McKinstry v. Genser et al

Filing 5

MEMORANDUM OPINION & ORDER: Trustee's motion to withdraw reference as to the motion for sanctions due to spoilation of evidence 1 is GRANTED. The petitioner shall FILE her spoilation motion by 2/13/14. The respondents shall RESPOND to the petitioner's motion by 3/6/14. The petitioner shall REPLY by 3/20/14. Signed by Judge Amul R. Thapar on 2/11/2014. (RKT) cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
PIKEVILLE
In re BLACK DIAMOND MINING
COMPANY, LLC, et al.

TAFT A. MCKINSTRY, Trustee of the
BD Unsecured Creditors Trust,
Petitioner,
v.
IRA J. GENSER, et al.,
Respondents.

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Civil No. 13-145-ART

MEMORANDUM OPINION
AND ORDER

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In this case, which the Court previously referred to the Bankruptcy Court, the
petitioner has moved to withdraw the reference for the limited purpose of deciding a
forthcoming motion for sanctions due to spoliation of evidence. R. 1. Because withdrawing
the reference for this reason would promote judicial economy and conserve the parties’
resources, the Court will grant the petitioner’s motion.
BACKGROUND
A comprehensive account of this case’s tortured history appears in Sergent v.
McKinstry, 472 B.R. 387, 390–95 (E.D. Ky. 2012). To cut a long story short, the Court
initially referred this case to the Bankruptcy Court, id. at 394, and later determined that cause
existed to withdraw the reference in its entirety, id. at 420. However, the Court declined to
withdraw the reference immediately, citing the existence of “unfinished pretrial matters with
which the Bankruptcy Court has greater familiarity.” Id. The Court specified that the

Bankruptcy Court should continue to handle all pretrial matters, including “determining and
managing the scope of any remaining discovery by the parties,” and reserved for itself the
ability to set the trial schedule and decide motions in limine. Id. at 421.
The petitioner now asks the Court to withdraw the reference for the sole purpose of
considering one motion: a motion for sanctions due to spoliation of evidence. R. 1 at 1. The
petitioner alleges that the respondents purposefully and willfully destroyed documents
relevant to the litigation between the parties. Id. at 2. As relief, the petitioner seeks: (1) a
non-rebuttable jury instruction that all of the destroyed documents contained evidence that
would have harmed the respondents and benefitted the petitioner; (2) an order directing
respondent Alvarez & Marsal North America, LLC to disclose when it learned that
respondents Ira Genser and Larry Tate had violated the applicable document retention policy;
(3) an order striking certain of the respondents’ affirmative defenses; (4) dismissal of the
respondents’ counterclaim; and (5) fees and costs. Id. at 2–3. Because some of these
remedies relate to trial—and trial-related matters are within the province of this Court—the
petitioner believes withdrawal is appropriate. Id. at 3.
While the respondents concede that most of these issues belong before this Court,
they say that withdrawal at this time would be premature. R. 2 at 1 (indicating partial
consent and partial opposition to the petitioner’s motion to withdraw). Instead, they suggest
that the Court leave the spoliation motion with the Bankruptcy Court, withdrawing the
reference only if the Bankruptcy Court finds that the respondents acted in bad faith. Id. at 3.
DISCUSSION
A district court may withdraw, “in whole or in part,” any case referred to a
bankruptcy court “for cause shown.” 28 U.S.C. § 157(d). The statute grants the Court

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discretion to decide whether to withdraw a reference. E.g., In re John Richards Homes Bldg.
Co., 320 B.R. 138, 138 (E.D. Mich. 2004). When making this decision, the Court considers
such factors as: (1) whether the right to a jury trial exists; (2) whether the matter is core or
non-core; (3) promoting judicial economy; (4) promoting uniformity in bankruptcy
administration; (5) reducing forum shopping and confusion; (6) conserving the creditor’s and
debtor’s resources; and (7) expediting the bankruptcy process. See Sergent, 472 B.R. at 404–
05 (collecting cases). In this case, withdrawing the reference to consider the petitioner’s
spoliation motion would serve judicial economy and conserve the parties’ resources.
Because the remaining factors are either neutral or weigh in favor of withdrawing the
reference, the Court will grant the petitioner’s motion.
Judicial Economy:

Withdrawing the reference in this instance would promote

judicial economy, since the Bankruptcy Court cannot consider the petitioner’s entire
spoliation motion under the terms of this Court’s referral. Assume the Bankruptcy Court
found in favor of the petitioner. That court could then offer the petitioner only a portion of
the requested relief. It could not, for example, issue the proposed jury instruction: such
authority belongs exclusively to this Court. See Sergent, 472 B.R. at 421 (reserving trialrelated matters for this Court). Therefore, the Bankruptcy Court would be forced to pass the
motion on to this Court for final resolution. Alternatively, imagine that the Bankruptcy
Court denied the petitioner’s motion or declined to grant her the full complement of
remedies. If this occurred, the petitioner—as she has all but promised—would likely seek a
reversal of the decision in this Court. R. 1 at 9. In short, some aspect of the petitioner’s
spoliation motion will likely land in this Court, whether or not it withdraws the reference.
Moreover, the spoliation motion concerns matters equally within the wheelhouse of

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both courts, and deciding this motion does not require extensive recourse to the Bankruptcy
Court’s record.

District courts regularly hear spoliation motions.

See, e.g., Adkins v.

Wolever, 554 F.3d 650, 653 (6th Cir. 2009) (holding that it is “within a district court’s
inherent power to exercise broad discretion in imposing sanctions based on spoliated
evidence”). And, despite the respondents’ claims to the contrary, R. 2 at 6–7, the Bankruptcy
Court has not already devoted substantial time to this question. The Bankruptcy Court
record reveals no previous mention of the particular issues implicated by the spoliation
motion. And a review of the spoliation motion suggests that resolving it would not require
this Court to familiarize itself with subjects already within the Bankruptcy Court’s expertise.
R. 1 at 14–64.
The Parties’ Resources: Partially withdrawing the reference would also conserve
the parties’ resources. A two-level proceeding would require multiple briefs and hearings,
spawning heftier bills for clients. As the petitioner points out, her finite resources are no
match for the potential legal fees in this matter. R. 3 at 4. The respondents do not directly
respond to this contention, and the petitioner argues that the respondents face less straitened
financial circumstances. Id. Accordingly, this factor too supports withdrawing the reference.
Other Factors: The remaining factors either favor the petitioner or have no bearing
on the outcome of the Court’s analysis. First, the Court previously found that the petitioner
had shown cause to withdraw the reference as to the entire proceeding because of her
entitlement to a jury trial. Sergent, 472 B.R. at 404–05. Second, consolidating the resolution
of the spoliation motion in one court can only expedite the bankruptcy process. Third, the
respondents have identified no reason why withdrawing the reference would promote forum
shopping.

And fourth, given that spoliation sanctions bear no special relationship to

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bankruptcy proceedings, deciding the spoliation motion in district court will not undermine
the uniformity of bankruptcy administration.
CONCLUSION
Accordingly, it is ORDERED that the Trustee’s motion to withdraw the reference as
to the motion for sanctions due to spoliation of evidence, R. 1, is GRANTED.

The

petitioner shall FILE her spoliation motion by Thursday, February 13, 2014.

The

respondents shall RESPOND to the petitioner’s motion by Thursday, March 6, 2014. The
petitioner shall REPLY to the respondents’ response by Thursday, March 20, 2014.
This the 11th day of February, 2014.

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