NEXTIRAONE FEDERAL, LLC v. SCHAFER, et al
Filing
5
MEMORANDUM OPINION AND ORDER signed by JUDGE THOMAS D. SCHROEDER on 6/18/12, that BBNS's motion to withdraw reference to the United States Bankruptcy Court (Doc. 2 ) is hereby DENIED. (Law, Trina)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
GERALD S. SCHAFER,
Chapter 7 Trustee,
)
)
)
Plaintiff,
)
)
v.
)
)
NEXTIRAONE FEDERAL, LLC d/b/a )
BLACK BOX NETWORK SERVICES,
)
)
Defendant.
)
)
1:12cv289
(Bank. Case No. B-10-10002C-7G)
(Adversary Proc. No. 11-02076)
MEMORANDUM OPINION AND ORDER
THOMAS D. SCHROEDER, District Judge.
This
action,
bankruptcy
Defendant
Services
court,
filed
is
Nextiraone
(―BBNS‖)
§ 157(d).
to
(Doc. 2.)
as
an
adversary
proceeding
before
this
court
on
Federal,
LLC
d/b/a
Black
withdraw
the
reference
the
in
motion
Box
under
28
the
of
Network
U.S.C.
Plaintiff Gerald S. Schafer, Chapter 7
Trustee (the ―Trustee‖), opposes the motion as being premature
on the grounds that, even assuming the bankruptcy court lacks
jurisdiction
to
enter
final
rulings,
it
may
pretrial proceedings and make recommendations.
still
conduct
(Doc. 3.)
For
the reasons set forth below, the motion will be denied.
I.
BACKGROUND
The following facts are alleged in the Trustee‘s complaint
and are taken as true for purposes of the present motion.
BBNS engineers and installs data networks infrastructure.
On October 23, 2007, it entered into a Subcontractor Agreement
with Premise Networks, Inc. (the ―Debtor‖), to provide certain
services in connection with a project for the United States
Department of Defense at Fort Bragg, North Carolina, on which
BBNS was bidding.
BBNS and the Debtor also entered into a
―teaming agreement‖ to improve BBNS‘s chance of being selected
as the prime contractor on the government project.
In February
2008, BBNS was awarded the federal contract.
In March 2008, BBNS and the Debtor executed an amendment to
the
Subcontractor
Agreement
to
set
the
pricing,
payment
schedule, and statement of work to be performed by the Debtor,
and
the
Debtor
―subcontract‖).
June 2008.
procured
a
$1,000,000
performance
bond
(the
The terms of the subcontract were revised in
On January 27, 2009, however, BBNS terminated the
subcontract and suspended the Debtor‘s work.
On January 2, 2010, the Debtor filed a voluntary petition
for relief under Chapter 7 of the Bankruptcy Code in the Middle
District of North Carolina.
Local Rule 83.11,
Pursuant to 28 U.S.C. § 157(a) and
the matter was
court in this district.
referred to the
bankruptcy
After the Trustee was appointed, he
filed this adversary proceeding against BBNS in the bankruptcy
court, allegedly as a ―core‖ proceeding – that is, the type in
which the bankruptcy court has authority to enter a judgment on
2
the merits as opposed to simply making recommended findings to
the
district
court.
The
Trustee
seeks
to
recover
over
$3,000,000 under four state law theories of recovery: breach of
contract; unfair and deceptive trade practices under N.C. Gen.
Stat. § 75-1.1 et seq.; quantum meruit; and unjust enrichment.
BBNS responded with the current motion to withdraw the reference
of the adversary proceeding to the bankruptcy court and to have
the case litigated in this court.
II.
ANALYSIS
BBNS raises three primary arguments for withdrawal of the
reference.1
First, it contends that this court must withdraw the
reference to the bankruptcy court under the requirements of 28
U.S.C.
§
157(d),
because
the
adversary
proceeding
involves
consideration of both Title 11 and laws of the United States
regulating
organizations
or
activities
affecting
interstate
commerce.
Second, it contends that the bankruptcy court lacks
constitutional authority to consider the action after Stern v.
Marshall, -- U.S. --, 131 S. Ct. 2594 (2011).
Third, it argues
that even if the action is deemed to be a non-core proceeding,
BBNS never submitted to the jurisdiction of the bankruptcy court
1
In the bankruptcy court, BBNS also filed a motion to dismiss
pursuant to Federal Rule of Civil Procedure 12(b)(1), contending that
the bankruptcy court lacked subject matter jurisdiction (Doc. 4-9),
and supported it with the same brief that supports its motion to
withdraw the reference. BBNS represents that its Rule 12(b)(1) motion
is not before the district court (Doc. 4-12 at 2), so the court does
not address it.
3
by filing a proof of claim and intends to invoke its Seventh
Amendment right to a trial by jury, which only an Article III
court can entertain absent consent of the parties.
