Official Committee of Unsecured Creditors of Cornerstone Homes, Inc. et al v. Fleet et al

Filing 9

-CLERK TO FOLLOW UP- DECISION AND ORDER denying 1 Motion to Withdraw Reference without prejudice to renew at a later date. The Adversary Proceeding will remain subject to the jurisdiction of the Bankruptcy Court at this time. Signed by Hon. Michael A. Telesca on 12/2/15. (JMC)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK

THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF CORNERSTONE HOMES,
INC., and MICHAEL H. ARNOLD,
CHAPTER 11 TRUSTEE OF CORNERSTONE
HOMES, INC.,

No. 6:15-cv-06484-MAT
DECISION AND ORDER

Plaintiffs,
-vsDAVID L. FLEET, TRACY L. FLEET, CNY
HOMES HOLDINGS, LLC, OUR FAMILY
GETAWAY, LLC, BUCK HOLLOW
OUTFITTERS & TREE FARM, LLC, and
FIRST CITIZENS NATIONAL BANK,
Defendants.
Bankruptcy No. 2:1321103-PRW

In re:
CORNERSTONE HOMES, INC.,
Debtor.

I.

Adversary No. 2:1502022-PRW

Introduction
Defendants

David

L.

Fleet

(“Fleet”),

Tracy

L.

Fleet

(“T. Fleet”), CNY Homes Holdings, LLC (“CNY”), and Buck Hollow
Outfitters & Tree Farm, LLC (“Buck Hollow”)

(collectively, “the

Fleet Defendants”) move to withdraw the reference to the Bankruptcy
Court for the Western District of New York in this action brought
by the Official Committee of Unsecured Creditors of Cornerstone
Homes, Inc. (“the Committee”), and Michael H. Arnold, Chapter 11
Trustee of Cornerstone Homes, Inc. (“the Trustee”) (collectively,

“Plaintiffs”). For the following reasons, the Court denies the
Fleet

Defendants’

motion

to

withdraw

the

reference,

without

prejudice with leave to renew.
II.

Procedural History
On July 15, 2013, Cornerstone Homes, Inc. (“Debtor”) filed a

voluntary petition for relief under Chapter 11 of the Bankruptcy
Code. On November 22, 2013, the Committee moved for the appointment
of a Chapter 11 trustee. The Bankruptcy Court (Warren, J.) held a
two-day hearing on this motion in January 2014. After Debtor
withdrew its opposition, the Bankruptcy Court entered an order
appointing the Trustee, who, since his appointment, has been in
control of Debtor’s assets and has continued to operate and manage
Debtor’s business in accordance with Section 1108 of the Bankruptcy
Code.
In December 2014, the Securities and Exchange Commission (“the
SEC”)

instituted

an

action

in

this

District

against

Fleet,

Securities and Exchange Comm’n v. Fleet, 6:14-cv-06695-MAT-MWP
(W.D.N.Y. Dec. 12, 2014). The SEC alleges that Fleet violated
Federal securities law by fraudulently selling approximately $16.75
million in unregistered and uncertified notes of his wholly-owned
company to more than 300 investors between 1997 and March 2010.
On March 31, 2015, the Committee filed a Motion to Prosecute,
seeking an order authorizing the Committee to prosecute and, if
appropriate, settle certain claims on behalf of Debtor’s estate

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pursuant

to

11

U.S.C.

§§

105(a),

1103(c),

and

1109(b).

The

Bankruptcy Court granted the application on July 9, 2015. On
July 14, 2015, the Committee and the Trustee jointly commenced an
Adversary

Proceeding

in

Bankruptcy

Court.

