Blue Cross and Blue Shield of North Carolina v. Jemsek Clinic, P.A. et al
Filing
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ORDER denying 1 Motion to Withdraw Reference to Bankruptcy Court. The Bankruptcy Court will oversee all discovery matters and, if necessary, issue findings of fact and conclusions of law on any dispositive motions. The reference with be withdrawn once the case is ready for trial. Signed by District Judge Robert J. Conrad, Jr on 3/11/2014. (eef)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
3:13-cv-674-RJC
BLUE CROSS AND BLUE SHIELD
OF NORTH CAROLINA,
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)
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Plaintiff,
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Counterclaim Defendant, and
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Counterclaim Plaintiff,
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v.
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JEMSEK CLINIC, P.A. and
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JOSEPH G. JEMSEK, M.D.,
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an individual,
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Defendants,
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Counterclaim Plaintiffs,
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Counterclaim Defendants
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____________________________________ )
ORDER
THIS MATTER comes before the Court on Plaintiff Blue Cross and Blue Shield of
North Carolina’s (BCBSNC) Motion to Withdraw Reference from the Bankruptcy Court, (Doc.
1), the Jemsek Defendants’ (Jemsek) Response, (Doc. No. 4), and Plaintiff’s Reply. (Doc. 5).
It is ripe for review by this Court.
I.
BACKGROUND
This peripatetic case has a convoluted history summarized here in barest form. In 2006,
Plaintiff BCBSNC filed a series of state law complaints against the Jemsek Defendants related to
insurance claims submitted to Plaintiff by Defendants. Shortly thereafter, Jemsek removed the
cases to Bankruptcy Court where they were consolidated into Case No. 07-3006. In 2007,
BCBSNC asserted its state claims as proofs of claim against the estates of the Jemsek
Defendants, who, in turn, filed nine counterclaims against BCBSNC.
The litigation has taken twists and turns since then. In 2008, a nationwide class action
lawsuit involving parallel claims was settled in the Southern District of Florida. Unaware of the
settlement, Jemsek failed to opt out, resulting in the dismissal of seven of Defendants’ nine
counterclaims. On appeal, the dismissal was affirmed by the Eleventh Circuit Court of Appeals.
In 2010, Jemsek moved for—and the Bankruptcy Court granted—sanctions against BCBSNC for
failing to inform Defendants of the existence or settlement of the parallel case. As sanctions, the
Bankruptcy Court dismissed all of BCBSNC’s claims and ordered the payment of attorney’s fees
and costs in the amount of $1,291,415.60. Thereafter, BCBSNC’s interlocutory appeal was
denied.
As it stands now, the sole claims remaining in this litigation belong to the Jemsek
Defendants, who bear that caption in form only. They are claims under North Carolina law for
defamation and tortious interference with a business relationship, and BCBSNC seeks to
withdraw them from Bankruptcy Court.
II.
DISCUSSION
The Jemsek Defendants have requested a jury trial on their counterclaims; likewise,
BCBSNC has declined to consent to the Bankruptcy Court entering a final order in this matter.
Given these postures, the parties concede that, following the Supreme Court’s decision in Stern
v. Marshall, the Bankruptcy Court lacks the constitutional authority to enter a final order with
respect to the two remaining claims in this case. 131 S. Ct. 2594 (2011). At issue here is
whether the Bankruptcy Court should handle pre-trial matters to include the issuance of findings
and recommendations, or whether the case should be withdrawn to this Court.
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A.
28 U.S.C. § 157
Federal district courts have original jurisdiction over all bankruptcy matters and related
proceedings. 28 U.S.C. § 1334(a), (b). Section 157(a) allows district courts to refer bankruptcy
cases to the bankruptcy court, which by standing order, this district has done.
28 U.S.C. § 157(d) empowers a district court to withdraw a proceeding from the
bankruptcy court on its own motion or on timely motion of any party and to have the proceeding
heard in the district court if there is “cause shown” for the removal. While this practice, known
as “discretionary” or “permissive” withdrawal, has been seldom utilized in this district, Plaintiff
contends that the sweeping implications of the Stern decision warrant withdrawal of Defendants’
remaining counterclaims.1
B.