The Trustee
does not address BBNS‘s first or third arguments.
Rather, he
argues only that the motion to withdraw reference is premature
because,
under
the
bankruptcy
court‘s
―related
to‖
authority
under 28 U.S.C. § 157(c)(1), it maintains the power to hear all
pretrial matters and make recommendations to the district court
on any dispositive pre-trial motions.
Each argument will be
addressed in turn.
A.
Mandatory
§ 157(d)
Withdrawal
of
Reference
under
28
U.S.C.
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.
28
U.S.C.
§
discretionary
district
157(d).
and
court,
While
mandatory
BBNS
withdrawal provision.
the
statute
withdrawal
proceeds
under
of
authorizes
reference
only
its
both
to
the
mandatory
As the moving party, it bears the burden
of demonstrating the requirements triggering withdrawal.
4
E.g.,
Vieira v. AGM, II, LLC, 366 B.R. 532, 535 (D.S.C. 2007); In re
U.S. Airways Grp., Inc., 296 B.R. 673, 677 (E.D. Va. 2003).
BBNS
litigation
adversary
contends
of
the
that
withdrawal
parties‘
proceeding
―will
is
construction
require
mandatory
subcontract
application
of
because
in
the
federal
regulations, and the interpretation of federal contract clauses
implemented by those regulations, relating to the performance of
[Department
of
Defense]
(Doc.
at
5.)
BBNS
Lithographers,
Inc.
v.
Lithographers,
Inc.),
127
4-10
prime
contracts
and
relies
heavily
Hibbert
(In
B.R.
122,
127-28
on
re
subcontracts.‖
Contemporary
Contemporary
(M.D.N.C.
1991),
where the court stated that withdrawal applies when a Title 11
proceeding ―presents a non-Title 11 federal question which will
affect the outcome of the proceeding.‖
The court stated that it
―does not believe that an unclear or complex federal statute is
a prerequisite to mandatory withdrawal under section 157(d),‖
and it rejected any requirement for ―significant interpretation‖
of ―vague and uncertain‖ federal law.
2
Id. at 127.2
In line with the vast majority of decisions, the court rejected the
view that mandatory withdrawal under section 157(d) requires material
Title 11 questions, finding that such an approach would frustrate
withdrawal in cases in which non-bankruptcy federal law must be
considered but bankruptcy law plays little or no role.
In re
Contemporary Lithographers, 127 B.R. at 127-28; see also Franklin
Savings Assoc. v. Office of Thrift Supervision, 150 B.R. 976, 980-81
(D. Kan. 1993) (noting that a literal approach would be incongruous
and frustrate the purpose of section 157(d) with respect to mandatory
withdrawal).
5
Since Contemporary Lithographers, courts have articulated
in
differing
section
ways
157(d)‘s
―requires.‖
their
interpretation
phrases
―resolution,‖
and
application
―consideration,‖
of
and
For example, in In re U.S. Airways, 296 B.R. at
677-78, the court noted that there is ―broad judicial agreement
that the phrase ‗requires consideration‘ cannot be given its
broadest possible reading -– as in merely to contemplate or give
-–
attention
for
to
read
the
phrase
trivialize
the
mandatory
withdrawal
drastically
the
bankruptcy
court‘s
concluded
that
consideration‖
the
must
terms
be
this
requirement
jurisdiction.‖
―resolution‖
read
broadly
together
would
and
limit
The
court
and
and
―requires
that
mandatory
withdrawal is not warranted unless, at a minimum, the bankruptcy
court must decide a question under non-bankruptcy federal law in
order to resolve the proceeding.
Id. at 679.
In other words,
―an issue or question of non-bankruptcy federal law must be
essential
or
proceeding.‖
material
to
the
disposition
of
the
bankruptcy
Id.; see also Vieira, 366 B.R. at 536 (following
In re U.S. Airways); 1 Howard J. Steinberg Bankruptcy Litigation
§ 1:75 (updated June 2011) (―It is well-settled that to trigger
mandatory
withdrawal,
the
‗consideration‘
of
non
Title
11
federal law required for resolution of the proceeding must be
‗substantial and material‘ and not just incidental.‘‖).
Compare
Terry v. Sparrow, 328 B.R. 442, 449 (M.D.N.C. 2005) (quoting
6
Contemporary Lithographers and citing In re U.S. Airways, but
finding the absence of any non-bankruptcy federal law that is
―determinative of any issue‖ in the bankruptcy proceeding).
While there may be different views for how to apply section
157(d),
the
court
need
not
sort
out
here
any
potential
distinction between them because BBNS has failed to demonstrate
even that the outcome of the state law claims in the adversary
proceeding will be affected by, much less that there will be
―substantial and material‖ or ―significant‖ interpretation of,
federal law.
