Adelsperger v. 3D Holographics Medical Imaging Inc et al

Filing 13

OPINION AND ORDER GRANTING 1 MOTION to Withdraw Reference filed by Robert A Foraker, Julius Toth. Signed by Judge Holly A Brady on 5/21/19. (ksp)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
DOUGLAS R. ADELSPERGER, as
Trustee for the Consolidated Bankruptcy
Estate of 5 Star Commercial, LLC, et al.,
Plaintiff,
CAUSE NO.: 3:16-CV-759-HAB
Bankruptcy No. 16-30078
Adversary Proceeding No. 16-03031

v.
3D HOLOGRAPHICS MEDICAL
IMAGING INC., 7 HEAVENS LLC dba
ECOWASHER, ASSOCIATED
COUNTRIES IN TECHNOLOGY
INTERNATIONAL INCUBATOR, INC.,
ECO II ECOWASH, LLC, GREEN
RESOURCE HOMES INC., H&H REAL
ESTATE HOLDINGS, LLC, JULIUS
TOTH, PEDAL WHEELCHAIR, LLC,
ROBERT A. FORAKER, as Trustee of the
Green Resource Homes Financial
Trust for the Benefit of Julius Toth, and
ROBERT A. FORAKER, individually,
Defendants.

OPINION AND ORDER
This matter is before the Court on Defendant’s Motion to Withdraw the Reference
[ECF No. 1], filed with the Bankruptcy Court on September 29, 2016, and docketed with
this Court on November 7, 2016.1 Defendants Julius Toth and Robert Foraker request that
the Court withdraw the reference to the Bankruptcy Court and move Trustee Douglas R.
Adelsperger’s adversary complaint to this Court. Defendants argue that withdrawal of
the reference is warranted because they have asserted their right to a jury trial with

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Although the Motion to Withdraw was docketed in this Court on November 7, 2016, the Complaint that
initiated the adversary proceeding was not entered on the docket of this Court until May 20, 2019.

respect to the claims for relief raised in the adversary complaint. Additionally, they have
not consented to the entry of a final judgment by the bankruptcy court.
Having reviewed Defendants’ Motion and the Trustee’s Objections, as well as
Bankruptcy Judge Harry C. Dees, Jr.’s, Report and Recommendation regarding the same,
the Court will grant the Motion.

BACKGROUND
Douglas R. Adelsperger, as Trustee of the substantively consolidated “5 Star
bankruptcy estates” in Case No. 16-30078-hcd before the United States Bankruptcy Court
for the Northern District of Indiana, filed a Complaint against Defendants, commencing
an adversary proceeding. The Trustee alleges that between February 12, 2015, and July
13, 2015, based on misrepresentations by Foraker and Toth, the Debtors transferred over
$2.2 million to various companies, without receiving reasonably equivalent value in
exchange. The Trustee seeks to avoid and recover fraudulent transfers, and to avoid and
recover an unauthorized post-petition fraudulent transfer. He also asserts claims against
Defendants for common law fraud, false representations, deception, aiding and abetting
fraud, breach of fiduciary duty, and unjust enrichment. The Trustee seeks a
determination that any damages recovered are property of the 5 Star consolidated estates.
Defendants filed a Motion seeking to withdraw the reference of this adversary
proceeding pursuant to 28 U.S.C. § 157(d), Rule 5011 of the Federal Rules of Bankruptcy
Procedure, and N.D. Ind. L.R. 200-1(b)(1). Defendants argue that they are entitled to a
jury trial on the Trustee’s claims and, because the bankruptcy court is not authorized to
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conduct jury trials, the reference must be withdrawn. As a second ground for withdrawal,
Defendants argue that the bankruptcy court does not have constitutional or statutory
authority to adjudicate the Trustee’s claims against them as non-creditor Defendants who
have not filed a proof of claim in the bankruptcy case.
The Trustee filed a response to Defendants’ Motion. Although implicitly
conceding that good cause exists for the Court to eventually withdraw the reference of
the adversary proceeding, the Trustee asserts that the Court should wait to withdraw the
reference until the adversary proceeding is ready for trial. The Trustee notes that district
courts routinely permit bankruptcy courts to retain jurisdiction of an adversary
proceeding until the proceeding is ready for trial and that, in this case, it would be more
efficient for the bankruptcy court to maintain jurisdiction of this adversary proceeding to
supervise the case through discovery and any dispositive motions.
The Bankruptcy Judge prepared a Report and Recommendation pursuant to
Northern District of Indiana Local Rule 200-1(b)(1)(C). The bankruptcy court
recommends that this Court grant Defendants’ Motion to Withdraw pursuant to 28 U.S.C.
§ 157(d) because Defendants are entitled to a jury trial and the United States Bankruptcy
Court for the Northern District of Indiana is not authorized to conduct jury trials.
Additionally, the adversary proceeding involves both core and non-core proceedings, so
it would best preserve the rights of Defendants to treat the litigation as a non-core
proceeding. As such, the most the Bankruptcy Court could do is “hear proceedings and
submit proposed findings of fact and conclusions of law to the district court for de novo
review and entry of judgment.” (Report and Recommendation 6–7 (quoting Exec. Benefits
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Ins. Agency v. Arkison, 573 U.S. 25, 36 (2014).) Under this scenario, the bankruptcy court
does not agree that it would be judicially efficient to make recommendations, including
for purposes of ruling on dispositive motions, only to have another court conduct de novo
review.