In

Plaintiffs assert seventeen causes of action.

the

complaint,

Counts I through

VIII seek avoidance and recovery of allegedly fraudulent transfers
of money and property, pursuant to Sections 502(d), 544, 550, and
551 of the Bankruptcy Code and Sections 276 and 276-a and 273, 274,
and 275 of the New York Debtor and Creditor Law (“NYDCL”); Count
XII is asserted against Fleet for breach of fiduciary duty to
Debtor; Count XIII asserts a claim of unjust enrichment against the
Fleet Defendants; Count XIV seeks to pierce the corporate veil and
hold Fleet liable for Debtor’s unsecured obligations; Count XV
asserts that Fleet’s claims should be equitably subordinated;
Count XVI is asserted

against Fleet for avoidance and recovery of

certain monies pursuant to Sections 502(d), 547, 550, and 551 of
the Bankruptcy Code; and Count XVII seeks an accounting of the
Fleet Defendants’ transactions with Debtor.
On July 9, 2015, Plaintiffs and The Community Preservation
Corporation, Elmira Savings Bank, First Citizens, First Niagara
Funding,

Inc.,

and

Lyons

National

Bank

(collectively,

“the

Prepetition Lenders”) filed stipulations and proposed orders with
the Bankruptcy Court agreeing to toll all statute of limitations
periods for claims arising under non-bankruptcy law and Chapter 5

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of the Bankruptcy Code until August 14, 2015. The limitations
periods were further extended to October 16, 2015.
On

August

31,

2015,

the

Trustee

commenced

an

adversary

proceeding against several of the Prepetition Lenders seeking
declaratory judgments that certain consolidated mortgages issued by
Debtor to them are unenforceable and that the notes on which they
are based are unsecured. This adversary proceeding remains pending
in the Bankruptcy Court.
On August 14, 2015, the Fleet Defendants filed the instant
motion (Dkt #1) requesting that the Court exercise its discretion
to permissively withdraw the automatic reference of the Adversary
Proceeding to the Bankruptcy Court “for cause.” Plaintiffs filed a
Response

on

September

9,

2015

(Dkt

#5),

to

which

the

Fleet

Defendants filed a Reply on October 2, 2015 (Dkt #7). The motion
was submitted without oral argument on October 16, 2015.
III. Applicable Legal Principles
A.

Jurisdiction

District
proceedings

courts

“arising

have
under”

original
or

jurisdiction

“related

to”

over

civil

bankruptcy

cases

brought pursuant to Title 11 of the United States Code, 28 U.S.C.
§ 1334. District courts are permitted to refer “any or all” cases
under Title 11, proceedings arising under Title 11, and cases
arising in or related to a case under Title 11 “to the bankruptcy
judges for the district.” 28 U.S.C. § 157(a). In this District, by

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standing order dated February 29, 2012, “any and all cases under
title 11 and any and all proceedings arising under title 11 or
arising in or related to a case under title 11” are referred to the
Bankruptcy Court for adjudication.
B.

Permissive Withdrawal of the Reference

A “district court may withdraw, in whole or in part, any case
or

proceeding

referred

[to

the

bankruptcy

court]

under

this

section, on its own motion or on timely motion of any party, for
cause shown.” 28 U.S.C. § 157(d). Section 157(d) does not define
“cause.”
In In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993)
(“Orion”), the Second Circuit held that whether “cause” has been
shown depends on a variety of factors, including “whether the claim
or

proceeding

is

core

or

non-core

.

.

.

considerations

of

efficiency, prevention of forum shopping, and uniformity in the
administration of bankruptcy law.” 4 F.3d at 1101 (citations
omitted). In the past, the nature of the claim as core or non-core1
was

the

most

important

factor.

See

id.

(“A

district

court

considering whether to withdraw the reference should first evaluate
1

Section 157 of the 1984 Act “classifies matters as either ‘core
proceedings,’ which the bankruptcy court may ‘hear and determine’ and on which
the court ‘may enter appropriate orders and judgments,’ [28 U.S.C.] § 157(b)(1),
or ‘non-core proceedings,’ which the bankruptcy court may hear, but for which the
bankruptcy court is only empowered to submit proposed findings of fact and
conclusions of law to the district court for de novo review, § 157(c)(1).” Orion,
4 F.3d at 1100-01. The 1984 Act does not define “core proceedings” but sets forth
a non-exhaustive list of examples, including “counterclaims by the estate against
persons filing claims against the estate,” and “proceedings to determine, avoid,
or recover fraudulent conveyances.” 28 U.S.C. § 157(b)(2).

