PERKINS et al v. VERMA
Filing
6
OPINION. Signed by Judge Susan D. Wigenton on 10/27/11. (jd, )
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
ERIC R. PERKINS, in his capacity as
Chapter 7 Trustee for the Estate of Jesal
Patwari; and CATHERINE YOUNGMAN,
in her capacity as Chapter 7 Trustee for
Shapat, Inc., Patwari, LLC, and Shapat 3,
LLC,
Plaintiffs,
v.
SUSHEELA VERMA,
Defendant.
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
Civil Action No. 11-2557 (SDW)(MCA)
OPINION
October 27, 2011
WIGENTON, District Judge.
This matter comes before the Court on Defendant Susheela Verma‟s (“Defendant” or
“Verma”) Motion for an Order Withdrawing the Reference pursuant to 28 U.S.C. § 157(d), of
the Adversary Proceeding captioned Eric R. Perkins, Chapter 7 Trustee for the Estate of Jesal
Patwari, and Catherine E. Youngman, Esq., Chapter 7 Trustee for Shapat, Inc., Patwari, LLC,
Shapat 2, LLC and Shapat 3, LLC v. Susheela Verma (the “Motion”).
This Court has
jurisdiction pursuant to 28 U.S.C. § 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408, 1409.
This Motion is decided without oral argument pursuant to Fed. R. Civ. P. 78. For the reasons
below, Defendant‟s Motion is DENIED without prejudice.
1
I.
STATEMENT OF FACTS AND PROCEDURAL HISTORY
A. Relevant Background
On August 27, 2008, Jesal Patwari, f/k/a Jesal Desai (“Patwari”) and Shapat, Inc.
(collectively “Patwari”) filed a voluntary petition for relief under Chapter 11 of Title 11 of the
United States Code (“Bankruptcy Code”). (Def.‟s Ex. C, Adversary Compl. ¶ 8.) On the same
day, Patwari also filed voluntary Chapter 11 petitions on behalf of four corporations: Patwari,
LLC, Shapat, Inc., Shapat II, LLC, and Shapat III, LLC (collectively “Corporate Debtors”),
through which she owned and operated four Subway sandwich shops.1 (Id. ¶ 9.) Verma, was the
Corporate Debtors‟ former legal counsel. She represented the Debtors in various pre-petition
legal matters against Doctors Associates, Inc. (“DAI”), which was the franchisor of Patwari‟s
Subway sandwich shops. (Id. ¶¶ 12-14.) On February 17, 2009, the Corporate Debtors‟ cases
were jointly administered under the lead case Shapat, Inc., Bankr. Case No. 08-26181. (Id. ¶ 9.)
On July 20, 2009, the Debtors‟ Chapter 11 proceedings were converted to Chapter 7
proceedings. (Id. ¶ 10.) Eric R. Perkins was appointed Chapter 7 Trustee for the Debtors on July
21, 2009 (“Patwari Trustee”). (Id. ¶ 5.) Thereafter, Catherine Youngman was appointed the
Chapter 7 Trustee for the bankruptcy estates of the Corporate Debtors (“Corporate Debtors
Trustee”).2 (Id. ¶ 6.) Plaintiff Trustees filed a motion for turnover of documents relating to
Defendant‟s pre-petition representation of Patwari and the Corporate Debtors and Defendant
filed a cross-motion to be relieved as counsel. By Order dated February 2, 2010, the Bankruptcy
Court granted Plaintiff Trustees‟ Motion and Defendant‟s Cross-Motion (“Turnover Order”).
(Pl. Trustees‟ Br. ¶ 12.)
1
In order to avoid confusion, the Court shall hereinafter refer to Patwari and the Corporate Debtors collectively as
“Debtors.”
2
The Court shall hereinafter refer to Corporate Debtors Trustee and Patwari Trustee collectively as “Plaintiff
Trustees.”
2
On August 26, 2010, Plaintiff Trustees, on behalf of their respective bankruptcy estates,
filed adversary proceedings. (Id. ¶ 2.) The Bankruptcy Court by Order dated March 1, 2011,
consolidated the separate adversary proceedings.
(Id. ¶ 3.)