BBNS‘s principal argument rests on its contention
that the subcontract and related documents incorporate ―almost
100‖ Federal Acquisition Regulations and Department of Defense
supplements to them.
true,
BBNS
has
(Doc. 4-10 at 6.)
failed
to
show
how
any
Assuming this to be
of
these
federal
regulations will even be relevant to the actual dispute in this
case, much less how they would affect the adversary proceeding.
The essence of the Trustee‘s complaint is the allegation that
BBNS, on the grounds it became concerned about the Debtor‘s
financial
well-being,
wrongfully
required
that
BBNS
obtain
a
performance bond, required a re-negotiation of the subcontract
terms, solicited away key employees, and then terminated the
subcontract.
These are quintessential state law claims; not a
single federal law is alleged in the complaint to have been
violated.
7
BBNS argues further that the Davis-Bacon Act will ―apply‖
to delivery orders under the subcontract.
(Id. at 6.)
Davis-Bacon
version
Act
required,
and
its
current
requires,
payment of ―prevailing wages‖ on public work products.
U.S.C. § 3141 et seq.
The
See 40
Again, however, BBNS has not demonstrated
that the law is relevant to the adversary proceeding in any way.
In short, BBNS does not tie non-bankruptcy federal law to
the complaint‘s allegations or causes of action.
BBNS
has
failed
to
carry
its
burden
of
Consequently,
demonstrating
that
mandatory withdrawal is warranted under section 157(d).
B.
Effect of Stern v. Marshall
BBNS‘s second argument is that even if withdrawal is not
mandated
by
section
157(d),
the
reference
must
be
withdrawn
because the bankruptcy court lacks constitutional authority to
hear or determine this case following Stern v. Marshall, -- U.S.
--, 131 S. Ct. 2594 (2011).
BBNS‘s argument relies on the
premise, alleged in the complaint, that the bankruptcy court‘s
jurisdiction arises from the adversary proceeding‘s status as a
core proceeding under the Bankruptcy Code.3
3
(Doc. 4-2 ¶ 4.)
―Although core proceedings are not statutorily defined, [Title 28]
section 157(b)(2) offers a nonexclusive list of such actions.
Distilling a principle, one court observed that a core proceeding
‗must
have
as
its
foundation
the
creation,
recognition,
or
adjudication of rights which would not exist independent of a
bankruptcy environment although of necessity there may be a peripheral
state law involvement.‘
A related proceeding, on the other hand, is
one in which the outcome ‗could conceivably have any impact on the
estate being administered in bankruptcy.‘‖ Holland Indus., Inc. v. W.
8
BBNS
argues
that
constitutionally
under
Stern,
not
only
is
the
barred from determining
it
lacks
statutory
bankruptcy
court
this core proceeding
authority
to
even
submit
findings of fact and conclusions of law to the district court
because 28 U.S.C. § 157(c)(1) authorizes such recommendations
only in non-core proceedings.
To understand BBNS‘ contentions, a brief overview of Stern
and its aftermath is helpful.
Stern involved a dispute over the
failure to include Vickie Marshall (a/k/a Anna Nicole Smith) in
the will of her deceased wealthy husband, J. Howard Marshall II.
Vickie sued Marshall‘s son in state court, contending that the
son tortiously interfered with Marshall‘s intent to provide for
her
in
Marshall‘s
will.
She
then
filed
for
bankruptcy
protection, and the son filed a proof of claim seeking damages
against Vickie‘s bankruptcy estate for alleged defamation for
her
public
controlling
statements
Marshall‘s
counterclaim
for
expected
Marshall‘s
Vickie
in
summary
inculpating
assets.
tortious
judgment
Vickie
interference
will.
on
the
The
the
son
fraud
responded
with
bankruptcy
son‘s
in
her
with
gift
court
defamation
awarded her millions of dollars on her counterclaim.
in
a
she
granted
claim
and
Following
Entm‘t, Inc., (In re Mountain View Coach Line, Inc.), No. 88 CIV 5385
(JFK), 1989 WL 129479, at *1, (S.D.N.Y. Oct. 27, 1989) (internal
citations omitted); see Valley Historic Ltd. P‘ship v. Bank of New
York, 486 F.3d 831, 835-36 (4th Cir. 2007).
9
appeals to the district and appellate court, the Supreme Court
held that while the bankruptcy court had statutory authority to
enter
final
judgment
on
Vickie‘s
counterclaim
under
section
157(b) as a core proceeding,4 it lacked constitutional authority
to do so because determination of the state law claim involved
the ―prototypical exercise of judicial power‖ that defines an
Article III court.
131 S. Ct. at 2615.
Courts have reached different conclusions regarding whether
a bankruptcy court can continue to hear a core proceeding that
is unconstitutional after Stern.
the
view
bankruptcy
core
–
argued
court‘s
proceedings
by
BBNS
authority
(over
At one end of the spectrum is
–
that
into
which
it
section
those
has
157
matters
plenary
divides
that
the
involve
authority
to
determine cases and enter judgments) and those that are non-core
but otherwise ―related to‖ the bankruptcy case (over which it
has authority only to make recommended rulings).
