NORTHEN et al v. WINDSOR INVESTMENTS OF NC, LLC et al
Filing
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MEMORANDUM OPINION AND ORDER signed by CHIEF JUDGE WILLIAM L. OSTEEN, JR on 1/9/2017; Defendants' Motion to Withdraw Reference (Doc. 2 ) of this Adversary Proceeding to the United States Bankruptcy Court is DENIED WITHOUT PREJUDICE. (Sheets, Jamie)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
JOHN A. NORTHEN,
Chapter 7 Trustee for C&M
Investments of High Point,
Inc., C. Wayne McDonald
Contractor, Inc., C. Wayne
McDonald, and Wendy C.
McDonald,
Plaintiff,
v.
WINDSOR INVESTMENTS OF NORTH
CAROLINA, LLC, et al.,
Defendants.
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1:16CV1023
MEMORANDUM OPINION AND ORDER
OSTEEN, JR., District Judge
Presently before this court is a Motion to Withdraw
Reference filed by Windsor Investments of North Carolina, LLC
(“Defendants” or “Family Defendants”).1 (Doc. 2.) John A.
Northen, serving as Chapter 7 Trustee in the cases of C&M
Investments of High Point, Inc., C. Wayne McDonald Contractor,
The Family Defendants include Windsor Investments of North
Carolina, LLC, The Maggie McDonald Irrevocable Trust, The
Jason W. McDonald Irrevocable Trust, The Ashley McDonald Davis
Irrevocable Trust, Branson Meadows Holding, LLC, Cedar Lane
Properties, LLC, Dorothy Jane Smith, Jack Smith, Maggie’s Farm,
LLC, Jason W. McDonald, The McFactory, LLC, Mac & Mac, LLC, The
Melissa Anne Martin Glick Irrevocable Trust, The Michael Steven
Martin Irrevocable Trust, and The Mary Margaret McDonald
Irrevocable Trust.
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Inc., C. Wayne McDonald, and Wendy C. McDonald (“Trustee”),
filed objections (Doc. 4) to the Motion to Withdraw Reference,
and Defendants replied. (Doc. 7.) This matter is now ripe for
resolution, and for the reasons stated herein, Defendants’
motion will be denied.
I.
BACKGROUND
On August 29, 2014, Trustee filed a Complaint containing
seventeen causes of action in “Adversary Case 14-02023.”
(Bankruptcy Record, Ex. 3, Complaint (Doc. 3-3).) The named
defendants are not parties to the bankruptcy case except as a
result of the adversary proceeding. The claims asserted in the
Complaint are all fraudulent transfer claims against various
defendants (id. at 19-54), except for four causes of action
seeking declaratory judgments as to various entities. (Id. at
30, 33, 37, 47.) Defendants filed an answer denying the
allegations and, inter alia, requesting a “trial by jury on all
issues of fact arising under this adversary proceeding.”
(Bankruptcy Record, Ex. 4, Answer (Doc. 3-4) at 26.)
Trustee filed an Amended Complaint on October 14, 2014
adding additional causes of action. (Bankruptcy Record, Ex. 5,
Amended Complaint (Doc. 3-5).) Defendants filed an answer again
asserting a request for jury trial (id., Ex. 8, Amended Answer
(Doc. 3-8) at 2), and a defense objecting to subject matter
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jurisdiction and the jurisdiction of the Bankruptcy Court over
all or some of the defendants and claims alleged in the amended
complaint. (Id., Ex. 6, Answer (Doc. 3-6) at 21.) Trustee filed
an Amendment to the Amended Complaint on December 28, 2015,
which included a twenty-fifth cause of action, adding Jason W.
McDonald to the group of defendants charged under 11 U.S.C.
§§ 544(b), 548, 549 and 550. (Id., Ex. 9 (Doc. 3-9).) Defendants
answered on January 25, 2016.
(Id., Ex. 10 (Doc. 3-10).)
As noted above, Defendants have moved in this court for an
order withdrawing “the reference of this Adversary
Proceeding . . . to the United States Bankruptcy Court for the
Middle District of North Carolina . . . under Fed. R. Bnkr. P.
5011 and 28 U.S.C. § 157(d).” (Doc. 2 at 1.)
II.
ANALYSIS
“[T]he district courts shall have 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.”
28 U.S.C. §§ 1334(a), (b). Further, “[e]ach district court may
provide that any or all cases under title 11 and any or all
proceedings arising under title 11 or arising in or related to a
case under title 11 shall be referred to the bankruptcy judges
for the district.” 28 U.S.C. § 157(a).