In the underlying complaints,
Plaintiff Trustees seek to avoid and recover certain transfers the Debtors made to, or for the
benefit of Verma pursuant to 11 U.S.C. §§ 544, 547-550 of the Bankruptcy Code, to disallow
claims pursuant to 11 U.S.C. § 502(d) and N.J. Stat. Ann. §§ 25:2-25 and 27, and to recover
payments received and injury caused by Verma with respect to her pre-petition legal
representation of the Debtors. (Def.‟s Reply Br. Ex. C, Adversary Compl. ¶¶ 32-58.) On
November 30, 2010, Defendant, pro se, filed a motion to dismiss. On February 8, 2011, the
Bankruptcy Court denied Defendant‟s motion to dismiss and granted Plaintiff Trustees‟ leave to
amend within ten (10) days. (Pl. Trustees‟ Br. ¶ 3.) Plaintiff Trustees filed a timely Second
Amended Complaint on February 18, 2011. The Second Amended Complaint contains nine
counts: (I) Avoidance of Preferential Transfers; (II) Avoidance of Fraudulent Transfers under §
548; (III) Avoidance of Fraudulent Transfers under N.J. Stat. Ann. §§ 25:2-25 and 27; (IV)
Avoidance of Post-Petition Transfers under § 549; (V) Recovery of Property under § 550; (VI)
Disallowance of Claim under § 502(d); (VII) Failure to Deliver Files and Comply with the
Bankruptcy Court‟s Turnover Order; (VIII) Legal Malpractice; and (IX) Accounting and
Repayment of Funds. (Def.‟s Reply Br. Ex. C, Adversary Compl. ¶¶ 32-82.)
On April 7, 2011, Defendant filed a motion to stay the adversary proceedings and to
extend her time to answer, which the Bankruptcy Court denied on May 13, 2011. On April 21
and May 19, 2011, Defendant filed an answer to the underlying adversary complaint and a jury
demand. (Def.‟s Reply Br. Exs. A, B.)
3
B. Defendant’s Motion to Withdraw the Reference3
On April 7, 2011, Defendant filed the instant Motion. Defendant submits that Count III
for fraudulent conveyance, and Count VIII for legal malpractice are state law claims and should
be tried either in state court or before this Court. (Docket No. 1.) Defendant also contends that
she: (1) never filed a proof of claim in the underlying bankruptcy proceeding; (2) refuses to
submit to the jurisdiction of the bankruptcy court; (3) is guaranteed a jury trial; and (3) does not
consent to the bankruptcy court conducting a jury trial. (Def.‟s Reply Br. Ex. A ¶¶ 3-4.4) Based
on the above and her desire to have her matter adjudicated by an Article III or state court judge,
Defendant asserts that mandatory withdrawal is applicable. (Docket No. 1, ¶ 7.) Defendant
further maintains that because she is neither a debtor nor has she filed a proof of claim in the
underlying bankruptcy proceeding, she has an inviolable Constitutional right under the Seventh
Amendment to a jury trial as to the fraudulent conveyance claims under New Jersey State law
and the legal malpractice claim. (Id. ¶¶ 14,5 16.)
On the other hand, Plaintiff Trustees argue that most of the claims are core proceedings
under the Bankruptcy Code. (Pl. Trustees‟ Br. ¶ 6.) They also allege that Verma has represented
the Debtors pre and post-petition and “availed herself of the assistance of the Bankruptcy Court.”
3
In a separate but related proceeding, DAI, which had filed a lawsuit in district court to enforce arbitration awards
and relief for trademark infringement, filed a motion to withdraw the reference (“DAI‟s Motion”). Doctors Assocs.,
Inc. v. Desai, No. 10-575, 2010 WL 3326726 (D.N.J. Aug. 23, 2010). DAI sought withdrawal because it was
concerned about the “misapplication of the Federal Arbitration Act,” 9 U.S.C. § 2, et seq. (2006) (“FAA”). Id. at
*6. The Hon. Katherine S. Hayden, U.S.D.J., denied DAI‟s Motion. Id. at *5. Judge Hayden determined that
neither mandatory nor permissive withdrawal under § 157(d) was warranted. Id. Specifically, she found that while
DAI filed claims involving the FAA and the Lanham Act, 15 U.S.C. § 1051, et seq. (2006), substantial and material
consideration of those laws was not required. Id. at *5. She also noted that DAI and Subway had filed proofs of
claims in the bankruptcy court. Id. at *6. Furthermore, she found that “[b]oth claims relate[d] to the prior
arbitration and currently both [we]re within the bankruptcy court” and allowing them to remain there would promote
uniformity in bankruptcy administration because of the possible overlap in discovery between the two cases. Id. at
*6. Additionally, Judge Hayden determined that allowing the DAI adversary proceeding to remain in the
bankruptcy court would reduce “forum shopping” and confusion. Id.
