Solis v. Wahl

Filing 4

OPINION AND ORDER by Judge Claire V Eagan ; denying 2 Motion to Withdraw the Reference to Bankruptcy Court (djh, Dpty Clk)

UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF OKLAHOMA

IN RE:

)
)
LARRY DONIVAN WAHL and
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CYNTHIA JOAN WAHL,
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Debtors.
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__________________________________________)
HILDA SOLIS,
)
Secretary of Labor, United States
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Department of Labor,
)
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Plaintiff,
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)
v.
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CYNTHIA WAHL,
)
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Defendant.
)

Bankruptcy Case No. 12-10491-R
Adversary Proceeding
Case No. 12-01038-R

Case No. 12-CV-395-CVE-FHM

OPINION AND ORDER
Now before the Court is the Unopposed1 Motion to Withdraw the Reference of Plaintiff’s
Adversary Complaint from the Bankruptcy Court to the District Court (Dkt. # 2). Plaintiff Hilda
Solis, Secretary of Labor for the United States Department of Labor, filed an adversary complaint
against Cynthia Wahl in the United States Bankruptcy Court for the Northern District of Oklahoma
asserting that certain debts were non-dischargeable. Solis asks the Court to withdraw the reference
of the adversary proceeding to the bankruptcy court under 28 U.S.C. § 157(d). Wahl has not filed
a response to Solis’ motion.

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The motion is styled as an “unopposed” motion, although there is no statement as to the
opposing party’s position on plaintiff’s request for withdrawal of the reference.

On August 17, 2011, Solis filed a civil case against Wahl, Wahlco Fabricators, Inc.
(Wahlco), and the Wahlco Fabricators, Inc. SIMPLE IRA Plan (the Plan). Solis v. Wahl et al., 11CV-509-JHP-TLW (N.D. Okla.). Solis alleges that Wahl was a fiduciary of the Plan and, inter alia,
that Wahl failed to remit employee contributions to the Plan in violation of the Employee Retirement
Income Security Act, 29 U.S.C. § 1001 et seq. (ERISA). Solis seeks injunctive and equitable relief
on behalf of Plan participants. Wahl filed a petition seeking relief under Chapter 7 of the United
States Bankruptcy Code in February 2012, and she filed a notice of bankruptcy in the civil case.
The civil case has not been stayed as to Wahl, but Solis has taken no further action to prosecute her
claims against Wahl. However, Solis has obtained entry of default by the Court Clerk as to Wahlco,
and Solis has filed a motion for default judgment against Wahlco that is set for hearing. On May
29, 2012, Solis filed an adversary proceeding against Wahl in the bankruptcy court seeking a ruling
that any debt owed by Wahl to the Plan, of which Wahl is allegedly a fiduciary, is not dischargeable
under 11 U.S.C. § 523(a)(4). Dkt. # 3, at 4-10. Solis claims that Wahl was the vice president and
payroll administrator for Wahlco, and Wahl made the decision not to remit employee contributions
to the Plan. Id. at 7. She states that the funds withheld from employee paychecks were commingled
with Wahlco’s general accounts and were used for the benefit of Wahlco. Id. at 8.
Solis asks the Court to withdraw the reference of the adversary proceeding to the bankruptcy
court. Dkt. # 2. She argues that withdrawal of the reference is mandatory due the presence of the
following issues arising under ERISA:
1.

Whether the Plan is or was an ERISA-covered plan;

2.

Whether Cynthia Wahl was a fiduciary to the Plan within the meaning of
ERISA Section 3 (21)(A), 29 U.S.C. 1002(21)(A), in that she exercised
control over the disposition of Plan assets and had discretionary authority in
the administration of the Plan;
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3.

With respect to the Plan, whether Cynthia Wahl violated her fiduciary
obligations under ERISA: a) by failing to forward employee contributions to
the Plan in accordance with the documents and instruments governing the
Plan; b) by failing to timely forward employee contributions to the Plan; c)
by failing to segregate employee contributions from the company’s general
accounts; and d) by transferring the Plans’ [sic] assets to a party in interest.

4.

Whether Cynthia Wahl is liable for the alleged breaches of fiduciary
responsibility alleged in the complaints.

Dkt. # 2, at 12. If the Court were to find that mandatory withdrawal of the reference were not
required, Solis argues that permissive withdrawal is appropriate in the interest of judicial economy.
Under § 157(d), a 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.”
Section 157 is interpreted narrowly and it is not intended to be an “escape hatch” from bankruptcy
court. See In re Lenard, 124 B.R. 101, 102 (D. Colo. 1991). Withdrawal of the reference 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). However, permissive withdrawal of the reference is permitted if
non-core bankruptcy issues are predominant or other factors suggests that withdrawal of the
reference will promote judicial efficiency. Security Farms v. Int’l Bhd. of Teamsters, Chauffers,
Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir. 1997). Under N.D. Okla. LCvR 84.1, a
party seeking withdrawal of a reference must file a motion with the bankruptcy court, and the
bankruptcy judge shall enter an order determining whether the proceeding “is a core proceeding or
a proceeding that is otherwise related to a case under Title 11.” In this case, Solis has complied with
LCvR 84.1 and the bankruptcy judge has entered an order determining that the adversary proceeding
is a core proceeding under § 157(b)(2)(B). Dkt. # 3, at 15.