Under this
view, the plain language of section 157(c)(1)5 does not authorize
4
Pursuant to 28 U.S.C. § 157(b)(2)(C), ―counterclaims by the estate
against persons filing claims against the estate‖ are ―core
proceedings.‖
5
Section 157(c)(1) provides:
A bankruptcy judge may hear a proceeding that is not a core
proceeding but that is otherwise related to a case under
title 11. In such proceeding, the bankruptcy judge shall
submit proposed findings of fact and conclusions of law to
the district court, and any final order or judgment shall
be entered by the district judge after considering the
bankruptcy judge's proposed findings and conclusions and
10
a
bankruptcy
court
to
hear a
core but unconstitutional
under its ―related to‖ jurisdiction.
case
See Ortiz v. Aurora Health
Care, Inc. (In re Ortiz), 665 F.3d 906, 915 (7th Cir. 2011)
(concluding that the court lacked appellate jurisdiction because
the bankruptcy court lacked ―related to‖ jurisdiction where the
proceeding
was
core
but
the
bankruptcy
court
lacked
a
constitutional basis for deciding it under Stern); Samson v.
Blixseth (In re Blixseth), Case No. 09-60452-7, Adv. No. 851190, 2011 WL 3274042, at *12 (Bankr. D. Mont. 2011), amended by
463 B.R. 896, 905-07 (Bankr. D. Mont. 2012).
BBNS argues that
the court must follow this approach because the Trustee‘s action
is a core proceeding, albeit unconstitutional after Stern, and
therefore
cannot
nevertheless
qualify
―related
to‖
as
a
the
non-core
proceeding
bankruptcy
case
under
that
is
section
157(c)(1).
Other courts have concluded that Stern did not eliminate
the ability of bankruptcy courts to issue proposed findings and
conclusions
in
core
proceedings
unconstitutional under Stern.
that
have
become
These courts read Stern as having
effectively removed such cases from the bankruptcy court‘s core
jurisdiction and relegated them to the category of ―related to‖
after reviewing de novo those matters to which any party
has timely and specifically objected.
28 U.S.C. § 157(c)(1) (emphasis added).
11
proceedings under section 157(c)(1).6
See, e.g., Burns v. Dennis
(In re Southeastern Materials, Inc.), 467 B.R. 337, 359 n.35
(Bankr. M.D.N.C. 2012) (citing cases); McCarthy v. Wells Fargo
Bank, N.A., (In re El–Atari), No. 1:11cv1090, 2011 WL 5828013,
at *3 (E.D. Va. Nov. 18, 2011) (―Even if a fraudulent conveyance
action . . . has lost its vaunted status as a core proceeding,
it is clearly ‗related to a case under title 11.‘‖); Field v.
Lindell (In re Mortg. Store, Inc.), 464 B.R. 421, 427 (D. Haw.
2011)
(―[T]he
Congress,
if
court
faced
has
with
little
the
difficulty
prospect
that
in
finding
bankruptcy
that
courts
could not enter final judgments on certain ‗core‘ proceedings,
would have intended them to fall within 28 U.S.C. § 157(c)(1)
granting
bankruptcy
courts
authority
to
enter
findings
and
recommendations.‖); Paloian v. Am. Express Co. (In re Canopy
Fin., Inc.), 464 B.R. 770, 774 (N.D. Ill. 2011) (noting that
Stern ―at least implied that the effect of its decision was to
‗remove‘ certain claims from ‗core bankruptcy jurisdiction,‘ and
to
relegate
them
to
the
category
of
claims
that
are
merely
‗related to‘ bankruptcy proceedings and thus subject to being
heard,
but
not
finally
decided,
6
by
bankruptcy
courts.‖);
Some of these cases rely on Stern‘s limiting language -- in which
the Court noted that Marshall‘s son did not argue that the bankruptcy
courts are barred from hearing all counterclaims and making
recommended
rulings
in
matters
―related
to‖
the
bankruptcy
proceedings, and emphasized that the question presented was a
―‗narrow‘ one‖ -- as evidence that the Court did not disapprove of the
bankruptcy court‘s ability to continue to hear the case under its
―related to‖ statutory grant. See Stern, 131 S. Ct. at 2620.
12
Justmed, Inc. v. Byce (In re Byce), No. 1:11-cv-00378-BLW, 2011
WL 6210938, at *4 (D. Idaho Dec. 14, 2011) (―A majority of
district courts considering the issue hold that the bankruptcy
courts
retain
the
power
to
enter
proposed
findings
and
recommendations.‖).
With this background in mind, the court returns to BBNS‘s
argument that Stern bars the bankruptcy court from hearing the
case because, as alleged by the Trustee in the complaint, the
adversary proceeding is a core proceeding under 28 U.S.C. § 157.