4
There are two paragraphs numbered “four” in this exhibit.
5
Here also, there are two paragraphs numbered “fourteen.” Therefore the paragraph citied is actually paragraph 15.
4
(Id. ¶ 7.) Plaintiff Trustees further maintain that Defendant waived her right to a jury trial
through an arbitration provision in the retainer agreement she had with the Debtors. (Id. ¶ 8.)
II.
CONCLUSIONS OF LAW
A. Statutory Basis
The District Court confers jurisdiction to the Bankruptcy Court in this District under a
standing order of reference dated July 23, 1984. 28 U.S.C. § 157(a). After a Title 11 proceeding
is referred to the bankruptcy court, § 157(d) governs the district court‟s authority to withdraw
that reference permissively “for cause” or mandatorily. Section 157(d) 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.
Id.
B. Mandatory Withdrawal
Defendant, as the moving party, “bears the burden of demonstrating that a substantial and
material consideration of non-bankruptcy law is necessary to resolve the case.” United States v.
Wood, 161 B.R. 17, 20 (D.N.J. 1993) (citing In re Cont’l Airlines, 138 B.R. 442, 444 (D. Del.
1992); In re Mich. Real Estate Ins. Trust, 87 B.R. 447, 459 (E.D. Mich. 1988)); see also In re
Anthony Tammaro, Inc., 56 B.R. 999, 1006-07 (D.N.J. 1986) (“[T]he moving party must
establish that the proceeding involves a substantial and material question of both Title 11 and
non-Code federal law and that the non-Code federal law has more than a de minimis effect on
interstate commerce.”). “Mandatory withdrawal is to be applied narrowly to ensure bankruptcy
5
cases are litigated in the bankruptcy courts and to prevent § 157(d) from becoming an „escape
hatch‟ from litigating cases under the Bankruptcy Code.” Official Comm. of Asbestos Claimants
v. G-I Holdings, Inc. (In re G-I Holdings, Inc.), 295 B.R. 211, 221 (D.N.J. 2003) (quoting In re
Mahlmann, 149 B.R. 866, 870 (N.D. Ill. 1993)).
C. Permissive Withdrawal
“Cause” is not defined in either the legislative history or the statute, but the Third Circuit
Court of Appeals has directed that “[t]he district court should consider the goals of promoting
uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering the
economical use of the debtors‟ and creditors‟ resources, and expediting the bankruptcy process.”
In re Pruitt, 910 F.2d 1160, 1168 (3d Cir. 1990) (quoting Holland Am. Ins. Co. v. Succession of
Roy, 777 F.2d 992, 999 (5th Cir. 1985)). Defendant, as the moving party, bears the burden of
showing cause. Travelers Cas. & Sur. Co. v. Skinner Engine Co. (In re Am. Capital Equip.),
LLC, 325 B.R. 372, 375 (W.D. Pa. 2005) (citing In re NDEP Corp., 203 B.R. 905, 907 (D. Del.
1996)).
“A bankruptcy court may enter final judgments only to „core proceedings‟ absent consent
of the parties.” Schubert v. Lucent Techs. Inc. (In re Winstar Commc’ns, Inc.), 554 F.3d 382,
405 (3d Cir. 2009) (citing 28 U.S.C. § 157(b)-(c). The Third Circuit “has adopted a two step
process to determine whether a claim is a core proceeding.” In re Winstar Commc’ns, Inc., 554
F.3d at 405. “First, „a court must consult § 157(b)‟ to determine if the claim at issue fits within
that provision‟s „illustrative list of proceedings that may be considered core.‟
If so, „a
proceeding is core [1] if it invokes a substantive right provided by title 11 or [2] if it is a
proceeding, that by its nature, could arise only in the context of a bankruptcy case.‟” Id.