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whether the claim is core or non-core, since it is upon this issue
that questions of efficiency and uniformity will turn.”).
However, the importance of the core versus non-core distinction was
called into question by the United States Supreme Court’s decision
in Stern v. Marshall, 131 S. Ct. 2594 (2011) (“Stern”). See, e.g.,
In re Lyondell Chem. Co., 467 B.R. 712, 719 (S.D.N.Y. 2012)
(“Lyondell”) (collecting and comparing cases). In Stern, the issue
before the Supreme Court was whether, absent explicit consent by
the parties, a bankruptcy court constitutionally may render a final
judgment regarding a counterclaim by the bankruptcy estate against
a person who filed a claim against the estate. The Supreme Court
concluded that although 28 U.S.C. § 157(b)(2)(C) permits the
bankruptcy court to enter final judgment on the counterclaim,
Article III of the Constitution does not, and to that extent
Congress exceeded the bounds of Article III. Stern, 131 S. Ct. at
2608, 2620. Citing its plurality decision in Northern Pipeline
Constr.

Co.

v.

Marathon

Pipe

Line

Co.,

458

U.S.

50

(1982),

recognizing a category of cases involving “public rights” that
Congress could constitutionally assign to “legislative” courts for
resolution, the Stern court held that Article III precluded the
bankruptcy court from finally determining the counterclaim because,
inter alia,2 the counterclaim involved only “private rights.” See
2

See Stern, 131 S. Ct. at 2621 (Scalia, J., concurring) (“count[ing] at
least seven different reasons given in the [majority]’s opinion for concluding
that an Article III judge was required to adjudicate this lawsuit” which “should

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Stern, 131 S. Ct. at 2611 (“[The] claim is a state law action
independent of the federal bankruptcy law and not necessarily
resolvable

by

a

ruling

on

the

creditor’s

proof

of

claim

in

bankruptcy. [Prior decisions have] . . . rejected the application
of the ‘public rights’ exception in such cases.”); 2614-15; see
also

id.

at

2620

(“The

Bankruptcy

Court

below

lacked

the

constitutional authority to enter a final judgment on a state law
counterclaim that is not resolved in the process of ruling on a
creditor’s proof of claim.”).

The Supreme Court emphasized,

however, that the issue presented in Stern was “narrow,” and that
it would not “meaningfully change[ ] the division of labor” between
bankruptcy courts and district courts. Stern, 131 S. Ct. at 2620.
In the wake of Stern, it is unclear to what extent the core
versus non-core distinction emphasized in Orion remains relevant to
determining whether to withdraw the reference “for cause.” The
Second Circuit has not yet ruled on the issue, and district courts
throughout the Circuit, and even within the same district, are
divided. Compare, e.g., In re Extended Stay, Inc., Nos. 11 Civ.
5394, 11 Civ. 5395, 11 Civ. 5396, 11 Civ. 5397, 11 Civ. 5864(JMP),
2011

WL

5532258,

at

*8

(S.D.N.Y.

Nov.

10,

2011)

(“[T]he

core/non-core distinction is still a relevant consideration in
permissive withdrawal analysis, except to the extent Stern holds
that Congress’s classification of a claim as ‘core’ [in the 1984
arouse the suspicion that something is seriously amiss with [the Supreme Court’s]
jurisprudence in this area”).

