In Re. Small Business Term Loans, Inc

Filing 17

Judge George A. O'Toole, Jr: OPINION AND ORDER entered granting 1 Motion to Withdraw Reference (Halley, Taylor)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 17-10249-GAO

In re: SMALL BUSINESS TERM LOANS, INC., d/b/a BFS Capital

OPINION AND ORDER
June 26, 2017
O’TOOLE, D.J.
ABC Disposal Service, Inc. (“ABC”) and New Bedford Waste Services, LLC (“NBW”)
are debtors in Chapter 11 bankruptcy cases being jointly administered under United States
Bankruptcy Court for the District of Massachusetts docket number 16-11787-JNF. Small Business
Term Loans, Inc., d/b/a BFS Capital (“BFS”) filed proofs of claims against ABC and NBW,
asserting that each debtor is liable to BFS for moneys due under certain promissory notes. In an
adversary proceeding, the debtors objected to the claims and filed counterclaims against BFS,
arguing, among other things, that the notes’ interest rates were unreasonable and usurious under
Massachusetts law and therefore unlawful and unenforceable.
BFS has moved to withdraw the automatic reference of the adversary proceeding, invoking
28 U.S.C. § 157(d), which provides:
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.
The first sentence of § 157(d) permits withdrawal of the reference if the district court finds
good cause supports that action. The second sentence requires withdrawal if the court determines

that resolution of the dispute necessarily involves consideration not only of title 11 law but also
“other laws of the United States.”
In response to the debtors’ claims that the interest rates are usurious and unenforceable,
BFS asserts (1) that, because the notes were initially issued by the debtors to BofI, a federally
chartered savings association, the Home Owners’ Loans Act (“HOLA”), 12 U.S.C. § 1461, et seq.,
governs the interest rate that may be charged, (2) that the notes’ rates were lawful under that statute,
(3) that under settled federal case law, a note that was “valid when made” remains valid and
enforceable even after it has been transferred to a holder that could not have charged the original
rate, see Gaither v. Farmers & Mechanics Bank of Georgetown, 26 U.S. (1 Pet.) 37, 43 (1828)
(“[I]f the note [is] free from usury, in its origin, no subsequent usurious transactions respecting it,
can affect it with the taint of usury.”); Nichols v. Fearson, 32 U.S. (7 Pet.) 103, 106 (1833) (“[A]
contract free from usury in its inception, shall not be invalidated by any subsequent usurious
transaction upon it.”), and (4) that HOLA and the National Banking Act (“NBA”), 12 U.S.C. § 1,
et seq., combine to require federal preemption of conflicting state law, such as the Massachusetts
usury statute relied on by the debtors. See 12 U.S.C. § 1465(a) (HOLA); id. §§ 85, 86 (NBA).
The question immediately at hand is not whether BFS’s arguments are correct, but rather
whether resolution of the issues in the adversary proceeding “requires consideration . . . of other
laws of the United States” beyond title 11. 28 U.S.C. § 157(d). If so, withdrawal of the reference
is mandated.
Courts that have construed this language have drawn a distinction between simply applying
an unquestioned legal rule to present facts, on the one hand, and interpreting or analyzing a rule to
determine whether to apply it (or to what extent), on the other. See, e.g., In re Vicars Ins. Agency,
Inc., 96 F.3d 949, 954 (7th Cir. 1996) (stating that “mandatory withdrawal [of a reference] is

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required only when [non-title 11] issues require the interpretation, as opposed to mere application,
of the non-title 11 statute, or when the court must undertake analysis of significant open and
unresolved issues regarding the non-title 11 law.”). Put another way, merely recognizing and
applying to the case at hand an uncontroversial non-bankruptcy rule does not qualify as
“consideration . . . of other laws of the United States” within the meaning of § 157(d). The
commonly applied test is to ask whether resolution of a contested point “involves substantial and
material consideration of non-bankruptcy federal statutes.” In re Ponce Marine Farm, Inc., 172
B.R. 722, 724 (D.P.R. 1994) (citations omitted). Manifestly, thinking about and deciding whether
or how a non-bankruptcy rule ought to be applied when the parties disagree about those questions
goes beyond “mere application” of the rule, and requires “consideration” of the pros and cons of
applying it.
The debtors’ position on this point is a bit muddled. If the non-title 11 rules invoked by
BFS are simply “applied” on their face without “consideration” of their pertinence, then the
debtors’ objection and counterclaims are defeated. But the debtors’ essential argument is that those
rules should not be applied. In support they cite a Second Circuit case where the court decided (in
a different, non-bankruptcy context) that the National Banking Act did not preempt New York’s
usury laws. Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015). Because that case is
an example of a court giving consideration to the scope and applicability of the federal preemption
rule to the matter at hand (and on reflection rejecting applicability), the citation actually works
against the debtors’ argument here.
There is an important principle underlying the distinction in this context between “mere
application” of non-title 11 statutory law and “consideration” of it. Bankruptcy judges must have
the authority in resolving title 11 issues to apply established and uncontroversial non-title 11

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principles as necessary. However, decisions about the meaning and scope of non-title 11 statutes
is beyond the delegation of authority to bankruptcy judges, and must rather be assigned to Article
III judges. Mandatory withdrawal, when the conditions for it are met, serves that important
principle.
Mandatory withdrawal under § 157(d) is required in the present circumstances, and BFS’s
motion to withdraw the reference as to Adversary Proceeding No. 17-01003 (dkt. no. 1) is
GRANTED.
It is SO ORDERED.
/s/ George A. O’Toole, Jr.
United States District Judge

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