(Doc. 4-2 ¶ 4.)
As clear from the above, however, if the
Trustee‘s adversary proceeding is not a core proceeding, Stern
does
come
not
into
play.7
is
whether
the
therefore,
assumption.
parties
fundamental
are
question
operating
on
a
here,
valid
It is that question to which the court now turns.
1.
A
The
Core Jurisdiction
bankruptcy
court
derives
its
jurisdiction
from
the
district court, which has, with exceptions not relevant here,
―original and exclusive jurisdiction of all cases under title
11,‖ and ―original but not exclusive jurisdiction of all civil
proceedings arising under title 11, or arising in or related to
cases under title 11.‖
Congress
has
divided
28 U.S.C. § 1334(a), (b); id. § 157(a).
bankruptcy
7
proceedings
into
three
BBNS has not filed a proof of claim and states that it does not
intend to do so. (Doc. 4-10 at 4.) Thus, there is no counterclaim by
the estate that would provide core jurisdiction under section
157(b)(2)(C).
13
categories:
(1)
those
―arising
under‖
Title
11;
(2)
those
―arising in‖ a Title 11 case; and (3) those ―related to‖ a Title
11 case.
Stern, 131 S. Ct. at 2603 (citing 28 U.S.C. § 157(a)).
A controversy may also be a ―non-core unrelated proceeding.‖
Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 399 (4th
Cir. 1992).
referred
The manner in which a bankruptcy judge may act on a
matter
―Bankruptcy
depends
judges
may
on
the
hear
type
and
of
proceeding
determine
.
.
.
involved.
all
core
proceedings arising under title 11, or arising in a case under
title 11 . . . and may enter appropriate orders and judgments,
subject to review‖ in these proceedings to the extent of the
district court‘s reference under 28 U.S.C. § 157(a).8
§ 157(b)(1); Stern, 131 S. Ct. at 2603.
28 U.S.C.
If the proceeding is
not core but is ―related to‖ a case under Title 11, bankruptcy
judges may make proposed findings of fact and conclusions of law
for review by the district court.
The
Bankruptcy
Code
does
28 U.S.C. § 157(c)(1).
not
define
a
core
proceeding.
Rather, section 157(b)(2) sets forth a non-exclusive list of 16
types of matters that constitute core proceedings.9
Ordinarily,
8
A party may appeal final judgments in core proceedings to the
district court.
28 U.S.C. § 158(a); Fed. R. Bankr. P. 8013; see
Stern, 131 S. Ct. at 2603-04.
9
Section 157(b)(2) provides:
Core proceedings include, but are not limited to—
(A)matters concerning the administration of the estate;
14
the determination whether a matter is core or not occurs in the
bankruptcy court.
28 U.S.C. § 157(b)(3) (providing that the
―bankruptcy judge shall determine, on the judge‘s own motion or
on timely motion of a party, whether a proceeding is a core
proceeding under this subsection‖).
However, a district court
may conduct the inquiry when considering whether to withdraw the
reference.
In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d
(B)allowance or disallowance of claims against the estate
or exemptions from property of the estate, and estimation
of claims or interests for the purposes of confirming a
plan under chapter 11, 12, or 13 of title 11 but not the
liquidation or estimation of contingent or unliquidated
personal injury tort or wrongful death claims against the
estate for purposes of distribution in a case under title
11;
(C)counterclaims by the estate against persons filing
claims against the estate;
(D)orders in respect to obtaining credit;
(E)orders to turn over property of the estate;
(F)proceedings to determine, avoid, or recover preferences;
(G)motions to terminate, annul, or modify the automatic
stay;
(H)proceedings to determine, avoid, or recover fraudulent
conveyances;
(I)determinations as to the dischargeability of particular
debts;
(J)objections to discharges;
(K)determinations of the validity, extent, or priority of
liens;
(L)confirmations of plans;
(M)orders approving the use or lease of property, including
the use of cash collateral;
(N)orders approving the sale of property other than
property resulting from claims brought by the estate
against persons who have not filed claims against the
estate;
(O)other proceedings affecting the liquidation of the
assets of the estate or the adjustment of the debtorcreditor or the equity security holder relationship, except
personal injury tort or wrongful death claims; and
(P)recognition of foreign proceedings and other matters
under chapter 15 of title 11.
15
Cir.
1993)
(assessing
core
or
non-core
status
under
discretionary withdrawal); In re U.S. Airways, 296 B.R. at 68183 (same).
But see, e.g., Official Comm. of Unsecured Creditors
v. Blease (In re Envisionet Computer Servs., Inc.), 276 B.R. 7,
11 (D. Me. 2002) (discretionary withdrawal).10
concludes
that
it
may
properly
address
Thus, the court
the
question
here,
especially since BBNS argues for withdrawal and its argument
rests on proof of core jurisdiction.
below,
it
becomes
readily
apparent
For the reasons noted
that
BBNS
has
not
demonstrated that the adversary proceeding is a core proceeding.