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Act] exceeds the boundaries of Article III.”) with Development
Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 462 B.R.
457, 467 (S.D.N.Y. 2011) (“[A]fter Stern, one can still apply the
Orion

factors

but

not

looking

at

whether

the

matter

can

be

classified as ‘core’ under 28 U.S.C. § 157, but rather at whether,
under Stern, the Bankruptcy Court has the final power to adjudicate
it.”) (emphasis supplied). The Court need not weigh in on the
debate because, as discussed further below, the result is the same
regardless of whether primacy is given to the core versus non-core
distinction or the evaluation of the Bankruptcy Court’s final
adjudicative authority.
IV.

Discussion
The Fleet Defendants assert that the Court should exercise its

discretion to withdraw the reference because (1) they are entitled
to and have demanded a jury trial on any legal claims asserted by
Plaintiffs in the adversary proceeding; (2) none of them has filed
a proof of claim; (3) they have not consented to the Bankruptcy
Court’s final adjudication of any claims; and (4) judicial economy
and effective case management weigh in favor of granting the motion
to withdraw now, rather than later.
A.

Core vs. Non-Core and Final Adjudicative Authority

The Fleet Defendants have not addressed the effect of Stern on
the core/non-core factor Orion analysis or the issue of whether the
Bankruptcy Court has final adjudicative authority over any of the

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claims.

Even

assuming

arguendo

that,

pursuant

to

Stern,

the

Bankruptcy Court lacks final adjudicative authority over most of
the claims asserted in the Adversary Proceeding, the Court finds
that this factor “is not determinative in deciding whether to
withdraw the reference[.]” Lyondell, 467 B.R. at 723. The Second
Circuit also requires an investigation into whether the claims are
legal

or

equitable

in

nature,

as

well

as

considerations

of

“efficiency, prevention of forum shopping, and uniformity in the
administration of bankruptcy law.” Orion, 4 F.3d at 1101. See,
e.g., Adelphia Recovery Trust v. FLP Group, Inc., No. 11 Civ.
6847(PAC), 2012 WL 264180, at *3 (S.D.N.Y. Jan. 30, 2012) (after
Stern, “a

court’s

consideration

of

a

motion

to

withdraw

the

reference to bankruptcy court should—in addition to the Orion
factors—include consideration of” the bankruptcy court’s final
adjudicative authority) (emphasis supplied).
B.

Nature of Trustee’s Claims: Legal or Equitable

The Bankruptcy Court, as a non-Article III court, lacks the
power to conduct a jury trial on an Article III right without the
consent of the parties. See 28 U.S.C. 157(e) (“If the right to a
jury trial applies in a proceeding that may be heard under this
section by a bankruptcy judge, the bankruptcy judge may conduct the
jury trial if specially designated to exercise such jurisdiction by
the

district

court

and

with

the

express

consent

of

all

the

parties.”); see generally Stern, 131 S. Ct. at 2614-15. The Fleet

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Defendants have not consented to a jury trial in the Bankruptcy
Court, and they are entitled to a jury trial before an Article III
judge on their legal claims if the proceedings progress to that
stage. However, the caselaw in this Circuit is clear that “a
district court is not compelled to withdraw a reference simply
because a party is entitled to a jury trial.” In re Enron Power
Marketing, Inc., No. 01 Civ. 7964, 2003 WL 68036, at *6 (S.D.N.Y.
Jan. 8, 2003). Furthermore, in similar cases, courts in this
Circuit have held that “withdrawing the reference is premature
where discovery has not commenced and plaintiffs have not yet
survived a motion to dismiss.” In re Extended Stay, Inc., 466 B.R.
at 206. Indeed, the legal claims in the Adversary Proceeding
eventually may resolve without the necessity of a jury trial.
However, if they do not, the Fleet Defendants may move to withdraw
the reference at a later date. E.g., In re Arbco Cap. Mgmt., LLP,
479 B.R. 254, 267 (S.D.N.Y. 2012).
B.

