South Louisiana Ethanol, LLC vs. Agrico Sales, Inc.

Filing 8

ORDER & REASONS denying 1 Motion to Withdraw Reference. Signed by Judge Jay C. Zainey on 1/19/2012. (gbw, )(cc: Bankruptcy Ct, Judge Magner)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
SOUTH LOUISIANA ETHANOL, LLC

CIVIL ACTION

VERSUS

NO: 11-3059

AGRICO SALES, INC.

SECTION: "A" (4)
BANKRUPTCY CASE NO.:
09-12676
ADVERSARY PROCEEDING NO.:
11-1084

ORDER AND REASONS
Before the Court is a Motion to Withdraw Reference (Rec.
Doc. 1) filed by defendant Agrico Sales, Inc.

South Louisiana

Ethanol, LLC and Whitney Bank oppose the motion.

The motion, set

for hearing on January 4, 2012, is before the Court on the briefs
without oral argument.
This motion involves an adversary proceeding filed in the
captioned bankruptcy case of South Louisiana Ethanol, LLC
(“SLE”).

The adversary proceeding was automatically referred to

the bankruptcy court pursuant to Local Rule 83.4.1.

This motion

is one of several pertaining to the SLE bankruptcy in which a
party moves this Court to withdraw the automatic reference based
upon the Supreme Court’s decision in Stern v. Marshall, 131 S.
Ct. 2594 (2011).

This Court is persuaded that Stern does not

draw the validity of the reference into question under the facts

1

of this case so as mandate withdrawal of the reference.
Moreover, the pre-Stern standards that govern permissive
withdrawal of a reference continue to be valid, and because the
movant has not established that withdrawal is appropriate under
those standards, the motion is DENIED.
I.

Background
SLE commenced its Chapter 11 bankruptcy case no. 09-12676 on

August 25, 2009.

SLE’s liquidating plan of reorganization was

confirmed on April 19, 2011.

On August 11, 2011, SLE as the

reorganized debtor filed adversary proceeding no. 11-1084,
Complaint for Breach of Contract of Deposit, Negligence,
Conversion and Dissolution of Contract, in the bankruptcy case.
Agrico Sales, Inc., movant herein, is the only defendant named in
the adversary complaint.1

The complaint is based solely on state

law.
Agrico filed a Motion to Withdraw Reference in which it
states that it opts to have the adversary proceeding transferred
to district court so that the district court can take up Agrico’s
pending motion to dismiss.

Via its reply memorandum2 Agrico

1

SLE filed a similar petition against Agrico in state
court. It is this Court’s understanding that the lawsuit remains
pending in Orleans Parish at this time.
2

Agrico did not file a memorandum in support of its Motion
to Withdraw Reference because it filed the motion ex parte at the
suggestion of the bankruptcy staff. Filing the motion ex parte
was not problematic because the district court will typically
schedule the motion for hearing once it is docketed by the
2

suggests that federal jurisdiction is lacking in this case and
that the bankruptcy court cannot adjudicate this matter in light
of Stern v. Marshall.
II.

Discussion
The district courts of the United States have original, non-

exclusive jurisdiction of all proceedings related to cases under
Title 11.

28 U.S.C.A. § 1334(b) (West 2006).

A civil proceeding

is related to a Title 11 case if the action’s outcome could
conceivably have any effect on the estate being administered in
bankruptcy.

In re Wood, 825 F.2d 90, 93 (5th Cir. 1987) (quoting

Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)).

This

grant of jurisdiction was intended to be broad in scope so as
give federal courts the power to adjudicate all matters having an
effect on the bankruptcy.

Id. at 92.

Once jurisdiction under § 1334 is established, the next
question is the placement of that jurisdiction, whether with the
bankruptcy court or with the district court.

Each district court

may provide that any or all cases under Title 11 or any and all
proceedings arising under Title 11 or arising in or related to a
case under Title 11 are to be referred to the bankruptcy court of

district court clerk. But filing a motion ex parte does not
excuse the requirement that the motion be accompanied by a
memorandum in support. The Court will treat Agrico’s reply
memorandum as a memorandum in support.
3

the district.3

28 U.S.C.A. § 157(a) (West 2006).

Pursuant to §

157(b)(1), bankruptcy judges may hear and determine (and enter
appropriate orders and judgments) on referral all cases under
Title 11 and core proceedings arising under Title 11 or arising
in a case under Title 11.

With respect to non-core proceedings

that are merely related to a case under Title 11, the bankruptcy
judge can hear the matter but cannot enter final orders or
judgments.

Id. § 157(c)(1).