Discretionary Withdrawal
As the party seeking withdrawal, BCBSNC bears the burden of demonstrating cause for
the Court to exercise its discretion and grant withdrawal. In re QSM, LLC, 453 B.R. 807, 810,
2011 WL 2161792, at *1 (E.D.Va. 2011). Here, BCBSNC contends that, having disallowed its
claims and lacking the constitutional authority to enter final judgment on Defendants
counterclaims, the Bankruptcy Court is no longer the proper locus for this case as there is no
scenario in which it can resolve the matter.
Although “cause” is not defined by statute, courts in this circuit have consistently
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28 U.S.C. § 157(d) also provides for mandatory withdrawal where the resolution of the proceeding requires
consideration of both the Bankruptcy Code and non-bankruptcy federal statutes regulating organizations or activities
affecting interstate commerce. Courts narrowly construe this provision to apply only in cases where substantial and
material consideration of non-bankruptcy federal statutes is necessary for the resolution of the proceeding. See In re
Manhattan Invest. Fund Ltd., 343 B.R. 63 (S.D.N.Y. 2006). As the two claims remaining are state law
counterclaims, mandatory withdrawal is not an issue in this case and the Court confines its analysis to discretionary
withdrawal.
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recognized several factors that govern whether discretionary withdrawal should be granted: (1)
whether the proceeding is core or non-core; (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. Id. at 809-10 (citing In re U.S. Airways Group, Inc.,
296 B.R. 673, 677 (E.D.Va. 2003)). Discretionary withdrawal of reference “should be
determined on a case-by-case basis by weighing all of the factors presented in a particular case,
including the core/non-core distinction.” Id. The Court examines each of these factors in turn.
1.
Core v. Non-Core
The Stern decision altered the way courts distinguish between core and non-core claims.
Prior to Stern, the determination of whether a matter was core or non-core was a comparatively
simple one and was governed by 28 U.S.C. § 157(b)(1), which accords to bankruptcy judges the
authority to “hear and determine” all core proceedings that “arise under title 11” or in a case
brought under title 11. For guidance, section 157(b)(2) establishes a non-exhaustive list of
sixteen core proceedings, including the type of claims brought in this suit, namely:
“counterclaims by the estate against persons filing claims against the estate.” 28 U.S.C. §
157(b)(2)(C).
This analysis has become considerably more complex in the aftermath of Stern. Plaintiff,
citing to cases in this district, contends that Stern added a layer of additional analysis requiring
courts to consider two additional factors: (1) whether the action stems from the bankruptcy itself;
and, (2) whether the issue would be “necessarily resolved” in the claims allowance process. See
In re Somerset Properties SPE, LLC, 2012 WL 3877791, at *4 (Bankr. E.D.N.C. Sept. 6, 2012);
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In re The McAlpine Group, LLC, 2012 WL 6138195, at *4-5 (Bankr. W.D.N.C. Dec. 11, 2012).
Other courts have agreed that Stern adds another layer of analysis, but have offered
different formulations of such analysis. See Dev. Specialists, Inc. v. Akin Gump Strauss Hauer
& Feld LLP, 462 B.R. 457, 472 (S.D.N.Y) (holding that the key factor determining whether a
matter could be defined as core turned on “whether, under Stern, the [b]ankruptcy [c]ourt has the
power to adjudicate it.”)
Regardless of the precise formulation employed by a court, this much is clear: the
question of whether a proceeding is core or non-core turns, in large measure, on whether a
bankruptcy court possesses the constitutional authority to enter final judgment in the matter.
Here, both parties concede that the Jemsek counterclaims are “statutorily core” under
157(b)(2)(C), and the Bankruptcy Court lacks the Constitutional authority to enter a final
judgment in the matter. They differ in their views of how such claims are treated in the wake of
Stern.
The primary argument of the Jemsek Defendants is that, regardless of whether the matter
is deemed core or non-core, the Bankruptcy Court can still enter proposed findings of fact and
conclusions of law as nothing in Stern strips it of such authority. Opposing this argument,
Plaintiff contends that Stern gave birth to a third classification of proceeding to account for
exactly the types of claims found here, namely, ones that are “statutorily core,” but which are
also deemed non-core by virtue of the fact that the bankruptcy court lacks constitutional
authority to enter judgment on them.2 Defying the principle of non-contradiction, these claims
This “third category” was not specifically identified by Plaintiff, but follows naturally from its arguments. In its
original motion, Plaintiff argued that, following the disallowance of Plaintiff’s claims, the Jemsek counterclaims
“fail both prongs of the Stern test and therefore are not core claims.” (Doc. 1 at 16). However, finding a claim noncore for the purposes of a motion for withdrawal does not alter whether the claims are “statutorily core. “More
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are, at once, core for the purposes of section 157(b)(2), and non-core for the purposes of
withdrawal under section 157(d).