Considerations of Efficiency

Contrary to the Fleet Defendants’ contentions, withdrawal
would not promote judicial economy and effective case management.
First, virtually all of the causes of action asserted by Plaintiffs
are considered core bankruptcy proceedings. Counts I, II, III, IV,
V, VI, VII, VIII, IX, X, XI, and XVI all assert claims for
avoidance

and

recovery

of

various

transfers

and

transactions

pursuant to Sections 502(d), 544, 550, and 551 of the Bankruptcy

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Code, and thus they qualify as core proceedings. See In re S.W.
Bach

&

Co.,

425

B.R.

78,

89

(Bankr.

S.D.N.Y.

2010)

(“‘Core

proceedings are matters arising under the Bankruptcy Code or
arising in bankruptcy cases.’”) (quotation and citations omitted).
The fact that these causes of action also invoke State law does not
preclude a finding that they are “core.” See In re CIS Corp., 172
B.R. 748, 756 (Bankr. S.D.N.Y. 1994) (citing, inter alia, In re
Manville Forest Products Corp., 896 F.2d 1384, 1389 (2d Cir. 1990)
(“The relevant analysis is whether the nature of [the] adversary
proceeding, rather than the state or federal basis for the claim,
falls within the core of federal bankruptcy power.”)). Count XV,
which asserts a cause of action for equitable subordination against
the Debtor’s estate under Section 510 of the Bankruptcy Code, is a
core claim. See In re Poughkeepsie Hotel Assocs. Joint Venture, 132
B.R. 287, 292 (Bankr. S.D.N.Y. 1991) (“The notion of equitable
subordination,

as embodied

in

Code

§

510(c),

is

peculiar

to

bankruptcy law and an issue which can only be decided in a
bankruptcy setting”). Count XVII seeks an accounting of the Fleet
Defendants’ transactions with the Debtor, which also is a core
claim. See Adelphia Communications Corp. v. Rigas, No. 02 Civ.8495
GBD, 02-41729 REG, 2003 WL 21297258, at *2 (S.D.N.Y. June 4, 2003)
(“The claims for fraudulent conveyance, a constructive trust, and
the demand for an accounting directly impact the bankruptcy estate
and are core claims.”) (citation omitted). Generally speaking,

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“‘core matters are ones with which the bankruptcy court has greater
familiarity and expertise,’” In re Enron Corp., 317 B.R. 232, 234
(S.D.N.Y. 2004) (quoting In re Chateaugay Corp., 193 B.R. 669, 675
(S.D.N.Y.

1996)).

Thus,

even

if

withdrawal

of

the

reference

ultimately becomes necessary, allowing the case to remain in the
Bankruptcy Court for the time being will provide this Court with
the benefit of the Bankruptcy Court’s subject-matter expertise.
See, e.g., Securities Investor Protection Corp. v. Bernard L.
Madoff Investment Securities LLC, 490 B.R. 46, 58 (S.D.N.Y. 2013)
(“Multiple courts in this District have already concluded that,
although Stern prevents the Bankruptcy Court from entering final
judgment on avoidance claims, considerations of efficiency and
uniformity counsel in favor of permitting the Bankruptcy Court to
issue

proposed

findings

of

fact

and

conclusions

of

law.”)

(citations omitted).3
Only Counts XII, XIII, and XIV, which assert causes of action
for breach of fiduciary duty, unjust enrichment, and piercing the
corporate

veil,

respectively,

appear

to

be

non-core

claims.

However, these claims might have a conceivable effect on the
bankruptcy estate, and arguably could fall under the “related to”
jurisdiction of the Bankruptcy Court. See McCord, 316 B.R. at 121

3

See In re Madison Bentley Assocs., LLC, 474 B.R. 430 (S.D.N.Y. 2012) (“The
authority of a bankruptcy court to issue recommendations on findings of facts and
conclusions of law survives Stern.”) (citation omitted); see also Executive
Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2171-72, 2173 (2014).

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(citing,

inter

alia,

In

re

Corson

Mfg.

Co.,

Nos.