Instead, the bankruptcy judge must

submit proposed findings of fact and conclusions of law to the
district court for consideration and a timely objection to the
proposed findings will trigger de novo review.
court then enters a final order or judgment.

Id.

The district

Id.

After a case is referred to the bankruptcy court, the
district court may withdraw, in whole or in part, any case or
proceeding referred under 28 U.S.C. § 157(b), for cause shown.
Id. § 157(d).

Mandatory withdrawal applies 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
interstate commerce.

Id.

affecting

District courts typically consider

several factors when deciding whether cause exists to withdraw

3

Via Eastern District Local Rule 83.4.1 all cases under
Title 11 and all proceedings arising under Title 11 or arising in
or related to a case under Title 11 are transferred by the
district court to the bankruptcy judges of the district.
4

the automatic reference:

Whether the proceeding involves core

bankruptcy matters, the interest of judicial economy, promoting
uniformity in bankruptcy administration, reducing forum shopping
and confusion, fostering economical use of the debtor’s and
creditors’ resources, expediting the bankruptcy process, and
whether there has been a jury demand.

In re Lapeyre, No. 99-

1312, 1999 WL 486888, at *2 (E.D. La. July 8, 1999); Holland Am.
Ins. Co. v. Succession of Roy, 777 F.2d 992, 998-99 (5th Cir.
1985)).
Turning now to the instant case, in its adversary complaint
SLE is seeking to recover equipment and cash that would have been
property of the estate under administration.

SLE’s liquidating

plan of reorganization was confirmed on April 19, 2011.

SLE did

not file its adversary complaint until August 11, 2011.

It is

not clear to this Court whether “related to” jurisdiction
continued to exist when the adversary complaint was filed
notwithstanding that the claim might have arisen pre-petition.
No party has raised this issue with the Court.

This Court

assumes without deciding that it has original subject matter
jurisdiction over the state law claims raised in the adversary
complaint pursuant to 28 U.S.C. 1334(b).4
4

Agrico has never challenged SLE’s (and intervenor
Whitney’s) assertion that “related to” jurisdiction exists
instead choosing to rely on the Stern case. In fact, in the
motion to dismiss that Agrico filed with the bankruptcy court it
specifically states that this case is related to a case under
5

Assuming that jurisdiction under § 1334(b) does in fact
exist, the suggestion that the bankruptcy court lacks
jurisdiction over the adversary complaint is simply incorrect.
It is true that the bankruptcy court lacks jurisdiction to enter
a final judgment over the adversary complaint because it is a
non-core matter.

But this situation is precisely what §

157(c)(1) was created to address in the wake of the Northern
Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50
(1982), decision.

After Northern Pipeline Congress and the

federal courts understood that bankruptcy courts could not
exercise Article III power over non-core matters.

Thus, Congress

crafted § 157(c)(1) to specifically allow district courts to
refer non-core matters to a bankruptcy judge subject to the

Title 11. (Memo in Support at 3). Of course subject matter
jurisdiction cannot be conferred by default, consent, waiver, or
error. As explained later in this Order and Reasons, this Court
is inclined to refer any case whose jurisdictional basis relies
solely on bankruptcy jurisdiction to the bankruptcy court, giving
great deference to the bankruptcy judge’s determination as to the
question of abstention. But if bankruptcy jurisdiction itself no
longer exists under § 1334(b) post-confirmation, then dismissal
without prejudice is appropriate. If Stern concerns prevent the
bankruptcy judge from dismissing this case without prejudice then
this Court, believing that the bankruptcy judge is best suited to
determine in the first instance whether a federal court has
jurisdiction over this matter, would give great deference to any
proposed findings and conclusions pursuant to 28 U.S.C. §
157(c)(1) recommending dismissal for lack of subject matter
jurisdiction notwithstanding de novo review. But again, no party
has even alluded to this issue.
The Court notes that SLE also pled diversity jurisdiction
but it now appears that the parties are not of diverse
citizenship. Thus, “related to” jurisdiction under § 1334(b) is
the sole basis for subject matter jurisdiction in federal court.
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restriction that the district judge retains sole power to finally
adjudicate the matter.

Thus, the Stern decision was hardly

necessary to point out the distinction between what a bankruptcy
judge could do with a core proceeding versus a non-core
proceeding.

Northern Pipeline pointed out that distinction and

Congress drafted § 157 in recognition of that distinction.
The lesson that Stern teaches is that the terms “core” and
“non-core” are not just mere labels that Congress can use to
transfer full adjudicative power over a matter to a bankruptcy
judge.