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The manner in which a bankruptcy judge may act on
a referred matter depends on the type of proceeding
involved. Bankruptcy judges may hear and enter final
judgments in all core proceedings arising under title
11, or arising in a case under title 11. § 157(b)(1).
Core proceedings include, but are not limited to 16
different types of matters, including counterclaims by
a debtor's estate against persons filing claims
against the estate. § 157(b)(2)(C). . . .
. . . .
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. § 157(c)(1).
Stern v. Marshall, 564 U.S. 462, 473-75 (2011) (internal
quotation marks and punctuation omitted).
“Section 157 sets forth the process by which the district
court may withdraw matters from the bankruptcy courts.” In re
Dain, No. 1:12-cv-1251 GBL-IDD, 2013 WL 428458, at *2 (E.D. Va.
Jan. 31, 2013). Withdrawal is mandatory “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).
A.
Mandatory Withdrawal of Reference
Defendants argue in their Motion to Withdraw Reference that
“[t]hey are not subject to the Bankruptcy Court’s jurisdiction”
because “[t]he Bankruptcy Court lacks the constitutional
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authority to enter final judgment in the Lawsuit.” (Doc. 2 at
3.) Defendants argue that they “are third parties, not parties
to the bankruptcy proceedings, and have demanded trial by jury
in the District Court.” (Id. at 2.) “Defendants expressly
indicate[] they do not consent to entry of final order by the
Bankruptcy Court and assert[] their rights to have all claims
against them decided, to the maximum degree possible, by a jury
in United States District Court.” (Id.) Defendants further argue
that “no constitutionally core issues exist and if any did
exist, Defendants did not consent to determination by the
Bankruptcy Court.” (Id.)
Trustee responds that “[a] motion to withdraw the reference
is premature when there were remaining pretrial matters in this
case.” (Doc. 4 at 3.) “Specifically, the Trustee intends to file
a motion for summary judgment with respect to the claims against
the Family Defendants.” (Id. at 4).
“Pursuant to Stern v. Marshall . . . adjudication of
fraudulent transfer actions under 11 U.S.C. § 548 follows the
practice of non-core proceedings with the bankruptcy court
having authority only to enter proposed findings of fact and
conclusion of law . . . .”
In re Daniel, 556 B.R. 722, 724
(Bankr. M.D.N.C. Sept. 2, 2016) (emphasis added).
However,
“nothing in Stern prohibits the bankruptcy court from handling
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pre-trial proceedings, including ruling on dispositive motions.”
Finley Grp. v. 222 S. Church St., LLC, No. 3:15-cv-00029-FDW,
2015 WL 996631, at *2 (W.D.N.C. Mar. 6, 2015).
Even assuming it has a right to a jury trial on some
or all of the claims in the Trustee's complaint,
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.
Schafer v. Nextiraone Fed., LLC, No. 1:12CV289, 2012 WL 2281828,
at *8–9 (M.D.N.C. June 18, 2012) (citing Official Comm. of
Unsecured Creditors v. Schwartzman (In re Stansbury Poplar
Place, Inc.), 13 F.3d 122, 128 (4th Cir. 1993)).
Further, in a recent case out of this district, the
court discussed the implications of Stern when
determining the procedure for bankruptcy cases where
the bankruptcy court cannot issue final judgment.
After careful dissection of the limited case law in
this area, the court agreed with other courts in this
district — and with other circuit courts — in holding
that the authority to issue findings and
recommendations can remain with the bankruptcy court
regardless of whether the matter is deemed core or
non-core under Stern analysis. The court ordered,
[t]he Bankruptcy Judge shall conduct discovery and
issue findings and recommendations on dispositive
motions subject to de novo review by this court.
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Finley Grp., 2015 WL 996631, at *2 (internal quotation marks and
citations omitted).
Other district courts within the Fourth Circuit have
reached the same conclusion as stated in Finley Group when
interpreting Stern, allowing bankruptcy courts to retain “the
authority to ‘submit proposed findings of fact and conclusions
of law’ that the district court then considers before entering a
final judgment.” In re El-Atari, No. 1:11cv1090 (LMB/IDD), 2011
WL 5828013, at *3 (E.D. Va. Nov. 18, 2011) (citing 28 U.S.C.
157(c)(1); see Finley Grp., 2015 WL 996631, at *3; ACC Retail
Prop. Dev. & Acquisition Fund, LLC v. Bank of Am., N.A., No.
