Demmons et al v. R3 Education, Inc. et al

Filing 2

ORDER AND REASONS denying 1 Motion to Withdraw Reference. Signed by Judge Ivan L.R. Lemelle. (ijg)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
WILLIAM DEMMONS, ET AL.

CIVIL ACTION

VERSUS

NO. 15-6329

R3 EDUCATION, INC., ET AL.

SECTION "B"(2)

ORDER AND REASONS
I.

NATURE OF MOTION AND RELIEF SOUGHT
Before the Court is Defendant’s, R3 Education, Inc. d/b/a

Saba

University

School

of

Medicine

(“Saba”),

Motion

and

Incorporated Memorandum in Support of Motion to Withdraw the
Reference. Defendant Saba avers that the claims against it by
Plaintiffs, William Demmons and Karen Fowler, are not based in the
Bankruptcy

Code,

such

that

the

Bankruptcy

Court

lacks

constitutional authority to adjudicate them and the District Court
should

withdraw

the

reference

accordingly.

For

the

reasons

discussed herein, IT IS ORDERED that Defendant’s Motion is DENIED.
II.

FACTS AND PROCEDURAL HISTORY
Plaintiffs are debtors who initiated a Chapter 7 bankruptcy

proceeding on June 25, 2014 and received a discharge on September
29, 2014. See In re Demmons, No. 14-11638 (Bankr. E.D. La. filed
June

25,

2015).

Defendant

Saba

is

the

medical

school

that

Plaintiffs attended. (Rec. Doc. 1 at 3). In Plaintiffs’ initial
bankruptcy proceeding, Defendant Saba did not file a proof of

claim, nor was Defendant Saba listed as a creditor. (Rec. Doc. 1
at 3).
On March 12, 2015, Plaintiffs filed an adversary proceeding
seeking
incurred

discharge
while

in

of

the

student

attendance

at

loan
Saba,

obligations
so

as

to

that
reopen

were
the

bankruptcy proceeding. See Complaint, Demmons v. R3 Education Inc.
et

al.,

No.

Plaintiffs
naming

as

15-1024

seek

(Bankr.

discharge

defendants

alternatively

asserting

of

E.D.

La.

their

filed

student

various

student

claims

directly

Mar.
loan

loan

12,

2015).

obligations,

companies,

against

Saba

for

but
the

recovery of damages. See id. Plaintiffs’ claims against Saba are
based on theories of fraudulent misrepresentation and breach of
contract. Id.; see also Amended Complaint, Demmons, No. 15-1024
(Bankr. E.D. La. filed July 30, 2015).
In Plaintiffs’ adversary proceeding, they assert that the
bankruptcy court has jurisdiction pursuant to 28 U.S.C. § 1334, as
well as pursuant to 28 U.S.C. § 157, because it is a “core
proceeding.” See Complaint, Demmons, No. 15-1024 (Bankr. Doc. 1 at
2-3). Defendant Saba has filed the instant motion solely contesting
the bankruptcy court’s jurisdiction over the proceeding against it
(and not over the proceedings against the student loan companies),
and likewise maintains that the proceeding against it is not
“core.”

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III. STANDARD FOR WITHDRAWAL OF THE REFERENCE
The standard for when a district court may withdraw the
reference from bankruptcy court is set forth in 28 U.S.C. § 157(d).
That

section

provides

for

both

mandatory

and

permissive

withdrawal:
The district court may withdraw, in whole or
in part, any case or proceeding referred under
this section, on its own motion or on timely
motion of any party, for cause shown. The
district court shall, on timely 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.
28 U.S.C. § 157(d).
The district court is required to withdraw the reference if
it

determines

that

resolution

of

the

proceedings

requires

consideration of both the Bankruptcy Code and other U.S. laws
regulating organizations or activities that affect interstate
commerce. Id. The mandatory withdrawal provision has generally
been interpreted strictly, “granting withdrawal of the reference
when

the

claim

consideration

of

and

defense

entail

non-Bankruptcy

material

Code

and

federal

substantial

law.”