This Court will leave it to higher courts to define the specific parameters of claims that
fall into the interstices revealed by Stern. Whether statutorily core claims such as the ones
brought by Defendants are deemed core, non-core or some third category need not be settled
here. What is significant is this: the bankruptcy judge cannot enter a final judgment on these
claims and they cannot be resolved in the claims allowance process. On the limited question of
whether to withdraw the claims, and before considering the other factors, the “core/non-core”
factor favors withdrawal. Plaintiff has made a persuasive case that such claims cannot be
deemed to be core for the purposes of withdrawal following Stern. “[A]fter Stern, one can still
[consider the applicable 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 [b]ankruptcy [c]ourt has the final
power to adjudicate it.” ACC Retail Property Development and Acquisition Fund, LLC v. Bank
of America, 12-361, 2012 WL 8667572 at * 2 (E.D.N.C. Sep. 28, 2012) (citing Dev. Specialists,
462 B.R. at 467).
2.
Other Factors
While the core/non-core factor favors withdrawal, the other factors strongly favor
retention by the Bankruptcy Court. There exists a standing order in this district, which
automatically refers all bankruptcy matters to the bankruptcy court. See, Local Rule Referencing
importantly, it is important to continue to construe [the counterclaims] as statutorily core for the purposes of the
Motion to Withdraw.” (Doc. 5 at 3). Such claim, by logical necessity, would be deemed “statutorily core” for the
purposes of § 157(b) but non-core for the purposes of § 157(d) as related to discretionary withdrawal. Other courts
have deemed this third category to constitute the “gap” in the analytical framework created by Stern. Executive
Benefits Ins. Agency v. Arkinson (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553, 565 (9th Cir. 2012)
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All Bankruptcy Matters to the Bankruptcy Judge, July 30, 1984.3 Additionally, the district court
issued a standing order referring to the bankruptcy court all pre-trial proceedings in bankruptcy
cases in which the parties have made a demand for jury trial. See, 3:04-MC-156, In re Adversary
Proceedings in Bankruptcy Court, (April 28, 2011).4 These orders reflect a consensus within this
district that all bankruptcy related claims, including non-core ones, should remain in front of the
bankruptcy judge unless cause is shown for withdrawal of reference or they are ready for trial in
a district court. The uniformity of administration is a strong consideration and dictates that
bankruptcy judges address matters that have legal and factual issues in common with the
bankruptcy action and that reference only be withdrawn when such matters are ready for final
adjudication in a district court.
Likewise, judicial 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. The disallowance of Plaintiff’s claims against the bankruptcy estate
does not alter the fact that judicial economy dictates that matters such as discovery would be
addressed most efficiently in the court in which this action was brought.
Finally, issues related to forum shopping, parties’ resources, and the right to trial by jury
on the remaining claims present no great matters. The existence of a jury demand 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
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4
Available at: http://www.ncwb.uscourts.gov/chambers/adminorders/main.html Order #63.
Available at: http://www.ncwd.uscourts.gov/court-info/local-rules-and-orders/general-orders?page=1
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responsibility for supervising discovery, conducting pre-trial conferences, and other matters short
of the jury selection and trial.” In re Stansbury Poplar Place, Inc., 13 F.3d 122, 128 (4th Cir.
1993) (internal quotations omitted). For these reasons, the Court declines to exercise its
discretion to withdraw reference.
Based on these considerations, the Court DENIES Plaintiff’s Motion to Withdraw
Reference to the District Court. (Doc. 1).
C.
Authority of Bankruptcy Court to Issue Findings and Recommendations
Having declined to withdraw reference, the final issue is whether the bankruptcy court
possesses the authority to issue findings and recommendations subject to de novo review by this
Court. 28 U.S.C. § 157(b)(2) provides statutory authority for bankruptcy courts to “hear and
determine” all “core” proceedings arising under title 11, or arising in a case under title 11. In
cases that are not core proceedings, a bankruptcy court may hear and “submit proposed findings
of fact and conclusions of law to the district court,” which reviews them de novo. 28 U.S.C. §
157(c)(1). Whether bankruptcy courts could issue findings of fact and conclusion of law was not
an issue prior to Stern. The implications of that decision, however, have led to the curious state
in which bankruptcy judges possess the authority under section 157(c) to issue findings and
recommendations on non-core matters subject to de novo review by the district court, but possess
no such express authority to do so in core matters under section 157(b).