5:12-CV-361-BO, 2012 WL 8667572, at *4 (E.D.N.C. Sept. 28,
2012); In re Joe Gibson's Auto World, Inc., C/A No. 7:11-2482TMC, 2012 WL 1107763, at *3 (D.S.C. Apr. 2, 2012) (collecting
cases); Blue Cross & Blue Shield of N. Carolina v. Jemsek
Clinic, P.A., 506 B.R. 694, 701 (Bankr. W.D.N.C. 2014).
This court is in agreement with the above-cited cases and
“finds that the bankruptcy court retains reference of this case
until the matter is ready for trial. The Bankruptcy Judge shall
conduct discovery and issue findings and recommendations on
dispositive motions subject to de novo review by this court.”
Jemsek Clinic, 506 B.R. at 701.
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B.
Permissive Withdrawal of Reference
Alternatively, Defendants argue in their Reply that:
Even in a case where the U.S. District Court can refer
pre-trial matters to the Bankruptcy Court, the
authority to do so does not mean that the District
Court should do so and not withdraw the reference at
some point in the pre-trial proceedings. When to
withdraw during pre-trial matters is discretionary
with the District Court.
(Doc. 7 at 1.) When considering a permissive withdrawal,
[w]hile neither statute nor the Fourth Circuit have
explicitly defined [a standard], several district
courts within the Fourth Circuit have consistently
considered the following factors:
(1) whether the proceeding is core or noncore; (2) the uniform administration of
bankruptcy proceedings; (3) expediting the
bankruptcy process and promoting judicial
economy; (4) the efficient use of debtors'
and creditors' resources; (5) the reduction
of forum shopping; and, (6) the preservation
of the right to a jury trial.
Finley Grp., 2015 WL 996631, at *3 (quoting Jemsek Clinic, 506
B.R. at 697); see Mooring Capital Fund, LLC v. Sullivan, Civil
Action No. 3:16-CV-74, 2016 WL 4628572, at *4 (N.D. W. Va.
Sept. 6, 2016); Mason v. Ivey, 498 B.R. 540, 549 (Bankr.
M.D.N.C. 2013); In re Dain, 2013 WL 428458, at *2; ACC Retail,
2012 WL 8667572, at *2.
The first factor is “whether the proceeding is core or noncore.” Finley Grp., 2015 WL 996631, at *3. This court observes
that because the “status of a fraudulent conveyance claim as a
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core proceeding is unclear after Stern, . . . this Court
presumes that such claims, like non-core proceedings, may still
be heard, although not decided, by bankruptcy courts. Because
such claims cannot be treated as core proceedings, this factor
weighs in [movant’s] favor.” In re El-Atari, 2011 WL 5828013, at
*5. However, “[t]hough the underlying action does not have the
qualities of a core bankruptcy proceeding, there is still
significant value in having the bankruptcy court preside over
preliminary legal and discovery issues in a proceeding that is
related to this bankruptcy action.” In re Dain, 2013 WL 428458,
at *4 (internal quotation marks omitted). This court agrees and,
whether or not fraudulent conveyances remain a core proceeding
under Stern, this court concludes that the first factor does not
warrant withdrawal at the present time.
The second factor is “the uniform administration of
bankruptcy proceedings.” Finley Grp., 2015 WL 996631, at *3.
“Uniformity of administration is best achieved where the
bankruptcy courts are permitted to address matters that have
factual and legal issues in common with the bankruptcy action.”
ACC Retail, 2012 WL 8667572, at *3. The district court cases
cited throughout this memorandum indicate that fraudulent
transfer hearings are commonly the subject of bankruptcy
proceedings, even without classification as core proceedings.
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These fraudulent transfer proceedings often relate to underlying
bankruptcy actions. As such, the bankruptcy courts are best
equipped to address those matters to the furthest extent
possible. Accordingly, the court finds that the second factor
weighs against withdrawal.
The third factor is “expediting the bankruptcy process and
promoting judicial economy.” Finley Grp., 2015 WL 996631, at *3.
“[J]udicial economy and efficiency favor retention in this case.