At issue in Stern was Congress’s characterization of

“counterclaims by the estate against persons filing claims
against the estate” as a core matter in § 157(b)(2)(C).

The

specific counterclaim at issue in Stern was a state law claim
wholly independent of the federal bankruptcy law and not
necessarily resolvable by a ruling on the creditor’s proof of
claim in the bankruptcy.

Stern, 131 S. Ct. at 2611.

Therefore,

in order to finally adjudicate that claim a bankruptcy judge
would have to engage in the verboten task of exercising the
Article III power of the courts of the United States.

But the

Constitution does not allow Congress to delegate the Article III
power of a district court to a bankruptcy judge.

And Stern

demonstrates that Congress cannot circumvent the Constitution by
statutorily characterizing a matter as “core.”
The Court is persuaded that Stern changes nothing for the

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instant case and has no direct impact on whether the automatic
reference should be withdrawn.

In contrast to what happened in

Stern, SLE’s adversary complaint does not fall into one of the
categories that Congress attempted to deem as core under §
157(b)(2).

The adversary complaint raises issues of state law

and the claims exist wholly outside of Title 11.

Under the pre-

Stern jurisprudence SLE’s adversary complaint was clearly a noncore matter as contemplated by § 157(c)(1).

Stern changed

nothing about § 157(c)(1) except perhaps to clarify that some
matters that Congress had statutorily deemed to be core would now
have to be treated as non-core and therefore referred under §
157(c)(1) instead of § 157(b)(1).5
That said, the Court turns its attention to whether Agrico
has established cause for permissive withdrawal of the
reference.6

For the reasons already explained, the recent Stern

decision does not constitute cause.

Moreover, even though the

bankruptcy court cannot enter a final judgment, that fact alone
is not cause because § 157(c)(1) specifically contemplates
referral of a non-core matter to a bankruptcy judge who cannot
enter a final order.

To the Court’s knowledge no party has

5

Indeed, the majority in Stern was clear that the issue
presented in the case was a narrow one, that the decision “does
not change all that much,” and that Congress violated Article III
in one isolated respect. Stern, 131 S. Ct. at 2620.
6

Mandatory withdrawal does not apply because the adversary
complaint is based solely on state law.
8

requested a jury trial on the claims against Agrico.

Should

trial by jury become an issue then the reference can be withdrawn
once the case is ready for trial.

The bankruptcy court is

intimately familiar with SLE’s bankruptcy.

The Court is not

inclined to believe that the bankruptcy process would be
expedited by moving SLE’s case to this Court’s trial docket at
this time.
Moreover, the Court notes that the sole jurisdictional basis
applicable to this case is § 1334(b).

This Court is persuaded

that § 1334(b) should be used for the purpose for which it was
created–-to effectuate the smooth administration of bankruptcies
by giving federal courts the power to entertain all matters
having an effect on the bankruptcy, and not to serve as an
alternative to diversity jurisdiction.

In fact, § 1334 contains

statutorily authorized, and sometimes mandated, abstention
provisions that serve to balance out § 1334(b)’s extremely broad
jurisdictional grant.

Therefore, when a case is in federal court

solely because it is related to a bankruptcy then it should be
referred to the bankruptcy judge presiding over the bankruptcy at
issue.

If the case is of such a nature such that a federal forum

is not necessary so as to effectuate the bankruptcy then the
appropriate course of action may very well be abstention under §
1334(c) but it is not withdrawal of the reference to place the
matter before a district judge who has no familiarity with the

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bankruptcy case.

And this Court is persuaded that the bankruptcy

judge, who is intimately familiar with the bankruptcy case
itself, is uniquely well-suited to determine whether a case
should be “close at hand” in federal court for the purpose of
protecting the bankruptcy process or whether abstention is
appropriate.7

Of course the foregoing discussion presupposes

that a federal court would have subject matter jurisdiction over
the complaint under § 1334(b).

See note 4, supra.

In sum, the Court finds that mover has not demonstrated
cause for withdrawal of the reference.
Accordingly;
IT IS ORDERED that the Motion to Withdraw Reference (Rec.
Doc. 1) filed by defendant Agrico Sales, Inc. is DENIED.
January 19, 2012
JAY C. ZAINEY
UNITED STATES DISTRICT JUDGE

7

If the bankruptcy judge concludes that abstention is
appropriate in this case, then the aggrieved party can appeal to
this Court, which would then make the final decision thereby
avoiding any Stern issues. But this Court would be inclined to
give great deference to the bankruptcy judge’s decision with
respect to abstention. Thus, the Court would not be inclined to
overturn such a decision even if it were to consider the question
de novo.
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