(alteration in original) (internal quotation marks and citations omitted) (quoting Halper v.
6
Halper, 164 F.3d 830, 836 (3d Cir. 1999)). Second, “[e]ven if a claim is not a core proceeding, a
bankruptcy court may still have jurisdiction over the claim if the claim is „related to a case under
title 11,‟ i.e. the Bankruptcy Code.” In re Winstar Commc’ns, Inc., 554 F.3d at 405 (citing 28
U.S.C. § 157(c)(1)).
According to the Third Circuit, a civil proceeding “falls within the
bankruptcy court‟s „related to‟ jurisdiction if „the outcome of that proceeding could conceivably
have any effect on the estate being administered in bankruptcy.‟” In re Winstar Commc’ns, Inc.,
554 F.3d at 405 (quoting Halper, 164 F.3d at 837).6
III.
DISCUSSION
A. Mandatory Withdrawal
Mandatory withdrawal under § 157(d) is required only when “the proceeding involves a
substantial and material question of both Title 11 and non-Code federal law and [] the non-Code
federal law has more than a de minimis effect on interstate commerce.” In re Anthony Tammaro,
Inc., 56 B.R. at 1006-07. Here, Verma asserts that mandatory withdrawal is applicable “for the
simple reason that [] [she] wants [t]his matter adjudicated by an Article III judge or a state court
judge.” (Docket No. 1, ¶ 7.) However, Defendant‟s request that this matter be adjudicated
before an Article III judge alone is not a basis for mandatory withdrawal. This Court notes that
the underlying claims do not require the bankruptcy court to engage in a novel analysis of federal
law. As a result, mandatory withdrawal is not implicated.
6
The “core/non-core distinction is relevant to the scope of the bankruptcy court‟s powers upon referral: in core
proceedings, the bankruptcy judge may issue final orders and judgments,” while in non-core proceedings, unless
both parties consent, the bankruptcy court “must submit „proposed findings of fact and conclusions of law‟ to the
district court, which enters an order only after conducting de novo review.” Mullarkey v. Tamboer (In re
Mullarkey), 536 F.3d 215, 221 (3d Cir. 2008).
7
B. Permissive Withdrawal
A threshold factor in determining whether a case is subject to permissive withdrawal is
whether it is “core” or “non-core” to the bankruptcy action. Certain Underwriters at Lloyd’s of
London v. Otlowski, No. 08-3998, 2009 U.S. Dist. LEXIS 6408, at *5 (D.N.J. Jan. 29, 2009). As
one court has noted, Section 157 (b)(3)‟s unambiguous language requires the Bankruptcy Court
to make the core or non-core determination in the first instance. Id. at 7 (citing E. W. Trade
Partners, Inc. v. Sobel WP, LLC (In re E. W. Trade Partners, Inc.), No. 06-01812, 2007 U.S.
Dist. LEXIS 29645, at *10 n.4 (D.N.J. Apr. 23, 2007)); see also Kohn v. Haymount Ltd. P’ship,
LP (In re Int’l Benefits Grp., Inc.), No. 06-2363, 2006 U.S. Dist. LEXIS 58487, at *7 (D.N.J.
Aug. 21, 2006) (stating that the bankruptcy court‟s core/non-core determination is the “most
important factor” in a court‟s withdrawal analysis). However, in this case the Bankruptcy Court
has yet to determine whether the underlying adversary proceeding is a core or non-core
proceeding. As a result, Verma‟s Motion is premature. See Katz v. Karagjozi (In re Kara
Homes), No. 09-1775, U.S. Dist. LEXIS 63215, at *5 (D.N.J. July 22, 2009) (concluding that the
motion to withdraw the reference was premature because the bankruptcy court had not yet
determined whether the proceeding was core or non-core); Certain Underwriters at Lloyd’s of
London, 2009 U.S. Dist. LEXIS 6408, at *7-8 (finding the motion to withdraw unripe and
premature because the bankruptcy judge had yet to make the core or non-core determination); In
re E. W. Trade Partners, Inc., 2007 U.S. Dist. LEXIS 29645, at *11 (concluding that the motion
to withdraw is not ripe for consideration by the district court because the bankruptcy judge had
not made the initial determination of whether the proceeding was core or non-core). Similarly,
Defendant‟s argument that she is entitled to a trial by jury is not ripe for adjudication before this
Court.
