant’s
interlocutory appeal (R.1) and denies without prejudice its motion to withdraw the reference
(R.9).
Dated: January 19, 2017
_________________________________
AMY J. ST. EVE
United States District Court Judge
26
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