In

re

Queyrouze, No. 14-2715, 2015 WL 5440825, at *2 (quoting In re OCA,
Inc., No. 06–3811, 2006 WL 4029578, at *2 (E.D.La. Sept. 19,
2006)).

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To determine whether to withdraw a reference on permissive
grounds, the Fifth Circuit has held that district courts should
consider whether the matter at issue is a core or a non-core
proceeding. Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d
992, 999 (5th Cir. 1985). Further, courts should consider whether
the proceedings involve a jury demand and whether withdrawal would
further

the

goals

of

promoting

uniformity

in

bankruptcy

administration, reducing forum shopping and confusion, fostering
the economical use of the debtor's and creditors' resources, and
expediting the bankruptcy process. Id.
IV.

DISCUSSION
A. Withdrawal of the Reference is Not Mandatory as Suggested
by Defendant.
Defendants

erroneously

recite

that

“[w]ithdrawal

of

the

reference is required in this case because the Bankruptcy Court
lacks constitutional authority to adjudicate state law claims that
are

independent

of

the

federal

bankruptcy

law

and

are

not

necessarily resolvable by a ruling on that creditor’s proof of
claim in bankruptcy.” (Rec. Doc. 1 at 5) (citing Stern v. Marshall,
131 S. Ct. 2594, 2611, 2620 (2011); In re Frazin, 732 F.3d 313,
320 (5th Cir. 2013)) (emphasis added). Defendant is correct to the
extent

that

a

bankruptcy

court

does

not

have

constitutional

authority to finally adjudicate certain types of claims; however,
withdrawal is not always “required” in these cases. The bankruptcy

4

court has the statutory authority, in certain circumstances, to
issue proposed findings of fact and conclusions of law to be
reviewed de novo by the district court. Executive Benefits Ins.
Agency v. Arkison, 134 S. Ct. 2165, 2168 (2014). In this case, the
bankruptcy court lacks the constitutional authority to enter a
final judgment but maintains the statutory authority to issue
proposed findings of fact and conclusions of law.
“The manner in which a bankruptcy judge may act on a referred
matter depends on the type of proceeding involved.” Stern, 131 S.
Ct. 2594 at 2603. More specifically, bankruptcy judges may only
enter final judgments in “core proceedings arising under title 11,
or arising in a case under title 11.” Id. (citing 28 U.S.C. §
157(b)(1)). A “proceeding is core under section 157 if it invokes
a substantive right provided by title 11 or if it is a proceeding
that,

by

its

nature,

could

arise

only

in

the

context

of

a

bankruptcy case.” In re U.S. Brass Corp., 301 F.3d 296, 304 (5th
Cir. 2002) (quoting Matter of Wood, 825 F.2d 90, 97 (5th Cir.
1987)). Here, Plaintiffs’ claims against Defendant Saba in the
adversary proceeding are based on state law theories of breach of
contract and tort and are separable from Plaintiffs’ allegations
concerning

the

Consequently,

the

dischargeability
proceeding

of

against

their

student

Defendant

Saba

loans.

does

not

invoke a substantive right provided by title 11. Stern, 131 S. Ct.
2594 at 2620. Additionally, the proceeding does not arise only in
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the context of a bankruptcy case, as such claims could proceed
separately. The adversary proceeding is therefore “non-core” and
there is no constitutional authority to enter a final judgment.
“When

a

bankruptcy

judge

determines

that

a

referred

‘proceeding . . . is not a core proceeding but . . . is otherwise
related to a case under title 11,’ the judge may only ‘submit
proposed findings of fact and conclusions of law to the district
court.’” Id. at 2604 (quoting 28 U.S.C. § 157(c)(1)) (emphasis
added). The district court then reviews de novo any matter to which
a party objects.

Id.