DISCUSSION
District courts have original jurisdiction over all bankruptcy proceedings arising
out of Title 11 of the United States Code, see 28 U.S.C. § 1334, but a district court may
“provide that any or all cases under title 11 [of the United States Code] 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,” 28 U.S.C. § 157(a). Local Rule 200-1 of
the United States District Court for the Northern District of Indiana addresses bankruptcy
cases and proceedings. Through Local Rule 200-1(a)(1), this Court has exercised its
authority to automatically refer bankruptcy matters to the bankruptcy judges, and this
automatic referral includes “all cases under Title 11 of the United States Code, and any
or all proceedings arising under Title 11 or arising in or related to a case under Title 11.”
Local Rule 200-1 also identifies matters to be determined by bankruptcy judges, matters
to be determined or tried by district judges, and procedures that apply to motions to
withdraw cases and proceedings to the district court.
Bankruptcy courts have statutory authority to issue final orders and judgments in
“core proceedings arising under title 11, or arising in a case under title 11, referred under
subsection (a).” 28 U.S.C. § 157(b)(1). The statute contains a non-exhaustive list of “core
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proceedings” in which the bankruptcy court may enter a final order or judgment. Id. §
157(b)(2). Orders to turn over property and proceedings to determine, avoid, or recover
fraudulent conveyances are listed as core proceedings. Id. § 157(b)(E) &(H).
By contrast, when the bankruptcy court determines, under § 157(b)(3), that a claim
is only “related to” the bankruptcy proceedings, the bankruptcy court may not enter final
judgment but “shall submit proposed findings of fact and conclusions of law to the
district court” for de novo review and final entry of final judgment. 28 U.S.C. § 157(c)(1).
The proceedings in this latter category are known as “non-core” proceedings. Non-core
proceedings are those only marginally related to the bankruptcy, which often are state
law causes of action. In re Conseco Finance Corp., 324 B.R. 50, 53–54 (N.D. Ill. 2005). As the
United States Supreme Court summarized it:
Put simply, 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, 134 S. Ct. at 2172.
A district judge “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” for the removal. 28 U.S.C. § 157(d). Section 157(d) does not define “cause,” but
courts generally consider the following factors in determining whether cause exists:
whether withdrawal would promote judicial economy or uniformity and efficiency in
bankruptcy administration; whether it would reduce forum shopping; whether it would