First, BBNS has
provision
of
not
section
shown
(or even argued)
157(b)(2)‘s
non-exclusive
under which
list
of
core
proceedings this adversary proceeding might fall, and the court
can find none that applies here.
Nor has BBNS shown how this
proceeding
not
157(b)(2).
generally,
is
a
core
BBNS‘s
section
proceeding
briefing
refers
157(b)(2)(C)
with
enumerated
to
in
section
respect
to
section
157(b)(2)
Stern
(a
subsection which does not apply here as noted above), and to two
cases
which
receivable‖
found
to
be
a
trustee‘s
a
core
action
proceeding
section 157(b)(2)(A) and (O).
to
collect
within
the
―accounts
meaning
(Doc. 4-10 at 14-15.)
of
These
cases, however, are at odds with the Fourth Circuit‘s opinion in
10
In discretionary withdrawal cases, the core/non-core determination
is important because that status is a factor considered in the motion.
See In re U.S. Airways, 296 B.R. at 681.
16
Humboldt
Express,
Inc.
v.
The
Wise
Co.
(In
re
Apex
Express
Corp.), 190 F.3d 624, 632 (4th Cir. 1999), which held that a
Chapter
11
debtor‘s
―accounts
receivable‖
claims
against
a
stranger to the bankruptcy proceeding grounded in state law and
arising pre-petition must be treated as non-core.
The court
expressed a concern that a contrary result would mean that
any claim involving a potential money judgment would
be considered core, even the precise contract claim at
issue in Northern Pipeline [Construction Co. v.
Marathon Pipe Line Co., 458 U.S. 50 (1982)].
Thus,
the rationale [reaching a contrary result] would
swallow the rule established by Northern Pipeline.
See In re Orion Pictures, 4 F.3d at 1102 (to treat
pre-petition contract claims as core proceedings under
§§ 157(b)(2)(A) or (O) ―creates an
exception under
Northern Pipeline that would swallow the rule.‖).
190 F.3d at 632.11
BBNS fails to show how Stern would apply
here, particularly as it has not filed a proof of claim.
Second, BBNS has not attempted to show that the adversary
proceeding is core under a scenario not specifically listed in
section 157(b)(2).
Although BBNS‘s Rule 12(b)(1) motion is not
before the court, its arguments under Stern require the court to
consider whether the bankruptcy court can proceed at all.
adversary
proceeding
is
not
one
11
―arising
under
title
The
11.‖
The Trustee‘s constructive trust and equitable lien claims sound in
state law. This proceeding is not one for turnover of a debt to the
estate under 11 U.S.C. § 542(b), because that subsection is limited on
its face to ―property of the estate and that is matured, payable on
demand, or payable on order.‖
A turnover proceeding may qualify as
core only when its purpose is collection rather than the creation,
recognition, or liquidation of a matured debt.
Porter-Hayden Co. v.
First State Mgt. Grp., Inc. (In re Porter-Hayden Co.), 304 B.R. 725,
731-32 (Bankr. D. Md. 2004).
17
Proceedings ―arise under‖ Title 11 ―when the cause of action or
substantive right claimed is created by the Bankruptcy Code.‖
In
re
Southeastern
Materials,
467
B.R.
at
346
n.4
(citing
cases); see In re Langford, Nos. 04-12447C-7, 04-83012C-7, 2007
WL 3376664, at *3 (Bankr. M.D.N.C. Nov. 2, 2007) (―Claims ‗arise
under‘
the
Bankruptcy
Code
created
if
the
claims
by
bankruptcy
‗clearly
law.‘‖
invoke
substantive
rights
(citation
omitted)).
The Trustee‘s complaint is not brought under, and
his claims are not created by, the Bankruptcy Code or invoke
rights created by bankruptcy law.
Nor
is
the
Trustee‘s
―arising in‖ Title 11.
complaint
an
adversary
proceeding
A proceeding ―arising in‖ Title 11 is
one that is ―not based on any right expressly created by Title
11, but nevertheless, would have no existence outside of the
bankruptcy.‖
Valley Historic Ltd. P‘ship v. Bank of New York,
486 F.3d 831, 835
omitted).
(4th Cir. 2007)
(internal quotation marks
In Valley Historic, the court, in considering the
bankruptcy court‘s jurisdiction over
an adversary proceeding,
held that that a breach of contract claim that pre-dated the
filing of a Chapter 11 bankruptcy did not ―arise within‖ a Title
11 case:
It seems self-evident that a claim, like the Debtor‘s
breach of contract claim, that pre-dates the filing of
the Chapter 11 case cannot be said to have arisen
within the case, and whether it caused the bankruptcy
is immaterial. . . . Here, the Debtor‘s claims [for
18
breach of contract and tortious interference] bear
only a coincidental relationship to the Debtor‘s
They would have existed whether or
bankruptcy case.
not the Debtor filed bankruptcy.