01–MC–5E,

99–16855K, AP 00–1366K, 2001 WL 877394, at *2 (W.D.N.Y. June 27,
2001) (ruling that breach of fiduciary duty claims were related to
core fraudulent transfer claims and refusing to withdraw reference
as to those claims)). Where, as here, non-core claims are closely
related to the core claims, “merely severing the non-core claims
from

the

core

claims

would

likely

result

“in

duplicative

presentations on substantially overlapping factual matters” and
“cause unnecessary delay and deplete both judicial resources and
the assets of the bankruptcy estate.” In re Corson Mfg. Co., 2001
WL 877394, at *2 (quotation omitted).
Moreover, as Plaintiffs point out, the Bankruptcy Court has
presided over Debtor’s Chapter 11 case for more than two years, has
considered and adjudicated the Trustee Motion and the Motion to
Prosecute, has held an evidentiary hearing on the Trustee Motion,
and is now presiding over a second adversary proceeding involving
Debtor. The “hypothetical possibility of duplicative proceedings”
cited by the Fleet Defendants does not outweigh the efficiencies
gained by receiving the recommendation of a court that has acquired
familiarity with the underlying facts and possesses substantial
expertise in the bankruptcy law applicable to Plaintiffs’ claims.
See Securities Investor Protection Corp., 57 B.R. at 58. Finally,
the Bankruptcy Court is as well-equipped as a Magistrate Judge to

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manage discovery in this matter, given that it handles similar
cases regularly. See Arbco, 479 B.R. at 268.
C. Prevention of Forum Shopping
The Fleet Defendants assert that they are not engaged in forum
shopping

and

seek

withdrawal

only

to

promote

uniformity

and

efficiency. Plaintiffs assert that if efficiency and uniformity
were the Fleet Defendants’ sole concern, they could have consented
to the entry of a final order by the Bankruptcy Court. See In re
Lehman Bros. Holdings Inc., 480 B.R. 179, 197 (S.D.N.Y. 2012)
(commenting that if judicial economy was “[Chase’s] sole concern,
[Chase] could have simply consented to” entry of final orders by
the bankruptcy court) (citations omitted). Regardless of the Fleet
Defendants’ motivations, withdrawal at this stage would result in
significant

inefficiencies,

as

discussed

above,

and

is

not

appropriate.
D.

Uniformity in the Administration of Bankruptcy Law

The Fleet Defendants argue that having two cases against the
Fleet Defendants (the Adversary Proceeding and the SEC’s action)
pending in

different

courts

gives

rise

to the

likelihood of

conflicting rulings on legal matters, such as the applicability of
the attorney-client privilege. The SEC’s action is pending only
against Fleet, however. And, as Plaintiffs point out, the relevant
consideration under Orion is whether withdrawal of the reference
would promote “uniformity in the administration of bankruptcy law,”

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4

F.3d

at

1101

(emphasis

supplied).

The

Second

Circuit

has

indicated that the determination of uniformity under Orion “will
turn” upon the core versus non-core distinction. Id. The SEC has
asserted claims against Fleet for violations of Section 10(b) of
the

Securities

Exchange

Act

and

Sections

17(a)(1),

17(a)(2),

17(a)(3), 5(a), and 5(c) of the Securities Act. Thus, while the
SEC’s action does not involve questions of bankruptcy law, the
Adversary Proceeding involves almost all core bankruptcy matters.
This factor therefore does not weigh in favor of withdrawal.
V.

Conclusion
For the reasons discussed above, the Fleet Defendants’ Motion

to Withdraw the Reference (Dkt #1) is denied without prejudice to
renew at a later date. The Adversary Proceeding will remain subject
to the jurisdiction of the Bankruptcy Court at this time.
IT IS SO ORDERED.

S/Michael A. Telesca
_________________________________
HON. MICHAEL A. TELESCA
United States District Judge
Dated:

December 2, 2015
Rochester, New York

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