The claims at issue have been pending for several years in the
bankruptcy court. The bankruptcy judge is familiar with the
parties, the factual makeup of the case, and the legal and
factual issues relevant to the remaining claims.” Jemsek Clinic,
506 B.R. at 699. Another district court in a substantially
similar situation held that:
Plaintiffs largely argue that it would be judicially
expedient to withdraw the referral to the bankruptcy
court because, they claim, a jury trial will at some
point have to occur in the District Court. However,
even if the bankruptcy court is unable to issue a
final order in this case, that court can utilize its
extensive knowledge of this complex area of the law
and oversee all pre-trial matters and then transfer
the action to the District Court when it is ready for
trial. Furthermore, the bankruptcy court can hear even
non-core matters and submit proposed findings of fact
and conclusions of law to the District Court. Using
the bankruptcy court's extensive knowledge of this
area of law is judicially expedient, even if the final
cases is heard before the District Court, and will
result in bankruptcy proceedings that are far more
uniform. Furthermore, the base of knowledge held by
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the bankruptcy court will more efficiently utilize the
parties' resources; therefore, all of these factors
weigh against withdrawing the referral to the
bankruptcy court.
Pettus Properties, Inc. v. VFC Partners 8, LLC, No. 3:12-CV00041, 2012 WL 273702, at *2 (W.D.N.C. Jan. 31, 2012) (internal
citations omitted); see In re El-Atari, 2011 WL 5828013, at *5.
With particular relevance to the present case, another district
court highlighted that:
[P]laintiff sensibly argues that judicial economy does
not favor withdrawal at this time; instead, it is more
appropriate to allow the bankruptcy court to continue
to adjudicate this action through the summary judgment
stage, . . .
. . . .
. . . Defendant essentially argues that it is a
waste of judicial resources to leave summary judgment
proceedings to the bankruptcy court where review by
the district court is, in defendant's view,
inevitable. This argument, while plausible, is not
persuasive. To begin with, the forecast of an appeal
is speculative, as neither party has yet even filed a
summary judgment motion, nor has any appealable
decision issued. But more importantly, the argument
proves too much, for if accepted it would lead to the
nonsensical conclusion that all references should be
withdrawn since all dispositive matters resolved by
the bankruptcy court may be appealed to the district
court.
In re QSM, LLC, 453 B.R. 807, 811 (Bankr. E.D. Va. 2011)
(internal quotation marks omitted). Trustee and Defendants make
extremely similar arguments in the present case. This court
finds the Defendants’ arguments unpersuasive for the same main
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reason — the possibility of an appeal does not immediately
warrant withdrawal. The potential for a jury trial or an appeal
to the district court does not necessitate withdrawal. As
discussed above, the bankruptcy court is capable of handling a
summary judgment motion and is in an optimal situation to do so,
having familiarity with the parties, the facts and the relevant
law. As such, this court finds the third factor to weigh heavily
against withdrawal.
The fourth factor is “the efficient use of the resources of
debtors and creditors.” Finley Grp., 2015 WL 996631, at *3. The
court does not find this factor to weigh heavily in favor of or
against withdrawal, as the parties would likely expend similar
amounts of financial resources and manpower litigating this
claim in the bankruptcy or district court.
The fifth factor is “reduction in forum shopping.” Finley
Grp., 2015 WL 996631, at *3. Here, “there is no evidence of
forum shopping in the instant case and therefore this factor is
neither in favor of nor against withdrawal.” Mooring Capital
Fund, 2016 WL 4628572, at *7.
The sixth and final factor is “the preservation of a right
to a trial by jury (or likelihood of a jury trial).” Finley
Grp., 2015 WL 996631, at *3. Even when the moving party is
entitled to a jury, “this does not mean that the bankruptcy
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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 pretrial conferences, and other matters short of the jury selection
and trial.” Mooring Capital Fund, 2016 WL 4628572, at *7
(internal quotation marks omitted); Finley Grp., 2015 WL 996631,
at *4; ACC Retail, 2012 WL 8667572, at *3. The court finds that
the sixth factor does not weigh heavily in favor of or against
withdrawal.
In conclusion, “[h]aving determined that after Stern, the
bankruptcy court retains jurisdiction to hear, but not decide,
fraudulent conveyances actions and that the traditional factors
for analyzing a motion for withdrawal of reference weigh against
withdrawal, defendant's Motion to Withdraw the Reference of
Adversary Proceeding will be denied . . . .”
In re El-Atari,
2011 WL 5828013, at *7.
For the reasons stated herein, Defendants’ Motion to
Withdraw Reference (Doc. 2) of this Adversary Proceeding to the
United States Bankruptcy Court is DENIED WITHOUT PREJUDICE.
This the 9th day of January, 2017.
_______________________________
United States District Judge
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