8
Furthermore, Defendant‟s assertion that she is entitled to a jury trial alone is not a basis
for this Court to grant her Motion. The “[a]ssertion of a Seventh Amendment right to a jury trial,
coupled with a refusal to consent to such a trial before the Bankruptcy Court, is not of itself
sufficient cause for discretionary withdrawal.” Pennsylvania Acad. of Music v. Regitz, No. 10172, 2010 U.S. Dist. LEXIS 127199, at *6-7 (E.D. Pa. Nov. 30, 2010) (quoting Williams v.
Avnet, Inc. (In re Techs. Liquidations Co.), No. 07-177, 2007 U.S. Dist. LEXIS 28320 (W.D. Pa.
Apr. 17, 2007)) (internal quotation marks omitted); see also Gen. Elec. Capital Corp. v. Teo, No.
01-1686, 2001 U.S. Dist. LEXIS 22266, at *13 (D.N.J. Dec. 14, 2001) (“[T]he mere fact that a
[d]efendant has asserted a right to trial by jury is not sufficient to immediately justify withdrawal
of an action from bankruptcy.”).
This Court is also aware that “courts in this district and elsewhere have held that even
when a district court must ultimately preside over a trial by jury, there is no reason why the
Bankruptcy Court may not „preside over [an] adversary proceeding and adjudicate discovery
disputes and motions only until such time as the case is ready for trial.‟” Gen. Elec. Capital
Corp., 2001 2001 U.S. Dist. LEXIS 22266, at *14 (quoting Stalford v. Blue Mack Transp. (In re
Lands End Leasing, Inc.), 193 B.R. 426, 436 (Bankr. D.N.J. 1996)); see also Pennsylvania
Acad., 2010 U.S. Dist. LEXIS 127199, at *6 (“[T]he fact that [d]efendants are entitled to a jury
trial . . . does not mean pre-trial proceedings must be conducted in the District Court.”); Keene
Corp. v. Willaims Bailey & Wesner L.L.P. (In re Kenne Corp.), 182 B.R. 379, 385 (S.D.N.Y.
1995) (denying on ripeness grounds motion to withdraw the reference, reasoning that while an
adversary proceeding carrying the right to a jury trial is in its initial stages, the bankruptcy judge
“is fully equipped with the tools to proceed with [the] matter” until such time as the issues are
ripe for submission to the jury); Hayes v. Royala, Inc., 180 B.R. 476, 477 (E.D. Tex. 1995)
9
(explaining that the inability of a bankruptcy judge to preside over a jury trial absent the parties‟
consent does not require withdrawal of the reference to the bankruptcy court until it is clear that
the issues are ready for consideration by a jury).
Consequently, Verma‟s Motion is denied without prejudice. Defendant has leave to refile her Motion under a new civil action number after the Bankruptcy Court has made a
determination as to whether the underlying adversary proceeding is core or non-core and after
the Bankruptcy Court has resolved pre-trial and discovery matters. The Bankruptcy Court may
also rule on summary judgment motions after the conclusion of discovery because a “bankruptcy
judge ruling on [a] summary judgment motion does not raise Seventh Amendment issues since
motion [is] disposed of as a matter of law and review by Article III judges is de novo.” Nw. Inst.
of Psychiatry, Inc. v. Travelers Indem. Co. (In re Nw. Inst. of Psychiatry, Inc.), 268 B.R. 79, 92
(Bankr. E.D. Pa. 2011) (quoting Hayes, 180 B.R. at 477) (citation omitted).
IV.
CONCLUSION
For the reasons stated above, Defendant‟s Motion is DENIED without prejudice.
SO ORDERED.
s/ Susan D. Wigenton
Susan D. Wigenton, U.S.D.J.
cc: Madeline Cox Arleo, U.S.M.J.
10
11
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?