It follows that
because the Debtor‘s breach of contract claim and
tortious interference claim would have existence
outside of the bankruptcy, they were not within the
bankruptcy court‘s ―arising in‖ jurisdiction.
486 F.3d at 836; see Stern, 131 S. Ct. at 2609; Thomas v. Union
Carbide Agr. Prods. Co., 473 U.S. 568, 584 (1985) (noting that
the Court in Northern Pipeline held that ―Congress may not vest
in a non-Article III court the power to adjudicate, render final
judgment, and issue binding orders in a traditional contract
action
arising
under
state
law,
without
consent
of
the
litigants, and subject only to ordinary appellate review‖).
The
same is true for state-law-based claims.
See In re Southeastern
Materials,
Stern,
467
B.R.
at
359-60
(citing
131
S.
Ct.
at
2611).
Here, the Trustee‘s claims relate solely to pre-petition
contracts and pre-petition actions, including an alleged prepetition
breach
of
contract.
The
subcontract
and
all
modifications to it were negotiated and entered into prior to
the Debtor‘s January 2, 2010 bankruptcy petition.
Similarly,
all acts forming the basis of alleged liability by BBNS (breach
of
contract,
unfair
and
deceptive
trade
practices,
quantum
meruit, and constructive trust) occurred pre-petition.
(Doc. 4-
3
BBNS
(Ex.
G:
January
27,
2009
termination
19
letter
from
to
Debtor); Doc. 4-1 ¶¶ 85, 91, 95 99, 102.)
This dispute seeks
the adjudication of state-created private rights and not the
restructuring of a debtor-creditor relation which is ―at the
core of the federal bankruptcy power.‖
U.S. at 71.
Northern Pipeline, 458
Moreover, BBNS has not filed a proof of claim.
Plainly, the adversary proceeding does not fall within the
provisions of 28 U.S.C. § 157(b)(2),
and
otherwise that it is a core proceeding.
BBNS
has not
shown
In the absence of such
a showing, BBNS fails to demonstrate how Stern would affect the
analysis.
2.
This
“Related to” Jurisdiction
does
Trustee
contends
because
the
not
end
that
the
bankruptcy
proceeding
and
157(c)(1)‘s
―related
make
accept that absent
the
court‘s
reference
court
can
authority.12
―related to‖
should
still
recommended
to‖
inquiry,
not
hear
rulings
The
authority
however.
The
be
withdrawn
the
adversary
under
parties
section
appear
to
in this case, the
bankruptcy court has no statutory authority to act.
See 28
U.S.C.
showing
§
157(a);
M.D.N.C.
LR
83.11.
The
burden
of
―related to‖ jurisdiction is on the party asserting it: here,
the Trustee.
In re Klavan, 297 B.R. 474 (Bankr. E.D. Va. 2002).
12
The determination is appropriate at this time because a non-core
proceeding may be unrelated to a bankruptcy case as well as related.
See In re Johnson, 960 F.2d at 399.
20
The Fourth Circuit, like the majority of circuits, adopts
the test for ―related to‖ jurisdiction articulated by the Third
Circuit in Pacor, Inc. v. Higgins, 743 F.3d 984, 994 (3d Cir.
1984): ―whether the outcome of that proceeding could conceivably
have
any
effect
bankruptcy.‖13
on
the
estate
being
administered
in
Valley Historic, 486 F.3d at 836 (quoting Owens-
Ill., Inc. v. Rapid Am. Corp. (In re Celotex Corp.), 124 F.3d
619,
625
(4th
Cir.
1994)
(emphasis
omitted)).
Thus,
―[a]n
action is related to bankruptcy if the outcome could alter the
debtor‘s
rights,
liabilities,
options
or
freedom
of
action
(either positively or negatively) and [it] in any way impacts
upon the handling and administration of the bankruptcy estate.‖
Id. (quoting Owens-Ill., 124 F.3d at 625-26).
Under this standard, it is plain that the outcome of the
adversary proceeding here could alter the Debtor‘s rights and
would
impact
the
administration
of
the
bankruptcy
estate
by
bringing into it sums of money constituting damages for the
Trustee‘s claims.
See, e.g., In re Bay Vista of Va., Inc., 394
B.R. 820, 839 (Bankr. E.D. Va. 2008) (finding resolution of
complaint
established
for
breach
―related
of
to‖
contract
claim
jurisdiction);
before
the
Porter-Hayden
court
Co.
v.
First State Mgt. Grp., Inc. (In re Porter-Hayden Co.), 304 B.R.
13
Although the Supreme Court has overturned Pacor in part, the Court
has not disturbed Pacor‘s ―related to‖ jurisdictional test.
Valley
Historic, 486 F.3d at 836 n.1.