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Solis argues that withdrawal of the reference is mandatory because the bankruptcy court will
have to consider certain issues arising under ERISA to determine whether debts owed by Wahl to
the Plan are dischargeable under Chapter 7. Dkt. # 2, at 12. However, the mere presence of issues
arising under federal laws other than Title 11 is not sufficient for mandatory withdrawal of the
reference. Abrahams v. Phil-Con Servs., LLC, 2010 WL 4875581 (S.D. Ala. Nov. 23, 2010);
BankUnited Financial Corp. v. FDIC, 436 B.R. 216 (S.D. Fla. 2010). The Tenth Circuit has not
considered what standard applies for mandatory withdrawal under § 157(d). The leading case on
this issue is In re Matter of Vicars Ins. Agency, Inc. 96 F.3d 949 (7th Cir. 1996), in which the
Seventh Circuit held that mandatory withdrawal is required when there are “substantial and
material” issues of non-bankruptcy law that must be resolved. Id. at 953. To constitute a
“substantial and material issue” of non-bankruptcy law, there must be “more than the mere
application of well-settled or ‘hornbook’ non-bankruptcy law . . . [and] ‘significant interpretation’
of the non-Code statute must be required.” Id.; see also City of New York v. Exxon Corp., 932 F.
2d 1020, 1026 (2d Cir. 1991) (“This mandatory withdrawal provision has been interpreted to require
withdrawal to the district court of cases or issues that would otherwise require a bankruptcy judge
to engage in significant interpretation, as opposed to simple application, of federal laws apart from
the bankruptcy statutes.”); In re Chrysler, LLC, 2009 WL 1490990 (S.D.N.Y May 26, 2009) (“This
narrow construction [of § 157(d)] means that a District Court should not withdraw the reference
where the bankruptcy issues to be resolved depend on the interpretations of a non-bankruptcy statute
but that this interpretation is closely intertwined with standard bankruptcy considerations”).
The adversary proceeding requires the consideration of bankruptcy and non-bankruptcy
issues, but it is unclear whether the non-bankruptcy issues are as substantial as Solis claims. Solis

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alleges that Wahl was a fiduciary of the Plan and that Wahl has incurred debts to the plan that are
not dischargeable in bankruptcy. Dkt. # 3, at 9. Wahl objects to the non-dischargeability of any
debts owed to the Plan, and she claims that she did not commingle the funds of Wahlco and the Plan.
Id. at 12. There is a substantial body of law as to who qualifies as an ERISA fiduciary, and
determination of this issue will likely require only the application of well-settled non-bankruptcy
law. The remaining questions posed by Solis primarily turn on the resolution of the factual issue
of whether Wahl actually withheld employee contributions from the Plan. This does not require any
interpretation of ERISA. If the debts are found to be non-dischargeable, this finding would be based
on § 523(a)(4), which provides that a debt incurred by “fraud or defalcation while acting in a
fiduciary capacity” is not dischargeable in bankruptcy proceedings. The bankruptcy court has
determined that this is a core proceeding concerning the allowance or disallowance of a claim
against the bankruptcy estate, and this suggests that the key issue in the adversary proceeding is the
application of Title 11, rather than any non-bankruptcy law that may incidentally arise. The Court
finds that the adversary proceeding may require the application of ERISA but, at its heart, the
adversary proceeding is a core proceeding to determine the dischargeability of certain debts under
Title 11. Thus, mandatory withdrawal of the reference is not required.
Solis also argues that permissive withdrawal of the reference of the adversary proceeding
is appropriate in the interest of judicial economy. Solis has identified seven factors that a district
court may consider when determining whether to grant a request for permissive withdrawal of a
reference:
(1) whether the proceeding is core or non-core; (2) judicial economy; (3) uniformity
in bankruptcy administration; (4) economical use of the debtors’ and creditors’
resources; (5) reduction of forum shopping and confusion; (6) expediting the

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bankruptcy process; and (7) the presence of a jury demand.
Samson Resources Co. v. Valero Marketing and Supply Co., 449 B.R. 120, 132 (D.N.M. 2011).
This is a core proceeding concerning the “allowance or disallowance of claims” against the
bankruptcy estate, even if it is related to a proceeding in another court, and this weighs heavily
against granting Solis’ request for permissive withdrawal. As a core proceeding, this is precisely
the kind of issue that falls within the expertise of the bankruptcy court, and there is a strong
preference for resolving core proceedings in the bankruptcy court. See 28 U.S.C. § 157; In re
Merrillville Surgery Center, LLC, 2012 WL 3732855 (N.D. Ind. Aug. 28, 2012); In re QSM, LLC,
453 B.R. 807, 811 (E.D. Va. 2011). Solis argues that judicial economy will be favored if the
reference is withdrawn, because the same issues are raised in the district court litigation. However,
Solis also ignores the fact that Wahl has filed for personal bankruptcy, and there will be multiple
proceedings involving the dischargeability of Wahl’s debts, even if this Court were to withdraw the
reference of the adversary proceeding. Solis raises no other arguments in support of her request for
permissive withdrawal of the reference, and the Court can find no other factor that would support
permissive withdrawal. Allowing the bankruptcy court to hear the adversary proceeding will
expedite the bankruptcy process, and this is not a case where any party would be entitled to a jury
trial. This will also promote uniformity in bankruptcy administration, as the adversary proceeding
concerns the discharge of certain debts and the application of the United States Bankruptcy Code,
and these matters should be left to the expertise of the bankruptcy court. The Court finds that Solis’
request for permissive withdrawal of the reference to the bankruptcy court should be denied.

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IT IS THEREFORE ORDERED that the Unopposed Motion to Withdraw the Reference
of Plaintiff’s Adversary Complaint from the Bankruptcy Court to the District Court (Dkt. # 2) is
denied.
DATED this 22nd day of October, 2012.

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