“[T]he Bankruptcy Code does not define

‘related matters,’” but the Fifth Circuit has held that a matter
is related when “the outcome of that proceeding could conceivably
have any effect on the estate being administered in bankruptcy.”
In re Galaz, 765 F.3d 426, 430 (5th Cir. 2014) (internal quotations
and citations omitted) (emphasis in original). More specifically,
a matter “is related to bankruptcy if the outcome could alter the
debtor’s

rights,

liabilities,

options,

or

freedom

of

action

(either positively or negatively) and which in any way impacts
upon the handling and administration of the bankrupt estate.” Id.
(internal quotations and citations omitted). Bankruptcy courts do
not have jurisdiction over a proceeding that does not have an
effect on the estate of the debtor, and consequently lack the
statutory

authority

to

enter

proposed

6

findings

of

fact

and

conclusions of law to be reviewed de novo by the district court.
Id.
In Galaz, the court determined that the bankruptcy court had
the

statutory

authority

to

hear,

but

not

the

constitutional

authority to finally adjudicate, a “non-core” proceeding that was
“related to” the bankruptcy. Id. at 430-32. In determining that
the claim was “related to” the bankruptcy, the court stated that
“a

judgment

against

Appellants

could,

at

least

conceivably,

increase the size of [the debtor’s] bankruptcy estate.” Id. at 430
(citing

In re BP RE, L.P., 735 F.3d 279, 282 (5th Cir.2013) (state

law claims brought by debtor against third-party non-creditors
were “related to” the bankruptcy case); Waldman v. Stone, 698 F.3d
910, 916 (6th Cir.2012) (bankruptcy court had subject matter
jurisdiction over a debtor's state law claims in an adversary
proceeding, in part because “a damages award on [the debtor's]
affirmative

claims

would

provide

assets

for

his

other

creditors”)). Still, the debtor’s “state law claim for damages and
other relief [was] against parties who [were] otherwise uninvolved
in the bankruptcy case and exist[ed] irrespective of the pendency
of the bankruptcy case[,]” such that it was a non-core proceeding.
Id. at 430-31.
This case is no different. As in Galaz, a damages award on
Plaintiffs’ claims against Defendant Saba would alter the debtor’s
rights, liabilities, options, or freedom of action. Specifically,
7

if

Defendant

Saba

was

found

liable

for

the

student

loans,

Plaintiffs would not be. Alternatively, if Defendant Saba was found
only to be liable to Plaintiffs for other state law claims, such
relief would also improve Plaintiffs’ options for payment to
Defendant Saba or other creditors. As such, it seems this case
falls in line with Galaz. Still, one additional assessment need be
made.
In Galaz, as well as other controlling precedent, the courts
stressed that “related to” proceedings were those that in some way
impacted the estate of the debtor. See, e.g., Celotex Corp. v.
Edwards, 514 U.S. 300, 308 n.6 (1995); Matter of Walker, 51 F.3d
562, 569 (5th Cir. 1995); Matter of Majestic Energy Corp., 835
F.2d 87, 90 (5th Cir. 1988); Wood, 825 F.2d at 93. Defendants point
out that “Plaintiffs received their discharge on September 30,
2014[,]” such that “[t]he estate no longer exists.” (Rec. Doc. 1
at

5).

Defendants

are

correct

that,

upon

the

granting

of

a

discharge in a bankruptcy proceeding, the estate ceases to exist.
See In re Craig's Stores of Texas, Inc., 266 F.3d 388, 390 (5th
Cir. 2001) (stating that “the debtor's estate terminates” upon the
discharge in the bankruptcy proceeding). Nevertheless, even when
the bankruptcy court closes a case because “an estate is fully
administered and the court has discharged the trustee, . . . [a]
case may be reopened in the court in which such case was closed to
administer assets, to accord relief to the debtor, or for other
8

cause.” 11 U.S.C. § 350. Here, Plaintiffs have reopened their case
to determine the dischargeability of student loans. Consequently,
any success on Plaintiffs’ claims against Defendant Saba will
benefit the estate and are therefore “related to” proceedings. As
a result, the bankruptcy court has the statutory authority to enter
proposed findings of fact and conclusions of law for the district
court to review de novo.1
B. The Permissive Factors for Withdrawal of the Reference do
Not Weigh in Favor of Withdrawal.
This Court does not find that “permissive” withdrawal is
warranted in this case. Under 28 U.S.C. § 157(d), “[t]he 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.” As already stated, in determining
“cause shown,” the district courts consider six factors: (1)
whether the matter is core or non-core, (2) whether promotion of
uniformity in bankruptcy administration will be achieved, (3)