21
725, 731-32 (Bankr. D. Md. 2004) (same).
Thus, the court finds
that the adversary proceeding is ―related to‖ the bankruptcy
case.
In sum, because
the adversary proceeding is not a core
proceeding but is ―related to‖ a case under Title 11, section
157(c)(1) applies and Stern does not bar the bankruptcy court
from hearing the proceeding and offering proposed findings of
facts and recommended rulings.
C.
Effect of Anticipated Request for
Absence of a Filed Proof of Claim
BBNS‘s
final
argument
is
that
the
Jury
Trial
reference
in
should
nevertheless be withdrawn because it has not consented to the
bankruptcy court‘s jurisdiction by filing a proof of claim in
the underlying bankruptcy case and has a Seventh Amendment right
to a jury trial that the bankruptcy court, as a non-Article III
court, cannot conduct absent consent of the parties.
(See Doc.
4-10 at 17-20, Doc. 4-11 at 3.)
It is true that a party‘s participation in a bankruptcy
case, particularly by filing a proof of claim, may historically
transform a matter ordinarily legal in nature
(to which the
Seventh Amendment may provide a right to a jury trial) to one
equitable in nature, that is, the allowance or disallowance of a
claim, for ―proceedings affecting that claim.‖
See Langenkamp
v. Culp, 498 U.S. 42 (1991); see also Valley Historic, 486 F.3d
22
at
838
n.2.14
However,
BBNS‘s
concern
is
premature.
Even
assuming it has a right to a jury trial on some or all of the
claims in the Trustee‘s complaint,15 withdrawal of the reference
is not mandated at this time.
As the Fourth Circuit observed,
the fact that the district court must undertake a jury trial in
an adversary proceeding
does not mean that the bankruptcy court immediately
loses jurisdiction of the entire matter or that the
district court cannot delegate to the bankruptcy court
the
responsibility
for
supervising
discovery,
conducting pre-trial conferences, and other matters
short of the jury selection and trial.
Official
Comm.
of
Unsecured
Creditors
v.
Schwartzman
(In
re
Stansbury Poplar Place, Inc.), 13 F.3d 122, 128 (4th Cir. 1993).
As noted by the court in Tyler v. McLane Foodservice, Inc. (In
re QSM, LLC), 453 B.R. 807 (E.D. Va. 2011), ―a rule requiring
immediate withdrawal of reference where a jury trial is required
runs
counter
underlies
the
to
the
policy
statutory
favoring
scheme
judicial
governing
the
between the district courts and bankruptcy courts.‖
economy
that
relationship
453 B.R. at
14
The Valley Historic court noted, however, that ―there still must be
jurisdiction over the proceeding under 28 U.S.C. § 1334.‖ In the only
motion pending before this court, however, BBNS does not directly
challenge the jurisdiction of the bankruptcy court or of this court
under Federal Rule of Civil Procedure 12(b)(1).
15
A breach of contract claim is one which could have been brought in
a court of law in 1791 and is therefore a legal claim entitling a
party to a right to a trial by jury.
See Chauffeurs, Teamsters &
Helpers, Local No. 391 v. Terry, 494 U.S. 558, 569-70 (1990).
23
811 (internal quotation marks omitted).16
Thus, BBNS‘s right to
jury trial does not mandate withdrawal of the reference to the
bankruptcy court at this time.
III. CONCLUSION
The
court
concludes
that
BBNS
has
failed
burden of demonstrating mandatory withdrawal.
to
carry
its
In the absence of
a showing that the adversary proceeding is a core proceeding,
and
because
it
is
―related
to‖
the
bankruptcy
case,
the
bankruptcy court may exercise such authority as permitted by 28
U.S.C.
subject
§
157(c)(1)
and
to
BBNS‘s
right
IS
THEREFORE
consistent
to
a
with
jury
Fourth
trial
on
Circuit
any
law,
applicable
claims.
IT
ORDERED
that
BBNS‘s
motion
to
withdraw
reference to the United States Bankruptcy Court (Doc. 2)
is
hereby DENIED.
/s/ Thomas D. Schroeder
United States District Judge
June 18, 2012
16
As noted, BBNS has not sought discretionary withdrawal, and thus
its right to a jury trial as a factor under that analysis is not
before the court. See Eide v. Haas (In re H&W Motor Express Co.), 343
B.R. 208, 214 (N.D. Iowa 2006); see 9 Collier on Bankruptcy
¶ 5011.01[1][b][i] (15th ed. rev. 2003).
Even so, the presence of a
jury demand is but one factor in determining whether cause for
discretionary withdrawal exists. See In re Orion Pictures, 4 F.3d at
1101-02 (citing Kenai Corp. v. Nat‘l Union Fire Ins. Co. (In re Kenai
Corp.), 136 B.R. 59, 61 (S.D.N.Y. 1992)).
24
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