The Fourth Circuit has not addressed it and the other circuit courts are split on this issue.
Examining the express language of the statute, the Seventh Circuit held in Ortiz v. Aurora
Healthcare, Inc., (in re Ortiz), that for a bankruptcy judge to issue findings of fact or conclusions
of law, “[the court] would have to hold that the debtor’s complaints were ‘not a core proceeding’
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but are ‘otherwise related to a case under title 11.’” 665 F.3d 906, 915 (7th Cir. 2011). In so
holding, the Seventh Circuit implied that the lack of explicit textual authority in the language of
section 157(b) authorizing the issuance of findings and recommendations determined that
bankruptcy courts lacked such authority.
Other courts, including the Ninth Circuit as well as those in this district have found no
prohibition to the issuance of findings and recommendations in core matters. In Executive
Benefits Ins. Agency v. Arkinson (In re Bellingham Ins. Agency, Inc.), the Ninth Circuit cited to
the Congressional objective of empowering bankruptcy courts in finding that bankruptcy judges
possessed such authority. 702 F.3d 553, 565 (9th Cir. 2012). Discussing whether a bankruptcy
judge could issue findings and recommendations on a core fraudulent conveyance claim, the
Court found that:
We have noted that Congress enumerated the examples of core proceedings in §
157(b)(2) with “a view toward expanding the bankruptcy court’s jurisdiction to its
constitutional limit.” Makin, 823 F.2d at 1301; see also Celotex Corp. v.
Edwards, 514 U.S. 300, 308, 115 S. Ct. 1493, 131 L.Ed.2d 403 (1995). With
respect to any bankruptcy-related claim, then, the bankruptcy courts must be
vested with as much adjudicatory power as the Constitution will bear. In light of
this statutory example, the power to “hear and determine” a proceeding surely
encompasses the power to hear the proceeding and submit proposed findings of
fact and conclusions of law to the district court. Section 157(b)(1) empowers
bankruptcy courts to “hear and determine” fraudulent conveyance claims in a
manner consistent with the strictures of Article III—and that includes the more
modest power to submit findings of fact and conclusions of law to the district
courts.
Id. (citing Duck v. Munn (In re Mankin), 823 F.2d 1296, 1300-01 (9th Cir. 1987).
Most importantly, the Stern opinion itself offered no indication that it viewed bankruptcy
courts as wholly without authority to issue findings and recommendations on core matters. In
Stern, the district court, finding that a right to jury trial existed as to the state law counterclaim,
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treated the bankruptcy court’s determination as findings and recommendations which it reviewed
de novo. The Stern majority offered no indication that such procedure was improper by either
court. In contrast, the language of the opinion suggests an intent to retain as much continuity
within the current framework as is constitutionally permissible. “We do not think the removal of
counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the
division of labor in the current statute; we agree . . . that the question presented here is a ‘narrow’
one.” Stern, 131 S. Ct. at 2620 (internal citation omitted).
This is an apt instance of the Holmesian “the greater includes the lesser” principle that
specific authorization of a greater power implies the existence of lesser powers consistent with
the greater. See Western Union Tel. Co. v. Kansas (ex rel Coleman), 216 U.S. 1, 53 (1910)
(Holmes, J. dissenting).5 The Court agrees with other courts in this district in holding that the
authority to issue findings and recommendations obtains regardless of whether the matter is
deemed core or non-core under Stern analysis. See In re El-Atari, 2011 WL 5828013 at *3
(E.D.Va. Nov. 18, 2011); In re TMQ Liquidation Co., 2012 WL 1986526 at *2 (D.S.C. June 4,
2012).
Accordingly, having denied Plaintiff’s motion to withdraw, the Court 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.
Discussing the power of a state to regulate, Justice Holmes noted that: “Even in the law the whole generally
includes its parts. If the State may prohibit, it may prohibit with the privilege of avoiding the prohibition in a certain
way.”
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III.
CONCLUSION
IT IS, THEREFORE, ORDERED that:
1.
Plaintiff’s Motion to Withdraw Reference to Bankruptcy Court, (Doc. 1), is
DENIED;
2.
The Bankruptcy Court will oversee all discovery matters and, if necessary, issue
findings of fact and conclusions of law on any dispositive motions. The reference
with be withdrawn once the case is ready for trial.
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