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cause delay and costs to the parties; whether a particular court has familiarity with the
case; whether parties have demanded a jury trial; and whether a core or non-core
proceeding is involved. See Matter of Powelson, 878 F.2d 976 n.9 (7th Cir. 1989); Abrams v.
DLA Piper (US) LLP, No. 2:12-CV-19-TLS, 2012 WL 1714591, at *3 (N.D. Ind. May 15, 2012);
In re Comdisco Ventures, Inc., Nos. 04-C-2007, 04-C-2393, 01-24795, 2004 WL 1375353, at *2
(N.D. Ill. June 18, 2004); U.S. (EPA) v. Envtl. Waste Control, Inc., 131 B.R. 410, 418 (N.D.
Ind. 1991).
Defendants here request withdrawal on grounds that they are entitled to, and have
demanded, a jury trial on the Trustee’s claims. The right to a jury trial is sufficient cause
to withdraw the reference to the bankruptcy court. Matter of Grabill Corp., 967 F.2d 1152,
1158 (7th Cir. 1992); Good v. Kvaerner U.S., Inc., No. 1:03-CV-476, 2003 WL 21755782, at *3
(S.D. Ind. July 25, 2003); Consol. Indus. Corp. v. Welbilt Holding Co., 254 B.R. 237, 238 (N.D.
Ind. 2000). Bankruptcy judges in this District are not permitted to conduct jury trials. N.D.
Ind. L.R. 2001-1(c). The Trustee has asserted state law claims that are non-core
proceedings, and to which a right to a jury trial has been asserted.
Additionally, because Defendants have not filed a proof of claim in the bankruptcy
case, the Seventh Amendment right to jury trial applies even to the Trustee’s action to
recover fraudulent transfers from it. Granfinanciera v. Nordberg, 492 U.S. 33, 36 (1989)
(holding that “a person who has not submitted a claim against a bankruptcy estate has a
right to a jury trial when sued by the trustee in bankruptcy to recover an allegedly
fraudulent monetary transfer . . . notwithstanding Congress’ designation of fraudulent
conveyance actions as ‘core proceedings’”). This right exists because the nature of the
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relief is legal, not equitable, 492 U.S. at 40–48, and because the fraudulent conveyance
action is not a public right arising as part of the process of allowance and disallowance of
claims, nor integral to the restructuring of debtor-creditor relations, id. at 52–59. Thus,
Defendants are entitled to a jury trial on the Trustee’s claims.
Because the bankruptcy court cannot conduct this trial, cause exists to withdraw
the reference of the adversary proceeding. Despite the existence of cause for granting the
withdrawal, the parties dispute whether the withdrawal should be immediate, or
whether it should or can be deferred to allow the bankruptcy court to retain jurisdiction
until the matter is ready for trial. The Trustee argues that having the bankruptcy court
retain the case through discovery and consideration of any dispositive motions meets the
intended goal, set forth in the Northern District of Indiana’s Local Rules, that bankruptcy
court’s exercise “the broadest possible authority to administer cases properly within their
jurisdiction,” N.D. Ind. L. R. 200-1(a)(1), as well as Congress’s “intent to let expert
bankruptcy judges determine bankruptcy matters to the greatest extent possible.” (ECF
No. 1 at 23.)
For its part, the bankruptcy court’s Recommendation is that the withdrawal be
immediate. This is based, in part, on the bankruptcy court’s position that it only has the
recommendatory authority provided by 28 U.S.C. § 157(c)(1), which would be subject to
de novo review by the district court. As the bankruptcy court puts it,
[there is] no economy in two judicial officers reviewing the same matters.
Such a procedure is not only inefficient, but it also opens the door to
contradictory conclusions by different judges. Additionally, in terms of
costs and delay to the parties, such a procedure would not be economical

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because it would require the parties’ participation in litigation in two courts
when they could accomplish all before one court.
(ECF No. 1 at 36.) The bankruptcy court also supposes that the “district court is at
least as familiar with the circumstances surrounding 5 Star” as is the bankruptcy
court based on other civil cases involving 5 Star that are pending in federal court.
(Id.)2
Having reviewed the record before it, the Court will exercise its discretion to
withdraw the reference to the bankruptcy court over this adversary proceedings. Several
factors inform the Court’s decision.
The adversary proceeding involves both core and non-core matters. However, this
Court agrees with the bankruptcy court that the circumstances of the claims are
intertwined, and that it would be impractical to separate them. Cf. In re K & R Exp. Sys.,
Inc., 382 B.R. 443, 448 (N.D. Ill. 2007) (noting that it would conserve the debtor’s estate
and promote judicial economy to withdraw reference to all the claims in an adversary
proceeding rather than to split the action into two forums). Defendants—none of whom
would have had a connection to the 5 Star bankruptcy proceedings absent the adversary
proceeding—have invoked their right to a jury trial. The bankruptcy court would be
limited in the matter in which it could manage the case with respect to dispositive
motions. In fact, the Trustee has filed a Motion for Partial Summary Judgment [ECF No.

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Presumably, this argument was made with the understanding that the presider in the adversary proceeding
would be same presider of civil litigation involving the Securities and Exchange Commission and two of the 5 Star
entities and the principal of those entities. In fact, an Order [ECF No. 5] entered on May 10, 2017, directed transfer
of this matter to Judge Joseph VanBokkelen because it was related to an earlier-filed case assigned to him:
Securities and Exchange Commission v. Miller et al., Case No. 3:15-CV-519-JVB-MGG. On May 14, 2019, this
case was reassigned to the undersigned. None of the “related” SEC proceedings are before this Court. Accordingly,
judicial familiarity is not a factor that weighs in favor of an immediate withdrawal.

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6], directed at 4 counts of the 33-count Complaint. The four counts allege a non-core claim
for breach of contract. The designated evidence in support of the Motion for Partial
Summary Judgment was not obtained through discovery conducted in the adversary
proceeding. Rather, the Trustee relies on testimony from depositions taken in a related
case pending in federal district court. Accordingly, there does appear to be a need, and
certainly not an efficiency, for the bankruptcy court to manage the discovery in this case.
Further, the Court sees no efficiency in having the bankruptcy court issue a report and
recommendation on the dispositive motion, only to have it subject to de novo review for
any portion that draws an objection. Finally, withdrawing the reference will not impede
administration of the 5 Star bankruptcy, which will continue parallel to this action.

CONCLUSION
For the reasons stated above, the Court GRANTS the Defendant’s Motion to
Withdraw Reference [ECF No. 1].
SO ORDERED on May 21, 2019.
s/ Holly A. Brady
JUDGE HOLLY A. BRADY
UNITED STATES DISTRICT COURT

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