1

This Court makes no decision on the merits of Plaintiffs’ claims against
Defendant Saba at this time, but notes that Plaintiffs had a duty to file a
financial statement with the bankruptcy court when the Chapter 7 proceedings
were initiated, that should have included a schedule of assets that were part
of the estate at that time. See 11 U.S.C. § 521(a)(1)(B). The estate’s assets
to be listed include “all legal or equitable interests of the debtor in property
as of the commencement of the case.” 11 U.S.C. § 541(a)(1). This includes
disclosure of all “causes of action owned by the debtor[.]” Chartschlaa v.
Nationwide Mut. Ins. Co., 538 F.3d 116, 122 (2d Cir. 2008). Property not
disclosed on the schedule remains part of the estate and the debtor lacks
standing to pursue the claims after emerging from bankruptcy. 11 U.S.C. §
554(d). This Court notes its concern as to whether Plaintiffs initially
disclosed this cause of action in light of the doctrine of judicial estoppel,
but declines to delve further into the issue in the absence of additional
information. See In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir. 2004).
9

whether forum shopping and confusion is reduced, (4) whether
debtors’ and creditors’ resources are conserved, (5) whether the
bankruptcy process is expedited, and (6) whether a party has
demanded a jury trial. Holland, 777 F.2d at 998-99. Withdrawal is
in the discretion of the district court. In re Mirant Corp., 197
F. App'x 285, 294 (5th Cir. 2006) (citing 28 U.S.C. § 157(a)).
As previously established, the proceeding against Defendant
Saba is non-core, favoring withdrawal under the first factor due
to the lack of constitutional authority the bankruptcy court has.
Despite this, all other factors weigh in favor of the bankruptcy
court hearing these “related to” proceedings. As to the second and
third factors, allowing this claim to proceed in bankruptcy court
will promote streamlined litigation, to preserve resources and
reduce confusion. For example, if Plaintiffs’ student loans are
determined to be dischargeable by the bankruptcy court, there would
be no need to litigate the issue of whether Defendant Saba is
alternatively liable on them. This would serve to preserve debtors’
and creditors’ resources. Conversely, if withdrawal were allowed,
and

the

bankruptcy

dischargeable

while

court
the

held

that

district

the

court

student

found

loans

were

Defendant

Saba

liable, a confusing situation would result regarding what is owed
to Plaintiffs’ creditors and what recovery is part of the estate.
Additionally, while Defendant asserts that this is not “forum
shopping,” it is noted that the instant motion was only filed after
10

the failure of two prior motions to dismiss in the adversary
proceeding.
As to the fourth factor, denying the motion to withdraw
reference will promote uniformity in bankruptcy administration, as
the bankruptcy court will be able to oversee administration of the
estate more easily if the claims against Saba remain in that court.
As to the fifth factor, this Court does not see how withdrawal
would expedite the bankruptcy process, but believes it might have
the opposite effect. Finally, as to the sixth factor, there is no
concern about the parties being deprived a jury trial in bankruptcy
court, as one was not requested. Accordingly, the Court declines
to exercise its authority to permissively withdraw the proceeding
against Defendant Saba.
V.

CONCLUSION
For

the

reasons

set

forth

above,

the

Court

finds

that

withdrawal is not mandatory, nor is the Court persuaded that it
should permissively withdraw the reference. Accordingly, IT IS
ORDERED that Defendant’s Motion to Withdraw Reference is DENIED.
New Orleans, Louisiana, this 18th day of March, 2016.

_______________________________
UNITED STATES DISTRICT JUDGE

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